Community projects supported in 2016, 60% more than our target 1 We can externally benchmark four of the ten questions we use to calculate employee engagement. 2 GfK Annual Relationship Survey, 2016. Net Promoter Score® (NPS) is a measure of the likelihood to recommend (brand) to a friend or colleague. ‡ Please refer to the glossary for further details on non-GAAP Alternative Performance Measures (APMs). All APMs are referenced using “‡” within the strategic report.
Our people I would like to thank our 29,500 people in 16 markets around the world for their contribution in delivering on our purpose. They strive to live our values - Care More, Kill Complexity, Never Rest and Create Legacy. We are building an innovative, energetic, supportive culture which is anchored in these strong values and focused on our customers’ needs, enabling us to make the most of our strategic advantages now and in the future. I am delighted that our overall colleague engagement score in 2016 has increased by four percentage points to 74%.
Each year we look to all corners of Aviva to find the true values legends. Those people who live by and champion our values every day. We celebrate these colleagues at our annual CEO Forum where we share their stories, and recognise their contribution by donating £5,000 to a charity of their choice. Alongside individual values legends, we recognise one individual as our Global Living Legend. A colleague who epitomises all our values. This year we celebrated Hugh Hessing as our Global Living
Insurance1, responsible for Aviva’s insurance operations in Canada, France, Ireland, Spain, Italy, Poland, Turkey and India. Chris Wei remains Executive Chairman of Asia & FPI and Global Chairman of Aviva Digital and Euan Munro remains CEO of Aviva Investors. This new structure better reflects our focus on meeting our customers’ needs and is reflected in how we report on our performance in this report.
We think of our markets in terms of “oaks” – which deliver solid growth and sustainable cash; as “acorns”, which promise fast future growth and “apple trees”, which we will simplify, restructure, focus and improve. It is through this strategic lens that we make decisions around capital to simplify, strengthen and grow the business.
Below market average At or above market average In upper quartile
Those who interpret data quickly and intuitively to inform the development of products and services that provide real value for customers will lead the way
We have unique strengths as a business that give us a significant competitive advantage: Brand strength
split by geography: UK & Ireland 59% Canada 8% Europe 27%
Society We play a significant role in our communities, including as a major employer and a long-term responsible investor.
In 2016, this approach inspired two campaigns in the UK - #DriveSafer and #SaveSmarter. As well as putting our strategy and values into action we have a key social purpose too: tackling issues that matter most to our customers, like safer roads and saving for retirement.
Guangzhou (below) is one of FuBaoBao’s developers. He opened an account for his six year old son and has topped it up more than 500 times. Derek shares pictures of his son with friends and family in other cities through WeChat, and they show their love for the boy by sending him “hong bao” digitally – gifts of money at Chinese New Year – which is paid directly into FuBaoBao. So distance is no longer a barrier for this wonderful tradition.
Canadian business has teamed up with the Institute for Catastrophic Loss Reduction to create the Plan and Protect app, which sends you personalised information so you can better prepare.
Tackling fraud We continued to defend our customers against claims fraud, taking over 1,500 cases to court and winning 70%.
We have the right products in the right markets and the right people and skills to deliver our strategy #Aviva2016
MT The acquisition of RBC GI in Canada was a definite highlight. It’s a great marriage of RBC Insurance’s powerful brand and sales force and our depth and manufacturing expertise. Our market position is growing and gross written premiums increased by around CAD$470 million.
The Alberta wildfires in 2016 were the costliest disaster in Canadian history, spreading across 1,500,000 acres, destroying 2,400 homes and leading to the evacuation of 80,000 people. It was a moment of truth for us – and we mobilised every resource we could to help our customers. We used digital to direct customers and brokers to our claims hotline, got our teams on the ground within 24 hours and mobilised our teams of volunteers, especially through our partnership with the Red Cross, to help thousands of people affected. And we made sure we were there for them once it was safe to return home. This is exactly why we’re in business: to help customers when bad things happen.
We continue to support our largest channel, our broker partners, to help them integrate digital technology. We want to lead the Canadian market with new product innovation to allow brokers to better serve customers and stay competitive.
In February 2017, we announced the sale of our entire shareholding in Antarius, our joint venture with Crédit du Nord, to Sogecap (both subsidiaries of Société Générale), for c.£425 million.
We continued to strengthen our distribution channels. We have the largest life insurance direct sales network with 2,200 advisers and own the second largest financial adviser network Expander, as well as a bancassurance agreement with BZ WBK, the third largest bank in Poland.
Asia We have wholly-owned subsidiaries in Singapore and Hong Kong1, affinity joint ventures in China, Indonesia and India2, bancassurance joint ventures in Taiwan and Vietnam, and Friends Provident International Limited (FPI), with branches in Singapore, Hong Kong and the United Arab Emirates
We know the great responsibility we have to our customers and the trust we have to earn from them. We don’t take that for granted.
We also see an acceleration towards digital in our daily life, and a heightened sense of fintech’s development, which play to Aviva’s strength in digital and innovation. We are encouraged by multiple Asian governments’ support in this area, and are ever more enthused in seeing consumers’ rapid adoption, such as our FuBaoBao online sales platform in China.
In terms of Not Everywhere, if we can’t do something to an exceptional standard we won’t do it. We have stopped activities for exactly that reason, including closing funds that were sub-scale and did not meet the needs of our customers.
FINANCIAL PERFORMANCE Fund management operating profit has increased by 32% to £139 million in 2016 (2015: £105 million). The growth in operating profit is driven by a £56 million increase in revenue from positive external net flows, the transfer to Aviva Investors of a further £14 billion of Friends Life assets during 2016, taking the total Friends Life assets transferred to £59 billion and the change in pricing to manage funds on behalf of other Aviva entities. Cost increases have been controlled as we invest to grow the business.
And we’re going further to try to limit the number of questions we ask our customers to make dealing with us beautifully simple.
Investment We are committed to investing our money and our customers’ money in a responsible manner. Aviva Investors is a founding signatory to the UN Principles of Responsible Investment and founding partner of the Corporate Human Rights Benchmark Initiative.
Suppliers We evaluate, select and ask suppliers to disclose their human rights policies as part of our selection criteria. In the UK, we were an early adopter in achieving accreditation by the Living Wage Foundation. We ensure suppliers pay at least the Living Wage to employees subcontracted to Aviva.
