Who we are At Aviva, we help our 33 million customers save for the future and manage the risks of everyday life. Our 29,600 people are focused on helping to free our customers from fear of uncertainty
Friends Life integration Over 2015 we continued to perform strongly against all our targets. The £6 billion acquisition of Friends Life in April 2015 and the ongoing integration work since then have been especially noteworthy features of the last year. The acquisition is in line with our strategic direction, and positions us well to capitalise on the opportunities that exist in the UK.
Regulatory change We also continue to manage considerable regulatory change, not least from the new Solvency II (SII) regime and the reforms to pensions in the UK. I am confident that the Board and the management team are well equipped to meet these challenges.
IFRS net asset value per share 389p IFRS profit before tax attributable to shareholders’ profits £1,390m Total dividend 20.80p Total shareholder return sir Adrian Montague CBE Chairman
And we’ll deliver the benefits of the composite model for our customers by putting Digital First – it’s what customers want and it’s more efficient. Our first task is to increase the number of customers registered with MyAviva. We’re only just starting to unlock our digital potential – we’re a very long way from where I want us to be.
} Develop an inclusive workforce that reflects the diversity of our customer base
Within this, operating expenses were £3,030 million (2014: £2,795 million), including £350 million of expenses from Friends Life post-acquisition and a foreign exchange benefit of £100 million.
Smartphone users worldwide by 20201 6.1bn Daily active Facebook users2 1bn “Internet of things” – connected devices by 20203 50bn Daily Uber rides completed worldwide4 1m
Jason Windsor Chief Capital & Investments Officer 1 Ericsson Mobility Report, June 2015. 2 Facebook.com, stats, September 2015.
Our values Our values of Care More, Kill Complexity, Never Rest and Create Legacy lie at the heart of how we do business.
Read more on pages 52-55 aviva plc Annual report and accounts 2015 | 19
True Customer Composite We can provide customers with life, general, accident and health insurance and asset management – a True Customer Composite. This is what differentiates us. We are the only composite insurer of scale in the UK, and one of only a few in the world.
MyAviva digital shop window We are continually striving to improve our MyAviva online portal. For example, we now provide MyAviva users with indicative quotes for Aviva products they don’t currently have, allowing them to compare prices with their current provider. MyAviva creates a digital shop window, giving customers a simple, speedy way to buy a wide range of Aviva products which meet their needs.
Aviva. We know we have more to do – and we are excited about the opportunities in this space.
The Digital Garages Our Digital Garage in London is up and running – and now we’ve opened another Garage in Singapore. Singapore is a tech savvy market – and our Garages are like Aviva campuses, where our creative minds bring their best ideas and make them happen. The result? Great digital products for our customers at every stage of their lives. That’s increasingly what customers want from us – and it means we can help them more quickly and more efficiently. We’re in the middle of a digital revolution. And we want our customers to benefit from it.
We will also continue to develop our digital infrastructure and talent as we harness the power of digital throughout the organisation and across all our distribution channels to improve processes, reduce costs and improve user experience.
Super 6 – Super Service! Our Customer Cup Competition captures our people’s best ideas so we can improve things for our customers. This year’s winners – called Super 6, from our Household Claims Team – know that customers want their claims resolved quickly and conveniently because they talk to them every day. Thanks to their bright idea and by working with our key suppliers – the Super 6 – customers can now get a digital voucher for a replacement item before their call is even over. It’s a great example of how we strive to meet our customers’ expectations – and then exceed them.
As a result we are simplifying how we do business and improving the service we offer customers, while reducing costs and improving efficiency.
By securing a strong, long-term relationship with our customers, the life business can be the Group’s anchor for delivering the benefits of the composite model to our customers.
} Ensure that, following the implementation of Solvency II, we continue to make our balance sheet as capital efficient as possible
Innovative protection platform ALPS isn’t just a mountain range. It’s Aviva Life Protection Solutions – our new protection platform for advisers and customers in the UK. It helps them make the right choice when arranging life protection by offering a flexible menu of cover which can be tailored to meet a customer’s circumstances – with all the policy documents stored online. 75% of applications are immediately accepted online – and that equals certainty and convenience for customers. It’s the biggest change in how we offer life insurance for years. We think ALPS is a game changer for Aviva – and our customers.
} Deliver simpler digital solutions which improve our automated processes and make it even easier for our customers to do business with us
Financial performance Our headline financial performance was impacted across all metrics by a weaker euro (11% down on average) and low interest rates. Prior year results include the benefits of one-off pension changes in Poland and Lithuania.
We also have a majority stake in Union Financière de France (UFF), the largest financial adviser network in France with around 1,200 advisers, and strong direct businesses with Aviva Direct, a leading direct provider of funeral protection, and Eurofil, one of the largest direct general insurers.
} Grew our agency force in China and Vietnam (a new channel with 1,415 agents) focusing on quality
Overview We have three and a half million customers across our markets, and operate a multi-distribution strategy which includes bancassurance, agents, financial advisers, direct and telemarketing, and a direct sales force.
euan Munro, Chief executive Officer, Aviva Investors what is your strategy? Our ambition is to be the global leader in outcome-oriented solutions. This means meeting the specific investment objectives of clients – whether that’s capital growth, beating inflation, receiving a reliable income or meeting a future liability. This drives everything we do.
everything we do is anchored in putting our customers’ interests first –
Fund management operating profit generated by Aviva Investors was £105 million (2014: £79 million), an increase of £26 million compared with the prior year. This included a £9 million contribution from Friends Life Investments (FLI). Excluding FLI, the increase of £17 million was driven by higher performance fees partly offset by higher operating expenses.
