The Strategic report is only part of the Annual report and accounts 2017. The Strategic report was approved by the Board on 7 March 2018 and signed on its behalf by Mark Wilson, Chief Executive Officer.
Contents Strategic Report 01 Chairman’s statement 02 Group Chief Executive Officer’s Review 05 Key performance indicators 07 The horizon 08 Business model 09 Our strategy 12 Our people 14 Chief Financial Officer’s Review 18 Market review 24 Risk and risk management 28 Corporate responsibility 31 Our climate-related financial disclosure
Other information 240 Alternative Performance Measures 246 Shareholder services 247 Cautionary statement
Businesses need to know why they exist. All businesses need to generate value for their shareholders, of course, but some also have a clear social purpose. Aviva is one of those. Simply put we are here to help our customers Defy Uncertainty.
Of course, the year has not been without its challenges. There is still market uncertainty and volatility to navigate. Although Brexit does not have a significant operational or financial impact on our business there is still a long way to go before the full implications become clear. In addition, performance across the Group has not been as universally strong as we would wish, notably in Canada due to a change in the trend of prior year reserve releases from favourable to unfavourable and increased claims frequency. We have enjoyed three years of sustained high levels of customer advocacy, but this year’s scores have marked a decline. We are working hard to boost customer’s loyalty by making things simpler and putting them in control, for example with the launch of our simplified home insurance proposition. The industry is also facing risks around cyber crime and changes in public policy. You can read about these risk factors in the ‘Risk and risk management’
Profit before tax attributable to shareholders’ profit increased to £2,003 million (2016: £1,193 million) reflecting higher Group adjusted operating profit1, lower integration and restructuring costs and the impact of the Ogden discount rate change in 2016.
As disclosed in our 2016 Annual report, the Lord Chancellor announced the decision to lower the Ogden discount rate to 0. 75%, from the previous level of 2.5% and we await the final outcome of the Ministry of Justice review. We will continue to monitor developments on this during 2018. This year’s performance is testament to the hard work and dedication of our nearly 30,000 people around the world. I have no doubt there will be more change in the year to come but I am equally confident in the skills and commitment of my colleagues to adapt and deliver for our customers and our shareholders, whatever 2018 has in store.
Sir Adrian Montague 1. Group adjusted operating profit is an Alternative Performance Measure (APM) which is used by the Group to supplement the required disclosures under IFRS. Please refer to note B in the ‘Accounting Policies’ section and to the
(where possible), can be found in the ‘Other Information’ section of the Annual report and accounts. 3 This measure is derived from the Group adjusted operating profit APM. Further details of this measure are included in the ‘Other information’ section.
A key element of Aviva’s strategy is allocating capital towards businesses and segments with the strongest returns and growth prospects. We made further progress on this strategic objective in 2017, announcing divestments that will result in our withdrawal from Spain, Taiwan and Friends Provident International.
Our priorities for deployment remain unchanged. Our objective is to use surplus cash to deliver sustainable benefits to our longterm shareholders. For 2018, we have outlined our intent to repay approximately £900 million of expensive hybrid debt, saving more than £60 million in annual pre-tax interest expense. We have allocated approximately £600 million for bolt-on M&A, which includes the €130 million already committed to the Friends First acquisition in Ireland. And we have indicated that in excess of £500 million will be used for capital returns, which may include liability management, share buy-back or special dividends.
Our strength in distribution and manufacturing is also helping to strengthen our composite position in markets outside the UK. In France, our new leadership team intends to align our high quality distribution franchises under a single Aviva brand to deepen customer relationships. In Ireland, we have maintained positive momentum in both sales volume and Group adjusted operating profit3 in 2017 and the acquisition of Friends First will move our market share to mid-teens across both life and general insurance. Italy has expanded IFA distribution and developed innovative hybrid products, which helped to underpin a doubling of value of new business and strong net fund flows. Singapore is drawing on our digital and distribution expertise to develop the Aviva Financial Advisors network, which has grown to more than 670 advisors.
Hong Kong. In 2017, we established Aviva Quantum, our artificial intelligence and global data science group, which now has 550 data scientists. This group has developed our Ask it Never IP, which allows us to reduce the number of questions we ask customers during the underwriting process, significantly improving their quote and buy experience. We are using this IP to develop a new generation of insurance products, called Aviva Plus. This proposition takes the subscription model and applies it to insurance and is expected to be progressively rolled out to our existing UK customers. In the next few years, we will continue to invest heavily to grow revenue and fully digitise our business. Through this, we are targeting improvements in efficiency and customer experience that we expect to lead to higher sales, better retention, expanding margins and in turn growing profit over the medium to long term.
The streamlining of our geographic perimeter is complete and the strength of our franchises is beginning to shine through. As a result, we have upgraded and bought forward our growth ambitions, and are now targeting greater than 5% growth in operating EPS1,2 from 2018. Together with our targets of £8 billion of cumulative remittances in 2016-2018 inclusive and increase in dividend payout ratio to 55-60% by 2020, we remain confident that we can continue to deliver cash flow plus growth for our shareholders.
2 This measure is derived from the Group adjusted operating profit APM. Further details of this measure are included in the ‘Other information’ section.
• Operating earnings per share (EPS)3 increased by 7% to 54.8p (2016: 51.1p) • Profit before tax attributable to shareholders’ profit increased by 68% to £2,003 million (2016: £1,193 million) and basic EPS increased by 19.7p to 35.0p (2016: 15.3p)
• Increased cash remittances2 to Group by 33% to £2,398 million
In Digital, we have: • Expanded the reach of MyAviva to include corporate customers and
• Focus on achieving a 55-60% dividend pay out ratio by 2020
• Build and deepen engagement with our customers on MyAviva • Disrupt in digital to do more for our customers • Continue to campaign for what’s important to our customers • Continue to reallocate capital to focus on what we do best and drive higher returns
• Build a culture where we consider our customers in every decision
• Develop an inclusive workforce that reflects the diversity of our customers
• Increase the impact of the Aviva Community Fund across the world
• Following the introduction of Solvency II, the new prudential regulatory framework that came into force on 1 January 2016, we calculate Value of New Business (VNB) on an adjusted Solvency II basis rather than on an MCEV basis.
• As a result of feedback from the Financial Reporting Council’s regular review and assessment of the quality of corporate reporting in the UK, we have relabelled ‘Operating Profit’ to ‘Group Adjusted Operating Profit’.
• We have included profit before tax attributable to shareholders’ profit (PBT). While not a metric that is used to measure the Group’s ongoing financial performance, it is important to assess it alongside Group adjusted operating profit when evaluating our overall result.
• The estimated shareholder cover ratio is now shown inclusive of pro forma adjustments required to reflect the effect of planned acquisitions and disposals consistent with the metric used internally.
We give our people the freedom to act in line with our values to create an environment in which they can thrive through collaboration and recognition. We measure this through our annual global ‘Voice of Aviva’ survey. Engagement is up one percentage point to 75%
and is now consistent across the world after significant improvements for France and Singapore, and a solid four percentage point increase for UK Customer teams. Trust in the Group Executive is now at a historic high and 85% of colleagues see how their team’s work aligns to Aviva’s strategy.
UN Momentum for Change award in recognition of a decade of work reducing the environmental impact of our business and helping inspire action on climate change.
CO2e data includes emissions from our buildings, business travel, water and waste to landfill.
2017: Symbol denotes key performance indicators used as a base to determine or modify remuneration.
1 All comparators have been rebased as we have reduced the number of markets covered in the survey from 12 to 10 markets as we have combined our UK operations in line with our True Customer Composite strategy and no longer report on Spain.
We continue to make progress with our digital transformation and MyAviva remains at its heart. Active registrations are the number of global users of MyAviva and other digital platforms, including customers and guests, who have registered or logged-in at least once during the previous 365 days. Active registrations have increased by 44% to 7.5 million. We will continue to monitor the progress we are making to engage with our customers through digital.
In 2016, PBT was heavily impacted by the Odgen discount rate change of £475 million.
Sustainable cash remittances2 from our businesses are a key financial priority.
Remittances from business units increased 33% to £2,398 million. This was primarily driven by the UK businesses which include an additional £500 million of Friends Life integration remittance (2016: £250 million) and increased remittances from the UK General Insurance business.
Solvency II cover ratio2 excludes the contribution from fully ring fenced with-profits funds (£3.3 billion) and staff pension schemes in surplus (£1.5 billion). The impact of the announced sales of FPI and the Italian joint venture Avipop Assicurazioni S.p.A have also been reflected in the estimated Solvency II position as pro forma adjustments. During the period the coverage ratio has strengthened from 189% to 198% primarily due to the positive impact of disposals and Operating Capital Generation (OCG)2, a key remuneration metric for the Group, offset by the payment of dividends, share buy-back and redemption of hybrid debt.
Expected increase in UK mobile transactions 2017 to 2022 121% Source: CACI, June 2017
The power of communities Government influence is reducing as the role of ‘communities’ of mutual interests and connected networks, both virtual and local, increases.
Daily active Facebook users on average 1.4 billion Source: facebook.com, stats, December 2017
Economic loss in US dollars caused by global natural disasters in $330 billion Source: Munich Re, catastrophe losses, January 2018
Estimated Global Insurance premium share of growth from emerging economies by 2025 47% Source: Munich Re, April 2017
The age of disruption New agile competitors will act faster to disrupt established businesses with customers embracing fintech providers.
Customers conducting business with at least one non-traditional firm 50.2% Source: Cap Gemini world Fintech report 2017
New threats in a connected world The proliferation of connected devices and the dominant role of social networks in modern life is raising the threat from cyber attacks and infringements to privacy.
Blurring of sector boundaries The clear boundaries between sectors no longer exist, from technology players offering banking services to telecom providers creating media content.
Payment volumes in China processed by non-bank institutions 54% Source Global Financial Development Report 2017/2018
Aviva exists to help our 33 million customers Defy Uncertainty. We give our customers the confidence and control to be ready for life’s opportunities and challenges.
We have a distinctive approach. It defines and differentiates us. It helps us meet our customers’ needs …
Our values are at the heart of how we do business. They are how we must operate: • Care More
We have unique strengths as a business that gives us a significant competitive advantage: • Brand strength
We have a great range and blend of skills: • Digital innovation • Data science
Customers pay insurance premiums which we use to pay claims. Our scale enables us to pool the risks. We maintain capital strength so we can be there for our customers in the future
We also invest the insurance premiums we receive to generate income to meet our obligations to customers and to generate value for shareholders.
Making sure that customers stay with us for the long term is important to the future success of our business.
We create value for shareholders by using our profits to reinvest and grow the business and pay out dividends.
True Customer Composite We are a True Customer Composite, giving customers the confidence and control to be ready for life’s opportunities and challenges. We can protect what’s important to customers through life, general and health insurance and help customers save for the future through life and pension products underpinned by our asset management capability. We are the only composite insurer of scale in the UK.
Customers have a wide range of insurance, protection and savings needs, and can find it challenging to manage them all. They find themselves with multiple products from different providers. This is not what they tell us they want: what they want is a simple way to meet their insurance and savings needs. True
While our overall global Net Promotor Score® (NPS®) has shown an unwelcome decline, there have been positive improvements in some areas. Customers with more than one Aviva product are far more likely to advocate the brand: multi-product customers have a NPS® of +47pts versus customers with one product. In a digital world, being a True Customer Composite provides a tangible competitive advantage. Digital allows us to introduce our customers to our composite range of products and offerings in a more effective manner than traditional channels.
In the past, although the financial benefits of our composite model were clear (such as lower capital requirements through diversifying our risk), few customers held more than one Aviva product because our business was distributed almost solely through intermediaries.
Customer Composite strategy. For example, we give multipleproduct discounts to customers who purchase products through
MyAviva. We are expanding our offerings to help our customers reduce their risks, for example we have launched a weather app in France which led to lower flood claims in motor compared to other insurers as it provided customers with foresight of weather warnings. We also offer the Wellbeing app in the UK to support a healthier lifestyle beyond just exercise and nutrition advice.
We recognise customers often have relationships with Aviva through the companies they work for, through a financial adviser, or directly with us. MyAviva helps to bridge all three channels effortlessly and conveniently. This is particularly important when our customers change jobs or move house. During 2017, we launched a pilot in the UK to work closely with some of our key corporate clients in order to develop a deeper, broader understanding of their business and objectives.
Digital First We put Digital First. This is how we will capitalise on being a True Customer Composite. With their busy lives, customers and businesses, large and small, are increasingly turning to digital to make things more convenient and quicker.
We’ve created Digital Garages in London, Singapore and Canada, and digital spaces in our Paris, Warsaw, Bristol and
Drive App • We help people plan for the life they want in retirement with our Shape my Future tool • We explain insurance jargon in a simple way through Our Alexa
Quotemehappy.com was our first success in the Digital First story and it keeps on growing – it now has over one million customers. It offers low-cost car and home insurance in the UK and is only available online. Our fully self-service insurance gives customers the flexibility to manage their policies online, such as downloading documents and making changes to their policy.
We’re working with some of the brightest companies around the world to innovate so that our customers can benefit.
We invest in cutting edge tech start-ups that shape the future of insurance through Aviva Ventures, our corporate venture capital fund. An example being the investment in Owlstone Medical who developed a device that can read chemicals in breath and detect early stages of cancer. We’re partnering with start-ups to trial innovative customer solutions, including through Founders Factory who help startups build and scale.
In the UK we’ve agreed to make a strategic investment in start-up Wealthify – a robo-investment platform that allows customers to save from as little as £1 with transparent fees.
Ask it Never is our ambition to make insurance simpler and easier for customers using data and analytics to improve the customer journey. In 2017 we launched a market leading Home Insurance proposition which allows customers to get an instant price in MyAviva and buy in less than two minutes with minimal questions. In 2018 we plan to extend our ambition to create a suite of customer friendly experiences on MyAviva.
We see digital experiences as one of the best ways to drive customer preference for the Aviva brand. While our overall global NPS® declined, digital scores were positive: • Globally, our digital customers have NPS® that is +24 points higher than non-digital customers • In the UK, Aviva’s digital users are more positive about their customer experience than digital users of our competitors (+27 NPS® score for Aviva versus +19 NPS® for competitors)
Hillhouse and Tencent, have tremendous investment and digital expertise. Together we want to shake up the Hong Kong insurance market, which currently relies on expensive intermediaries, by offering a superior digital solution so that insurance meets our customers’ needs. We are planning to launch a joint proposition in the first half of 2018, pending regulatory approval.
Medical (UK), Savari and Biofourmis (both Singapore) bringing the total direct investments to ten. We have also deployed capital into Anthemis’ Fintech fund and Aquiline’s Technology Growth fund. By working with these innovative companies, Aviva is able to stay at the forefront of the fast paced world of digital innovation.
It is about focussing our resources where we can be most competitive and doing a relatively small number of things well, rather than casting our net too widely. Not Everywhere is also about capital allocation. We allocate capital to the markets, businesses and products that offer the most attractive returns, looking at it through three lenses: strategic, financial and execution.
In 2017 we largely completed the restructuring of our businesses to narrow our focus on what we can do best.
In 2017, we announced the sale of Friends Provident International, a major part of our Spanish business and our 49%
Our Major Markets and Strategic investments categorisation shows how Aviva’s markets and business lines contribute to our overall portfolio, either now or in the future.
• France – a cash generator underpinned by strong distribution • Canada – leading general insurance franchise with attractive cross-cycle returns • Poland – high ROE business with strong distribution and digital credentials • Italy – rebounding economic opportunity providing strong net flows • Ireland – a leading brand in a growth economy with accelerated development of the composite model • Singapore – an innovative strategy to accelerate development of the financial advisory channel in an attractive growth market
• Hong Kong – joint venture with Tencent and Hillhouse focussed on digital disruption
We have a clear purpose. We help our customers Defy Uncertainty; this remains at the core of what our people do. This commitment to customers, high levels of people engagement and skills, and alignment to Aviva’s values helped contribute to Aviva’s strong financial performance.
Our global people strategy sets out how we will accelerate our performance. We will: • Focus on our customers by connecting the day-to-day activities of our people with our purpose • Give our people the freedom to act in line with our values
We start with the customer and prioritise delivering a great outcome for them. We do the right thing, making sure we and those around us are acting with positive intent. We don’t shrink from the tough conversations. We’re in it together.
We can list our priorities on one hand, picking a few things to do brilliantly. We make the call with the right information. We join forces and build it once.
We invest with courage, taking smart risks and making good decisions to ensure we allocate our resources where they can do most. We think like an owner, taking responsibility. We go for more than quick wins. We take the long view.
We continue to strengthen the leadership teams including restructuring the UK business to ensure the management structure reflects the True Customer Composite nature of the business.
During 2017 we have welcomed the employees from RBC General Insurance into Aviva Canada and successfully negotiated with unions to facilitate the sale of our Spanish business with 90% of people transferring across to the new buyer.
• Moved 39% of our high potential senior leaders into new or broader roles to develop core experiences and strengthen our executive pipeline • Delivered our Leadership Accelerator programme to 290 of our senior leaders. Feedback has been extremely positive and we are seeing a difference in leadership approach and capability. A
• Ensured that 83 high potential female leaders from a range of levels have attended ‘Accelerate Leadership from the Inside out’
(ALIO), our female-only leadership programme. The programme offers a unique opportunity to develop our female leaders, build their confidence and deepen their commitment to Aviva • Launched our Digital Academy in Poland to help develop the next generation of programmers and future digital talent • Established the Global Graduate Leadership Programme to create a high performing pipeline of globally mobile graduates, designed to build our long-term leadership capability and meet our future business needs. We currently have graduates located across UK, Singapore, Hong Kong, Vietnam, Canada, USA, France, Poland and Italy
Our culture journey will continue in 2018 with on-going focus on colleague engagement, giving people the freedom and room to operate and innovate, developing our leaders to lead for the future and creating the conditions where colleagues can perform at their best. We recognise that we still have more to simplify processes and systems within Aviva and this will be a key focus for 2018.
