As filed with
the Securities and Exchange Commission on March 29, 2016
|
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
|
|
FORM 20-F
|
(Mark one)
|
o
|
REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G)
|
|
OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
OR
|
x
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
|
|
OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For the fiscal year ended December 31, 2015
|
|
OR
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
|
|
OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
OR
|
o
|
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
|
|
OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
Commission file number: 001-34486
|
|
AVIVA PLC
(Exact Name of Registrant as Specified in its Charter)
|
|
|
|
ENGLAND AND WALES
(Jurisdiction of Incorporation)
|
|
|
|
St. Helen’s, 1 Undershaft
London EC3P 3DQ, England
(Address of Principal Executive Offices)
|
|
|
|
David Rogers, Chief
Accounting Officer
Aviva plc
St. Helen’s, 1 Undershaft
London EC3P 3DQ, England
+44 20 7662 8934 david.f.rogers@aviva.com
(Name, telephone, e-mail and/or facsimile number and address
of company contact person)
|
Securities registered or to be registered
pursuant to Section 12(b) of the Act:
Title of Each Class
|
Name of Each Exchange on Which Registered
|
American
Depositary Shares, each representing 2 Ordinary Shares,
25 pence par value each
Ordinary Shares
8.25% Capital Securities
|
New York Stock Exchange
New York Stock Exchange (for listing purposes only)*
New York Stock Exchange
|
Securities registered or to be registered
pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act:
None
The number of outstanding shares of each of the issuer’s
classes of capital or common stock as of December 31, 2015 was:
Ordinary Shares, 25 pence par value each
4,048,465,173
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate website, if any, every Interactive Data file required to be submitted and posted pursuant
to of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files).**
**This requirement does not apply to the registrant.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
|
Accelerated filer
o
|
Non-accelerated filer
o
|
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
U.S. GAAP
o
|
International Financial Reporting Standards as issued by the International Accounting Standards Board
x
|
Other
o
|
If ‘‘Other’’ has been checked in response
to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
* Not for trading, but only in connection with the registration
of American Depositary Shares.
Cross
reference to Form 20-F 2015
|
|
|
Page
|
Item 1.
|
Identity of Directors, Senior Management and Advisors
|
n/a
|
Item 2.
|
Offer Statistics and Expected Timetable
|
n/a
|
Item 3.
|
Key Information
|
|
|
A.
|
Selected financial data
|
18 – 19, 98 – 99, 262
|
|
B.
|
Capitalisation and indebtedness
|
n/a
|
|
C.
|
Reason for the offer and use of proceeds
|
n/a
|
|
D.
|
Risk factors
|
(ii), 32 – 33, 110 – 125, 233 – 244
|
Item 4.
|
Information on the Company
|
|
|
A.
|
History and development of the company
|
2 – 5, 20, 51-52, 68, 96 – 97
|
|
B.
|
Business overview
|
2 – 17, 20 – 26, 27 – 30, 103 – 109, 263 – 266
|
|
C.
|
Organisational structure
|
248 – 249
|
|
D.
|
Property, plants and equipment
|
30,176
|
Item 4A.
|
Unresolved Staff Comments
|
n/a
|
Item 5.
|
Operating and Financial Review and Prospects
|
|
|
A.
|
Operating results
|
2 – 17
|
|
B.
|
Liquidity and capital resources
|
2 – 3, 32 – 35, 99 –
103, 222 – 224, 230 – 232, 238 – 239, 258 - 259
|
|
C.
|
Research and development, patents and licences, etc.
|
n/a
|
|
D.
|
Trend information
|
2 – 19, 20 – 26, 99, 262
|
|
E.
|
Off-balance sheet arrangements
|
99
|
|
F.
|
Tabular disclosure of contractual arrangements
|
31
|
|
G.
|
Safe harbour
|
ii
|
Item 6.
|
Directors, Senior Management and Employees
|
|
|
A.
|
Directors and senior management
|
40 – 45
|
|
B.
|
Compensation
|
72 – 94, 98, 215 – 221
|
|
C.
|
Board practices
|
46 – 54, 61 – 64, 68 – 71, 72 – 94
|
|
D.
|
Employees
|
164, 282
|
|
E.
|
Share ownership
|
80 – 81, 84 – 86, 88 –
89, 96, 191 – 195
|
Item 7.
|
Major Shareholders and Related Party Transactions
|
|
|
A.
|
Major Shareholders
|
68, 262
|
|
B.
|
Related Party Transactions
|
98, 247, 259 – 260
|
|
C.
|
Interests of Experts and Counsel
|
n/a
|
Item 8.
|
Financial information
|
|
|
A.
|
Consolidated statements and other financial information
|
2 – 19, 98 – 99, 127 – 260
|
|
B.
|
Significant changes
|
151, 167, 184, 214, 250, 255 –
256, 262
|
Item 9.
|
The Offer and Listing
|
262
|
Item 10.
|
Additional Information
|
|
|
A.
|
Share capital
|
68, 96 – 97, 191, 195
|
|
B.
|
Articles of association
|
69, 273 – 278
|
|
C.
|
Material contracts
|
5, 192 – 194
|
|
D.
|
Exchange controls
|
278
|
|
E.
|
Taxation
|
278 – 280
|
|
F.
|
Dividends and paying agents
|
280
|
|
G.
|
Statements by experts
|
n/a
|
|
H.
|
Documents on display
|
280
|
|
I.
|
Subsidiary information
|
n/a
|
Item 11.
|
Quantitative and Qualitative Disclosures about Market Risk
|
32 – 33, 110 – 114, 236 – 238
|
Item 12.
|
Description of Securities Other Than Equity Securities
|
281
|
Item 13.
|
Defaults, Dividend Arrearages and Delinquencies
|
n/a
|
Item 14.
|
Material Modifications to the Rights of Security Holders and Use of Proceeds
|
n/a
|
Item 15.
|
Controls and Procedures
|
282 – 283
|
Item 16A.
|
Audit Committee Financial Expert
|
62
|
Item 16B.
|
Code of Ethics
|
283
|
Item 16C.
|
Principal Accountant Fees and Services
|
62, 165
|
Item 16D.
|
Exemptions from the Listing Standards for Audit Committees
|
n/a
|
Item 16E.
|
Purchases of Equity Securities by the Issuer and Affiliated Purchases
|
282
|
Item 16F.
|
Change in Registrant’s Certifying Accountant
|
n/a
|
Item 16G.
|
Corporate Governance
|
71, 282
|
Item 16H.
|
Mine Safety Disclosure
|
n/a
|
Item 17.
|
Financial Statements
|
n/a
|
Item 18.
|
Financial Statements
|
127 – 260
|
Item 19.
|
Exhibits
|
289
|
|
|
|
|
Glossary
|
|
|
285 – 287
|
Signatures
|
|
|
288
|
Main contents
In this Form 20F
|
|
Performance review
|
1
|
Governance
|
37
|
Shareholder information
|
95
|
IFRS Financial statements
|
127
|
Additional disclosures for SEC
|
261
|
Other information
|
284
|
Forward-looking
statements
This Annual Report on Form 20-F may contain certain “forward-looking
statements” with respect to certain of our plans, current goals and expectations relating to our future financial condition,
performance, results, strategic initiatives and objectives. Statements containing the words “believes”, “intends”,
“expects”, “plans”, “will”, “seeks”, “aims”, “may”, “could”,
“likely”; “outlook”, “target”, “goal”, “guidance”; “trends”;
“future”; “projects”, “on track”, “estimates” and “anticipates”, and
words of similar meaning, are forward-looking. By their nature, all forward-looking statements involve risk and uncertainty because
they relate to future events and circumstances which are beyond our control. These forward-looking statements reflect our current
views with respect to future events and because our business is subject to numerous risks, uncertainties and other factors, our
actual future financial condition, performance and results may differ materially from those anticipated in our forward-looking
statements and the differences could be significant.
All forward-looking statements address matters
that involve risks and uncertainties. We believe that these factors include, but are not limited to, those set forth under “Financial
and operating performance” and “Risks relating to our business” included in our most recent Annual Report on
Form 20-F as filed with the SEC, with regard to trends, risk management, and exchange rates and with regard to the effects of changes
or prospective changes in regulation, and the following:
|
·
|
the impact of ongoing difficult conditions in the global financial markets and the economy generally;
|
|
·
|
the impact of simplifying our operating structure and activities;
|
|
·
|
the impact of various local political, regulatory and economic conditions, including market developments and government actions
regarding the referendum on UK membership of the European Union;
|
|
·
|
the effect of credit spread volatility on the net unrealised value of the investment portfolio;
|
|
·
|
the effect of losses due to defaults by counterparties, including potential sovereign debt defaults or restructurings, on the
value of our investments and, where we use the reinsurance markets to limit our risk, the inability of reinsures to meet obligations
or unavailability of reinsurance coverage;
|
|
·
|
the impact of changes or fluctuations in short or long term inflation, currency exchange rates, equity or property prices or
interest rates (including the risks of policyholders surrendering their contracts, a reduction in the value of our portfolio, impact
to our asset and liability matching and effect on the value of options and guarantees embedded in some of our life insurance products
and the value of the assets backing their reserves);
|
|
·
|
the impact of poor investment returns in our investment management business, including from the failure of our fund management
controls to mitigate risks in operating securities lending programmes and changes in valuation methodologies, estimates and assumptions
used in the valuation of investment securities;
|
|
·
|
the effect of adverse capital and credit market conditions on our ability to meet liquidity needs and our access to capital
and changes in, or restrictions on, our ability to initiate capital management initiatives;
|
|
·
|
changes to the insurance industry, including those arising from a cyclical downturn, increased competition in the countries
in which we have material operations and changes demand for products (including individual annuities in the UK due to recent changes
in UK law);
|
|
·
|
changes in or inaccuracy of assumptions in pricing and reserving for insurance business (particularly with regard to mortality
and morbidity trends, lapse rates and policy renewal rates), longevity and endowments;
|
|
·
|
the impact of actual experience differing from estimates used in valuing and amortising deferred acquisition costs (“DAC”)
and acquired value of in-force business (“AVIF”);
|
|
·
|
the impact of natural and man-made catastrophic events on our business activities and results of operations;
|
|
·
|
our reliance on information and technology and third-party service providers for our operations and systems and the operational
risks associated with those systems (including cyber attack);
|
|
·
|
risks associated with arrangements with third parties, including joint ventures and our reliance on third party distribution
channels to deliver our products;
|
|
·
|
the failure to attract or retain the necessary key personnel;
|
|
·
|
funding risks associated with our participation in defined benefit staff pension schemes;
|
|
·
|
the impact of recognising an impairment of our goodwill or intangibles with indefinite lives;
|
|
·
|
the effect of systems errors or regulatory changes on the calculation of unit prices or deduction of charges for our unit-linked
products that may require retrospective compensation to our customers;
|
|
·
|
failure by key IT initiatives to deliver what is required either on time or within budget or provide required performance levels
|
|
·
|
the timing/regulatory approval impact, integration risk and other uncertainties such as non-realisation of expected benefits
or diversion of management attention and other resources or the effect of undisclosed liabilities, relating to our acquisitions
and disposals;
|
|
·
|
changes to our brand and reputation, including arising from our inability to protect our intellectual property and ratings
downgrades;
|
|
·
|
regulatory approval of extension of use of the Group’s internal model for calculation of regulatory capital under the
European Union’s Solvency II rules;
|
|
·
|
the effect of legal proceedings and regulatory investigations;
|
|
·
|
changes in government regulations or tax laws in jurisdictions where we conduct business;
|
|
·
|
the impact of any changes to accounting methodologies for insurance companies, including the amount of allowances and impairments
taken on our investments and changes in valuation methodologies, estimates and assumptions used in the valuation of investment
securities;
|
|
·
|
the effect of fluctuations in share price as a result of general market conditions or otherwise; and
|
|
·
|
delays to our ADS holders being able to exercise their voting rights, limited recourse of ADS holders if we or the Depositary
fails to meet our obligations, and the ineligibility in the part of ADS holders to participate in certain securities offerings.
|
The foregoing review of important factors should not be construed
as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Annual Report.
You should not place undue reliance on forward-looking
statements. Each forward-looking statement speaks only as of the date hereof. Except as required by our regulators, the London
Stock Exchange or applicable law, we do not intend to, and undertake no obligation to (and expressly disclaim any such obligations
to), update publicly or revise any forward-looking statement as a result of new information, future events or otherwise. In light
of these risks, our results could differ materially from the forward-looking statements contained in this Annual Report. We may
also make or disclose written and/or oral forward-looking statements in reports filed or furnished to the US Securities and Exchange
Commission (“SEC”), our annual report and accounts to shareholders, proxy statements, offering circulars, registration
statements and prospectuses, press releases and other written materials and in oral statements made by our directors, officers
or employees to third parties, including financial analysts.
Performance review
In this section
|
Page
|
Financial and operating performance
|
2
|
Selected consolidated financial data
|
18
|
Information on the Company
|
20
|
Analysis of investments
|
27
|
Contractual obligations
|
31
|
Risk and capital management
|
32
|
Financial and operating performance
Overview
In 2015 we successfully navigated regulatory change and turbulent
external conditions to deliver a stronger, cleaner balance sheet and continued operating momentum.
Under the new Solvency II capital rules, we ended
the year with an estimated £9.7 billion surplus
1
, which translates to a 180% cover ratio
1
, at the top
end of our working range. Our transition to Solvency II has avoided surprises and sudden changes. Aviva strengthened the methodology
of its economic capital models over the course of the year, resulting in what we believe to be a conservatively stated cover ratio
under both our economic capital model (181%)
2
and the new rules (180%)
1
.
We have benefitted from the £6 billion
acquisition of Friends Life in April 2015. IFRS net asset value per share (NAV) increased 14% to 389p at year end, largely as a
result of this acquisition.
In 2015, adjusted operating profit
3,4
increased 20% to £2,665 million, with a significant contribution from Friends Life. In 2015, management changed the definition
of adjusted operating profit to exclude amortisation and impairment of acquired value of in-force business (‘AVIF’),
aligning the presentation of this item with the amortisation and impairment of intangible assets as non-operating items. This change
in presentation had no impact on reported profit or loss or equity, the statement of financial position or the statement of cash
flows. As a result of this change comparative information in ‘IFRS financial statements – note 3 – Segmental
information’ has been restated.
Adjusted operating profit
3,4
after
integration and restructuring costs was up 10% from £2,073 million to £2,286 million. Integration and restructuring
costs were much higher in 2015, at £379 million reflecting the Friends Life acquisition, Solvency II costs and other restructuring,
primarily in the UK. IFRS profit after tax, after economic variances and the expense of amortising AVIF, was down 38% to £1,079
million from £1,738 million.
Excess centre cash flow
5
of £699 million in 2015
did not show improvement from the £692 million in 2014, but this also reflects our decision to retain cash in Canada, rather
than pay a planned dividend, to partly fund the proposed acquisition of Royal Bank of Canada General Insurance Company.
Based on our overall stronger capital, cash flow
and liquidity position this year, we increased the shareholder total dividend by 15% to 20.8p, following last year’s 21%
increase to 18.1p.
Profit before tax
The overall result for the year was a total profit before tax of £1,390
million
(2014: £2,339 million)
. Within this, adjusted operating profit was £2,665 million
(2014: £2,213
million)
. Non-operating profit items were a charge of £1,275 million
(2014: £68 million profit)
. The adverse
movement includes higher integration and restructuring costs of £379 million
(2014: £140 million)
and AVIF and
intangible asset amortisation charges of £653 million
(2014: £130 million)
. It also includes a charge of £53
million relating to a UK reinsurance transaction which provides significant protection against claims volatility, lower profits
from disposal of subsidiaries and negative investment variances
(2014: positive variances)
.
Balance sheet
In addition to transitioning to Solvency II at year end, during 2015
we took a number of steps to reduce risk and free up under-utilised capital, further improving our balance sheet.
In UK Life, we sold £2.2 billion of non-core
commercial mortgages. As a result, the average mortgage loan-to-value ratio in our portfolio decreased 24 points from 85% a year
ago to 61% at 31 December 2015. In UK general insurance we transferred out £0.7 billion of latent exposures by purchasing
an adverse development cover. We also undertook additional equity and credit risk hedging activity during the year, which has moderated
the impact of recent market volatility on our capital position.
Through a series of non-cash and cash actions,
we reduced the balance of the intercompany loan between our main UK general insurance legal entity, Aviva Insurance Limited, and
the Group, from £2.8 billion as at the end of February 2015 down to £1.5 billion as at the end of February 2016, below
our target of £2.2 billion. Our external debt leverage improved slightly and remains within our target range of being comparable
to an AA level. Liquidity at the centre is £1.3 billion as at the end of February 2016
(February 2015: £1.1 billion)
and within our risk appetite.
Efficiency gains
We hit our operating expense ratio
6
target
of 50% in 2015, a year earlier than expected. On a constant currency basis and excluding Friends Life, operating expenses reduced
by 1%. In our business segments, our expense ratios improved in general insurance to 13.9%
(FY14: 14.8%)
and in health to
14.5%
(FY14: 15.7%)
. However, the impact of the Friends Life acquisition increased the life insurance expense ratio
3
for the life segment to 32.2%
(FY14: 29.7%)
. Operating expenses have increased in Aviva Investors and Asia as we have funded
growth in those businesses and our group expenses include a significant investment in digital.
Capital generation
Although Solvency II did not apply during 2015,
we estimate, based on unaudited figures, that Aviva generated approximately £2.7 billion of economic surplus in 2015, primarily
from management actions and operating activity, partly offset by adverse economic variances. This estimated figure is before dividends
paid, centre costs and external interest paid, and excludes the impact of both hybrid debt financing in 2015 and the impact of
the Friends Life acquisition
Dividend policy
Our commitment is to deliver on the Aviva investment
thesis of cash flow plus growth. After rebasing the shareholder dividend in 2013, we have increased it by 21% and 15% over the
last two years.
In 2014 our dividend cover was 2.7x
3
and our payout ratio was 37.5%. In 2015 we improved this to a payout ratio of 42.3% with a cover ratio of 2.4x. As we reduce spending
on Solvency II costs, integration and other restructuring costs in the coming years, this cover ratio should move towards our target
of approximately 2:1 coverage.
Cash Flow
Cash remittances
5
relating to 2015
activity were £1,507 million
(2014: £1,431 million)
including dividends and interest remitted on internal
loans. The increase was primarily driven by the UK and Ireland life and general insurance businesses as a result of
management actions during the year and the benefit from the
|
1
|
The estimated Solvency II ratio represents the shareholder view. This ratio excludes the contribution to Group SCR and Group
Own Funds of fully ring-fenced with-profits funds (£2.7 billion) and staff pension schemes in surplus (£0.7 billion)
– these exclusions have no impact on Solvency II surplus. The impact from internal reinsurance arrangements between UK Life,
UK and Ireland General Insurance and Aviva International Insurance Limited and the securitisation of equity release mortgages held
by UK Life, effective 1 January 2016, have also been reflected in the Solvency II position.
|
|
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.
|
|
3
|
Adjusted 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.
|
|
4
|
Excludes the impact from an outward quota share reinsurance agreement completed in 2015 in Aviva Insurance Limited (AIL)
|
|
5
|
For further information see Shareholder information – Sources of liquidity.
|
|
6
|
Refer to the glossary for the definition of the operating expense ratio.
|
internal interest received on Friends Life intercompany loans
following its acquisition in April 2015. Cash generated in Canada was largely retained in the business to part-fund the
proposed acquisition of Royal Bank of Canada General Insurance Company, which is expected to close in the third quarter of
2016. In addition, lower Europe cash remittances mainly reflect the impact of adverse foreign exchange movements.
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.
Factors affecting results of operations
Our financial results are affected by a number of external factors,
including demographic trends, general economic and market conditions, government policy and legislation and exchange rate fluctuations.
See ‘Other information – Risk and capital management’ for more information on these and other risk factors. In
addition, our financial results are affected by corporate actions taken by the Group, including acquisitions, disposals and other
actions aimed at achieving our stated strategy. We believe that all of these factors will continue to affect our results in the
future.
During the year, sterling strengthened against the euro,
Canadian dollar and Polish zloty which has impacted the overall results and performance. See IFRS financial statements –
note 1 – Exchange rates. In addition, the Group undertook the following actions which impacted the overall results and performance:
|
·
|
On 10 April 2015, the Group completed the acquisition of 100% of the outstanding ordinary shares of Friends Life Group Limited
(‘Friends Life’) through an all share exchange. See ‘IFRS Financial statements – note 2 – Subsidiaries’
for further details.
|
|
·
|
The
Group continued to undertake restructuring and transformation activity to align our business
operations with our strategy, and in connection with the Friends Life acquisition. Integration
and restructuring costs were £379 million
(2014:
£140 million),
principally driven by transaction and integration activity in
relation to
the acquisition of Friends Life, and expenses associated with the
Solvency II programme of £82 million (
2014: £94 million
).
|
|
·
|
The Group’s UK general insurance business completed an outwards reinsurance contract that provides significant protection
against claims volatility from mesothelioma, industrial deafness and other long-tail risks. This gave rise to a day one loss of
£53 million, comprising £712 million in premiums ceded less £659 million in reinsurance recoverables recognised.
|
|
·
|
There was an adverse movement of £235 million
(2014: £1,662
million favourable)
relating to the Group’s staff pension schemes which has been recognised in other comprehensive
income. This was principally due to the main UK staff pension scheme. The surplus has decreased over the period largely as a result
of a rise in interest rates and narrowing credit spreads. See ‘IFRS Financial statements – note 44 – Pension
obligations’ for further details.
|
Demographic trends
Our results are affected by the demographic make-up of the countries
in which we operate. The types of products that we sell reflect the needs of our customers. For example, in countries with a high
proportion of older people, a larger proportion of our sales will reflect their needs for pre-and post-retirement planning. Our
sales levels will also be impacted by our ability to help provide useful information to such policyholders on retirement planning
and to offer products that are competitive and respond to such policyholders’ needs.
In our long-term insurance and savings business
we make assumptions about key non-economic factors, such as the mortality rate that we expect to be experienced by our policyholders.
In countries where the life expectancy is growing, this will need to be reflected in our pricing models as lower mortality rates
will increase profitability of life insurance products but will reduce the returns on annuity products. We review our assumptions
against our own experience and industry expectations.
Economic conditions
Our results are affected by the economic conditions in our geographic
markets and, consequently, by economic cycles in those markets. High levels of general economic activity typically result in high
levels of demand for, and sales of, our products and services. Economic activity in turn is affected by government monetary and
fiscal policy as well as by global trading conditions and external shocks such as terrorist activity, war and oil price movements.
2015 saw continued uneven global economic activity,
leading to subdued global growth overall.
The economies where the Group has operations
that were impacted in 2015 by estimated low growth include: Italy 0.8%
7
, France 1.1%
7
and Canada 1.2%
7
.
Economic growth in the UK was 2.2%
7
. Some of our other markets experienced stronger growth, for example c.3%
8
in Turkey, c.3.5%
8
in Poland, and 6.9%
7
in China.
The world economy is expected to grow c.3.4%
7
in 2016 and 3.6%
7
in 2017, slightly higher than the previous two years (growth was 3.1%
7
in 2015 and 3.3%
in 2014). Advanced economies, led by the US and UK, are expected to continue their modest and uneven recovery, with the eurozone
continuing to grow slowly. Growth in emerging markets is expected to be mixed, impacted by the slowdown in China, lower commodity
prices and strains in some large emerging economies. Risks remain weighted to the downside.
Capital and credit market conditions
An important part of our business involves investing client, policyholder
and shareholder funds across a wide range of financial investments, including equities, fixed income securities and properties.
Our results are sensitive to volatility in the market value of these investments, either directly because we bear some or all of
the investment risk, or indirectly because we earn management fees for investments managed on behalf of policyholders. Investment
market conditions also affect the demand for a substantial portion of our life insurance products. In general, rising equity price
levels have a positive effect on the demand for equity-linked products, such as unit trusts and unit-linked life insurance products,
and conversely have a negative effect on the demand for products offering fixed or guaranteed minimum rates of return. Declining
equity price levels tend to have the opposite effects.
With-profits business
With-profits products are mainly written in our UK &
Ireland operating segment, with small funds in France and Singapore. These funds enable policyholders to participate in a
large pool of diverse investments, therefore reducing their exposure to individual securities or asset classes. The
investment pool is managed by us with returns to with-profits policyholders paid through bonuses which are added to the value
of their policy. In order to provide an element of stability in the returns to policyholders, bonuses are designed to reduce
policyholders’ exposure to the volatility of investment returns over time and to provide an equitable share of surplus
earned, depending on the investment and operating performance of the fund. Shareholders also have a participating interest in
the with-profits funds and any declared bonuses. Further details on the policyholder and shareholder participation in
with-profits funds in the UK is set out in ‘IFRS Financial Statements – Note 36 – Insurance
Liabilities’.
|
7
|
International Monetary Fund world economic outlook (January 2016)
|
|
8
|
International Monetary Fund world economic outlook (October 2015)
|
Shareholders’ profits arising on with-profits
business under IFRS depend on the total bonuses declared to policyholders on an annual basis.
The level of bonuses declared to policyholders
is influenced by the actual returns on investments and our expectation of future rates of return. Whilst bonuses can never be negative,
a predicted sustained fall in equity markets could lead to a reduction in regular and final bonus rates, thereby reducing both
policyholder returns and shareholders’ profit under IFRS.
General insurance and health underwriting cycle
Our general insurance and health business is comprised of our property
and casualty insurance and health insurance operations. In 2015, general insurance and health sales accounted for 39% of Group
net written premiums (NWP) from continuing operations. Demand for general insurance is usually price-sensitive because of the limited
degree of product differentiation inherent in the industry. As a result, the price of insuring property and casualty risks is subject
to a cycle (called an underwriting cycle). In periods when the price of risk is high, the high profitability of selling insurance
attracts new entrants and hence new capital into the market. Increased competition, however, drives prices down. Eventually the
business becomes uneconomic and some industry players, suffering from losses, exit the market whilst others fail, resulting in
lower capital invested within the market. Decreased competition leads to increasing prices, thereby repeating the cycle. Our various
general insurance markets are not always at the same stage of the underwriting cycle.
During 2015, the UK personal motor market saw
prices start to rise, following 3 years of premium reductions which had resulted from intense competition combined with regulatory
changes designed to reduce the cost of claims. Challenging market conditions apply to other UK classes of business as insurers
seek opportunities to gain share in segments with better margin, putting pressure on rates and extent of cover.
We expect the underwriting cycle to continue
in the future but to be less pronounced than in the past. Capital markets are imposing financial discipline by being increasingly
more demanding about performance from insurance companies before extending new capital. Such discipline, together with the increased
concentration of competitors within the market, and the adoption of more advanced pricing methods, is expected to make the underwriting
cycle less pronounced in the future.
Natural and man-made disasters
Our general insurance business results are affected by the amount
of claims we need to pay out which, in turn, can be subject to significant volatility depending on many factors, including natural
and man-made disasters. Natural disasters arise from adverse weather, earthquakes and other such natural phenomena. Man-made disasters
include accidents and intentional events, such as acts of terrorism. These events are difficult to predict with a high degree of
accuracy, although they generally occur infrequently at a material level. Our exposure to large disasters is somewhat reduced through
our focus on personal lines business and small to medium sized commercial risks in the general insurance business. The Group cedes
the majority of its worldwide catastrophe risk to third-party reinsurers.
In 2015 our UK general insurance business suffered
losses due to severe flooding in December 2015 (see ‘Market performance – United Kingdom and Ireland’ below for
further details).
Government policy and legislation
Changes in government policy and legislation are applicable to our
business in many of the markets in which we operate, particularly in the UK and may affect the results of our operations. These
include changes to the tax treatment of financial products and services, government pension arrangements and policies, the regulation
of selling practices and the regulation of solvency standards. Such changes may affect our existing and future business by, for
example, requiring us to change our range of products and services, causing customers to cancel existing policies, requiring us
to redesign our technology, requiring us to retrain our staff or increase our tax liability. As a global business, we are exposed
to various local political, regulatory and economic conditions, and business risks and challenges which may affect the demand for
our products and services, the value of our investments portfolio and the credit quality of local counterparties. Our regulated
business is subject to extensive regulatory supervision both in the UK and internationally. For details please refer to the section
‘Shareholder information – Regulation’.
Exchange rate fluctuations
We publish our consolidated financial statements in pounds sterling.
Due to our substantial non-UK operations, a significant portion of our operating earnings and net assets are denominated in currencies
other than sterling, most notably the euro, Canadian dollar and the Polish zloty. As a consequence, our results are exposed to
translation risk arising from fluctuations in the values of these currencies against sterling.
We generally do not hedge foreign currency revenues,
as we retain local currency in each business to support business growth, to meet local and regulatory market requirements and to
maintain sufficient assets in local currency to match local currency liabilities.
Movements in exchange rates may affect the value
of consolidated shareholders’ equity, which is expressed in sterling. Exchange differences taken to other comprehensive income
arise on the translation of the net investment in foreign subsidiaries, associates and joint ventures. This aspect of foreign exchange
risk is monitored centrally against limits that we have set to control the extent to which capital deployment and capital requirements
are not aligned. We use currency borrowings and derivatives when necessary to keep currency exposures within these predetermined
limits, and to hedge specific foreign exchange risks when appropriate; for example, in any acquisition or disposal activity.
During 2015, sterling strengthened against a
number of currencies including the euro and the Canadian dollar. This resulted in a foreign currency loss in other comprehensive
income of £378 million
(2014: £396 million loss).
The impact of these fluctuations is limited to
a significant degree, however, by the fact that revenues, expenses, assets and liabilities within our non-UK operations are generally
denominated in local currencies.
Acquisitions and disposals
Over the last three years we have completed and announced a number
of transactions, some of which have had a material impact on our results. These transactions reflect our strategic objectives of
narrowing our focus to businesses where we can produce attractive returns and exit businesses which we do not consider central
to our future growth.
Activity in 2015
On 10 April 2015, the Group completed the acquisition of 100% of the
outstanding shares of Friends Life Group Limited (‘Friends Life‘) through an all share exchange. 1,086,326,606 Group
shares were issued for a consideration of £5,975 million. During 2015 the Group also completed other minor acquisitions,
undertook a further sale of shares in our Turkey Life business, and sold some small reinsurance operations in Asia.
Further details can be found in the section ‘IFRS
Financial statements – note 2 – Subsidiaries’.
Activity in 2014
In May 2014, the Group restructured its existing business in Indonesia
and reduced its ownership interest from 60% to 50% to form a 50-50 joint venture (Astra Aviva Life) between Aviva and PT Astra
International Tbk.
On 27 June 2014, the Group completed the disposal
of its 47% holding in Woori Aviva Life Insurance Co. Ltd in South Korea for consideration of £17 million.
On 30 June 2014, Finoa Srl, an Italian holding
company in which the Group owns a 50% share, disposed of its entire interest in Eurovita Assicurazioni S.p.A for gross cash consideration
of £36 million.
Also on 30 June 2014, the Group completed the
sale of US equity manager River Road Asset Management, LLC (‘River Road‘) to Affiliated Managers Group, Inc. for consideration
of £75 million.
In October 2013, the Group completed the sale
of its US Life subsidiary. In 2014, the Group paid a settlement of £20 million related to the purchase price adjustment.
The settlement and the aggregate development of other provisions related to the discontinued operations in 2014 resulted in a net
£58 million gain which has been presented as profit on disposal of discontinued operations.
On 13 November 2014 the Group and its joint venture
partner Sabanci Holdings completed an initial public offering of a minority share of their Turkish life and pensions joint venture
AvivaSA Emeklilik ve Hayat A.s (‘Aviva SA’). The sale reduced the Group’s holding in Aviva SA from 49.8% to 41.3%
which continued to be recognised as a joint venture. The Group received cash proceeds of £40 million from the share sale
resulting in a £23 million gain.
On 11 December 2014, the Group completed the
disposal of its 50% holding in Spanish subsidiary CXG Aviva Corporacion Caixa Galicia de Seguros y Reaseguros, S.A. for cash consideration
of £221 million.
On 18 December 2014, the Group completed the
sale of its Turkish general insurance operations resulting in a £17 million loss on sale.
Further details can be found in the section ‘IFRS
Financial statements – note 2 – Subsidiaries’.
Basis of earnings by line of business
Our earnings originate from four main lines of business: our long-term
insurance and savings business, which includes a range of life insurance and savings products; general insurance, which focuses
on personal and commercial lines; health insurance and fund management, which manages funds on behalf of our long-term insurance
and general insurance businesses, external institutions, pension funds and retail clients. These lines of business are present
in our various operating segments to a greater or lesser extent.
In the UK, we have major long-term insurance
and savings businesses and general insurance and health businesses; in Europe we have long-term insurance and savings businesses
in all countries in which we operate, large general insurance businesses in France, Ireland and Italy, and smaller general insurance
operations in several other countries and health businesses in France and Ireland; in Canada we have a leading general insurance
operation; in Asia we predominantly have long-term insurance and savings businesses. Our fund management businesses operate across
Europe, Asia, North America and the UK.
Long-term insurance and savings business
For most of our life insurance businesses, such as those in the UK
and France, operating earnings are generated principally from our in-force books of business. Our in-force books consist of business
written in prior years and on which we continue to generate profits for shareholders. Under IFRS, certain costs incurred in acquiring
new business must be expensed, thereby typically giving rise to a loss in the period of acquisition, although the degree of this
effect will depend on the pricing structure of product offerings. In certain higher growth markets, current year sales have a more
significant effect on current year operating earnings.
UK with-profits business
With-profits products are designed to pay policyholders smoother
investment returns through a combination of regular bonuses and final bonuses. Shareholders’ profit emerges from this business
in direct proportion to policyholder bonuses as shareholders receive up to one-ninth of the value of each year’s bonus declaration
to policyholders. Accordingly, the smoothing inherent in the bonus declarations provides for relatively stable annual shareholders’
profit from this business. The most significant factors that influence the determination of bonus rates are the return on the
investments of the with-profits funds and expectations about future investment returns. Actual and expected investment returns
are affected by, among other factors, the mix of investments supporting the with-profits fund, which in turn is influenced by
the extent of the inherited estate within the with-profits fund.
The annual excess of premiums and investment
return over operating expenses, benefit provisions and claims payments within our with-profits funds that are not distributed as
bonuses and related shareholders’ profit is transferred from the income statement to the unallocated divisible surplus. Conversely,
if a shortfall arises one year, for example because of insufficient investment return, a transfer out of the unallocated divisible
surplus finances bonus declarations and related shareholders’ profit.
The unallocated divisible surplus consists of
future (as yet undetermined) policyholder benefits, associated shareholders’ profit and the inherited estate. The inherited
estate serves as working capital for our with-profits funds. It affords the with-profits funds a degree of freedom to invest a
substantial portion of the funds’ assets in investments yielding higher returns than might otherwise be obtainable without
being constrained by the need to demonstrate solvency.
Other participating business
Outside of the UK, most of our long-term operations write participating
business. This is predominantly savings or pensions business, where the policyholders receive guaranteed minimum investment returns,
and additional earnings are shared between policyholders and shareholders in accordance with local regulatory and policy conditions.
This may also be referred to as ‘with-profits’ business.
Other long-term insurance and savings business
Non-profit business falls into two categories: investment type business
and risk cover and annuity business.
Investment type business, which accounts for
most of our non-profit business, includes predominantly unit-linked life and pensions business where the risk of investing policy
assets is borne entirely by the policyholder. Operating earnings arise from unit-linked business when fees charged to policyholders
based on the value of the policy assets exceed costs of acquiring new business and administration costs. Shareholders bear the
risk of investing shareholder capital in support of these operations.
Risk cover business includes term assurance,
or term life insurance business. Annuity business includes immediate annuities purchased for individuals or on a bulk purchase
basis for groups of people. The risk of investing policy assets in this business is borne entirely by the shareholders. Operating
earnings arise when premiums, and investment return earned on assets supporting insurance liabilities and shareholder capital,
exceed claims and benefit costs, costs of acquiring new business and administration costs.
General insurance and health business
Operating earnings within our general insurance and health business
arise when premiums and investment return earned on assets supporting insurance liabilities and shareholder capital exceed claims
costs, costs of acquiring new business and administration costs.
Fund management
Fund management operating earnings consist of fees earned for managing
policyholder funds and external retail and institutional funds on behalf of clients, net of operating expenses.
Arrangements for the management of proprietary
funds are conducted on an arm’s length basis between our fund management and insurance businesses. Such arrangements exist
mainly in the UK, France, Ireland and Canada. Proprietary insurance funds in most other countries are externally managed.
Other operations
Other operations include our operations other than insurance and fund
management, including Group Centre expenses.
Financial highlights
The following analysis is based on our consolidated financial statements
and should be read in conjunction with those statements. In order to fully explain the performance of our business, we discuss
and analyse the results of our business in terms of certain financial measures which are based on ‘non-GAAP measures’
and which we use for internal monitoring purposes. We review these in addition to GAAP measures, such as profit before and after
tax.
The remainder of the financial performance section
focuses on the activity of the Group’s continuing operations.
Non-GAAP measures
Sales
The total sales of the Group consist of long-term insurance and savings
new business sales and general insurance and health net written premiums (excluding long-term health business).
Long-term insurance and savings new business sales
Sales of the long-term insurance and savings business consist of:
|
·
|
Insurance and participating investment business
|
|
–
|
This includes traditional life insurance, long-term health, annuity business and with-profits business.
|
|
–
|
There is an element of insurance risk borne by the Group therefore, under IFRS, these are reported within net written premiums.
|
|
·
|
Non-participating investment business
|
|
–
|
This includes unit-linked business and pensions business.
|
|
–
|
The amounts received for this business are treated as deposits under IFRS and an investment management fee is earned on the
funds deposited.
|
|
–
|
For new business reporting in the UK, companies continue to report non-participating investment business within their ‘covered
business’ sales, in line with the historic treatment under UK GAAP.
|
|
·
|
Non-covered business or investment sales:
|
|
–
|
These include retail sales of mutual fund type products.
|
|
–
|
There is no insurance risk borne by the Group therefore, under IFRS, these are treated as deposits and an investment management
fee income is earned on the funds deposited.
|
Sales is a non-GAAP financial measure and financial performance
indicator that we report to our key decision makers in the businesses in order to help assess the value of new business from our
customers and compare performance across the markets in which we operate.
For long-term insurance and savings new business,
we define sales as the sum of the present value of new business premiums (PVNBP) of life, pension and savings products and investment
sales.
PVNBP is equal to total single premium sales
received in the year plus the discounted value of annual premiums expected to be received over the terms of newly incepted contracts
and is calculated as at the date of sale. We adjust annual premiums to reflect the expected stream of business coming from this
new business over future years. In the view of management, this performance measure better recognises the relative economic value
of regular premium contracts compared with single premium contracts. PVNBP is a European insurance industry standard measure of
new business.
For our long-term insurance and savings business,
we believe that sales is an important measure of underlying performance and a better measure for new business than IFRS net written
premiums. We consider that the use of sales over IFRS net written premiums provides a:
|
·
|
Consistent treatment of long-term insurance and investment contracts: IFRS net written premiums do not include deposits received
on non-participating investment contracts. Long-term insurance contracts and participating investment contracts both contain a
deposit component, which are included in IFRS net written premiums, in addition to an insurance risk component. Therefore, to assess
the revenue generated on a consistent basis between types of contracts, we evaluate the present value of new business sales of
long-term insurance and investment products on the basis of total premiums and deposits collected, including sales of mutual fund
type products such as unit trusts and open ended investment companies (OEICs).
|
|
·
|
Better reflection of the relative economic value of regular premium contracts compared to single premium contracts: Sales recognise
the economic value of all expected contractual cash flows for regular premium contracts in the year of inception, whereas IFRS
net written premiums only recognise premiums received in the year.
|
|
·
|
Better reflection of current management actions in the year: IFRS net written premiums include premiums on regular premium
contracts which incepted in prior years, and therefore reflect the actions of management in prior years.
|
In comparison with IFRS net written premiums, sales do not include
premiums received from contracts in-force at the beginning of the year, even though these are a source of IFRS revenue, as these
have already been recognised as sales in the year of inception of the contract. In addition, unlike IFRS net written premiums,
sales do not reflect the effect on premiums of any increase or decrease in persistency of regular premium contracts compared with
what was assumed at the inception of the contract.
PVNBP is not a substitute for net written premiums
as determined in accordance with IFRS. Our definition of sales may differ from similar measures used by other companies, and may
change over time.
General insurance and health sales
General insurance and health (excluding long-term health business)
sales are defined as IFRS net written premiums
2
, which are premiums written during the year net of amounts reinsured
with third parties. For sales reporting, we use the GAAP measure for this business.
The table below presents our consolidated sales
for the three years ended 31 December 2015, 2014 and 2013 for our continuing operations, as well as the reconciliation of sales
to net written premiums in IFRS.
Continuing operations
|
2015
£m
|
2014
£m
|
2013
£m
|
Long-term insurance, savings and health new business sales
|
33,122
|
27,099
|
26,012
|
General insurance and health sales (excluding long-term health)
|
7,510
|
7,760
|
8,173
|
Total sales
|
40,632
|
34,859
|
34,185
|
Less: Effect of capitalisation factor on regular premium long-term business
|
(10,357)
|
(7,314)
|
(6,807)
|
Share of long-term new business sales from JVs and associates
|
(427)
|
(473)
|
(660)
|
Annualisation impact of regular premium long-term business
|
(451)
|
(214)
|
(203)
|
Deposits taken on non-participating investment contracts and equity release contracts
|
(6,560)
|
(5,641)
|
(4,389)
|
Retail sales of mutual fund type products (investment sales)
|
(6,437)
|
(4,977)
|
(4,875)
|
Add: IFRS gross written premiums from existing long-term business
|
4,876
|
4,787
|
4,143
|
Less: long-term insurance and savings business premiums ceded to reinsurers
|
(1,529)
|
(971)
|
(905)
|
Less: outward reinsurance premium relating to general insurance business
1
|
(712)
|
—
|
—
|
Total IFRS net written premiums
|
19,035
|
20,056
|
20,489
|
Analysed as:
|
|
|
|
Long-term insurance and savings net written premiums
|
11,658
|
11,756
|
11,769
|
General insurance and health net written premiums
|
7,377
|
8,300
|
8,720
|
|
19,035
|
20,056
|
20,489
|
|
1
|
2015 represents a reinsurance premium ceded of £712 million relating to an outwards reinsurance contract completed by
the UK General Insurance business.
|
|
·
|
Effect of capitalisation factor on regular premium long-term
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.
|
The discounted value reflects the expected
income streams over the life of the contract, adjusted for expected levels of persistency, discounted back to present value. The
discounted value can also be expressed as annualised regular premiums multiplied by a weighted average capitalisation factor (WACF).
The WACF varies over time depending on the mix of new products sold, the average outstanding term of the new contracts and the
projection assumptions.
|
·
|
Share of long-term new business sales from joint ventures and
associates
Total long-term new business sales include our share of sales from joint ventures and associates. Under IFRS reporting, premiums
from these sales are excluded from our consolidated accounts, with only our share of profits or losses from such businesses being
brought into the income statement separately.
|
|
·
|
Annualisation impact of regular premium long-term business
As noted above, the calculation of PVNBP includes annualised regular premiums. The impact of this annualisation is removed in order
to reconcile the non-GAAP new business sales to IFRS premiums and will vary depending on the volume of regular premium sales during
the year.
|
|
·
|
Deposits taken on non-participating investment contracts and
equity release contracts
Under IFRS, non-participating investment contracts are recognised in the Statement of Financial Position by recording the cash
received as a deposit and an associated liability and are not recorded as premiums received in the IFRS income statement. Only
the margin earned is recognised in the IFRS income statement.
|
|
·
|
Retail sales of mutual fund type products (investment sales)
Investment sales included in the total sales number represent the cash inflows received from customers to invest in mutual fund
type products such as unit trusts and OEICs. We earn fees on the investment and management of these funds which are recorded separately
in the IFRS income statement as ‘fees and commissions received’ and are not included in statutory premiums.
|
|
·
|
IFRS gross written premiums from existing long-term business
The non-GAAP measure of long-term and savings sales focuses on new business written in the year under review whilst the IFRS income
statement includes premiums received from all business, both new and existing.
|
Consolidated results of operations
The table below presents our consolidated sales from continuing operations
for the three years ended 31 December 2015, 2014 and 2013.
Continuing operations
|
2015
£m
|
2014
£m
|
2013
£m
|
United Kingdom & Ireland Life
|
16,797
|
12,444
|
12,393
|
United Kingdom & Ireland GI
2
|
4,051
|
4,028
|
4,200
|
France
|
5,835
|
5,739
|
5,603
|
Poland
|
514
|
630
|
555
|
Italy, Spain and Other
|
3,559
|
4,639
|
4,430
|
Canada
|
1,992
|
2,104
|
2,250
|
Asia
|
2,879
|
2,162
|
1,980
|
Aviva Investors
|
5,005
|
3,106
|
2,741
|
Other Group activities
|
—
|
7
|
33
|
Total sales
2
|
40,632
|
34,859
|
34,185
|
|
2
|
2015 excludes a reinsurance premium ceded of £712 million relating to an outwards reinsurance contract completed by the
UK General Insurance business.
|
Sales (from continuing operations)
Year ended 31 December 2015
Total sales from continuing operations increased to £40,632
million
(2014: £34,859 million)
for the reasons set
out in the market performance sections below.
Year ended 31 December 2014
Total sales from continuing operations increased to £34,859
million
(2013: £34,185 million)
for the reasons set
out in the market performance sections below.
Adjusted operating profit
We report to our chief operating decision makers in the businesses
the results of our operating segments using a non-GAAP financial performance measure we refer to as ‘adjusted operating profit’.
Management has changed the definition of adjusted operating profit during 2015 to exclude amortisation and impairment of acquired
value of in-force business and comparatives have been restated accordingly. We now define our segment adjusted operating profit
as profit before income taxes and non-controlling interests in earnings, excluding the following items: investment return variances
and economic assumption changes on long-term and non-long-term business, impairment of goodwill, associates, and joint ventures
and other amounts expensed, amortisation and impairment of acquired value of in-force business, amortisation and impairment of
other intangibles, profit or loss on the disposal and remeasurement of subsidiaries, joint ventures and associates and integration
and restructuring costs and other items.
Whilst these excluded items are significant components
in understanding and assessing our consolidated financial performance, we believe that the presentation of adjusted operating profit
enhances the understanding and comparability of the underlying performance of our segments by highlighting net income attributable
to on-going segment operations.
Adjusted operating profit for long-term insurance
and savings business is based on expected investment returns on financial investments backing shareholder and policyholder funds
over the period, with consistent allowance for the corresponding expected movements in liabilities. The expected rate of return
is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment
return and asset classification. Where assets are classified as fair value through profit and loss, expected return is based on
the same assumptions used under embedded value principles for fixed income securities, equities and properties. Where fixed interest
securities are classified as available for sale the expected return comprises interest or dividend payments and amortisation of
the premium or discount at purchase. Adjusted operating profit includes the effect of variances in experience for non-economic
items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic
items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment
returns, and the impact of changes in economic assumptions on liabilities, are disclosed as non-operating items.
Adjusted operating profit for non-long-term insurance
business is based on expected investment returns on financial investments backing shareholder funds over the period. Expected investment
returns are calculated for equities and properties by multiplying the opening market value of the investments, adjusted for sales
and purchases during the year, by the longer-term rate of return. This rate of return is the same as that applied for the long-term
business expected returns. The longer-term return for other investments is the actual income receivable for the period. Changes
due to market value movement and interest rate changes, which give rise to variances between actual and expected investment returns,
are disclosed as non-operating items. The impact of changes in the discount rate applied to claims provisions is also treated outside
adjusted operating profit.
Adjusted operating profit is not a substitute
for profit before income taxes and non-controlling interests in earnings or net income as determined in accordance with IFRS. Our
definition of adjusted operating profit may differ from similar measures used by other companies, and may change over time.
The table below presents our consolidated
adjusted operating profit for the three years ended 31 December 2015, 2014 and 2013, as well as the reconciliation of adjusted
operating profit to profit before tax attributable to shareholders’ profits under IFRS.
Continuing operations
|
2015
£m
|
Restated
1
2014
£m
|
Restated
1
2013
£m
|
United Kingdom & Ireland Life
|
1,424
|
1,062
|
1,139
|
United Kingdom & Ireland GI
|
414
|
492
|
465
|
France
|
449
|
470
|
467
|
Poland
|
141
|
195
|
187
|
Italy, Spain and Other
|
268
|
304
|
325
|
Canada
|
214
|
191
|
246
|
Asia
|
223
|
78
|
87
|
Aviva Investors
|
106
|
63
|
(26)
|
Other Group activities
|
(574)
|
(642)
|
(793)
|
Adjusted operating profit before tax attributable to shareholders’ profit
|
2,665
|
2,213
|
2,097
|
Integration and restructuring costs
|
(379)
|
(140)
|
(363)
|
Adjusted operating profit before tax after integration and restructuring costs
|
2,286
|
2,073
|
1,734
|
Adjusted for the following:
|
|
|
|
Investment return variances and economic assumption changes on long-term business
|
14
|
72
|
(49)
|
Short-term fluctuation in return on investments on non long-term business
|
(84)
|
261
|
(336)
|
Economic assumption changes on general insurance and health business
|
(100)
|
(145)
|
33
|
Impairment of goodwill, associates and joint ventures and other amounts expensed
|
(22)
|
(24)
|
(77)
|
Amortisation and impairment of intangibles
|
(155)
|
(90)
|
(91)
|
Amortisation and impairment of acquired value of in-force business
|
(498)
|
(40)
|
(48)
|
Profit on the disposal and re-measurement of subsidiaries and associates
|
2
|
174
|
115
|
Other
|
(53)
|
—
|
—
|
Non-operating items before tax
|
(896)
|
208
|
(453)
|
Profit before tax attributable to shareholders’ profits – continuing operations
|
1,390
|
2,281
|
1,281
|
Profit before tax attributable to shareholders’ profits – discontinued operations
|
—
|
58
|
1,538
|
Profit before tax attributable to shareholders’ profits
|
1,390
|
2,339
|
2,819
|
|
1
|
Adjusted 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. There is no impact on the result or the total equity for any period presented as a
result of this restatement.
|
Adjusted operating profit before tax
(from continuing operations)
Year ended 31 December 2015
Adjusted operating profit before tax increased by £452
million to £2,665 million
(2014: £2,213 million
1
)
for the reasons set out in the market performance section below.
Year ended 31 December 2014
Adjusted operating profit before tax increased by 6% to £2,213
million
(2013: £2,097 million
1
)
for the
reasons set out in the market performance section below.
Adjusting items (from continuing operations)
Year ended 31 December 2015
Integration and restructuring costs from continuing
operations were £379 million
(2014: £140 million),
principally driven by transaction and integration activities in relation to the acquisition of Friends Life. It also includes expenses
associated with the Solvency II programme of £82 million
(2014: £94 million)
.
Life investment variances were £14 million
positive
(2014: £72 million positive)
mainly driven
by realised bond gains and equity outperformance in France and positive variances in Asia, partially offset by widening credit
spreads in Italy. The investment variance in the UK was broadly neutral.
Short-term fluctuations on non-long term business
were £84 million negative
(2014: £261 million positive
).
The adverse movement in short-term fluctuations during 2015 compared with 2014 is mainly due to an increase in risk-free rates
reducing fixed income security market values.
Economic assumption changes of £100 million
adverse (
2014: £145 million adverse
) arise as a result of an increase in the expected future inflation rates used
to calculate reserves for periodic payment orders (PPOs), and a decrease in the swap rates used to discount latent claims reserves
and PPOs.
The total charge for impairment of goodwill,
associates and joint ventures and other amounts expensed for the year was £22 million
(2014:
£24 million
).
Amortisation and impairment of intangibles was
a charge of of £155 million (
2014: £90 million charge
), and amortisation and impairment of acquired value of
in-force business (AVIF) was a charge of £498 million
(2014: £40 million)
. The higher charges during 2015 were
driven by amortisation of the AVIF and intangibles arising on the acquisition of Friends Life.
Profit on the disposal and remeasurement of subsidiaries,
joint ventures and associates was £2 million
(2014: £174
million).
See ‘IFRS Financial Statements – note 2 – Subsidiaries’ for further details.
Other items, a charge of £53 million, represents
a day one loss upon the completion of an outwards reinsurance contract by the UK General Insurance business, which provides significant
protection against claims volatility from mesothelioma, industrial deafness and other long tail risks.
Further details on significant movements are
outlined in the market performance sections below.
Year ended 31 December 2014
Integration and restructuring costs from continuing operations were
£140 million
(2013: £363 million)
and mainly
included expenses associated with the Solvency II programme. Integration and restructuring costs reduced by 61%, driven by a significant
reduction in transformation spend.
Life investment variances were £72 million
positive
(2013: £49 million negative)
mainly driven
by lower risk-free rates and narrowing credit spreads on government and corporate bonds in Italy and Spain. Adverse variances in
the UK were due to the adverse impact of falling reinvestment yields net of improved underlying property values on commercial mortgages
partly offset by a change to the model used to value certain equity release assets and the consequential impact on the liabilities
that they back.
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.
The total charge for impairment of goodwill,
joint ventures and associates for the year was £24 million
(2013:
£77 million
).
Profit on disposal and remeasurement
of subsidiaries, joint ventures and associates was £174 million
(2013:
£115 million).
See ‘IFRS Financial Statements – note 2 – Subsidiaries’ for further details.
Continuing operations
|
2015
£m
|
2014
£m
|
2013
£m
|
Income
|
|
|
|
Gross written premiums
|
21,925
|
21,670
|
22,035
|
Premiums ceded to reinsurers
|
(2,890)
|
(1,614)
|
(1,546)
|
Premiums written net of reinsurance
|
19,035
|
20,056
|
20,489
|
Net change in provision for unearned premiums
|
(111)
|
1
|
134
|
Net earned premiums
|
18,924
|
20,057
|
20,623
|
Fee and commission income
|
1,797
|
1,230
|
1,279
|
Net investment income
|
2,825
|
21,889
|
12,509
|
Share of profit of joint ventures and associates
|
180
|
147
|
120
|
Profit on the disposal and re-measurement of subsidiaries, joint ventures and associates
|
2
|
174
|
115
|
|
23,728
|
43,497
|
34,646
|
Expenses
|
|
|
|
Claims and benefits paid, net of recoveries from reinsurers
|
(21,985)
|
(19,474)
|
(22,093)
|
Change in insurance liabilities, net of reinsurance
|
6,681
|
(5,570)
|
2,493
|
Change in investment contract provisions
|
(1,487)
|
(6,518)
|
(7,050)
|
Change in unallocated divisible surplus
|
984
|
(3,364)
|
280
|
Fee and commission expense
|
(3,347)
|
(3,389)
|
(3,975)
|
Other expenses
|
(2,784)
|
(1,979)
|
(2,220)
|
Finance costs
|
(618)
|
(540)
|
(609)
|
|
(22,556)
|
(40,834)
|
(33,174)
|
Profit before tax
|
1,172
|
2,663
|
1,472
|
Tax attributable to policyholders’ returns
|
218
|
(382)
|
(191)
|
Profit before tax attributable to shareholders’ profits
|
1,390
|
2,281
|
1,281
|
Net Written Premiums (from continuing
operations)
Year ended 31 December 2015
Net written premiums for continuing operations were £19,035
million
(2014: £20,056 million)
which includes
a reinsurance
premium ceded of £712 million relating to an outwards reinsurance contract completed by the UK General Insurance business.
Excluding this, net written premiums decreased by £309 million, or 2%, to £19,747 million
(2014: £20,056 million)
.
Long-term insurance and savings premiums decreased
by £98 million, or 1% to £11,658 million
(2014: £11,756
million).
Higher sales in France and the UK (mainly due to the contribution from Friends Life) were more than offset by lower premiums
in Italy and Spain (mainly due to the effect of disposals in the prior period and adverse foreign exchange), and Ireland.
G
eneral
insurance and health premiums were £7,377 million
(2014: £8,300
million).
Excluding the outwards reinsurance premium described above,
premiums decreased by £211 million, or 3%,
to £8,089 million
(2014: £8,300 million)
. Higher
sales in the UK were more than offset by lower premiums in Europe and Canada mainly due to adverse foreign exchange.
Further details on significant movements are
outlined in the market performance sections below.
Year ended 31 December 2014
Net written premiums for continuing operations decreased by £433
million, or 2%, to £20,056 million
(2013: £20,489 million)
.
Long-term insurance and savings remained broadly flat at £11,756 million
(2013:
£11,769 million)
with lower sales in the UK and Spain (mainly due to the disposal of Aseval in 2013) offset by
higher sales in France, Poland, Italy and Asia. General insurance and health premiums decreased by £420 million, or 5%, to
£8,300 million
(2013: £8,720 million)
, mainly
reflecting lower sales in the UK and Ireland.
Net investment income (from continuing
operations)
Year ended 31 December 2015
Net investment income from continuing operations was £2,825
million
(2014: £21,889 million)
. Compared to 2014,
unrealised gains were significantly lower in 2015 reflecting market movements, including lower fixed income security market values
arising from higher risk-free interest rates.
Year ended 31 December 2014
Net investment income from continuing operations was £21,889
million
(2013: £12,509 million)
. Compared to 2013,
realised and unrealised gains were higher in 2014 primarily as a result of higher fixed income security market values due to lower
interest rates.
Other income (from continuing operations)
Year ended 31 December 2015
Other income, which consists of fee and commission income, share of
profit after tax of joint ventures and associates, and profit on disposal and remeasurement of subsidiaries, joint ventures and
associates, increased by £428 million, or 28%, to £1,979 million in 2015
(2014:
£1,551 million)
.
Fee and commission income increased by £567
million, or 46% to £1,797 million (
2014: £1,230 million
), mainly due to the contribution from the acquired Friends
Life businesses.
Profit on disposal and remeasurement of subsidiaries,
joint ventures and associates was £2 million
(2014: £174
million profit)
and the
share of profits from joint ventures and associates was £180 million
(2014:
£147 million)
.
Year ended 31 December 2014
Other income, which consists of fee and commission income, share of
profit/(loss) after tax of joint ventures and associates, and profit/(loss) on disposal and remeasurement of subsidiaries, joint
ventures and associates, increased by £37 million, or 2%, to £1,551 million in 2014
(2013:
£1,514 million)
. This was mainly due to profits on disposal and remeasurement of subsidiaries of £174 million
(2013: £115 million profit)
, including profits on disposal
of CxG in Spain (£132 million) and River Road (£35 million) in the United States.
Fee and commission income was broadly stable
and the share of profits from joint ventures and associates was £147 million
(2013:
£120 million)
.
Expenses (from continuing operations)
Year ended 31 December 2015
Claims and benefits paid net of reinsurance in 2015 increased by £2,511
million, or 13% to £21,985 million
(2014: £19,474 million)
.
This was mainly due to higher claims payments in UK Life following
the acquisition of Friends Life, partly offset by
lower claims in our European life businesses due in part to the weakening of the euro during 2015. General insurance and health
claims decreased by £437 million, or 8% to £5,176 million
(2014: £5,613 million)
mainly due to lower claims
in UK & Ireland GI.
Change in insurance liabilities in 2015 was a
credit of £6,681 million
(2014: £5,570 million charge)
,
resulting mainly from changes in economic and non-economic assumptions on long-term business.
The change in investment contract provisions
was a charge of £1,487 million
(2014: £6,518 million charge)
as a result of investment market conditions causing an increase in contract liabilities.
The change in unallocated divisible surplus (‘UDS’)
was a credit of £984 million
(2014: £3,364 million charge)
primarily driven by adverse market movements in Europe as a result of higher interest rates and corporate bond yields during 2015.
Fee and commission expense, other expenses and
finance costs increased by £841 million, or 14% to £6,749 million
(2014:
£5,908 million)
mainly as a result of increased amortisation of acquired value of in-force business following
the acquisition of Friends Life, and higher integration and restructuring costs principally driven by transaction and integration
activities in relation to the Friends Life acquisition. See ‘IFRS Financial Statements – note 5 – Details of
expenses’ for further details.
Year ended 31 December 2014
Claims and benefits paid net of reinsurance in 2014 decreased by £2,619
million, or 12% to £19,474 million
(2013: £22,093 million)
mainly due to lower claims payments in our life businesses and the strengthening of sterling during 2014. In particular there were
lower bond and pensions claims in the UK compared with prior year.
Change in insurance liabilities in 2014 was a
charge of £5,570 million
(2013: £2,493 million credit)
,
resulting from changes in economic and non-economic assumptions.
The change in investment contract provisions
was a charge of £6,518 million
(2013: £7,050 million charge)
as a result of improved investment market conditions causing an increase in contract liabilities.
The change in unallocated divisible surplus (‘UDS’)
was a charge of £3,364 million
(2013: £280 million credit)
primarily driven by Italy and France as a result of lower corporate and government bond yields during 2014.
Fee and commission expense, other expenses and
finance costs decreased by £896 million to £5,908 million
(2013:
£6,804 million)
mainly as a result of the Group’s cost savings programme, lower fee and commission expenses
primarily in the UK and lower finance costs due to the repayment of debt during the year. See ‘IFRS Financial Statements
– note 5 – Details of expenses’ for further details.
Profit before tax attributable to
shareholders’ profits (from continuing operations)
Year ended 31 December 2015
Profit before tax attributable to shareholders was £1,390 million
(2014: £2,281 million)
mainly due to the reasons set
out in the sections ‘net written premiums’, ‘net investment income’, ‘other income’ and ‘expenses’
above.
It also includes a credit of £218 million
(2014: £382 million charge)
in relation to tax attributable to policyholders’ returns. See ‘IFRS Financial
Statements – note 9 – Tax’ for further details.
Year ended 31 December 2014
Profit before tax attributable to shareholders was £2,281 million
(2013: £1,281 million)
. The increase was primarily
due to lower expenses and positive investment variances.
Market performance
United Kingdom and Ireland
UK & Ireland life
The table below presents sales, net written premiums, adjusted
operating profit and profit before tax attributable to shareholders’ profits under IFRS from our UK and Ireland long-term
businesses for the three years ended 31 December 2015, 2014 and 2013.
|
2015
£m
|
Restated
1
2014
£m
|
Restated
1
2013
£m
|
Pensions
|
8,950
|
5,803
|
5,476
|
Annuities
|
2,945
|
1,948
|
2,327
|
Bonds
|
139
|
174
|
183
|
Protection
|
1,586
|
1,103
|
992
|
Equity release
|
699
|
696
|
401
|
Others
|
1,917
|
2,285
|
2,545
|
United Kingdom
|
16,236
|
12,009
|
11,924
|
Ireland
|
561
|
435
|
469
|
Long-term insurance, savings and health sales
|
16,797
|
12,444
|
12,393
|
IFRS net written premiums
|
4,042
|
3,515
|
4,228
|
Adjusted operating profit before tax
|
|
|
|
United Kingdom
|
1,408
|
1,025
|
941
|
Ireland
|
24
|
24
|
26
|
Life business
|
1,432
|
1,049
|
967
|
General insurance and health – UK health
|
21
|
11
|
18
|
Fund management
|
—
|
6
|
23
|
Other operations
|
(29)
|
(4)
|
131
|
Total adjusted operating profit before tax
|
1,424
|
1,062
|
1,139
|
Profit before tax attributable to shareholders’ profits
|
717
|
980
|
717
|
|
1
|
Adjusted 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.
|
Year ended 31 December 2015
On a PVNBP basis, sales in the UK long-term insurance and savings
business increased by £4,227 million to £16,236 million
(2014:
£12,009 million
). This included a contribution from Friends Life of £4,477 million following the acquisition
in April 2015. Excluding Friends Life, UK long-term insurance and savings business decreased by £250 million, or 2%, to £11,759
million
(2014: £12,009 million
). Within this, growth
in sales of pensions and bulk purchase annuities was more than offset by lower sales of individual annuities following the pension
reforms announced in March 2014 together with the impact of the transfer of the retail fund management business to Aviva Investors
in 2014.
In Ireland, sales increased 29% to £561
million
(2014: £435 million)
mainly reflecting higher
sales of pensions and annuities.
UK and Ireland IFRS net written premiums were
up 15% to £4,042 million
(2014: £3,515 million)
mainly due to the post acquisition contribution from Friends Life.
Overall UK & Ireland Life adjusted operating
profit increased to £1,432 million
(2014
(restated)
: £1,049
million)
. UK life adjusted operating profit was £1,408 million
(2014
(restated)
:
£1,025 million)
, including a contribution of £358 million from Friends Life following its acquisition in April
2015. Excluding Friends Life, UK profits increased 2% to £1,050 million
(2014
(restated)
:
£1,025 million)
, benefitting from lower operating expenses as well as improved new business profitability. In Ireland,
adjusted operating profit was stable at £24 million
(2014 (restated): £24 million)
.
In UK Health, adjusted operating profit was up
£10 million to £21 million
(2014: £11 million)
due to lower expenses and the benefit of pricing actions.
Adjusted operating profit from other operations
resulted in a £29 million loss
(2014: £4 million loss)
reflecting
continued investment into the UK Life Platform business.
IFRS profit before tax attributable to shareholders’
profits decreased to £717 million
(2014: £980 million)
.
This includes higher adjusted operating profits which increased for the reasons set out above. It also includes a higher amortisation
of acquired value of in-force business charge of £350 million (
2014: £10 million charge
) following the acquisition
of Friends Life, higher integration and restructuring costs of £215 million
(2014: £28 million)
and a higher
amortisation of intangibles charge of £84 million
(2014: £31 million charge)
.
Year ended 31 December 2014
On a PVNBP basis, sales in the UK long-term insurance and savings
business increased by £85 million, or 1%, to £12,009 million
(2013:
£11,924 million
). Volumes in the UK remained broadly flat year on year. There has been a significant decrease
in individual annuities. This is primarily as a result of the changes announced by the UK Chancellor of the Exchequer in the Budget
in March 2014 which are intended to give increased flexibility as to how customers can access their pension from April 2015. These
changes are having a significant impact across the market and have seen many customers defer their decision regarding their pension,
exacerbating the general market decline for individual annuities. This decrease has been partly offset by increases in bulk purchase
annuities and equity release sales.
Pension sales were up 6% to £5,803 million
(2013: £5,476 million)
. Within this, sales of group
pensions decreased to £3,679 million
(2013: £3,809 million)
whilst sales of individual pensions were £2,124 million
(2013:
£1,667 million)
with growth in our platform (self-invested personal pension) business more than offset by lower
sales of other individual pensions products.
Sales of annuities were down 16% to £1,948
million
(2013: £2,327 million)
due to the reasons outlined
above. Protection sales were up 11% to £1,103 million
(2013: £992
million)
, reflecting higher sales of individual group business. Bond sales were down 5% to £174 million
(2013:
£183 million)
. Equity release sales were 74% higher at £696 million
(2013:
£401 million)
due to higher sales as a result of a strong market. Other sales (which include investment sales)
decreased 10% to £2,285 million
(2013: £2,545 million)
,
mainly as a result of the UK Retail Fund Management business being transferred from UK Life to Aviva Investors in May 2014. This
was partly offset by an increase in the UK Platform business driven by new business volumes.
In Ireland, sales fell 7% to £435 million
(2013: £469 million)
.
IFRS net written premiums were down 17% to £3,515
million
(2013: £4,228 million)
primarily due to the
impact of lower individual annuities sales.
Life business adjusted operating profit before
tax increased by 8% to £1,049 million
(2013 (restated): £967
million
). Within this, UK adjusted operating profit increased by 9% to £1,025 million
(2013
(restated): £941 million
). 2014 results saw a net additional benefit to profit from non-recurring items of £282
million
(2013: £116 million)
, mainly from longevity
assumption changes and expense reserve releases, which are partially offset by increased DAC amortisation charges on pension business.
Excluding these items, profits have decreased 10%, with the benefits of cost savings offset by the impact of reduced annuity trading
and lower expected returns as a result of de-risking activity. Ireland adjusted operating profit was down to £24 million
(2013 (restated): £26 million)
as we continue to make
progress in turning the business around.
Adjusted operating profit from other operations
resulted in a £4 million loss
(2013: £131 million profit
which included a £145 million one-off gain from plan amendments to the Ireland pension scheme).
IFRS profit before tax increased to £980
million
(2013: £717 million)
. This includes adjusted
operating profits of £1,062 million
(2013 (restated): £1,139
million)
. The increase in profit before tax was due to lower negative economic variances of £13 million
(2013:
£414 million negative)
. Adverse variances in the UK were due to the adverse impact of falling reinvestment yields
net of improved underlying property values on commercial mortgages partly offset by a change to the model used to value certain
equity release assets and the consequential impact on the liabilities that they back.
UK & Ireland general insurance
and health
The table below presents sales, net written premiums, adjusted
operating profit and profit before tax attributable to shareholders’ profits under IFRS from our UK and Ireland general insurance
and health businesses for the three years ended 31 December 2015, 2014 and 2013.
|
2015
£m
|
2014
£m
|
2013
£m
|
Total Sales
1
|
4,051
|
4,028
|
4,200
|
IFRS net written premiums
|
|
|
|
United Kingdom
|
2,972
|
3,663
|
3,823
|
Ireland
|
367
|
365
|
377
|
|
3,339
|
4,028
|
4,200
|
Adjusted operating profit before tax
|
|
|
|
United Kingdom
|
368
|
455
|
431
|
Ireland
|
41
|
33
|
40
|
General insurance and health business
|
409
|
488
|
471
|
Other operations
|
5
|
4
|
(6)
|
Total adjusted operating profit before tax
|
414
|
492
|
465
|
Profit before tax attributable to shareholders’ profits
|
140
|
406
|
387
|
|
1
|
2015 excludes a reinsurance premium ceded of £712 million relating to an outwards reinsurance contract.
|
Year end 31 December 2015
UK & Ireland general insurance and health NWP decreased to £3,339
million
(2014: £4,028 million)
, which
includes a reinsurance premium ceded of £712 million relating to an outwards reinsurance contract completed in
the year by the UK business. Excluding this, net written premiums increased by £23 million, or 1%, to £4,051 million
(2014: £4,028 million)
. In the UK, general insurance NWP increased 1% to £3,684 million
(2014:
£3,663 million)
primarily driven by growth in personal motor, partly offset by selected exits in personal property
lines
.
Ireland general insurance and health NWP was stable
at £367 million
(2014: £365 million)
.
Adjusted operating profit before tax from general
insurance and health business was down 16% to £409 million
(2014:
£488 million)
.
In the UK, adjusted operating profit was £368
million
(2014: £455 million).
Within this, longer term investment return reduced by £45 million to £215
million
(2014: £260 million)
mainly as a result of the lower intercompany loan balance (which is neutral at an overall
Group level). The underwriting result was £154 million
(2014: £199 million)
with the adverse weather experience
due to the December floods in the UK being partly offset by the benefit of expense savings and more favourable prior year claims
development.
In Ireland, general insurance and health adjusted
operating profit increased to £41 million
(2014: £33 million)
mainly driven by favourable weather experience
partly offset by lower prior year claims reserve releases.
IFRS profit before tax has decreased to £140
million
(2014: £406 million)
. This included adjusted
operating profits of £414 million
(2014: £492 million)
,
which decreased for the reasons set out above.
The remaining decrease in IFRS profit before
tax attributable to shareholders’ profits is due to higher integration and restructuring costs of £26 million
(2014:
£11 million),
adverse short-term investment variances of £84 million
(2014:
£82 million positive
), lower adverse economic assumption changes of £98 million
(2014: £145 million
adverse)
and the day one loss arising from the completion of the outwards reinsurance contract of £53 million.
Year end 31 December 2014
UK & Ireland general insurance and health NWP decreased by 4%
to £4,028 million
(2013: £4,200 million)
. Within
this, UK general insurance sales fell 4% to £3,663 million
(2013:
£3,823 million)
: personal lines NWP was down 5% to £2,152 million
(2013:
£2,276 million)
reflecting underwriting discipline in a soft market, and commercial lines NWP was down 2% to £1,511
million
(2013: £1,547 million)
reflecting management
actions to focus on profitability. Ireland general insurance and health NWP was £365 million
(2013:
£377 million)
.
Adjusted operating profit before tax from general
insurance and health business was up 4% to £488 million
(2013:
£471 million)
. An improvement in the underwriting result to £204 million
(2013:
£123 million)
, driven by expense savings and favourable prior year claims development, was partly offset by the
fact that 2013 benefitted from benign large loss experience and lower interest income on the internal loan ( see ‘Other Group
Activities’ below).
IFRS profit before tax increased to £406
million
(2013: £387 million)
. This included adjusted
operating profits of £492 million
(2013: £465 million)
,
which increased for the reasons set out above.
The increase in IFRS profit before tax is mainly
due to lower integration and restructuring costs of £11 million
(2013:
£24 million)
. The impact of positive short-term fluctuations in investments was £82 million
(2013:
£74 million negative
) and in 2014 this mainly arose due to a decrease in risk-free rates increasing fixed income
security market values. This was offset by an adverse impact from a decrease in the swap rate used to discount latent claims reserves
and periodic payment orders.
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.
|
2015
£m
|
Restated
1
2014
£m
|
Restated
1
2013
£m
|
Sales
|
|
|
|
Long-term insurance and savings business
|
4,821
|
4,633
|
4,498
|
General insurance and health net written premiums
|
1,014
|
1,106
|
1,105
|
Total sales
|
5,835
|
5,739
|
5,603
|
IFRS net written premiums
|
5,702
|
5,684
|
5,565
|
Adjusted operating profit before tax
|
|
|
|
Long-term insurance and savings business
|
395
|
412
|
404
|
General insurance and health
|
71
|
78
|
84
|
Other operations
|
(17)
|
(20)
|
(21)
|
Total adjusted operating profit before tax
|
449
|
470
|
467
|
Profit before tax attributable to shareholders’ profits
|
420
|
462
|
457
|
|
1
|
Adjusted 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.
|
Year ended 31 December 2015
The weakening of the euro affected all metrics from a Group perspective.
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, with-profit 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.
Adjusted operating profit before tax was 4% lower
at £449 million
(2014 (restated): £470 million)
but improved by 6% on a constant currency basis. Within this, life adjusted operating profit decreased by 4% to £395 million
(2014 (restated): £412 million)
but improved by
7%
on a constant currency basis, mainly from portfolio growth and a change in mix towards unit-linked products and protection products,
together with strong results from UFF, our majority owned broker business. General insurance and health adjusted operating profit
was lower at £71 million
(2014: £78 million),
but up 2% on a constant currency basis due to better weather experience compared with the prior year, partly offset by higher large
losses and lower investment returns.
Profit before tax attributable to shareholders’
profits decreased to £420 million
(2014: £462 million)
,
which includes the lower adjusted operating profits discussed above, lower favourable investment variances of £15 million
(2014: £41 million favourable
) and higher integration
and restructuring costs of £19 million
(2014: £15 million)
partially offset by a lower amortisation and impairment of AVIF charge of £5 million
(2014: £18 million).
Year ended 31 December 2014
The weakening of the euro affected all metrics from a Group perspective.
On a PVNBP basis, long-term insurance and savings
business sales in France increased by £135 million, or 3%, to £4,633 million
(2013:
£4,498 million),
with higher sales of unit-linked products. General insurance and health sales were broadly flat
year on year at £1,106 million
(2013: £1,105 million)
.
On a constant currency basis general insurance and health net written premiums increased by 5% benefitting from rating and other
management actions. IFRS net written premiums were up 2% to £5,684 million
(2013:
£5,565 million)
for similar reasons.
Adjusted operating profit before tax (restated)
remained stable at £470 million
(2013 (restated): £467 million)
but improved by 6% on a constant currency basis. Within this, life profits increased by 2% to £412 million
(2013
(restated): £404 million)
, mainly reflecting increased margins. General insurance and health profits decreased
to £78 million
(2013: £84 million)
largely due
to adverse weather events and higher healthcare claims costs.
IFRS profit before tax increased to £462
million
(2013: £457 million)
, which includes the higher
adjusted operating profits discussed above. The increase in IFRS profit includes lower integration and restructuring costs of £15
million
(2013: £25 million)
which offset less favourable
investment variances of £41 million
(2013: £55 million
).
Poland
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 Poland for
the three years ended 31 December 2015, 2014 and 2013.
|
2015
£m
|
Restated
1
2014
£m
|
Restated
1
2013
£m
|
Sales
|
|
|
|
Long-term insurance and savings business
|
448
|
573
|
486
|
General insurance and health net written premiums
|
66
|
57
|
69
|
Total sales
|
514
|
630
|
555
|
IFRS net written premiums
|
477
|
482
|
475
|
Adjusted operating profit before tax
|
|
|
|
Long-term insurance and savings business
|
129
|
183
|
167
|
General insurance and health
|
10
|
9
|
9
|
Other operations
|
2
|
3
|
11
|
Total adjusted operating profit before tax
|
141
|
195
|
187
|
Profit before tax attributable to shareholders’ profits
|
139
|
196
|
178
|
|
1
|
Adjusted 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.
|
Year ended 31 December 2015
The weakening of the zloty affected all metrics from a Group perspective.
Life and pensions sales on a PVNBP basis were
down 22% to £448 million
(2014: £573 million)
. Excluding
the one-off benefit in 2014 from regulatory pension change
in Lithuania, PVNBP was broadly stable. General insurance
net written premiums were £66 million
(2014: £57 million)
with increases mainly in personal lines. Total net written premiums decreased 1% to £477 million
(2014:
£482 million)
.
Adjusted operating profit decreased by 28% to
£141 million
(2014 (restated): £195 million)
.
Within this, Life adjusted operating profit was lower at £129 million
(2014
(restated): £183 million)
largely due to a £39 million one-off regulatory pension change which benefitted
the prior year. General insurance adjusted operating profit was £10 million
(2014:
£9 million
).
Profit before tax attributable to shareholders’
profits was £139 million
(2014: £196 million
),
a decrease of 29%, for the reasons described above.
Year ended 31 December 2014
Life and pensions sales on a PVNBP basis were up 18% to £573
million
(2013: £486 million)
, mainly benefitting from
changes in pensions legislation in Lithuania and an increase in sales of higher margin protection products. General insurance net
written premiums were £57 million
(2013: £69 million)
.
Total net written premiums increased 1% to £482 million
(2013:
£475 million)
due to improved sales of life products partially offset by decreased sales in general insurance
business.
Adjusted operating profit (restated) increased
by 4% to £195 million
(2013 (restated): £187 million)
.
Life profits increased by 10% to £183 million
(2013 (restated):
£167 million)
mainly due to a one-off regulatory pension change of £39 million. General insurance profits
remained flat at £9 million
(2013: £9 million
).
Profit before tax attributable to shareholders was £196 million, an increase of 10%
(2013:
£178 million
).
Italy, Spain and Other
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 Italy, Spain
and Other for the three years ended 31 December 2015, 2014 and 2013.
|
2015
£m
|
Restated
1
2014
£m
|
Restated
1
2013
£m
|
Sales
|
|
|
|
Long-term insurance and savings business
|
|
|
|
Italy – excluding Eurovita
|
2,147
|
2,473
|
1,975
|
Spain – excluding Aseval & CxG
|
622
|
1,054
|
1,055
|
Other
|
460
|
495
|
544
|
Eurovita, Aseval & CxG
|
—
|
224
|
429
|
Total long-term insurance and savings business
|
3,229
|
4,246
|
4,003
|
General insurance and health
|
|
|
|
Italy & Other
|
330
|
393
|
427
|
Total sales
|
3,559
|
4,639
|
4,430
|
IFRS net written premiums
|
2,687
|
3,444
|
3,193
|
Adjusted operating profit before tax
|
|
|
|
Long-term insurance and savings business
|
|
|
|
Italy
|
139
|
148
|
150
|
Spain
|
92
|
126
|
150
|
Other
|
11
|
13
|
13
|
|
242
|
287
|
313
|
General insurance and health
|
|
|
|
Italy & Other
|
33
|
26
|
19
|
Other operations
|
(7)
|
(9)
|
(7)
|
Total adjusted operating profit before tax
|
268
|
304
|
325
|
Profit before tax attributable to shareholders’ profits
|
191
|
489
|
509
|
|
1
|
Adjusted 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.
|
Year ended 31 December 2015
The weakening of the euro affected all metrics from a Group perspective.
Total long-term insurance and savings sales were
£3,229 million
(2014: £4,246 million)
mainly
due to lower sales in Italy and Spain.
In Italy (excluding Eurovita), life sales decreased
by £326 million, or 13%, to £2,147 million
(2014: £2,473
million)
or 3% on a constant currency basis, reflecting lower unit linked and with-profit sales.
In Spain (excluding Aseval & CxG), life sales
decreased by £432 million, or 41%, to £622 million
(2014:
£1,054 million)
mainly reflecting reduced with-profit sales.
Other life sales, which relates to sales in our
Turkey Life joint venture, decreased by £35 million, or 7%, to £460 million
(2014:
£495 million)
, but increased 7% on a constant currency basis driven by increased sales of pensions offset by the impact of
a reduction in our share of the business following the partial IPO in 2014.
General insurance sales which in 2015 were only
made by our operation in Italy decreased by £63 million, or 16%, to £330 million
(2014:
£393 million)
mainly due to the sale of our Turkish general insurance operations in late 2014. Excluding this
disposal, premiums grew by 3% on a constant currency basis mainly due to growth in the creditor business in Italy.
IFRS net written premiums decreased £757
million, or 22%, to £2,687 million
(2014: £3,444 million)
mainly reflecting 2014 disposals in Italy, Spain and Turkey
.
Total adjusted operating profit decreased by
£36 million, or 12%, to £268 million
(2014 (restated): £304
million)
. This was mainly due to the 2014 disposals in Italy and Spain. Within this, life adjusted operating profit
in Italy, excluding Eurovita, increased to £139 million
(2014: £135 million),
up 15% on a constant currency
basis, mostly due to improved margins on with-profits business driven by management actions to reduce the cost of guarantees. In
Spain (excluding CxG), life adjusted operating profit decreased to £92 million
(2014: £101 million)
but was
2% higher on a constant currency basis.
General insurance and health adjusted operating
profit increased to £33 million
(2014: £26 million)
mainly driven by the disposal of the loss-making Turkey
GI business in December 2014.
Profit before tax attributable to shareholders’
profits decreased by £298 million to £191 million
(2014:
£489 million)
. This includes lower adjusted operating profit as described above and adverse investment variances
of £45 million
(2014: £88 million positive
).
The prior year also included profit on disposal of subsidiaries, including CxG and Eurovita, of £125 million.
Year ended 31 December 2014
The weakening of the euro affected all metrics from a Group perspective.
Total long-term insurance and savings sales increased
by £243 million, or 6%, to £4,246 million
(2013: £4,003
million)
mainly due to increased sales in Italy.
In Italy (excluding Eurovita), life sales increased
by £498 million, or 25%, to £2,473 million
(2013: £1,975
million)
driven by higher sales of with-profits products.
In Spain (excluding Aseval & CxG), life sales
remained relatively stable at £1,054 million
(2013: £1,055
million).
Other life sales, which mainly includes sales
in our Turkey Life joint venture, decreased by £49 million, or 9%, to £495 million
(2013:
£544 million).
General insurance sales decreased by £34
million, or 8%, to £393 million
(2013: £427 million)
driven by lower sales in Turkey. Premiums in Italy were broadly stable.
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.
Total adjusted operating profit (restated) decreased
by £21 million, or 6%, to £304 million
(2013 (restated):
£325 million)
. This was mainly due to lower life profits in Spain (mainly reflecting the Aseval and CxG disposals).
In Italy, excluding Eurovita, life profits were up 13% (19% in constant currency) driven by improved product mix.
Profit before tax attributable to shareholders’
profits decreased by £20 million to £489 million
(2013:
£509 million)
. This includes lower adjusted operating profits described above and positive life investment variances,
which were lower than prior year, at £101 million
(2013: £267
million
) arising from narrowing spreads on government and corporate bonds. It also included profit on disposal of subsidiaries,
including CxG and Eurovita, of £125 million and impairment charges of £nil
(2013:
£48 million).
Canada
The table below presents sales, net written premiums, adjusted
operating profit and IFRS profit before tax attributable to shareholders for the three years ended 31 December 2015, 2014 and 2013.
|
2015
£m
|
2014
£m
|
2013
£m
|
IFRS net written premiums
|
1,992
|
2,104
|
2,250
|
|
|
|
|
Adjusted operating profit before tax
|
|
|
|
General insurance
|
214
|
189
|
246
|
Other operations
|
—
|
2
|
—
|
Total adjusted operating profit before tax
|
214
|
191
|
246
|
Profit before tax attributable to shareholders’ profits
|
142
|
253
|
104
|
Year ended 31 December 2015
The weakening of the Canadian dollar has affected all metrics from
a Group perspective.
General insurance net written premiums decreased
by 5% to £1,992 million
(2014: £2,104 million).
On a constant currency basis, net written premiums increased by 1%, mainly due to improved rates and retention on personal lines.
Adjusted operating profit was £214 million
(2014: £191 million)
, a 12% increase compared to the
prior year. On a constant currency basis, profit increased by 21%. The increase in profits included higher underwriting profits
of £120 million
(2014: £83 million)
and benefitted
from more benign weather conditions compared to prior year and higher positive prior year reserve releases in personal lines. Longer-term
investment return reduced 13% to £98 million
(2014: £112 million)
, down 6% on a constant currency basis, primarily
as a result of lower reinvestment yields.
Profit before tax attributable to shareholders’
profits was £142 million
(2014: £253 million)
including
higher adjusted operating profits more than offset by adverse
short-term investment variances of £47 million
(2014:
£65 million positive)
reflecting lower investment values.
Year ended 31 December 2014
The weakening of the Canadian dollar affected all metrics from a Group
perspective.
General insurance net written premiums decreased
by 6% to £2,104 million
(2013: £2,250 million).
On a constant currency basis, net written premiums increased by 6% mainly due to new business growth in Western Canada along with
rating increases on commercial lines and improved retention on personal lines.
Adjusted operating profit was £191 million
(2013: £246 million)
, a 22% reduction compared to the
prior year. On a constant currency basis, profit decreased by 12%. The reduction in profits included lower underwriting profits
of £83 million
(2013: £117 million)
, reflecting
higher large losses and lower prior year reserve releases partly offset by expense savings in all lines and an improvement in the
underwriting result for commercial lines. In addition weather experience, although better than 2013, impacted profits, with a harsher
winter in the first quarter of the year followed by hail storms in Alberta in August.
Profit before tax attributable to shareholders
was £253 million
(2013: £104 million)
. Lower
adjusted operating profits were more than offset by positive short-term investment variances of £65 million
(2013:
£122 million negative)
reflecting higher fixed income security market values.
Asia
The table below presents the sales, net written premiums,
adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS for the three years ended
31 December 2015, 2014 and 2013.
|
2015
£m
|
2014
£m
|
2013
£m
|
Sales
|
|
|
|
Long-term insurance, savings and health business
|
|
|
|
Singapore
|
1,498
|
1,336
|
914
|
Other Asia – excluding Malaysia & South Korea
|
1,196
|
518
|
494
|
Malaysia & South Korea
|
—
|
97
|
331
|
Total long-term savings sales
|
2,694
|
1,951
|
1,739
|
General insurance and health (excluding long-term health)
|
|
|
|
Singapore
|
56
|
56
|
70
|
Other Asia
|
—
|
9
|
19
|
Total general insurance and health sales
|
56
|
65
|
89
|
Investment sales
|
129
|
146
|
152
|
Total sales
|
2,879
|
2,162
|
1,980
|
IFRS net written premiums
|
783
|
781
|
532
|
Adjusted operating profit before tax
|
|
|
|
Long-term insurance and savings business
|
|
|
|
Singapore
|
94
|
82
|
83
|
Other Asia
|
150
|
5
|
13
|
Total
|
244
|
87
|
96
|
General insurance and health
|
|
|
|
Singapore
|
(6)
|
(3)
|
(3)
|
Other Asia
|
—
|
1
|
4
|
Other operations
|
(15)
|
(7)
|
(10)
|
Total adjusted operating profit before tax
|
223
|
78
|
87
|
Profit before tax attributable to shareholders’ profits
|
70
|
38
|
98
|
Year ended 31 December 2015
Long-term insurance and savings sales in Asia increased by 38% to
£2,694 million
(2014: £1,951 million)
mainly
reflecting higher protection sales in Singapore and China and £582 million sales contributed by Friends Provident International
(‘FPI’), following the Friends Life acquisition in April 2015. General insurance and health net written premiums, excluding
long-term health, were £56 million
(2014: £65 million)
.
Total net written premiums were stable at £783
million
(2014: £781 million)
.
Adjusted operating profits were £223 million
(2014: £78 million) including
a £151 million
contribution from FPI (£15 million adjusted operating profit net of amortisation of acquired value of in-force business).
Excluding FPI, adjusted operating profit was £72 million
(2014: £78 million)
. Within this, higher life adjusted
operating profits were more than offset by lower non-life profits.
Profit before tax attributable to shareholders’
profits was £70 million
(2014: £38 million).
As described above, this included adjusted operating profits partly offset by a higher AVIF amortisation charge. In addition, there
were favourable life investment variances of £11 million
(2014: £11 million adverse)
and lower goodwill impairment
charges.
Year ended 31 December 2014
Long-term insurance and savings sales in Asia (excluding Malaysia)
increased by 12% to £1,951 million
(2013: £1,739 million)
due to higher health sales in Singapore and higher protection sales in China partly offset by lower sales in other markets. General
insurance and health net written premiums excluding long-term health were £65 million
(2013:
£89 million)
, down 27%.
Total net written premiums were £781 million
(2013: £532 million)
, up £249 million or 47%,
for the same reasons.
Adjusted operating profits decreased by 10% to
£78 million
(2013: £87 million)
, mainly due to
the disposal of the Group’s South Korean business and investment in the Group’s Indonesian joint venture.
Profit before tax attributable to shareholders
was £38 million
(2013: £98 million)
including
negative investment variances of £11 million
(2013: £29
million positive).