2015 saw difficult but necessary decisions that had a significant impact on our people as we integrated Friends Life into Aviva. By bringing our people together in core locations we continue to enhance our expertise and collaboration. Current plans remain within the 1,500 role reductions announced in 2015.
In the September 2015 survey, on a like-for-like basis excluding Friends Life, engagement rose from 65% in 2014 to 66%. As anticipated, uncertainty during the integration of Friends Life meant overall engagement remained broadly stable at 63%.
We are driven to think bigger and do better for our customers and each other.
• Empowering our people to take decisions that balance risk and results.
} Reduced our CO2e by 39% since 2010 versus restated baseline
} We will challenge our industry, leading the fight to cut fraud and cut costs for our customers
Please visit www.aviva.com/corporateresponsibility to find out more about the different aspects of our corporate responsibility strategy.
In 2016, we will continue work on implementation of the requirements of our human rights policy across the business and to consider our obligations under the UK Modern Slavery Act.
Championing responsible investment At Aviva we are an active and responsible investor. With £290 billion assets under management at Aviva Investors, we finance important economic assets, such as infrastructure, which support the wider economy and we promote sustainable business practices in the global markets, encouraging greater transparency and better corporate governance. This helps us to reduce risk and enhance the long term value of our clients’ investments. Aviva Investors was a founding signatory to the UN Principles for Responsible Investment. We were also one of the first global fund managers to integrate environmental, social and governance issues into our investment decision-making across all asset classes (90% AUM) in 2014.
** Assurance provided by PricewaterhouseCoopers LLP in the Independent Limited Assurance Report to the Directors of Aviva plc.
Michael – it’s a pleasure to help get you back on the road!
2 The economic capital surplus represents an estimated position. The economic capital requirement is based on Aviva’s own internal assessment and capital management policies. The term ‘economic capital’ does not imply capital as required by regulators or other third parties.
We have a preference for those risks that we understand well, which are intrinsically well-managed and where there is a spread of risks in the same category.
We like longevity risk as it diversifies well (i.e. has little or no correlation) against other risks we retain. General insurance risk diversifies well with our life insurance and other risks.
General insurance risk is the risk arising from loss events (fire, flooding, windstorms, accidents etc).
• RAC staff pension scheme longevity swap covering circa £0.6 billion of pensioner in payment scheme liabilities reducing our longevity risk exposure
We actively engage with governments and regulators in the development of public policy and regulation, as changes in government policy on insurance, long term savings and pension provision, and in regulation, can significantly impact demand for our products, the types of product we offer customers, how we sell them and how much capital we need to hold.
We have plans in place to ensure a swift and effective response in case risks crystallise into major loss events, including: } Financial Event Response Plans – to ensure we can respond promptly to severe adverse financial events (e.g. an equity market crash, sovereign default etc.) which may weaken the financial position of Aviva
External Appointments: Sir Malcolm is currently chairman of Cass Business School’s Strategy and Development Board, the Board of Trustees of Youth Business International Ltd, the Governing Council of the Centre for the Study of Financial Innovation and NewDay Group Ltd (banking).
Patricia was formerly a nonexecutive director at SuncorpMetway Ltd (insurance and banking), AMP Ltd (insurance), Westfarmers Ltd (ASX10 conglomerate including insurance), Qantas Airways Ltd and National Australia Bank Ltd.
Skills and Experience: Belén brings to the Board significant experience of the financial services industry, including a detailed knowledge of insurance and European regulation.
He has more than 30 years of experience in the financial services and retail sectors. He was formerly a senior partner at McKinsey & Company and started his career at N M Rothschild as an analyst.
Joined Aviva in 2001 Angela is responsible for Aviva’s risk function, providing oversight and challenge on the Group’s management of risks, and the continual development of the Solvency II internal model and risk management framework. Angela has held a variety of actuarial roles within Aviva, including UK Life chief actuary.
Joined Aviva in 2014 Euan is responsible for driving Aviva Investors’ expertise in managing Aviva’s own funds, and has widened Aviva Investors’ distribution network whilst achieving scalability within the organisation. Euan has significant experience in fixed income and multi-asset management in an insurance environment.
Joined Aviva in 1992 Maurice has repositioned the global General Insurance business within the Group, whilst championing the “Road to Reform” campaign to reform the UK motor insurance market to the benefit of customers. Prior to his appointment Maurice held the role of chief executive officer of Aviva Canada.
To set and uphold the values and standards of the Company.
Prior to Sir Adrian’s appointment as Chairman, the Nomination Committee reviewed the time commitment required for the role and noted that Sir Adrian intended to reduce his external commitments to give him sufficient time to dedicate to the role. During the year, Sir Adrian retired as Chairman of Anglian Water Group Ltd and 3i Group plc and also resigned as a non-executive director from Skanska AB.
Frameworks for risk management and internal control The Board is responsible for promoting the long-term success of the Company for the benefit of shareholders. This includes ensuring that an appropriate system of governance is in place throughout the Group. To discharge this responsibility, the Board has established frameworks for risk management and internal control using a ‘three lines of defence’ model and reserves to itself the setting of the Group’s risk appetite. Details of the Group’s approach to risk and risk management are contained on pages 62 to 65.
In view of Belén’s background and industry experience the Committee considered that Belén possessed the required skills and experience and invited her to become a NED and a member of the Governance, Nomination and Risk Committees on 26 June 2015.
