(v) Amendments to IAS 19, Employee Benefits These narrow scope amendments simplify accounting for contributions from employees or third parties to defined benefit plans. They are not expected to have significant implications for the Group’s consolidated financial statements. The amendments have yet to be endorsed by the EU.
(vii) IFRS 9, Financial Instruments IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement. Under IFRS 9, all recognised financial assets that are currently within the scope of IAS 39 will be measured at either amortised cost or fair value. The basis of classification will depend on the business model and the contractual cash flow characteristics of the financial asset. All equity instruments will be measured at fair value. A debt instrument is measured at amortised cost only if it is held to collect the contractual cash flows and the cash flows represent principal and interest, otherwise it is measured at fair value through profit or loss (FVTPL). For financial liabilities designated as at FVTPL, the change in the fair value attributable to changes in the liability’s credit risk is recognised in other comprehensive income unless it gives rise to an accounting mismatch in profit or loss.
We have not yet completed our assessment of the impact of the adoption of IFRS 9 on the Group which, to a large extent, will need to take into account the finalisation of the standard and the interaction of the requirements of IFRS 9 with the IASB’s ongoing insurance contracts accounting project. IFRS 9 has not yet been endorsed by the EU.
(D) Consolidation principles Subsidiaries Subsidiaries are those entities over which the Group has control. The Group controls an investee if and only if the Group has all of the following: power over the investee, exposure, or rights, to variable returns from its involvement with the investee, and the ability to use its power over the investee to affect its returns.
The group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Subsidiaries are consolidated from the date the Group obtains control and are excluded from consolidation from the date the Group loses control. All inter-company transactions, balances and unrealised surpluses and deficits on transactions between Group companies have been eliminated. Accounting policies of subsidiaries are aligned on acquisition to ensure consistency with the Group policies. The Group is required to use the acquisition method of accounting for business combinations. Under this method, the cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any non-controlling interest in the acquiree. For each business combination, the Group has the option to measure the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. The excess of the consideration transferred over the fair value of the net assets of the subsidiary acquired is recorded as goodwill (see accounting policy O below). Acquisition-related costs are expensed as incurred. Transactions that do not result in a loss of control are treated as equity transactions with non-controlling interests.
As part of their investment strategy, the UK and certain European long-term business policyholder funds have invested in a number of property limited partnerships (PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a Group subsidiary. Accounting for the PUTs and PLPs as subsidiaries, joint ventures, associates or other financial investments depends on whether the Group is deemed to have control or joint control over the PUTs and PLPs’ shareholdings in the GPs and the terms of each partnership agreement are considered along with other factors that determine control, as outlined above. Where the Group exerts control over a PUT or a PLP, it has been treated as a subsidiary and its results, assets and liabilities have been consolidated. Where the partnership is managed by an agreement such that there is joint control between the parties, notwithstanding that the Group’s partnership share in the PLP (including its indirect stake via the relevant PUT and GP) may be greater than 50%, such PUTs and PLPs have been classified as joint ventures. Where the Group has significant influence over the PUT or PLP, as defined in the following section, the PUT or PLP is classified as an associate. Where the Group holds non-controlling interests in PLPs, with no significant influence or control over their associated GPs, the relevant investments are carried at fair value through profit or loss within financial investments.
Associates and joint ventures Associates are entities over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control. Generally, it is presumed that the Group has significant influence if it has between 20% and 50% of voting rights. Joint ventures are joint arrangements whereby the Group and other parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. In a number of these, the Group’s share of the underlying assets and liabilities may be greater than 50% but the terms of the relevant agreements make it clear that control is not exercised. Such jointly controlled entities are referred to as joint ventures in these financial statements. Gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in the associates and joint ventures. Losses are also eliminated, unless the transaction provides evidence of an impairment of the asset transferred between entities. Other than investments in investment vehicles which are carried at fair value through profit or loss, investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group’s share of that entity’s post-acquisition changes to shareholders’ funds, is included as an asset in the consolidated statement of financial position. As explained in accounting policy O, the cost includes goodwill identified on acquisition. The Group’s share of their post-acquisition profits or losses is recognised in the income statement and its share of postacquisition movements in reserves is recognised in reserves. Equity accounting is discontinued when the Group no longer has significant influence or joint control over the investment. If the Group’s share of losses in an associate or joint venture equals or exceeds its interest in the undertaking, the Group does not recognise further losses unless it has incurred obligations or made payments on behalf of the entity.
(F) Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. This presumes that the transaction takes place in the principal (or most advantageous) market under current market conditions. Fair value is a market-based measure and in the absence of observable market prices in an active market, it is measured using the assumptions that market participants would use when pricing the asset or liability. 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 have 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. If an asset or a liability measured at fair value has a bid price and an ask price, the price within the bid-ask spread that is most representative of fair value in the circumstances is used to measure fair value.
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. For liabilities relating to UK with-profit contracts, the Group has adopted FRS 27 Life Assurance, as described in policy G above, in addition to the requirements of IFRS. In the United States, shadow adjustments were made to the liabilities or related deferred acquisition costs and were recognised directly in other comprehensive income. This means that the measurement of these items was adjusted for unrealised gains or losses on the backing assets such as AFS financial investments (see accounting policy T), that were recognised directly in other comprehensive income, in the same way as if those gains or losses had been realised. 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 the UK. 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 41(b). For liabilities of the UK with-profit funds, FRS 27 requires liabilities to be calculated as the realistic basis liabilities as set out by the UK’s Prudential Regulation Authority (PRA), adjusted to remove the shareholders’ share of future bonuses. For UK non-profit insurance contracts, the Group applies regulatory requirements, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business. On 1 April 2013 the rules made by the FSA were designated by the PRA.
(O) Goodwill, AVIF and intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired subsidiary, associate or joint venture at the date of acquisition. Goodwill on acquisitions prior to 1 January 2004 (the date of transition to IFRS) is carried at its book value (original cost less cumulative amortisation) on that date, less any impairment subsequently incurred. Goodwill arising before 1 January 1998 was eliminated against reserves and has not been reinstated. Goodwill arising on the Group’s investments in subsidiaries since that date is shown as a separate asset, whilst that on associates and joint ventures is included within the carrying value of those investments.
Intangible assets Intangibles consist primarily of contractual relationships such as access to distribution networks and customer lists. The economic lives of these are determined by considering relevant factors such as usage of the asset, typical product life cycles, potential obsolescence, maintenance costs, the stability of the industry, competitive position and the period of control over the assets. These intangibles are amortised over their useful lives, which range from five to 30 years, using the straight- line method. The amortisation charge for the year is included in the income statement under ‘Other expenses’. For intangibles with finite lives, impairment charges will be recognised in the income statement where evidence of such impairment is observed. Intangibles with indefinite lives are subject to regular impairment testing, as described below.
(P) Property and equipment Owner-occupied properties are carried at their revalued amounts, and movements are recognised in other comprehensive income and taken to a separate reserve within equity. When such properties are sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings. These properties are depreciated down to their estimated residual values over their useful lives. All other items classed as property and equipment within the statement of financial position are carried at historical cost less accumulated depreciation. Investment properties under construction are included within property and equipment until completion, and are stated at cost less any provision for impairment in their values until construction is completed or fair value becomes reliably measurable. Depreciation is calculated on the straight-line method to write-down the cost of other assets to their residual values over their estimated useful lives as follows: Properties under construction No depreciation Owner-occupied properties, and related mechanical and electrical equipment
Motor vehicles Three years, or lease term (up to useful life) if longer
(Q) Investment property Investment property is held for long-term rental yields and is not occupied by the Group. Completed investment property is stated at its fair value, as assessed by qualified external valuers or by local qualified staff of the Group. Changes in fair values are recorded in the income statement in net investment income. As described in accounting policy P above, investment properties under construction are included within property and equipment, and are stated at cost less any impairment in their values until construction is completed or fair value becomes reliably measurable.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
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. For securities identified as being impaired, the cumulative unrealised loss previously recognised within the investment valuation reserve is transferred to realised losses for the year with a corresponding movement through other comprehensive income. Any subsequent increase in fair value of these impaired securities is recognised in other comprehensive income and recorded in the investment valuation reserve. Reversals of impairments on any of these assets are only recognised where the decrease in the impairment can be objectively related to an event occurring after the write-down (such as an improvement in the debtor’s credit rating), and are not recognised in respect of equity instruments.
(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. Loans with indefinite future lives are carried at unpaid principal balances or cost. However, for the majority of mortgage loans, the Group has taken advantage of the fair value option under IAS 39 to present the mortgages, associated borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for these three items. The fair values of these mortgages are estimated using discounted cash flow models, based on a risk-adjusted discount rate which reflects the risks associated with these products. They are revalued at each period end, with movements in their fair values being taken to the income statement. At each reporting date, we review loans carried at amortised cost for objective evidence that they are impaired and uncollectable, either at the level of an individual security or collectively within a group of loans with similar credit risk characteristics. To the extent that a loan is uncollectable, it is written down as impaired to its recoverable amount, measured as the present value of expected future cash flows discounted at the original effective interest rate of the loan, taking into account the fair value of the underlying collateral. Subsequent recoveries in excess of the loan’s written-down carrying value are credited to the income statement.
(W) Collateral The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions, certain derivative contracts and loans, in order to reduce the credit risk of these transactions. Collateral is also pledged as security for bank letters of credit. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Collateral received in the form of cash, which is not legally segregated from the Group, is recognised as an asset in the statement of financial position with a corresponding liability for the repayment in financial liabilities (note 60). However, where the Group has a currently enforceable legal right of set-off, the collateral liability and associated derivative balances are shown net, in line with market practice. Non-cash collateral received is not recognised in the statement of financial position unless the Group either (a) sells or repledges these assets in the absence of default, at which point the obligation to return this collateral is recognised as a liability; or (b) the counterparty to the arrangement defaults, at which point the collateral is seized and recognised as an asset. Collateral pledged in the form of cash, which is legally segregated from the Group, is derecognised from the statement of financial position with a corresponding receivable recognised for its return. Non-cash collateral pledged is not derecognised from the statement of financial position unless the Group defaults on its obligations under the relevant agreement, and therefore continues to be recognised in the statement of financial position within the appropriate asset classification.
(Y) Statement of cash flows Cash and cash equivalents Cash and cash equivalents consist of cash at banks and in hand, deposits held at call with banks, treasury bills and other shortterm highly liquid investments that are readily convertible to 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.
(AA) Provisions and contingent liabilities Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more probable than not that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Restructuring provisions comprise lease termination penalties and employee termination payments. They include only the direct expenditures arising from the restructuring, which are those that are necessarily entailed by the restructuring; and not associated with the ongoing activities of the entity. The amount recorded as a provision is the best estimate of the expenditure required to settle the present obligation at the balance sheet date. Where the effect of the time value of money is material, the provision is the present value of the expected expenditure. Provisions are not recognised for future operating losses. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. Contingent liabilities are disclosed if there is a possible future obligation as a result of a past event, or if there is a present obligation as a result of a past event but either a payment is not probable or the amount cannot be reasonably estimated.
(AC) Income taxes The current tax expense is based on the taxable profits for the year, after any adjustments in respect of prior years. Tax, including tax relief for losses if applicable, is allocated over profits before taxation and amounts charged or credited to components of other comprehensive income and equity, as appropriate. Provision is made for deferred tax liabilities, or credit taken for deferred tax assets, using the liability method, on all material temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. The principal temporary differences arise from depreciation of property and equipment, revaluation of certain financial assets and liabilities including derivative contracts, technical provisions and other insurance items, provisions for pensions and other post-retirement benefits and tax losses carried forward; and, in relation to acquisitions, on the difference between the fair values of the net assets acquired and their tax base. The rates enacted or substantively enacted at the statement of financial position date are used to value the deferred tax assets and liabilities. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. In countries where there is a history of tax losses, deferred tax assets are only recognised in excess of deferred tax liabilities if there is convincing evidence that future profits will be available. Deferred tax is provided on temporary differences arising from investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the foreseeable future. Deferred taxes are not provided in respect of temporary differences arising from the initial recognition of goodwill, or from goodwill for which amortisation is not deductible for tax purposes, or from the initial recognition of an asset or liability in a transaction which is not a business combination and affects neither accounting profit nor taxable profit or loss at the time of the transaction.
(AG) Earnings per share Basic earnings per share is calculated by dividing net income available to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding the weighted average number of ordinary shares purchased by the Group and held as Treasury shares. Earnings per share has also been calculated on the adjusted operating profit before impairment of goodwill and other adjusting items, after tax, attributable to ordinary shareholders, as the directors believe this figure provides a better indication of operating performance. Details are given in note 15. For the diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares, such as convertible debt and share options granted to employees. Potential or contingent share issuances are treated as dilutive when their conversion to shares would decrease net (losses) earnings per share.
Premiums written net of reinsurance 20,489 1,489 21,173 3,589 Net change in provision for unearned premiums 134 — (16) —
Tax expense AC & 14 (594) (265) (482) (152) Less: tax attributable to policyholders’ returns 14 191 — 221 — Tax attributable to shareholders’ profits (403) (265) (261) (152)
Consolidated statement of comprehensive income For the year ended 31 December 2013
Items that will not be reclassified to income statement Owner occupied properties – fair value losses (2) (3) Remeasurements of pension schemes 49b(i) (674) (980) Aggregate tax effect – shareholder tax on items that will not be reclassified subsequently to the income statement 125 189
Reconciliation of Group operating profit to profit/(loss) for the year For the year ended 31 December 2013
Operating profit before tax attributable to shareholders' profits Life business 1,901 272 2,173 1,831 200 2,031 General insurance and health 797 — 797 894 — 894 Fund management 93 31 124 51 55 106 Other: Other operations (90) (4) (94) (177) (4) (181) Corporate centre (150) — (150) (136) — (136) Group debt costs and other interest (502) (9) (511) (537) (12) (549)
Operating profit before tax attributable to shareholders' profits (excluding Delta Lloyd as an associate) 2,049 290 2,339 1,926 239 2,165
Share of operating profit (before tax) of Delta Lloyd as an associate — — — 112 — 112
Operating profit before tax attributable to shareholders' profits 2,049 290 2,339 2,038 239 2,277
Adjusted for the following: Investment return variances and economic assumption changes on life business 9 (49) 452 403 (620) 342 (278) Short-term fluctuation in return on investments on non-life business 10a (336) — (336) 7 — 7 Economic assumption changes on general insurance and health business 10a 33 — 33 (21) — (21) Impairment of goodwill, associates and joint ventures and other amounts expensed 17a, 19, 20 (77) — (77) (60) (782) (842) Amortisation and impairment of intangibles (91) (9) (100) (128) (129) (257) Profit/(loss) on the disposal and remeasurement of subsidiaries, joint
Non-operating items before tax (405) 1,251 846 (1,509) (2,928) (4,437) Share of Delta Lloyd's tax expense, as an associate — — — 107 — 107
Corporate centre (136) Group debt costs and other interest (537) Share of operating profit (before tax) of Delta Lloyd as an associate 112
Total – continuing operations 2,038 Total – discontinued operations 239 2,277 1 Following the adoption of the revised IAS 19 ‘Employee benefits’ the Group has retrospectively applied the changes to the comparative period in these financial statements. This has led to an increase in profit before tax of £150 million for 2012 with a corresponding decrease in other comprehensive income. For further details of the impact of the restatement please see note 1. 2 Following the announcement in Q1 2013 relating to modifications to its management structure, the Group’s operating segments were changed to align them with the revised organisational reporting structure. See note 5 for more information.
Balance at 31 December 736 200 1,165 3,271 (32) 1,675 1,389 8,404 1,382 1,574 11,360 1 Refer to note 37 for further details of balances included in Other reserves. 2 Following the adoption of the revised IAS 19 ‘Employee benefits’ the Group has retrospectively applied the changes to the comparative period in these financial statements. This has led to an increase in profit before tax of £150 million for 2012 with a corresponding decrease in other comprehensive income. For further details of the impact of the restatement please see note 1.
Equity Capital AE Ordinary share capital 31 736 736 Preference share capital 34 200 200 936 936 Capital reserves Share premium 31b 1,165 1,165 Merger reserve D & 36 3,271 3,271 4,436 4,436 Shares held by employee trusts 33 (31) (32) Other reserves 37 475 1,675 Retained earnings 38 2,348 1,389
Liabilities Gross insurance liabilities L & 41 110,555 113,091 Gross liabilities for investment contracts M & 42 116,058 110,494 Unallocated divisible surplus L & 46 6,713 6,931 Net asset value attributable to unitholders D 10,362 9,983 Provisions AA, AB & 48 984 1,119 Deferred tax liabilities AC 563 547 Current tax liabilities 116 112 Borrowings AD & 50 7,819 8,179 Payables and other financial liabilities S & 51 9,194 9,398 Other liabilities 52 2,472 1,842 Liabilities of operations classified as held for sale AH & 4c 3,023 41,411
Net cash from/(used in) investing activities – continuing operations 363 (5) Net cash used in investing activities – discontinued operations2 (1,588) (10)
Net cash used in financing activities – continuing operations (1,548) (1,092) Net cash from/(used in) financing activities – discontinued operations2 19 (27)
Total net increase in cash and cash equivalents 1,243 1,365 Cash and cash equivalents at 1 January 23,453 22,401 Effect of exchange rate changes on cash and cash equivalents 161 (313)
Notes to the consolidated financial statements 1 – Analysis of the impact of new standards and amendments to published standards that have been adopted by the Group (a) Impact of changes in accounting policies/standards on the consolidated income statement
Loss after tax (202) — 116 (86) Loss after tax from discontinued operations (2,848) — — (2,848)
Loss for the year attributable to: Equity shareholders of Aviva plc (3,218) — 116 (3,102) Non-controlling interests 168 — — 168
Effect of change in policy analysed as: Remeasurement of pension schemes2 (830) — (150) (980) Aggregate tax effect – shareholder tax 163 — 34 197 2 Including actuarial gains/(losses) on pension schemes.
Total liabilities 304,329 (1,222) — 303,107 Effect of change in policy analysed as: Net asset value attributable to unit holders 11,146 (1,163) — 9,983 Borrowings 8,194 (15) — 8,179 Payables and other financial liabilities 9,441 (43) — 9,398 Other liabilities 1,843 (1) — 1,842
There is no overall impact from the adoption of these standards on the consolidated statement of changes in equity reported at 31 December 2012. As shown in the impact of changes in accounting policies / standards on the consolidated statement of comprehensive income table in 1(b) above, the favourable impact of the adoption of IAS19R on the profit / (loss) for the year ended 31 December 2012 is offset by an equal and opposite amount in other comprehensive income.
Adjustment for share of loss of joint ventures and associates 277 (22) — 255 Adjustment for fair value gains (11,867) (33) — (11,900) Adjustment for interest expense on borrowings 653 (19) — 634 Adjustment for net finance charge on pension schemes 82 — (150) (68)
Notes to the consolidated financial statements continued 3 – Presentation changes (a) Discontinued operations As described in note 4, the Group’s US life and annuity business and associated investment management operations (together ‘US Life’), were classified as held for sale in 2012 and sold on 2 October 2013. As the Group exited from a major geographical area of operation and consistent with the presentation in the 2012 Annual Report and Accounts, the results of US Life up to the completion date of the disposal, as well as those for preceding years, have been classified as discontinued operations.