Within Aviva we take our responsibility to consult very seriously. We have a positive and constructive relationship with the trade union Unite as well as a fully elected all-employee representative body ‘Your Forum’. The existence of Your Forum within Aviva is a key way of recognising that we all have a part to play in contributing to the debate on issues and opportunities impacting on our people and our organisation. The representative bodies meet regularly with the CEO and members of the GEC throughout the year. We believe that by doing so we encourage a culture of trust and open and honest communication that will help us ensure that our organisation is a better place to be.
We continue to provide an employee share scheme and all employees have the opportunity to engage with senior leader through weekly #Uncut episodes ‘our global streaming platform’, results live and regular town halls. This ensures everyone at Aviva is aware of significant changes in the business and financial and economic factors affecting the business.
Inclusive diversity is at the heart of how we do business and a key requirement for the workforce of the future. If people can be themselves, they’ll be happier and contribute their best thinking. They will also be more in tune with our diverse customer base and better able to serve their evolving needs. Our staff engagement survey shows that 87% of our people feel that people from diverse backgrounds can succeed at Aviva and we want to see this reflected in the diversity of talent we attract and develop within the
Aviva to be eligible to the same amount of paid and unpaid time off, regardless of gender, sexual orientation or how they became a parent (birth, adoption or surrogacy). We are an equal opportunities employer and ensure a consistent approach to recruitment and all areas of employment policies across all our markets. These policies apply to all Aviva directors and employees, business units, and operations, and it is the responsibility of CEOs (or equivalent) to ensure that their business operates in line with them. We are committed to ensuring we provide full and fair consideration for job applications from people with disabilities, as well as supporting any of our people who become disabled while working for Aviva. We have a duty of care to make adjustments to roles and responsibilities which will allow a disabled person to work or continue working. For example, we adapt the working environment where we can and offer flexible working practices and appropriate training to take into account their personal circumstances.
Read about our approach to responsible and sustainable business in the ‘Corporate Responsibility’ section of this report and our people strategy at www.aviva.com/about-us/our-people
In 2017, Aviva repaid debt of US$650 million and returned capital to shareholders via a £300 million share repurchase programme. With our Solvency II cover ratio2,4 remaining above our working range, we have plans to reduce hybrid debt by a further £900 million in 2018 and will consider other opportunities to deploy surplus capital to strengthen our businesses and enhance longterm shareholder returns. During 2017, Aviva announced divestments of joint ventures in
Aviva currently derives virtually all of its Group adjusted operating profit1 and cash flow from eight major markets: UK, Ireland, France,
Poland, Italy, Canada, Singapore and Aviva Investors. This is where Aviva believes it is currently best positioned to compete on the basis of our scale, brand and leading distribution. The Group adjusted operating profit1 from these major markets
(excluding divestitures) totalled £3,508 million (2016: £3,300 million), an increase of 6%. Growth was supported by higher adjusted operating profit1 from our businesses in the UK, Aviva Investors, France, Ireland, Poland and Singapore. These more than offset the reduction in adjusted operating profit1 from Canada.
Aviva is unique as the only large-scale composite insurer in the UK market with a top three share across multiple product lines. In UK
Insurance adjusted operating profit1 increased 13% to £2,201 million (2016: £1,946 million) due to attractive growth across most of our core product lines together with favourable development of reserves.
In long-term savings, adjusted operating profit1 rose 30% to £185 million (2016: £142 million) reflecting higher assets under management (AUM)2, stable in-force profit margin and strict management of acquisition costs, despite increases in new business sales. Net fund flows almost doubled to £5.6 billion (2016: £2.9 billion) due to mandate wins in workplace pensions together with a sharp increase in net flows into the advisor platform, where AUM2 increased by 56% to £20 billion.
Adjusted operating profit1 from annuities and equity release grew 11% to £725 million (2016: £656 million) due to higher new business volumes and continued progress on optimising assets backing the in-force portfolio. New business volumes increased 58% to £4.3 billion (2016: £2.7 billion), mainly as a result of bulk purchase annuities, where sales more than tripled in 2017 to £2,045 million (2016: £620 million). Life protection saw a reduction in adjusted operating profit1 to £227 million (2016: £242 million). While increased volumes and margins supported growth in new business contribution from both the consumer and group protection portfolios, the result from the existing business declined due to unfavourable claims experience in group protection. General insurance made continued progress in 2017, increasing net written premiums by 4% while further refining product and channel mix. Adjusted operating profit1 grew 4% to £408 million
(2016: £392 million) due to improved underwriting. Excluding the impact of the change in Ogden discount rate in the prior year, the combined operating ratio2 was stable at 93.9%, helping to generate underwriting result of £246 million (2016: £232 million). The long term investment return was consistent with the prior year at £163 million (2016: £162 million). In 2017, we announced the extension and expansion of our relationship with HSBC in the UK, which is expected to provide additional impetus for growth in 2018.
1 Group adjusted operating profit is an Alternative Performance Measure (APM) which is used by the Group to supplement the required disclosures under IFRS. Please refer to note B in the ‘Accounting Policies’ section, note 4
4 The estimated Solvency II position represents the shareholder view. This excludes the contribution to Group Solvency Capital Requirement (SCR) and Group Own Funds of fully ring fenced with-profits funds of £3.3 billion
In addition to the above core product lines, we have made changes to assumptions and methodology in 2017. The net effect of these changes increased to £290 million (2016: £151 million). This included changes in relation to longevity reserves, partially offset by increased provisions in other areas including expenses.
Aviva’s UK business has unrivalled strength and depth and provides a blueprint for our digital composite strategy. Looking forward, our priorities are to grow adjusted operating profit1 while generating significant levels of free cash-flow that can be invested or returned to deliver additional long-term benefits for shareholders.
The UK offers structural growth drivers including the shift in assets and savings flows from defined benefit (DB) pensions into defined contribution (DC), rising auto-enrolment pension contribution rates and the trend for corporates to seek insured solutions to manage (and outsource) their DB pension schemes. By leveraging the strength of our relationships with customers and partners, we are focussed on extending our track record of growth via higher net flows, increases in premium volumes and continued discipline in managing expenses.
• Improving investment performance - where we can capitalise on our strong fund performance track record, the strength of the
Aviva brand and the acquisition of additional asset management talent to increase our presence in traditional asset classes.
(2016: £506 million) due to higher average AUM2, an increase in revenue margin associated with the expansion of the third party business and greater levels of infrastructure asset origination. Operating expenses2 rose slower than revenues at 11%, leading to an improvement in the operating margin to 29% (2016: 27%). AUM2 rose to £353 billion (2016: £345 billion). Net inflows of £1.6 billion (2016: £1.0 billion) benefitted from higher inflows into internal core propositions while market and foreign exchange movements added £5.9 billion to AUM2. Looking forward, the priority for Aviva Investors is to continue the targeted shift toward external funds and Aviva core propositions, along with increased origination activity in infrastructure and real estate financing. This should further increase revenue margins and adjusted operating profits1 and more than offset the net outflow in legacy Aviva life products that are no longer actively marketed.
In 2017, Aviva Ireland delivered adjusted operating profit1 of £86 million (2016: £80 million) an increase of 18% after excluding the contribution from the health insurance business divested in 2016. In general insurance, net written premiums increased 8% to £436 million (2016: £378 million) and the combined operating ratio2 improved by one percentage point to 91.4%. This underpinned growth in general insurance adjusted operating profit1 to £53 million (2016: £48 million). In life insurance, adjusted operating profit1 was £33 million (2016: £32 million) with a modest increase in sales volumes offset by higher investment management charges. `Looking forward, the priority in Ireland is to maintain underwriting discipline and continue to develop our composite, multi-product franchise with brokers, partners and customers. We recently announced the acquisition of Friends First for €130 million (subject to regulatory approval), increasing the scale of our life insurance business.
In France, Aviva has strong distribution and a composite footprint, with increased brand recognition providing an opportunity to expand our presence with customers.
Aviva is a scale player in the Canadian general insurance market, with a circa 10% market share. We have a leading position in the broker channel and, following our recent acquisition of RBC General
In 2017, Canada had a very challenging year, with adjusted operating profit1 falling to £46 million (2016: £269 million). Net written premiums grew 15% to £3,028 million (2016: £2,453 million) due to a full 12 month contribution from RBCGI (acquired in July 2016) and long term investment return rose to £115 million (2016: £105 million). However, the underwriting result deteriorated from a profit of £168 million in 2016 to a loss of £64 million in 2017.
The increase in the combined operating ratio2 to 102.2% (2016: 93.0%) was attributable to adverse prior year reserve development across auto and property insurance portfolios together with weaker accident year profitability in the auto insurance market, where bodily injury claims inflation rose sharply. In 2016, prior year reserve releases added £130 million to adjusted operating profit1, while in 2017, reserves were strengthened by £37 million. The underwriting result in Canada also suffered from heightened levels of large losses in the commercial insurance portfolio, while weather and natural catastrophe claims remained at elevated levels. Looking forward, the priority in Canada is to restore adjusted operating profit1 to historical levels. We have undertaken a number of remedial actions, including increasing premium rates across a number of product classes. Our medium term objective is to return our combined operating ratio2 to a 94-96% target range. However, the impact of these actions may take time to be reflected in our results, and our combined operating ratio2 is likely to remain above our target range in 2018 and 2019.
Aviva Poland increased adjusted operating profit1 by 12% in local currency to £177 million (2016: £140 million). In life insurance, adjusted operating profit1 rose 8% to £156 million (2016: £132 million) while general insurance adjusted operating profit1 was £21 million (2016: £8 million). Growth was supported by higher average AUM2 in life insurance helped by improved productivity in our direct sales force and higher retention. In general insurance, increased volumes in direct retail and commercial lines together with lower motor claims frequency helped to support growth. Adjusted operating profit1 from both the life insurance and general insurance businesses also benefitted from consolidating the joint venture with Bank Zachodni WBK SA
for the first time in 2017. The emphasis in Poland is maintaining positive momentum in the life insurance business and continuing to build scale across the composite.
Aviva has a composite position in the Italian market supported by joint ventures and distribution relationships with leading banks and a growing franchise among independent financial advisors. We have an opportunity to deploy our digital expertise in Italy to further strengthen our propositions for customers and distribution partners. Aviva Italy has generated strong growth in life new business volumes and delivered £2.3 billion of net fund inflows reflecting the success of their hybrid product and expansion of the distribution footprint. However, this also gave rise to short term strain in profitability against what was a record result in 2016. As a result adjusted operating profit1 from Aviva’s Italian business was stable in 2017 at £213 million (2016: £212 million), despite a 7% benefit from foreign exchange translation. In life insurance, adjusted operating profit1 of £168 million (2016: £170 million) represented an 8% decline in local currency terms. General insurance adjusted operating profit1 was stable at £45 million (2016: £42 million), reflecting an increase in net written premiums to £412 million (2016: £395 million) and a slight deterioration in combined operating ratio2 to 94.2%
(2016: £112 million) was stable in local currency terms. Aviva’s financial advisor network began to build momentum in new business production, increasing value of new business2 by 24% to £123 million. In general insurance and health, adjusted operating losses1 narrowed to £8 million (2016: £12 million).
In addition to its major markets, Aviva has strategic investments which are managed to produce long term growth in adjusted operating profit1 and value. These strategic investments are in China, Hong Kong, Turkey, India, Vietnam and Indonesia. Within this, we are currently delivering attractive and growing profits in our joint ventures in China and Turkey, however these are offset by losses from less mature businesses in Indonesia and Vietnam, coupled with our acceleration of investment into Digital.
(2016: 189%). We increased our Solvency II cover ratio2,4 by 9 percentage points, whilst also paying off approximately £500 million of subordinated debt and completing a £300 million share repurchase programme during 2017. Operating capital generation2 of £2.6 billion (2016: £3.5 billion) remained well above underlying levels due to benefits associated with merging legal entities in the
Aviva’s Group centre cash resources are £2.0 billion (February 2017: £1.8 billion). Our intention is to maintain this in a range of £1.0 billion to £1.5 billion over time. In view of our surplus capital and liquidity position and expected level of Group centre cash receipts over the coming year, we anticipate having £3 billion available for deployment in 2018 and 2019.
Our priorities for deployment of surplus cash and capital remain unchanged. We prioritise profitable organic growth in our existing businesses. After allowing for this, we will look to reduce debt balances, consider bolt-on acquisitions and provide additional capital returns. In 2018, we have signalled our intention to reduce hybrid debt by £900 million. We are targeting more than £500 million in additional capital returns, incorporating liability management and returns to shareholders. In this regard, we have the ability to cancel preference shares4 at par value through a reduction of capital, subject to shareholder vote and court approval. The preference shares carry high coupons that are not tax-deductible and they will not count as regulatory capital from 2026. As we evaluate the alternatives, one of the things we are considering is how to balance the interests of ordinary and preferred shareholders. We have committed €130 million to acquire Friends First in Ireland and have further appetite for bolt-on acquisitions in our major markets. Any unused M&A budget will be diverted to further reduce debt balances or fund additional returns.
We have outlined an ambition to maintain higher growth in operating EPS2,3. Aviva is now a more focussed business, with operations in countries that have attractive economic prospects and segments where there are sustainable and growing demand dynamics. Turning specifically to the drivers of our results and other large or notable items, we highlight the following factors for our
With positive and negative items largely offsetting, we expect fundamental business performance in our major markets to drive our 2018 results. We are targeting greater than 5% growth in operating EPS2,3 subject to the impacts from foreign exchange, weather and other items.
Chief Financial Officer 7 March 2018 1. Group adjusted operating profit is an Alternative Performance Measure (APM) which is used by the Group to supplement the required disclosures under IFRS. Please refer to note B in the ‘Accounting Policies’ section, note 4
Aviva is the UK’s largest insurer with a 18%1 share of the UK life and savings market, a 10%2 share of the UK General Insurance and
Health market. We offer a market leading range of propositions to individual and corporate customers covering their savings, retirement, insurance and health needs. We also have one of the largest legacy books in the UK life and pensions market.
We continue to support our corporate clients and the health of their employees with the launch of our low cost ‘Health Essentials’
UK Insurance was created in 2017 by bringing our UK life, health and general insurance businesses together under a common leadership team to unlock the potential of our unique position as a large scale composite. The business delivered an increase of 13% in adjusted operating profit5,7 to £2,201 million (2016: £1,946 million), including a 6% increase from our legacy and core product segments.
demonstrating the value of our market leading franchise. Dealing with the main components of UK Insurance in turn: • UK life adjusted operating profit5,7 increased by 15% to £1,758 million (2016: £1,523 million) driven by an improvement in new business profit, continued growth of the long-term savings franchise, further optimisation of the annuity asset mix and an additional £139 million year on year benefit arising from the annual assumptions review, including longevity. Profit before tax attributable to shareholders’ profits7 is broadly unchanged at £1,619 million (2016: £1,616 million), with the increase in adjusted operating profit5,7 primarily offset by more favourable life investment variances and economic assumption changes9.
Insurance operating expenses were broadly flat, reflecting tight control of the direct expense base as we absorb growth.
1 Association of British Insurers (ABI ) 9 months to end Q3 2017.
‘Segmental Information’ and ‘Other Information’ within the Annual report and accounts for further information.
6 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further information on APM’s, including a reconciliation to the financial statements
7 The amounts shown above in respect of adjusted operating profit and profit before tax attributable to shareholders’ profits do not reconcile to the corresponding amounts in note 4 ‘Segmental information’ within the Annual report and accounts due to i) the inclusion of our Health business within UK general insurance and ii) the reclassification of non-insurance business to Other Group activities.
UK general insurance COR of 93.9% was stable year on year
(DB) pension risk from their balance sheets, we have built up our DB de-risking and bulk annuity capabilities from focussing on smaller, sub-£100 million schemes, to winning large schemes, for example the £600 million deal with Pearson covering around 2,400 members. • We have secured a ten year distribution deal with HSBC to provide home and travel insurance to their customers through HSBC’s extensive digital channels, the branch network and over the telephone. This partnership is one of the UK’s largest general insurance bancassurance deals and presents us with significant growth opportunities. • We continued to defend our customers against claims fraud, cancelling over 9,000 fraudulent policies and detecting more than £89 million of suspect and fraudulent claims in 2017.
Brexit continues to drive uncertainty, but we are well placed to manage with the implications. We are continuing to prepare for regulatory change in our UK
Protection Regulation (GDPR ) coming into force in 2018. We continue to support our customers through the wide range of choices they have as they approach and move through their retirement with market leading propositions (investment, drawdown, annuity, equity release), information through our Aviva Retirement Centre, online guides and tools and our in-house advice service, Aviva Financial Advice. We look forward to further improvements in the market over the next two to three years. We would like to see a fairer pension taxation system and a simpler regulatory environment which allows us to better serve the needs of our customers. 2018 will also see Auto-Enrolment minimum contributions start to increase from the current base of 1% employee contributions to 3% in April 2018, and then to 5% in April 2019. This is a key period in establishing better retirement prospects for all UK workers.
In general insurance, market conditions have remained competitive across our entire product range, and we expect that to continue. In 2017, the UK Government changed the Ogden discount rate, which is used by the courts to calculate awards for cases involving bodily injury. This increased the cost of bodily injury compensation claims significantly. However, the Government has agreed to review the way the rate is calculated. We believe injured claimants should be fully compensated for the injuries they receive, but it is also vital that individuals are not over-compensated to a level which increases the cost of insurance premiums for individuals and businesses, large and small.
Wealthify – a robo-investment platform that allows customers to save from as little as £1 with transparent fees. Our chatbots help customers in seconds or provide an insurance quote in minutes. Customers can make most claims online and we settle simple claims within seconds. And we help people plan for the life they want in retirement with our Shape my Future tool.
• Grow our business and deepen customer relationships by expanding our propositions in targeted markets such as corporate multinational, bulk purchase annuities, home, digital SME and wellbeing.
Our objective is to be the customer-centric leader in Canadian insurance by building on our strong service to customers and distributors, enhancing our digital capabilities and leading product innovation.