UK datacentres, GI underwriting risk accumulation and outsourcing. Actions on these topics include the provision of more detailed controls on information security, business continuity and physical security, the completion of a GI risk accumulation data accuracy and capture project, and work to improve the management and oversight of outsourcing arrangements Group-wide
What topics has the Committee focused on during the year? The Committee has a number of standing items that it considers each year affecting the Company’s financial statements and policies, financial risks, internal control matters and internal and external audit. In addition, each year the Committee focuses on a number of operational matters. Some of the items the Committee spent time on during 2015 were: • preparing for SII • consideration of the financial statement assumptions and judgements in relation to the annual report and accounts and the Group’s interim results. Further details of these can be found in the table on page 94
1 Including the statutory audit of the Group and Company financial statements, the audit of Group subsidiaries, additional fees relating to the prior year audit of
 Following the acquisition of Friends Life, the UK Life business now represents a significant proportion of the Group and the Committee has focused on the key issues and judgements applied in UK Life, in particular the key economic and demographic assumptions. These include expenses, longevity, pensions and bond lapses, which were considered at an ad hoc meeting of the Committee in December 2015 and the impact of the revised equity release model adopted in 2014
During 2015 the Committee established the Subsidiary Governance Principles. What are the main benefits of these Principles? We believe that effective and accountable subsidiary boards are critical to ensuring best practice corporate governance throughout the Group. In 2015 we produced the Aviva Subsidiary Governance
The CR strategy was considered and approved by the Committee because CR is integral to the way we run our whole business and we recognise that our CR performance and reputation helps build the pride of our employees and win the trust of our customers. Customers are at the heart of the new CR strategy and our new Good Thinking brand. The strategy is designed to inspire good thinking that benefits our customers, wider communities and the world in which we operate.
Governance  The Committee received regular updates from the Group Company Secretary on governance matters, legal and litigation risks which had the potential to impact the reputation of the Group and reviewed and approved changes to the composition of the material subsidiary boards. The Committee oversaw the development of the Subsidiary Governance Principles
 Other matters reviewed included reviewing and monitoring the Group’s compliance with the UK Corporate Governance Code and other areas of regulation and guidance; monitoring the integration of the Friends Life business with regard to governance issues; subsidiary board and committee effectiveness review outcomes and associated actions; and the governance oversight framework for the UK Digital business and specifically its application to the Financial Conduct Authority to act as a regulated intermediary
Set and monitor the effectiveness of the Group’s procedures and controls relating to the Group’s conduct and financial crime risk appetite and the prevention of financial crime.
Andy Briggs Chief Executive Officer of Aviva UK Life and Chairman of Global Life 29/04/2015
The directors are responsible for making, and continuing to make, the Company’s Annual report and accounts available on the website maintained by the Company. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Mark Wilson Tom Stoddard Group Chief Chief Financial Officer Executive Officer
The acquisition has improved our positioning on both liquidity and capital. The synergies associated with the acquisition are being realised ahead of schedule; a testament to the hard work undertaken by our management team on the integration. It has provided unique growth opportunities for Aviva as we continue to pursue our strategic ambitions.
Remuneration in respect of 2015 Group CEO: £980,000 p.a. CFO: £675,000 p.a. CEO UK Life: £691,875 p.a. (pro-rated since appointment)
(£673,014) Pro-rated to reflect period of employment with Aviva during the year
and 50% based on relative TSR against a group of international insurers
4 Pension contributions consist of employer contributions into the defined contribution section of the Aviva Staff Pension Scheme, excluding salary exchange contributions made by the employees, plus payments in lieu of pension above the lifetime or annual allowance caps. From 1 May 2015, EDs are eligible to participate in a defined contribution plan and receive pension contributions or a cash pension allowance from the Company of 28% of basic salary. The cash pension allowance is payable where the annual or lifetime limits have been reached.
Since commencing with Aviva post the acquisition of Friends Life, Andy Briggs has quickly established himself as a key member of the Group’s leadership team, making a valuable contribution across the Group and in the successful integration of the Friends Life business. • The UK Life business was again one of the major profit contributors for Aviva, and this has been achieved while responding to structural changes affecting the UK pensions industry.
G o vern an ce 2014 Annual bonus – disclosure of performance against targets As stated in last year’s report, we have provided details on the targets and the achievement against these targets for the purposes of determining 2014 annual bonus awards in the table below, as they are no longer considered to be commercially sensitive.
Due to our Remuneration Policy being put to shareholders for approval in 2015, the proposed LTIP grant for the EDs was delayed until the Policy was approved. Face value for the awards granted on 18 May 2015 has been calculated using the average of the middlemarket closing price of an Aviva ordinary share on the three consecutive business days immediately preceding the date of the main grant, on 23 March 2015 (564.00 pence).
6 2015 LTIP ROE targets Achievement of ROE targets over the three-year performance period Percentage of shares in award that vests based on achievement of ROE targets
The table below summarises the Group CEO single figure for total remuneration, annual bonus pay-out and LTIP vesting as a percentage of maximum opportunity over this period.
4 ‘Options vested but not exercised’ are options over shares granted under the Aviva SAYE Scheme. 5 Based on the closing middle-market price of an ordinary share of the Company on 31 December 2015 of 516.00 pence. The closing middle-market price of an ordinary share of the Company during the year ranged from 428.40 pence to 571.50 pence.
This Policy was approved by shareholders at Aviva’s 2015 AGM, held on 29 April 2015. We have included the Policy below, but have updated the scenario charts and details of our Directors’ dates of appointment. The full Policy, as approved by shareholders, can be found on the Aviva plc website.
There is no automatic entitlement to an annual bonus for the year in which loss of office occurs. The Committee may determine that an ED may receive a pro rata bonus in respect of the period of employment during the year loss of office occurs based on an assessment of performance. Where an ED leaves the Company by reason of death, disability or ill health, or any other reason determined by the Committee, there may be a payment of a pro rata bonus for the relevant year at the discretion of the Committee.
