Foreword The Strategic report on pages 1 to 38 contains information about Aviva, how we create value and how we run our business. It includes our strategy, business model, market outlook and key performance indicators, as well as our approach to sustainability and risk.
Our people Ultimately, I am confident we can and will unlock our full potential, both through the focus of our new Chief Executive Officer and the skills, commitment and values of our people.
Our communities We also remain determined to be a responsible, sustainable business. It is important for us to contribute to the communities where we work as well as the customers we are here to serve.
Overview Saving for the future, drawing a secure pension income, or protecting against unforeseen events, all these are fundamental to our customers’ well-being. Supporting customers in these areas, and more, is Aviva’s lifeblood and, through this commitment to serving customers, we will earn the returns our shareholders expect.
Our European businesses have been invigorated through intelligent choices on product design and mix and a focus on expanding our distribution footprint. In France, we have begun the process of bringing our multi-channel distribution under the Aviva brand, and there is more work to do on that in the coming year. In Italy, our success in the financial adviser channel has paved the way for sustained growth in sales volumes. In Ireland, we completed the acquisition of Friends First, strengthening our position in life insurance.
3 This measure is derived from the Group adjusted operating profit APM. Further details of this measure are included in the ‘Other Information’ section of the Annual report and accounts. 4 The estimated Solvency II position represents the shareholder view. Please refer to note 57 and the ‘Other information’ section of the Annual report and accounts for more information.
Outlook The coming year is shaping up as an important period for Aviva. The arrival of our new Chief Executive will have a galvanising effect on our organisation, providing renewed clarity of purpose. Aviva has abundant strengths: committed and energetic staff, depth in technical expertise, supportive partners and most importantly, 33 million customers. Our challenge is to capitalise on these strengths to become a better, simpler, more efficient company known for excellence in serving customers. This will require significant improvements by Aviva. It will also entail choices with respect to resource allocation. However, our strong existing foundations give us all we need to ensure the new phase Aviva is embarking on will be a success.
For society, we have: • Supported over 3,000 community projects, helping over 1.5 million people on a range of issues from social inclusion and diversity to supporting SMEs and water sanitation
3 This measure is derived from the Group adjusted operating profit APM. Further details of this measure are included in the ‘Other Information’ section of the Annual report and accounts. 4 The 2017 MyAviva active registrations number (7.5 million as previously reported) has been restated to now only include customers who hold at least one policy with us and have been active on MyAviva in the last 365 days. On the restated basis, 2017 active customer registrations were 3.6 million. 5 The estimated Solvency II position represents the shareholder view. Please refer to note 57 and the ‘Other information’ section of the Annual report and accounts for more information.
Values Our values are at the heart of how we do business. They are how we must operate: • Care More • Kill Complexity • Never Rest • Create Legacy
Offered initially on certain general insurance products, we aim to build this into our broader True Customer Composite offering. AvivaPlus is a significant shift for insurance, creating value, and driving engagement.
Digital First In an increasingly digital, data-driven world, our customers’ needs are changing. From individual customers, to intermediary partners and large corporate clients, our customers want innovative products and services, which are easy-to-use and provide a positive customer experience. Digital First is our strategic approach to creating a group which can respond to those demands.
In protection, we adapted to changing market conditions, resulting in adjusted operating profit1 remaining stable at £226 million (2017: £227 million). Results from group protection improved in 2018 following actions taken to address adverse claims experience in 2017. This offset weaker results in individual protection, where new business volumes fell 8% in response to heightened competition while margins were compressed by higher reinsurance costs. We will continue to manage our protection business with a focus on maximising profit over the cycle rather than volume.
Aviva Investors In a challenging year for the fund management industry, Aviva Investors top-line growth slowed, with revenue up 4% to £597 million (2017: £577 million). However, we chose to continue to invest in building a more valuable diversified long-term business, particularly in our Equities and Real Assets capabilities. This continued investment, together with the absorption of MiFID II costs, which we did not pass onto clients, resulted in adjusted operating profit1 of £150 million (2017: £168 million). We also realised a non-operating profit of £27 million on the sale of a part of our real estate business. Over the year, assets under management2 declined due to the aforementioned business disposal, adverse market movements and expected net outflows on Aviva’s legacy life insurance books. The AIMS range of funds saw assets reduce to £10.3 billion (2017: £12.6 billion) as difficult market conditions weighed on performance.
Adjusted operating profit4,6 Life 1,871 1,728 General Insurance 415 411 Health 38 36 2,324 2,175 Cash remitted to Group5,7,8 Life 2,170 1,366 General Insurance and Health 379 434 2,549 1,800 Expenses Operating expenses5 1,613 1,493 Integration and restructuring costs — 76 1,613 1,569 New business Present value of new business premiums (PVNBP)5 23,946 23,764 Value of new business on an adjusted Solvency II basis
Other In 2018, the contribution from Other was £350 million. The largest driver of this result was the release of longevity provisions totalling £728 million due to changes in life expectancy trends8. This was partly offset by the recognition of an additional £175 million provision relating to potential redress for advised sales by Friends Provident (of which over 90% of cases relate to pre-2002, with the total provision recognised being £250 million) and a £119 million adverse impact in respect of the settlement of certain legacy reinsurance arrangements.