Scope 2 – electricity. Scope 3 – business travel and grey fleet, waste and water.
A CHALLENGE FOR TODAY, NOT TOMORROW Aviva has a long-term commitment to tackle climate change and in November we published progress on our strategy to act on climate-related investment risk over the next five years (2015-2020). This can be found on aviva.com/reports and includes details of our progress a year on from the historic COP21 agreement in a number of areas, including low carbon investment, supporting policy action, active stewardship and divestment.
Non-operating items including integration and restructuring costs were a charge of £1,817 million (2015: £1,275 million). The movement includes: ` the change in the Ogden rate had an adverse impact of £475 million (12 pence per share)
OutlOOk Our three financial targets are to deliver mid-single digit percentage growth in operating EPS over the medium term, for our business units to remit £7 billion of cash to group centre in 2016 to 2018 inclusive and to increase our dividend payout ratio to 50% by the end of 2017, following which the dividend trajectory is expected to align with growth in operating EPS. We remain confident that we can deliver on these objectives.
Our process The processes we use to identify, measure, manage, monitor and report risks, including the use of our risk models and stress and scenario testing: We prefer risks we understand, have the expertise to manage and which are well-rewarded
UK-EU relations (Brexit uncertainty) – Following the referendum result there is considerable uncertainty over the UK’s future relationship with the EU (including access to the single market), and economic growth and financial markets, as well as the status of our EU employees working in the UK and longer term implications for financial services regulation, including Solvency II.
INTRODUCTION The Board and I are pleased to report that Aviva has made considerable progress in the past three years as we have grown operating profit, increased cash remittances and strengthened the balance sheet. This performance has been delivered against a backdrop of significant political, market and regulatory change, in particular following the national election in America and the result of the European Union (EU) referendum. Change breeds uncertainty, and during this period, strong governance has supported the organisation in successfully anticipating and adapting to the more volatile environment.
CHALLENGES DURING 2016 During 2016 the Board and its committees of course faced some challenges, with the Governance Committee in particular examining the conduct implications
>10 yrs 5–10 yrs 4 years 3 years 2 years 1 year
following the suspension of dealings in the Aviva Property Trust Funds. The Board also reviewed the steps taken following the breaches of the Financial Conduct Authority’s Principles with regard to client money. This is an area we have invested in and will continue to monitor.
Tom has a strong track record of leading the finance function of Aviva including successfully steering the Group through the implementation of Solvency II.
Tenure: 6 years 3 months. Appointed as Company Secretary in December 2010 Qualifications: Bachelor of laws degree (Glasgow) and qualified solicitor. Graduate of the general manager programme (INSEAD) Skills and Experience: Kirstine has over 25 years of experience at Aviva and is an experienced and trusted adviser to the Board. Previously Kirstine was the Deputy Group Company Secretary and Legal Counsel and her experience as a lawyer together with the various senior management roles she has held within Aviva make her well qualified to advise the Board on governance issues and the regulatory agenda.
People, culture, succession planning and Board effectiveness – 14% Ensures adequate succession planning, taking into consideration the talent pipeline and sets and embeds the Group’s culture and values.
` Deep Dives; In-depth sessions on particular areas and Business Unit visits
RISK MANAGEMENT FRAMEWORK The Risk Management Framework (RMF) is designed to identify, measure, manage, monitor and report the principal risks to the Group of achieving its business objectives and is embedded throughout the Group. The RMF has been in place for the year under review and up to the date of the approval of the annual report and accounts. It is codified through risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements for the Group’s worldwide operations. Further detail is set out in note 56.
FIRST LINE The Group Executive members and each business unit chief executive officer are responsible for the implementation of Group strategies, plans and policies, the monitoring of operational and financial performance, the assessment and control of financial, business and operational risks and the maintenance and ongoing development of a robust control framework and environment in their areas of responsibility. Chaired by the Chief Risk Officer (CRO) during 2016, the Asset Liability Committee (ALCO) assists the Chief Financial Officer (CFO) with discharging his responsibilities in relation to management of the Group’s balance sheet within risk appetite and provides financial and insurance risk management oversight. From January 2017, the ALCO has been chaired by the Chief Capital Officer (CCO).
The Disclosure Committee minutes are sent to the Audit Committee. It oversees the design and effectiveness of the Group’s disclosure controls, for financial and non-financial information, evaluates the Group’s disclosure controls and reviews and endorses the Group’s key periodic external reports, including the consolidated financial statements.
AM This is something we regularly assess as a Committee and as a Board. To assist with these discussions we have recently enhanced our skills matrix and now Board members are asked, via an online questionnaire, to self-assess their experience and skills each year. This matrix is reviewed by myself, as Group Chairman, and forms the basis for succession plans for the Board.
The principal purpose of the Committee is to assist the Board in its oversight of risk within the Group, with particular focus on the Group’s risk appetite and risk profile in relation to capital, liquidity and franchise value. The Committee annually reviews the effectiveness of the Group’s risk management framework and the performance of the CRO and overall Risk function. It reviews the risks inherent in the Group’s investment portfolios, and in the products it offers our customers, in addition to monitoring the Group’s overall operational risks. The Committee assesses the risks of strategic and material transactions as part of due diligence appraisals. It also monitors changes to the prudential regulations applicable to the Group and how the Group responds to them, a significant activity due to our designation as a Global Systemically Important Insurer (G-SII).
` Reviewed the Group Own Risk Solvency Assessment Supervisory Report and approved its submission
I am pleased to present the Audit Committee’s report for the year ended 31 December 2016.
The Committee reviews quarterly updates on the effectiveness of the Financial Reporting Control Framework (FRCF). During 2016 this included updates on the progress to align financial reporting controls processes within the heritageFriends Life businesses with the FRCF methodology. In addition, it receives regular reports on the status of the control environment, reports on the Group’s MCITs, and updates on progress to embed the new approach to managing operational risks and controls under our Integrated Assurance Implementation programme (IAI). IAI embeds and aligns ownership of risk management with first line management and clarifies risk ownership with the business while ensuring proper separation of accountability from the second and third line functions.
The Committee also receives quarterly control reports from the Internal Audit function and reviews and challenges management on the actions being taken to improve the quality of the overall control environment and the control culture across the Group.