Overview • Overall Group materiality: £114 million which represents 5% of Operating profit before tax and after the deduction of integration and restructuring costs. • Based on the outputs of a risk assessment, along with our understanding of the Aviva structure, we performed full scope audits over the following markets; UK Life (including Friends Life), UK General Insurance, Canada, and France Life. • We identified a further six markets where specific account balances are considered to be significant in size in relation to the
• Used our valuation experts to perform independent valuations, where applicable.
Based on the work performed, we considered the assumptions used by management to be appropriate.
As noted in the Directors’ statement, the Directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the Group and parent company have adequate resources to remain in operation, and that the Directors intend them to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the Directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s and parent company’s ability to continue as a going concern.
• The Directors’ explanation on page 100 of the Annual Report, in accordance with provision C.2.2 of the Code, as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
The amendments to IAS 27 allow investments in subsidiaries to be accounted for using the equity method within the Company’s financial statements. The Company does not intend to use the equity method in its separate financial statements. The amendments to IAS 27 are effective for annual reporting periods beginning on or after 1 January 2016 and have been endorsed by the EU.
Interest rate and currency swaps Interest rate swaps are contractual agreements between two parties to exchange fixed rate and floating rate interest by means of periodic payments, calculated on a specified notional amount and defined interest rates. Most interest rate swap payments are netted against each other, with the difference between the fixed and floating rate interest payments paid by one party. Currency swaps, in their simplest form, are contractual agreements that involve the exchange of both periodic and final amounts in two different currencies. Both types of swap contracts may include the net exchange of principal. Exposure to gain or loss on these contracts will increase or decrease over their respective lives as a function of maturity dates, interest and foreign exchange rates, and the timing of payments.
Collateral received in the form of cash, which is not legally segregated from the Group, is recognised as an asset in the statement of financial position with a corresponding liability for the repayment in financial liabilities (note 59). However, where the Group has a currently enforceable legal right of set-off and the ability and intent to net settle, the collateral liability and associated derivative balances are shown net. Non-cash collateral received is not recognised in the statement of financial position unless the Group either (a) sells or repledges these assets in the absence of default, at which point the obligation to return this collateral is recognised as a liability; or (b) the counterparty to the arrangement defaults, at which point the collateral is seized and recognised as an asset.
Other comprehensive income from continuing operations: Items that may be reclassified subsequently to income statement Investments classified as available for sale
Items that will not be reclassified to income statement Owner-occupied properties – fair value gains 27 7 Remeasurements of pension schemes 48b(i) (235) 1,662 Aggregate tax effect – shareholder tax on items that will not be reclassified into profit or loss 93 (347)
Other comprehensive income, net of tax from continuing operations (503) 994 Other comprehensive income, net of tax from discontinued operations1 — —
The issue of new shares in the Company in exchange for shares of Friends Life has attracted merger relief under section 612 of the Companies Act 2006. Of the £5,975 million, £272 million (25 pence per ordinary share) has been credited to share capital and the remaining £5,703 million has been credited to the merger reserve within equity, increasing the reserve from £3,271 million to £8,974 million. Refer to note 35 for further detail regarding the merger reserve.
Acquisition costs of £29 million related to legal and professional fees incurred to support the transaction have been recognised within other expenses in the income statement.
(ii) Other acquisitions The Group also completed other minor acquisitions in 2015. The aggregate consideration paid in these transactions was £97 million. Goodwill of £23 million and intangible assets of £29 million were recognised in relation to these transactions. With the exception of the acquisition of additional shares in unconsolidated Polish entities (refer to note 18) and the acquisition of an associate within Canada, the acquired entities were consolidated as subsidiaries. The acquired subsidiaries contributed no material profit or loss in 2015.
Profit/(loss) before tax from continuing operations 2,457 759 105 (658) 2,663 Tax attributable to policyholder returns (382) — — — (382)
Operating profit/(loss) before tax attributable to shareholders’ profits from continuing operations3 2,019 808 86 (700) 2,213
Gross written premiums (note 4a and 4b) Long-term: Insurance contracts 8,577 7,898 Participating investment contracts 4,610 4,829
Claims and benefits paid Claims and benefits paid to policyholders on long-term business
Interest on collateral received 13 18 Net finance charge on pension schemes (note 48(b)(i)) 25 13 Unwind of discount on GI reserves 2 6 Extinguishment of debt 13 — Other similar charges 83 58
168 | Aviva plc Annual report and accounts 2015 8 – Long-term business economic volatility continued The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return on investments and the impact of experience variances and assumption changes for non-economic items.
Short-term fluctuations in investment return (see (b) below) (84) 261 Economic assumption changes (see (g) below) (100) (145)
Profit attributable to ordinary shareholders 1,390 844 22.6 2,339 1,483 50.4 1 Operating profit has been restated to exclude amortisation and impairment of acquired value of in-force business, which is now shown as a non-operating item. See note 1 for further details. There is no impact on the result or the total equity for any period presented as a result of this restatement. 2 DCI includes the direct capital instrument and tier 1 notes
For the goodwill in the UK Life long-term business that arose on the Friends Life acquisition, the embedded value of the business was sufficient to demonstrate goodwill recoverability on its own. Therefore it was not necessary to estimate the present value of expected profits from future new business.
Reduction in Group interest in 2015 relates to the sale of a 1.28% share in our life operations in Turkey AvivaSA Emeklilik ve Hayat A.S.
Cost or valuation At 1 January 2014 8 258 3 596 166 1,031 Additions — 100 — 9 7 116 Disposals (13) (4) — (39) (5) (61) Transfers to investment property (note 21) — — — — — — Fair value gains 5 4 — — — 9 Foreign exchange rate movements — (15) — (3) (9) (27)
• The remaining £0.2 billion relate to assets transferred into Level 3 from Level 1 and Level 2 as observable prices are no available longer available.