Adjusted operating profit1,5 46 269 Cash remittances2 55 130 Operating expenses2 478 396 Combined Operating Ratio (COR) 2 102.2% 93.0%
In 2017, adjusted operating profit1,5 decreased by 84% to £46 million (2016: £269 million). The lower underwriting result was mainly driven by a change in the trend of prior year reserve development, which deteriorated from £130 million favourable to £37 million unfavourable. This change was the primary factor behind a current year loss before tax attributable to shareholders’ profits5 of £54 million (2016: profit before tax attributable to shareholders’ profit of £165 million). Cash remittances2 have decreased to £55 million (2016: £130 million) due to lower adjusted operating profit1. Operating expenses2 increased to £478 million (2016: £396 million) mainly due to a full twelve months of RBC GI. The combined operating ratio2 was 102.2% (2016: 93.0%).
Excluding prior year development and adverse weather experience, the COR was 3.0pp higher due to increased claims frequency and severity.
• Our primary focus is to return the business to target levels of profitability. We have a comprehensive plan to improve pricing, risk selection and indemnity management.
Aviva has a focussed approach in Europe with insurance operations in France, Italy, Poland, Ireland3 and Turkey.
Our European markets are a major contributor to the Group, providing a valuable source of diversification.
We are present in attractive markets where we have a competitive advantage and ability to source skills. We believe this offers us clear potential for future profitable growth whilst at the same time benefitting from positive economic outlook and resilient economies. We remain cognisant of low interest rates and challenging regulatory environments, and believe we are well positioned to succeed.
All percentage movements below are quoted in constant currency unless otherwise stated.
At an overall level, adjusted operating profit1,5 is down by 2% compared to 2016. However, our continuing businesses have delivered an increase in adjusted operating profit1,5 of 7%, demonstrating the strength of our focussed approach. Profit before tax attributable to shareholders’ profits5 has increased to £1,044 million (2016: £837 million), with the adverse impact of economic assumption changes in France partly offset by the profit of £180 million arising as a result of the disposal of Antarius6.
6 Further information in respect of life investment variances is included within the APM section of the Annual report and accounts.
Cash remitted2 to the Group increased to £485 million (2016: £449 million) mainly due to an increased dividend in France, partly offset by a reduction in cash remitted from Spain, following disposals. The Solvency II Value of New Business (SII VNB)2 increased by 17%, and by 27% excluding disposed businesses, with strong performance in Italy which was up 102% as a result of higher unit-linked and hybrid product volumes and an improved margin on with-profits products.
France’s COR2 reducing by 2.5pp due to lower large losses and improved claims experience. Our claims ratio has decreased by 2.9pp to 63.1 % (2016: 66.0%) with improvement across all markets except Italy.
Banco BPM S.p.A. • Delivered adjusted operating profit1,4 of £213 million (2016: In 2018, our priority is to implement a new strategy and increase digital capabilities to further enhance our customers’
We are a leading life insurer in Poland and also provides health and general insurance products through the largest direct sales networks, a financial adviser network and bancassurance partners.
Our results in 2017 were driven by a rebound in general insurance profitability. The government has recently announced its intention to launch mandatory pension auto-enrolment providing further impetus to grow our life insurance business.
• Delivered adjusted operating profit1,4 of £177 million (2016: £140 million).
We are a market leading composite insurer with a multidistribution network and strong brand presence. With the announcement to acquire the life insurer, Friends First, we will become one of the largest composite insurers with market share of 15% in Life and General Insurance.
• Delivered adjusted operating profit1,4 of £86 million (2016: £80 million).
(where possible), can be found in the ‘Other Information’ section of the Annual report and accounts.
4 The amounts shown above in respect of adjusted operating profit and profit before tax attributable to shareholders’ profits do not reconcile to the corresponding amounts in note 4 – ‘Segmental information’ within the Annual report and accounts due to the reclassification of non-insurance business to Other Group activities.
Including FPI, life adjusted operating profit1,3 was broadly unchanged at £235 million (2016: £241 million).
Our announcement to dispose of FPI and Taiwan resulted in a loss of £125 million as these businesses have been remeasured at fair value. A further charge of £65 million has arisen as a result of an annual impairment review of our investment in India. These charges have contributed to a loss before tax attributable to shareholders’
profits3 of £146 million (2016: profit of £48 million). No dividends were remitted to Group during the year (2016: £nil)
Singapore and investment in digital and analytics capabilities. The SII VNB2 of our life businesses increased by 47% to £162 million (2016: £106 million) reflecting higher volumes from Singapore’s financial advisory channel. In China, SII VNB2 increased to £45 million (2016: £19 million) driven by sales growth in agency and broker channels and higher interest rates.
Net written premiums were £13 million (2016: £11 million). COR2 deteriorated by 13.3pp to 123.2% (2016: 109.9%) due to unfavourable claims experience and the continued softening of market premium rates for motor insurance in Singapore.
• We continued to work with partners, Hillhouse Capital and Tencent, to create Hong Kong’s first truly digital insurer
• We announced the disposal of FPI which will enable us to focus on allocating capital to areas where we can generate strong returns
• We will accelerate our operational efficiency through digitalisation and optimisation of structures and processes 1 Adjusted operating profit is an Alternative Performance Measure (APM) which is used by the Group to supplement the required disclosures under IFRS. Please refer to note B in the ‘Accounting Policies’ section, note 4
‘Segmental Information’ and ‘Other Information’ within the Annual report and accountsAnnual report and accounts for further information.
3 The amounts shown above in respect of adjusted operating profit and profit before tax attributable to shareholders’ profits do not reconcile to the corresponding amounts in note 4 – ‘Segmental information’ within the Annual report and accounts due to the reclassification of non-insurance business to Other Group activities.
We are Aviva’s global asset management business with expertise in multi-asset, fixed income, equity, real estate and alternative investments. We currently invest more than £353 billion on behalf of our customers across a number of major markets. This gives us the size and scale to successfully seek out opportunities that will deliver specific investor outcomes.
Aviva’s development of the digital platform provides us with significant opportunities with direct clients: if these clients select
Aviva Investor funds on Aviva’s digital platforms, we are confident that they will benefit from a high quality solution and a seamless customer experience.
We have made progress in externalising the business and developing higher value outcome-oriented propositions for our clients.
Fund management adjusted operating profit1 increased by 21% to £168 million driven by growth in revenue, with operating expenses increasing at a slower rate. This led to a 2pp improvement in the adjusted operating profit1 margin, calculated as fund management adjusted operating profit1 expressed as a percentage of revenue, to 29% (2016: 27%).
• We added to our range of outcome-oriented funds with the launch of our Alternative Investment Solutions aimed at
Institutional investors looking for long-term income and can invest in multiple illiquid asset classes.
• We secured significant mandate wins in global high yield, emerging market debt, long income real estate and illiquid alternatives.
Market conditions have been benign despite considerable economic and geo-political uncertainty. These conditions have rewarded high levels of exposure to market risk, making strategies with good downside protection strategies look less attractive in the short term. We continue to invest in our Global Responsible Investing credentials, winning the coveted Responsible Investor Innovation and Industry Leadership award. Environmental and social thinking and governance (ESG) is embedded within our investment decision making process across all asset classes. Read more in the
• We will improve our already strong investment performance through better research, challenge and debate, higher conviction and improved portfolio construction. • We will grow and protect our asset base by investing in distribution and creating attractive savings solutions for the rest of the Group.
• We will simplify our business by removing complexity, introducing robotics for routine tasks and leveraging big data to give us better insights. • We will accelerate our Real Assets business, with a particular emphasis on the origination of illiquid assets to support Aviva’s expected growth in bulk purchase annuities.
Risk management is key to Aviva’s success. We accept the risks inherent to our core business lines of life, accident and health, and general insurance and asset management. We diversify these risks through our scale, geographic spread, the variety of the products and services we offer and the channels through which we sell them. We receive premiums which we invest in order to maximise riskadjusted returns, so that we can fulfil our promises to customers while providing a return to our shareholders. In doing so we have a preference for retaining those risks we believe we are capable of managing to generate a return.
Looking forward, these risks may be magnified or dampened by current and emerging external trends which may impact upon our current and longer term profitability and viability, in particular our ability to write profitable new business.
This includes the risk of failing to adapt our business model to take advantage of these trends. The ‘Principal risk trends and causal factors’ table in this section describe what these trends are, their impact, future outlook and how we manage these risks.
Group through our Risk Management Framework, comprising our systems of governance, risk management processes and risk appetite framework.
This includes risk policies and business standards, risk oversight committees and roles and responsibilities. Line management in the business is accountable for risk management which, together with the risk function and internal audit, form our ‘three lines of defence’ of risk management. The roles and responsibilities of the Board
Governance, Audit and Risk Committees and Management Disclosure, Asset Liability and Operational Risk Committees in the oversight of risk management and internal control is set out in the ‘Directors’ and corporate governance report’ in the Annual report and accounts.
• Life insurance risk includes longevity risk (annuitants living longer than we expect), mortality risk (customers with life protection), critical illness risk, expense risk (the amount it costs us to administer policies) and persistency risk (customers lapsing or surrendering their policies) • General insurance risk is the risk arising from loss events (fire, flooding, windstorms, accidents etc) • Accident and Health insurance risk covers healthcare costs and loss of earnings arising from customers falling ill
• Operational risk is the risk of direct or indirect loss, arising from inadequate or failed internal processes, people and systems, or external events including changes in the regulatory environment
• Asset management risk is the risk of customers redeeming funds, not investing with us, or switching funds, resulting in reduced fee income
• Risk appetites set to limit overall level of credit risk • Credit limit framework imposes limits on credit concentration by issuer, sector and type of instrument • Investment restrictions on sovereign and corporate exposure to certain
We actively seek some market risks as part of our investment and product strategy. We have a limited appetite for interest rate, foreign exchange and inflation risks as we do not believe that these are adequately rewarded.
We take measured amounts of life insurance risk provided we have the appropriate core skills in underwriting and pricing. We like longevity risk as it diversifies well (i.e. has little/no correlation)
• Risk selection and underwriting on acceptance of new business • Aviva’s staff pension scheme longevity swap covering approximately £5 billion of pensioner in payment scheme liabilities • Product design that ensures products and propositions meet customer needs • Use of reinsurance to mitigate mortality/morbidity risks
We take general insurance risk in measured amounts for explicit reward, in line with our core skills in underwriting and pricing. We have a preference for those risks that we understand well, that are intrinsically well managed and where there is a spread of risks in the same category. GI risk diversifies well with our Life Insurance and other risks.
• Asset liability matching methodology develops optimal asset portfolio maturity structures in our businesses to ensure cash flows are sufficient to meet liabilities • Commercial paper issuance
While interest rates are still well below prefinancial crisis levels, during 2017, the US Fed raised interest rates on three occasions, the
Bank of England reversed its 2016 rate reduction and the ECB has begun to reduce its asset purchases. Although rates may remain below pre-2008 financial crisis levels in the EU
employees working in the UK and longer term implications for financial services regulation, including Solvency II.
Brexit does not have a significant operational impact on Aviva. We are actively engaged to ensure the interests of our customers, the company and the industry are appropriately taken into account. Our plans to address the loss of the ability for UK firms to passport business into the EU are currently in progress. Given our corporate structure, this is not a major risk. We are also reviewing our data arrangements to ensure that adequate measures are in place to allow continued uninterrupted flow of personal data.
Our Financial Event Response Plan ensures that we will be able to respond swiftly and effectively to any severe adverse financial event.
In December 2017, the UK and EU agreed separation terms, reducing the risk of a sudden departure in March 2019. In 2018, negotiations will begin on transitional arrangements and a future trade agreement. Uncertainty over the ultimate outcome is heightened by the UK Government’s lack of parliamentary majority.
Medical advances and healthier life styles – these contribute to an increase in life expectancy of our annuitants and thus future payments over their lifetime may be in excess of the amounts we currently expect.
We monitor our own experience carefully and analyse external population data to identify emerging trends. Detailed analysis of the factors that influence mortality informs our pricing and reserving policies. We add qualitative medical expert inputs to our statistical analysis and analyse factors influencing mortality and trends in mortality by cause of death. Aviva’s Staff Pension Scheme hedges its longevity risk covering £5 billion of pensioner in payment liabilities. Since 2016 we have used longevity reinsurance for bulk purchase annuities and Aviva guaranteed annuity options. We continue to evaluate emerging reinsurance market solutions.
Global average temperatures over the last four years have been the hottest on record. Despite the UNFCCC Paris agreement, the current trend of increasing CO2 emissions is expected to continue with global temperatures likely to exceed pre-industrial levels by at least 2oC and weather events (floods, droughts, windstorms)
increasing in frequency (with a possibility of more cluster events) and severity. Disclosure of impacts against various climate scenarios and time horizons will become increasingly common for all companies.
failure to understand and react to the impact of new technology and its effect on customer behaviour and how we distribute products could potentially result in our business model becoming obsolete. While failure to keep pace with the use of data to price more accurately and to detect insurance fraud could lead to loss of competitive advantage and underwriting losses.
Aviva’s strategy is focussed on transformation into a digital leader by taking a bold and enterprisewide approach to digital and automation. Four years ago Aviva announced its strategic framework and embarked on a digital strategy using predictive analytics, automation and digital sales channels. We are currently integrating data analytics into our operations, enabling new means of underwriting, personalised customer propositions and operational efficiency now and in the futuresuch as our Ask it Never initiatives.
Refer to ‘Our strategy’ for further information on our digital strategy.
There is expected to be a five-fold growth in digital data between now and 2020. Big data is becoming a critical driver of competitive advantage for insurers.
Artificial intelligence and robotic automation are likely to increasingly transform the efficiency of insurance operations such as underwriting and claims and will transform the customer experience and build deeper customer relationships.
We are not complacent. We continue to invest significantly in IT Security, introducing additional automated controls to protect our data, detect and prevent cyber-attacks. In addition to implementing secure development practices we employ our own ‘white hat’ hackers to regularly test our IT security defences. We undertake regular activities with our people to promote awareness of cyber and data security, including: employee phishing exercises, computer based training and more regular communications about specific threats as they are identified.
In 2017 there were a number of high profile cyber security incidents for corporates in the UK and elsewhere (most notably the global
Not only do we listen to our customers to ensure we meet their needs, we also seek to transform the customer experience through our digital strategy, creating an effortless customer experience. For information on how we are mitigating this risk through the execution of Digital
First and True Customer Composite strategies refer to ‘Our strategy’, with further examples provided in the ‘Market review’ section.
We expect customers will be much more in control, expecting to self-service and self-solve.
They will want to access data and insight and use it to guide their own decisions.
Outsourcing – we rely on a number of outsourcing providers for business processes, customer servicing, investment operations and IT support. The failure of a critical outsourcing provider could significantly disrupt our operations.
In 2017, globally we paid out £34.6 billion in benefits and claims, supporting our customers when they needed us the most.
In addition, nearly two thirds of our markets offered our customers a product which enabled them to be more environmentally responsible or gave them easier access to the protection they needed for themselves and their families1. For example, in Poland we funded 300 external air quality sensors which were added to the national network in places selected by local communities. By helping people monitor the air quality where they live, they can take action to protect themselves, their families, and their communities. We are also offering discounts for in-home air quality sensors to life and health insurance customers in Poland.
We continue to improve our processes for the benefit of our customers. For example, Aviva Singapore has implemented esubmission for new business applications for individual life and health customers. This has reduced the need for paper forms and made applications easier for customers and advisers by providing an immediate underwriting decision.
We work hard to offer great customer service and this is reflected in our NPS score® which shows that seven out of ten of our businesses are in or above the upper quartile relative to the local market average.
Board Governance Committee with regular reporting on financial crime matters, including Aviva’s anti-bribery and anti-corruption programme. Our malpractice helpline, Right Call, makes it easy to report any concerns in confidence, with all reports referred to an independent investigation team. In 2017, 41 cases were reported through Right
Call (2016: 25), including one related to bribery and corruption concerns. 35 cases reached conclusion, and 6 remain under investigation. There has been no material litigation arising from any case reported in 2017.
(2016: 1,600). This in turn helped 792,000 people. We harnessed the passion and talent of our people at Aviva, with 13% of our employees contributing 48,400 hours of volunteering time and giving or fundraising over £1.2 million. Our Voice of Aviva results show that 88% of our people believe that Aviva is a good corporate citizen, up 8% since 2015 and 15% above the industry benchmark.
These employees are 58% more likely to be proud of Aviva. We are now two years into our strategic partnership with the
Across the world, we are working with entrepreneurs to nurture their ideas and grow their businesses, with the aim of changing insurance for the better. In 2014 Aviva France launched ‘Aviva Impact Investing France’, becoming the first financial institution in the country to create an investment fund dedicated to financing socially and environmentally responsible companies. This fund is now endowed with €30 million. With this pioneering initiative, Aviva wants to participate in the development of social entrepreneurship, a particularly innovative sector that creates viable economic solutions to address major social issues. Aviva France also wants to demonstrate that investments can create social good as well as healthy financial earnings.
During 2017, Aviva Ventures, our global capital investment business, also invested in a number of start-ups having a positive social impact on people’s lives. This included in the UK, investment in Owlstone Medical Ltd, a medical diagnostics company developing a breathalyser that can detect diseases at a very early stage. The company is currently developing tests for lung and colorectal cancer, two of the most common terminal cancer conditions worldwide.
A challenge for today, not tomorrow Aviva has a long-term commitment to tackle climate change. In 2015, we announced an investment target of £500 million annually for the next five years in low-carbon infrastructure. We also set an associated carbon savings target for this investment of 100,000 tonnes of CO2e annually. In 2017, Aviva Investors signed £527.5 million of new investment in wind, solar, biomass and energy efficiency. Aviva continues to manage the impact of our business on the environment. Our Corporate Responsibility, Environment and Climate change business standard focuses on the most material operational environmental impacts, which we have identified as greenhouse gas emissions. We report these as carbon dioxide equivalent emissions (CO2e) on an operational basis in respect of Aviva’s Group-wide operations. See the table below.