4 – Subsidiaries This note provides details of the acquisitions and disposals of subsidiaries, joint ventures and associates that the Group has made during the year, together with details of businesses held for sale at the year end.
Profit/(loss) on disposal and remeasurement from continuing operations 115 (164) Profit/(loss) on disposal and remeasurement from discontinued operations (see (vii) below) 808 (2,359)
The figures above include £(104) million (2012: £nil) attributable to non-controlling interests, refer to section (c) below.
Notes to the consolidated financial statements continued 4 – Subsidiaries continued £m
Assets Intangible assets 77 Investment property 13 Financial Investments 2,955 Reinsurance assets 249 Prepayments and accrued income 9 Other assets 77 Cash and cash equivalents 362
ALHI non-controlling interest purchase liability settled 166 Cash consideration 117 Less: Transaction costs (6)
(ii) Spanish long-term business – Aseval On 18 December 2012 Aviva reached a settlement with Bankia S.A. (“Bankia”) to transfer the Group’s 50% interest in its subsidiary Aseval Aseguradora Valenciana, Sociedad Anónima de Seguros y Reaseguros (“Aseval”), a Spanish life assurance company, to Bankia. Aseval was classified as held for sale at this date. On 24 April 2013 the Group disposed of its entire holding in Aseval to Bankia for cash consideration of £502 million resulting in a profit on disposal of £197 million, calculated as follows: £m
Notes to the consolidated financial statements continued 4 – Subsidiaries continued (iii) Malaysia On 12 April 2013 the Group disposed of its 49% interest in its Malaysia long-term business joint ventures, CIMB Aviva Assurance Berhad and CIMB Aviva Takaful Berhad, to Sun Life Assurance Company of Canada, a subsidiary of Sun Life Financial Inc. for cash consideration of £153 million resulting in a profit on disposal of £39 million, calculated as follows: £m
On 21 December 2012, the Group announced that it had agreed to sell US Life for consideration of £1.0 billion including the shareholder loan. Following classification as held for sale, US Life was remeasured to fair value less costs to sell in 2012 resulting in an impairment loss of £2,359 million recognised as a loss on remeasurement of subsidiaries. The sale of US Life completed on 2 October 2013 and the transaction proceeds received were based on the estimated earnings and other improvements in statutory surplus over the period from 30 June 2012 to 30 September 2013. The final purchase price is subject to customary completion adjustments. The process to agree completion adjustments is on-going and is expected to complete by mid-2014. Until the outcome of this process is known there remains uncertainty on the final determination of the completion adjustment. The transaction resulted in a profit on disposal of £808 million in 2013, reflecting management’s best estimate of the completion adjustment. The profit on disposal, calculated as follows, includes £644 million of currency translation and investment valuation reserves recycled to the income statement on completion of the sale.
Assets Acquired value of in-force business and intangible assets 445 Investment property 6 Loans 3,615 Financial Investments 28,185 Reinsurance assets 648 Receivables and other financial assets 329 Prepayments and accrued income 340 Other assets 293 Cash and cash equivalents 2,467
Cash consideration received1 1,434 Less: Settlement of intercompany loan (553) Less: transaction costs (4)
Other comprehensive income, net of tax from discontinued operations of £(319) million includes £(215) million in fair value gains on available for sale financial instruments, £(281) million in fair value gains on available for sale financial instruments transferred to the income statement on disposal, £12 million of impairment losses transferred to the income statement, £(4) million recycled out of other comprehensive income and £169 million aggregate shareholder tax effect.
Notes to the consolidated financial statements continued 4 – Subsidiaries continued (c) Assets and liabilities of operations classified as held for sale The assets and liabilities of operations classified as held for sale as at 31 December 2013 are as follows: Total £m US Life £m Other £m Total £m
Assets Goodwill 4 — 183 183 Acquired value of in-force business and intangible assets — 408 83 491 Interests in, and loans to, joint ventures and associates 29 — 126 126 Property and equipment — — 2 2 Investment property — 6 12 18 Loans — 3,397 — 3,397 Financial investments 2,675 31,212 5,203 36,415 Reinsurance assets 37 644 239 883 Deferred acquisition costs 6 1,468 70 1,538 Other assets 196 769 97 866 Cash and cash equivalents 351 544 373 917
Additional impairment to write down the disposal group to fair value less costs to sell (185) (2,233) — (2,233)
(ii) Other businesses Also classified as held for sale at 31 December 2013 are operations in Indonesia, South Korea, the general insurance business in Turkey, Taiwan and other small operations.
In Indonesia management decided to restructure existing operations and establish a new joint venture. As Aviva’s holding will change from a 60% controlling interest to a 50% joint venture the investment is classified as held for sale at 31 December 2013. Net assets are £17 million at 31 December 2013. On 17 January 2014, Aviva and PT Astra International Tbk signed an agreement to form Astra Aviva Life, a 50-50 joint venture to sell and distribute life insurance products in Indonesia.
Management committed to sell the Turkey general insurance business with completion of the sale expected in 2014. As a result, the business was classified as held for sale as of 31 December 2013 and remeasured at fair value based on the expected sales price less costs to sell of £2 million resulting in a remeasurement loss of £9 million.
Significant restrictions In certain jurisdictions the ability of subsidiaries to transfer funds to the Group in the form of cash dividends or to repay loans and advances is subject to local corporate or insurance laws and regulations and solvency requirements. We do not believe that these requirements constitute a material limitation on the ability of the subsidiaries to transfer funds to the Group. There are no protective rights of non-controlling interests which significantly restrict the Group’s ability to access or use the assets and settle the liabilities of the Group.
Canada The principal activity of the Canadian operation is general insurance. In particular it provides personal and commercial lines insurance products principally through intermediaries and insurance brokers.
Aviva Investors Aviva Investors operates in most of the markets in which the Group operates, in particular the UK, France and Canada and other international businesses, managing policyholders’ and shareholders’ invested funds, providing investment management services for institutional pension fund mandates and managing a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. The internal asset management operations of Aviva Investors North America were sold with the Group’s US life operations and are classified as a discontinued operation in these financial statements.
Discontinued operations In October 2013 the Group sold its US life operations (including the related internal asset management operations of Aviva Investors), which has been presented as a discontinued operation in the income statement, statement of comprehensive income and statement of cash flows.
Notes to the consolidated financial statements continued 5 – Segmental information continued (a) (i) Segmental income statement for the year ended 31 December 2013
Premiums written net of reinsurance 4,228 4,200 5,565 475 3,193 2,250 532 — 46 20,489 1,489 21,978
Adjusted for non-operating items: Reclassification of corporate costs and unallocated interest — 7 21 — — — — — (28) — — —
Investment return variances and economic assumption changes on life business 414 — (70) 1 (267) — (29) — — 49 (452) (403)
Impairment of goodwill, joint ventures and associates — — — — 48 — 29 — — 77 — 77
Operating profit/(loss) before tax attributable to shareholders 1,124 465 448 184 314 246 87 (26) (793) 2,049 290 2,339 1 Total reported income, excluding inter-segment revenue, includes £15,862 million from the United Kingdom (Aviva plc’s country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts were written.
2 Aviva Investors operating profit includes £2 million profit relating to the Aviva Investors Pooled Pensions business. 3 Other Group activities include Group Reinsurance. 4 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). For further details see note 4.
Notes to the consolidated financial statements continued 5 – Segmental information continued (a) (ii) Segmental income statement for the year ended 31 December 2012 – (Restated)4
Gross written premiums 6,363 4,951 4,763 441 3,195 2,248 740 — 43 22,744 3,796 26,540 Premiums ceded to reinsurers (740) (450) (55) (6) (150) (63) (101) — (6) (1,571) (207) (1,778) Internal reinsurance revenue — (11) (6) (2) (9) (9) (3) — 40 — — —
Profit/(loss) before tax attributable to shareholders' profits 107 248 482 176 273 245 62 2 (1,420) 175 (2,696) (2,521)
Short-term fluctuation in return on investments backing non-life business — (17) (68) (1) (43) 10 — — 112 (7) — (7)
Economic assumption changes on general insurance and health business — 20 — — — — — — 1 21 — 21
Impairment of goodwill, joint ventures and associates6 (1) — — — 108 — — — (47) 60 782 842
Amortisation and impairment of intangibles 54 6 — — 16 11 1 6 34 128 129 257
(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates 2 21 — — (7) — (12) — 160 164 2,359 2,523
Integration and restructuring costs 71 170 11 5 12 11 4 33 144 461 7 468 Share of Delta Lloyd's non-operating items (before tax), as an associate — — — — — — — — 523 523 — 523 Share of Delta Lloyd's tax expense,
2 Aviva Investors operating profit includes £3 million profit relating to Aviva Investors Pooled Pensions business. 3 Other Group activities include Group Reinsurance. 4 Restated for the adoption of revised IAS19 and IFRS 10. See note 1 for further details. Also restated for the revised segmentation per note 3. 5 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). For further details see note 4. 6 Other Group activities included a reversal of an impairment in respect of our investment in Delta Lloyd of £205 million.
Notes to the consolidated financial statements continued 5 – Segmental information continued (a) (iii) Segmental statement of financial position as at 31 December 2013
Insurance liabilities Long-term business and outstanding claims provisions 67,484 5,657 16,185 2,640 9,575 2,372 2,142 — 45 106,100 Unearned premiums 248 2,094 404 43 298 1,088 50 — 1 4,226 Other insurance liabilities — 84 50 — 1 92 — — 2 229 Liability for investment contracts 54,679 — 49,856 14 9,750 — — 1,759 — 116,058 Unallocated divisible surplus 1,857 — 4,292 72 342 — 150 — — 6,713 Net asset value attributable to unitholders 287 — 3,032 — 324 — — — 6,719 10,362 External borrowings 2,620 — — — 72 — — — 5,127 7,819 Other liabilities, including inter-segment liabilities 6,987 (3,412) 2,650 114 963 444 279 272 5,032 13,329 Liabilities of operations classified as held for sale — — — — 3,003 — 20 — — 3,023
Goodwill — 1,037 — 9 342 50 55 27 — — 1,520 Acquired value of in-force business and intangible assets 140 3 133 10 633 49 5 56 — 55 1,084 Interests in, and loans to, joint ventures and associates 1,132 — 148 10 116 — 245 4 — — 1,655 Property and equipment 91 13 220 2 8 21 6 5 — 25 391 Investment property 6,774 8 1,342 — 2 — — 1,093 — 720 9,939 Loans 23,193 369 848 — 14 83 30 — — — 24,537 Financial investments 90,182 3,946 59,853 2,920 21,917 3,766 2,808 759 — 2,592 188,743 Deferred acquisition costs 1,357 519 211 19 117 275 5 — — — 2,503 Other assets 16,756 5,074 11,421 201 2,561 1,053 335 436 — 3,655 41,492 Assets of operations classified as held for sale 3,490 — — — 2,762 — 126 28 36,187 10 42,603
Fund management Our fund management business invests policyholders’ and shareholders’ funds, provides investment management services for institutional pension fund mandates and manages a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. Clients include Aviva Group businesses and third-party financial institutions, pension funds, public sector organisations, investment professionals and private investors.
Net earned premiums 11,769 8,854 — — 20,623 Fee and commission income 600 80 348 251 1,279 12,369 8,934 348 251 21,902 Net investment income/(expense) 12,184 349 3 (27) 12,509 Inter-segment revenue — — 143 — 143 Share of profit of joint ventures and associates 117 3 — — 120 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 125 (10) — — 115
Claims and benefits paid, net of recoveries from reinsurers (16,333) (5,760) — — (22,093) Change in insurance liabilities, net of reinsurance 2,519 (26) — — 2,493 Change in investment contract provisions (7,050) — — — (7,050) Change in unallocated divisible surplus 280 — — — 280 Fee and commission expense (1,078) (2,492) (34) (371) (3,975) Other expenses (764) (495) (369) (592) (2,220) Inter-segment expenses (134) (9) — — (143) Finance costs (163) (11) (60) (375) (609)
Profit before tax from continuing operations 2,072 483 31 (1,114) 1,472 Tax attributable to policyholder returns (191) — — — (191)
Profit before tax attributable to shareholders’ profits 1,881 483 31 (1,114) 1,281 Adjusted for: Non-operating items from continuing operations 20 314 62 372 768
Operating profit/(loss) before tax attributable to shareholders’ profits from continuing operations 1,901 797 93 (742) 2,049
Operating profit/(loss) before tax attributable to shareholders’ profits from discontinued operations3 272 — 31 (13) 290
Notes to the consolidated financial statements continued 5 – Segmental information continued (b) (ii) Segmental income statement – products and services for the year ended 31 December 2012 – (Restated)3
Gross written premiums1 13,209 9,535 — — 22,744 Premiums ceded to reinsurers (930) (641) — — (1,571)
Net earned premiums 12,279 8,878 — — 21,157 Fee and commission income 632 65 331 245 1,273 12,911 8,943 331 245 22,430 Net investment income 20,236 823 6 70 21,135 Inter-segment revenue — — 127 — 127 Share of (loss)/profit of joint ventures and associates (5) 1 3 (254) (255) Loss on the disposal and remeasurement of subsidiaries, joint ventures and associates (6) (21) — (137) (164)
Profit/(loss) before tax from continuing operations 1,085 636 11 (1,336) 396 Tax attributable to policyholder returns (221) — — — (221)
Operating profit/(loss) before tax attributable to shareholders’ profits from continuing operations 1,831 894 51 (738) 2,038
Notes to the consolidated financial statements continued 5 – Segmental information continued (b) (iii) Segmental statement of financial position as at 31 December 2013
Goodwill 328 1,048 27 73 1,476 Acquired value of in-force business and intangible assets 791 160 48 69 1,068 Interests in, and loans to, joint ventures and associates 1,462 5 — — 1,467 Property and equipment 187 91 1 34 313 Investment property 8,760 140 — 551 9,451 Loans 23,523 346 — 10 23,879 Financial investments 179,653 10,717 35 2,556 192,961 Deferred acquisition costs 1,525 862 10 — 2,397 Other assets 29,673 4,815 459 7,804 42,751 Assets of operations classified as held for sale 2,949 164 — — 3,113
Gross insurance liabilities 96,153 14,402 — — 110,555 Gross liabilities for investment contracts 116,058 — — — 116,058 Unallocated divisible surplus 6,713 — — — 6,713 Net asset value attributable to unitholders 3,643 — — 6,719 10,362 External borrowings 2,678 — — 5,141 7,819 Other liabilities, including inter-segment liabilities 9,323 (2,629) 346 6,289 13,329 Liabilities of operations classified as held for sale 2,881 142 — — 3,023
Total equity and liabilities 314,467 1 The statement of financial position has been restated following the adoption of IFRS 10 ‘Consolidated Financial Statements’- see note 1 for details. There is no impact on the result for the year ended 31 December 2012 as a result of this restatement.
Gross written premiums (notes 5a and 5b) Long-term: Insurance contracts 8,749 9,683 Participating investment contracts 3,925 3,526 General insurance and health 9,361 9,535 22,035 22,744 Less: premiums ceded to reinsurers (notes 5a and 5b) (1,546) (1,571) Gross change in provision for unearned premiums (note 41e) 136 (21) Reinsurers’ share of change in provision for unearned premiums (note 44ciii) (2) 5 Net change in provision for unearned premiums 134 (16)
Fee and commission income Fee income from investment contract business 465 461 Fund management fee income 347 330 Other fee income 294 304 Reinsurance commissions receivable 90 92 Other commission income 45 41 Net change in deferred revenue 38 45
Notes to the consolidated financial statements continued 7 – Details of expenses This note gives further detail on the items appearing in the expenses section of the consolidated income statement.
Claims and benefits paid, net of recoveries from reinsurers 22,093 23,601
Change in insurance liabilities Change in insurance liabilities (note 41) (2,396) 688 Change in reinsurance asset for insurance provisions (note 41) (97) (258)
Change in investment contract provisions Investment income allocated to investment contracts 4,406 3,178 Other changes in provisions Participating investment contracts (note 42) 2,244 759 Non-participating investment contracts 409 525 Change in reinsurance asset for investment contract provisions (9) (12)
Other net foreign exchange (gains)/losses (78) 4 Finance costs (note 8) 609 653
Total finance costs 625 674 1 Restated for the adoption of revised IAS19 and IFRS10. See note 1 for further details.
(b) Economic volatility The investment variances and economic assumption changes excluded from the long-term business operating profit are as follows: Long-term business 2013 £m
Notes to the consolidated financial statements continued 9 – Long-term business economic volatility continued The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return on investments and the impact of experience variances and assumption changes for non-economic items. The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside operating profit. For many types of long-term business, including unit-linked and with-profits funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business the profit impact of economic volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.
(a) The short-term fluctuations in investment return and economic assumption changes attributable to the non-long-term business result and reported outside operating profit were as follows: Non-long-term business 2013 £m
Short-term fluctuations in investment return (see (b) below) – continuing operations (336) 7 Economic assumption changes – continuing operations (see (g) below) 33 (21)
Analysis of investment income: Net investment income 266 827 Foreign exchange on unrealised gains/losses and other charges (35) (97)
Notes to the consolidated financial statements continued 10 – Longer-term investment return and economic assumption changes for non-long-term business continued The longer-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated longer-term return for other investments is the actual income receivable for the year. Actual income and longer-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities. For other operations, the longer-term return reflects assets backing non-longterm business held in the France holding company and Group centre investments, including the centre hedging programme. Market value movements which give rise to variances between actual and longer-term investment returns are disclosed separately in short term fluctuations outside operating profit. The adverse movement in short term fluctuations during 2013 compared with 2012 is mainly due to an increase in risk free rates reducing fixed income security market values and other market movements impacting Group centre investments and the centre hedging programme.
(d) The total assets supporting the general insurance and health business, which contribute towards the longer-term return, are: Debt securities 10,105 9,297 Equity securities 339 774 Properties 140 139 Cash and cash equivalents 1,969 2,535 Other 5,410 5,997
Total assets supporting non-long-term business 18,658 18,948 1 For 2013 represents assets backing non-life business in the France holding company and Group centre investments, including the centre hedging programme. For 2012 represents assets in France holding company backing non-longterm business.