Aviva Investors
The table below presents the sales, adjusted operating profit,
profit before tax attributable to shareholders’ profits under IFRS and assets under management of Aviva Investors for the
three years ended 31 December 2015, 2014 and 2013.
|
2015
£m
|
2014
£m
|
2013
£m
|
Sales
1
|
|
|
|
Long-term insurance and saving business (including UK retail collectives)
|
1,647
|
881
|
58
|
Investment sales (excluding UK retail collectives)
|
3,358
|
2,225
|
2,683
|
Total sales
|
5,005
|
3,106
|
2,741
|
Adjusted operating profit before tax
|
|
|
|
Fund management
1
|
105
|
79
|
68
|
Long-term insurance and savings business – Pooled Pensions
1
|
1
|
2
|
2
|
Other operations
|
—
|
(18)
|
(96)
|
Total adjusted operating profit/(loss) before tax
|
106
|
63
|
(26)
|
Profit/(loss) before tax attributable to shareholders’ profits
|
81
|
83
|
(89)
|
Assets under management (continuing operations)
|
289,910
|
245,898
|
240,507
|
|
1
|
The UK Retail fund management business was transferred from UK Life to Aviva Investors on 9 May 2014 and hence is included
in Aviva Investors from 9 May 2014 onwards.
|
Year ended 31 December 2015
Total sales increased by 61% to £5,005 million (
2014: £3,106
million
). Long-term insurance and savings business increased to £1,647 million following the transfer of the UK retail
fund management business from UK Life in May 2014. Investment sales increased to £3,358 million reflecting higher sales of
European funds.
Fund management adjusted operating profit was
£105 million
(2014: £79 million)
, including a
contribution of £9 million from Friends Life Investments (FLI). Excluding FLI, the increase of £17 million was driven
by increased performance fees partly offset by higher operating expenses.
Assets under management increased by £44.0
billion to £289.9 billion
(2014: £245.9 billion)
. This was driven by acquisitions partly offset by net outflows
and adverse market and other movements including adverse euro exchange rate movements.
Profit before tax attributable to shareholders’
profits was broadly flat at £81 million
(2014: £83 million
profit)
. This included higher fund management adjusted operating profits and higher integration and restructuring costs
of £11 million
(2014: £4 million)
. The 2014 result included a profit on disposal of River Road of £35
million and the provision for the FCA fine of £17.6 million as described below.
Year ended 31 December 2014
Fund management adjusted operating profits were £79 million
(2013: £68 million)
, mainly due to the transfer of
UK retail fund management business from UK Life and higher performance fees, partly offset by the impact of the disposal of River
Road. Assets under management increased by £5.4 billion to £245.9 billion, driven by favourable market returns which
more than offset net redemptions and the impact of the disposal of River Road. Profit before tax was £83 million
(2013:
£89 million loss)
, which included a £35 million profit on disposal of River Road and lower integration and
restructuring costs.
In February 2015, Aviva Investors reached
a settlement with the FCA for certain systems and controls failings that happened between 2005-2013 and agreed to pay a fine of
£17.6 million. Provision for this expected cost was made at the year end and is fully reflected within Aviva Investors’
adjusted operating profit from other operations.
Other Group activities (from continuing operations)
The table below presents net written premiums, adjusted operating
losses and loss before tax attributable to shareholders’ profits from other Group activities for the three years ended 31
December 2015, 2014 and 2013.
|
2015
£m
|
2014
£m
|
2013
£m
|
IFRS net written premiums
|
13
|
18
|
46
|
|
|
|
|
Adjusted operating profit before tax
|
|
|
|
General Insurance
|
13
|
9
|
(51)
|
Corporate centre
|
(180)
|
(132)
|
(150)
|
Group debt costs and other interest
|
(361)
|
(463)
|
(502)
|
Other Group operations
|
(46)
|
(56)
|
(90)
|
Total adjusted operating loss before tax
|
(574)
|
(642)
|
(793)
|
Loss before tax attributable to shareholder’s profits
|
(510)
|
(626)
|
(1,080)
|
Year ended 31 December 2015
Net written premiums from our reinsurance business were £13
million
(2014: £18 million)
.
Adjusted operating profit from general insurance
was £13 million
(2014: £9 million)
.
Corporate centre costs were £180 million
(2014: £132 million)
mainly as a result of increased spend on
digital initiatives across the Group as well as the inclusion of Friends Life costs following the acquisition of this business
.
Group debt costs and other interest decreased
to £361 million
(2014: £463 million)
, mainly
due to lower internal debt costs of £92 million (
2014: £186 million
) and an increase in the net finance income
on the main UK pension scheme to £94 million (
2014: £33 million
), partially offset by higher external debt costs
reflecting the inclusion of Friends Life external debt. The impact of internal debt costs is neutral at an overall Group level.
Losses from other operations were £46 million
(2014: £56 million).
Loss before tax attributable to shareholders’
profits was £510 million
(2014: £626 million loss)
.
The lower loss in 2015 was mainly due to lower operating losses and higher positive short term investment variances, partially
offset by higher integration and restructuring costs.
Year ended 31 December 2014
Net written premiums from our reinsurance business were £18
million
(2013: £46 million)
. The decrease is primarily
as a result of reinsurance previously written with Aviva Re being written in the external market.
Adjusted operating profit from general insurance
was £9 million
(2013: £51 million loss)
. The
improvement compared to prior year was mainly due to the impact of the floods in Canada on our reinsurance business in prior year.
Corporate centre costs were £132 million
(2013: £150 million)
. Group debt costs and other interest
decreased to £463 million
(2013: £502 million)
,
mainly due to lower internal debt costs. The impact of this is neutral at an overall Group level.
Losses from other operations were £56 million
(2013: £90 million)
. 2013 included a non-recurring
amount of £36 million for compensation expected to be claimed from a Group holding company (see Aviva Investors above).
Loss before tax attributable to shareholders’
profits was £626 million
(2013: £1,080 million loss)
.
The improvement in 2014 was mainly due to lower operating losses, lower integration and restructuring costs, and positive investment
variances.
Selected
consolidated financial data
This data is derived from our consolidated financial statements which
have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) as issued
by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU).
On 10 April 2015, the Group completed the acquisition
of 100% of the outstanding ordinary shares of Friends Life Group Limited (‘Friends Life’) through an all share exchange
which gave Friends Life shareholders 0.74 Group shares for every Friends Life share held. In total 1,086 million Group shares were
issued for a consideration of £5,975 million.
On 2 October 2013 the Group completed the sale
of its US Life and related internal asset management operations, which have been shown as discontinued operations in the income
statement, statement of comprehensive income and statement of cash flows. In 2014, the Group paid a settlement related to the purchase
price adjustment, which in conjunction with the aggregate development of other provisions has been presented as discontinued operations.
The results presented as discontinued
operations for 2011 also include the results of Delta Lloyd N.V., which was deconsolidated during 2011. Between May 2011 and July
2012 Delta Lloyd was accounted for as an associate within continuing operations. In July 2012, following a further sell-down, the
Group’s shareholding fell below 20% and from July 2012 Delta Lloyd was treated as a financial investment within continuing
operations at fair value through profit and loss. The Group sold its remaining shareholding in Delta Lloyd in January 2013.
Income statement data
|
|
|
|
|
|
Amounts in accordance with IFRS
Continuing operations
|
2015
£m
|
2014
£m
|
2013
£m
|
2012
£m
|
2011
£m
|
Income
|
|
|
|
|
|
Gross written premiums
|
21,925
|
21,670
|
22,035
|
22,744
|
26,255
|
Premiums ceded to reinsurers
|
(2,890)
|
(1,614)
|
(1,546)
|
(1,571)
|
(1,548)
|
Premiums written net of reinsurance
|
19,035
|
20,056
|
20,489
|
21,173
|
24,707
|
Net change in provision for unearned premiums
|
(111)
|
1
|
134
|
(16)
|
(236)
|
Net earned premiums
|
18,924
|
20,057
|
20,623
|
21,157
|
24,471
|
Fee and commission income
|
1,797
|
1,230
|
1,279
|
1,273
|
1,465
|
Net investment income
|
2,825
|
21,889
|
12,509
|
21,135
|
4,373
|
Share of profit/(loss) after tax of joint ventures and associates
|
180
|
147
|
120
|
(255)
|
(123)
|
Profit/(loss) on the disposal and re-measurement of subsidiaries, joint ventures and associates
|
2
|
174
|
115
|
(164)
|
565
|
|
23,728
|
43,497
|
34,646
|
43,146
|
30,751
|
Expenses
|
|
|
|
|
|
Claims and benefits paid, net of recoveries from reinsurers
|
(21,985)
|
(19,474)
|
(22,093)
|
(23,601)
|
(24,380)
|
Change in insurance liabilities, net of reinsurance
|
6,681
|
(5,570)
|
2,493
|
(430)
|
(2,284)
|
Change in investment contract provisions
|
(1,487)
|
(6,518)
|
(7,050)
|
(4,450)
|
1,478
|
Change in unallocated divisible surplus
|
984
|
(3,364)
|
280
|
(6,316)
|
2,721
|
Fee and commission expense
|
(3,347)
|
(3,389)
|
(3,975)
|
(4,457)
|
(4,326)
|
Other expenses
|
(2,784)
|
(1,979)
|
(2,220)
|
(2,843)
|
(2,779)
|
Finance costs
|
(618)
|
(540)
|
(609)
|
(653)
|
(711)
|
|
(22,556)
|
(40,834)
|
(33,174)
|
(42,750)
|
(30,281)
|
Profit before tax
|
1,172
|
2,663
|
1,472
|
396
|
470
|
Tax
attributable to policyholders’ returns
|
218
|
(382)
|
(191)
|
(221)
|
178
|
Profit before tax attributable to shareholders’ profits
|
1,390
|
2,281
|
1,281
|
175
|
648
|
Tax
attributable to shareholders’ profits
|
(311)
|
(601)
|
(403)
|
(261)
|
(159)
|
Profit/(loss) after tax from continuing operations
|
1,079
|
1,680
|
878
|
(86)
|
489
|
Profit/(loss) after tax from discontinued operations
|
—
|
58
|
1,273
|
(2,848)
|
(357)
|
Total profit/(loss) for the year
|
1,079
|
1,738
|
2,151
|
(2,934)
|
132
|
Amounts in accordance with IFRS
|
Per share
|
Per share
|
Per share
|
Per share
|
Per share
|
Profit/(loss) per share attributable to equity shareholders:
|
|
|
|
|
|
Basic (pence per share)
|
22.6p
|
50.4p
|
65.3p
|
(109.1)p
|
8.3p
|
Diluted (pence per share)
|
22.3p
|
49.6p
|
64.5p
|
(109.1)p
|
8.1p
|
Continuing operations – Basic (pence per share)
|
22.6p
|
48.4p
|
22.0p
|
(11.2)p
|
13.6p
|
Continuing operations – Diluted (pence per share)
|
22.3p
|
47.7p
|
21.8p
|
(11.2)p
|
13.4p
|
|
Per share
|
Per share
|
Per share
|
Per share
|
Per share
|
Dividends paid per share
|
20.8
|
18.1
|
15.0
|
19.0
|
26.0
|
|
Millions
|
Millions
|
Millions
|
Millions
|
Millions
|
Number of shares in issue at 31 December
|
4,048
|
2,950
|
2,947
|
2,946
|
2,906
|
Weighted average number of shares in issue for the year
1
|
3,741
|
2,943
|
2,940
|
2,910
|
2,845
|
|
1
|
Weighted average number of shares in issue for the year is calculated after deducting treasury shares.
|
Statement of financial position data
|
|
|
|
|
|
Amounts in accordance with IFRS
|
2015
£m
|
2014
£m
|
2013
£m
|
2012
£m
|
2011
£m
|
Total assets
|
387,874
|
285,719
|
281,627
|
317,120
|
314,374
|
Gross insurance liabilities
|
140,556
|
113,445
|
110,555
|
113,091
|
147,379
|
Gross liabilities for investment contracts
|
181,173
|
117,245
|
116,058
|
110,494
|
113,366
|
Unallocated divisible surplus
|
8,811
|
9,467
|
6,713
|
6,931
|
650
|
Core structural borrowings
|
6,912
|
5,310
|
5,125
|
5,139
|
5,255
|
Other liabilities
|
32,190
|
27,976
|
32,159
|
70,105
|
32,361
|
Total liabilities
|
369,642
|
273,443
|
270,610
|
305,760
|
299,011
|
Total equity
|
18,232
|
12,276
|
11,017
|
11,360
|
15,363
|
Information
on the Company
History and development of Aviva
General
Aviva plc, a public limited company incorporated under the laws of
England and Wales, is the holding company of the Aviva Group. The Group provides customers with long-term insurance and savings,
general and health insurance, and fund management products and services. Our purpose is to free people from fear of uncertainty.
The long-term strategic framework for Aviva is based on our investment thesis of cash flow plus growth.
Our history
The Group was formed by the merger of CGU plc and Norwich Union plc
on 30 May 2000. CGU plc was renamed CGNU plc on completion of the merger, and subsequently renamed Aviva plc on 1 July 2002. CGU
plc and Norwich Union plc were both major UK-based insurers operating in the long-term insurance business and general insurance
markets. Both companies had long corporate histories.
CGU plc was formed in 1998 from the merger of
Commercial Union plc and General Accident plc. General Accident plc was incorporated in 1865. Commercial Union was incorporated
in 1861 and in 1905 acquired Hand in Hand, which was incorporated in 1696.
Norwich Union plc was founded as a mutual society
in 1797, and had expanded as a global business by the 20
th
century. In 1997 it demutualised and became an English public
limited company.
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 2 – Subsidiaries’.
Business overview
Our strategic framework
Our strategic framework increases the focus on the
things that really matter and put the customer clearly at the centre. It provides clear direction across all our markets for how
we run our business. Our overarching purpose is to free people from the fear of uncertainty. And we have a clear strategy to deliver
our investment thesis of cash flow growth by always putting our customers first. Our Strategic Anchor is the ‘what we do,
how we do it and where we do it’ of our strategy – True Customer Composite, Digital First and Not Everywhere.
|
·
|
True Customer Composite
Meeting all customer needs across life, general, accident and health insurance and asset management.
|
|
·
|
Digital First
Emphasising customer experience driven by digital – online and mobile.
|
|
·
|
Not everywhere
Focusing only in markets and segments where we can win.
|
This is all underpinned by our values of kill complexity,
care more, never rest and create legacy, the core beliefs at the heart of how we do business.
Our business
Overview
Our business operates across four main market sectors – life
insurance and savings; general insurance, accident and health insurance and fund management, providing services to over 33 million
customers worldwide. We operate in 16 different countries and have approximately 29,600 employees.
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 fund-management services to third-party investors and to our long-term and general insurance businesses.
The activities of the acquired Friends Life business
are included within the UK & Ireland Life, Asia and Aviva Investors segments.
Life insurance and savings business
Long-term insurance and savings business accounted for approximately
82% of our total worldwide sales from continuing operations for the year ended 31 December 2015. We reported total long-term insurance,
savings and health new business sales from continuing operations of £33.1 billion
1
.
Market position
In the UK we have a market share of 13.3
2
%
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.
Brands and products
In 2010, we brought all our businesses together
under the Aviva brand, which remains the case for the vast majority of our products and services.
Our long-term insurance and savings businesses
offer a broad range of life insurance and savings products. Our products are split into the following categories:
|
·
|
Pensions
–
a means of providing income in retirement for
an individual and possibly his or her dependants. Our pension products include personal and group pensions, stakeholder pensions
and income drawdown.
|
|
·
|
Annuities – a type of policy that pays out regular amounts of benefit, either immediately and for the remainder of a
person’s lifetime, or deferred to commence from a future date. Immediate annuities may be purchased for an individual and
his or her dependants or on a bulk purchase basis for groups of people. Deferred annuities are asset accumulation contracts, which
may be used to provide benefits in retirement, and may be guaranteed, unit-linked or index-linked.
|
|
·
|
Protection – an insurance contract that protects the policyholder or his or her dependants against financial loss on
death or ill-health. Our product ranges include term assurance, mortgage life insurance, flexible whole of life and critical illness
cover and group schemes.
|
|
·
|
Bonds and savings – accumulation products with single or regular premiums and unit-linked or guaranteed investment returns.
Our product ranges include single premium investment bonds and regular premium savings plans.
|
|
·
|
Investment sales – retail sales of mutual fund type products such as unit trusts, individual savings accounts (ISAs)
and open ended investment companies (OEICs).
|
|
·
|
Other – includes equity release contracts.
|
|
1
|
See ‘financial and operating performance’ for further details.
|
|
2
|
Association of British Insurers (ABI) Stats published Q3 2015.
|
Some of our insurance and investment contracts contain a discretionary
participation feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These
are referred to as ‘participating’ contracts.
General insurance and health insurance
General insurance and health insurance accounted for 18% of
our total worldwide sales for the year ended 31 December 2015. In the year ended 31 December 2015, we reported general and
health insurance net written premiums of £7.5 billion
1, 5
.
Market position
We are a leading general insurer in the United Kingdom and Canada
with 12.4%
3
and 8.4%
4
market share respectively. We also have general insurance operations in France, Italy, Ireland, and Poland. We sell health products
in the UK, Ireland, France, Singapore and Indonesia. In the year ended 31 December 2015, 52%
5
of our total general insurance and health new business was written in the UK.
Brands and products
Our general insurance business operates under the Aviva brand globally
and concentrates on the following products:
|
·
|
Personal lines – motor, household, travel and creditor;
|
|
·
|
Commercial lines – fleet, liability and commercial property insurance;
|
|
·
|
Health insurance – private health insurance, income protection and personal accident insurance, as well as a range of
corporate healthcare products; and
|
|
·
|
Corporate and specialty risks – products for large clients or where the risk is specialised.
|
Fund management
Aviva Investors, our fund management business, provides fund management
services to Aviva’s long-term insurance and savings, and general insurance operations as well as to third-party investors.
The fund management operations are in the UK, Europe, North America and Asia. All sales of retail fund management products are
included in our long-term insurance and savings business sales.
Market position
Aviva Investors was ranked 48
th
globally by assets under
management
6
. Total worldwide funds
managed by Aviva Investors, at 31 December 2015, was £290 billion. The substantial majority of this relates to Aviva’s
insurance and savings operations.
Brands and products
Aviva Investors operates under a single brand across the majority
of the Aviva Group’s markets. Its products cover a broad range of asset classes. In Europe, this includes open-ended collective
investment schemes which are domiciled in France, Luxembourg and Poland; while in the United Kingdom, this includes segregated
mandates and specialist funds for pension schemes, local authorities and insurance companies, as well as retail and wholesale products.
Other offerings include specialist property funds and money market funds.
Distribution
Customers can buy our products through a range of distribution channels,
including:
|
·
|
Direct – in many of our markets, customers can buy our products over the telephone or via the internet. This method of
distribution is most commonly available for simple products which do not require advice.
|
|
·
|
Direct sales force – in some of our European and Asian markets we operate direct sales forces that only sell Aviva’s
products and the sales forces receive commission on the products they sell.
|
|
·
|
Intermediaries – we offer a range of long-term insurance, savings, retirement, general insurance and health insurance
products which can be bought through an intermediary, such as an independent financial adviser or an insurance broker. Subject
to regulatory requirements, intermediaries receive a commission on sales of Aviva’s products.
|
|
·
|
Corporate partnerships, bancassurance and joint ventures – Aviva is a corporate partner for many organisations, including
banks and other financial institutions, who wish to offer their customers insurance products. We have various distribution agreements
with bancassurance partners and joint ventures across the markets in which we operate. In return for offering our products to their
customers, the bank or joint venture partners receive a commission as a percentage of sales and in some cases achieve extra commission
if agreed target levels of sales are met. Certain agreements have a profit sharing element based on a predetermined percentage.
In some cases, if the agreed targets are not met, certain terms of the contract can be renegotiated. Under the joint venture agreements,
the cost of running the venture are often split between the partners.
|
Further details of the distribution channels specific to each market
are included in the following market analysis.
UK & Ireland Life
Business overview and strategy
On 10 April 2015, the Group completed
the acquisition of Friends Life Group. Integration of the Friends Life UK business is in progress.
The UK business is a leading long-term insurance
and savings provider with an overall market share of 13.3%
7
,
based on annual premium equivalent (APE) data as at 30 September 2015. The Irish business is a large life and pensions provider
in Ireland.
Our strategy in the UK is to offer great value
to our customers through our market leading expertise in Retirement, Corporate Benefits, Protection and Health products, continue
to improve cash generation and deliver profitable growth whilst continuing to integrate Friends Life and realise synergies.
Our Irish long-term business is now focused primarily
on distribution through intermediaries. On 1
January 2015, following approval from the High Court of Ireland in December
2014, the Irish business, (previously within Aviva Life and Pensions Ireland Ltd) was transferred to Aviva Life and Pensions UK
Ltd (UKLAP) becoming a branch of UKLAP.
Market and competition
Over the last few years, Auto-Enrolment, pension freedoms and the
Department of Work and Pensions (DWP) charge cap have transformed the way that long-term savings products are bought and sold in
the UK.
The changes to annuities announced by the UK
Chancellor of the Exchequer in the Budget in March 2014 have given increased flexibility to how customers can access their pension
since coming into effect in April 2015. These changes are having a significant impact across the market and have seen many customers
defer their decision regarding their pension, driving a general decline in the market for individual annuities.
|
3
|
Datamonitor UK Insurance Competitor Analytics 2015.
|
|
4
|
Market Security Analysis & Research Inc, 2014 online database.
|
|
5
|
Excludes the impact of an outwards quote share reinsurance agreement in the UK.
|
|
6
|
Towers Watson World 500 largest asset manager’s study 2014.
|
|
7
|
Association of British Insurers (ABI) Stats published Q3 2015.
|
The Department of Work and Pensions (DWP) charge
cap of 75 basis points came into force in April 2015, and the removal of active member discounts (AMDs) commences from April 2016.
We implemented these changes in 2014, ahead of the regulatory requirement.
The UK long-term savings market is highly competitive
and we consider our main competitors to be Standard Life, Prudential, Legal & General, Scottish Widows, JRP Group and Royal
London.
Since the return to growth in the life and pensions
market in Ireland in 2013, there has been continued and increasing growth in 2014 and 2015. The life insurance market in Ireland
is relatively concentrated. We consider our main competitors to be Bank of Ireland Life, Irish Life, Zurich Life and Friends First.
Products
In the UK, we provide a comprehensive product range focused on both
the consumer and corporate markets. The pensions and retirement products we offer include personal pensions, equity release, annuities
and income drawdown. Our annuity offerings include immediate life, enhanced, fixed-term annuities and with-profits pension annuities.
We provide a number of traditional life insurance products, including level-term, decreasing-term (with or without critical illness),
guaranteed whole of life insurance, over 50s life cover and income protection. Our savings and investment products include ISAs,
investment bonds, funds, base rate trackers, investments with guarantees and with-profits products. A direct to consumer platform
was launched in June 2015, offering new retirement propositions and investment products
In Ireland, our long-term insurance and savings
business offers a wide range of products with our focus being on protection, annuities and pensions and savings products. Our protection
products include life insurance, mortgage protection and specified illness. The pensions and savings range covers retirement and
investment products and is delivered by taking advantage of the Aviva Investors fund propositions.
Distribution
We have a multi-distribution strategy, which means we sell our products
through intermediaries, corporate partners, in the workplace, and directly to customers.
Our direct to consumer platform was launched
in June 2015, offering new retirement propositions and investment products.
In the UK, we have exclusive distribution deals
for the sale of protection products with Royal Bank of Scotland, Barclays, Santander, Tesco, the Post Office, Connells, Countrywide,
and LSL estate agents.
We remain committed to building on our existing
relationships and distribution partnerships as well as growing our workplace and direct channels.
In 2015 we also launched Aviva Life Protection
Solutions to advisers and customers in the UK, which offers flexible cover with all policy documents stored online.
UK & Ireland General Insurance
Business overview and strategy
We are a leading general insurer in both the UK and Ireland with market
shares of 12.4%
8
and 13.3%
9
respectively. We employ around 6,700 people and operate from a number of locations throughout the UK and Ireland, including Norwich,
Perth, Glasgow, London and Dublin.
We focus on personal and commercial insurance.
In the UK we hold top three positions in the motor and property markets
8
. We believe our key strengths include underwriting
and pricing sophistication, claims and cost management and excellent customer service. Our aim is to deliver cash and profitable
growth by focusing on the fundamentals of the insurance business to maximise underwriting returns and we have a portfolio strategy
to deliver greater stability of earnings.
Market and competition
The UK is the 4
th
largest non-life insurance market in
the world
10
. In 2014, the top four
companies had a 36.9%
8
share of the UK general insurance market.
The UK and Ireland general insurance markets
are cyclical in nature and remain very competitive, particularly in personal lines, where the market is highly commoditised.
During 2015, the UK personal motor market saw
prices start to rise, following 3 years of premium reductions which had resulted from intense competition combined with regulatory
changes designed to reduce the cost of claims. However, market conditions continue to be challenging in other UK classes of business
as insurers seek opportunities to gain share in segments with better margin, putting pressure on rates and extent of cover. In
Ireland, the market remains challenging, with low market growth at 3.2% in 2014
9
and continued market-wide pressure
on profitability.
In the UK our main competitors are Direct Line
Group, RSA, The Admiral Group, AXA, Zurich, LV, Allianz, Ageas and NFU. In Ireland, our competitors include RSA, AXA, Zurich, FBD,
Allianz, Liberty and AIG.
Products
We provide a wide range of general insurance products both in the
UK and Ireland. In the UK we have a business mix of approximately 60% personal lines and 40% commercial lines.
Our UK personal products include motor, home
and travel insurance. Our UK commercial products include motor, property and liability insurance for small and medium size enterprises
(SMEs) and larger UK corporate customers as well as products in the specialty risks market.
In Ireland our products include property, motor,
travel, agricultural and business insurance and our health insurance business products for both the personal and commercial sector.
Distribution
We have a multi-distribution strategy. Our personal products are sold
directly to customers over the phone and through our websites, via brokers and through corporate partnerships. Our Quotemehappy
and General Accident insurance products are also available through price comparison websites. For commercial insurance, we focus
on broker distribution and believe that independent brokers remain the best source of advice for business customers.
We are expanding our digital capability through
allowing customers to view their policies as well as purchase new products using the MyAviva app. In addition, we have made major
investments in Fast Trade, our online tool for brokers and implemented Guidewire, which is a new policy and claims system, across
our commercial lines business.
France
Business overview and strategy
France is the second largest insurance market in
Europe
11
. We have a significant presence
in the French Life insurance market and we operate through two main companies: Aviva Vie and Antarius (JV structure with Crédit
Du Nord). On 25 February 2015, Crédit du Nord, the Group’s partner in Antarius S.A (‘Antarius’), exercised
its call option to purchase Aviva France’s 50% share of Antarius. In accordance with the shareholders agreement, the exercise
of the call option starts a period of approximately two years to complete the disposal. In accordance with IFRS 5, the subsidiary
will be classified as held for sale from the date when the transaction is expected to complete within 12 months.
|
8
|
Datamonitor UK Insurance Competitor Analytics 2015.
|
|
9
|
Irish Insurance Federation, 2015.
|
|
10
|
Swiss Re Sigma Study (World Insurance 2014).
|
|
11
|
Insurance Europe: European Insurance — Key Facts , August 2015.
|
We are ranked 11
th
in general insurance,
as measured by gross written premiums, according to L’Argus de l’Assurance, as at 31 December 2014. Our strategy is
to deliver sustainable dividends to Group by increasing profitability in our life business and targeted growth in profitable general
insurance segments.
Market and competition
The life insurance market is driven by individual savings and dominated
by bancassurance, which has accounted for around 60% of the life insurance market over the past decade according to FFSA
12
.
We believe the long-term insurance and savings market in France has longer-term growth potential due to the ageing population and
the growing need for private pensions. We also believe that multi-funds policies and unit-linked funds are the best saving vehicles
for performance over a longer period.
The general insurance market in France is mature.
In personal lines, the digital transformation occurring in the market is increasing competition through multi-access and direct
distribution models, whereas in commercial lines the market still mainly relies on local physical distribution networks.
Products
We provide a wide range of insurance solutions: life and long-term
savings, general and health insurance and asset management through Aviva Investors France. The products sold through our life channel
are long-term savings, pensions and regular premium products, with a focus on the unit-linked market and a broad range of protection
products, primarily for individuals.
We have a longstanding relationship with the
Association Française d’Epargne et de Retraite (AFER) which is the largest retirement savings association in France
with over 720,000 members as at December 2014, to manufacture and distribute the AFER savings product.
In the general insurance market our product range
includes household, motor, health and legal protection products and also a range of insurance products for small to medium sized
entities, farms, craftsmen and tradesmen, and specific products for building firms and motor fleets.
Distribution
We have developed a multi-distribution model combining retail, direct
and bancassurance networks through owned distribution channels, independent networks and partnerships. Our retail network sells
through over 920 tied agents, a direct sales force made up of approximately 1,200 Union Financière de France (UFF) consultants
and direct advisors (Aviva France also holds a majority stake in UFF), and through brokers in the life, health and construction
markets. Direct distribution is managed through the Eurofil brand for personal general insurance, the Aviva Direct brand for protection
and Epargne Actuelle for the AFER product. We operate in the bancassurance market through our partnership with Crédit du
Nord, a subsidiary of Société Générale, selling life, savings and protection products.
Poland
Business overview and strategy
Aviva is the second largest insurer in the Life individual
market in terms of gross written premiums
13
with a market share of 8%. Our general insurance business is the 14
th
largest with a market share of 1% on the same
basis
14
. Our focus in Poland is to
grow the value of life new business and in general insurance we aim to grow our portfolio whilst maintaining the portfolio quality
and combined operating ratio.
Market and competition
The key forces shaping the insurance market in Poland are:
|
·
|
Regulatory changes driven by the Polish government, including a new Insurance Act that implements Solvency II into the local
regulatory framework, as well as introducing other changes designed to strengthen policyholder protection and extend the powers
of the regulator.
|
|
·
|
Increasing regulatory focus from governmental agencies, such as the Financial Supervisory Authority (KNF) and the Office of
Competition and Consumer Protection (UOKiK) on unit-linked products.
|
|
·
|
At the beginning of 2016, the introduction of a levy on finance sector assets of 0.44% per annum.
|
Products
Our life business in Poland provides a broad range of protection,
savings and pension products as well as health insurance. For institutions we offer group life insurance and employee pension programmes,
which are both unit-linked products. We offer a standard product as part of our privately managed Pillar II pensions business.
We offer general insurance products to both commercial entities and individuals. For individuals, our offer consists of home, accident
and travel insurance, which are primarily sold by tied agents, as well as motor insurance, which is sold primarily through our
direct operation. For institutions, we offer selected commercial lines risks.
Distribution
The direct sales force and bancassurance are the main distribution
channels for most of the Polish business and is made up of over 2,100 tied insurance agents. Our biggest relationship is with Bank
Zachodni WBK (a subsidiary of Banco Santander) that sells both life and general insurance products through the bank’s network
of 723 branches
14
. In addition, on 3 July 2015, we acquired Expander Advisors, the second largest network of IFAs in
Poland
15
. We also co-operate with independent
insurance agencies and brokers. Our mutual funds are also sold in brokerage houses and our individual products are supported by
call centre and website sales.
Italy, Spain and Other
Italy
Business overview and strategy
Aviva is Italy’s 10
th
largest Life insurer, with
a market share of 2.9%
16
based on 2014 premiums and the 13
th
largest General Insurance company with a market
share of 1.28%
16
. We have approximately
2.2 million customers across both the Life and General Insurance businesses.
During 2015 we continued to develop our business,
the focus of which is to:
|
·
|
Renew and refocus our distribution agreements with UBI Banca and Unicredit to maintain the level of value of new business and,
extend our product range (protection, accident and health) with Banco Popolare.
|
|
12
|
Fédération Française des Sociétés d’Assurance (dated 12 June 2015).
|
|
13
|
Polish Financial Supervision Authority (‘KNF’) report as at 30 June 2015.
|
|
14
|
BZ WBK bank Zachodni 31 December 2015 results.
|
|
15
|
Association of Polish intermediaries.
|
|
16
|
Associazione Nazionale fra le Imprese Assicuratrici (‘ANIA’).
|
|
·
|
Boost the IFA distribution channel especially in unit linked and protection products.
|
|
·
|
Accelerate general insurance organic growth of our Agents network with specific focus on protection and accident and health.
|
|
·
|
Implement our Digital strategy, with new digital services provided to customers and distributors through MyAviva and Telematics.
|
Market and competition
The Italian life and general insurance markets are dominated by the
top 3 providers, which accounted for c.54% and c.48% market share respectively. The life insurance industry in Italy reported another
year of increased volumes as of 30 June 2015 with gross written premiums up by c.15% compared to the same period in 2014
16
.
The general insurance segment decreased by 1.8% in the first half 2015 compared to the previous year, mainly driven by a 5.9% decline
in Motor
16
due to lower average prices.
Products
Our Life business offers a wide range of products covering protection,
savings and pensions, with a continued focus on less capital intensive products, to optimise the product mix. We have reviewed
our Unit Linked product range, and further improved our protection offering for both retail and bancassurance networks.
In 2015, as part of our household insurance offering,
we launched a new ‘connected house’ product sold by agents which includes a ‘white box’ capable of alerting
the client in case of water damage, presence of gas or smoke etc. In addition, we launched a new health product sold both through
Banco Popolare and our retail network.
Distribution
Our products are distributed through bancassurance partnerships with
Unicredit Group (life), Banco Popolare Group (life and general insurance) and UBI Banca (life). These partnerships give us access
to more than 3,500 branches. In addition, we also have approximately 1,500 active financial advisors (life), and a retail network
of c.700 insurance (multi-mandate) agents and brokers (general insurance and life) as at 30 June 2015.
Spain
Business overview and strategy
We are Spain’s 11
th
largest long-term insurer by
gross written premiums with a market share of 3% as at 30 September 2015
17
.
We sell protection, long-term savings and pensions, health and accident insurance through a bancassurance network based on four
joint ventures with three banks. We also sell through Aviva Vida y Pensiones, the wholly-owned Aviva branded long-term insurance
company and through our Spanish mutual insurance company Pelayo.
Our strategy is to maintain the franchise value
in Spain and to develop our retail operations with new distribution agreements. The ongoing focus is on less capital intensive
products.
Market and competition
We have seen the Spanish insurance market recover with improved lending
conditions, and expect this to benefit our credit linked insurance product sales.
The top positions in the long-term life insurance
market are dominated by bank-owned or bank-insurer joint ventures, with the overall bancassurance channel accounting for more than
65% of gross written premiums at the end of 2014 in the Spanish life insurance market
17
.
Customers in Spain are accustomed to receiving
advice through banking channels, and we continue to use our relationship with our partners to capitalise on this whilst developing
our retail agents and broker distribution network.
Products
We offer a wide range of bonds, savings, and protection products.
Investment products include both unit linked and traditional plans, where profit sharing is regularly used to increase the policy
return. Our traditional plans include savings schemes and income products. Pension savings products have valuable tax advantages.
We offer a flexible range of individual and group pension plans with alternative investment choices. We also offer protection products,
covering both mortgages and credit loans, typically providing cover for the family.
Distribution
Through bancassurance partnerships we have established subsidiaries
to distribute our products with each of the banks as set out below:
|
·
|
Unicorp Vida – in conjunction with Unicaja since 2001.
|
|
·
|
Caja España Vida – in conjunction with Caja España since 2001
|
|
·
|
Caja Granada Vida – in conjunction with Caja Granada (now part of Banco Mare Nostrum (BMN)) since 2002
|
|
·
|
Cajamurcia Vida – in conjunction with Cajamurcia (now part of Banco Mare Nostrum (BMN)) since 2007
|
Aviva Vida y Pensiones distributes our products through professional
intermediaries (agents and brokers), supported by a branch office network and call centres, and through Pelayo´s network.
Other
The Italy, Spain, and Other segment includes our business in Turkey.
Aviva’s business in Turkey sells life and
savings products including unit-linked pensions through its life joint venture, AvivaSA, which is listed as ‘AVISA’
on Borsa Istanbul.
AvivaSA has an exclusive bancassurance agreement
with Akbank until 2029. Akbank sells AvivaSA’s life and pensions products on an exclusive basis through its banking network
in Turkey.
Canada
Business overview and strategy
We are Canada’s second largest general insurer
18
.
Through our distribution partners we provide a range of personal and commercial lines general insurance products to 2.8 million
policyholders. We have an 8.4% market share and a top five position in all major provinces
18
. We employ over 3,300 people
and operate from a head office in Toronto, with other offices located throughout Canada.
We believe that we are well placed for continued
growth and that our success is underpinned by our focus on the insurance fundamentals of pricing, risk selection, distribution,
claims indemnity and expense management. We are broadening our distribution reach and strengthening our business mix, as well as
taking a ‘Digital First’ approach to our business.
On 21 January 2016, Aviva Group announced that
Aviva Canada will acquire RBC General Insurance Company and enter into an exclusive 15 year strategic agreement with RBC Insurance.
The proposed transaction is subject to customary closing conditions, including receipt of required regulatory approvals and is
expected to complete in the third quarter of 2016.
|
17
|
Investigación Co-operativa entre Entidades Asegurados y Fordos de Pensionies (‘ICEA’).
|
|
18
|
Market Security Analysis & Research Inc, 2014 online database.
|
We believe the transformation of our commercial
lines business over the last few years has ensured the business is highly competitive. We expect that continued refinement to our
models will allow us to leverage this position to positively react to market opportunities. We will continue to address increasing
customer demand for choice, simplicity and self-service by working with our broker partners on processes and technology solutions
in order to help them compete with other channels.
Market and competition
Canada is the 8
th
largest non-life insurance market
19
in the world and is established and stable. The four largest provinces generate around 88% of total premiums with Ontario, the
largest, representing 46% of total Canadian premiums
18
.
The Canadian general insurance industry is highly
fragmented with many small players and no dominant consumer brand. Steady consolidation has resulted in the top five companies
representing 42% of the market and the top two companies, Intact Financial and Aviva, controlling 23% of the market
18
.The
rest of the industry includes several national carriers as well as smaller, provincially based or niche companies.
Whilst direct and affinity channels are gradually
increasing in market share, the traditional broker channel accounts for a high proportion of distribution
(personal
lines and commercial lines). In addition to the growth of direct and affinity channels, insurance carriers are increasingly supporting
and controlling distribution through investment in brokers.
Products
The general insurance products that we provide through our Canadian
companies are:
|
·
|
Personal, home and motor insurance;
|
|
·
|
Small and medium-size enterprise commercial insurance, including motor, property, liability, boiler and machinery, and surety;
and
|
|
·
|
Niche personal insurance products including holiday trailers, boats as well as antique, classic and custom cars.
|
Distribution
Independent brokers are our largest distribution channel, with 1,500
independent group and retail brokers distributing our core personal and commercial line products. We also built our own direct
distribution capability and, with the proposed acquisition of RBC General Insurance Company, we will have exposure to customers
who choose to deal directly with their insurer.
Asia
Business overview and strategy
In Asia, we are focused on growth. Increasing the value of our new
business remains our first priority in Asia. We are achieving this through scale benefits and by focusing our product mix on higher
margin products.
In Singapore, our life business is a leading
insurer in the market
20
, providing
employee benefit and individual life insurance through diversified distribution channels. We also have general insurance and health
operations in Singapore and are considered the market leader in online personal motor insurance
21
.
In China, through our 50% joint venture with
COFCO Capital Investment Co., Ltd, we are ranked number 7 among 27 foreign life insurers in terms of APE as at 30 September 2015
22
.
We have a presence in 12 provinces and over 50 branches. We operate a multi-distribution platform including agency, bancassurance,
direct marketing, and brokerage channels offering a wide range of protection and savings products.
In Indonesia, through our 50% joint venture with
PT Astra International Tbk, we distribute our products primarily through our bancassurance arrangement with Permata Bank that launched
in December 2014.
In Taiwan and Vietnam, through our joint ventures
with First Financial Holdings Co., Ltd and Vietnam Joint Stock Commercial Bank for Industry and Trade, respectively, we aim to
grow our bancassurance businesses and continue the diversification of our distribution networks.
In Hong Kong, our wholly owned subsidiary operates
primarily through IFA distribution networks.
In India, with a distribution network of 121
branches, we operate in partnership with the Dabur Group through a 26% interest in Aviva Life Insurance Company India Ltd. As at
31 October 2015, we ranked 13
th
among the private life insurance companies in India based on total APE (including Group
Business)
23
.
Friends Provident International Limited (
‘
FPIL’),
an Isle of Man-based company with operations in Asia, was acquired in April 2015 as part of the acquisition of Friends Life.
Market and competition
The Asian markets are strategically important to Aviva, owing to large
populations in fast-growing economies, coupled with relatively low insurance penetration rates and social insurance coverage. Life
insurance penetration (as measured by insurance premium as a proportion of GDP) in most Asian countries is typically less than
6% (1.7% in China, 1.1% in Indonesia, 0.7% in Vietnam, and 5% in Singapore)
24
.
The Asian markets are expected to deliver GDP growth of 6.2%
25
in 2016, ranging from 3.4%
25
in Singapore to 6.8%
25
in China.
Products
Our Asian businesses offer a wide range of protection, savings, and
pension products, including universal life, participating and non-participating endowments, unit-linked single and regular premium
life insurance, and a range of accident and health insurance products.
FPIL offers a range of products including single
premium investment products, regular premium savings plans, and individual assurance policies.
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.
|
19
|
Swiss Re Sigma Study (World Insurance 2014).
|
|
20
|
Latest available competitor results (30 June 2015).
|
|
21
|
The General Insurance Association of Singapore (30 September 2015).
|
|
22
|
National Insurance Industry Communication Club (30 September 2015).
|
23
Insurance Regulatory and Development Authority of India (31 October 2015).
24
Swiss Re Sigma Study (World Insurance 2014).
|
25
|
Asian Development Bank, Asian Development Outlook 2015 update.
|
On 31 December 2015, our 15 year regional bancassurance
agreement with DBS Bank Ltd expired and was not renewed. Aviva retains the existing book of business, associated profits, and customer
rights and relationships which were purchased in the original transaction with DBS in 2001.
FPIL’s products are targeted towards affluent
expatriate individuals and are sold via distribution hubs in Hong Kong, Singapore and the United Arab Emirates.
Aviva Investors
Business overview and strategy
Aviva Investors offers a range of fund management
services, operating in the UK, Europe, North America and Asia and had £290 billion in assets under management as at 31 December
2015 (
31 December 2014: £246 billion
), including assets managed by Friends Life Investments (‘FLI’), as
a result of the acquisition of Friends Life.
Our largest clients are the long-term insurance,
savings, and general insurance businesses of Aviva, to whom we provide bespoke asset management services across a broad spectrum
of asset classes.
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.
Our strategy is to offer a range of investment
propositions to deliver the specific outcomes that our clients value.
Market and competition
At the end of 2014, the global asset management market stood at circa
USD$74 trillion in size, almost half of which was accounted for by North America, and nearly a third by Europe
26
.
The global market is highly fragmented, with the top ten managers accounting for around a third of the total assets, and hundreds
of other managers accounting for the remainder. As such, the dynamics in all large markets are highly competitive. Aviva Investors
is ranked 48
th
in ‘The World’s 500 Largest Asset Managers
27
.
Our main competitors are large global asset managers
including Blackrock, State Street Global, Fidelity Investments, Schroders and Aberdeen, in addition to other UK and European insurer-owned
asset managers with whom we compete on a product by product basis.
Products
Our products cover a broad range of asset classes. In Europe, we have
a range of SICAVs (open-ended collective investment schemes), which are domiciled in France, Luxembourg and Poland. These funds
have different share classes depending on the size and type of investor. Our traditional distribution model for these funds focuses
on wholesale distributors, asset allocators and small to mid-size institutional investors.
In the UK, we largely sell segregated mandates
and specialist funds to pension schemes, local authorities and insurance companies. We also supply products to the retail and wholesale
markets, principally through UK domiciled bond, real estate, equity, multi-asset and multi-strategy OEIC funds. The Aviva Investors
Multi-Strategy (‘AIMS’) range of funds focuses on meeting the needs of our customers to achieve better outcomes with
their investments. In addition, we have a range of pooled pension funds which are aimed at the smaller pension fund market, normally
defined benefit schemes. We also have a range of specialist property funds, six money market funds domiciled in Dublin and Paris,
and also offer feeder funds domiciled in the Cayman Islands for US and Australian investors.
Distribution
Aviva Investors has a Global Business Development team based in 16
locations with clients around the world. We manage relationships with a diverse range of clients including corporate and public
sector pension funds, sovereign wealth funds, financial institutions, charities, insurance companies, wealth managers and national
and local government bodies.
Our distribution model for our open-ended collective
investment schemes focuses on wholesale distributors, asset allocators and small to mid-size institutional investors. In the UK,
our retail products are promoted to investors via independent financial advisors, fund platforms, fund supermarkets and discretionary
asset managers. In the United States, we have a strategic partnership with Virtus Investment Partners which provides Aviva Investors’
strategies to US customers in US open-ended mutual funds.
Our property funds are targeted at specialist
real estate buyers and large institutions (mostly pension funds and local authorities), and our money market funds are sold by
a specialist sales team and target corporate treasury functions.
|
26
|
Boston Consulting Group, Global Asset Management 2014.
|
|
27
|
Towers Watson World 500 largest asset managers study 2014.
|
Analysis
of investments
Analysis of investments
We invest our policyholders’ funds and our own funds in order
to generate a return for both policyholders and shareholders. The financial strength of the Group and both our current and future
operating results and financial performance are, therefore, in part dependent on the quality and performance of our investment
portfolios in the UK, Europe, North America and Asia.
For additional information on our financial investments,
see ‘IFRS Financial statements – Note 22 – Financial investments’.
Investment strategy
Our investment portfolio supports a range of businesses operating
in a number of geographical locations. Our aim is to match the investments held to support a line of business to the nature of
the underlying liabilities, whilst at the same time considering local regulatory requirements, the level of risk inherent within
different investments, and the desire to generate superior investment returns, where compatible with this stated strategy and risk
appetite.
Long-term insurance and savings business
As stated above, we aim to optimise investment returns whilst ensuring
that sufficient assets are held to meet future liabilities and regulatory requirements. As different types of life insurance business
vary in their cash flows and in the expectations placed upon them by policyholders, we need to hold different types of investments
to meet these different cash flows and expectations.
The UK with-profits business is comprised largely
of long-term contracts with some guaranteed payments. We are therefore able to invest a significant proportion of the funds supporting
this business in equities and real estate. This is because the long-term nature of these contracts allows us to take advantage
of the long-term growth potential within these classes of assets, whilst the level of guaranteed payments is managed to mitigate
the level of risk that we bear in relation to the volatility of these classes of assets.
Non-UK participating business, annuities and
non-participating contracts in all countries, have a high level of guaranteed future payments. We endeavour to match the investments
held against these types of business to future cash flows. We therefore have a policy of generally holding fixed income securities
and mortgage loans with appropriate maturity dates.
With unit-linked business, the primary objective
is to maximise investment returns, subject to following an investment policy consistent with the representations that we have made
to our unit-linked product policyholders.
General insurance and health business
The general insurance and health business is comprised of shorter-term
liabilities than the long-term insurance business. Furthermore, all the risk attaching to the investments is borne by our shareholders.
As a result, the investment portfolio held to cover general insurance liabilities contains a higher proportion of fixed income
securities than the portfolio held to cover life insurance liabilities.
Property partnerships
As part of their investment strategy, the UK and certain European
policyholder funds have invested in a number of property limited partnerships (‘PLPs’), either directly or via property
unit trusts (‘PLPs’), through a mix of capital and loans. The nature of our involvement in property partnerships is
set out in the second and third paragraphs of the Investment vehicles section of ‘IFRS Financial Statements – Accounting
policies – (D) Consolidation principles’. Property partnerships are accounted for as subsidiaries, joint ventures or
financial investments depending on our participation and the terms of each partnership agreement. For each property partnership
accounted for as a subsidiary, joint venture or financial investment, we are exposed to falls in the value of the underlying properties
which are reflected as unrealised gains/losses on investment properties, our share of joint venture results and unrealised gains/losses
on financial investments, respectively. However, the majority of these are in policyholder funds (rather than shareholder funds)
so such losses are offset by changes in the amounts due to policyholders or unitholders, or UDS.
Analysis of investments
We distinguish between policyholder, participating fund and shareholder
investments, which are terms used to reflect the differing exposure to investment gains and losses. Policyholder assets are connected
to our unit-linked business, where the policyholder bears the investment risk on the assets in the unit-linked funds. Our exposure
to loss on policyholder assets is limited to the extent that income arising from asset management charges is based on the value
of assets in the funds. Participating fund assets relate to some of our insurance and investment contracts which contain a discretionary
participation feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. Our
exposure to investment losses on participating funds is generally limited to our participation in the fund. Shareholder assets
are other assets held within our businesses that are not backing unit-linked liabilities or participating funds.
Investments held at 31 December 2015 and 31 December 2014
are listed below:
2015
|
Policyholder assets
£m
|
Participating fund assets
£m
|
Shareholder assets
£m
|
Carrying value in the statement of financial position
£m
|
Investment property
|
6,647
|
4,116
|
538
|
11,301
|
Loans
|
83
|
3,386
|
18,964
|
22,433
|
Financial investments
|
|
|
|
|
Debt securities
|
24,022
|
91,006
|
47,936
|
162,964
|
Equity securities
|
47,394
|
15,627
|
537
|
63,558
|
Other investments
|
39,795
|
5,739
|
2,161
|
47,695
|
Total
|
117,941
|
119,874
|
70,136
|
307,951
|
Total %
|
38.3%
|
38.9%
|
22.8%
|
100.0%
|
2014
|
71,454
|
106,086
|
59,283
|
236,823
|
2014 %
|
30.2%
|
44.8%
|
25.0%
|
100.0%
|
As the table indicates, approximately 22.8% of total investments
can be directly attributed to shareholders. The apportionment of our shareholder assets is predominantly weighted towards debt
securities and loans. In comparison, policyholder assets contain a greater proportion of equities and other investments (e.g. unit
trusts), and participating funds contain a greater proportion of debt and equity securities, reflecting the underlying investment
mandates.
We carry investments on our statement of financial
position at either fair value or amortised cost. At 31 December 2015, approximately 99% of the Group’s total investments
were carried at fair value on the statement of financial position.
For more information about financial investments
analysed according to their accounting classification and valuation approach, as well as the cost, unrealised gains and losses,
impairments, fair value and other information concerning financial investments, see ‘IFRS Financial statements − Note
22 − Financial investments’.
Debt securities
Participating fund asset and shareholder debt
securities analysed by credit rating and sector
Participating fund asset and shareholder debt securities
analysed by credit rating and product type as at 31 December 2015 are set out in the tables below. Government and corporate debt
securities are further analysed by type of issuer.
|
|
|
|
|
Ratings
|
|
|
2015 – Participating fund assets
|
AAA
£m
|
AA
£m
|
A £m
|
BBB
£m
|
Less than BBB
£m
|
Non-rated £m
|
Total
£m
|
Government
|
|
|
|
|
|
|
|
UK Government
|
—
|
13,715
|
—
|
—
|
—
|
8
|
13,723
|
Non-UK Government
|
6,526
|
13,604
|
2,069
|
7,821
|
389
|
56
|
30,465
|
Corporate
|
|
|
|
|
|
|
|
Public utilities
|
—
|
85
|
1,503
|
2,743
|
193
|
94
|
4,618
|
Convertibles and bonds with warrants
|
—
|
—
|
—
|
150
|
—
|
8
|
158
|
Other corporate bonds
|
4,877
|
4,634
|
10,068
|
9,843
|
2,244
|
2,945
|
34,611
|
Certificate of deposits
|
—
|
357
|
326
|
12
|
35
|
10
|
740
|
Structured
|
732
|
302
|
322
|
207
|
39
|
1
|
1,603
|
Wrapped credit
|
—
|
9
|
99
|
46
|
16
|
—
|
170
|
Other
|
318
|
87
|
620
|
1,996
|
995
|
902
|
4,918
|
Total
|
12,453
|
32,793
|
15,007
|
22,818
|
3,911
|
4,024
|
91,006
|
Total %
|
13.7%
|
36.0%
|
16.5%
|
25.1%
|
4.3%
|
4.4%
|
100.0%
|
2014
|
11,160
|
30,484
|
14,540
|
20,855
|
2,036
|
3,155
|
82,230
|
2014 %
|
13.6%
|
37.1%
|
17.7%
|
25.3%
|
2.5%
|
3.8%
|
100.0%
|
|
|
|
|
|
Ratings
|
|
|
2015 – Shareholder assets
|
AAA
£m
|
AA
£m
|
A
£m
|
BBB
£m
|
Less than BBB
£m
|
Non-rated £m
|
Total
£m
|
Government
|
|
|
|
|
|
|
|
UK Government
|
—
|
8,940
|
50
|
—
|
—
|
199
|
9,189
|
Non-UK Government
|
4,138
|
3,489
|
850
|
1,085
|
2
|
2
|
9,566
|
Corporate
|
|
|
|
|
|
|
|
Public utilities
|
—
|
170
|
3,106
|
1,892
|
4
|
232
|
5,404
|
Convertibles and bonds with warrants
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Other corporate bonds
|
2,227
|
2,959
|
8,109
|
5,095
|
481
|
2,127
|
20,998
|
Certificate of deposits
|
—
|
9
|
16
|
8
|
33
|
—
|
66
|
Structured
|
388
|
686
|
510
|
103
|
58
|
10
|
1,755
|
Wrapped credit
|
—
|
13
|
416
|
49
|
51
|
45
|
574
|
Other
|
17
|
5
|
88
|
115
|
62
|
97
|
384
|
Total
|
6,770
|
16,271
|
13,145
|
8,347
|
691
|
2,712
|
47,936
|
Total %
|
14.1%
|
34.0%
|
27.4%
|
17.4%
|
1.4%
|
5.7%
|
100.0%
|
2014
|
6,031
|
11,341
|
9,792
|
5,537
|
291
|
2,811
|
35,803
|
2014 %
|
16.8%
|
31.7%
|
27.3%
|
15.5%
|
0.8%
|
7.9%
|
100.0%
|
Debt securities are graded according to external credit ratings
issued at the balance sheet date. The credit rating used for each individual security is the median rating of the available ratings
from the major credit rating agencies. If a credit rating is available from only one of these rating agencies then this rating
is used. If an individual security has not been given a credit rating by any of the major rating agencies, the security is classified
as ‘non-rated’.
For the table above we have expressed our rating
using a rating scale whereby investment grade debt securities are classified within the range of AAA (extremely strong) to BBB
(good) ratings, with AAA being the highest possible rating. Debt securities which fall outside this range are classified as less
than BBB. This rating scale is analogous with that used by major rating agencies.
At 31 December 2015, the proportion of our shareholder
debt securities that are investment grade increased to 92.9%
(2014:
91.3%)
. The remaining 7.1% of shareholder debt securities that do not have an external rating of BBB or higher can be
split as follows:
|
·
|
1.4% are debt securities that are rated as below investment grade; and
|
|
·
|
5.7% are not rated by the major rating agencies.
|
Of the securities not rated by an external agency most are allocated
an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to
be of investment grade credit quality; these include £2.5 billion
(2014:
£2.5 billion)
of debt securities held in our UK Life business, predominantly made up of private placements and
other corporate bonds, which have been internally rated as investment grade.
Total wrapped credit
In respect of the wrapped credit investments, the table below
shows the credit rating of the securities as they are officially rated, and an estimate of their rating without the guarantee.
As rating agencies do not provide credit ratings for individual wrapped credit securities without consideration of the insurance
guarantee, the credit ratings disclosed in the table below are based on internal best estimates.
|
|
|
|
2015
|
|
|
|
2014
|
|
Rating with
insurance guarantee
|
Rating without
insurance guarantee
|
Rating with
insurance guarantee
|
Rating without
insurance guarantee
|
|
Fair value
£m
|
% of total
|
Fair value
£m
|
% of total
|
Fair value
£m
|
% of total
|
Fair value
£m
|
% of total
|
Wrapped credit
|
|
|
|
|
|
|
|
|
AAA
|
—
|
0.0%
|
—
|
0.0%
|
—
|
0.0%
|
—
|
0.0%
|
AA
|
24
|
3.1%
|
24
|
3.1%
|
18
|
3.3%
|
—
|
0.0%
|
A
|
543
|
69.8%
|
516
|
66.3%
|
346
|
64.2%
|
269
|
50.0%
|
BBB
|
98
|
12.6%
|
120
|
15.4%
|
90
|
16.7%
|
135
|
25.0%
|
Less than BBB
|
68
|
8.7%
|
68
|
8.7%
|
38
|
7.1%
|
—
|
0.0%
|
Non-rated
|
45
|
5.8%
|
50
|
6.5%
|
47
|
8.7%
|
135
|
25.0%
|
Not available without insurance guarantee
|
—
|
0.0%
|
—
|
0.0%
|
—
|
0.0%
|
—
|
0.0%
|
|
778
|
100.0%
|
778
|
100.0%
|
539
|
100.0%
|
539
|
100.0%
|
Exposures to peripheral European countries
Included in our debt securities and other financial assets are exposures
to peripheral European countries. All of these assets are valued on a mark to market basis under IAS 39, and therefore our statement
of financial position and income statement already reflect any change in value between the date of purchase and the balance sheet
date. The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed
by the nature and extent of our participation within those funds.
Net of non-controlling interests, our direct
shareholder and participating fund asset exposure to the government (and local authorities and agencies) of Italy is £4.7
billion
(2014: £4.9 billion).
Direct sovereign exposures to Greece,
Ireland, Portugal, Italy and Spain (net of non-controlling interests, excluding policyholder assets)
|
|
Participating
|
|
Shareholder
|
|
Total
|
|
2015
£bn
|
2014
£bn
|
2015
£bn
|
2014
£bn
|
2015
£bn
|
2014
£bn
|
Greece
|
—
|
—
|
—
|
—
|
—
|
—
|
Ireland
|
0.6
|
0.6
|
0.1
|
0.2
|
0.7
|
0.8
|
Portugal
|
0.1
|
0.2
|
—
|
—
|
0.1
|
0.2
|
Italy
|
4.4
|
4.8
|
0.3
|
0.1
|
4.7
|
4.9
|
Spain
|
0.8
|
0.9
|
0.4
|
0.4
|
1.2
|
1.3
|
Total Greece, Ireland, Portugal, Italy and Spain
|
5.9
|
6.5
|
0.8
|
0.7
|
6.7
|
7.2
|
Direct sovereign exposures to Greece, Ireland, Portugal,
Italy and Spain (gross of non-controlling interests, excluding policyholder assets)
|
|
Participating
|
|
Shareholder
|
|
Total
|
|
2015
£bn
|
2014
£bn
|
2015
£bn
|
2014
£bn
|
2015
£bn
|
2014
£bn
|
Greece
|
—
|
—
|
—
|
—
|
—
|
—
|
Ireland
|
0.6
|
0.6
|
0.1
|
0.2
|
0.7
|
0.8
|
Portugal
|
0.1
|
0.2
|
—
|
—
|
0.1
|
0.2
|
Italy
|
6.1
|
6.7
|
0.5
|
0.5
|
6.6
|
7.2
|
Spain
|
1.1
|
1.2
|
0.6
|
0.6
|
1.7
|
1.8
|
Total Greece, Ireland, Portugal, Italy and Spain
|
7.9
|
8.7
|
1.2
|
1.3
|
9.1
|
10.0
|
Equity securities
The table below analyses our investments in equity securities
by sector.
2015
|
Policyholder £m
|
Participating £m
|
Shareholder £m
|
Total
£m
|
Public utilities
|
2,674
|
688
|
5
|
3,367
|
Banks, trusts and insurance companies
|
10,603
|
3,270
|
153
|
14,026
|
Industrial, miscellaneous and all other
|
34,087
|
11,662
|
215
|
45,964
|
Non-redeemable preferred shares
|
30
|
7
|
164
|
201
|
Total
|
47,394
|
15,627
|
537
|
63,558
|
Total %
|
74.6%
|
24.6%
|
0.8%
|
100.0%
|
2014
|
26,324
|
8,813
|
482
|
35,619
|
2014 %
|
73.9%
|
24.7%
|
1.4%
|
100.0%
|
Other investments
The table below analyses other investments by type:
2015
|
Policyholder £m
|
Participating £m
|
Shareholder £m
|
Total
£m
|
Unit trusts and other investment vehicles
|
39,002
|
2,852
|
787
|
42,641
|
Derivative financial instruments
|
52
|
2,262
|
1,014
|
3,328
|
Deposits and credit institutions
|
327
|
28
|
105
|
460
|
Minority holdings in property management undertakings
|
114
|
597
|
249
|
960
|
Other
|
300
|
—
|
6
|
306
|
Total
|
39,795
|
5,739
|
2,161
|
47,695
|
Total %
|
83.5%
|
12.0%
|
4.5%
|
100.0%
|
2014
|
27,181
|
6,145
|
2,032
|
35,358
|
2014 %
|
76.9%
|
17.4%
|
5.7%
|
100.0%
|
Property
Our global headquarters are located in St. Helen’s, 1 Undershaft,
London, England, EC3P 3DQ. In addition, we have major offices in the following locations:
|
·
|
UK: UK Life, York and Bristol; UK General Insurance, Norwich; Aviva Investors, London;
|
|
·
|
North America: Scarborough, Ontario, Canada.
|
|
·
|
Europe: Paris, France; Dublin, Ireland; Madrid, Spain; Warsaw, Poland; and Milan, Italy.
|
As of 31 December 2015, we owned and occupied land and buildings
for our own use with a total book value of £337 million
(2014:
£316 million).
We believe that these facilities are adequate for our present needs in all material respects. We
also hold other properties, both directly and indirectly, for investment purposes, valued at £9,372 million at 31 December
2015
(2014: £7,521 million)
. The increase is primarily
as a result of the acquisition of the Friends Life business.
Contractual
obligations
Contractual obligations
Contractual obligations with specified payment dates at 31
December 2015 included the following:
|
Less than one year
£m
|
Between one & three years
£m
|
Between three & five years
£m
|
After five years
£m
|
Total
£m
|
Insurance and investment contracts
|
|
|
|
|
|
Long-term business
|
|
|
|
|
|
– Insurance contracts – non-linked
1
|
9,048
|
17,676
|
14,614
|
95,303
|
136,641
|
– Investment contracts – non-linked
2
|
64,735
|
—
|
—
|
—
|
64,735
|
– Linked business
2
|
130,184
|
—
|
—
|
—
|
130,184
|
General Insurance
3
|
5,858
|
3,507
|
1,654
|
2,955
|
13,974
|
|
209,825
|
21,183
|
16,268
|
98,258
|
345,534
|
Other contractual obligations
4
|
|
|
|
|
|
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 liabilities
5
|
9,146
|
291
|
348
|
3,212
|
12,997
|
Net assets attributable to unit holders
|
11,415
|
—
|
—
|
—
|
11,415
|
Total
|
231,724
|
22,810
|
17,774
|
117,578
|
389,886
|
Reconciliation to the statement of financial position
|
£m
|
Total contractual obligations above
|
389,886
|
Effect of discounting contractual cash flows for insurance contracts
|
(23,805)
|
Contractual undiscounted interest payments
6
|
(9,795)
|
Difference between carrying value of borrowings and undiscounted cash flows of principle
|
(124)
|
Contractual cash flows under operating leases and capital commitments
|
(1,251)
|
Difference between derivative liabilities contractual cash flows and carrying value
|
(549)
|
Unallocated divisible surplus
7
|
8,811
|
Provisions
8
|
1,416
|
Current and deferred tax liabilities
|
2,251
|
Other liabilities
|
2,802
|
Total liabilities per statement of financial position
|
369,642
|
|
1
|
Amounts shown in respect of long-term insurance contracts represent estimated undiscounted cash flows for the Group’s
life assurance contracts. In determining the projected payments, account has been taken of the contract features, in particular
that the amount and timing of the contractual payments reflect either surrender, death or contract maturity. In addition, the undiscounted
amounts shown include the expected payments based on assumed future investment returns on assets backing insurance and investment
contract liabilities. The projected cash flows exclude the unallocated divisible surplus of with-profits funds (see below).
|
|
2
|
All linked contracts and almost all non-linked investment contracts may be surrendered or transferred on demand. For such contracts
the earliest contractual maturity is therefore at the current statement of financial position date, for a surrender amount approximately
equal to the current statement of financial position liability. Although we expect surrenders, transfers and maturities to occur
over many years, the total liability for linked and non-linked investment contracts is shown in the less than one year column above.
|
|
3
|
Amounts shown in respect of general insurance contracts are based on undiscounted estimates of future claim payments, including
for those classes of business for which discounted provisions are held, see ‘IFRS Financial Statements– Note 36 –
Insurance liabilities’. The timing of cash flows reflects a best estimate of when claims will be settled.
|
|
4
|
The Group has no material finance leases for property and equipment.
|
|
5
|
Includes obligations for repayment of collateral received under stock lending arrangements and derivative transactions amounting
to £4,855 million.
|
|
6
|
When subordinated debt is undated or loan notes perpetual, the interest payments have not been included beyond 15 years. Annual
interest payments in future years for these borrowings are £79 million. Contractual undiscounted interest payments are calculated
using fixed interest rates or prevailing market floating rates as applicable.
|
|
7
|
The unallocated divisible surplus represents the excess of assets over liabilities, including policyholder ‘asset share’
liabilities in the UK, which reflect the amount payable under the realistic Peak 2 reporting regime of the Prudential Regulatory
Authority. Although accounted for as a liability, as permitted by IFRS 4, there is currently no expected payment date for the unallocated
divisible surplus.
|
|
8
|
Provisions include pension obligations, which have been excluded from the contractual obligations table above, due to the uncertainty
of the amount and timing of future cash flows. The Group operates both funded defined benefit and funded defined contribution pension
schemes, full details of which are provided in ‘IFRS Financial Statements – Note 44 – Pension obligations’.
We have a contractual obligation to fund these schemes. However, the amount and timing of the Group’s cash contributions
to these schemes is uncertain and will be affected by factors such as future investment returns and demographic changes. Our cash
funding of defined contribution schemes is based on percentages of salary. Our cash contribution to defined benefit schemes is
agreed in advance with scheme trustees. The Company and trustees have agreed to a long-term funding plan where contributions, together
with anticipated growth on scheme investments are expected to eliminate the funding deficits over time. Contributions to these
and the other schemes are regularly reviewed in light of changes in expectations of investment returns and other assumptions. The
discounted scheme liabilities have an average duration of 19 years in the main UK scheme, 19 years in the RAC scheme, 19 years
in the Irish scheme, 12 years in the Canadian scheme and 21 years in the Friends Provident Pension Scheme (FPPS).
|
Risk
and capital management
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.
Our sustainability and financial strength are
underpinned by an effective risk management process which helps us identify major risks to which we may be exposed, establish appropriate
controls and take mitigating actions for the benefit of our customers and investors. The Group’s risk strategy is to invest
its available capital to optimise the balance between return and risk whilst maintaining an appropriate level of economic (i.e.
risk-based) capital and regulatory capital in accordance with our risk appetite. Consequently, our risk management objectives are
to:
|
·
|
Embed rigorous risk management throughout the business, based on setting clear risk appetites and staying within these;
|
|
·
|
Allocate capital where it will make the highest returns on a risk-adjusted basis; and
|
|
·
|
Meet the expectations of our customers, investors and regulators that we will maintain sufficient capital surpluses to meet
our liabilities even if a number of extreme risks materialise.
|
Aviva’s risk management framework has been designed and implemented
to support these objectives. The key elements of our risk management framework comprise our risk appetite; risk governance, including
risk policies and business standards, risk oversight committees and roles & responsibilities; and the processes we use to identify,
measure, manage, monitor and report (IMMMR) risks, including the use of our risk models and stress and scenario testing. These
elements are expanded in the IFRS Financial statements – Note 53 – Risk management.
Principal risks and uncertainties
In accordance with the requirements of the FCA Handbook (DTR 4.1.8)
we provide a description of the principal risks and uncertainties facing the Group here and in note 53 to the IFRS Financial statements.
Our disclosures covering ‘risks relating to our business’ in line with reporting requirements of the Securities Exchange
Commission (SEC) provide more detail and can be found in the shareholder information section ‘Risks relating to our business’.
Risk environment
The first half of 2015 saw strengthening economic growth in Europe,
benefitting from accommodative monetary policy, a weak euro, continued low oil prices, while economic growth in the UK and US remained
robust. Up until April, a combination of a positive macroeconomic outlook and the launch of the European Central Bank’s (ECB)
quantitative easing programme in March led to global equity markets reaching all-time highs, weakening euro against the US dollar
and pounds sterling, and reduced yields on eurozone sovereign bonds.
In the latter half of the year concerns over
the sustainability of current growth rates in developed economies, growing evidence of an economic slowdown in China and other
emerging economies, further severe falls in the price of oil and other commodities and geopolitical concerns over the Middle East
have depressed equity markets reversing earlier gains. Despite these concerns the US Federal Reserve were sufficiently confident
on the strength of the US economy to raise interest rates for the first time since 2006, which has underpinned the current strong
US dollar.
These concerns are likely to continue into 2016
with the potential to depress equity markets and cause further financial market volatility and divergence amongst developed economies
(US compared to eurozone in particular) in monetary policy, interest rates and economic growth, and exacerbate macroeconomic imbalances
in the global economy. In the UK concerns over the outcome of the referendum on EU membership may depress sterling and the price
of gilts. Despite the recent increase in interest rates by the US Federal Reserve the current low interest rate environment compared
to historical norms is likely to persist in the intermediate future at least.
2015 also saw a number of high profile cyber
security breaches for corporates in the UK and elsewhere and this risk is expected to increase in the future.
Continuing on from 2014, 2015 saw further change
in UK public policy on pensions and from April 2016 annuitants will have the option to sell their annuity income to a third party
for a cash lump sum. While in most of our markets conduct regulation and enforcement has received increased focus from national
supervisors, as well as international supervisory bodies such as EIOPA and IAIS. This is expected to continue into the future.
In November 2015 the Group’s designation
as a Global Systemically Important Insurer (G-SII) was re-confirmed. Among other policy requirements, this will result in new higher
loss absorbency (HLA) capital requirements, which are still under development, to be applied from January 2019, if the Group remains
a G-SII.
On 1 January 2016, Solvency II the new capital
regime became effective. In December 2015, the PRA approved use of the Group’s internal model to calculate the regulatory
capital requirement under Solvency II for much of the Group’s businesses. Over the next year or two the Group plans to apply
to extend use of the internal model to other businesses within the Group, with a beneficial impact (if approved by the PRA and
the relevant national supervisory authorities) on the Group’s capital requirement.
Risk profile
The types of risk to which the Group is exposed have not changed significantly
over the year and remain credit, market, insurance, asset management, liquidity, operational and reputational risks as described
in note 53 of the IFRS financial statements.
The Group continues to manage its risk profile
to reflect Aviva’s objective of maintaining financial strength and reducing capital volatility. In April 2015, the Group
completed the acquisition of Friends Life. The principal impact of the acquisition on the Group’s risk profile has been to
increase our exposure to equity price risk and UK life insurance risks, in particular lapse risk, as well as reducing the Group’s
external leverage. Work was undertaken during 2015 to adopt the Aviva risk management framework in the former Friends Life businesses.
The Group continued to take steps to amend its
risk profile, successfully completing a number of management actions. These include: the disposal of £2.2 billion of non-core
commercial mortgages, the reinsurance of £0.7 billion of latent exposures to historical UK employer’s liability business
(with conditional agreement to extend coverage to £0.8 billion); the purchase of interest swaps to better cash flow match
our annuity portfolio; reducing exposure to longevity risk as a result of the RAC staff pension scheme entering into a longevity
swap covering £0.6 billion of pensioner in payment liabilities; and reducing our operational risk exposures through investment
in our Security Transformation programme in response to the increasing cyber security risk and on-going investment in simplifying
our technology estate to improve resilience and reliability of our systems. Restrictions on non-domestic investment in sovereign
and corporate debt from Greece, Italy, Portugal and Spain remain in place. As described in note 53 to the IFRS Financial statements,
a number of foreign exchange, credit and equity hedges are also in place. These are used to mitigate the Group’s credit and
equity exposure, and enable the Group to accept other credit risks offering better risk adjusted returns while remaining within
appetite. In addition, we renewed our catastrophe reinsurance programme to reduce the Group’s potential loss to an extreme
insurance loss event.
During 2015, the Group continued to pay-down
the inter-company loan between Aviva Insurance Limited (AIL) and Aviva Group Holdings (AGH). By the end of February 2016, the balance
of the loan had been reduced to £1.5 billion, below the level at which we estimate AIL would no longer rely on the loan to
meet its stressed liabilities.
In 2015, the Group further enhanced the operating
capability of its primary on-shore internal reinsurance mixing vehicle, Aviva International Insurance Limited (AII), and in December,
AII received approval to use Aviva’s internal model to calculate its capital requirement. These steps now successfully concluded
should enable the Group to significantly increase the amount of business ceded to AII, with the objective of promoting greater
capital efficiency and realising the benefits of group diversification of risk through lower solo capital requirements in the ceding
entities.
During 2015 the Group has continued to maintain
its external leverage at a level commensurate with a AA rating.
Low interest rate environment
The Group continues to be adversely impacted by the low interest rate
environment in a number of markets around the world. This has resulted in reduced interest spread on participating contracts (the
difference between the amounts that we are required to pay under the contracts and the investment income we are able to earn on
the investments supporting our obligations under those contracts), and current reinvestment yields being lower than the overall
current portfolio yield, primarily for our investments in fixed income securities and commercial mortgage loans. We anticipate
that interest rates may remain below historical averages for an extended period of time and that financial markets may continue
to have periods of high volatility. As a result we continue to rebalance the Group’s revenues towards product lines, such
as protection, that are not significantly sensitive to interest rate or market movements. Further information on the Group’s
exposure to low interest rates is included in the sensitivity analysis in Note 53 of the IFRS Financial Statements.
Capital management
Capital management objectives
The primary objective of capital management is to optimise the balance
between return and risk, whilst maintaining economic and regulatory capital in accordance with risk appetite. Aviva’s capital
and risk management objectives are closely interlinked, and support the dividend policy and earnings per share growth, whilst also
recognising the critical importance of protecting policyholder and other stakeholder interests.
Overall capital risk appetite, which is reviewed
and approved by the Aviva Board, is set and managed with reference to the requirements of a range of different stakeholders including
shareholders, policyholders, regulators and rating agencies. Risk appetite is expressed in relation to a number of key capital
and risk measures, and includes a Solvency II capital risk appetite of holding sufficient capital resources to enable the Group
to meet its liabilities in extreme adverse scenarios, on an ongoing basis. Our risk appetite is consistent with a AA range credit
rating.
In managing capital we seek to:
|
·
|
maintain sufficient, but not excessive, financial strength in accordance with risk appetite, to support new business growth
and satisfy the requirements of our regulators and other stakeholders giving both our customers and shareholders assurance of our
financial strength;
|
|
·
|
optimise our overall debt to equity structure to enhance our returns to shareholders, subject to our capital risk appetite
and balancing the requirements of the range of stakeholders;
|
|
·
|
retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit facilities
and access to a range of capital markets;
|
|
·
|
allocate capital rigorously across the Group, to drive value adding growth through optimising risk and return; and
|
|
·
|
declare dividends with reference to factors including growth in cash flows and earnings.
|
In line with these objectives, the capital generated and invested
by the Group’s businesses is a key management focus.
Accounting basis:
Capital employed by segment and financing of capital
The table below shows how our capital, on an IFRS basis,
is deployed by segment and how that capital is funded.
|
2015
£m
|
2014
£m
|
Long-term savings
|
16,326
|
10,579
|
General insurance and health
|
5,870
|
6,007
|
Fund management
|
411
|
298
|
Corporate and other business
1
|
2,537
|
702
|
Total capital employed
|
25,144
|
17,586
|
Financed by:
|
|
|
Equity shareholders’ funds
|
15,764
|
10,018
|
Non-controlling interests
|
1,145
|
1,166
|
Direct capital instrument and tier 1 notes
|
1,123
|
892
|
Preference shares
|
200
|
200
|
Subordinated debt
|
6,427
|
4,594
|
Senior debt
|
485
|
716
|
Total capital employed
|
25,144
|
17,586
|
|
1
|
Corporate and other business includes centrally held tangible net assets, the main UK staff pension scheme surplus and also
reflects internal lending arrangements. These internal lending arrangements, which net out on consolidation, include the formal
loan agreement between Aviva Group Holdings and Aviva Insurance Limited (AIL).
|
|
2
|
Internal capital management mechanisms in place allocated a majority of the total capital of AIL to the UK general insurance
operations with the remaining capital deemed to be supporting residual (non-operational) Pillar II ICA risks.
|
|
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.
|
Total capital employed is financed by a combination of equity shareholders’
funds, preference capital, subordinated debt and other borrowings.
At the end of 2015 we had £25.1 billion
(2014: £17.6 billion)
of total capital employed in
our trading operations measured on an IFRS basis.
Regulatory capital – overview
Solvency II, the new Europe-wide prudential regulatory framework,
came into force on 1 January 2016. This new regime puts in place a consistent solvency framework for insurers across Europe. 2015
was an important year for Aviva as it prepared for formal implementation of Solvency II on 1 January 2016. The Group has used a
risk based capital model to assess economic capital requirements for a number of years which helped prepare for the new regime.
Aviva’s Group Solvency II partial internal model was approved in December 2015 by the Prudential Regulation Authority (PRA).
Whilst Solvency II is applicable from 1 January 2016, during 2015 and as at the year end the European Insurance Groups Directive
(IGD) was still applicable.
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 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.
This measure represents the excess of the aggregate
value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators,
excluding the surplus held in the UK and Ireland with-profit life funds. The minimum solvency requirement for our European businesses
is based on the Solvency I Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked
life reserves respectively and for our general insurance portfolio of business is the higher of 18% of gross premiums or 26% of
gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our business in Canada a risk charge on
assets and liabilities approach is used.
From 1 January 2016 EU-based insurance groups
are no longer required to disclose their solvency position under the European Insurance Groups Directive, as the regulatory framework
has been replaced by the new Solvency II regime. As such, after 31 December 2015 Aviva will no longer disclose its solvency surplus
under the IGD rules.
Regulatory capital – Group
European Insurance Groups Directive
|
UK life
funds
£bn
|
Other
business
£bn
|
31
December
2015
£bn
|
31
December
2014
£bn
|
Insurance Groups Directive (IGD) capital resources
|
11.8
|
10.8
|
22.6
|
14.4
|
Less: capital resources requirement
|
(11.8)
|
(4.8)
|
(16.6)
|
(11.2)
|
Insurance Groups Directive (IGD) excess solvency
|
—
|
6.0
|
6.0
|
3.2
|
Cover over EU minimum (calculated excluding UK life funds)
|
|
|
2.2 times
|
1.6 times
|
The IGD regulatory capital solvency surplus has increased
by £2.8 billion since 31 December 2014 to £6.0 billion. The key drivers of the increase are the acquisition of Friends
Life (£1.6 billion), adjusted operating profits (£1.6 billion) and the net issue of hybrid debt (£0.4 billion),
offset by dividend payments and pension scheme funding (£0.5 billion).
The key movements over the period are
set out in the following table:
|
£bn
|
IGD solvency surplus at 31 December 2014
|
3.2
|
Acquisition of Friends Life
|
1.6
|
Adjusted operating profits net of integration and restructuring costs
|
1.6
|
Net hybrid debt issue
1
|
0.4
|
Dividends and appropriations
|
(0.3)
|
Pension scheme funding
|
(0.2)
|
Outward reinsurance of latent reserves
2
|
0.2
|
Increase in capital resources requirement
|
(0.1)
|
Other regulatory adjustments
|
(0.4)
|
Estimated IGD solvency surplus at 31 December 2015
|
6.0
|
|
1
|
Net hybrid debt issue includes £1 billion benefit of two new Tier 2 subordinated debt instruments issued on 4 June 2015;
offset by £(0.6) billion derecognition of two instruments redeemed in the second half of 2015.
|
|
2
|
Outward quota share reinsurance agreement completed in 2015 in Aviva Insurance Limited (AIL).
|
Regulatory capital – UK Life with-profits fund
The available capital of the with-profits funds is represented
by the realistic inherited estate. The estate represents the assets of the long-term with-profits funds less the realistic liabilities
for non-profits policies within the funds, less asset shares aggregated across the with-profits policies and any additional amounts
expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs, guarantees and
promises. Realistic balance sheet information is shown below for the four main UK with-profits funds: New With-Profits Sub-Fund
(NWPSF), Old With-Profits Sub-Fund (OWPSF), With-Profits Sub-Fund (WPSF) and Friends Provident With-Profits Fund (FP WPF). Realistic
balance sheet information for the five Friends Life (FL) with-profits funds that are closed to new business have been disclosed
as ‘Other FL WPFs’ including: FPLAL With-Profits Fund (FPLAL WPF), FLC New With-Profits Fund (FLC New WPF), Old With-Profits
Fund (FLC Old WPF), FLAS With-Profits Fund (FLAS WPF) and WL With-Profits Fund (WL WPF). These realistic liabilities have been
included within the long-term business provision and the liability for insurance and investment contracts on the Group’s
IFRS Statement of financial position at 31 December 2015 and 31 December 2014, with comparatives at 31 December 2014 including
NWPSF, OWPSF and WPSF only.
|
|
|
|
|
|
31 December 2015
|
31 December 2014
|
|
Estimated
realistic
assets
£bn
|
Estimated
realistic
liabilities
1
£bn
|
Estimated
realistic
inherited
estate
2
£bn
|
Capital
support
arrangement
3
£bn
|
Estimated
risk
capital
margin
£bn
|
Estimated
excess
available
capital
£bn
|
Estimated
excess
available
capital
£bn
|
NWPSF
|
14.0
|
(14.0)
|
—
|
2.1
|
(0.2)
|
1.9
|
1.9
|
OWPSF
|
2.6
|
(2.4)
|
0.2
|
—
|
—
|
0.2
|
0.2
|
WPSF
4
|
16.7
|
(15.2)
|
1.5
|
—
|
(0.3)
|
1.2
|
1.3
|
FP WPF
5
|
7.2
|
(7.0)
|
0.2
|
—
|
(0.2)
|
—
|
—
|
Other FL WPFs
6
|
10.7
|
(10.7)
|
—
|
—
|
—
|
—
|
—
|
Aggregate
|
51.2
|
(49.3)
|
1.9
|
2.1
|
(0.7)
|
3.3
|
3.4
|
|
1
|
Realistic liabilities include the shareholders’ share of accrued bonuses of £0.8 billion
(31 December 2014:
£(0.2) billion)
. Realistic liabilities adjusted to eliminate the shareholders’ share of accrued bonuses are £48.5
billion
(31 December 2014: £33.0 billion)
. These realistic liabilities make provision for guarantees, options and
promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £1.4
billion, £0.3 billion, £3.2 billion, and £0.8 billion for NWPSF, OWPSF, WPSF and FP WPF respectively
(31 December
2014: £1.4 billion, £0.3 billion and £3.0 billion for NWPSF, OWPSF and WPSF respectively)
.
|
|
2
|
Estimated realistic inherited estate at 31 December 2014 was £nil, £0.3 billion and £1.6 billion for NWPSF,
OWPSF and WPSF respectively.
|
|
3
|
The support arrangement represents the reattributed estate (RIEESA) of £2.1 billion at 31 December 2015
(31 December
2014: £2.1 billion)
.
|
|
4
|
The WPSF fund includes the Ireland With-Profits Sub-Fund (IWPSF) and the Provident Mutual (PM) Fund which have realistic assets
and liabilities of £2.4 billion in total, and therefore do not contribute to the realistic inherited estate.
|
|
5
|
For FP WPF the realistic inherited estate is restricted to the estimated risk capital margin with excess available capital
used to enhance asset shares.
|
|
6
|
Includes FPLAL WPF, FLC New WPF, FLC Old WPF, FLAS WPF and WL WPF. For these funds it is assumed that the entire estimated
realistic inherited estate is distributed to policyholders.
|
Investment mix
The aggregate investment mix of the assets in the four main
with-profit funds at 31 December 2015 and three main with-profit funds at 31 December 2014 was:
|
31
December 2015
%
|
31
December 2014
%
|
Equity
|
30%
|
24%
|
Property
|
10%
|
10%
|
Fixed interest
|
54%
|
59%
|
Other
|
6%
|
7%
|
The equity backing ratios, including property, supporting
with-profit asset shares are 75% in NWPSF and OWPSF, 72% in WPSF and 45% in FP WPF.
Economic capital
We use a risk-based capital model to assess economic capital requirements
and to aid in risk and capital management across the Group. The model is based on a framework for identifying the risks to which
business units, and the Group as a whole, are exposed. Where appropriate, businesses also supplement these with additional risk
models and stressed scenarios specific to their own risk profile. When aggregating capital requirements at business unit and Group
level, we allow for diversification benefits between risks and between businesses, with restrictions to allow for non-fungibility
of capital where appropriate. This means that the aggregate capital requirement is less than the sum of capital required to cover
all of the individual risks. The capital requirement reflects the cost of mitigating the risk of insolvency to a 99.5% confidence
level over a one year time horizon (equivalent to events occurring in 1 out of 200 years) against financial and non-financial tests.
The financial modelling techniques employed in
economic capital enhance our practice of risk and capital management. They enable understanding of the impact of the interaction
of different risks allowing us to direct risk management activities appropriately. These same techniques are employed to enhance
product pricing and capital allocation processes.
Rating agency
Credit ratings are an important indicator of financial strength and
support access to debt markets as well as providing assurance to business partners and policyholders over our ability to service
contractual obligations. In recognition of this we have solicited relationships with a number of rating agencies. The agencies
generally assign ratings based on an assessment of a range of financial factors (e.g. capital strength, liquidity, leverage and
fixed charge cover ratios) and non-financial factors (e.g. strategy, competitive position and quality of management).
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.
The Group’s overall financial strength
is reflected in our credit ratings. The Group’s rating from Standard and Poor’s is A+ (strong) with a Stable outlook;
A1 (good) with a Stable outlook from Moody’s; AA- (very strong) with a Stable outlook from Fitch Ratings; and A (excellent)
with a Stable outlook from A.M. Best.
Financial flexibility
The Group’s borrowings are comprised primarily of long dated
hybrid instruments with maturities spread over many years, minimising refinancing risk. In addition to central liquid asset holdings
of £1.0 billion, the majority of which was held within Aviva Group Holdings Limited at the 2015 year end, the Group also
has access to unutilised committed credit facilities of £1.7 billion provided by various highly rated international banks.
This page is intentionally left blank
Governance
In this section
|
Page
|
Chairman’s governance letter
|
38
|
Board of directors
|
40
|
Group executive
|
44
|
Directors’ and corporate governance report
|
46
|
Directors’ remuneration report
|
72
|
Chairman’s governance letter
Dear shareholder
I am pleased to present this year’s directors’
and corporate governance report, which is my first as Chairman
As Chairman and as a Board, we take our governance responsibilities
extremely seriously: we take pride not only in what we do but also in the way that we conduct our business and deliver our strategy.
Our governance structure is key to this: good governance helps to deliver value for customers and shareholders and to manage the
inherent risks of the business prudently.
Governance in 2015
During the year, we have sought to ensure that our governance structures
at Board, committee and subsidiary company levels continue to be appropriate for the businesses and the markets in which we operate
around the world, while supporting our overall strategy and culture. It is important that our approach to governance matches our
values: Care More; Kill Complexity; Never Rest; and Create Legacy.
In 2015, we have strengthened governance within
the Group by codifying the principles for subsidiary governance and issuing specific guidance for individual legal entities. This
has supported effective decision-making by providing clarity on the relationship between Aviva plc, as ultimate shareholder and
subsidiary boards. These principles also articulate our governance expectations at every level in our corporate structure.
In other areas of the business, we have announced our desire to maximise our competitive advantage as a composite
insurer and asset manager by launching UK Digital, a new business structure to develop our digital service and capability. UK Digital
has required an evolution in our governance processes. An example of how our governance structure has adapted over the year to
support our work on UK Digital is contained within this report.
Other areas of business focus
which have featured on our governance agenda have included Solvency II readiness, IT infrastructure, conduct risk and the
integration of Friends Life.
Board changes and succession planning
There were several changes to the composition of the Board in 2015
which are detailed in the directors’ and corporate governance report in this report. During the year, the Nomination Committee
discussed matters relating to Board composition, succession and talent planning at executive level and this is an area that will
continue to be part of its agenda during 2016. In addition to those changes made in 2015, on 8 February 2016 we were pleased to
announce the appointment of Claudia Arney to the Board as an Independent Non-Executive Director. Our Board and executive team have
a wide and diverse range of skills as indicated in the charts opposite. Gender diversity is considered as one aspect of those discussions:
we have made progress towards achieving our target of 25% female representation on the Board, and we remain committed to improving
this position further when the appropriate opportunity arises. The Nomination Committee report contains further information on
our approach.
Effectiveness and evaluation
As Chairman it is my role to provide leadership to ensure that it
is possible to make high-quality decisions and ensure the operation of an effective Board. I am supported by all the directors
but particularly by Sir Malcolm Williamson, the Senior Independent Director, who meets independently with the other directors and
with the Company’s major shareholders when required. This report contains an interview with Sir Malcolm who reflects on his
impressions of Aviva since joining the Board in April 2015.
During 2015, the Board and each committee conducted
its annual evaluation of its own performance. This was externally facilitated and the findings provided a clear agenda for us
to continue to improve as a Board, including the opportunity to focus on succession planning and on the quantity and quality of
information being presented to the Board. Further detail on the results of the Board evaluation can be found in this report.
Governance framework
This year the Board and each of its committees have applied the revised
UK Corporate Governance Code (the Code), to the Group for the 2015 financial year.
The directors’ and corporate governance
report and the directors’ remuneration report have been prepared in order to provide shareholders with a comprehensive understanding
of how the Board and its committees operate within Aviva’s governance framework. The reports demonstrate how we meet the
requirements of the Code and other guidance and how we structure ourselves to meet the changing regulatory environment and deliver
value for customers and shareholders.
Communication with shareholders is extremely important to the Board and I very much look
forward to discussing the Group’s progress with you at our forthcoming Annual General Meeting.