More details of our environmental KPI data and our independent assurance process can be found on www. aviva.com/CRkpisandassurance2017
Our carbon footprint boundaries show the scope of the data we monitor and the emissions we offset. We report on Greenhouse Gas
(GHG) emission sources on a carbon dioxide emissions equivalents basis (CO2e) as required under the Companies Act 2006 (Strategic report and Directors’ reports) 2013 Regulations. We also refer to the GHG Protocol Corporate Accounting and Reporting Standard, and emission factors from the UK Government’s GHG Conversion Factors for Company Reporting 2017.
Scope 1 17,915 19,210 19,112 Scope 2 31,280 41,008 49,595 Scope 3 19,305 19,193 19,991 Absolute CO2e** 68,500 79,410 88,698 Carbon offsetting*** (68,500) (79,410) (88,698) Total net emissions - - -
Scope 1 – natural gas, fugitive emissions, oil, and company owned cars. Scope 2 – electricity.
* This includes Friends Life business operations for the whole of 2015.
** 2017 Assurance provided by PricewaterhouseCoopers LLP available at aviva.com/CRkpisandassurance2017 *** Carbon offsetting through the acquisition and surrender of emissions units on the voluntary and compliance markets.
Our Board Governance Committee oversees our responsible and sustainable business strategy and the policies that underpin it. As a company we are subject to the UK Corporate Governance Code (the
Code), which we aim to comply with fully. Details of the Company’s compliance with the Code can be found in the Directors’ and
Corporate Governance Report in the Annual report and accounts and online at www.aviva.com/investors/corporate-governance. The activities of the Board Governance Committee can be found in the Governance Committee Report in the Annual report and accounts.
‘Risk and Risk Management’ section and in our high level response to the recommendations of the Financial Stability Boards’ Taskforce on Climate-related Financial Disclosure, in the ‘Aviva’s climaterelated financial disclosure’ section.
We also manage the risks associated with our community investment activities through the controls outlined in our Corporate
Responsibility Business Standard. This includes a governance framework for our charitable donations and partnerships and details of how we manage the risks associated with employee volunteering (for example, through robust child safeguarding). This standard is reviewed each year and communicated to all Aviva businesses. We review compliance annually, and all businesses demonstrate how they are complying with the requirements. Where a gap is identified the business is required to produce an action plan to ensure that is rectified.
We have a human rights policy that identifies our main stakeholders as well as the most salient human rights issues for our business. The scope of this policy is group-wide and sets out the Group’s commitment to respect human rights. It applies to all Aviva business units, operations, functions and staff, including but not limited to legal entities (including joint ventures), acquisitions, disposals, outsourcing arrangements, new products, new asset classes and strategic projects.
Our approach to modern slavery is part our overall approach to human rights. In 2017, we updated our human rights policy to make explicit mention of modern slavery as an area of focus. In addition, we: • Engaged with our UK managed suppliers on their work to prevent modern slavery in their operations; • Worked with our UK procurement teams to further improve their processes, ensuring that new suppliers are required to agree to abide by our Business Code of Behaviour and our Business Ethics Code (both make explicit reference to modern slavery); • Reviewed the clauses in our supplier contract templates that reference modern slavery, to ensure they remain fit for purpose and continued providing training on modern slavery to employees; • Created a page on our UK intranet dedicated to human rights and modern slavery to keep employees informed; • Collaborated with the UN Global Compact as part of the UK working group on modern slavery (which brings together peers from across different industry sectors to share learnings; and information to support our work in tackling modern slavery) and are also a founding member of the Business Against Slavery working group convened by the UK Home Office.
As part of our human rights due diligence, in 2017 we have looked at how our community investment projects include women as beneficiaries. This is in line with our commitment to respect human rights and women empowerment. We also have a set of internal policies (Business Standards) that support our commitment to respect human rights including: • People Standard and supporting policies and procedures
Corporate responsibility (CR) key performance indicators (including 2015-2017 figures) and the accompanying limited assurance statement by PwC can be found on www.aviva.com/social-purpose, alongside Aviva’s 2017 CR
Summary and Environmental, Social and Governance Data sheet. More details of our internal diversity, inclusion and wellbeing approach can be found in the ‘Our People’ section of this report.
At the Aviva Plc Board level, the following two Committees oversee our management of climate related risks: Board risk committee
While Aviva’s climate change strategy relates to the entire Group, the businesses that form Aviva work to different risk horizons. For example, general insurance (GI) has primarily an 18 month outlook
(although recognising there are longer term risks) and focuses on the physical impacts of climate change. As a life insurer and pension provider we also make investments. This is, first and foremost, to ensure we can cover our future commitments and meet the promises we have made to our customers, so insurance claims and pensions will be honoured. To do this we look very carefully at how different investments meet our risk appetite in the longer term, when transition risks become much more important.
Aviva’s strategy to implement the TCFD recommendations includes conducting climate-related scenario analysis consistent with the recommendations, wherever possible using commonly agreed sector/subsector scenarios and time horizons. This will enable us to better anticipate and manage climate risks, as well as identify climate-related opportunities. This work will involve an inter-disciplinary team including Group Risk, Group Capital, Aviva Investors, Group Reinsurance, the General and Life insurance businesses, and the Corporate Responsibility and Public Policy team. We will partner with industry associations and sector peers to drive consistency in scenarios, including one for limiting average temperatures from rising by more than 2oC by the end of the century. We will report on the progress of our work on scenarios to Aviva’s relevant board committees and aim to first report against scenarios in our disclosure next year. We recognise that the increased severity and frequency of weather-related losses has the potential to change events that could benefit our earnings, to ones that will negatively impact our profitability. Consequently, large catastrophic (CAT) losses are already explicitly considered in our economic capital modelling to ensure we are resilient to such CAT scenarios. We are closely monitoring sectors or subsectors particularly exposed to transition risk and analysing the risk to Aviva of our individual company level investments. In 2017, we worked with 2
Degree Investing Initiative to analyse how close we are as an asset owner to achieving a 2oC future. Using the European Commission’s
1 Aviva is an asset owner with assets to the value of £490 billion and Aviva Investors has assets under management of £353 billion.
Strategic report Governance IFRS financial statements Other information Strategic report Governance IFRS financial statements Other information Strategic report Governance IFRS financial statements Other information Strategic report Governance IFRS financial statements Other information Strategic report Governance IFRS financial statements Other information Strategic report Governance IFRS financial statements Other information 1. Physical risk a. Insurance risks We recognise that weather-related events may become more frequent, severe, clustered and persistent. These single and cumulative losses may impact our ability to write profitable new business over the longer term. This has driven a focus on explicitly considering the impact of climate and weather in financial planning and pricing. Our GI business exposure is limited by being predominantly in Northern Europe and Canada. We require our GI
businesses to protect against all large, single catastrophe events in line with local regulatory requirements, or where none exist, to at least a 1 in 250 year event. Factors determining these decisions include: capital efficiency, appetite for GI earnings volatility, predictability of cash flows and dividend paying capability and reinsurance market competitiveness. Canada is moving to 1:500 reinsurance limits in line with government requirements. We consider our top insurance climate-related risks to be: • Our actuarial pricing assumptions and projections which may prove incorrect
We purchase reinsurance to protect against the severity and frequency of large CAT events, and review the adequacy of the cover and the programme structure annually at renewal. A change in climate can mean that disease may spread to new and expanded geographic areas. Therefore Aviva uses external reinsurance for its life business to manage its exposure to life insurance risks such as pandemics, and manages capital in an efficient manner in line with the Aviva Group’s risk appetite.
We undertake this engagement individually and collaboratively, actively supporting or co-filing shareholder resolutions as appropriate. We continue to be committed to increasing our investment in low carbon infrastructure and to considering how best we support the financing of the transition to a lower carbon economy.
Directors and Officers and Pension Trustee Liability insurances. However, we may have holdings in companies that could be subject to regulatory and legal challenges due to their climate-related impacts and level disclosures. The direct impact from legal challenges and any associated fines are likely to be limited to specific companies.
Although we do not consider these material, we have a long-term reduction target of 70% by 2030, from a baseline of 2010. These figures can be found at www.aviva.com/ESGdatasheet 2017
In 2015, we identified 40 companies with more than 30% of their business revenue associated with thermal coal mining or coal power generation and undertook focussed engagement with them, including 51 in depth conversations. In 2017, we were asked to review our holdings against a list of 120 coal companies. We had beneficial holdings in 26 companies with a total market value of £55.6 million or 0.01% of our total assets. 11 of these companies are also part of the list of 40 companies identified and engaged with since 2015. More details of this engagement can be found on aviva.com/social-purpose.
Our governance A strong system of governance, with effective and prudent controls to assess and manage risk, is central to helping any organisation anticipate and adapt to changing external circumstances. It is very pleasing that this year we ranked second in the FTSE 100 IOD/Cass
Business School Good Governance Index 2017. This external recognition is testament to the dedication of the team and all our colleagues who work to ensure high standards of corporate governance throughout our business.
We are not, however, complacent and constantly assess and reassess how we are performing against the risks that we face. For example, in 2018 as we continue to implement our Digital First strategy, we are not only conscious of the benefit of the everevolving technological developments but alert to the risks they can represent. We strive to mitigate these risks by ensuring our controls continue to be strong and that we are well equipped to protect our business and customers from whatever new threats emerge. More information on our principal risks can be found in the ‘Risk and risk management’ section of this report.
Executive level. At the 2017 Annual General Meeting, Bob Stein and
Senior Independent Director (SID) respectively, with Glyn Barker becoming SID, having been on the Board for five years. Following the 2017 half year results, Glyn stepped down as Chair of the Audit
Governance Committee Chair in January 2017 having been a member of the Committee since June 2016. To further the execution of our Digital First Strategy, Claudia was also appointed as Chair of UK Digital in September 2017.
Our stakeholders In December 2017 the FRC issued proposals for a refresh of the UK
Corporate Governance Code and we are participating in the consultation process and are largely supportive of the planned changes. We recognise the importance of responding to increased scrutiny on how companies are run and the emphasis on the importance of considering the interests of a broad stakeholder group in making business decisions.
Council, which will comprise high calibre leaders from across the business with a specific focus on the generation X/Y view of our colleagues, and will be in operation from March 2018. The Council will receive a broad selection of materials ahead of each Board meeting with a focus on digital, brand and marketing, and will be asked to provide insight and comments on the matters covered.
This will be an invaluable way of ensuring the views of our employees’ are fed back to the Board on our strategic and business matters, and that we have insight from the heart of our operations.
At the outset, I will Chair the Council, with a view to rotating this in due course around other Non-Executive Directors.
Additionally, the Board will be developing a programme to receive further input from employee forums, suppliers and the communities in which we operate during the 2018 year. An example of our planned interactions with the employee forum is set out in the Remuneration Committee report.
The Board remains focussed on all our stakeholders be they our people, our customers, our shareholders, and the communities which we are part of. I am proud that we put people at the heart of our business. You can read about the work that we do in these areas in the ‘Corporate responsibility’ and ‘Our people’ sections of this report.
Board and Group executive diversity The charts below illustrate the diversity of the Board and senior management as at the date of this report.
4 4 Insurance 9 8 4 Banking 5 3 4 Actuarial 6 8 4 Transformation 5 5 2 Law 3 7 3 Government 4 8 4 Customer 7 5 2 IT/Digital 3 8 4 Strategy 7
There has rightly been a continued focus on diversity during the year with the publication of the Hampton-Alexander review and
McGregor Smith and Parker reviews during 2017. The Board and I
We welcome efforts to remove the barriers preventing women advancing into senior roles, and we are proud that we are part of the Future Boards Scheme, and that both myself and the Group
Executive Director in January 2013, and as Chairman in April 2015
Skills and Experience: Tom’s financial expertise and strategic decision-making skills play a fundamental role in driving Aviva to attain its financial goals. As a result of Tom’s work Aviva has strengthened its financial position and now has a capital surplus that it can deploy in the years to come. Prior to joining Aviva, Tom worked in senior positions as an investment banker in highly respected US firms, including Blackstone Advisory Partners LP, where he was responsible for successfully driving Blackstone’s business advising banks, insurers and other financial institutions globally.
Tenure: 2 years 11 months. Appointed to the Board as Executive
CEO of the Friends Life business, Andy’s knowledge and experience of the UK insurance sector are invaluable to the Board. His role as chairman of the Association of British Insurers gives him a unique perspective of the UK insurance and regulatory environment.
Tenure: 9 months. Appointed to the Board as an Executive Director in June 2017
Skills and Experience: Maurice has more than 25 years experience within Aviva and was appointed as CEO of International Insurance in
June 2017. Maurice has responsibility for Aviva’s insurance operations in France, Canada, Ireland, Italy, Poland, Spain, Turkey and India. His addition to the Board brings expertise and focus to the Group’s International businesses.
Skills and Experience: Claudia has significant experience of building digital businesses, strategy formulation, business transformation and customer strategy. Claudia previously worked for the Financial Times, where she was part of the team that launched FT.com. In addition, Claudia acted as CEO of the internet start up, TheStreet.co.uk.
Chairman and the Board by instilling the appropriate culture, values and behaviour in the Boardroom. Glyn was previously a vice chairman of PricewaterhouseCoopers LLP (PwC) and was responsible for leading the strategy and business development for
Macquarie Group Ltd and Macquarie Bank Ltd. Chair of the 30% Club in Australia.
Tenure: 2 years 8 months. Appointed to the Board in June 2015
Tenure: 8 years 2 months. Appointed to the Board in January 2010
Europe, Asia and Australia, which included 7 years as CEO of
Michael to bring a unique perspective and insight to the Board.
Skills and Experience: Keith has significant financial experience including a detailed knowledge of business planning, capital projects and project finance gained in a number of industries. Keith has more than 10 years of executive experience as Chief Financial
Officer and CEO at British Airways plc and, during his time, Keith transformed the Company into a customer focussed organisation.
Qualifications: Bachelor of Laws degree (Glasgow University) and qualified solicitor. Graduate of the General Manager Programme
Kirstine is able to execute the role of Company Secretary by advising the Board on governance issues and the regulatory environment.
The full biographies for all our Board and Group Executive committee members are available online at www.aviva.com.
As a UK premium listed company, Aviva has adopted a governance structure based on the principles of the 2016 UK Corporate
May 2017 and, following announcement of the half year results on 3
August 2017, stepped down as Chair of the Audit Committee (but remained as a member), with Keith Williams becoming the Audit
The statement sets out our beliefs around the importance of diversity and inclusion in the Group, and how these are reflected in our Global Inclusive Diversity Strategy (Diversity Strategy). It also details how we implement the Diversity Strategy, our objectives, and the timelines in which we aim to implement it.
Board by 2020, as evidenced from our participation in initiatives such as Future Boards Scheme and the 30% Club. The diversity charts in the Chairman’s Governance Letter show that we have a
The Board is focussed on creating an inclusive culture in line with Aviva’s values and the Diversity strategy, which we believe will lead to greater diversity both on our Board and throughout the
• Approved the 2018-2020 Group Plan and received presentations and reports from markets in respect of strategy execution and performance against the Group Plan
(CFO), proposals for significant transactions, changes in senior management, regulatory developments, the control environment, and progress against the Group Plan and the Group’s strategy
• Received regular updates from the Chairman on Board matters for which he is responsible such as Board composition
• Received reports from the Chief Risk Officer (CRO), and assessed the Group’s significant risks and regulatory issues, approved the
Group’s risk appetite, approved the Group risk policies which provide the risk framework for managing risk across the Group, and received updates on the Group’s capital and liquidity position
• Received assurance that governance structures remained appropriate for the businesses and the global markets in which we operate, while supporting the overall strategy and culture
Financial reporting and controls, capital structure and dividend policy – 15% of agenda time
• Reviewed the Group’s financial performance, financial results, and approved dividend payments
• Assessed the Group capital and liquidity requirements, arising from the Group’s strategy and Group Plan
• Reviewed reports provided by its committees on key matters of financial reporting, providing the opportunity for the Board to input and challenge where necessary
• Regularly discussed the current Group culture, its alignment with strategy, and how it has been embedded during the year
who can apply their wider business skills, knowledge and experience to the oversight of the Group, and provide input and challenge in the boardroom to assist in the development and execution of our strategy. Executive director appointments are made to ensure that the appropriate business focus is represented on the Board to support effective implementation of the Group strategy. The Board reviews and refreshes the skills of Board members, identifying any areas of skills, experience and knowledge that we can further strengthen. Director appointments are made by the Board and are subject to a formal, rigorous, and transparent process and the appropriate regulatory approvals. The Nomination
Executive director appointments follow the executive succession planning process that ensures there is a pipeline of executive talent available. All Board appointments are also subject to continued satisfactory performance following the Board’s annual effectiveness review, and the Company’s articles of association, which prescribe that all serving directors will retire and stand for election or reelection at each AGM. The NEDs assist management in the development of the Group’s strategy, which is set by the Board, so it is important that they have experience of strategy formulation, business planning and transformation. To be effective, it is the
Board’s view that the majority of our NEDs should also have a sound understanding of the financial services industry to effectively evaluate the information they receive and for them to provide appropriate challenge. The diversity charts in the Chairman’s
Each NED must be able to devote sufficient time to the role in order to discharge his or her responsibilities effectively. The Chairman assesses the time commitment of the NEDs as part of the annual review of their effectiveness, and the SID reviews the time commitment of the Chairman. This assessment takes into account the number of external commitments each director has and that each director has demonstrated they have sufficient time to devote to their present role within Aviva including under potential periods of corporate stress. Under the Board’s policy on this matter, executive directors may hold one external directorship and must obtain the prior consent of the Board before accepting a nonexecutive directorship in any other company. Executive Directors may retain the fees from any external directorship. Maurice Tulloch is a director of Pool Reinsurance Company Ltd and the fees he receives from this role are disclosed in the Directors’ Remuneration report. No other Executive Director holds an external directorship.
which set out the duties of each role. The Chairman’s priority is to lead the Board, monitor the Group’s culture and ensure its effectiveness and the Group CEO’s priority is the management of the Group. The Board has delegated the day-to-day running of the
Glyn Barker met each NED from time to time, providing a forum in which they could raise matters. Role profiles for the Chairman, SID,
During the year, the directors attended a number of internal training sessions on topics including Solvency II (SII) benchmarking and unconscious bias. An independent IT adviser to the Board was retained for a short period to provide additional bespoke support and a holistic view on technological developments and the cyber security environment in the context of the Company’s strategic objectives. The Board will keep its IT expertise under review as the
The Board visits different markets whenever it can and, during 2017, two Board meetings were held at Aviva offices in France and
Keith Williams 10/10 7/7 6/6 4/4 — 3/3 1 During the year there were 10 Board meetings, of which eight were scheduled meetings and two were called at short notice.
