Foreword The Strategic report on pages 1 to 53 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.
We are a leading international Savings, Retirement and Insurance business serving 33 million customers. Our c.30,000 employees aim to earn customers’ trust as the best place to save for the future, navigate retirement and insure what matters most to them.
Dividend At the full year 2018 results, we announced our move to a progressive dividend policy. In line with this policy, the Board proposes a final dividend for 2019 of 21.40 pence per share (2018: 20.75 pence per share).
In the UK, we separated management of our life and general insurance businesses, and our digital operations have been integrated back into the businesses to improve efficiency and customer delivery. Globally, we have reorganised our portfolio of major markets and strategic investments into five divisions with clear alignment of business model. Our objective is to compete and win in our markets by providing great customer outcomes and excelling at the fundamentals.
Progress against financial targets At our capital markets day in November 2019, I outlined five key financial objectives that Aviva is targeting for 2022. Delivering these targets will provide a material enhancement in business performance and reinforce the sustainability of our progressive dividend policy and medium-term growth ambitions. In 2019, we made a strong start in pursuit of these objectives and we are on track to achieve our targets: Solvency II Return on equity1,2,3 (RoE) – 2022 target of 12%: Aviva’s RoE1,2,3 was 14.3% in 2019, benefiting from favourable assumption changes. Meeting our 2022 ambition of a sustainable 12% RoE1,2,3 will require improved underlying returns that will be achieved through cost reductions, organic business growth and active capital allocation to higher returning segments.
Our life businesses in Europe and Asia also expanded their customer franchises in 2019, with new business volumes up 9% and 15% respectively and European net fund inflows1 remaining robust at £4.5 billion (2018: £4.2 billion). In France, in the face of significantly lower interest rates, we increased unit linked new business volumes 46% through targeted campaigns and active engagement with our distribution partners. In Poland, we successfully launched a new protection product in the direct market and made a strong start in auto-enrolment, winning nearly 400 new corporate pension schemes covering more than 70,000 employees. In Singapore, we continued to invest in our leading financial advisor network, which provides customers with high levels of service and a wider array of product and provider choice compared with the traditional agency model.
Invest in sustainable growth There is no shortage of ambition at Aviva and we have continued to invest in sustainable growth. This investment has been both direct, through deploying capital to write new business, and indirect, to improve the quality and cost effectiveness of our customer propositions and further enhance our data and risk management capability.
Solvency II Operating Capital Generation1 Group Operating Capital Generation1 is £0.9 billion lower due to management actions impacting the Solvency Capital Requirement. See the ‘Market review’ section for further details of the performance of our markets in the year.
• Manage heritage savings to minimise operational complexity and optimise capital use
Key priorities for 2020: • Focus on simplicity, speed and efficiency for our customers to strengthen growth and profitability across our business. To date we have already reduced the personal lines product suite by more than a quarter, and we continue to invest in our ‘self-serve’ claims technology
‘Asia continues to be the growth engine for the insurance industry worldwide. Despite intense competition, Aviva focuses on leveraging our unique competitive advantages in individual Asian markets to continue to outperform our peers’ – Chris Wei, CEO
Section 172 (1) statement and our stakeholders Overview We report here on how our directors have performed their duty under Section 172 (s.172) of the Companies Act 2006, and this statement reflects the contribution by the Aviva Group to the performance of Aviva plc. S.172 sets out a series of matters to which the directors’ must have regard in performing their duty to promote the success of the Company for the benefit of its shareholders, which includes having regard to other stakeholders. Where this statement draws upon information contained in other sections of the Strategic report, this is signposted accordingly1.
Our culture As the provider of financial services to millions of customers, Aviva seeks to earn their trust by acting with integrity and a deep sense of responsibility at all times. We look to build relationships with all our stakeholders based on openness and continuing dialogue.
Developing our people Developing our people remains central to the work we do. We continue to build a digitally-enabled, life-long learning culture at Aviva, and focus on developing our talent and coaching capability. Highlights from 2019 include: • We completed the global rollout of our flagship leadership programme – Leading for Growth. Over 2,000 leaders have now gone through the programme, and markets have been trained to provide ongoing delivery for remaining leaders and new recruits.
• We’ve continued to build and develop a professional internal global coaching faculty of around 100 “jobs-plus” coaches, providing valuable support and challenge to enhance the performance of our people.
Diversity and Inclusion Diversity and Inclusion are key to Aviva being a sustainable, successful business. An inclusive culture ensures employees are happier, can be themselves and work towards achieving their and the organisation’s goals. Aviva’s employees need to reflect our customer base and we continue to make sure all our customers are represented inside the organisation.
Our malpractice helpline, Speak Up, makes it easy to report any concerns in confidence, with all reports referred to an independent investigation team. In 2019, 89 cases were reported through Speak Up (2018: 50), with four related to bribery and corruption concerns. 59 cases reached conclusion, and 30 remain under investigation. There has been no material litigation arising from any case reported in 2019.
To achieve our 12% RoE3 target in 2022, an increase in underlying economic returns is planned. This improvement will include lower costs, improved operating experience, higher new business profitability and prioritisation of capital to product and business segments offering superior returns.
Capital and liquidity At the end of 2019, our Solvency II surplus5 was £12.6 billion (2018: £12.0 billion), giving rise to cover ratio3,5 of 206% (2018: 204%).
Protection VNB3 decreased by 10% to £126 million (2018: £140 million) mainly due to hardening reinsurance rates with PVNBP3 up 4% to £1,875 million (2018: £1,799 million). Group protection volumes grew strongly driven by large corporates growth. Individual protection volumes were stable despite competitive trading pressures.