Actual return attributable to shareholders 2,902 3,095 Longer-term return credited to operating results (3,578) (3,902)
(f) The table below shows the sensitivity of the Group’s non-long-term business operating profit for continuing operations before tax to changes in the longer-term rates of return: Continuing operations – Movement in investment return for By Change in 2013 £m
Equities 1% higher/lower Group operating profit before tax 8 6 Properties 1% higher/lower Group operating profit before tax 1 2
United Kingdom & Ireland 14,886 17,580 16,751 18,695 France 4,134 4,272 4,177 4,261 Poland 1,260 1,162 1,230 1,207 Italy, Spain and Other 1,239 1,624 1,392 1,817 Canada 3,582 3,758 3,685 3,729 Asia 1,081 1,118 1,128 1,913 Aviva Investors 923 1,056 979 1,134 Other Group Activities 613 641 628 833
Employees in continuing operations 27,718 31,211 29,970 33,589 Employees in discontinued operations — 1,911 1,552 1,941
Wages and salaries 1,230 1,421 Social security costs 200 214 Post-retirement obligations Defined benefit schemes (note 49d)1 (128) 19 Defined contribution schemes (note 49d) 107 102 Profit sharing and incentive plans 117 112 Equity compensation plans (note 32d) 39 47 Termination benefits 106 51
Acquisition costs 474 561 Claims handling expenses 156 158 Central costs and sharesave schemes 85 78 Other operating expenses 841 1,122 Integration and restructuring costs 115 47
Current tax For this year 517 531 Prior year adjustments 13 (47)
Deferred tax Origination and reversal of temporary differences 63 (33) Changes in tax rates or tax laws (13) (12) Write-down of deferred tax assets 14 43
Total tax charged to income statement from continuing operations 594 482 Total tax charged to income statement from discontinued operations 265 152
Total tax charged to income statement 859 634 1 Restated for the adoption of revised IAS19. See note 1 for further details.
(ii) The Group, as a proxy for policyholders in the UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Irish and Singapore life insurance policyholder returns is included in the tax charge. The tax charge attributable to policyholders’ returns included in the charge above is £191 million (2012: £221 million).
Restated1 859 634 1 Restated for the adoption of revised IAS19. See note 1 for further details.
Long-term business technical provisions and other insurance items (24) (1,868) Deferred acquisition costs (90) 254 Unrealised gains on investments 145 2,312 Pensions and other post-retirement obligations 6 12 Unused losses and tax credits 112 (30) Subsidiaries, associates and joint ventures (2) — Intangibles and additional value of in-force long-term business (6) (12) Provisions and other temporary differences (77) (670)
Total tax credited to other comprehensive income (280) (90) 1 Restated for the adoption of revised IAS19. See note 1 for further details.
Notes to the consolidated financial statements continued 14 – Tax continued (c) Tax credited to equity Tax credited directly to equity in the year amounted to £52 million (2012: £18 million). This comprises £22 million in respect of coupon payments on the direct capital instruments and fixed rate tier 1 notes and £30 million in respect of the currency translation reserve recycled to the income statement on the sale of Aviva USA Corporation.
(d) Tax reconciliation The tax on the Group’s profit/(loss) before tax differs from the theoretical amount that would arise using the tax rate of the home country of the Company as follows: Shareholder £m Policyholder £m £m Shareholder £m Policyholder £m
Total tax charged to income statement 668 191 859 413 221 634 1 Restated for the adoption of revised IAS19. See note 1 for further details.
Different basis of tax – policyholders per tax reconciliation 147 170
Notes to the consolidated financial statements continued 15 – Earnings per share This note shows how we calculate earnings per share, based both on the present shares in issue (the basic earnings per share) and the potential future shares in issue, including conversion of share options granted to employees (the diluted earnings per share). We have also shown the same calculations based on our operating profit as we believe this gives a better indication of operating performance.
(a) Basic earnings per share (i) The profit/(loss) attributable to ordinary shareholders is: Continuing operations
Profit/(loss) before tax 2,049 (768) 1,281 2,010 (1,835) 175 Tax attributable to shareholders' profit/(loss) (534) 131 (403) (499) 238 (261)
Profit/(loss) attributable to ordinary shareholders 1,461 460 1,921 1,416 (4,590) (3,174) 1 Restated for the adoption of revised IAS19. See note 1 for further details.
Net of tax, noncontrolling interests, preference dividends and DCI1 £m Per share p
Operating profit attributable to ordinary shareholders 2,049 1,254 42.6 2,038 1,255 43.1 Non-operating items: Investment return variances and economic assumption changes on life business (49) (142) (4.8) (620) (499) (17.1) Short-term fluctuation in return on investments backing non life business (336) (254) (8.6) 7 9 0.3 Economic assumption changes on general insurance and health business 33 27 0.9 (21) (16) (0.6) Impairment of goodwill, associates and joint ventures (77) (77) (2.6) (60) (60) (2.1) Amortisation and impairment of intangibles (91) (65) (2.2) (128) (84) (2.9) Profit/(loss) on disposal and remeasurement of subsidiaries, joint ventures and associates 115 220 7.4 (164) (164) (5.6) Integration and restructuring costs and exceptional items (363) (315) (10.7) (461) (379) (13.0) Share of Delta Lloyd's non-operating items (before tax) as an associate — — — (523) (388) (13.3) Share of Delta Lloyd's tax expense, as an associate — — — 107 — —
Profit/(loss) attributable to ordinary shareholders from continuing operations 1,281 648 22.0 175 (326) (11.2)
(iii) The calculation of basic earnings per share uses a weighted average of 2,940 million (2012: 2,910 million) ordinary shares in issue, after deducting shares owned by the employee share trusts. The actual number of shares in issue at 31 December 2013 was 2,947 million (2012: 2,946 million) and 2,938 million (2012: 2,936 million) excluding shares owned by the employee share trusts.
Profit/(loss) attributable to ordinary shareholders 648 2,940 22.0 (326) 2,910 (11.2) Dilutive effect of share awards and options — 39 (0.2) — 44 —
Diluted earnings/(loss) per share from discontinued operations1 1,273 2,979 42.7 (2,848) 2,954 (97.9)
Operating profit attributable to ordinary shareholders 1,254 2,940 42.6 1,255 2,910 43.1 Dilutive effect of share awards and options — 39 (0.5) — 44 (0.6)
Operating profit attributable to ordinary shareholders 207 2,940 7.0 161 2,910 5.5 Dilutive effect of share awards and options — 39 (0.1) — 44 (0.1)
Diluted operating profit per share from discontinued operations 207 2,979 6.9 161 2,954 5.4
Diluted operating profit per share 1,461 2,979 49.0 1,416 2,954 47.9 1 Restated for the adoption of revised IAS19. See note 1 for further details.
Ordinary dividends declared and charged to equity in the year Final 2012 – 9.00 pence per share, paid on 17 May 2013 264 — Final 2011 – 16.00 pence per share, paid on 17 May 2012 — 465 Interim 2013 – 5.6 pence, paid on 15 November 2013 165 — Interim 2012 – 10.00 pence per share, paid on 16 November 2012 — 292 429 757 Preference dividends declared and charged to equity in the year 17 17 Coupon payments on direct capital instruments and fixed rate tier 1 notes 92 73
Gross amount At 1 January 2,774 2,850 Acquisitions and additions 6 1 Disposals1 (1,034) (13) Foreign exchange rate movements 24 (64)
Accumulated impairment At 1 January (1,071) (210) Impairment losses charged to expenses (48) (891) Disposals1 842 10 Foreign exchange rate movements (13) 20
Goodwill on acquisitions and additions arose on the acquisition of a small general insurance business in Canada and a small wealth management business in Singapore. Goodwill impairment charges of £48 million have been recognised in income statement (see (b) below). Together with impairment charges of £29 million recognised in respect of goodwill within interests in associates (note 20), the total charge for impairment of goodwill, joint ventures and associates for the year was £77 million. Goodwill disposed of during the year relates to the Group’s US Life business, Aseval, a Spanish long-term business, and the Russian long-term business (see note 4(b)). Goodwill classified as held for sale of £4 million relates to the Group’s Indonesian business (see note 4(c)).
Italy long-term business MCEV MCEV 2.0 2.0 10.5 10.6 Spain long-term business MCEV MCEV 1.5 0.0 10.0 7.9
At 31 December 2012 2,261 288 1,737 114 4,400 Additions — — 110 — 110 Disposals3 (1,850) (158) (477) — (2,485) Movement in shadow adjustment 133 — — — 133 Foreign exchange rate movements 18 10 8 4 40
Accumulated amortisation At 1 January 2012 (1,535) (155) (650) — (2,340) Amortisation for the year (226) (20) (107) — (353) Disposals 154 5 59 — 218 Foreign exchange rate movements 60 5 16 — 81
Accumulated Impairment At 1 January 2012 (114) — (105) (65) (284) Impairment losses charged to expenses (34) (39) (152) — (225) Disposals 3 — 70 — 73 Foreign exchange rate movements 1 — 2 2 5
Less: Assets classified as held for sale — — — — —
(a) Intangible assets with indefinite useful lives comprise the value of the Union Financière de France Banque distribution channel, where the existing lives of the assets and their competitive position in, and the stability of, their respective markets support this classification. Impairment testing of these intangible assets is covered in note 17(b).
(b) Other intangible assets with finite useful lives consist primarily of the value of bancassurance and other distribution agreements. Acquisitions of intangible assets with finite lives relate to Canadian broker businesses. Disposals comprise the AVIF and intangible assets with finite useful lives of the US Life business and also include the derecognition of exhausted assets which are fully amortised or impaired with nil carrying value. Impairment losses on intangible assets with finite lives of £24 million arise from impairments of capitalised software in the
US long-term operations, Aviva Investors and Canada general insurance operations of £10 million, £11 million and £3 million respectively. Impairment tests were conducted as described in note 17(b).
AVIF on insurance and investment contracts is generally recoverable in more than one year. Of the total AVIF of £132 million (£94 million on insurance contracts, £38 million on investment contracts), £93 million (2012: £131 million) is expected to be recovered more than one year after the statement of financial position date.
Share of (loss)/profit after tax (5) 145 — 140 (15) — — (15) Impact of the adoption of IFRS 102 — — — — — (77) (49) (126) Additions — 149 6 155 — 89 4 93 Reclassification to subsidiary — — — — — (107) — (107) Reduction in Group interest — (37) — (37) — — — — Disposals (54) (378) — (432) — (41) — (41) Share of (losses)/gains taken to other comprehensive income — (37) — (37) — 21 — 21 Loans repaid — — (21) (21) — — (12) (12) Dividend received — (37) — (37) — (5) — (5) Foreign exchange rate movements (13) (1) (4) (18) — (4) — (4)
Less: Amounts classified as held for sale — (29) — (29) (54) (72) — (126)
The impact of the adoption of IFRS 10 on the Group’s share of results has been reflected in the appropriate lines in the table above. See note 1 for further details.
Property management undertakings — 893 24 917 — 996 43 1,039 Long-term business undertakings 60 252 — 312 132 339 — 471 General insurance undertakings — — — — — 6 — 6
Total 60 1,145 24 1,229 132 1,341 43 1,516 1 Restated for the adoption of IFRS10. Refer to note 1 for further details
The property management undertakings perform property ownership and management activities, and are incorporated and operate in the UK. All such investments are held by subsidiary entities. The loans are not secured and no guarantees were received in respect thereof. They are interest-bearing and are repayable on termination of the relevant partnership. The long-term business undertakings perform life insurance activities. All investments in such undertakings are unlisted and are held by subsidiaries, except for the shares in the Chinese joint venture, Aviva-COFCO Life Insurance Co. Limited, which are held by Aviva plc. The Group’s share of net assets of that company is £177 million (2012: £141 million), which has a fair value of £177 million (2012: £141 million).
Total comprehensive income 103 6 1 Restated for the adoption of IFRS10. See note 1 for further details.
b) Impairment testing Joint ventures are tested for impairment by comparing the carrying value of the cash generating unit to which the goodwill relates to the recoverable value of that cash generating unit. The recoverable amount of long-term business undertakings is the value in use of the joint venture. This is calculated according to the methodology for the calculation of the value in use of long-term business cash generating units for the impairment testing of goodwill, as set out in note 17(b). The recoverable amount for joint ventures in Korea and Taiwan classified as operations held for sale (Woori Aviva Life Insurance Co. Ltd and First-Aviva Life Insurance Co., Ltd.) is the fair value less costs to sell for each entity, based on the expected net disposal proceeds. The recoverable amount of property management undertakings is the fair value less costs to sell of the joint venture, measured in accordance with the Group’s accounting policy for Investment Property (accounting policy Q). Following impairment testing for the remaining joint ventures, the goodwill amounts within the joint ventures are fully recoverable.
At 31 December — 262 5 267 — 256 9 265 1 Comprises the impact of the adoption of IFRS 10 on prior year comparatives and the resulting consolidation and deconsolidation of entities based on the revised definition and criteria of control outlined in accounting Policy (D).
Loans to associates The loans are not secured and no guarantees were received in respect thereof. They are interest-bearing and are repayable on termination of the relevant partnership.
(ii) No associates are considered to be material from a Group perspective (2012: none). All investments in principal associates are held by subsidiaries. The Group’s principal associates are as follows: Name Nature of activities Principal place of business
Aviva Life Insurance Company India Limited Life insurance India 26.00% 26.00% SCPI Logipierre 1 Property Management France 44.46% 44.46% SCPI Selectipierre 2 Property Management France 22.16% 22.16% SCPI Ufifrance Immobilier Property Management France 20.40% 20.40% SCPI Croissance Immo Property Management France 46.84% 46.84% Encore +1 Property Management UK 12.32% 12.49% 1 The Group has significant influence over Encore + and it is therefore accounted for as an associate.
Total comprehensive income (20) (247) 1 Restated for the adoption of IFRS10. See note 1 for further details.
(iv) The associates have no significant contingent liabilities to which the Group is exposed. In certain jurisdictions the ability of associates to transfer funds in the form of cash dividends or to repay loans and advances made by the Group is subject to local corporate or insurance laws and regulations and solvency requirements. We do not believe that these requirements constitute a material limitation on the ability of the associates to transfer funds to the Group.
Notes to the consolidated financial statements continued 21 – Property and equipment This note analyses our property and equipment, which are primarily properties occupied by Group companies and computer equipment.
Less: Assets classified as held for sale — — — — — —
Fair value losses on owner-occupied properties of £2 million (2012: £3 million losses) have been taken to other comprehensive income. Owner-occupied properties are stated at their revalued amounts, as assessed by qualified external valuers. These values are assessed in accordance with the relevant parts of the current RICS Appraisal and Valuation Standards in the UK, and with current local valuation practices in other countries. This assessment is in accordance with UK Valuations Standards (“Red book”), and is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction, after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion, on the basis of the highest and best use of asset that is physically possible, legally permissible and financially feasible. The valuation assessment is in line with guidance from the International Valuation Standards Committee and the requirements of IAS 16, Property, Plant and Equipment. Similar considerations apply to properties under construction, where an estimate is made of valuation when complete, adjusted for anticipated costs to completion, profit and risk, reflecting market conditions at the valuation date. In 2012, the £106 million impairment loss charged to the income statement mainly related to Aviva USA’s property and equipment, the carrying value of which was reduced to nil. If owner-occupied properties were stated on a historical cost basis, the carrying amount would be £255 million (2012: £275 million). The Group has no material finance leases for property and equipment.
Level 2 Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the instrument. Level 2 inputs include the following: Quoted prices for similar assets and liabilities in active markets. Quoted prices for identical or similar assets and liabilities in markets that are not active, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. Inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves observable at commonly quoted intervals, implied volatilities, and credit spreads). Market-corroborated inputs.
Where we use broker quotes and no information as to the observability of inputs is provided by the broker, the investments are classified as follows: Where the broker price is validated by using internal models with market observable inputs and the values are similar, we classify the investment as Level 2.
Level 3 Inputs to Level 3 fair values are unobservable inputs for the asset or liability. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs reflect the assumptions the business unit considers that market participants would use in pricing the asset or liability. Examples are investment properties, certain private equity investments and private placements.
Notes to the consolidated financial statements continued 23 – Fair value methodology continued The majority of the Group’s assets and liabilities measured at fair value are based on quoted market information or observable market data. 16.6% of assets and 0.9% of liabilities measured at fair value are based on estimates and recorded as Level 3. Where estimates are used, these are based on a combination of independent third-party evidence and internally developed models, calibrated to market observable data where possible. Third-party valuations using significant unobservable inputs validated against Level 2 internally modelled valuations are classified as Level 3, where there is a significant difference between the third-party price and the internally modelled value. Where the difference is insignificant, the instrument would be classified as Level 2.
(b) Changes to valuation techniques: There were no changes in the valuation techniques during the year compared to those described in the 2012 annual consolidated financial statements, other than those noted below.
Fair value of the following assets and liabilities approximate to their carrying amounts: Receivables Cash and cash equivalents Payables and other financial liabilities The equivalent assets to those above, which are classified as held for sale d) Fair value hierarchy analysis An analysis of assets and liabilities measured at amortised cost and fair value categorised by fair value hierarchy is given below: Fair value hierarchy £m
Fixed maturity securities 74,904 40,602 8,879 124,385 — 124,385 Equity securities 36,783 102 441 37,326 — 37,326 Other investments (including derivatives) 24,077 4,283 2,890 31,250 — 31,250
Financial liabilities measured at fair value Non-participating investment contracts1 (note 42(a)) 47,889 251 — 48,140 — 48,140 Net asset value attributable to unit holders 10,183 179 — 10,362 — 10,362 Borrowings (note 50) — 831 482 1,313 6,506 7,819 Derivative liabilities (note 51) 218 907 63 1,188 — 1,188
Total — — 257 257 1 Non-recurring fair value measurements are those that are required or permitted by other IFRS to be measured at fair value in the statement of financial position in particular circumstances. Owner occupied property is revalued in accordance with IAS 16.
Notes to the consolidated financial statements continued 23 – Fair value methodology continued Owner-occupied properties are stated at their revalued amounts, as assessed by qualified external valuers in line with the Group’s policy. The fair values stated in the table above are as at 31 December 2013. Further details on the valuation of these properties can be found in note 21.
Total 45,154 3,727 501 49,382 8,392 (4,211) 53,563 1 Restated for the impact of the adoption of IFRS 10. Refer to note 1 for further details. 2 This table was prepared in accordance with IFRS 7. 3 In addition to the balances in this table, included within Reinsurance Assets in the Statement of Financial Position and note 44 are £1,581 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as level 1 assets.
Assets and liabilities for which fair value is disclosed The table below shows the fair value and fair value hierarchy for those assets and liabilities not carried at fair value but for which fair value is disclosed in the notes. These exclude any assets or liabilities held for sale.
e) Transfers between levels of the fair value hierarchy For recurring fair value measurements, the Group determines whether transfers have occurred between the levels of the fair value hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of the year.
Level 2 to 1 Transfers from Level 2 to Level 1 of £1.1 billion (2012: £0.3 billion) arose in France (£0.5 billion), Ireland (£0.4 billion), and Spain (£0.2 billion) and were due to improvements in pricing sourcing or increasing liquidity of underlying investments.