Sir Adrian Montague CBE
Chairman
9 March 2016
Board of directors: Biographies
Board of
Directors
We have a strong, experienced and diverse Board with
a good balance of skills
|
|
|
|
|
|
|
Nationality:
British
Appointment date:
14 January 2013
8 May 2013 as Senior Independent Director
29 April 2015 as Chairman
Committee membership:
Nomination Committee
(Chair)
|
|
Nationality:
New Zealander
Appointment date:
1 December 2012
1 January 2013 as Chief Executive Officer
Committee membership:
N/A
|
|
Nationality:
American
Appointment date:
28 April 2014
Committee membership:
N/A
|
|
Nationality:
British
Appointment date:
29 April 2015
Committee membership:
N/A
|
Skills and Experience:
Sir Adrian’s previous experience as a
Board member and as Senior Independent Director brings continuity to the Board and a deep knowledge of the Company and its
businesses.
Sir Adrian has significant experience of
the financial services industry, government affairs and regulatory matters. He has previously been the chairman of a number of
companies across a variety of sectors including Friends Provident plc, Anglian Water Group Ltd, British Energy Group plc, Michael
Page International plc, UK Green Investment Bank plc, 3i Group plc and Cross London Rail Links Ltd.
He was formerly a partner at Linklaters &
Paines.
External Appointments:
Sir Adrian is currently chairman of The Manchester Airports Group plc and The Point of Care Foundation
(charity) and non-executive director of Cellmark Holdings AB (forest products).
|
|
Skills and Experience:
Mark has extensive experience of leading major international insurance
companies and has an excellent track record as a focused and inspirational business leader.
Under his leadership, Aviva has emerged with
a strong financial position and a clear strategy to fully maximise the potential of the business. In 2015 Mark led the £6 billion
acquisition by Aviva of the Friends Life Group and the subsequent integration which is progressing ahead of schedule.
Mark continues to lead campaigns on issues
of importance to Aviva’s customers and has emerged as a major commentator in debates about the role of business in society.
Previously, Mark worked for 14 years in Asia,
including as chief executive officer of AIA Group, based in Hong Kong. He repositioned AIA into the leading pan-Asian insurance
company, creating a stronger and significantly more valuable independent entity, leading to the largest initial public offering
in the corporate history of Hong Kong.
External Appointments:
None.
|
|
Skills and Experience:
Tom brings to his position as Chief Financial Officer diverse
experience, having held senior positions in highly respected US firms including his role as head of Global Financial Institutions
Advisory at the investment and advisory firm Blackstone Advisory Partners LP.
Tom has played a fundamental role in our
strategic decision making and has continued to drive forward our investment thesis of cash flow plus growth. Tom’s considerable
experience and financial expertise has also been invaluable in the Board’s deliberations concerning the acquisition of the
Friends Life business and in our preparations for Solvency II.
Prior to joining the Company, Tom worked
primarily as an investment banker, which included advising Aviva. He also has experience as a corporate lawyer and as an asset
based lender. His other senior positions were at Credit Suisse; Donaldson, Lufkin & Jenrette; and Cravath, Swaine & Moore
LLP.
External Appointments:
Tom is a trustee of Trout Unlimited (conservation).
|
|
Skills and Experience:
Andy joined the Board to lead Aviva’s enlarged UK Life business
following the acquisition of Friends Life where he was group chief executive.
He has more than 25 years of operational
and executive experience across life assurance and general insurance, both in the UK and overseas. He has extensive knowledge of
the UK regulated environment combined with experience in capital and risk management. At Friends Life he led the transformation
of the three acquired businesses and brings his strategic and business skills, experience of organisational change, and knowledge
of the Friends Life business, to the Board.
Andy was formerly chief executive officer
of Scottish Widows plc, the life insurance business of Lloyds Banking Group plc and the Prudential Group’s retirement income
business.
External Appointments:
Andy is deputy chair of the board of the Association of British Insurers (ABI) and represents the ABI at the
Financial Conduct Authority Practitioner Panel. He is also a member of the NSPCC’s fundraising committee.
|
|
|
|
|
|
|
Nationality:
British
Appointment date:
29 April 2015
Committee membership:
Audit Committee
Governance Committee
Nomination Committee
Remuneration Committee
|
|
Nationality:
British
Appointment date:
8 February 2016
Committee membership:
Nomination Committee
|
|
Nationality:
British
Appointment date:
27 February 2012
Committee membership:
Audit Committee (Chair)
Nomination Committee
Risk Committee
|
|
Skills and Experience:
Sir Malcolm brings to the Board more than 50 years’ leadership
experience in the insurance and banking sectors and has extensive knowledge of the UK life insurance market. Sir Malcolm also brings
a detailed knowledge of Friends Life, providing vital continuity during the integration of the businesses.
Sir Malcolm gained extensive experience while
fulfilling a number of senior positions including his role as chairman of Clydesdale Bank plc, group chief executive of Standard
Chartered plc and deputy chairman of Resolution plc.
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).
|
|
Skills and Experience:
Claudia has a wide range of experience as both an executive and
non-executive director across a number of sectors including financial services, digital and government.
Previously Claudia was deputy chairman and
senior independent director of Telecity plc, chairman of the Public Data Group and a non-executive director of Which?, Doctors.net.uk,
Transport for London and Partnerships UK. In her executive career, Claudia was group managing director of Emap and was responsible
for transforming the predominantly print trade publishing business into a digital data and information business.
External Appointments:
Currently Claudia is a non-executive director of Derwent London
plc (commercial real estate), Halfords Group plc and the Premier League. She is also a member of the Advisory Board of the Shareholder
Executive.
|
|
Skills and Experience:
Glyn has extensive experience as a business leader and a trusted
adviser to FTSE100 companies and their boards on a wide variety of corporate and finance issues. He possesses a deep understanding
of accounting and regulatory issues together with in-depth transactional and financial services experience.
Glyn was formerly vice chairman, UK of PricewaterhouseCoopers
LLP with responsibility for leading the executive team for the Europe, Middle East, Africa and India regions.
External Appointments:
Currently Glyn is chairman of Interserve plc (support services
and construction), Irwin Mitchell (law firm) and Transocean Partners LLC (offshore drilling); non-executive director of Transocean
Ltd and Berkeley Group Holdings plc (construction); and a trustee of English National Opera.
|
|
|
|
|
|
|
|
|
Nationality:
Australian
Appointment date:
1 December 2013
Committee membership:
Remuneration Committee
(Chair)
Audit Committee
Nomination Committee
|
|
Nationality:
Spanish
Appointment date:
26 June 2015
Committee membership:
Governance Committee
Nomination Committee
Risk Committee
|
|
Nationality:
Australian
Appointment date:
1 January 2010
Committee membership:
Risk Committee (Chair)
Audit Committee
Nomination Committee
|
|
Nationality:
British
Appointment date:
12 September 2013
Committee membership:
Governance Committee
Nomination Committee
Remuneration Committee
Risk Committee
|
Skills and Experience:
Patricia brings a broad range of experience and skills to the
Board, gained over more than 30 years across financial services and other regulated industries in the United States, Europe and
Australia.
She was previously group executive, wholesale
banking and finance at National Australia Bank Ltd and has worked in senior roles with JP Morgan Chase and BNP Paribas.
Patricia was formerly a non-executive director
at Suncorp-Metway Ltd (insurance and banking), AMP Ltd (insurance), Westfarmers Ltd (ASX10 conglomerate including insurance), Qantas
Airways Ltd and National Australia Bank Ltd.
External Appointments:
Patricia is currently chair of the Commonwealth Superannuation
Corporation and a non-executive director of Macquarie Group Ltd and Macquarie Bank Ltd. She is an ambassador for the Australian
Indigenous Education Foundation.
|
|
Skills and Experience:
Belén brings to the Board significant experience of the
financial services industry, including a detailed knowledge of insurance and European regulation.
As a former Spanish civil servant, Belén
has held senior positions at the Spanish Treasury, the International Monetary Fund, the European Central Bank, the Organisation
for Economic
Co-operation and Development and the European Commission.
Belén has held non-executive positions
at Ageas (insurance), Acerinox (stainless steel manufacturing conglomerate) and Banesto (banking).
External Appointments:
Belén is currently an independent non-executive director
of Banco Santander.
|
|
Skills and Experience:
Michael brings to the Board a wealth of knowledge and experience
gained over a long career in the banking and insurance industries, in both executive and non-executive roles in Europe, Asia and
Australia.
He was formerly chief executive and managing
director of Insurance Australia Group, group chief executive of business and consumer banking at Westpac Banking Corporation and
chairman of the Insurance Council of Australia.
External Appointments:
Michael is currently a non-executive director of Macquarie Group
Ltd, Macquarie Bank Ltd and Washington H Soul Pattinson Pty and Company Ltd (investment).
Michael is chairman of The George Institute
for Global Health.
|
|
Skills and Experience:
Michael has extensive experience of implementing transformation
programmes and also brings an
in-depth understanding of the financial services sector.
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.
Michael also gained governmental experience
at the Central Policy Review Staff (now the Number 10 Policy Unit).
External Appointments:
Michael is currently the senior independent director at the Care
Quality Commission.
|
|
|
|
|
|
|
Nationality:
American
Appointment date:
28 January 2013
Committee membership:
Audit Committee
Nomination Committee
Remuneration Committee
Risk Committee
|
|
Nationality:
British
Appointment date:
5 December 2007
Committee membership:
Governance Committee
(Chair)
Nomination Committee
Risk Committee
|
|
Nationality:
British
Appointment date:
22 December 2010
Committee membership:
N/A
|
|
Skills and Experience:
Bob brings significant accounting and financial services experience
to the Board from his roles in actuarial, insurance and financial services practices.
He has had a number of managing partner roles
at Ernst & Young, culminating in being managing partner, Global Actuarial Practice.
Bob is a certified public accountant and
a fellow of the Society of Actuaries. He is a member of the American Institute of Certified Public Accountants and a member of
the American Academy of Actuaries.
External Appointments:
Bob is currently a non-executive director of Assurant, Inc (US specialty insurance), a director of Resolution
Life Holdings, Inc. and is a trustee emeritus of the board of trustees of the US Actuarial Foundation.
|
|
Skills
and Experience:
Scott has a wealth of business experience in the retail sector
and a good understanding of customer priorities. He brings expertise in driving excellence in customer service within the business.
Scott has served on the Board for more than
eight years giving him extensive historical knowledge of the Company and providing valuable continuity to the Board.
He was former chief executive officer of
Best Buy Europe, director of The Boots Company plc (now known as The Boots Company Ltd), managing director and retail director
of Boots the Chemist at Alliance Boots plc, and director of the British Retail Consortium. He formerly held a number of senior
executive positions at Tesco plc, including chief executive of Tesco in Japan.
External Appointments:
Scott is currently a non-executive director of Santander UK plc.
|
|
Skills and Experience:
Kirstine joined Aviva in 1991 and is the Group General Counsel
and Company Secretary for Aviva plc and heads the Office of the Chairman.
She established the legal and secretarial
function as a global team and is responsible for the provision of legal services to the Group, legal risk management, regulatory
compliance, public policy and corporate responsibility. She also supports the Chairman and the Board in the discharge of their
responsibilities.
Kirstine is a lawyer and held a number
of legal and senior management roles within Aviva’s legacy companies before leading the Group legal function of Aviva for
eight years.
External Appointments:
Kirstine is a board member of the English National Ballet,
ENB Productions Ltd and English National Ballet Enterprises Ltd.
|
|
Group
Executive: Biographies
Group
Executive
The Group Executive focuses on our strategy, business model,
financial and business performance and ensures that the Group remains committed to being a True Customer Composite
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Go to page
40
to read Mark’s biography.
|
|
Go to page
40
to read Tom’s biography.
|
|
Go to page
40
to read Andy’s biography.
|
|
Go to page
43
to read Kirstine’s biography.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joined Aviva in 2013
Nick is responsible for the transformation programme across the
Group, which includes driving the integration and cost synergies associated with the Friends Life integration. Nick has a strong
international background in consumer banking, insurance and transformation projects over a 40 year career.
|
|
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 2002
David is responsible for Aviva’s European, Indian and health
business across the Group. David was previously group transformation director with responsibility for managing the implementation
of Aviva’s strategic plan across the Group.
|
|
Joined Aviva in 2015
Sarah is responsible for the leadership of Aviva’s people
and communication strategy. Sarah has significant international experience, particularly in transformation and change across a
number of industries. She was most recently global human resources director for a division of Thomson Reuters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2014
Monique has led the transformation of Aviva’s information
security capability, and established a three year programme to simplify Aviva’s IT estate, whilst continuing to deliver a
high-volume of change to support the business. Monique previously worked as chief technology officer at Capital One and had responsibility
for defining and driving their technology strategy.
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joined Aviva in 2014
Chris is responsible for the strategic growth of Aviva’s
Asian businesses and overall leadership of Aviva’s digital product transformation. Prior to joining Aviva, Chris was group
chief executive officer and executive director of Great Eastern Holdings Ltd.
|
|
Joined Aviva in 2010
Jason is responsible for the Group’s strategy, capital and
insurance investments, which includes capital management and allocation, asset liability management, treasury, reinsurance and
mergers & acquisitions. He was previously managing director in the Financial Institutions Group at Morgan Stanley, with management
responsibility for the European asset management sector.
|
|
|
|
|
|
|
|
|
|
Directors’
and corporate governance report
Directors’
and corporate
governance report
This report sets out the role and activities of the Board
and explains how the Group is governed
The UK Corporate Governance Code
As a UK premium listed company, Aviva has adopted a governance structure
based on the principles of the UK Corporate Governance Code 2014 (the Code). Further details of how the Company has applied the
Code principles and complied with its provisions, are set out in this report and the directors’ remuneration report.
The Board’s view is that the Company was
compliant throughout the accounting period with the relevant provisions of the Code. Further information on the Code can be found
on the Financial Reporting Council’s website www.frc.org.uk
The Board
The Board’s role is to provide entrepreneurial leadership within
a framework of prudent and effective controls which enable risk to be assessed and managed. The Board believes that a strong system
of governance throughout the Group is essential in ensuring that the business runs smoothly. This aids effective decision-making
and supports the achievement of the Group’s objectives for the benefit of customers and shareholders.
The Board is responsible to shareholders for promoting the long-term success of the Company and, in particular,
for setting the Group’s strategic aims, monitoring management’s performance against those strategic aims, setting the
Group’s risk appetite, ensuring the Group is adequately resourced, and that effective controls are in place. The Board, supported
by the Governance Committee, also sets the values and supports the culture of the Group.
The
duties of the Board are set out in its terms of reference which address a wide range of corporate governance matters and list those
items that are specifically reserved for decision by the Board. They also set out those matters that must be reported to the Board,
such as senior leadership changes, significant litigation or material regulatory breaches and explain how matters that arise between
scheduled meetings should be dealt with. The Board delegates clearly defined responsibilities to various committees and reports
from the Audit, Governance, Nomination and Risk Committees are contained in this report. A report from the Remuneration Committee
is included in the directors’ remuneration report.
The
terms of reference for each of the committees can be found on the Company’s website at www.aviva.com/committees and
are also available from the Group Company Secretary.
We have included a number of case studies in
the report this year to highlight areas of interest. For example, later in this report you will find an interview with Sir Malcolm
Williamson who joined the Aviva Board in April 2015 following the completion of the Friends Life acquisition and opposite, details
of the governance oversight we are applying to the digital business.
Board
Responsibilities
and allocation
of agenda
time
People, Board effectiveness and succession
planning
– 5%
Ensure adequate succession planning including changes to the
composition of the Board and its committees, and undertaking the annual effectiveness review.
To set and uphold the values and standards
of the Company.
Financial reporting
and controls,
capital structure and dividend
policy
– 19%
Review the financial results and forecasts; reports on performance
against the financial plan; competitor results and treasury activities.
Solvency II
– 8%
Approve the Group’s Partial Internal Model Application
Package (IMAP).
Apply Solvency II (SII) principles to manage
risk and capital. Define risk management practices and measure progress.
|
Significant transactions
and expenditure
– 10%
Consider, review and approve updates on transactions and expenditure.
|
Group strategy and business
plans
– 30%
Set the Group’s strategic aims and approve the Group Plan;
monitor the performance of the Group and its management against its strategic aims; receive reports on changes in senior management;
regulatory developments; and the control environment.
Group risk
appetite and
framework
– 10%
Set the Group’s risk appetite and monitor the Group’s
significant risks; the Group’s capital and liquidity position; and compliance with business standards and controls.
Corporate governance
–
18%
Review and approve all financial results announcements, the Form
20-F and significant shareholder communications. Receive regular reports from each committee and updates on proposed changes to
legislation and regulatory matters.
|
Group strategy and business plans
|
|
|
|
Approved the 2016-2018 Group Plan and received presentations and reports from business units
in respect of strategy execution and performance against Plan
|
|
|
The Board received regular reports from the Group Chief Executive Officer which contained updates
on the Group’s financial performance; discussions of any proposed corporate transactions; changes in senior management; regulatory
developments; and the control environment, together with progress against the Group Plan and the Group’s strategy
|
Group risk appetite and framework
|
|
|
The Board received reports from the Chief Risk Officer on the Group’s significant risks
and regulatory issues; monitored the Group’s risk appetite; ensured compliance with business standards and controls; and
received updates on the Group’s capital and liquidity position
|
|
|
The Board received regular updates from its committees and management on legislation and proposed
consultations that may affect the Company’s legal and regulatory obligations
|
|
|
The Board ensured that governance structures remained appropriate for the businesses and the
markets in which we operate around the world, while supporting the overall strategy and culture. The Board supported the development
of the Subsidiary Governance Principles
|
Significant transactions and expenditure
|
|
|
The Board agreed the Aviva content of the prospectus and circular that was sent to shareholders
in connection with the acquisition of Friends Life
|
|
|
Regular updates regarding the progress of the Friends Life integration were made to the Board
|
|
|
Consideration and recommendation of the proposed acquisition of RBC General Insurance Company
by Aviva Canada, which was announced on 21 January 2016
|
|
|
The Board approved the IMAP and received tailored training on SII
including
Pillar 3
with Risk Committee members receiving more detailed training on specific areas
|
Financial reporting and controls, capital structure and dividend policy
|
|
|
As part of its annual work plan, the Board reviewed the financial performance of the Company
and approved all financial results announcements, the annual report and accounts and dividend payments
|
|
|
The Board considered the Group capital and liquidity requirements arising from the Company’s
strategy and Group Plan
|
People, Board effectiveness and succession planning
|
|
|
Succession planning was a focus for the Board in 2015 and further details are provided in the
Nomination Committee report
|
|
|
The Board undertook an external evaluation of its effectiveness and the effectiveness of each
committee and the individual directors during 2015. Further details are included later in this report
|
The directors
2015 Board changes
As at the date of this report the Board comprises the Chairman,
three
E
xecutive Directors and
nine
Independent Non-Executive
Directors (NEDs).
On 29 April 2015, the date of the 2015 Annual
General Meeting (AGM), Sir Adrian Montague CBE, who was the Company’s Senior Independent Director, was appointed as Chairman
of the Board in place of John McFarlane who retired on the same date. As explained in the Company’s 2014 annual report, and
given the well developed succession plan that had been put in place for this position the Board decided not to use an external
search consultancy or open advertising for this appointment.
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.
In addition, following the acquisition of Friends
Life, Sir Malcolm Williamson and Andy Briggs joined the Board on 29 April 2015. Sir Malcolm replaced Sir Adrian as the Company’s
Senior Independent Director and Andy Briggs became Chief Executive Officer of the enlarged UK Life business.
Gay Huey Evans retired from the Board on 29 April
2015 and Belén Romana García was appointed as a NED on 26 June 2015. Since the year end, the Company has announced
the appointment of Claudia Arney as a NED with effect from 8 February 2016.
NED appointments
The Board’s policy is to appoint and retain NEDs who can apply
their wider business knowledge and experiences to their oversight of the Group and to review and progressively refresh the skills
on the Board. The report of the Nomination Committee sets out the work carried out during the year on succession planning for the
Board. Committee membership is also regularly refreshed.
Appointments of NEDs are made by the Board subject
to the usual regulatory approvals and continued satisfactory performance following the Board’s annual performance evaluation.
Their appointment is also subject to the Company’s articles of association which prescribe that all serving directors will
retire and stand for re-election at each AGM.
NEDs are required to be able to present objective, rigorous and constructive
challenge to management, drawing on their wider experiences to question assumptions and viewpoints. The NEDs should also assist
management in the development of the Company’s strategy. To be effective, it is the Board’s view that the majority
of our NEDs should have a sound understanding of the financial services industry so as to be able to evaluate properly the information
provided.
Board independence
Each NED must be able to devote sufficient time to the role in order
to discharge his or her responsibilities effectively.
The Board, having considered the matter carefully,
is of the opinion that all of the current NEDs remain independent and free from any relationship or circumstances that could affect,
or appear to affect, their independent judgement. Scott Wheway has served on the Board since his appointment in December 2007
and Mike Hawker since his appointment in January 2010, and accordingly in early 2016 their performance, including their independence,
was the subject of a particularly rigorous review pursuant to the requirements of the Code. The Board remains satisfied that they
remain independent and that they continue to make valuable contributions in their various roles. Scott will remain on the Board
until the end of 2016 at which point he will retire.
Over half of the Board members, excluding the
Chairman, are independent NEDs. Biographical details including a summary of the skills and experience the directors bring to the
Board are set out in their biographies on pages 40
to 43 and in the Company’s 2016 Notice
of Annual General Meeting.
Time commitment
In considering the time commitment required from directors the Board
takes into account the number of other external commitments that each director has. The time commitments of the NEDs are assessed
as part of the annual review of their effectiveness and each director has demonstrated that they have sufficient time to devote
to their present role with Aviva. Under the Board’s policy on this matter, executive directors may hold one external directorship
and must obtain the prior consent of the Board before accepting a non-executive directorship in any other company. Executive directors
may retain the fees from any such directorship. Details of any external non-executive directorship
s
held by executive directors during 2015 are shown in the directors’ remuneration report.
Board diversity
The diversity charts, that are contained within the governance letter
earlier in this report, show that Aviva has a strong Board with a range of different skills. One of the benefits arising from the
Friends Life acquisition was the opportunity to invite Sir Malcolm Williamson and Andy Briggs to join the Board. Both have a wide
range of industry experience which is now benefiting the enlarged Group. In addition, the Group has benefitted from appointing
three new NEDs, who were formerly on the Board of Friends Life, to the UK Life subsidiary boards which retains valuable knowledge
and experience within the Group.
Independent advice
All directors have access to the advice and services of the Group
Company Secretary and the Board has established a procedure whereby directors wishing to do so in furtherance of their duties may
take independent professional advice at the Company’s expense. No such requests were made during 2015.
The Company arranges appropriate insurance cover
in respect of legal actions against its directors. The Company has also entered into indemnities with its directors as described
on page 69.
The Chairman and Group CEO
Role profiles are in place for the Chairman and the Group Chief Executive
Officer (Group CEO), which clearly set out the duties of each role. The Chairman’s priority is to lead the Board and ensure
its effectiveness; the Group CEO’s priority is the management of the Group. The Board has delegated the day-to-day running
of the Group to the Group CEO within certain limits, above which matters must be escalated to the Board for determination.
Senior Independent Director
The Senior Independent Director’s (SID) role is to act as a
sounding board for the Chairman, to serve as an intermediary for the other directors where necessary and to be available to shareholders
should they have concerns that they have been unable to resolve through normal channels, or when such channels would be inappropriate.
During the year the NEDs, led by Sir Adrian Montague prior to 29 April 2015, and following this date, by Sir Malcolm Williamson,
met several times without the Chairman present. An interview with Sir Malcolm follows on the next page.
The role of the Board and role profiles for
the Chairman, SID, Group CEO and NEDs can be found on the Company’s website at
www.aviva.com
/roles
.
Sir Malcolm Williamson
–
Senior Independent Director
Sir Malcolm discusses his initial impressions of Aviva
and the importance of the Board induction process
You have joined the Aviva Board and have significant leadership
experience in the financial services sector. What are your first impressions of Aviva?
Moving to Aviva has meant moving from a life insurer to a composite
and the opportunities for Aviva are exciting. Some challenges are common to all insurers – sustainability, a revolution in
how customers want to deal with us and issues like Solvency II.
I’ve been particularly impressed by the
drive, technical expertise and strength of the workforce across the Company, and not least in the management team and amongst
my Board colleagues, as well as the robustness of the governance arrangements. The new Subsidiary Governance Principles help support
this and bring further clarity to our structure.
I strongly believe in effective corporate governance
and see this as a definite strength in Aviva and key to its success going forward. Good succession planning, both at Board level
and throughout the organisation, is also essential – these areas I am pleased to say are a focus at Aviva.
What do you think you have brought to the Aviva Board
and as Aviva’s Senior Independent Director?
I bring considerable experience of the insurance sector, particularly
life insurance. As its former Chairman, I specifically bring a detailed knowledge of the Friends Life business, which is also
the case for Andy Briggs. I think this continuity is essential with any type of transaction and the subsequent integration of
the business and the issues it faces. I am pleased my former Friends Life non-executive directors, Belinda Richards, Mel Carvill
and David Allvey remain on the UK Life boards to support this. I also believe I add an independence of judgement and challenge
to Board discussions which is vital to being an effective SID.
Since the acquisition
I have chaired meetings of my fellow
NEDs as part of the ongoing effectiveness process and reviewed the workings of the
Board and of the Chairman and this is something I will continue.
Finally I bring a great enthusiasm to continue
the journey we have started together!
Aviva has highlighted the importance of a comprehensive
induction process for all. Have you found this valuable?
I have always believed that a good induction process is essential
not just at Board level. Throughout the organisation there has been a big drive to improve this and recent efforts to recruit and
develop new talent, for example through the new programmes for graduates, make this even more important.
My experience, along with Andy Briggs’,
has been slightly different from the induction a member of the Board would normally receive as I had already met with Aviva’s
directors and senior executives and received a lot of information about the Group as part of the due diligence undertaken on the
transaction.
Nevertheless, I have received a comprehensive
induction with a series of meetings with individual Board members and senior management to gain a more detailed and tailored understanding
of Aviva’s business. This has included visits to several business unit operations such as Canada and Poland and meetings
with the Company’s major shareholders and advisors.
What do you look forward to at Aviva in 2016?
I look forward to continuing to build the enlarged Group. As a business
Aviva is well placed to seize the opportunities out there, especially as a composite insurer. I’m looking forward to
working to deliver even more for our customers and shareholders.
Board membership and attendance at Board and Committee
meetings
The Company requires directors to attend all meetings of
the Board and the committees on which they serve and to devote sufficient time to the Company in order to effectively perform
their duties. All meetings were attended unless stated in the footnotes below the table. Fuller details on the operation of each
committee are contained in the committee reports.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Board and committee meetings attendance during 2015
|
|
|
|
|
|
|
|
|
|
|
|
Number of meetings held
|
Board
11
|
Audit Committee
13
|
Governance Committee
7
|
Nomination Committee
7
|
Remuneration Committee
5
|
Risk Committee
8
|
|
|
Chairman
|
|
|
|
|
|
|
|
|
John McFarlane
1
|
5/5
|
–
|
–
|
2/2
|
–
|
–
|
|
|
Sir Adrian Montague
2
|
10/11
|
6/6
|
3/3
|
7/7
|
–
|
–
|
|
|
Executive directors
|
|
|
|
|
|
|
|
|
Mark Wilson
|
11/11
|
–
|
–
|
–
|
–
|
–
|
|
|
Tom Stoddard
|
11/11
|
–
|
–
|
–
|
–
|
–
|
|
|
Andy Briggs
3
|
6/6
|
–
|
–
|
–
|
–
|
–
|
|
|
Non-executive directors
|
|
|
|
|
|
|
|
|
Glyn Barker
4
|
10/11
|
13/13
|
–
|
7/7
|
|
8/8
|
|
|
Patricia Cross
|
11/11
|
13/13
|
–
|
7/7
|
5/5
|
–
|
|
|
Gay Huey Evans
5
|
5/5
|
–
|
–
|
2/2
|
1/1
|
3/3
|
|
|
Belén Romana García
6
|
5/5
|
–
|
3/3
|
4/4
|
–
|
3/3
|
|
|
Michael Hawker
7
|
11/11
|
11/13
|
–
|
7/7
|
–
|
8/8
|
|
|
Michael Mire
8
|
11/11
|
–
|
7/7
|
7/7
|
4/4
|
8/8
|
|
|
Bob Stein
9
|
11/11
|
7/7
|
–
|
7/7
|
5/5
|
8/8
|
|
|
Scott Wheway
10
|
11/11
|
6/6
|
7/7
|
7/7
|
–
|
4/4
|
|
|
Sir Malcolm Williamson
11
|
6/6
|
7/7
|
4/4
|
5/5
|
4/4
|
–
|
|
|
|
|
|
|
|
|
|
|
|
1
|
John McFarlane retired from the Board and the Nomination Committee on 29 April 2015.
|
|
2
|
Sir Adrian Montague was appointed as Chairman of the Company on 29 April 2015 and Chairman of the Nomination Committee on 14
May 2015. He resigned as a member of the Audit and Governance Committees on 14 May 2015. Sir Adrian was unable to participate in
one ad hoc Board call due to a prior engagement which could not be altered.
|
|
3
|
Andy Briggs was appointed as a director on 29 April 2015.
|
|
4
|
Glyn Barker was unable to participate in one ad hoc Board call due to a prior engagement which could not be altered.
|
|
5
|
Gay Huey Evans retired as a director of the Company and as a member of the Nomination, Remuneration and Risk Committees on
29 April 2015.
|
|
6
|
Belén Romana García was appointed as a NED and as a member of the Nomination, Governance and Risk Committees
on 26 June 2015.
|
|
7
|
Michael Hawker was unable to attend two meetings of the Audit Committee due to having prior engagements which could not be
altered.
|
|
8
|
Michael Mire was appointed as a member of the Remuneration Committee on 14 May 2015.
|
|
9
|
Bob Stein was appointed as a member of the Audit Committee on 14 May 2015.
|
|
10
|
Scott Wheway stepped down from the Audit Committee and was appointed as a member of the Risk Committee on 14 May 2015.
|
|
11
|
Sir Malcolm Williamson was appointed as the Company’s SID on 29 April 2015 and as a member of the Audit, Governance,
Nomination and Remuneration Committees on 14 May 2015.
|
Board and Committee evaluation and effectiveness
The effectiveness of the Board is vital to the success of the Group
and the Company undertakes a rigorous evaluation process each year in order to assess how well the Board, its committees, the
directors and the Chairman are performing. The aim is to continually improve the Board’s effectiveness and the Group’s
overall performance.
The Board’s focus over the past year has
been spent on a number of issues, notably the Friends Life acquisition, the Chairman’s succession and SII readiness. Due
to these major events it was felt best practice to bring forward to early 2015 our plan to hold an external evaluation. Our normal
cycle would have been to hold this in 2016; the last such external review being held in 2013.
The 2015 evaluation was conducted by Independent
Board Evaluation, a specialist consultancy which undertakes no other business for the Company.
In March 2015, interviews were conducted with
every then Board member. All participants were interviewed by Ffion Hague, a director of Independent Board Evaluation, according
to a set agenda tailored for the Aviva Board, which had been agreed with the Chairman and the Group Company Secretary. In addition,
interviews were held with senior managers and advisers together with former Board members and also Andy Briggs and Sir Malcolm
Williamson to gain additional feedback. The main actions that we have taken from the evaluation in 2015 are shown in the table
on the next page.
The review of the performance of John McFarlane,
who was Chairman until the Company’s AGM, concluded that he continued to operate to a high level, exhibiting positive leadership
and ensuring that the necessary conditions for effective discussion both on an individual and Board level were met.
The review recognised that Sir Adrian Montague
would be appointed as the Company’s new Chairman following the 2015 AGM. Board members were united in welcoming Sir Adrian
as the Company’s new Chairman and felt positive about the year ahead. The evaluation also recognised that following the Friends
Life acquisition, the new Board would be a very visible role model to the business in terms of integration and should show a positive
example by adapting quickly and embracing the ‘best of both’ principle.
The then Chairman and SID assessed the performance
of the other NEDs and the Executive Directors in their capacity as directors. The Chairman concluded that each director had contributed
effectively and demonstrated full commitment to their duties. To assess the Group CEO in respect of his executive duties a separate
process was carried out by the Chairman and in respect of the Chief Financial Officer (CFO), by the Group CEO. The process involved
measuring performance against each Executive Director’s objectives.
Board and committee evaluation and
effectiveness
0B
|
|
0B
Outcomes and steps taken in 2015
|
|
Board debate
|
|
|
The evaluation indicated that open and productive debate was widespread across the Board and its committees. Overall, the Board and its committees were found to be functioning well with a collaborative and professional atmosphere around the Board table
|
|
Boardroom information
|
|
|
The evaluation highlighted the significant level of agenda time and Boardroom discussion spent on the changing regulatory environment. In order to allow more strategic debate, efforts were made during the year to streamline agendas and enable deeper discussion on strategy, for example through separate off-agenda business unit reviews. Seven such sessions are currently planned for 2016
|
|
|
In addition to the structure of agendas, the content and makeup of Board and committee packs was reviewed and a new reporting approach is being implemented with the aim of improving the quality of information presented at meetings and creating more time for discussion and decision-making. This will remain a focus in 2016
|
|
Improvements in committee collaboration
|
|
|
Committee collaboration was discussed in the output of the 2014 effectiveness review, and in 2015, the Board has continued to successfully strengthen the relationship between each Board committee
|
|
|
During 2015 the collaboration between the Board and the boards of subsidiary companies continued. NED attendance at subsidiary board meetings is an example of this together with the Subsidiary Independent Non-Executive Directors’ conference which furthers the collaboration between directors. Further details on the conference can be found in the Risk Committee report
|
|
|
The Subsidiary Governance Principles were developed and launched during the year to strengthen and provide further clarity on the relationship between Aviva plc and the subsidiary boards. Further details can be found in the Governance Committee report
|
|
Succession planning
|
|
|
The response to the evaluation indicated that
succession planning at both Board and executive level should remain a priority. During 2015, succession plans were further developed
and discussed at the Board and Nomination Committee. This succession programme resulted in a number of appointments to the Board,
including that of the Chairman
|
|
|
The Nomination Committee will continue to review the Board skills matrix during 2016 to
enable the Board to enhance its support of the transformation of the business. The Nomination Committee report sets out
further information on our succession planning process
|
|
Commitment to Board diversity
|
|
|
The evaluation suggested further focus on improving the representation of female NEDs on the Board was required. The appointments that have been made during the year result in 23% female representation. The Nomination Committee will retain its focus on diversity in 2016 as part of its approach to succession planning
|
|
Strengthening
the Board’s connection to the Business
|
|
|
The evaluation identified that the Board’s engagement with the business had improved. The new Board appointees completed their induction programmes which included business unit visits and in 2016 the Board will continue this trend and place further emphasis on discussing areas such as customer experience and product design
|
|
Work to broaden
the remit of the Governance Committee was continued during 2015
|
|
|
The changes to the remit of the Governance Committee that had been implemented in 2014, for example adding the oversight of customer outcomes, were identified as being very positive. In 2015 the Committee scope was further broadened to cover UKD, as set out in the case study at the beginning of this report
|
Induction, training and development
The Board and the Chairman believe strongly in the development of
the directors and the Group’s employees.
It is a requirement of each director’s appointment that they
commit to continuing their professional development.
During the year, directors attended a number
of internal training sessions, including sessions on various aspects of SII, the Senior Insurance Managers Regime (SIMR), Pillar
3 reporting, remuneration developments and matters affecting our IT architecture and related technical platforms. In addition the
Board attended in-depth sessions on Aviva France, Aviva Asia, UK and Ireland General Insurance and our digital business. Training
sessions have been built into the Board’s and committees’ annual plans for 2016.
The Chairman ensures that all new directors receive
a comprehensive induction programme tailored to their particular needs and which consists of several separate training sessions
over a number of months. Induction programmes were put in place for Andy Briggs, Sir Malcolm Williamson and Belén Romana
García on their new appointment to the Board in 2015. This comprehensive induction included meetings with Board members,
presentations from key members of senior management, and visits to the Group’s main operating businesses and functions to
gain a more detailed and tailored understanding of our business. In addition meetings with the External Auditor and some of the
Company’s advisors were held. The SID also met with a number of the Company’s major shareholders.
Further meetings are arranged where a director
requires a deeper understanding of a particular issue. All new directors also receive induction materials, which include the current
strategic and operational plan; recent Board and committee minutes and meeting packs; organisation structure charts; role profiles;
a history of the Group; and relevant policies, procedures and governance material. Any knowledge or skills gaps identified during
the director’s approved person application process are also addressed through their induction programme.
During 2015,
11
Board meetings were held, of which,
nine
were
scheduled Board meetings and
two
were additional Board meetings called at short notice.
In addition the Board delegated responsibility for certain items, such as giving final approval to proposals broadly agreed by
the full Board, to specially created committees of the Board which met
six
times during 2015.
The Chairman and the NEDs met several times in
the absence of the Executive Directors and the NEDs met in the absence of the Chairman, including one meeting chaired by the SID
to appraise John McFarlane’s performance as Chairman.
The Group Company Secretary assisted the Chairman
of the Board and the Chair of each committee in planning the work for each meeting and ensuring that Board and committee members
received information and papers in a timely manner. Members of senior management regularly attend Board meetings to present items
of business.
It is the Board’s practice to visit different
business units whenever it can and during 2015, one Board meeting was held in Poland and one in York. This gave the Board the
opportunity to meet the senior management teams and to also gain a deeper understanding of the operations of each of the businesses.
During 2016, it is planned that the Board will visit the Group’s business in Asia.
Conflicts of interest
In accordance with the Companies Act 2006, the Company’s articles
of association allow the Board to authorise potential conflicts of interest that may arise and to impose such limits or conditions
as it thinks fit. The decision to authorise a conflict of interest can only be made by non-conflicted directors (those who have
no interest in the matter being considered) and in making such a decision the directors must act in a way they consider, in good
faith, will be most likely to promote the Company’s success for the benefit of its shareholders as a whole. The Board’s
procedure is to regularly review and approve actual and potential conflicts of interest as they arise. This procedure operated
effectively during the year.
Board Priorities for 2016
2015 was a transformational year for the Company. The Board made good
progress against its objectives, including the Friends Life integration, UK Life strategy, continued oversight of conduct risk,
True Customer Composite, digital and the proposed acquisition of RBC General Insurance Company by Aviva Canada. This was in addition
to the annual cycle of matters dealt with including risk management, financial reporting and strategic planning. Some of these
areas will remain a focus for the Board during 2016, together with SII as this is embedded into the business.
As part of the 2016-2018 Plan, the Board anticipates
that IT, the digital strategy and use of ‘MyAviva’ will each be areas of focus during 2016 as the Group builds on the
progress in these areas achieved to date. The Audit, Governance and Risk Committees will continue to carefully consider the risks
associated with each area of the business and also the quality of the Group’s cyber security. The Board will continue to
provide oversight and challenge to management in its execution of the 2016-2018 Plan. As in previous years, this and future strategic
priorities will be a focus of the Board Strategy day in June.
The Board has taken positive steps in the last
few years to embed the purpose and values throughout the organisation and has feedback from employees through our annual, all employee
survey, ‘Voice of Aviva’ and this is an area the Board will remain close to during 2016.
The Governance and Nomination Committees will
continue the focus they began during 2015 in connection with succession planning and talent development both at Board and senior
management level throughout the Group to ensure the right people are in place across the business to deliver on the strategic plans.
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 in note 53 of the IFRS financial statements.
In-depth monitoring of the establishment and
operation of prudent and effective controls in order to assess and manage risks associated with the Group’s operations is
delegated to the Audit, Governance and Risk Committees which report regularly to the Board. However, the Board retains ultimate
responsibility for the Group’s systems of internal control and risk management and has reviewed their effectiveness for the
year.
A robust assessment was also conducted of the
principal risks facing the Company, including those that would threaten its business model, future performance, solvency and liquidity.
The frameworks for risk management and internal
control play a key role in the management of risks that may impact the fulfilment of the Board’s objectives. They are designed
to identify and manage, rather than eliminate, the risk of Aviva failing to achieve business objectives and can only provide reasonable
and not absolute assurance against material misstatement or losses. These frameworks are regularly reviewed and comply with the
Financial Reporting Council’s updated guidance on Risk Management, Internal Controls and related financial and business reporting.
Risk Management Framework
The Risk Management Framework (RMF) is designed to identify, measure,
manage, monitor and report the principal risks to the achievement of the Group’s business objectives and is embedded throughout
the Group. The RMF has been in place for the year under review and up to the date of the approval of the annual report and accounts.
It is codified through risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements
for the Group’s worldwide operations. Further detail is set out in note 53.
Internal controls
Internal controls facilitate effective and efficient business operations,
the development of robust and reliable internal reporting and compliance with laws and regulations.
A Group reporting manual including International
Financial Reporting Standards (IFRS) requirements and a Financial Reporting Control Framework (FRCF) are in place across the Group.
FRCF relates to the preparation of reliable financial reporting and preparation of local and consolidated financial statements
in accordance with applicable accounting standards and with the requirements of the Sarbanes-Oxley Act of 2002. The FRCF process
follows a risk-based approach, with management identification, assessment (documentation and testing), remediation (as required),
reporting and certification over key financial reporting-related controls. Management regularly undertakes quality assurance procedures
over the application of the FRCF process and FRCF controls. The Friends Life Group had an established framework of financial reporting
controls in place at the time of acquisition and work is now underway to align this with the Aviva Group’s FRCF methodology.
This work will be completed in 2016.
First line
Management are responsible for the application of the RMF, for implementing
and monitoring the operation of the system of internal control and for providing assurance to the Audit, Governance and Risk Committees
and the Board.
The Group Executive members and each business
unit chief executive officer are responsible for the implementation of Group strategies, plans and policies, the monitoring of
operational and financial performance, the assessment and control of financial, business and operational risks and the maintenance
and ongoing development of a robust control framework and environment in their areas of responsibility. Chaired by the Chief Risk
Officer (CRO), the Asset Liability Committee (ALCO) assists the CFO with the discharge of his responsibilities in relation to
management of the Group’s balance sheet within risk appetite and provides financial and insurance risk management oversight.
Board Oversight of Risk Management
The Operational Risk Committee is also chaired by the CRO. It supports
the first line owners of key operations and franchise risks in the discharge of their responsibilities in relation to operational
risk management.
The Disclosure Committee is chaired by the CFO
and reports to the Audit Committee. It oversees the design and effectiveness of the Group’s disclosure controls, for both
financial and non-financial information, evaluates the Group’s disclosure controls and reviews and endorses the Group’s
key periodic external reports, including the consolidated financial statements. The results of the FRCF process are signed off
by business unit chief executive officers and chief financial officers and compliance with the FRCF is reported to the Disclosure
and the Audit Committees.
Second line
The Risk function is accountable for the quantitative and qualitative
oversight and challenge of the identification, measurement, monitoring and reporting of principal risks and for developing the
RMF.
As the business responds to changing market conditions
and customer needs, the Risk function regularly monitors the appropriateness of the Company’s risk policies and the RMF to
ensure they remain up to date. This helps to provide assurance to the various risk oversight committees that there are appropriate
controls in place for all core business activities, and that the processes for managing risk are understood and followed consistently
across the Group.
The second line Risk function as a whole also
includes the Compliance and Actuarial functions. The Actuarial function is accountable for Group wide actuarial methodology, reporting
to the relevant governing body on the adequacy of reserves and capital requirements, as well as underwriting and reinsurance arrangements.
The Compliance function supports and advises the business on the identification, measurement and management of its regulatory,
financial crime and conduct risks. It is accountable for maintaining the compliance standards and framework within which the Group
operates, and monitoring and reporting on its compliance risk profile.
Third line
The Internal Audit function provides independent and objective assessment
on the robustness of the RMF and the appropriateness and effectiveness of internal control to the Audit, Governance and Risk Committees,
business unit audit committees and the Board. Further information on the activities of the Internal Audit function is contained
within the Audit Committee report.
Board oversight
The Board has established and delegated responsibilities to various
committees to assist in its oversight of risk management and the approach to internal controls. There is a good working practice
between each committee and they make regular reports to the Board. The responsibilities and activities of each Board committee
are set out in the committee reports that follow. The principal committees that oversee risk management are as follows:
|
(i)
|
The Audit Committee, working closely with the Risk Committee, is responsible for assisting the Board in discharging its responsibilities
for the integrity of the Company’s financial statements, the effectiveness of the system of internal financial controls and
for monitoring the effectiveness, performance and objectivity of the internal and external auditor.
|
|
(ii)
|
The Governance Committee also works closely with the Risk Committee and is responsible for assisting the Board in its oversight
of operational risk across the Group, particularly in respect of the risk of not delivering good customer outcomes.
|
|
(iii)
|
The Risk Committee assists the Board in its oversight of risk and risk management across the Group and makes recommendations
on risk appetite to the Board.
|
The Audit, Governance and Risk Committees report regularly to the
Board on their activities and make recommendations and escalate significant risk exposures to the Board as appropriate. They ensure
that mitigating actions are taken when risks are, or are expected to move, out of appetite.
The chart above
shows the
Board and committee structure that oversees the Company’s frameworks for risk management and internal control.
Further details on procedures for the management
of risk operated by the Group are given in note 53.
Assessment of effectiveness
To support an assessment of the effectiveness of the Group’s
governance, internal control and risk management requirements, the chief executive officer of each business unit is required
to certify that:
|
·
|
there are sound risk management and internal control systems that are effective and fit for purpose in place across the business;
and
|
|
·
|
material existing or emerging risks within the business have been identified and assessed and the business operates in a manner
which conforms to the minimum requirements outlined in Group risk policies and business standards
|
The chief risk officer of each business unit must certify that:
|
·
|
the risk function has reviewed and challenged the process supporting the business unit chief executive officer’s certification
and is satisfied that it can provide reasonable assurance of the material accuracy and completeness of the business unit chief executive officer’s assessment; and
|
|
·
|
no material gaps exist in the RMF as it applies to their business unit
|
Any material risks not previously identified, control weaknesses
or non-compliance with the Group’s risk policies and business standards or local delegations of authority, must be highlighted
as part of this process. This is then supplemented by investigations carried out at Group level and ultimately a Group CEO and
CRO certification for Aviva plc.
The effectiveness assessment also draws on the
regular cycle of assurance activity carried out during the year, as well as the results of the certification process. The results
of the certification process and details of key failings or weaknesses are reported to the Audit Committee and the Board annually
to enable them to carry out an effectiveness assessment.
The Audit Committee, working closely with the
Risk Committee, on behalf of the Board, last carried out a full review of the effectiveness of the systems of internal control
and risk management in March 2016
, covering all material contr
ols, including financial,
operational and compliance controls and the RMF and processes. The review identified a number of areas for improvement and the
necessary actions have been or are being taken.
The committee reports refer to a number of areas
where control issues have been identified and describes the mitigating actions to address them.
The risk management framework of a small number
of our joint ventures and strategic equity holdings differs from the Aviva framework outlined in this report. We work with these
entities to understand how their risks are managed and to align them, where possible, with Aviva’s framework.
Communication with shareholders
The Company places considerable importance on communication with shareholders
and engages with them on a wide range of issues.
The directors have an ongoing dialogue and a
programme of meetings with institutional investors, fund managers and analysts which are managed by the Company’s Investor
Relations function. At these meetings a wide range of issues are discussed including strategy, financial performance, management,
remuneration and governance, within the constraints of information already made public, to understand any issues of concern
to investors. Shareholders’ views are regularly shared with the Board through the Group CEO’s and CFO’s reports
and the Company’s corporate brokers also periodically brief the Board on investor views.
Prior to his retirement in April 2015, John McFarlane,
as Chairman, met with the Company’s major institutional investors. This included consultation on the appointment of Sir Adrian
Montague as Chairman and in respect of the proposed Friends Life acquisition. Since his appointment, Sir Adrian Montague has also
met with the Company’s major shareholders. In addition, the SID was available to meet with major investors to discuss any
areas of concern that could not be resolved through normal channels of investor communication.
Interim Management Statements
In November 2014, the Financial Conduct Authority removed the requirement
in the Disclosure and Transparency Rules to publish quarterly interim management statements (IMS). After careful consideration,
the Board has determined that Aviva should no longer provide IMS disclosures for quarter one and quarter three, with immediate
effect.
2016 AGM
The 2016 AGM will be held on Wednesday 4 May 2016 and the Notice of
the AGM and related papers will, unless otherwise noted, be sent to shareholders at least 20 working days before the meeting. The
AGM provides a valuable opportunity for the Board to communicate with private shareholders. All directors normally attend the Company’s
AGM, however, Patricia Cross was unable to attend the 2015 AGM due to illness and being unable to travel. All serving directors
plan to attend the 2016 AGM.
There is a dedicated email address which shareholders
can use to ask questions on the business of the AGM at
aviva.shareholders@aviva.com
and this
address is included in the shareholder information section of the Notice of AGM.
A presentation on the Group’s performance
will be given at the AGM and made available on the Company’s website after the meeting at
www.aviva.com/agm
.
Shareholders are invited to ask questions related
to the business of the meeting at the AGM and have an opportunity to meet with the directors following the conclusion of the meeting.
Nomination
Committee report
In my role as Chairman, I am pleased to present the Nomination
Committee’s report for the year ended 31 December 2015
This year the Committee has continued to review the composition of the Board and the succession plans for
executive management.
|
|
|
|
|
|
|
|
|
|
|
|
|
Committee Membership
|
|
|
|
|
|
|
|
Member since:
|
|
|
Sir Adrian Montague, Chairman
|
06/03/2013
|
|
|
Claudia Arney
|
08/02/2016
|
|
|
Glyn Barker
|
01/07/2012
|
|
|
Patricia Cross
|
01/12/2013
|
|
|
Belén Romana García
|
26/06/2015
|
|
|
Michael Hawker
|
01/07/2012
|
|
|
Michael Mire
|
12/09/2013
|
|
|
Bob Stein
|
06/03/2013
|
|
|
Scott Wheway
|
01/07/2012
|
|
|
Sir Malcolm Williamson
|
14/05/2015
|
|
|
|
|
|
During 2015, we welcomed Sir Malcolm Williamson and Belén
Romana García to the Committee and on 8 February 2016, Claudia Arney was appointed to the Committee. John McFarlane and
Gay Huey Evans retired from the Committee on 29 April 2015. I am grateful to all members for their support and dedication.
What is the main function of the Nomination Committee?
The Committee has overall responsibility for succession planning
and leading the process for new appointments to the Board and the senior executive team. Its purpose is to ensure that the succession
planning process and any appointments made bring a balance of skills, knowledge, experience and diversity to the Board and senior
management of the Company.
What have been the main challenges faced in 2015?
2015 has been a period of significant activity and the Committee
held seven meetings during the year. Its main priority was to oversee the smooth succession of the Chairman and to consider the
proposed changes to the Board following the acquisition of Friends Life. The process to appoint the Chairman was led by Scott Wheway,
Chairman of the Governance Committee, and I withdrew from all discussions regarding the appointment process.
The other appointments to the Board made during
the year were that of Sir Malcolm Williamson as our Senior Independent Director, Andy Briggs as an Executive Director and Belén
Romana García as an Independent Non-Executive Director (NED). Sir Malcolm’s and Andy’s appointments were made
against the backdrop of the successful completion of the acquisition of Friends Life, and Aviva is now benefiting from the industry
wide experience that they both bring to the Board. With the addition of Belén, who has strong financial and European regulatory
experience, there is a good balance of skills, knowledge, experience and diversity on the Board. Subsequent to the year-end we
have also appointed Claudia Arney who brings extensive digital experience to the Board. Further information on each director can
be found in their biographies and on the Company’s website at
www.aviva.com/board
.
How does the Group consider the issue of succession
planning?
The Group has a history of developing talent from within. The
transition of Angela Darlington, our Chief Risk Officer whose case study is featured later in this report, is a good example of
the benefits this policy can bring.
The Board takes succession planning very
seriously and following the changes that were made at Board level we increased our focus to ensure that both the Board and the
Committee conducted a detailed review and debate on the subject. It was agreed that further attention to executive succession
planning and contingency plans for a range of situations, including key personnel loss, was required and we have developed longer-term
plans that we are now implementing. The initial work we embarked upon in 2015 in relation
to succession planning and development
will continue to remain a focus for the Committee in 2016.
What prompted the changes to the composition of the Board
committees in May 2015?
We review the membership of each Board committee annually and, following
the 2015 review, recommended a number of changes for approval by the Board. This was with the intention of refreshing and strengthening
the performance of each committee. Details of the members of each committee and their attendance at meetings are shown in
the table in the directors’ and corporate governance report.
Will you appoint more women to the Board?
Aviva continues to have an aspiration to increase female representation
on the Board and the Committee acknowledges that the Board is currently just below its policy of 25% female representation, at
23
%
. We are committed to improving this position as soon as is reasonably possible and have
made good progress in the diversity balance at senior management level as shown in the charts earlier in my governance letter.
Having said that, diversity at Aviva includes
but is not limited to gender. Within the topic of diversity there are a variety of different aspects, including professional and
industry experience, understanding of different geographical regions and ethnic background as well as different perspectives and
skills. Each of these components is equally important and ensuring that we have the right mix of each is also vital. In making
new appointments, the Board will have regard to gender but will remain focused on recruiting, on merit, the best candidate for any
future roles.
What are the steps you take to identify and appoint new
directors?
The process is rigorous and transparent. The Committee identifies
the skills and experience that it would like to have at both Board and executive level and these qualities are recorded into a
skills matrix. The steps we took to identify Belén Romana García, whom we appointed to the Board in June 2015, were
broadly as follows.
During the year the Committee expressed the desire
to appoint an additional NED to the Board with financial services experience and engaged the global executive headhunting firm,
JCA Group, which has no other connection to the Aviva Group and is a signatory to the Voluntary Code of Conduct for Executive Search
Firms.
Following several meetings with them and after
reviewing our skills matrix, we agreed a detailed candidate brief which included consideration for candidates with different backgrounds
and they undertook the search process to identify a list of suitable candidates. From the initial interviews, a shortlist was
submitted to the Committee for consideration.
For selected candidates further interviews were
held and, for the preferred candidate, interviews with the Chairman, Group Chief Executive Officer (CEO), Chief Financial Officer
(CFO) and all NEDs were held. Interviews focused on testing whether the candidates had the required skills, experience and competencies
for the role as well as assessing whether candidates would be a good fit for the Board.
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.
A similar process, also supported by JCA Group,
was followed in the appointment of Claudia Arney.
Do you think it is important to have a Board evaluation each
year?
The assessment of the Board and its committees through an annual
evaluation has now become a part of the normal governance cycle and we do consider it to be a very useful process.
We plan our evaluation on the basis that at least every three years
we will conduct an external evaluation. External evaluations were held in both 2013 and in 2015 as we felt that it was beneficial
to bring forward our external evaluation given the Board changes and the Friends Life acquisition last year.
For our evaluation in 2016, we have engaged with
the external facilitator we used in both 2013 and 2015 to help us design the questionnaire that we will use for our internal evaluation
to ensure that we have a level of consistency and build on the themes of previous reviews. We welcome the opportunity to assess
what we do and to look at how effectively we operate. It is also useful to review the commitment of individual directors to ensure
that they have enough time and energy available to devote to the job.
I am satisfied that all our directors do so.
What are the Committee’s priorities in 2016?
The Committee made a recommendation to the Board that Claudia Arney
be appointed as a NED and this appointment was made on 8 February 2016. This appointment is in line with the Committee’s
plans for succession that were identified during 2015 and has helped the Company move nearer to its target of having 25% of female
representation on the Board.
The Committee has in place a skills matrix which
it uses to review and reflect on the skills that individual directors currently possess. During 2016, the skills matrix will be
integral to the Committee’s planning and discussions for developing further the Board’s succession plans.
As part of this ongoing process the Committee
will consider the skills and experience of the Board, taking into account all relevant aspects of diversity, to ensure that there
remains a good balance on the Board which supports the Group’s values and culture. As set out earlier in the report, Scott
Wheway is due to retire from the Board on 31 December 2016 and the composition of the Board will continue to be reviewed.
The Committee will also review the outcomes of
the 2016 effectiveness review in respect of its performance, agree any actions and monitor these going forward.
Sir Adrian Montague CBE
Chairman of the Nomination Committee
9 March 2016
Nomination Committee Responsibilities
and allocation of agenda
time
Evaluation
and annual assessment
– 10%
Review the results of the annual Board performance evaluation
process.
Assess the independence of each of the NEDs
and to make recommendations regarding the directors’ actual or potential conflicts of interest.
Succession planning
–
39%
Monitor succession plans for the appointment of executive
directors and NEDs to the Board and senior executives below Board level.
Ensure the Audit Committee has members with recent and relevant financial experience who meet SEC requirements.
|
|
Board composition
– 18%
Evaluate and review the composition of the Board including the
balance of skills, knowledge, experience and diversity taking into account the Company’s risk appetite and strategy.
Ensure that on appointment a director has
sufficient time to undertake the role.
Board pipeline
– 33%
Identify and nominate suitable candidates for appointment to
the Board, including chairmanship of the Board and its committees, against a specification for the role and capabilities required
for the position.
|
|
|
The Committee reviewed the composition of the Board and in particular,
whether the Board required additional skills and experience which would complement those of the existing Board members. It also
managed the transition of the Chairman and the induction process for three new directors
|
|
|
The Board appointments of Sir Adrian Montague (as Chairman), Sir
Malcolm Williamson and Andy Briggs were agreed with effect from 29 April 2015. The Committee concluded that the appointments
would be beneficial and complement the composition of the Board given their knowledge and experience
|
|
|
The Committee also engaged in an extensive search and interview
process with the intention of appointing another NED to the Board. Belén Romana García was subsequently appointed
as a NED on 26 June 2015. In addition, Claudia Arney was appointed as a NED on 8 February 2016
|
|
|
Succession planning at both Board level and at executive level has been an area of focus for
the Committee during the year
|
|
|
In 2015 a number of senior management changes were made to strengthen the Group Executive team
including the appointments of Andy Briggs and Angela Darlington
|
Evaluation and annual assessment
|
|
|
|
During the year, the effectiveness review of the Board, its committees,
the Chairman and individual directors was conducted through an external evaluation process
|
|
|
As part of the year-end review, the Committee reviewed the independence
of each NED including each director’s actual, potential or perceived conflicts of interest
|
|
|
The Committee concluded that each NED was independent in character
and judgement and that there were no circumstances that were likely to affect their judgement
|
Risk
Committee
report
As Chairman of the Committee, I am pleased to present
the Risk Committee’s report for the year ended 31 December 2015
The Company’s approach to risk and risk management together with the principal risk types that face
the Group are explained in note 53 of the IFRS financial statements.
During the year, market conditions
generally have offered some challenges and the acquisition and integration of the Friends Life business, ensuring our readiness
for Solvency II (SII) and the evolving cyber risk environment have all required close attention.
|
|
|
|
|
|
|
|
|
|
|
|
|
Committee Membership
|
|
|
|
|
|
|
|
Member since:
|
|
|
Michael Hawker, Chairman
|
01/01/2010
|
|
|
Glyn Barker
|
02/05/2012
|
|
|
Belén Romana García
|
26/06/2015
|
|
|
Michael Mire
|
12/09/2013
|
|
|
Bob Stein
|
06/03/2013
|
|
|
Scott Wheway
|
14/05/2015
|
|
|
|
|
|
Scott Wheway was appointed to the Committee on 14 May 2015
and Belén Romana García was appointed as a member of the Committee on 26 June 2015. Gay Huey Evans served on the
Committee until she retired on 29 April 2015. The members of the Committee are shown in the table above and details of members’
attendance at Committee meetings are shown in the table earlier in the directors’ and corporate governance report.
What is the main function of the Risk Committee?
The Committee oversees all aspects of risk management in the Group,
save for conduct, financial crime, brand and reputation risk oversight, responsibility for which lies with the Governance Committee.
The principal purpose of the Committee is to
assist the Board in its oversight of risk within the Group, with particular focus on the Group’s risk appetite, risk profile
and the effectiveness of the Group’s risk management framework including the risk management function itself.
As part of our activities, we review the risks
inherent in our investment portfolios and in the insurance products we offer our clients, as well as the operational risks present
in the business.
We consider the effectiveness of the ways in
which the risks are managed, the strength of contingency planning and the adequacy of our capital and liquidity resources in the
context of the residual risks facing the Group and recommend risk appetites to the Board.
We also monitor potential changes to the prudential
regulations applicable to the Group and how the Group is responding to them. In recent years this has been a significant activity
due to the preparations for SII and as a result of Aviva’s designation as a Global Systemically Important Insurer, and this
will continue during 2016.
The Committee oversees due diligence appraisals carried out on strategic
or material transactions, such as the Friends Life acquisition, and also works with the Remuneration Committee to ensure that
risk management is properly considered in setting the Group’s remuneration policy.
What have been some of the highlights from the year?
During the year the Committee spent time on the following areas:
|
·
|
strengthening the capital and liquidity position of the Group ensuring the effective implementation of the new SII framework
(an undertaking which has seen the Company spend in excess of £400m), and understanding the transferability of capital and
seeking to address the potential liquidity traps that the new regime creates
|
|
·
|
reviewing the asset portfolio for its positioning to perform in the current low growth, low interest rate and volatile market
environment
|
|
·
|
ensuring that the strategy is sensible in light of the evolutionary changes occurring to our businesses through changing customer
preferences and regulatory change
|
|
·
|
reviewing that our systems are fit for purpose to manage our business in the evolving digital world.
|
Who attends meetings of the Committee?
During 2015, the Committee met on eight occasions. The Chairman of
the Company, the Group Chief Executive Officer, Chief Audit Officer (CAO), Chief Financial Officer and Chief Risk Officer (CRO)
regularly attended Committee meetings. Other members of senior management were also invited to attend as appropriate to present
reports, and the Committee had access to the services of regular attendees as well as external professional advisers.
The Committee holds regular private sessions
with the CRO and the CAO to enable them to raise any matters of concern to them without any other members of management present.
The Group Company Secretary acted as the secretary to the Committee.
How would you assess the Company’s approach and
readiness for SII?
SII has been many years in the making and the Company has operated
a structured, Group-wide SII programme throughout this time and the Committee has provided oversight. The approach has generally
been to build on our existing, effective risk management framework and model, rather than start from scratch. This has had the
benefit of leveraging several years of experience of using risk-based economic capital models to support decision-making. The outcome
has been that our partial internal model has been approved by the regulators and that we are well placed to succeed in a SII world.
What action during the year has the Committee taken to
review the Friends Life acquisition?
The majority of the Committee’s work in reviewing the risks
associated with the transaction itself was actually carried out in 2014. Following the completion of the acquisition, the integration
risks and the risks in the former Friends Life business were all included in the business as usual risk reporting that we received
and discussed with management.
In addition, as Chairman of the Committee, I
received all of management’s Integration Steering Committee papers in connection with the integration of Friends Life.
How does the Committee report to the Board and how does
it plan its work schedule?
The work of the Committee follows an agreed annual work plan, which
evolves throughout the year in response to the changing macro-economic, business and regulatory environment and changes in the
Company’s strategy.
The Group Company Secretary and the CRO assisted
me in planning the Committee’s work, and ensured that the Committee received information and papers in a timely manner.
As Chairman of the Committee, I reported to
subsequent meetings of the Board on the Committee’s work and the Board received a copy of the CRO’s report, the meeting
agenda and the minutes of each meeting of the Committee.
The Committee is satisfied that it has the resources
and expertise necessary to fulfil its responsibilities.
How do you ensure that risk is appropriately managed across
the various committees?
We ensure that there is cross-membership between the committees and
this was reviewed during 2015 to ensure that risk issues continue to be appropriately considered in the decisions of each committee.
The appointments to the Risk Committee made in May 2015 have increased the cross-membership between the Audit, Governance, Remuneration
and Risk Committees.
Throughout the year both Glyn Barker and I were
members of the Audit Committee (Glyn as Chairman of the Audit Committee), ensuring that there was efficient and complete coverage
of the effectiveness of the systems of internal control and risk management across the two committees.
In addition, attendance by Committee members
is encouraged at subsidiary risk committee meetings and there is a schedule of attendance maintained centrally to ensure equal
distribution and oversight. In support of this, I annually speak to the chairs of each subsidiary risk committee and local CROs
to maintain linkage to the matters being considered at subsidiary level.
We have seen the benefits of these initiatives
with an increased understanding of the work of each committee and improved communication and reporting both at Group and subsidiary
company level. This was also evidenced once again in November 2015 when I, together with the Chairman of the Board and the Chairmen
of the Audit and Governance Committees co-hosted a two-day conference for the chairmen of the boards and audit, conduct and risk
committees of the Group’s principal subsidiaries, their chief audit officers, chief financial officers and chief risk officers.
Further details can be found in the case study opposite.
What are the Committee’s priorities in 2016?
Given the volatile and weak performance of the financial markets at
the start of 2016, the Committee will be monitoring the positioning and performance of the Group’s investment portfolio and
its hedging policy closely. This will link in with contingency planning work considering the impact of various scenarios on our
investments, business and operations, including for example UK exit from the European Union (EU). In addition, against the backdrop
of an ever changing cyber threat environment, our continued drive for efficiency and the Group’s strategic ambitions with
respect to digital, the Committee will continue to focus on the quality of the Group’s cyber security, its disaster recovery
plans, the simplification of our IT estate and the development of our digital business.
Finally, the Committee’s focus on SII did
not end with it coming into force in January 2016 and the Committee will spend time reviewing plans to expand the perimeter of
the Group’s approved partial internal model and ensuring that changes to the risk management framework made in response to
SII are embedded within the business.
Michael Hawker
Chairman of the Risk Committee
9 March 2016
Risk Committee
Responsibilities
and allocation
of agenda
time
Regulatory, Governance
and
Internal Audit
– 19%
Review developments in the prudential regulatory environment,
the Group’s external risk and capital disclosures and the assessment of the internal control environment as it relates to
risk.
Ensure due diligence appraisals are carried
out on strategic or significant transactions.
External Factors
– 12%
Review the external risk environment (for example macroeconomic
and cyber risk), the impact on the Company’s risk profile and how those risks are being managed and mitigated with a particular
focus on the impact on the Group’s asset portfolio and disaster recovery planning.
|
|
Risk Appetite, Risk Management and
Risk Reporting
–
14%
Review and robustly assess the design and the effectiveness of
the risk management framework and any proposed changes to it including recommending updated risk appetites to the Board.
Ensure that risk management is considered
in setting the Company’s overall remuneration policy.
Group Capital, Financial Plan, Liquidity
and Stress Testing
– 14%
Review and monitor the risks to and arising from the Company’s
strategy and business plan and major transactions.
Solvency II
– 41%
Satisfy itself that the SII partial internal model is fit for
purpose and meets all required regulations.
|
Activities
during 2015
|
|
|
Risk Appetite, Risk Management and Risk Reporting
|
|
|
|
The Committee reviewed and monitored how potential risks connected with increased cost efficiency
were being managed; considered the risks associated with the 2016-2018 Group Plan and how management was proposing to mitigate
them
|
|
|
The Committee received a report from the risk function on the performance of business units against
the risk and control objectives approved by the Committee. The Committee debated an update to the Group’s liquidity risk
appetite and proposed new SII capital risk appetites and recommended these to the Board
|
|
|
The Committee reviewed and approved changes to the Group-wide risk policies and selected business
standards to reflect changes to the risk target operating model for SII and reflecting Financial Stability Board guidance. The
Committee selected the extreme stress scenarios to be used in the Group’s recovery plan and liquidity risk management plan
and reviewed and recommended those plans and the systemic risk management plan to the Board for approval
|
Group Capital, Financial Plan, Liquidity and Stress Testing
|
|
|
The Committee also reviewed proposals to materially increase the use of an internal composite
reinsurer to enhance capital transferability and efficiency and a number of strategic transactions including the reinsurance of
a block of the UK General Insurance latent reserves
|
|
|
The Committee reviewed proposed hybrid debt issuance and redemption
|
|
|
The Committee also reviewed capital and liquidity projections on a quarterly basis and the results
of the Group’s stress and scenario testing
|
|
|
The Committee carried out a series of deep reviews of the key internal model components, reviewed
proposed model changes, received independent internal model validation reports, reviewed and recommended approval of the partial
internal model application and received reports on the application of the standard formula for those businesses not covered by
the internal model
|
|
|
The Committee also provided oversight of the SII programme’s preparations for the implementation
of SII including Pillar 2 and Pillar 3 and confirmed that the Own Risk and Solvency Assessment (ORSA) requirements had been met
|
|
|
The Committee received regular updates on the external economic environment and considered the
implications for the Group’s asset portfolio
|
|
|
The Committee conducted deeper thematic reviews into cyber security, broader IT risks, derivatives
usage, outsourcing arrangements and general insurance exposure accumulation management
|
Regulatory, Governance and Internal Audit
|
|
|
The Committee monitored closely the developments of the more detailed SII requirements and proposals
for higher loss absorbency capital requirements for Global Systemically Important Insurers as well as progress made by the International
Association of Insurance Supervisors towards a Global Insurance Capital Standard
|
|
|
The Committee reviewed the effectiveness of the risk management function and approved the appointment
of the CRO and the appointment of a number of subsidiary board risk committee members
|
|
|
The Committee received regular updates from the Group’s Asset and Liability Committee and
Operational Risk Committee
|
|
|
The Committee monitored certain Major Control Improvement Topics identified by management namely,
IT security, disaster recovery in 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
|
Audit
Committee
report
As Chairman of the Committee, I am pleased to present the
Audit Committee’s report for the year ended 31 December 2015
The challenges of adopting Solvency II (SII) were a major focus area during the year in readiness for implementation
on 1 January 2016. The Committee also continued to focus on the control environment and developing and strengthening the internal
control framework, including the integration of the Friends Life entities following their acquisition in April 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Committee Membership
|
|
|
|
|
|
|
|
Member since:
|
|
|
Glyn Barker,
Chairman
|
08/08/2012
|
|
|
Patricia Cross
|
01/12/2013
|
|
|
Michael Hawker
|
01/09/2011
|
|
|
Bob Stein
|
14/05/2015
|
|
|
Sir Malcolm Williamson
|
14/05/2015
|
|
|
|
|
|
This year we welcomed Sir Malcolm Williamson and Bob Stein
to the Committee and I am grateful to all members of the Committee for their support and dedication in 2015. Sir Adrian Montague
and Scott Wheway retired from the Committee on 14 May 2015. The members of the Committee are shown in the table above and details
of members’ attendance at Committee meetings during the year are shown earlier in the directors’ and corporate governance
report.
What is the purpose of the Committee and what is its role?
The Committee’s principal role is to assist the Board in discharging
its responsibilities for monitoring the integrity of the Company’s financial statements; the oversight of internal controls
and the performance of internal and external audit.
The Committee acts independently of management
and works closely with the Governance, Remuneration and Risk Committees. There is cross-membership between each committee which
provides better understanding and more efficient communication of the work of each committee. Details of the Committee’s
responsibilities are shown later in the report.
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:
|
·
|
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 64
|
|
·
|
significant
issues such as the valuation of life insurance contract liabilities for the UK life business (UK Life). Areas of focus were the
annuitant mortality, credit and expense assumptions. In addition the Committee considered the valuation of non-life insurance contract
liabilities for the general insurance business, valuation of hard to value investments and the valuation of finite intangible assets
and goodwill in relation to the Friends Life acquisition
|
|
·
|
recommending to the Board that the annual report and accounts are fair, balanced and understandable
|
|
·
|
the Major Control Improvement Topics (MCITs) identified by management. The MCITs that were allocated to the Committee related
to control issues in Aviva UK Commercial Finance and Turkey Life. The Committee tracked the progress that has been made in connection
with these issues and the remedial actions implemented by management. These included the documentation of loan management activity
in the UK Commercial Finance business, and actions to enhance the core operating systems for the Turkey Life business and develop
its risk and control framework. Both topics have now been closed and removed from the list of MCITs.
|
What has the Committee done to assess the impact of the acquisition
of Friends Life on the financial reports and control environment of the Group?
Following the successful completion of the Friends Life acquisition
in April 2015, the Committee has spent time considering the alignment and adoption of the Group’s Market Consistent Embedded
Value (MCEV) and International Financial Reporting Standards (IFRS) accounting policies and methodologies, the restructuring provisions
and the key issues and judgements which resulted from the acquisition. The Committee received reports on the Friends Life acquisition
from Internal Audit in July and November which focused on the impact of the acquisition on the overall control environment of the
Group and closely monitored the integration plan that was put in place.
How does the Committee satisfy itself that its members
meet the requirements of the UK Corporate Governance Code, the Disclosure and Transparency Rules and the US requirements for financial
expertise?
As part of the annual review of the effectiveness of the Committee,
the expertise of the members is considered and reviewed based on their recent and relevant experience against each of the criteria
as set out in the Code, the Disclosure and Transparency Rules and the US requirements.
Following the review in respect of 2015, a recommendation
was made to the Board, which confirmed that I, as Chairman of the Audit Committee, fulfilled each of the requirements and that
Patricia Cross, Michael Hawker and Bob Stein met the US requirements to be an audit committee financial expert.
How does the Committee monitor the control environment
across the Group?
The Committee receives quarterly updates on the effectiveness of
the Financial Reporting Control Framework (FRCF). During the year these have included updates on the progress to align financial
reporting controls processes within the heritage-Friends Life businesses with the FRCF methodology. In addition, it receives regular
updates on progress to embed the new approach to managing operational risks and controls (formerly Integrated Assurance Implementation)
and reports on the Group’s MCITs.
The Committee also receives quarterly control reports from Internal Audit and reviews and challenges management
on the actions being taken to improve the quality of the overall control environment and the control culture across the Group.
The Committee reviews and approves the semi-annual
Internal Audit Plan and conducts an annual review of the Internal Audit function. The Committee concluded that for 2015 the function
was performing well and it continued to deliver an objective and independent service.
Regular reports are provided to the Committee
through the Group’s malpractice reporting service on issues of malpractice that have been raised and the Committee was satisfied
that none of the reports received in 2015 made allegations of financial malpractice.
In response to the new regulatory requirement
for whistleblowing in large financial services firms, including insurers,
I agreed to be the whistleblowers’ champion for the Group.
How does the Committee satisfy itself that the External
Auditor remains independent, effective and objective?
PricewaterhouseCoopers LLP (PwC) was appointed as the Group’s
External Auditor (Auditor) in 2012 following a formal tender process. The external audit contract will be put out to tender at
least every ten years.
The Committee conducts an annual review of the
Auditor through completion of a questionnaire by the Committee, senior management across the Group and members of the Group’s
finance community. The questionnaire seeks opinions on the importance of certain criteria and the performance of the Auditor against
those criteria. The Committee concluded that PwC continued to perform effectively and is recommended for re-appointment.
The Company has complied during the financial
year under review and up to the date of this report with the Statutory Audit Services for Large Companies Market Investigation
(Mandatory Uses of Competitive Tender Process and Audit Committee Responsibilities) Order 2014.
The Company has an External Auditor Business
Standard in place which is aimed at safeguarding and supporting the independence and objectivity of the Auditor Standard. This
Standard is in full compliance with all UK, US and International Federation of Accountants rules and takes into account the Auditing
Practices Board Ethical Standards for Auditors.
The Standard regulates the appointment of former
audit employees to senior finance positions in the Group and sets out the approach to be taken by the Group when using the non-audit
services of the Auditor.
The Standard distinguishes between (i) those
services where an independent view is required and services that should be performed by the Auditor (such as statutory and non-statutory
audit and assurance work); (ii) prohibited services where the independence of the Auditor could be threatened and the Auditor must
not be used; and (iii) other non-audit services where the Auditor may be used which include non-recurring internal controls and
risk management reviews (excluding outsourcing of internal audit work), advice on financial reporting and regulatory matters, due
diligence on acquisitions and disposals project assurance and advice, tax compliance services and employee tax services.
In 2015 the Group paid PwC £19.3 million
(
2014: £14.7 million
) for audit and audit-related assurance services
1
, with the overall increase due to
the fee for the audit of the acquired Friends Life subsidiaries, including the acquisition balance sheet.
In addition, PwC were paid £15.2 million
(
2014: £11.5 million
) for other services, giving a total fee to PwC of £34.5 million (
2014: £26.2 million
).
This included £11.6 million relating to SII implementation
assurance fees.
SII implementation is a major project requiring substantial model
validation assurance that the Company believes is most appropriately performed by the principal Auditor. In view of the significance
and scale of this work, the Committee specifically assessed the suitability of PwC to provide this service.
In line with the Standard, the Committee satisfied
itself that for all non-audit engagements, robust controls were in place to ensure that PwC’s objectivity and independence
was safeguarded, and concluded that it was in the interests of the Company to purchase these services from PwC due to their specific
expertise. Further details are provided in note 8 of the financial statements.
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 Group subsidiaries and audit-related assurance services.
|
What are the Committee’s
main priorities for 2016?
During 2016 the Committee will continue to focus on the following
issues:
|
·
|
the appropriateness of the significant issues and judgements and the methodology and assumptions used in relation
to the Group’s financial statements
|
|
·
|
review of the formal announcements on the Group’s financial performance to ensure significant issues are appropriately
disclosed
|
|
·
|
the review of the services provided by the Auditor, the ongoing independence of the Auditor, legal and regulatory developments
relating to external audit services and the application and appropriateness of
|
the External Auditor Business Standard
|
·
|
the performance of the Chief Audit Officer (CAO) and the Internal Audit function and the appropriateness of the remuneration
of the CAO
|
|
·
|
the 2016 Internal Audit Plan
|
|
·
|
the review of management’s progress in addressing the MCITs, in particular the Fraud Management MCIT which has been allocated
to the Committee
|
|
·
|
the inclusion of the heritage-Friends Life entities in the scope of Aviva’s attestation for 2016 to meet the financial
control requirements for the 2002 Sarbanes-Oxley (SOx) Act for its US Listing
|
|
·
|
the impact of the revised model used to value equity release mortgage loans held by the UK Life Annuity business
|
|
·
|
in line with the focus by the regulator on increasing the level of challenge that an audit committee should pose in its review
of risk management and internal controls; the Committee will consider how best it can look to improve this area of activity
during 2016.
|
Glyn Barker
Chairman of the Audit Committee
9 March 2016
Audit Committee
Responsibilities
and allocation
of agenda
time
Internal Controls, including the
financial reporting control framework and financial reporting developments
– 36%
Assess the effectiveness of the Group’s system of internal
control and risk management.
Internal Audit
– 16%
Approve and monitor the application of the Internal Audit Charter
and Business Standard.
Discuss control issues identified by Internal
Audit and review reports on the Group’s malpractice reporting.
Assess the effectiveness of the Internal
Audit function, review the performance of the CAO, and agree his remuneration.
|
|
Financial Statements
and
accounting policies
– 32%
Review the significant issues and judgements of management,
and the methodology and assumptions used in relation to the Group’s financial statements and formal announcements on the
Group’s financial performance.
Review the Group’s going concern assumptions.
External Audit, auditor engagement
and policy
– 16%
Consider and make recommendations to the Board
on the appointment, reappointment, dismissal or resignation, effectiveness, independence and objectivity of the External Auditor
and agree their remuneration.
Consider and monitor the application and appropriateness
of the External Auditor Business Standard.
|
Financial Statements and accounting policies
|
|
|
|
The Committee monitored the impact of the acquisition of Friends Life on the Group’s MCEV
and IFRS Consolidated Financial Statements, including the adoption of the Group’s accounting policies and methodologies
|
|
|
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
|
|
|
The Committee considered the implications of preparing for SII on the Company’s Financial
Statements and the suitability of PwC to perform the model validation assurance
|
|
|
The provisions relating to commercial mortgages, in particular relating to credit default, and
corporate bonds were fully reviewed together with the sale of a portfolio of higher risk mortgages in the second half of 2015
|
|
|
The reserving position relating to the Group’s life assurance and general insurance operations
were reviewed
|
|
|
The Committee reviewed goodwill and other intangible assets
|
|
|
The Committee reviewed the going concern assumptions for 2015
|
External audit, auditor engagement and policy
|
|
|
A formal response was submitted to the regulator in relation to the Prudential Regulatory Authority
(PRA) consultation on implementing audit committee requirements under the revised Statutory Audit Directive in the European Union
|
|
|
The Committee reviewed the effectiveness of the External Auditor and was satisfied that the services
provided by the External Auditor remained effective, objective and fit for purpose
|
|
|
The Committee reviewed PwC’s compliance with the independence criteria and the steps taken
by PwC to ensure that it was able to act for the larger Group following the acquisition of Friends Life
|
|
|
The Committee monitored compliance with the External Auditor Business Standard on a quarterly
basis and three minor breaches of our Internal Standard were identified during the year relating to pre-approvals and an employment
screening. In each case the processes were reviewed and improved to prevent reoccurrence. These were not breaches of the SEC independence
rules and did not impact PwC’s formal independence of the Group
|
|
|
The Committee reviewed the Group’s External Auditor Business Standard and refreshed it
in November 2015 to align the presentation with the requirements of its Group-wide operational risks and control programme
|
|
|
The Committee reviewed and approved the Internal Audit Charter and Business Standard
|
|
|
The Committee concluded that the Internal Audit function was performing well, was sufficiently
resourced and had demonstrated continued improvement
|
|
|
The Committee reviewed and agreed that the CAO’s independence had been maintained and was
satisfied that his annual performance related bonus was unconnected to the Group’s financial performance
|
Internal Controls, including the financial reporting control framework
|
|
|
The Committee received quarterly updates on the effectiveness of the FRCF framework and rectification
of controls
|
|
|
The Committee monitored progress to address the MCITs allocated to the Committee
|
|
|
The Committee reviewed the Internal Audit function report and the Internal Audit Plan for 2015
and 2016 to ensure adequacy of the systems of control
|
|
|
The Committee undertook a benchmarking exercise of the Group’s IT controls and assessed
the impact of the integration of the heritage-Friends Life entities on the overall control environment
|
Governance
Committee
report
I am pleased to present the Governance Committee’s
report for the year ended
31 December 2015
The Board strongly believes that
good governance and strong, responsible leadership is critical to creating long-term shareholder value and business success. During
the year the Committee continued its oversight of conduct risk throughout the Group and also focused on the development of the
Subsidiary Governance Principles and the governance of the Company’s digital business.
|
|
|
|
|
|
|
|
|
|
|
|
|
0B
Committee Membership
|
|
|
|
|
|
|
|
Member since:
|
|
|
Scott Wheway, Chairman
|
05/12/2007
|
|
|
Belén Romana García
|
26/06/2015
|
|
|
Michael Mire
|
12/09/2013
|
|
|
Sir Malcolm Williamson
|
14/05/2015
|
|
|
|
|
|
This year we welcomed Sir Malcolm Williamson and
Belén Romana García to the Committee and I am grateful to all members for their support and dedication in 2015.
Sir Adrian Montague retired from the Committee on 14 May 2015. The members of the Committee are shown in the table above and details
of members’ attendance at Committee meetings during the year are shown in the table in the directors’ and corporate
governance report.
What is the main function of the Governance Committee
and what is its role?
The Committee’s role is to help the Board to shape and direct
the culture and ethical values of the Aviva Group by overseeing and advising on conduct, reputation, corporate responsibility
and sustainability, people, regulatory and financial crime matters. The focus of the Committee adapts as the business and regulatory
environment evolves – for example, in 2014 we extended the remit to oversee all forms of risk that impact customer outcomes
and during 2015 to oversee the governance processes within our UK Digital business.
The Committee’s remit also includes employee
talent management and development programmes to create a sustainable future workforce. The Committee receives a summary of
the 2015 Voice of Aviva employee survey results.
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 Principles
which provide a framework for the governance standards expected of subsidiary companies within the Group. They cover a range of
topics including strategy and planning, remuneration, shareholder interaction and governance accountability. Our case study later
in the report provides further information on the development of the Principles and their implementation.
How has the Committee reviewed and challenged the Group’s
delivery of good outcomes for customers during the year?
During the year the treatment of customers has continued to be a significant
focus for the Committee. Core to this has been the quarterly review by the Committee on the performance of a series of key risk
indicators in relation to customer outcomes and experience in each of the Group’s business units. The Committee also receives
a report from the Group Regulatory Director at each meeting in relation to any material concerns regarding the treatment of customers
that may have arisen within the Group, and the adequacy of management’s response in addressing these issues.
The Group’s business units continually
reassess and reappraise their performance in delivering good customer outcomes. As part of reinforcing this discipline, the Committee
has reviewed the action plans developed to further embed the Conduct Risk Management Framework into each business and address
any issues regarding the treatment of customers. During the year the Committee has discussed with the chief executive officers
of our UK life business, UK & Ireland general insurance business, Aviva Investors business, Canada, France, Poland and Turkey
their plans for further enhancing and embedding conduct risk management within their businesses.
With the development of the Group’s digital
strategy and the decision to establish UK Digital to drive forward the strategy in the UK, the Committee has taken a central role
in overseeing the development of UK Digital as a legal entity and monitoring the customer risks that the new business will encounter.
To ensure this is achieved in a robust way the Committee has reviewed and challenged the business’s plans and progress on
a regular basis. Further detail can be seen in the digital governance case study earlier in the directors’ and corporate
governance report.
The Committee is responsible for the oversight of
talent development within the Group. How do you view progress?
The Nomination Committee is responsible for Board and executive level
recruitment and succession planning and the Governance Committee has responsibility for developing talent below this level.
The development of talent is critical to delivering
the Group’s strategy. In 2015, the Committee actively supported progress in this area, including the creation and launch
of a new international general management programme for graduates, with the aim of attracting and developing future talent into
the Company.
We recognise that further work in this area
remains to be done, especially around developing a robust talent pipeline for critical senior leadership roles. A new programme
to assess and develop potential successors to these senior roles will be a focus for 2016. We believe that Aviva has a very talented
pool of people from which it can develop leaders and the Committee will continue to provide appropriate oversight and guidance
in this area.
The Committee agreed the refreshed Aviva Group Corporate
Responsibility (CR) strategy during 2015. Why was this important?
As the Group heads into a new phase of transformation we need a CR
strategy that supports our strategic anchor and helps us deliver on our purpose. We can use CR in digital channels and communications
to help build life long relationships with customers, and we can use our influence to help tackle the big issues in our industry
and our world such as sustainability and climate change. The new strategy builds on our historic strengths, ensures we have a strong
governance foundation and focuses our attention on where we can make the biggest difference for our customers and communities.
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.
What are the Committee’s priorities in 2016?
The Committee will retain its focus on the areas outlined
earlier in the report with continued attention on the treatment of customers.
The Committee will, in addition, focus on embedding
its oversight of the governance structure of the UK Digital business; monitoring the application of the Subsidiary Governance Principles;
providing guidance and oversight in the area of talent development and building an internal pipeline for senior leadership roles.
Furthermore, the Committee will retain its oversight of the Group’s relationship with the Financial Conduct Authority and
other regulatory bodies and monitor the implementation of the Senior Insurance Managers Regime.
Scott Wheway
Chairman of the Governance Committee
9 March 2016
Governance Committee Responsibilities
and allocation
of agenda
time
Regulatory and Financial Crime
– 24%
Review relationships with the conduct regulatory and competition
authorities and the actions taken in respect of regulatory developments.
Review the reporting process in respect
of any material regulatory breaches.
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.
People
– 13%
Review and approve the Business Ethics Code and the Group’s
policies on diversity, employees, suppliers and the communities in which it operates to ensure these are in line with the Group’s
ethical values.
Review senior and critical talent development
programmes for leadership.
Review the key themes and management of
action plans from the annual employee survey.
|
|
Governance
– 30%
Shape the corporate governance principles, culture and ethical
values of the Group in line with the Group’s strategic priorities.
Oversee subsidiary governance throughout
the Group including UK Digital and review any legal or litigation risks for the Group and the associated action plans.
|
|
Customer, Conduct and
Reputational Risk
– 22%
Review and monitor strategy, the Group’s risk profile
and the effectiveness of the risk management control framework as it relates to customer outcomes, franchise value and reputation.
Work with the Risk Committee in respect
of the impact of any material conduct and reputation risks on the Group’s capital and liquidity position.
Review the Group’s overall culture
and values as they influence risk to reputation.
Corporate Responsibility
–
11%
Recommend and review the Group’s CR strategy and
monitor external developments and environmental regulations.
Review the Group’s Environment and
Climate Change Business Standard and monitor compliance with the CR strategy.
Work with the Risk Committee
to monitor any CR risk exposures.
|
Customer, Conduct and Reputational Risk
|
|
|
|
The Committee received reports on conduct risk management at each meeting to enable it to monitor
compliance with regulatory standards and to ensure good customer outcomes
|
|
|
Under the Group-wide framework for the consistent management and reporting of conduct risk, different
business units were invited to attend meetings to discuss their progress in ensuring good customer outcomes. In 2015 this included
the UK life, UK & Ireland general insurance, Aviva Investors, Aviva Canada, Aviva France, Aviva Poland and Aviva Turkey
|
|
|
Reports detailing ongoing and possible reputational risks and brand and franchise risks were
considered by the Committee. These also included any media or public policy issues
|
|
|
The Committee received regular updates on the customer outcome metrics relating to sales, retention,
claims experience and complaints
|
|
|
The Committee received reports from management during the year on the Aviva Community Fund, the
Group’s low carbon investment strategy, the Group’s health and safety compliance and the Group’s Human Rights
Policy
|
|
|
CR strategy and particularly the link to the brand strategy were regularly reviewed during the
year
|
|
|
The Committee reviewed and approved the Aviva Investors’ Voting Policy and Stewardship
Statement
|
|
|
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
|
|
|
Monitored certain Major Control Improvement Topics – data governance/protection, fraud
management and conduct risk, including the significant enhancement of the Group’s Business Protection Business Standard in
2015, the progress to improve fraud and conduct control awareness and training and the Group-wide rollout of a consistent sanction
screening tool
|
|
|
The Committee has continued to monitor progress regarding embedding Aviva’s values and
the engagement of employees and has considered regular reports on talent development and the Group’s diversity and inclusion
strategy. In monitoring employee engagement the Committee reviewed the results of the annual Voice of Aviva survey prior to discussion
at the Board
|
|
|
Approved the Business Ethics code
|
Regulatory and Financial Crime
|
|
|
Received regular regulatory updates from the Group Compliance Officer
|
|
|
The Committee was responsible for oversight of the Group’s relationship and interaction
with the Financial Conduct Authority and has monitored preparations to implement the Senior Insurance Managers’ Regime
|
|
|
Reviewed regular reports on the Group’s financial crime prevention procedures and controls
and any associated actions and the effectiveness of the anti-bribery controls
|
Other statutory information
The directors submit their annual report and accounts for Aviva plc,
together with the consolidated financial statements of the Aviva group of companies, for the year ended 31 December 2015.