2 The Board meeting on 26 January 2017 was called at short notice. Due to this Glyn Barker, Mike Hawker, Bob Stein, Michael Mire, Patricia Cross and Sir Malcolm Williamson were unable to attend due to other prior commitments. Papers were circulated to all directors before the meeting and those unable to attend could raise issues and give comments to the Chairman in advance of the meeting.
5 Bob Stein missed the Board, Nomination Committee, Remuneration Committee, Audit Committee and Risk Committee meetings on 8 May 2017 and 9 May 2017 respectively, as they fell immediately prior to his retirement date.
In accordance with the Companies Act 2006, the Company’s Articles of Association allow the Board to authorise potential conflicts of interest that may arise and to impose such limits or conditions as it thinks fit. The decision to authorise a conflict of interest can only be made by non-conflicted directors (those who have no interest in the matter being considered) and in making such a decision the directors must act in a way they consider, in good faith, will be most likely to promote the Company’s success for the benefit of its shareholders as a whole. The Board’s procedure is to review and approve actual and potential conflicts of interest as they arise. This procedure operated effectively during the year.
The Board has made considerable progress during 2017 on the objectives set at the beginning of the year. This included exiting from Taiwan and Spain, demonstrating that we are delivering on our strategy of Not Everywhere by focusing our resources in markets where we believe we have a clear competitive advantage, and further increasing value for our shareholders by increasing our growth and cash flow.
These areas of focus were in addition to the Board’s routine standing agenda which included financial reporting and strategic planning.
Board has undertaken a rigorous evaluation process each year to assess how it, its committees and individual directors are performing.
The normal process is for an evaluation to be undertaken by way of an internal questionnaire, supported by discussions with the
Interviews were conducted during the year with every Board member, according to a set agenda tailored for the Board, which had been agreed with the Chairman and the Group Company
In addition, during the year the NEDs, led by the Chairman, met to discuss the executives’ performance. The NEDs, led by Sir
Investors’ views are regularly sought and incorporated into the Board’s planning. During the year the Board undertook an independent investor survey in order to gain further insight into shareholder expectations, which will feed into the Board’s strategy going forward. The
Chair of the Remuneration Committee met with institutional shareholders and advisory groups in respect of the new Remuneration Policy to be put to shareholders for approval at the 2018 AGM.
This remains a continued focus as evidenced, at Board level, by the appointment of Maurice
Tulloch in 2017. Maurice brings expertise and focus to the Board of the Group’s International businesses, with the UK already being represented at Board level through Andy Briggs.
The Board’s delegations of authority have been refreshed and the Group Company
Board and committee schedules have been reviewed to ensure the number and timing of meetings are appropriate throughout the year.
As part of the Board effectiveness review process, each committee undertakes a rigorous review of its effectiveness annually. In 2017 the committee reviews were conducted alongside the evaluation of the Board and also facilitated by IBE. The committees will each consider the feedback from the evaluation and responses as appropriate.
In-depth monitoring of the establishment and operation of prudent and effective controls in order to assess and manage risks associated with the Group’s operations is delegated to the Risk,
Strategic report Governance IFRS financial statements Other information ongoing regulatory change and other emerging risks and market uncertainty. Further information is contained in the Risk Committee report.
Internal controls facilitate effective and efficient operations, the development of robust and reliable internal reporting and compliance with laws and regulations.
Framework (FRCF) are in place across the Group. FRCF relates to the preparation of reliable financial reporting, covering both IFRS and
Management regularly undertakes quality assurance procedures over the application of the FRCF process and controls.
A Major Control Improvement Topic programme is also in place, designed to focus attention on enhancing our control environment around six areas identified by management. Of these, four have been closed during 2017. The areas that have been closed include
The Group Executive members and each market chief executive officer are responsible for the application of RMF, for implementing and monitoring the operation of the system of internal control and for providing assurance to the Audit, Governance and Risk
The Risk Management function is accountable for the quantitative and qualitative oversight and challenge of the identification, measurement, monitoring and reporting of principal risks and for developing the RMF.
Assists the Board in its oversight of risk and risk management across the Group and makes recommendations on risk appetite to the Board. Reviews the effectiveness of the Risk Management Framework, and the methodology in determining the Group’s capital and liquidity requirements.
Works closely with the Risk Committee and is responsible for assisting the Board in its oversight of operational risk across the
The Chief Executive Officer and Chief Risk Officer of each market is required to make a declaration that the Group’s governance, internal control and risk management requirements are effective and fit for purpose across the business and that they are kept under review through the year.
Any material risks not previously identified, control weaknesses or non-compliance with the Group’s risk policies or local delegations of authority must be highlighted as part of this process.
This is supplemented by investigations carried out at Group level and a Group CEO and CRO certification for Aviva plc.
The effectiveness assessment also draws on the regular cycle of assurance activity carried out during the year, as well as the results of the certification process. During 2017, this has been enhanced by the application of the Group’s improved Operational Risk & Control
Management (ORCM) framework. Through ORCM the Group has defined a common system and methodology for the management of operational risks and controls to be deployed throughout the
Through regular reporting and the annual review, a number of areas of improvement have been identified and the required actions have been or are being taken. The committee reports refer to a number of areas where significant control improvement is needed and in progress such as cyber security and disaster recovery, as well as financial crime prevention, data management and preparedness for the EU General Data Protection Regulation. We are investing in improvements in these areas and will continue to monitor them.
The 2018 AGM will be held on Thursday 10 May 2018 and the Notice of AGM and related papers will, unless otherwise noted, be sent to shareholders at least 20 working days before the meeting. The AGM
We have an email address, aviva.shareholders@aviva.com, for shareholders to ask questions on the business of the AGM.
A presentation on the Group’s performance will be given at the
Further details on the AGM are provided in the Shareholder Services section.
Executive Director. Maurice brings significant general insurance and international experience to the Board.
Glyn Barker, who has been a member of the Board for six years, was appointed as Senior Independent Director (SID) following Sir
Committee’s discussions during the Board and committee appointment process. The skills matrix sets out the expertise and experience of each Board member and the Group Executive and assists the Committee in identifying those who possess the desired skills and experience to join the Board and its committees, both now and in the future.
In the year, the skills matrix was used to identify our need to give greater focus to the Group’s European and International businesses at Board level and, coupled with the Board’s desire to appoint an additional Executive Director, it was agreed that Maurice
Tulloch should join the Board. Maurice’s promotion demonstrates how we continue to develop our talent in the Group.
Executive and Board succession planning continues to be a priority for the Committee and throughout the year the Committee monitored the future leader pipeline and the available pool of talent in the Company.
With respect to the wider people agenda, the Board is heavily involved in managing and strengthening the talent pipeline across the Group. Members of the Board have been involved in various initiatives including an ongoing programme of talent breakfasts where high potential employees meet the Board at least four times a year. Further information on our people strategy can be found in the Strategic report.
The Board is committed to having a diverse and inclusive leadership team which provides a range of perspectives, insights and the challenge needed to support good decision making.
Hampton-Alexander Review and are committed to raising the representation of women on the Board to 33%. As at the date of this report, 25% of the Board are female, which is an increase from 23%
in 2016. In terms of our senior management, 30% of our Group
(Group CEO) and I are active members of the 30% Club. The Board will continue to monitor Aviva’s talent management programmes and practices with a special regard to those designed for women with high potential.
The Board and its committees conduct an evaluation of their performance each year and in accordance with the UK Corporate
Board Evaluation’, a firm that has no other connection with the
Further information about the 2017 effectiveness review can be found in the Directors’ and Corporate Governance Report.
The Committee will review the outcomes of the 2017 effectiveness review, agree any actions and monitor these going forward.
Committee activities and agenda time during 2017 Evaluation and annual assessment – 15% of agenda time
• Considered and recommended to the Board the election/reelection of each continuing director ahead of their election/reelection by shareholders at the Company’s 2017 AGM
• Reviewed and made recommendations to the Board in respect of each directors actual, potential or perceived conflicts of interests
• Reviewed the composition of the Board and its committees and in particular, whether the Board required additional skills and experience which would complement those of the existing members and the Company’s risk profile and strategy
• Considered plans for succession for each Group Executive member, including talent development below Group Executive level
• Identified and endorsed the appointment of Maurice Tulloch to the Board in June 2017
Executive to ensure that there is an adequate talent pool of potential executive directors
I am pleased to present the Committee’s report for the year ended
The Company’s approach to risk and risk management together with the principal risks that face the Group are explained within the
During the year the Committee’s focus remained on geopolitical risks (including Brexit), the elevated prices of assets, the emerging strategic risks posed by technology and market changes, risks posed by climate change, the heightened risk of cyber threats and data security, ongoing regulatory change and other emerging risks and market uncertainty.
Much work has gone into understanding the emerging risk environment, diversifying the Group’s risks and hedging its risk exposures against extreme stresses to provide a more stable capital position. The Committee has incorporated emerging risk scenarios into its scenario planning, enabling it to review the most significant risks that would affect the Company’s strategy both now and in the future. Cyber risk continues to be managed through the Company wide systemic programme, the Major Control Improvement Topics
The Committee continues to analyse the impact of Brexit particularly the potential exit scenarios, as well as the emerging regulatory framework for Global Systemically Important Insurers (G-
During the year, Bob Stein retired from the Committee at the conclusion of the 2017 Annual General Meeting on 10 May 2017, and
The main purpose of the Committee is to assist the Board in its oversight of risk within the Group, with particular focus on the
The Committee continuously monitored the credit environment throughout the year and considered the current economic factors, in particular the unwinding of quantitative easing and the ongoing tightening of monetary policy in many of the major economies, which may cause counterparty credit risks. It also reviewed the level of hedging and protection in place to mitigate these risks and in particular monitored the Group’s exposure to interest rates and widening credit spreads.
During the year the Committee reviewed the current and projected capital and liquidity position, risk environment and risk profile, including the estimated impact of the change in Ogden discount rate on the SII capital ratio.
Strategic report Governance IFRS financial statements Other information liquidity position, which included reviewing forecasted operating capital generation over the plan period. The Committee challenged the different levels of risk appetite and capital ranges across the
The Committee monitored the ongoing changes to the regulatory framework and prudential regulatory requirements across the Group and will continue to provide an open dialogue with the regulators, particularly in regards to Brexit planning, dividend plans and changes to the internal model.
Given the Group’s digital strategy and the increasing external cyber security threat, focus has remained on the transformation of the
Group’s IT estate, its resilience, and its ability to support the Group’s strategy and keep customer data safe. During the year the
The Group’s ORCM requirements and guidance have provided greater clarity of accountability, with the risk function having specific responsibility for identifying any missing risks and therefore mitigating the risk of further thematic issues developing.
Although we do not believe that Brexit has a significant operational impact on our business, the influence that it will continue to have on the UK economy will require careful monitoring. During the year the Committee reviewed the potential exit scenarios and their impact on the Group, and the Group’s operational planning in response. It also considered the public policy risks that might arise in 2018 if there was another general election in the UK and a change of government, and continues to monitor political and public policy risk in Aviva’s other principal markets.
The Committee will continue to monitor the political environment, the exit of Britain from the European Union, and the current global economic cycle, with inflated asset values. It will also focus on managing balance sheet volatility and the operational and economic impacts, with contingency financing available to manage any broad market impact.There will be an ongoing and significant focus on strengthening the control framework, cyber risk reduction and disaster recovery capabilities of the Group. The Committee’s focus will remain on the emerging risks, and the potential benefits that could be derived from them, particularly around advances in technology across financial services, automotive and the medical services.
Committee activities and agenda time during 2017 Risk appetite, risk management and risk reporting – 21% of agenda time
Group capital and liquidity, financial plan and stress testing – 21% of agenda time
• Reviewed updates on credit risk and the Company’s exposure and reviewed mitigating actions
• Received the scenarios for Group-wide stress testing to support the Recovery Plan, and the results
• Monitored the risk of cyber security, the progress against cyber risks and reviewed the results of simulation security attacks against the Group
• Monitored the impact of Brexit, in particular the exit scenarios and regularly reviewed updates regarding the potential impact on capital and liquidity
• Received updates on the disaster recovery, IT security, outsourcing and cyber risk MCITs, and monitored and challenged progress by management
• Received quarterly reports from the Chief Audit Officer (CAO) on internal audit which included progress on improving the control environment, progress on MCITs, and the review of the Internal
• Reviewed the effectiveness of the systems of internal control and risk management
• Recommended the 2018 Risk and Control Goal for approval by the
I am pleased to present the Audit Committee’s report for the year 2017 has been a year of continued political and business turbulence. Against this background the Committee has continued to focus on the fundamentals of financial reporting, our system of internal controls and the performance of the internal and external auditors. This has included the potential impact of a number of new
programme assists management in providing even greater focus on enhancing our control environment around the six thematic areas identified.
Financial Reporting Council (FRC) in relation to its regular review and assessment of the quality of corporate reporting in the UK. The comment letter focussed on the disclosures of the Alternative
Performance Measures (APMs) in our 2016 Annual report and accounts. The CRRT raised certain questions regarding the composition and labelling of the Operating Profit measure. Aviva responded to the CRRT’s questions providing clarifying information and proposing specific enhancements to its 2017 Annual report and accounts that would address the questions and comments raised.
Committee after the conclusion of the Annual General Meeting on 10 May 2017. Glyn Barker stepped down as Committee Chair and became Senior Independent Director, following the announcement of the 2017 half year results on 3 August 2017. Glyn remains as a member of the Committee, and I took over as Committee Chair from that date.
Sir Malcolm Williamson*** 14/05/2015 2 * Chair from 3 August 2017 ** Chair until 3 August 2017 *** Retired from the conclusion of the 2017 Annual General Meeting (10 May 2017)
The Committee annually reviews how its members meet the expertise criteria set out in the UK Corporate Governance Code 2016 and the Disclosure Guidance and Transparency Rules (DTRs).
• monitoring the effectiveness, performance and objectivity of our internal and external auditors.
There is cross-membership between these Committees to ensure a good understanding and efficient communication of the work of each.
SII disclosures Reviewed the SII judgements, development of the Group Solvency and Financial Condition Report and the Regulatory Supervisory Report, and recommended them to the Board for approval, ahead of filing for the first time on 1 July 2017.
Challenged the proposed MCIT closure dates and governance around the closure process for the MCIT programme, as some of the control topics approach satisfying the closure criteria, upon which they will be managed on a business as usual basis. The Fraud Management, Outsourcing, Compliance Effectiveness and Data Governance MCITs were all closed during the 2017 year following satisfaction of these criteria.
Committee is mindful that it is necessary to allow the selected auditor appropriate time to become independent should the
Group's 2016 financial statements as part of their annual inspection of audit firms. The Committee received and reviewed the final report from the FRC which indicated that there were no significant areas of concern. An annual review of the Auditor was undertaken through completion of a questionnaire by the Committee, senior management, and members of the Group’s finance community.
(Standard) in place which is aimed at safeguarding and supporting the independence and objectivity of the Auditor. The Standard is compliant with all UK and International Federation of Accountants rules and takes into account the FRC’s Revised Ethical Standard 2016 and the EU Audit Directive that became applicable to Aviva
In 2017 the Group paid PwC £22.3 million (2016: £23.9 million) for audit and audit-related assurance services, with the overall decrease due to Friends Life integration and US SEC delisting savings. In addition, PwC were paid £3.0 million (2016: £9.4 million)
for other services, including £2.2 million (2016: £8.1 million) for other assurance services, giving a total fee to PwC of £25.3 million (2016: Aviva plc Annual report and accounts 2017
The Committee is responsible for supporting the Board in ensuring a robust system of internal control and risk management in the
For the financial year under review, the Company met the relevant provisions of the Code relating to internal controls, and the
The Committee Chair is the whistleblowers’ champion for the Group and has responsibility to oversee the integrity, independence and effectiveness of the Group’s policies. The Committee as a whole is responsible for establishing and overseeing the effectiveness of controls put in place in accordance with regulatory requirements in respect of whistleblowing. The Board annually receive a formal report in respect of whistleblowing activity and compliance in line with updated regulatory requirements.
Committee activities and agenda time during 2017 Financial statements and accounting policies – 57% of agenda time
• Recommended to the Board for approval the 2017 half and full year results
• Approved the IFRS and SII technical provisions with the 2017 half and full year results
• Recommended to the Board for approval the SII Solvency and
• Reviewed and challenged the going concern assumptions for 2017 and the principles underpinning our Longer Term Viability
• Reviewed the Internal Audit function report to ensure adequacy of our systems of internal control and risk management
I am pleased to present the Governance Committee’s report for the year ended 31 December 2017.
There were a number of changes to the Committee membership during the year. I was appointed as Chair of the
The main purpose of the Committee is to assist the Board in overseeing compliance with our corporate governance principles and implementation, shaping the culture and ethical values of the Group through overseeing and advising on business and customer conduct obligations, reputation, community and societal issues, data governance and financial crime matters. In addition, the Committee acts as the conduct committee for Aviva’s UK Digital (UKD) business.