£2.6 billion of UK equity release mortgage loans. During 2013, the discounted cash flow model used to value certain equity release mortgage loans has been revised, incorporating a greater number of inputs relevant to calculating a fair value of these mortgages. Within this model, credit risk assumptions are derived from market data with adjustments applied to ensure they are relevant to the mortgage portfolio, but these are not fully market observable. As a result, these assets have been classified as Level 3 and transferred from Level 2.
f) Further information on Level 3 assets and liabilities: The table below shows movement in the Level 3 assets and liabilities measured at fair value: Assets Liabilities
Opening balance at 1 January 2013 — — 9,962 473 2,489 516 (443) (58) — Total net (losses)/gains recognised in the income statement — — (36) (39) 179 4 — (13) — Total net gains recognised in other comprehensive income — — — — 1 19 — — — Purchases — — 1,983 11 832 187 — (50) — Issuances — — — — — — (11) — — Disposals1 — — (1,527) (11) (897) (737) 270 58 — Transfers into Level 3 9,482 15,362 301 — 545 — — — (482) Transfers out of Level 3 — — (2,089) — (119) — 184 — — Reclassification to held for sale — — — (3) (159) 162 — — — Foreign exchange movements (31) — 285 10 19 (3) — — —
The principal investments classified as Level 3, and the valuation techniques applied to them, are: Commercial mortgage loans held by our UK Life business amounting to £9.9 billion, valued using a Portfolio Credit Risk Model (PCRM). This model calculates a Credit Risk Adjusted Value (CRAV) for each mortgage. The risk adjusted cash flows are discounted using a yield curve, taking into account the term dependent gilt yield curve, and global assumption for the liquidity premium. The mortgage loans have been classified as Level 3 as the liquidity premium is not deemed to be market observable.
Investment property amounting to £9.5 billion. In the UK, the majority of investment property is valued at least annually by external chartered surveyors in accordance with guidance issued by The Royal Institution of Chartered Surveyors, and using estimates during the intervening period. For other investment property, valuations are produced by local qualified staff of the Group or external qualified professional valuers in the countries concerned. Fair values are determined using an income method, by which own lease agreement cash-flows are adjusted for anticipated uplifts, and discounted by rates implied by recent market transactions for similar properties where available. These inputs are deemed unobservable.
Private equity investment funds amounting to £1.1 billion (2012: £1.3 billion), together with external hedge funds held principally by businesses in the UK and France amounting to £1.1 billion (2012: £1.3 billion), and property funds amounting to £0.5 billion are valued based on external reports received from the fund manager. Where these valuations are at a date other than balance sheet date, as in the case of some private equity funds, we make adjustments for items such as subsequent draw-downs and distributions and the fund manager’s carried interest.
Level 3 investments including a collateralised loan obligation of £0.4 billion (2012: £nil) and UK non-recourse loans of £0.8 billion (2012: £nil) have been valued using internally developed discounted cash flow models.
Investments including debt securities held by our French business of £0.7 billion (2012: £nil) and notes issued by loan partnerships held by our UK Life business amounting to £0.3 billion (2012: £1.0 billion), have been valued using third party or counterparty valuations.
Other Level 3 investments amount to £1.1 billion (2012: £0.9 billion) and relate to a diverse range of different types of securities held by a number of businesses throughout the Group.
Where possible, the Group tests the sensitivity of the fair values of Level 3 investments to changes in unobservable inputs to reasonable alternatives. Where possible of valuations for Level 3 investments are sourced from independent third parties and, where appropriate, validated against internally-modelled valuations, third-party models or broker quotes. Where third-party pricing sources are unwilling to provide a sensitivity analysis for their valuations, the Group undertakes, where feasible, sensitivity analysis on the following basis: For third-party valuations validated against internally-modelled valuations using significant unobservable inputs, the sensitivity of the internally modelled valuation to changes in unobservable inputs to a reasonable alternative is determined.
On the basis of the methodology outlined above, the Group is able to perform sensitivity analysis for £35.7 billion of the Group’s Level 3 investments. For these Level 3 investments, changing unobservable valuation inputs to a reasonable alternative would result in a change in fair value by ± £1.8 billion. Of the £1.5 billion Level 3 investments for which sensitivity analysis is not provided, £0.6 billion relates to investments held in unit-linked and participating funds in France where investment risk is predominantly borne by policyholders and therefore shareholder profit before tax is insensitive to reasonable change in fair value of these investments. The remaining £0.9 billion of Level 3 investments are held predominantly to back non-linked shareholder business and it is estimated that a 10% change in valuation of these investments would increase or reduce shareholder profit before tax by £90 million.
(a) Carrying amounts The carrying amounts of loans at 31 December 2013 and 2012 were as follows: At fair value through profit or loss other than trading £m
Policy loans 1 888 889 2 1,309 1,311 Loans to banks 757 4,087 4,844 — 4,250 4,250 UK securitised mortgage loans (see note 25) 2,169 — 2,169 2,218 — 2,218 Non-securitised mortgage loans 15,550 192 15,742 16,753 3,211 19,964 Loans to brokers and other intermediaries — 78 78 — 89 89 Other loans — 157 157 — 102 102
Less: Amounts classified as sale — — — (56) (3,341) (3,397)
Loans at amortised cost The fair value of these loans at 31 December 2013 was £5,334 million (2012: £8,735 million).
Notes to the consolidated financial statements continued 24 – Loans continued The movements in the impairment provisions on these loans for the years ended 31 December 2012 and 2013 were as follows: £m
At 1 January (128) (94) Increase during the year (30) (45) Write back following sale or reimbursement 3 2 Write back following recovery in value 4 9 Foreign exchange rate movements — —
(a) Description of current arrangements In a UK long-term business subsidiary, Aviva Equity Release UK Limited (AER), the beneficial interest in certain portfolios of lifetime mortgages has been transferred to five special purpose securitisation companies (the ERF companies), in return for initial consideration and, at later dates, deferred consideration. The deferred consideration represents receipts accrued within the ERF companies after meeting all their obligations to the note holders, loan providers and other third parties in the priority of payments. The purchases of the mortgages were funded by the issue of fixed and floating rate notes by the ERF companies. All the shares in the ERF companies are held by independent companies, whose shares are held on trust. Although AER does not own, directly or indirectly, any of the share capital of the ERF companies or their parent companies, it has control of the securitisation companies, and they have therefore been treated as subsidiaries in the consolidated financial statements. AER has no right to repurchase the benefit of any of the securitised mortgage loans, other than in certain circumstances where AER is in breach of warranty or loans are substituted in order to effect a further advance. AER has purchased subordinated notes and granted subordinated loans to some of the ERF companies. In addition, Group companies have invested in loan notes issued by the ERF companies. These have been eliminated on consolidation through offset against the borrowings of the ERF companies in the consolidated statement of financial position. In all of the above transactions, the Company and its subsidiaries are not obliged to support any losses that may be suffered by the note holders and do not intend to provide such support. Additionally, the notes were issued on the basis that note holders are only entitled to obtain payment, of both principal and interest, to the extent that the available resources of the respective special purpose securitisation companies, including funds due from customers in respect of the securitised loans, are sufficient and that note holders have no recourse whatsoever to other companies in the Aviva Group.
Secured mortgage loans at fair value (note 24) 2,169 (1,493) 2,218 (1,515) Other securitisation assets/(liabilities) 301 (977) 351 (1,054)
(a) Interests in consolidated structured entities The Group has determined that where it has control over investment vehicles, these investments are consolidated structured entities. As at 31 December 2013 the Group has granted loans to consolidated PLPs for a total of £371 million (2012: £351 million). The purpose of these loans is to assist the consolidated PLPs to purchase or construct properties within the funds business activity. The Group has also provided support, without having a contractual obligation to do so, to certain PLPs via letters of support amounting to £39 million (2012: £34 million) in relation to loans to consolidated PLPs. The Group has also given support to the consolidated structured entity Aviva Equity Release UK Limited (AER). As reported in note 25, at the inception of the securitisation vehicle, the UK subsidiary, Aviva Equity Release UK Limited (AER), has granted subordinated loan facilities to some of the ERF companies. AER receives various fees in return for the services provided to the entities. For the administration of the loan note liabilities Aviva receives cash management fees based on the outstanding loan balance at the start of each quarter. As compensation for managing the mortgage assets, AER receives portfolio administration fees. As at the reporting date, the Group has no intentions to provide financial or other support in relation to any other investment vehicles.
Specialised investment vehicles2 917 84 10,068 11,069 Analysed as: OEICs — — 1,683 1,683 PLPs 917 84 986 1,987 SICAVs — — 3,966 3,966 FCPs — — 3,312 3,312 SPVs — — 121 121
Specialised investment vehicles: 1,496 9 Analysed as: OEICs 200 3 PLPs 1,196 5 SICAVS 2 — FCP 98 1
Total 25,226 103 1 Investment funds relate to the Group’s US external mutual funds management business and the Spanish and Polish pension funds.
Other investments Unit trusts and other investment vehicles — 28,599 7 28,606 — 25,142 441 25,583 Derivative financial instruments (note 59) 1,058 — — 1,058 1,590 — — 1,590 Deposits with credit institutions — 598 3 601 — 739 — 739 Non-controlling interest in property management undertakings — 796 — 796 — 726 — 726 Other investments – long-term — 386 3 389 — 370 54 424 Other investments – short-term — 1 — 1 — 6 — 6
Total financial investments 1,058 193,384 1,194 195,636 1,590 193,112 30,456 225,158 Less assets classified as held for sale Fixed maturity securities — (2,413) (7) (2,420) — (4,236) (29,381) (33,617) Equity securities — (54) — (54) — (1,187) (61) (1,248) Other investments — (201) — (201) — (1,072) (478) (1,550) — (2,668) (7) (2,675) — (6,495) (29,920) (36,415)
1,058 190,716 1,187 192,961 1,590 186,617 536 188,743 1 Restated for the adoption of IFRS10. See note 1 for further details.
These are further analysed as follows: At fair value through profit or loss 179,683 18,592 (3,833) 194,442 180,739 18,463 (4,500) 194,702 Available for sale 1,251 53 (110) 1,194 27,051 3,582 (177) 30,456 180,934 18,645 (3,943) 195,636 207,790 22,045 (4,677) 225,158 1 Restated for the adoption of IFRS10. See note 1 for further details.
At 1 January (84) (4) (9) (97) (126) (5) (7) (138) Charge for the year taken to the income statement (12) — (1) (13) (12) — (2) (14) Write back following sale or reimbursement 101 — — 101 49 — — 49 Write back following recovery in value — — — — — 1 — 1 Foreign exchange rate movements (5) (1) 2 (4) 5 — — 5
(d) Financial investment arrangements (i) Stock lending arrangements The Group has entered into stock lending arrangements in the UK and overseas in accordance with established market conventions. The majority of the Group’s stock lending transactions occur in the UK, where investments are lent to EEA-regulated, locally domiciled counterparties and governed by agreements written under English law.
Notes to the consolidated financial statements continued 27 – Financial investments continued Non-cash collateral received The Group receives collateral in order to reduce the credit risk of these arrangements. Collateral must be in a readily realisable form, such as listed securities, and is held in segregated accounts. Transfer of title always occurs for collateral received, although no market risk or economic benefit is taken. The level of collateral held is monitored regularly, with further collateral obtained where this is considered necessary to manage the Group’s risk exposure. In certain markets, the Group or the Group’s appointed stock lending managers obtain legal ownership of the collateral received and can re-pledge it as collateral elsewhere or sell outright in the absence of default. The carrying amount of financial assets received in this manner at 31 December 2013 was £16,914 million (2012: £16,943 million). The value of collateral that was actually sold in the absence of default was £nil (2012: £nil).
Cash collateral received In addition to the above, the Group has received cash collateral under stock lending arrangements that has been recognised in the statement of financial position with a corresponding obligation for its return. The latter balance is included in note 51.
(ii) Other arrangements In carrying on its bulk purchase annuity business, the Group’s UK Life operation is required to place certain investments in trust on behalf of the policyholders. Amounts become payable from the trust funds to the trustees if the Group were to be in breach of its payment obligations in respect of policyholder benefits. At 31 December 2013 £1,201 million (2012: £1,208 million) of financial investments were restricted in this way. Certain financial investments are also required to be deposited under local laws in various overseas countries as security for the holders of policies issued in those countries. Other investments are pledged as security collateral for bank letters of credit.
Less: assets of operations classified as held for sale 13 197 1,649 556 201 2,274 1,863 3,027
Total (excluding assets held for sale) 1,985 2,496 30,045 31,103 10,001 9,834 42,031 43,433 1 Restated for the adoption of IFRS10. See note 1 for further details.
At 31 December 2013, the Group’s total non-UK government debt securities stood at £43.9 billion (2012: £46.5 billion), a decrease of £2.6 billion. The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds. Our direct shareholder asset exposure to non-UK government debt securities amounts to £10.2 billion (2012: £12.1 billion). The primary exposures, relative to total shareholder non-UK government debt exposure, are to Canadian (22%), French (19%), Spanish (9%), German (7%) and Italian (6%) government debt securities. The participating funds exposure to non-UK government debt amounts to £31.7 billion (2012: £31.7 billion). The primary exposures, relative to total non-UK government debt exposures included within our participating funds, are to the government debt securities of France (31%), Italy (27%), Germany (6%), Belgium (5%), Spain (4%) and Netherlands (4%).
Austria — — — 0.2 — 0.2 France 0.2 — 0.2 3.4 0.9 4.3 Germany — — — 0.5 0.5 1.0 Italy 0.1 0.1 0.2 0.3 0.1 0.4 Netherlands 0.2 0.2 0.4 1.8 0.1 1.9 Spain 0.8 0.1 0.9 0.9 0.1 1.0 United Kingdom 0.6 0.3 0.9 0.7 0.9 1.6 United States 0.5 0.1 0.6 1.0 0.1 1.1 Other 0.4 0.3 0.7 1.7 0.5 2.2
Less: assets of operations classified as held for sale — — — — — —
Total (excluding assets held for sale) 2.8 1.1 3.9 10.5 3.2 13.7
Net of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £3.9 billion. The reduction from 2012 is principally driven by the disposal of our US business during 2013. The majority of our holding (72%) is in senior debt. The primary exposures are to Spain (23%), UK (23%) and US (15%) banks. Net of non-controlling interests, our direct shareholder asset exposure to worldwide bank equity securities is £0.3 billion. Our holdings include strategic holdings in Italian banks of £132 million. Net of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £13.7 billion. The majority of the exposure (77%) is in senior debt. Participating funds are the most exposed to French (31%), Dutch (14%) and UK (12%) banks.
Amounts owed by contract holders 1,762 1,693 Amounts owed by intermediaries 1,222 1,398 Deposits with ceding undertakings 1,479 1,395 Amounts due from reinsurers 294 367 Amounts due from brokers for investment sales 149 444 Amounts receivable for cash collateral pledged (note 59) 202 241 Amounts due from government, social security and taxes 475 521 Corporate owned life insurance — 162 Dividends receivable 4 6 Other receivables 1,549 1,662
Total 7,136 7,889 Less: Amounts classified as held for sale (76) (413)
29 – Deferred acquisition costs, other assets, prepayments and accrued income (a) Deferred acquisition costs and other assets – carrying amount The carrying amount comprises: Restated1
Deferred acquisition costs in respect of: Insurance contracts – Long-term business 485 2,122 Insurance contracts – General insurance and health business 868 939 Participating investment contracts – Long-term business 27 30 Non-participating investment contracts – Long-term business 1,013 936 Retail fund management business 10 14
Total deferred acquisition costs 2,403 4,041 Surpluses in the staff pension schemes (note 49(a)) 606 1,257 Other assets 49 35
3,051 3,778 1 Restated for the adoption of IFRS10. See note 1 for further details.
Carrying amount at 1 January 3,088 939 14 4,041 3,778 986 14 4,778 Acquisition costs deferred during the year 407 2,276 — 2,683 841 2,221 4 3,066 Amortisation (466) (2,327) (4) (2,797) (804) (2,257) (4) (3,065) Impact of assumption changes (213) — — (213) (201) — — (201) Effect of portfolio transfers, acquisitions and disposals1 (2,418) — — (2,418) (15) (1) — (16) Foreign exchange rate movements (22) (20) — (42) (89) (10) — (99) Shadow adjustment 1,149 — — 1,149 (422) — — (422)
Less: Amounts classified as held for sale — (6) — (6) (1,538) — — (1,538)
1,525 862 10 2,397 1,550 939 14 2,503 1 Disposals in 2013 include the disposal of the US business (£2,344 million), and the disposal of Ark Life (£67 million).
(c) Other assets Other assets include £1 million (2012: £3 million) that is expected to be recovered more than one year after the statement of financial position date.
(d) Prepayments and accrued income Prepayments and accrued income of £2,599 million including assets classified as held for sale (2012: £3,104 million), includes £103 million (2012: £108 million) that is expected to be recovered more than one year after the statement of financial position date.
30 – Assets held to cover linked liabilities Certain unit-linked products have been classified as investment contracts, while some are included within the definition of an insurance contract. The assets backing these unit-linked liabilities are included within the relevant balances in the consolidated statement of financial position, while the liabilities are included within insurance and investment contract provisions. This note analyses the carrying values of assets backing these liabilities.
Loans 471 605 Debt securities 12,835 16,494 Equity securities 25,836 22,648 Reinsurance assets 2,043 1,576 Cash and cash equivalents 4,725 4,380 Other 30,703 28,027
(a) Details of the Company’s ordinary share capital are as follows: The allotted, called up and fully paid share capital of the Company at 31 December 2013 was: 2,946,939,622 (2012: 2,945,972,261) ordinary shares of 25 pence each 736 736
Share Option Schemes 967,361 — — 3,335,566 1 1 Shares issued in lieu of dividends — — — 36,923,757 9 (9)
(a) Description of the plans The Group maintains a number of active share option and award plans and schemes (the Group’s share plans). These are as follows: (i) Savings-related options These are options granted under the HMRC-approved save as you earn (SAYE) share option schemes in the UK and the Irish revenue-approved SAYE share option scheme in Ireland. Options are normally exercisable during the six-month period following either the third, fifth or seventh anniversary of the start of the relevant savings contract. Options granted in 2012 and 2013 are normally exercisable following the third or fifth anniversary.
(iii) Long-term incentive plan awards These awards have been made under the Aviva long term incentive plan 2011, and are described in section (b) below and in the directors’ remuneration report.
Normally exercisable 593 31,442 2013 310 1,032,407 2013, 2015 or 2017 563 43,128 2014 268 8,589,161 2014, 2016 or 2018 410 237,203 2013 or 2015 266 4,854,627 2015 or 2017 316 1,318,491 2014 or 2016 312 2,822,984 2016 or 2018
The following table summarises information about options outstanding at 31 December 2013: Range of exercise prices
The comparative figures as at 31 December 2012 were: Range of exercise prices
Aviva recruitment and retention share awards plan Number of shares Vesting period
(e) Fair value of options and awards granted after 7 November 2002 The weighted average fair values of options and awards granted during the year, estimated by using the binomial option pricing model, were £1.26 and £2.15 (2012: £0.70 and £2.61) respectively.
Share price 408p 326p Exercise price 312p 266p Expected volatility 38% 41% Expected life 3.66 years 3.71 years Expected dividend yield 3.58% 7.98% Risk-free interest rate 0.92% 0.37%
Share price 295.37p 331.54p Expected volatility1 35% 37% Expected volatility of comparator companies’ share price1 31% 38% Correlation between Aviva and competitors’ share price1 67% 63% Expected life 3.00 years 3.00 years Expected dividend yield2 — — Risk-free interest rate1 0.29% 0.42% 1 For awards with market-based performance conditions. 2 The long term incentive plan awards granted in 2012 and 2013 include additional shares being provided to employees equal to dividend rights before vesting. As a result, no dividend yield assumption is required for these awards.