• We continue to improve connectivity with our intermediary partners, making it easier, simpler and more efficient to deal with us. For example, we have introduced a protection online advisor portal, enabling self-serve and reducing inbound call volumes. We have also launched MyPension into workplace to further capitalise on our market leading workplace position.
Overview We are Aviva’s global asset management business with expertise in real assets, solutions, multi assets and macro1, equity and credit. We currently invest £346 billion on behalf of our customers across a number of major markets. This gives us the size and scale to successfully seek out opportunities that will deliver specific outcomes our investors are looking for.
Solvency II return on capital3 14.0% 11.7% Solvency II operating capital generation (OCG)3 574 647
Personal lines COR3 of 99.3% (2018: 92.9%) was 6.4pp higher year-onyear, of which 4.6pp reflects the UK digital alignment. Excluding this, Personal lines COR3 was 1.8pp higher reflecting higher expenses and lower prior year reserve releases, partly offset by lower weather costs.
Cash Cash remitted to Group3 was down 31% to £248 million (2018: £361 million), reflecting lower Solvency II operating capital generation3.
Other key operational and customer highlights during the year included: • Launched Connex, our new Personal lines service model for brokers, including dedicated underwriting teams and web chat for faster service.
• In Alberta the provincial government decided not to renew a 5% cap on auto rate increases, from Q4 2019.
Europe Life Overview, market context and challenges • In France we are number 114 in a life market dominated by mutuals and banks and are number four amongst the traditional insurers. We offer a full range of savings, investment, protection and health insurance products with strength in distribution through AFER, the number 1 savers association5, and UFF the number 2 financial adviser network5. In late 2018 the French government proposed new laws that seek to shift savings and investment towards the real economy, bringing about further opportunities for our savings and retirement business. The main challenge we face continues to be balancing the demand amongst French savers for low volatility guaranteed products with the pressure this places on our return on capital in the current low interest rate market environment. A key pillar of our strategy is to continue to adapt our business mix to position us for longer-term low interest rates whilst continuing to serve our customers’ needs through the provision of attractive unit-linked and capital-light products.
Following the outbreak of Coronavirus, our Asia business has implemented safeguards to ensure business continuity and supporting the wellbeing of our customers, colleagues and communities. We continue to monitor developments closely.
We receive premiums which we invest to maximise risk-adjusted returns, so that we can fulfil our promises to customers while providing a return to our shareholders.
In doing so we have a preference for retaining those risks we believe we are capable of managing to generate a return.
1 Top three risks ranked by diversified Solvency II Solvency Capital Requirement 2 Not quantifiable in terms of economic capital
UK-EU relations (Free Trade Agreement uncertainty) – there remains considerable uncertainty over the outcome of negotiations over the UK’s future relationship with the EU, and the implications for our operations, economic growth and productivity and in the longer term for financial services regulation, including Solvency II.
We expect customers will be much more in control, expecting to self-service and selfsolve. They will want to access data and insight and use it to guide their own decisions. However, we also expect regulatory scrutiny to increase to ensure we continue to serve and treat our existing customers fairly particularly those who are vulnerable and less digitally aware.
2020 has begun with the outbreak of a new strain of the Coronavirus in China. With confirmed cases in more than 50 countries including all of those in which Aviva has material businesses. There is a risk of a significant global pandemic and economic disruption. We have imposed travel restrictions on staff and a work-from-home self-quarantine regime for staff who have recently visited infected regions. In addition we have reviewed the exposure of our balance sheet, and are taking actions to further reduce our sensitivity to economic shocks.
Investments – There are three ways in which Aviva is involved in investments i.e. as an asset owner, a long-term savings and pensions provider and as an asset manager. • As an asset owner, we seek to align our investments with a pathway towards net zero carbon emissions and ensure consistency with the Paris target. We have signed-up to key global commitments such as the UN Net Zero Asset Owners Alliance. We are working with the industry to define methodologies and milestones with respect to these commitments and plan to increase our level of investment in low carbon infrastructure through to 2030; in addition to our £3.8 billion investments since 2015. We use our shareholder influence to encourage companies to transition to a low carbon economy and divest from highly carbon-intensive fossil fuel companies where we consider they are not making sufficient progress towards the engagement goals set. We engaged with an initial set of 40 companies where Aviva has beneficial holdings, and which have >30% of their business (by revenue) associated with thermal coal mining or coal power generation. By the start of 2020 we had divested Aviva’s own assets from 18 thermal coal mining and power generation companies; we are prepared to add further companies to our Investment Stoplist to limit our exposure to this and other carbon intensive sectors.
• As an asset manager, Aviva Investors (AI) integrates consideration of ESG factors into the investment process to deliver long-term sustainable and superior investment outcomes for customers whilst adhering to their mandate. AI is developing a range of funds that support the climate change transition. In 2019, AI launched the European Equity Climate Transition Fund, which whilst excluding investments in companies with exposure to high carbon fossil fuels, invests in companies that provide solutions for climate mitigation/adaptation; or are orientating their business models to be successful in adapting to a warmer world, and supporting the transition to a low-carbon economy. In 2019 we integrated the TRisk methodology5 into our real assets’ assessment process and continued to integrate climate issues into our voting strategy by withholding support for high carbon emitting companies that do not publish TCFD disclosures.
• We use Carbon Delta’s portfolio warming potential metric to assess our shareholder funds’ alignment with the Paris target. This warming potential methodology captures Scope 11 emissions as well as revenues from low-carbon technology to provide a forwardlooking perspective. We would like to extend this analysis to our whole portfolio over time.