Our Policy on Hedging
The hedging policy can be found in note 54.
Results
The Group’s results for the year are shown in the consolidated
income statement.
Related Party Transactions
Related party transactions are disclosed in note 56 which is incorporated
into this report by reference.
2016 Annual general meeting (AGM)
The 2016 AGM will be held on Wednesday 4 May 2016.
Post balance sheet events that occurred subsequent
to
31 December 2015
Details of significant events that have occurred subsequent to 31
December 2015 are disclosed in notes 2, 9, 20, 42, and 58.
Dividends
Dividends for ordinary shareholders of Aviva plc are as follows:
|
·
|
Paid interim dividend of 6.75 pence per ordinary share (
2014
: 5.85
pence
)
|
|
·
|
Proposed final dividend of 14.05
pence per ordinary share (
2014
:
12.25 pence
)
|
|
·
|
Total ordinary dividend
of 20.80 pence
per ordinary share (
2014: 18.1 pence
),
|
|
·
|
Total cost of ordinary dividends paid in 2015 was
£635
million (
2014:
£449
million
)
|
Subject to shareholder approval at the 2016 AGM, the final dividend
for 2015 will become due and payable on
17
May 2016 to all holders of ordinary shares on
the Register of Members at the close of business
on 8 April
2016 (approximately five business
days later for holders of the Company’s American Depositary Receipts).
Further details on the company’s dividend policy is set out
on pages 98 to 99 and details of any dividend waivers are disclosed in note 28.
Share class and listing
All the Company’s shares in issue are fully paid up and the
ordinary and preference shares have a Premium and Standard listing respectively on the London Stock Exchange. The Company is listed
on the New York Stock Exchange (NYSE) in the form of American Depositary Shares, referenced to ordinary shares, under a depositary
agreement with Citibank. Details of the Company’s share capital and shares under option at 31 December 2015 and shares issued
during the year are given in notes
26 to 29.
Share capital
The issued ordinary share capital of the Company was
increased by
1,097,977,833 ordinary shares du
ring the year which were allotted in
respect of the acquisition of Friends Life and to satisfy amounts under the Group’s employee share and incentive
plans.
At 31 December 2015 the:
|
·
|
issued ordinary share capital totalled
4,048,465,173
shares of 25 pence each
|
|
·
|
issued preference share capital
totalled 200,000,000 shares
of £1 each
|
Further details on the ordinary share capital of the Company are shown
in Note 26.
Rights and obligations attaching to the Company’s
ordinary shares and preference shares
Rights and obligations together with the powers of the Company’s
directors are set out in the Company’s articles of association, copies of which can be obtained from Companies House and
the Company’s website at
www.aviva.com/articles
, or by writing to the Group Company Secretary.
The powers of the Company’s directors are subject to relevant legislation and, in certain circumstances (including in relation
to the issue or buying back by the Company of its shares), are subject to authority being given to the directors by shareholders
in general meeting.
At the 2016 AGM, shareholders will be asked to
renew the directors’ authority to allot new securities. Details are contained in the 2016 Notice of Annual General Meeting
(Notice of AGM).
Restrictions on transfer of securities
With the exception of restrictions on the transfer of ordinary shares
under the Company’s employee share incentive plans, whilst the shares are subject to the rules of the plans, there are no
restrictions on the transfer rights attaching to the Company’s ordinary shares or the transfer of securities in the Company.
Where, under an employee share incentive plan
operated by the Company, participants are the beneficial owners of shares but not the registered owners, the voting rights are
normally exercised at the discretion of the participants. No person holds securities in the Company carrying special rights with
regard to control of the Company. The Company is not aware of any agreements between holders of securities that may result in restrictions
in the transfer of securities or voting rights.
Significant agreements – change of control
There are a number of agreements that take effect, alter or terminate
upon a change of control of the Company following a takeover bid, such as commercial contracts and joint venture agreements. None
are considered to be significant in terms of their potential impact on the business of the Group as a whole. All of the Company’s
employee share incentive plans contain provisions relating to a change of control. Outstanding awards and options would normally
vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions and pro rata reduction
as may be applicable under the rules of the employee share incentive plans.
Authority to purchase own shares
At the Company’s 2015 AGM, shareholders renewed the Company’s
authorities to make market purchases of up
to 295
million ordinary shares, up to
100
million 8¾% preference shares and up to 100
million 8⅜% preference shares. These authorities were not used
during the year or up to the date of this report. At the 2016 AGM, shareholders will be asked to renew these authorities for another
year and the resolution will once again propose a maximum aggregate number of ordinary shares which the Company can purchase of
less than 10% of the issued ordinary share capital. Details are contained in the Notice of AGM. The Company held no treasury shares
during the year or up to the date of this report.
Disclosure and Transparency Rule 5 – major shareholders
The table below shows the holdings of major shareholders
in the Company’s issued ordinary share capital in accordance with the Disclosure and Transparency Rules as at 31 December
2015 and
8
March 2016.
|
|
|
|
|
|
|
|
|
|
Shareholding interest
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2015
|
At 8 March
2016
|
|
|
Shareholder
|
Notified holdings
|
Nature of holding
|
Notified holdings
|
Nature of holding
|
|
|
BlackRock, Inc
1
|
Above 5%
|
Indirect
|
Above 5%
|
Indirect
|
|
|
|
|
|
|
|
|
|
1
|
Holding includes holdings of subsidiaries.
|
Directors
The directors as at the date of this report are shown together
with their biographical details earlier in the report. During the year and up to the date of this report, the following Board
appointments, resignations and retirements occurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appointments:
|
|
|
|
|
|
|
|
Director
|
Position
|
Effective Date
|
|
|
Sir Malcolm Williamson
|
Senior Independent Director
|
29/04/2015
|
|
|
Andy Briggs
|
Chief Executive Officer of Aviva UK Life and Chairman of Global Life
|
29/04/2015
|
|
|
Belén Romana García
|
Independent Non-Executive Director
|
26/06/2015
|
|
|
Claudia Arney
|
Independent Non-Executive Director
|
08/02/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement / Resignation:
|
|
|
|
|
|
|
|
Director
|
Position
|
Effective Date
|
|
|
John McFarlane
|
Chairman
|
29/04/2015
|
|
|
Gay Huey Evans
|
Independent Non-Executive Director
|
29/04/2015
|
|
|
|
|
|
|
The rules regarding the appointment and replacement
of directors are contained in the Company’s articles of association (the articles). Under the Company’s articles,
the Board can appoint additional directors or appoint a director to fill a casual vacancy. The new director must retire at the
first AGM following their appointment and can only continue as a director if they are elected by shareholders at the AGM.
At no time during the year did any director
hold a material interest in any contract of significance with the Company or any of its subsidiary undertakings other than an
indemnity provision between each director and the Company and employment contracts between each executive director and a Group
company. The Company has purchased and maintained throughout the year directors’ and officers’ liability insurance
in respect of itself and its directors. The Company has also executed deeds of indemnity for the benefit of each director of the
Company, and each person who was a director of the Company during the year, in respect of liabilities that may attach to them
in their capacity as directors of the Company or of associated companies. The articles of association allow such indemnities to
be granted.
These indemnities were granted at different
times according to the law in place at the time and where relevant are qualifying third-party indemnity provisions as defined
by section 234 of the Companies Act 2006. These indemnities were in force throughout the year and are currently in force. Details
of directors’ remuneration, service contracts, employment contracts and interests in the shares of the Company are set out
in the directors’ remuneration report.
The Company has also granted indemnities
by way of a deed poll to the directors of the Group’s subsidiary companies, including former directors who retired during
the year.
Financial instruments
Group companies use financial instruments to manage certain types
of risks, including those relating to credit, foreign currency exchange, cash flow, liquidity, interest rates, and equity and
property prices. Details of the objectives and management of these instruments are contained in the risk and capital management
section, the shareholder information section and an indication of the exposure of Group companies to such risks is contained in
note 53.
Political donations
At the 2015 AGM, shareholders passed a resolution, on a precautionary
basis, to authorise the Company and its subsidiaries to make political donations and/or incur political expenditure (as such terms
are defined in sections 362 to 379 of the Companies Act 2006), in each case in amounts not exceeding £100,000
in aggregate. As the authority granted will expire at the 2016 AGM, renewal of this authority will be sought at this year’s
AGM. Further details are available in the Notice of AGM. It is not the policy of the Company to make donations to European Union
(EU) political organisations or to incur any other political expenditure. However, definitions of political donations and political
expenditure used in the Companies Act 2006 are broad in nature and this authority is sought to ensure that any activities undertaken
throughout the Group, which could otherwise be construed to fall within these provisions, can be undertaken without inadvertently
infringing the rules. During the year, Aviva Canada Inc. spent a total of CA$5,650 (£2,757 based on the exchange rate as
at 31 December 2015) on tickets to attend events hosted by Canadian Members of Provincial Parliament. Attendance at these events
enabled representatives from Aviva Canada to engage with local parties in relation to certain issues including Ontario auto reforms,
a review of the Ontario regulator and the introduction of a new auto product. No other political expenditure was incurred by the
Aviva Group during 2015.
Disclosure of information to the auditor
In accordance with section 418 of the Companies Act 2006, the directors
in office at the date of approval of this report confirm that, so far as they are each aware, there is no relevant audit information
of which the Company’s External Auditor, PricewaterhouseCoopers (PwC), is unaware and each director has taken all reasonable
steps that ought to have been taken as a director to be aware of any relevant audit information and to establish that PwC is aware
of that information.
Annual general meeting
The 2016 AGM of the Company will be
held
on Wednesday, 4 May 2016 at the Queen Elizabeth II Centre, Broad Sanctuary, Westminster, London SW1P 3EE at 11am. The Notice of
AGM convening the
meeting describes the business to be conducted thereat. Further details can be found in the shareholder
information section of the Notice of AGM.
Articles of association
Unless expressly stated to the contrary in the articles, the Company’s
articles may only be amended by special resolution of the shareholders. The Company’s current articles were adopted on 29
April 2015.
Going concern
The Group’s business activities, together with the factors likely
to affect its future development, performance and position are set out in the Performance review section. The performance review
includes the risk and capital management section. In addition, the financial statements sections include notes on the Group’s
borrowings (note 45); its contingent liabilities and other risk factors (note 48); its capital structure and position (note 50);
management of its risks including market, credit and liquidity risk (note 53); and derivative financial instruments (note 54).
The Group has considerable financial resources
together with a diversified business model, with a spread of businesses and geographical reach. As a consequence, the directors
believe that the Group is well placed to manage its business risks successfully.
After making enquiries, the directors have a
reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for
a period of at least 12 months from the date of approval of the financial statements. For this reason, they continue to adopt,
and to consider appropriate, the going concern basis in preparing the financial statements.
Fair, balanced and understandable
To support the directors’ statement below that the Annual report
and accounts, taken as a whole, is fair, balanced and understandable, the Board considered the process followed to draft the Annual
report and accounts:
|
·
|
each section of the Annual report and accounts is prepared by a member of management with appropriate knowledge, seniority
and experience. Each preparer receives guidance on the requirement for content included in the Annual report and accounts to be
fair, balanced and understandable
|
|
·
|
the overall co-ordination of the production of the Annual report and accounts is overseen by the Chief Accounting Officer to
ensure consistency across the document
|
|
·
|
an extensive verification process is undertaken to ensure factual accuracy
|
|
·
|
comprehensive reviews of drafts of the Annual report and accounts are undertaken by members of the Group Executive and, other
members of senior management, and in relation to certain parts of the report external legal advisers and the External Auditor
|
|
·
|
an advanced draft is considered and reviewed by the Disclosure Committee
|
|
·
|
the final draft is reviewed by the Audit Committee prior to consideration by the Board
|
|
·
|
our Board members also receive drafts of the Annual report and accounts in sufficient time to facilitate their review and input.
This includes the opportunity to discuss the draft Annual report and accounts with both management and the External Auditor and
where appropriate challenging the disclosures as appropriate
|
Directors’ responsibilities
The directors are responsible for preparing the Annual report, the
directors’ remuneration report and the financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare
financial statements for each financial year. Under that law the directors have prepared the Group and parent company financial
statements in accordance with IFRSs as adopted by the EU. In preparing these financial statements, the directors have also elected
to comply with IFRSs, issued by the International Accounting Standards Board (IASB). Under company law the directors must not
approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the
Group and the Company and of the profit or loss for that period. In preparing these financial statements, the directors are required
to:
|
·
|
select suitable accounting policies and then apply them consistently
|
|
·
|
make judgements and accounting estimates that are reasonable and prudent
|
|
·
|
state whether applicable IFRSs as adopted by the EU and IFRSs issued by IASB have been followed, subject to any material departures
disclosed and explained in the financial statements
|
|
·
|
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the
Group will continue in business
|
The directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the
financial position of the Company and the Group and enable them to ensure that the financial statements and the directors’
remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
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.
The directors consider that the Annual report
and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to
assess the Group’s and the Company’s position and performance, business model and strategy.
Each of the directors, whose names and
functions are listed on pages 40
to 43
in the
directors’ and corporate governance report confirm that, to the best of their knowledge: the Group financial
statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and profit of the Group; the performance review and the directors’ and corporate
governance report in this Form 20-F include a fair review of the development and performance of the business and the position
of the Group, together with a description of the principal risks and uncertainties that it faces.
By order of the Board on 9 March 2016.
Mark Wilson
|
Tom Stoddard
|
Group Chief Executive Officer
|
Chief Financial Officer
|
New York Stock Exchange listing requirements
The Company’s ordinary shares are admitted to the NYSE
and are traded as American Depositary Shares. As a foreign company listed on the NYSE, the Company is required to comply with
the NYSE corporate governance rules to the extent that these rules apply to foreign private issuers. As a foreign private issuer,
the Company is therefore required to comply with NYSE Rule 303A.11 by making a disclosure of the significant differences between
the Company’s corporate governance practices and NYSE corporate governance rules applicable to US companies listed on NYSE.
The Company complied with the UK Corporate Governance Code 2014 (the Code) in respect of its 2015 financial year and other relevant
best practice principles and guidelines. The significant differences between UK and US requirements are summarised below together
with Aviva’s approach to compliance:
|
|
|
|
|
|
|
|
|
|
|
NYSE Listing Rules
|
UK Corporate Governance Code
|
Aviva approach
|
|
|
Independence criteria for directors
|
|
|
|
|
Independent directors must form the
majority of the board of directors. A director cannot qualify as independent unless the Board affirmatively determines that the
director has no material relationship with the company. NYSE rules prescribe a list of specific factors and tests that US-listed
companies must use for determining independence.
|
At least half the Board, excluding the Chairman, should comprise independent Non-Executive Directors, as determined by the Board. The Code sets out its own criteria that may be relevant to the independence determination, but the Board is permitted to conclude affirmative independence notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, so long as it states its reasons.
|
The majority of the Board comprises independent Non-Executive Directors (NEDs) who are deemed independent under the Code and meet the independence criteria in the NYSE rules.
|
|
|
Non-executive director meetings
|
|
|
|
|
Non-management directors of each listed company must meet at regularly scheduled executive sessions without management and, if that group includes directors who are not independent, listed companies should at least once a year schedule an executive session including only independent directors.
|
The Chairman should hold meetings with
the NEDs without the Executive Directors present.
|
The NEDs meet without Executive Directors present at least once annually.
|
|
|
Committees
|
|
|
|
|
US companies are required to have a Nominating/Corporate Governance Committee comprised of independent directors. In addition to identifying individuals qualified to become Board members, this committee must develop and recommend to the Board a set of corporate governance principles and oversee the evaluation of the Board and management.
|
The Company is required to have a Nomination Committee but not a Corporate Governance Committee. A majority of the members of the Nomination Committee should be independent NEDs. The Board is required to undertake a formal and rigorous annual appraisal of its own performance, externally facilitated at least every three years.
|
The Company has a Nomination Committee and
a Governance Committee, each of which are comprised
of Independent NEDs. The Governance Committee assists the Board in shaping the culture and values of the Group, however the Board
as a whole is ultimately responsible for the corporate governance of the Group and oversees this through reports to the Board and
its committees. The Board conducts an annual appraisal of its own performance, as well as the performance of each of its committees
and of individual directors.
|
|
|
US companies are required to have a Compensation
Committee made up entirely
of independent directors.
|
The Company is required to have a Remuneration Committee and under the Companies Act 2006 is required to obtain shareholder approval of the remuneration policy for Executive Directors. The Committee should be comprised of independent NEDs.
|
The Company has a Remuneration Committee comprised of independent NEDs which covers all NYSE and Code requirements and recommends the remuneration policy for Executive Directors to the Board and shareholders for approval.
|
|
|
US companies are required to have an audit committee comprised of independent directors and that one member must meet the requirements to be an Audit Committee financial expert. The Audit Committee should also cover risk matters.
|
The Company must have an Audit Committee and at least one member must have recent and relevant financial experience. The Committee should be comprised of independent NEDs.
|
The Company has an Audit Committee comprised of independent NEDs and at least one member meets both the NYSE and Code requirements on financial experience. The Audit Committee does not review risk management as this is covered by the Risk and Governance Committees.
|
|
|
Code of business conduct and ethics
|
|
|
|
|
Companies are required to adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.
|
Not required under the Code.
|
The Company has adopted a Business Ethics Code to which all employees are bound and a Code of Ethics for senior management, which complies with the Sarbanes-Oxley Act of 2002.
|
|
|
Shareholder approval of equity-compensation plans
|
|
|
|
Shareholders must be given the opportunity to vote on all equity-compensation plans and ‘material revisions’ to those plans, with limited exceptions. Detailed definitions of ‘material revisions’ are provided by NYSE.
|
Shareholder approval is necessary for certain
equity-compensation plans and ‘significant changes’ thereto, subject to certain exceptions.
The Code does not provide a detailed definition
or explanation of what are considered to be ‘significant changes’.
|
All new equity-compensation plans or amendments to existing plans that are required to be approved by shareholders under the Code are put to shareholders for approval.
|
|
|
|
|
|
|
By order of the Board
Sir Adrian Montague
Chairman
9 March 2016
Directors’
remuneration report
Aligning
performance and
remuneration
Patricia Cross
Chairman, Remuneration Committee
|
|
Dear shareholder, on behalf of the Remuneration Committee,
I am pleased to present the Directors’ Remuneration Report (DRR) for the year ended 31 December 2015
After a thorough review of our remuneration framework, we received strong levels of shareholder support for
both our Policy Report and Annual Report on Remuneration at last year’s Annual General Meeting (AGM).
|
|
|
|
|
|
|
|
|
|
|
|
|
Committee Membership
|
|
|
|
|
|
|
|
Member since:
|
|
|
Patricia Cross, Chairman
|
01/12/2013
|
|
|
Michael Mire
|
14/05/2015
|
|
|
Bob Stein
|
06/03/2013
|
|
|
Sir Malcolm Williamson
|
14/05/2015
|
|
|
|
|
|
|
|
|
|
|
We
believe that ongoing engagement with all relevant stakeholders is fundamental to ensure that our remuneration framework remains
fit for purpose, and delivers outcomes that are appropriate in the context of Group and individual performance. We are committed
to being open and transparent on all remuneration related decisions, and therefore we continued to engage with shareholders and
other key stakeholders following last year’s AGM.
Key 2015 performance highlights and acquisition
of Friends Life Group (FLG)
2015 was a milestone year for the Group and saw a renewed focus on
the transformation of the business, securing the balance sheet and growing profitability. Our Solvency II (SII) cover ratio is
180%, adjusted operating profit grew 20% to £2,665 million, value of new business increased for the 12
th
consecutive
quarter, and the combined operating ratio improved 1.1 points to 94.6%. The improved financial strength, and sustained operational
performance underpin the 15% increase in our final dividend.
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.
New Executive Director
Andy Briggs, who had been Chief Executive Officer at FLG, was appointed
to the Board of Aviva in April 2015 when he took on the role of CEO of the enlarged UK Life business (CEO UK Life). Andy did not
receive an increase to his basic salary on appointment and his incentive awards granted in respect of his employment with Aviva
in 2015 are in line with our Policy and pro-rated to reflect his period of employment.
Andy had long-term awards granted by FLG which vested
as a result of the acquisition, for services provided to FLG. These awards were disclosed in FLG’s acquisition documents
and the payments were approved by the FLG Remuneration Committee on acquisition. Details of these awards can be found on page 81.
Key decisions on remuneration in respect
of 2015
2015 Long Term Incentive Plan (LTIP)
Last year, in line with our Remuneration Policy, we proposed awards
of 350% of salary and 250% of salary to Mark Wilson, Group Chief Executive Officer (Group CEO) and Tom Stoddard, Chief Financial
Officer (CFO), respectively, under the LTIP. Following feedback from a shareholder proxy agency on the proposed awards, the Group
CEO and CFO decided not to accept these awards.
Consequently, the Committee approved new LTIP awards to be granted
at 300% of salary to the Group CEO and 225% of salary to the CFO, which both individuals accepted.
Adjustment of LTIP targets
Following the acquisition of FLG in April 2015, we considered our
LTIP targets for the outstanding 2013 and 2014 awards (50% based on Relative Total Shareholder Return (TSR); 50% based on Return
on Equity (ROE)). After a process of shareholder consultation, we decided to re-calibrate them to reflect the enlarged Group and
its increased capital base.
Shareholders indicated to us that they were satisfied with the approach
of making mechanical adjustments to the ROE targets, so they would be no less challenging than those that were originally set.
Shareholders were also comfortable with the approach taken to adjusting
the comparator group used for assessing relative TSR performance to take into account the de-listing of FLG. These adjustments
to targets are as described on page 79.
2015 Bonus
The annual bonus awards made to the Executive Directors (EDs) reflect
a strong year for the Company under their leadership. The Group exceeded target performance overall for the financial measures
(adjusted operating profit, cash remittances, value of new business (VNB), economic surplus generation, operating expense ratio
and combined operating ratio (COR) ). The continued progress of the integration with FLG has strengthened and stabilised our position
in terms of capital and liquidity.
Performance against non-financial measures (customer, employee and
risk) has also been taken into account, together with personal performance. Further information is provided on page 78.
When determining bonus payouts, the Committee also took into account
the wider performance of Aviva, together with the experience of our shareholders to ensure that the payments are a fair reflection
of performance achieved during the year.
The Committee awarded a bonus of 91% of maximum to the Group CEO in
light of the strong financial performance and the progress on our strategic objectives achieved during the year. The CFO received
an award of 87% of maximum and the CEO UK Life received a pro-rated award of 90% of maximum. The Committee recognised the critical
role that all three EDs have played in the integration of FLG. The integration is ahead of schedule and at the end of 2015, we
have delivered £168 million of run-rate savings and we expect to achieve the targeted £225 million of synergies one
year earlier than our original plan.
To provide longer-term alignment with our shareholders, two-thirds
of these awards will be deferred into shares for three years under the Annual Bonus Plan (ABP).
2013 LTIP
Given the dates of appointment of our EDs, only the Group CEO will
receive shares under this award. Awards under the 2013 LTIP vested subject to Aviva’s ROE and relative TSR performance over
the period 1 January 2013 to 31 December 2015. 53.0% of the maximum vested. Full details can be found on page 79.
Application of Policy in 2016
No significant changes are proposed for the 2016 financial year, and
we continue to take a market leading approach in terms of the time period over which pay is earned and delivered.
The EDs’ salaries have been reviewed by the Committee and an
increase of 3% will be made to the Group CEO’s salary effective from 1 April 2016; his first increase since he was appointed
in 2013. Increases of 3% will also be applied to the salaries of the CFO and CEO UK Life. All increases are in line with the general
increase applied across our UK-based employee population.
2016 Bonus
In line with our stated Group strategy, our progress in developing
our digital capabilities and interfaces will be foundational for our future profit growth, and our ambition to provide a world
class customer experience. For 2016, 25% of the annual bonus scorecard will therefore be linked to our progress on the expansion
of a digital interface with our customers. The remaining 75% will continue to be based on the financial performance of the Group
as set out on page 87. Non-financial modifiers, risk, conduct and individual performance will also be considered when determining
payments.
2016 LTIP
In 2016, awards under the LTIP will be 300% of salary for the Group
CEO and 225% of salary for the Group CFO and CEO UK Life. These awards will vest subject to Aviva’s ROE and relative TSR
performance over a three year period to 31 December 2018. Any shares vesting based on long-term performance to this date will be
subject to an additional two year holding period.
Committee changes during the year
Gay Huey Evans stepped down from the Board and the Committee in 2015
and I would like to thank Gay for her hard work and commitment since joining the Committee in 2011. I would also like to take this
opportunity to welcome Michael Mire and Sir Malcolm Williamson to the Committee.
Committee priorities for 2016
The key priority of the Committee in 2016 is to direct the ongoing
development of a remuneration system which is fair to executives and aligned to long term, sustainable growth in shareholder value.
In light of a heightened international competition for talent, the Committee faces significant challenge in this endeavour.
Other priorities will include monitoring compliance with evolving
regulatory requirements, including SII provisions.
Our core values provide a compelling foundation
on which to continue to shape our Policy. We continue to:
|
·
|
Care More - we care about how our executives feel about our remuneration framework just as we care about how our broad community
of stakeholders view this framework
|
|
·
|
Kill Complexity - we have a constant task to remove undue complexity from our remuneration systems, not easy given continuing
disclosure changes and regulatory requirements
|
|
·
|
Never Rest - because our competitors won't and all of our stakeholders require our constant engagement; and
|
|
·
|
Create Legacy - perhaps this is the value that resonates the most strongly with the Remuneration Committee. We want to
create a Remuneration ecosystem that we can all be proud of, the Board, the executives, our staff and all of our stakeholders.
|
We are committed to maintaining an open and transparent dialogue with
our shareholders. The objective of this report is to communicate our approach to pay in light of the Group’s performance
and regulatory landscape. As always, I welcome any comments that you may have and look forward to seeing shareholders at the 2016
AGM.
Patricia Cross
Chairman, Remuneration Committee
9 March 2016
Our
remuneration framework
at a glance
Overview of Policy (approved in 2015)
|
|
Set by reference to relevant pay data, levels of increase for the broader UK employee population and individual and business
performance
|
Remuneration in respect of 2015
|
|
Group CEO: £980,000 p.a.
|
|
|
CEO UK Life: £691,875 p.a. (pro-rated since appointment)
|
Application of Policy in 2016
Overview of Policy (approved in 2015)
|
|
Maximum of 200% of salary for CEO and 150% of salary for other EDs
|
|
|
Performance is assessed against a range of relevant financial, employee, customer and risk measures designed to incentivise
the achievement of our strategy, as well as individual strategic objectives as set by the Committee
|
|
|
Malus and clawback provisions apply to all awards granted from 2015
|
Remuneration in respect of 2015
|
|
Group CEO: 91% of maximum (£1,783,600)
|
|
|
CFO: 87% of maximum (£877,500)
|
|
|
CEO UK Life: 90% of maximum (£673,014)
Pro-rated to reflect period of
employment with Aviva during the year
|
Application of Policy in 2016
|
|
Award opportunities will be fully in line with the Policy
|
|
|
Payments will be determined after taking into consideration a scorecard based on a split of 75% on Group financial performance,
and 2
5% on the expansion of a digital interface with our customers. Performance against non-financial
modifiers and individual performance will also be taken into account
|
Overview of Policy (approved in 2015)
|
|
Maximum of 350% of salary
|
|
|
Shares vest subject to performance over a three-year period. Once vested, shares are typically subject to an additional two-year
holding period
|
|
|
Malus and clawback provisions apply to all awards granted from 2015
|
Remuneration in respect of 2015
|
2013 LTIP award vested at 53.0% of maximum based on:
|
|
–
|
Cumulative three-year ROE of 39.7% resulting in vesting of 32.3%
|
|
–
|
Aviva ranked between 6 and 7 in terms of TSR against a group of international insurers, vs. median rank of 7.5, resulting in 20.7% vesting
|
|
Given the timing of appointment, the CEO is the only ED to receive shares in respect of this grant
|
Application of Policy in 2016
|
|
Group CEO: 300% of salary
|
|
|
CEO UK Life: 225% of salary
|
|
|
Performance measured over 1 January 2016 to 31 December 2018
|
|
|
50% based on three-year cumulative ROE and 50% based on relative TSR against a group of international insurers
|
|
|
Two-year post vesting holding period.
|
Annual
Report on
Remuneration
This section of the report sets out how Aviva has
implemented its Remuneration Policy for EDs during the course of 2015, and how the approved Policy will be implemented for 2016.
This is in accordance with the requirements of the Large & Medium Sized Companies and Groups (Accounts and Reports) Regulations
2008 (as amended).
The full terms of reference for the Committee can be found on the
Company’s website at www.aviva.com/terms-of-reference and are also available from the Group General Counsel and Company Secretary.
Consideration by the Committee of matters
relating to directors’ remuneration
The Committee met five times during 2015. Details of attendance at
Committee meetings are shown on page 50.
The Group Chairman attended all meetings
of the Committee. The Group General Counsel and Company Secretary acted as secretary to the Committee. The Chairman of the Committee
reported to subsequent meetings of the Board on the Committee’s work and the Board received a copy of the agenda and the
minutes of each meeting of the Committee.
The Committee received assistance in considering executive
remuneration from the Group Chairman, the Group CEO, the Group Chief People Officer, the Group Reward Director, the Chief Accounting
Officer, the Chief Capital & Investments Officer, the CEO – Aviva Investors, the Remuneration Committee Chairman of Aviva
Investors and the Chief Audit Officer. These people attended meetings by invitation during the year. No person was present during
any discussion relating to their own remuneration.
During the year, the Committee received advice on executive
remuneration matters from Deloitte LLP who were appointed by the Committee. They are a member of the Remuneration Consultants’
Group and adhere to its Code of Conduct. The Group received advice on remuneration matters, taxation and other consulting services
(including advice in relation to SII) during the year.
Deloitte LLP were paid fees totalling £112,500, during
the year for the provision of advice to the Committee on senior executive remuneration matters, and views on shareholder perspectives.
Fees were charged on a time plus expenses basis.
The Committee reflects on the quality of the advice provided and whether
it properly addresses the issues under consideration as part of its normal deliberations. The Committee is satisfied that the advice
received during the year was objective and independent.
Committee performance and effectiveness
In March 2015, the Committee undertook an annual
review of its performance and effectiveness which concluded that; overall the Committee was effective in carrying out its duties
with the areas of development identified being consistent with the outcomes of the Board evaluation process, as set out earlier
in the report. The 2015 review was carried out by Independent Board Evaluation as described on page 50.
In addition, the effectiveness review highlighted
some areas for further consideration by the Committee:
|
·
|
there should be an on-going focus on the link between the remuneration framework and the strategic objectives of the Group.
This includes taking into account non-financial and strategic measures of performance, as well as financial measures, to ensure
that the right culture and behaviours are encouraged. Conduct and risk outcomes are both key considerations in the assessment of
performance and the determination of bonus outcomes. A formal process for making risk adjustments at individual and business unit
level was implemented for the 2015 annual bonus
|
|
·
|
in line with recent comments made in the external environment, it is recognised that simplicity is favoured to ensure that
there is sufficient line of sight between performance and remuneration within the Group
|
|
·
|
the review recognised there had been a focus on the alignment of remuneration and risk, with the introduction of more formal
input from Group Risk. In addition, the implementation of SII across the Group has contributed to an improvement in how risk is
taken into account in remuneration related decisions, and that this would continue to be a key area of focus for the Committee
in 2016.
|
Remuneration Committee Responsibilities
and allocation
of agenda
time
Senior management objectives and
pay decisions
– 44%
Recommend to the Board the Group’s Policy in respect of
remuneration of the Board Chairman, EDs, members of the Group Executive (GE) and members of senior management, taking account of
all legal and regulatory requirements and provisions of best practice and remuneration trends across the Group.
Review the general principles applying to
relevant employees under SII and oversee remuneration decisions relating to these employees to ensure they are aligned to the agreed
Policy.
Review and recommend to management the level
and structure of senior management remuneration.
Approve the Aviva Investors' reward strategy,
including any changes to the strategy.
|
|
Governance, regulatory issues and
reporting policy
– 29%
Work with the Risk Committee to ensure that risk and risk appetite
are considered in setting the Remuneration Policy and reflected appropriately in pay outcomes.
Obtain information about remuneration in
other companies to act as one of many reference points considered.
Select, appoint and determine the terms
of reference for independent remuneration consultants, to advise on Remuneration Policy and levels of remuneration.
Review and determine the remuneration of
the Board Chairman and the terms of employment and remuneration of individual EDs and GE members, including any specific recruitment
or severance terms.
Share plans, performance testing
and targets
operations
– 27%
Recommend to the Board the establishment of any employee share
plans and exercise all the Board’s powers in relation to the operation of all employee share and incentive plans.
|
Governance, regulatory issues and reporting
|
|
|
|
The Committee reviewed and agreed the Remuneration Policy, Principles and Framework Business
Standard (the Framework). The Framework has been designed to take into account both the integrated assurance implementation programme
framework and the SII regulations. Under SII, it is a requirement for the Group’s Remuneration Policy to be made available
to all staff members, and therefore the Framework has been created as a separate document in a simple and understandable format
|
|
|
The Committee received and considered a report from Internal Audit following an internal review
of the adequacy and effectiveness of controls over the preparation, validation and evaluation of financial and non-financial bonus
metrics and noted that no material issues had been identified
|
|
|
The Committee received regular updates and briefings from management and the external advisor
on regulatory issues
|
|
|
The Committee considered and approved the implementation of malus and clawback provisions on
incentive plans
|
Share plans, performance testing and targets
|
|
|
|
The Committee approved the 2015 LTIP and considered annual bonus targets for 2016
|
|
|
The Committee reviewed and amended plan rules where necessary
|
|
|
The Committee considered the impact of the FLG acquisition on outstanding 2013 and 2014 LTIP
targets and subsequently engaged with shareholders on adjustments to targets. Consideration was also given to the appropriateness
of the 2015 bonus targets, in light of the acquisition
|
|
|
The Committee reviewed and approved the performance achieved for 2012 LTIP awards
|
Senior management objectives and pay decisions
|
|
|
|
The Committee benchmarked, reviewed and set salaries for the Group CEO, CFO and GE members from
1 April 2015
|
|
|
The Committee reviewed and approved the Group bonus pool for 2014, taking into account performance
against financial KPIs and non-financial modifiers
|
|
|
The Committee reviewed and approved the key individual objectives for 2015 for each member of
the GE
|
|
|
The Committee reviewed the detail and methodology for assessing the bonus pool for Aviva Investors,
approving the maximum bonus pool and allocations. Remuneration proposals for 2015 were considered and approved, including formal
approval of the bonus targets and consideration of a new Aviva Investors LTIP
|
|
|
The Committee ensured that remuneration outcomes were aligned with delivery against the strategic
anchor, long-term sustainable growth, shareholder experience and the risk profile of the Group
|
Single
total figures of remuneration for 2015 – Executive Directors (audited information)
The table below sets out the total remuneration for 2015 and
2014 for each of our EDs.
1
|
|
Total 2015 remuneration – Executive Directors
|
|
|
Mark Wilson
|
|
Tom Stoddard
|
|
Andy Briggs
5
|
|
Total emoluments of
Executive Directors
|
|
|
2015
£000
|
2014
£000
|
|
2015
£000
|
2014
£000
|
|
2015
£000
|
2014
£000
|
|
2015
£000
|
2014
£000
|
|
Basic salary
|
980
|
980
|
|
675
|
458
|
|
466
|
—
|
|
2,121
|
1,438
|
|
Benefits
|
65
|
54
|
|
152
|
83
|
|
30
|
—
|
|
247
|
137
|
|
Annual bonus
1
|
1,783
|
1,274
|
|
877
|
526
|
|
673
|
—
|
|
3,333
|
1,800
|
|
LTIP
2
|
2,562
|
—
|
|
—
|
—
|
|
—
|
—
|
|
2,562
|
—
|
|
Buyout award – CFO Award 2014
3
|
—
|
—
|
|
1,000
|
—
|
|
—
|
—
|
|
1,000
|
—
|
|
Pension
4
|
280
|
292
|
|
185
|
120
|
|
139
|
—
|
|
604
|
412
|
|
Total
|
5,670
|
2,600
|
|
2,889
|
1,187
|
|
1,308
|
—
|
|
9,867
|
3,787
|
|
Notes
|
1
|
Bonus payable in respect of the financial year including any deferred element at face value at date of award.
|
|
2
|
The value of the LTIP for 2015 relates to the 2013 award, which had a three-year performance period ending 31 December 2015.
53.0% of the award will vest in April 2016. An assumed share price of 491.68p has been used to determine the value of the award
based on the average share price over the final quarter of the 2015 financial year.
|
|
3
|
As disclosed in last year’s report, Tom was eligible to receive a buyout award on a strict “like for like”
basis to replace deferred compensation he had forfeited on resignation from his previous employer. This award was made in 2015
once share dealing restrictions that applied during 2014 because of the FLG acquisition had lifted.
|
|
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.
|
|
5
|
Remuneration in relation to services to Aviva from 29 April 2015.
|
Additional disclosures in respect of the single
total figure of remuneration table
(audited information)
Benefits
The benefits disclosure includes the cost, where relevant, of private
medical insurance, life insurance, accommodation, travel and car benefits. In the case of Mark and Andy this also includes benefits
resulting from the Save As You Earn (SAYE plan), in which they participate on the same basis as all eligible employees. All numbers
disclosed include the tax charged on the benefits, where applicable. In line with previous disclosure, the benefits figure for
Tom includes some expenditure in respect of his relocation from the US to the UK. (£200,000 limit inclusive of benefit in
kind charges against appropriate receipts or other evidence of expenditure.)
2015 annual bonus outcome
The Group’s financial performance, together with non-financial
modifiers and personal performance have been used to determine ED bonuses paid in respect of 2015. As communicated to shareholders,
the targets were reviewed and adjusted to take into account the impact of the FLG acquisition. The Committee is comfortable that
the revised targets were no less difficult to achieve. Targets and our performance against them for 2015 will be disclosed in next
year’s report when they are no longer considered commercially sensitive. The Committee believes that disclosing them so soon
after the end of the relevant financial year may adversely impact the Group’s business.
We have provided an indication of performance against the performance
measures for 2015 in table 2. As set out in this table, the bonuses reflect a year of strong financial performance for the Group,
with performance against all financial measures (with the exception of cash remittances) exceeding target.
As initiated last year, the assessment of performance against financial
targets for Annual Bonus outcomes has included a Quality of Earnings “checkpoint” step – i.e. to provide further
assurance that the performance reflects sustainable value for shareholders. (Equivalent considerations are applied in assessing
the ROE performance for the LTIP, i.e. to ensure that LTIP outcomes are consistent with the experience of shareholders). Shareholders
approved increased “at target” and maximum annual bonus opportunities for the CEO as part of the Remuneration Policy
adopted at the 2015 AGM. In proposing the changes, we undertook that we would not “pay more for the same performance”
and 2015 annual bonus outcomes reported here have been achieved against appropriately challenging hurdles.
New Executive Director
Remuneration in relation to employment with Aviva
Andy Briggs joined the Group as an employee on 13 April 2015, and
was appointed to the Board as an ED on 29 April 2015. His remuneration is in line with the approved Policy with details for 2015
provided below:
|
·
|
Basic salary - £691,875 p.a.
|
|
·
|
Benefits in line with our approved Policy, including a cash car allowance, pension contribution and the provision of Private
Medical Insurance (PMI)
|
|
·
|
Annual bonus - 100% of basic salary for target performance and 150% of basic salary for maximum performance. Two-thirds of
any bonus awarded is deferred into Aviva shares for three years
|
|
·
|
LTIP - eligible for an LTIP grant with a face value (at grant) of up to 350% of basic salary. The LTIP is subject to performance
conditions and vests after three years to the extent that those conditions have been met. Vested shares are subject to a two-year
holding period post vesting. Andy received an LTIP grant in 2015 of 225% of basic salary
|
2
|
|
Assessment of 2015 ED performance and impact on bonus (audited information)
|
|
Group Financial Performance
|
|
|
|
|
Overall achievement against Group financial scorecard
|
|
|
160%
|
Notes:
MCEV value of new business (VNB)
is a non-GAAP measure (as defined by the glossary). The Directors believe this figure is one of the important financial elements
in the assessment of bonus awards. VNB is provided above in the unaltered form contained in the Annual Report and Accounts in accordance
with the home country’s disclosure requirements and pursuant to item 6.B of Form 20-F.
Refer to the glossary for the definition
of the operating expense ratio.
Under Aviva’s Annual Bonus Plan – this
outcome can be modified by the performance on the Employee, Customer and Risk and Controls modifiers.
Typically, adjustments (if made) would be in the
range of +/- 15% but for major Risk or Controls or Customer issues (eg concerning Conduct) a considerably greater adjustment could
be made.
|
Non-Financial Element
|
Assessment
|
Employee
Engagement and Enablement scores.
|
Employee engagement improved by 1% during 2015, on a same population basis of employees who were with Aviva year-on-year, to 66%. It is recognised that there are challenges around employee engagement following the acquisition of FLG with significant change being experienced by some of our employees and the EDs recognise this is a critical area of focus.
|
Customer
Performance against Relationship Net Promoter Score (RNPS) targets and, if these are met, against Average Product Holding (APH) targets reflecting progress against the True Customer Composite strategic goal.
|
Against RNPS, upper quartile performance has been maintained in our key markets, including the UK.
The decision was taken, during the year, to coordinate our approach
on APH to our progress in implementing our Digital strategy.
A system of monitoring and assessment known as Conduct Management
Information has been established for reporting and monitoring on conduct issues across the Group.
|
Risk & Controls
Aviva’s reward strategy includes specific risk and control objectives for senior management and Directors. The aim is to help drive and reward effective risk management and a robust control environment across the Group.
|
In 2015, almost all business units were assessed as ‘on target’ against the goal of maintaining an appropriate and
clearly effective risk management and control environment. Two business units have been identified as needing to make improvements
and action has been taken within the relevant units to address this.
The signal achievement in relation to risk in 2015 was the successful
implementation of SII across the Group, including the approval of the internal model. This demonstrates the importance placed on
how risk is managed and reported within the Group.
|
For the 2015, no adjustments were made in
relation to the modifier factors
.
While the modified outcome against the Group Financial Scorecard provides a pool of funding for bonuses, actual bonus decisions
are made based on individual contribution and achievements, how the person has assisted the Group achieve progress against its
strategic objectives, the leadership they have exhibited and how the individual has demonstrated the Aviva values.
Each individual has a target and maximum bonus
opportunity against which this is assessed.
|
|
Individual bonus outcomes for EDs
|
|
|
|
Mark Wilson – CEO
|
Tom Stoddard – CFO
|
Andy Briggs – CEO UK Life
1
|
|
The Aviva Group had a strong year under Mark Wilson’s
leadership.
·
The
financial results for 2015 exceeded target on all metrics, except for cash remittances (primarily due to the retention of
the dividend from the Canadian business to fund the acquisition of RBC General Insurance in that market).
·
The CEO was at the forefront of the Group's digital ambitions, driving the establishment
of the Digital Garage operations in London and Singapore, and continuing to provide a strong strategic lead to Aviva.
·
The SII outcome and approval of the internal model was a major achievement and followed a
long process of engagement with the regulator and the Government in which the CEO was prominently engaged.
·
The acquisition of FLG was another major achievement and the progress with its integration
has made the Group stronger as regards capital and liquidity.
|
Tom Stoddard provided outstanding leadership
to the Finance function and drove many initiatives to ensure Aviva is making solid progress on its strategic ambitions, including:
·
Playing a key role in the acquisition of Friends Life and in Aviva getting ahead of schedule
on the integration and benefits delivery;
·
Raising £1bn hybrid capital and protecting the Group’s capital position in volatile
markets through additional hedging activity and divesting £2bn of non-core commercial property assets to Lone Star;
·
Strategic acquisitions in Canada and Poland;
·
Reducing claims volatility by reinsuring £800m of UK General Insurance latent risks;
·
Launching Aviva Ventures, which made its first startup investment during the year;
·
Ranking highest in UK insurance sector for Investor Relations team; and
·
Securing PRA approval of Aviva’s internal model for SII, which went live on 1 January
2016.
|
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.
·
UK Life has been a key partner in the development of a scalable Digital Direct strategy across
the UK, along with the General insurance business and the newly formed UK Digital Board within Aviva.
|
|
|
|
|
Bonus award : £1,783,600
Bonus as a % of basic salary: 182%
Bonus as a % of max opportunity: 91%
|
Bonus award : £877,500
Bonus as a % of basic salary: 130%
Bonus as a % of max opportunity: 87%
|
Bonus award : £673,014
Bonus as a % of basic salary: 135%
Bonus as a % of max opportunity: 90%
|
Assessment of 2015 ED performance and impact on bonus (audited
information) continued
In determining the bonus awards, the Committee took into account
the wider performance of Aviva and the experience of shareholders during the year, and is satisfied that the bonus awards above
are fair in the light of those considerations.
One-third of the bonus award for all EDs will be delivered in cash,
with two-thirds being deferred into shares for three years.
Notes to the table on the previous
page
1 Andy’s bonus has been pro-rated to reflect his period of
employment with Aviva.
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.
3
|
2014 Performance against targets for Group CEO
|
|
Financial KPI
|
Threshold
|
Maximum
|
Outcome
|
2014 bonus as a % of basic salary
|
2014 bonus as a % of maximum
|
|
Cash Remittances (35% Financial KPI weighting at target)
|
£1,267m
|
£1,472m
|
£1,412m
|
30.9%
|
20.6%
|
|
IFRS Profit Before Tax
1
(25% weighting)
|
£1,832m
|
£2,129m
|
£1,919m
|
13.8%
|
9.2%
|
|
IFRS ROCE
(10% weighting)
|
8.2%
|
9.5%
|
9.9%
|
15%
|
10%
|
|
VNB
2
(14% weighting)
|
£859m
|
£998m
|
£1,009m
|
30%
|
20%
|
|
COR (6% weighting)
|
95.6%
|
93.5%
|
95.7%
|
—
|
—
|
|
Operating Expense Ratio
3
(10% weighting)
|
55.1%
|
51.2%
|
51.5%
|
17.1%
|
11.4%
|
|
Financial KPIs
|
|
|
|
106.8%
|
71.2%
|
|
Customer and Employee
4
|
|
|
|
+8.2%
|
+5.5%
|
|
Company performance
|
|
|
|
115%
|
76.7%
|
|
Personal performance
4
|
|
|
|
+15%
|
+10%
|
|
Total bonus % outcome
|
|
|
|
130%
|
86.7%
|
|
|
1
|
IFRS profit before tax is calculated as IFRS adjusted operating profit before tax attributable to shareholders’ profits
(continuing and discontinued operations) after integration and restructuring costs, impairment of goodwill, joint ventures and
associates and other amounts expensed and amortisation and impairment of intangibles.
|
|
2
|
MCEV value of new business (VNB) is a non-GAAP measure (as defined by the glossary). The Directors believe this figure is one
of the important financial elements in the assessment of bonus awards. VNB is provided above in the unaltered form contained in
the Annual Report and Accounts in accordance with the home country’s disclosure requirements and pursuant to item 6.B of
Form 20-F.
|
|
3
|
Refer to the glossary for the definition of the operating expense ratio.
|
|
4
|
Commentary on performance against these components of assessment was included in last years report.
|
2013 LTIP award vesting in respect of performance
period 2013-2015
As mentioned in the Chairman’s letter, the targets
for both the 2013 and 2014 LTIPs were adjusted to ensure that they were appropriately calibrated for the enlarged Group to support
the realisation of benefits from the acquisition and the achievement of the Group’s strategic agenda.
Due to the de-listing of FLG during the performance period,
for the purposes of assessing TSR performance over the period, FLG’s performance was re-invested in Aviva reflecting the
subsequent conversion of FLG shares to Aviva shares. Performance for the 2013 grant was assessed against the following companies:
Aegon, Allianz, Assicurazioni Generali, Axa, CNP Assurances, Direct Line Group, FLG (with performance subsequently reinvested in
Aviva), Legal & General, MetLife, Old Mutual, Prudential, RSA Insurance Group, Standard Life and Zurich Financial.
The Committee are satisfied that the targets are no less
challenging in the context of the enlarged Group, and shareholders were supportive during the consultation process.
Given the timing of the appointment dates of our EDs, Mark
is the only ED who will receive shares under the 2013 LTIP award. As indicated in the table below, 53.0% of the award will vest
in April 2016.
4
|
2013 LTIP award – performance conditions
|
|
|
|
|
|
|
|
Weighting
|
Threshold (20% vests)
|
Maximum (100% vests)
|
Outcome
|
Vesting (%
of maximum)
|
|
ROE performance
|
50%
|
35.5%
|
43%
|
39.7%
|
32.3%
|
|
Relative TSR performance
|
50%
|
Median
|
Upper quintile and above
|
Between rank 6 and 7
|
20.7%
|
|
Share awards made during the financial year
(audited information)
Share awards granted to EDs during the year are set out in
the table below.
As disclosed last year, Tom joined Aviva in April 2014. Share dealing
restrictions applied during 2014 because of the FLG acquisition and as a result it was not possible to make share awards during
the 2014 financial year, therefore awards were based on the following share prices:
|
·
|
A share price of 509.00 pence was used to calculate the CFO award, being the average of the middle-market closing price of
an Aviva ordinary share on the three consecutive business days immediately preceding Tom’s start date.
|
|
·
|
A share price of 489.00 pence was used to calculate the LTIP award, being the average of the middle-market closing price of
an Aviva ordinary share on the three consecutive business days immediately preceding the date of the main grant, on 24 March 2014.
|
The table below therefore includes some awards made in respect
of 2014, but granted in 2015.
5
|
Share awards granted during the year
|
|
|
|
|
|
|
Amount vesting
|
|
|
|
Date of award
|
Award Type
|
Face value
(% of
basic salary)
|
Face value
(£)
|
Threshold performance (% of
face value)
|
Maximum performance (% of
face value)
|
End of performance period
|
|
Mark Wilson
|
18.05.2015
|
LTIP
|
300%
|
£2,939,997
|
20%
|
100%
|
31.12.2017
|
|
Mark Wilson
|
18.05.2015
|
ABP
|
87%
|
£849,333
|
N/A
|
|
|
|
Tom Stoddard
|
23.03.2015
|
LTIP
|
225%
|
£1,518,746
|
20%
|
100%
|
31.12.2016
|
|
Tom Stoddard
|
23.03.2015
|
CFO Award
|
148%
|
£999,997
|
N/A
|
|
|
|
Tom Stoddard
|
18.05.2015
|
LTIP
|
225%
|
£1,518,745
|
20%
|
100%
|
31.12.2017
|
|
Tom Stoddard
|
18.05.2015
|
ABP
|
52%
|
£350,966
|
N/A
|
|
|
|
Andy Briggs
|
18.05.2015
|
LTIP
|
225%
|
£1,556,719
|
20%
|
100%
|
31.12.2017
|
|
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 middle-market 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).
ROE targets for awards made in 2015
ROE targets determine the vesting of 50% of the LTIP award
and are set annually within the context of the Company’s three-year business plan. Vesting depends upon performance over
the three-year period against a target return. The 2015 targets are provided below and have been set in the context of the enlarged
Group.
Achievement of ROE targets over the three-year performance period
|
Percentage of shares in award that vests based on achievement of ROE targets
|
|
Less than 24.5%
|
0%
|
|
24.5%
|
10%
|
|
Between 24.5% and 30%
|
Pro rata between 10% and 50% on a straight line basis
|
|
30% and above
|
50%
|
|
ROE is calculated as the IFRS profit after tax and
non-controlling interest, excluding the impact of investment variances pension scheme income/charge and economic assumption changes,
over average IFRS equity (excluding pension scheme net surplus/deficit) attributable to the ordinary shareholders of the Company.
TSR targets for awards made in 2015
Relative TSR determines the vesting of the other 50% of the
LTIP award. Historically, FLG were a constituent of our TSR comparator group, however they de-listed in April 2015 and so will
be excluded for awards from 2015. NN Group will be included in the comparator group going forward and it is considered an appropriate
company for inclusion given its size, importance of life insurance within its portfolio and its mix of strong home position and
multi-market presence.
Performance for the 2015 grant will therefore be assessed against
the following companies: Aegon, Allianz, Assicurazioni Generali, Axa, CNP Assurances, Direct Line Group, Legal & General, MetLife,
NN Group, Old Mutual, Prudential, RSA Insurance Group, Standard Life and Zurich Financial.
The performance period for the TSR performance condition will
be three years beginning 1 January 2015. For the purposes of measuring the TSR performance condition, the Company’s TSR and
that of the comparator group will be based on the 90-day average TSR for the period immediately preceding the start and end of
the performance period.
The vesting schedule is set out in table 7 below.
7
|
TSR vesting schedule for the 2015 LTIP award
|
|
|
TSR position over the three-year performance period
|
Percentage of shares in award that vests based on achievement of TSR targets
|
|
Below median
|
0%
|
|
Median
|
10%
|
|
Between median and upper quintile
|
Pro-rata between 10% and 50% on a straight line basis
|
|
Upper quintile and above
|
50%
|
|
Payments to past directors (audited information)
Trevor Matthews resigned from the Board with effect from 8 May 2013
and left the Company on 6 June 2013.
|
·
|
As disclosed in the 2013 Form 20-F, Trevor’s 2012 LTIP award was pro-rated to reflect his service during the performance
period and vested to the extent that the performance conditions had been achieved at the end of the period
|
|
·
|
There was a maximum of 230,073 shares (not inclusive of shares awarded in lieu of dividends accrued) available to vest in March
2015. The vesting percentage was 50% which resulted in 128,891 shares, (inclusive of shares awarded in lieu of dividends accrued),
vesting at a share price of 549.85 pence. The value realised was £708,708.56. This is the final payment made to Trevor
|
Russell Walls retired from the Board with effect from 8 May 2013.
|
·
|
Russell was appointed as Chairman and Non-Executive Director (NED) of Aviva Insurance Limited on 1 May 2013 and subsequently
resigned on 13 April 2015
|
|
·
|
He was appointed as a NED of Aviva Italia Holdings S.p.A on 4 December 2014 and on 30 April 2015 was appointed as Chairman
|
|
·
|
On 13 April 2015 Russell was also appointed as Chairman of Aviva Annuity UK Limited, Aviva Life Holdings UK Limited, Aviva
Life Services UK Limited and Aviva Life & Pensions UK Limited each of which are subsidiary companies of Aviva plc
|
|
·
|
The emoluments he received in respect of these directorships for the 2015 financial year were £107,105 and €64,058
|
Richard Karl Goeltz retired from the Board with effect from 8 May
2013
|
·
|
Richard was appointed as Chairman and NED of Aviva Life Holdings UK Limited, a subsidiary company of Aviva plc on 14 May 2013.
|
|
·
|
He is a NED of Aviva Life & Pensions UK Limited, Aviva Annuity UK Limited and Aviva Life Services UK Limited, each of which
are subsidiary companies of Aviva plc
|
|
·
|
Richard resigned from these positions on 13 April 2015
|
|
·
|
The emoluments he received in respect of these directorships for the 2015 financial year were £29,481
|
FLG Payments to current directors
Remuneration in relation to employment with FLG
In the interests of transparency with our shareholders, we are
making an additional voluntary disclosure and details of awards relating to Andy's employment with FLG are set out below. This
is in line with the disclosure previously made in FLG acquisition documents. All awards relate to the performance of FLG, and payments
were determined by the FLG Remuneration Committee prior to the completion of the acquisition and relate to contractual arrangements
between Andy and FLG.
In April 2015 Andy received an annual bonus paid by FLG in respect
of services provided to FLG prior to the acquisition. It was pro-rated for the period 1 January 2015 to 10 April 2015 and amounted to £157,461 (50% of the maximum bonus available for
that period taking into account achievement against performance measures).
Following the completion of the acquisition of FLG by Aviva, there
were a number of long-term awards which vested as a result of the acquisition.
|
·
|
FLG Deferred Share Award Plan (DSAP) 116,362 shares - all awards vested in full (one-third of annual bonuses in respect of
2013 and 2014 were deferred into shares)
|
|
·
|
FLG Performance Share Plan (PSP) 82,598 shares - PSP awards vested on the acquisition. Performance was tested at the point
of vesting, with 75% of the maximum paying out. The awards were subject to time pro-rating to take into account the period between
grant and vesting, and therefore the number of vested shares was reduced by 70%
|
Whilst these awards were originally satisfied in FLG shares,
they converted to Aviva shares at the point of acquisition given the structure of the transaction. As set out in the announcement
to the London Stock Exchange, on 14 April 2015, Andy sold these shares in April 2015 on the open market. Andy retained a reportable
interest in 222,903 Aviva shares post the acquisition and therefore met his shareholding requirement of 150% of salary at 31 December
2015. In addition, Andy retains an interest in the FLG Long Term Incentive Plan.
|
·
|
FLG Long Term Incentive Plan (FLG LTIP) - the FLG LTIP was originally implemented by Resolution Ltd in 2009 and approved by
Resolution Ltd shareholders in 2013 following modification. It was structured as a private equity type arrangement to support a
strategy of consolidation within the Life sector and an IPO of the consolidated businesses and, was therefore not a conventional
share plan. It was instead structured to reward growth in the value of the company if a stretching threshold level of performance
was achieved, and was the only long-term incentive plan operated from 2009 to May 2014
|
The acquisition of FLG triggered payments under the plan rules. The
payments to participants were based on the offer price and achievement of a threshold level of performance (i.e. percentage of
absolute total return to shareholders) and so were strongly aligned to shareholder value created. Under the terms of the FLG LTIP,
Andy is due to receive a total of £5.3 million under the plan (50% paid in September 2015, with the remaining 50% to be paid
in September 2016). Prior to Aviva’s acquisition of FLG, the FLG Remuneration Committee determined that payments under the
plan would be in cash as permitted under the rules, and in line with the original plan design.
Single total figure of remuneration for
2015 – Non-Executive Directors (NED) (audited information)
The table below sets out the total remuneration earned by each
NED who served during 2015.
8
|
Total 2015 remuneration – Non-Executive Directors
|
|
|
|
Fees
|
|
Benefits
|
|
Total
|
|
|
2015
£000
|
2014
£000
|
2015
£000
|
2014
£000
|
2015
£000
|
2014
1
£000
|
|
Chairman
|
|
|
|
|
|
|
|
Sir Adrian Montague
2
|
417
|
138
|
64
|
15
|
481
|
153
|
|
Non-executive directors
|
|
|
|
|
|
|
|
Glyn Barker
|
138
|
136
|
2
|
1
|
140
|
137
|
|
Patricia Cross
|
128
|
123
|
—
|
1
|
128
|
124
|
|
Belén Romana García
2
|
54
|
—
|
—
|
—
|
54
|
—
|
|
Michael Hawker
|
138
|
136
|
—
|
1
|
138
|
137
|
|
Michael Mire
|
113
|
103
|
—
|
1
|
113
|
104
|
|
Bob Stein
|
114
|
104
|
—
|
1
|
114
|
105
|
|
Scott Wheway
3
|
128
|
124
|
—
|
1
|
128
|
125
|
|
Sir Malcolm Williamson
2
|
101
|
—
|
7
|
—
|
108
|
—
|
|
Former non-executive directors
|
|
|
|
|
|
|
|
John McFarlane
2
|
182
|
550
|
19
|
61
|
201
|
611
|
|
Gay Huey Evans
2
|
35
|
104
|
5
|
1
|
40
|
105
|
|
Total emoluments of NEDs
|
1,548
|
1,518
|
97
|
83
|
1,645
|
1,601
|
|
|
1
|
The prior year total has been recalculated to show the directors that continued in office during all or part of the current
year and excludes remuneration of directors that left in the prior year.
|
|
2
|
Sir Adrian Montague was appointed Chairman at the 2015 AGM, when John McFarlane and Gay Huey Evans stepped down from the Board.
Sir Malcolm Williamson was appointed on 29 April 2015. Subsequently, Belén Romana García was appointed to the Board
on 26 June 2015.
|
|
3
|
Scott Wheway acts as non-executive chairman to Aviva Insurance Limited and was appointed on 13 April 2015. The emoluments he
received in respect of this directorship for the 2015 financial year was £75,654.
|
The total amount paid to NEDs in 2015 was £1,645,000, which
is within the limits set in the Company’s Articles of Association, as previously approved by shareholders.
Payments for loss of office (audited information)
There were no payments for loss of office during the year.
Percentage change in remuneration of Group
CEO
The table below sets out the increase in the basic salary,
bonus and benefits of the Group CEO and that of the wider workforce. The UK employee workforce was chosen as a suitable comparator
group, as all EDs are based in the UK (albeit with global responsibilities), and pay changes across the Group vary widely depending
on local market conditions.
9
|
Percentage change in remuneration of Group CEO
|
|
|
|
|
|
% change in basic salary 2014–2015
|
% change in bonus
2014–2015
|
% change in benefits 2014–2015
|
|
Group CEO
|
0%
|
40%
|
24%
|
|
All UK-based employees
|
5%
|
-4%
|
12%
|
|
Notes
Basic salary increase for the CEO was
nil, whereas the average UK employee had an increase of 5%. Mark’s bonus level was increased, as approved by shareholders
in 2015 and his outcome reflects strong performance across the Group. In comparison, for the major business units, performance
during 2015 continued to be strong, but was not as strong as the outstanding results achieved in 2014, and the lower bonus outcomes
for the individuals in these business units reflect that.
Historical TSR performance and Group
CEO remuneration outcomes
Table 10 compares the TSR performance of the Company over the
past seven years with the TSR of the FTSE 100 Return Index. This index has been chosen because it is a recognised equity market
index of which Aviva is a member. In addition, median TSR performance for the LTIP comparator group has been shown. The companies
which comprise the current LTIP comparator group for TSR purposes are listed in the ‘TSR Targets’ section on page
80.
10
|
|
Aviva plc seven-year TSR performance against the FTSE 100 Index and the median of the Comparator Group
|
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.
11
|
|
Historical Group CEO remuneration outcomes
|
|
|
Group CEO
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
|
Annual bonus payout (as a % of maximum opportunity)
|
Mark Wilson
|
|
—
|
—
|
—
|
75%
|
86.7%
|
91%
|
|
Andrew Moss
|
74.2%
|
74.3%
|
81.0%
|
—
|
—
|
—
|
—
|
|
|
|
|
|
|
|
|
|
|
|
LTIP vesting (as a % of maximum opportunity)
|
Mark Wilson
|
|
—
|
—
|
—
|
—
|
—
|
53%
|
|
Andrew Moss
|
50.0%
|
72.3%
|
81.7%
|
—
|
—
|
—
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Group CEO Single figure of remuneration (£000)
|
Mark Wilson
1
|
|
—
|
—
|
—
|
2,615
|
2,600
|
5,670
|
|
Andrew Moss
2
|
2,591
|
2,748
|
3,477
|
554
|
—
|
—
|
—
|
|
Notes
|
1
|
Mark joined the Board as an ED with effect from 1 December 2012, and became Group CEO on 1 January 2013. He received no emoluments
in respect of 2012.
|
|
2
|
Andrew Moss resigned from the Board with effect from 8 May 2012 and left the Company on 31 May 2012.
|
Relative
importance of spend on pay
The table below outlines adjusted operating profit before
tax attributable to shareholders’ profits after integration and restructuring costs, dividends paid to shareholders and
buybacks compared to overall spend on pay (in total and per capita). The measure of profit has been chosen as a straightforward
measure reflecting the performance of the Company, showing both gross income, and also taking into account integration and restructuring
costs.
12
|
|
Relative importance of spend on pay
|
|
|
|
|
|
Restated
Year end
31 December 2014
£m
|
Year end
31 December 2015
£m
|
%
change
|
|
Adjusted operating profit before tax
1,2
|
2,073
|
2,286
|
10%
|
|
Dividends paid
3
|
449
|
635
|
41%
|
|
Share buybacks
4
|
—
|
—
|
—
|
|
Total staff costs
5
|
1,534
|
1,628
|
6%
|
|
Notes
|
1
|
Adjusted 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.
|
|
2
|
Adjusted operating profit before tax attributable to shareholders’ profits for continuing operations after integration
and restructuring costs.
|
|
3
|
The total cost of ordinary dividends paid to shareholders.
|
|
4
|
There were no share buybacks in 2014 or 2015.
|
|
5
|
Total staff costs from continuing operations includes wages and salaries, social security costs, post-retirement obligations,
profit sharing and incentive plans, equity compensation plans and termination benefits. The average number of employees in continuing
operations was 26,937 (2014) and 30,007 (2015).
|
External Board appointments
Tom Stoddard is a Trustee of Trout Unlimited (a non-profit conservation
organisation).
Andy Briggs is a Director of the Association of British Insurers.
Neither Tom nor Andy received any fees or other compensation for these
appointments.
Statement of directors’ shareholdings
and share interests (audited information)
Executive directors’ share ownership requirements
The Company requires the Group CEO to build a shareholding in the
Company equivalent to 300% of basic salary and each ED to build a shareholding in the Company equivalent to 150% of basic salary.
|
·
|
The EDs are required to retain 50% of the net shares released from deferred annual bonuses and LTIPs until the shareholding
requirement is met
|
|
·
|
Shareholding requirement needs to be built up over a five-year period
|
|
·
|
Unvested share awards, including shares held in connection with bonus deferrals, are not taken into account in applying this
test
|
13
|
|
Executive Directors – share ownership requirements
|
|
|
|
|
Shares held
|
|
Options held
|
|
|
|
|
Executive Directors
|
Owned
outright
1
|
Unvested and
subject to
performance
conditions
2
|
Unvested and
subject to
continued
employment
3
|
Unvested and
subject to
continued
employment
|
Vested but
not exercised
4
|
Shareholding
requirement
(% of salary)
|
Current
shareholding
5
(% of salary)
|
Requirement
met
|
|
Mark Wilson
|
150,000
|
2,105,779
|
300,897
|
3,615
|
—
|
300
|
79
|
No
|
|
Tom Stoddard
|
28,487
|
579,863
|
207,611
|
—
|
—
|
150
|
22
|
No
|
|
Andy Briggs
|
222,903
|
276,014
|
—
|
2,368
|
—
|
150
|
166
|
Yes
|
|
Other PDMRs
6
|
742,947
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
|
Notes
|
1
|
Shares ‘Owned outright’ are the directors’ beneficial holdings in the ordinary shares of the Company. This
information includes holdings of any connected persons.
|
|
2
|
Shares ‘Unvested and subject to performance conditions’ are awards granted under the Aviva LTIP which vest only
if the performance conditions are achieved.
|
|
3
|
Shares ‘Unvested and subject to continued employment’ are awards arising through the ABP and CFO award in the case
of Tom. 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.
|
|
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.
|
|
6
|
Persons Discharging Managerial Responsibility (PDMRs) under the UK Listing Rules includes the directors of Aviva plc and other
senior managers. Table 13 shows the aggregate shareholding of PDMRs other than the directors at 31 December 2015. A PDMR also holds
19,909 7 7/8% preference shares and 17,634 8 7/8% preference shares as at 24 March 2016.
|
There was a disposal of 34,400 Aviva shares from
the PDMR interest in the period 1 January 2016 to 24 March 2016. In the same period the interests of Other PDMRs has
increased by 150 ordinary shares as a result of monthly purchases under the AESOP.
14
|
Non-Executive Directors’ shareholdings
1
|
|
|
|
|
1 January 2015
|
31 December 2015
|
|
Sir Adrian Montague
|
22,068
|
25,266
|
|
Sir Malcolm Williamson
|
—
|
41,421
|
|
Glyn Barker
|
11,700
|
11,700
|
|
Patricia Cross
|
7,000
|
7,000
|
|
Belén Romana García
|
—
|
—
|
|
Michael Hawker
|
20,000
|
20,000
|
|
Michael Mire
|
7,500
|
7,500
|
|
Bob Stein
2
|
17,000
|
21,000
|
|
Scott Wheway
|
13,579
|
13,579
|
|
Former non-executive directors
|
|
|
|
John McFarlane
3
|
10,000
|
10,000
|
|
Gay Huey Evans
3
|
5,000
|
5,000
|
|
Notes
|
1
|
This information includes holdings of any connected persons.
|
|
2
|
Bob Stein’s holding includes 2,000 ADRs (representing 4,000 ordinary shares).
|
|
3
|
John McFarlane and Gay Huey Evans stepped down from the Board at the 2015 AGM. Shares held are as at 29 April 2015 being the
date the former NEDs stepped down from the Board.
|
Claudia Arney was appointed to the Board on 8
February 2016 and on 14 March 2016 acquired 14,000 shares. There were no further changes to the current NEDs’
interests in Aviva shares during the period 1 January 2016 to 24 March 2016.
Share awards and share options (audited
information)
Details of the EDs who were in office for any part of the
2015 financial year and hold or held outstanding share awards or options over ordinary shares of the Company pursuant to the Company’s
share based incentive plans are set out in the below table. Savings-related share options refer to options granted under the HMRC
tax advantaged Aviva 2007 SAYE Plan and are normally exercisable during the six month period following the end of the relevant
(3, 5 or 7 year) savings contract.
15
|
LTIP, ABP, CFO Award and options over Aviva Shares
|
|
|
|
At 1 January
2015
Number
|
Options/
Awards
granted
during year
1
Number
|
Options/
Awards
exercised/
vesting
during year
Number
|
Options/
Awards
lapsing
during
year
Number
|
At
31 December
2015
2
Number
|
Market price
at date
awards
Granted
3
Pence
|
Exercise
Price
(Options)
Pence
|
Market price
at date
awards
vested/option
exercised
Pence
|
Normal
Vesting
Date/Exercise
Period
6
|
|
Mark Wilson
|
|
|
|
|
|
|
|
|
|
|
Aviva long term incentive plan
4, 5
|
|
|
|
|
|
|
|
|
|
|
2013
|
983,277
|
—
|
—
|
—
|
983,277
|
294.20
|
|
—
|
Apr-16
|
|
2014
|
601,226
|
—
|
—
|
—
|
601,226
|
476.40
|
|
—
|
Mar-17
|
|
2015
|
—
|
521,276
|
—
|
—
|
521,276
|
535.00
|
|
—
|
Mar-18
|
|
Aviva annual bonus plan
|
|
|
|
|
|
|
|
|
|
|
2014
|
150,306
|
—
|
—
|
—
|
150,306
|
476.40
|
|
—
|
Mar-17
|
|
2015
|
—
|
150,591
|
—
|
—
|
150,591
|
535.00
|
|
—
|
Mar-18
|
|
Savings-related options 2014
7
|
3,615
|
—
|
—
|
—
|
3,615
|
—
|
419.00
|
—
|
Dec 19 - May 20
|
|
Tom Stoddard
|
|
|
|
|
|
|
|
|
|
|
Aviva long term incentive plan
4, 5
|
|
|
|
|
|
|
|
|
|
|
2014
|
—
|
310,582
|
—
|
—
|
310,582
|
564.50
|
|
—
|
Mar-17
|
|
2015
|
—
|
269,281
|
—
|
—
|
269,281
|
535.00
|
|
—
|
Mar-18
|
|
Aviva annual bonus plan
|
|
|
|
|
|
|
|
|
|
|
2015
|
—
|
62,228
|
—
|
—
|
62,228
|
535.00
|
|
—
|
Mar-18
|
|
Aviva Chief Financial Officer Award 2014
|
—
|
196,463
|
53,033
8
|
—
|
145,383
|
564.50
|
|
523.00
|
Jul 15 -
Jul 17
|
|
Andy Briggs
|
|
|
|
|
|
|
|
|
|
|
Aviva long term incentive plan
4, 5
|
|
|
|
|
|
|
|
|
|
|
2015
|
—
|
276,014
|
—
|
—
|
276,014
|
535.00
|
|
—
|
Mar-18
|
|
Savings-related options 2015
7
|
—
|
2,368
|
—
|
—
|
2,368
|
—
|
380.00
|
—
|
Dec 18 -May 19
|
|
Other PDMRs
9
|
3,820,264
|
2,357,403
|
719,164
|
363,028
|
5,095,475
|
N/A
|
N/A
|
N/A
|
N/A
|
|
Notes
|
1
|
The aggregate net value of share awards granted to the directors in the period was
£9.7
million
(
2014: £3.6 million
). The net value has been calculated by reference to the closing middle-market price
of an ordinary share of the Company at the date of grant.
|
|
2
|
The information given in this column is at 31 December 2015 or the date on which a director ceased to be a director of the
Company.
|
|
3
|
The actual price used to calculate the ABP and LTIP awards is based on a three day average closing middle-market price of an
ordinary share of the Company, prior to grant date. These were in 2013: 299.00 pence, 2014: 489.00 pence and 2015: 564.00 pence.
The actual price used to calculate the CFO Award is based on a three day average closing middle-market price of an ordinary share
of the Company, prior to employment start date, which was 509.00 pence.
|
|
4
|
For the 2013 and 2014 LTIP grant, the TSR comparator group consisted of the following companies: Aegon, Allianz, Assicurazioni
Generali, Axa, CNP Assurances, Direct Line Group, Friends Life Group, Legal & General, Met Life, Old Mutual, Prudential, RSA
Insurance Group, Standard Life and Zurich Financial. For the 2015 LTIP grant, the TSR comparator group consisted of the following
companies: Aegon, Allianz, Assicurazioni Generali, Axa, CNP Assurances, Direct Line Group, Legal & General, MetLife, NN Group,
Old Mutual, Prudential, RSA Insurance Group, Standard Life and Zurich Financial.
|
|
5
|
The performance periods for these awards begin at the commencement of the financial year in which the award is granted.
|
|
6
|
Any unexercised options will lapse at the end of the exercise period.
|
|
7
|
Options are not subject to performance conditions (the savings related options being granted under the SAYE plan). The option
price was fixed by reference to a three day average closing middle-market price of an ordinary share of the Company, prior to grant
date, with a discount of 20% as permitted under the SAYE plan.
|
|
8
|
The shares compromised in these vested awards include shares issued in lieu of dividends accrued during the deferral period.
|
|
9
|
See note 6, of table 13 for the definition of Other PDMRs. Table 15 shows the aggregate shares awards for PDMRs other
than the directors for the period in which they were designated as PDMRs during 2015. The market prices on the day these
awards were granted were as per footnote 3.
|
All employee share plans
EDs are eligible to participate in two HMRC tax advantaged all employee
share plans on the same basis as other eligible employees.
Details of options granted to EDs under these plans are included
in table 15. More information around HMRC tax advantaged plans can be found in note 27.
Dilution
Awards granted under the Aviva all employee share plans are currently
met by issuing new shares as agreed by the Board. Shares are still held in employee trusts, details of which are set out in note
28.
The Company monitors the number of shares issued under the Aviva employee
share plans and their impact on dilution limits. The Company’s usage of shares compared to the relevant dilution limits set
by the Investment Association in respect of all share plans (10% in any rolling ten-year period) and executive share plans (5%
in any rolling ten-year period) was 2.16% and 1.32% respectively on 31 December 2015.
Governance
Regulatory remuneration code
The Financial Conduct Authority’s (FCA) remuneration code applies
to Aviva Investors and two small ‘firms’ (as defined by the FCA) within the UK & Ireland Life business. From 1
January 2014 the majority of these firms are subject to the Capital Requirements Directive IV (CRD IV) and the Remuneration Code
(SYSC 19A), having previously been subject to the Capital Requirements Directive III (which remains the active regulatory directive
for two BIPRU ‘firms’). Additionally, there are three Aviva Investors ‘firms’ subject to the Alternative
Investment Fund Management Directive (AIFMD). The FCA remuneration requirements of AIFMD take effect in the first full performance
year following registration i.e. January – December 2015. Remuneration Code requirements include an annual disclosure. For
Aviva Investors this can be found in the Chapter 4 of the Pillar 3 Disclosure which can be found at www.avivainvestors.com/about_us/our_corporate_governance/index.htm
and for the UK & Ireland Life firms at www.aviva.com/media/news/item/fsa-remuneration-code-disclosure-17350/.
Aviva’s reward principles and arrangements are designed to incentivise
and reward employees for achieving stated business goals in a manner that is consistent with the Company’s approach to sound
and effective risk management.
Statement of voting at AGM
The result of the shareholder vote at the Company’s
2015 AGM in respect of the 2014 DRR is set out in the table below.
16
|
Result of the vote at 2015 AGM
|
|
|
Percentage of Votes Cast
|
|
|
|
For
|
Against
|
Votes withheld
|
|
Directors’ Remuneration Policy
|
97.46%
|
2.54%
|
82,821,178
|
|
Directors’ Remuneration Report
|
98.68%
|
1.32%
|
12,079,913
|
|
Following the 2015 AGM, the Committee Chairman continued
dialogue with major institutional shareholders, including consulting on the proposed adjustment to LTIP targets.
Implementation of Remuneration Policy in
2016
The implementation of the policy will be consistent with that outlined
in the Policy Report, with no significant changes from how the Policy was implemented during 2015.
Basic salaries
The basic salary for the Group CEO £1,009,400 per annum.
The basic salary for the CFO £695,250 per annum.
The basic salary for the CEO UK Life £712,631 per annum.
Annual bonus
The maximum annual bonus opportunity will be in line with the levels
set out in the Policy section of this report (i.e. 200% of salary for the Group CEO and 150% of salary for other EDs). As discussed
in the Chairman’s letter, from 2016, a target is being introduced linked to our strategic progress on expanding our digital
interface with our customers. The performance measures and weightings for the 2016 bonus will therefore be as follows:
|
·
|
IFRS Adjusted Earnings per Share (EPS) (22.50%)
|
|
·
|
Cash Remittance (18.75%)
|
|
·
|
Economic Surplus generation (11.25%)
|
|
·
|
Progress on strategy – Digital (25.00%)
|
For the financial element, a quality of earnings assessment will be
undertaken by the Remuneration Committee to provide assurance that bonus payouts appropriately reflect the shareholder experience.
Performance against a number of other non-financial measures will
be considered when determining bonus payouts (employee engagement, customer and risk). In addition, each ED’s personal performance
during the year will be taken into account.
LTIP
LTIP grants in 2016 will be in line with the levels set out in the
Policy report. The CEO will receive an award of 300% of salary and the other two EDs will receive an award of 225% of salary. The
LTIP will vest subject to performance against two equally weighted performance measures, absolute ROE and relative TSR performance,
which have been chosen to reflect shareholders’ long-term interests.
Approach to Non-Executive Directors’ fees for 2016
NED fees were last reviewed in March 2016. No changes are
made to the current fee levels, as set out in the table below:
17
|
Non-Executive Directors’ fees
|
|
|
|
Role
|
Fee from
1 April 2016
|
Fee from
1 April 2015
|
|
Chairman of the Company
1
|
£550,000
|
£550,000
|
|
Board membership fee
|
£70,000
|
£70,000
|
|
Additional fees are paid as follows:
|
|
|
|
Senior Independent Director
|
£35,000
|
£35,000
|
|
Committee Chairman (inclusive of committee membership fee)
|
|
|
|
– Audit
|
£45,000
|
£45,000
|
|
– Governance
|
£35,000
|
£35,000
|
|
– Remuneration
|
£35,000
|
£35,000
|
|
– Risk
|
£45,000
|
£45,000
|
|
Committee membership
|
|
|
|
– Audit
|
£15,000
|
£15,000
|
|
– Governance
|
£12,500
|
£12,500
|
|
– Nomination
|
£7,500
|
£7,500
|
|
– Remuneration
|
£12,500
|
£12,500
|
|
– Risk
|
£15,000
|
£15,000
|
|
Notes
|
1
|
Inclusive of Board membership fee and any committee membership fees.
|
Directors’
Remuneration
Policy
This section sets out Aviva’s remuneration Policy for
directors, in accordance with the requirements of the Companies Act 2006 (as amended) and the Large & Medium Sized Companies
and Groups (Accounts and Reports) Regulations 2008 (as amended).
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.
Alignment of Group strategy with executive remuneration
The Committee considers alignment between Group strategy and the remuneration
of its EDs is critical. Our Remuneration Policy provides market competitive remuneration, and incentivises EDs to achieve both
the annual business plan and the longer-term strategic objectives of the Group. Significant levels of deferral and an aggregate
shareholding requirement align EDs’ interests with those of shareholders and aid retention of key personnel. As well as rewarding
the achievement of objectives, variable remuneration can be zero if performance thresholds are not met.
Table 18 below provides an overview of our Remuneration Policy
for EDs. For an overview of the Remuneration Policy for NEDs see table 20.
18
|
Remuneration Policy for Executive Directors – overview
|
|
Element
|
Purpose and link to strategy
|
Operation and recovery provisions
(if applicable)
|
Maximum opportunity
|
Performance measures
|
|
Basic salary
|
To provide core market related pay to attract and retain the required level of talent.
|
Annual review, with changes normally taking effect
from 1 April each year. The review is informed by:
·
Relevant pay data including market practice among relevant FTSE listed companies of comparable size to Aviva in terms of
market capitalisation, large European and global insurers; and UK financial services companies
·
Levels of increase for the broader UK employee population
·
Individual and business performance
|
Current basic salaries are disclosed on page 74.
There is no maximum increase within the Policy. However,
basic salary increases take account of the average basic salary increase awarded to UK employees. Different levels of increase
may be agreed in certain circumstances at the Committee’s discretion, such as:
·
An increase in job scope and responsibility
·
Development of the individual in the role
·
A significant increase in the size, value or complexity of the Group
|
Any movement in basic salary takes account of performance of the individual and the Group.
|
|
Annual bonus
|
To incentivise EDs to achieve the annual business
plan.
To reward EDs who achieve the Company’s strategic
objectives and demonstrate the Aviva values and behaviours.
Deferral provides alignment with shareholder interests
and aids retention of key personnel.
|
Awards are based on performance in the year. Targets
are set annually and pay-out levels are determined by the Committee based on performance against those targets.
Two-thirds of any bonus awarded is deferred into shares
which vest after three years.
Additional shares are awarded at vesting in lieu of
dividends paid on the deferred shares.
Cash and deferred awards are subject to malus and
clawback. Details of when these may be applied are set out in the notes below.
The Committee retains discretion to amend annual bonus
pay-outs for a range of factors, including financial, market and other considerations. The Committee will exercise its discretion
to reduce otherwise unreasonable reward outcomes. If extraordinary circumstances were to arise where the Committee felt an adjustment
upwards is warranted, it would consult with major stakeholders before making any adjustment. Any exceptional adjustment would not
exceed the stated maximum.
|
Maximum bonus opportunity for the Group CEO is 200%
of basic salary with 100% of basic salary payable for performance in line with target.
Maximum bonus opportunity for other EDs is 150% of
basic salary with 100% of basic salary payable for performance in line with target.
Threshold performance would result in a bonus payment
of no more than 25% of basic salary.
Performance below threshold would result in no bonus
being paid.
|
Performance is assessed against a range of relevant financial, employee, customer and risk targets designed to incentivise the achievement of our strategy, as well as individual strategic objectives as set by the Committee. Although financial performance is the major factor in considering overall expenditure on bonuses, performance against non-financial measures including behaviours in line with our values will also be taken into consideration.
|
|
18
|
Remuneration Policy for Executive Directors – overview
|
|
Element
|
Purpose and link to strategy
|
Operation and recovery provisions
(if applicable)
|
Maximum opportunity
|
Performance measures
|
|
Long-term incentive
plan
|
To motivate EDs to achieve the Company’s longer-term objectives, to align EDs’ interests with those of shareholders and to aid the retention of key personnel.
|
Shares are awarded which vest dependent on the achievement
of performance conditions over a three year period. Additional shares are awarded at vesting in lieu of dividends on any shares
which vest.
Shares are typically subject to a two year holding period
after vesting, creating a total of five years between the award being granted, and the first opportunity to sell.
Awards are subject to malus and clawback. Details of when
these may be applied are set out in the notes below.
The Committee has discretion to amend vesting levels to prevent
unreasonable outcomes, which it may use taking into account a range of factors, including the management of risk and good governance
and, in all cases, the experience of shareholders.
|
The plan rules allow for awards to be made up to a maximum
of 350% of basic salary.
Threshold performance would result in a vesting level
of 20% of maximum.
Performance below threshold on both targets would result
in the award lapsing in its entirety.
|
Currently, performance targets over three years are:
·
50% vest based on targets for absolute Return on Equity (ROE) performance
·
50% vest based on relative Total Shareholder Return (TSR) against a comparator group
Actual targets for ROE and the appropriate TSR comparator group
are agreed by the Committee annually and disclosed in the annual remuneration report section.
|
|
Pension
|
To give a market competitive level of provision for post-retirement income.
|
EDs are eligible to participate in a defined contribution plan up to the annual limit. Any amounts above the annual or lifetime limits are paid in cash.
|
If suitable employee contributions are made, employer contributes 28% of basic salary (into pension or as cash as applicable).
|
N/A
|
|
Benefits
|
To provide EDs with a suitable but reasonable package of benefits
as part of a competitive remuneration package. This involves both core executive benefits, and the opportunity to participate in
flexible benefits programmes offered by the Company (via salary sacrifice).
This enables us to attract and retain the right level of talent
necessary to deliver the Company’s strategy.
|
Benefits are provided on a market related basis. The Company
reserves the right to deliver benefits to EDs depending on their individual circumstances, which may include a cash car allowance,
life insurance and private medical insurance. In the case of non-UK executives, the Committee may consider additional allowances
in line with standard relevant market practice.
EDs employed under UK contracts are eligible to participate
in any HMRC approved all employee share plans operated by the Company on the same basis as other eligible employees.
|
Set at a level which the Committee considers appropriate
against comparable roles in companies of a similar size and complexity to provide a reasonable level of benefit.
Costs would normally be limited to providing a cash car
allowance, private medical insurance, life insurance, and reasonable travel benefits, including the tax cost where applicable.
In addition, there may be one-off or exceptional items on a case by case basis, which would be disclosed in the DRR.
|
N/A
|
|
Relocation and mobility
|
To assist with mobility across the Group to ensure the appropriate talent is available to execute strategy locally.
|
Employees who are relocated or reassigned from one location to another receive relevant benefits to assist them and their dependants in moving home and settling in to the new location.
|
Dependent on location and family size, benefits are market
related and time bound. They are not compensation for performing the role but to defray costs of a relocation or residence outside
the home country.
The Committee would pay no more than it judged reasonably necessary,
in the light of all applicable circumstances.
|
N/A
|
|
Shareholding requirement
|
To align EDs’ interests with those of shareholders.
|
A requirement to build a shareholding in the Company equivalent
to 300% of basic salary for the Group CEO and 150% of basic salary for other EDs.
This shareholding is normally to be built up over a period
not exceeding 5 years (subject to the Committee’s discretion where personal circumstances dictate).
|
N/A
|
N/A
|
|
Notes to the table:
Performance measures
For the annual bonus, performance measures are chosen to align to
the Group’s KPIs and include financial, risk, employee and customer measures. Achievement against individual strategic objectives
is also taken into account.
LTIP performance measures are chosen to provide an indication
of both absolute and relative return generated for shareholders. In terms of target setting, a number of reference points
are taken into account each year including, but not limited to, the Group’s business plan and external market expectations
of the Company. Maximum payouts require exceptional performance that significantly exceeds performance targets or expected performance,
under both the annual bonus and LTIP.
Malus and Clawback
The circumstances when malus and clawback may apply include (but are
not limited to) where the Committee considers that the employee concerned has been involved in or partially or wholly responsible
for:
|
·
|
A materially adverse misstatement of the Company’s financial statements, or a misleading representation of performance;
or
|
|
·
|
A significant failure of risk management and/or controls; or
|
|
·
|
A scenario or event which causes material reputational damage to the Company; or
|
|
·
|
Misconduct which, in the opinion of the Committee, ought to result in the complete or partial lapse of an award
|
The clawback period runs for two years from the date of vesting (or
from the date of payment in the case of annual bonus awards).
Clawback was introduced in 2015 so applies to the annual
bonus from 2015 (paid March 2016) and the LTIP awards granted in 2015 and any future awards.
Discretions
The discretions the Committee has in relation to the operation of
the ABP and LTIP are set out in the plan rules. These include (but are not limited to) the ability to set additional
conditions (and the discretion to change or waive those conditions) in exceptional circumstances. In relation to the LTIP, in accordance
with its terms, the Committee has discretion in relation to vesting and in exceptional circumstances to waive or change a performance
condition if anything happens which causes the Committee reasonably to consider it appropriate to do so. Any use of the discretions
will be disclosed, where relevant, in the annual report and, where appropriate be subject to consultation with Aviva’s shareholders.
Change in control
In the event of a change in control, unless a new award is granted
in exchange for an existing award, or if there is a significant corporate event like a demerger, awards under the LTIP would normally
vest to the extent that the performance conditions have been satisfied as at the date of the change in control, and unless the
Committee decides otherwise, would be pro-rated to reflect the time between the start of the performance period and the change
in control. Awards under the ABP would normally vest on the date of the change in control and may vest if there is a significant
corporate event.
Consistency of executive Remuneration Policy across the
Group
The Remuneration Policy for our EDs is designed as part of the remuneration
philosophy and principles that underpin remuneration for the wider Group. Remuneration arrangements for employees below the EDs
take account of the seniority and nature of the role, individual performance and local market practice. The components and levels
of remuneration for different employees may therefore differ from the Policy for EDs. Any such elements are reviewed against market
practice and approved in line with internal guidelines and frameworks.
Differentiation in reward outcomes based on performance and
behaviour that is consistent with the Aviva values is a feature of how Aviva operates its annual bonus plan for its senior leaders
and managers globally. A disciplined approach is taken to moderation across the Company in order to recognise and reward the key
contributors. The allocation of LTIP awards also involves strong differentiation, with expected contribution and ability to collaborate
effectively in implementation of the strategy driving award levels.