We must comply with the new SII reporting requirements for the first time following their implementation in January 2016. We have met the new requirements through a coordinated approach across our Board committees. The Risk Committee monitored the construction of the partial internal model, the Audit Committee focused on the new reporting requirements of the publically filed SFCR and the privately filed RSR. The Committee provided oversight to a series of tests on the capability of our reporting systems in preparation for the first live SFCR submission in 2017. SII introduces complex capital reporting requirements and the disclosure of information that will be prepared and made public for the first time, and there is a challenge to make this disclosure useful and meaningful for users of the SFCR. When making decisions, the Board now has to consider the impact of SII requirements and the combined work of the Board committees has helped to ensure we are well prepared for the new SII reporting obligations.
The Company has complied with the Statutory Audit Services for Large Companies Market Investigation (Mandatory Uses of Competitive Tender Process and Audit Committee Responsibilities) Order 2014 during the financial year under review and up to the date of this report.
Financial Statements and accounting policies – 42% Assesses and reviews the significant issues and judgements of, and methodology and assumptions used by management in relation to the Group’s financial statements and formal announcements.
` Following assessment, recommended to the Board for approval the SII First Opening Information Results
` Reviewed and challenged the going concern assumptions for 2016 and the principles underpinning the Longer Term Viability Statement
` Held private meetings with the CAO without management present to provide an appropriate forum for issues to be raised
CA In 2017 the Committee will focus even more strongly on our customers, ensuring that we treat customers fairly and that we focus on good customer outcomes. The Committee will also give priority to enhancing the governance framework around the handling of customer data, and will have detailed oversight of the governance impact of combining the UK Life and General Insurance operations.
The Committee will also continue to focus on the Group’s conduct risk agenda, financial crime prevention processes, external regulatory developments and the relationship with various regulatory bodies, in particular the Financial Conduct Authority (FCA). It will remain the first line of oversight for conduct risk for the UKD business and monitor the Group’s CR agenda.
` Communication between the Group and BUs has been built upon, for example the annual NEDs’ conference has been expanded to include all NEDs in the Group and provide a broader focus
` Reviewed and where appropriate approved changes to the composition of the material subsidiary boards
` Reviewed and challenged management’s explanations and actions in response to issues/events. For example, the suspension of dealings in Aviva Investors’ Property Trusts
` Constructively challenged the UKD Board on matters in relation to conduct, regulatory and financial crime risks and the risk management control framework
Details of significant post balance sheet events that have occurred subsequent to 31 December 2016 are disclosed in notes 3, 18, 40, 60 and 62.
1 TOTAL 2016 REMUNER ATION – EXECUTIVE DIREC TORS (AUDITED INFORMATION)
Weighting 75% Metric 18.75% Net cash remittances 11.25% Economic Surplus Generation (ESG)
` Acquisition of the Royal Bank of Canada (RBC) General Insurance in Canada, increasing the Group’s size in Canada by 25% and diversifying its distribution mix.
Tom Stoddard continued to provide outstanding leadership to the Finance function and was instrumental in many initiatives that supported the Group’s strategy, including: ` Delivered Aviva’s first year under the new SII capital regime. The cover ratio of 189% as at 31 December 2016 is above the top end of our working range, and capital generation of £3.5bn was much stronger than planned.
5 Total staff costs from continuing operations includes wages and salaries, social security costs, post-retirement obligations, profit sharing and incentive plans, equity compensation plans and termination benefits. The average number of employees in continuing operations was 30,007 (2015) and 29,653 (2016).
Notes 1 The aggregate net value of share awards granted to the EDs in the period was £8.1 million (2015: £9.7 million). The net value has been calculated by reference to the closing middle-market price of an ordinary share of the Company at the date of grant.
8 The shares comprised in these vested awards include shares issued in lieu of dividends accrued during the deferral period. 9 Andy Briggs withdrew from the 2015 SAYE in order to participate fully into the 2016 SAYE. As a result his option under the 2015 SAYE was cancelled.
Following the 2016 AGM, the Committee Chairman continued dialogue with major institutional shareholders. Note 1 Voting on Remuneration Policy at 2015 AGM
LTIP ` Group CEO – 300% of salary. ` CFO & CEO UK – 225% of salary. ` Subject to performance against two equally weighted 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.
Shares are typically subject to a two year holding period after vesting, creating a total of five years between the award being granted, and the first opportunity to sell.
Notice period By the ED 6 months. By the Company 12 months, rolling. No notice or payment in lieu of notice to be paid where the Company terminates for cause.
• We validated significant assumptions used by management against past experience, market observable data and our experience of market practices.
For these hard to value investments we assessed both the methodology and assumptions used by management in the calculation of the year end values as well as testing the governance controls that the Directors have in place to monitor these processes. The testing included performing the following procedures: • We agreed data inputs to underlying documentation. • We evaluated the methodology and assumptions in particular, yield curves, discounted cash flows, property growth rates and liquidity premium used within the valuation models.
On acquisition of Friends Life Group Limited, Aviva recognised the Acquired Value of In Force Business ‘AVIF’ (£4,790 million) in respect of the insurance and investment contract portfolios. Under IFRS, the intangible asset is amortised each period in accordance with IAS 38 (non-participating investment contracts) and IFRS 4 (insurance contracts). Further, the Group has to, at least annually, perform impairment testing on the non-participating investment contract AVIF under IAS 36 and the insurance contract AVIF is assessed as part of the wider liability adequacy test (under IFRS 4).
• The statement given by the directors on page 103, in accordance with provision C.1.1 of the UK Corporate Governance Code (the “Code”), that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the group’s and parent company’s position and performance, business model and strategy is materially inconsistent with our knowledge of the group and company acquired in the course of performing our audit.
Accounting policies continued 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 majority of the Group’s contracts classified as nonparticipating investment contracts are unit-linked contracts and are measured at fair value. Certain liabilities for non-linked nonparticipating contracts are measured at amortised cost.
For securities identified as being impaired, the cumulative unrealised loss previously recognised within the investment valuation reserve is transferred to realised losses for the year with a corresponding movement through other comprehensive income. Any subsequent increase in fair value of these impaired securities is recognised in other comprehensive income and recorded in the investment valuation reserve.
The notional or contractual amounts associated with derivative financial instruments are not recorded as assets or liabilities on the statement of financial position as they do not represent the fair value of these transactions. These amounts are disclosed in note 57(b).
For a variety of reasons, certain derivative transactions, while providing effective economic hedges under the Group’s risk management positions, do not qualify for hedge accounting under the specific IFRS rules and are therefore treated as derivatives held for trading. Their fair value gains and losses are recognised immediately in net investment income.