The improvements made in 2019 have been recognised by the Board, however, the downward risk and control adjustment to the Annual Bonus Plan scorecard is a clear statement of the need to keep a strong focus on improving in these areas and this is something the Board will be closely monitoring in 2020.
Amanda Blanc ▲ Position: Independent Non-Executive Director Nationality: British Committee Membership: Governance Committee1 (Chair), Nomination Committee2, Risk Committee Tenure: 2 months. Appointed to the Board in January 2020. Skills and Experience: Amanda brings extensive knowledge and experience of the insurance industry to her role at Aviva, having held several senior executive roles across the insurance industry. Amanda was most recently CEO, EMEA & Global Banking Partnerships at Zurich Insurance Group and before that CEO at AXA UK & Ireland. In 2018, Amanda was the first woman to be appointed as Chair of the Association of British Insurers and was also Chair of the Insurance Fraud Bureau and President of the Chartered Insurance Institute. Amanda’s breadth and depth of experience of the UK and European insurance industry and her detailed understanding of insurance business and customers make her well placed to Chair the Governance Committee. External Appointments: Non-Executive Director of the Welsh Rugby Union and Chair of the Professional Game Board.
Amanda Blanc joined the Board as a Non-Executive Director on 2 January 2020. She was formerly CEO at AXA UK & Ireland, and CEO, EMEA & Global Banking Partnerships at Zurich Insurance Group. Amanda is Chair of the Customer, Conduct and Reputation Committee (previously the Governance Committee) and is a member of the Risk and the Nomination and Governance Committees (previously the Nomination Committee).
The Non-Executive Chairman is tasked with leadership of the Board, setting its agenda and ensuring its effectiveness, and enabling the constructive challenge of the performance and strategic plans of the Executive Directors by the Non-Executive Directors. The Chairman also plays a key role in working with the Board to establish our culture, purpose and values. The Group CEO is the senior executive of the Company and has overall accountability for the development and execution of the Group’s overall strategy in line with the policies and objectives agreed by the Board.
14 This is an Alternative Performance Measure (APM) which provides useful information to supplement an understanding of our financial performance. Further information on APMs, including a reconciliation to the financial statements (where possible), can be found in the ‘Other Information’ section of the Annual report and accounts.
The Board had several discussions on the Group’s culture and this remains a priority for 2020. The Board remains committed to maintaining our focus on valuing diversity and policies supporting inclusion across the Group. It ensured that these are fully considered in overseeing succession planning for the senior leadership team. It also closely monitors the outputs from our ‘Voice of Aviva’ engagement surveys and reviews actions proposed to improve employee engagement.
The Risk Committee, on behalf of the Board, have reviewed the effectiveness of the systems of internal control and risk management. This review occurs annually. In addition, Internal Audit plays a significant role in contributing to the routine ongoing assessment of the Group’s Risk & Control framework. There has been regular reporting to the committees throughout the year to ensure that outstanding areas of improvement are both identified and remediated. Whilst there has been substantial progress during the year there remains a number of areas where significant work is still required. The reports to the Audit and Risk Committees refer to the need to sustain the embedding of controls in a number of areas where significant progress has been made in 2019, such as cyber security, risk management through major change, UK Insurance complaints management and IT disaster recovery; and the need to continue to make further improvement in a number of other areas, such as IT resilience, financial crime prevention, data management, risk culture and ongoing improvements in Canada, France and Ireland. The Risk Committee, on behalf of the Board will continue to monitor progress throughout 2020.
2020 priorities In 2020, the Committee will continue to focus on succession planning at the Board and senior management level (particularly following the internal appointments to the ALT during the year) and developing a strong and diverse talent pipeline. The Committee will also focus on appointing the new Chair and building an induction and training programme to support their appointment process. The Committee will also begin to operate under its extended Terms of Reference as the Nomination and Governance Committee.
During the year the remit of the Committee was reviewed, and it was agreed that responsibility for controls over financial reporting will remain with the Audit Committee while the Committee has responsibility for all other internal controls. The Committee’s Terms of Reference were updated accordingly.
UK exit from the EU During the year the Committee monitored the negotiations between the UK and EU and reviewed the Group’s operational readiness planning, including the appropriateness of the ‘No Deal’ operational planning assumption against the backdrop of political uncertainty. Management plans included implementing a monthly Steering Committee to oversee preparations and the Committee reviewed the progress made by the Steering Committee and the implementation of the Part VII transfers of insurance portfolios to subsidiaries in Ireland, which were completed by 29 March 2019. More generally the Committee discussed the Group’s contingency planning to ensure continuous service to customers in the event of a ‘No Deal’ exit and also considered customer service capacity planning to ensure that continuous service could be maintained in the event that a ‘No Deal’ exit occurred concurrently with other risk events (for example extreme weather) and business-as-usual peak demand (for example tax year-end). The resilience of the Group’s balance sheet and the effectiveness of financial hedges to help mitigate possible financial market shocks from a ‘No Deal’ exit were reviewed, together with the progress made by the team working across the Group to ensure EEA to UK data transfers would be legally compliant absent of an EU data protection adequacy ruling. The Committee reviewed the scenario planning for potential fund suspensions, particularly property funds, to ensure that communication controls and cascades were in place.
Belén Romana García Chair of the Risk Committee 4 March 2020
Related Financial Disclosures requirements • Recommended the 2020 Risk and Control Goal for approval by the
Internal audit • Reviewed reports from the Chief Audit Officer (CAO) • Recommended to the Board the appointment of a new CAO during the year • Reviewed and approved changes to our Internal Audit Charter and
Committee focus during 2019 I am pleased to present the Governance Committee’s (the Committee) report for the year ended 31 December 2019.