The Committee reserves the right to make any remuneration
payments and payments for loss of office (including exercising any discretions available to it in connection with such payments)
notwithstanding that they are not in line with the Policy set out above where the terms of the payment were agreed (i) before the
Policy came into effect or (ii) at a time when the relevant individual was not a director of the Company and, in the opinion of
the Committee, the payment was not in consideration for the individual becoming a director of the Company. For these purposes “payments”
includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment
are “agreed” at the time the award is granted.
Approach to recruitment remuneration
On hiring a new ED, the Committee would align the proposed remuneration
package with our Remuneration Policy.
In determining the actual remuneration for a new ED, the
Committee would consider the package in totality, taking into account elements such as the likely contribution of the individual,
local market benchmarks, remuneration practice, and the existing remuneration of other senior executives. The Committee would ensure
any arrangements agreed would be in the best interests of Aviva and its shareholders. It would seek not to pay more than necessary
to secure the right candidate.
The Committee may make awards on hiring an external candidate
to ‘buyout’ remuneration arrangements forfeited on leaving a previous employer. In doing so, the Committee would take
account of relevant factors including any performance conditions attached to these awards, the form in which it was paid (e.g.
cash or shares) and the timeframe of awards. The Committee considers that a buyout award is a significant investment in human
capital by Aviva, and any buyout decision will involve careful consideration of the contribution that is expected from the individual.
Buyout awards would be awarded on a “like for like“ basis compared to remuneration being forfeited, and would be capped
to reflect the value being forfeited.
The maximum level of variable pay which could be awarded
to a new ED, excluding any buyouts, would be in line with the Policy set out above and would therefore be no more than 550% of
basic salary for the Group CEO (200% of basic salary annual bonus opportunity and 350% of basic salary as the face value of a LTIP
grant) and 500% of basic salary for other EDs (150% of basic salary annual bonus opportunity and 350% of basic salary as the face
value of a LTIP grant).
All other elements of remuneration will also be in line with
the Policy set out above.
Should the Company have any prior commitments outside of
this Policy in respect of an employee promoted internally to an ED position, the Committee may continue to honour these for a period
of time. Where an ED is appointed from within the organisation, the normal policy of the Company is that any legacy arrangements
would be honoured in line with the original terms and conditions. Similarly, if an ED is appointed following Aviva’s acquisition
of, or merger with, another company, legacy terms and conditions may be honoured.
On hiring a new NED, the Committee would align the remuneration
package with the Remuneration Policy for NEDs, outlined in table 20, including fees and travel benefits.
Illustration of the Policy
The charts below illustrate how much EDs could earn under different
performance scenarios in one financial year:
|
·
|
Minimum – basic salary, pension or cash in lieu of pension and benefits, no bonus and no vesting of the LTIP
|
|
·
|
Target – basic salary, pension or cash in lieu of pension, benefits, and:
|
|
–
|
A bonus of 100% and an LTIP of 300% of basic salary (with notional LTIP vesting at 50% of maximum) for the Group CEO;
|
|
–
|
A bonus of 100% and an LTIP of 225% of basic salary (with notional LTIP vesting at 50% of maximum) for the CFO; and
|
|
–
|
A bonus of 100% and an LTIP of 225% of basic salary (with notional LTIP vesting at 50% of maximum) for the CEO UK Life.
|
|
·
|
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;
|
|
–
|
A bonus of 150% and an LTIP of 225% of basic salary (with notional LTIP vesting at maximum) for the CFO; and
|
|
–
|
A bonus of 150% and an LTIP of 225% of basic salary (with notional LTIP vesting at maximum) for the CEO UK Life.
|
Notes to the charts
|
·
|
Fixed pay consists of basic salary, pension as described in table 18, and estimated value of benefits provided under the Remuneration
Policy, excluding any one offs. This therefore excludes the relocation assistance for Tom, in connection with his relocation
to the UK. Actual figures may vary in future years.
|
|
·
|
The value of the LTIP and deferred element of the annual bonus assumes a constant share price and does not include additional
shares awarded in lieu of dividends, that may have been accrued during the vesting period.
|
|
·
|
LTIP as awarded in 2016.
|
Employment contracts and letters of appointment
ED employment contracts and NED letters of appointment are
available for inspection at the Company’s registered office during normal hours of business, and at the place of the
Company’s 2016 AGM from 10.45am on 4 May 2016 until the close of the meeting.
The key employment terms and conditions of the current EDs,
and those who served during the year, as stipulated in their employment contracts, are set out in the table 19 below.
19
|
Executive Directors’ conditions of employment
|
|
|
Provision
|
Policy
|
|
Notice period
By the ED
By the Company
|
6 months.
12 months, rolling. No notice or payment in lieu of notice to be paid where the Company terminates for cause.
|
|
Termination payment
|
Pay in lieu of notice up to a maximum of 12 months’
basic salary.
Any payment is subject to phasing and mitigation requirements.
An ED would be expected to mitigate the loss of office by seeking alternative employment. Any payments in lieu of notice would
be reduced, potentially to zero, by any salary received from such employment.
|
|
Remuneration and benefits
|
The operation of the annual bonus and LTIP is at the Company’s discretion.
|
|
Expenses
|
Reimbursement of expenses reasonably incurred in accordance with their duties.
|
|
Car allowance
|
A cash car allowance is received, as varied from time to time.
|
|
Holiday entitlement
|
30 working days plus public holidays.
|
|
Private medical insurance
|
Private medical insurance is provided for the ED and their family. The ED can choose to opt out of this benefit or take a lower level of cover. However, no payments are made in lieu of reduced or no cover.
|
|
Other benefits
|
Other benefits include private medical insurance and participation in the Company’s staff pension scheme.
|
|
Sickness
|
100% of basic salary for 52 weeks, and 75% thereafter for a further 52 weeks.
|
|
Non-compete
|
During employment and for six months after leaving (less any period of garden leave) without the prior written consent of the Company.
|
|
Contract dates
|
Director:
Mark Wilson
Tom Stoddard
Andy Briggs
|
Date current contract commenced:
1 January 2013
28 April 2014
13 April 2015
|
|
Policy on payment for loss of office
There are no pre-determined ED special provisions for compensation
for loss of office. The Committee has the ability to exercise its discretion on the final amount actually paid. Any compensation
would be based on basic salary, pension entitlement and other contractual benefits during the notice period, or a payment made
in lieu of notice, depending on whether the notice is worked.
Where notice of termination of a contract is given, payments to the
ED would continue for the period worked during the notice period. Alternatively, the contract may be terminated and phased monthly
payments made in lieu of notice for, or for the balance of, the 12 months’ notice period. During this period, EDs would be
expected to mitigate their loss by seeking alternative employment. Payments in lieu of notice would be reduced by the salary received
from any alternative employment, potentially to zero. The Company would typically make a reasonable contribution towards an ED’s
legal fees in connection with advice on the terms of their departure.
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.
The treatment of leavers under our ABP and LTIP is determined by
the rules of the relevant plans. Good leaver status under these plans would be granted in the event of, for example, the death
of an ED, or their departure on ill health grounds. Good leaver status for other leaving reasons is at the discretion of the Committee,
taking into account the circumstances of the individual’s departure, but would typically include planned retirement. In
circumstances where good leaver status has been granted, awards may still be subject to malus and clawback in the event that inappropriate
conduct of the ED is subsequently discovered post departure. If good leaver status is not granted, all outstanding awards will
lapse.
In the case of LTIPs, where the Committee determines EDs to be good
leavers, vesting is normally based on the extent to which performance conditions have been met at the end of the relevant performance
period, and the proportion of the award that vests is pro-rated for the time from the date of grant to final date of service (unless
the Committee decides otherwise). Any decision not to apply this would only be made in exceptional circumstances, and would be
fully disclosed. It is not the practice to allow such treatment.
Consideration of wider employee pay and
shareholder views
When determining the Remuneration Policy and arrangements for our
EDs, the Committee considers:
|
·
|
Pay and employment conditions elsewhere in the Group to ensure that pay structures are suitably aligned and that levels of
remuneration remain appropriate. The Committee reviews levels of basic salary increases for other employees and executives based
in the UK. It reviews changes in overall bonus pool funding and long-term incentive grants. The Committee does not directly consult
with employees on pay issues but it does consider feedback from sources including the employee opinion survey. The Committee also
takes into account information provided by the people function and external advisers
|
|
·
|
Its ongoing dialogue with shareholders. It seeks shareholder views and takes them into account when any significant changes
are being proposed to remuneration arrangements and when formulating and implementing Remuneration Policy. For example, during
2014 and continuing in 2015, the Committee has had detailed engagement with our largest shareholders to discuss amendments to targets
for existing LTIP awards and 2015 annual bonus plan following the acquisition of FLG
|
Non-Executive Directors
The table below sets out details of our Remuneration Policy
for NEDs.
20
|
Remuneration Policy for Non-Executive Directors – overview
|
|
Element
|
Purpose and link
to strategy
|
Operation
|
Maximum opportunity
|
Performance measures
|
|
Chairman and NEDs’ fees
|
To attract individuals with the required range of skills and experience to serve as a Chairman and as a NED.
|
NEDs receive a basic annual fee in respect of their Board
duties. Further fees are paid for membership and, where appropriate, chairmanship of Board committees.
The Chairman receives a fixed annual fee. Fees are reviewed
annually taking into account market data and trends and the scope of specific Board duties.
The Chairman and NEDs do not participate in any incentive
or performance plans or pension arrangements and do not receive an expense allowance.
NEDs are reimbursed for reasonable expenses, and any tax arising
on those expenses is settled directly by Aviva. To the extent that these are deemed taxable benefits, they will be included in
the annual remuneration report, as required.
|
The Company’s Articles of Association provide that the total aggregate remuneration paid to the Chairman of the Company and NEDs will be determined by the Board within the limits set by shareholders and detailed in the Company’s Articles of Association.
|
N/A
|
|
Chairman’s Travel Benefits
|
To provide the Chairman with suitable travel arrangements for him to discharge his duties effectively.
|
The Chairman has access to a company car and driver for business use. Where these are deemed a taxable benefit, the tax is paid by the Company.
|
N/A
|
N/A
|
|
NED Travel and Accommodation
|
To reimburse NEDs for appropriate business travel and accommodation, including attending Board and committee meetings.
|
Reasonable costs of travel and accommodation for business purposes are reimbursed to NEDs. On the limited occasions when it is appropriate for a NED’s spouse or partner to attend, such as to a business event, the Company will meet these costs. The Company will meet any tax liabilities that may arise on such expenses.
|
N/A
|
N/A
|
|
The NEDs, including the Chairman of the Company, have letters of appointment which
set out their duties and responsibilities. The key terms of the appointments are set out in table below.
21
|
Non-Executive Directors’ key terms of appointment
|
|
Provision
|
Policy
|
|
Period
|
In line with the requirement of the UK Corporate Governance Code, all NEDs, including the Chairman, are subject to annual re-election by shareholders at each AGM.
|
|
Termination
|
By the director or the Company at their discretion without compensation upon giving one month’s written notice for NEDs and three months’ written notice for the Chairman of the Company.
|
|
Fees
|
As set out in table 17.
|
|
Expenses
|
Reimbursement of travel and other expenses reasonably incurred in the performance of their duties.
|
|
Time commitment
|
Each director must be able to devote sufficient time to the role in order to discharge his or her responsibilities effectively.
|
|
Appointment dates
|
Director
|
Committee appointments
|
Date of last appointment
on letter of appointment
1
|
Appointment end date in accordance with letter of appointment
|
|
|
Glyn Barker
|
|
3 May 2012
|
AGM 2016
|
|
|
Patricia Cross
|
|
1 December 2013
|
AGM 2016
|
|
|
Michael Hawker
|
|
3 May 2012
|
AGM 2016
|
|
|
Belén Romana García
|
|
26 June 2015
|
AGM 2016
|
|
|
Sir Adrian Montague
|
|
15 January 2013
|
AGM 2016
|
|
|
Michael Mire
|
|
12 September 2013
|
AGM 2016
|
|
|
Bob Stein
|
|
15 January 2013
|
AGM 2016
|
|
|
Scott Wheway
|
|
3 May 2012
|
AGM 2016
|
|
|
Sir Malcolm Williamson
|
|
21 May 2015
|
AGM 2016
|
|
Key
Audit Committee member
|
Remuneration Committee member
|
Governance Committee member
|
Risk Committee member
|
Nomination Committee member
|
Denotes chair of committee
|
Notes
|
1
|
The dates shown above reflect actual appointment dates where agreed following signature of the letter as all appointments are
subject to regulatory approval.
|
Patricia Cross
Chairman, Remuneration Committee
Shareholder information
In this section
|
Page
|
Company address
|
96
|
Share capital
|
96
|
Related party disclosures
|
98
|
Dividend data
|
98
|
Guarantees, securitised assets and off-balance sheet arrangements
|
99
|
Liquidity and capital resources
|
99
|
Regulation
|
103
|
Risks relating to our business
|
110
|
Shareholder information
Company address
The Company’s registered office is St Helens, 1 Undershaft,
London, EC3P 3DQ.
The Company’s telephone number is +44 (0)20 7283 2000.
Share capital
The Company has two classes of shares in issue:
|
·
|
Ordinary shares of £0.25 each which constitute equity security and hold voting rights
|
|
·
|
Cumulative irredeemable preference shares of £1 each, which entitle holders to attend and vote at general meetings only
when dividends on such shares are in arrears. Cumulative irredeemable preference shareholders may also attend general meetings
and vote on particular proposals when such proposals relate to an alteration of the rights attaching to such shares, a reduction
of capital (other than through a redemption or repurchase of shares) or a winding up of business. On a winding up, they carry a
preferential right of return of capital ahead of the ordinary shares
|
Issued share capital
The Company had an aggregate issued and outstanding ordinary
share capital of £1,012 million as of 31 December 2015. The following table sets out information about the issued and outstanding
classes of equity as of 31 December 2015.
|
Shares issued and outstanding
|
Shares covered by outstanding options
|
Share class
|
2015
Million
|
2014
Million
|
2013
Million
|
2015
Million
|
2014
Million
|
2013
Million
|
Ordinary shares, nominal value 25p
|
4,048
|
2,950
|
2,947
|
18
|
17
|
20
|
8.375% Cumulative irredeemable
|
|
|
|
|
|
|
preference shares, nominal value £1
|
100
|
100
|
100
|
—
|
—
|
—
|
8.75% Cumulative irredeemable
|
|
|
|
|
|
|
preference shares, nominal value £1
|
100
|
100
|
100
|
—
|
—
|
—
|
The Companies Act 2006 abolished the requirement for a company
to have an authorised share capital and the Company’s current articles of association reflect this. Directors are still limited
as to the number of shares they can allot, as the allotment authority continues to be required under the Act, save in respect of
employee share schemes. Details of existing authorities to allot shares are set out in notes 26 and 29. Ordinary shares in issue
in the Company rank pari passu. All the ordinary shares in issue carry the same right to receive all dividends and other distributions
declared, made or paid by the Company.
The Company is not permitted under English law
to hold its own ordinary shares. Whilst the Company is presently authorised to repurchase up to 295 million ordinary shares, any
shares that are repurchased must be cancelled. Details of the Company’s dividends are set out in the section ‘Dividend
data’. The Company’s preference shares rank, as to the payment of dividends and capital, as set out in note 29 of the
IFRS Financial statements.
Share options and awards
The Company maintains a number of active stock option and
share award schemes. Details of any outstanding awards under these schemes are set out in ‘IFRS Financial statements –
note 27 – Group’s share plans’. Details of employee share schemes are set out in Note 27 and/or the Directors’
remuneration report. In addition to the share schemes mentioned in note 27 and the DRR, we operate the following share schemes:
The matching share plan
Under the Aviva all employee share ownership plan (AESOP),
eligible employees can invest up to statutory limits, currently £150 per month out of their gross salary in the Company’s
shares. A matching element was introduced in April 2013 through which the Company matches every purchased share with two matching
shares for the first £40 of a participant’s monthly contribution. Matching shares are subject to forfeiture if purchased
shares are withdrawn from the AESOP within three years of purchase, as long as the employee remains employed by the Company. Participants
are also eligible to receive dividend shares through the AESOP.
Aviva Group employee share ownership
scheme
Aviva Group operates an Irish Revenue approved share scheme
for employees of the Aviva Group in Ireland. Under the Aviva Group Employee Share Ownership Scheme, eligible employees can elect
to forego some of their gross bonus and gross salary (up to a maximum of €12,700 per tax year) in exchange for the Company’s
shares. The shares are held in trust for three years.
Aviva France employee profit sharing
scheme
Aviva France operates an employee profit sharing scheme where
employees are given an award based on a percentage of salary, which can be either received in cash or invested in one of four mutual
funds. One of the four mutual funds is invested solely in Aviva plc ordinary shares. Any investment in a mutual fund must be held
for at least five years.
Additional information
For the purposes of Listing Rule (LR) 9.8.4C R, the information
required to be disclosed by LR 9.8.4 R can be found in the following locations:
Section in LR 9.8.4C R
|
Topic
|
Location in the Annual Report on Form 20-F
|
1
|
Interest capitalised
|
N/A
|
2
|
Publication of unaudited financial information
|
N/A
|
3
|
Requirement deleted from the listing rules
|
|
4
|
Details of long-term incentive schemes
|
DRR and IFRS Financial Statements – note 27
|
5
|
Waiver of emoluments by a director
|
N/A
|
6
|
Waiver of future emoluments by a director
|
N/A
|
7
|
Non pre-emptive issues of equity for cash
|
N/A
|
8
|
Item (7) in relation to major subsidiary undertakings
|
N/A
|
9
|
Parent participation in a placing by a listed subsidiary
|
N/A
|
10
|
Contracts of significance
|
N/A
|
11
|
Provision of services by a controlling shareholder
|
N/A
|
12
|
Shareholder waivers of dividends
|
IFRS Financial Statements – note 28
|
13
|
Shareholder waivers of future dividends
|
IFRS Financial Statements – note 28
|
14
|
Agreements with controlling shareholders
|
N/A
|
History of share capital
The following table sets out information about the history
of the Company’s ordinary shares over the last three full calendar years.
|
Number of shares
outstanding
|
At 31 December 2012
|
2,945,972,261
|
Shares issued under the Group’s Employee and Executive Share Option Schemes
1
|
967,361
|
At 31 December 2013
|
2,946,939,622
|
Shares issued under the Group’s Employee and Executive Share Option Schemes
1
|
3,547,718
|
At 31 December 2014
|
2,950,487,340
|
Shares issued under the Group’s Employee and Executive Share Option Schemes
1
|
11,651,227
|
Shares issued in relation to the acquisition of Friends Life
|
1,086,326,606
|
At 31 December 2015
|
4,048,465,173
|
|
1
|
For more information on our various option schemes, see note 27 in the financial statements.
|
There were no changes to the voting rights of any class of shares
during 2013, 2014 and 2015, other than issuances in connection with our various employee option schemes and in relation to the
acquisition of Friends Life. The Company did not issue shares for consideration other than cash during 2013, 2014 and 2015, with
the exception of the acquisition of Friends Life. Details of the acquisition through a share exchange are set out in note 2. In
addition, at the Company’s general meetings in 2013, 2014 and 2015, shareholders authorised the limited dis-application of
section 561 of the Companies Act 2006 to permit the Company to issue new equity securities for cash without applying shareholders’
statutory pre-emptive rights.
Related party disclosures
Related party transactions
For more information relating to related party transactions, including
more information about the transactions described below, please see ‘IFRS Financial Statements – note 56 – Related
party transactions’.
Subsidiaries
Transactions between the Company and its subsidiaries are eliminated
on consolidation.
Key management compensation
The total compensation to those employees classified as key
management, being those having authority and responsibility for planning, directing and controlling the activities of the Group,
including the executive and non-executive directors is as follows:
|
2015
£m
|
2014
£m
|
2013
£m
|
Salary and other short-term benefits
|
13.3
|
8.9
|
6.7
|
Post-employment benefits
|
1.7
|
1.0
|
1.1
|
Equity compensation plans
|
10.6
|
1.9
|
3.3
|
Termination benefits
|
2.0
|
—
|
1.1
|
Other long-term benefits
|
5.2
|
4.1
|
1.6
|
Total
|
32.8
|
15.9
|
13.8
|
The increase in total key management compensation in 2015
mainly reflects the effect of an increase in the number of employees classified as key management compared to 2014.
Various directors and key management of Aviva may from time
to time purchase insurance, asset management or annuity products from Aviva Group companies in the ordinary course of business
on substantially the same terms, including interest rates and security requirements, as those prevailing at the time for comparable
transactions with other persons.
Apart from the disclosed transactions discussed
above and in the ‘Governance’ section of this report, no director had an interest in shares, transactions or arrangements
that requires disclosure under applicable rules and regulations.
Other related parties
The Group received income from and paid expenses to other related
parties from transactions made in the normal course of business. Loans to other related parties are made on normal arm’s
length commercial terms.
Services provided to other related
parties
|
|
2015
|
|
2014
|
|
2013
|
|
Income earned
in year
£m
|
Receivable
at year
end
£m
|
Income earned
in year
£m
|
Receivable
at year
end
£m
|
Income earned
in year
£m
|
Receivable
at year
end
£m
|
Associates
|
9
|
—
|
7
|
—
|
3
|
11
|
Joint ventures
|
27
|
192
|
28
|
154
|
51
|
56
|
Employee pension schemes
|
13
|
3
|
11
|
3
|
12
|
9
|
|
49
|
195
|
46
|
157
|
66
|
76
|
In addition to the amounts disclosed for associates and joint
ventures above, at 31 December 2015 amounts payable at year-end were £nil
(2014:
£nil)
, and expenses incurred during the period were £7 million
(2014:
£2 million)
.
Transactions with joint ventures in the UK relate
to the property management undertakings, the most material of which are listed in note 14(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 14(a)(i).
Our fund management companies also charge fees
to these joint ventures for administration services and for arranging external finance.
Our UK fund management companies manage most
of the assets held by the Group’s main UK staff pension scheme, for which they charge fees based on the level of funds under
management. The main UK scheme holds investments in Group-managed funds and insurance policies with other Group companies, as explained
in note 44(b)(ii).
The related parties’ receivables are not
secured and no guarantees were received in respect thereof. The receivables will be settled in accordance with normal credit terms.
Details of guarantees, indemnities and warranties provided on behalf of related parties are given in note 48(f).
Loans to joint ventures
We make loans to our property management joint ventures to
fund property developments which we undertake with our joint venture partners. Movements in these loans may be found in ‘IFRS
Financial Statements – Note 14 – Interests in, and loans to, joint ventures’. Total loans at 31 December 2015
and at the end of each of the last three financial years are shown in the table below:
|
2015
£m
|
2014
£m
|
2013
£m
|
Loans to joint ventures
|
94
|
73
|
24
|
Dividend data
The Company has a policy to pay a progressive dividend with reference
to growth in cash flows and earnings. Under UK company law, we may only pay dividends if the Company has ‘distributable profits’
available. ‘Distributable profits’ are accumulated, realised profits not previously distributed or capitalised, less
accumulated, unrealised losses not previously written off based on IFRS. Even if distributable profits are available, we pay dividends
only if the amount of our net assets is not less than the aggregate of our called-up share capital and undistributable reserves
and the payment of the dividend does not reduce the amount of our net assets to less than that aggregate.
As a holding company, the Company is dependent
upon dividends and interest from our subsidiaries to pay cash dividends. Many of the Company’s subsidiaries are subject to
insurance regulations that restrict the amount of dividends that they can pay to us. From 1 January 2016, the Company and its insurance
subsidiaries in the UK, are also required to comply with the PRA Supervisory Statement SS2/15 in respect of the payment of dividends.
Historically, the Company has declared an interim
and a final dividend for each year (with the final dividend being paid in the year following the year to which it relates). Subject
to the restrictions set out above, the payment of interim dividends on ordinary shares is made at the discretion of our Board,
whilst payment of any final dividend requires the approval of the Company’s shareholders at a general meeting. Preference
shares are irredeemable and dividends on preference shares are made at the discretion of our Board.
The Company pays cash dividends in pounds sterling,
although the articles of association permit payment of dividends on ordinary shares in other currencies and in forms other than
cash, such as ordinary shares. If dividends on ordinary shares held by the American Depositary Shares (ADS) depositary are paid
in pounds sterling, the ADS depositary will convert the pounds sterling that it receives on behalf of the ADS holders into US dollars
according to the prevailing market rate on the date that the ADS depositary actually receives the dividends.
From the 2009 interim dividend to the 2012 interim
dividend, shareholders on record were provided the opportunity to elect to receive dividends in the form of newly issued ordinary
shares through the Aviva Scrip Dividend Scheme. For the 2012 final and subsequent dividends, the Aviva Scrip Dividend Scheme has
been withdrawn.
An interim dividend is generally paid in November
of each year. 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 for the periods
indicated in pounds sterling and converted into US dollars at the noon buying rate in effect on each payment date.
Year
|
Interim dividend per share
(pence)
|
Interim dividend per share
(cents)
|
Final dividend per share
(pence)
|
Final dividend per share (cents)
|
2009
|
9.00
|
14.75
|
15.00
|
23.55
|
2010
|
9.50
|
15.20
|
16.00
|
25.80
|
2011
|
10.00
|
15.70
|
16.00
|
25.27
|
2012
|
10.00
|
15.85
|
9.00
|
13.67
|
2013
|
5.60
|
9.01
|
9.40
|
15.79
|
2014
|
5.85
|
9.15
|
12.25
|
19.21
|
2015
|
6.75
|
10.21
|
14.05
|
N/A
|
Guarantees, securitised assets and
off-balance sheet arrangements
As a normal part of our operating activities, various Group companies
have given financial guarantees and options, including interest rate guarantees, in respect of certain long-term assurance and
fund management products, as set out in Note 38 to the IFRS Financial Statements. These are accounted for on-balance sheet as either
part of the host insurance contract or as financial instruments under IFRS.
Information on operating lease commitments can
be found in Note 49(b) to the IFRS Financial Statements.
It is standard business practice for our Group
companies to give guarantees, indemnities and warranties in connection with disposals of subsidiaries, joint ventures and associates
to third parties. As of 31 December 2015, we believe no material loss will arise in respect of these guarantees, indemnities and
warranties. Principal warranties include the accuracy and completeness of the statement of financial position at an agreed specified
date, details of outstanding litigation, regulatory matters, material contractual commitments, the position on tax filings and
other customary matters together with any specific items identified during due diligence. In addition, specific clauses cover such
items as regulatory approvals and licences, the basis of calculation regarding actuarial insurance liabilities, reinsurance contracts
and the status of employee pension plans. Their exact terms are tailored to each disposal and are set out in the respective sale
and purchase agreement. Similarly, the open warranty periods, within which the purchaser could claim, and limits on the maximum
amount potentially recoverable will vary for each item covered in each disposal.
We have received notice of a number of claims
on recent disposals, and where appropriate, hold provisions in respect of such claims. There are also open claim periods on other
recent disposals in respect of which we have neither received, nor have any reason to believe we will receive, any claims. Accordingly,
as of 31 December 2015, we believe that appropriate provisions have been made regarding known and expected material warranty and
indemnity claims relating to recent disposal activity.
We have loans receivable, secured by mortgages,
which have then been securitised through non-recourse borrowings by special purpose entities in our UK Life business, as set out
in Note 20 to the IFRS Financial Statements. These special purpose entities have been consolidated and included in the statement
of financial position, as we retain the residual interest in them.
Limited liability partnerships classified
as joint ventures
As part of their investment strategy, the UK and certain European
long-term business policyholder funds have invested in a number of property limited partnerships (PLP), either directly or via
property unit trusts (PUT), through a mix of capital and loans. The PLPs are managed by general partners (GP), in which the long-term
business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by
a Group subsidiary.
Accounting for the PUTs and PLPs as subsidiaries,
joint ventures, associates or other financial investments depends on whether the Group is deemed to have control or joint control
over the PUTs and PLPs’ shareholdings in the GPs and the terms of each partnership agreement are considered along with other
factors that determine control.
Note 14 to the IFRS Financial Statements provides
a list of the principal PLPs accounted for as joint ventures, as well as summarised information on the income, expenses, assets
and liabilities of the Group’s interests in its joint ventures in aggregate. In respect of these PLPs, there are no significant
contingent liabilities to which we are exposed, nor do we have any significant contingent liabilities in relation to our interests
in them. External debt raised by the PLPs is secured on their respective property portfolios, and the lenders are only entitled
to obtain payment of both interest and principal to the extent there are sufficient resources in the respective PLPs. The lenders
have no recourse whatsoever to the policyholder and shareholders’ funds of any companies in the Aviva Group. At 31 December
2015, we had £47 million capital commitments to these PLP joint ventures.
Liquidity and capital resources
Treasury function
The treasury function of our business is managed by our centralised
treasury team, headed by the Group treasurer. The Group treasurer acts as owner of Group business standards for liquidity and foreign
exchange risk management within the Group risk governance and oversight framework. Changes in policy require the agreement of the
Chief Risk Officer. These policies are independently implemented and monitored by each of our businesses. Our central treasury
team is split into distinct functions: a Group team, which develops our overall treasury strategy and our treasury team at Aviva
Investors, which manages and monitors our treasury and cash flow positions for our holding companies. Each business unit is responsible
for monitoring its own cash and liquidity positions, as well as its ongoing funding requirements. It is our policy to make the
majority of our financing arrangements at the parent company level for our business units, primarily through external borrowings
and equity offerings. This enables us to achieve the efficiencies afforded by our collective size. A number of our business units
also raise debt on their own behalf.
Our principal objective in managing our liquidity
and capital resources is to maximise the return on capital to shareholders, while enabling us to pay dividends, service our debt
and our holding companies’ cash flows. In the context of a financial services company where our working capital is largely
representative of our liquidity, we believe that our working capital is sufficient for our present operational requirements. For
additional information, see ‘IFRS Financial statements – Note 53 – Risk management – liquidity risk’.
Extraordinary market conditions
Starting in mid-September 2008, the global financial markets experienced
unprecedented disruption, adversely affecting the business environment in general, as well as financial services companies in particular.
Markets have improved but continue to be fragile. A return to adverse financial market conditions could significantly affect our
ability to meet liquidity needs and obtain capital, although management believes that we have liquidity and capital resources to
meet business requirements under current and stressed market conditions.
At 31 December 2015, total consolidated cash
and cash equivalents net of bank overdrafts amounted to £33,170 million, an increase of £10,606 million from £22,564
million in 2014.
Processes for monitoring and managing liquidity
risk, including liquidity stress models, have been enhanced to take into account the extraordinary market conditions, including
the impact on policyholder and counterparty behaviour, the ability to sell various investment assets and the ability to raise incremental
funding from various sources. Management has taken steps to strengthen liquidity in light of its assessment of the impact of market
conditions and intends to continue to monitor liquidity closely.
Management of capital resources
We seek to maintain an efficient capital structure using a combination
of equity shareholders’ funds, preference capital, subordinated debt and borrowings. This structure is consistent with our
risk profile and the regulatory and market requirements of our business.
In managing our capital, we seek to:
|
·
|
match the profile of our assets and liabilities, taking into account the risks inherent in each business;
|
|
·
|
maintain financial strength to support new business growth whilst still satisfying the requirements of policyholders, regulators
and rating agencies;
|
|
·
|
retain financial flexibility by maintaining strong liquidity, access to a range of capital markets and significant unutilised
committed credit lines;
|
|
·
|
allocate capital efficiently to support growth and repatriate excess capital where appropriate; and
|
|
·
|
manage exposures to movements in exchange rates by aligning the deployment of capital by currency with our capital requirements
by currency.
|
We are subject to a number of regulatory capital tests and employ
realistic scenario tests to allocate capital and manage risk. The impact of these regulatory capital tests on our ability to transfer
capital around the Group through dividends and capital injections is discussed later in this section under the headings ‘Sources
of liquidity’ and ‘Capital injections’.
At 31 December 2015, the Group had £25.1
billion (
31 December 2014: £17.6 billion
) of total capital employed on an IFRS basis in our trading operations which
is financed by a combination of equity shareholders’ funds, preference capital, direct capital instrument and tier 1 notes,
subordinated debt and internal and external borrowings.
In addition to external funding sources, we have
a number of internal debt arrangements in place. All internal loans satisfy arm’s length criteria and all interest payments
have been made when due.
Management of debt
Aviva plc is the principal financing vehicle in our centralised funding
strategy. We aim to manage our external debt in line with rating agency limits applicable for entities with a rating in the AA
range. We manage the maturity of our borrowings and our undrawn committed facilities to avoid bunching of maturities. We aim to
maintain access to a range of funding sources, including the banking market, the commercial paper market and the long-term debt
capital markets. We issue debt in a variety of currencies, predominantly sterling and euro, based on investor demand at the time
of issuance and management of the Group’s foreign exchange translation exposures in the statement of financial position.
In June 2015 Aviva plc issued €900 million
and £400 million of Lower Tier 2 subordinated debt callable in 2025 and 2030 respectively. This was used to repay the following
instruments: £268 million Step-up Tier 1 Insurance Capital Securities at first call date in July 2015; €500 million
undated subordinated debt at first call date in September 2015; and £200 million debenture loans in September 2015, ahead
of the June 2016 maturity.
At 31 December 2015, our total external borrowings,
including subordinated debt and securitised mortgage loans, amounted to £8.8 billion
(2014:
£7.4 billion).
Of the total borrowings, £6.9 billion
(2014:
£5.3 billion)
are considered to be core borrowings and are included within the Group’s capital employed.
The balance of £1.9 billion
(2014: £2.1 billion)
represents
operational debt issued by operating subsidiaries. We also have substantial committed credit facilities available for our use.
At 31 December 2015, we had undrawn committed credit facilities expiring within one year of £0.6
billion
(2014: £0.4 billion)
and £1.1 billion in credit facilities expiring after more than one year
(2014:
£1.2 billion)
.
Further information on the maturity profile,
currency and interest rate structure of our borrowings is presented in ‘IFRS Financial statements – Note 45 –
Borrowings’. Commercial paper is issued for terms up to 12 months and is generally reissued at maturity. The earliest repayment
date for other debt instruments is a $400 million subordinated debt instrument with a first call date of 1 December 2016 at the
option of the Company. At this time Aviva will have the option of repaying the debt or deferring repayment until future coupon
dates.
The table below presents our debt position
for the periods indicated:
|
2015
£m
|
2014
£m
|
Core structural borrowings
|
|
|
Subordinated debt
|
6,469
|
4,594
|
Debenture loans
|
—
|
200
|
Commercial paper
|
485
|
516
|
|
6,954
|
5,310
|
Less: Amounts held by Group Companies
|
(42)
|
—
|
|
6,912
|
5,310
|
Operating borrowings
|
|
|
Operational borrowings at amortised cost
|
550
|
696
|
Operational borrowings at fair value
|
1,308
|
1,372
|
|
1,858
|
2,068
|
Total
|
8,770
|
7,378
|
In the UK, we have raised non-recourse funding secured against
books of mortgages. This funding has been raised through the use of special-purpose entities. The beneficial interest in the books
of mortgages has been passed to these special-purpose entities. These entities, which are owned by independent trustees, have funded
this transfer through the issue of loan notes.
The value of the secured assets and the corresponding
non-recourse funding was £1,308 million
(2014: £1,372 million)
.
We continue to receive fees from these special purpose entities in respect of loan administration services.
These special purpose entities have been consolidated
as we retain the residual interest in them. The transactions and reasons for consolidation are discussed further within ‘IFRS
Financial statements – Note 20 – Securitised mortgages and related assets’.
Undrawn borrowings
At 31 December 2015, we had £1.7 billion
(2014:
£1.6 billion)
undrawn committed central borrowing facilities available to us, provided by various highly rated
banks, all of which have investment grade credit ratings. These borrowings are used to support Aviva’s commercial paper programme.
Undrawn borrowings are analysed below:
|
2015
£m
|
2014
£m
|
Expiring within one year
|
575
|
350
|
Expiring beyond one year
|
1,075
|
1,200
|
Total
|
1,650
|
1,550
|
Our committed central borrowing facilities have no financial
covenants following the renewal of terms undertaken in 2015.
Sources of liquidity
In managing our cash flow position, we have a number of sources of
liquidity, including:
|
·
|
dividends from operating subsidiaries;
|
|
·
|
external debt issuance;
|
|
·
|
internal debt and central assets; and
|
|
·
|
funds generated by the sale of businesses.
|
Our principal source of liquidity is cash remittances in the form
of dividends and debt interest receipts from our subsidiaries. The level of dividends is based on two primary factors: the financial
performance and the local solvency and capital requirements of our individual business units.
The table below shows liquid resources provided
by the business units to Group centre holding companies during the periods indicated. Cash remittances include amounts received
from UKGI in February 2016 in respect of 2015 activity and in February 2015 in respect of 2014 activity:
Amounts received in respect of 2015 and 2014 activity
|
2015
£m
|
Restated
1
2014
£m
|
UK & Ireland life
|
667
|
437
|
France
|
252
|
264
|
Poland
|
81
|
106
|
Italy
|
45
|
32
|
Spain
|
49
|
68
|
Other Europe
|
4
|
3
|
Canada
2
|
6
|
138
|
Asia
|
21
|
23
|
Other
3
|
24
|
66
|
|
1,149
|
1,137
|
UK & Ireland general insurance & health
4
|
358
|
294
|
Total
|
1,507
|
1,431
|
|
1
|
Cash remittances have been restated to include interest remitted on internal loans.
|
|
2
|
CAD$230 million in respect of 2015 activity has been retained at the Canadian holding company in order to part-fund the proposed
RBC General Insurance Company acquisition.
|
|
3
|
Other includes Aviva Investors and Group Reinsurance.
|
|
4
|
Cash remittances include amounts of £351 million received from UKGI in February 2016 in respect of 2015 activity and
£273 million received from UKGI in February 2015 in respect of 2014 activity.
|
Excess centre cash flow represents cash remitted by business
units to Group centre holding companies less central operating expenses and debt financing costs paid by the Group centre holding
companies. It is an important internal measure of the cash that is available to pay dividends, reduce debt, pay exceptional charges
or invest back into our business units. It does not include non-operating cash movements such as disposal proceeds or capital injections.
It is a measure at the Group centre holding companies level and differs from the Group and parent company operating cash flow on
an IFRS basis. The Group consolidated operating cash flow is discussed on page 102.
|
2015
£m
|
2014
£m
|
Dividends received
1
|
1,378
|
1,412
|
Internal interest received
|
129
|
19
|
Cash remitted to Group
|
1,507
|
1,431
|
External interest paid
|
(554)
|
(425)
|
Internal interest paid
|
(138)
|
(170)
|
Central spend
|
(252)
|
(173)
|
Other operating cash flows
2
|
136
|
29
|
Excess centre cash flow
3
|
699
|
692
|
|
1
|
This excludes a £150 million dividend paid by Friends Life Holdings prior to the acquisition.
|
|
2
|
Other operating cash flows include central investment income and group tax relief payments and other financial cash flows previously
reported under central spend.
|
|
3
|
Before non-operating items and capital
injections.
|
Excess centre cash flow of £699 million has remained broadly
stable compared with the prior period. Increased internal interest received driven by Friends Life intercompany loans and foreign
exchange movement gains on Group centre holdings was offset by an increase in external interest, largely due to the inclusion of
Friends Life external debt, as well as higher central spend mainly relating to Friends Life and investment in our digital capability.
In addition, the total excess centre cash flow is reduced as a result of the dividend payment retained in Canada to part-fund the
proposed acquisition of Royal Bank of Canada General Insurance Company.
Under UK company law, dividends can only be paid
if a company has distributable reserves sufficient to cover the dividend. At 31 December 2015, Aviva plc itself had distributable
reserves of £3,124 million, which would have covered four years of historic dividend payments to our shareholders. In UK
Life, our largest operating subsidiary, distributable reserves, which could be paid to Aviva plc via its intermediate holding company,
are created mainly by the statutory long-term business profit transfer to shareholders. While the UK insurance regulatory laws
applicable to UK Life and our other UK subsidiaries impose no statutory restrictions on an insurer’s ability to declare a
dividend, the rules require maintenance of each insurance company’s solvency margin, which might impact their ability to
pay dividends to the parent company. Our other life and general insurance, and fund management subsidiaries’ ability to pay
dividends and make loans to the parent company is similarly restricted by local corporate or insurance laws and regulations. In
all jurisdictions, when paying dividends, the relevant subsidiary must take into account its capital position and must set the
level of dividend to maintain sufficient capital to meet minimum solvency requirements and any additional target capital expected
by local regulators. We do not believe that the legal and regulatory restrictions constitute a material limitation on the ability
of our businesses to meet their obligations or to pay dividends to the parent company, Aviva plc.
The Group has received proceeds on completion
of the disposals as disclosed in ‘IFRS Financial statements – note 2 – Subsidiaries’.
Aviva plc maintains two £2 billion commercial
paper programmes, one of which is guaranteed by Aviva Insurance Limited, which allow debt to be issued in a range of currencies.
At 31 December 2015, outstanding debt issued under the unguaranteed programme was £485 million
(2014:
£516 million).
No commercial paper has been issued under the guaranteed programme in 2014 or 2015. More details
of movements in debt can be found in the ‘Management of debt section’.
Aviva plc has also issued longer-term debt under
a euro Medium Term Note (EMTN) programme. Debt issued under this programme may be senior debt or regulatory qualifying debt and
may have a fixed or floating interest rate. At 31 December 2015, the outstanding debt (including equity accounted tier 1 notes)
issued under this programme was £3,838 million
(2014: £2,860
million)
.
Application of funds
We use funds to pay dividends to our shareholders, to service our
debt and to pay our central Group cash flows.
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.
In 2015, our total interest costs on central
borrowings were £350 million. This compared with £310 million of interest paid on central borrowings in 2014. Total
corporate centre expenses in 2015 were £180 million compared with £132 million in 2014.
An additional application of our funds is the
acquisition of businesses. In 2015, cash received in the acquisition of subsidiaries, joint ventures and associates from continuing
operations net of cash paid amounted to £7,783 million, compared with cash paid of £79 million in 2014.
Capital injections
We make capital injections into
our businesses where necessary to ensure that they meet their local solvency requirements and also to support development of their
operations. Capital is provided either by equity or subordinated debt, where such debt is recognised as capital by the regulator.
Each capital injection is subject to central review and needs to meet our required internal rates of return. To the extent that
capital injections are provided or funded by regulated entities we consider the regulatory capital impact of the capital injection.
Otherwise our
ability to make capital injections into our businesses is not materially limited by applicable legal and regulatory restrictions.
Total capital injections into the business units were £469 million and £567 million in 2015 and 2014 respectively.
Payments during the year include capitalisation of the Group’s internal reinsurance vehicle and other restructuring activity.
Consolidated cash flows
The cash and cash equivalents consist of cash at banks and in hand,
deposits held at call with banks, treasury bills and other short-term highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of change in value.
For the purposes of the cash flow statement,
cash and cash equivalents also include bank overdrafts, which are included in payables and other financial liabilities on the balance
sheet.
Year ended 31 December 2015
Net cash from operating activities
Total net cash from operating activities (continuing operations) increased
by £5,299 million to a £4,755 million inflow in 2015
(2014:
£544 million
outflow
). The increase mainly reflects net cash inflows arising from purchases and sales of
operating assets including financial investments.
Net cash from investing activities
Net cash from investing activities (continuing operations) was £7,641
million inflow
(2014: £228 million outflow).
The increase
of £7,869 million is mainly due to cash balances brought into the Group following the acquisition of Friends Life.
Net cash outflow on financing activities
Net cash used in financing activities (continuing operations) decreased
by £590 million to an outflow of £1,365 million
(2014: £1,955
million outflow).
The decrease is mainly due to the redemption of a direct capital instrument 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.
Year ended 31 December 2014
Net cash from operating activities
Total net cash from operating activities (continuing operations) decreased
by £2,643 million to a £544 million outflow in 2014
(2013:
£2,099 million
inflow
). The net operating cash outflow reflects a number of factors, including the level
of premium income, payments of claims, creditors and surrenders and purchases and sales of operating assets including financial
investments. It also includes changes in the size and value of consolidated cash investment funds and changes in the Group’s
participation in these funds.
Net cash from investing activities
Net cash used in investing activities (continuing operations) decreased
by £562 million to £228 million outflow
(2013: £334
million inflow).
The decrease in cash is mainly due to lower inflows from disposals and higher purchases of property
and equipment.
Net cash outflow on financing activities
Net cash used in financing activities (continuing operations) increased
by £407 million to an outflow of £1,955 million
(2013: £1,548
million outflow).
The increase is mainly due to the redemption of a direct capital instrument.
Net cash and cash equivalents
At 31 December 2014, total consolidated net cash and cash equivalents,
net of bank overdrafts, amounted to £22,564 million, a decrease of £3,425 million over £25,989 million in 2013.
Currency
Our exposures to movements in exchange rates and the management of
these exposures is detailed in ‘Performance review – Financial and operating performance – Exchange rate fluctuations’.
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.
This measure represents the excess of the aggregate
value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators,
excluding the surplus held in the UK and Ireland with-profit life funds. The minimum solvency requirement for our European businesses
is based on the Solvency I Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked
life reserves respectively and for our general insurance portfolio of business is the higher of 18% of gross premiums or 26% of
gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our business in Canada a risk charge on
assets and liabilities approach is used.
From 1 January 2016 EU-based insurance groups
are no longer required to disclose their solvency position under the European Insurance Groups Directive, as the regulatory framework
has been replaced by the new Solvency II regime. As such, after 31 December 2015 Aviva Group will no longer disclose its capital
solvency surplus under the IGD rules.
European Insurance Groups Directive
|
UK life funds £bn
|
Other business
£bn
|
31 December 2015
£bn
|
31 December 2014
£bn
|
Insurance Groups Directive (IGD) capital resources
|
11.8
|
10.8
|
22.6
|
14.4
|
Less: capital resources requirement
|
(11.8)
|
(4.8)
|
(16.6)
|
(11.2)
|
Insurance Groups Directive (IGD) excess solvency
|
—
|
6.0
|
6.0
|
3.2
|
Cover over EU minimum (calculated excluding UK life funds)
|
|
|
2.2 times
|
1.6 times
|
The IGD regulatory capital solvency surplus has increased
by £2.8 billion since 2014 to £6.0 billion. The key drivers of the increase are the acquisition of Friends Life (£1.6
billion), adjusted operating profits (£1.6 billion) and the net issue of hybrid debt (£0.4 billion), offset by dividend
payments and pension scheme funding (£0.5 billion).
The key movements over the period are
set out in the following table:
|
£bn
|
IGD solvency surplus at 31 December 2014
|
3.2
|
Acquisition of Friends Life
|
1.6
|
Adjusted operating profits net of integration and restructuring costs
|
1.6
|
Net hybrid debt issue
1
|
0.4
|
Dividends and appropriations
|
(0.3)
|
Pension scheme funding
|
(0.2)
|
Outward reinsurance of latent reserves
2
|
0.2
|
Increase in capital resources requirement
|
(0.1)
|
Other regulatory adjustments
|
(0.4)
|
Estimated IGD solvency surplus at 31 December 2015
|
6.0
|
|
1
|
Net hybrid debt issue includes £1 billion benefit of two new Tier 2 subordinated debt instruments issued on 4 June 2015;
offset by £(0.6) billion derecognition of two instruments redeemed in the second half of 2015.
|
|
2
|
Outward quota share reinsurance agreement completed in 2015 in Aviva Insurance Limited (AIL).
|
Capital commitments
Contractual commitments for acquisitions or capital expenditures
of investment property, property and equipment and intangible assets, which have not been recognised in our consolidated financial
statements, are as follows:
|
2015
£m
|
2014
£m
|
2013
£m
|
Investment property
|
71
|
97
|
3
|
Property and equipment
|
61
|
8
|
24
|
Other investment vehicles
|
202
|
—
|
—
|
Total
|
334
|
105
|
27
|
Contractual obligations for future repairs and maintenance
on investment properties are £nil
(2014: £nil, 2013: £nil).
We have capital commitments to joint ventures and associates of £62 million
(2014:
£91 million, 2013: £145 million)
. These commitments are expected to be funded through operational cash flow
without recourse to core structural borrowings.
Regulation
Compliance
In both our insurance and fund management businesses, matters
may arise as a result of industry-wide issues, inspection visits or other regulatory activity, requiring discussion and resolution
with industry regulators. The Group needs to ensure that procedures are in place to address any regulatory concerns, and that such
procedures are properly planned, managed and resourced. Corrective action is undertaken, when necessary, with progress reported
to relevant regulatory bodies in a timely manner.
Overview of regulation as it affects our business
Our principal insurance and fund management operations are in the
UK, Europe, Canada and Asia. We are therefore subject to financial services regulation and local regulatory supervision in all
these areas, as individually covered below.
As the Group’s parent company is based
in the UK, both EU legislation and UK regulatory rules can impact Aviva’s business practices worldwide. Regulators supervising
the Group co-ordinate on a cross-border basis through a ‘college’.
The European Union
In addition
to its UK businesses, Aviva is active in other EU member states through wholly owned subsidiary and joint venture companies. These
companies are subject to the laws and regulations of the EU member state in which they are based, but are also affected by higher
level EU legislation, which will continue to have a significant influence on the legislative environment in the UK and other EU
markets.
The EU operates by promulgating directives that
must be implemented into local national legislation within each EU member country. These directives can either be framed as minimum
or maximum harmonisation for the standards for national legislatures to meet. National governments may not pass laws which fail
to meet the standards set out in a directive, but are generally free to impose legal requirements which go beyond those required
other than where a directive on a maximum harmonisation basis applies. Even greater detail may be imposed through the rules and
regulations of national regulators and, for financial services businesses these rules can be extensive.
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.
Key directives of particular relevance to the
financial services industry, and so to Aviva’s businesses in the EU include:
European System for Financial Supervision
The European
System for Financial Supervision comprises European Supervisory Authorities, including the European Insurance and Occupational
Pensions Authority (EIOPA). Its aims include achieving consistent regulation and supervision within the European Union. In this
respect it is able to issue supervisory guidelines on a comply or explain basis to National Competent Authorities and where European
Directives provide Delegated Acts, it may propose Regulatory Technical Standards to the Commission.
Third Life and Non-Life Directives
These directives implemented the home country control principle for
life and non-life insurance business in the mid-1990s and placed the responsibility for such issues as solvency, actuarial reserves,
investment of assets, and certain governance issues on the home country regulator. Most companies licensed to conduct insurance
business in one member state may rely on their home country regulation to ‘passport’ into all other member states to
conduct business without having to be separately licensed in each. The general exception is selling activity which continues to
be regulated by the state in which the sale takes place.
Reinsurance Directive
Adopted on 16 November 2005, this directive requires that all reinsurance
undertakings be authorised in their home member state. To obtain that authorisation, they need to meet strict requirements, but
are then free to operate anywhere in the EU through the single market passport process.
Insurance Groups Directive (IGD)
The IGD required member states to introduce the following measures
to strengthen supervision of insurance companies
which are part of a group:
|
·
|
An adjustment margin to the solvency calculation in relation to participating interests in other insurance undertakings in
order to eliminate ‘double-gearing’ (the use of the same regulatory capital in more than one entity of a group).
|
|
·
|
An additional parent undertaking solvency margin calculation analogous to the adjusted margin test referred to above, to be
applied at the level of the parent undertaking.
|
|
·
|
The introduction of solo supervision requirements, including rules as to internal control within the insurance undertaking
regarding the production of information relevant to supplementary supervision, the exchange of information within the Group and
the supervision of intra-group transactions.
|
|
·
|
Further provisions aimed at ensuring co-operation between competent regulatory authorities of member states.
|
Since 31 December 2006, the Group capital resources requirement (the
parent undertaking solvency calculation mentioned above) has been a ‘hard’ test (i.e. it constitutes a requirement
to maintain the Group capital resources, rather than simply to make the calculation) for UK-based companies operating under PRA
rules.
From 1 January 2016 EU-based insurance groups
are no longer required to disclose their solvency position under the European Insurance Groups Directive, as the regulatory framework
has been replaced by the new Solvency II regime. As such, after 31 December 2015 Aviva Group will no longer disclose its capital
solvency surplus under the IGD rules.
Solvency II
The Solvency II Directive which governs insurance industry regulation
and prudential capital requirements within the European Union, including associated Implementing Technical Standards and guidelines
became effective from 1 January 2016. This replaces the directives listed above (Third Life and Non Life Directives, Reinsurance
Directive and Insurance Groups Directive). Solvency II is a harmonised European prudential framework that reflects risk management
practices to define required capital and manage risk. The framework has three main pillars:
|
·
|
Pillar 1 consists of the quantitative requirements (for example the amount of capital an insurer should hold);
|
|
·
|
Pillar 2 sets out requirements for the governance and risk management of insurers, as well as their supervision; and
|
|
·
|
Pillar 3 focuses on disclosure and transparency requirements.
|
Distance Marketing Directive
Under the Distance Marketing Directive, EU member states are required
to implement a framework of rules and guidance in order to protect consumers by:
|
·
|
setting minimum standards for information that must be provided to consumers before entering into a financial services contract
by ‘distance means’; and
|
|
·
|
for certain products and services, giving a cooling-off period in which a consumer may cancel a contract without penalty.
|
Insurance Mediation Directive
This requires EU member states to establish a framework to:
|
·
|
ensure that insurance and reinsurance intermediaries have been registered on the basis of a minimum set of professional and
financial requirements;
|
|
·
|
ensure that registered intermediaries will be able to operate in other member states by availing themselves of the freedom
to provide services or by establishing a branch; and
|
|
·
|
impose requirements on insurance intermediaries to provide specified minimum information to potential customers.
|
Markets in Financial Instruments Directive (MIFID2)
MIFID2, which superseded the earlier Investment Services Directive,
builds on the home country control principle, extending the range of ‘core’ investment services and activities that
may be passported from one member state to another, clarifying the allocation of responsibilities between home and host country
jurisdictions, and introducing greater harmonisation governing the organisation and conduct of business of investment firms.
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.
Insurance Capital Standard (ICS)
The Financial Stability Board (FSB) has stated that a sound capital
and supervisory framework for the insurance sector is essential for supporting financial stability. In this respect the IAIS will
develop a work plan to develop a comprehensive, group-wide supervisory and regulatory framework for Internationally Active Insurance
Groups (IAIGs), including a quantitative capital standard. The ICS will be incorporated into the global framework for the supervision
of internationally active insurance groups (ComFrame) that the IAIS is developing. The IAIS plans to develop the ICS by 2016 for
adoption by the IAIS in 2019 along with the rest of ComFrame.
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.
United Kingdom
The regulatory structure
On 1 April 2013 the Financial Services Authority was replaced by the
Prudential Regulation Authority (the ‘PRA’) and the Financial Conduct Authority (the ‘FCA’).
The PRA is currently a subsidiary of the Bank
of England and is responsible for the micro-prudential regulation of banks, building societies, credit unions, insurers and major
investment firms. The PRA has two statutory objectives:
|
·
|
to promote the safety and soundness of regulated firms; and
|
|
·
|
in the case of insurers, to contribute to securing an appropriate degree of protection for policyholders.
|
The FCA is a company limited by guarantee, accountable to the UK Treasury,
and through the Treasury, to the UK Parliament. It is operationally independent of government and entirely funded by the firms
it regulates. The FCA’s strategic objective as set out in the Financial Services Act 2012 is to ensure that markets “function
well” and it is responsible for the conduct regulation of all financial services firms (including those prudentially regulated
by the PRA, such as insurers). In addition, the FCA prudentially regulates those financial services firms not supervised by the
PRA, including most asset managers. The FCA has three operational objectives:
|
·
|
securing an appropriate degree of protection for consumers;
|
|
·
|
protecting and enhancing the integrity of the UK financial system; and
|
|
·
|
promoting effective competition in the interests of consumers in the markets for financial services.
|
Within their respective jurisdictions, the PRA and FCA have authority
to make rules and issue guidance, taking into account relevant EU directives, impacting individuals and firms authorised to conduct
regulated activities (‘Authorised Persons’ and ‘Authorised Firms’).
Under the Financial Services and Markets Act
2000 (FSMA) no person may carry on, or purport to carry on, a regulated activity by way of business in the UK unless he is an Authorised
Person or an exempt person. A firm granted permission to carry on regulated activities becomes an Authorised Person for the purposes
of FSMA. ‘Regulated activities’ are prescribed in the FSMA (Regulated Activities) Order 2001 and include banking, insurance
and investment business, stakeholder pension schemes, insurance mediation and certain mortgage mediation and lending activities.
Authorised Firms must at all times meet specified
threshold conditions, including possession of adequate resources for the carrying on of their business, and being fit and proper
to conduct that business, having regard to all the circumstances. Authorised Firms must also operate in accordance with the FCA’s
Principles for Business if solo regulated and the PRA’s Fundamental Rules and FCA’s Principles for Business if dual
regulated. The FCA has 11 high level principles for conducting financial services business in the UK, including maintenance of
adequate systems and controls, treating customers fairly, and communicating with customers in a manner that is clear, fair and
not misleading. The PRA has 9 Fundamental Rules including organising and controlling its affairs responsibly and effectively and
acting in a prudent manner.
The PRA and FCA regulatory regimes are based
on the principle that firms should have effective systems and controls, including robust risk management, which are appropriate
to the size, complexity and diversity of their business.
UK Regulation of the Aviva Group
A number of the Groups’ UK subsidiaries are dual regulated (directly
authorised by both the PRA (for prudential regulation) and the FCA (for conduct regulation)) whilst others are solo regulated (regulated
solely by the FCA for both prudential and conduct regulation).
Aviva plc, although not directly authorised,
does come within the scope of some regulation as the ultimate insurance holding company in the Group. The PRA and FCA have powers
under the FS Act in relation to unregulated parent undertakings (‘qualifying parent undertakings’) that control and
exert influence over regulated firms. The powers include the ability to make directions imposing requirements on parent undertakings,
take enforcement action where such directions are breached and gather information from parent undertakings.
As Aviva is a UK-based group, the PRA has the
responsibility of acting as lead regulator (i.e. the cross-sector supervisory coordinator) for the Group.
Aviva was designated as a Global Systemically
Important Insurer (G-SII) by the IAIS. The IAIS has developed a framework of policy measures for G-SIIs. The policy framework includes:
|
·
|
The recovery and resolution planning requirements under the Financial Stability Board’s Key Attributes of Effective Resolution
Regimes;
|
|
·
|
Enhanced group-wide supervision; and
|
|
·
|
Higher loss absorbency requirements (HLA).
|
The enhanced group-wide supervision of G-SIIs introduces more tailored
regulation, greater supervisory resources and more thorough use of existing supervisory tools compared to the supervision of non-systemically
important insurers. For G-SIIs, the group-wide supervisor has specific powers over holding companies to ensure that a direct approach
to group-wide supervision can be applied. In addition, other involved supervisors may have direct or indirect powers over holding
companies in their jurisdiction.
UK regulated entities within
Aviva plc
DUAL REGULATED
|
SOLO REGULATED
|
Aviva Annuity UK Ltd
|
Aviva Equity Release UK Ltd
|
Aviva Insurance Ltd
|
Aviva Health UK Ltd
|
Aviva International Insurance Ltd
|
Aviva Insurance Services UK Ltd
|
Aviva Investors Pensions Ltd
|
Aviva Investors Global Services Ltd
|
Aviva Life & Pensions UK Ltd
|
Aviva Investors UK Fund Services Ltd
|
Friends Annuities Ltd
|
Aviva Investors UK Funds Ltd
|
Friends Life and Pensions Ltd
|
Aviva Life International Ltd
|
Friends Life FPLMA Ltd
|
Aviva Life Services UK Ltd
|
Friends Life Ltd
|
Aviva Pension Trustees UK Ltd
|
Gresham Insurance Company Ltd
|
Aviva Wrap UK Ltd
|
The Ocean Marine Insurance Company Ltd
|
Bankhall PMS Ltd
|
|
Friends Life Funds Ltd
|
|
Friends Life Investment Solutions Ltd
|
|
Friends Life Investments Ltd
|
|
Friends Life Marketing Ltd
|
|
Friends Life Services Ltd
|
|
Friends Provident International Ltd
|
|
Optimum Investment
Management Ltd
|
|
ORN Capital LLP
|
|
Sesame Ltd
|
|
TenetConnect Ltd
|
|
TenetConnect Services Ltd
|
|
TenetLime Ltd
|
Approved persons and controllers
From 1 January 2016, the Approved Person regime (APER) will be replaced
with Senior Insurance Managers Regime (SIMR) for the UK Solvency II firms. Although in substance similar to APER, SIMR will result
in a greater transparency with a narrower focus on individuals running Solvency II companies.
Both the PRA and FCA place great emphasis on
the principle of senior management responsibility. The directors of, and senior managers carrying out controlled function roles
(as defined in the PRA and FCA handbooks) in, any of the Group’s regulated entities are individually registered with either
the PRA or FCA under the ‘Approved Person’ regime, and can be held directly accountable to the relevant regulator for
control failings in those entities. For solo regulated entities, individuals applying for approval in a controlled function make
their application to the FCA and if successful, are registered with the FCA. For dual regulated entities, responsibility for applying
the approved persons regime to controlled functions is split between the PRA and FCA, with the PRA having responsibility for all
of the Governing Functions. However, the PRA cannot approve an application without the consent of the FCA. Each regulator can apply
its Statements of Principles and Code of Practice for Approved Persons to the conduct expected of approved persons, and each can
discipline an approved person who has breached a statement of principle, regardless of which regulator gave approval.
A number of senior managers at Group are registered
as Approved Persons with either the PRA or FCA for the regulated subsidiaries, even though they are neither directors nor senior
managers of these firms. This recognises that these managers exert significant influence over the regulated subsidiaries, because
they are responsible for key parts of the Group’s control framework on which the regulated subsidiaries place reliance.
The PRA and FCA regulate from a legal entity
perspective, even though Aviva tends to operate by business unit. However, both regulators expect that Aviva’s regulated
subsidiaries will operate within an overall framework of Group governance and controls. PRA and FCA rules expressly provide that
any systems and controls which operate on a Group basis will be taken into account in determining the adequacy of a regulated subsidiary’s
systems and controls. The robustness of these Group controls is therefore subject to scrutiny and challenge by both regulators.
PRA and FCA rules regulate the acquisition and
increase of control over Authorised Firms. Under FSMA, any person proposing to acquire control of, or increase control over certain
thresholds of, an Authorised Firm must first obtain the consent of the appropriate regulator. The Authorised Firm must also inform
the appropriate regulator of any such proposed acquisition or increase. In considering whether to grant or withhold its approval
of the acquisition or increase of control, the appropriate regulator must be satisfied both that the acquirer is a fit and proper
person and that the interests of consumers would not be threatened by this acquisition or increase of control.
Control over a UK Authorised Firm is acquired
if the acquirer:
|
·
|
holds 10% (or 20% if the Authorised Firm is an insurance intermediary) or more of the shares, or voting power, in that firm,
or a parent undertaking of the firm; or
|
|
·
|
is able to exercise significant influence over the management of the firm by virtue of the acquirer’s shares or voting
power in that company or a parent undertaking of the firm.
|
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).
In order to determine whether a person or a group
of persons is a ‘controller’ for the purposes of FSMA, the holdings (shares or voting rights) of the person and any
other person ‘acting in concert’, if any, are aggregated.
Conduct of business rules
The FCA’s Conduct of Business (COBS) and Insurance: Conduct
of Business (ICOBS) Rules apply to every Authorised Firm carrying on relevant regulated activities, and regulate the day-to-day
conduct of business standards to be observed by all Authorised Persons in carrying out regulated activities.
The COBS and ICOBS Rules are principle based,
and the scope and range of obligations imposed on an Authorised Firm will vary according to the scope of its business and range
of the Authorised Firm’s clients. Generally speaking, however, the obligations imposed on an Authorised Firm by the COBS
and ICOBS Rules will include the need to classify its clients according to their level of sophistication, provide them with information
about the Authorised Firm, meet certain standards of product disclosures (including fee and remuneration arrangements), ensure
that promotional material which it produces is clear, fair and not misleading, assess suitability when advising on certain products,
control the range and scope of advice given, manage conflicts of interest, report appropriately to its clients and provide certain
protections in relation to client assets.
The PRA’s COBS rule book is limited to
with-profits business and linked long-term insurance business as these classes of business are regulated by both the PRA and FCA.
For with-profits business the FCA is concerned with ensuring fairness between policyholders and shareholders whilst the PRA has
ultimate responsibility in respect of decisions which have material consequences for both affordability and fairness. For linked
long-term business, the FCA is concerned with ensuring benefits are determined by reference to an approved index, whilst the PRA
is concerned with linked assets being capable of being realised in time to meet obligations to policyholders and the matching of
linked assets with linked liabilities.
Capital and solvency rules for insurers
The PRA rules require that a UK insurer (including those within the
Group) must hold capital resources equal to at least the Minimum Capital Requirement (MCR). Insurers with with-profits liabilities
of more than £500 million (which is the case with Aviva’s with-profits funds) must hold capital equal to the higher
of MCR and the Enhanced Capital Requirement (ECR). The ECR is intended to provide a more risk responsive and ‘realistic’
measure of a with-profits insurer’s capital requirements, whereas the MCR is broadly equivalent to the previous required
minimum margin, and satisfies the minimum EU standards.
Determination of the ECR involves the comparison
of two separate measurements of the Authorised Firm’s financial resources requirements, which the PRA refers to as the ‘twin
peaks’ approach. The two separate peaks are:
|
·
|
the requirement comprised by the mathematical reserves plus the ‘long term insurance capital requirement’ (the
LTICR), together known as the ‘regulatory peak’; and
|
|
·
|
a calculation of the ‘realistic’ present value of the insurer’s expected future contractual liabilities together
with projected ‘fair’ discretionary bonuses to policyholders, plus a risk capital margin, together known as the ‘realistic
peak’.
|
All UK insurers must also carry out an Individual Capital Assessment
(ICA) to calculate the amount of capital needed to back their business. If the PRA decides that the final ICA amount is insufficient,
it may draw up its own Individual Capital Guidance (ICG) for the firm, which can be imposed as a requirement on the scope of the
Authorised Firm’s permission. From 1 January 2016, Aviva is subject to the new Solvency II regulatory regime.
Day-to-day supervision
Both the PRA and FCA take a risk-based approach to supervision, with
the PRA focusing on those issues and authorised firms posing the greatest risk to the stability of the UK financial system and
policyholders, and the FCA conducting in-depth structured supervision work with those firms with the potential to cause the greatest
risk to its objectives. Given our size and our share of the UK retail market, a major issue within our business which causes concern
for the regulators may have a significant impact on these objectives.
Both regulators therefore maintain proactive
engagement with us, with day-to-day supervision of Aviva conducted by dedicated teams within the PRA and FCA. In practice, this
means that a wide range of Group and UK business unit senior managers have regular scheduled meetings with the UK regulators, and
other meetings and discussions on specific issues take place as the need occurs. This adds up to frequent regulatory interaction
at business unit and Group level, and the sharing of detailed information about the Group.
Areas of potential risk or weakness where the
regulators particularly require Aviva to focus attention are formally set out in a Risk Mitigation Plan (RMP) from the FCA and
key actions from the PRA.
All open actions are progressed in accordance
with timescales agreed with the PRA and FCA.
Outside of the UK, each Aviva business is regulated
by its own national regulator(s). However, overseas operations are also within the remit of the PRA to the extent that they have
an interest in the systems and controls by which the Group manages its overseas businesses to mitigate the risk of financial shocks
arising overseas flowing through to the UK.
The PRA monitors the strategy and performance
of the Group’s international businesses through its programme of regular meetings and reviews.
The UK regulators aim to play a leading role
in the development of both EU and international regulation.
Intervention and enforcement
The PRA and FCA have extensive powers to investigate and intervene
in the affairs of Authorised Firms. In relation to dual regulated firms, under the terms of a Memorandum of Understanding entered
into in April 2013, the PRA and FCA will consult each other before taking enforcement action. The PRA has the right to veto certain
FCA regulatory actions in relation to dual regulated firms, but the FCA is not required to comply if in its opinion it would be
incompatible with any EU or other international obligation of the UK.
The regulators’ enforcement powers, which
may be exercised against both Authorised Firms and Approved Persons, include public censure, imposition of unlimited fines and,
in serious cases, the variation or revocation of permission to carry on regulated activities or of an Approved Person’s status.
The FCA may also vary or revoke an Authorised Firm’s permissions to protect the interests of consumers or potential consumers
if the Authorised Firm has not engaged in regulated activity for 12 months, or if it is failing to meet the threshold conditions
for authorisation. The FCA has further powers to obtain injunctions against Authorised Persons and to impose or seek restitution
orders where consumers have suffered loss.
In addition to applying sanctions for market
abuse, the FCA has the power to prosecute criminal offences arising under FSMA and insider dealing under Part V of the Criminal
Justice Act 1993, and breaches of money laundering regulations. The FCA’s stated policy is to pursue criminal prosecution
in all appropriate cases.
The Financial Services Compensation Scheme (FSCS)
The FSCS is intended to compensate individuals and small businesses
for claims against an Authorised Firm where the Authorised Firm is unable or unlikely to be able to meet those claims (generally,
when it is insolvent or has gone out of business). The FSCS levy is to split into twelve broad classes:
|
·
|
the life and pensions provision class;
|
|
·
|
the general insurance provision class;
|
|
·
|
the investment provision class;
|
|
·
|
the life and pensions intermediation class;
|
|
·
|
the home finance intermediation class;
|
|
·
|
the investment intermediation class;
|
|
·
|
the general insurance intermediation class;
|
|
·
|
the deposit acceptor’s contribution class;
|
|
·
|
the insurers – life contribution class;
|
|
·
|
the insurers – general contribution class; and
|
|
·
|
the home finance providers and administrators’ contribution class.
|
The permissions held by each firm determine into which class,
or classes, it falls.
Restrictions on business
UK regulatory rules restrict an insurance company from carrying on
any commercial business other than insurance business and activities directly arising from that business. Therefore, authorised
insurance companies in the Group are bound by this restriction.
Long-term assets and liabilities
Where a UK insurer carries on life insurance business, its long-term
business assets and liabilities i.e. those assets and liabilities relating to life and health insurance policies, must be segregated
from the assets and liabilities attributable to non-life insurance business or to shareholders. Separate accounting and other records
must be maintained and a separate fund established to hold all receipts of long-term business.
The extent to which long-term fund assets may
be used for purposes other than long-term business is restricted by the PRA rules. Only the ‘established surplus’,
which is the excess of assets over liabilities in the long-term fund as determined by actuarial investigation, may be transferred
so as to be available for other purposes. Following the transition to Solvency II at 1 January 2016, only the ‘eligible own
funds’, which are the funds available for covering the regulatory capital requirements of the long-term business, may be
transferred so as to be available for other purposes, although a waiver from the PRA is required before any transfer is performed.
Restrictions also apply to the payment of dividends by the insurance company, as described below. PRA rules also require insurers
to maintain sufficient assets in the separate long-term insurance fund to cover the actuarially determined value of the insurance
liabilities.
Distribution of profits and with-profits business
For UK authorised life insurers carrying on with-profits business,
such as Aviva Life and Pensions UK Ltd (‘AVLAP’), the FCA’s rules require that where a firm decides to make a
distribution of surplus from the with-profits fund it must distribute at least the required percentage (as defined in the FCA Handbook)
of the total amount distributed to policyholders, with the balance of the total amount to be distributed being payable to the shareholders.
In addition, at least once a year the AVLAP Board
must consider whether a distribution is required to be made from the Old with-profits sub-fund (‘Old WPSF’) inherited
estate. Such a distribution will ordinarily be required if the level of the inherited estate of the Old WPSF exceeds the Required
Distribution Threshold as described in the Reattribution Scheme of Transfer effective from 1 October 2009 (‘The Scheme’)
on any such annual investigation from the third such investigation after 1 October 2009. The Scheme permits distributions from
the Old WPSF inherited estate earlier than required by The Scheme where the AVLAP Board determines that a distribution is necessary
for the fair treatment of Old WPSF customers. The AVLAP Board set aside £89 million as at 31 December 2014 to be applied
to enhance the with-profits benefits of Old WPSF customers as they leave (with effect from 1 July 2014). An Annual investigation
may also be carried out to determine if a Release to shareholders can be made from the RIEESA. Releases can only be made:
|
·
|
if the Reattributed Inherited Estate exceeds the Permitted Release Threshold as defined in the Scheme;
|
|
·
|
the AVLAP Board (based on appropriate actuarial advice including that of the With-Profits Actuary) are of the opinion that
the Release will not give rise to a significant risk that the New with-profits sub-fund (including the RIEESA) would be unable
to meet its obligations to policyholders and its capital requirements or the Old WPSF would be unable to meet its obligations to
policyholders; and
|
|
·
|
following the sixth annual investigation after 1 October 2009 or later investigation and provided that investigation and investigations
made in the previous 2 years determined that the Reattributed Inherited Estate exceeded the Permitted Release Threshold.
|
The AVLAP Board set aside £189 million
as at 31 December 2014 to enhance the with-profits benefits for customers as they leave the AVLAP With-Profits Sub Fund (“AVLAP
WPSF”), with effect from 1 July 2015.
Reporting requirements
PRA rules require insurance companies to submit annually their audited
annual accounts, statements of financial position and life insurers’ annual reports from the actuary performing the actuarial
function with the regulator. There is also a requirement to report the annual solvency position of the insurance company’s
ultimate parent.
The PRA uses the annual return to monitor the
solvency (i.e. the ability to meet current and future obligations such as claims payments to policyholders) of the insurance company.
For general insurance business, the return is also used to assess retrospectively the adequacy of the company’s claims provisions.
The directors of an insurance company are required to sign a certificate, which includes a statement as to whether they have complied
in all material respects with the requirements of Senior Management Arrangements, Systems and Controls (SYSC), Principles for Businesses
(PRIN), Interim Prudential Sourcebook for Insurers (IPRU (INS)), General Prudential Sourcebook (GENPRU) and Prudential Sourcebook
for Insurers (INSPRU). The directors must also certify that the company has completed its return to the PRA properly in accordance
with the PRA’s instructions, and that the directors are satisfied that the company has complied in all material respects
with the requirements set out in the PRA rules. From 1 January 2016, Aviva is subject to the new Solvency II regulatory regime.
UK winding up rules
The general insolvency laws and regulations applicable to UK companies
are modified in certain respects in relation to UK insurance companies where direct insurance claims will have priority over the
claims of other unsecured creditors (with the exception of preferred creditors), including reinsurance creditors, on a winding
up by the court or a creditors’ voluntary winding up of the insurance company. Furthermore, instead of making a winding-up
order when an insurance company has been proved unable to pay its debts, a UK court may reduce the amount of one or more of the
insurance company’s contracts on terms and subject to conditions (if any) which the court considers fit. Where an insurance
company is in financial difficulties but not in liquidation, the FSCS may take measures to secure the transfer of all or part of
the business to another insurance company.
FSMA provides further protection to
policyholders of insurance companies effecting or carrying out contracts of long-term insurance. Unless the court orders otherwise,
a liquidator and/or administrator must carry on the insurer’s business so far as it consists of carrying out the insurer’s
contracts of long-term insurance with a view to it being transferred as a going concern to a person who may lawfully carry out
those contracts. In carrying on the business, the liquidator/administrator may agree to the variation of any contracts of insurance
in existence when the winding-up order is made, but must not effect any new contracts of insurance.
Canada
We write property and casualty business in Canada via a number of
wholly owned companies.
Insurance business in Canada is regulated federally
by the Office of the Superintendent of Financial Institutions (OSFI) for prudential supervision (i.e. capital adequacy, solvency,
etc). OSFI derives its powers from the federal Insurance Companies Act (Canada) which governs the structure and operation of federally
incorporated insurance companies.
The capital adequacy of insurance companies is
monitored under the Minimum Capital Test (‘MCT’), a risk-based framework allowing for capital to be assessed on the
basis of an individual company’s risk profile taking account of the investments held and insurance business being written.
Companies have their own internal MCT target that is communicated to OSFI, which is set to ensure that they maintain capital in
excess of 150% of the OSFI minimum requirement.
Market conduct regulation is conducted at the
provincial level through ten independent provincial regulators. Those regulators derive their powers from insurance acts enacted
by provincial legislatures. Market conduct regulation focuses on personal lines products and business practices, including rating
formulas, underwriting and policy terms and conditions. Commercial lines insurance is not subject to as extensive regulations.
Asia
We operate in Asia through a network of subsidiary companies either
wholly owned or established as a joint venture with a local partner. Our business is predominantly long-term and savings business,
with small general insurance and health operations.
There are wholly owned businesses in Singapore
and Hong Kong. During 2015, Aviva also operated businesses in China, India, Taiwan, Indonesia and Vietnam which, depending on the
nature and extent of the control exerted by Aviva, were accounted for as joint ventures or associates. In 2015, following the acquisition
of the Friends Life Group, one of its subsidiaries, Friends Provident International Limited (which is domiciled in the Isle of
Man) also operates in Asia through branches in Singapore, Hong Kong and the United Arab Emirates.
The Asia area is made up of a number of widely
differing and independent markets. The markets tend to be at various different stages in their economic and regulatory development
but each has its own regulatory structures and Aviva must ensure it complies with the local regulation in each of the countries
in which it operates.
Industry regulation typically focuses on financial
stability and market conduct i.e. minimum capital and the basis for calculating solvency, reserves and policyholder liability.
In many of the markets, regulators have the power to revoke operating licences, regulate shareholder structures and the participation
in and the payment of dividends. Asia markets are moving quickly to modernise insurance regulation with an increasing focus on
governance and conduct risk.
Intellectual property
Our primary brands (the Aviva name and logo) are registered trademarks
in the UK and are registered or pending in all other countries where Aviva has operations.
Aviva has an active programme of review of marks
and watching for infringements. There are no material infringements in the UK known to us as at the date of this report, either
by the Group or third parties.
Risks relating to our business
You should carefully review the following
risk factors together with other information contained in this Annual Report before making an investment decision relating to our
ordinary shares or ADSs. Our business, financial position, results of our operations and cash flow could be materially affected
by any of these risks, the trading price of our ordinary shares or ADSs could decline due to any of these risks and investors may
lose part or all of their investment.
Ongoing difficult conditions in the global financial markets
and the economy generally may adversely affect our business and results of operations, and these conditions may continue.
Our results of operations are materially affected by uncertainty in
the worldwide financial markets and macro-economic conditions generally. A wide variety of factors, including concerns over slowing
growth (more recently in China), high sovereign debt within, and to a lesser degree outside, the eurozone, the stability and solvency
of financial institutions, longer-term low interest rates in developed markets, inflationary threats as well as geopolitical issues
in, and emanating from, the Middle East, Russia, Ukraine and North Africa, have contributed to increased volatility in the financial
markets in recent years and have diminished growth expectations for the global economy. Global fixed income markets continue to
experience periods of both volatility and limited market liquidity, which have affected a broad range of asset classes and sectors.
Factors relating to general economic conditions
(such as consumer spending, business investment, government spending, and high sovereign debt levels, exchange rates and commodity
prices), uncertainty over the United Kingdom’s continued membership of and influence in the European Union (‘EU’),
the volatility and strength of both debt and equity markets, and inflation, all affect the profitability of our business. In a
sustained economic phase of low growth and high public debt, characterised by higher unemployment, lower household income, lower
corporate earnings, lower business investment and lower consumer spending, the demand for financial and insurance products could
be adversely affected. In addition, we may experience an elevated incidence of claims or surrenders of policies or claims of mis
selling. Any potential material adverse effect on us will also be dependent upon customer behaviour and confidence.
As a result of these market exposures, our financial
position and results of operations may be subject to significant volatility and negative effects, particularly if it is prolonged.
Such effects may include, inter alia: (i) a general reduction in business activity and market volumes which affects fees, commissions
and margins from customer driven transactions and revenues, and from sales of insurance products; (ii) market downturns which are
likely to reduce the level and valuations of assets managed on behalf of clients, thereby reducing asset based and performance
based fees; (iii) reduced market liquidity, limiting trading and arbitrage opportunities and presenting impediments for managing
risks, impacting both trading income and performance based fees; (iv) a reduced value in assets held for our own account if trading
positions fall in value; (v) increased impairments and defaults on credit exposures and on trading and investment positions, which
losses may be exacerbated by falling collateral values; (vi) increased collateral requirements under derivative and other financial
instruments; (vii) increased costs of hedging against market risks such as equity or interest rate exposure; (viii) pressure to
reduce equity and/or debt investments or maintain additional capital in respect of such holdings; (ix) an increase in technical
provisions and capital requirements in response to market related stress tests; and (x) a requirement to hold a larger proportion
of liquid assets in order to offset the impact of a reduction in market liquidity on a company’s ability to meet payment
obligations.
The interdependence of global financial institutions
means that the failure of a sufficiently large and influential financial institution could materially disrupt global securities
markets or clearance and settlement systems in the markets. This could cause severe market decline or volatility. Such a failure
could also lead to a chain of defaults by counterparties that could materially adversely affect the Group. This risk, known as
‘systemic risk’, could adversely impact our future product sales as a result of reduced confidence in the financial
services industry. It could also adversely impact our results because of market declines and write downs of assets.
As a global business, we are exposed to various local
political, regulatory and economic conditions, business risks and challenges which may affect the demand for our products and services,
the value of our investment portfolios and the credit quality of local counterparties.
We offer our products and services in Europe (including the United
Kingdom (‘UK’)), North America and the Asia Pacific region through wholly owned and majority owned subsidiaries, joint
ventures, companies in which we hold non controlling equity stakes, agents and independent contractors. Our international operations
expose us to different local political, regulatory, business and financial risks and challenges which may affect the demand for
our products and services, the value of our investment portfolio, the required levels of capital and surplus, and the credit quality
of local counterparties. These risks include, for example, political, social or economic instability in countries in which we operate,
discriminatory regulation, credit risks of our counterparties, lack of local business experience in certain markets, risks associated
with exposure to insurance industry insolvencies through policyholder guarantee funds or similar mechanisms set up in markets in
which we are present and, in certain cases, risks associated with the potential incompatibility with foreign partners, especially
in countries in which we are conducting business through entities which we do not control. Some of our international insurance
operations are, and are likely to continue to be, in emerging markets where these risks are heightened. Our overall success as
a global business and our results of operations depend, in part, upon our ability to succeed in different economic, social and
political conditions.
Credit risks relating to Aviva’s
business
Market developments and government actions regarding the sovereign
debt crisis in Europe, particularly in Greece, Cyprus, Ireland, Italy, Portugal and Spain, could have a material adverse effect
on our results of operations, financial condition and liquidity.
The continued uncertainty over the outcome of various EU and international
financial support programmes, and the possibility that other EU member states may experience similar financial pressures, could
further disrupt global markets. In particular, this crisis has disrupted, and could further disrupt, equity and fixed income markets,
and has resulted in volatile bond yields on the sovereign debt of EU members.
The issues arising out of the recent sovereign
debt crisis may transcend Europe, cause investors to lose confidence in the safety and soundness of European financial institutions
and the stability of European member economies, and likewise affect UK and U.S. based financial institutions, the stability of
the global financial markets and any economic recovery. We hold investments in both UK and non-UK securities.
More recently, economic conditions in affected
EU member states seem to be stabilising or improving, as evidenced by the stabilisation of credit ratings, particularly in Spain,
Portugal and Ireland. However, there can be no assurance that any stabilisation or improvement in economic conditions will continue
or that the risk of default on the sovereign debt of certain countries will be reduced, all of which could have a material adverse
effect on our financial condition and results of operations.
If an EU member state were to default on its
obligations or to seek to leave the eurozone, or if the eurozone were broken up entirely, the impact on the financial and currency
markets would be significant and could impact materially all financial institutions, including the Group. Past political negotiations
in the United States over raising the U.S. debt ceiling indicate that the risks associated with record levels of government debt
and sovereign debt default and the potential adverse impact on global markets which could result from this is not limited to the
eurozone. Such events could adversely affect our business, results of operations, financial condition and liquidity.
Credit spread volatility may adversely affect the
net unrealised value of our investment portfolio and our results of operations.
Our exposure to credit spreads primarily relates to market price variability
associated with changes in credit spreads in our investment portfolio, which is largely held to maturity. Although our financial
statements reflect the market value of assets, our priority remains the management of assets and liabilities over the longer-term.
Credit spread moves may be caused by changes in the perception of the creditworthiness of a company, or from market factors such
as the market’s risk appetite and liquidity. A widening of credit spreads will generally reduce the value of fixed income
securities we hold. Conversely, credit spread tightening will generally increase the value of fixed income securities we hold.
It can be difficult to value certain of our securities if trading becomes less liquid. Accordingly, valuations of investments may
include assumptions or estimates that may have significant period to period changes that could have a material adverse effect on
our consolidated results of operations or financial condition. Downturns in the net unrealised value of our investment portfolio
may also have a material adverse effect on our regulatory capital surplus.
Losses due to defaults by counterparties, or changing
market perceptions as to the risk of default, including potential sovereign debt defaults or restructurings, could adversely affect
the value of our investments and reduce our profitability and shareholders’ equity.
We choose to take and manage credit risk through investment assets
partly to increase returns to policyholders whose policies the assets back, and partly to optimise the return for shareholders.
We have a significant exposure to third parties
that owe us money, securities or other assets who may not perform under their payment obligations. These parties include private
sector and government (or government-backed) issuers whose debt securities we hold in our investment portfolios (including mortgage-backed,
asset-backed, government bonds and other types of securities), borrowers under residential and commercial mortgages and other loans,
reinsurers to which we have ceded insurance risks, customers, trading counterparties, and counterparties under swap and other derivative
contracts. We also execute transactions with other counterparties in the financial services industry, including brokers and dealers,
commercial and investment banks, hedge funds and other investment funds, insurance groups and institutions. Many of these transactions
expose us to credit risk in the event of default of our counterparty.
In addition, with respect to secured transactions,
our credit risk may be increased when the collateral held by us cannot be realised or is liquidated at prices insufficient to recover
the full amount of the loan or other value due. We also have exposure to financial institutions in the form of unsecured debt instruments
and derivative transactions. Such losses or impairments to the carrying value of these assets could materially and adversely affect
our financial condition and results of operations.
The Group has significant holdings of UK sovereign
and corporate debt. Credit rating agencies have indicated that in the event of the UK leaving the EU as a result of the referendum
on UK-EU membership, the credit rating of the UK government could be downgraded. In the event this occurred it could result in
a fall in the price of UK sovereign and corporate debt, adversely impacting the Group’s solvency, profitability and shareholders’
equity.
We use reinsurance and hedging programmes to
hedge various risks, including certain guaranteed minimum benefit contained in many of our long-term insurance and fund management
products. These programmes cannot eliminate all of the risks and no assurance can be given as to the extent to which such programmes
will be effective in reducing such risks. We enter into a variety of derivative instruments, including options, forwards, interest
rate and currency swaps, with a number of counterparties. Our obligations under our fund management and life products are not changed
by our hedging activities and we are liable for our obligations even if our derivative counterparties do not pay us. Defaults by
such counterparties could have a material adverse effect on our financial condition and results of operations.
We are also susceptible to an adverse financial
outcome from a change in third-party credit standing. As well as having a potential impact on asset values and, as a result, our
financial condition and results of operations, credit rating movements can also impact our solvency position where regulatory capital
requirements are linked to the credit rating of the investments held. Such movements in the credit standing of third parties could
impact on the Group’s solvency, profitability and shareholders’ equity.
Market risks relating to Aviva’s
business
Changes in interest rates may cause policyholders to surrender
their contracts, reduce the value of our investment portfolio and may have an adverse impact on our asset and liability matching,
which could adversely affect our results of operation and financial condition.
Interest rates are highly sensitive to many factors, including governmental,
monetary and tax policies, domestic and international economic and political considerations, inflationary factors, fiscal deficits,
trade surpluses or deficits, regulatory requirements and other factors beyond our control.
Our exposure to interest rate risk relates primarily
to the market price and cash flow variability of assets and liabilities associated with changes in interest rates.
Some of our products, principally traditional
participating products, universal life insurance and annuities expose us to the risk that changes in interest rates will reduce
our ‘spread’, or the difference between the amounts that we are required to pay under the contracts and the rate of
return we are able to earn on investments intended to support obligations under the contracts. Our spread is a key component of
our net income.
As interest rates decrease or remain at low levels,
we may be forced to reinvest proceeds from investments that have matured or have been prepaid or sold at lower yields, reducing
our investment return. Moreover, borrowers may prepay or redeem the fixed-income securities, commercial mortgages and mortgage-backed
securities in our investment portfolio with greater frequency in order to borrow at lower market rates, which increases this risk.
Lowering interest crediting or policyholder bonus rates can help offset decreases in investment margins on some products. However,
our ability to lower these rates could be limited by competition or by contractually guaranteed minimum rates and may not match
the timing or magnitude of changes in asset yields. As a result, our spread could decrease or potentially become negative. Our
expectation for future spreads is an important component in the amortisation of policy acquisition costs and significantly lower
spreads may cause us to accelerate amortisation, thereby reducing net income in the affected reporting period. In addition, during
periods of declining interest rates, the guarantees within existing life insurance and annuity products may be more attractive
to consumers, resulting in increased premium payments on products with flexible premium features, and a higher percentage of insurance
policies remaining in force from year to year, during a period when our new investments carry lower returns. Accordingly, during
periods of declining interest rates, profitability may suffer as the result of a decrease in the spread between interest rates
credited to policyholders and returns on our investment portfolio.
Increases in market interest rates could also
negatively affect our profitability. This could arise as the accommodative monetary policies of central banks, in particular the
US Federal Reserve and the Bank of England, are wound down or stopped. Surrenders of life insurance policies and contracts may
increase as policyholders seek higher returns and higher guaranteed minimum returns. Obtaining cash to satisfy these surrenders
may require us to liquidate fixed maturity investments at a time when market prices for those assets are depressed which may result
in realised investment losses. Regardless of whether we realise an investment loss, these cash payments would result in a decrease
in total invested assets, and may decrease our net income. Premature withdrawals may also cause us to accelerate amortisation of
policy acquisition costs, which would also reduce our net income.