The Committee has been designated by the Board as the body that provides oversight of governance activities and this work has principally focussed on three areas: changes to the
The Committee has reviewed and provided input to the changes to the Board and committee composition of the two regulated subsidiary companies that represent the UKI business.
‘deep dives’ into customer complaints when our products and services have not met customer expectation for any reason, and the resulting upskilling of our people and technology improvements to support our customer contact colleagues. The
Committee has also reviewed the vulnerable customer support framework that has been implemented during the year.
The Committee continued to monitor our approach to corporate responsibility and during the year reviewed Aviva’s reporting on modern slavery. Our commitment to respect human rights is guided by the United Nations Guiding Principles on Business and Human Rights and other internationally recognised frameworks and during the year, the Committee also approved updates to our Business Ethics Code to reflect these Principles.
In the past year the Committee has paid particular attention to
The Group’s Business Units (BU) reassessed their conduct risk performance and conduct risk framework which the
Assets Sourcebook (CASS) enforcement action in 2016, and reviewed the actions taken and the progress in addressing these actions. An independent review has been conducted following the enforcement action, and significant progress had been made to address the issues raised.
The Committee undertakes a rigorous review of its effectiveness annually. More information can be found in the Directors’ and
experience, embedding the Aviva Signature processes and reviewing customer conduct risk issues. We will also continue to oversee the GDPR programme in order to ensure delivery
The Committee will also monitor the wellbeing and engagement of our people through responses to the Voice of
• Focused on the customer agenda and received regular updates and monitored progress on customer metrics relating to sales, retention, claims experience and complaints
• Reviewed the Group’s modern slavery statement, annual corporate responsibility reporting and the Group’s Financial
• Reviewed potential financial crime risks and any actions required in response
• Monitored the Group’s relationship and interaction with regulatory bodies and actions taken in respect of regulatory developments
The directors submit their Annual report and accounts for Aviva plc, together with the consolidated financial statements of the Aviva group of companies, for the year ended 31 December 2017.
The directors’ report required under the Companies Act 2006 comprises this directors’ and corporate governance report; the directors’ remuneration report and the following disclosures in the
Dividends for ordinary shareholders of Aviva plc are as follows: • Paid interim dividend of 8.4 pence per ordinary share (2016: 7.42 pence)
• Proposed final dividend of 19.00 pence per ordinary share (2016: • Total ordinary dividend of 27.40 pence per ordinary share (2016: • Total cost of ordinary dividends paid in 2017 was £983 million
For the full year dividend for 2017 the Company has applied its policy to pay out 50% of operating earnings per share as a dividend to shareholders. In November 2017, the Company announced its intention to increase its pay-out ratio target to 55-60% of operating
As a holding company, the Company is dependent upon dividends and interest from our subsidiaries to pay cash dividends.
Interim dividends have previously been paid in November of each year. Following feedback from shareholders, to bring Aviva’s practice in line with its peers and to reduce the gap between the interim results announcement and dividend payment, from 2018 interim dividends are expected be paid in September, subject to declaration by the Board. A final dividend is typically proposed by the Company’s Board after the end of the relevant year and generally paid in May. The following table shows certain information regarding the dividends that we paid on ordinary shares.
Under UK company law, dividends can only be paid if a company has distributable reserves sufficient to cover the dividend. At 31
In the Annual report and accounts for the year ending 31 December 2016, we indicated that our strong Solvency II ratio provided capacity to deploy surplus capital. A share re-purchase programme was one method by which we intended to return capital to shareholders allowing a reduction in hybrid debt.
Details of the Company’s share capital and shares under option at 31 December 2017 and shares issued during the year are given in notes 30 to 33. The calculation of earnings per share and the impact of the share buy-back is included in note 14.
Further details on the ordinary share capital of the Company are shown in note 30.
Rights and obligations attaching to the Company’s ordinary shares and preference shares
Rights and obligations together with the powers of the Company’s directors are set out in the Company’s articles of association (the
Articles), copies of which can be obtained from Companies House and the Company’s website at www.aviva.com/articles, or by writing to the Group Company Secretary. The powers of the
Company. The Company is not aware of any agreements between holders of securities that may result in restrictions on the transfer of securities or voting rights.
There are a number of agreements that take effect, alter or terminate upon a change of control of the Company following a takeover bid, such as commercial contracts and joint venture agreements. None are considered to be significant in terms of their potential impact on the business of the Group as a whole. All of the
The rules regarding the appointment and removal of directors are contained in the Company’s Articles. Under the Articles, the
The Company has purchased and maintained throughout the year directors’ and officers’ liability insurance in respect of itself, its directors and others. The Company has also executed deeds of indemnity for the benefit of each director of the Company, and each person who was a director of the Company during the year, in respect of liabilities that may attach to them in their capacity as directors of the Company or of associated companies. The Articles allow such indemnities to be granted. These indemnities were granted at different times according to the law in place at the time and where relevant are qualifying third-party indemnity provisions as defined by section 234 of the Companies Act 2006. These indemnities were in force throughout the year and are currently in force. Details of directors’ remuneration, service contracts, employment contracts and interests in the shares of the Company are set out in the directors’ remuneration report.
In accordance with section 418 of the Companies Act 2006, the directors in office at the date of approval of this report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s External Auditor, PricewaterhouseCoopers
The 2018 AGM of the Company will be held on Thursday, 10 May 2018 at the Queen Elizabeth II Centre, Broad Sanctuary,
Company’s Articles may only be amended by special resolution of the shareholders. The Company’s current articles were adopted on 29 April 2015. A special resolution seeking authority to amend the
Company’s articles is being put to shareholders at the 2018 AGM.
from 1 January 2016, and as a result of being designated a Global
Against this background, the directors have assessed the prospects of the Group in accordance with provision C.2.2 of the 2016 UK Corporate Governance Code, with reference to the Group’s current position and prospects, its strategy, risk appetite, and the potential impact of the principal risks and how these are managed
The assessment of the Group’s prospects by the directors covers the three years to 2020 and is underpinned by management’s 2018-2020 business plan which includes projections of the Group’s capital, liquidity and solvency.
The Group’s stress and scenario testing considers the Group’s capacity to respond to a series of relevant financial, insurance (e.g., catastrophe) or operational shocks should future circumstances or events differ from these current assumptions. The Group addresses the impacts of contingent management actions designed to maintain or restore key capital, liquidity and solvency metrics to within the Group’s approved risk appetites over the planning period.
• Comprehensive reviews of drafts of the Annual report and accounts are undertaken by members of the Group Executive and other members of senior management and, in relation to certain parts of the report external legal advisers and the External Auditor
The directors are responsible for preparing the Annual report and accounts, the directors’ remuneration report and the financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group and parent company financial statements in accordance with IFRS as adopted by the EU. In preparing these financial statements, the directors have also elected to comply with IFRSs, issued by the International Accounting Standards Board (IASB).
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss for that period. In preparing these financial statements, the directors are required to: • select suitable accounting policies and apply them consistently
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and Group and enable them to ensure that the financial statements and the directors’
The directors are responsible for making, and continuing to make, the Company’s Annual report and accounts available on the
Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
For the purposes of Listing Rule (LR) 9.8.4C R, the information required to be disclosed by LR 9.8.4 R can be found in the following locations: Section in LR 9.8.4C R Topic
12 Shareholder waivers of dividends IFRS Financial Statements – note 32 13 Shareholder waivers of future dividends IFRS Financial Statements – note 32
On behalf of the Remuneration Committee (the Committee), I am pleased to present the Directors’ Remuneration Report (DRR), for the year ended 31 December 2017. I also include the details of the proposed changes to the Directors’ Remuneration Policy (the
Aviva has had another strong year of financial results due to our success in engaging customers, employees and the community with our purpose: Defy Uncertainty. The remuneration decisions detailed in the DRR reflect the contributions of our Executive Directors (ED)
Meeting (AGM), and through our engagement with shareholders over the past three years, we have received clear indications of support for the current remuneration framework, and for the reward outcomes approved under it.
In the last year, the Committee has undertaken an extensive review of the Policy. This has focused on whether the Policy remains fit for purpose and whether changes could be made to improve the link between the progress being achieved on our strategy and reward outcomes. We have also consulted extensively with shareholders and shareholder representatives, and have used this
Policy proposal to begin a process of ongoing engagement with our employees as well.
• The maximum quantum of the Long Term Incentive Plan (LTIP)
opportunity, and the plan rules used for making LTIP grants will not change; however, it is proposed to make a change to the metrics.
We've adapted our Policy in order to gain maximum alignment with these views and we are now confident this approach will be supported by our major shareholders.
At our Capital Markets Day in November 2017, we updated the market about our strategy and financial targets for the future, specifically: • Earnings per share growth and improved quality of earnings
Financial metric – Earnings per share (EPS1) growth with gateway hurdles (underpins) of Return on Equity (RoE2) and Solvency II (SII) Shareholder Cover Ratio– 50% weighting
Vesting of this portion of the LTIP can only commence after two hurdles are met: • Return on equity – This measure of Operating RoE2 is reported as part of the capital and assets summary in our annual results announcement. We will set and disclose a minimum hurdle for 3 years for each grant – in determining vesting, our Operating RoE2
• SII Shareholder Cover Ratio – we must maintain solvency above the minimum of our stated working range (currently 150% to 180%) prior to any vesting.
Quality of earnings was a stated ambition at our Capital Markets
Day. The Committee has complete discretion to revise any payout on this metric for example in the event there are concerns with quality of earnings. The quality of earnings process that underlies each vesting tranche will be detailed in the DRR each year.
This will continue to be measured against relevant insurance and financial services peers. The application of this metric will continue to be based on achieving upper quintile TSR for maximum vesting, whilst upper quartile is the normal market benchmark.
It aligns with some clear shareholder views that incentive metrics should include a focus on critical strategic inputs, with progress on digital transformation being a high priority at this stage for the
Board in its stewardship role. We believe, therefore, that this warrants future discussion with shareholders given the strength and range of views.
Policy achieves this and is seeking approval from shareholders for it to be effective for three years from the conclusion of the 2018 AGM.
As part of the previous Policy approved in 2015, we introduced a rigorous quality of earnings assessment process as the final step in decisions on LTIP vesting, and in determining annual bonus scorecard outcomes.
Maurice Tulloch was appointed to the Board on 20 June 2017.
Maurice brings over 25 years’ experience with Aviva and his appointment gives further focus at Board level to the Group's
Increase of 2.5% consistent with the budget applied for average increases in the annual pay review for other Aviva employees in the
Performance at Group level against the financial targets in our bonus scorecard was again strong in 2017. We have further developed our Digital First approach across our businesses while developing market-leading digital propositions. The Committee has also made its annual assessment of the modifier factors, in determining the overall bonus scorecard outcome.
The Committee’s decisions on annual bonus and on the vesting of the 2015 LTIP were made after conducting the quality of earnings assessment and risk review for both plans. The risk review takes into account the conduct and control environment across the Group.
The Committee has exercised judgement for the 2015 LTIP vesting in respect of performance period 2015 – 2017. The re-measurement loss on Friends Provident International Limited (FPI) and Taiwan has been excluded from the RoE performance outcome and will be recognised in 2018 upon completion of the sale. In addition, the positive impact of the £300m share buyback has been removed from the RoE performance outcome.
Last year, we indicated our intention to address the impact of the
Ogden rate change on incentive awards once the UK Government established a new methodology for setting the rate. The rate had been adjusted in March 2017 from 2.5% to minus 0.75%, and set with reference to a ‘very low risk’ investment approach by UK
claimants receiving lump sum awards. The new methodology is still not yet in place, but the draft legislation released in September 2017 provided clear guidance as to the direction of travel, in particular that a ‘low risk’ rather than a ‘very low risk’ investment approach will be used for setting the rate. The indicative range remains wide at 0.0% to 1.0%; we therefore believe that the approach of deferring this item from the assessment of incentives until the new rate is set continues to be the right one.
Last year, we outlined our commitment to increasing the focus on our diversity agenda at Aviva and our ambition of inclusivity across the Group. This continues to be central to our values and critical to the success of our business. Further to the UK GPGR requirements introduced in the UK in April 2017, we released our initial report in
Our gender pay gap data shows that we need to do more to create opportunities for women to progress. We understand the reasons why we have a gender pay gap and this gives us the best possible chance of doing more to fix it. We have a significant challenge ahead of us but, at Aviva, this is about progression and not equal pay.
We are not proud of the position as it stands and have identified areas of focus that we believe will have a significant positive impact, both in continuing to build an inclusive culture and reducing our gender pay gap
Increase of 3% consistent with other Aviva employees in the UK.
Digital First strategy. The measure will focus on growth in customers with multiple product holdings (MPH) and the number of MyAviva active customers.
In 2018, maximum awards under the LTIP will be in line with previous years.
Key priorities for 2018 include the publication of the new UK
Corporate Governance Code (Code), expected to be in the summer 2018. The draft Code includes proposals to: • widen the remit of remuneration committees; and
There will also be UK legislation requiring companies to publish pay ratios between the CEO and the average UK employee. We will report on pay ratios in the 2018 DRR, as, by then, the methodology to calculate the pay ratio should have been published. In the meantime, we are reporting the ratio of the Group CEO’s pay relative to other members of the Group Executive (GE). Based on this year’s pay decisions, the Group CEO earns approximately 2.1 times more than the GE average and 1.8 times more than the average for the other EDs. The percentage change in Group CEO pay for 2017 versus other UK based employees is reported in table 13.
The Remuneration Policy for directors is set out in accordance with the requirements of the Companies Act 2006 (as amended) and the
Table 1 below provides an overview of the proposed Policy for EDs and highlights the proposed changes from the existing Policy. For an overview of the proposed Policy for Non Executive Directors (NEDs) see table 3.
Annual review, with changes normally taking effect from 1 April each year. The review is informed by: • Individual and business performance
There is no maximum increase within the Policy. However, basic salary increases take account of the average basic salary increase awarded to the broader employee population. Different levels of increase may be agreed in certain circumstances at the Committee’s discretion, such as: • An increase in job scope and responsibility
• A significant increase in the size, value or complexity of the Group
To reward EDs for achievement against the Company’s strategic objectives and for demonstrating the Aviva values and behaviours.
Deferral provides alignment with shareholder interests and aids retention of key personnel.
Awards are based on performance in the year. Targets are set annually and pay-out levels are determined by the
• One-third of any bonus is payable in cash at the end of the year
• Two-thirds of any bonus awarded is deferred into shares which vest in three equal annual tranches
Threshold performance against a single metric would result in a bonus payment of no more than 25% of basic salary.
Although financial performance is the major factor in considering overall expenditure on bonuses, performance against non-financial measures including progress towards our strategic priorities and behaviours in line with our values will also be taken into consideration.
The Committee has discretion to amend vesting levels to prevent unreasonable outcomes, which it may use taking into account a range of factors, including the management of risk and good governance, the quality of earnings and, in all cases, the experience of shareholders.
For awards in respect of 2018 onwards, vesting occurs in three equal tranches on the first, second and third anniversaries after grant (rather than at the end of three years as under the previous policy).
Additional shares are awarded at vesting in lieu of dividends on any shares which vest.
The Committee has discretion to amend vesting levels to prevent unreasonable outcomes, which it may use taking into account a range of factors, including the management of risk and good governance, the quality of earnings, and, in all cases, the experience of shareholders.
To give a market competitive level of provision for postretirement income.
To provide EDs with a suitable but reasonable package of benefits as part of a competitive remuneration package.
Element opportunity to participate in flexible benefits programmes offered by the Company (via salary sacrifice).
To assist with mobility across the Group to ensure the appropriate talent is available to execute our strategy locally.
A requirement to build a shareholding in the Company equivalent to 300% of basic salary for the Group CEO and 200% of basic salary for other EDs.
LTIP performance measures are chosen to provide an indication of both absolute and relative return generated for shareholders. In terms of target setting, a number of reference points are taken into account each year including, but not limited to, the Group’s business plan and external market expectations of the Company. Maximum payouts require performance that significantly exceeds expected performance under both the annual bonus and LTIP.
Throughout the year, the Committee engages in a regular quality of earnings assessment. A quality of earnings assessment sign-off is the final step in determining annual bonus scorecard outcomes, and in making decisions on LTIP vesting.
This sign-off is undertaken before decisions are made on the modifiers for risk, customer and employee engagement under the annual bonus, and before vesting is determined against financial metrics under the LTIP.
As a minimum, at any Committee meeting where LTIP vesting or annual bonus scorecard decisions are considered, the Chief
Accounting Officer prepares a report to the Committee on the quality of earnings reflected in the results being assessed against performance targets. Extensive information from the audited accounts is used to explain the vesting and scorecard outcomes – ranging from movements in reserves, capital management decisions, consistency of accounting treatment and period to period comparability. The
Chief Accounting Officer attends the Committee meeting to answer any questions that any member of the Committee may choose to ask.
The circumstances when malus (the forfeiture or reduction of unvested shares awarded under the Annual Bonus Plan (ABP) and LTIP) and clawback (the recovery of cash and share awards after release) may apply include (but are not limited to) where the Committee considers that the employee concerned has been involved in or partially / wholly responsible for: • A materially adverse misstatement of the Company’s financial statements, or a misleading representation of performance; • A significant failure of risk management and/or controls; • A scenario or event which causes material reputational damage to the Company; • Misconduct which, in the opinion of the Committee, ought to result in the complete or partial lapse of an award; • Conduct which resulted in significant loss(es); • Failure to meet appropriate standards of fitness and propriety; or
The discretions the Committee has in relation to the operation of the ABP and LTIP are set out in the plan rules. These include (but are not limited to) the ability to set additional conditions (and the discretion to change or waive those conditions). In relation to the LTIP and in accordance with its terms, the Committee has discretion in relation to vesting and to waive or change a performance condition if anything happens which causes the Committee reasonably to consider it appropriate to do so. Such discretions would only be applied in exceptional circumstances, to ensure that awards properly reflect underlying business performance. Any use of the discretions and how they were exercised will be disclosed, where relevant, in the DRR and, where appropriate, be subject to consultation with Aviva’s shareholders.