33 – Shares held by employee trusts We satisfy awards and options granted under the Group’s share plans primarily through shares purchased in the market and held by employee share trusts. This note gives details of the shares held in these trusts. Movements in the carrying value of shares held by employee trusts comprise: Number £m Number £m
34 – Preference share capital This note gives details of Aviva plc’s preference share capital. The preference share capital of the Company at 31 December 2013 was: Issued and paid up 100,000,000 8.375% cumulative irredeemable preference shares of £1 each 100 100 100,000,000 8.75% cumulative irredeemable preference shares of £1 each 100 100
The euro and sterling direct capital instruments (the DCIs) were issued on 25 November 2004 and qualify as Innovative Tier 1 capital, as defined by the PRA in GENPRU Annex 1 ‘Capital Resources’. They have no fixed redemption date but the Company may, at its sole option, redeem all (but not part) of the euro and sterling DCIs at their principal amounts on 28 November 2014 and 27 July 2020 respectively, at which dates the interest rates change to variable rates, or on any respective coupon payment date thereafter. In the case of the sterling DCI this variable rate will be the six month sterling deposit rate plus margin while the euro DCI variable rate will be the three month euro deposit rate plus margin. The fixed rate tier 1 notes (the FxdRNs) were issued on 3 May 2012 and also qualify as Innovative Tier 1 capital. The FxdRNs are perpetual but are subject to a mandatory exchange into non-cumulative preference shares in the Company after 99 years. The Company may, at its sole option, redeem all (but not part) of the FxdRNs at their principal amounts on 3 November 2017, or on any respective coupon payment date thereafter. On the occurrence of a Capital Disqualification Event as defined in the terms and conditions of the issue for both the DCIs and FxdRNs, the Company may at its sole option substitute at any time not less than all of the DCIs or FxdRNs for, or vary the terms of the DCIs so that they become, Qualifying Tier 1 Securities or Qualifying Upper Tier 2 Securities. In addition, on the occurrence of a Substitution Event as defined in the terms and conditions of the issue for the DCIs, the Company may at its sole option substitute not less than all of the DCIs for fully paid non-cumulative preference shares in the Company. These preference shares can only be redeemed on 28 November 2014 in the case of the euro DCIs and on 27 July 2020 in the case of the sterling DCIs, or in each case on any dividend payment date thereafter. For the FxdRNs, having given the required notice, the Company has the right to substitute not less than all of the notes for fully paid non-cumulative preference shares at any time. These preference shares can only be redeemed on 3 November 2017, or on any dividend payment date thereafter. The Company has the right to choose whether or not to pay any dividend on the new shares, and any such dividend payment will be non-cumulative. The Company has the option to defer coupon payments on the DCIs or FxdRNs on any relevant payment date. In relation to the DCIs, deferred coupons shall be satisfied only in the following circumstances, all of which occur at the sole option of the Company: Redemption; or Substitution by, or variation so they become, alternative Qualifying Tier 1 Securities or Qualifying Upper Tier 2 Securities; or Substitution by preference shares.
36 – Merger reserve This note describes the use of the merger reserve. Prior to 1 January 2004, certain significant business combinations were accounted for using the ‘pooling of interests method’ (or merger accounting), which treats the merged groups as if they had been combined throughout the current and comparative accounting periods. Merger accounting principles for these combinations gave rise to a merger reserve in the consolidated statement of financial position, being the difference between the nominal value of new shares issued by the Parent Company for the acquisition of the shares of the subsidiary and the subsidiary’s own share capital and share premium account. The merger reserve is also used where more than 90% of the shares in a subsidiary are acquired and the consideration includes the issue of new shares by the Company, thereby attracting merger relief under the Companies Act 1985 and, from 1 October 2009, the Companies Act 2006. The balance on the reserve of £3,271 million (2012: £3,271 million) has arisen through the mergers of Commercial Union, General Accident and Norwich Union companies, forming Aviva plc in 2000, together with the acquisition of RAC plc (“RAC”) in 2005. Because RAC ownership was immediately transferred from Aviva plc to a subsidiary company, this reserve is unaffected by the disposal of RAC in 2011.
Balance at 1 January 2012 1,530 79 530 (663) 86 1,562 Arising in the year through other comprehensive income: Fair value gains/(losses) — (3) 554 — — 551 Fair value gains transferred to profit on disposals — — (234) — — (234) Share of other comprehensive income of joint ventures and associates — — 14 — — 14 Impairment losses on assets previously revalued directly through other comprehensive income now taken to income statement — — 12 — — 12 Foreign exchange rate movements (367) — — 74 — (293) Aggregate tax effect – shareholders’ tax 18 1 (117) — — (98)
Balance at 31 December 2012 1,272 77 855 (589) 60 1,675 Arising in the year through other comprehensive income: Fair value losses — (2) (196) — — (198) Fair value gains transferred to profit on disposals — — (280) — — (280) Share of other comprehensive income of joint ventures and associates — — (37) — — (37) Impairment losses on assets previously revalued through other comprehensive income now taken to income statement — — 12 — — 12 Foreign exchange rate movements (34) — — (39) — (73) Aggregate tax effect – shareholders’ tax (6) — 161 — — 155
Total other comprehensive income for the year (40) (2) (340) (39) — (421) Tax transferred to income statement 30 — — — — 30 Transfer to profit on disposal of subsidiaries, joint ventures and associates (355) (1) (497) 50 — (803) Reserves credit for equity compensation plans — — — — 37 37 Shares issued under equity compensation plans (note 38) — — — — (43) (43)
38 – Retained earnings This note analyses the movements in the consolidated retained earnings during the year.
Balance at 1 January 1,389 5,954 Profit/(Loss) for the year attributable to equity shareholders 2,008 (3,102) Remeasurements of pension schemes (674) (980) Dividends and appropriations (note 16) (538) (847) Shares issued in lieu of dividends — 127 Shares issued under equity compensation plans (note 37) 43 67 Shares distributed by employee trusts (28) (36) Transfer from other reserves on disposal of subsidiary 1 — Aggregate tax effect 147 206
Notes to the consolidated financial statements continued 39 – Non-controlling interests This note gives details of the Group’s non-controlling interests and shows the movements during the year.
Non-controlling interests at 31 December comprised: Equity shares in subsidiaries 641 424 Share of earnings 321 643 Share of other reserves 259 257
Movements in the year comprised: Balance at 1 January 1,574 1,530 Profit for the year attributable to non-controlling interests 143 168 Non-controlling interests share of movements in other reserves — 1 Foreign exchange rate movements 34 (37) Total comprehensive income attributable to non-controlling interests 177 132 Capital contributions from non-controlling interests 1 20 Non-controlling interests share of dividends declared in the year (134) (102) Changes in non-controlling interest in subsidiaries (147) (6)
Notes to the consolidated financial statements continued 41 – Insurance liabilities This note analyses the Group insurance contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions the Group used.
(a) Carrying amount (i) Insurance liabilities (gross of reinsurance) at 31 December comprise: Long-term business £m
Outstanding claims provisions 1,287 7,730 9,017 1,342 7,711 9,053 Provision for claims incurred but not reported — 2,568 2,568 — 2,843 2,843
Provision for unearned premiums — 4,226 4,226 — 4,441 4,441 Provision arising from liability adequacy tests — 10 10 — 11 11 Other technical provisions — — — — — —
Less: Amounts classified as held for sale (106) (132) (238) (34,446) (1) (34,447)
Notes to the consolidated financial statements continued 41 – Insurance liabilities continued (b) Long-term business liabilities (i) Business description The Group underwrites long-term business in a number of countries as follows: In the UK mainly in: – New With-Profits sub-fund (NWPSF) of Aviva Life & Pensions UK (UKLAP), where the with-profit policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance. Any surplus or deficit emerging in NWPSF that is not distributed as bonus will be transferred from this sub-fund to the Reattributed Inherited Estate External Support Account (RIEESA) (see below).
Equity returns 22.2% 26.3% Property returns 15.0% 15.0% Fixed interest yields 16.3% 17.1%
Future regular bonuses Annual bonus assumptions for 2014 have been set consistently with the year-end 2013 declaration. Future annual bonus rates reflect the principles and practices of each fund. In particular, the level is set with regard to the projected margin for final bonus and the change from one year to the next is limited to a level consistent with past practice.
Non-profit business The valuation of non-profit business is based on regulatory requirements, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business. Conventional non-profit contracts, including those written in the with-profit funds, are valued using gross premium methods which discount projected future cash flows. The cash flows are calculated using the amount of contractual premiums payable, together with explicit assumptions for investment returns, inflation, discount rates, mortality, morbidity, persistency and future expenses. These assumptions vary by contract type and reflect current and expected future experience. For unit-linked and some unitised with-profit business, the provisions are valued by adding a prospective non-unit reserve to the bid value of units. The prospective non-unit reserve is calculated by projecting the future non-unit cash flows on the assumption that future premiums cease, unless it is more onerous to assume that they continue. Where appropriate, allowance for persistency is based on actual experience. Valuation discount rate assumptions are set with regard to yields on the supporting assets and the general level of long-term interest rates as measured by gilt yields. An explicit allowance for risk is included by restricting the yields for equities and properties with reference to a margin over long-term interest rates or by making an explicit deduction from the yields on corporate bonds, mortgages and deposits, based on historical default experience of each asset class. A further margin for risk is then deducted for all asset classes. The provisions held in respect of guaranteed annuity options are a prudent assessment of the additional liability incurred under the option on a basis and method consistent with that used to value basic policy liabilities, and includes a prudent assessment of the proportion of policyholders who will choose to exercise the option.
The above valuation discount rates are after reduction for investment expenses and credit risk. For conventional immediate annuity business the allowance for credit risk comprises long-term assumptions for defaults and downgrades, which vary by asset category and rating. The credit risk allowance made for corporate bonds and mortgages, including healthcare mortgages, held by Aviva Annuity UK Limited equated to 48bps and 124bps respectively at 31 December 2013 (2012: 56 bps and 89 bps respectively). For corporate bonds, the allowance represented 44% of the average credit spread for the portfolio (2012: 30%). The total valuation allowance held by Aviva Annuity UK Limited in respect of corporate bonds and mortgages, including healthcare mortgages, was £2.0 billion (2012: £2.0 billion including an implicit reinvestment margin of £0.2 billion) over the remaining term of the UK Life corporate bond and mortgage portfolio. Total liabilities for the annuity business were £30 billion at 31 December 2013 (2012: £30 billion). Whilst the total valuation allowance held by Aviva Annuity UK Limited remained unchanged, the allowance for defaults for commercial mortgages was increased by £0.3 billion at half year (whilst the implicit reinvestment margin was reduced by £0.2 billion to reflect management actions to better duration match), during the second half of 2013 this has reduced slightly in line with interest rate increases and default experience, the allowance for corporate bonds remains largely unchanged. Mortality assumptions for non-profit business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below: Mortality tables used 2013 2012
Annuities in payment Pensions business and general annuity business PCMA00/PCFA00 adjusted plus allowance for future mortality improvement
For the main pensions annuity business in Aviva Annuity UK Limited, the underlying mortality assumptions for Males are 103.0% of PCMA00 with base year 2000; for Females the underlying mortality assumptions are 98.5% of PCFA00 with base year 2000. Improvements have been strengthened and are based on data used in CMI_2013 with a long-term improvement rate of 1.75% for males and 1.5% for females both with an addition of 0.5% to all future annual improvement (2012: CMI_2011 with long-term improvement rate of 1.5% for males and 1.0% for females both with an addition of 0.5% to all future annual improvement). Year-specific adjustments are made to allow for selection effects due to the development of the Enhanced Annuity market.
Carrying amount at 1 January 131,190 131,171 Provisions in respect of new business 5,671 8,631 Expected change in existing business provisions (8,015) (8,362) Variance between actual and expected experience 2,871 943 Impact of operating assumption changes 428 (718) Impact of economic assumption changes (2,812) 1,726 Other movements1 (235) 2 Change in liability recognised as an expense (2,092) 2,222 Effect of portfolio transfers, acquisitions and disposals2 (34,441) (214) Foreign exchange rate movements 509 (1,878) Other movements1,3 (194) (111)
The variance between actual and expected experience of £2.9 billion in 2013 was primarily due to the impact of favourable equity and property returns on liabilities for unit-linked and with profit contracts in the UK and Ireland, and unit-linked contracts in France and Italy. For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. Minor variances arise from differences between actual and expected experience for persistency, mortality and other demographic factors. The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of insurance liabilities. The £0.4 billion impact of operating assumption changes relates to a strengthening of mortality and lapse assumptions on protection business in the UK (with the impact on profit mainly offset by a corresponding increase in reinsurance assets), and the impact on with profit liabilities in the With profits sub-fund (WPSF), of a decision to discontinue the charge on assets shares for guarantee costs, and to refund previously deducted charges to asset shares. The £2.8 billion impact of economic assumption changes reflects increases in valuation interest rates, primarily in respect of immediate annuity and participating insurance contracts in the UK. The £0.2 billion release of reserves due to “other movements” (included within change in liability recognised as an expense) largely relates to UK with profit liabilities, the most significant individual item being the impact on asset shares of moving to a fair-value asset valuation, for loans previously valued at amortised cost. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year shown in note 45, together with the impact of movements in related non-financial assets. In 2013 we found evidence of improper allocation of trades in fixed income securities in Aviva Investors. This occurred between 2006 – 2012. These breaches of our dealing policy involved late allocation of trades which favoured external hedge funds to the detriment of certain Aviva UK Life funds. The relevant regulatory authorities were notified at an early stage and have been kept fully apprised of the issue. A thorough review of internal control processes relating to the dealing policy has been carried out by management and reviewed by PwC. Measures to improve controls have been implemented. Of the total expected cost of £132 million, an amount of £126 million in relation to this matter has been recognised within insurance liabilities (this reflects the compensation expected to be claimed in respect of these breaches), with the balance relating to other associated costs.
Notes to the consolidated financial statements continued 41 – Insurance liabilities continued (c) General insurance and health liabilities (i) Provisions for outstanding claims Delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the statement of financial position date. The reserves for general insurance and health business are based on information currently available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments. Provisions for outstanding claims are established to cover the outstanding expected ultimate liability for losses and loss adjustment expenses (LAE) in respect of all claims that have already occurred. The provisions established cover reported claims and associated LAE, as well as claims incurred but not yet reported and associated LAE. The Group only establishes loss reserves for losses that have already occurred. The Group therefore does not establish catastrophe equalisation reserves that defer a share of income in respect of certain lines of business from years in which a catastrophe does not occur to future periods in which catastrophes may occur. When calculating reserves, the Group takes into account estimated future recoveries from salvage and subrogation, and a separate asset is recorded for expected future recoveries from reinsurers after considering their collectability. The table below shows the split of total general insurance and health outstanding claim provisions and IBNR provisions, gross of reinsurance, by major line of business.
The gross outstanding claims provision before discounting was £10,914 million (2012: £11,004 million). The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims. The discount rate that has been applied to latent claims reserves is based on the relevant swap curve in the relevant currency having regard to the expected settlement dates of the claims. The range of discount rates used depends on the duration of the claims and is given in the table above. The duration of the claims span over 35 years, with the average duration being between 6 and 15 years depending on the geographical region. Any change in discount rates between the start and the end of the accounting period is reflected outside operating profit as an economic assumption change. During 2013, the Group has seen a levelling off in the number of new bodily injury claims settled by periodic payment orders (PPOs) or structured settlements, which are reserved for on a discounted basis.
(iii) Assumptions Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are set by skilled claims technicians and established case setting procedures. Claims technicians apply their experience and knowledge to the circumstances of individual claims. They take into account all available information and correspondence regarding the circumstances of the claim, such as medical reports, investigations and inspections. Claims technicians set case estimates according to documented claims department policies and specialise in setting estimates for certain lines of business or types of claim. Claims above certain limits are referred to senior claims handlers for estimate authorisation. No adjustments are made to the claims technicians’ case estimates included in booked claim provisions, except for rare occasions when the estimated ultimate cost of individual large or unusual claims may be adjusted, subject to internal reserve committee approval, to allow for uncertainty regarding, for example, the outcome of a court case. The ultimate cost of outstanding claims is then estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. The main assumption underlying these techniques is that a company’s past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed by accident period, although underwriting or notification period is also used where this is considered appropriate. Claim development is separately analysed for each geographic area, as well as by each line of business. Certain lines of business are also further analysed by claim type or type of coverage. In addition, large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development.
Notes to the consolidated financial statements continued 41 – Insurance liabilities continued The assumptions used in most non-life actuarial projection techniques, including future rates of claims inflation or loss ratio assumptions, are implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in the future, for example, to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy conditions and claims handling procedures in order to arrive at a point estimate for the ultimate cost of claims that represents the likely outcome, from a range of possible outcomes, taking account of all the uncertainties involved. The range of possible outcomes does not, however, result in the quantification of a reserve range. The following explicit assumptions are made which could materially impact the level of booked net reserves: UK mesothelioma claims The level of uncertainty associated with latent claims is considerable due to the relatively small number of claims and the long-tail nature of the liabilities. UK mesothelioma claims account for a large proportion of the Group’s latent claims. The key assumptions underlying the estimation of these claims include claim numbers, the base average cost per claim, future inflation in the average cost of claims and legal fees. The best estimate of the liabilities reflects the latest available market information and studies. Many different scenarios can be derived by flexing these key assumptions and applying different combinations of the different assumptions. An upper and lower scenario can be derived by making reasonably likely changes to these assumptions, resulting in an estimate £235 million greater than the best estimate, or £70 million lower than the best estimate. These scenarios do not, however, constitute an upper or lower bound on these liabilities.
Allowance for risk and uncertainty The uncertainties involved in estimating loss reserves are allowed for in the reserving process and by the estimation of explicit reserve uncertainty distributions. The reserve estimation basis for non-life claims requires all non-life businesses to calculate booked claim provisions as the best estimate of the cost of future claim payments, plus an explicit allowance for risk and uncertainty. The allowance for risk and uncertainty is calculated by each business unit in accordance with the requirements of the Group non-life reserving policy, taking into account the risks and uncertainties specific to each line of business and type of claim in that territory. The requirements of the Group non-life reserving policy also seek to ensure that the allowance for risk and uncertainty is set consistently across both business units and reporting periods. Changes to claims development patterns can materially impact the results of actuarial projection techniques. However, allowance for the inherent uncertainty in the assumptions underlying reserving projections is automatically allowed for in the explicit allowance for risk and uncertainty included when setting booked reserves. Lump sum payments in settlement of bodily injury claims decided by the UK courts are calculated in accordance with the Ogden Tables. The Ogden Tables contain a discount rate that is set by the Lord Chancellor and that is applied when calculating the present value of loss of earnings for claims settlement purposes. The process for setting this discount rate is under review. The timing of the conclusion of this review is unclear and it is still uncertain whether or by how much the rate will change. However an allowance has been included in provisions for a reduction in the Ogden discount rates. A reduction in the Ogden discount rates will increase lump sum payments to UK bodily injury claimants.