The Committee monitored material compliance developments and changes in the regulatory landscape particularly from a conduct risk perspective. The Committee also reviewed and approved the annual Group Compliance Plan and reviewed performance against this Plan and the delivery of good customer outcomes. The Committee continued to monitor the financial crime risks for the Group, and associated action plans and during the year focused on strengthening first line anti-fraud controls.
(2018: 20.75 pence) • Total ordinary dividend of 30.9 pence per ordinary share (2018: 30.0 pence) • Total cost of ordinary dividends paid in 2019 was £1,184 million
Interim dividends are paid in September, subject to declaration by the Board. A final dividend is typically proposed by the Company’s Board after the end of the relevant year and generally paid in May. The following table shows certain information regarding the dividends that we paid on ordinary shares.
Details of this assessment are contained in this report. The formulaic outcome against the 2019 bonus scorecard prior to any adjustments was 101.1% (out of a maximum of 200%).
During the year, the Committee received assistance in considering executive remuneration from a number of senior managers, who attended certain meetings (or parts thereof) by invitation during the year, including: • the Group CEO; • the Group CFO; • the Chief People Officer; • the Group Reward and Performance Director; • the Chief Accounting Officer; • the Chief Audit Officer; • the Group Chief Risk Officer; and • the Remuneration Committee Chair of Aviva Investors
Single total figures of remuneration for 2019 The table below sets out the total remuneration for 2019 and 2018 for each of our EDs. Sir Adrian Montague remained on his Non-Executive Chairman remuneration arrangements while acting as Executive Chairman for the period 9 October 2018 to 4 March 2019. Given that he was not performing the role of Group CEO and did not receive a typical CEO remuneration package, he is not shown in this table, and is instead shown in table 9. Maurice was appointed Group CEO on 4 March 2019 and remuneration figures up to this date reflect his role as CEO of International Insurance.
3 Bonus payable in respect of the financial year including any deferred element at the face value at the date of award. The deferred element is made under the ABP. 4 With the exception of Jason, the value of the LTIP for 2019 relates to the 2017 award, which had a three-year performance period ending 31 December 2019. 50% of the award will vest in March 2020. An assumed share price of 411.2 pence has been used to determine the value of the award based on the average share price over the final quarter of the 2019 financial year. The proportion of the value of the LTIP that is attributable to share price depreciation (the depreciation being the difference between the face value at the date of award and the vested value of the award) is 22.4% for Maurice and Tom. In a similar manner, the LTIP amounts shown in last year’s report in respect of the LTIPs awarded in 2016 were calculated with an assumed share price of 415.20 pence. The actual share price at vesting was 412.25 pence, and the table has been updated to reflect this change. The estimated value of the awards for the EDs was £1,958,000; the actual value was £1,944,000 (decrease of £14,000). Jason, prior to becoming an ED, was granted a Restricted Stock Unit (RSU) award. This award does not have performance conditions and in accordance with the regulations, a pro-rated amount is shown in respect of qualifying services during the year, using the share price at grant to determine the value of the award. Following confirmation of his role at Phoenix Group, Andy’s 2017 LTIP award has lapsed. Additional information on these awards can be found in table 18.
5 Pension contributions consist of employer defined contribution benefits, excluding salary exchange contributions made by the employees, plus cash payments in lieu of pension. For Maurice, following his appointment as Group CEO on 4 March 2019 and for Jason the total was 12.34% of basic salary (pension contribution of 14% which is reduced for the effect of employers’ National Insurance contributions when paid as cash). For former EDs (and Maurice prior to his appointment as Group CEO) the aggregate total was 28% of basic salary. No ED has prospective entitlement to benefit in a defined benefit scheme.
• Implemented a new operational model to make Aviva simpler, separating UK GI and Life management teams, aligning UK Digital to UK GI, and creating the new IS&R division
• Provided an orderly handover with his successor to ensure continuity in the finance function
Quality of earnings assessment – 2019 remuneration decisions The Committee discussed those items that impacted the overall results in 2019 including to update e.g. foreign exchange, acquisitions and disposals, life assumption and modelling changes, prior year reserve development, and other items that are non-recurring in nature. This process provides the Committee with an understanding of the core profitability of the business taking these factors into account.
Former Non-Executive Directors4 Michael Hawker 34 138 — — 34 138 — — 34 138 Keith Williams 59 150 — 2 59 152 — — 59 152
Maurice Tulloch 471,522 1,291,728 290,810 6,338 — 300 202% No6 Jason Windsor 427,708 — 298,218 6,338 — 200 265% Yes Andy Briggs 431,289 — 351,730 5,128 — 200 235% Yes Tom Stoddard 509,702 453,626 347,460 — — 200 285% Yes 1 Directors’ beneficial holdings in the ordinary shares of the Company. This information includes holdings of any connected persons. 2 Awards granted under the Aviva LTIPs which vest only if the performance conditions are achieved. 3 Awards arising through the ABP. Under this plan, some of the earned bonuses are paid in the form of conditional shares and deferred for three years. The transfer of the shares to the director at the end of the period is not subject to the attainment of performance conditions but the shares can be forfeited if the ED leaves service before the end of the period. For Jason, this also includes RSU awards, granted under the LTIP prior to his appointment to the Board. Details of these awards can be found in table 18.
• Group CEO – 300% of salary • CFO – 225% of salary
Assessment of performance Any movement in basic salary takes account of the performance of the individual and the Group.