Our mitigation efforts with respect to interest
rate risk are primarily focused on maintaining an investment portfolio with diversified maturities that has a weighted average
duration approximately equal to the duration of our estimated liability cash flow profile. However, it may not be possible to hold
assets that will provide cash flows to exactly match those relating to policyholder liabilities, in particular in jurisdictions
with less developed bond markets and in certain markets where regulated surrender value or maturity values are set with reference
to the interest rate environment prevailing at the time of policy issue. This is due to the duration and uncertainty of the liability
cash flows and the lack of sufficient assets of suitable duration. This results in a residual asset/liability mismatch risk that
can be managed but not eliminated. In addition, our estimate of the liability cash flow profile may be inaccurate for other reasons,
such as varying mortality, morbidity or general insurance claims, and we may be forced to liquidate investments prior to maturity
at a loss in order to cover the liability. Such a loss could have a material adverse effect on our results of operations and financial
condition.
Changes in short or long-term inflation may cause
policyholders to surrender their contracts, increase the size of our claims payments and expenses and reduce the value of our investments,
which could adversely affect our results of operations and financial condition.
We are subject to inflation risk through our holdings of fixed interest
and other investments and as a result of the potential for the cost of claims and expenses to rise faster than anticipated in our
pricing or reserving. Changes in inflation could also affect the value perceived to be offered by our policies and so adversely
affect persistency levels.
Falls in equity or property prices could have an adverse
impact on our investment portfolio and impact on our results of operations and shareholders’ equity.
We are subject to equity and property price risk due to holdings of
equities and investment properties in a variety of locations worldwide. Downturns in equity markets will depress equity prices
and have a negative impact on our capital position in that unrealised losses in our net investment portfolio will increase, and
our defined benefit pension scheme surplus/deficit will reduce/increase as the market value of scheme assets invested in equities
decreases.
Downturns and volatility in equity markets can
have a material adverse effect on the revenues and returns from our unit-linked, participating and fund management business. The
unit-linked and fund management business depends on fees related primarily to the value of assets under management and would therefore
be reduced by declines in equity and property markets. Profit could also be reduced as a result of current investors withdrawing
funds or reducing their rates of on-going investment with our fund management companies, or switching to lower risk funds generating
lower income, or as a result of our fund management companies failing to attract funds from new investors. Similarly, bonuses credited
to participating policyholders will reduce following declines in equity and property markets and this will generally also lead
to reductions in transfers to shareholders.
Downturns in equity markets may also have a material
adverse effect on our regulatory capital surplus as measured under the EU Solvency II Insurance Directive.
Heightened uncertainty surrounding the UK referendum
on EU membership and subsequent possible exit may increase market volatility and act as a drag on the relative valuations of UK
equities or other companies making use of the common market from the UK, with a negative impact on insurers, such as the Group,
whose assets are exposed to UK equity markets. It may also have an adverse impact on European equity markets and beyond.
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.
For property investment, we are subject to counterparty,
valuation and liquidity risks. These investments may be adversely affected by weakness in property markets and increased mortgage
delinquencies. We are also subject to property risk indirectly in our investments in residential mortgage-backed securities and
commercial mortgage-backed securities and covered bonds. There is the risk that the underlying collateral may fall in value causing
the investment in securities to fall in value. The markets for these property investments and instruments can become illiquid,
and issues relating to counterparty credit ratings and other factors may increase pricing and valuation uncertainties. We are also
indirectly exposed to property risk through our UK commercial finance lending. The fall in prices of any such investments due to
such risks could adversely affect our results of operations, shareholders’ equity and financial condition.
Fluctuations in currency exchange rates may adversely
affect our results of operations and financial condition.
We operate internationally and are exposed to foreign currency exchange
risk arising from fluctuations in exchange rates of various currencies. For the year ended 31 December 2015, approximately 58%
of our premium income from continuing operations arose in currencies other than sterling, and our net assets were denominated in
a variety of currencies, of which the largest are the euro, sterling and Canadian dollar. In managing our foreign currency exposures,
we do not hedge revenues as these are substantially retained locally to support the growth of the business and meet local regulatory
and market requirements. Nevertheless, the effect of exchange rate fluctuations on local operating results could lead to significant
fluctuations in our consolidated financial statements upon translation of the results into sterling. Although we take certain actions
to address this risk, foreign currency exchange rate fluctuation could materially adversely affect our reported results due to
unhedged positions or the failure of hedges to effectively offset the impact of the foreign currency exchange rate fluctuation.
Any adverse foreign currency exchange fluctuation may also have a material adverse effect on our regulatory capital surplus based
on the EU Solvency II Insurance Directive.
Market fluctuations may cause the value of options
and guarantees embedded in some of our life insurance products to exceed the value of the assets backing their reserves, which
could adversely affect our results of operations or financial condition.
As a normal part of their operating activities, various Group companies
have given guarantees and options, including interest rate and investment return guarantees, in respect of certain long-term insurance
and fund management products. In providing these guarantees and options, our capital position is sensitive to fluctuations in financial
variables, including foreign currency exchange rates, interest rates, property values and equity prices.
Interest rate guaranteed returns, such as those
available on guaranteed annuity options (‘GAOs’), are sensitive to interest rates falling below the guaranteed level.
Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations
in the investment return below the level assumed when the guarantee was made.
Periods of significant and sustained downturns
in equity markets, increased equity volatility or reduced interest rates could result in an increase in the valuation of the future
policy benefits or policyholder account balance liabilities associated with such products, resulting in a reduction to net income.
We use reinsurance and derivative instruments to mitigate some of the liability exposure and the volatility of net income associated
with these liabilities, and while we believe that these and other actions mitigate the risks related to these benefits, we remain
liable for the guaranteed benefit in the event that reinsurers or derivative counterparties are unable or unwilling to pay.
We are also subject to the risk that the cost
of hedging these guaranteed minimum benefit increases, resulting in a reduction to net income. In addition, we are subject to the
risk that unanticipated policyholder behaviour or mortality, combined with adverse market events, produces economic losses beyond
the scope of the risk management techniques employed. These, individually or collectively, may have a material adverse effect on
our results of operations, financial condition or liquidity.
Asset management risks relating to
Aviva’s business
Our fund management business may be affected by the poor investment
performance of the funds we manage
Poor investment returns in our investment management business, due
either to general market conditions or underperformance (relative to competitors or to benchmarks) by funds or accounts that we
manage, may adversely affect our ability to retain existing assets and to attract new clients or additional assets from existing
clients. The ability of our investment team to deliver strong investment performance depends in large part on our ability to identify
appropriate investment opportunities in which to invest client assets. If the investment team for any of our strategies is unable
to identify sufficient appropriate investment opportunities for existing and new client assets on a timely basis, the investment
performance of the strategy could be adversely affected. The risk that sufficient appropriate investment opportunities may be unavailable
is influenced by a number of factors, including general market conditions. This could adversely affect the management and incentive
fees that we earn on assets under management and our results of operations.
Failure to comply with client contractual requirements
and/or guidelines could result in damage awards against us and our fund management operations and loss of revenues due to client
terminations.
When clients retain us to manage assets on their behalf, we must comply
with contractual obligations and guidelines agreed with such clients in the provision of our services. A failure to comply with
these guidelines or contractual requirements could result in damage to our reputation or in our clients seeking to recover losses,
withdrawing their funds or terminating their contracts, any of which could cause our revenues and earnings to decline.
Failure to manage risks in operating securities lending
of Group and third party client assets could adversely affect our results of operations and financial condition and for our fund
management operations lead to a loss of clients and a decline in revenues and liquidity.
In operating securities lending of Group and third party client assets,
our fund management operations must manage risks associated with (i) ensuring that the value of the collateral held against the
securities on loan does not decline in value or become illiquid and that its nature and value complies with regulatory requirements
and investment requirements; (ii) the potential that a borrower defaults or does not return a loaned security on a timely basis;
and (iii) errors in the settlement of securities, daily mark-to-market valuations and collateral collection. The failure of our
fund management controls to mitigate these risks could result in financial losses for us and third party clients that participate
in our securities lending programmes.
Liquidity risks relating to Aviva’s
business
Adverse capital and credit market conditions may adversely
affect our financial flexibility in addressing liquidity needs, as well as access to and the cost of capital which could adversely
affect our results of operations or financial condition.
At Group level, we need some of our invested assets to be liquid to
pay our operating expenses, taxes, interest on our debt, dividends on our capital stock and to repay maturing debt. At an operational
level we also need liquidity and sufficient cash flow sources to meet insurance claims. Without sufficient liquidity, we could
be forced to curtail our operations and our business would suffer. The principal sources of our liquidity are insurance premiums,
annuity considerations, deposit funds and cash flow from our investment portfolio and assets, consisting mainly of cash or assets
that are readily convertible into cash. Sources of liquidity in normal markets also include a variety of short and long-term instruments,
including repurchase agreements, commercial paper, medium and long-term debt, junior subordinated debt, securities, capital securities
and stockholders’ equity.
We hold certain investments that may lack liquidity
such as commercial mortgages, real estate, privately placed fixed-maturity securities, and unlisted equities. The valuations of
such assets are based on inputs which are not directly observable in the market. The inputs used reflect the assumptions that we
consider market participants would normally use based on a combination of independent third party evidence and internally developed
models, intended to be calibrated to market observable data where possible. These are known as Level 3 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.
The reported value of our relatively illiquid
types of investments, our investments in the asset classes described in the paragraph above and, at times, our higher-quality,
generally liquid asset classes, do not necessarily reflect the lowest current market price for the asset. If we were forced to
sell certain of our assets in the current market, there can be no certainty that we would be able to sell them for the prices at
which we have recorded them and we may be forced to sell them at significantly lower prices.
We may refinance existing financing arrangements
and may, in exceptional circumstances, need to seek additional financing to supplement liquidity available from internal resources.
The availability of additional financing will depend on a variety of factors such as market conditions, the general availability
of credit, the overall availability of credit to the financial services industry and the market’s perception of our financial
condition. Disruptions and uncertainty or volatility in the capital and credit markets, as has been experienced in the last few
years, in particular throughout the eurozone, may exert downward pressure on availability of liquidity and credit capacity for
certain issuers and, if access to liquidity is constrained for a prolonged period of time, may limit our access to capital required
to operate and grow our business at a sustainable cost. Adverse market conditions may limit our ability to replace, in a timely
manner, maturing debt, satisfy statutory capital requirements and generate fee income and market related revenue to meet liquidity
needs.
As such, we may be forced to reduce our dividends,
defer interest payments or redemptions, delay raising capital, issue shorter-term securities than we prefer, or bear an unattractive
cost of capital which could decrease profitability and reduce financial flexibility. Our results of operations, financial condition
and cash flows could be materially adversely affected.
As a holding company, Aviva plc is dependent over
the medium to long-term on its operating subsidiaries to cover operating expenses and dividend payments.
As a holding company, Aviva plc has no substantial operations of its
own. Its principal sources of funding are dividends from subsidiaries, shareholder-backed funds and any amounts that may be raised
through the issuance of debt and commercial paper. Our insurance and fund management operations are generally conducted through
direct and indirect subsidiaries. Certain subsidiaries have regulatory restrictions that may limit the payment of dividends and
could prompt a decision to inject capital, which in some more adverse circumstances and over the longer-term could limit our ability
to pay dividends to shareholders. This could have a material adverse impact on our business.
Insurance risks relating to Aviva’s
business
The cyclical nature of the insurance industry may cause fluctuations
in our results.
Historically, the insurance industry has been cyclical and operating
results of insurers have fluctuated because of volatile and sometimes unpredictable developments, many of which are beyond the
direct control of any insurer. Although we have a geographically diverse group of businesses providing a wide range of products,
we expect to experience the effects of this cyclical nature, including changes in sales and premium levels. The unpredictability
and competitive nature of the general insurance business has contributed historically to significant quarter-to-quarter and year-to-year
fluctuations in underwriting results and net earnings.
The use of inaccurate assumptions in pricing and reserving
for insurance business may have an adverse effect on our business profitability.
Our life insurance companies are required to make a number of assumptions
in relation to the business written, including the mortality and morbidity rates of our customers (the proportion of customers
dying or falling sick or recovering from illness), the development of interest rates, persistency rates (the proportion of customers
retaining existing policies and continuing to pay premiums up to their maturity dates), the exercise by customers of options included
within their policies and future levels of expenses. By their nature, these assumptions may prove to be incorrect.
When establishing their liabilities, our life
insurance companies allow for changes in the assumptions made, monitor their experience against the actuarial assumptions used
and assess the information gathered to refine their long-term assumptions, together with taking actual claims experience into account.
However, it is not possible to determine precisely the total amounts that will ultimately be paid under the policies written by
the business as amounts may vary from estimates. Changes in assumptions may also lead to changes in the level of capital required
to be maintained, meaning that we may need to increase the amount of our reserves. This could have a material adverse impact on
our value, the results of our operations and financial condition.
Additionally, our management of the general insurance
business requires the general insurance companies to make a number of assumptions in relation to the business written. These assumptions
include the costs of writing the business and settling claims, and the frequency and severity of claims. The assumptions may turn
out to be incorrect, thereby adversely impacting on our profit. Additionally, man-made disasters, including accidents and intentional
events, are particularly difficult to predict with a high degree of accuracy. These would also have an adverse impact on our profit
due to higher than expected claims.
Furthermore, outstanding claims provisions for
the general insurance business are based on the best-estimate ultimate cost of all claims incurred but not settled at a given date,
whether reported or not, together with related claims handling costs. Any provisions for re-opened claims are also included. A
range of methods, including stochastic projections, may be used to determine these provisions. Underlying these methods are a number
of explicit or implicit assumptions relating to the expected settlement amount and settlement pattern of claims.
If the assumptions underlying the reserving basis
were to prove incorrect, we might have to increase the amount of the general insurance provisions, which would adversely impact
our financial condition or results of operations.
We have a significant exposure to annuity business
and a significant life insurance risk is associated with longevity.
Longevity statistics are monitored in detail, compared with emerging
industry trends, and the results are used to inform both the reserving and pricing of annuities. It is likely that uncertainty
will remain in the development of future longevity that cannot be mitigated.
A strengthening in the longevity assumption,
either to reflect changes in the underlying life expectancy (for example, as a result of healthier lifestyles, improved screening
programmes or increased availability or effectiveness of medical treatments) of the population or of our particular portfolio used
to calculate our long-term business liabilities, would result in an increase in these reserves and reduce shareholders’ equity.
If our business does not perform well or if actual
experience versus management estimates used in valuing and amortising Deferred Acquisition Costs (‘DAC’) and Acquired
value of in-force business (‘AVIF’) varies significantly, we may be required to accelerate the amortisation and/or
impair the DAC and AVIF which could adversely affect the results of operations or financial condition.
We incur significant costs in connection with acquiring new and renewal
business. Those costs that vary with and are driven by the production of new and renewal business are deferred and referred to
as DAC. The recovery of DAC is dependent upon the future profitability of the related business. The amount of future profit or
margin is dependent principally on investment returns in excess of the amounts credited to policyholders, mortality, morbidity,
persistency, general insurance underwriting profit and expenses to administer the business. Of these factors, investment margins
and general insurance underwriting profit are most likely to impact the rate of amortisation of such costs. The aforementioned
factors enter into management’s estimates of gross profit or margins, which generally are used to amortise such costs. If
the estimates of gross profit or margins were overstated, then the amortisation of such costs would be accelerated in the period
the actual amount is known and would result in a charge to income. Significant or sustained equity market declines could result
in an acceleration of amortisation of the DAC related to unit-linked business, resulting in a charge to income. Such adjustments
could have a material adverse effect on the results of operations or financial condition.
AVIF reflects the estimated present value of
future profit that will emerge over the remaining life of certain in-force contracts in a life insurance company, acquired either
directly or through the purchase of a subsidiary, and represents the portion of the purchase price that is allocated to the value
of the right to receive future cash flows from the insurance and investment contracts in-force at the acquisition date. AVIF is
based on actuarially determined projections. Actual experience may vary from the projections. Revisions to estimates result in
changes to the amounts expensed in the reporting period in which the revisions are made and could result in impairment and a charge
to income. Where AVIF is amortised, an acceleration of the amortisation of AVIF would occur if the estimates of gross profit or
margins were overstated in the period in which the actual experience is known and would result in a charge to net income. Such
adjustments could have an adverse effect on our results of operations or financial condition.
Catastrophic events, which are often unpredictable
by nature, could result in material losses and abruptly and significantly interrupt our business activities and results of operations.
Our business is exposed to volatile natural and man-made disasters
such as pandemics, hurricanes, windstorms, earthquakes, terrorism, riots, fires and explosions. Such events may not only affect
insurance claims, but could also adversely impact investment markets and cause declines in the value of our investment portfolio.
Over the past several years, changing weather patterns and climatic conditions have added to the unpredictability and frequency
of natural disasters in certain parts of the world and created additional uncertainty as to future trends and exposure.
Our life insurance operations are exposed to
the risk of catastrophic mortality, such as a pandemic or other event that causes a large number of deaths. The effectiveness of
external parties, including governmental and non-governmental organisations, in combating the spread and severity of such a pandemic
could have a material impact on the losses experienced by us.
The extent of losses from a catastrophe is a
function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes
are restricted to small geographic areas; however, pandemics, hurricanes, earthquakes and man-made catastrophes may produce significant
damage in larger areas, especially those that are heavily populated. Catastrophic events could also harm the financial condition
of our reinsurers and thereby increase the probability of default on reinsurance recoveries and could also reduce our ability to
write new business. Furthermore, pandemics, natural disasters, terrorism and fires could disrupt our operations and result in significant
loss of property, key personnel and information about our clients and our business if our business continuity plans fail to cope
with the scale or nature of the catastrophe. Such events could adversely affect our business, results of operations, corporate
reputation and financial condition for a substantial period of time.
Furthermore, market conditions beyond our control
determine the availability and cost of the reinsurance protection we purchase. Accordingly, we may be forced to incur additional
expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable terms, which could adversely affect
our ability to write future business.
Operational risks relating to Aviva’s
business
All of our businesses are subject to operational risks, including
the risk of direct or indirect loss resulting from inadequate or failed internal and external processes, systems and human error
or from malicious acts by third parties or external events.
Our business is dependent on processing a large number of complex
transactions across numerous and diverse products. Furthermore, the long-term nature of the majority of our business means that
accurate records have to be maintained for significant periods.
Our systems and processes on which we are dependent
to serve our customers are designed to identify appropriately and address the operational risks associated with our activities.
However, they may nonetheless fail due to IT malfunctions, human error, intentional disruption through the hacking of our IT systems,
phishing attacks, or planting of malware by third parties or by other means, business interruptions, non-performance by third parties
or other external events and failure of disaster recovery arrangements. This could disrupt business operations resulting in material
reputational damage and the loss of customers, and have a consequent material adverse effect on our results of operations and financial
condition. Although we have taken steps to upgrade systems and processes to reduce these operational risks, we cannot anticipate
the details or timing of all possible operational and systems failures which may adversely impact our business. The increasing
sophistication of cyber criminals and the importance of digital interaction with our customers to our strategy means the inherent
risk of failure of our operations due to the malicious acts of third parties is expected to increase.
Our businesses are exposed to risk from potential
non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious
reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses
due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter employee misconduct, and
the precautions we take to prevent and detect this activity may not always be effective.
Our risk management methods may leave us exposed to
unidentified, unanticipated or incorrectly quantified risks, which could lead to material losses or material increases in liabilities.
In particular, our risk mitigation strategies may prove less effective than anticipated, including in relation to our reinsurance
arrangements.
We have in place risk management policies, procedures and assessment
methods to identify, assess and control risks to avoid or limit potential losses or liabilities. However, such policies, procedures
and assessment methods may not be fully effective in identifying and mitigating the risk exposure of such businesses in all market
environments or against all types of risk. Unanticipated or incorrectly quantified risk exposures and/or inadequate or incorrect
responses to these risk exposures could result in a material adverse effect on our business, results of operations and/or financial
condition.
We employ a range of risk mitigation strategies
including the use of equity, interest rate and credit derivatives and reinsurance arrangements to reduce market, credit and insurance
risk. A range of different modelling approaches are used to derive and evaluate the strategies adopted. The breakdown of the assumptions
used in these modelling approaches, which may occur during market dislocations, could cause these risk mitigation strategies to
be less effective than anticipated and thereby adversely affect our financial condition and results of operations.
We currently use the reinsurance markets primarily
to limit our risk, to support growth and to manage our capital more efficiently. We are exposed to concentrations of risk with
individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit
ratings. We operate a policy to manage our reinsurance counterparty exposures, by limiting the reinsurers that may be used and
applying strict limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that the overall
counterparty risk is within appetite. Our asset and liability management and risk functions have an active monitoring role with
escalation to the Chief Financial Officer, the Group’s asset liability committee and the Board’s risk committee as
appropriate. Our largest reinsurance counterparty is BlackRock Life Ltd (including subsidiaries) arising as a result of BlackRock
funds offered to UK Life customers via unit linked contracts. At 31 December 2015, the reinsurance asset recoverable, including
debtor balances, from BlackRock Life Ltd was £12,660 million. Whilst the risk of default is considered remote due to the
nature of the arrangement and the counterparty, the Group is currently considering alternative ways to structure the agreements
with BlackRock to reduce or remove this exposure. Excluding potential exposures arising from reinsurance of unit linked funds,
our largest reinsurance counterparty is Swiss Reinsurance Company Ltd. At 31 December 2015, the reinsurance asset recoverable,
including debtor balances, from Swiss Reinsurance Company Ltd (including subsidiaries) was £2,863 million.
Reductions in risk appetite among reinsurers
may result in changes in price or willingness to reinsure certain risks, which could have a material adverse effect on our results
of operations or financial condition. If reinsurers do not offer to renew their products and services, in whole or in part, for
any reason, there is a risk that we may be unable to procure replacement cover for any reinsurance agreements terminated at rates
equivalent to those of the terminated cover, or at all, and we may be exposed to un-reinsured losses during any interim period
between termination of the existing agreements and the start of any replacement cover.
While reinsurance makes the assuming reinsurer
liable to the Group to the extent of the risk ceded, it does not discharge us from our primary obligation to pay under an insurance
policy for losses incurred. We are therefore subject to credit risk with respect to our current and future reinsurers. The insolvency
of any reinsurers or their inability or refusal to pay claims under the terms of any of their agreements with us could therefore
have a material adverse effect on the Group. Collectability of reinsurance is largely a function of the solvency of reinsurers.
Significant reinsurance purchases are reviewed annually by us to verify that the levels of protection being bought reflect any
developments in exposure and our risk appetite.
There is a risk that customer data could be stolen,
lost or misused.
As a financial services group, we maintain significant amounts of
sensitive customer data. Despite the controls put in place, there remains a risk that this data could be stolen, lost and or misused
as a result of an intentional or unintentional act by parties internal or external to us, including through the hacking of our
IT systems and failure to adequately encrypt data. This could result in fines, the need to compensate customers, the cost of remediation
and a negative impact on our reputation with the consequential impact on sales volumes, persistency levels, and third party managed
funds, and hence adversely impact our results of operations.
We operate in several markets through arrangements
with third parties, and this may expose us to additional risks.
Our ability to exercise management control over our partnership operations,
our joint ventures and our investment in them depends on the terms of the legal agreements. In particular, the relationships depend
on the allocation of control among, and continued co-operation between, the participants.
We may also face financial or other exposure
in the event that any of our partners fail to meet their obligations under the agreement or encounter financial difficulty. Partnership
agreements may also be terminated on certain dates or subject to certain conditions and could be subject to renewal on less favourable
terms. In addition, a significant proportion of our product distribution, such as bancassurance, is carried out through arrangements
with third parties not controlled by us and is dependent upon the continuation of these relationships. A temporary or permanent
disruption to these distribution arrangements could affect our financial condition. Some of these arrangements require our third-party
partners to participate in and provide capital to our joint venture, associate and subsidiary undertakings. Our partners may change
their strategic priorities or encounter financial difficulties preventing them from providing the necessary capital to promote
future growth.
In addition, we outsource certain customer service,
technology and legacy policy administration functions to third parties and may do so increasingly in the future. If we do not effectively
develop, implement and maintain our outsourcing strategy, third-party providers do not perform as anticipated or we experience
technological or other problems with a transition to or between such providers, we may not realise the full extent of productivity
improvements or administration and cost efficiencies and, as a result, may experience operational difficulties, increased costs
and a loss of business. In particular, failings by our outsource partners to perform outsourced functions, or to perform them to
the required standards, may adversely affect our reputation and lead to the loss of customers and adjusted operating profit or
to regulatory fines.
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 products, which could result in financial losses for our clients and impact
our results of operations.
The failure to attract or retain the necessary personnel,
or to keep existing personnel’s skills up to date and in line with our strategy, could have a material adverse effect on
our results of operations and/or our businesses.
As a global financial services organisation with a decentralised management
structure, we rely to a considerable extent on the quality of local management in the countries in which we operate. The success
of our operations is dependent, among other things, on our ability to attract and retain highly qualified professional employees.
Competition for such key employees is intense. Our ability to attract and retain key employees is dependent on a number of factors,
including prevailing market conditions, working environment and compensation packages offered by companies competing for the same
talent.
There are inherent funding risks associated with our
participation in defined benefit staff pension schemes.
We operate both defined benefit and defined contribution staff pension
schemes. In the UK, we operate three main pension schemes: the Aviva Staff Pension Scheme (‘ASPS’), the Friends Provident
Pension Scheme (‘FPPS’) and the RAC (2003) Pension Scheme. The defined benefit section of the ASPS was closed to new
members in 2002 other than on an exceptional basis, and closed to future accruals for all existing members from 1 April 2011. The
FPPS has been closed to new members since July 2007 and closed to active membership on 31 December 2012. The defined benefit section
of the RAC (2003) Pension Scheme was also closed to new members and closed to future accrual in April 2011.
Closure of the defined benefit schemes removes
some of the volatility associated with additional future accrual for active members.
There are still inherent funding risks associated
with the defined benefit schemes. Events could result in a material reduction in the funding position of such schemes and may result
in a materially increased deficit between the pension scheme’s assets and liabilities. The factors that affect the scheme’s
position include: poor performance of pension fund investments; greater life expectancy than assumed; adverse changes in interest
rates or inflation or discount rates; and other events occurring that increase the costs of past service benefits over the amounts
predicted in the actuarial assumptions. In the short-term, the funding position is inherently volatile due to movements in the
market value of assets. Where a funding deficit or surplus arises, the position will be discussed with the scheme trustees to agree
appropriate actions. This may include a plan to fund the deficit over a period of years. Any surplus or deficit in the defined
benefit pension scheme will affect shareholders’ equity, although the IFRS position may diverge from the scheme funding position.
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.
The determination of the amount of allowances and
impairments taken on our investments is highly subjective. Our process for valuing investments may include methodologies, estimations
and assumptions which require judgement and could result in changes to investment valuations. If our business does not perform
well, we may be required to recognise an impairment of our goodwill or intangibles with indefinite and finite useful lives, which
could adversely affect our results of operations or financial condition.
The determination of the amount of allowances and impairments taken
on our investments is highly subjective. Our process for valuing investments may include methodologies, estimations and assumptions
which require judgement and could result in changes to investment valuations.
The determination of the amount of allowances
and impairments varies by investment type and is based upon our periodic evaluation and assessment of known risks associated with
the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available
and additional impairments may need to be taken or allowances provided for in the future. If the carrying value of an investment
is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of
impairment. There can be no assurance that management has accurately assessed the level of impairments taken and allowances reflected
in our financial statements.
We value our fair value securities using designated
methodologies, estimations and assumptions. These securities, which are reported at fair value on the consolidated statement of
financial position, represent the majority of our total cash and invested assets. We have categorised the measurement basis for
assets carried at fair value into a ‘fair value hierarchy’ in accordance with the valuation inputs and consistent with
IFRS 13: Fair Value Measurement. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical
assets or liabilities (Level 1); the middle priority to fair values other than quoted prices based on observable market information
(Level 2); and the lowest priority to unobservable inputs that reflect the assumptions that we consider market participants would
normally use (Level 3). The majority of our financial assets are valued based on quoted market information (Level 1) or observable
market data (Level 2). At 31 December 2015, 16% of total financial investments, loans and investment properties at fair value were
classified as Level 3, amounting to £49,122 million. Where estimates were used for inputs to Level 3 fair values, these were
based on a combination of independent third-party evidence and internally developed models, intended to be calibrated to market
observable data where possible.
An asset or liability’s classification
within the fair value hierarchy is based on the lowest level of significant input to our valuation.
Goodwill represents the excess of the amounts
paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. We test goodwill
and intangible assets with indefinite useful lives at least annually for impairment or when circumstances or events indicate there
may be uncertainty over this value. We test intangibles with finite lives when circumstances or events indicate there may be uncertainty
over this value. For impairment testing, goodwill and intangibles have been allocated to cash-generating units by geographical
reporting unit and business segment.
The fair value of the reporting unit is impacted
by the performance of the business. Goodwill, negative unallocated divisible surplus and indefinite life intangibles are written
down for impairment where the recoverable amount is insufficient to support our carrying value. Such write downs could have a material
adverse effect on our results of operations or financial condition.
Systems errors or regulatory changes may affect the
calculation of unit prices or deduction of charges for unit-linked products which may require us to compensate customers retrospectively.
A significant proportion of our product sales are unit-linked contracts,
where product benefit are linked to the prices of underlying unit funds. While comprehensive controls are in place, there is a
risk of error in the calculation of the prices of these funds due to human error in data entry, IT-related issues or other causes.
Additionally, it is possible that policy charges which are deducted from these contracts are taken incorrectly, or the methodology
is subsequently challenged by policyholders or regulators and changed retrospectively. Any of these can give rise to compensation
payments to customers. Controls are in place to mitigate these risks, but errors could give rise to future liabilities. Payments
due to errors or compensation may negatively impact our results of operations or financial condition.
Moves to simplify the operating structure and activities
of the Group increases the reliance placed on core businesses and is subject to execution risk.
As part of our move to a more simplified structure, a number of business
disposals, operating entity mergers and operational restructures have taken place, and may continue to occur in the future. This
includes the potential sale of a number of non-core businesses. These changes are intended to reduce the operational costs of the
Group and allow resources to be re-deployed in more capital efficient businesses. There is a risk that these expected benefits
may not be realised. These changes may reduce adjusted operating profit in the short-term and will lead to changes in the geographical
and product risk profile of the Group. The execution risk including the risks relating to securing the necessary regulatory approvals,
could result in the failure to achieve cost savings, the loss of key staff, and disruption to core business activities and governance
structures which could have a material adverse effect on our business, results of operations and financial condition.
The proceeds received from disposals may not
reflect the values that management believes are achievable and/or may cause substantial accounting losses (particularly if the
disposals are done in difficult market conditions), each of which may result in our failure to realise the anticipated benefits
and gains from any such disposal. In addition, disposals of businesses, which may be cash generative and profitable, may adversely
affect our short-term cash flows until the medium to long-term strategic benefits of such disposals are realised, as well as gives
rise to a corresponding potential impact on capital requirements and liquidity. Preparation of businesses for disposal, and the
disposal process more generally, may divert management time and attention away from the operation of the business in the ordinary
course and may be disruptive to the business. We retain a residual exposure in respect of disposed business as a result of any
representations, warranties or indemnities provided.
Execution risk is inherent in the completion
of all strategic transactions. Such risks include uncertainty in relation to obtaining the required regulatory approvals on satisfactory
terms for the change of control envisaged by such transactions. Such execution risk gives rise to a corresponding potential impact
on capital requirements and liquidity.
We are reliant on IT systems and there are risks that
our current and legacy systems cannot be made to adapt to growth in the business or new styles of doing business.
Key IT initiatives may not deliver what is required either on time
or within budget or provide the performance levels required to support the current and future needs of the business. Significant
resources are devoted to maintaining and developing IT systems to keep pace with developments within the insurance and fund management
industries and to maintain service levels and availability at acceptable levels. Failure to do so could result in the inability
to gather information for pricing, underwriting and reserving, to attract and retain customers or meet regulatory requirements
or only to do so at excessive cost.
Risk relating to the execution of
our strategy, and corporate disposals and acquisitions, including specifically the acquisition of Friends Life Group
Our acquisitions and other corporate transactions may not realise
expected benefits and may divert management attention and other resources and involve risks of undisclosed liabilities and integration
issues.
In past years, we have completed a number of acquisitions. On 10 April
2015 the Group acquired Friends Life and on 21 January 2016 the Group announced its intention to acquire RBC General Insurance
Company, which is expected to complete later in 2016, and the Group may undertake further acquisitions in the future. Growth by
acquisition involves risks that could adversely affect our operating results, including the substantial amount of management time
and other resources that may be diverted from operations to pursue and complete acquisitions, or risks of undisclosed liabilities
or integration or separation issues. The integration of any future acquisition may not be successful or in line with our expectations
and any acquired businesses may fail to achieve, in the near or long-term, the financial results projected or the strategic objectives
of the relevant acquisition (such as cost savings or synergies) and, once acquired, may continue to divert further management attention
and resources or necessitate changes in Group strategy. The inability to realise expected benefits from such transactions may adversely
affect our results of operations.
The implementation of our strategy may not proceed
as expected.
Our strategy, which may be revised from time to time, may involve
carrying on business in new markets, developing capabilities to carry out new business activities, expanding or reducing the scope
of certain types of business activities or products and reorganising the Group in a manner which is appropriate for such business
development changes, taking into account legal, regulatory, operational, capital and other requirements. The implementation of
any strategy, changes in strategy, adoption of any new strategy and/or entry into new markets could entail significant changes
in our business which may entail higher levels of risk or could adversely affect the results of operations, the financial condition
and/or the credit and financial strength ratings of the Group.
We may be unable to execute, or may encounter
difficulties or delays in successfully executing, our business and strategic goals which are subject to the risks set out herein
and other factors that are currently unforeseen and which may be beyond their control. Failure to achieve any or all strategic
goals, or the encounter of undue delay or unforeseen costs in implementing such goals, could adversely affect our results of operations
and financial condition, as well as our reputation and standing in the marketplace.
Having acquired Friends Life Group, the Group’s
success will be dependent upon its ability to integrate the two businesses; there will be numerous challenges associated with the
integration and the synergies expected from the acquisition of Friends Life Group may not be fully achieved.
Following the acquisition of Friends Life Group on 10 April 2015,
a process was commenced to integrate the operations of the Aviva Group and the Friends Life Group over a period expected to last
two to three years. To the extent that the enlarged Group is unable to efficiently integrate operations, realise cost reductions,
transfer existing Friends Life Group asset management contracts to Aviva Investors, retain qualified personnel or customers and
avoid unforeseen costs or delay, there may be an adverse effect on the business, results of operations and/or the financial condition
of the enlarged Group. While Aviva believes that the costs and synergies expected to arise from the acquisition have been reasonably
estimated, unanticipated events or liabilities may arise which result in a delay or reduction in the benefits derived from the
transaction, or in costs significantly in excess of those estimated. The integration of the Group and the Friends Life Group will
be supported by a strong management team with experience of large integration processes. However, no assurance can be given that
the integration process will deliver all or substantially all of the expected benefits or realise such benefits in a timely manner.
The enlarged Group will encounter numerous integration
challenges as a consequence thereof. In particular, the enlarged Group’s management and resources may be diverted from its
core business activity of administering the enlarged businesses due to personnel being required to assist in the integration process.
The integration process may lead to an increase in the level of administrative errors. A decline in the service standards of the
enlarged Group may result in an increase in customer complaints and customer and/or regulatory actions, which may lead to reputational
damage and the loss of customers and/or distributors by the enlarged Group and have an adverse impact on financial performance
and condition. Furthermore, whether as a result of a decision or action taken by a regulator with jurisdiction over the enlarged
Group’s business or otherwise, it may not prove possible to achieve the expected level of synergy benefits on integration
of the businesses of the Group and the Friends Life Group on time or at all and/or the cost of delivering such benefits may exceed
the expected cost.
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.
During the integration period the enlarged Group
may not be in a position to acquire other insurance and/or asset management related targets that it might otherwise have sought
to acquire. In view of the demands the integration process may have on management time, it may also cause a delay in other projects
currently contemplated by the Group.
Under any of these circumstances, the business
growth opportunities, overhead functions consolidation benefits, purchasing and distribution benefits and other synergies anticipated
to result from the acquisition of Friends Life Group may not be achieved as expected, or at all, or may be delayed materially.
To the extent that the enlarged Group incurs higher integration costs or achieves lower synergy benefits than expected, its results
of operations, financial condition and/or prospects may be adversely affected.
Brand and reputation risks relating
to Aviva’s business
We are rated by several rating agencies, and a decline in any
of these ratings could affect our standing among customers, broker-dealers, agents, wholesalers and other distributors of our products
and services and cause our sales and earnings to decrease.
A rating downgrade, or the perceived potential for such a downgrade,
of Aviva plc or any of our rated insurance subsidiaries may, among other things, materially increase the number of policy surrenders
and withdrawals by policyholders of cash values from their policies. The outcome of such activities may be cash payments requiring
the sale of invested assets, including illiquid assets, at a price that may result in realised investment losses. These cash payments
to policyholders would result in a decrease in total invested assets and a decrease in net income. Among other things, early withdrawals
may also cause us to accelerate amortisation of policy acquisition costs, which would reduce net income. A rating downgrade may
also impact sales volumes, particularly in Canada, where there is more focus by brokers on ratings when evaluating similar products.
The ratings provided by AM Best and Standard & Poor’s (‘S&P’) are considered to be the most important
for distribution in Canada, and a downgrade could lead to a significant loss of sales and could lead to the termination of some
distribution agreements. A significant rating downgrade may also increase our cost of borrowing or limit our access to some forms
of financing.
We are dependent on the strength of our brand, the
brands of our partners and our reputation with customers and agents in the sale of our products and services.
Our results are, to a certain extent, dependent on the strength of
our brand and reputation. While we are well recognised, we are vulnerable to adverse market and customer perception. We operate
in an industry where integrity, customer trust and confidence are paramount. We are exposed to the risk that litigation, employee
misconduct, operational failures, the outcome of regulatory investigations, press speculation and negative publicity, disclosure
of confidential client information, inadequate services, amongst others, whether true or not, could impact our brand or reputation.
Our brand and reputation could also be affected if products or services recommended by us (or any of our intermediaries) do not
perform as expected (whether or not the expectations are founded) or in line with the customers’ expectations for the product
range. Such a change to our brand strength could adversely affect our results of operations and financial condition.
We may not be able to protect our intellectual property
and may be subject to infringement claims by a third party.
Our primary brand in the UK (‘Aviva’) is a registered
trade mark in the UK and elsewhere. We own and trade under other registered or pending trade marks in the UK and elsewhere (such
as Friends Provident, General Accident and Quote Me Happy), including Community trade marks having effect in the entire EU. We
rely on a combination of contractual rights, copyright and trademark laws to establish and protect our intellectual property. Although
we use a broad range of measures to protect our intellectual property rights, third parties may infringe or misappropriate our
intellectual property. The loss of intellectual property protection or the inability to secure or enforce the protection of our
intellectual property assets could have a material adverse effect on our business and our ability to compete.
Third parties may have, or may eventually be
issued, patents or other protections that could be infringed by our products, methods, processes or services or could limit our
ability to offer certain product features. In recent years, there has been increasing intellectual property litigation in the financial
services industry challenging, among other things, product designs and business processes. If a third party were to successfully
assert an intellectual property infringement claim against us, or if we were otherwise precluded from offering certain features
or designs, or utilising certain processes, it could have a material effect on our business, results of operations and financial
condition.
Our businesses are conducted in highly competitive
environments.
There are many factors which affect our ability to sell our products,
including fiscal incentives, price and yields offered, financial strength and ratings, range of product lines and product quality,
brand strength and name recognition, service levels to customers, fund management performance and historical bonus levels. In some
of our markets, we face competitors that are comparable in size, scope and brand recognition. In some markets, competitors have
greater financial resources or greater market share, offer a broader range of products, benefit from more advantageous tax treatments,
or have higher bonus rates or claims paying ratios. Further, heightened competition for talented and skilled employees with local
experience, particularly in the emerging, high growth markets, may limit our ability to grow businesses as quickly as planned.
In certain non UK markets, we face intense competition from local and international financial institutions, which may be more established
in these markets and may have other competitive advantages, such as greater size and breadth, which may limit our ability to be
successful in these markets. In addition, local laws and regulations may be tailored to domestic providers, which may pose additional
challenges to our business.
Our principal competitors in the life market
include many of the major financial services businesses including, in particular, Axa, Allianz, CNP, Generali, Prudential, Legal
& General, Standard Life, Unum and Zurich. Our principal competitors in the general insurance market include Direct Line Insurance,
Intact, RSA, Zurich, Axa and Allianz. Our principal competitors in the fund management market include BlackRock, State Street Global,
Fidelity Investments, Schroders and Aberdeen, as well as the fund management divisions of our principal competitors in the life
market.
We also face competitors who specialise in many
of the niche markets in which we operate. We believe that competition will intensify across all regions in response to consumer
demand, technological advances, the impact of consolidation, regulatory actions and other factors.
Our ability to generate an appropriate return
depends significantly upon our capacity to anticipate and respond appropriately to these competitive pressures.
Regulatory and legislative risks relating
to our businesses
We may experience a decreased demand for individual annuities
in the United Kingdom as a result of recent and possible further changes in UK law.
Our sales of annuities in the UK are composed of individual annuities
and bulk purchase annuities. We may experience a decreased demand for individual annuities in the UK due to recent changes in UK
law. Individual annuities have historically played a central role in most UK pensioners’ post retirement financial arrangements
due to the requirement for the benefits of defined contribution pensions to be converted to an individual annuity by the time the
policyholder reached age 75 and such pension contracts offering a tax efficient method of saving for retirement.
New legislation that took effect from April 2015,
has given retirees greater flexibility in accessing defined contribution pensions at retirement. Under the new legislation, inter
alia, consumers approaching retirement have the freedom to take their whole pension pot as cash (the first 25% remaining tax free,
with the balance taxed at the individual’s marginal rate), which removes the compulsion for customers to buy an annuity.
Subsequent to the UK Government’s announcement
of its intention to pass the new legislation in March 2014 and its coming into effect in April 2015, sales of individual annuities
have been and continue to be adversely impacted, and there continues to be uncertainty over the longer-term impact, in particular
with the possibility that the UK Government might further liberalise the restrictions on customers accessing their pension funds
on retirement adversely impacting sales of individual annuities.
In response, within the UK, we have refocused
our retirement solutions business to use our existing broad product universe (for example, individual annuities, investment platform
and equity release products) to help customers through their retirement journey and we also seek to deliver profitable growth from
our ‘Bulk Purchase Annuities’ products. However, at this stage it remains too early to assess the full impact of these
changes on our adjusted operating profit and the extent to which these impacts can be mitigated by substitution of annuity sales
with alternative products offered or being developed by us.
Our regulated business is subject to extensive regulatory
supervision both in the UK and internationally.
We are subject to extensive laws and regulations that are administered
and enforced by a number of different governmental authorities and non-governmental agencies, including the PRA, the FCA and other
regulators. In light of wider financial and economic conditions, some of these authorities are considering, or may in the future
consider, enhanced or new regulatory requirements intended to prevent future crises or otherwise assure the stability of institutions
under their supervision. These authorities may also seek to exercise their supervisory or enforcement authority in new or more
robust ways. All of these possibilities, if they occurred, could affect the way we conduct our business and manage our capital,
and may require us to satisfy increased capital requirements.
Insurance regulation in the UK is largely based
on the requirements of EU directives. Inconsistent application of directives by regulators in different EU member states may place
us at a competitive disadvantage to other European financial services groups. In addition, changes in the local regulatory regimes
of designated territories could affect the calculation of our solvency position.
Our insurance subsidiaries and branches worldwide
are subject to detailed and comprehensive government regulation in each of the jurisdictions in which they conduct business. Regulatory
agencies have broad administrative power over many aspects of the insurance business, which may include premium rates, marketing
and selling practices, advertising, licensing agents, policy forms, capital adequacy and permitted investments. Government regulators
are concerned primarily with the protection of policyholders rather than our shareholders or creditors.
The failure of any of our subsidiaries to meet
minimum capital and surplus requirements could subject us to further examination or corrective action imposed by insurance regulators,
including limitations on our ability to write additional business, increased supervision by regulators or the implementation of
resolution plans. Any corrective action imposed could have a material adverse effect on our business, results of operations and
financial condition. A decline in minimum capital and surplus amounts may also limit the ability of an insurance subsidiary to
make dividend payments or distributions and could be a factor in causing rating agencies to downgrade our financial strength ratings,
which could have a material adverse effect on our business, results of operations and financial condition.
In the UK, our business is subject to regulation
by both the PRA and the FCA, which have broad powers, including the authority to grant, vary the terms of, or cancel a regulated
firm’s authorisation, to investigate marketing and sales practices, to make product intervention rules and to require the
maintenance of adequate financial resources. The PRA and the FCA have the power to undertake a range of investigative, disciplinary
or enforcement actions, including public censure, restitution, fines or sanctions and to require firms to pay compensation.
The PRA and the FCA may make enquiries of the
companies which they regulate regarding compliance with regulations governing the operation of business and, similar to the other
UK regulated financial services companies, we face the risk that the PRA or the FCA could find that we have failed to comply with
applicable regulations or have not undertaken corrective action as required.
Issues and disputes may arise from time to time
from the way in which the insurance industry or fund management industry has sold or administered an insurance policy or other
product or in the way in which they have treated policyholders or customers, either individually or collectively, which may result
in investigative, disciplinary or enforcement actions by the FCA or PRA or require the making of redress to customers.
There has been an increased focus in the EU on
the fair treatment of customers, in particular on the way in which the insurance industry or fund management industry sells and
administers insurance policies or other products. The European Commission is currently in the process of preparing delegated regulations
under the Insurance Distribution Directive (‘IDD’) and has also been working on an initiative in relation to Packaged
Retail and Insurance based Investment Products (‘PRIIPs’) with the aim of harmonising pre contractual disclosures and
selling practices for such products. There is a risk that any new rules required in due course to implement the IDD and any new
rules relating to PRIIPs will lead to restrictions on our ability to distribute our products within the EU and additional distribution
and compliance costs, which could have a material adverse effect on our results, operations, and/or costs or otherwise negatively
impact on our distribution arrangements.
Where larger groups or matters of public policy
are concerned, the PRA and the FCA may intervene directly to provide redress to customers. There have been several industry-wide
issues in recent years in which the PRA or the FCA (or previously the Financial Services Authority) has intervened directly, including
the sale of personal pensions, the sale of mortgage-related endowments and investments in split capital investment trusts and sale
of payment protection insurance.
Outside of the UK, our businesses are regulated
by local regulators that often have similar powers to the PRA and the FCA and the exercise of these powers could therefore have
a similar negative impact on perceptions of our businesses or have a material adverse effect on our business.
Furthermore, various jurisdictions in which we
operate, including the UK, have created investor compensation schemes that require mandatory contributions from market participants
in some instances in the event of a failure of another market participant. As a major participant in the majority of our chosen
markets, circumstances could arise where we, along with other companies, may be required to make such contributions. We (like all
other groups in which an entity is PRA and/or FCA regulated) contribute to the Financial Services Compensation Scheme and the levels
of contribution to the Financial Services Compensation Scheme may change over time.
A determination that we have failed to comply
with applicable regulation could have a negative impact on our results of operations or on our relations with current and potential
customers. Regulatory action against a member of the Group could result in adverse publicity for, or negative perceptions regarding,
the Group, or could have a material adverse effect on our business, our results of operations and financial condition and divert
management’s attention from the day-to-day management of the business.
We will not always be able to predict the impact
of future legislation or regulation or changes in the interpretation or operation of existing legislation or regulation on our
business, results of operations and financial condition. Changes in government policy, legislation or regulatory interpretation
applying to companies in the financial services and insurance industries in any of the markets in which we operate, which may be
applied retrospectively, may adversely affect the range of products offered, the terms and conditions applicable to these products
(including retrospectively), distribution channels, capital requirements, dividends payable by subsidiaries and, consequently,
results and financing requirements.
Similarly, the FCA has conducted a number of
thematic reviews and market studies of the annuity and retirement income markets. Initially, a review was conducted by the FCA
of annuity pricing data, which concluded in February 2014 that the market was not working well for most consumers. This pricing
review looked at whether and to what extent prospective customers are not purchasing the best value annuities, or exercising the
open market option (‘OMO’) to buy their annuity from a firm other than the one providing the pension policy. The FCA
conducted its own pricing research to determine which groups of consumers are most likely to be affected. This involved a pricing
survey of major annuity providers, and compared the rates available through a range of distribution channels, including rates available
through the OMO and those only available to existing pension policyholders. This pricing review was followed up by the related
Thematic Review of Annuity Sales Practices, which was published by the FCA on 11 December 2014. The FCA has highlighted that its
work on this review has revealed that firms needed to make improvements in relation to the way consumers are informed about shopping
around for enhanced annuities.
The FCA has followed-up with further work in
the field of pension market reform and on 26 March 2015 published findings and proposed remedies in relation to its retirement
income market study. The FCA suggested the following remedies to support consumer choice in the market: (i) requiring firms to
provide an annuity quotation ranking so that consumers can easily identify if they could be getting a better deal by shopping around;
(ii) redesigning and behaviourally trialling the information that consumers receive from their providers, such as wake-up packs,
in the run up to their retirement; and (iii) in the longer-term, the creation of a pensions dashboard which will allow consumers
to see all their pension pots in one place. In addition, the FCA noted that they want to see firms framing the options available
to help consumers make good decisions, rather than to drive sales of certain products. On 1 October 2015 the FCA published a consultation
paper setting out proposed changes to FCA rules and guidance in relation to pension reforms. The purpose of the paper is to consult
on the FCA’s expectations about how existing rules and guidance will operate in the new environment as well as bring forward
proposals for further changes to the FCA’s rules. Following receipt of feedback, the FCA is scheduled to publish its rules
at the beginning of Q2 2016 which will come into effect in stages, within one year of the end of the consultation.
The consequences of the FCA’s work in this
area remains uncertain but could include requirements to pay redress to customers who could have obtained a more favourable annuity
rate by exercising their OMO or purchasing an enhanced annuity and/or the imposition of greater obligations on annuity providers
to treat customers fairly and provide increased levels of information on alternative options available to customers at retirement.
Regulatory action of this type could have consequences for the Group and have a material adverse effect on our business, results
of operations and/or financial condition.
Following a market study by the Office of Fair
Trading (‘OFT’) and the Department of Work and Pensions (‘DWP’), since April 2015, a 0.75% charge cap has
come into effect on auto-enrolment schemes. The cap covers member-borne deductions which include all charges on member savings
other than transaction costs. Other measures arising out of the recommendations from the OFT and DWP’s market study will
be implemented in coming years, but how these will be implemented remains uncertain. The extent of the measures, including the
impact of the charge cap on providers of workplace pensions, together with any requirement to remove commission payments, remain
uncertain and the industry response to these measures could have a range of possible impacts on the Group’s trading and financial
performance.
We may face increased compliance costs due to
the need to set up additional compliance controls or the direct cost of such compliance because of changes to financial services
legislation or regulation.
The Solvency II Directive, which governs insurance
industry regulation and prudential capital requirements in the European Union, including associated Implementing Technical Standards
and guidelines, became effective on 1 January 2016. There remains uncertainty as to how the Directive and associated standards
and guidelines will be interpreted and implemented by national supervisory authorities (‘NSAs’) in individual member
states, which may adversely impact the amount of capital required to support the business. There is a risk that NSAs will be inconsistent
in their interpretation and application of the Directive and associated standards and guidelines, for example rules pertaining
to the dynamic volatility adjustment, which could put us at competitive disadvantage in some markets by adversely impacting the
Group and subsidiary capital requirements compared to domestic competitors.
In December 2015, the PRA approved use of the
Group’s partial internal model to calculate the regulatory capital requirement under Solvency II for much of the Group’s
businesses. Over the next year or two the Group plans to apply to extend use of the Internal model to other businesses within the
Group, with a beneficial impact on the Group’s capital requirement. There is a risk that the PRA and the NSAs responsible
for these businesses do not approve extension to the use of the Internal model or apply conditions that result in the anticipated
capital benefits failing to materialise.
In July 2013 the Group was designated by the
Financial Stability Board (‘FSB’) as a global systemically important insurer (‘G-SII’). The initial list
of nine insurance groups that have been designated as G-SIIs also includes a number of our competitors. The list will be updated
annually and the Group’s inclusion on the list was reconfirmed in November 2015. For so long as it is designated as a G-SII,
the Group is within the scope of policy requirements issued by the International Association of Insurance Supervision (‘IAIS’),
including: enhanced supervision requiring the maintenance of a ‘Systemic Risk Management Plan’; a liquidity risk management
plan; a recovery plan; a resolution plan; and higher loss absorbency capital requirements, which will apply from January 2019,
subject to implementation by NSAs, for those insurers still designated as G-SIIs in November 2017. Details of the higher loss absorbency
capital requirements are still being developed by the IAIS leading to uncertainty over their impact. There is a risk that, if we
continue to be designated as a G-SII, this could lead to a significant increase in capital required to support our business which
may give rise to a need for us to delay deleveraging plans or to issue additional debt. Similarly we could be required to reduce
or discontinue activities which contribute to systemic riskiness, restructure to facilitate resolvability and/or remove or reduce
(or accelerate the planned reduction of) intercompany debts or guarantees within the Group. Such requirements could have negative
consequences for our business and results of operations and, in particular, could impact on the ability of subsidiaries to remit
dividends to Aviva and consequently on the Aviva’s ability to remit dividends to shareholders.
The IAIS is also developing a common framework
for the supervision of internationally active insurance groups (‘ComFrame’). The framework is designed to develop common
principles for supervision and so may result in more extensive regulation, particularly at Group level, in those jurisdictions
which do not currently employ group-wide supervision. In addition, it is not clear how ComFrame will interact with existing regimes
of group-wide supervision. The intention is that an insurance capital standard (‘ICS’), applicable to globally active
insurers, will ultimately form part of ComFrame. A revised draft ComFrame proposal was published in September 2014 and ComFrame,
including the final ICS, is expected to be adopted in 2019, subject to its incorporation into EU law and / or regulation.
We are involved in various legal proceedings, regulatory
investigations and examinations and may be involved in more in the future.
We have been named as defendants in lawsuits, including class actions
and individual lawsuits. We have been subject to regulatory investigations or examinations in the various jurisdictions in which
we operate. These actions arise in various contexts, including in connection with our activities as an insurer, securities issuer,
employer, investment adviser, investment manager, investor and taxpayer.
Lawsuits and investigations may also arise which
could seek significant or unspecified amounts of damages, including punitive damages, and certain of the regulatory authorities
involved in these proceedings have substantial powers over the conduct and operations of our business.
Due to the nature of certain of these lawsuits
and investigations, we cannot make an estimate of loss or predict with any certainty the potential impact of these lawsuits or
investigations.
In the course of conducting insurance business,
we receive general insurance liability claims, and become involved in actual or threatened related litigation arising therefrom,
including claims in respect of pollution and other environmental hazards. Given the significant delays that are experienced in
the notification of these claims, the potential number of incidents that they cover and the uncertainties associated with establishing
liability and the availability of reinsurance, the ultimate cost cannot be determined with certainty.
Additionally, it is possible that a regulator
in one of our major markets may conduct a review of products previously sold, either as part of an industry-wide review or specific
to it. The result of this review may be to compensate customers for losses they have incurred as a result of the products they
were sold.
As industry practices and legal, judicial, social
and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. Examples
of emerging claims and coverage issues include adverse changes in loss trends, judicial expansion of policy coverage and the impact
of new theories of liability; growth of claims culture; legislative or judicial action that affects policy coverage or interpretation,
claim quantification, or pricing; a growing trend of plaintiffs targeting property and casualty insurers in purported class action
litigation relating to claims handling and other practices; new causes of liability or mass claims; claims in respect of directors’
and officers’ coverage, professional indemnity and other liability covers; and climate change related litigation.
All of the above could adversely impact our results
of operations or financial condition.
From time to time, changes in the interpretation of
existing tax laws, amendments to existing tax rates or the introduction of new tax legislation may adversely impact our business.
We operate in numerous tax jurisdictions around the world and face
risks associated with changes in tax law, interpretation of tax law, changes in tax rates and the risk of failure to comply with
procedures required by tax authorities. Failure to manage tax risks could lead to an additional tax charge or a financial penalty.
If, as a result of a particular tax risk materialising,
the tax costs associated with certain transactions are greater than anticipated, it could affect the profitability of those transactions.
In 2005 the European Court Justice judgement
in the case of Arthur Andersen highlighted that the UK and some other EU member states were granting a VAT exemption for wider
range of insurance related services than the VAT Directive allowed. The EU Commission then initiated a project to update the
insurance VAT exemption in light of current market conditions, which was discontinued in late 2015. On 23 December 2015 the EU
Advocate General in the case of Aspiro SA confirmed the ECJ’s 2005 judgement. Subject to final judgement and consultation
on its implementation the effect could be that services outsourced to parties who have no contractual relationship with the insured
will not benefit from the VAT exemption for insurance services. Any restriction is expected to be applied prospectively and not
until 2017 at the earliest, and may increase the irrecoverable VAT incurred by the Group negatively impacting our results of operations
or financial condition.
There are also specific rules governing the taxation
of policyholders. We are unable to predict accurately the impact of future changes in tax law on the taxation of life insurance
and pension policies in the hands of policyholders. Amendments to existing legislation, particularly if there is the withdrawal
of any tax relief, or an increase in tax rates, or the introduction of new rules, may affect the future long-term business and
the decisions of policyholders. The impact of such changes upon us might depend on the mix of business in-force at the time of
such change.
The design of life insurance products by our
life insurance companies takes into account a number of factors, including risks and taxation and is based on the tax legislation
in force at that time. Changes in tax legislation or in the interpretation of tax legislation may therefore, when applied to such
products, have a material adverse effect on the financial condition of the relevant long-term business fund of the company in which
the business was written.
We may face increased compliance costs as a result
of legislation passed in the United States and globally
The U.S. Foreign Account Tax Compliance Act (‘FATCA’)
requires 30% withholding on payments of U.S. source dividends, interest, and other fixed payments (including, no earlier than 1
January 2019, payments of gross proceeds) made to a non-United States financial institution (‘FFI’) unless the FFI
has entered into an agreement with the Internal Revenue Service to report account information for any of the FFI’s U.S. accountholders.
An intergovernmental agreement between the U.S. and certain other jurisdictions will allow FFIs in those jurisdictions to report
U.S. accountholder information only to local revenue authorities, rather than to the IRS.
A number of other jurisdictions, in which we
operate, have introduced or announced that they intend to introduce similar measures requiring financial institutions in their
territory to report account information. The OECD Common Reporting Standard (CRS), which was endorsed by the G20 in July 2014,
calls on jurisdictions to obtain information from their financial institutions regarding non-resident account holders and automatically
exchange that information with other participating jurisdictions on an annual basis. To date, over 90 jurisdictions have committed
to participating in automatic exchange by reference to CRS requirements, 56 of those jurisdictions committing to implement legislation
to implement CRS as of 1 January 2016 and require first reporting by financial institutions in 2017 of 2016 information. Despite
commitments, certain participating jurisdictions have yet to implement domestic legislation and there is a lack of concrete domestic
implementation guidance in many jurisdictions. As there remains uncertainty over the precise scope of measures, we are at risk
of late changes to interpretation of implementation requirements and consequently an increase of our compliance costs, and impact
to the results of operations.
Changes to IFRS generally or specifically for insurance
companies may materially adversely affect the reporting of our financial results
Changes to IFRS for insurance companies have been proposed in recent
years and further changes may be proposed in the future. The International Accounting Standards Board published proposals that
would introduce significant changes to the statutory reporting of insurance entities that prepare financial statements according
to IFRS. The accounting proposals, which are not expected to be finalised until later in 2016 at the earliest with an effective
date still to be determined, will change the presentation and measurement of insurance contracts, including the effect of technical
reserves and reinsurance on the value of insurance contracts. It is uncertain whether and how the proposals may affect the Group
should they become definitive standards. Current proposals may have an adverse effect on the manner in which we report insurance
provisions and, therefore, identify and report revenues, costs and distributable reserves. The changes could, therefore, have an
adverse effect on our financial performance and condition (including through changes affecting the calculation of taxation). These
and any other changes to IFRS if endorsed by the EU, that may be proposed in the future, whether or not specifically targeted at
insurance companies, could materially adversely affect our reported results of operations and financial position.
Risks related to ownership of the ADSs
and ordinary shares
The trading price of our ADRs and dividends paid on our ADSs
may be materially adversely affected by fluctuations in the exchange rate for converting sterling into US dollars.
An ADS is a negotiable US security representing ownership in one share.
An ADR is denominated in US dollars and represents ownership of any number of ADSs. ADRs are publicly traded shares in a non-US
corporation, quoted and traded in US dollars in the US securities market. Any dividends are paid to investors in US dollars. ADRs
are specifically designed to facilitate the purchase, holding and sale of non-US securities by US investors. The term ADR is often
used to mean both the certificates and the securities themselves.
Fluctuations in the exchange rate for converting
pound sterling into US dollars may affect the value of our ADRs. Specifically, as the relative value of the pound sterling against
the US dollar declines, each of the following values will also decline:
|
·
|
the US dollar equivalent of the pound sterling trading price of our ordinary shares on the London Stock Exchange which may
consequently cause the trading price of our ADRs in the US to also decline;
|
|
·
|
the US dollar equivalent of the proceeds that a holder of our ADSs would receive upon the sale in
the UK of any our ordinary shares withdrawn from the depositary; and
|
|
·
|
the US dollar equivalent of cash dividends paid in pound sterling on our ordinary shares represented by our ADSs.
|
The holders of our ADSs may not be able to exercise
their voting rights due to delays in notification to, and by, the depositary.
The depositary for our ADSs may not receive voting materials for our
ordinary shares represented by our ADSs in time to ensure that holders of our ADSs can instruct the depositary to vote their shares.
In addition, the depositary’s liability to holders of our ADSs for failing to carry out voting instructions or for the manner
of carrying out voting instructions is limited by the Deposit Agreement governing our ADR facility. As a result, holders of our
ADSs may not be able to exercise their right to vote and may have limited or no recourse against the depositary or us, if their
shares are not voted according to their request.
Holders of our ADSs will have limited recourse if
we or the depositary fail to meet our respective obligations under the Deposit Agreement.
The Deposit Agreement expressly limits our obligations and liability
and those of the depositary. Neither we nor the depositary will be liable if either of us:
|
·
|
are prevented from or delayed in performing any obligation by circumstances beyond our/their control;
|
|
·
|
exercise or fail to exercise discretion under the Deposit Agreement; or
|
|
·
|
take any action based upon the advice of, or information from, legal counsel, accountants, any person presenting ordinary shares
for deposit, any person in whose name the ADSs are registered on the books of the depository, any person or entity having a beneficial
interest deriving from the ownership of ADRs, or any other person believed by us or the depositary in good faith to be competent
to give such advice or information.
|
In addition, the depositary has the obligation to participate in any
action, suit or other proceeding with respect to our ADSs which may involve it in expense or liability only if it is indemnified.
These provisions of the Deposit Agreement will limit the ability of holders of our ADSs to obtain recourse if we or the depositary
fail to meet our obligations under the Deposit Agreement or if they wish to involve us or the depositary in a legal proceeding.
The holders of our ADRs in the US may not be able
to participate in offerings of rights, warrants or similar securities to holders of our ordinary shares on the same terms and conditions
as holders of our ordinary shares.
In the event that we offer rights, warrants or similar securities
to the holders of our ordinary shares or distribute dividends payable, in whole or in part, in securities, the Deposit Agreement
provides that the depositary (after consultation with us) shall have discretion as to the procedure to be followed in making such
rights or other securities available to ADR holders, including disposing of such rights or other securities and distributing the
net proceeds in US dollars to ADR holders. Given the significant number of our ADR holders in the US, we generally would be required
to register with the SEC any public offering of rights, warrants or other securities made to our ADR holders unless an exemption
from the registration requirements of the US securities laws is available. Registering such an offering with the SEC can be a lengthy
process which may be inconsistent with the timetable for a global capital raising operation. Consequently, we have in the past
elected and may in the future elect not to make such an offer in the US, including to our ADR holders in the US, and rather only
conduct such an offering in an ‘offshore’ transaction in accordance with ‘Regulation S’ under the US Securities
Act of 1933, as amended (the ‘Securities Act’). Therefore, there can be no assurance that our ADR holders will be able
to participate in such an offering in the same manner as our ordinary shareholders.
The ADR and ordinary share price of Aviva has been,
and may continue to be volatile.
The share price of our ADRs and ordinary shares has been volatile
in the past and the share price and trading volume of our ADRs may continue to be subject to significant fluctuations due, in part,
to changes in our actual or forecast operating results and the inability to fulfill the profit expectations of securities analysts,
as well as to the high volatility in the securities markets generally and more particularly in shares of financial institutions.
Other factors, besides our financial results, that may impact our share price include, but are not limited to:
|
·
|
market expectations of the performance and capital adequacy of financial institutions in general;
|
|
·
|
investor perceptions of the success and impact of our strategies;
|
|
·
|
a downgrade or review of our credit ratings;
|
|
·
|
potential litigation or regulatory action involving Aviva or sectors we have exposure to through our insurance and fund management
activities;
|
|
·
|
the operations, accounting practices or regulatory investigations, and share price performance of other companies in the insurance
and fund management markets in which we operates; and
|
|
·
|
conjecture about our business in the press, media or investment communities.
|
|
·
|
strategic actions by competitors, including acquisitions and/or restructurings;
|
|
·
|
changes in market conditions and regulatory changes in any number of countries, whether or not the Company derives significant
revenue therefrom; and
|
|
·
|
shifts in macro-economic or geopolitical conditions generally.
|
As a ‘foreign private issuer’ we are not
subject to U.S. proxy rules and we are subject to U.S. Exchange Act reporting obligations that, to some extent, are less detailed
and less frequent than those of a U.S. issuer; this may afford less protection to investors in our securities than those afforded
to shareholders of companies that are not ‘foreign private issuers’.
As a ‘foreign private issuer’ we are exempt from certain
rules under the US Securities Exchange Act of 1934, as amended (the ‘Exchange Act’), that impose certain disclosure
obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers,
directors and principal shareholders are exempt from the reporting and ‘short-swing’ profit recovery provisions of
Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our ordinary shares
and ADRs. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly
as US companies whose securities are registered under the Exchange Act. In addition, we are not required to comply with Regulation
FD, which restricts the selective disclosure of material information. Although we must comply with UK Listing Rules on insider
reporting of share ownership and on protection of inside information, there may be less publicly available information concerning
us than there is for US public companies.
Aviva plc is an English company and it may be difficult
to enforce judgements against us or our directors and executive officers.
Aviva plc is incorporated under the laws of England and Wales and
our business is based in the UK. In addition, certain of our directors and officers reside outside the US, and a substantial portion
of our assets and the assets of such persons are located in jurisdictions outside the US. As such, it may be difficult or impossible
to effect service of process within the US upon us or those persons or to recover against us or them on judgements of US courts,
including judgements predicated upon civil liability provisions of the US federal securities laws.
Shareholder rights under English law differ from the
US.
Individual shareholders of an English company (including US persons)
have the right under English law to bring lawsuit on behalf of the company in which they are a shareholder, and on their own behalf
against the company, in certain limited circumstances. English law does not permit class action lawsuit by shareholders, except
in limited circumstances.
This page is intentionally left blank
IFRS financial statements
In this section
|
Page
|
Report of Independent Registered Public
Accounting Firm
|
128
|
Accounting policies
|
129
|
Consolidated financial statements
|
|
Consolidated income statement
|
143
|
Consolidated statement of comprehensive income
|
144
|
Consolidated statement of changes
in equity
|
145
|
Consolidated statement of financial position
|
147
|
Consolidated statement of cash flows
|
148
|
Notes to the
consolidated financial statements
|
|
1
|
Exchange rates
|
149
|
2
|
Subsidiaries
|
149
|
3
|
Segmental information
|
152
|
4
|
Details of income
|
162
|
5
|
Details of expenses
|
163
|
6
|
Finance costs
|
164
|
7
|
Employee information
|
164
|
8
|
Auditors’ remuneration
|
165
|
9
|
Tax
|
166
|
10
|
Earnings per share
|
168
|
11
|
Dividends and appropriations
|
169
|
12
|
Goodwill
|
170
|
13
|
Acquired value of in-force business (AVIF) and intangible assets
|
172
|
14
|
Interests in, and loans to, joint ventures
|
173
|
15
|
Interests in, and loans to, associates
|
175
|
16
|
Property and equipment
|
176
|
17
|
Investment property
|
177
|
18
|
Fair value methodology
|
177
|
19
|
Loans
|
183
|
20
|
Securitised mortgages and related assets
|
184
|
21
|
Interest in structured entities
|
184
|
22
|
Financial investments
|
186
|
23
|
Receivables
|
190
|
24
|
Deferred acquisition costs, other assets, prepayments and accrued income
|
190
|
25
|
Assets held to cover linked liabilities
|
191
|
26
|
Ordinary share capital
|
191
|
27
|
Group’s share plans
|
192
|
28
|
Treasury shares
|
195
|
29
|
Preference share capital
|
195
|
30
|
Direct capital instrument and tier 1 notes
|
196
|
31
|
Merger reserve
|
196
|
32
|
Other reserves
|
197
|
33
|
Retained earnings
|
197
|
34
|
Non-controlling interests
|
198
|
35
|
Contract liabilities and associated reinsurance
|
198
|
36
|
Insurance liabilities
|
199
|
37
|
Liability for investment contracts
|
208
|
38
|
Financial guarantees and options
|
209
|
39
|
Reinsurance assets
|
211
|
40
|
Effect of changes in assumptions and estimates during the year
|
213
|
41
|
Unallocated divisible surplus
|
213
|
42
|
Tax assets and liabilities
|
214
|
43
|
Provisions
|
215
|
44
|
Pension obligations
|
215
|
45
|
Borrowings
|
222
|
46
|
Payables and other financial liabilities
|
225
|
47
|
Other liabilities
|
225
|
48
|
Contingent liabilities and other risk factors
|
225
|
49
|
Commitments
|
227
|
50
|
Group capital structure
|
228
|
51
|
Statement of cash flows
|
229
|
52
|
Capital statement
|
230
|
53
|
Risk management
|
233
|
54
|
Derivative financial instruments and hedging
|
244
|
55
|
Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements
|
246
|
56
|
Related party transactions
|
247
|
57
|
Organisational structure
|
248
|
58
|
Subsequent events
|
250
|
Financial statements schedule
|
|
Financial statements of the Company
|
251
|
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and the Shareholders
In our opinion, the accompanying consolidated
statement of financial position and the related consolidated statements of income and comprehensive income, changes in equity
and cash flows present fairly, in all material respects, the financial position of Aviva plc and its subsidiaries as at 31
December 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period
ended 31 December 2015 in conformity with International Financial Reporting Standards as issued by the International
Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European
Union. In addition, in our opinion, the Financial Statement Schedule – Financial Statements of the Company presents
fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of 31 December 2015 based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is
responsible for these financial statements and financial statement schedule, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
‘Management’s annual report on internal control over financial reporting’ appearing on pages 282-283 of
the Annual Report on Form 20-F 2015. Our responsibility is to express opinions on these financial statements, the
Financial Statement Schedule – Financial Statements of the Company and on the Company's internal control over financial
reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and International Standards on Auditing. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement
and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As described in Management’s
annual report on internal control over financial reporting’ appearing on pages 282-283 of the Annual Report on Form
20-F 2015, management has excluded Friends Life Group (‘Friends Life’) from its assessment of internal control
over financial reporting as at 31 December 2015 because it was acquired by the Company in a purchase business combination
during 2015. We have also excluded the acquired Friends Life business from our audit of internal control over financial
reporting. The total assets and loss before tax of the Friends Life business represent £106 billion and £371
million loss, respectively, of the related Aviva Group consolidated financial statement amounts as at
and for the year ended 31 December 2015.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
London, United Kingdom
29 March 2016
Accounting
policies
Aviva plc (the ‘Company’), a public limited company incorporated
and domiciled in the United Kingdom (UK), together with its subsidiaries (collectively, the ‘Group’ or ‘Aviva’)
transacts life assurance and long-term savings business, fund management and most classes of general insurance and health business
through its subsidiaries, joint ventures, associates and branches in the UK, Ireland, continental Europe, Canada, Asia and other
countries throughout the world.
The principal accounting policies adopted in
the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented,
unless otherwise stated.
(A) Basis of preparation
The consolidated financial statements and those of the Company have
been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) as issued by
the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU), and those parts of the Companies
Act 2006 applicable to those reporting under IFRS. In addition to fulfilling their legal obligation to comply with IFRS as adopted
by the EU, the Group and the Company have also complied with IFRS as issued by the IASB applicable at 31 December 2015. The consolidated
financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings,
investment property, available-for-sale financial assets, and financial assets and financial liabilities (including derivative
instruments) at fair value through profit or loss.
In accordance with IFRS 4
Insurance Contracts
,
the Group has applied existing accounting practices for insurance and participating investment contracts, modified as appropriate
to comply with the IFRS framework and applicable standards. Further details are given in accounting policy G.
Items included in the financial statements of
each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates
(the functional currency). The consolidated financial statements are stated in pounds sterling, which is the Company’s functional
and presentational currency. Unless otherwise noted, the amounts shown in these financial statements are in millions of pounds
sterling (£m). The separate financial statements of the Company are on pages 251 to 260.
New standards, interpretations and
amendments to published standards that have been adopted by the Group
The Group has adopted the following amendments to standards
which became effective for the annual reporting period beginning on 1 January 2015.
|
(i)
|
Amendments to IAS 19, Employee Benefits – Employee Contributions
|
|
|
These narrow scope amendments simplify accounting for defined benefit plans that require contributions from employees or third
parties. The adoption of the amendments has no impact on the Group’s consolidated financial statements as the Group does
not have defined benefit plans that require employees or third parties to contribute to the cost of the plan.
|
|
(ii)
|
Annual Improvements to IFRSs 2011-2013
|
|
|
These improvements to IFRSs consist of amendments to four IFRSs including IFRS 3
Business Combinations
and IFRS 13
Fair
Value Measurement
. The amendments clarify existing guidance and there is no impact on the Group’s consolidated financial
statements.
|
Standards, interpretations and amendments
to published standards that are not yet effective and have not been adopted early by the Group
The following new standards, amendments to existing standards have
been issued, are not yet effective and have not been adopted early by the Group:
|
(i)
|
Amendments to IAS 16 and IAS 38 – Clarification of Acceptable Methods of Depreciation and Amortisation
|
|
|
These amendments provide additional guidance on how the depreciation or amortisation of property, plant and equipment and intangible
assets should be calculated. The amendments to IAS 16 and IAS 38 prohibit the use of revenue-based depreciation for property, plant
and equipment and significantly limit the use of revenue-based amortisation for intangible assets.
|
|
|
The adoption of these amendments is not expected to have a significant impact for the Group’s consolidated financial
statements as the Group does not apply revenue-based depreciation or amortisation. These amendments are effective for annual reporting
periods beginning on or after 1 January 2016 and have been endorsed by the EU.
|
|
(ii)
|
Amendments to IAS 27, Equity Method in Separate Financial Statements
|
|
|
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.
|
|
(iii)
|
Narrow scope amendments to IFRS10, IFRS 12 and IAS 28 – Applying the Consolidation Exception
|
|
|
These narrow scope amendments clarify the application of the requirements for investment entities to measure subsidiaries at
fair value instead of consolidating them. There are no implications for the Group’s consolidated financial statements as
the Group does not meet the definition of an investment entity. These amendments are effective for annual reporting periods beginning
on or after 1 January 2016 and have not yet been endorsed by the EU.
|
|
(iv)
|
Amendments to IAS 1 – Disclosure Initiative
|
|
|
These amendments clarify guidance in IAS 1 on materiality and aggregation, the presentation of subtotals, the structure of
financial statements and the disclosure of accounting policies. The amendments form part of the IASB’s Disclosure Initiative,
which explores how financial statement disclosures can be improved. The adoption of these amendments will have no impact on the
Group’s profit or loss or equity. The amendments are effective for annual reporting periods beginning on or after 1 January
2016 and have been endorsed by the EU.
|
|
(v)
|
Annual Improvements to IFRSs 2012-2014
|
|
|
These improvements consist of amendments to five IFRSs including IFRS 5
Non-current Assets Held for Sale
and
Discontinued Operations
, IFRS 7
Financial Instruments: Disclosures
and IAS 19
Employee Benefits
. The amendments
clarify existing guidance. The adoption of these amendments is not expected to have a significant impact on the Group’s consolidated
financial statements. The amendments are effective for annual reporting periods beginning on or after 1 January 2016 and have been
endorsed by the EU.
|
|
(vi)
|
IFRS 15, Revenue from Contracts with Customers
|
|
|
IFRS 15 will replace IAS 18
Revenue
and establishes a principle based five-step model to be applied to all contracts
with customers, except for insurance contracts, financial instruments and lease contracts. IFRS 15 also includes enhanced disclosure
requirements. The impact of the adoption of the new standard has yet to be fully assessed by the Group. This standard applies to
annual reporting periods beginning on or after 1 January 2018 and has not yet been endorsed by the EU.
|
|
(vii)
|
IFRS 9, Financial Instruments
|
|
|
In July 2014, the IASB published IFRS 9
Financial Instruments
which will replace IAS 39
Financial Instruments: Recognition
and Measurement
. The standard incorporates new classification and measurements requirements for financial assets, the introduction
of an expected credit loss impairment model which will replace the incurred loss model of IAS 39, and new hedge accounting requirements.
Under IFRS 9, all financial assets will be measured at either amortised cost or fair value. The basis of classification will depend
on the business model and the contractual cash flow characteristics of the financial assets. The standard retains most of IAS 39’s
requirements for financial liabilities except for those designated at fair value through profit or loss whereby that part of the
fair value changes attributable to own credit is to be recognised in other comprehensive income instead of the income statement.
The hedge accounting requirements are more closely aligned with risk management practices and follow a more principle based approach.
|
|
|
In December 2015, the IASB published an Exposure Draft to consult on amendments to IFRS 4
Insurance Contracts
that would
address the accounting consequences of the application of IFRS 9 to insurers prior to the publication of the new accounting standard
for insurance contracts. The ED introduces two alternative options to insurers: the overlay approach and the deferral approach.
The deferral approach provides an entity, if eligible, with a temporary exemption from applying IFRS 9 until the earlier of
the effective date of a new insurance contract standard or 2021.The overlay approach allows an entity to remove from profit or
loss the effects of some of the accounting mismatches that may occur before the new insurance contracts standard is applied. These
amendments are expected to be finalised and issued in 2016.
|
|
|
Until the forthcoming ED is finalised, and the interaction with the new insurance contracts standard is clear, it is not possible
to fully assess the effect of the adoption of IFRS 9. IFRS 9 has not yet been endorsed by the EU.
|
(viii) Amendments
to IFRS 10 and IAS 28 – Sale of Contribution of Assets between an Investor and its Associate or Joint Venture
|
|
Amendments to IFRS 10 and IAS 28 clarify that for transactions between an investor and its associate or joint venture, full
gains are to be recognised where the assets sold or contributed constitute a business as defined in IFRS 3
Business Combinations
.
Where the assets sold or contributed do not constitute a business, gains and losses are recognised only to extent of other investors’
interests in associate or joint venture. The adoption of these amendments is not expected to have significant implications for
the Group’s consolidated financial statements. In December 2015, the IASB postponed the effective date of these amendments
indefinitely pending the outcome of its research project on the equity method of accounting.
|
|
|
In January 2016, the IASB published IFRS 16
Leases
which will replace IAS 17
Leases
. IFRS 16 introduces a definition
of a lease with a single lessee accounting model eliminating the classification of either operating or finance leases. Lessees
will be required to account for all leases in a similar manner to the current financial lease accounting recognising lease assets
and liabilities on the statement of financial position. Lessor accounting remains similar to current practice. The impact of the
adoption of IFRS 16 has yet to be fully assessed by the Group. This standard applies to annual reporting periods beginning on or
after 1 January 2019 and has not yet been endorsed by the EU.
|
|
(x)
|
Narrow scope amendments to IAS 12 – Recognition of Deferred Tax Assets for Unrealised Losses
|
|
|
The revisions to IAS 12
Income Taxes
clarify the accounting for deferred tax assets on unrealised losses and state that
deferred tax assets should be recognised when an asset is measured at fair value and that fair value is below the asset’s
tax base. It also provides further clarification on the estimation of probable future taxable profits that may support the recognition
of deferred tax assets. The adoption of this amendment is not expected to have an impact on the consolidated financial statements
as the clarifications to IAS 12 are consistent with our existing interpretation. The amendment is effective from 1 January
2017 and has not yet been endorsed by EU.
|
|
(xi)
|
Amendments to IAS 7 – Disclosure initiative
|
|
|
The amendments to IAS 7,
Statement of Cash Flows
, which form part of the IASB’s Disclosure Initiative, require
disclosure of the movements in liabilities arising from financing activities with cash and non-cash changes presented separately.
The adoption of this amendment is not expected to have an impact on the consolidated financial statements as the Group already
voluntarily discloses this information in note 45. The amendment is effective from 1 January 2017 and has not yet been endorsed
by EU.
|
(B) Operations held for sale
Assets and liabilities held for disposal as part
of operations which are held for sale are shown separately in the consolidated statement of financial position. Operations held
for sale are recorded at the lower of their carrying amount and their fair value less the estimated selling costs.
(C) Critical accounting policies and
the use of estimates
Critical accounting policies
The preparation of financial statements requires the Group to select
accounting policies and make estimates and assumptions that affect items reported in the consolidated income statement, consolidated
statement of financial position, other primary statements and notes to the consolidated financial statements.
The Audit Committee reviews the reasonableness
of judgements and assumptions applied and the appropriateness of significant accounting policies. Details of significant issues
considered by the Committee in the year are included within the Audit Committee Report on page 61.
These major areas of judgement on policy
application are summarised below:
Item
|
Critical accounting judgement
|
Accounting policy
|
Consolidation
|
Assessment of whether the Group controls the underlying entities including consideration of its decision making authority and the rights to variable returns from the entity
|
D
|
Insurance and participating investment contract liabilities
|
Assessment of the significance of insurance risk transferred to the Group in determining whether a contract should be accounted for as insurance or investment contract
|
G
|
Financial investments
|
Classification of investments including the application of the fair value option
|
T
|
All estimates are based on management’s knowledge of
current facts and circumstances, assumptions based on that knowledge and their predictions of future events and actions. Actual
results may differ from those estimates, possibly significantly.
The table below sets out those items
considered particularly susceptible to changes in estimates and assumptions, and the relevant accounting policy and note disclosures.
Item
|
Critical accounting assumptions
|
Accounting policy
|
Note
|
Measurement of insurance and investment contract liabilities
|
Principal assumptions will include those in respect of mortality, morbidity, persistency, expense, valuation interest rates, credit default allowances on corporate bonds and valuation of guarantees
|
L
|
36(b)
|
Acquired value of in-force business (‘AVIF’) and intangible assets
|
AVIF is recognised, amortised and tested for impairment by reference to the present value of estimated future profits. Other acquired intangible assets are recognised and tested for impairment using an income approach method. Significant estimates include forecast cash flows and discount rates
|
O
|
13
|
Fair value of financial investments, derivative financial instruments and investment property
|
Where quoted market prices are not available, valuation techniques are used to value financial investments, derivatives and investment property. These include broker quotes and models using both observable and unobservable market inputs.
|
F,T,U
|
18,22
|
Impairment of financial assets
|
Factors considered when assessing whether there is objective evidence of impairment include industry risk factors, financial condition, credit rating and whether there has been a significant or prolonged decline in fair value
|
T,V
|
19,22
|
Deferred acquisition costs
|
Management use estimation techniques to determine the amortisation profile and impairment test by reference to the present value of estimated future profits
|
X
|
24
|
Provisions and contingent liabilities
|
When evaluating whether a provision or a contingent liability should be recognised the Group assesses the likelihood of a constructive or legal obligation to settle a past event and whether the amount can be reliably estimated. The amount of provision is determined based on the Group’s estimation of the expenditure required to settle the obligation at the statement of financial position date
|
AA
|
43,48
|
Pension obligations
|
The Group uses a number of estimates when calculating its pension obligations, including mortality assumptions, discount rates and inflation rates
|
AB
|
44
|
Deferred income taxes
|
Calculation and recognition of temporary differences giving rise to deferred tax balances includes estimates of the extent to which future taxable profits are available against which the temporary differences can be utilised
|
AC
|
42
|
(D) Consolidation principles
Subsidiaries
Subsidiaries are those entities over which the Group has control.
The Group controls an investee if and only if the Group has all of the following:
|
·
|
power over the investee,
|
|
·
|
exposure, or rights, to variable returns from its involvement with the investee, and
|
|
·
|
the ability to use its power over the investee to affect its returns.
|
The Group considers all relevant facts and circumstances in assessing
whether it has power over an investee, including: the purpose and design of an investee, relevant activities, substantive and protective
rights, and voting rights and potential voting rights.
The Group reassesses whether or not it controls
an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Subsidiaries
are consolidated from the date the Group obtains control and are excluded from consolidation from the date the Group loses control.
All intercompany transactions, balances and unrealised surpluses and deficits on transactions between Group companies have been
eliminated. Accounting policies of subsidiaries are aligned on acquisition to ensure consistency with Group policies.
The Group is required to use the acquisition
method of accounting for business combinations. Under this method, the cost of an acquisition is measured as the aggregate of the
consideration transferred, measured at acquisition date fair value, and the amount of any non-controlling interest in the acquiree.
For each business combination, the Group has the option to measure the non-controlling interest in the acquiree either at fair
value or at the proportionate share of the acquiree’s identifiable net assets. The excess of the consideration transferred
over the fair value of the net assets of the subsidiary acquired is recorded as goodwill (see accounting policy O below). Acquisition-related
costs are expensed as incurred.
Transactions with non-controlling interests that
lead to changes in the ownership interests in a subsidiary but do not result in a loss of control are treated as equity transactions.
Merger accounting and the merger reserve
Prior to 1 January 2004, the date of first time adoption of IFRS,
certain significant business combinations were accounted for using the ‘pooling of interests method’ (or merger accounting),
which treats the merged groups as if they had been combined throughout the current and comparative accounting periods. Merger accounting
principles for these combinations gave rise to a merger reserve in the consolidated statement of financial position, being the
difference between the nominal value of new shares issued by the Parent Company for the acquisition of the shares of the subsidiary
and the subsidiary’s own share capital and share premium account. These transactions have not been restated, as permitted
by the IFRS 1 transitional arrangements.
The merger reserve is also used where more than
90% of the shares in a subsidiary are acquired and the consideration includes the issue of new shares by the Company, thereby attracting
merger relief under the Companies Act 1985 and, from 1 October 2009, the Companies Act 2006.
Investment vehicles
In several countries, the Group has invested in a number of specialised
investment vehicles such as Open-ended Investment Companies (OEICs) and unit trusts. These invest mainly in equities, bonds, cash
and cash equivalents, and properties, and distribute most of their income. The Group’s percentage ownership in these vehicles
can fluctuate from day to day according to the Group’s and third-party participation in them. When assessing control over
investment vehicles, along with the factors determining control outlined above, the Group considers the scope of its decision-making
authority including its ability to direct the relevant activities of the fund and exposure to variability of returns from the perspective
of an investor in the fund and of the asset manager. In addition, the Group assesses rights held by other parties including substantive
removal rights that may affect the Group’s ability to direct the relevant activities and indicate that the Group does not
have power. Where the Group is deemed to control such vehicles, they are consolidated, with the interests of parties other than
Aviva being classified as liabilities. These appear as ‘Net asset value attributable to unitholders’ in the consolidated
statement of financial position.
Where the Group does not control such vehicles,
and these investments are held by its insurance or investment funds, they are carried at fair value through profit or loss within
financial investments in the consolidated statement of financial position, in accordance with IAS 39
Financial
Instruments: Recognition and Measurement
.
As part of their investment strategy, the UK
and certain European and Asian long-term business policyholder funds have invested in a number of property limited partnerships
(PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general
partners (GPs), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes
in the PLPs. The PUTs are managed by a Group subsidiary.
Accounting for the PUTs and PLPs as subsidiaries,
joint ventures, associates or other financial investments depends on whether the Group is deemed to have control or joint control
over the PUTs and PLPs’ shareholdings in the GPs and the terms of each partnership agreement are considered along with other
factors that determine control, as outlined above. Where the Group exerts control over a PUT or a PLP, it has been treated as a
subsidiary and its results, assets and liabilities have been consolidated. Where the partnership is managed by an agreement such
that there is joint control between the parties, notwithstanding that the Group’s partnership share in the PLP (including
its indirect stake via the relevant PUT and GP) may be lower or higher than 50%, such PUTs and PLPs have been classified as joint
ventures. Where the Group has significant influence over the PUT or PLP, as defined in the following section, the PUT or PLP is
classified as an associate. Where the Group holds non-controlling interests in PLPs, with no significant influence or control over
their associated GPs, the relevant investments are carried at fair value through profit or loss within financial investments.
Associates and joint ventures
Associates are entities over which the Group has significant influence.
Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control
or joint control. Generally, it is presumed that the Group has significant influence if it has between 20% and 50% of voting rights.
Joint ventures are joint arrangements whereby the Group and other parties that have joint control of the arrangement have rights
to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists
only when decisions about the relevant activities require unanimous consent of the parties sharing control. In a number of these,
the Group’s share of the underlying assets and liabilities may be greater or less than 50% but the terms of the relevant
agreements make it clear that control is not exercised. Such jointly controlled entities are referred to as joint ventures in these
financial statements.
Gains on transactions between the Group and its
associates and joint ventures are eliminated to the extent of the Group’s interest in the associates and joint ventures.
Losses are also eliminated, unless the transaction provides evidence of an impairment of the asset transferred between entities.