The underwriting result increased 3% to £253 million (2017: £246 million), reflecting an improved underlying performance, as we maintained a disciplined approach to underwriting and distribution. The impact of less favourable weather compared to 2017, (although weather remained favourable to the long-term average), was offset by higher prior year reserve releases.
‘Segmental Information’ and ‘Other Information’ within the Annual report and accounts for further information 2 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
• We are a trusted partner for individuals to manage their transition into and through retirement, with market leading propositions (investment, drawdown, annuity, equity release), online guides and tools and our in-house advice service, Aviva Financial Advice. In 2018 we launched a ‘Mid-Life MOT’ service for our own employees aged 45 and over, providing targeted guidance on wealth, work and wellbeing. We will use the findings from this pilot to help inform discussions with government and the business community about how best to support UK employees more broadly as they approach retirement.
‘Segmental Information’ and ‘Other Information’ within the Annual report and accounts for further information 3 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further information on APMs, including a reconciliation to the financial statements
Excluding the impact of disposals, the adjusted operating profit1,2 of our life businesses grew by 10% to £816 million (2017: £740 million). Dealing with each of the markets in turn: • In France, adjusted operating profit1,2 was up 7% to £436 million (2017: £403 million), due to increase in new business volumes of our unit-linked savings products.
• In Italy, adjusted operating profit1,2 was £156 million (2017: £136 million), an increase of 14% with significant net inflows mainly driven by an increase in new business volumes of our hybrid product.
Cash Cash remitted to Group2 was £92 million in 2018, an increase of £34 million from 2017 (2017: £58 million).
Priorities for 2019 We will continue to build our investment capabilities, while also selectively diversifying our business. Our key focus is on enhancing investment returns for our clients. We will do this by: • Building our Real Asset manufacturing capability across Europe • Continuing to invest in our Equity proposition to add value to our
In 2018, the insolvency of Carillion, which was not a direct supplier of services to Aviva, and financial difficulties faced by other outsourcing providers, as well as customer service issues following the migration of our third party provided investment platform has brought added focus to this risk and we expect regulatory scrutiny of outsourcing arrangements to increase.
• Contributed to the review of the Modern Slavery Act (MSA) 2015 commissioned by the UK Government to strengthen and enhance the current legislation. We participated in a number of high level forums in 2018, including a workshop organised by the Home Office and the Modern Slavery Review Secretariat 2015. Our Group Company Secretary also participated in the UN Forum on Business and Human Rights in Geneva to discuss due diligence, emerging practice and challenges to accelerate progress and support survivors.
Number of risk of modern slavery assessments conducted on suppliers 8
We have reported on climate change in our Annual Report and Accounts since 2004. Our 2018 disclosure reflects Aviva’s response to the recommendations of the Taskforce on Climate-related Financial Disclosures, published in June 2017, and reflects our multiple roles as an asset owner, an insurer and an asset manager. This response sets out how Aviva incorporates climate-related risks and opportunities into our governance, strategy, risk management, metrics and targets and how we disclose our exposure. These pages, along with the expanded version of our response, are available at www.aviva.com/TCFD.
In December 2018, as part of our regular training programme, Aviva’s climate-related risks and opportunities were presented to the Board. The Board will use this training to give appropriate direction to the Company and ensure actions are taken to identify, measure, manage, monitor and report these risks and opportunities.
To assess the impact of climate change on our business, Aviva is calculating a Climate Value-at-Risk (Climate VaR) from the model outputs for each IPCC scenario to assess the climate-related risks and opportunities over the next 15 years with the ability to look at shorter time periods (three to five years) where appropriate. A range of different financial indicators are used to assess the impact on our investments and insurance liabilities. These impacts are aggregated together to determine the overall impact of climate-related risks and opportunities across all scenarios by assigning relative likelihoods or probabilities to each scenario.
Aviva is also committed to investing in lower carbon infrastructure, amounting to £2.5 billion in the period between 2015-2020, with the intention of delivering 100,000 tonnes of CO2 savings per year. Aviva currently holds more than £4.3 billion of green assets, including £3.1 billion in low carbon infrastructure investments (mainly solar, wind and waste-to-heat biomass) and £1.3 billion in green bonds.
Claudia Arney ▲ Position: Independent Non-Executive Director Nationality: British Committee Membership: Governance Committee (Chair), Nomination Committee, Remuneration Committee, Risk Committee Tenure: 3 years 1 month. Appointed to the Board in February 2016 Qualifications: MBA (INSEAD) 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. External Appointments: Non-Executive Director of Kingfisher plc, Derwent London plc, Halfords Group plc (until 1 March 2019) and the Premier League.