As a minimum, at any Committee meeting where LTIP vesting or annual bonus scorecard decisions are considered, the Chief Accounting Officer prepares a report to the Committee on the quality of earnings reflected in the results being assessed, against performance targets. Extensive information from the audited accounts is used to explain the vesting and scorecard outcomes – ranging from movements in reserves, capital management decisions, consistency of accounting treatment and period to period comparability. The Chief Accounting Officer attends the Committee meeting to answer any questions that any member of the Committee may choose to ask. Any vesting decision or confirmation of awards is made after this process has been undertaken.
• Maximum – basic salary, pension or cash in lieu of pension, benefits, and: – A bonus of 200% and an LTIP of 300% of basic salary (with notional LTIP vesting at maximum) for the Group CEO; and – A bonus of 150% and an LTIP of 225% of basic salary (with notional LTIP vesting at maximum) for the CFO.
Notes to the consolidated financial statements 1 Changes to comparative amounts 139 2 Exchange rates 141 3 Subsidiaries, joint ventures and associates –
Our audit approach Overview • Overall group materiality: £158.0 million (2018: £156 million), based on 5% of Group adjusted operating profit before tax attributable to shareholders’ profits. • Overall Company materiality: £47.8 million (2018: £105.0 million), based on 5% of Profit for the year before tax. • Based on the output of our risk assessment, along with our understanding of the Aviva Group structure, we performed full scope audits over the following components; UK Life, UK General Insurance, Canada and France Life. • We identified a further two components, Aviva Investors and Italy Life, where specific account balances were considered to be significant in size in relation to the Group, and scoped our audit to include detailed testing of those account balances. • We completed review procedures over other components not subject to full scope audits. • We also performed audit procedures over the head office operations and the consolidation process, as well as over certain other group activities, including specific account balances in the Aviva Employment Services, Aviva Central Services and Aviva Group Holdings components.
In respect of the annuitant mortality assumptions, we performed the following: • We tested the methodology used by management to derive the assumptions with reference to relevant rules and actuarial guidance and by applying our industry knowledge and experience. This included evaluating management’s choice of, and fitting to, the CMI or equivalent base tables and the adoption of the CMI 2018 model and dataset for improvements, together with associated parameters and the margin for prudence; • We assessed the results of the experience investigations carried out by UK Life management for the annuity business to determine whether they provided support for the assumptions used by management; and
Valuation of non-life insurance contract liabilities (Group) Refer to the Audit Committee report, Accounting policy (L) Insurance and participating investment contract liabilities – General insurance and health provisions and note 43 Insurance liabilities methodology and assumptions (c) General insurance and health.
There were two material provisions held at the year end at UK Life.
Rationale for benchmark applied In determining our materiality, we considered financial metrics which we believed to be relevant, and concluded, consistent with the prior year that Group adjusted operating profit before tax attributable to shareholders’ profit was the most relevant benchmark. 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. We draw attention to Accounting policy (B), which describes amendments made to the definition of this metric during the period. The benchmark we have used has been updated for these amendments.
Group, including those that would threaten its business model, future performance, solvency or liquidity; • The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated; and • The directors’ explanation on page 81 of the Annual Report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Eligibility for the deferral approach was based on an assessment of the Group’s liabilities as at 31 December 2015, in accordance with the date specified in the amendments to IFRS 4. At this date the Group’s liabilities connected with insurance exceeded 90% of the carrying amount of the Group’s total liabilities. The Group’s total liabilities were £369,642 million and liabilities connected with insurance in the statement of financial position at this date primarily included insurance and participating investment contracts within the scope of IFRS 4 (£218,604 million), non-participating investment contract liabilities (£103,125 million), unallocated divisible surplus (£8,811 million), borrowings (£8,770 million), and certain amounts within payables and other financial liabilities which arise in the course of writing insurance business (£10,285 million).
In November 2018 the IASB recommended an amendment to IFRS 17 to defer the effective date to 1 January 2022. At the same time, they recommended an extension to the fixed expiry date for the temporary exemption for insurers from applying IFRS 9 until 1 January 2022. These amendments are subject to IASB’s due process and were included in an exposure draft published in July 2019, with final amendments expected to be published in mid-2020.
The Audit Committee reviews the reasonableness of judgements and assumptions applied and the appropriateness of significant accounting policies. The significant issues considered by the Committee in the year are included within the Audit Committee Report on page 72.
Where the Group does not control such vehicles, and these investments are held by its insurance or investment funds, they are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position, in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
Long-term business provisions Under current IFRS requirements, insurance and participating investment contract liabilities are measured using accounting policies consistent with those adopted previously under existing accounting practices, with the exception of liabilities remeasured to reflect current market interest rates to be consistent with the value of the backing assets, and those relating to UK with-profits and nonprofit contracts.
Derivative contracts may be traded on an exchange or over-thecounter (OTC). Exchange-traded derivatives are standardised and include certain futures and option contracts. OTC derivative contracts are individually negotiated between contracting parties and include forwards, swaps, caps and floors. Derivatives are subject to various risks including market, liquidity and credit risk, similar to those related to the underlying financial instruments. Many OTC transactions are contracted and documented under International Swaps and Derivatives Association master agreements or their equivalent, which are designed to provide legally enforceable set-off in the event of default, reducing the Group’s exposure to credit risk.
Deferred tax is provided on any temporary differences arising from investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the foreseeable future.