The Group accounts for options and awards under equity compensation plans, which were granted after 7 November 2002, until such time as they are fully vested, using the fair value based method of accounting (the ‘fair value method’). Under this method, the cost of providing equity compensation plans is based on the fair value of the share awards or option plans at date of grant, which is recognised in the income statement over the expected vesting period of the related employees and credited to the equity compensation reserve,
For the diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares, such as convertible debt and share options granted to employees.
Consolidated statement of comprehensive income For the year ended 31 December 2016 £m £m
Attributable to: Equity holders of Aviva plc 1,901 478 Non-controlling interests 301 116 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note 1 for further details.
Consolidated statement of financial position As at 31 December 2016 £m £m
Earnings per share Basic (pence per share) 22.6p 0.5p 23.1p Diluted (pence per share) 22.3p 0.5p 22.8p
Assets and liabilities of operations classified as held for sale as at 31 December 2016 relate to Antarius S.A. (‘Antarius’), a consolidated subsidiary of Aviva. The subsidiary has been classified as held for sale from May 2016, the date when the transaction was expected to complete within 12 months. The business is measured at its carrying amount. See note 3(d)(ii) for further details.
The Group has determined its operating segments along market reporting lines and internal management reporting.
Profit/(loss) before tax 508 140 420 139 191 142 84 81 (510) 1,195 Tax attributable to policyholders’ returns 232 — — — — — (14) — — 218
Goodwill 862 1,035 — 58 1,955 Acquired value of in-force business and intangible assets 5,369 309 15 38 5,731 Interests in, and loans to, joint ventures and associates 1,878 34 — 7 1,919 Property and equipment 299 95 1 54 449 Investment property 10,582 335 — 384 11,301 Loans 22,292 141 — — 22,433 Financial investments 258,995 10,280 23 4,919 274,217 Deferred acquisition costs 1,604 812 5 — 2,421 Other assets 52,844 7,315 769 6,477 67,405 Assets of operations classified as held for sale — — — — —
Claims and benefits paid, net of recoveries from reinsurers 23,782 21,985
(a) Definitions Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions, where not treated as other items. Changes due to economic items, such as market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.
Analysis of investment income: Net investment income (136) 327 Foreign exchange gains/losses and other charges (35) (10)
(a) The short-term fluctuations in investment return and economic assumption changes attributable to the non-long-term business result and reported outside operating profit were as follows: Non-long-term business 2016 £m
Finance (No 2) Act 2015 introduced legislation reducing the rate of corporation tax from 20% at 1 April 2016 to 19% from 1 April 2017 and to 18% from 1 April 2020. These reduced rates were used in the calculation of the UK’s deferred tax assets and liabilities as at 31 December 2015. Finance Act 2016, which received Royal Assent on 15 September 2016, reduced the corporation tax rate to 17% from 1 April 2020.
Profit attributable to ordinary shareholders 1,193 618 15.3 1,413 862 23.1 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note 1 for further details.
At 31 December 2015 2,631 2,703 1,734 325 7,393 Additions — — 337 — 337 Disposals (43) — (216) — (259) Foreign exchange rate movements 51 1 121 42 215
At 31 December 2015 (43) (24) (78) (59) (204) Impairment losses charged to expenses — — (14) — (14) Foreign exchange rate movements 24 — 11 (9) 26
(b) Other intangible assets with finite useful lives consist mainly of the value of bancassurance and other distribution agreements and capitalised software. In 2015, a Spanish distribution agreement with a carrying amount of £157 million (£214 million cost less £57 million amortisation) was transferred to ‘Other intangible assets with indefinite useful life’ as a result of an extension in the duration of the agreement from 30 years to perpetuity.
Freehold £m Leasehold £m Total £m Freehold £m Leasehold £m Total £m
If owner-occupied properties were stated on a historical cost basis, the carrying amount would be £341 million (2015: £361 million).
Fair value of the following assets and liabilities approximate to their carrying amounts: • Receivables • Cash and cash equivalents • Payables and other financial liabilities
Non-recurring fair value measurement1 Properties occupied by group companies — — 321 321 1 Non-recurring fair value measurements of assets or liabilities are those fair value measurements that other IFRSs permit or require in particular circumstances.
Net asset value attributable to unitholders Derivative liabilities Borrowings 2016 £m £m £m £m £m £m £m £m £m £m
At 1 January (6) (61) Increase during the year (1) (2) Write back following sale or reimbursement — 57 At 31 December (7) (6)
Fixed maturity securities Debt securities UK government — 30,733 — 30,733 — 33,279 — 33,279 UK local authorities — 19 — 19 — 18 — 18 Non-UK government (note 26e) — 51,563 842 52,405 — 41,952 712 42,664 Corporate bonds
These are further analysed as follows: At fair value through profit or loss 273,548 38,550 (2,657) 309,441 258,777 23,447 (8,938) 273,286 Available for sale 994 107 (1) 1,100 857 85 (11) 931
Austria 11 14 715 697 138 140 864 851 Belgium 21 34 1,273 1,195 357 166 1,651 1,395 France 115 139 13,285 10,673 1,859 1,846 15,259 12,658 Germany 142 145 1,629 1,470 606 590 2,377 2,205 Greece — — — — — — — — Ireland 3 12 662 595 130 100 795 707 Italy 223 319 7,500 6,090 556 442 8,279 6,851 Netherlands 47 31 976 1,156 329 302 1,352 1,489 Poland 807 559 769 689 384 399 1,960 1,647 Portugal 2 7 118 110 — — 120 117 Spain 88 98 1,386 1,093 659 636 2,133 1,827 European Supranational debt 174 72 2,404 2,798 1,821 1,760 4,399 4,630 Other European countries 272 167 1,029 1,107 642 520 1,943 1,794
Net of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £17.9 billion (2015: £15.7 billion). The majority of the exposure (83%) is in senior debt. Participating funds are the most exposed to French (22%), UK (15%) and US (11%) banks.
The expected volatility used was based on the historical volatility of the share price over a period equivalent to the expected life of the option prior to its date of grant. The risk-free interest rate was based on the yields available on UK government bonds as at the date of grant. The bonds chosen were those with a similar remaining term to the expected life of the options. 4,709,978 options granted after 7 November 2002 were exercised during the year (2015: 5,011,905).