• Reviewed and constructively challenged reports from the Group CEO and 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
Stakeholder Engagement • Customer – Received updates on customer metrics, strategies and challenged action plans to reduce customer complaints – Undertook deep dives into renewal pricing, customer experience journeys, and customer operations and transformation
• Approved strategic M&A activities including the disposal of the Group’s two Spanish joint ventures to Bankia, and the launch of a digital insurance joint venture in Hong Kong with Hillhouse Capital Group and Tencent Holdings Limited. Concluded the disposal of Aviva’s shareholding in its joint venture in Italy, Avipop Assicurazioni S.p.A. to Banco BPM S.p.A. in March 2018
According to the Board’s policy, Executive Directors may hold one external directorship and must obtain the prior consent of the Board before accepting a non-executive directorship in any other company. During the year, this procedure was followed when former Group CEO Mark Wilson became a non-executive director of BlackRock, Inc. the US-based asset manager in March 2018. The time commitment and potential conflicts involved were carefully examined and the appointment was approved on the basis that exposure to BlackRock’s businesses for Mark would be to the benefit of Aviva, particularly in terms of developing Mark’s exposure to the priorities of strategic investors. In addition the potential conflicts could be adequately managed by the Chairman and Chief Financial Officer.
The Board engages with our people in several ways. The Board receives regular updates on the culture and engagement of our employees. We have a fully elected employee forum ‘Your Forum’ representing UK and European employees, which meets with one of our Non-Executive Directors annually. We also have the ‘Evolution Council,’ made up of high calibre developing leaders from across the business, that provides insight on digital, brand and strategy. The Executive Chairman chairs all meetings of the Evolution Council and two other Non-Executive Directors have also attended meetings. We also engage with our people through forums such as ‘Uncut’, unscripted Q&A sessions with senior managers streamed live, and a programme of town hall meetings.
The Board meets with shareholders at the Annual General Meeting which provides an opportunity, predominantly for our retail shareholders, to engage directly with the Board. The Chairman and Executive Directors have a programme of meetings with institutional investors during the year. The Board also receives weekly reports from the Investor Relations team and briefings from our corporate brokers on investor views.
2019 priorities The Committee will continue to monitor the political environment, the expected exit of the UK from the EU, and the current global economic cycle, particularly the impact around perceived inflated asset values. It will also focus on the economic and market impacts on the Group operationally, together with managing any balance sheet volatility that these may bring. There will be an ongoing and significant focus on further strengthening the control framework, particularly in relation to change management, cyber risk reduction and disaster recovery capabilities of the Group. Particular attention will also remain on emerging risks, and the potential benefits that could be derived from them, particularly around advances in technology across financial services, automotive and healthcare.
• Approved the Global Systemically Important Insurer Plans, including Recovery Plan and Liquidity Risk Management Plan
• Approved the refresh of certain Group Business Standards • Approved the annual objectives of the CRO • Reviewed the effectiveness of the systems of internal control and risk management • Recommended the 2019 Risk and Control Goal for approval by the
Challenged the assumptions used in the calculation of the Best Estimate Liability component of the technical provisions and the reserves required under SII. Reviewed and challenged the longevity, expense and credit default assumptions used for the 2018 half and full year. The challenge around the setting of longevity assumptions was a particularly significant area for review. During 2018, a detailed analysis was conducted, and reviewed by the Committee, to validate changes observed in recent mortality experience and the resulting impact on our existing longevity assumptions. In particular, the Committee reviewed the rate of annuitant mortality improvement reflecting recent experience in the UK market. The Committee met with the Chair of the UK Life Audit Committee, which had conducted its own ‘deep dive’ on longevity assumptions, together with the UK Life Chief Financial Officer. Following assessment of the proposed assumption changes the Committee considered the associated release of margins and the timing of recognition of changes in longevity experience in the financial statements. During the year the Committee considered, reviewed and approved the adoption of the relevant industry tables for the Bulk Purchase Annuity business in the UK. The Committee also reviewed proposals for adoption of CMI 2017 model for mortality improvement including the selection of parameters within the CMI model. The Committee also reviewed the implementation of a new actuarial modelling system in the UK. During 2018, annuities and certain protection products were transferred onto the new model. In addition, the Committee continued to review the allowance for the possible adverse impact of the decision for the UK to leave the European Union.
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. The Committee concluded that PwC continued to perform effectively and is recommended to shareholders for reappointment at the 2019 AGM.