The impact of the changes above on the statement of financial position for the prior periods presented is shown below: 31 December 2018 1 January 2018
Gross written premiums 8,596 4,624 3,204 6,883 643 5,761 1,532 — — 31,243 Premiums ceded to reinsurers (2,271) (406) (143) (86) (12) (264) (381) — — (3,563) Internal reinsurance revenue — — — — — — 1 — (1) — Premiums written net of reinsurance 6,325 4,218 3,061 6,797 631 5,497 1,152 — (1) 27,680 Net change in provision for unearned premiums (2) (57) (99) (28) 2 (9) (16) — — (209) Net earned premiums 6,323 4,161 2,962 6,769 633 5,488 1,136 — (1) 27,471 Fee and commission income 951 113 24 305 99 123 205 320 1 2,141 7,274 4,274 2,986 7,074 732 5,611 1,341 320 — 29,612 Net investment income 27,070 254 171 6,267 155 4,352 967 61 1,280 40,577 Inter-segment revenue — — — — — — — 247 — 247 Share of profit of joint ventures and associates 20 — — 48 — 12 33 — (28) 85 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates — — 6 — — — (28) — — (22) Segmental income1 34,364 4,528 3,163 13,389 887 9,975 2,313 628 1,252 70,499 Claims and benefits paid, net of recoveries from reinsurers (9,569) (2,614) (1,938) (4,751) (380) (2,820) (1,003) — (21) (23,096) Change in insurance liabilities, net of reinsurance (3,428) (53) (16) (1,112) (49) (1,062) (32) — 50 (5,702) Change in investment contract provisions (16,411) — — (4,041) 1 (3,365) (216) (63) — (24,095) Change in unallocated divisible surplus 162 — — (2,010) (4) (1,764) (369) — — (3,985) Fee and commission expense (669) (1,265) (823) (816) (156) (352) (257) (27) (1,171) (5,536) Other expenses (1,332) (298) (162) (246) (95) (230) (283) (447) (236) (3,329) Inter-segment expenses (218) (6) (6) (2) (5) (10) — — — (247) Finance costs (159) (4) (7) (1) (1) (6) (8) — (390) (576) Segmental expenses (31,624) (4,240) (2,952) (12,979) (689) (9,609) (2,168) (537) (1,768) (66,566) Profit/(loss) before tax 2,740 288 211 410 198 366 145 91 (516) 3,933 Tax attributable to policyholders’ returns (487) — — — — (14) (58) — — (559) Profit/(loss) before tax attributable to shareholders’
Profit/(loss) before tax 967 413 (75) 426 178 303 83 170 (813) 1,652 Tax attributable to policyholders’ returns 469 — — — — 1 7 — — 477 Profit/(loss) before tax attributable to shareholders’ profits 1,436 413 (75) 426 178 304 90 170 (813) 2,129
Fund management Our fund management business invests policyholders’ and shareholders’ funds and provides investment management services for institutional pension fund mandates. It manages a range of retail investment products, including investment funds, unit trusts, open-ended investment companies and individual savings accounts. Clients include Aviva Group businesses and third-party financial institutions, pension funds, public sector organisations, investment professionals and private investors.
Profit/(loss) before tax 1,931 482 162 (923) 1,652 Tax attributable to policyholders’ returns 477 — — — 477 Profit/(loss) before tax attributable to shareholders’ profits 2,408 482 162 (923) 2,129 Adjusting items 568 169 (19) 157 875
Interest on collateral received 10 8 Net finance charge on pension schemes (note 52(b)(i)) 23 22 Interest on lease liabilities 14 — Other similar charges 80 60 Total finance costs 576 573
The Group continues to keep under review the allowance in our assumptions for future property prices and rental income in relation to our commercial and equity release mortgages, for the possible adverse impact including but not limited to the ultimate arrangements regarding the UK’s exit from the European Union. At 31 December 2019 this allowance has been determined in line with previous periods and is estimated at £440 million (2018: £395 million). As more clarity is provided on the terms of the UK’s exit from the European Union, the Group will look to establish core property assumptions without an explicit allowance for Brexit uncertainty.
Strategic report Governance IFRS financial statements Other information 10 – Non-life business: short-term fluctuations in return on investments (a) Definitions Group adjusted operating profit for non-life business is based on an expected long-term investment return over the period. Any variance between the total investment return (including realised and unrealised gains) and the expected return over the period is disclosed separately outside Group adjusted operating profit, in short-term fluctuations.
566 (96) 1 Other operations represents short-term fluctuations on assets backing non-life business in Group centre investments, including the centre hedging programme.
Profit attributable to ordinary shareholders 3,374 2,497 63.8 2,129 1,515 38.2 1 DCI includes the direct capital instrument and tier 1 notes. 2 During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note 1(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated resulting in a reduction in the prior period Group adjusted operating profit of £112 million. There is no impact on profit before tax attributable to shareholders’ profit. Following the change in the definition of Group adjusted operating profit, comparative amounts for operating earnings per share have also been restated resulting in a reduction in the prior period of 2.2 pence.
The investment in general insurance and health undertakings relates to the health insurance operations in our Indonesian joint venture.
Within 1 year 265 Between 1 and 2 years 205 Between 2 and 3 years 183 Between 3 and 4 years 161 Between 4 and 5 years 208 Later than 5 years 1,599 2,621
(b) Changes to valuation techniques There were no changes in the valuation techniques during the year compared to those described in the 2018 annual consolidated financial statements.
Opening balance at 1 January 2018 10,797 23,949 14,100 776 3,900 2,093 — (13) (358) (1,180) (3,306) Total net gains/(losses) recognised in the income statement1 376 (530) (363) (102) (69) (73) — — (136) (81) 74 Purchases 1,185 3,451 3,137 189 1,799 201 (108) — (59) — (95) Issuances — 200 — — — — — — — — — Disposals (927) (2,065) (1,221) (544) (554) (191) 108 (12) 20 36 189 Settlements2 — — — — — — — — — — — Transfers into Level 3 — — 1,242 95 77 20 — — — — (20) Transfers out of Level 3 — — (503) (2) — (58) — — — — 58 Foreign exchange rate movements 51 3 111 2 29 — — — (1) — —
Balance at 31 December 2018 11,482 25,008 16,503 414 5,182 1,992 — (25) (534) (1,225) (3,100) 1 Total net gains/(losses) recognised in the income statement includes realised gains/(losses) on disposals. 2 Following a review of the classification of financial assets, comparative amounts have been restated from those previously reported. The effect of the change is to classify £2,201 million of assetsfrom fixed maturity securities to other investments.