At the 2015 Annual General Meeting, the Company was authorised to allot the following: • Sterling new preference shares, as defined in the Company’s articles of association, up to a maximum nominal value of £500 million; and • Additional dollar preference shares, as defined in the 2015 Notice of Annual General Meeting, up to a maximum nominal value of US$650 million.
Balance at 1 January 2015 534 77 75 (522) 65 229 Arising in the year through other comprehensive income: Fair value gains — 27 (9) — — 18 Fair value gains transferred to profit on disposals — — — — — — Share of other comprehensive income of joint ventures and associates — — (14) — — (14) Impairment losses on assets previously revalued directly through other comprehensive income now taken to income statement — — — — — — Foreign exchange rate movements (377) — — 44 — (333) Aggregate tax effect – shareholders’ tax 7 — 6 — — 13
Balance at 1 January 4,774 4,637 Profit for the year attributable to equity shareholders 703 936 Remeasurements of pension schemes 311 (235) Dividends and appropriations (note 15) (973) (724) Net shares issued under equity compensation plans 26 19 Fair value gains realised from other reserves 46 33 Aggregate tax effect (52) 108 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for the 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note 1 for further details.
(ii) Group practice The long-term business provision is calculated separately for each of the Group’s life operations. The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, modified where necessary to reflect the requirements of the Companies Act 2006.
The cost of future policy-related liabilities is determined using a market-consistent approach and, in the main, this is based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market-related assumptions (for example, persistency, mortality and expenses) are assessed on a best estimate basis with reference to Company and wider industry experience, adjusted to take into account future trends.
Reinsured London Market business 2.0% 2.0% 9 years 9 years Latent claims 0.00% to 2.31% 0.00% to 2.30% 6 to 15 years 6 to 15 years Structured settlements 0.15% to 2.98% 2.1% 13 to 39 years 38 years
On 27 February 2017 the Lord Chancellor announced a reduction in the discount rate used in the Ogden tables from 2.5% set in 2001 to minus 0.75%. The reduction in the Ogden discount rate will increase lump sum payments to UK bodily injury claimants. As a result, claim reserves in the UK have been strengthened by £475 million to allow for the impact of the reduction in the current discount rate. The Lord Chancellor has also announced that the framework for setting the discount rate is under review and a public consultation will be launched before the end of April 2017. The timing of the conclusion of this review and its outcome and impact on future Ogden discount rates is unclear.
The Group aims to maintain reserves in respect of its general insurance and health business that protect against adverse future claims experience and development. The Group establishes reserves in respect of the current accident year (2016), where the development of claims is less mature, that allow for the greater uncertainty attaching to the ultimate cost of current accident year claims. As claims develop and the ultimate cost of claims become more certain, the absence of adverse claims experience will result in a release of reserves from earlier accident years, as shown in the loss development tables and movements table (c)(iv) above. Releases from prior accident year reserves are also due to an improvement in the estimated cost of claims.
Present value 2,168 90 174 186 249 399 627 843 1,184 1,645 3,413 10,978 Cumulative effect of foreign exchange
Carrying amount at 1 January 78,048 67,232 Provisions in respect of new business 4,584 3,710 Expected change in existing business provisions (4,893) (4,219) Variance between actual and expected experience 3,084 1,590 Impact of operating assumption changes 36 43 Impact of economic assumption changes 450 97 Other movements (347) 49 Change in liability recognised as an expense1 2,914 1,270 Effect of portfolio transfers, acquisitions and disposals2 — 12,245 Foreign exchange rate movements 8,721 (2,699) Other movements 56 —
1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. Deferred tax liabilities as at 31 December 2016 have been restated from £2,074 million to £2,084 million. See note 1 for further details.
Net liability at 1 January (1,953) (1,020) Acquisition and disposal of subsidiaries2 (50) (1,338) Amounts (charged)/credited to income statement (note 13a) (43) 334 Amounts (charged)/credited to other comprehensive income (note 13b) (98) 55 Foreign exchange rate movements (83) 20 Other movements (4) (4)
(a) Current tax Current tax assets recoverable and liabilities payable in more than one year are £29 million and £7 million (2015: £4 million and £50 million), respectively.
In addition, the French government has reduced the rate of corporation tax from 34.43% to 28.92% with effect from 1 January 2020. The further reduction in the future corporation tax rates in the UK from 18% to 17%, and the reduction in France from 34.43% to 28.92% has been used in the calculation of deferred tax assets and liabilities in the UK and France for the year ended 31 December 2016. This results in a reduction in the Group’s net deferred tax liabilities of £24 million, comprising a £14 million credit to the income statement and a £10 million credit to the statement of comprehensive income.
Total contractual undiscounted cash flows 2,183 816 2,999 2,109 929 3,038
Non-recourse Loans to property partnerships (see (a) below) 66 62 UK Life reassurance (see (b) below) 131 160 Other non-recourse loans (see (c) below) 193 208
(a) As explained in accounting policy D, the UK long-term business policyholder funds have invested in a number of property funds and structures (the ‘Property Funds’), some of which have raised external debt, secured on the relevant Property Fund’s property portfolio. The lenders are only entitled to obtain payment of interest and principal to the extent there are sufficient resources in the relevant Property Fund and they have no recourse whatsoever to the policyholder or shareholders’ funds of any companies in the Group. Loans of £66 million (2015: £62 million) included in the table relate to those Property Funds which have been consolidated as subsidiaries. (b) The UK long-term business entered into a financial reassurance agreement with Swiss Re in 2008, under which up-front payments are received from Swiss Re in return for 90% of future surpluses arising. The loan will be repaid as profits emerge on the business. (c) Other non-recourse loans primarily include external debt raised by special purpose vehicles in the UK long-term business. The lenders have no recourse whatsoever to the shareholders’ funds of any companies in the Group. (d) Other loans include external debt raised by overseas long-term businesses to fund operations.
The primary objective of capital management is to maintain an efficient capital structure, in a manner consistent with our risk profile and the regulatory and market requirements of our business.