• Reviewed and prepared for changes in the Ogden rate • Reviewed the Group Risk Actuary’s report on significant issues related to the technical provisions of SII and IFRS • Assessed that the Annual Report was considered fair, balanced and understandable
Final dividend per share (cents)1 2018 9.25 10.25 xx.xx – 1 Euro dividend rate per share
• The final draft is reviewed by the Audit Committee prior to consideration by the Board
Remuneration in 2019 Salary Aside from Maurice, the other EDs received salary increases of 2% for 2019, consistent with other Aviva employees in the UK.
Key Element of the Reward Governance Framework managed as part of the business of the Committee
Performance against financial measures subject to a quality of earnings assessment.
Customer Performance against our RNPS targets and our overall focus on customer outcomes.
shareholder cover ratio2 well above the working range at 204% • Robust execution of key IT deliveries, including Cloud migrations and IT service improvements • Improved employee engagement and positive shift in our culture • Continued progress towards our digital ambitions, including
Tom continued to provide strong leadership to the finance function and was critical to many initiatives that supported delivery of the Group’s strategy, including: • Delivered growth in operating EPS2 and cash dividends consistent with the Group’s targets, while increasing the Group’s overall Solvency II shareholder cover ratio2 and returning £1.5 billion of capital to investors
• Strong balance sheet management • Sponsored the ‘Generations’ community to promote a culture where age is not a barrier to achievement
Mark Wilson 11 May 2018 LTIP3 300% £3,103,904 20% 100% 31 Dec 2020 26 Mar 2023 26 Mar 2018 ABP 125% £1,296,742 N/A 26 Mar 2021
New Group CEO appointment As announced on 4 March 2019, the Board appointed Maurice Tulloch as our new Group CEO with immediate effect. Maurice’s remuneration as Group CEO is in accordance with our Policy, as approved by shareholders at our 2018 AGM, and consists of: • A salary of £975,000 per annum • Our standard benefits package for executive directors, including private family medical insurance, life insurance, and reasonable travel benefits • Pension contributions of 14% of salary, in line with the majority of our UK workforce • An annual bonus opportunity of 200% of salary, with one-third of any bonus earned paid in cash after the year end, and two-thirds deferred into shares which will vest in equal annual tranches over three years. His annual bonus opportunity for 2019 will be pro-rated to reflect the time spent in each role.
14 Salary and total remuneration used in the pay ratio calculations
Governance Regulatory Remuneration Code Aviva Investors and two small ‘firms’ (as defined by the 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 Services Ltd, subject to the Alternative Investment Fund Management Directive (AIFMD), the Undertakings for Collective Investments in Transferrable Securities (UCITS V) directive and the Markets in Financial Instruments Directive II (MiFID II). Remuneration Code requirements include an annual disclosure. For AIFMD and UCITS V the disclosure is part of the Financial Statements and/or Annual accounts of the Alternative Investment Funds or UCITS V. For CRD IV requirements the most recent Aviva Investors disclosure can be found in Section 5 of the Pillar 3 Disclosure available at www.aviva.com/pillar3 and a link to the disclosure for the UK Insurance firms can be found at www.aviva.com/remuneration-committee.
Statement of voting at AGM The result of the shareholder vote at the Company’s 2018 AGM in respect of the 2018 Directors’ Remuneration Policy and the 2018 Directors’ Remuneration Report is set out in table 19. The Committee was pleased with the level of support received from shareholders for both the resolutions.
– RoE2 and Solvency II shareholder cover ratio2 • 50% relative TSR against a comparator group3 50% Operating EPS2 target 50% TSR target
1 Salary for Group CEO will be effective from 4 March 2019, while for the CFO and CEO UKI,the change will be effective from 1 April 2019. 2 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further information on APMs, including a reconciliation to the financial statements
Patricia Cross Chair, Remuneration Committee 2/3rds deferred into shares vesting in three equal tranches over three years 1/3rd paid in cash 2-year holding period Award released
The following section reproduces the Policy for convenience, although the original Policy referred to above remains our formally approved Policy and should be consulted where this is required. In addition, we have taken the opportunity to update the scenario charts to reflect 2019 remuneration arrangements for our EDs, as well as appointment end dates for NEDs.
Operation Annual review, with changes normally taking effect from – 1 April each year. The review is informed by: • Individual and business performance • Levels of increase for the broader employee population • Relevant pay data including market practice among relevant FTSE listed companies of comparable size to Aviva in terms of market capitalisation, large European and global insurers, and UK financial services companies
Malus and Clawback 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; • Any other circumstance required by local regulatory obligations.
Discretions 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.
Company’s profit and cash flows for the year then ended; • have been properly prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements,
• Rate of mortality improvements: this component is more subjective given the lack of data and the uncertainty over how life expectancy will change in the future. Management has adopted the most recent CMI 2017 model and dataset in setting this assumption with specific parameters for the long term rate of improvement and tapering at older ages and adjustments to reflect the profile of their portfolio. This reflects their views on the rate of mortality improvement.