Remuneration arrangements for employees below the EDs take account of the seniority and nature of the role, individual performance and local market practice. The components and levels of remuneration for different employees may therefore differ from the Policy for EDs. Any such elements are reviewed against market practice and approved in line with internal guidelines and frameworks.
Differentiation in reward outcomes based on performance and behaviour that is consistent with the Aviva values is a feature of how
Aviva operates its annual bonus plan for its senior leaders and managers globally. A disciplined approach is taken to moderation across the
Company in order to recognise and reward the key contributors. The allocation of LTIP awards also involves strong differentiation, with expected contribution and ability to collaborate effectively in implementation of the strategy driving award levels.
The Committee reserves the right to make any remuneration payments and payments for loss of office (including exercising any discretions available to it in connection with such payments) notwithstanding that they are not in line with the Policy set out above, where the terms of the payment were agreed (i) before May 2014 (the date the Company’s first Policy came into effect, (ii) before the Policy set out above came into effect, provided that the terms of the payment were consistent with the Policy in force at the time they were agreed, or (iii) at a time when the relevant individual was not a director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a director of the Company. For these purposes, ‘payments’ includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are ‘agreed’ at the time the award is granted.
On hiring a new ED, the Committee would align the proposed remuneration package with the Policy in place for EDs at the time of the appointment.
Should the Company have any prior commitments outside of this Policy in respect of an employee promoted internally to an ED
On appointing a new NED, the Committee would align the remuneration package with the Policy for NEDs, outlined in table 3, including fees and travel benefits.
Fixed pay consists of basic salary, pension as described in table 1, and estimated value of benefits provided under the Remuneration Policy, excluding any one offs. Actual figures may vary in future years.
Private medical insurance Private medical insurance is provided for the ED and their family. The ED can choose to opt out of this benefit or take a lower level of cover. However, no payments are made in lieu of reduced or no cover.
Sickness In the case of Mark, Tom and Andy, 100% of basic salary for 52 weeks, and 75% thereafter for a further 52 weeks.
Non-compete During employment and for six months after leaving (less any period of garden leave) without the prior written consent of the Company.
There are no pre-determined ED special provisions for compensation for loss of office. The Committee has the ability to exercise its discretion on the final amount actually paid. Any compensation would be based on basic salary, pension entitlement and other contractual benefits during the notice period, or a payment made in lieu of notice, depending on whether the notice is worked.
Alternatively, the contract may be terminated and phased monthly payments made in lieu of notice for, or for the balance of, the 12 months’ notice period. During this period, EDs would be expected to mitigate their loss by seeking alternative employment. Payments in lieu of notice would be reduced by the salary received from any alternative employment, potentially to zero. The Company would typically make a reasonable contribution towards an ED’s legal fees in connection with advice on the terms of their departure.
ED may receive a pro-rata bonus in respect of the period of employment during the year loss of office occurs based on an assessment of performance. Where an ED leaves the Company by reason of death, disability or ill health, or any other reason determined by the
The table below sets out details of our Policy for NEDs.
To attract individuals with the required range of skills and experience to serve as a Chairman or as a NED.
NEDs are able to use up to 100 percent of their posttax base fees to acquire shares in Aviva plc.
The Chairman and NEDs do not participate in any incentive or performance plans or pension arrangements and do not receive an expense allowance.
The Company’s Articles of Association provide that the total aggregate remuneration paid to the
Company will meet any tax liabilities that may arise on such expenses.
Period In line with the requirement of the Code, all NEDs, including the Chairman, are subject to annual reelection by shareholders at each AGM.
Policy for EDs during the course of 2017, and how the proposed
Committee after the conclusion of the AGM on 10 May 2017. Glyn
Sir Malcolm Williamson** 14/05/2015 3 * Chair ** Retired from the conclusion of the 2017 Annual General Meeting (10 May 2017)
The Committee met seven times during 2017, of which five were scheduled meetings and two were additional meetings outside of the normal timetable. Details of attendance at Committee meetings are shown on page 42.
The Committee received assistance in considering executive remuneration from members of senior management, including: • the Group CEO; • the CFO; • the Chief People Officer; • the Group Reward Director; • the Chief Accounting Officer; • the Chief Audit Officer; • the Group Chief Risk Officer; and
Group and adhere to its Code of Conduct. Deloitte LLP also provided advice to the Group on taxation, financial due diligence, crisis management and other consulting services (including advice in relation to corporate and cyber opportunities). Tapestry
Compliance LLP, appointed by the Company, provided advice on share incentive plan related matters, including on senior executive remuneration matters and views on shareholder perspectives.
During the year, Deloitte LLP were paid fees totalling £149,800, and Tapestry Compliance LLP were paid fees totalling £51,655 for their advice to the Committee on these matters. Fees were charged on a time plus expenses basis.
Committee activities and agenda time during 2017 Governance, regulatory issues and reporting policy – 41%
• Discussed the mandatory GPGR due to come into force in 2018, and agreed the range of reportable metrics and a strategy to make progress against them.
• Focussed on the alignment of the remuneration policy with an appropriate risk culture and to appropriate sustainability metrics including an approach on Ogden.
Senior management objectives, bonus target setting and pay decisions – 31%
• Discussed and approved the overall maximum bonus pool available to senior managers for the 2017 performance year, taking into account metrics on culture and risk as well as on financial performance.
• Discussed and approved the ABP targets for 2017 in relation to the financial targets set in the 2017-2019 Group plan.
Scheme 2017 (SAYE) and the Aviva Ireland Save as You Earn
Scheme, the Ireland Profit Share Scheme and the invitation terms for eligible employees.
Sets out the Committee’s scope and responsibilities, including authorities which may be delegated but which still retain Committee oversight Remuneration business standard
Approved by the Committee, applies to all employees at entities within Aviva
Proposed for approval by shareholders, applies to Directors of Aviva plc
Key Element of the reward governance framework managed as part of the business of the Committee
Mark Wilson Tom Stoddard Andy Briggs Maurice Tulloch6 Total emoluments of Executive Directors7
3 Bonus payable in respect of the financial year including any deferred element at the face value at the date of award. The deferred element is made under the ABP.
6 For Maurice, his 2017 values only relate to his qualifying services as a Director of Aviva from 20 June 2017, when he was appointed as an ED. His basic salary, bonus and benefits are set in Canadian dollars and have been converted to sterling using an average exchange rate for 2017.
Additional disclosures in respect of the single total figure of remuneration table 2017 annual bonus outcome
bonuses paid in respect of 2017. We have set out details of performance against the financial and non-financial metrics for 2017 in tables 6 and 7 below. As set out in the tables, the bonuses reflect the fact that the fundamentals around our cash position, strategy and culture are in good shape. The results come amidst unprecedented political, economic and technological changes. We have grown Operating EPS2, cash remittances2 and further strengthened our estimated SII shareholder position.
As part of the annual pay review process, the Committee has considered whether any recovery or withholding under the malus and clawback provisions of Aviva’s incentive plans is required by any current circumstances. No incidents concerning the EDs are currently subject to action under Aviva’s malus and clawback policy.
Under the ABP, the bonus scorecard outcome can be modified by the performance of the employee, customer and risk and controls modifiers. Typically, adjustments (if made) would be in the range of +/- 15% but for major risk or controls or customer issues (e.g.
of colleagues see how their team’s work aligns with the Group’s strategy.
Our relationship NPS® survey shows three years of sustained high levels of customer advocacy, but this year’s scores have marked a decline. We are working hard to boost customers’ loyalty by making things simple for customers and putting them in control, for example with the launch of our simplified home insurance proposition.
All our businesses/functions were rated as acceptable or above, against their overall goal in relation to risk, conduct and control outcomes. The assessments performed by our Risk and
Audit Committees ahead of decisions being made on impacts to bonus. It was concluded that no areas had been identified that would warrant bonus pool adjustments as part of determining incentive awards for 2017.
The Aviva Group had a strong year under Mark Wilson’s leadership: • Strong financial results in 2017 with Group adjusted operating profit1 growth up 2%, Operating EPS1 up 7% and fourth consecutive year of double digit growth in the total dividend. All other key metrics met or exceeded market commitments. Aviva’s guidance to the market has been upgraded; higher than midsingle digit Operating EPS1 growth, increased pay-out target of 55-60% of Operating EPS1 by 2020; and a cash remittance2 target up to £8bn.
Banco Populare (Italy partnership). This signals the business moving from ‘fix’ in to a ‘growth’ phase.
• Solid progress made in Digital as Aviva increased active registrations by 44% and launched Ask it Never – providing quotes to UK home insurance customers with no questions asked. Digital intellectual property has contributed to long term, significant partnership announcements with Tencent, Royal Bank of Canada and HSBC.
• Our UK Life, Health and General Insurance businesses have been brought together under a common leadership. Execution of this change has been effective as the UK business has grown adjusted operating profits2 well above its target range as well as growing sales in every major product line.
• We completed announcements on our programme of business exits, allowing stronger focus on major growth markets from 2018 onwards. This included exits of Spain, Taiwan, Antarius, FPI and
• We began our bolt-on merger and acquisitions activity with the accretive acquisition of Friends First in Ireland.
Aviva announced a ground breaking equal parental leave policy, promoting equal opportunities for all.
In 2017 Andy Briggs became CEO of Aviva UK Insurance combining our UK based Life, GI and Health businesses. Key results include: • Strong financial performance in UKI with double digit adjusted operating profit2 growth, new business trading growth across all product segments and net cash remittances2.
• Progress made via True Customer Composite (TCC) among large corporate customers. Over 70% profit and 75% of new business in the corporate segment is now coming from companies with more than one line of business with Aviva.
• Broad based growth across our major product lines, for example 2 times growth in long term savings net fund flows and greater than 3 times increase in bulk purchase annuities sales.
• Strong balance sheet management and progress in improving the control environment.
• Growth continued in Ireland and our acquisition of Friends First will improve our life insurance position.
• Energised our Global Corporate & Specialty business, delivering a new strategy, significant top and bottom line growth, and a business rebrand.
• Finalised our disposals in Europe, delivering a total value of €1.3 billion, through selective exits in Spain, France and Italy.
All references to RoE represent RoE calculated as IFRS profit after tax and non-controlling interest but excluding investment variances, economic assumption changes, pension scheme income/ charge over average IFRS equity (excluding pension scheme net surplus/ deficit).
RoE Performance1 50% 24.5% 30% 28.2% 36.9% Relative TSR Performance 50% Median Upper quintile and above Between rank 1 2015 RoE performance outcome has been adjusted to exclude the positive impact of the £300m share buyback which then increases shareholders’ equity and further excludes the re-measurement loss on FPI and Taiwan which will be recognised in 2018 upon completion of the sale.
Committee with an understanding of the core profitability of the business taking these factors into account.
RoE targets determine the vesting of 50% of the LTIP award and are set annually within the context of the Company’s three-year business plan. Vesting depends upon performance over the three-year period against a target return. The 2017 targets are provided below.
Less than 28.8% 0% 28.8% 10% Between 28.8% and 35.2% Pro-rata between 10% and 50% on a straight line basis 35.2% and above 50%
for the period immediately preceding the start and end of the performance period. The vesting schedule is set out in the table below.
TSR position over the three-year performance period Percentage of shares in award that vests based on achievement of TSR targets
Limited, Aviva Life Services UK Limited, Aviva Administration Limited, Friends Life and Pensions Limited and Friends Life Limited each of which are subsidiary companies of Aviva plc. Russell subsequently stepped down from Aviva Life Services UK Limited and Aviva
• Scott was appointed as a NED of Aviva Insurance Limited on 13 April 2015 and stepped down on 30 September 2017.
Bob Stein 44 120 5 16 49 136 — — 49 136 Sir Malcolm Williamson 56 152 2 7 58 159 — — 58 159 1 Benefits include the gross taxable value of expenses relating to accommodation, travel and other expenses incurred on Company business in accordance with our expense policy and may vary year-on-year dependent on the time required to be spent in the UK.
• Patricia Cross received an additional fee of £52,808 (2016: nil) in respect of her duties as a Board member of Aviva Investors Holdings
• During 2017, Michael Hawker received an additional fee of £15,000 (2016: nil) in respect of his duties as a Board member of Aviva Life
employee workforce was chosen as a suitable comparator group, as the Group CEO and the majority of EDs are based in the UK (albeit with global responsibilities), and pay changes across the Group vary widely depending on local market conditions.
Group CEO 2.5% 5.9% 7.3% All UK-based employees 3.6% 8.6% -0.7%
1 Mark joined the Board as an ED with effect from 1 December 2012, and became Group CEO on 1 January 2013. He received no emoluments in respect of 2012.
2 Andrew resigned from the Board with effect from 8 May 2012 and left the Company on 31 May 2012.
Table 16 outlines Group adjusted operating profit after integration and restructuring costs, dividends paid to shareholders and buybacks compared to overall spend on pay (in total and per capita). This measure of profit has been chosen as it is used for decision making and the internal performance management of the Group’s operating segments.
• Andy Briggs is the Chair of the Association of British Insurers, on the Board of Trustees of the NSPCC and the Government’s Business
• Maurice Tulloch is a Director of Pool Reinsurance Company Limited.
• Unvested share awards, including shares held in connection with bonus deferrals, are not taken into account in applying this test.
Mark Wilson6 607,429 1,698,819 626,841 6,179 — 300 297 No Tom Stoddard 199,964 877,578 300,907 — — 150 142 No Andy Briggs 241,498 899,518 209,040 5,128 — 150 168 Yes Maurice Tulloch7 306,710 808,134 192,147 — — 150 220 Yes 1 Directors’ beneficial holdings in the ordinary shares of the Company. This information includes holdings of any connected persons. For Andy Briggs it also includes partnership shares purchased under the AESOP, under which participants can currently contribute up to £150 every month. Shares are purchased on a monthly basis, and have to be held in the AESOP trust for three years. These vest after three years providing the ED does not leave and the related partnership shares are not withdrawn from the AESOP trust.
5 Based on the closing middle-market price of an ordinary share of the Company on 29 December 2017 of 506.5 pence. The closing middle-market price of an ordinary share of the Company during the year ranged from 470.6 pence to 544 pence.
Strategic report Governance IFRS financial statements Other information 18 Non-executive directors’ shareholdings1 (audited information)
Bob Stein 21,000 21,000 Sir Malcolm Williamson 41.421 41,421 1 This information includes holdings of any connected persons.
Andy Briggs LTIP3, 4 2015 276,014 — — — 276,014 535.00 — Mar-18 2016 320,972 — — — 320,972 475.20 — Mar-19 2017 — 302,532 — — 302,532 523.00 — Mar-20 ABP 2016 92,510 — — — 92,510 475.20 — Mar-19 2017 — 116,530 — — 116,530 523.00 — Mar-20 SAYE 20166 5,128 — — — 5,128 — 351.00 — Dec-19 – May-20
Maurice Tulloch LTIP3, 4 2014 212,167 — 99,5607 124,542 — 476.40 525.50 Mar-17 2015 212,765 — — — 212,765 535.00 — Mar-18 2016 309,278 — — — 309,278 475.20 — Mar-19 2017 — 286,091 — — 286,091 523.00 — Mar-20 ABP 2014 42,433 — 48,2137 — — 476.40 525.50 Mar-17 2015 43,439 — — — 43,439 535.00 — Mar-18 2016 63,144 — — — 63,144 475.20 — Mar 19 2017 — 85,564 — — 85,564 523.00 — Mar-20 1 The aggregate net value of share awards granted to the EDs in the period was £10.6 million (2016: £8.1 million). The net value has been calculated by reference to the closing middle-market price of an ordinary share of the
3 For the 2014 LTIP grant, the TSR comparator group consisted of the following companies: Aegon, Allianz, Assicurazioni Generali, Axa, CNP Assurances, Direct Line Group, FLG, Legal & General, Met Life, Old Mutual, Prudential,
5 Any unexercised options will lapse at the end of the exercise period.
7 The shares comprised in these vested awards include shares issued in lieu of dividends accrued during the deferral period.
Awards granted under Aviva employee share plans are generally met by issuing new shares as agreed by the Board. Shares are still held in employee trusts, details of which are set out in note 32.
The Company monitors the number of shares issued under the Aviva employee share plans and their impact on dilution limits. The
Aviva Investors and two small ‘firms’ (as defined by the Financial Conduct Authority (FCA)) within the UK Insurance business are subject to the Capital Requirements Directive IV (CRD IV) and the FCA Remuneration Code (SYSC 19A). Additionally, there are two Aviva Investors
‘firms’ in the UK, Friends Life Funds Limited and Aviva Investors UK Funds Limited, subject to the Alternative Investment Fund Management Directive (AIFMD) and the Undertakings for Collective Investments in transferrable securities (UCITS) directive. Remuneration Code requirements include an annual disclosure. For AIFMD and UCITs the disclosure is part of the Financial Statements and/or Annual accounts of the Alternative Investment Funds or UCITs. For CRD IV requirements the Aviva Investors disclosure can be found in Section 5 of the Pillar 3
Remuneration Requirements (PRA PS22/16 & SS10/16) apply to the Aviva Group. Our remuneration structures have been designed in a way so that they are compliant with these requirements for all senior managers across the Group, not just those identified as being specifically covered by the requirements of the regulation. Such employees at Aviva are termed ‘Covered Employees’. We are required to complete a
Condition Report (SFCR) which contains remuneration information and is publicly available.
Aviva’s reward principles and arrangements are designed to incentivise and reward employees for achieving stated business goals in a manner that is consistent with the Company’s approach to sound and effective risk management.
The result of the shareholder vote at the Company’s 2017 AGM in respect of the 2016 Directors’ Remuneration Report (DRR) is set out in 20 Result of the vote at the 2017 AGM
Following the 2017 AGM, the Committee Chair continued dialogue with major institutional shareholders.
Strategic report Governance IFRS financial statements Other information 22 Implementation of Policy in 2018
Salary • Group CEO – £1,065,674 per annum. • CFO – £733,360 per annum. • CEO UKI – £751,900 per annum. • CEO International – CAD1,231,880 per annum.