At 31 December 2016, total capital employed prepared on an IFRS basis amounted to £28.1 billion (2015: £25.2 billion). This comprises: 2016 Capital employed £m
Debt securities 12.4% 37.4% 19.8% 21.2% 4.0% 5.2% 162,964 — 162,964 Reinsurance assets 0.1% 88.2% 8.0% 0.0% 0.0% 3.7% 20,918 — 20,918 Other investments 0.0% 0.1% 0.8% 0.0% 0.0% 99.1% 47,695 — 47,695 Loans 0.0% 8.2% 1.3% 0.1% 0.0% 90.4% 22,433 — 22,433
Sensitivity to changes in property prices is given in section ‘(j) risk and capital management’ below.
Net assets at 31 December 2016 (92) 92 (63) 20 Net assets at 31 December 2015 (166) 128 (33) 67
Long-term business Insurance contracts – non-linked 116,400 9,757 31,423 44,791 30,429 Investment contracts – non-linked 70,749 5,358 14,687 27,568 23,136 Linked business 156,264 24,165 47,465 58,284 26,350 General insurance and health 16,488 6,761 6,594 2,448 685
Notes to the consolidated financial statements continued 58 – Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements continued Amounts subject to enforceable netting arrangements
The Group undertakes transactions with related parties in the normal course of business. Loans to related parties are made on normal arm’s-length commercial terms.
The direct related undertakings of the Company as at 31 December 2016 are listed below.
A-Win Insurance Ltd. Ordinary Shares 100 328 Mill Street, Unit 11, Beaverton L0K 1A0
Bay-Mill Specialty Insurance Adjusters Inc. Common Shares 100 555 Chabanel Ouest, Bureau 900, Montreal QC H2N 2H8
France 24 Rue de la Pépinière, 75008 Paris Afer Actions Amerique FCP FCP 100 Afer Actions Euro A FCP 100 Afer Actions Euro I FCP 100 Afer Actions Monde FCP 100 Afer Convertibles C. FCP 100 Afer Diversifie Durable FCP 100 Afer Marches Emergents FCP FCP 100 Afer Objectif 2017 FCP FCP 100 Afer Obl Md Ent C. FCP 100 Afer Patrimoine FCP 100 Afer-Flore FCP 95 Aviv.Inv.Sm.&Mid Cap.Eur. FCP 100 Aviva Diversifie SICAV 95 Aviva Actions Croissance FCP 100 Aviva Actions Euro FCP 98 Aviva Actions Europe FCP 100 Aviva Actions France FCP 81 Aviva Amerique FCP 99 Aviva Asie FCP 100 Aviva Convertibles SICAV 91 Aviva Conviction Opportunites FCP 100 Aviva Conviction Patrimoine FCP 100 Aviva Developpement SICAV 99 Aviva Eur Corp Senior Debts Mutual Fund 100 Aviva Europe SICAV 96 Aviva Flexible C. Mutual Fund 100 Aviva Flexible Emergents A FCP FCP 100 Aviva Flexible Emetgents I FCP FCP 100 Aviva France Opportunites FCP 96 Aviva Grandes Marque FCP 100 Aviva Grandes Marque A C. FCP 99 Aviva Interoblig FCP 100 Aviva Investors Actions Euro FCP 90 Aviva Investors Alpha Taux A Mutual Fund 100 Aviva Investors Alpha Yield FCP 96 Aviva Investors Britannia (D) SICAV 100
Ordinary Shares 100 5/482, Ve Svahu, Prague 4, 14700 Aieref Renewable Energy S.R.O. Ordinary Shares 99
Pierrevenus Partner Shares 82 7 Rue Auber, 75009 Paris ViIP Conseils Ordinary Shares 34 102 C Rue Amelot, 75011, Paris Aviva Impact Investing France Ordinary Shares 100 3 Rue Alexandre Fleming , 92260, Fontenay-Aux-Roses
One Park Place, Hatch Street, Dublin 2 Area Life International Assurance Designated Activity Company
Aviva Investors Sfio Akcyjny UCITS 100 Aviva Investors Sfio Dluzny UCITS 100 Aviva Investors Sfio Spolek Dywidend UCITS 100 Aviva Investors Sfio Pieniezny UCITS 100 Aviva Investors Sfio Pap Nieskarbowych UCITS 100 Aviva Investors Sfio Aviva Lokacyjny UCITS 100 Aviva Investors Fio Depozyt Plus UCITS 34 Aviva Investors Fio Malych Spolek UCITS 45 Aviva Investors Fio Nowoczesnych Technologii
Iquo Limited Ordinary A Shares 67 AXA Investment Managers UK Limited, 7 Newgate Street,
Durhy Investments Sp. Z O.O. Ordinary Shares 7 Al. Jana Pawła II 25, 00-854, Warszawa Focus Mall Zielona Gora Sp Zoo Ordinary Shares 100 Focus Park Piotrków Trybunalski Sp.Z O.O. Ordinary Shares 100 Focus Park Zielona Góra Sp.Z O.O. Ordinary Shares 100 Lodz Bc Sp. Z O.O Ordinary Shares 100 Peace Harbor Investment Capital Sp. Z O.O.
Saudi Arabia Riyad Capital, 6775 Takhassusi Street – Olaya, Riyadh 12331 – 3712
Fuku Ii Investment Holdings Pte. Ltd Ordinary Shares 100 Fuku Investment Holdings Pte Ltd Ordinary Shares 100 Fukut Investmenr Holdings Pte. Ltd. Ordinary Shares 80 Kout Investment Holdings Pte. Ltd. Ordinary Shares 80 5 Shenton Way, # 01 – 01 Sgx Centre 2, 068807
Spain 9 Camino Fuente De La Mora, Madrid Aviva Grupo Corporativo S.L. Ordinary Shares 100 Santa Nonia 4, León, León Caja Espana Vida, Compania De Seguros Y Reaseguros
ASL Caravel LP Limited Partnership 100 ASL Clipper LP Limited Partnership 100 ASL Mainsail LP Limited Partnership 100 ASL Schooner LP Limited Partnership 100 ASL/Slas Xebec LP Limited Partnership 100 Slas Topsail LP Limited Partnership 100 60 Gresham Street, London, EC2V 7BB Alliance Trust Sustainable Future ICVC – European Growth Fund
Aviva Investors Polish Retail GP Limited Ordinary Shares 100 Aviva Investors Polish Retail Limited Partnership
Airport Property GP (No. 2) Limited2 Ordinary A Shares Ordinary B Shares
Opal (UK) Holdings Limited Ordinary Shares 29 Opal Information Systems Limited Ordinary Shares 29 Outsourced Professional Administration Limited
Non-Listed Shares 50 1 Investment Company with Variable Capital (‘ICVC’) Fond Common de Placement (‘FCP’) Open Ended Investment Fund (‘OEIC’) Société d’Investissement à Capital Variable (‘SICAV’) Undertakings for Collective Investments in Transferrable Securities (‘UCIT’) Irish Collective Asset Management Vechicle (‘ICAV’) Authorised Contractual Scheme (‘ACS’) 2 Please refer to accounting policies (D) Consolidation principles, for further detail on Joint Ventures and the factors on which joint management is based. 3 These joint ventures have a 30 June financial year-end.