Group adjusted operating profit presents a longer-term assessment of the performance of the entity which is more in line with the operations and time horizons of an insurer where insurance contracts and customer relationships span over multiple years.
(vi) Annual Improvements to IFRS Standards 2015-2017 Cycle These improvements consist of amendments to four IFRSs including IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income taxes and IAS 23 Borrowing Costs. The amendments are effective for annual reporting beginning on or after 1 January 2019 and have not yet been endorsed by the EU.
Intangible assets Intangible assets consist primarily of contractual relationships such as access to distribution networks, customer lists and software. The economic lives of these are determined by considering relevant factors such as usage of the asset, typical product life cycles, potential obsolescence, maintenance costs, the stability of the industry, competitive position and the period of control over the assets. These intangibles are amortised over their useful lives, which range from three to 30 years, using the straight-line method.
Strategic report Governance IFRS financial statements Other information controlled and it is probable that the difference will not reverse in the foreseeable future.
United Kingdom1 1,871 453 — — 2,324 Canada — 46 — 1 47 France 436 110 — (35) 511 Poland 170 20 — 9 199 Italy, Ireland, Spain and Other 225 90 — (14) 301 Asia 300 (16) (4) (18) 262 Aviva Investors 1 — 150 — 151 Other Group activities (4) 1 — (180) (183) 2,999 704 146 (237) 3,612 Corporate Centre (216) Group debt costs and other interest (280) Total 3,116
Balance at 1 January 1,003 200 10,195 (14) 1,141 (274) 4,918 731 17,900 1,235 19,135 Profit for the year — — — — — — 1,568 — 1,568 119 1,687 Other comprehensive income — — — — 28 (50) (236) — (258) 5 (253) Total comprehensive income for the year — — — — 28 (50) 1,332 — 1,310 124 1,434 Dividends and appropriations — — — — — — (1,189) — (1,189) — (1,189) Non-controlling interests share of dividends declared in the year — — — — — — — — — (90) (90) Shares purchased in buy-back2 (30) — 30 — — — (600) — (600) — (600) Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — (40) 36 — — (4) — (4) Changes in non-controlling interests in subsidiaries — — — — (7) — 1 — (6) (306) (312) Reserves credit for equity compensation plans — — — — — 64 — — 64 — 64 Shares issued under equity compensation plans 2 — 7 (1) — (55) 49 — 2 — 2 Capital contributions from non-controlling interests — — — — — — — — — 3 3 Forfeited dividend income — — — — — — 4 — 4 — 4 Reclassification of tier 1 notes to financial liabilities — — — — — — — — — — — Treasury shares held by subsidiary companies — — — — — — — — — — — Owner-occupied properties fair value gains transferred to retained earnings on disposals — — — — — — — — — — — Aggregate tax effect – shareholder tax — — — — — — 8 — 8 — 8 Balance at 31 December 975 200 10,232 (15) 1,122 (279) 4,523 731 17,489 966 18,455 1 Capital reserves consist of share premium of £1,214 million, a capital redemption reserve of £44 million and a merger reserve of £8,974 million. 2 On 1 May 2018, the Group announced a share buy-back of ordinary shares for an aggregate purchase price of up to £600 million. On completion in 2018 of this buy-back, £600 million of shares had been purchased and shares with a nominal value of £30 million have been cancelled, giving rise to an additional capital redemption reserve of an equivalent amount. See note 32 for further details of the shares purchased in buy-back.
Asia Our activities in Asia principally comprise our long-term business operations in China, India, Singapore, Hong Kong, Vietnam, Indonesia, Taiwan (up to 19 January 2018, (see note 4(b))) and FPI (see note 4(c)). This segment also includes general insurance and health operations in Singapore and health operations in Indonesia. This segment includes the results of the digital insurance joint venture in Hong Kong, which commenced operating under its new corporate structure during the first half of 2018.
Long-term business and outstanding claims provisions 94,181 4,914 3,455 16,778 3,068 12,646 4,069 — 4 139,115 Unearned premiums 214 2,104 1,517 501 109 410 91 — — 4,946 Other insurance liabilities — 16 — — — — — — — 16
Investment variances and economic assumption changes were £197 million negative (2017: £34 million positive), primarily due to negative variances in the UK and Italy. In the UK, these variances were mainly due to an increase in yields, the widening of corporate bond spreads and an increase in the allowance for the possible adverse impact of the decision for the UK to leave the European Union, partially offset by the beneficial impact of our equity hedges. The negative variance in Italy was primarily driven by a widening of sovereign credit spreads and a fall in equity markets.
Current tax In respect of pensions and other post-retirement obligations (59) (45) In respect of foreign exchange movements (1) 4
Strategic report Governance IFRS financial statements Other information 17 – Goodwill This note analyses the changes to the carrying amount of goodwill during the year, and details the results of our impairment testing on both goodwill and intangible assets with indefinite lives.