The Group holds redeemable shares or units in investment vehicles, which consist of: • Debt securities comprising securitisation vehicles that Aviva does not originate. These investments are comprised of a variety of debt instruments, including asset-backed securities and other structured securities. • Investment funds which include: hedge funds, liquidity funds, private equity funds, unit trusts, mutual funds and Private Finance
At 1 January — — (9) (9) — (5) (8) (13) Charge for the year taken to the income statement — — — — — — (2) (2) Write back following sale or reimbursement — — — — — 5 — 5 Foreign exchange rate movements — — — — — — 1 1
At 31 December 2015, the Group’s total government (non-UK) debt securities stood at £42.7 billion (2014: £45.0 billion), a decrease of £2.3 billion. The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds.
(b) During 2015, a total of 1,097,977,833 ordinary shares of 25 pence each were allotted and issued by the Company as follows: Number of shares
Normally exercisable 198 | Aviva plc Annual report and accounts 2015
Deferred coupons on the DCI, FxdRNs and the STICS will be satisfied by the issue and sale of ordinary shares in the Company at their prevailing market value, to a sum as near as practicable to (and at least equal to) the relevant deferred coupons. In the event of any coupon deferral, the Company will not declare or pay any dividend on its ordinary or preference share capital. These instruments have been treated as equity. Please refer to accounting policy AE.
The DCI, FxdRNs and STICS count as ‘tier 1 restricted’ capital from 1 January 2016 in accordance with the Solvency II Own Funds guidelines issued by the PRA.
36 – Other reserves This note gives details of the various reserves forming part of the Group’s consolidated equity and shows the movements during the year net of non-controlling interests: Currency translation reserve (see accounting policy E) £m
1 Includes Friends Life’s Step-up Tier one Insurance Capital Securities (‘STICS’) issuances classified as equity instruments within non-controlling interests at the date of acquisition. See Note 3a for further detail. 2 On 29 May 2015, notification was given that the Group would redeem the 2005 STICS issuance. At that date the instrument was reclassified as a financial liability. The instrument was redeemed on 1 July 2015, £272 million represents the fair value of instruments recognised on acquisition, made up of the £268 million outstanding principal redeemed on 1 July 2015 and £4 million amortised subsequent to the reclassification and included within finance costs in the income statement.
The above valuation discount rates are after reduction for investment expenses and credit risk. For conventional immediate annuity business the allowance for credit risk comprises long-term assumptions for defaults and downgrades, which vary by asset category and rating. The credit risk allowance made for corporate bonds and mortgages, including healthcare mortgages, held by Aviva Annuity UK Limited equated to 58bps and 59bps respectively at 31 December 2015 (2014: 55 bps and 87 bps respectively). For corporate bonds, the allowance represented approximately 32% of the average credit spread for the portfolio (2014: 40%). The reduction in the credit allowance for mortgages is primarily driven by UK Life’s commercial mortgage loans restructure and recovery programme which completed in 2015 with the sale of £2.2 billion of commercial mortgage loans to Lone Star. The total valuation allowance held by Aviva Annuity UK Limited in respect of corporate bonds and mortgages, including healthcare mortgages, was £1.5 billion (2014: £1.9 billion) over the remaining term of the UK Life corporate bond and mortgage portfolio. Total liabilities for the annuity business were £47 billion at 31 December 2015 (2014: £34 billion), with the £13 billion increase mainly due to the acquisition of Friends Life business.
210 | Aviva plc Annual report and accounts 2015 40 – Insurance liabilities continued The Group only establishes loss reserves for losses that have already occurred. The Group therefore does not establish catastrophe equalisation reserves that defer a share of income in respect of certain lines of business from years in which a catastrophe does not occur to future periods in which catastrophes may occur. When calculating reserves, the Group takes into account estimated future recoveries from salvage and subrogation, and a separate asset is recorded for expected future recoveries from reinsurers after considering their collectability.
Reinsured London Market business 2.0% 2.1% 9 years 10 years Latent claims 0.00% to 2.30% 0.16% to 2.75% 6 to 15 years 6 to 15 years Structured settlements 2.1% 2.0% 38 years 35 years
Products with GAOs similar to those offered in the UK have been issued in Ireland. The net provision as at 31 December 2015 for such options is £317 million (2014: £273 million). This has been calculated on a deterministic basis, making conservative assumptions for the factors which influence the cost of the guarantee, principally annuitant mortality option take-up and long-term interest rates.
Non-AFER contracts with guaranteed surrender values had liabilities of £16 billion at 31 December 2015 (2014: £16 billion) and all guaranteed annual bonus rates are between 0% and 4.5%. For non-AFER business the accounting income return exceeded guaranteed bonus rates in 2015.
(a) Carrying amounts The reinsurance assets at 31 December comprised: Long-term business Insurance contracts 5,018 4,032 Participating investment contracts 11 3 Non-participating investment contracts2 13,967 2,533
The adverse change in discount rate assumptions on general insurance and health business of £100 million arises as a result of a decrease in the swap rates used to discount latent claim reserves, and a decrease in the swap rates, net of expected future inflation, used to value periodic payment orders. In 2014 discount rate assumption changes were £145 million adverse due to a decrease in the swap rates used to discount latent claims reserves and periodic payment orders.
(iii) The movement in the net deferred tax liability was as follows: Net liability at 1 January (1,015) (312) Acquisition and disposal of subsidiaries1 (1,338) 5 Amounts credited/(charged) to income statement (note 13a) 339 (291) Amounts credited/(charged) to other comprehensive income (note 13b) 55 (445) Foreign exchange rate movements 20 28 Other movements (4) —
IAS 19 plan assets include investments in Group-managed funds in the consolidated statement of financial position of £1,115 million (2014: £905 million) and transferable insurance policies with other Group companies of £163 million (2014: £189 million) in ASPS. Where the investment and insurance policies are in segregated funds with specific asset allocations, they are included in the appropriate line in the table above, otherwise they appear in ‘Cash and other’.