Other than investments in investment vehicles
which are carried at fair value through profit or loss, investments in associates and joint ventures are accounted for using the
equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with
the Group’s share of that entity’s post-acquisition changes to shareholders’ funds, is included as an asset in
the consolidated statement of financial position. As explained in accounting policy O, the cost includes goodwill identified on
acquisition. The Group’s share of their post-acquisition profits or losses is recognised in the income statement and its
share of post-acquisition movements in reserves is recognised in reserves. Equity accounting is discontinued when the Group no
longer has significant influence or joint control over the investment.
If the Group’s share of losses in an associate
or joint venture equals or exceeds its interest in the undertaking, the Group does not recognise further losses unless it has incurred
obligations or made payments on behalf of the entity.
The Company’s investments
In the Company’s statement of financial position, subsidiaries,
associates and joint ventures are stated at their fair values, estimated using applicable valuation models underpinned by the Company’s
market capitalisation. These investments are classified as available for sale (AFS) financial assets, with changes in their fair
value being recognised in other comprehensive income and recorded in a separate investment valuation reserve within equity.
(E) Foreign currency translation
Income statements and cash flows of foreign entities are translated
into the Group’s presentation currency at average exchange rates for the year while their statements of financial position
are translated at the year-end exchange rates. Exchange differences arising from the translation of the net investment in foreign
subsidiaries, associates and joint ventures, and of borrowings and other currency instruments designated as hedges of such investments,
are recognised in other comprehensive income and taken to the currency translation reserve within equity. On disposal of a foreign
entity, such exchange differences are transferred out of this reserve and are recognised in the income statement as part of the
gain or loss on sale. The cumulative translation differences were deemed to be zero at the transition date to IFRS.
Foreign currency transactions are accounted for
at the exchange rates prevailing at the date of the transactions. Gains and losses resulting from the settlement of such transactions,
and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement.
Translation differences on debt securities and
other monetary financial assets measured at fair value and designated as held at fair value through profit or loss (FVTPL) (see
accounting policy T) are included in foreign exchange gains and losses in the income statement. For monetary financial assets designated
as available for sale (AFS), translation differences are calculated as if they were carried at amortised cost and so are recognised
in the income statement, whilst foreign exchange differences arising from fair value gains and losses are recognised in other comprehensive
income and included in the investment valuation reserve within equity. Translation differences on non-monetary items, such as equities
which are designated as FVTPL, are reported as part of the fair value gain or loss, whereas such differences on AFS equities are
included in the investment valuation reserve.
(F) Fair value measurement
Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether
that price is directly observable or estimated using another valuation technique. This presumes that the transaction takes place
in the principal (or most advantageous) market under current market conditions. Fair value is a market-based measure and in the
absence of observable market prices in an active market, it is measured using the assumptions that market participants would use
when pricing the asset or liability.
The fair value of a non-financial asset is determined
based on its highest and best use from a market participant’s perspective. When using this approach, the Group takes into
account the asset’s use that is physically possible, legally permissible and financially feasible.
The best evidence of the fair value of a financial
instrument at initial recognition is normally the transaction price i.e. the fair value of the consideration given or received.
In certain circumstances, the fair value at initial recognition may differ from the transaction price. If the fair value is evidenced
by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging),
or is based on a valuation technique whose variables include only data from observable markets, then the difference between the
fair value at initial recognition and the transaction price is recognised as a gain or loss in the income statement. When unobservable
market data has a significant impact on the valuation of financial instruments, the difference between the fair value at initial
recognition and the transaction price is not recognised immediately in the income statement, but deferred and recognised in the
income statement on an appropriate basis over the life of the instrument but no later than when the valuation is supported wholly
by observable market data or the transaction is closed out or otherwise matured.
If an asset or a liability measured at fair value
has a bid price and an ask price, the price within the bid-ask spread that is most representative of fair value in the circumstances
is used to measure fair value.
(G) Product classification
Insurance contracts are defined as those containing significant insurance
risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding
scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all
rights and obligations are extinguished or expire. Contracts can be reclassified as insurance contracts after inception if insurance
risk becomes significant. Any contracts not considered to be insurance contracts under IFRS are classified as investment contracts.
Some insurance and investment contracts contain a discretionary participation feature, which is a contractual right to receive
additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts.
As noted in accounting policy A, insurance contracts
and participating investment contracts in general continue to be measured and accounted for under existing accounting practices
at the later of the date of transition to IFRS (‘grandfathered’) or the date of the acquisition of the entity, in accordance
with IFRS 4. IFRS accounting for insurance contracts in UK companies was grandfathered at the date of transition to IFRS and determined
in accordance with the Statement of Recommended Practice issued by the Association of British Insurers (subsequently withdrawn
by the ABI in 2015).
In certain businesses, the accounting policies
or accounting estimates have been changed, as permitted by IFRS 4 and IAS 8 respectively, to remeasure designated insurance liabilities
to reflect current market interest rates and changes to regulatory capital requirements. When accounting policies or accounting
estimates have been changed, and adjustments to the measurement basis have occurred, the financial statements of that year will
have disclosed the impacts accordingly. One such example is our adoption of Financial Reporting Standard 27
Life Assurance
(FRS
27) which was issued by the UK’s Accounting Standards Board (ASB) in December 2004 (subsequently withdrawn by the ASB in
2015). The additional requirements of FRS 27 are detailed in accounting policy L below.
(H) Premiums earned
Premiums on long-term insurance contracts and participating investment
contracts are recognised as income when receivable, except for investment-linked premiums which are accounted for when the corresponding
liabilities are recognised. For single premium business, this is the date from which the policy is effective. For regular premium
contracts, receivables are recognised at the date when payments are due. Premiums are shown before deduction of commission and
before any sales-based taxes or duties. Where policies lapse due to non-receipt of premiums, then all the related premium income
accrued but not received from the date they are deemed to have lapsed is offset against premiums.
General insurance and health premiums written
reflect business incepted during the year, and exclude any sales-based taxes or duties. Unearned premiums are those proportions
of the premiums written in a year that relate to periods of risk after the statement of financial position date. Unearned premiums
are calculated on either a daily or monthly pro rata basis. Premiums collected by intermediaries, but not yet received, are assessed
based on estimates from underwriting or past experience, and are included in premiums written.
Deposits collected under investment contracts
without a discretionary participation feature (non-participating contracts) are not accounted for through the income statement,
except for the fee income (covered in accounting policy I) and the investment income attributable to those contracts, but are accounted
for directly through the statement of financial position as an adjustment to the investment contract liability.
(I) Other investment contract fee revenue
Investment contract policyholders are charged fees for policy administration,
investment management, surrenders or other contract services. The fees may be for fixed amounts or vary with the amounts being
managed, and will generally be charged as an adjustment to the policyholder’s balance. The fees are recognised as revenue
in the period in which they are collected unless they relate to services to be provided in future periods, in which case they are
deferred and recognised as the service is provided.
Initiation and other ‘front-end’
fees (fees that are assessed against the policyholder balance as consideration for origination of the contract) are charged on
some non-participating investment and investment fund management contracts. Where the investment contract is recorded at amortised
cost, these fees are deferred and recognised over the expected term of the policy by an adjustment to the effective yield. Where
the investment contract is measured at fair value, the front-end fees that relate to the provision of investment management services
are deferred and recognised as the services are provided.
(J) Other fee and commission income
Other fee and commission income consists primarily of fund management
fees, distribution fees from mutual funds, commissions on reinsurance ceded, commission revenue from the sale of mutual fund shares
and transfer agent fees for shareholder record keeping. Reinsurance commissions receivable are deferred in the same way as acquisition
costs, as described in accounting policy X. All other fee and commission income is recognised as the services are provided.
(K) Net investment income
Investment income consists of dividends, interest and rents receivable
for the year, movements in amortised cost on debt securities, realised gains and losses, and unrealised gains and losses on fair
value through profit or loss investments (as defined in accounting policy T). Dividends on equity securities are recorded as revenue
on the ex-dividend date. Interest income is recognised as it accrues, taking into account the effective yield on the investment.
It includes the interest rate differential on forward foreign exchange contracts. Rental income is recognised on an accruals basis,
and is recognised on a straight line basis unless there is compelling evidence that benefits do not accrue evenly over the period
of the lease.
A gain or loss on a financial investment is only
realised on disposal or transfer, and is the difference between the proceeds received, net of transaction costs, and its original
cost or amortised cost, as appropriate.
Unrealised gains and losses, arising on investments
which have not been derecognised as a result of disposal or transfer, represent the difference between the carrying value at the
year end and the carrying value at the previous year end or purchase value during the year, less the reversal of previously recognised
unrealised gains and losses in respect of disposals made during the year. Realised gains or losses on investment property represent
the difference between the net disposal proceeds and the carrying amount of the property.
(L) Insurance and participating investment
contract liabilities
Claims
Long-term business claims reflect the cost of all claims arising during
the year, including claims handling costs, as well as policyholder bonuses accrued in anticipation of bonus declarations.
General insurance and health claims incurred
include all losses occurring during the year, whether reported or not, related handling costs, a reduction for the value of salvage
and other recoveries, and any adjustments to claims outstanding from previous years.
Claims handling costs include internal and external
costs incurred in connection with the negotiation and settlement of claims. Internal costs include all direct expenses of the claims
department and any part of the general administrative costs directly attributable to the claims function.
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-profit and non-profit contracts.
The long-term business provisions are calculated
separately for each life operation, based either on local regulatory requirements or existing local GAAP (at the later of the date
of transition to IFRS or the date of the acquisition of the entity); and actuarial principles consistent with those applied in
each local market. Each calculation represents a determination within a range of possible outcomes, where the assumptions used
in the calculations depend on the circumstances prevailing in each life operation. The principal assumptions are disclosed in note
36(b). For the UK with-profit funds, FRS 27 requires liabilities to be calculated on the realistic basis as set out by the UK’s
Prudential Regulation Authority (PRA), adjusted to remove the shareholders’ share of future bonuses. For UK non-profit insurance
contracts, the Group applies PRA regulatory requirements, adjusted to remove certain regulatory reserves and margins in assumptions,
notably for annuity business.
Unallocated divisible surplus
In certain participating long-term insurance and investment business,
the nature of the policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain.
Amounts whose allocation to either policyholders or shareholders has not been determined by the end of the financial year are held
within liabilities as an unallocated divisible surplus.
If the aggregate carrying value of liabilities
for a particular participating business fund is in excess of the aggregate carrying value of its assets, then the difference is
held as a negative unallocated divisible surplus balance, subject to recoverability from margins in that fund’s participating
business. Any excess of this difference over the recoverable amount is charged to net income in the reporting period.
Embedded derivatives
Embedded derivatives that meet the definition of an insurance contract
or correspond to options to surrender insurance contracts for a set amount (or based on a fixed amount and an interest rate) are
not separately measured. All other embedded derivatives are separated and measured at fair value if they are not considered closely
related to the host insurance contract or do not meet the definition of an insurance contract. Fair value reflects own credit risk
to the extent the embedded derivative is not fully collateralised.
Liability adequacy
At each reporting date, an assessment is made of whether the recognised
long-term business provisions are adequate, using current estimates of future cash flows. If that assessment shows that the carrying
amount of the liabilities (less related assets) is insufficient in light of the estimated future cash flows, the deficiency is
recognised in the income statement by setting up an additional provision in the statement of financial position.
General insurance and health provisions
Outstanding claims provisions
General insurance and health outstanding claims provisions are based
on the estimated ultimate cost of all claims incurred but not settled at the statement of financial position date, whether reported
or not, together with related claims handling costs. Significant delays are experienced in the notification and settlement of certain
types of general insurance claims, particularly in respect of liability business, including environmental and pollution exposures,
the ultimate cost of which cannot be known with certainty at the statement of financial position date. As such, booked claim provisions
for general insurance and health insurance are based on the best estimate of the cost of future claim payments plus an explicit
allowance for risk and uncertainty. Any estimate represents a determination within a range of possible outcomes. Further details
of estimation techniques are given in note 36(c).
Provisions for latent claims are discounted,
using rates based on the relevant swap curve, in the relevant currency at the reporting date, having regard to the expected settlement
dates of the claims. The discount rate is set at the start of the accounting period with any change in rates between the start
and end of the accounting period being reflected below adjusted operating profit as an economic assumption change. The range of
discount rates used is described in note 36(c)(ii). Outstanding claims provisions are valued net of an allowance for expected future
recoveries. Recoveries include non-insurance assets that have been acquired by exercising rights to salvage and subrogation under
the terms of insurance contracts.
Provision for unearned premiums
The proportion of written premiums, gross of commission payable to
intermediaries, attributable to subsequent periods is deferred as a provision for unearned premiums. The change in this provision
is taken to the income statement as recognition of revenue over the period of risk.
Liability adequacy
At each reporting date, the Group reviews its unexpired risks and
carries out a liability adequacy test for any overall excess of expected claims and deferred acquisition costs over unearned premiums,
using the current estimates of future cash flows under its contracts after taking account of the investment return expected to
arise on assets relating to the relevant general business provisions. If these estimates show that the carrying amount of its insurance
liabilities (less related deferred acquisition costs) is insufficient in light of the estimated future cash flows, the deficiency
is recognised in the income statement by setting up a provision in the statement of financial position.
Other assessments and levies
The Group is subject to various periodic insurance-related assessments
or guarantee fund levies. Related provisions are established where there is a present obligation (legal or constructive) as a result
of a past event. Such amounts are not included in insurance liabilities but are included under ‘Provisions’ in the
statement of financial position.
(M) Non-participating investment contract
liabilities
Claims
For non-participating investment contracts with an account balance,
claims reflect the excess of amounts paid over the account balance released.
Contract liabilities
Deposits collected under non-participating investment contracts are
not accounted for through the income statement, except for the investment income attributable to those contracts, but are accounted
for directly through the statement of financial position as an adjustment to the investment contract liability.
The majority of the Group’s contracts classified
as non-participating investment contracts are unit-linked contracts and are measured at fair value. Certain liabilities for non-linked
non-participating contracts are measured at amortised cost.
The liability’s fair value is determined
in accordance with IAS 39, using a valuation technique to provide a reliable estimate of the amount for which the liability could
be transferred in an orderly transaction between market participants at the measurement date, subject to a minimum equal to the
surrender value. For unit-linked contracts, the fair value liability is equal to the current unit fund value, including any unfunded
units. In addition, if required, non-unit reserves are held based on a discounted cash flow analysis. For non-linked contracts,
the fair value liability is based on a discounted cash flow analysis, with allowance for risk calibrated to match the market price
for risk.
Amortised cost is calculated as the fair value
of consideration received at the date of initial recognition, less the net effect of payments such as transaction costs and front-end
fees, plus or minus the cumulative amortisation (using the effective interest rate method) of any difference between that initial
amount and the maturity value, and less any write-down for surrender payments. The effective interest rate is the one that equates
the discounted cash payments to the initial amount. At each reporting date, the amortised cost liability is determined as the value
of future best estimate cash flows discounted at the effective interest rate.
(N) Reinsurance
The Group assumes and cedes reinsurance in the normal course of business,
with retention limits varying by line of business. Premiums on reinsurance assumed are recognised as revenue in the same manner
as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured
business. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured
policies, using assumptions consistent with those used to account for these policies.
Where general insurance liabilities are discounted,
any corresponding reinsurance assets are also discounted using consistent assumptions.
Gains or losses on buying retroactive reinsurance
are recognised in the income statement immediately at the date of purchase and are not amortised. Premiums ceded and claims reimbursed
are presented on a gross basis in the consolidated income statement and statement of financial position as appropriate.
Reinsurance assets primarily include balances
due from both insurance and reinsurance companies for ceded insurance and investment contract liabilities. This includes balances
in respect of investment contracts which are legally reinsurance contracts but do not meet the definition of a reinsurance contract
under IFRS. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying contract liabilities,
outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance
contract.
Reinsurance of non-participating investment contracts
and reinsurance contracts that principally transfer financial risk are accounted for directly through the statement of financial
position. A deposit asset or liability is recognised, based on the consideration paid or received less any explicitly identified
premiums or fees to be retained by the reinsured. These deposit assets or liabilities are shown within reinsurance assets in the
consolidated statement of financial position.
If a reinsurance asset is impaired, the Group
reduces the carrying amount accordingly and recognises that impairment loss in the income statement. A reinsurance asset is impaired
if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that
the Group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact
on the amounts that the Group will receive from the reinsurer.
(O) Goodwill, AVIF and intangible assets
Goodwill
Goodwill represents the excess of the cost of an acquisition over
the fair value of the Group’s share of the net assets of the acquired subsidiary, associate or joint venture at the date
of acquisition. Goodwill arising on the Group’s investments in subsidiaries is shown as a separate asset, whilst that on
associates and joint ventures is included within the carrying value of those investments.
Goodwill on acquisitions prior to 1 January 2004
(the date of transition to IFRS) is carried at its book value (original cost less cumulative amortisation) on that date, less any
impairment subsequently incurred. Goodwill arising before 1 January 1998 was eliminated against reserves and has not been reinstated.
Acquired value of in-force business
(AVIF)
The present value of future profits on a portfolio of long-term insurance
and investment contracts, acquired either directly or through the purchase of a subsidiary, is recognised as an asset.
If the AVIF results from the acquisition of an
investment in a joint venture or an associate, it is held within the carrying amount of that investment. In all cases, the AVIF
is amortised over the useful lifetime of the related contracts in the portfolio on a systematic basis. The rate of amortisation
is chosen by considering the profile of the additional value of in-force business acquired and the expected depletion in its value.
Non-participating investment contract AVIF is
reviewed for evidence of impairment, consistent with reviews conducted for other finite life intangible assets. Insurance and participating
investment contract AVIF is reviewed for impairment at each reporting date as part of the liability adequacy requirements of IFRS
4 (see accounting policy L). AVIF is reviewed for evidence of impairment and impairment tested at product portfolio level by reference
to a projection of future profits arising from the portfolio.
Intangible assets
Intangible assets consist primarily of contractual relationships such
as access to distribution networks, customer lists and software. The economic lives of these are determined by considering relevant
factors such as usage of the asset, typical product life cycles, potential obsolescence, maintenance costs, the stability of the
industry, competitive position and the period of control over the assets. These intangibles are amortised over their useful lives,
which range from three to 30 years, using the straight-line method.
The amortisation charge for the year is included
in the income statement under ‘Other expenses’. For intangibles with finite lives, impairment charges will be recognised
in the income statement where evidence of such impairment is observed. Intangibles with indefinite lives are subject to regular
impairment testing, as described below.
Impairment testing
For impairment testing, goodwill and intangible assets with indefinite
useful lives have been allocated to cash-generating units. The carrying amount of goodwill and intangible assets with indefinite
useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. Goodwill
and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support its carrying
value. Further details on goodwill allocation and impairment testing are given in note 12. Any impairments are charged as expenses
in the income statement.
(P) Property and equipment
Owner-occupied properties are carried at their revalued amounts, and
movements are recognised in other comprehensive income and taken to a separate reserve within equity. When such properties are
sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings. These properties are depreciated
down to their estimated residual values over their useful lives. All other items classed as property and equipment within the statement
of financial position are carried at historical cost less accumulated depreciation.
Investment properties under construction are
included within property and equipment until completion, and are stated at cost less any provision for impairment in their values
until construction is completed or fair value becomes reliably measurable.
Depreciation is calculated on the straight-line
method to write down the cost of other assets to their residual values over their estimated useful lives as follows:
·
Properties under construction
|
No depreciation
|
·
Owner-occupied properties, and related mechanical and electrical equipment
|
25 years
|
·
Motor vehicles
|
Three years, or lease term (up to useful life) if longer
|
·
Computer equipment
|
Three to five years
|
·
Other assets
|
Three to five years
|
The assets’ residual values, useful lives and method
of depreciation are reviewed regularly, and at least at each financial year end, and adjusted if appropriate. Where the carrying
amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.
Gains and losses on disposal of property and equipment are determined by reference to their carrying amount.
Borrowing costs directly attributable to the
acquisition and construction of property and equipment are capitalised. All repair and maintenance costs are charged to the income
statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount
of the asset when it is probable that future economic benefits in excess of the most recently assessed standard of performance
of the existing asset will flow to the Group and the renovation replaces an identifiable part of the asset. Major renovations are
depreciated over the remaining useful life of the related asset.
(Q) Investment property
Investment property is held for long-term rental yields and is not
occupied by the Group. Completed investment property is stated at its fair value. Changes in fair values are recorded in the income
statement in net investment income.
As described in accounting policy P above, investment
properties under construction are included within property and equipment, and are stated at cost less any impairment in their values
until construction is completed or fair value becomes reliably measurable.
(R) Impairment of non-financial assets
Property and equipment and other non-financial assets are reviewed
for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An
impairment loss is recognised in the income statement for the amount by which the carrying amount of the asset exceeds its recoverable
amount, which is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing
impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. Non-financial assets
except goodwill which have suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
(S) Derecognition and offset of financial
assets and financial liabilities
A financial asset (or, where applicable, a part of a financial asset
or part of a group of similar financial assets) is derecognised where:
|
·
|
The rights to receive cash flows from the asset have expired.
|
|
·
|
The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without
material delay to a third party under a ‘pass-through’ arrangement.
|
|
·
|
The Group has transferred its rights to receive cash flows from the asset and has either transferred substantially all the
risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but
has transferred control of the asset.
|
A financial liability is derecognised when the obligation under the
liability is discharged or cancelled or expires.
Financial assets and liabilities are offset and
the net amount reported in the statement of financial position when there is a currently enforceable legal right to set off the
recognised amounts and there is the ability and intention to settle on a net basis, or realise the asset and settle the liability
simultaneously.
(T) Financial investments
The Group classifies its investments as either FVTPL or AFS. The classification
depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. The
FVTPL category has two subcategories – those that meet the definition as being held for trading and those the Group chooses
to designate as FVTPL (referred to in this accounting policy as ‘other than trading’) upon initial recognition.
In general, the other than trading category is
used as, in most cases, the Group’s investment or risk management strategy is to manage its financial investments on a fair
value basis. Debt securities and equity securities, which the Group acquires with the intention to resell in the short-term, are
classified as trading, as are non-hedge derivatives (see accounting policy U below). The AFS category is used where the relevant
long-term business liability (including shareholders’ funds) is passively managed, as well as in certain fund management
and non-insurance operations.
Purchases and sales of investments are recognised
on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values. Debt securities
are initially recorded at their fair value, which is taken to be amortised cost, with amortisation credited or charged to the income
statement. Investments classified as trading, other than trading and AFS, are subsequently carried at fair value. Changes in the
fair value of trading and other than trading investments are included in the income statement in the period in which they arise.
Changes in the fair value of securities classified
as AFS are recognised in other comprehensive income and recorded in a separate investment valuation reserve within equity. When
securities classified as AFS are sold or impaired, the accumulated fair value adjustments are transferred out of the investment
valuation reserve to the income statement with a corresponding movement through other comprehensive income.
Impairment
The Group reviews the carrying value of its AFS investments
on a regular basis. If the carrying value of an AFS investment is greater than the recoverable amount, the carrying value is reduced
through a charge to the income statement in the period of impairment. The following policies are used to determine the level of
any impairment, some of which involve considerable judgement:
AFS
debt securities:
An AFS debt security is impaired if there is objective evidence that a loss event has occurred
which has impaired the expected cash flows, i.e. where all amounts due according to the contractual terms of the security are not
considered collectible. An impairment charge, measured as the difference between the security’s fair value and amortised
cost, is recognised when the issuer is known to be either in default or in financial difficulty. Determining when an issuer is
in financial difficulty requires the use of judgement, and we consider a number of factors including industry risk factors, financial
condition, liquidity position and near-term prospects of the issuer, credit rating declines and a breach of contract. A decline
in fair value below amortised cost due to changes in risk-free interest rates does not necessarily represent objective evidence
of a loss event.
For securities identified as being impaired,
the cumulative unrealised loss previously recognised within the investment valuation reserve is transferred to realised losses
for the year, with a corresponding movement through other comprehensive income. Any subsequent increase in fair value of these
impaired securities is recognised in other comprehensive income and recorded in the investment valuation reserve unless this increase
represents a decrease in the impairment loss that can be objectively related to an event occurring after the impairment loss was
recognised in the income statement. In such an event, the reversal of the impairment loss is recognised as a gain in the income
statement.
AFS
equity securities:
An AFS equity security is considered impaired if there is objective evidence that the cost may
not be recovered. In addition to qualitative impairment criteria, such evidence includes a significant or prolonged decline in
fair value below cost. Unless there is evidence to the contrary, an equity security is considered impaired if the decline in fair
value relative to cost has been either at least 20% for a continuous six-month period or more than 40% at the end of the reporting
period, or been in an unrealised loss position for a continuous period of more than 12 months at the end of the reporting period.
We also review our largest equity holdings for evidence of impairment, as well as individual equity holdings in industry sectors
known to be in difficulty. Where there is objective evidence that impairment exists, the security is written down regardless of
the size of the unrealised loss.
For securities identified as being impaired,
the cumulative unrealised loss previously recognised within the investment valuation reserve is transferred to realised losses
for the year with a corresponding movement through other comprehensive income. Any subsequent increase in fair value of these impaired
securities is recognised in other comprehensive income and recorded in the investment valuation reserve.
Reversals of impairments on any of these assets
are only recognised where the decrease in the impairment can be objectively related to an event occurring after the write-down
(such as an improvement in the debtor’s credit rating), and are not recognised in respect of equity instruments.
(U) Derivative financial instruments
and hedging
Derivative financial instruments include foreign exchange contracts,
interest rate futures, currency and interest rate swaps, currency and interest rate options (both written and purchased) and other
financial instruments that derive their value mainly from underlying interest rates, foreign exchange rates, credit or equity indices,
commodity values or equity instruments.
All derivatives are initially recognised in the
statement of financial position at their fair value, which usually represents their cost. They are subsequently remeasured at their
fair value, with the method of recognising movements in this value depending on whether they are designated as hedging instruments
and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices or, if these are not available,
by using valuation techniques such as discounted cash flow models or option pricing models. All derivatives are carried as assets
when the fair values are positive and as liabilities when the fair values are negative. Premiums paid for derivatives are recorded
as an asset on the statement of financial position at the date of purchase, representing their fair value at that date.
Derivative contracts may be traded on an exchange
or over-the-counter (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 (ISDA) 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.
The notional or contractual amounts associated
with derivative financial instruments are not recorded as assets or liabilities on the statement of financial position as they
do not represent the fair value of these transactions. These amounts are disclosed in note 54(b).
The Group has collateral agreements in place
between the individual Group entities and relevant counterparties. Accounting policy W covers collateral, both received and pledged,
in respect of these derivatives.
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.
Interest rate futures, forwards and
options contracts
Interest rate futures are exchange-traded instruments and represent
commitments to purchase or sell a designated security or money market instrument at a specified future date and price. Interest
rate forward agreements are OTC contracts in which two parties agree on an interest rate and other terms that will become a reference
point in determining, in concert with an agreed notional principal amount, a net payment to be made by one party to the other,
depending upon what rate prevails at a future point in time. Interest rate options, which consist primarily of caps and floors,
are interest rate protection instruments that involve the potential obligation of the seller to pay the buyer an interest rate
differential in exchange for a premium paid by the buyer. This differential represents the difference between current rate and
an agreed rate applied to a notional amount. Exposure to gain or loss on all interest rate contracts will increase or decrease
over their respective lives as interest rates fluctuate. Certain contracts, known as swaptions, contain features which can act
as swaps or options.
Foreign exchange contracts
Foreign exchange contracts, which include spot, forward and futures
contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed price
and settlement date. Foreign exchange option contracts are similar to interest rate option contracts, except that they are based
on currencies, rather than interest rates.
Derivative instruments for hedging
On the date a derivative contract is entered into, the Group designates
certain derivatives as either:
|
(i)
|
a hedge of the fair value of a recognised asset or liability (fair value hedge);
|
|
(ii)
|
a hedge of a future cash flow attributable to a recognised asset or liability, a highly probable forecast transaction or a
firm commitment (cash flow hedge); or
|
|
(iii)
|
a hedge of a net investment in a foreign operation (net investment hedge).
|
Hedge accounting is used for derivatives designated in this
way, provided certain criteria are met. At the inception of the transaction, the Group documents the relationship between the hedging
instrument and the hedged item, as well as the risk management objective and the strategy for undertaking the hedge transaction.
The Group also documents its assessment of whether the hedge is expected to be, and has been, highly effective in offsetting the
risk in the hedged item, both at inception and on an ongoing basis.
Changes in the fair value of derivatives that
are designated and qualify as net investment or cash flow hedges, and that prove to be highly effective in relation to the hedged
risk, are recognised in other comprehensive income and a separate reserve within equity. Gains and losses accumulated in this reserve
are included in the income statement on disposal of the relevant investment or occurrence of the cash flow as appropriate.
Changes in the fair value of derivatives that
are designated and qualify as fair value hedges are recognised in the income statement. The gain or loss on the hedged item that
is attributable to the hedged risk is recognised in the income statement. This applies even if the hedged item is an available
for sale financial asset or is measured at amortised cost. If a hedging relationship no longer meets the criteria for hedge accounting,
the cumulative adjustment made to the carrying amount of the hedged item is amortised to the income statement, based on a recalculated
effective interest rate over the residual period to maturity. In cases where the hedged item has been derecognised, the cumulative
adjustment is released to the income statement immediately.
For a variety of reasons, certain derivative
transactions, while providing effective economic hedges under the Group’s risk management positions, do not qualify for hedge
accounting under the specific IFRS rules and are therefore treated as derivatives held for trading. Their fair value gains and
losses are recognised immediately in net investment income.
(V) Loans
Loans with fixed maturities, including policyholder loans, mortgage
loans on investment property, securitised mortgages and collateral loans, are recognised when cash is advanced to borrowers. Certain
loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan
fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield
using the effective interest rate method. Loans with indefinite future lives are carried at unpaid principal balances or cost.
However, for the majority of mortgage loans,
the Group has taken advantage of the fair value option under IAS 39 to present the mortgages, associated borrowings and derivative
financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more
relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for
these three items. The fair values of these mortgages are estimated using discounted cash flow models, based on a risk-adjusted
discount rate which reflects the risks associated with these products. They are revalued at each period end, with movements in
their fair values being taken to the income statement.
At each reporting date, we review loans carried
at amortised cost for objective evidence that they are impaired and uncollectable, either at the level of an individual security
or collectively within a group of loans with similar credit risk characteristics. To the extent that a loan is uncollectable, it
is written down as impaired to its recoverable amount, measured as the present value of expected future cash flows discounted at
the original effective interest rate of the loan, taking into account the fair value of the underlying collateral through an impairment
provision account. Subsequent recoveries in excess of the loan’s written-down carrying value are credited to the income statement.
(W) Collateral
The Group receives and pledges collateral in the form of cash or non-cash
assets in respect of stock lending transactions, certain derivative contracts and loans, in order to reduce the credit risk of
these transactions. Collateral is also pledged as security for bank letters of credit. The amount and type of collateral required
depends on an assessment of the credit risk of the counterparty.
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 55). 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.
Collateral pledged in the form of cash, which
is legally segregated from the Group, is derecognised from the statement of financial position with a corresponding receivable
recognised for its return. Non-cash collateral pledged is not derecognised from the statement of financial position unless the
Group defaults on its obligations under the relevant agreement, and therefore continues to be recognised in the statement of financial
position within the appropriate asset classification.
(X) Deferred acquisition costs and
other assets
Costs relating to the acquisition of new business for insurance and
participating investment contracts are deferred in line with existing local accounting practices, to the extent that they are expected
to be recovered out of future margins in revenues on these contracts. For participating contracts written in the UK, acquisition
costs are generally not deferred as the liability for these contracts is calculated in accordance with the PRA’s realistic
capital regime and FRS 27 (see accounting policy L). For non-participating investment and investment fund management contracts,
incremental acquisition costs and sales enhancements that are directly attributable to securing an investment management service
are also deferred.
Where such business is reinsured, an appropriate
proportion of the deferred acquisition costs is attributed to the reinsurer, and is treated as a separate liability.
Long-term business deferred acquisition costs
are amortised systematically over a period no longer than that in which they are expected to be recoverable out of these future
margins. Deferrable acquisition costs for non-participating investment and investment fund management contracts are amortised over
the period in which the service is provided. General insurance and health deferred acquisition costs are amortised over the period
in which the related revenues are earned. The reinsurers’ share of deferred acquisition costs is amortised in the same manner
as the underlying asset.
Deferred acquisition costs are reviewed by category
of business at the end of each reporting period and are written-off where they are no longer considered to be recoverable.
Other receivables and payables are initially
recognised at cost, being fair value. Subsequent to initial measurement they are measured at amortised cost.
(Y) Statement of cash flows
Cash and cash equivalents
Cash and cash equivalents consist of cash at bank and in hand, deposits
held at call with banks, treasury bills and other short-term highly liquid investments that are readily convertible to known amounts
of cash and which are subject to an insignificant risk of change in value. Such investments are those with less than three months’
maturity from the date of acquisition, or which are redeemable on demand with only an insignificant change in their fair values.
For the purposes of the statement of cash flows,
cash and cash equivalents also include bank overdrafts, which are included in payables and other financial liabilities on the statement
of financial position.
Operating cash flows
Purchases and sales of investment property, loans and financial investments
are included within operating cash flows as the purchases are funded from cash flows associated with the origination of insurance
and investment contracts, net of payments of related benefits and claims.
(Z) Leases
Leases, where a significant portion of the risks and rewards of ownership
is retained by the lessor, are classified as operating leases. Where the Group is the lessee, payments made under operating leases
(net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the term of
the relevant leases.
Where the Group is the lessor, lease income from
operating leases is recognised in the income statement on a straight-line basis over the lease term.
When assets are subject to finance leases, the
present value of the lease payments, together with any unguaranteed residual value, is recognised as a receivable. The Group has
not entered into any material finance lease arrangements either as lessor or lessee.
(AA) Provisions and contingent liabilities
Provisions are recognised when the Group has a present legal or constructive
obligation as a result of past events, it is more probable than not that an outflow of resources embodying economic benefits will
be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Restructuring provisions
include lease termination penalties and employee termination payments. They comprise only the direct expenditures arising from
the restructuring, which are those that are necessarily entailed by the restructuring; and not associated with the ongoing activities
of the entity. The amount recorded as a provision is the best estimate of the expenditure required to settle the present obligation
at the balance sheet date. Where the effect of the time value of money is material, the provision is the present value of the expected
expenditure. Provisions are not recognised for future operating losses.
Where the Group expects a provision to be reimbursed,
for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is
virtually certain.
The Group recognises a provision for onerous
contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations
under the contract. Contingent liabilities are disclosed if there is a possible future obligation as a result of a past event,
or if there is a present obligation as a result of a past event but either a payment is not probable or the amount cannot be reasonably
estimated.
(AB) Employee benefits
Annual leave
Employee entitlements to annual leave are recognised when they accrue
to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up
to the statement of financial position date.
Pension obligations
The Group operates a number of pension schemes, whose members receive
benefits on either a defined benefit or defined contribution basis. Under a defined contribution plan, the Group’s legal
or constructive obligation is limited to the amount it agrees to contribute to a fund and there is no obligation to pay further
contributions if the fund does not hold sufficient assets to pay benefits. A defined benefit pension plan is a pension plan that
is not a defined contribution plan and typically defines the amount of pension benefit that an employee will receive on retirement.
The defined benefit obligation is calculated
by independent actuaries using the projected unit credit method. The pension obligation is measured as the present value of the
estimated future cash outflows, using a discount rate based on market yields for high-quality corporate bonds that are denominated
in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension
liability. The resultant net surplus or deficit recognised as an asset or liability on the statement of financial position is the
present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets.
If the fair value of plan assets exceeds the
present value of the defined benefit obligation, the resultant asset is limited to the asset ceiling defined as present value of
economic benefits available in the form of future refunds from the plan or reductions in contributions to the plan. In order to
calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any
plan in the Group.
Remeasurements of defined benefit plans comprise
actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions, the return on plan assets
(excluding net interest) and the effect of the asset ceiling (if any). The Group recognises remeasurements immediately in other
comprehensive income and does not reclassify them to the income statement in subsequent periods.
Service costs comprising current service costs,
past service costs, gains and losses on curtailments and net interest expense/(income) are charged or credited to the income statement.
Past service costs are recognised at the earlier
of the date the plan amendment or curtailment occurs or when related restructuring costs are recognised.
The Group determines the net interest expense/(income)
on the net defined benefit liability/(asset) for the period by applying the discount rate used to measure the defined benefit obligation
at the beginning of the year to the net defined benefit liability/(asset). Net interest expense is charged to finance costs, whereas,
net interest income is credited to investment income.
For defined contribution plans, the Group pays
contributions to publicly or privately administered pension plans. Once the contributions have been paid, the Group, as employer,
has no further payment obligations. The Group’s contributions are charged to the income statement in the year to which they
relate and are included in staff costs.
Equity compensation plans
The Group offers share award and option plans over the Company’s
ordinary shares for certain employees, including a Save As You Earn plan (SAYE plan), details of which are given in the Directors’
Remuneration Report and in note 27.
The Group accounts for options and awards under
equity compensation plans, which were granted after 7 November 2002, until such time as they are fully vested, using the fair value
based method of accounting (the ‘fair value method’). Under this method, the cost of providing equity compensation
plans is based on the fair value of the share awards or option plans at date of grant, which is recognised in the income statement
over the expected vesting period of the related employees and credited to the equity compensation reserve, part of shareholders’
funds. In certain jurisdictions, awards must be settled in cash instead of shares, and the credit is taken to liabilities rather
than reserves. The fair value of these cash-settled awards is recalculated each year, with the income statement charge and liability
being adjusted accordingly.
Shares purchased by employee share trusts to
fund these awards are shown as deduction from shareholders’ equity at their weighted average cost.
When the options are exercised and new shares
are issued, the proceeds received, net of any transaction costs, are credited to share capital (par value) and the balance to share
premium. Where the shares are already held by employee trusts, the net proceeds are credited against the cost of these shares,
with the difference between cost and proceeds being taken to retained earnings. In both cases, the relevant amount in the equity
compensation reserve is then credited to retained earnings.
(AC) Income taxes
The current tax expense is based on the taxable profits for the year,
after any adjustments in respect of prior years. Tax, including tax relief for losses if applicable, is allocated over profits
before taxation and amounts charged or credited to components of other comprehensive income and equity, as appropriate.
Provision is made for deferred tax liabilities,
or credit taken for deferred tax assets, using the liability method, on all material temporary differences between the tax bases
of assets and liabilities and their carrying amounts in the consolidated financial statements.
The principal temporary differences arise from
depreciation of property and equipment, revaluation of certain financial assets and liabilities including derivative contracts,
technical provisions and other insurance items, provisions for pensions and other post-retirement benefits and tax losses carried
forward; and, in relation to acquisitions, on the difference between the fair values of the net assets acquired and their tax base.
The rates enacted or substantively enacted at the statement of financial position date are used to value the deferred tax assets
and liabilities.
Deferred tax assets are recognised to the extent
that it is probable that future taxable profit will be available against which the temporary differences can be utilised. In countries
where there is a history of tax losses, deferred tax assets are only recognised in excess of deferred tax liabilities if there
is convincing evidence that future profits will be available.
Deferred tax is provided on 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.
Deferred taxes are not provided in respect of
temporary differences arising from the initial recognition of goodwill, or from the initial recognition of an asset or liability
in a transaction which is not a business combination and affects neither accounting profit nor taxable profit or loss at the time
of the transaction.
Current and deferred tax relating to items recognised
in other comprehensive income and directly in equity are similarly recognised in other comprehensive income and directly in equity
respectively. Deferred tax related to fair value re-measurement of available for sale investments, pensions and other post-retirement
obligations and other amounts charged or credited directly to other comprehensive income is recognised in the statement of financial
position as a deferred tax asset or liability. Current tax on interest paid on direct capital instruments and tier 1 notes is credited
directly in equity.
In addition to paying tax on shareholders’
profits (‘shareholder tax’), the Group’s life businesses in the UK, Ireland and Singapore pay tax on policyholders’
investment returns (‘policyholder tax’) on certain products at policyholder tax rates. The incremental tax borne by
the Group represents income tax on policyholder’s investment return. In jurisdictions where policyholder tax is applicable,
the total tax charge in the income statement is allocated between shareholder tax and policyholder tax. The shareholder tax is
the corporate tax charge calculated on shareholder profit. The difference between the total tax charge and shareholder tax is allocated
to policyholder tax. The Group has decided to show separately the amounts of policyholder tax to provide a meaningful measure of
the tax the Group pays on its profit.
(AD) Borrowings
Borrowings are classified as being for either core structural or operational
purposes. They are recognised initially at their issue proceeds less transaction costs incurred. Subsequently, most borrowings
are stated at amortised cost, and any difference between net proceeds and the redemption value is recognised in the income statement
over the period of the borrowings using the effective interest rate method. All borrowing costs are expensed as they are incurred
except where they are directly attributable to the acquisition or construction of property and equipment as described in accounting
policy P.
Where loan notes have been issued in connection
with certain securitised mortgage loans, the Group has taken advantage of the fair value option under IAS 39 to present the mortgages,
associated liabilities and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value
basis. This presentation provides more relevant information and eliminates any accounting mismatch which would otherwise arise
from using different measurement bases for these three items.
(AE) Share capital and treasury shares
Equity instruments
An equity instrument is a contract that evidences a residual interest
in the assets of an entity after deducting all its liabilities. Accordingly, a financial instrument is treated as equity if:
|
(i)
|
there is no contractual obligation to deliver cash or other financial assets or to exchange financial assets or liabilities
|
on terms that may be unfavourable; and
|
(ii)
|
the instrument is a non-derivative that contains no contractual obligation to deliver a variable number of shares or is a derivative
that will be settled only by the Group exchanging a fixed amount of cash or other assets for a fixed number of the Group’s
own equity instruments.
|
Share issue costs
Incremental external costs directly attributable to the issue of new
shares are shown in equity as a deduction, net of tax, from the proceeds of the issue and disclosed where material.
Dividends
Interim dividends on ordinary shares are recognised in equity in the
period in which they are paid. Final dividends on these shares are recognised when they have been approved by shareholders. Dividends
on preference shares are recognised in the period in which they are declared and appropriately approved.
Treasury shares
Where the Company or its subsidiaries purchase the Company’s
share capital or obtain rights to purchase its share capital, the consideration paid (including any attributable transaction costs
net of income taxes) is shown as a deduction from total shareholders’ equity. Gains and losses on own shares are charged
or credited to the treasury share account in equity.
(AF) Fiduciary activities
Assets and income arising from fiduciary activities, together with
related undertakings to return such assets to customers, are excluded from these financial statements where the Group has no contractual
rights in the assets and acts in a fiduciary capacity such as nominee, trustee or agent.
(AG) Earnings per share
Basic earnings per share is calculated by dividing net income available
to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding the weighted average
number of ordinary shares purchased by the Group and held as Treasury shares.
Earnings per share has also been calculated on
the adjusted operating profit before impairment of goodwill and other adjusting items, after tax, attributable to ordinary shareholders,
as the directors believe this figure provides a better indication of operating performance. Details are given in note 10.
For the diluted earnings per share, the weighted
average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares, such as
convertible debt and share options granted to employees.
Potential or contingent share issuances are treated
as dilutive when their conversion to shares would decrease net earnings per share.
Consolidated
financial statements
Consolidated income statement
For the year ended 31 December 2015
|
Note
|
2015
£m
|
2014
£m
|
|
2013
£m
|
|
|
Continuing operations
|
Continuing operations
|
Continuing operations
|
Discontinued operations
1
|
Income
|
4
|
|
|
|
|
Gross written premiums
|
|
21,925
|
21,670
|
22,035
|
1,589
|
Premiums ceded to reinsurers
|
|
(2,890)
|
(1,614)
|
(1,546)
|
(100)
|
Premiums written net of reinsurance
|
|
19,035
|
20,056
|
20,489
|
1,489
|
Net change in provision for unearned premiums
|
|
(111)
|
1
|
134
|
—
|
Net earned premiums
|
H
|
18,924
|
20,057
|
20,623
|
1,489
|
Fee and commission income
|
I & J
|
1,797
|
1,230
|
1,279
|
28
|
Net investment income
|
K
|
2,825
|
21,889
|
12,509
|
2,340
|
Share of profit after tax of joint ventures and associates
|
|
180
|
147
|
120
|
—
|
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates
|
2b
|
2
|
174
|
115
|
808
|
|
|
23,728
|
43,497
|
34,646
|
4,665
|
Expenses
|
5
|
|
|
|
|
Claims and benefits
paid, net of recoveries from reinsurers
|
|
(21,985)
|
(19,474)
|
(22,093)
|
(2,037)
|
Change in insurance liabilities, net of reinsurance
|
36a(ii)
|
6,681
|
(5,570)
|
2,493
|
(312)
|
Change in investment contract provisions
|
|
(1,487)
|
(6,518)
|
(7,050)
|
(31)
|
Change in unallocated divisible surplus
|
41
|
984
|
(3,364)
|
280
|
—
|
Fee and commission expense
|
|
(3,347)
|
(3,389)
|
(3,975)
|
(438)
|
Other expenses
|
|
(2,784)
|
(1,979)
|
(2,220)
|
(293)
|
Finance costs
|
6
|
(618)
|
(540)
|
(609)
|
(16)
|
|
|
(22,556)
|
(40,834)
|
(33,174)
|
(3,127)
|
Profit before tax
|
|
1,172
|
2,663
|
1,472
|
1,538
|
Tax
attributable to policyholders’ returns
|
9d
|
218
|
(382)
|
(191)
|
—
|
Profit before tax attributable to shareholders’ profits
|
|
1,390
|
2,281
|
1,281
|
1,538
|
Tax expense
|
AC & 9
|
(93)
|
(983)
|
(594)
|
(265)
|
Less: tax attributable to policyholders’ returns
|
9d
|
(218)
|
382
|
191
|
—
|
Tax attributable to shareholders’ profits
|
9d
|
(311)
|
(601)
|
(403)
|
(265)
|
Profit after tax
|
|
1,079
|
1,680
|
878
|
1,273
|
Profit from discontinued operations
1
|
|
—
|
58
|
1,273
|
|
Profit for the year
|
|
1,079
|
1,738
|
2,151
|
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
|
Equity holders of Aviva plc
|
|
918
|
1,569
|
2,008
|
|
Non-controlling interests
|
34
|
161
|
169
|
143
|
|
Profit for the year
|
|
1,079
|
1,738
|
2,151
|
|
Earnings per share
|
AG & 10
|
|
|
|
|
Basic (pence per share)
|
|
22.6p
|
50.4p
|
65.3p
|
|
Diluted (pence per share)
|
|
22.3p
|
49.6p
|
64.5p
|
|
|
|
|
|
|
|
Continuing operations – Basic (pence per share)
|
|
22.6p
|
48.4p
|
22.0p
|
|
Continuing operations – Diluted (pence per share)
|
|
22.3p
|
47.7p
|
21.8p
|
|
|
1
|
Discontinued operations relates to the US Life and related internal asset management businesses (US Life) sold in 2013.
|
The accounting policies (identified alphabetically) on pages 129 to
142 and notes (identified numerically) on pages 149 to 250 are an integral part of the financial statements.
Consolidated statement of comprehensive income
For the year ended 31 December 2015
|
Note
|
2015
£m
|
2014
£m
|
2013
£m
|
Profit for the year from continuing operations
|
|
1,079
|
1,680
|
878
|
Profit for the year from discontinued operations
1
|
|
—
|
58
|
1,273
|
Total profit for the year
|
|
1,079
|
1,738
|
2,151
|
|
|
|
|
|
Other comprehensive income from continuing operations:
|
|
|
|
|
Items that may be reclassified subsequently to income statement
|
|
|
|
|
Investments classified as available for sale
|
|
|
|
|
Fair value (losses)/gains
|
|
(9)
|
62
|
19
|
Fair value (losses)/gains transferred to profit on disposals
|
|
—
|
(7)
|
1
|
Share of other comprehensive income of joint ventures and associates
|
|
(14)
|
22
|
(37)
|
Foreign exchange rate movements
|
|
(378)
|
(396)
|
(35)
|
Aggregate tax effect – shareholder tax on items that may be reclassified subsequently to the income statement
|
|
13
|
(9)
|
(14)
|
|
|
|
|
|
Items that will not be reclassified to income statement
|
|
|
|
|
Owner-occupied properties – fair value gains/(losses)
|
|
27
|
7
|
(2)
|
Remeasurements of pension schemes
|
44b(i)
|
(235)
|
1,662
|
(674)
|
Aggregate tax effect – shareholder tax on items that will not be reclassified subsequently to the income statement
|
|
93
|
(347)
|
125
|
Other comprehensive income, net of tax from continuing operations
|
|
(503)
|
994
|
(617)
|
Other comprehensive income, net of tax from discontinued operations
1
|
|
—
|
—
|
(319)
|
Total other comprehensive income, net of tax
|
|
(503)
|
994
|
(936)
|
Total comprehensive income for the year from continuing operations
|
|
576
|
2,674
|
261
|
Total comprehensive income for the year from discontinued operations
1
|
|
—
|
58
|
954
|
Total comprehensive income for the year
|
|
576
|
2,732
|
1,215
|
|
|
|
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
Equity holders of Aviva plc
|
|
460
|
2,642
|
1,038
|
Non-controlling interests
|
|
116
|
90
|
177
|
|
|
576
|
2,732
|
1,215
|
|
1
|
Discontinued operations relates to the US Life and related internal asset management businesses (US Life) sold in 2013.
|
The accounting policies (identified alphabetically) on pages 129 to
142 and notes (identified numerically) on pages 149 to 250 are an integral part of the financial statements.
Consolidated statement of changes in equity
For the year ended 31 December 2015
|
Ordinary
share
capital
£m
|
Preference
share
capital
£m
|
Share
premium
£m
|
Merger
reserve
£m
|
Treasury
shares
£m
|
Other
Reserves
1
£m
|
Retained
earnings
£m
|
Equity
attributable
to
shareholders
of Aviva plc
£m
|
DCI and
tier 1
notes
£m
|
Non-
controlling
interests
£m
|
Total
equity
£m
|
Balance at 1 January
|
737
|
200
|
1,172
|
3,271
|
(8)
|
229
|
4,617
|
10,218
|
892
|
1,166
|
12,276
|
Profit for the year
|
—
|
—
|
—
|
—
|
—
|
—
|
918
|
918
|
—
|
161
|
1,079
|
Other comprehensive income
|
—
|
—
|
—
|
—
|
—
|
(316)
|
(142)
|
(458)
|
—
|
(45)
|
(503)
|
Total comprehensive income for the year
|
—
|
—
|
—
|
—
|
—
|
(316)
|
776
|
460
|
—
|
116
|
576
|
Issue of share capital - acquisition of Friends Life
|
272
|
—
|
—
|
5,703
|
—
|
—
|
—
|
5,975
|
—
|
—
|
5,975
|
Non-controlling interests in acquired subsidiaries
2
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
504
|
504
|
Reclassification of non-controlling interests to financial liabilities
3
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(272)
|
(272)
|
Reclassification of non-controlling interests to tier 1 notes
4
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
231
|
(231)
|
—
|
Owner-occupied properties fair value gains transferred to retained earnings on disposals
|
—
|
—
|
—
|
—
|
—
|
(33)
|
33
|
—
|
—
|
—
|
—
|
Dividends and appropriations
|
—
|
—
|
—
|
—
|
—
|
—
|
(724)
|
(724)
|
—
|
—
|
(724)
|
Non-controlling interests share of dividends declared in the year
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(142)
|
(142)
|
Transfer to profit on disposal of subsidiaries, joint ventures and associates
|
—
|
—
|
—
|
—
|
—
|
1
|
—
|
1
|
—
|
—
|
1
|
Capital contributions from non-controlling interests
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
5
|
5
|
Changes in non-controlling interests in subsidiaries
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(1)
|
(1)
|
Treasury shares held by subsidiary companies
|
—
|
—
|
—
|
—
|
(27)
|
—
|
—
|
(27)
|
—
|
—
|
(27)
|
Reserves credit for equity compensation plans
|
—
|
—
|
—
|
—
|
—
|
40
|
—
|
40
|
—
|
—
|
40
|
Shares issued under equity compensation plans
|
3
|
—
|
13
|
—
|
6
|
(35)
|
19
|
6
|
—
|
—
|
6
|
Aggregate tax effect –
shareholder tax
|
—
|
—
|
—
|
—
|
—
|
—
|
15
|
15
|
—
|
—
|
15
|
Balance at 31 December
|
1,012
|
200
|
1,185
|
8,974
|
(29)
|
(114)
|
4,736
|
15,964
|
1,123
|
1,145
|
18,232
|
|
1
|
Refer to note 32 for further details of balances included in Other reserves.
|
|
2
|
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 2a for further detail.
|
|
3
|
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.
|
|
4
|
On 1 October 2015 Aviva plc replaced Friends Life Holdings plc as issuer of the 2003 STICS issuance which resulted in a reclassification
of the STICS from non-controlling interests to DCI and tier 1 notes.
|
For the year ended 31 December 2014
|
Ordinary
share
capital
£m
|
Preference
share
capital
£m
|
Share
premium
£m
|
Merger
reserve
£m
|
Treasury
shares
£m
|
Other
Reserves
1
£m
|
Retained
earnings
£m
|
Equity
attributable to
shareholders
of Aviva plc
£m
|
DCI and tier
1 notes
£m
|
Non-
controlling
interests
£m
|
Total
equity
£m
|
Balance at 1 January
|
736
|
200
|
1,165
|
3,271
|
(31)
|
475
|
2,348
|
8,164
|
1,382
|
1,471
|
11,017
|
Profit for the year
|
—
|
—
|
—
|
—
|
—
|
—
|
1,569
|
1,569
|
—
|
169
|
1,738
|
Other comprehensive income
|
—
|
—
|
—
|
—
|
—
|
(242)
|
1,315
|
1,073
|
—
|
(79)
|
994
|
Total comprehensive income for the year
|
—
|
—
|
—
|
—
|
—
|
(242)
|
2,884
|
2,642
|
—
|
90
|
2,732
|
Owner-occupied properties fair value gains transferred to retained earnings on disposals
|
—
|
—
|
—
|
—
|
—
|
(2)
|
2
|
—
|
—
|
—
|
—
|
Dividends and appropriations
|
—
|
—
|
—
|
—
|
—
|
—
|
(551)
|
(551)
|
—
|
—
|
(551)
|
Non-controlling interests share of dividends declared in the year
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(189)
|
(189)
|
Transfer to profit on disposal of subsidiaries, joint ventures and associates
|
—
|
—
|
—
|
—
|
—
|
(13)
|
2
|
(11)
|
—
|
—
|
(11)
|
Changes in non-controlling interests in subsidiaries
|
—
|
—
|
—
|
—
|
—
|
—
|
(36)
|
(36)
|
—
|
(206)
|
(242)
|
Reserves credit for equity compensation plans
|
—
|
—
|
—
|
—
|
—
|
39
|
—
|
39
|
—
|
—
|
39
|
Shares issued under equity compensation plans
|
1
|
—
|
7
|
—
|
23
|
(28)
|
6
|
9
|
—
|
—
|
9
|
Aggregate tax effect – shareholder tax
|
—
|
—
|
—
|
—
|
—
|
—
|
19
|
19
|
—
|
—
|
19
|
Redemption of direct capital instrument
2
|
—
|
—
|
—
|
—
|
—
|
—
|
(57)
|
(57)
|
(490)
|
—
|
(547)
|
Balance at 31 December
|
737
|
200
|
1,172
|
3,271
|
(8)
|
229
|
4,617
|
10,218
|
892
|
1,166
|
12,276
|
|
1
|
Refer to note 32 for further details of balances included in Other reserves.
|
|
2
|
£57 million relates to the foreign exchange loss on redemption of €700 million direct capital instrument on 28 November
2014.
|
The accounting policies (identified alphabetically) on pages 129 to
142 and notes (identified numerically) on pages 149 to 250 are an integral part of the financial statements.
Consolidated statement of changes in equity
continued
For the year ended 31 December 2013
|
Ordinary
share
capital
£m
|
Preference
share
capital
£m
|
Share
premium
£m
|
Merger
reserve
£m
|
Treasury
shares
£m
|
Other
Reserves
1
£m
|
Retained
earnings
£m
|
Equity
attributable to
shareholders
of Aviva plc
£m
|
DCI and
tier 1
notes
£m
|
Non-
controlling
interests
£m
|
Total
equity
£m
|
Balance at 1 January
|
736
|
200
|
1,165
|
3,271
|
(32)
|
1,675
|
1,389
|
8,404
|
1,382
|
1,574
|
11,360
|
Profit for the year
|
—
|
—
|
—
|
—
|
—
|
—
|
2,008
|
2,008
|
—
|
143
|
2,151
|
Other comprehensive income
|
—
|
—
|
—
|
—
|
—
|
(421)
|
(549)
|
(970)
|
—
|
34
|
(936)
|
Total comprehensive income for the year
|
—
|
—
|
—
|
—
|
—
|
(421)
|
1,459
|
1,038
|
—
|
177
|
1,215
|
Dividends and appropriations
|
—
|
—
|
—
|
—
|
—
|
—
|
(538)
|
(538)
|
—
|
—
|
(538)
|
Capital contributions from non-controlling interests
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
1
|
1
|
Non-controlling interests share of dividends declared in the year
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(134)
|
(134)
|
Transfer to profit on disposal of subsidiaries, joint ventures and associates
|
—
|
—
|
—
|
—
|
—
|
(803)
|
1
|
(802)
|
—
|
—
|
(802)
|
Changes in non-controlling interests in subsidiaries
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(147)
|
(147)
|
Reserves credit for equity compensation plans
|
—
|
—
|
—
|
—
|
—
|
37
|
—
|
37
|
—
|
—
|
37
|
Shares issued under equity compensation plans
2
|
—
|
—
|
—
|
—
|
1
|
(43)
|
15
|
(27)
|
—
|
—
|
(27)
|
Aggregate tax effect – shareholder tax
|
—
|
—
|
—
|
—
|
—
|
30
|
22
|
52
|
—
|
—
|
52
|
Balance at 31 December
|
736
|
200
|
1,165
|
3,271
|
(31)
|
475
|
2,348
|
8,164
|
1,382
|
1,471
|
11,017
|
|
1
|
Refer to note 32 for further details of balances included in Other reserves.
|
|
2
|
Within shares issued under equity compensation plans are treasury shares of £1 million which includes shares distributed by employee trusts of £33 million offset by shares acquired by employee trusts of (£32) million.
|
The accounting policies (identified alphabetically) on pages 129 to
142 and notes (identified numerically) on pages 149 to 250 are an integral part of the financial statements.
Consolidated statement of financial position
As at 31 December 2015
|
Note
|
2015
£m
|
2014
£m
|
Assets
|
|
|
|
Goodwill
|
O & 12
|
1,955
|
1,302
|
Acquired value of in-force business and intangible assets
|
O & 13
|
5,731
|
1,028
|
Interests in, and loans to, joint ventures
|
D & 14
|
1,590
|
1,140
|
Interests in, and loans to, associates
|
D & 15
|
329
|
404
|
Property and equipment
|
P & 16
|
449
|
357
|
Investment property
|
Q & 17
|
11,301
|
8,925
|
Loans
|
V & 19
|
22,433
|
25,260
|
Financial investments
|
S, T, U & 22
|
274,217
|
202,638
|
Reinsurance assets
|
N & 39
|
20,918
|
7,958
|
Deferred tax assets
|
AC & 42
|
131
|
76
|
Current tax assets
|
|
114
|
27
|
Receivables
|
23
|
6,875
|
5,933
|
Deferred acquisition costs and other assets
|
X & 24
|
5,061
|
5,091
|
Prepayments and accrued income
|
X & 24
|
3,094
|
2,466
|
Cash and cash equivalents
|
Y & 51d
|
33,676
|
23,105
|
Assets of operations classified as held for sale
|
B & 2c
|
—
|
9
|
Total assets
|
|
387,874
|
285,719
|
Equity
|
|
|
|
Capital
|
AE
|
|
|
Ordinary share capital
|
26
|
1,012
|
737
|
Preference share capital
|
29
|
200
|
200
|
|
|
1,212
|
937
|
Capital reserves
|
|
|
|
Share premium
|
26b
|
1,185
|
1,172
|
Merger reserve
|
D & 31
|
8,974
|
3,271
|
|
|
10,159
|
4,443
|
Treasury shares
|
28
|
(29)
|
(8)
|
Other reserves
|
32
|
(114)
|
229
|
Retained earnings
|
33
|
4,736
|
4,617
|
Equity attributable to shareholders of Aviva plc
|
|
15,964
|
10,218
|
Direct capital instrument and tier 1 notes
|
30
|
1,123
|
892
|
Equity excluding non-controlling interests
|
|
17,087
|
11,110
|
Non-controlling interests
|
34
|
1,145
|
1,166
|
Total equity
|
|
18,232
|
12,276
|
Liabilities
|
|
|
|
Gross insurance liabilities
|
L & 36
|
140,556
|
113,445
|
Gross liabilities for investment contracts
|
M & 37
|
181,173
|
117,245
|
Unallocated divisible surplus
|
L & 41
|
8,811
|
9,467
|
Net asset value attributable to unitholders
|
D
|
11,415
|
9,482
|
Provisions
|
AA, AB & 43
|
1,416
|
879
|
Deferred tax liabilities
|
AC & 42
|
2,074
|
1,091
|
Current tax liabilities
|
|
177
|
169
|
Borrowings
|
AD & 45
|
8,770
|
7,378
|
Payables and other financial liabilities
|
S & 46
|
12,448
|
12,012
|
Other liabilities
|
47
|
2,802
|
2,273
|
Liabilities of operations
classified as held for sale
|
B & 2c
|
—
|
2
|
Total liabilities
|
|
369,642
|
273,443
|
Total equity and liabilities
|
|
387,874
|
285,719
|
Approved by the Board on 29 March 2016
Thomas D. Stoddard
Chief Financial Officer
Company number: 2468686
The accounting policies (identified alphabetically) on pages 129 to
142 and notes (identified numerically) on pages 149 to 250 are an integral part of the financial statements.
Consolidated statement of cash flows
For the year ended 31 December 2015
The cash flows presented in this statement cover all the
Group’s activities and include flows from both policyholder and shareholder activities. All cash and cash equivalents are
available for use by the Group.
|
Note
|
2015
£m
|
2014
£m
|
2013
£m
|
Cash flows from operating activities
1
|
|
|
|
|
Cash generated from/(used in) continuing operations
|
51a
|
5,197
|
(87)
|
2,562
|
Tax paid
|
|
(442)
|
(457)
|
(463)
|
Net cash from/(used in) operating activities - continuing operations
|
|
4,755
|
(544)
|
2,099
|
Net cash from operating activities - discontinued operations
2
|
|
—
|
—
|
1,919
|
Total net cash from/(used in) operating activities
|
|
4,755
|
(544)
|
4,018
|
Cash flows from investing activities
|
|
|
|
|
Acquisitions of, and additions
to, subsidiaries, joint ventures and associates, net of cash acquired
|
51b
|
7,783
|
(79)
|
(29)
|
Disposals of subsidiaries, joint ventures and associates, net of cash transferred
|
51c
|
(3)
|
110
|
377
|
New loans to joint ventures and associates
|
14a(i)
|
(21)
|
(73)
|
(6)
|
Repayment of loans to joint ventures and associates
|
14 & 15
|
—
|
33
|
25
|
Net new loans to joint ventures and associates
|
|
(21)
|
(40)
|
19
|
Purchases of property and equipment
|
|
(58)
|
(116)
|
(30)
|
Proceeds on sale of property and equipment
|
|
51
|
19
|
56
|
Other cash flow related to intangible assets
|
|
(111)
|
(122)
|
(59)
|
Net cash from/(used in) investing activities - continuing operations
|
|
7,641
|
(228)
|
334
|
Net cash
used in
investing activities - discontinued operations
2
|
|
—
|
(20)
|
(1,588)
|
Total net cash from/(used in) investing activities
|
|
7,641
|
(248)
|
(1,254)
|
Cash flows from financing activities
|
|
|
|
|
Redemption of Direct Capital Instrument
|
|
—
|
(547)
|
—
|
Proceeds from issue of ordinary shares and fixed rate tier 1 notes, net of transaction costs
|
|
16
|
8
|
—
|
Treasury shares purchased for employee trusts
|
|
(1)
|
—
|
(32)
|
New borrowings drawn down, net of expenses
|
|
2,049
|
2,383
|
2,201
|
Repayment of borrowings
3
|
|
(1,979)
|
(2,442)
|
(2,441)
|
Net drawdown/(repayment) of borrowings
|
45
|
70
|
(59)
|
(240)
|
Interest paid on borrowings
|
|
(588)
|
(527)
|
(605)
|
Preference dividends paid
|
11
|
(17)
|
(17)
|
(17)
|
Ordinary dividends paid
4
|
11
|
(635)
|
(447)
|
(429)
|
Coupon payments on the direct capital instruments and tier 1 notes
|
11
|
(72)
|
(88)
|
(92)
|
Capital contributions from non-controlling interests of subsidiaries
|
34
|
5
|
—
|
1
|
Dividends paid to non-controlling interests of subsidiaries
5
|
34
|
(142)
|
(189)
|
(134)
|
Changes in controlling interest in subsidiaries
|
|
(1)
|
(89)
|
—
|
Net cash used in financing activities - continuing operations
|
|
(1,365)
|
(1,955)
|
(1,548)
|
Net cash from financing activities - discontinued operations
2
|
|
—
|
—
|
19
|
Total net cash used in financing activities
|
|
(1,365)
|
(1,955)
|
(1,529)
|
Total net increase/(decrease) in
cash and cash equivalents
|
|
11,031
|
(2,747)
|
1,235
|
Cash and cash equivalents at 1
January
|
|
22,564
|
25,989
|
24,564
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(425)
|
(678)
|
190
|
Cash and cash equivalents at 31 December
|
51d
|
33,170
|
22,564
|
25,989
|
|
1
|
Cash flows from operating activities include interest received of £5,251 million
(2014: £4,986 million; 2013:
£5,637 million from continuing operations and £1,279 million from discontinued operations)
and dividends received
of £2,353 million
(2014: £1,442 million; 2013: £1,528 million from continuting operations and £1 million
from discontinued operations)
.
|
|
2
|
Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) sold
in 2013.
|
|
3
|
Includes redemption of 2005 STICS of £268 million in 2015.
|
|
4
|
Ordinary dividends paid in 2014 amounted to £449 million. £2 million of unclaimed and waived dividends has been
set off against this above
.
|
|
5
|
Dividends paid to non-controlling interests of subsidiaries in 2015
included £7 million on the 2003 STICS
and £17 million on the 2005 STICS prior to reclassification.
|
The accounting policies (identified alphabetically) on pages 129 to
142 and notes (identified numerically) on pages 149 to 250 are an integral part of the financial statements.
Notes
to the consolidated financial statements
1 – Exchange rates
The Group’s principal overseas operations during the
year were located within the eurozone, Canada and Poland. The results and cash flows of these operations have been translated into
sterling at the average rates for the year and the assets and liabilities have been translated at the year end rates as follows:
|
2015
|
2014
|
2013
|
Eurozone
|
|
|
|
Average rate (€1 equals)
|
£0.72
|
£0.81
|
£0.85
|
Year end rate (€1 equals)
|
£0.74
|
£0.78
|
£0.83
|
Canada
|
|
|
|
Average rate ($CAD1 equals)
|
£0.51
|
£0.55
|
£0.62
|
Year end rate ($CAD1 equals)
|
£0.49
|
£0.55
|
£0.57
|
Poland
|
|
|
|
Average rate (PLN1 equals)
|
£0.17
|
£0.19
|
£0.20
|
Year end rate (PLN1 equals)
|
£0.17
|
£0.18
|
£0.20
|
United States
|
|
|
|
Average rate ($US1 equals)
|
£0.65
|
£0.61
|
£0.64
|
Year end rate ($US1 equals)
|
£0.68
|
£0.64
|
£0.60
|
2 – Subsidiaries
This note provides details of the acquisitions and disposals of subsidiaries,
joint ventures and associates that the Group has made during the year, together with details of businesses held for sale at the
year end.
(a) Acquisitions
(i) Friends Life
On 10 April 2015, the Group completed the acquisition of 100% of the
outstanding ordinary shares of Friends Life Group Limited (‘Friends Life’) through an all share exchange which gave
Friends Life shareholders 0.74 Group shares for every Friends Life share held. In total, 1,086,326,606 Group shares were issued
and commenced trading on 13 April 2015.
Friends Life is a leading insurance business
which provides a range of pension, investment and insurance products and services to both individual customers and corporates.
Prior to the acquisition, Friends Life operated through three distinct divisions: the Heritage division which administers products
which are no longer actively marketed for new business; the UK division whose main lines of business are corporate benefits, retirement
income and protection; and the International division which provides savings, investment and protection products for customers
in Asia and the Middle East. The acquisition accelerates the Group’s investment thesis of cash flow plus growth and is expected
to benefit the Group over time through the realisation of significant incremental capital, financial and revenue synergies as well
as supporting the Group to secure its position as a leading insurance and savings business.
£768 million of the shares transferred
to the shareholders of Friends Life represents the fair value of the liabilities, based on discounted cash flows substantiated
against internally modelled and external market values, held by the Group related to the settlement of a pre-existing insurance
contract between the Group and Friends Life held by the Friends Provident pension scheme (refer to note 44). The remaining £5,207
million represents the consideration exchanged for £4,536 million of net assets of Friends Life and £671 million of
goodwill, as follows:
2 – Subsidiaries continued
|
Book Value
£m
|
Fair Value
and
Accounting
Policy
Adjustments
£m
|
Fair Value
£m
|
Assets
|
|
|
|
Acquired value of in-force business and intangible assets
|
3,055
|
2,219
|
5,274
|
Investment property
|
2,685
|
—
|
2,685
|
Financial investments
|
97,580
|
(11,314)
|
86,266
|
Reinsurance assets
|
1,254
|
11,251
|
12,505
|
Deferred tax assets
|
51
|
54
|
105
|
Other assets
|
2,619
|
(854)
|
1,765
|
Cash and cash equivalents
|
7,878
|
—
|
7,878
|
Total assets
|
115,122
|
1,356
|
116,478
|
Liabilities
|
|
|
|
Insurance liabilities
|
36,068
|
12
|
36,080
|
Liability for investment contracts
|
68,778
|
(129)
|
68,649
|
Unallocated divisible surplus
|
724
|
—
|
724
|
Net asset value attributable to unitholders
|
212
|
—
|
212
|
Deferred tax liabilities
|
1,203
|
240
|
1,443
|
Borrowings
|
1,064
|
243
|
1,307
|
Other liabilities
|
2,355
|
668
|
3,023
|
Total liabilities
|
110,404
|
1,034
|
111,438
|
Net assets
|
4,718
|
322
|
5,040
|
Non-controlling interests (NCI) including tier 1 notes
|
329
|
175
|
504
|
Net assets excluding NCI
|
4,389
|
147
|
4,536
|
Goodwill arising on acquisition
|
|
|
671
|
Fair value of shares exchanged for net assets
|
|
|
5,207
|
Fair value of Group liabilities related to pre-existing relationship
|
|
|
768
|
Fair value of total shares exchanged
1
|
|
|
5,975
|
|
1
|
Fair value of consideration based on the opening market price on the date of acquisition.
|
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 31 for further detail
regarding the merger reserve.
Acquired value of in-force business and intangible
assets
An asset of £4,790 million was recognised upon acquisition representing
the present value of future profits from the acquired in-force business (‘AVIF’) as of 10 April 2015. This will be
amortised in accordance with the Group’s accounting policies. Deferred acquisition costs (‘DAC’) are not recognised
upon acquisition.
Intangible assets of £484 million represent
Friends Life’s distribution agreements and customer contracts. These assets have been assessed as having a useful life of
between five and ten years and will be amortised over that period in accordance with the Group’s accounting policies, along
with the corresponding release of the applicable deferred tax provision.
Fair value and accounting policy adjustments
A reclassification of £11.3 billion was made from financial
investments to reinsurance assets to align to the Group’s presentation policy for reinsurance assets.
The adjustments to other liabilities are primarily
related to a Group insurance contract held within the Friends Provident pension scheme (refer to note 44(b)(i)).
The adjustment to non-controlling interests represents
the fair value adjustment of the 2003 and 2005 Step-up Tier one Insurance Capital Securities (‘STICS’) issuances based
on the market quoted price which were classified as equity instruments within NCI on acquisition (refer to note 34).
Goodwill
The residual goodwill on acquisition of £671 million, none of
which is expected to be deductible for tax purposes, represents future synergies expected to arise from combining the operations
of Friends Life with those of the Group as well as the value of the workforce in place and other future business value. Refer to
note 12 for changes to the carrying amount of goodwill during the year.
Profit and loss
In the period from 10 April 2015 to 31 December 2015 the acquired
Friends Life subsidiaries contributed net earned premiums and fee and commission income of £1,338 million and a loss before
tax attributable to shareholders of £371 million, including £160 million of integration and restructuring costs, to
the consolidated results of the Group.
If the acquisition had been effective on 1 January
2015, on a pro-forma basis the Group’s net earned premiums and fee and commission income is estimated at £21.1 billion
and profit before tax attributable to shareholders is estimated at £1,391 million. In determining these amounts, management
has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred
on 1 January 2015. The pro-forma results are provided for information purposes only and do not necessarily reflect the actual results
that would have occurred had the acquisition taken place on 1 January 2015, nor are they necessarily indicative of the future results
of the combined Group.
2 – Subsidiaries continued
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 14) 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.
(b) Profit on the disposal and re-measurement
of subsidiaries, joint ventures and associates
The profit on the disposal and re-measurement of subsidiaries,
joint ventures and associates comprises:
|
2015
£m
|
2014
£m
|
2013
£m
|
Spain – long-term business
|
—
|
132
|
197
|
Italy – long-term business
|
—
|
(6)
|
(178)
|
Korea
|
—
|
2
|
(20)
|
Turkey – general insurance
|
—
|
(16)
|
(9)
|
Aviva Investors
|
—
|
35
|
—
|
Turkey – long-term business
|
1
|
15
|
—
|
Indonesia
|
—
|
(3)
|
—
|
Ireland – long-term business
|
—
|
—
|
87
|
Malaysia
|
—
|
—
|
39
|
Russia
|
—
|
—
|
1
|
Czech Republic, Hungary and Romania
|
—
|
—
|
1
|
Poland
|
—
|
—
|
(4)
|
Other small operations
|
1
|
15
|
1
|
Profit on disposal and remeasurement from continuing operations
|
2
|
174
|
115
|
Profit on disposal and remeasurement from discontinued operations
|
—
|
58
|
808
|
Total profit on disposal and remeasurement
|
2
|
232
|
923
|
The total Group profit on disposal and re-measurement
of subsidiaries, joint ventures and associates from continuing operations is £2 million
(2014:
£174 million; 2013: £115 million)
. This includes a gain of £1 million (
2014: £15 million;
2013: £nil
) recognised on the further sale of shares in the Turkey Life business and profits on the disposal of small
reinsurance operations in Asia of £1 million. There was no profit or loss recognised relating to discontinued operations
in 2015
(2014: £58 million profit; 2013: £808 million profit)
.
(c) Assets and liabilities of operations
classified as held for sale
There were no operations classified as held for sale as at
31 December 2015.
|
2015
£m
|
2014
£m
|
Assets
|
|
|
Cash and cash equivalents
|
—
|
9
|
Total assets
|
—
|
9
|
Liabilities
|
|
|
Insurance liabilities
|
—
|
(1)
|
Other liabilities
|
—
|
(1)
|
Total liabilities
|
—
|
(2)
|
Net assets
|
—
|
7
|
(d) Subsequent events
On 21 January 2016, Aviva plc announced that its Canadian business
Aviva Canada will acquire 100% ownership of RBC General Insurance Company, the existing home and motor insurance business of RBC
Insurance, and enter into an exclusive 15 year strategic agreement with RBC Insurance. Aviva will pay £281 million ($CAD
581 million) upon completion, subject to customary completion adjustments. The proposed transaction is subject to closing conditions
including receipt of required regulatory approvals and is expected to complete in the third quarter of 2016.
On 9 March 2016 the Group agreed to sell its entire 70% stake in its
Irish private medical insurance business, Aviva Health Insurance Ireland Limited, to Irish Life Group Limited. The proposed transaction
will be subject to customary closing conditions including receipt of required regulatory approvals and is expected to complete
in the third quarter of 2016. The subsidiary has been classified as held for sale from 9 March 2016.
2 – Subsidiaries continued
(e) Significant restrictions
In certain jurisdictions the ability of subsidiaries to transfer funds
to the Group in the form of cash dividends or to repay loans and advances is subject to local corporate or insurance laws and regulations
and solvency requirements. There are no protective rights of non-controlling interests which significantly restrict the Group’s
ability to access or use the assets and settle the liabilities of the Group.
3 – Segmental information
The Group’s results can be segmented either by activity or by
geography. Our primary reporting format is on market reporting lines, with supplementary information being given by business activity.
This note provides segmental information on the consolidated income statement and consolidated statement of financial position.
The Group has determined its operating segments
along market reporting lines. These reflect the management structure whereby a member of the Executive Management team is accountable
to the Group CEO for the operating segment for which they are responsible.
United Kingdom & Ireland
United Kingdom and Ireland comprises two operating segments –
Life and General Insurance. The principal activities of our UK and Ireland Life operations are life insurance, long-term health
(in the UK) and accident insurance, savings, pensions and annuity business, and include the UK insurance operations acquired as
part of the acquisition of Friends Life (refer to note 2). UK and Ireland General Insurance provides insurance cover to individuals
and businesses, for risks associated mainly with motor vehicles, property and liability (such as employers’ liability and
professional indemnity liability) and medical expenses. UK & Ireland General Insurance includes the results of our Ireland
Health business.
France
The principal activities of our French operations are long-term business
and general insurance. The long-term business offers a range of long-term insurance and savings products, primarily for individuals,
with a focus on the unit-linked market. The general insurance business predominantly sells personal and small commercial lines
insurance products through agents and a direct insurer.
Poland
Activities in Poland comprise long-term business and general insurance
operations, including our long-term business in Lithuania.
Italy, Spain and Other
These countries are not individually significant at a Group level,
so have been aggregated into a single reporting segment in line with IFRS 8. This segment includes our operations in Italy (including
Eurovita up until the date of disposal in June 2014) and Spain (including CxG up until the date of disposal in December 2014).
The principal activities of our Italian operations are long-term business and general insurance. The life business offers a range
of long-term insurance and savings products, and the general insurance business provides motor and home insurance products to individuals,
as well as small commercial risk insurance to businesses. The principal activity of the Spanish operation is the sale of long-term
business, accident and health insurance and a selection of savings products. Our Other European operations include our life operations
in Turkey (including our reduced joint venture share following IPO in November 2014) and our Turkish general insurance business
(up until the date of disposal in December 2014).
Canada
The principal activity of the Canadian operation is general insurance.
In particular it provides personal and commercial lines insurance products principally distributed through insurance brokers.
Asia
Our activities in Asia principally comprise our long-term business
operations in China, India, Singapore, Hong Kong, Vietnam, Indonesia, Taiwan and the international operations of Friends Life.
This segment also includes general insurance and health operations in Singapore, health operations in Indonesia and the results
of South Korea (until the date of disposal in June 2014).
Aviva Investors
Aviva Investors operates in most of the markets in which the Group
operates, in particular the UK, France, North America, Asia Pacific and other international businesses, managing policyholders’
and shareholders’ invested funds, providing investment management services for institutional pension fund mandates and managing
a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. This segment also includes the
results of River Road Asset Management LLC until the date of its disposal in June 2014.
Other Group activities
Investment return on centrally held assets and head office expenses,
such as Group treasury and finance functions, together with certain taxes and financing costs arising on central borrowings are
included in ‘Other Group activities’, along with central operations of Friends Life, central core structural borrowings
and certain tax balances in the segmental statement of financial position. The results of our internal reinsurance operations are
also included in this segment.
Discontinued operations
In October 2013 the Group sold its US life operations (including the
related internal asset management operations of Aviva Investors), which has been presented as a discontinued operation for the
comparative periods in the income statement, statement of comprehensive income and statement of cash flows. In 2014 this represented
the settlement of the purchase price adjustment, in conjunction with the aggregate development of other provisions in the year.
3 – Segmental information continued
Measurement basis
The accounting policies of the segments are the same as those for
the Group as a whole. Any transactions between the business segments are subject to normal commercial terms and market conditions.
The Group evaluates performance of operating segments on the basis of:
(i) profit or loss from operations before tax attributable to shareholders
(ii) profit or loss from operations before tax attributable to
shareholders, adjusted for non-operating items outside the segment management’s control, including investment market performance
and fiscal policy changes.
(a) (i) Segmental income statement for the year ended
31 December 2015
|
United Kingdom & Ireland
|
|
|
|
Europe
|
|
|
|
|
|
|
Life
£m
|
GI
£m
|
France
£m
|
Poland
£m
|
Italy, Spain
and Other
£m
|
Canada
£m
|
Asia
£m
|
Aviva
Investors
2
£m
|
Other
Group
activities
3
£m
|
Total
£m
|
Gross written premiums
|
5,402
|
4,503
|
5,777
|
484
|
2,733
|
2,109
|
917
|
—
|
—
|
21,925
|
Premiums ceded to reinsurers
|
(1,355)
|
(1,163)
|
(75)
|
(6)
|
(42)
|
(117)
|
(132)
|
—
|
—
|
(2,890)
|
Internal reinsurance revenue
|
(5)
|
(1)
|
—
|
(1)
|
(4)
|
—
|
(2)
|
—
|
13
|
—
|
Premiums written net of reinsurance
|
4,042
|
3,339
|
5,702
|
477
|
2,687
|
1,992
|
783
|
—
|
13
|
19,035
|
Net change in provision for unearned premiums
|
(1)
|
(53)
|
(11)
|
(13)
|
(7)
|
(15)
|
(14)
|
—
|
3
|
(111)
|
Net earned premiums
|
4,041
|
3,286
|
5,691
|
464
|
2,680
|
1,977
|
769
|
—
|
16
|
18,924
|
Fee and commission income
|
810
|
160
|
232
|
40
|
115
|
28
|
134
|
281
|
(3)
|
1,797
|
|
4,851
|
3,446
|
5,923
|
504
|
2,795
|
2,005
|
903
|
281
|
13
|
20,721
|
Net investment income/(expense)
|
448
|
159
|
1,949
|
(1)
|
444
|
49
|
(325)
|
155
|
(53)
|
2,825
|
Inter-segment revenue
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
195
|
—
|
195
|
Share of profit of joint ventures and associates
|
149
|
—
|
7
|
5
|
8
|
—
|
11
|
—
|
—
|
180
|
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates
|
2
|
—
|
—
|
—
|
(1)
|
—
|
1
|
—
|
—
|
2
|
Segmental income
1
|
5,450
|
3,605
|
7,879
|
508
|
3,246
|
2,054
|
590
|
631
|
(40)
|
23,923
|
Claims and benefits paid, net of recoveries from reinsurers
|
(10,663)
|
(2,533)
|
(4,454)
|
(302)
|
(2,343)
|
(1,240)
|
(415)
|
—
|
(35)
|
(21,985)
|
Change in insurance liabilities, net of reinsurance
|
7,070
|
492
|
(1,093)
|
17
|
264
|
(12)
|
(68)
|
—
|
11
|
6,681
|
Change in investment contract provisions
|
943
|
—
|
(1,915)
|
18
|
(702)
|
—
|
328
|
(159)
|
—
|
(1,487)
|
Change in unallocated divisible surplus
|
22
|
—
|
841
|
12
|
93
|
—
|
16
|
—
|
—
|
984
|
Fee and commission expense
|
(585)
|
(1,195)
|
(623)
|
(57)
|
(252)
|
(571)
|
(114)
|
(26)
|
76
|
(3,347)
|
Other expenses
|
(1,369)
|
(223)
|
(205)
|
(51)
|
(111)
|
(81)
|
(250)
|
(365)
|
(129)
|
(2,784)
|
Inter-segment expenses
|
(169)
|
(5)
|
(9)
|
(6)
|
—
|
(4)
|
—
|
—
|
(2)
|
(195)
|
Finance costs
|
(214)
|
(1)
|
(1)
|
—
|
(4)
|
(4)
|
(3)
|
—
|
(391)
|
(618)
|
Segmental expenses
|
(4,965)
|
(3,465)
|
(7,459)
|
(369)
|
(3,055)
|
(1,912)
|
(506)
|
(550)
|
(470)
|
(22,751)
|
Profit/(loss) before tax from continuing operations
|
485
|
140
|
420
|
139
|
191
|
142
|
84
|
81
|
(510)
|
1,172
|
Tax attributable to policyholders’ returns
|
232
|
—
|
—
|
—
|
—
|
—
|
(14)
|
—
|
—
|
218
|
Profit/(loss) before tax attributable to shareholders’ profits from continuing operations
|
717
|
140
|
420
|
139
|
191
|
142
|
70
|
81
|
(510)
|
1,390
|
Profit from discontinued operations
|
|
|
|
|
|
|
|
|
—
|
—
|
Adjusted for non-operating items:
|
|
|
|
|
|
|
|
|
|
|
Reclassification of corporate costs and unallocated interest
|
7
|
(1)
|
20
|
—
|
—
|
6
|
—
|
4
|
(36)
|
—
|
Investment return variances and economic assumption changes on long-term business
|
—
|
—
|
(17)
|
—
|
14
|
—
|
(11)
|
—
|
—
|
(14)
|
Short-term fluctuation in return on investments backing non-long-term business
|
53
|
84
|
2
|
(2)
|
31
|
47
|
—
|
—
|
(131)
|
84
|
Economic assumption changes on general insurance and health business
|
—
|
98
|
—
|
—
|
—
|
2
|
—
|
—
|
—
|
100
|
Impairment of goodwill, joint ventures and associates and other amounts expensed
|
—
|
—
|
—
|
—
|
9
|
—
|
13
|
—
|
—
|
22
|
Amortisation and impairment of intangibles
|
84
|
14
|
—
|
2
|
14
|
10
|
9
|
10
|
12
|
155
|
Amortisation and impairment of AVIF
|
350
|
—
|
5
|
2
|
5
|
—
|
136
|
—
|
—
|
498
|
(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates
|
(2)
|
—
|
—
|
—
|
1
|
—
|
(1)
|
—
|
—
|
(2)
|
Integration and restructuring costs
|
215
|
26
|
19
|
—
|
3
|
7
|
7
|
11
|
91
|
379
|
Adjusted for non-operating items from discontinued operations
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Other
4
|
—
|
53
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
53
|
Adjusted operating profit/(loss) before tax attributable to shareholders
5
|
1,424
|
414
|
449
|
141
|
268
|
214
|
223
|
106
|
(574)
|
2,665
|
|
1
|
Total reported income, excluding inter-segment revenue, includes £9,031 million from the United Kingdom (Aviva plc’s
country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by
geographical destination, as most risks are located in the countries where the contracts were written.
|
|
2
|
Aviva Investors adjusted operating profit includes £1 million profit relating to the Aviva Investors Pooled Pensions
business.
|
|
3
|
Other Group activities include Group Reinsurance.
|
|
4
|
Other items represents a day one loss upon the completion of an outwards reinsurance contract by the UK General Insurance business,
which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks.