Bonus • Three financial metrics. • One strategic Digital First metric, focusing on two elements: growth in customers with Multiple Product Holding (MPH) and in the number of MyAviva active customers.
• For the financial element, a quality of earnings assessment will be undertaken by the Committee to provide assurance that bonus payouts appropriately reflect the shareholder experience.
• Performance against a number of other non-financial measures will be considered when determining bonus payouts (employee engagement, customer and risk).
• Personal performance during the year will be taken into account.
Policy at the 2018 AGM. • Subject to performance against two performance measures, which have been chosen to reflect shareholders’ long-term interests, as detailed below. Shares are typically subject to a two-year holding period after vesting.
• Operating EPS1 is defined in the other information section and is subject to two gateway hurdles – Operating RoE2 and SII Shareholder Cover Ratio.
on a straight line basis 10.0% p.a and above 50% Upper quintile and above 50%
2 This is an APM which provides useful information to enhance the understanding of financial performance. Further information on APM’s, including a reconciliation to the financial statements (where possible), can be found in the ‘Other Information’ section of the Annual report and accounts.
For 2018, the Operating RoE2 hurdle is 12% p.a. and the SII Shareholder Cover Ratio is to meet or exceed the minimum of the stated working range (currently 150% to 180%).
This Directors’ Remuneration Report was reviewed and approved by the Board on 7 March 2018.
Consolidated financial statements Consolidated income statement 106 Consolidated statement of comprehensive income 107 Reconciliation of Group operating profit to profit for the year
Consolidated statement of changes in equity 110 Consolidated statement of financial position 111 Consolidated statement of cash flows 112
Notes to the consolidated financial statements 1 Prior period adjustments 113 2 Exchange rates 113 4 Segmental information 117 5 Details of income 124 6 Details of expenses 125 7 Finance costs 126 8 Long-term business economic volatility 126 9 Longer-term investment return and economic assumption changes for non-long-term business 10 Employee information 130 12 Auditors’ remuneration 131 14 Earnings per share 134 15 Dividends and appropriations 135 17 Acquired value of in-force business (AVIF) and intangible assets 138 18 Interests in, and loans to, joint ventures 139 19 Interests in, and loans to, associates 140 20 Property and equipment 142 21 Investment property 143 22 Fair value methodology 143 24 Securitised mortgages and related assets 150 25 Interest in structured entities 151 26 Financial investments 153 28 Deferred acquisition costs, other assets, prepayments and accrued income 157 29 Assets held to cover linked liabilities 30 Ordinary share capital 159 31 Group’s share plans 160 32 Treasury shares 163 33 Preference share capital 163 34 Direct capital instrument and tier 1 notes 164 35 Merger reserve 165 36 Currency translation and other reserves 165 37 Retained earnings 165 38 Non-controlling interests 166 39 Contract liabilities and associated reinsurance 166 40 Insurance liabilities 167 41 Liability for investment contracts 177 42 Financial guarantees and options 178 43 Reinsurance assets 180 44 Effect of changes in assumptions and estimates during the year 182 45 Unallocated divisible surplus 183 46 Tax assets and liabilities 184 47 Pension deficits and other provisions 185 48 Pension obligations 186 50 Payables and other financial liabilities 195 51 Other liabilities 195 52 Contingent liabilities and other risk factors 195 54 Group capital management 198 55 Statement of cash flows 200 56 Risk management 201 57 Derivative financial instruments and hedging 212 58 Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements 59 Related party transactions 215 60 Organisational structure 216 61 Related undertakings 218 62 Subsequent events 228
Financial statements of the Company Income statement 229 Statement of comprehensive income 229 Statement of changes in equity 230 Statement of financial position 231 Statement of cash flows 232 Notes to the Company’s financial statements 233
• have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual report and accounts (the ‘Annual report’) which comprise: • the Consolidated and Company statements of financial position as at 31 December 2017; • the Consolidated and Company income statements and statements of comprehensive income for the year then ended; • the Reconciliation of Group adjusted operating profit to profit for the year then ended; • the Consolidated and Company statements of changes in equity and statements of cash flows for the year then ended; • the principal accounting policies adopted in the preparation of the financial statements; and
• the notes to the financial statements which include other explanatory information.
• We also performed audit procedures over the head office operations and the consolidation process, as well as over certain UK service companies, including Aviva Employment Services and Aviva Group Holdings.
• Our risk assessment analysis identified the following as areas of focus : Valuation of life insurance contract liabilities (Group).
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We gained an understanding of the legal and regulatory framework applicable to the Group and the industry in which it operates, and considered the risk of acts by the Group which were contrary to applicable laws and regulations, including fraud. We designed audit procedures at Group and significant component level to respond to this risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
We focussed on laws and regulations that could give rise to a material misstatement in the Group financial statements, including but not limited to, the Companies Act 2006, the Listing Rules, the Prudential Regulation Authority’s regulations, UK tax legislation and equivalent local laws and regulations applicable to significant components. Our tests included, but were not limited to, review of the financial statement disclosures to underlying supporting documentation, review of correspondence with the regulators, review of correspondence with legal advisors, enquiries of management, review of significant component auditors' work and review of internal audit reports in so far as they related to the financial statements.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it.
We did not identify any key audit matters relating to irregularities, including fraud. As in all of our audits, we also addressed the risk of management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud.
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud)
identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit.
valuation of the provisions for the settlement of future claims, involves complex and subjective judgements about future events, both internal and external to the business, for which small changes in assumptions can result in material impacts to the valuation of these liabilities.
The work to address the valuation of the UK Life insurance contract liabilities included the following procedures: • We understood the governance process in place to determine the insurance contract liabilities, including testing the associated financial reporting control framework.
• Using our actuarial specialist team members, we applied our industry knowledge and experience and we compared the methodology, models and assumptions used against recognised actuarial practices. • We tested the key judgements and controls over the liability, including the preparation of the manually calculated components. We focussed on the consistency in treatment and methodology period-on-period and with reference to recognised actuarial practice. • We used the results of an independent PwC annual benchmarking survey of assumptions to further challenge the assumption setting process by comparing certain assumptions used relative to the
Group’s industry peers. • We assessed the disclosures in the financial statements.
As part of our consideration of the entire set of assumptions, we focussed particularly on the Annuitant Mortality, Credit Default and Expense assumptions for the UK Life component given their significance to the Group’s result and the level of judgement involved. These have been considered in greater detail below.
There are two main components to the annuitant mortality assumptions: • Mortality base assumption: this component is typically less subjective as it is derived using the external Continuous Mortality Investigation (CMI) tables, adjusted for internal experience. However, judgement is required in choosing the appropriate table and fitting internal experience to this table.
Refer to the Audit Committees’ Report, Accounting policy (L) Insurance and participating investment contract liabilities – Long- term business provisions and Note (40) Insurance liabilities (b) Long-term business liabilities.
Credit default assumptions for illiquid assets, specifically: Commercial mortgages and equity release mortgages (Group) UK Life has substantial holdings in asset classes with significant credit risk, notably commercial mortgages and equity release mortgages.
In addition to the procedures above, in respect of the credit default assumptions: • We tested the methodology and credit risk pricing models used by management for commercial and equity release mortgages to derive the assumptions with reference to relevant rules and actuarial guidance, including the adoption of an appropriate prudence margin and by applying our industry knowledge and experience. • We validated significant assumptions used by management by ensuring consistency with the assumptions used for the valuation of the assets, and against market observable data (to the extent available and relevant) and our experience of market practices.
• We validated significant assumptions used by management, including the margin for prudence and the rate of inflation against past experience, market observable data (to the extent available and relevant) and our experience of market practices.
• We have tested that the assumptions appropriately reflect the expected future expenses for maintaining policies in force at the balance sheet date, which includes consideration of the allowance for project costs.
Based on the work performed and the evidence obtained, we consider the assumptions for expense risk to be appropriate.
• Using our actuarial specialist team members, we applied our industry knowledge and experience and we compared the methodology, models and assumptions used against recognised actuarial practices. • We understood and tested the governance process in place to determine the insurance contract liabilities, including testing the associated financial reporting control framework.
• Using our actuarial specialist team members, we independently estimated the reserves on selected classes of business, particularly focusing on the largest and most uncertain reserves. For these classes we compared our estimated reserves to those booked by management, and sought to understand any significant differences. • For the remaining classes we evaluated the methodology and assumptions, or performed a diagnostic check to identify and investigate any anomalies.
Valuation of hard to value investments (Group) Refer to Audit Committees’ Report, Accounting policies (F), (T) and (U) and Note 22 Fair Value methodology, Note 24 Securitised mortgages and related assets and Note 26 Financial Investments.
• Equity release and UK securitised mortgage loans (UK Life). • Structured bond-type investments (France Life).
We assessed the Directors’ approach to valuation for these hard to value investments by performing the following procedures: • We agreed data inputs to underlying documentation on a sample basis.
Valuation of investments in subsidiaries and joint venture (Company) Refer to Financial statements of the Company and Note A-Investment in subsidiaries and joint venture.
The determination of the fair value is a judgemental area and the investments in subsidiaries and joint venture together comprise the largest assets in the parent company’s statement of financial position.
We tailored the scope of our audit to ensure that we performed sufficient work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the Company, the financial reporting process and controls, and the industry in which they operate.
Using the outputs of our risk assessment, along with our understanding of Aviva, we scoped our audit based on the significance of the results and financial position of individual components relative to the Group result and financial position. In doing so, we also considered qualitative factors and ensured we had obtained sufficient coverage across all financial statement line items in the consolidated financial statements. Our scoping provided us with audit coverage of over 80% for both IFRS profit before tax and Group adjusted operating profit before tax and after the deduction of integration and restructuring costs (2016: 78%). We also obtained audit coverage of 80% for Gross Written Premiums (2016: 80%) and 84% for Total Assets (2016: 84%).
The Group’s primary reporting format aggregates individual components into market reporting lines with supplementary information being given by business activity. The operating segments or ‘markets’ of the Group are ‘United Kingdom’ (Life and General Insurance),
France, Poland, ‘Italy, Ireland, Spain and Other’, Canada, Asia, Aviva Investors and ‘Other Group Activities’. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at each of the components by us, as the Group audit team, or auditors of the components within PwC UK or from other PwC network firms operating under our instructions. As the Group audit team, we determined the level of involvement required at those components to be able to conclude whether sufficient and appropriate audit evidence had been obtained as a basis for our opinion on the financial statements as a whole. In our role as Group auditors, we exercised oversight of work performed by auditors of the components including performing the following procedures: • Maintained an active dialogue with reporting component audit teams throughout the year, including holding a workshop for those teams in London during the planning phase of the audit; • Visited all in-scope components and undertook a detailed review of audit working papers; • Attended meetings with local management; and
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
Overall materiality £147 million (2016: £140 million). £56 million (2016: £69 million).
Rationale for benchmark applied In determining our materiality, we considered financial metrics which we believed to be relevant, and concluded, consistent with last year that Group adjusted operating profit before tax and after the deduction of integration and restructuring costs was the most relevant benchmark.
In accordance with ISAs (UK) we report as follows: Reporting obligation Outcome
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Strategic report and Directors’ and corporate governance report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’ and corporate governance report for the year ended 31 December 2017 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06) In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic report and Directors’ and corporate governance report. (CA06)
• The disclosures in the Annual report that describe those risks and explain how they are being managed or mitigated. • The directors’ explanation on page 59 of the Annual report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
• The section of the Annual report on page 53 describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. (CA06)
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Chartered Accountants and Statutory Auditors London 1 The maintenance and integrity of the Aviva plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly the auditors accept no responsibility for any changes that may have occurred to the full annual financial statements since they were initially presented on the website.
New standards, interpretations and amendments to published standards that have been adopted by the Group
The adoption of this amendment does not have an impact on the Group’s consolidated financial statements as the clarifications are consistent with our existing interpretation.
IFRS 9 is effective for the Company from 1 January 2018 as it is not eligible to apply the deferral option available to insurers. The adoption of IFRS 9 is not expected to have a significant impact on the Company’s balance sheet.
(iii) IFRS 16, Leases In January 2016, the IASB published IFRS 16 Leases which will replace IAS 17 Leases. IFRS 16 introduces a definition of a lease with a single lessee accounting model eliminating the classification of either operating or finance leases. Lessees will be required to account for all leases in a similar manner to the current finance lease accounting recognising lease assets and liabilities on the statement of financial position. Lessor accounting remains similar to current practice. The impact of the adoption of IFRS 16 has yet to be fully assessed by the Group. This standard applies to annual reporting periods beginning on or after 1 January 2019 and has been endorsed by the EU.
(v) Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions
Entities and IAS 28 Investments in Associates. The amendments to IFRS 1 and IAS 28 are effective for annual reporting periods beginning on or after 1 January 2018; the amendment to IFRS
(vii) Amendments to IAS 40 – Transfers of Investment Property In December 2016, the IASB published amendments to IAS 40
(viii) IFRIC 22, Foreign Currency Transactions and Advance Consideration In December 2016, the IASB published IFRIC 22 Foreign
Currency Transactions and Advance Consideration. The standard is effective for annual reporting beginning on or after 1 January 2018 and has not yet been endorsed by the EU.
In February 2018, the IASB published Plan Amendment, Curtailment or Settlement (Amendments to IAS 19). The amendments are effective for annual reporting beginning on or after 1 January 2019 and have not yet been endorsed by the
Group adjusted operating profit, a non-GAAP alternative performance measure (APM) which is not bound by IFRS. The APM
Variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside Group adjusted operating profit. For non-long-term business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer-term return and short-term fluctuations from that level. The exclusion of short-term realised and unrealised investment gains and losses from the Group adjusted operating profit APM reflects the long-term nature of much of our business and presents separately the operating profit APM which is used in managing the performance of our operating segments from the impact of economic factors. Further details of this analysis and the assumptions used are given in notes 8 and 9. Group adjusted operating profit is presented before and after integration and restructuring costs with further details of restructuring costs provided in note 6.
Strategic report Governance IFRS financial statements Other information activity which we view as strategic in nature, hence they are excluded from the operating profit APM as this is principally used to manage the performance of our operating segments when reporting to the Group’s chief operating decision maker. Other items are those items that, in the Directors’ view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group’s financial performance. Details of these items, including an explanation of the rationale for their exclusion, are provided in the ‘Other information’ section.
(C) Critical accounting policies and the use of estimates Critical accounting policies
The preparation of financial statements requires the Group to select accounting policies and make estimates and assumptions that affect items reported in the consolidated income statement, consolidated statement of financial position, other primary statements and notes to the consolidated financial statements. The Audit Committee reviews the reasonableness of judgements and assumptions applied and the appropriateness of significant accounting policies. The significant issues considered by the
Committee in the year are included within the Audit Committee Report on page 52.
Principal assumptions used in the calculation of life insurance and participating investment contract liabilities include those in respect of annuitant mortality, expenses, valuation interest rates and credit default allowances on corporate bonds and other non-sovereign credit assets. Principal assumptions used in the calculation of general insurance and health liabilities include the discount rates used in determining our latent claim and structures settlements liabilities, and the assumption that
Item Critical accounting estimates Accounting policy Note past claims experience can be used as a basis to project future claims (estimated using a range of standard actuarial claims projection techniques).
• exposure, or rights, to variable returns from its involvement with the investee, and
The Group reassesses 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 intercompany 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 Group policies. The Group is required to use the acquisition method of accounting for business combinations. Under this method, the Group recognises identifiable assets, liabilities and contingent liabilities at fair value, and any non-controlling interest in the
Strategic report Governance IFRS financial statements Other information 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.
Prior to 1 January 2004, the date of first time adoption of IFRS, 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. These transactions have not been restated, as permitted by the IFRS
In several countries, the Group has invested in a number of specialised investment vehicles such as Open-ended Investment Companies (OEICs) and unit trusts. These invest mainly in equities, bonds, cash and cash equivalents, and properties, and distribute most of their income. The Group’s percentage ownership in these vehicles can fluctuate from day to day according to the Group’s and third-party participation in them. When assessing control over investment vehicles, along with the factors determining control outlined above, the Group considers the scope of its decisionmaking authority including its ability to direct the relevant activities of the fund and exposure to variability of returns from the perspective of an investor in the fund and of the asset manager. In addition, the Group assesses rights held by other parties including substantive removal rights that may affect the Group’s ability to direct the relevant activities and indicate that the Group does not have power. Where the Group is deemed to control such vehicles, they are consolidated, with the interests of parties other than Aviva being classified as liabilities. These appear as ‘Net asset value attributable to unitholders’ in the consolidated statement of financial position. Where the Group does not control such vehicles, and these investments are held by its insurance or investment funds, they are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position, in accordance with IAS 39 Financial Instruments: Recognition and
Measurement. As part of their investment strategy, 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.
GP) may be lower or higher than 50%, such PUTs and PLPs have been classified as joint ventures (see below). 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 no longer has significant influence or joint control over the investment.
Company’s market capitalisation. These investments are classified as available for sale (AFS) financial assets, with changes in their fair value being recognised in other comprehensive income and recorded in a separate investment valuation reserve within equity.
(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 has a significant impact on the valuation of financial instruments, the difference between the fair value at initial recognition and the transaction price is not recognised immediately in the income statement, but deferred and recognised in the income statement on an appropriate basis over the life of the instrument but no later than when the valuation is supported wholly by observable market data or the transaction is closed out or otherwise matured. 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.
In certain businesses, the accounting policies or accounting estimates have been changed, as permitted by IFRS 4 and IAS 8 respectively, to remeasure designated insurance liabilities to reflect current market interest rates and changes to regulatory capital requirements. When accounting policies or accounting estimates have been changed, and adjustments to the measurement basis have occurred, the financial statements of that year will have disclosed the impacts accordingly. One such example is our adoption of Financial Reporting Standard 27 Life Assurance (FRS 27) which was issued by the UK’s Accounting Standards Board (ASB) in