(iii) Assumptions on scheme liabilities The valuations used for accounting under IAS 19 have been based on the most recent full actuarial valuations, updated to take account of the standard’s requirements in order to assess the liabilities of the material schemes at 31 December 2015.
Total contractual undiscounted cash flows 6,785 8,866 15,651 5,346 7,039 12,385
Bank overdrafts amount to £113 million (2014: £95 million) in life business operations and £393 million (2014: £455 million) in general insurance business and other operations.
(ii) Future contractual aggregate minimum lease payments under non-cancellable operating leases are as follows: Within 1 year 95 92 Later than 1 year and not later than 5 years 329 290 Later than 5 years 493 421
(3,527) (3,267) Fair value (gains)/losses on: 8,797 (11,836) Depreciation of property and equipment 24 19 Equity compensation plans, equity settled expense 40 39 Impairment and expensing of: Goodwill on subsidiaries 22 — Financial investments, loans and other assets 7 (3) Acquired value of in-force business and intangibles 18 10 Non-financial assets — 26
55 – Statement of cash flows continued (c) Cash flows in respect of the disposal of subsidiaries, joint ventures and associates comprised: Cash proceeds from disposal of subsidiaries, joint ventures and associates 6 349 Less: Net cash and cash equivalents divested with subsidiaries (9) (239)
Participating investment liabilities 719 3,049 6,096 3,584 5,214 18,662 5,000 54,386 78,048 — 78,048 67,232 Non-participating investment liabilities — — 97 — — 97 89,721 13,307 103,125 — 103,125 50,013 1 Other sources of capital include subordinated debt of £6,203 million issued by Aviva – as reflected in the capital resources of the underlying legal entities, which may differ to the Group’s carrying value – and £36 million of other qualifying capital issued by Italian and Spanish subsidiary and associate undertakings.
In accordance with the PRA’s regulatory rules under its realistic capital regime, the Group is required to hold sufficient capital in its UK life with-profits funds to meet the PRA capital requirements, based on the risk capital margin (RCM). The determination of the RCM depends on various actuarial and other assumptions about potential changes in market prices, and the actions management would take in the event of particular adverse changes in market conditions.
• (ii) UK non-participating funds – any available surplus held in these is attributable to shareholders. Capital in the non-profit funds may be made available to meet requirements elsewhere in the Group subject to meeting the regulatory requirements of the fund or, in FLL, the 2013 scheme in relation to support arrangements for the with-profits funds. Under the scheme, the FP WPF and Other Friends Life WPFs are subject to support arrangements which require the Friends Life shareholder and non-profit fund to retain £0.9 billion of capital support assets. Of this, £0.6 billion needs to be held in the form of tangible assets which could be transferred to the various Friends Life with-profits funds on a temporary basis if necessary. These assets and related investment income would remain attributable to the shareholders as they would be returned when they are no longer required to support the capital requirements of the with-profits funds, under the tests of the 2013 scheme. In the case of the FLC WPFs if all or part of the assets transferred were unlikely to be returned in the foreseeable future, then the relevant part of the transfer would be designated permanent. Any transfer of the surplus may give rise to a tax charge subject to availability of tax relief elsewhere in the Group.
Economic capital risk appetites are also set for each risk type, calculated on the basis of the Solvency II balance sheet. The Group’s position against risk appetite is monitored and reported to the Board on a regular basis. Long-term sustainability depends upon the protection of franchise value and good customer relationships. As such, Aviva has a risk preference that we will not accept risks that materially impair the reputation of the Group and requires that customers are always treated with integrity. The oversight of risk and risk management at the Group level is supported by the Asset Liability Committee (ALCO), which focuses on business and financial risks, and the Operational Risk Committee (ORC) which focuses on operational and reputational risks. Similar committee structures with equivalent terms of reference exist in the business units.
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
Details of material guarantees and options are given in note 42. In addition, the following table summarises the weighted average minimum guaranteed crediting rates and weighted average book value yields on assets as at 31 December 2015 for our Italian and French participating contracts, where the Group’s key exposure to sustained low interest rates arises.
The Group cedes much of its worldwide catastrophe risk to third-party reinsurers through excess of loss and aggregate excess of loss structures. The Group purchases a group-wide catastrophe reinsurance programme to protect against catastrophe losses exceeding a 1 in 200 year return period. The total Group potential retained loss from its most concentrated catastrophe exposure peril (Northern Europe Windstorm) is approximately £150 million on a per occurrence basis and £175 million on an annual aggregate basis. Any losses above these levels are covered by the group-wide catastrophe reinsurance programme to a level in excess of a 1 in 200 year return period. In addition the Group purchases a number of GI business line specific reinsurance programmes with various retention levels to protect both capital and earnings. In September 2015 the Group reinsured £0.7 billion of latent exposures to its historic UK employers’ liability business with conditional agreement to extend coverage to £0.8 billion.
57 – Risk management continued Fund management and non-insurance business sensitivities as at 31 December 2015 2015 Impact on profit before tax (£m)
Transactions with joint ventures in the UK relate to the property management undertakings, the most material of which are listed in note 18(a)(iii). Our interest in these joint ventures comprises a mix of equity and loans, together with the provision of administration services and financial management to many of them. Our UK life insurance companies earn interest on loans advanced to these entities, movements in which may be found in note 18(a)(i). Our fund management companies also charge fees to these joint ventures for administration services and for arranging external finance.