As recognised in the consolidated statement of financial position line item £m
Loans at fair value Fair values have been calculated by using cash flow models appropriate for each portfolio of mortgages. Further details of the fair value methodology and models utilised are given in note 24(g).
Analysed as: Unit trust and other investment vehicles — — 41,836 — 41,836 — — 38,604 — 38,604 PLPs and property funds 792 209 2,395 — 3,396 797 217 1,975 — 2,989 Other (Including other funds and equity securities) — — 438 — 438 — — 476 — 476
Austria 66 21 434 590 215 167 715 778 Belgium 166 53 877 905 336 268 1,379 1,226 France 698 426 14,537 14,464 1,878 2,036 17,113 16,926 Germany 305 212 1,795 1,831 455 490 2,555 2,533 Greece 1 1 — 1 — — 1 2 Ireland 75 55 774 920 389 138 1,238 1,113 Italy 801 379 10,849 9,848 194 772 11,844 10,999 Netherlands 53 53 562 637 318 340 933 1,030 Poland 674 727 655 715 581 541 1,910 1,983 Portugal 71 73 175 215 160 — 406 288 Spain 627 251 688 776 229 94 1,544 1,121 European supranational debt 512 226 1,837 1,770 1,968 1,763 4,317 3,759 Other European countries 553 444 944 1,595 1,051 652 2,548 2,691
Expected to be recovered in less than one year 9,032 8,615 Expected to be recovered in more than one year 32 35 9,064 8,650 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the year or equity.
Executive Share Option Schemes 18,776,934 5 — 25 9,160,708 2 — 7 Shares cancelled through buy-back — — — — (119,491,188) (30) 30 —
Share price 394p 480p Exercise price 284p 387p Expected volatility 20.22% 24.85% Expected life 3.80 years 3.67 years Expected dividend yield 7.68% 5.88% Risk-free interest rate 0.23% 1.05%
and France; • Impact of non-economic assumption changes of £(1.0) billion mainly due to updates to longevity assumptions (with the impact on profit partially offset by a corresponding reduction in reinsurance assets) in the UK; and • Economic assumption changes of £3.8 billion, which reflects a reduction in valuation interest rates in response to decreasing interest rates and narrowing of credit spreads, primarily in respect of annuity contracts in the UK.
Gross cumulative claim payments At end of accident year (3,502) (3,420) (3,055) (3,068) (3,102) (2,991) (3,534) (3,517) (3,769) (3,617) One year later (5,466) (4,765) (4,373) (4,476) (4,295) (4,285) (4,972) (4,952) (5,239) Two years later (5,875) (5,150) (4,812) (4,916) (4,681) (4,710) (5,435) (5,388) Three years later (6,163) (5,457) (5,118) (5,221) (4,974) (4,997) (5,781) Four years later (6,405) (5,712) (5,376) (5,467) (5,244) (5,198) Five years later (6,564) (5,864) (5,556) (5,645) (5,406) Six years later (6,649) (5,978) (5,635) (5,739) Seven years later (6,690) (6,032) (5,718) Eight years later (6,718) (6,078) Nine years later (6,740)
Non-unit reserves on unit-linked business Life 0.9% 0.9% to 1.3% Pensions 1.1% 0.9% to 1.6%
Carrying amount at 31 December 92,762 90,455 1 Other movements recognised as an expense during 2019 relate primarily to a special bonus distribution to with-profits policyholders and the recognition of unitised with-profits annual management charges in UK Life.
Realistic liabilities for GAOs in the UK with-profits funds were £1,628 million at 31 December 2019 (2018: £1,644 million). With the exception of the with-profits sub-fund supported by the RIEESA, movements in the realistic liabilities in the with-profits funds are offset by a corresponding movement in the unallocated divisible surplus, with no net impact on IFRS profit. Realistic liabilities for GAOs in the with-profits sub-fund supported by the RIEESA were £129 million at 31 December 2019 (2018: £155 million).
Of the above total, £10,943 million (2018: £10,800 million) is expected to be recovered more than one year after this statement of financial position.
Strategic report Governance IFRS financial statements Other information 47 – Reinsurance assets continued (ii) General insurance and health claims liabilities £m
Reinsurers’ share of incurred claim losses and expenses 291 216 Less: Reinsurance recoveries received on claims
In Ireland and Singapore there was a slight reduction in the reserves of £28 million following a review of recent experience.
Minimum Pension (GMP). This additional liability has arisen following the High Court judgement in October 2018 in the case involving Lloyds Banking Group. 2 Administrative expenses are expensed as incurred. 3 Net interest income of £89 million has been credited to investment income and net interest expense of £22 million has been charged to finance costs (see note 8).
SAPS tables as a proxy for Club Vita pooled experience, including an allowance for future improvements 60 88.2 90.0 89.6 91.9
In October 2019 the ASPS completed a bulk annuity buy-in transaction with Aviva Life & Pensions UK Limited, a Group Company. This covered approximately £1.1 billion of liabilities related to deferred pensioners and current pensioners, removing the investment and longevity risk for these members from the scheme.