Disposals in 2018 include the disposal of the Italy Avipop business as well as the remainder of the business in Spain (see note 4).
20 – Interests in, and loans to, associates This note analyses our interests in entities which we do not control but where we have significant influence.
In 2017, the Group determined that the goodwill of £47 million and AVIF of £18 million of its investment in Aviva Life Insurance Company India Limited (Aviva India) were fully impaired following management’s annual impairment review. The total impairment of £65 million was recognised within the income statement as a component of share of profit after tax of joint ventures and associates.
Owner-occupied properties are stated at their revalued amounts, as assessed by qualified external valuers. These values are assessed in accordance with the relevant parts of the current Royal Institute of Chartered Surveyors Appraisal and Valuation Standards in the UK, and with current local valuation practices in other countries. This assessment is in accordance with UK Valuations Standards (‘Red book’), and is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction, after proper marketing wherein the parties had acted knowledgeably and without compulsion, on the basis of the highest and best use of asset that is physically possible, legally permissible and financially feasible. The valuation assessment adopts market-based evidence and is in line with guidance from the International Valuation Standards Committee and the requirements of IAS 16 Property, Plant and Equipment.
Recurring fair value measurements Investment property (note 22) — — 10,797 10,797 — 10,797 Loans (note 24(a)) — 443 23,949 24,392 3,465 27,857 Financial investments measured at fair value (note 27(a))
Transfers between Level 1 and Level 2 There were no significant transfers between Level 1 and Level 2 during the year.
Policy loans 1 769 770 1 792 793 Loans to banks 303 1,620 1,923 554 1,970 2,524 Healthcare, infrastructure & PFI other loans 5,358 — 5,358 3,563 — 3,563 UK securitised mortgage loans (see note 25) 2,437 — 2,437 2,463 — 2,463 Non-securitised mortgage loans 17,427 — 17,427 17,817 — 17,817 Loans to brokers and other intermediaries — 164 164 — 180 180 Other loans — 706 706 — 523 523
Strategic report Governance IFRS financial statements Other information 26 – Interests in structured entities continued (b) Interests in unconsolidated structured entities As part of its investment activities, the Group invests in unconsolidated structured entities. As at 31 December 2018, the Group’s total interest in unconsolidated structured entities was £59.0 billion (2017 : £57.5 billion) on the Group’s statement of financial position. The Group’s total interest in unconsolidated structured entities is classified as ‘Interests in and loans to joint ventures and associates’ and ‘financial investments held at fair value through profit or loss’. The Group does not sponsor any of the unconsolidated structured entities.
Strategic report Governance IFRS financial statements Other information 27 – Financial investments continued (b) Cost, unrealised gains and fair value The following is a summary of the cost/amortised cost, gross unrealised gains and losses and fair value of financial investments: Cost/amortised cost £m
Strategic report Governance IFRS financial statements Other information 28 – Receivables This note analyses our total receivables.
Deferred acquisition costs in respect of: Insurance contracts – Long-term business 931 858 Insurance contracts – General insurance and health business 1,088 1,110 Participating investment contracts – Long-term business 101 33 Non-participating investment contracts – Long-term business 1,036 1,071 Retail fund management business — 2
Carrying amount at 1 January 694 19 861 1,037 3 2,614 Acquisition costs deferred during the year 200 — 106 2,418 — 2,724 Amortisation (76) 14 (92) (2,369) (1) (2,524) Impact of assumption changes — — 192 — — 192 Effect of portfolio transfers, acquisitions and disposals 26 — — 25 — 51 Foreign exchange rate movements 14 — 4 1 — 19 Other movements — — — (2) — (2)
(b) Shares held by subsidiary companies At 31 December 2018, the balance of shares held by subsidiary companies of 2,435,983 (2017: 2,471,599 shares) had an aggregate nominal value of £608,996 (2017: £617,900) and a market value of £9,148,336 (2017: £13,295,284).
At the end of 2018 the fair value of the DCI and the STICS was £722 million (2017: £778 million).
Estimate of gross ultimate claims At end of accident year 7,364 6,911 6,428 6,201 6,122 5,896 5,851 6,947 6,894 7,185 One year later 7,297 7,006 6,330 6,028 6,039 5,833 5,930 6,931 6,796 Two years later 7,281 6,950 6,315 6,002 6,029 5,865 5,912 6,864 Three years later 7,215 6,914 6,292 5,952 6,067 5,842 5,814 Four years later 7,204 6,912 6,262 6,002 6,034 5,772 Five years later 7,239 6,906 6,265 5,979 5,996 Six years later 7,217 6,926 6,265 5,910 Seven years later 7,256 6,913 6,223 Eight years later 7,228 6,877 Nine years later 7,227
The total valuation allowance in respect of corporate bonds and mortgages, including healthcare mortgages but excluding equity release, was £1.9 billion (2017: £1.8 billion) over the remaining term of the portfolio at 31 December 2018. The total valuation allowance in respect of equity release assets was £1.3 billion at 31 December 2018 (2017: £1.2 billion). Total liabilities for the annuity business were £53.7 billion at 31 December 2018 (2017: £52.0 billion).