Carrying amount at 1 January 10,554 10,745 Impact of changes in assumptions (80) 61 Claim losses and expenses incurred in the current year 6,337 6,291 Decrease in estimated claim losses and expenses incurred in prior years (237) (199) Exceptional strengthening of general insurance latent claims provisions — —
£9 million release from Europe mainly due to favourable development across a number of lines of business in France. £160 million release from Canada mainly due to continued favourable experience on motor, following the legislative changes in Ontario.
Key elements of the release from prior accident year general insurance and health net provisions during 2012 were: £47 million release from UK & Ireland, including Group reinsurance business, due to favourable development in Group reinsurance, health and across a number of lines of business in Ireland.
Present value recognised in the statement of financial position 1,328 70 119 177 227 407 511 700 1,095 1,567 2,933 9,134
In the loss development tables shown above, the cumulative claim payments and estimates of cumulative claims for each accident year are translated into sterling at the exchange rates that applied at the end of that accident year. The impact of using varying exchange rates is shown at the bottom of each table. Disposals are dealt with by treating all outstanding and IBNR claims of the disposed entity as ‘paid’ at the date of disposal. The loss development tables above include information on asbestos and environmental pollution claims provisions from business written before 2004. The undiscounted claim provisions for continuing operations, net of reinsurance, in respect of this business at 31 December 2013 were £976 million (2012: £1,003 million). The movement in the year reflects strengthening of provisions by £5 million in the UK (2012: £8 million), other decreases in undiscounted provisions of £2 million (2012: £51 million increase), claim payments, reinsurance recoveries and foreign exchange rate movements.
(e) Provision for unearned premiums Movements The following changes have occurred in the provision for unearned premiums (UPR) during the year: Carrying amount at 1 January 4,441 4,483 Premiums written during the year 9,361 9,535 Less: Premiums earned during the year (9,497) (9,514)
Participating contracts 70,628 66,849 Non-participating contracts at fair value 48,140 46,299 Non-participating contracts at amortised cost — 1,400 48,140 47,699
Carrying amount at 1 January 66,849 67,707 Provisions in respect of new business 3,421 2,695 Expected change in existing business provisions (2,243) (2,039) Variance between actual and expected experience 1,085 102 Impact of operating assumption changes 329 9 Impact of economic assumption changes (301) 74 Other movements (47) (82) Change in liability recognised as an expense 2,244 759 Effect of portfolio transfers, acquisitions and disposals1 (39) — Foreign exchange rate movements 1,380 (1,610) Other movements2 194 (7)
Carrying amount at 31 December 70,628 66,849 1 Disposals in 2013 relate to Aseval. 2 Other movements (outside change in liability recognised as an expense) in 2013 of £194 million represents the reclassification of liabilities from insurance to participating investment in Eurovita.
Notes to the consolidated financial statements continued 42 – Liability for investment contracts continued For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. Minor variances arise from differences between actual and expected experience for persistency, mortality and other demographic factors. The £0.3 billion impact of operating assumption changes relates to the impact on with profit liabilities in the With-profits sub-fund (WPSF), of a decision to discontinue the charge on assets shares for guarantee costs, and to refund previously deducted charges to asset shares. The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of participating investment contract liabilities. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year shown in note 45, together with the impact of movements in related non-financial assets.
Notes to the consolidated financial statements continued 43 – Financial guarantees and options continued (iii) Guaranteed annuity options The Group’s UK with-profit funds have written individual and group pension contracts which contain guaranteed annuity rate options (GAOs), where the policyholder has the option to take the benefits from a policy in the form of an annuity based on guaranteed conversion rates. The Group also has exposure to GAOs and similar options on deferred annuities. Realistic liabilities for GAOs in the UK with-profit funds were £921 million at 31 December 2013 (2012: £1,156 million). With the exception of the New With-Profits Sub Fund (NWPSF), movements in the realistic liabilities in the with-profit funds are offset by a corresponding movement in the unallocated divisible surplus, with no net impact on IFRS profit. Realistic liabilities for GAOs in the NWPSF were £149 million at 31 December 2013 (2012: £180 million).
(i) Guaranteed annuity options Similar options to those written in the with-profit fund have been written in relation to non-profit products. Provision for these guarantees does not materially differ from a provision based on a market-consistent stochastic model, and amounts to £31 million at 31 December 2013 (2012: £35 million).
(ii) Ireland Guaranteed annuity options Products with similar GAOs to those offered in the UK have been issued in Ireland. The current net of reinsurance provision for such options is £202 million (2012: £256 million). This has been calculated on a deterministic basis, making conservative assumptions for the factors which influence the cost of the guarantee, principally annuitant mortality option take-up and long-term interest rates. These GAOs are ‘in the money’ at current interest rates but the exposure to interest rates under these contracts has been hedged through the use of derivatives (receiver swaps and payer swaptions).
(iii) Spain and Italy Guaranteed investment returns and guaranteed surrender values The Group has also written contracts containing guaranteed investment returns and guaranteed surrender values in both Spain and Italy. Traditional profit-sharing products receive an appropriate share of the investment return, assessed on a book value basis, subject to a guaranteed minimum annual return of up to 6% in Spain and up to 4% in Italy on existing business, while on new business the maximum guaranteed rate is lower. Liabilities are generally taken as the face value of the contract plus, if required, an explicit provision for guarantees calculated in accordance with local regulations. At 31 December 2013, total liabilities for the Spanish business were £1 billion (2012: £3 billion) with a further reserve of £0.1 million (2012: £0.1 million) for guarantees. Total liabilities for the Italian business were £11 billion (2012: £10 billion), with a further provision of £43 million (2012: £45 million) for guarantees. Liabilities are most sensitive to changes in the level of interest rates. It is estimated that provisions for guarantees would need to increase by £7 million (2012: £5 million) in Spain and £0 million (2012: £1 million) in Italy if interest rates fell by 1% from end 2013 values. Under this sensitivity test, the guarantee provision in Spain is calculated conservatively, assuming a longterm market interest rate of 2.34% and no lapses or premium discontinuances.
General insurance and health Outstanding claims provisions 849 900 Provisions for claims incurred but not reported 315 354 7,257 7,567 Less: Amounts classified as held for sale (37) (883)
Total 7,220 6,684 1 Balances in respect of all reinsurance treaties are included under reinsurance assets, regardless of whether they transfer significant insurance risk. The reinsurance assets classified as non-participating investment contracts are financial instruments measured at fair value through profit or loss.
Of the above total, £5,553 million (2012: £5,251 million) is expected to be recovered more than one year after the statement of financial position date.
(b) Assumptions The assumptions, including discount rates, used for reinsurance contracts follow those used for insurance contracts. Reinsurance assets are valued net of an allowance for their recoverability.
Carrying amount at 1 January 5,972 5,373 Asset in respect of new business 268 387 Expected change in existing business asset 19 166 Variance between actual and expected experience 454 197 Impact of operating assumption changes 247 (306) Impact of economic assumption changes (426) 143 Other movements 81 (137)
Change in reinsurance asset recognised as income (64) 46 Effect of portfolio transfers, acquisitions and disposals (9) (136) Foreign exchange rate movements (11) (26) Other movements (6) 1
Carrying amount at 1 January 248 245 Premiums ceded to reinsurers in the year 641 641 Less: Reinsurers’ share of premiums earned during the year (643) (636) Change in reinsurance asset recognised as income (2) 5 Reinsurers’ share of portfolio transfers and acquisitions 7 3 Foreign exchange rate movements — (5) Other movements 3 —
The impact of interest rates for long-term business relates primarily to the UK and Ireland driven by the increase in valuation interest rates. This had the effect of decreasing liabilities and hence a positive impact on profit. The overall impact on profit also depends on movements in the value of assets backing the liabilities, which is not included in this disclosure. The impact of annuitant mortality assumptions relates to a slight weakening of annuitant mortality assumptions in the UK and Ireland. Mortality assumptions in the UK and Ireland are reviewed each year, and updated to reflect recent experience.
46 – Unallocated divisible surplus An unallocated divisible surplus (UDS) is established where the nature of policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain at the reporting date. Therefore the expected duration for settlement of the UDS is not defined. The following movements have occurred in the year: Carrying amount at 1 January 6,986 650 Change in participating contract assets (262) 6,140 Change in participating contract liabilities (22) 253 Other movements 4 (77) Change in liability recognised as an expense (280) 6,316 Effect of portfolio transfers, acquisitions and disposals (115) 1 Foreign exchange rate movements 118 24 Other movements — (5)
Following the reversal of previous losses in Italy and Spain, all Italian participating funds at 31 December 2013 have a positive UDS balance with the exception of Eurovita (which is held for sale) and a number of smaller funds in Italy. In Spain, all participating funds had positive UDS balances at 31 December 2013. Negative UDS balances result from an accounting mismatch between participating assets carried at market value and participating liabilities measured using local practice. The negative balances are tested for recoverability using embedded value methodology and in line with local accounting practice. Testing is conducted at a participating fund-level within each life entity. The negative balances are considered to be recoverable from margins in the existing participating business liabilities. In Italy the estimation of the recoverable negative UDS balance uses a real-world embedded value method, with a risk-discount rate of 6.6% (2012: 6.25%). The embedded value method includes implicit allowance for the time value of options and guarantees. In Spain, the estimation of the recoverable negative UDS balance uses a market-consistent embedded value method. At 31 December 2013 there was no negative UDS in Spain and consequently testing was not required. The carrying value of UDS was £132 million positive (2012: £95 million positive in aggregate, though certain funds had a negative UDS balance totalling £39 million). At 31 December 2013, the negative UDS balances in Italy were tested for recoverability and £42 million (£39 million Eurovita) of negative UDS was considered irrecoverable (2012: £130 million, £108 million Eurovita). The remaining carrying value of negative UDS in Italy is £5 million, of which £4 million is in Eurovita. The aggregate UDS balance was £205 million positive at 31 December 2013 (2012: £2 million negative).
(a) Current tax Current tax assets recoverable and liabilities payable in more than one year are £42 million and £1 million (2012: £37 million and £8 million), respectively.
Net liability at 1 January (1,007) (933) Acquisition and disposal of subsidiaries1 682 — Amounts charged to income statement (note 14(a)) (251) (141) Amounts credited to other comprehensive income (note 14(b)) 271 43 Foreign exchange rate movements (8) 27 Other movements 1 (3)
Notes to the consolidated financial statements continued 48 – Provisions This note details the non-insurance provisions that the Group holds, and shows the movements in these during the year.
Charge to income statement 222 198 420 236 95 331 Utilised during the year (210) (72) (282) (197) (53) (250) Disposal of subsidiaries (17) (116) (133) — (3) (3) Foreign exchange rate movements 1 4 5 (1) (14) (15)
Disposal of subsidiaries in 2013 includes £132 million relating to US Life.
Total fair value of scheme assets (see b(ii) below) 11,734 431 233 12,398 11,647 406 228 12,281 Present value of defined benefit obligation (11,185) (640) (334) (12,159) (10,501) (777) (397) (11,675)
Net surplus/(deficits) in the schemes 549 (209) (101) 239 1,146 (371) (169) 606
Notes to the consolidated financial statements continued 49 – Pension obligations continued The number of scheme members was as follows: United Kingdom Ireland Canada
Active members — — — 791 — — Deferred members 56,009 56,825 2,017 1,246 919 1,022 Pensioners 30,945 30,647 747 723 1,364 1,344
(ii) Other schemes Following formal consultation, the Group confirmed its decision to close the final salary section of the Irish scheme with effect from 30 April 2013, in addition to making amendments to future pension increases and breaking the link to final salary. The consequential reduction in the liabilities, arising from the plan amendments to future pension increases and the break to final salary has resulted in a negative past service cost (a gain) of £145 million. The Irish scheme is regulated by the Irish Pensions Board. In Canada, although future accruals ceased with effect from 31 December 2011, the defined benefit components continue to reflect future increases in salary as benefits are based on a member’s best average earnings at a future date. The main Canadian plan is a Registered Pension Plan in Canada and as such is registered with the Canada Revenue Agency and Financial Services Commission of Ontario and is required to comply with the Income Tax of Canada and the various provincial Pension Acts within Canada.
Total recognised in income statement from continuing operations 543 (381) 162
Net surplus in the scheme at 31 December 12,398 (12,159) 239 1 Includes £145 million gain relating to plan amendments to the Irish pension scheme. 2 Administrative expenses are expensed as incurred. 3 Net interest income of £57 million has been credited to investment income and net interest expense of £20 million has been charged to finance costs (see Note 8). 4 Total recognised in income from discontinued operations is £nil and total remeasurements recognised in other comprehensive income from discontinued operations is £nil.
Total pension cost charged to net operating expenses — (4) (4) Net interest credited/(charged) to investment income/(finance costs)3 577 (509) 68
Remeasurements: Actual return on these assets 611 — 611 Less: Interest income on scheme assets (577) — (577)
Return on scheme assets excluding amounts in interest income 34 — 34 Losses from change in financial assumptions — (914) (914) Experience losses — (100) (100)
2 Administrative expenses are expensed as incurred. 3 Net interest income of £87 million has been credited to investment income and net interest expense of £19 million has been charged to finance costs (see Note 8). 4 Total recognised in income from discontinued operations is £nil and total remeasurements recognised in other comprehensive income from discontinued operations is £nil.
(ii) Scheme assets Scheme assets are stated at their fair values at 31 December 2013. Total scheme assets are comprised in the UK, Ireland and Canada as follows: UK £m
Bonds1 Fixed interest government 1,500 139 69 1,708 1,601 130 76 1,807 Fixed interest corporate 2,776 10 60 2,846 2,595 14 45 2,654 Index-linked 4,502 112 — 4,614 4,492 116 — 4,608
Total fair value of assets 11,734 431 233 12,398 11,647 406 228 12,281 1 £179 million of transferrable insurance policies with other Group companies in the UK, previously disclosed within bonds, has been reclassified to other assets for 2012.
Total scheme assets are analysed by those that have a quoted market price in an active market and those that do not as follows: Total Quoted £m
Total fair value of assets 5,719 6,679 12,398 5,341 6,940 12,281 1 £179 million of transferrable insurance policies with other Group companies in the UK, previously disclosed within bonds, has been reclassified to other assets for 2012.
The discount rate and pension increase rate are the two assumptions that have the largest impact on the value of the liabilities, with the difference between them being known as the net discount rate. For each country, the discount rate is based on current average yields of high-quality debt instruments taking account of the maturities of the defined benefit obligations.
The assumptions above are based on commonly used mortality tables. The tables make allowance for observed variations in such factors as age, gender, pension amount, salary and postcode-based lifestyle group, and have been adjusted to reflect recent research into mortality experience. However, the extent of future improvements in longevity is subject to considerable uncertainty and judgment is required in setting this assumption. In the UK schemes, which are the most material to the Group, the allowance for future mortality improvement is per the actuarial professions CMI 2012 model, with assumed long term rates of improvement of 1.75% p.a. for males, and 1.50% p.a. for females.
Impact on present value of defined benefit obligation at 31 December 2013 (1,968) 2,616 2,388 (1,824) 324 Impact on present value of defined benefit obligation at 31 December 2012 (1,954) 2,591 2,334 (1,790) 293 1 The effect of assuming all members in the schemes were one year younger.
Maturity profile of the defined benefit obligation The discounted scheme liabilities have an average duration of 20 years in ASPS, 19 years in the RAC scheme, 20 years in the Irish scheme and 12 years in the Canadian scheme. The expected undiscounted benefits payable from the main UK defined benefit scheme, ASPS, is shown in the chart below: Undiscounted benefit payments (£m)
Main UK scheme The Company works closely with the trustee, who is required to consult it on the investment strategy. Interest rate and inflation risks are managed using a combination of liability-matching assets and swaps. Exposure to equity risk has been reducing over time and credit risk is managed within risk appetite. Currency risk is relatively small and is largely hedged. The other principal risk is longevity risk. On 5 March 2014, ASPS entered into a longevity swap covering approximately £5 billion of pensioner in payment scheme liabilities. The swap transfers longevity risk to three external reinsurers.
(v) Funding Formal actuarial valuations normally take place every three years and where there is a deficit, the Company and the trustee would agree a deficit recovery plan. The assumptions adopted for triennial actuarial valuations are determined by the trustee and agreed with the Company and are normally more prudent than the assumptions adopted for IAS19 purposes, which are best estimate. For ASPS, following the latest formal actuarial valuation (with an effective date of 31 March 2012) a new deficit recovery plan was agreed, to make good the deficit over a period of time, consistent with the requirements of the UK pension regulations. Under this agreement, the deficit funding payment for the next annual period is estimated to be £252 million (of which £98 million relates to contributions deferred from 2013). As at 31 December 2013, the funding deficit was estimated at £0.6 billion. Total employer contributions for all schemes in 2014 are currently expected to be £380 million, which includes the £98 million of deficit funding contributions deferred for ASPS from 2013.
(d) Charge to staff costs in the income statement The total pension (credit)/charge to staff costs for all of the Group’s defined benefit and defined contribution schemes were: Continuing operations UK defined benefit schemes 19 12 Overseas defined benefit schemes1 (147) 7
Core structural borrowings, at amortised cost 5,125 5,139 Operational borrowings, at amortised cost 1,410 1,853 Operational borrowings, at fair value 1,313 1,332 2,723 3,185
7,819 8,179 1 Restated for the adoption of IFRS 10. See note 1 for further details.
Notes to the consolidated financial statements continued 50 – Borrowings continued The classifications between Upper Tier 2, Lower Tier 2 and Senior debt shown above are as defined by the PRA in GENPRU Annex 1 ‘Capital Resources’. All the above borrowings are stated at amortised cost. As described in note 59, the Group has designated a portion of its euro denominated debt as a hedge of the net investment in its European subsidiaries. The carrying value of the debt, included in the table above, at 31 December 2013 was £1,428 million (2012: £1,741 million).
Within one year 556 314 870 603 307 910 1 to 5 years 200 1,204 1,404 200 1,197 1,397 5 to 10 years 242 1,348 1,590 241 1,342 1,583 10 to 15 years — 1,341 1,341 527 1,192 1,719 Over 15 years 4,165 2,950 7,115 3,608 2,610 6,218
Total contractual undiscounted cash flows 5,163 7,157 12,320 5,179 6,648 11,827
Borrowings are considered current if the contractual maturity dates are within a year. Where subordinated debt is undated or loan notes are perpetual, the interest payments have not been included beyond 15 years. Annual interest payments for these borrowings are £73 million (2012: £72 million). Contractual undiscounted interest payments are calculated based on underlying fixed interest rates or prevailing market floating rates as applicable. Year-end exchange rates have been used for interest projections on loans in foreign currencies.
Total contractual undiscounted cash flows 3,127 1,238 4,365 3,626 1,262 4,888 1 Restated for the adoption of IFRS 10. See note 1 for further details.
Contractual undiscounted interest payments are calculated based on underlying fixed interest rates or prevailing market floating rates as applicable. Year-end exchange rates have been used for interest projections on loans in foreign currencies.