Expenses Net investment expense — (3) Operating expenses B (603) (224) Interest payable to group companies I (182) (174) Interest payable on borrowings (345) (344)
Unrecognised tax losses and temporary differences of previous years were used to reduce the deferred tax expense by £nil (2015: £8 million).
(iv) Tax reconciliation The tax on the Company’s profit before tax differs from the theoretical amount that would arise using the tax rate of the home country of the Company as follows: Profit before tax 1,464 562
Factors affecting results of operations Our financial results are affected, by a number of external factors, including demographic trends, general economic and market conditions, government policy and legislation and exchange rate fluctuations. See ‘Other information – Risk and capital management’ for more information on these and other risk factors. In addition, our financial results are affected by corporate actions taken by the Group, including acquisitions, disposals and other actions aimed at achieving our stated strategy. We believe that all of these factors will continue to affect our results in the future.
Natural and man-made disasters Our general insurance business results are affected by the amount of claims we need to pay out which, in turn, can be subject to significant volatility depending on many factors, including natural and man-made disasters. Natural disasters arise from adverse weather, earthquakes and other such natural phenomena. Man-made disasters include accidents and intentional events, such as acts of terrorism. These events are difficult to predict with a high degree of accuracy, although they generally occur infrequently at a material level. Our exposure to large disasters is somewhat reduced through our focus on personal lines business and small to medium sized commercial risks in the general insurance business. The Group cedes the majority of its worldwide catastrophe risk to thirdparty reinsurers.
The world economy is expected to grow c.3.4%1 in 2017 and 3.6%1 in 2018, slightly higher than the previous two years (growth was 3.1%1 in 2016 and 3.2%1 in 2015). Economic activity is projected to pick up in 2017 and 2018, especially in emerging markets and developing economies. Advanced economies led by the US, are expected to continue their recovery, with the eurozone and UK growing more slowly. However, there is considerable uncertainty around this forecast, in view of potential changes in the economic policy stance of the US under the newly elected administration and future macroeconomic outcomes following the UK referendum result in favour of leaving the European Union. Risks remain weighted to the downside.
Operating profit is not a substitute for profit before income taxes and non-controlling interests in earnings or net income as determined in accordance with IFRS. Our definition of operating profit may differ from similar measures used by other companies, and may change over time.
Economic assumption changes of £100 million adverse (2014: £145 million adverse) arose as a result of an increase in the expected future inflation rates used to calculate reserves for periodic payment orders (PPOs), and a decrease in the swap rates used to discount latent claims reserves and PPOs.
Operating profit before tax Long-term insurance and savings business 132 129 183 General insurance and health 8 10 9 Other operations 6 2 3
Profit before tax attributable to shareholders’ profits increased by £77 million to £268 million (2015: £191 million) mainly driven by movement in operating profit as described above.
Investment sales decreased to £2,931 million reflecting lower sales in Europe.
Total net written premiums were slightly lower at £775 million (2015: £783 million) for the reasons mentioned above.
Fund management operating profit was £105 million (2014: £79 million), including a contribution of £9 million from Friends Life Investments (FLI). Excluding FLI, the increase of £17 million was driven by increased performance fees partly offset by higher operating expenses.
History and development of Aviva General Aviva plc, a public limited company incorporated under the laws of England and Wales, is the holding company of the Aviva Group. The Group provides customers with long-term insurance and savings, general and health insurance, and fund management products and services. Our purpose is to help people defy uncertainty so they can get on with their lives with confidence.
France Business overview and strategy We have a significant presence in the French insurance market and we operate through two main companies: Aviva Vie, ranked 10th in life insurance, based on premiums collected, and Aviva Assurance, ranked 11th in general insurance, as measured by gross written premiums11. Our strategy is to deliver sustainable dividends to Group by increasing profitability in our life business and targeted growth 10 Insurance Ireland Factfile Report 2015. 11 L’Argus de l’Assurance, May 2016.
Exposures to peripheral European countries Included in our debt securities and other financial assets are exposures to peripheral European countries. All of these assets are valued on a mark to market basis under IAS 39, and therefore our statement of financial position and income statement already reflect any change in value between the date of purchase and the balance sheet date. The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds. Net of non-controlling interests, our direct shareholder and participating fund asset exposure to the government (and local authorities and agencies) of Italy is £5.8 billion (2015: £4.7 billion).
At 31 December 2016, total capital employed prepared on an IFRS basis amounted to £28.1 billion (2015: £25.2 billion). This comprises of: 2016 Capital employed £m
Community Amount of community investment1 £6.3m £10.8m £11.3 m Maintain or improve investment 5% Y Maintain or improve investment % of employees participating in volunteering2 23% 12% 18% Increase % of employee volunteering 6pp Y Increase % of employees volunteering
• Board Governance Committee – one of this Committee’s key responsibilities is to oversee Aviva’s conduct in relation to its corporate and societal obligations, including setting the guidance, direction and policies for Aviva’s customer and corporate responsibility agenda and advising the Board and management on these matters. This Committee met six times in 2016 and formally considered Aviva’s strategic approach to climate change during the year. The Committee continues to ensure the Board remains informed on the issue.
Strategy 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 has primarily an 18 month outlook (although recognising there are longer term risks) compared to the much longer term outlook taken by Aviva’s life and asset management businesses, as providers of pensions and long term savings.
Initial response to the Financial Stability Board’s Taskforce on Climate-related Financial Disclosure (TCFD) As an international insurance group, risk management is at the heart of what we do. It is an integral part of maintaining financial stability for our customers, shareholders and other stakeholders. Our sustainability and financial strength is underpinned by an effective risk management process which helps us identify major risks to which we may be exposed, establish appropriate controls and take mitigating actions for the benefit of our customers and investors.