PCMA00/PCFA00 adjusted plus allowance for future mortality improvement Bulk purchase annuities CV2 PCMA00/PCFA00/CV2
Strategic report Governance IFRS financial statements Other information 43 – Insurance liabilities methodology and assumptions continued UK mesothelioma claims The level of uncertainty associated with latent claims is considerable due to the relatively small number of claims and the long-tail nature of the liabilities. UK mesothelioma claims account for a large proportion of the Group’s latent claims. The key assumptions underlying the estimation of these claims include claim numbers, the base average cost per claim, future inflation in the average cost of claims and legal fees.
For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated divisible surplus, except for the with-profits sub-fund supported by the RIEESA. Guarantees on longterm investment products are discussed in note 45.
The Canadian defined benefit schemes ceased with effect from 31 December 2011. The main Canadian plan is a Registered Pension Plan in Canada and as such is registered with the Canada Revenue Agency and Financial Services Commission of Ontario and is required to comply with the Income Tax of Canada and the various provincial Pension Acts within Canada.
Remeasurements: Actual return on these assets (182) — (182) Less: Interest income on scheme assets (442) — (442) Return on scheme assets excluding amounts in interest income (624) — (624) Gains from change in financial assumptions — 622 622 Losses from change in demographic assumptions — (185) (185) Experience losses — (93) (93) Total recognised in other comprehensive income (624) 344 (280)
Return on scheme assets excluding amounts in interest income 270 — 270 Losses from change in financial assumptions — (182) (182) Losses from change in demographic assumptions — (30) (30) Experience losses — (63) (63)
Bonds Fixed interest 6,121 493 148 6,762 6,925 408 163 7,496 Index-linked 10,409 293 — 10,702 11,744 292 — 12,036
Within one year 251 376 627 978 427 1,405 1 to 5 years 1,370 1,353 2,723 928 1,627 2,555 5 to 10 years 673 1,490 2,163 444 1,759 2,203 10 to 15 years — 1,441 1,441 — 1,756 1,756 Over 15 years 5,365 2,923 8,287 6,216 3,282 9,498
Amounts owed to financial institutions Loans 496 466 Securitised mortgage loan notes UK lifetime mortgage business (note 25(b)) 1,225 1,180
56 – Commitments This note gives details of our commitments to capital expenditure and under operating leases.
Strategic report Governance IFRS financial statements Other information 57 – Group capital management continued During 2018, Aviva has undertaken a number of actions to deploy its excess capital.
(c) Solvency II basis Solvency II is the Europe-wide prudential regulatory framework that came into force on 1 January 2016 and put in place a consistent solvency framework for insurers across Europe. This capital regime requires insurers to calculate regulatory capital adequacy at both individual regulated subsidiaries and an aggregate Group level. Non-EEA entities have been included in Group solvency in line with Solvency II requirements. Other financial sector entities (including fund management) are included at their proportional share of the capital requirement according to the relevant sectoral values.
Strategic report Governance IFRS financial statements Other information 58 – Statement of cash flows This note gives further detail behind the figures in the statement of cash flows.
Debt securities 10.3% 33.6% 18.2% 25.1% 6.5% 6.3% 169,686 (397) 169,289 Reinsurance assets — 83.1% 10.0% 2.7% — 4.2% 11,800 (45) 11,755 Other investments 0.2% 0.1% 0.3% 0.1% — 99.3% 52,812 (6,644) 46,168 Loans — 5.6% — — — 94.4% 28,785 — 28,785 Total 263,083 (7,086) 255,997
(iv) Credit concentration risk The long-term and general insurance businesses are generally not individually exposed to significant concentrations of credit risk due to the regulations applicable in most markets and the Group credit policy and limits framework, which limit investments in individual assets and asset classes. Credit concentrations are monitored as part of the regular credit monitoring process and are reported to the Group Asset Liability Committee (ALCO). With the exception of government bonds the largest aggregated counterparty exposure within shareholder assets is to the Swiss Reinsurance Company Ltd (including subsidiaries), representing approximately 2.3% of the total shareholder assets.
Sensitivity to changes in interest rates is given in section (j) Risk and capital management, below.