Notes to the consolidated financial statements continued 50 – Borrowings continued (d) Description and features (i) Subordinated debt A description of each of the subordinated notes is set out in the table below: Notional amount Issue date Redemption date Callable at par at option of the Company from In the event the Company does not call the notes, the coupon will reset at each applicable reset date to £700 million 14 Nov 2001 14 Nov 2036 16 Nov 2026 5 year Benchmark Gilt + 2.85% €500 million 29 Sep 2003 Undated 29 Sep 2015 3 month Euribor + 2.35% £800 million 29 Sep 2003 Undated 29 Sep 2022 5 year Benchmark Gilt + 2.40% £400 million 20 May 2008 20 May 2058 20 May 2038 3 month LIBOR + 3.26% £200 million 8 Aug 2008 20 May 2058 20 May 2038 3 month LIBOR + 3.26% €500 million 20 May 2008 22 May 2038 22 May 2018 3 month Euribor + 3.35% £200 million 1 Apr 2009 1 Apr 2019 1 Apr 2014 3 month LIBOR + 8.10% €50 million 30 Apr 2009 30 Apr 2019 30 Apr 2014 3 month Euribor + 8.25% £450 million 26 May 2011 3 June 2041 3 June 2021 6 Month LIBOR + 4.136% $400 million 22 November 2011 1 December 2041 1 December 2016 8.25%(fixed) €650 million 5 July 2013 5 July 2043 5 July 2023 5 year EUR mid-swaps + 5.13%
(a) As explained in accounting policy D, the UK long-term business policyholder funds have invested in a number of property limited partnerships (PLPs). The PLPs have raised external debt, secured on their respective property portfolios, and the lenders are only entitled to obtain payment of both interest and principal to the extent there are sufficient resources in the respective PLPs. The lenders have no recourse whatsoever to the policyholder or shareholders’ funds of any companies in the Group. Loans of £804 million (2012: £989 million) included in the table relate to those PLPs which have been consolidated as subsidiaries. (b) There is one Irish policyholder investment fund, which has been fully consolidated in accordance with accounting policy D, that has raised external borrowings. The borrowings are secured on the fund, with the only recourse on default being the underlying investments in this fund. The lender has no recourse whatsoever to the shareholders’ funds of any companies in the Aviva Group. The loan runs for a period of five years, with the interest rate fixed quarterly based on a fixed margin above the euro inter-bank rate. (c) The UK long-term business entered into a financial reassurance agreement with Swiss Re in 2008, under which up-front payments are received from Swiss Re in return for 90% of future surpluses arising. The loan will be repaid as profits emerge on the business. The UK long-term business entered into an additional financial reassurance agreement with BNP Paribas in 2012 in return for 100% of future surpluses arising. The loan will be repaid as profits emerge on the business. (d) Other non-recourse loans primarily include external debt raised by special purpose vehicles in the UK long-term business. The lenders have no recourse whatsoever to the shareholders’ funds of any companies in the Group. (e) Other loans include external debt raised by overseas long-term businesses to fund operations.
Net cash (outflow)/inflow (42) (163) (205) (95) 105 10 Impact of the adoption of IFRS 101 — — — — (15) (15) Foreign exchange rate movements 24 (42) (18) (54) (130) (184) Loans repaid for non-cash consideration2 — (183) (183) — — — Fair value movements — (4) (4) — 43 43 Amortisation of discounts and other non-cash items 5 (21) (16) 1 (13) (12) Movements in debt held by Group companies3 (1) (49) (50) 32 — 32
Movements in the year (14) (462) (476) (116) (10) (126) Balance at 1 January 5,139 3,185 8,324 5,255 3,195 8,450
Balance at 31 December 5,125 2,723 7,848 5,139 3,185 8,324 1 Comprises the impact of adoption of IFRS 10 on prior year comparatives and the resulting consolidation and deconsolidation of entities based on the revised definition and criteria of control outlined in accounting Policy (D). See note 1 for further details 2 Includes borrowings disposed of / repaid as part of the disposal of the US business in 2013 of £179 million. 3 Certain subsidiary companies have purchased issued subordinated notes and securitised loan notes as part of their investment portfolios. In the consolidated statement of financial position, borrowings are shown net of these holdings but movements in such holdings over the year are reflected in the tables above.
All movements in fair value in 2012 and 2013 on securitised mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions.
(f) Undrawn borrowings The Group and Company have the following undrawn committed central borrowing facilities available to them, of which £750 million (2012: £750 million) is used to support the commercial paper programme: Expiring within one year 400 420 Expiring beyond one year 1,100 1,725 51 – Payables and other financial liabilities This note analyses our payables and other financial liabilities at the end of the year.
Payables arising out of direct insurance 1,115 1,234 Payables arising out of reinsurance operations 398 426 Deposits and advances received from reinsurers 145 318 Bank overdrafts 493 566 Derivative liabilities 1,188 1,751 Amounts due to brokers for investment purchases 164 135 Obligations for repayment of cash collateral received (notes 27(d) (i) & 59(c)) 3,958 4,460 Other financial liabilities 1,747 1,616
Expected to be settled within one year 8,579 8,582 Expected to be settled in more than one year 615 816 9,194 9,398 1 Restated for the adoption of IFRS10. See note 1 for further details.
Deferred income 177 319 Reinsurers’ share of deferred acquisition costs 11 11 Accruals 1,386 1,138 Other liabilities 930 1,109
53 – Contingent liabilities and other risk factors This note sets out the main areas of uncertainty over the calculation of our liabilities.
Contractual obligations for future repairs and maintenance on investment properties are £nil (2012: £nil). Note 19 sets out the commitments the Group has to its joint ventures.
Notes to the consolidated financial statements continued 55 – Group capital structure continued Accounting basis and capital employed by segment The table below shows how our capital, on an IFRS basis, is deployed by segment and how that capital is funded.
Life business United Kingdom 5,237 4,911 Ireland 595 735 United Kingdom & Ireland 5,832 5,646 France 2,366 2,119 Poland 380 336 Italy 1,108 1,276 Spain 769 1,113 Other Europe 93 155 Europe 4,716 4,999 Asia 676 784
General insurance & health United Kingdom 3,725 3,653 Ireland 421 355 United Kingdom & Ireland 4,146 4,008 France 570 562 Italy 269 242 Other Europe 43 57 Europe 882 861 Canada 925 1,039 Asia 33 41
Total capital employed is financed by a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. At the end of 2013 we had £16.1 billion (2012: £16.5 billion) of total capital employed in our trading operations measured on an IFRS basis. In July 2013 we issued €650 million of Lower Tier 2 subordinated debt callable in 2023. This was used to repay a €650 million Lower Tier 2 subordinated debt instrument at its first call date, in October 2013. On a net basis, these transactions did not impact on Group IGD solvency and Economic Capital measures. Financial leverage, the ratio of external senior and subordinated debt to tangible capital employed was 50% (2012: 50%). At the end of 2013 the market value of our external debt, subordinated debt, preference shares (including both Aviva plc preference shares of £200 million and General Accident plc preference shares, within non-controlling interests, of £250 million), and direct capital instruments and fixed rate tier 1 notes was £7,573 million (2012: £7,260 million), with a weighted average cost, post tax, of 3.8% (2012: 4.4%). The Group Weighted Average Cost of Capital (WACC) is 6.6% (2012: 6.3%) and has been calculated by reference to the cost of equity and the cost of debt at the relevant date. The cost of equity at 2013 was 8.3% (2012: 7.5%) based on a risk free rate of 3% (2012: 1.9%), an equity risk premium of 4.0% (2012: 4.0%) and a market beta of 1.3 (2012: 1.4).
Notes to the consolidated financial statements continued 56 – Statement of cash flows This note gives further detail behind the figures in the statement of cash flows.
(a) The reconciliation of profit before tax to the net cash inflow from operating activities is: Profit before tax from continuing operations 1,472 396 Adjustments for: Share of (profits)/loss of joint ventures and associates (120) 255 Dividends received from joint ventures and associates 47 48 (Profit)/loss on sale of: Investment property 2 (7) Property and equipment — — Subsidiaries, joint ventures and associates (115) 164 Investments (3,047) (1,167)
Changes in working capital (Increase) in reinsurance assets (571) (416) Decrease in deferred acquisition costs 90 216 Increase in insurance liabilities and investment contracts 3,983 4,325 Increase in other assets and liabilities 5,114 2,021 8,616 6,146 Net purchases of operating assets Purchases of investment property (370) (839) Proceeds on sale of investment property 1,115 1,141 Net (purchases)/sales of financial investments (4,033) 1,231 (3,288) 1,533
Cash generated from operating activities – continuing operations 2,541 2,881 Cash generated from operating activities – discontinued operations2 1,950 46
Cash flows on disposals – continuing operations 377 421 Cash flows on disposal – discontinued operations (1,582) —
(d) Cash and cash equivalents in the statement of cash flows at 31 December comprised: Restated1
Notes to the consolidated financial statements continued 57 – Capital statement This statement sets out the financial strength of our Group entities and provides an analysis of the disposition and constraints over the availability of capital to meet risks and regulatory requirements. The capital statement also provides a reconciliation of shareholders’ funds to regulatory capital. The analysis below sets out the Group’s available capital resources, which includes available capital resources of subsidiaries classified as held for sale in the Group IFRS statement of financial position still included in the Group’s available capital resources at 31 December 2013.
Total liabilities 2,762 18,379 16,377 37,518 78,184 115,702 96,509 212,211 — 212,211 208,580 1 Other sources of capital include subordinated debt of £4,370 million issued by Aviva and £43 million of other qualifying capital issued by Italian and Spanish subsidiary and associate undertakings. 2 Unallocated divisible surplus for overseas life operations is included gross of minority interest and amounts disclosed include balances classified as held for sale. 3 Goodwill and other intangibles includes goodwill of £60 million in joint ventures and associates, and amounts disclosed include balances classified as held for sale. 4 Includes an adjustment for minorities (except for other sources of capital that are reflected net of minority interest). 5 Includes the Provident Mutual with-profit fund. 6 Other operations include general insurance and fund management business.
Available capital resources at 1 January 291 907 1,836 3,034 2,688 5,722 12,360 18,082 Effect of new business 3 (191) (4) (192) 158 (34) (102) (136) Expected change in available capital resources 5 134 164 303 261 564 627 1,191 Variance between actual and expected experience 38 75 (220) (107) (119) (226) (348) (574) Effect of operating assumption changes (3) 2 (24) (25) 86 61 143 204 Effect of economic assumption changes 26 80 363 469 — 469 165 634 Effect of changes in management policy 1 260 (597) (336) 119 (217) (3) (220) Transfers, acquisitions and disposals — — — — — — (2,082) (2,082) Foreign exchange movements — — — — — — 216 216 Other movements 2 31 (8) 25 (400) (375) (244) (619)
Notes to the consolidated financial statements continued 57 – Capital statement continued The with-profit funds and the RIEESA use internal hedging to limit the impacts of equity market volatility. In aggregate, the Group has at its disposal total available capital of £18.6 billion (2012: £19.0 billion), representing the aggregation of the solvency capital of all of our businesses. This capital is available to meet risks and regulatory requirements set by reference to local guidance and EU directives. After effecting the year-end transfers to shareholders, the UK with-profit funds have available capital of £3.2 billion (2012: £3.0 billion) (including amounts held in RIEESA). Subject to certain conditions, the RIEESA capital can be used to write new non-profit business, but the primary purpose of this capital is to provide support for the UK with-profit business. The capital is comfortably in excess of the required capital margin, and therefore the shareholders are not required to provide further support. For the remaining life and general insurance operations, the total available capital amounting to £15.4 billion (2012: £16 billion) is higher than the minimum requirements established by regulators and, in principle, the excess is available to shareholders. In practice, management will hold higher levels of capital within each business operation to provide appropriate cover for risk. The total available capital of £18.6 billion is arrived at on the basis of local regulatory guidance, which evaluates assets and liabilities prudently and includes the Group’s unallocated divisible surplus of overseas life operations. This is a limitation of the Group Capital Statement which, to be more meaningful, needs to evaluate available capital on an economic basis and compare it with the risk capital required for each individual operation, after allowing for the considerable diversification benefits that exist in our Group. Within the Aviva Group there exist intra-group arrangements to provide capital to particular business units. Included in these arrangements is a subordinated loan of £200 million from Aviva Life Holdings UK Limited to Aviva Annuity Limited to provide capital to support the writing of new business. The available capital of the Group’s with-profit funds is determined in accordance with the ‘Realistic balance sheet’ regime prescribed by the PRA’s regulations, under which liabilities to policyholders include both declared bonuses and the constructive obligation for future bonuses not yet declared. The available capital resources include an estimate of the value of their respective estates, included as part of the unallocated divisible surplus. The estate represents the surplus in the fund that is in excess of any constructive obligation to policyholders. It represents capital resources of the individual with-profit fund to which it relates and is available to meet regulatory and other solvency requirements of the fund and, in certain circumstances, additional liabilities may arise. The liabilities included in the balance sheet for the with-profit funds do not include the amount representing the shareholders’ portion of future bonuses. However, the shareholders’ portion is treated as a deduction from capital that is available to meet regulatory requirements and is therefore shown as a separate adjustment in the capital statement. In accordance with the PRA’s regulatory rules under its realistic capital regime, the Group is required to hold sufficient capital in its UK life with-profit funds to meet the PRA capital requirements, based on the risk capital margin (RCM). The determination of the RCM depends on various actuarial and other assumptions about potential changes in market prices, and the actions management would take in the event of particular adverse changes in market conditions.
Under the PRA regulatory regime, UK life with-profits business is required to hold capital equivalent to the greater of their regulatory requirement based on EU directives (regulatory peak) and the PRA realistic bases (realistic peak) described above. For UK non-participating business, the relevant capital requirement is the minimum solvency requirement determined in accordance with PRA regulations. The available capital reflects the excess of regulatory basis assets over liabilities before deduction of capital resources requirement. For UK general insurance businesses, the relevant capital requirement is the minimum solvency requirement determined in accordance with the PRA requirements. For overseas businesses in the European Economic Area (EEA), Canada, Hong Kong and Singapore, the available capital and the minimum requirement are calculated under the locally applicable regulatory regimes. The businesses outside these territories are subject to the PRA rules for the purposes of calculation of available capital and capital resource requirement. For fund management and other businesses, the relevant capital requirement is the minimum solvency requirement determined in accordance with the local regulator’s requirements for the specific class of business.
Notes to the consolidated financial statements continued 57 – Capital statement continued The available capital resources in each regulated entity are generally subject to restrictions as to their availability to meet requirements that may arise elsewhere in the Group. The principal restrictions are: (i) UK with-profits fund – (NWPSF, OWPSF and WPSF) – any available surplus held in each fund can be used to meet the requirements of the fund itself, be distributed to policyholders and shareholders or in the case of NWPSF and OWPSF, transferred via the capital support arrangement explained above (for OWPSF only to the extent support has been provided in the past). In most cases, with-profit policyholders are entitled to at least 90% of the distributed profits while the shareholders receive the balance. The latter distribution would be subject to a tax charge, which is met by the fund.
(i) Financial exposures by credit ratings Financial assets are graded according to current external credit ratings issued. AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB ratings. Financial assets which fall outside this range are classified as sub-investment grade. The following table provides information regarding the aggregated credit risk exposure of the Group for financial assets with external credit ratings, excluding assets ‘held for sale’. ‘Not rated’ assets capture assets not rated by external ratings agencies.
Debt securities 13.0% 33.1% 20.8% 24.9% 2.8% 5.4% 126,805 (2,420) 124,385 Reinsurance assets 0.3% 53.6% 37.1% 1.1% 0.1% 7.8% 7,257 (37) 7,220 Other investments — 0.3% 0.7% 1.0% 0.1% 97.9% 31,451 (201) 31,250 Loans 3.8% 12.1% 1.2% — 0.3% 82.6% 23,879 — 23,879
As at 31 December 2012 (Restated1) AAA AA A BBB Speculative grade Not rated
Debt securities 24.4% 16.9% 23.9% 25.4% 4.2% 5.2% 161,777 (33,617) 128,160 Reinsurance assets 0.4% 63.4% 30.1% 0.7% 0.1% 5.3% 7,567 (883) 6,684 Other investments 0.1% 0.2% 2.4% 2.1% 1.6% 93.6% 29,068 (1,550) 27,518 Loans 5.8% 8.2% 1.2% 0.1% 0.7% 84.0% 27,934 (3,397) 24,537
Total 226,346 (39,447) 186,899 1 Restated for the adoption of IFRS10. See note 1 for further details.
(iv) Loans The Group loan portfolio principally comprises: Policy loans which are generally collateralised by a lien or charge over the underlying policy; Loans and advances to banks which primarily relate to loans of cash collateral received in stock lending transactions.
(vi) Reinsurance credit exposures The Group is exposed to concentrations of risk with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures, by limiting the reinsurers that may be used and applying strict limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that the overall risk is within appetite. The Group risk function has an active monitoring role with escalation to the Chief Financial Officer (CFO), Group ALCO and the Board Risk Committee as appropriate. The Group’s largest reinsurance counterparty is Swiss Reinsurance Company Ltd (including subsidiaries). At 31 December 2013, the reinsurance asset recoverable, including debtor balances, from Swiss Reinsurance Company Ltd was £1,620 million.
(viii) Derivative credit exposures The Group is exposed to counterparty credit risk through derivative trades. This risk is mitigated through collateralising almost all trades (the exception being certain foreign exchange trades where it has historically been the market norm not to collateralise). Residual exposures are captured within the Group’s credit management framework.
Neither past due nor impaired £m 0–3 months £m 3–6 months £m 6 months–1 year £m
Debt securities 1,133 — — — — — 1,133 Reinsurance assets 7,220 — — — — — 7,220 Other investments 7 — — — — 6 13 Loans 5,263 — — — — 139 5,402 Receivables and other financial assets 6,934 56 26 18 22 4 7,060
(i) Equity price risk The Group is subject to equity price risk arising from changes in the market values of its equity securities portfolio. We continue to limit our direct equity exposure in line with our risk preferences. The disposal of the Group’s remaining shareholding in Delta Lloyd has decreased the Group’s shareholder equity price risk and, in particular, has led to a fall in equity exposures. At a business unit level, investment limits and local asset admissibility regulations require that business units hold diversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have signigicant holdings of unquoted equity securities. Equity risk is also managed using a variety of derivative instruments, including futures and options. Businesses actively model the performance of equities through the use of risk models, in particular to understand the impact of equity performance on guarantees, options and bonus rates. At 31 December 2013 the Group’s shareholder funds held £1.5 billion notional of equity hedge put spreads, with up to 15 months to maturity with an average strike of 82-68% of the prevailing market levels on 31 December 2013. Sensitivity to changes in equity prices is given in section ‘(j) risk and capital management’ below.
Notes to the consolidated financial statements continued 58 – Risk management continued (ii) Property price risk The Group is subject to property price risk directly due to holdings of investment properties in a variety of locations worldwide and indirectly through investments in mortgages and mortgage backed securities. Investment in property is managed at business unit level, and is subject to local regulations on asset admissibility, liquidity requirements and the expectations of policyholders. As at 31 December 2013, no material derivative contracts had been entered into to mitigate the effects of changes in property prices. Sensitivity to changes in property prices is given in section ‘(j) risk and capital management’ below.