Catastrophic event model results are supplemented by in-house disaster scenarios to quantify cross class accumulation risks such as a major weather event, aggregation of major weather events and a scenario of a long dry summer driving a subsidence event year; these have been considered as Realistic Disaster Scenarios (RDSs) and have had their potential impact assessed. To date activity has been limited to stress and scenario testing; for example in 2016 we have examined the impact of an extreme windstorm in Northern Europe.
Ordinary shares, nominal value 25p 4,062 4,048 2,950 24 18 17 8.375% Cumulative irredeemable preference shares, nominal value £1 100 100 100 — — — 8.75% Cumulative irredeemable preference shares, nominal value £1 100 100 100 — — —
Our UK fund management companies manage most of the assets held by the Group’s main UK staff pension scheme, for which they charge fees based on the level of funds under management. The main UK scheme holds investments in Groupmanaged funds and insurance policies with other Group companies, as explained in note 48(b)(ii).
We are subject to a number of regulatory capital tests and employ realistic scenario tests to allocate capital and manage risk. The impact of these regulatory capital tests on our ability to transfer capital around the Group through dividends and capital injections is discussed later in this section under the headings ‘Sources of liquidity’ and ‘Capital injections’.
Undrawn borrowing facilities At 31 December 2016, we had £1.7 billion (2015: £1.7 billion) undrawn committed central borrowing facilities available to us, provided by a range of leading international banks, all of which have investment grade credit ratings. These borrowings are used to support Aviva’s commercial paper programme. Undrawn borrowing facilities are analysed below: Expiring within one year — 575 Expiring beyond one year 1,650 1,075
Under UK company law, dividends can only be paid if a company has distributable reserves sufficient to cover the dividend. At 31 December 2016, Aviva plc itself had distributable reserves of £3,746 million, which would have covered five years of historic dividend payments to our shareholders. In UK Life, our largest operating subsidiary, distributable reserves, which could be paid to Aviva plc via its intermediate holding company, are based on the updated Companies Act 2006 (Distributions of Insurance Companies) Regulations 2016 which uses an adjusted Solvency II Own Funds measure in determining profits available for distribution. While the UK insurance regulatory laws applicable to UK Life and our other UK subsidiaries impose no statutory restrictions on an insurer’s ability to declare a dividend, the rules require maintenance of each insurance company’s solvency margin, which might impact their ability to pay dividends to the parent company. Our other life and general insurance, and fund management subsidiaries’ ability to pay dividends and make loans to the parent company is similarly restricted by local corporate or insurance laws and regulations. In all jurisdictions, when paying dividends, the relevant subsidiary must take into account its capital position and must set the level of dividend to
The PRA and FCA regulatory regimes are based on the principle that firms should have effective systems and controls, including robust risk management, which are appropriate to the size, complexity and diversity of their business.
A number of senior managers at Group are registered as Approved Persons with either the PRA or FCA for the regulated subsidiaries, even though they are neither directors nor senior managers of these firms. This recognises that these managers exert significant influence over the regulated subsidiaries, because they are responsible for key parts of the Group’s control framework on which the regulated subsidiaries place reliance.
Both regulators therefore maintain proactive engagement with us, with day-to-day supervision of Aviva conducted by dedicated teams within the PRA and FCA. In practice, this means that a wide range of Group and UK business unit senior managers have regular scheduled meetings with the UK regulators, and other meetings and discussions on specific issues take place as the need occurs. This adds up to frequent regulatory interaction at business unit and Group level, and the sharing of detailed information about the Group.
The regulators’ enforcement powers, which may be exercised against both Authorised Firms and Approved Persons, include public censure, imposition of unlimited fines and, in serious cases, the variation or revocation of permission to carry on regulated activities or of an Approved Person’s status. The FCA may also vary or revoke an Authorised Firm’s permissions to protect the interests of consumers or potential consumers if the Authorised Firm has not engaged in regulated activity for 12 months, or if it is failing to meet the threshold conditions for authorisation. The FCA has further powers to obtain injunctions against Authorised Persons and to impose or seek restitution orders where consumers have suffered loss.
Considerable uncertainty exists over the arrangements which will be put in place between the UK and the EU as the UK departs from the EU including the UK’s continued access to the EU single market in relation to trade in goods and services. Adverse outcomes from the UK’s negotiations with the EU could have a material impact on the regulatory and legal framework within which our UK and European businesses operate.
Past political negotiations in the United States over raising the U.S. debt ceiling indicate that the risks associated with record levels of government debt and sovereign debt default and the potential adverse impact on global markets which could result from this is not limited to the eurozone. Such events could adversely affect our business, results of operations, financial condition and liquidity.
Some of our products, principally traditional participating products, universal life insurance and annuities expose us to the risk that changes in interest rates will reduce our ‘spread’, or the difference between the amounts that we are required to pay under the contracts and the rate of return we are able to earn on investments intended to support obligations under the contracts. Our spread is a key component of our net income.
Interest rate guaranteed returns, such as those available on guaranteed annuity options (‘GAOs’), are sensitive to interest rates falling below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was made.
In November 2016, the FCA published its Asset Management Market Study interim report (MS15/2.2). The report provisionally proposed the following possible remedies: a strengthened duty on asset managers to act in the best interest of investors; introducing an all-in fee approach to quoting charges; requiring asset managers to be clear about the objectives of their funds; clarifying and strengthening the appropriate use of benchmarks; providing tools for retail investors to identify persistent underperformance; making it easier for retail investors to move into better value share classes, requiring clearer communication of fund charges; requiring increased transparency and standardisation of costs and charges; and requiring clearer disclosure of fiduciary management fees and performance. Any rule changes will require the publication of a final report and consultation paper, so it is uncertain which of the proposed remedies might result in rule changes or when they might take effect. Any rule changes could have consequences for our UK asset management business and UK Life self-investment platform business and have a material adverse effect on our business, results of operations and/or financial condition.
Term assurance A simple form of life insurance, offering cover over a fixed number of years during which a lump sum will be paid out if the life insured dies within the specified time period.
Bancassurance/Affinity An arrangement whereby banks and building societies sell insurance and investment products to their customers on behalf of other financial providers.
Independent Financial Advisers (IFAs) A person or organisation authorised to give independent advice on financial matters. IFAs are authorised by the FCA in the UK.
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GROUP COMPANY SECRETARY Shareholders may contact the Group Company Secretary: By Email: Aviva.shareholders@aviva.com