Businesses aim to maintain sufficient assets in local currency to meet local currency liabilities, however movements may impact the value of the Group’s consolidated shareholders’ equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. These exposures are managed by aligning the deployment of regulatory capital by currency with the Group’s regulatory capital requirements by currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set. Except where the Group has applied net investment hedge accounting (see note 60(a)), foreign exchange gains and losses on foreign currency borrowings are recognised in the income statement, whereas foreign exchange gains and losses arising on consolidation from the translation of assets and liabilities of foreign subsidiaries are recognised in other comprehensive income. At 31 December 2018 and 2017, the Group’s total equity deployment by currency including assets ‘held for sale’ was: Sterling £m Euro £m CAD$
Long-term business Insurance contracts – non-linked 109,900 10,105 27,278 41,720 30,797 Investment contracts – non-linked 71,948 5,370 17,088 26,300 23,190 Linked business 163,571 17,609 27,632 55,519 62,811 General insurance and health 16,794 6,877 6,838 2,462 617 Total contract liabilities 362,213 39,961 78,836 126,001 117,415
Strategic report Governance IFRS financial statements Other information 59 – Risk management continued The assets above are analysed in accordance with the earliest possible redemption date of the instrument at the initiation of the Group. Where an instrument is transferable back to the issuer on demand, such as most unit trusts or similar types of investment vehicle, it is included in the ‘On demand or within 1 year’ column. Debt securities with no fixed contractual maturity date are generally callable at the option of the issuer at the date the coupon rate is reset under the contractual terms of the instrument. The terms for resetting the coupon are such that we expect the securities to be redeemed at this date, as it would be uneconomic for the issuer not to do so, and for liquidity management purposes we manage these securities on this basis. The first repricing and call date is normally ten years or more after the date of issuance. Most of the Group’s investments in equity securities and fixed maturity securities are market traded and therefore, if required, can be liquidated for cash at short notice.
Sensitivities as at 31 December 2017 31 December 2017 Impact on profit before tax £m Interest rates
Fair value assets of £4,994 million (2017: £5,507 million) are recognised as ‘Derivative financial instruments’ in note 27(a), while fair value liabilities of £5,571 million (2017: £5,766 million) are recognised as ‘Derivative liabilities’ in note 53.
Strategic report Governance IFRS financial statements Other information 61 – Financial assets and liabilities subject to offsetting, enforceable master netting agreements and similar arrangements (a) Offsetting arrangements Financial assets and liabilities are offset in the statement of financial position when the Group has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis, or to realise the asset and settle the liability simultaneously.
Associates 1 — — 2 4 (4) — — Joint ventures 49 — (1) 2 49 — — 2 Employee pension schemes 10 — — 7 12 — — 14
AXA Property Trust Ltd OEIC 28 F&C Commercial Property Trust Limited OEIC 47 St Martin’s House, Le Bordage, St Peter Port Paragon Insurance Company Guernsey Limited Ordinary Shares 47 80 George Street, F&C Commercial Property Trust Ltd Closed Ended Investment
JPMorgan Indonesia Fund Unit Trust 25 30/F, One Kowloon, 1 Wang Yuen Street, Kowloon Bay, Hong Kong
CGU Project Services Private Limited Rs.10 Shares 100 Aviva Life Insurance Company India Limited2 Ordinary Shares 49 A-47 (L.G.F), Hauz Khas, New Delhi, Delhi Sesame Group India Private Limited Ordinary Shares 100 Pune Office Addresses 103/P3, Pentagon, Magarpatta City, Hadapsar, Pune – 411013
Nikko AM Shenton Asia Pacific Fund Unit Trust 65 Nikko AM Shenton Income Fund Unit Trust 65 Nikko AM Shenton Global Green Bond Fund Unit Trust 53 4 Shenton Way, #01-01 SGX Centre 2, Singapore, 068807
Tec Marina Terra Nova Way Penarth, Wales United Kingdom CF64 1SA
Assets Non-current assets Investments in subsidiaries F 31,788 31,788 31,788 Investment in joint venture F 123 123 123 Receivables and other financial assets G 5,401 3,680 5,941 Deferred tax assets H 9 9 156 Current tax assets H 89 255 135 37,410 35,855 38,143 Current assets Receivables and other financial assets G 414 2,028 321 Prepayments and accrued income 10 9 11 Cash and cash equivalents 15 87 82
Interest payable on borrowings 325 352 Interest payable to group companies P(ii) 194 175
Tax calculated at standard UK corporation tax rate of 19.00% (2017: 19.25%) 399 214 Reconciling items Adjustment to tax charge in respect of prior years (2) (3) Non-assessable dividend income (528) (335) Disallowable expenses 7 8 Different local basis of tax on overseas profits — (4) Change in future local statutory tax rates — (19) Losses surrendered intra-group for nil value 28 26
This section includes a definition of each APM and additional information, including a reconciliation to the relevant amounts in the IFRS Financial Statements and, where appropriate, commentary on the material reconciling items.
• A charge of £10 million relating to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs (see note 35)
Other acquisition costs and claims handling costs are included as these are considered to be controllable by the operating segments and directly impact their performance.
Dividend record date 12 April 2019 16 August 2019 Last day for Dividend Reinvestment
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