Healthcare Purchasing Alliance Limited United Kingdom Ordinary ‘A’ Shares 50 Healthcode Limited United Kingdom Ordinary ‘C’ Shares
Other comprehensive income Items that may be reclassified subsequently to income statement Fair value gains on investments in subsidiaries and joint ventures E 1,095 866
Where applicable, the accounting policies of the Company are the same as those of the Group on pages 133 to 146. The notes identified alphabetically on pages 274 to 278 are an integral part of these separate financial statements. Where the same items appear in the Group financial statements, reference is made to the notes (identified numerically) on pages 154 to 269.
(ii) Staff costs Total staff costs were: Wages and salaries 49 35 Social security costs 7 5 Post-retirement obligations Defined contribution schemes 8 6 Equity compensation plans (see (iii) below) 16 11 Termination benefits 2 8
(iii) Tax credited to equity Tax credited directly to equity in the year amounted to £15 million (2014: £19 million). This comprises coupon payments on the direct capital instrument and tier 1 notes.
As legislated in Finance (No 2) Act 2015, which was substantively enacted on 26 October 2015, the UK corporate rate will reduce further to 19% from 1 April 2017 and to 18% from 1 April 2020. The reductions in rate from 20% to 19% and then to 18% have been used in the calculation of the UK’s deferred tax assets and liabilities as at 31 December 2015. The reduction in the future corporation tax rates has resulted in a reduction to the company’s net deferred tax asset of £20 million charged to the income statement.
Further details of the Merger reserve are given in the Group consolidated financial statements, note 35.
The Company faces exposure to foreign currency risk through some of its borrowings which are denominated in euro. However, most of these borrowings have been on-lent to a subsidiary which holds investments in euro, generating the net investment hedge described in the Group consolidated financial statements, note 58(a).
Financial and operating performance Our main activities are the provision of products and services in relation to long-term insurance and savings, fund management and general, accident and health insurance.
1 International Monetary Fund world economic outlook (January 2016) 2 International Monetary Fund world economic outlook (October 2015)
• Effect of capitalisation factor on regular premium longterm business PVNBP is derived from the single and regular premiums of the products sold during the financial period and is expressed at the point of sale. The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts. The discounted value of regular premiums is calculated using the market consistent embedded value methodology proposed by the CFO Forum Principles.
Short-term fluctuations on non-long-term business were £261 million positive (2013: £336 million negative). The favourable movement in short-term fluctuations during 2014 compared with 2013 is mainly due to a decrease in risk-free rates increasing fixed income security market values and other market movements impacting Group centre investments and the centre hedging programme.
Economic assumption changes of £145 million adverse (2013: £33 million favourable) arose mainly as a result of a decrease in the swap rates used to discount latent claims reserves and periodic payment orders.
million one-off gain from plan amendments to the Ireland pension scheme).
France The table below presents sales, net written premiums, adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from our operations in France for the three years ended 31 December 2015, 2014 and 2013.
On a PVNBP basis, long-term insurance and savings business sales in France increased by £188 million to £4,821 million (2014: £4,633 million), with higher sales of unit-linked, withprofit and protection products. General insurance and health sales decreased by £92 million to £1,014 million (2014: £1,106 million), but increased by 2% on a constant currency basis, with increases across both personal and commercial lines of business. IFRS net written premiums remained stable at £5,702 million (2014: £5,684 million), but were up 12% on a constant currency basis.
Profit before tax attributable to shareholders’ profits was £139 million (2014: £196 million), a decrease of 29%, for the reasons described above.
IFRS net written premiums for the segment increased £251 million, or 8%, to £3,444 million (2013: £3,193 million) for the reasons described above.
Adjusted operating profit from general insurance was £13 million (2014: £9 million).
On 10 April 2015, the Group completed the acquisition of Friends Life Group Limited through an all share exchange. Further details can be found in ‘IFRS Financial Statements – Note 3 – Subsidiaries’.
The Group’s operating segments are determined along market reporting lines. The operating segments are: UK & Ireland; France; Poland; Italy, Spain and Other; Canada; Asia; and Aviva Investors. These reflect the management structure whereby a member of the Executive Management team is accountable to the Group Chief Executive Officer (CEO) for the operating segment for which they are responsible. Due to the size of the UK & Ireland segment, it has been split into separate life and general insurance segments, which undertake long-term insurance and savings business and general and health insurance respectively. Aviva Investors, our fund management business, operates across most markets providing fundmanagement services to third-party investors and to our longterm and general insurance businesses.
Market position In the UK we have a market share of 13.32% based on annual premium equivalent (APE) data as at 30 September 2015. We also have life insurance businesses in Ireland, France, Italy, Spain, Poland, Turkey and Asia. Further details of our position in each market are set out in the market sections below.
products and the sales forces receive commission on the products they sell.
Distribution Across Asia, we operate a multi-distribution strategy. In Singapore, we operate across multiple proprietary and affinity channels, and also own a majority interest in Professional Investment Advisory Services Pte Ltd, a leading financial advisory firm. In China, our products are sold mainly through agents, telemarketing, and bancassurance. In Indonesia, individual business is primarily sold through our bancassurance channel and group business is sold through our direct sales force. In Taiwan, bancassurance is our main distribution channel and our products are also sold through direct marketing. In Vietnam, our products are sold through bancassurance and agents. We are also investing in other channels such as direct marketing and digital to differentiate ourselves from competitors. In Hong Kong, we operate primarily through IFA networks.
We provide external clients with bespoke segregated solutions or offer access to a variety of fund ranges. Our principal target clients for the larger segregated solutions tend to be large pension funds and financial institutions such as insurance companies and banks.