For the ASPS, following the latest formal actuarial valuation (with an effective date of 31 March 2018) a schedule of contributions was agreed with the trustees, even though the ASPS was fully funded on its technical provisions basis consistent with the requirements of the UK pension regulations.
(d) Charge to staff costs in the income statement The total pension charge to staff costs for all of the Group’s defined benefit and defined contribution schemes were: £m
(c) Operational borrowings (i) The carrying amounts of these borrowings are: £m
Premium/discount on debt securities 109 587 Premium/discount on borrowings (23) (35) Premium/discount on non-participating investment contracts 226 243 Financial instruments 23 16 Acquired value of in-force business and intangibles 392 392 727 1,203 Change in unallocated divisible surplus 3,985 (3,237) Interest expense on borrowings 553 551 Net finance income on pension schemes (73) (67) Foreign currency exchange losses/(gains) 345 (164)
As at 31 December 2019 AAA AA A BBB Below BBB Not rated
Restated1 as at 31 December 2018 AAA AA A BBB Below BBB Not rated
Average assets £m 2017 2.07% 14,770 2018 2.28% 14,651 2019 2.21% 14,350 1 Before realised and unrealised gains and losses and investment expenses
Strategic report Governance IFRS financial statements Other information 63 – Related party transactions This note gives details of the transactions between Group companies and related parties which comprise our joint ventures, associates and staff pension schemes.
Key management personnel of the Company may from time to time purchase insurance, savings, asset management or annuity products marketed by group companies on equivalent terms to those available to all employees of the Group. In 2019, other transactions with key management personnel were not deemed to be significant either by size or in the context of their individual financial positions.
The indirect related undertakings of the Company as at 31 December 2019 are listed below: Company name Share Class1 % held
Elite Insurance Company Common 100 Insurance Agent Service Inc. Common 100 National Home Warranty Group Inc.
Bellatrix SICAV 99 Betelgeuse SICAV 92 Europe Israel Croissance SICAV 85 Société Française de Gestion et d’Investissement
Logipierre 1 Ordinary 44 47 Rue du Faubourg SaintHonoré, 75008, Paris
SCI Campus Medicis St Denis Ordinary 30 SCI Campus Rimbaud St Denis Ordinary 30 9 Rue Newton, 75116 Paris
EP Megaron Holding Sarl Ordinary 100 European Properties Sarl Ordinary 98 Sapphire Ile de France 1 Sarl Ordinary 100
Aviva Investors Sfio Akcyjny Non UCITS 100 Aviva Investors Sfio Aviva Lokacyjny
Unit Trust 45 4 Shenton Way, #01-01 SGX Centre 2, Singapore, 068807
Professional Investment Advisory Services Pte Ltd 1 Raffles Quay #27-13 South Tower 4, Singapore 048583
Polaris U.K. Limited Ordinary 39 The Green Easter Park, Benyon Road, Reading RG7 2PQ
Origo Services Limited Ordinary 22 7 Newgate Street, EC1A 7NX AXA Ethical Distribution Fund OEIC 32 AXA Rosenberg American Fund OEIC 89 AXA Rosenberg Asia Pacific Ex Japan Fund
Aviva Health UK Limited Ordinary 100 Aviva Insurance UK Limited Ordinary 100 Aviva UKGI Investments Limited
On 23 December 2014, the Company provided an unsecured revolving credit facility of £2,000 million to Aviva Group Holdings Limited, its subsidiary, with an initial maturity date of 3 September 2018 which was subsequently extended to 31 December 2023. The facility accrues interest at 75 basis points above 6 month LIBOR. As at the statement of financial position date, the total amount drawn down on the facility was £1,563 million (2018: £1,752 million).
On 14 December 2017, the Company renewed its facility with GA plc, its subsidiary, of £9,990 million and the Board approved the extension of the maturity of the loan by five years from 31 December 2017 to 31 December 2022. The other terms of the loan will remain unchanged, including the rate of interest payable by the Company to GA plc (65 basis points above 3 month LIBOR and in the event that the LIBOR rate is less than zero, the rate shall be deemed to be zero). As at 31 December 2019, the loan balance outstanding was £9,630 million (2018: £9,770 million). This loan is secured against the ordinary share capital of Aviva Group Holdings Limited. The loan agreement also includes a penalty interest charge of 1% above the interest rate if any amounts payable under the loan agreement remain outstanding.
Commission and Expenses – Health & Other Non GI 300 309
Commission and expense ratio A financial measure of the performance of our general insurance business which is derived from the sum of earned commissions and expenses expressed as a percentage of net earned premiums from the COR table above.
IFRS net asset value (NAV) per share IFRS NAV per share is calculated as the equity attributable to shareholders of Aviva plc, less preference share capital (both within the consolidated statement of financial position), divided by the actual number of shares in issue at the balance sheet date. IFRS NAV per share monitors the value generated by the Company in terms of the equity shareholders’ face value per share investment.
4. Includes valuation adjustments and the impact of the difference between consolidation methodologies under Solvency II and IFRS.
own funds (e.g. UK and Asia Healthcare, Retail fund management and UK equity release); and
Solvency II contract boundary restrictions – new business (71) (148) (45) (264)
An analysis of the components of OCG is presented below, including an analysis of Solvency II operating own funds generation which is the own funds component of OCG (see the section below): Solvency II own funds impact of new business (net of tax and non-controlling interests)
Estimated Solvency II regulatory own funds2 28,347 27,567 1 Tier 3 regulatory own funds at 31 December 2019 consists of £259 million subordinated debt (2018: £253 million) plus £78 million net deferred tax assets (2018: £95 million). 2 Regulation was introduced in France that allows French insurers to place the Provision pour Participation aux