Notes to the consolidated financial statements continued 58 – Risk management continued Profit before tax on General Insurance and Health Insurance business is generally a mixture of insurance, expense and investment returns. The asset portfolio is invested primarily in fixed income securities and the reduction in interest rates in recent years has reduced the investment component of profit. The portfolio investment yield and average total invested assets in our general insurance and health business are set out in the table below.
(v) Currency risk The Group has minimal exposure to currency risk from financial instruments held by business units in currencies other than their functional currencies, as nearly all such holdings are backing either by unit-linked or with-profit contract liabilities or hedging. The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. Approximately half of the Group’s premium income arises in currencies other than sterling and the Group’s net assets are denominated in a variety of currencies, of which the largest are euro, sterling and Canadian dollars. The Group does not hedge foreign currency revenues as these are substantially retained locally to support the growth of the Group’s business and meet local regulatory and market requirements. Businesses aim to maintain sufficient assets in local currency to meet local currency liabilities, however movements may impact the value of the Group’s consolidated shareholders’ equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. These exposures are managed by aligning the deployment of regulatory capital by currency with the Group’s regulatory capital requirements by currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set. At 31 December 2013 and 2012, the Group’s total equity deployment by currency including assets ‘held for sale’ was: Sterling £m Euro £m CAD$
A 10% change in sterling to euro/Canada$ (CAD) foreign exchange rates would have had the following impact on total equity.
in sterling/ euro rate £m in sterling/ euro rate £m 10% increase in sterling/ CAD$ rate £m 10% decrease in sterling/ CAD$ rate £m
Notes to the consolidated financial statements continued 58 – Risk management continued (vi) Derivatives risk Derivatives are used by a number of the businesses. Activity is overseen by the Group risk function, which monitors exposure levels and approves large or complex transactions. Derivatives are primarily used for efficient investment management, risk hedging purposes, or to structure specific retail savings products. The Group applies strict requirements to the administration and valuation processes it uses, and has a control framework that is consistent with market and industry practice for the activity that is undertaken.
(d) Liquidity risk Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form. The relatively illiquid nature of insurance liabilities is a potential source of additional investment return by allowing us to invest in higher yielding, but less liquid assets such as commercial mortgages. The Group seeks to ensure that it maintains sufficient financial resources to meet its obligations as they fall due through the application of a Group liquidity risk policy and business standard. At Group and business unit level, there is a liquidity risk appetite which requires that sufficient liquid resources be maintained to cover net outflows in a stress scenario. In addition to the existing liquid resources and expected inflows, the Group maintains significant undrawn committed borrowing facilities (£1.5 billion) from a range of leading international banks to further mitigate this risk.
Maturity analyses The following tables show the maturities of our insurance and investment contract liabilities, and of the financial and reinsurance assets to meet them. A maturity analysis of the contractual amounts payable for borrowings and derivatives is given in notes 50 and 59, respectively. Contractual obligations under operating leases and capital commitments are given in note 54.
Notes to the consolidated financial statements continued 58 – Risk management continued (ii) Analysis of maturity of financial assets The following table provides an analysis, by maturity date of the principal, of the carrying value of financial assets which are available to fund the repayment of liabilities as they crystallise. This table excludes assets held for sale.
236,382 69,608 38,655 92,531 35,588 1 Restated for the impact of IFRS 10. See note 1 for further details 2 To reflect the contractual redemption terms of the instruments, collective investment schemes included in ‘other investments’ previously reported as having no fixed term and maturing over 5 years, amounting to £17 million and £12,278 million respectively, have been reclassified as repayable on demand or within 1 year
Longevity risk and internal experience analysis are monitored against the latest external industry data and emerging trends. Whilst individual businesses are responsible for reserving and pricing for annuity business, the Group monitors the exposure to this risk and any associated capital implications. The Group has used reinsurance solutions to reduce the risks from longevity and continually monitors and evaluates emerging market solutions to mitigate this risk further.
Notes to the consolidated financial statements continued 58 – Risk management continued Embedded derivatives The Group has exposure to a variety of embedded derivatives in its long-term savings business due to product features offering varying degrees of guaranteed benefits at maturity or on early surrender, along with options to convert their benefits into different products on pre-agreed terms. The extent of the impact of these embedded derivatives differs considerably between business units and exposes Aviva to changes in policyholder behaviour in the exercise of options as well as market risk.
Examples of each type of embedded derivative affecting the Group are: Options: call, put, surrender and maturity options, guaranteed annuity options, options to cease premium payment, options for withdrawals free of market value adjustment, annuity options, and guaranteed insurability options.
(f) General insurance risk Types of risk General insurance risk in the Group arises from: Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations; Unexpected claims arising from a single source or cause; Inaccurate pricing of risks or inappropriate underwriting of risks when underwritten; and Inadequate reinsurance protection or other risk transfer techniques.
(g) Asset management risk Aviva is directly exposed to the risks associated with operating an asset management business through its ownership of Aviva Investors. The underlying risk profile of our asset management risk is derived from investment performance, specialist investment professionals and leadership, product development capabilities, fund liquidity, margin, client retention, regulatory developments, fiduciary and contractual responsibilities. The risk profile is regularly monitored. Investment performance has remained strong over 2013 despite some positions being impacted by the volatility of global markets. A client relationship team is in place to manage client retention risk, while all new asset management products undergo a review and approval process at each stage of the product development process, including approvals from legal, compliance and risk functions. Investment performance against client objectives relative to agreed benchmarks is monitored as part of our investment performance and risk management process, and subject to further independent oversight and challenge by a specialist risk team, reporting directly to the Aviva Investors’ CRO.
Insurance participating (45) — (60) (10) (20) (30) (5) (40) Insurance non-participating (145) 140 (415) (5) 10 (80) (60) (450) Investment participating (10) 5 (5) 5 (5) (10) — — Investment non-participating (20) 20 (5) 5 (5) (15) — — Assets backing life shareholders' funds (75) 100 (35) 45 (45) — — —
Insurance participating (45) (15) (110) 60 (95) (25) (5) (50) Insurance non-participating (160) 130 (430) — — (75) (45) (470) Investment participating (55) 45 — 5 (10) (10) — — Investment non-participating (40) 35 (5) 10 (15) (20) — — Assets backing life shareholders' funds 10 (15) (40) 45 (45) — — —
Insurance participating (45) (15) (110) 60 (95) (25) (5) (50) Insurance non-participating (165) 125 (430) — — (75) (45) (470) Investment participating (55) 45 — 5 (10) (10) — — Investment non-participating (45) 40 — 10 (15) (20) — — Assets backing life shareholders' funds (5) — (45) 50 (50) — — —
Sensitivities as at 31 December 2012 2012 Impact on profit before tax (£m)
Limitations of sensitivity analysis The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The sensitivity analyses do not take into consideration that the Group’s assets and liabilities are actively managed. Additionally, the financial position of the Group may vary at the time that any actual market movement occurs. For example, the Group’s financial risk management strategy aims to manage the exposure to market fluctuations. As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation, adjusting bonuses credited to policyholders, and taking other protective action. A number of the business units use passive assumptions to calculate their long-term business liabilities. Consequently, a change in the underlying assumptions may not have any impact on the liabilities, whereas assets held at market value in the statement of financial position will be affected. In these circumstances, the different measurement bases for liabilities and assets may lead to volatility in shareholder equity. Similarly, for general insurance liabilities, the interest rate sensitivities only affect profit and equity where explicit assumptions are made regarding interest (discount) rates or future inflation. Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Group’s view of possible near-term market changes that cannot be predicted with any certainty, and the assumption that all interest rates move in an identical fashion.
(a) Instruments qualifying for hedge accounting The Group has formally assessed and documented the effectiveness of its instruments qualifying for hedge accounting in accordance with IAS 39, Financial Instruments: Recognition and Measurement. These instruments are analysed into cash flow, fair value and net investment hedges, as detailed below.
(ii) Fair value hedges The Group entered into a number of interest rate swaps in order to hedge fluctuations in the fair value part of its portfolio of mortgage loans and debt securities in the US. Subsequent to the sale of the US Life business, Aviva exited these swaps. Therefore at 31 December 2013 there was a £nil notional value of these swaps (2012: £765 million) and £nil fair value (2012: £54 million liability).
Foreign exchange contracts OTC Forwards 6,906 38 (9) 8,123 71 (7) Interest rate and currency swaps 1,411 51 (24) 611 64 (21) Options 7,000 19 (7) 4,600 6 (5)
Interest rate contracts OTC Forwards 333 22 — — — — Swaps 28,051 198 (914) 25,889 135 (915) Options 53,925 92 — 32,656 272 (4) Exchange traded Futures 2,723 111 (36) 3,725 58 (14)
Less: Assets classified as held for sale — — — (4,403) (679) 54 126,987 1,058 (1,188) 100,754 906 (1,643) 1 Restated for the adoption of IFRS 10. See note 1 for further details.
Interest rate swap option (“swaption”) contracts are grouped with options above as management’s intention in entering into and subsequent managing of the swaption contracts most closely resembles option-type contracts. Fair value assets are recognised as ‘Derivative financial instruments’ in note 27(a), while fair value liabilities are recognised as ‘Derivative liabilities’ in note 51. 2012 fair value assets in note 27(a) of £1,590 million represent non-hedge derivatives of £1,585 million per the table above plus £5 million of cash flow hedges. Fair value liabilities in note 51 of £1,751 million represent nonhedge derivatives of £1,697 million per the table above plus £54 million of fair value hedges. The Group’s derivative risk management policies are outlined in note 58.
(c) Collateral Certain derivative contracts, primarily interest rate and currency swaps, involve the receipt or pledging of cash and non-cash collateral. The amounts of cash collateral receivable or repayable are included in notes 28 and 51 respectively.
Notes to the consolidated financial statements continued 60 – Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements Financial assets and liabilities are offset in the statement of financial position when the Group has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis, or to realise the asset and settle the liability simultaneously. Aviva mitigates credit risk in derivative contracts by entering into collateral agreements, where practical, and in ISDA master netting agreements for each of the legal entities to facilitate Aviva’s right to offset credit risk exposure. The credit support agreement will normally dictate the threshold over which collateral needs to be pledged by Aviva or its counterparty. Transactions requiring Aviva or its counterparty to post collateral are typically the result of over-the-counter derivative trades, comprised mostly of interest rate swaps, currency swaps and credit default swaps. These transactions are conducted under terms that are usual and customary to standard long-term borrowing, derivative, securities lending and securities borrowing activities. The derivative assets and liabilities in the table below are made up of the contracts described in detail in note 59. Reverse repurchase arrangements are instances in which cash has been received as collateral for securities. Those amounts included as securities lending in the tables below are securities which have been obtained as collateral in arrangements which transfer economic risk and reward, and therefore are recognised as assets by Aviva. In both of these cases, the collateral received is over 100%, however, in accordance with IFRS 7, the amount reported in the tables below as collateral is limited to the amount reported on the balance sheet. The amounts in the other investments lines represent offsetting collateral arrangements related to miscellaneous asset lending and unit trust arrangements.
Financial assets Derivatives 2,099 (1,041) 1,058 (36) (65) 957 Cash held as collateral on reverse repurchase and similar arrangements 4,543 — 4,543 — (4,543) — Securities Lending 666 (111) 555 — (552) 3 Other investments 532 — 532 — (301) 231
Net amounts of financial liabilities presented in the statement of financial position £m
Gross amounts of recognised financial liabilities set off in the statement of financial position £m
Associates 3 (3) — 11 — (4) — 9 Joint ventures 51 — — 56 23 (1) — 54 Employee pension schemes 12 — — 9 12 — — 6 66 (3) — 76 35 (5) — 69 1 Restated for the adoption of IFRS 10. See note 1 for details.
Salary and other short-term benefits 5.3 4.7 Other long-term benefits 1.6 0.4 Post-employment benefits 1.1 1.9 Equity compensation plans 3.3 4.8 Termination benefits 1.1 1.5
Notes to the consolidated financial statements continued 62 – Organisational structure The following chart shows, in simplified form, the organisational structure of the Group as at 31 December 2013. Aviva plc is the holding company of the Group.
Subsidiaries The principal subsidiaries of the Company are listed below by country of incorporation. All are wholly-owned, directly or indirectly, and transact insurance or reinsurance business, fund management activities or services in connection therewith, unless otherwise stated. A complete list of the Group’s subsidiaries is contained in the Group’s annual return to Companies House.
Ireland Aviva Health Group Ireland Limited (71.4%) Aviva Life & Pensions Ireland Limited
Spain Aviva Vida y Pensiones, SA de seguros y reaseguros Caja Espana Vida, Compania de Seguros y Reaseguros (50.0%) Caja Murcia Vida y Pensiones, de Seguros y Reaseguros S.A. (50.0%) Caja Granada Vida, de Seguros y Reaseguros, S.A. (25.0%) CxG Aviva Corporación Caixa Galicia de Seguros y Reaseguros, S.A. (50.0%) Unicorp Vida, Compania de Seguros y Reaseguros (50.0%)
United States Aviva Investors North America, Inc. River Road Asset Management, LLC
Associates and joint ventures The Group has ongoing interests in the following operations that are classified as associates or joint ventures. Further details of those operations that were most significant in 2013 are set out in notes 19 and 20 to the financial statements.
Expenses Net investment (expense)/income (5) 28 Operating expenses B (326) (333) Interest payable to Group companies I (326) (402) Interest payable on borrowings (332) (347) Realised loss on loan I (78) — Impairment of subsidiaries — (254)
Statement of comprehensive income For the year ended 31 December 2013 £m
Other comprehensive income Items that may be reclassified subsequently to income statement Fair value gains on investments in subsidiaries and joint ventures E 2,108 2,126 Impairment losses on assets previously revalued through other comprehensive income now taken to income statement — 254
Items that will not be reclassified to income statement Remeasurements of pension schemes E (2) —
Statement of changes in equity For the year ended 31 December 2013
Balance at 1 January 736 200 1,165 735 6,794 60 3,060 12,750 1,382 14,132 Profit for the year — — — — — — 602 602 — 602 Other comprehensive income — — — — 2,108 — (2) 2,106 — 2,106 Total comprehensive income for the year — — — — 2,108 — 600 2,708 — 2,708 Dividends and appropriations 16 — — — — — — (538) (538) — (538) Shares issued in lieu of dividends 31 & 38 — — — — — — — — — — Employee trust shares
Balance at 1 January 726 200 1,173 735 4,414 86 3,116 10,450 990 11,440 Profit for the year — — — — — — 616 616 — 616 Other comprehensive income — — — — 2,380 — — 2,380 — 2,380 Total comprehensive income for the year — — — — 2,380 — 616 2,996 — 2,996 Dividends and appropriations 16 — — — — — — (847) (847) — (847) Shares issued in lieu of dividends 31 & 38 9 — (9) — — — 127 127 — 127 Employee trust shares distributed in the year 33 — — — — — — (44) (44) — (44) Reserves credit for equity compensation plans — — — — — 42 — 42 — 42 Shares issued under equity compensation plans 1 — 1 — — (68) 74 8 — 8 Issue of fixed rate tier 1 notes — — — — — — — — 392 392 Aggregate tax effect — — — — — — 18 18 — 18
Assets Non-current assets Investments in subsidiaries A 33,095 31,023 Investment in joint venture 19a 177 141 Loans owed by subsidiaries I 1,040 1,054 Deferred tax assets C 205 180 Current tax assets C 93 50 34,610 32,448 Current assets Loans owed by subsidiaries I 42 1,240 Other amounts owed by subsidiaries I 624 3,019 Other assets D 347 49 Cash and cash equivalents 223 152
Equity Ordinary share capital 31 736 736 Preference share capital 34 200 200 Called up capital 936 936 Share premium account 31b 1,165 1,165 Merger reserve E 735 735 Investment valuation reserve E 8,902 6,794 Equity compensation reserve E 54 60 Retained earnings E 3,158 3,060 Direct capital instruments and fixed rate tier 1 notes 35 1,382 1,382
Liabilities Non-current liabilities Borrowings F 4,569 4,536 Loans owed to subsidiaries I 563 13,153 Provisions 39 36 5,171 17,725 Current liabilities Borrowings F 556 603 Loans owed to subsidiaries I 9,975 794 Other amounts owed to subsidiaries I 3,722 3,569 Other creditors 90 85
Where applicable, the accounting policies of the Company are the same as those of the Group on pages 110 to 123. The notes identified alphabetically on pages 242 to 246 are an integral part of these separate financial statements. Where the same items appear in the Group financial statements, reference is made to the notes (identified numerically) on pages 131 to 237.
Cash flows from financing activities Funding provided by subsidiaries 1,283 887 New borrowings, net of expenses 2,137 2,200 Repayment of borrowings (2,179) (2,295) Net repayment of borrowings (42) (95) Proceeds from issue of fixed rate tier 1 notes, net of expenses — 392 Preference dividends paid (17) (17) Ordinary dividends paid (429) (630) Interest paid on direct capital instruments and fixed rate tier 1 notes (92) (73) Interest paid on borrowings (328) (310) Treasury shares purchased for employee trusts (25) (25) Shares issued under equity compensation plans — 1
Cash and cash equivalents at 1 January 152 17 Exchange gains on cash and cash equivalents 15 5
(ii) At 31 December 2013, the Company has two wholly owned subsidiaries, both incorporated in the UK. These are General Accident plc and Aviva Group Holdings Limited. Aviva Group Holdings Limited is an intermediate holding company, whilst General Accident plc has preference shares listed on the London Stock Exchange. The principal subsidiaries of the Aviva Group at 31 December 2013 are described in note 62 to the Group consolidated financial statements.
B – Operating expenses (i) Operating expenses Operating expenses comprise: £m
Wages and salaries 84 143 Social security costs 8 12 Post-retirement obligations Defined benefit schemes (see (iii) below) — 1 Defined contribution schemes 11 12 Profit sharing and incentive plans — (2) Equity compensation plans (see (iv) below) 11 32 Termination benefits 80 10
(iii) Pension costs The Company is one of a number of UK companies being charged for its employees participating in the Aviva Staff Pension Scheme, and its contributions are affected by the financial position of the scheme. There is no contractual agreement or policy for charging the net defined benefit cost for this scheme across the participating Group entities but, instead, this cost is recognised in the financial statements of the main UK employing company. The Company therefore recognises a pension expense equal to its contributions payable in the year for its staff, together with the service cost of any unfunded benefits, within staff costs above. Full disclosure on the Group’s pension schemes is given in the Group consolidated financial statements, note 49.
(iv) Equity compensation plans All transactions in the Group’s equity compensation plans involve options and awards for ordinary shares of the Company. Full disclosure of these plans is given in the Group consolidated financial statements, note 32. The cost of such options and awards is borne by all participating businesses and, where relevant, the Company bears an appropriate charge. As the majority of the charge to the Company relates to directors’ options and awards, for which full disclosure is made in the Directors’ Remuneration Report, no further disclosure is given here on the grounds of immateriality.