Insurance and investment contracts Long-term business – Insurance contracts – non-linked1 9,048 17,676 14,614 95,303 136,641 – Investment contracts – non-linked2 64,735 — — — 64,735 – Linked business2 130,184 — — — 130,184 General Insurance3 5,858 3,507 1,654 2,955 13,974 209,825 21,183 16,268 98,258 345,534 Other contractual obligations4 Borrowings 1,143 1,068 982 15,496 18,689 Operating lease obligations 95 178 151 493 917 Capital commitments 100 90 25 119 334 Payables and other financial liabilities5 9,146 291 348 3,212 12,997 Net assets attributable to unit holders 11,415 — — — 11,415
Risk management objectives As a global insurance group, risk management is at the heart of what we do and is the source of value creation as well as a vital form of control. It is an integral part of maintaining financial stability for our customers, shareholders and other stakeholders.
3 Certain subsidiaries, subject to satisfying stand-alone capital and liquidity requirements, loan funds to corporate and holding entities. These loans satisfy arm’s length criteria and all interest payments are made when due.
Certain rating agencies have proprietary capital models which they use to assess available capital resources against capital requirements as a component in their overall criteria for assigning ratings. Managing our capital and liquidity position in accordance with our target rating levels is a core consideration in all material capital management and capital allocation decisions.
Waste generated (tonnes) – absolute 11,468 11,481 9,255 9,564 Reduce by 4%
Our independence and quality control We applied the Institute of Chartered Accountants in England and Wales (ICAEW) Code of Ethics, which includes independence and other requirements founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.
In 2015, total cash paid by the Company as ordinary and preference dividends and coupon payments on the direct capital instrument and tier 1 notes amounted to £724 million, compared with £554 million in 2014.
Net cash and cash equivalents At 31 December 2015, total consolidated net cash and cash equivalents, net of bank overdrafts, amounted to £33,170 million, an increase of £10,606 million over £22,564 million in 2014.
Regulatory capital position Under the Solvency I regime effective until 31 December 2015, individual regulated subsidiaries measure and report solvency based on applicable local regulations, including in the UK the regulations established by the Prudential Regulatory Authority (PRA). These measures are also consolidated under the European Insurance Groups Directive (IGD) to calculate regulatory capital adequacy at an aggregate Group level, where Aviva has a regulatory obligation to have a positive position at all times.
The EU may also impose requirements directly on countries through regulation. EU financial services regulation is based on the principle of ‘home country control’, which makes the home country regulator responsible for monitoring compliance with all applicable regulation.
Systemic Risk In July 2013, the Financial Stability Board (FSB) designated nine insurance groups, including Aviva as Global Systemically Important Insurers G-SIIs. The designation is reviewed on an annual basis, with the FSB re-affirming Aviva as a G-SII in November 2015. The International Association of Insurance Supervisors (IAIS) has published policy measures that apply to G-SIIs. The policy measures include enhanced supervision, recovery and resolution planning, the preparation of systemic risk management and liquidity risk management plans. The policy measures also include higher loss absorbency requirements (HLA). In the absence of a global capital framework for insurers, the IAIS has developed a Basic Capital Requirement (BCR) to provide a comparable foundation for the application of HLA to G-SIIs. The IAIS plans that its approach to HLA will be applicable to G-SIIs from 2019.
Future EU developments There are a number of European dossiers that are expected to continue to progress during 2016, including Packaged Retail and Insurance-based Investment Products (PRIIPs) that will introduce common product disclosure standards, the Insurance Distribution Directive (IDD) that will introduce new standards for insurance distribution and MIFID2 II that introduces new conduct and market transparency requirements.
Increases in control require the consent of the appropriate regulator when they reach thresholds of 20%, 30% and 50% of the shares or voting power of the firm (or its parent).
We provide certain guarantees within some of our products that protect policyholders against significant downturns in the equity markets. In volatile or declining equity market conditions, we may need to increase liabilities for future policy benefits and policyholder account balances, negatively affecting net income.
asset classes in our fair value hierarchy and represented 16% of total financial assets and investment properties held at fair value as of 31 December 2015. As has been the case across the industry, even some higher-quality assets have been more illiquid as a result of the recent challenging market conditions.
Our fund management operation depends on a number of key vendors, for various fund administration, accounting, valuations, custody and transfer agent roles and other operational needs. The failure or inability to diversify sources for key services or the failure of any key vendors to fulfil their obligations could lead to operational issues for us and in certain
The UK pension schemes are subject to statutory requirements with regards to funding and other matters relating to the administration of the schemes. Compliance with these requirements is subject to regular review. A determination that we have failed to comply with applicable regulations could have an adverse impact on our results of operations or our relationship with current and potential contributors and employees, and adverse publicity.
There will inevitably be a cost involved in revising the current systems and structures of the enlarged Group. There is a risk that these costs could exceed current estimates, which would adversely affect anticipated integration benefits.
Cash remittances Amounts paid by our businesses to the Group, comprising dividends and interest on internal loans.
Fair value The price that would be received to sell or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price).
Risk Margin The amount an insurance company would require, in excess of best estimate liabilities, in order to take over and meet the whole portfolio of insurance and reinsurance obligations. It reflects the cost of providing capital equal to the solvency capital requirement for non-hedgable risks necessary to support the insurance obligations over their lifetime. Risk Margin represents the value of deviation risk of the actual outcome compared with the best estimate, expressed in terms of a defined risk measure.
American Depositary Receipts (ADRs) – Contact: For any queries regarding Aviva ADRs, please contact Citibank Shareholder Services (Citibank): By Telephone: 1 877 248 4237 (1 877-CITI-ADR), or +1 781 575 4555 if calling from outside of the US – Lines are open 8.30am to 6pm, Monday to Friday US Eastern Standard Time.
Aviva undertakes no obligation to update the forward looking statements in this announcement or any other forwardlooking statements we may make. Forward-looking statements in this report are current only as of the date on which such statements are made.