The £53 million loss comprises £712 million in premiums ceded less £659 million in reinsurance recoverables recognised.
|
|
5
|
Adjusted operating profit is a non-GAAP measure as defined in the glossary.
|
3 – Segmental information continued
(a) (ii) Segmental income statement for the year ended
31 December 2014
|
United Kingdom & Ireland
|
|
|
|
Europe
|
|
|
|
|
|
|
Life
£m
|
GI
£m
|
France
£m
|
Poland
£m
|
Italy, Spain
and Other
£m
|
Canada
£m
|
Asia
£m
|
Aviva
Investors
2
£m
|
Other Group
activities
3
£m
|
Total
£m
|
Gross written premiums
|
4,306
|
4,484
|
5,756
|
490
|
3,514
|
2,176
|
942
|
—
|
2
|
21,670
|
Premiums ceded to reinsurers
|
(784)
|
(454)
|
(70)
|
(7)
|
(68)
|
(70)
|
(161)
|
—
|
—
|
(1,614)
|
Internal reinsurance revenue
|
(7)
|
(2)
|
(2)
|
(1)
|
(2)
|
(2)
|
—
|
—
|
16
|
—
|
Premiums written net of reinsurance
|
3,515
|
4,028
|
5,684
|
482
|
3,444
|
2,104
|
781
|
—
|
18
|
20,056
|
Net change in provision for unearned premiums
|
23
|
43
|
(27)
|
6
|
10
|
(54)
|
(3)
|
—
|
3
|
1
|
Net earned premiums
|
3,538
|
4,071
|
5,657
|
488
|
3,454
|
2,050
|
778
|
—
|
21
|
20,057
|
Fee and commission income
|
398
|
160
|
203
|
87
|
115
|
15
|
9
|
243
|
—
|
1,230
|
|
3,936
|
4,231
|
5,860
|
575
|
3,569
|
2,065
|
787
|
243
|
21
|
21,287
|
Net investment income/(expense)
|
13,301
|
362
|
5,174
|
147
|
2,392
|
180
|
125
|
267
|
(59)
|
21,889
|
Inter-segment revenue
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
158
|
—
|
158
|
Share of profit/(loss) of joint ventures and associates
|
139
|
—
|
7
|
4
|
9
|
—
|
(12)
|
—
|
—
|
147
|
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates
|
—
|
—
|
—
|
—
|
125
|
14
|
(1)
|
35
|
1
|
174
|
Segmental income
1
|
17,376
|
4,593
|
11,041
|
726
|
6,095
|
2,259
|
899
|
703
|
(37)
|
43,655
|
Claims and benefits paid, net of recoveries from reinsurers
|
(7,522)
|
(2,745)
|
(4,594)
|
(331)
|
(2,572)
|
(1,276)
|
(362)
|
—
|
(72)
|
(19,474)
|
Change in insurance liabilities, net of reinsurance
|
(3,955)
|
88
|
(1,119)
|
(70)
|
(212)
|
(70)
|
(294)
|
—
|
62
|
(5,570)
|
Change in investment contract provisions
|
(3,036)
|
—
|
(1,881)
|
8
|
(1,347)
|
—
|
—
|
(262)
|
—
|
(6,518)
|
Change in unallocated divisible surplus
|
(62)
|
—
|
(2,182)
|
(6)
|
(1,055)
|
—
|
(59)
|
—
|
—
|
(3,364)
|
Fee and commission expense
|
(462)
|
(1,294)
|
(564)
|
(65)
|
(289)
|
(570)
|
(60)
|
(24)
|
(61)
|
(3,389)
|
Other expenses
|
(674)
|
(228)
|
(232)
|
(59)
|
(127)
|
(81)
|
(61)
|
(332)
|
(185)
|
(1,979)
|
Inter-segment expenses
|
(137)
|
(4)
|
(4)
|
(7)
|
—
|
(4)
|
—
|
—
|
(2)
|
(158)
|
Finance costs
|
(191)
|
(4)
|
(3)
|
—
|
(4)
|
(5)
|
—
|
(2)
|
(331)
|
(540)
|
Segmental expenses
|
(16,039)
|
(4,187)
|
(10,579)
|
(530)
|
(5,606)
|
(2,006)
|
(836)
|
(620)
|
(589)
|
(40,992)
|
Profit/(loss) before tax from continuing operations
|
1,337
|
406
|
462
|
196
|
489
|
253
|
63
|
83
|
(626)
|
2,663
|
Tax attributable to policyholders’ returns
|
(357)
|
—
|
—
|
—
|
—
|
—
|
(25)
|
—
|
—
|
(382)
|
Profit/(loss) before tax attributable to shareholders’ profits from continuing operations
|
980
|
406
|
462
|
196
|
489
|
253
|
38
|
83
|
(626)
|
2,281
|
Profit from discontinued operations
4
|
|
|
|
|
|
|
|
|
58
|
58
|
Adjusted for non-operating items:
|
|
|
|
|
|
|
|
|
|
|
Reclassification of corporate costs and unallocated interest
|
—
|
11
|
16
|
—
|
1
|
—
|
—
|
—
|
(28)
|
—
|
Investment return variances and economic assumption changes on long-term business
|
13
|
—
|
9
|
(4)
|
(101)
|
—
|
11
|
—
|
—
|
(72)
|
Short-term fluctuation in return on investments backing non-long-term business
|
—
|
(82)
|
(50)
|
(1)
|
13
|
(65)
|
—
|
—
|
(76)
|
(261)
|
Economic assumption changes on general insurance and health business
|
—
|
145
|
—
|
—
|
—
|
3
|
—
|
—
|
(3)
|
145
|
Impairment of goodwill, joint ventures and associates and other amounts expensed
|
—
|
—
|
—
|
—
|
—
|
—
|
24
|
—
|
—
|
24
|
Amortisation and impairment of intangibles
|
31
|
1
|
—
|
—
|
17
|
10
|
3
|
11
|
17
|
90
|
Amortisation and impairment of AVIF
5
|
10
|
—
|
18
|
3
|
9
|
—
|
—
|
—
|
—
|
40
|
(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates
|
—
|
—
|
—
|
—
|
(125)
|
(14)
|
1
|
(35)
|
(1)
|
(174)
|
Integration and restructuring costs
|
28
|
11
|
15
|
1
|
1
|
4
|
1
|
4
|
75
|
140
|
Adjusted for non-operating items from discontinued operations
4
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(58)
|
(58)
|
Adjusted operating profit/(loss) before tax attributable to shareholders
5,6
|
1,062
|
492
|
470
|
195
|
304
|
191
|
78
|
63
|
(642)
|
2,213
|
|
1
|
Total reported income, excluding inter-segment revenue, includes £20,816 million from the United Kingdom (Aviva plc’s
country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by
geographical destination, as most risks are located in the countries where the contracts were written.
|
|
2
|
Aviva Investors adjusted operating profit includes £2 million profit relating to Aviva Investors Pooled Pensions business.
|
|
3
|
Other Group activities include Group Reinsurance.
|
|
4
|
In 2014 the Group paid a settlement of £20 million related to the purchase price adjustment relating to the disposal
of the US Life business in 2013. The settlement and the aggregate development of other provisions related to the discontinued operations
in 2014 resulted in a net £58 million gain which has been presented as profit on disposal of discontinued operations.
|
|
5
|
Adjusted 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. There is no impact on the result or the total equity for any period presented as a
result of this restatement.
|
|
6
|
Adjusted operating profit is a non-GAAP measure as defined in the glossary.
|
3 – Segmental information continued
(a) (ii) Segmental income statement for the year ended
31 December 2013
|
United Kingdom & Ireland
|
|
|
|
Europe
|
|
|
|
|
|
|
|
|
Life
£m
|
GI
£m
|
France
£m
|
Poland
£m
|
Italy, Spain
and Other
£m
|
Canada
£m
|
Asia
£m
|
Aviva
Investors
2
£m
|
Other Group
activities
3
£m
|
Continuing
operations
£m
|
Discontinued
operations
4
£m
|
Total
£m
|
Gross written premiums
|
4,971
|
4,664
|
5,634
|
484
|
3,277
|
2,318
|
678
|
—
|
9
|
22,035
|
1,589
|
23,624
|
Premiums ceded to reinsurers
|
(743)
|
(455)
|
(63)
|
(6)
|
(79)
|
(60)
|
(146)
|
—
|
6
|
(1,546)
|
(100)
|
(1,646)
|
Internal reinsurance revenue
|
—
|
(9)
|
(6)
|
(3)
|
(5)
|
(8)
|
—
|
—
|
31
|
—
|
—
|
—
|
Premiums written net of reinsurance
|
4,228
|
4,200
|
5,565
|
475
|
3,193
|
2,250
|
532
|
—
|
46
|
20,489
|
1,489
|
21,978
|
Net change in provision for unearned premiums
|
(9)
|
185
|
(25)
|
(2)
|
31
|
(54)
|
8
|
—
|
—
|
134
|
—
|
134
|
Net earned premiums
|
4,219
|
4,385
|
5,540
|
473
|
3,224
|
2,196
|
540
|
—
|
46
|
20,623
|
1,489
|
22,112
|
Fee and commission income
|
424
|
198
|
190
|
60
|
115
|
40
|
14
|
238
|
—
|
1,279
|
28
|
1,307
|
|
4,643
|
4,583
|
5,730
|
533
|
3,339
|
2,236
|
554
|
238
|
46
|
21,902
|
1,517
|
23,419
|
Net investment income/(expense)
|
6,898
|
293
|
3,332
|
180
|
1,628
|
17
|
40
|
148
|
(27)
|
12,509
|
2,340
|
14,849
|
Inter-segment revenue
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
143
|
—
|
143
|
49
|
192
|
Share of profit/(loss) of joint ventures and associates
|
88
|
—
|
8
|
3
|
6
|
—
|
15
|
—
|
—
|
120
|
—
|
120
|
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates
|
87
|
—
|
—
|
(4)
|
13
|
—
|
19
|
—
|
—
|
115
|
808
|
923
|
Segmental income
1
|
11,716
|
4,876
|
9,070
|
712
|
4,986
|
2,253
|
628
|
529
|
19
|
34,789
|
4,714
|
39,503
|
Claims and benefits paid, net of recoveries from reinsurers
|
(8,960)
|
(2,818)
|
(4,858)
|
(363)
|
(3,222)
|
(1,342)
|
(489)
|
—
|
(41)
|
(22,093)
|
(2,037)
|
(24,130)
|
Change in insurance liabilities, net of reinsurance
|
4,102
|
119
|
(1,618)
|
(103)
|
(2)
|
(42)
|
92
|
—
|
(55)
|
2,493
|
(312)
|
2,181
|
Change in investment contract provisions
|
(4,829)
|
—
|
(1,725)
|
34
|
(386)
|
—
|
—
|
(144)
|
—
|
(7,050)
|
(31)
|
(7,081)
|
Change in unallocated divisible surplus
|
199
|
—
|
426
|
16
|
(363)
|
—
|
2
|
—
|
—
|
280
|
—
|
280
|
Fee and commission expense
|
(598)
|
(1,479)
|
(554)
|
(60)
|
(286)
|
(620)
|
(61)
|
(23)
|
(294)
|
(3,975)
|
(438)
|
(4,413)
|
Other expenses
|
(370)
|
(301)
|
(280)
|
(51)
|
(214)
|
(136)
|
(73)
|
(446)
|
(349)
|
(2,220)
|
(293)
|
(2,513)
|
Inter-segment expenses
|
(129)
|
(4)
|
—
|
(7)
|
—
|
(3)
|
—
|
—
|
—
|
(143)
|
(49)
|
(192)
|
Finance costs
|
(224)
|
(6)
|
(4)
|
—
|
(4)
|
(6)
|
—
|
(5)
|
(360)
|
(609)
|
(16)
|
(625)
|
Segmental expenses
|
(10,809)
|
(4,489)
|
(8,613)
|
(534)
|
(4,477)
|
(2,149)
|
(529)
|
(618)
|
(1,099)
|
(33,317)
|
(3,176)
|
(36,493)
|
Profit/(loss) before tax from continuing operations
|
907
|
387
|
457
|
178
|
509
|
104
|
99
|
(89)
|
(1,080)
|
1,472
|
1,538
|
3,010
|
Tax attributable to policyholders’ returns
|
(190)
|
—
|
—
|
—
|
—
|
—
|
(1)
|
—
|
—
|
(191)
|
—
|
(191)
|
Profit/(loss) before tax attributable to shareholders’ profits from continuing operations
|
717
|
387
|
457
|
178
|
509
|
104
|
98
|
(89)
|
(1,080)
|
1,281
|
1,538
|
2,819
|
Adjusted for non-operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of corporate costs and unallocated interest
|
—
|
7
|
21
|
—
|
—
|
—
|
—
|
—
|
(28)
|
—
|
—
|
—
|
Investment return variances and economic assumption changes on long-term business
|
414
|
—
|
(70)
|
1
|
(267)
|
—
|
(29)
|
—
|
—
|
49
|
(452)
|
(403)
|
Short-term fluctuation in return on investments backing non-long-term business
|
—
|
74
|
15
|
—
|
12
|
122
|
—
|
—
|
113
|
336
|
—
|
336
|
Economic assumption changes on general insurance and health business
|
—
|
(28)
|
—
|
—
|
—
|
(4)
|
—
|
—
|
(1)
|
(33)
|
—
|
(33)
|
Impairment of goodwill, joint ventures and associates and other amounts expensed
|
—
|
—
|
—
|
—
|
48
|
—
|
29
|
—
|
—
|
77
|
—
|
77
|
Amortisation and impairment of intangibles
|
21
|
1
|
—
|
—
|
17
|
15
|
1
|
22
|
14
|
91
|
9
|
100
|
Amortisation and impairment of AVIF
5
|
15
|
—
|
19
|
3
|
11
|
—
|
—
|
—
|
—
|
48
|
96
|
144
|
(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates
|
(87)
|
—
|
—
|
4
|
(13)
|
—
|
(19)
|
—
|
—
|
(115)
|
(808)
|
(923)
|
Integration and restructuring costs
|
59
|
24
|
25
|
1
|
8
|
9
|
7
|
41
|
189
|
363
|
3
|
366
|
Adjusted operating profit/(loss) before tax attributable to shareholders
5,6
|
1,139
|
465
|
467
|
187
|
325
|
246
|
87
|
(26)
|
(793)
|
2,097
|
386
|
2,483
|
|
1
|
Total reported income, excluding inter-segment revenue, includes £15,862 million from the United Kingdom (Aviva plc’s
country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by
geographical destination, as most risks are located in the countries where the contracts were written.
|
|
2
|
Aviva Investors adjusted operating profit includes £2 million profit relating to Aviva Investors Pooled Pensions business.
|
|
3
|
Other Group activities include Group Reinsurance.
|
|
4
|
Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until
the date of disposal (2 October 2013). The transaction proceeds received were based on the estimated earnings and other improvements
in statutory surplus from 30 June 2012 to 30 September 2013. The final purchase price was subject to customary completion adjustments.
A profit on disposal of ££808 million was recorded in 2013, reflecting management’s best estimate of the completion
adjustments as of 31 December 2013.
|
|
5
|
Adjusted 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. There is no impact on the result or the total equity for any period presented as a
result of this restatement.
|
|
6
|
Adjusted operating profit is a non-GAAP measure as defined in the glossary.
|
3 – Segmental information continued
(a) (iii) Segmental statement of financial position
as at 31 December 2015
|
United Kingdom & Ireland
|
|
|
|
Europe
|
|
|
|
|
|
|
Life
£m
|
GI
£m
|
France
£m
|
Poland
£m
|
Italy, Spain and
Other
£m
|
Canada
£m
|
Asia
£m
|
Aviva
Investors
£m
|
Other
Group
activities
£m
|
Total
£m
|
Goodwill
|
663
|
1,026
|
5
|
23
|
172
|
21
|
45
|
—
|
—
|
1,955
|
Acquired value of in-force business and intangible assets
|
3,600
|
139
|
86
|
12
|
539
|
69
|
1,206
|
15
|
65
|
5,731
|
Interests in, and loans to, joint ventures and associates
|
1,291
|
—
|
138
|
39
|
72
|
7
|
372
|
—
|
—
|
1,919
|
Property and equipment
|
130
|
27
|
225
|
3
|
5
|
10
|
8
|
1
|
40
|
449
|
Investment property
|
7,483
|
198
|
2,089
|
—
|
1
|
—
|
—
|
1,146
|
384
|
11,301
|
Loans
|
21,502
|
5
|
733
|
1
|
26
|
135
|
31
|
—
|
—
|
22,433
|
Financial investments
|
163,987
|
4,715
|
65,413
|
2,575
|
19,176
|
3,187
|
9,684
|
515
|
4,965
|
274,217
|
Deferred acquisition costs
|
1,394
|
418
|
227
|
32
|
77
|
255
|
57
|
4
|
—
|
2,464
|
Other assets
|
42,636
|
5,301
|
9,678
|
239
|
1,480
|
860
|
1,351
|
901
|
4,959
|
67,405
|
Total assets
|
242,686
|
11,829
|
78,594
|
2,924
|
21,548
|
4,544
|
12,754
|
2,582
|
10,413
|
387,874
|
Insurance liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term business and outstanding claims provisions
|
99,435
|
5,439
|
16,487
|
2,308
|
7,699
|
2,058
|
2,865
|
—
|
18
|
136,309
|
Unearned premiums
|
226
|
2,083
|
393
|
45
|
237
|
1,016
|
48
|
—
|
—
|
4,048
|
Other insurance liabilities
|
—
|
76
|
44
|
—
|
—
|
77
|
—
|
—
|
2
|
199
|
Liability for investment contracts
|
114,143
|
—
|
47,834
|
2
|
9,770
|
—
|
7,681
|
1,743
|
—
|
181,173
|
Unallocated divisible surplus
|
2,575
|
—
|
4,941
|
55
|
1,047
|
—
|
193
|
—
|
—
|
8,811
|
Net asset value attributable to unitholders
|
203
|
—
|
2,863
|
—
|
413
|
—
|
—
|
—
|
7,936
|
11,415
|
External borrowings
|
1,903
|
—
|
—
|
—
|
49
|
—
|
—
|
—
|
6,818
|
8,770
|
Other liabilities, including inter-segment liabilities
|
12,261
|
(1,240)
|
4,066
|
99
|
715
|
596
|
565
|
370
|
1,485
|
18,917
|
Total liabilities
|
230,746
|
6,358
|
76,628
|
2,509
|
19,930
|
3,747
|
11,352
|
2,113
|
16,259
|
369,642
|
Total equity
|
|
|
|
|
|
|
|
|
|
18,232
|
Total equity and liabilities
|
|
|
|
|
|
|
|
|
|
387,874
|
3 – Segmental information continued
(a) (iv) Segmental statement of financial position
as at 31 December 2014
|
United Kingdom &
Ireland
|
|
|
|
Europe
|
|
|
|
|
|
|
Life
£m
|
GI
£m
|
France
£m
|
Poland
£m
|
Italy, Spain and
Other
£m
|
Canada
£m
|
Asia
£m
|
Aviva
Investors
£m
|
Other Group
activities
£m
|
Total
£m
|
Goodwill
|
—
|
1,031
|
—
|
8
|
190
|
23
|
50
|
—
|
—
|
1,302
|
Acquired value of in-force business and intangible assets
|
127
|
103
|
96
|
5
|
581
|
60
|
2
|
25
|
29
|
1,028
|
Interests in, and loans to, joint ventures and associates
|
953
|
—
|
145
|
10
|
82
|
2
|
352
|
—
|
—
|
1,544
|
Property and equipment
|
74
|
33
|
214
|
3
|
6
|
9
|
4
|
1
|
13
|
357
|
Investment property
|
5,558
|
95
|
1,758
|
—
|
1
|
—
|
—
|
1,120
|
393
|
8,925
|
Loans
|
24,178
|
84
|
788
|
—
|
58
|
122
|
30
|
—
|
—
|
25,260
|
Financial investments
|
97,410
|
5,415
|
66,484
|
2,829
|
19,959
|
3,483
|
3,192
|
660
|
3,206
|
202,638
|
Deferred acquisition costs
|
1,310
|
438
|
227
|
23
|
89
|
280
|
4
|
7
|
—
|
2,378
|
Other assets
|
19,092
|
4,895
|
10,009
|
171
|
1,585
|
937
|
459
|
784
|
4,346
|
42,278
|
Assets of operations classified as held for sale
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
9
|
9
|
Total assets
|
148,702
|
12,094
|
79,721
|
3,049
|
22,551
|
4,916
|
4,093
|
2,597
|
7,996
|
285,719
|
Insurance liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term business and outstanding claims provisions
|
71,619
|
5,515
|
16,179
|
2,444
|
8,414
|
2,317
|
2,598
|
—
|
36
|
109,122
|
Unearned premiums
|
225
|
2,038
|
402
|
34
|
247
|
1,114
|
46
|
—
|
1
|
4,107
|
Other insurance liabilities
|
—
|
79
|
46
|
—
|
—
|
89
|
—
|
—
|
2
|
216
|
Liability for investment contracts
|
57,201
|
—
|
48,316
|
10
|
9,867
|
—
|
—
|
1,851
|
—
|
117,245
|
Unallocated divisible surplus
|
1,879
|
—
|
6,104
|
71
|
1,202
|
—
|
211
|
—
|
—
|
9,467
|
Net asset value attributable to unitholders
|
19
|
—
|
2,928
|
—
|
317
|
—
|
—
|
—
|
6,218
|
9,482
|
External borrowings
|
2,016
|
—
|
—
|
—
|
52
|
—
|
—
|
—
|
5,310
|
7,378
|
Other liabilities, including inter-segment liabilities
|
9,539
|
(1,787)
|
3,673
|
120
|
662
|
404
|
388
|
377
|
3,048
|
16,424
|
Liabilities of operations classified as held for sale
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
2
|
2
|
Total liabilities
|
142,498
|
5,845
|
77,648
|
2,679
|
20,761
|
3,924
|
3,243
|
2,228
|
14,617
|
273,443
|
Total equity
|
|
|
|
|
|
|
|
|
|
12,276
|
Total equity and liabilities
|
|
|
|
|
|
|
|
|
|
285,719
|
(b) Further analysis by products and
services
The Group’s results can be further analysed by products and
services which comprise long-term business, general insurance and health, fund management and other activities.
Long-term business
Our long-term business comprises life insurance, long-term health
and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension
fund business. Long-term business also includes our share
of the other life and related business written in our associates and
joint ventures, as well as lifetime mortgage business written in the UK.
General insurance and health
Our general insurance and health business provides insurance cover
to individuals and to small and medium sized businesses, for risks associated mainly with motor vehicles, property and liability,
such as employers’ liability and professional indemnity liability, and medical expenses.
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, OEICs and ISAs. Clients include Aviva Group businesses and third-party financial
institutions, pension funds, public sector organisations, investment professionals and private investors.
Other
Other includes service companies, head office expenses such as Group
treasury and finance functions, and certain financing costs and taxes not allocated to business segments.
3 – Segmental information continued
(b) (i) Segmental income statement – products
and services for the year ended 31 December 2015
|
Long-term
business
£m
|
General
insurance
and
health
2
£m
|
Fund
management
£m
|
Other
£m
|
Total
£m
|
Gross written premiums
1
|
13,187
|
8,738
|
—
|
—
|
21,925
|
Premiums ceded to reinsurers
|
(1,529)
|
(1,361)
|
—
|
—
|
(2,890)
|
Premiums written net of reinsurance
|
11,658
|
7,377
|
—
|
—
|
19,035
|
Net change in provision for unearned premiums
|
—
|
(111)
|
—
|
—
|
(111)
|
Net earned premiums
|
11,658
|
7,266
|
—
|
—
|
18,924
|
Fee and commission income
|
1,161
|
61
|
274
|
301
|
1,797
|
|
12,819
|
7,327
|
274
|
301
|
20,721
|
Net investment income/(expense)
|
2,667
|
240
|
(5)
|
(77)
|
2,825
|
Inter-segment revenue
|
—
|
—
|
201
|
—
|
201
|
Share of profit of joint ventures and associates
|
177
|
3
|
—
|
—
|
180
|
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates
|
1
|
1
|
—
|
—
|
2
|
Segmental income
|
15,664
|
7,571
|
470
|
224
|
23,929
|
Claims and benefits paid, net of recoveries from reinsurers
|
(16,809)
|
(5,176)
|
—
|
—
|
(21,985)
|
Change in insurance liabilities, net of reinsurance
|
6,205
|
476
|
—
|
—
|
6,681
|
Change in investment contract provisions
|
(1,487)
|
—
|
—
|
—
|
(1,487)
|
Change in unallocated divisible surplus
|
984
|
—
|
—
|
—
|
984
|
Fee and commission expense
|
(1,121)
|
(2,118)
|
(23)
|
(85)
|
(3,347)
|
Other expenses
|
(1,663)
|
(368)
|
(367)
|
(386)
|
(2,784)
|
Inter-segment expenses
|
(190)
|
(11)
|
—
|
—
|
(201)
|
Finance costs
|
(202)
|
(5)
|
—
|
(411)
|
(618)
|
Segmental expenses
|
(14,283)
|
(7,202)
|
(390)
|
(882)
|
(22,757)
|
Profit/(loss) before tax from continuing operations
|
1,381
|
369
|
80
|
(658)
|
1,172
|
Tax attributable to policyholder returns
|
218
|
—
|
—
|
—
|
218
|
Profit/(loss) before tax attributable to shareholders’ profits
|
1,599
|
369
|
80
|
(658)
|
1,390
|
Adjusted for:
|
|
|
|
|
|
Non-operating items from continuing operations
|
820
|
396
|
26
|
33
|
1,275
|
Adjusted operating profit/(loss) before tax attributable to shareholders’ profits from continuing operations
3
|
2,419
|
765
|
106
|
(625)
|
2,665
|
Adjusted operating profit/(loss) before tax attributable to shareholders’ profits
|
2,419
|
765
|
106
|
(625)
|
2,665
|
|
1
|
Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £146 million, of
which £80 million relates to property and liability insurance and £66 million relates to long-term business.
|
|
2
|
General insurance and health business segment includes gross written premiums of £1,092 million relating to health business.
The remaining business relates to property and liability insurance.
|
|
3
|
Adjusted operating profit is a non-GAAP measure as defined in the glossary.
|
3 – Segmental information continued
(b) (ii) Segmental income statement – products
and services for the year ended 31 December 2014
|
Long-term
business
£m
|
General
insurance
and
health
2
£m
|
Fund
management
£m
|
Other
£m
|
Total
£m
|
Gross written premiums
1
|
12,727
|
8,943
|
—
|
—
|
21,670
|
Premiums ceded to reinsurers
|
(971)
|
(643)
|
—
|
—
|
(1,614)
|
Premiums written net of reinsurance
|
11,756
|
8,300
|
—
|
—
|
20,056
|
Net change in provision for unearned premiums
|
—
|
1
|
—
|
—
|
1
|
Net earned premiums
|
11,756
|
8,301
|
—
|
—
|
20,057
|
Fee and commission income
|
705
|
54
|
256
|
215
|
1,230
|
|
12,461
|
8,355
|
256
|
215
|
21,287
|
Net investment income/(expense)
|
21,295
|
666
|
5
|
(77)
|
21,889
|
Inter-segment revenue
|
—
|
—
|
158
|
—
|
158
|
Share of profit of joint ventures and associates
|
144
|
3
|
—
|
—
|
147
|
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates
|
140
|
(16)
|
35
|
15
|
174
|
Segmental income
|
34,040
|
9,008
|
454
|
153
|
43,655
|
Claims and benefits paid, net of recoveries from reinsurers
|
(13,861)
|
(5,613)
|
—
|
—
|
(19,474)
|
Change in insurance liabilities, net of reinsurance
|
(5,604)
|
34
|
—
|
—
|
(5,570)
|
Change in investment contract provisions
|
(6,518)
|
—
|
—
|
—
|
(6,518)
|
Change in unallocated divisible surplus
|
(3,364)
|
—
|
—
|
—
|
(3,364)
|
Fee and commission expense
|
(977)
|
(2,247)
|
(26)
|
(139)
|
(3,389)
|
Other expenses
|
(920)
|
(402)
|
(321)
|
(336)
|
(1,979)
|
Inter-segment expenses
|
(148)
|
(10)
|
—
|
—
|
(158)
|
Finance costs
|
(191)
|
(11)
|
(2)
|
(336)
|
(540)
|
Segmental expenses
|
(31,583)
|
(8,249)
|
(349)
|
(811)
|
(40,992)
|
Profit/(loss) before tax from continuing operations
|
2,457
|
759
|
105
|
(658)
|
2,663
|
Tax attributable to policyholder returns
|
(382)
|
—
|
—
|
—
|
(382)
|
Profit/(loss) before tax attributable to shareholders’ profits
|
2,075
|
759
|
105
|
(658)
|
2,281
|
Adjusted for:
|
|
|
|
|
|
Non-operating items from continuing operations
3
|
(56)
|
49
|
(19)
|
(42)
|
(68)
|
Adjusted operating profit/(loss) before tax attributable to shareholders’ profits from continuing operations
3,4
|
2,019
|
808
|
86
|
(700)
|
2,213
|
Adjusted operating profit/(loss) before tax attributable to shareholders’ profits
3,4
|
2,019
|
808
|
86
|
(700)
|
2,213
|
|
1
|
Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £164 million, of
which £81 million relates to property and liability insurance and £83 million relates to long-term business.
|
|
2
|
General insurance and health business segment includes gross written premiums of £1,146 million relating to health business.
The remaining business relates to property and liability insurance.
|
|
3
|
Adjusted 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. There is no impact on the result or the total equity for any period presented as a
result of this restatement.
|
|
4
|
Adjusted operating profit is a non-GAAP measure as defined in the glossary.
|
.
3 – Segmental information continued
(b) (ii) Segmental income statement – products
and services for the year ended 31 December 2013
|
Long-term
business
£m
|
General
insurance
and
health
2
£m
|
Fund
management
£m
|
Other
£m
|
Total
£m
|
Gross written premiums
1
|
12,674
|
9,361
|
—
|
—
|
22,035
|
Premiums ceded to reinsurers
|
(905)
|
(641)
|
—
|
—
|
(1,546)
|
Premiums written net of reinsurance
|
11,769
|
8,720
|
—
|
—
|
20,489
|
Net change in provision for unearned premiums
|
—
|
134
|
—
|
—
|
134
|
Net earned premiums
|
11,769
|
8,854
|
—
|
—
|
20,623
|
Fee and commission income
|
656
|
80
|
292
|
251
|
1,279
|
|
12,425
|
8,934
|
292
|
251
|
21,902
|
Net investment income/(expense)
|
12,184
|
349
|
3
|
(27)
|
12,509
|
Inter-segment revenue
|
—
|
—
|
143
|
—
|
143
|
Share of profit of joint ventures and associates
|
117
|
3
|
—
|
—
|
120
|
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates
|
125
|
(10)
|
—
|
—
|
115
|
Segmental income
|
24,851
|
9,276
|
438
|
224
|
34,789
|
Claims and benefits paid, net of recoveries from reinsurers
|
(16,333)
|
(5,760)
|
—
|
—
|
(22,093)
|
Change in insurance liabilities, net of reinsurance
|
2,519
|
(26)
|
—
|
—
|
2,493
|
Change in investment contract provisions
|
(7,050)
|
—
|
—
|
—
|
(7,050)
|
Change in unallocated divisible surplus
|
280
|
—
|
—
|
—
|
280
|
Fee and commission expense
|
(1,078)
|
(2,492)
|
(34)
|
(371)
|
(3,975)
|
Other expenses
|
(764)
|
(495)
|
(369)
|
(592)
|
(2,220)
|
Inter-segment expenses
|
(134)
|
(9)
|
—
|
—
|
(143)
|
Finance costs
|
(219)
|
(11)
|
(4)
|
(375)
|
(609)
|
Segmental expenses
|
(22,779)
|
(8,793)
|
(407)
|
(1,338)
|
(33,317)
|
Profit/(loss) before tax from continuing operations
|
2,072
|
483
|
31
|
(1,114)
|
1,472
|
Tax attributable to policyholder returns
|
(191)
|
—
|
—
|
—
|
(191)
|
Profit/(loss) before tax attributable to shareholders’ profits
|
1,881
|
483
|
31
|
(1,114)
|
1,281
|
Adjusted for:
|
|
|
|
|
|
Non-operating items from continuing operations
3
|
68
|
314
|
62
|
372
|
816
|
Adjusted operating profit/(loss) before tax attributable to shareholders’ profits from continuing operations
3,4
|
1,949
|
797
|
93
|
(742)
|
2,097
|
Adjusted
operating profit/(loss) before tax attributable to shareholders' profits from discontinued operations
3,4,5
|
368
|
—
|
31
|
(13)
|
386
|
Adjusted operating profit/(loss) before tax attributable to shareholders’ profits
3,4
|
2,317
|
797
|
124
|
(755)
|
2,483
|
|
1
|
Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £246 million, of
which £142 million relates to property and liability insurance and £104 million relates to long-term business.
|
|
2
|
General insurance and health business segment includes gross written premiums of £1,196 million relating to health business.
The remaining business relates to property and liability insurance.
|
|
3
|
Adjusted 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. There is no impact on the result or the total equity for any period presented as a
result of this restatement.
|
|
4
|
Adjusted operating profit is a non-GAAP measure as defined in the glossary.
|
|
5
|
Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until
the date of disposal (2 October 2013).
|
3 – Segmental information continued
(b) (iii) Segmental statement of financial position
– products and services as at 31 December 2015
|
Long-term
business
£m
|
General
insurance
and health
£m
|
Fund
management
£m
|
Other
£m
|
Total
£m
|
Goodwill
|
862
|
1,035
|
—
|
58
|
1,955
|
Acquired value of in-force business and intangible assets
|
5,369
|
309
|
15
|
38
|
5,731
|
Interests in, and loans to, joint ventures and associates
|
1,878
|
34
|
—
|
7
|
1,919
|
Property and equipment
|
299
|
95
|
1
|
54
|
449
|
Investment property
|
10,582
|
335
|
—
|
384
|
11,301
|
Loans
|
22,292
|
141
|
—
|
—
|
22,433
|
Financial investments
|
258,995
|
10,280
|
23
|
4,919
|
274,217
|
Deferred acquisition costs
|
1,647
|
812
|
5
|
—
|
2,464
|
Other assets
|
52,844
|
7,315
|
769
|
6,477
|
67,405
|
Assets of operations classified as held for sale
|
—
|
—
|
—
|
—
|
—
|
Total assets
|
354,768
|
20,356
|
813
|
11,937
|
387,874
|
Gross insurance liabilities
|
127,050
|
13,506
|
—
|
—
|
140,556
|
Gross liabilities for investment contracts
|
181,173
|
—
|
—
|
—
|
181,173
|
Unallocated divisible surplus
|
8,811
|
—
|
—
|
—
|
8,811
|
Net asset value attributable to unitholders
|
3,479
|
—
|
—
|
7,936
|
11,415
|
External borrowings
|
1,857
|
—
|
—
|
6,913
|
8,770
|
Other liabilities, including inter-segment liabilities
|
15,387
|
(307)
|
346
|
3,491
|
18,917
|
Liabilities of operations classified as held for sale
|
—
|
—
|
—
|
—
|
—
|
Total liabilities
|
337,757
|
13,199
|
346
|
18,340
|
369,642
|
Total equity
|
|
|
|
|
18,232
|
Total equity and liabilities
|
|
|
|
|
387,874
|
(b) (iv) Segmental statement of financial position
– products and services as at 31 December 2014
|
Long-term
business
£m
|
General
insurance
and health
£m
|
Fund
management
£m
|
Other
£m
|
Total
£m
|
Goodwill
|
216
|
1,043
|
—
|
43
|
1,302
|
Acquired value of in-force business and intangible assets
|
691
|
270
|
25
|
42
|
1,028
|
Interests in, and loans to, joint ventures and associates
|
1,526
|
16
|
—
|
2
|
1,544
|
Property and equipment
|
230
|
100
|
1
|
26
|
357
|
Investment property
|
8,310
|
223
|
—
|
392
|
8,925
|
Loans
|
25,053
|
207
|
—
|
—
|
25,260
|
Financial investments
|
188,094
|
11,435
|
23
|
3,086
|
202,638
|
Deferred acquisition costs
|
1,519
|
852
|
7
|
—
|
2,378
|
Other assets
|
29,839
|
6,270
|
657
|
5,512
|
42,278
|
Assets of operations classified as held for sale
|
—
|
9
|
—
|
—
|
9
|
Total assets
|
255,478
|
20,425
|
713
|
9,103
|
285,719
|
Gross insurance liabilities
|
99,453
|
13,992
|
—
|
—
|
113,445
|
Gross liabilities for investment contracts
|
117,245
|
—
|
—
|
—
|
117,245
|
Unallocated divisible surplus
|
9,467
|
—
|
—
|
—
|
9,467
|
Net asset value attributable to unitholders
|
3,264
|
—
|
—
|
6,218
|
9,482
|
External borrowings
|
2,068
|
—
|
—
|
5,310
|
7,378
|
Other liabilities, including inter-segment liabilities
|
12,689
|
(952)
|
354
|
4,333
|
16,424
|
Liabilities of operations classified as held for sale
|
—
|
2
|
—
|
—
|
2
|
Total liabilities
|
244,186
|
13,042
|
354
|
15,861
|
273,443
|
Total equity
|
|
|
|
|
12,276
|
Total equity and liabilities
|
|
|
|
|
285,719
|
4 – Details of income
This note gives further detail on the items appearing in
the income section of the consolidated income statement.
|
2015
£m
|
2014
£m
|
2013
£m
|
Gross written premiums (note 3a and 3b)
|
|
|
|
Long-term:
|
|
|
|
Insurance contracts
|
8,577
|
7,898
|
8,749
|
Participating investment contracts
|
4,610
|
4,829
|
3,925
|
General insurance and health
|
8,738
|
8,943
|
9,361
|
|
21,925
|
21,670
|
22,035
|
Less: premiums ceded to reinsurers (note 3a and 3b)
|
(2,890)
|
(1,614)
|
(1,546)
|
Gross change in provision for unearned premiums (note 36e)
|
(125)
|
(8)
|
136
|
Reinsurers’ share of change in provision for unearned premiums (note 39ciii)
|
14
|
9
|
(2)
|
Net change in provision for unearned premiums
|
(111)
|
1
|
134
|
Net earned premiums
|
18,924
|
20,057
|
20,623
|
Fee and commission income
|
|
|
|
Fee income from investment contract business
|
922
|
459
|
465
|
Fund management fee income
|
342
|
320
|
347
|
Other fee income
|
310
|
344
|
294
|
Reinsurance commissions receivable
|
74
|
81
|
90
|
Other commission income
|
134
|
13
|
45
|
Net change in deferred revenue
|
15
|
13
|
38
|
|
1,797
|
1,230
|
1,279
|
Total revenue
|
20,721
|
21,287
|
21,902
|
Net investment income
|
|
|
|
Interest and similar income
|
|
|
|
From financial instruments designated as trading and other than trading
|
5,219
|
4,945
|
5,488
|
From AFS investments and financial instruments at amortised cost
|
49
|
36
|
75
|
|
5,268
|
4,981
|
5,563
|
Dividend income
|
2,238
|
1,444
|
1,527
|
Other income from investments designated as trading
|
|
|
|
Realised gains/(losses)on disposals
|
1,264
|
208
|
(202)
|
Unrealised gains and losses (policy K)
|
|
|
|
Gains/(Losses) arising in the year
|
107
|
795
|
(67)
|
(Gains)/Losses recognised now realised
|
(1,264)
|
(208)
|
202
|
|
(1,157)
|
587
|
135
|
|
107
|
795
|
(67)
|
Other income from investments designated as other than trading
|
|
|
|
Realised gains on disposals
|
2,150
|
2,829
|
3,250
|
Unrealised gains and losses (see policy K)
|
|
|
|
Gains/(Losses) arising in the year
|
(6,279)
|
13,403
|
4,639
|
(Gains) recognised now realised
|
(2,150)
|
(2,829)
|
(3,250)
|
|
(8,429)
|
10,574
|
1,389
|
|
(6,279)
|
13,403
|
4,639
|
Realised gains and losses on AFS investments
|
|
|
|
Losses/(gains) recognised in prior periods as unrealised in equity
|
—
|
7
|
(1)
|
|
|
|
|
Net income from investment properties
|
|
|
|
Rent
|
590
|
521
|
647
|
Expenses relating to these properties
|
(52)
|
(42)
|
(42)
|
Realised (losses)/gains on disposal
|
120
|
49
|
(2)
|
Fair value gains on investment properties (note 17)
|
778
|
678
|
184
|
|
1,436
|
1,206
|
787
|
Realised gains/(losses) on loans
|
(10)
|
(4)
|
—
|
Foreign exchange gains and losses on investments other than trading
|
176
|
146
|
109
|
Other investment expenses
|
(111)
|
(89)
|
(48)
|
Net investment income
|
2,825
|
21,889
|
12,509
|
Share of profit after tax of joint ventures (note 14)
|
162
|
129
|
140
|
Share of profit/(loss) after tax of associates (note 15a)
|
18
|
18
|
(20)
|
Share of profit after tax of joint ventures and associates
|
180
|
147
|
120
|
Profit on disposal and remeasurement of subsidiaries, joint ventures and associates (note 2b)
|
2
|
174
|
115
|
Income from continuing operations
|
23,728
|
43,497
|
34,646
|
Income from discontinued operations
|
—
|
58
|
4,665
|
Total income
|
23,728
|
43,555
|
39,311
|
5 – Details of expenses
This note gives further detail on the items appearing in
the expenses section of the consolidated income statement.
|
2015
£m
|
2014
£m
|
2013
£m
|
Claims and benefits paid
|
|
|
|
Claims and benefits paid to policyholders on long-term business
|
|
|
|
Insurance contracts
|
12,443
|
10,085
|
11,899
|
Participating investment contracts
|
5,270
|
4,431
|
5,089
|
Non-participating investment contracts
|
368
|
27
|
61
|
Claims and benefits paid to policyholders on general insurance and health business
|
5,522
|
5,917
|
6,082
|
|
23,603
|
20,460
|
23,131
|
Less: Claim recoveries from reinsurers
|
|
|
|
Insurance contracts
|
(1,563)
|
(933)
|
(975)
|
Participating investment contracts
|
(55)
|
(53)
|
(63)
|
Claims and benefits paid, net of recoveries from reinsurers
|
21,985
|
19,474
|
22,093
|
Change in insurance liabilities
|
|
|
|
Change in insurance liabilities (note 36)
|
(6,442)
|
5,890
|
(2,396)
|
Change in reinsurance asset for insurance provisions (note 36)
|
(239)
|
(320)
|
(97)
|
Change in insurance liabilities, net of reinsurance
|
(6,681)
|
5,570
|
(2,493)
|
Change in investment contract provisions
|
|
|
|
Investment income allocated to investment contracts
|
1,958
|
2,629
|
4,406
|
Other changes in provisions
|
|
|
|
Participating investment contracts (note 37)
|
1,270
|
3,218
|
2,244
|
Non-participating investment contracts
|
(2,957)
|
678
|
409
|
Change in reinsurance asset for investment contract provisions
|
1,216
|
(7)
|
(9)
|
Change in investment contract provisions
|
1,487
|
6,518
|
7,050
|
Change in unallocated divisible surplus (note 41)
|
(984)
|
3,364
|
(280)
|
Fee and commission expense
|
|
|
|
Acquisition costs
|
|
|
|
Commission expenses for insurance and participating investment contracts
|
2,220
|
2,103
|
2,264
|
Change in deferred acquisition costs for insurance and participating investment contracts
|
(127)
|
(59)
|
184
|
Deferrable costs for non-participating investment contracts
|
30
|
63
|
82
|
Other acquisition costs
|
819
|
828
|
872
|
Change in deferred acquisition costs for non-participating investment contracts
|
(11)
|
38
|
(93)
|
Investment income attributable to unitholders
|
17
|
112
|
347
|
Reinsurance commissions and other fee and commission expense
|
399
|
304
|
319
|
|
3,347
|
3,389
|
3,975
|
Other expenses
|
|
|
|
Other operating expenses
|
|
|
|
Staff costs
|
944
|
848
|
841
|
Central costs and sharesave schemes
|
181
|
132
|
150
|
Depreciation
|
24
|
19
|
31
|
Impairment of goodwill on subsidiaries (note 12)
|
22
|
—
|
48
|
Amortisation of acquired value of in-force business on insurance/investment contracts
|
496
|
37
|
45
|
Amortisation of intangible assets
|
131
|
76
|
73
|
Impairment of intangible assets
|
18
|
10
|
14
|
Integration and restructuring costs (see below)
|
379
|
140
|
363
|
Other expenses
|
764
|
773
|
701
|
|
2,959
|
2,035
|
2,266
|
Impairments
|
|
|
|
Net impairment on loans
|
2
|
(9)
|
30
|
Net impairment on financial investments
|
—
|
1
|
2
|
Net impairment on receivables and other financial assets
|
3
|
5
|
—
|
Net impairment on non-financial assets
|
2
|
—
|
—
|
|
7
|
(3)
|
32
|
Other
net foreign exchange (gains)/losses
|
(182)
|
(53)
|
(78)
|
Finance
costs (note 6)
|
618
|
540
|
609
|
Expenses from continuing operations
|
22,556
|
40,834
|
33,174
|
Expenses from discontinued operations
|
—
|
—
|
3,127
|
Total expenses
|
22,556
|
40,834
|
36,301
|
Integration and restructuring costs
Integration and restructuring costs were £379 million
(2014:
£140 million, 2013: £363 million)
, principally driven by transaction and integration activities in relation to
the acquisition of Friends Life. In addition, expenses associated with the Solvency II programme were £82 million
(2014:
£94 million, 2013: £79 million)
.
6 – Finance costs
This note analyses the interest costs on our borrowings (which are
described in note 45) and similar charges.
Finance costs comprise:
|
2015
£m
|
2014
£m
|
2013
£m
|
Interest expense on core structural borrowings
|
|
|
|
Subordinated debt
|
335
|
289
|
305
|
Long-term senior debt
|
14
|
19
|
21
|
Commercial paper
|
1
|
2
|
2
|
|
350
|
310
|
328
|
Interest expense on operational borrowings
|
|
|
|
Amounts owed to financial institutions
|
48
|
48
|
70
|
Securitised mortgage loan notes at fair value
|
84
|
87
|
89
|
|
132
|
135
|
159
|
Interest on collateral received
|
13
|
18
|
20
|
Net finance charge on pension schemes (note 44(b)(i))
|
25
|
13
|
20
|
Unwind of discount on GI reserves
|
2
|
6
|
5
|
Extinguishment of debt
|
13
|
—
|
—
|
Other
similar charges
|
83
|
58
|
77
|
Total finance costs from continuing operations
|
618
|
540
|
609
|
Total finance costs from discontinued operations
|
—
|
—
|
16
|
Total finance costs
|
618
|
540
|
625
|
7 – Employee information
This note shows where our staff are employed throughout the world,
excluding staff employed by our joint ventures and associates.
Employee numbers
The number of persons employed by the Group, including directors
under a service contract, was:
|
At 31 December
|
Average for the year
1
|
|
2015
Number
|
Restated
2
2014
Number
|
2013
Number
|
2015
Number
|
Restated
2
2014
Number
|
2013
Number
|
United Kingdom & Ireland
|
16,222
|
14,144
|
14,886
|
16,695
|
14,333
|
16,751
|
France
|
4,161
|
4,082
|
4,134
|
4,122
|
4,135
|
4,177
|
Poland
|
1,677
|
1,380
|
1,260
|
1,706
|
1,342
|
1,230
|
Italy, Spain and Other
|
950
|
932
|
1,239
|
958
|
1,169
|
1,392
|
Canada
|
3,558
|
3,461
|
3,582
|
3,542
|
3,455
|
3,685
|
Asia
|
1,486
|
999
|
1,081
|
1,517
|
1,021
|
1,128
|
Aviva Investors
|
1,204
|
953
|
923
|
1,095
|
957
|
979
|
Other Group Activities
|
381
|
413
|
613
|
372
|
525
|
628
|
Employees in continuing operations
|
29,639
|
26,364
|
27,718
|
30,007
|
26,937
|
29,970
|
Employees in discontinued operations
|
—
|
—
|
—
|
—
|
—
|
1,552
|
Total employee numbers
|
29,639
|
26,364
|
27,718
|
30,007
|
26,937
|
31,522
|
|
|
|
|
|
|
|
|
|
1
|
Average employee numbers have been calculated using a monthly average that takes into account
recruitment, leavers, transfers, acquisitions and disposals of businesses during the year.
|
|
2
|
Following a move of certain employees within the Group, to facilitate comparison the 2014 comparatives
above have been restated as follows: 180 employees (at 31 December 2014) and 284 employees (average for 2014) previously reported
within United Kingdom & Ireland have been reclassified to Other Group Activities. There is no impact on total employee numbers
as a result of this restatement.
|
8 – Auditors’ remuneration
This note shows the total remuneration payable by the Group,
excluding VAT and any overseas equivalent thereof, to our principal auditors, PricewaterhouseCoopers LLP.
|
2015
£m
|
2014
£m
|
2013
£m
|
Fees payable to PwC LLP and its associates for the statutory audit of the Aviva Group and Company financial statements
|
3.8
|
2.5
|
2.4
|
Fees payable to PwC LLP and its associates for other services
Audit of Group subsidiaries
|
12.4
|
9.8
|
10.1
|
Additional fees related to the prior year audit of Group subsidiaries
|
0.5
|
0.1
|
0.7
|
Total audit fees
|
16.7
|
12.4
|
13.2
|
Audit related assurance
|
2.6
|
2.3
|
2.2
|
Other assurance services
|
13.3
|
9.8
|
6.1
|
Total audit and assurance fees
|
32.6
|
24.5
|
21.5
|
Tax compliance services
|
0.1
|
0.1
|
0.1
|
Tax advisory services
|
0.1
|
0.1
|
0.1
|
Services relating to corporate finance transactions
|
0.2
|
—
|
0.1
|
Other non audit services not covered above
|
1.5
|
1.5
|
1.1
|
Fees payable to PwC LLP and its associates for services to Group companies
|
34.5
|
26.2
|
22.9
|
Discontinued operations
|
|
|
|
Fees payable to PwC LLP and its associates for audit of Group subsidiaries
|
—
|
—
|
1.2
|
Fees payable to PwC LLP and its associates for other non-audit services to Group subsidiaries
|
—
|
—
|
0.1
|
Total fees payable to Pwc LLP and its associates for services to Group companies
|
34.5
|
26.2
|
24.2
|
The table above reflects the disclosure requirements of SI2011/2198
– The Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011.
In addition to the fees shown above, during 2015
the Group paid PwC £0.2 million
(2014: £0.2 million; 2013: £0.2 million)
in relation to the audit of Group
occupational pension schemes.
Fees payable for the audit of the Group’s
subsidiaries include fees for the statutory audit of the subsidiaries, both inside and outside the UK, and for the work performed
by the principal auditors in respect of the subsidiaries for the purpose of the consolidated financial statements of the Group.
Total audit fees (excluding additional fees relating
to the prior year audits of Group subsidiaries), audit-related assurance fees and fees for the audit of the Group’s MCEV
reporting were £20.2 million
(2014: £15.8 million; 2013: £15.8 million)
. The main driver of the increase
is the audit fee in respect of the acquired Friends Life subsidiaries. The fee also includes £1.1 million in respect of the
audit work relating to the acquisition balance sheet.
Audit related assurance comprises services in
relation to statutory and regulatory filings. These include audit services for the audit of regulatory returns in the UK and review
of interim financial information under the Listing Rules of the UK Listing Authority.
Fees for other assurance services comprise non-statutory
assurance work which is customarily performed by the external auditor, including the audit of the Group’s MCEV reporting.
Although embedded value is a key management reporting basis and our disclosures are audited, the relevant fees are not classified
as being for statutory audit.
Other assurance services in 2015 of £13.3
million
(2014: £9.8 million; 2013: £6.1 million)
includes fees relating to the audit of the Group’s MCEV
reporting of £1.4 million
(2014: £1.2 million; 2013: £1.1 million)
and £11.6 million
(2014: £6.4
million; 2013: £1.5 million)
associated with assurance services related to Solvency II implementation. Solvency II implementation
is a major project requiring substantial model validation assurance that the Company believes is most appropriately performed by
the principal auditors. In view of the significance and scale of this work, the Audit Committee specifically assessed the suitability
of PwC to provide this service.
The 2015 fees for other non-audit services of
£1.5 million includes £0.3 million relating to a controls review, £0.3 million relating to a regulatory advice
engagement and £0.9 million for a number of other, individually smaller services.
Details of the Group’s process for safeguarding
and supporting the independence and objectivity of the external auditors are given in the Audit Committee report.
9 – Tax
This note analyses the tax charge for the year and explains the factors
that affect it.
(a) Tax charged to the income statement
(i) The total tax charge comprises:
Continuing operations
|
2015
£m
|
2014
£m
|
2013
£m
|
Current tax
|
|
|
|
For the year
|
500
|
680
|
517
|
Prior period adjustments
|
(68)
|
12
|
13
|
Total current tax
|
432
|
692
|
530
|
Deferred tax
|
|
|
|
Origination and reversal of temporary differences
|
(227)
|
315
|
63
|
Changes in tax rates or tax laws
|
(82)
|
(17)
|
(13)
|
Write (back)/down of deferred tax assets
|
(30)
|
(7)
|
14
|
Total deferred tax from continuing operations
|
(339)
|
291
|
64
|
Total tax charged to income statement from continuing operations
|
93
|
983
|
594
|
Total tax charged to income statement from discontinued operations
|
—
|
—
|
265
|
Total tax charged to income statement
|
93
|
983
|
859
|
(ii) The Group, as a proxy for policyholders in the
UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or
expense attributable to UK, Irish and Singapore life insurance policyholder returns is included in the tax charge. The tax credit
attributable to policyholder returns included in the charge above is £218 million
(2014: charge of £382 million;
2013: charge of £191 million).
(iii) The tax charge above, comprising current and deferred
tax, can be analysed as follows:
|
2015
£m
|
2014
£m
|
2013
£m
|
UK tax
|
(294)
|
462
|
76
|
Overseas tax
|
387
|
521
|
783
|
|
93
|
983
|
859
|
(iv) Unrecognised tax losses and temporary differences
of previous years were used to reduce the current tax expense and deferred tax expense by £5 million and £30 million
(2014: £5 million and £nil; 2013: £3 million and £57 million)
, respectively.
(v) Deferred tax (credited)/charged to the income
statement represents movements on the following items:
|
2015
£m
|
2014
£m
|
2013
£m
|
Long-term business technical provisions and other insurance items
|
517
|
(1,209)
|
(24)
|
Deferred acquisition costs
|
(46)
|
34
|
(90)
|
Unrealised gains/(losses) on investments
|
(847)
|
1,254
|
145
|
Pensions and other post-retirement obligations
|
(4)
|
7
|
6
|
Unused losses and tax credits
|
34
|
32
|
112
|
Subsidiaries, associates and joint ventures
|
4
|
5
|
(2)
|
Intangibles and additional value of in-force long-term business
|
(149)
|
(7)
|
(6)
|
Provisions and other temporary differences
|
152
|
175
|
(77)
|
Deferred tax (credited)/charged to income statement from continuing operations
|
(339)
|
291
|
64
|
Deferred tax charged to income statement from discontinued operations
|
—
|
—
|
187
|
Total deferred tax (credited)/charged to income statement
|
(339)
|
291
|
251
|
(b) Tax (credited)/charged to other
comprehensive income
(i) The total tax (credit)/charge comprises:
|
2015
£m
|
2014
£m
|
2013
£m
|
Current tax from continuing operations
|
|
|
|
In respect of pensions and other post-retirement obligations
|
(44)
|
(77)
|
(15)
|
In respect of foreign exchange movements
|
(7)
|
(12)
|
6
|
|
(51)
|
(89)
|
(9)
|
Deferred tax from continuing operations
|
|
|
|
In respect of pensions and other post-retirement obligations
|
(49)
|
424
|
(110)
|
In respect of unrealised (losses)/gains on investments
|
(6)
|
21
|
8
|
|
(55)
|
445
|
(102)
|
Tax (credited)/charged to other comprehensive income arising from continuing operations
|
(106)
|
356
|
(111)
|
Tax credited to other comprehensive income arising from discontinued operations
|
—
|
—
|
(169)
|
Total tax (credited)/charged to other comprehensive income
|
(106)
|
356
|
(280)
|
(ii) The tax charge attributable to policyholders’
returns included above is £nil
(2014: £nil; 2013: £nil).
9 – Tax continued
(c) Tax credited to equity
Tax credited directly to equity in the year amounted to £15
million
(2014: £19 million; 2013 £52 million).
Of this £15 million
(2014: £19 million; 2013:
£22 million)
is in respect of coupon payments on the direct capital instrument and tier 1 notes. In 2013, £30 million
related to the currency translation reserve recycled to the income statement on the sale of Aviva USA Corporation.
(d) Tax reconciliation
The tax on the Group’s profit(/loss) before tax differs
from the theoretical amount that would arise using the tax rate of the home country of the Company as follows:
|
Shareholder
£m
|
Policyholder
£m
|
2015
£m
|
Shareholder
£m
|
Policyholder
£m
|
2014
£m
|
Shareholder
£m
|
Policyholder
£m
|
2013
£m
|
Total profit/(loss) before tax
|
1,390
|
(218)
|
1,172
|
2,339
|
382
|
2,721
|
2,819
|
191
|
3,010
|
Tax calculated at standard UK corporation tax rate of 20.25%
(2014: 21.5%; 2013: 23.25%)
|
281
|
(44)
|
237
|
503
|
82
|
585
|
656
|
44
|
700
|
Reconciling items
|
|
|
|
|
|
|
|
|
|
Different basis of tax – policyholders
|
—
|
(174)
|
(174)
|
—
|
302
|
302
|
—
|
147
|
147
|
Adjustment to tax charge in respect of prior periods
|
(46)
|
—
|
(46)
|
(36)
|
—
|
(36)
|
(18)
|
—
|
(18)
|
Non-assessable income and items not taxed at the full statutory rate
|
19
|
—
|
19
|
(22)
|
—
|
(22)
|
(54)
|
—
|
(54)
|
Non-taxable loss/(profit) on sale of subsidiaries and associates
|
1
|
—
|
1
|
(31)
|
—
|
(31)
|
(154)
|
—
|
(154)
|
Disallowable expenses
|
67
|
—
|
67
|
76
|
—
|
76
|
98
|
—
|
98
|
Different local basis of tax on overseas profits
|
126
|
—
|
126
|
138
|
(2)
|
136
|
184
|
—
|
184
|
Change in future local statutory tax rates
|
(82)
|
—
|
(82)
|
(17)
|
—
|
(17)
|
(9)
|
—
|
(9)
|
Movement in deferred tax not recognised
|
(52)
|
—
|
(52)
|
3
|
—
|
3
|
(21)
|
—
|
(21)
|
Tax effect of profit from joint ventures and associates
|
(6)
|
—
|
(6)
|
(4)
|
—
|
(4)
|
(10)
|
—
|
(10)
|
Other
|
3
|
—
|
3
|
(9)
|
—
|
(9)
|
(4)
|
—
|
(4)
|
Total tax charged/(credited) to income statement
|
311
|
(218)
|
93
|
601
|
382
|
983
|
668
|
191
|
859
|
The (credit)/charge attributable to policyholder returns
is removed from the Group’s total profit before tax in arriving at the Group’s profit before tax attributable to shareholders’
profits. As the net of tax profits attributable to with-profit and unit-linked policyholders is zero, the Group’s pre-tax
profit attributable to policyholders is an amount equal and opposite to the tax (credit)/charge attributable to policyholders included
in the total tax charge. The difference between the policyholder tax (credit)/charge and the impact of this item in the tax reconciliation
can be explained as follows:
|
2015
£m
|
2014
£m
|
2013
£m
|
Tax attributable to policyholder returns
|
(218)
|
382
|
191
|
UK corporation tax at a rate of 20.25%
(2014: 21.5%; 2013: 23.25%)
in respect of the policyholder tax deduction
|
44
|
(82)
|
(44)
|
Different local basis of tax of overseas profits
|
—
|
2
|
—
|
Different basis of tax - policyholders per tax reconciliation
|
(174)
|
302
|
147
|
UK legislation was substantively enacted in July 2013 to reduce the
main rate of corporation tax from 21% to 20% from 1 April 2015, resulting in an effective rate for the year ended 31 December 2015
of 20.25%.
As legislated in Finance (No 2) Act 2015, which
was substantively enacted on 26 October 2015, the UK corporation tax 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. In addition, the calculation of deferred tax assets and liabilities in France
and Italy reflect the reduction in corporation tax rates from 38% to 34.43% (effective 1 January 2016) and from 34.3% to 30.8%
(effective 1 January 2017) respectively. The effect of the reduction in the future corporation tax rates in the UK, France and
Italy on the Group’s net deferred tax liabilities is £120 million, comprising an £82 million credit included
in the income statement and a £38 million credit included in the statement of comprehensive income.
On 16 March 2016, the UK Government announced that
the rate of corporation tax will be 17% from 1 April 2020. A 1% reduction in the tax rate applied to the UK deferred tax liability
at 31 December 2015 would reduce the liability by approximately £35 million.
The UK Government also announced changes to
the legislation governing the use of brought forward losses. The proposals would restrict to 50% the amount of profits that can
be offset by carried forward losses. The impact on the recognition of the Group’s deferred tax assets will be assessed when
details of the proposed legislation are known.
10 – Earnings per share
This note shows how we calculate earnings per share, based both on
the present shares in issue (the basic earnings per share) and the potential future shares in issue, including conversion of share
options granted to employees (the diluted earnings per share).
(a) Basic earnings per share
(i) The profit attributable to ordinary shareholders is:
Continuing operations
|
2015
£m
|
2014
£m
|
2013
£m
|
Profit before tax attributable to shareholders’ profits
|
1,390
|
2,281
|
1,281
|
Tax attributable to shareholders’ profit
|
(311)
|
(601)
|
(403)
|
Profit for the year
|
1,079
|
1,680
|
878
|
Amount attributable to non-controlling interests
|
(161)
|
(169)
|
(143)
|
Cumulative preference dividends for the year
|
(17)
|
(17)
|
(17)
|
Coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax)
|
(57)
|
(69)
|
(70)
|
Profit attributable to ordinary shareholders from continuing operations
|
844
|
1,425
|
648
|
Profit attributable to ordinary shareholders from discontinued operations
|
—
|
58
|
1,273
|
Profit attributable to ordinary shareholders
|
844
|
1,483
|
1,921
|
(ii) Basic earnings per
share is calculated as follows:
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Before tax
£m
|
Net of tax,
non-
controlling
interests,
preference
dividends
and DCI
1
£m
|
Per share
p
|
Before tax
£m
|
Net of tax,
non-
controlling
interests,
preference
dividends
and DCI
1
£m
|
Per share
p
|
Before tax
£m
|
Net of tax,
non-
controlling
interests,
preference
dividends
and DCI
1
£m
|
Per share
p
|
Profit attributable to ordinary shareholders from continuing operations
|
1,390
|
844
|
22.6
|
2,281
|
1,425
|
48.4
|
1,281
|
648
|
22.0
|
Profit attributable to ordinary shareholders from discontinued operations
|
—
|
—
|
—
|
58
|
58
|
2.0
|
1,538
|
1,273
|
43.3
|
Profit attributable to ordinary shareholders
|
1,390
|
844
|
22.6
|
2,339
|
1,483
|
50.4
|
2,819
|
1,921
|
65.3
|
|
1
|
DCI includes the direct capital instrument and tier 1 notes
|
(iii) The calculation of basic earnings per share uses
a weighted average of 3,741 million
(2014: 2,943 million; 2013: 2,940 million)
ordinary shares in issues, after deducting
treasury shares. The actual number of shares in issue at 31 December 2015 was 4,048 million
(2014: 2,950 million; 2013: 2,947
million)
and 4,042 million
(2014: 2,948 million; 2013: 2,938 million)
excluding treasury shares.
(b) Diluted earnings per share
(i) Diluted earnings per share is calculated as follows:
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Total
£m
|
Weighted
average
number of
shares
million
|
Per share
p
|
Total
£m
|
Weighted
average
number of
shares
million
|
Per share
p
|
Total
£m
|
Weighted
average
number of
shares
million
|
Per share
p
|
Profit attributable to ordinary shareholders
|
844
|
3,741
|
22.6
|
1,425
|
2,943
|
48.4
|
648
|
2,940
|
22.0
|
Dilutive effect of share awards and options
|
—
|
39
|
(0.3)
|
—
|
44
|
(0.7)
|
—
|
39
|
(0.2)
|
Diluted earnings per share from continuing operations
|
844
|
3,780
|
22.3
|
1,425
|
2,987
|
47.7
|
648
|
2,979
|
21.8
|
Profit attributable to ordinary shareholders
|
—
|
3,741
|
—
|
58
|
2,943
|
2.0
|
1,273
|
2,940
|
43.3
|
Dilutive effect of share awards and options
|
—
|
39
|
—
|
—
|
44
|
(0.1)
|
—
|
39
|
(0.6)
|
Diluted earnings per share from discontinued operations
|
—
|
3,780
|
—
|
58
|
2,987
|
1.9
|
1,273
|
2,979
|
42.7
|
Diluted earnings per share
|
844
|
3,780
|
22.3
|
1,483
|
2,987
|
49.6
|
1,921
|
2,979
|
64.5
|
11 – Dividends and appropriations
This note analyses the total dividends and other appropriations
we paid during the year. The table below does not include the final dividend proposed after the year end because it is not accrued
in these financial statements.
|
2015
£m
|
2014
£m
|
2013
£m
|
Ordinary dividends declared and charged to equity in the year
|
|
|
|
Final 2014 – 12.25 pence per share, paid on 15 May 2015
|
362
|
—
|
—
|
Final 2013 – 9.40 pence per share, paid on 16 May 2014
|
—
|
277
|
—
|
Final 2012 – 9.00 pence per share, paid on 17 May 2013
|
—
|
—
|
264
|
Interim 2015 – 6.75 pence per share, paid on 17 November 2015
|
273
|
—
|
—
|
Interim 2014 – 5.85 pence per share, paid on 17 November 2014
|
—
|
172
|
—
|
Interim 2013 – 5.60 pence per share, paid on 15 November 2013
|
—
|
—
|
165
|
|
635
|
449
|
429
|
Dividends waived/unclaimed returned to the Company
|
—
|
(3)
|
—
|
Preference dividends declared and charged to equity in the year
|
17
|
17
|
17
|
Coupon payments on the direct capital instruments and tier 1 notes
|
72
|
88
|
92
|
|
724
|
551
|
538
|
Subsequent to 31 December 2015, the directors proposed a
final dividend for 2015 of 14.05 pence per ordinary share
(2014: 12.25 pence; 2013: 9.40 pence
), amounting to £569
million
(2014: £362 million; 2013: £277 million)
in total. Subject to approval by shareholders at the AGM, the
dividend will be paid on 17 May 2016 and will be accounted for as an appropriation of retained earnings in the year ending 31 December
2016.
Interest on the direct capital instrument and
tier 1 notes is treated as an appropriation of retained profits and, accordingly, is accounted for when paid. Tax relief is obtained
at a rate of 20.25%
(2014: 21.50%; 2013: 23.25%).
12 – Goodwill
This note analyses the changes to the carrying amount of
goodwill during the year, and details the results of our impairment testing on both goodwill and intangible assets with indefinite
lives.
(a) Carrying amount
|
2015
£m
|
2014
£m
|
Gross amount
|
|
|
At 1 January
|
1,503
|
1,770
|
Acquisitions and additions
|
694
|
3
|
Disposals
|
—
|
(191)
|
Movements in contingent consideration
|
—
|
(39)
|
Foreign exchange rate movements
|
(27)
|
(40)
|
At 31 December
|
2,170
|
1,503
|
Accumulated impairment
|
|
|
At 1 January
|
(201)
|
(290)
|
Impairment losses charged to expenses
|
(22)
|
—
|
Disposals
|
—
|
73
|
Foreign exchange rate movements
|
8
|
16
|
At 31 December
|
(215)
|
(201)
|
Carrying amount at 1 January
|
1,302
|
1,480
|
Carrying amount at 31 December
|
1,955
|
1,302
|
Goodwill from acquisitions and additions primarily arose on the acquisition
of Friends Life (£671 million), a network of independent financial advisors in Poland (£15 million) and a property
fund in France (£5 million).
The total impairment of goodwill in subsidiaries,
joint ventures and associates is a charge of £22 million as management determined that goodwill in subsidiaries of £13
million in Hong Kong and £9 million in Italy was impaired. Impairment tests on goodwill were conducted as described in note
12(b).
Movements in contingent consideration in 2014
relate to contingent consideration received in respect of acquisitions of subsidiaries made prior to 1 January 2010.
(b) Goodwill allocation and impairment
testing
A summary of the goodwill and intangibles with indefinite
useful lives allocated to cash generating units is presented below.
|
Carrying amount
of goodwill
|
Carrying amount of
intangibles with
indefinite useful lives
(detailed in note 13)
|
|
Total
|
|
2015
£m
|
2014
£m
|
2015
£m
|
2014
£m
|
2015
£m
|
2014
£m
|
United Kingdom - long-term business
|
663
|
—
|
—
|
—
|
663
|
—
|
United Kingdom - general insurance and health
|
924
|
924
|
—
|
—
|
924
|
924
|
Ireland - general insurance and health
|
102
|
107
|
—
|
—
|
102
|
107
|
France - long-term business
|
5
|
—
|
46
|
48
|
51
|
48
|
Poland
|
23
|
8
|
6
|
—
|
29
|
8
|
Italy - long-term business
|
7
|
14
|
—
|
—
|
7
|
14
|
Italy - general insurance and health
|
24
|
28
|
—
|
—
|
24
|
28
|
Spain - long-term business
|
141
|
148
|
—
|
—
|
141
|
148
|
Canada
|
21
|
23
|
—
|
—
|
21
|
23
|
Asia
|
45
|
50
|
—
|
—
|
45
|
50
|
|
1,955
|
1,302
|
52
|
48
|
2,007
|
1,350
|
Goodwill in all business units is tested for impairment by
comparing the carrying value of the cash generating unit to which the goodwill relates, to the recoverable value of that cash generating
unit. The recoverable amount is the value in use of the cash generating unit unless otherwise stated.
Long-term business
Value in use is calculated as an actuarially determined appraisal
value, based on the embedded value of the business calculated in accordance with market consistent embedded value (‘MCEV’)
principles, together with the present value of expected profits from future new business. If the embedded value of the business
tested is sufficient to demonstrate goodwill recoverability on its own, then it is not necessary to estimate the present value
of expected profits from future new business.
If required, the present value of expected profits
arising from future new business written over a given period is calculated on an MCEV basis, using profit projections based on
the most recent three year business plans approved by management. These plans reflect management’s best estimate of future
profits based on both historical experience and expected growth rates for the relevant cash generating unit. The underlying assumptions
of these projections include market share, customer numbers, mortality, morbidity and persistency.
12 – Goodwill continued
Future new business profits for the remainder of the given period
beyond the initial three years are extrapolated using a steady growth rate. Growth rates and expected future profits are set with
regards to management estimates, past experience and relevant available market statistics.
Expected profits from future new business
are discounted using a risk adjusted discount rate. The discount rate is a combination of a risk-free rate and a risk margin to
make prudent allowance for the risk that experience in future years for new business may differ from that assumed.
Key Assumptions
|
Embedded value basis
|
Future new business
profits growth rate
|
Future new business
profits discount rate
|
|
2015
|
2014
|
2015
%
|
2014
%
|
2015
%
|
2014
%
|
Italy long-term business
|
MCEV
|
MCEV
|
1.3
|
2.0
|
8.1
|
8.4
|
Spain long-term business
|
MCEV
|
MCEV
|
1.5
|
1.5
|
10.0
|
10.0
|
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.
General insurance, health, fund management and other
businesses
Value in use is calculated as the discounted value of expected future
profits of each business. The calculation uses cash flow projections based on business plans approved by management covering a
three year period. These plans reflect management’s best estimate of future profits based on both historical experience and
expected growth rates for the relevant cash generating unit. The underlying assumptions of these projections include market share,
customer numbers, premium rate and fee income changes, claims inflation and commission rates.
Cash flows beyond that three year period are
extrapolated using a steady growth rate. Growth rates and expected future profits are set with regards to past experience and relevant
available market statistics.
Future profits are discounted using
a risk adjusted discount rate.
Key assumptions
|
Extrapolated future profits growth rate
|
Future profits discount rate
|
|
2015
%
|
2014
%
|
2015
%
|
2014
%
|
United Kingdom general insurance and health
|
1.3
|
1.3
|
6.4
|
6.7
|
Ireland general insurance and health
|
1.3 – 2.5
|
1.3
|
6.1
|
5.9
|
Italy general insurance and health
|
1.3
|
2.0
|
6.5 – 7.8
|
6.8 – 7.9
|
France – indefinite life intangible asset
The recoverable amount of the indefinite life intangible asset has
been assessed based on the fair value less costs to sell of the cash generating unit to which it relates. The fair value less costs
to sell was determined based on the quoted market value of Aviva’s share of the subsidiary to which it relates.
Results of impairment testing
The goodwill associated with the Italian long-term and general insurance
cash generating units was reviewed in the first half of the year due to prevailing economic conditions in Italy. As a result of
revised estimates, management concluded that the goodwill was no longer fully recoverable. Impairments of £6 million and
£3 million were recognised in the Italian long-term and general insurance cash generating units respectively reducing the
carrying values to their recoverable amounts. Subsequently, management reviewed the goodwill at 31 December 2015 and concluded
that no further impairment was required as the recoverable amount exceeded the carrying amount.
The goodwill of £13 million associated
with Hong Kong was fully impaired in the first half of the year as management concluded that goodwill was no longer recoverable
based on revised estimates.
Other than the cash generating units noted above,
the recoverable amount exceeds the carrying value of the cash generating units including goodwill. Furthermore, a reasonably possible
change in assumptions would not cause the carrying amount to exceed its recoverable amount.
13 – Acquired value of in-force
business (AVIF) and intangible assets
This note shows the movements in cost, amortisation and impairment
of the acquired value of in-force business and intangible assets during the year.
|
AVIF on
insurance
contracts
1
(a)
£m
|
AVIF on
investment
contracts
2
(a)
£m
|
Other
intangible
assets with
finite useful
lives (b)
£m
|
Intangible
assets with
indefinite
useful lives
(c)
£m
|
Total
£m
|
Gross amount
|
|
|
|
|
|
At 1 January 2014
|
562
|
140
|
1,378
|
118
|
2,198
|
Additions
|
—
|
—
|
161
|
—
|
161
|
Disposals
|
(70)
|
(21)
|
(67)
|
—
|
(158)
|
Foreign exchange rate movements
|
(27)
|
(1)
|
(51)
|
(8)
|
(87)
|
At 31 December 2014
|
465
|
118
|
1,421
|
110
|
2,114
|
Additions
|
2,205
|
2,585
|
596
|
6
|
5,392
|
Disposals
|
(21)
|
—
|
(20)
|
—
|
(41)
|
Foreign exchange rate movements
|
(18)
|
—
|
(49)
|
(5)
|
(72)
|
At 31 December 2015
|
2,631
|
2,703
|
1,948
|
111
|
7,393
|
Accumulated amortisation
|
|
|
|
|
|
At 1 January 2014
|
(383)
|
(78)
|
(433)
|
—
|
(894)
|
Amortisation for the year
|
(32)
|
(5)
|
(76)
|
—
|
(113)
|
Disposals
|
30
|
21
|
34
|
—
|
85
|
Foreign exchange rate movements
|
22
|
1
|
7
|
—
|
30
|
At 31 December 2014
|
(363)
|
(61)
|
(468)
|
—
|
(892)
|
Amortisation for the year
|
(259)
|
(237)
|
(131)
|
—
|
(627)
|
Disposals
|
21
|
—
|
13
|
—
|
34
|
Foreign exchange rate movements
|
15
|
—
|
12
|
—
|
27
|
At 31 December 2015
|
(586)
|
(298)
|
(574)
|
—
|
(1,458)
|
Accumulated Impairment
|
|
|
|
|
|
At 1 January 2014
|
(85)
|
(24)
|
(61)
|
(66)
|
(236)
|
Impairment losses charged to expenses
|
—
|
—
|
(10)
|
—
|
(10)
|
Disposals
|
40
|
—
|
6
|
—
|
46
|
Foreign exchange rate movements
|
2
|
—
|
—
|
4
|
6
|
At 31 December 2014
|
(43)
|
(24)
|
(65)
|
(62)
|
(194)
|
Impairment losses charged to expenses
|
—
|
—
|
(18)
|
—
|
(18)
|
Disposals
|
—
|
—
|
5
|
—
|
5
|
Foreign exchange rate movements
|
—
|
—
|
—
|
3
|
3
|
At 31 December 2015
|
(43)
|
(24)
|
(78)
|
(59)
|
(204)
|
Carrying amount
|
|
|
|
|
|
At 1 January 2014
|
94
|
38
|
884
|
52
|
1,068
|
At 31 December 2014
|
59
|
33
|
888
|
48
|
1,028
|
At 31 December 2015
|
2,002
|
2,381
|
1,296
|
52
|
5,731
|
|
1
|
On insurance and participating investment contracts.
|
|
2
|
On non-participating investment contracts.
|
|
(a)
|
Additions relate to the acquisition of Friends Life. AVIF on insurance and investment contracts is generally recoverable in
more than one year. Of the total AVIF of £4,383 million (£2,002 million on insurance contracts, £2,381 million
on investment contracts), £3,962 million is expected to be recovered more than one year after the statement of financial
position date.
|
Non-participating investment contract AVIF is reviewed for evidence of impairment, consistent with reviews conducted for other finite life intangible assets. Insurance and participating investment contract AVIF is reviewed for impairment at each reporting date as part of the liability adequacy requirements of IFRS 4. AVIF is reviewed for evidence of impairment and impairment tested at product portfolio level by reference to the value of future profits. No impairment charges for AVIF were recognised in the year.
|
(b)
|
Other intangible assets with finite useful lives consist mainly of the value of bancassurance and other distribution agreements
and capitalised software.
|
Additions of intangibles with finite
lives primarily relate to distribution agreements and customer lists acquired as part of Friends Life and capitalised software
in the UK and Canadian general insurance businesses.
Disposals primarily comprise the derecognition
of exhausted assets which are fully amortised or impaired with nil carrying value.
Impairment losses on intangible assets
with finite lives of £18 million arose from impairments of capitalised software in the UK long-term business and Aviva Investors.
|
(c)
|
Intangible assets with indefinite useful lives primarily comprise the value of the Union Financière de France Banque
distribution channel, where the existing lives of the assets and their competitive position in, and the stability of, their respective
markets support this classification. Impairment testing of these intangible assets is covered in note 12(b).
|
14 – Interests in, and loans to,
joint ventures
In several businesses, Group companies and other parties jointly control
certain entities. This note analyses these interests and describes the principal joint ventures in which we are involved.
(a) Carrying amount and details of joint
ventures
(i) The movements in the carrying amount comprised:
|
|
|
|
2015
|
|
|
|
2014
|
|
Goodwill
and
intangibles
£m
|
Equity
interests
£m
|
Loans
£m
|
Total
£m
|
Goodwill and
intangibles
£m
|
Equity
interests
£m
|
Loans
£m
|
Total
£m
|
At 1 January
|
87
|
980
|
73
|
1,140
|
60
|
1,145
|
24
|
1,229
|
Share of results before tax
|
—
|
174
|
—
|
174
|
—
|
138
|
—
|
138
|
Share of tax
|
—
|
(4)
|
—
|
(4)
|
—
|
(3)
|
—
|
(3)
|
Share of results after tax
|
—
|
170
|
—
|
170
|
—
|
135
|
—
|
135
|
Amortisation of intangibles
1
|
(8)
|
—
|
—
|
(8)
|
(6)
|
—
|
—
|
(6)
|
Share of (loss)/profit after tax
|
(8)
|
170
|
—
|
162
|
(6)
|
135
|
—
|
129
|
Reclassification (to)/from subsidiary
|
—
|
(1)
|
—
|
(1)
|
43
|
21
|
—
|
64
|
Reclassification from associate
|
—
|
9
|
—
|
9
|
—
|
—
|
—
|
—
|
Additions
|
21
|
587
|
21
|
629
|
—
|
7
|
73
|
80
|
Disposals
|
—
|
(292)
|
—
|
(292)
|
—
|
(311)
|
—
|
(311)
|
Reduction in Group interest
|
(1)
|
(1)
|
—
|
(2)
|
(10)
|
(26)
|
—
|
(36)
|
Share of gains/(losses) taken to other comprehensive income
|
—
|
(14)
|
—
|
(14)
|
—
|
22
|
—
|
22
|
Loans repaid
|
—
|
—
|
—
|
—
|
—
|
—
|
(25)
|
(25)
|
Dividends received from joint ventures
|
—
|
(28)
|
—
|
(28)
|
—
|
(22)
|
—
|
(22)
|
Foreign exchange rate movements
|
(9)
|
(4)
|
—
|
(13)
|
—
|
9
|
1
|
10
|
At 31 December
|
90
|
1,406
|
94
|
1,590
|
87
|
980
|
73
|
1,140
|
|
1
|
Comprises amortisation of AVIF on insurance contracts of £2 million
(2014: £3 million)
and other intangibles
of £6 million
(2014: £3 million).
|
Additions and disposals primarily relate to the Group’s holdings
in property management undertakings.
The Group also increased its holdings in two
Polish operations from 34% to 51%, as a result of which the entities have been reclassified from associates to joint ventures reflecting
the Group’s joint control. This transaction gave rise to £21 million of additions to goodwill and intangibles.
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.
The Group’s share of total comprehensive
income related to joint venture entities is £148 million
(2014: £151 million; 2013: £103 million).
(ii) The carrying amount at 31 December comprised:
|
|
|
|
2015
|
|
|
|
2014
|
|
Goodwill
and
intangibles
£m
|
Equity
interests
£m
|
Loans
£m
|
Total
£m
|
Goodwill
and
intangibles
£m
|
Equity
interests
£m
|
Loans
£m
|
Total
£m
|
Property management undertakings
|
—
|
1,097
|
94
|
1,191
|
—
|
692
|
73
|
765
|
Long-term business undertakings
|
77
|
288
|
—
|
365
|
87
|
278
|
—
|
365
|
General insurance and health undertakings
|
13
|
21
|
—
|
34
|
—
|
10
|
—
|
10
|
Total
|
90
|
1,406
|
94
|
1,590
|
87
|
980
|
73
|
1,140
|
The property management undertakings perform property ownership
and management activities, and are incorporated and operate in the UK. All such investments are held by subsidiary entities. The
loans are not secured and no guarantees were received in respect thereof. They are interest-bearing and are repayable on termination
of the relevant partnership.
The long-term business undertakings perform life
insurance activities. All investments in such undertakings are unlisted with the exception of Aviva SA Emklilik ve Hayat A.S. which
has issued publicly a minority portion of shares. All investments in such undertakings are held by subsidiaries, except for the
shares in the Chinese joint venture, Aviva-COFCO Life Insurance Co. Limited, which are held by Aviva plc. The Group’s share
of net assets of that company is £214 million
(2014: £208 million
) and has a fair value of £322 million
(2014: £208 million).
The investment in general insurance and health
undertakings relates to the health insurance operations in our Indonesian joint venture and the general insurance operations in
our Polish joint venture.
14 – Interests in, and loans to,
joint ventures continued
(iii) No joint ventures are considered to be material from
a Group perspective
(2014: none).
The Group’s principal joint ventures are as follows:
|
|
|
Proportion of
ownership interest
|
Name
|
Nature of activities
|
Principal place of business
|
2015
|
2014
|
Airport Property Partnership
|
Property management
|
UK
|
50.00%
|
50.00%
|
Ascot Real Estate Property LP
|
Property management
|
UK
|
50.00%
|
—
|
2-10 Mortimer Limited Partnership
|
Property management
|
UK
|
50.00%
|
45.54%
|
BZ WBK-Aviva Towarzystwo Ubezpieczen Ogolnych SA
1
|
General insurance
|
Poland
|
51.00%
|
34.00%
|
BZ WBK-Aviva Towarzystwo Ubezpieczen na Zycie SA
1
|
Life insurance
|
Poland
|
51.00%
|
34.00%
|
Aviva-COFCO Life Insurance Co. Ltd
|
Life insurance
|
China
|
50.00%
|
50.00%
|
PT Astra Aviva Life
|
Life and Health insurance
|
Indonesia
|
50.00%
|
50.00%
|
First-Aviva Life Insurance Co. Ltd
|
Life insurance
|
Taiwan
|
49.00%
|
49.00%
|
AvivaSA Emeklilik ve Hayat A.S
|
Life insurance
|
Turkey
|
40.00%
|
41.28%
|
Vietinbank Aviva Life Insurance Co. Ltd
|
Life insurance
|
Vietnam
|
50.00%
|
50.00%
|
|
1
|
During 2015, the Group increased its interest in Poland and the associate holdings were reclassified to joint ventures reflecting
the Group’s joint control.
|
The Group has one joint venture whose non-controlling interest
(NCI) is material on the basis of their share of profit/(loss), as follows:
|
Proportion of ownership interests
held by NCI
|
Proportion of voting rights
held by NCI
|
Profit/(loss) allocated to NCI
|
Accumulated NCI
|
|
2015
|
2014
|
2013
|
2015
|
2014
|
2013
|
2015
£m
|
2014
£m
|
2013
£m
|
2015
£m
|
2014
£m
|
2013
£m
|
Airport Property Partnership
|
50%
|
50%
|
50%
|
50%
|
50%
|
50%
|
77
|
53
|
11
|
324
|
258
|
212
|
(iv) The joint ventures have no significant contingent liabilities
to which the Group is exposed. The Group has commitments to provide funding to property management joint ventures of £47
million
(2014: £70 million).
In certain jurisdictions the ability of joint
ventures to transfer funds in the form of cash dividends or to repay loans and advances made by the Group is subject to local corporate
or insurance laws and regulations and solvency requirements.
b) Impairment testing
Joint ventures are tested for impairment by comparing the carrying
value of the cash generating unit to which the goodwill or intangible relates to the recoverable value of that cash generating
unit.
The recoverable amount of long-term business
undertakings is the value in use of the joint venture. This is calculated according to the methodology for the calculation of the
value in use of long-term business cash generating units for the impairment testing of goodwill, as set out in note 12(b).
The recoverable amount of property management
undertakings is the fair value less costs to sell of the joint venture, measured in accordance with the Group’s accounting
policy for Investment Property (see accounting policy Q).
There is no impairment in the goodwill and intangible
amounts within the joint ventures.
15 – Interests in, and loans to,
associates
This note analyses our interests in entities which we do not control
but where we have significant influence.
(a) Carrying amount and details of associates
(i) The movements in the carrying amount comprised:
|
|
|
|
2015
|
|
|
|
2014
|
|
Goodwill
and
intangibles
£m
|
Equity
interests
£m
|
Loans
£m
|
Total
£m
|
Goodwill
and
intangibles
£m
|
Equity
interests
£m
|
Loans
£m
|
Total
£m
|
At 1 January
|
—
|
404
|
—
|
404
|
—
|
262
|
5
|
267
|
Share of results before tax
|
—
|
18
|
—
|
18
|
—
|
44
|
—
|
44
|
Share of tax
|
—
|
—
|
—
|
—
|
—
|
(2)
|
—
|
(2)
|
Share of results after tax
|
—
|
18
|
—
|
18
|
—
|
42
|
—
|
42
|
Impairment
|
—
|
—
|
—
|
—
|
(24)
|
—
|
—
|
(24)
|
Share of results after tax
|
—
|
18
|
—
|
18
|
(24)
|
42
|
—
|
18
|
Acquisitions
|
—
|
4
|
—
|
4
|
—
|
—
|
—
|
—
|
Additions
|
26
|
6
|
—
|
32
|
24
|
34
|
—
|
58
|
Loans repaid by associate
|
—
|
—
|
—
|
—
|
—
|
—
|
(8)
|
(8)
|
Reduction in Group interest
|
—
|
(94)
|
—
|
(94)
|
—
|
(43)
|
—
|
(43)
|
Reclassification from subsidiary
|
—
|
—
|
—
|
—
|
—
|
125
|
—
|
125
|
Reclassification from investment
|
—
|
—
|
—
|
—
|
—
|
25
|
—
|
25
|
Reclassification to joint venture
|
—
|
(9)
|
—
|
(9)
|
—
|
—
|
—
|
—
|
Dividends received from associate
|
—
|
(17)
|
—
|
(17)
|
—
|
(30)
|
—
|
(30)
|
Foreign exchange rate movements
|
—
|
(9)
|
—
|
(9)
|
—
|
(11)
|
3
|
(8)
|
Movements in carrying amount
|
26
|
(101)
|
—
|
(75)
|
—
|
142
|
(5)
|
137
|
At 31 December
|
26
|
303
|
—
|
329
|
—
|
404
|
—
|
404
|
b) Impairment testing
The addition of goodwill relates to Aviva Life Insurance Company India
Limited (‘Aviva India‘). There is no impairment of goodwill in 2015
(2014: £24 million; 2013: £29 million).
The recoverable amount of property management
undertakings is the fair value less costs to sell of the associate, measured in accordance with the Group’s accounting policy
for Investment Property (see accounting policy Q).
Other movements
Additions of equity interests and reduction in Group interests relate
to the purchase and sale of portions of the Group’s holdings in various property management undertakings.
Reclassification to joint venture relates to
the increase in the Group’s interest in Poland from an associate.
The Group’s share of total comprehensive
income related to associates is £18 million
(2014: income of £18 million; 2013: loss of £20 million)
.
(i) No associates are considered to be material from a Group
perspective
(2014: none)
. All investments in principal associates are held by subsidiaries. The Group’s principal
associates are as follows:
|
|
|
Proportion of
ownership interest
|
Name
|
Nature of activities
|
Principal place of business
|
2015
|
2014
|
Aviva Life Insurance Company India
|
Life insurance
|
India
|
26.00%
|
26.00%
|
SCPI Ufifrance Immobilier
|
Property Management
|
France
|
20.40%
|
20.40%
|
AI UK Commerical Real Estate Debt Fund
|
Property Management
|
UK
|
20.72%
|
26.33%
|
Encore+
1
|
Property Management
|
UK
|
10.19%
|
10.82%
|
|
1
|
The Group has significant influence over Encore+ and it is therefore accounted for as an associate.
|
(ii) The associates have no significant contingent liabilities to
which the Group is exposed. The Group has commitments to provide funding to property management associates of £15 million
(2014: £21 million).
In certain jurisdictions the ability of associates
to transfer funds in the form of cash dividends or to repay loans and advances made by the Group is subject to local corporate
or insurance laws and regulations and solvency requirements.
16 – Property and equipment
This note analyses our property and equipment, which are
primarily properties occupied by Group companies.
|
Properties
under
construction
£m
|
Owner-
occupied
properties
£m
|
Motor
vehicles
£m
|
Computer
equipment
£m
|
Other
assets
£m
|
Total
£m
|
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 17)
|
—
|
—
|
—
|
—
|
—
|
—
|
Fair value gains
|
5
|
4
|
—
|
—
|
—
|
9
|
Foreign exchange rate movements
|
—
|
(15)
|
—
|
(3)
|
(9)
|
(27)
|
At 31 December 2014
|
—
|
343
|
3
|
563
|
159
|
1,068
|
Additions
|
3
|
53
|
—
|
8
|
30
|
94
|
Disposals
1
|
—
|
(51)
|
—
|
(300)
|
(2)
|
(353)
|
Transfers (to)/from investment property (note 17)
|
—
|
(13)
|
—
|
—
|
55
|
42
|
Fair value gains
|
—
|
39
|
—
|
—
|
—
|
39
|
Foreign exchange rate movements
|
—
|
(11)
|
—
|
(4)
|
(6)
|
(21)
|
At 31 December 2015
|
3
|
360
|
3
|
267
|
236
|
869
|
Depreciation and impairment
|
|
|
|
|
|
|
At 1 January 2014
|
—
|
(1)
|
(2)
|
(569)
|
(146)
|
(718)
|
Charge for the year
|
—
|
—
|
—
|
(13)
|
(6)
|
(19)
|
Disposals
|
—
|
—
|
—
|
37
|
5
|
42
|
Impairment charge
|
—
|
(26)
|
—
|
—
|
—
|
(26)
|
Foreign exchange rate movements
|
—
|
—
|
—
|
5
|
5
|
10
|
At 31 December 2014
|
—
|
(27)
|
(2)
|
(540)
|
(142)
|
(711)
|
Charge for the year
|
—
|
—
|
—
|
(11)
|
(13)
|
(24)
|
Disposals
1
|
—
|
4
|
—
|
300
|
2
|
306
|
Impairment charge
|
—
|
—
|
—
|
—
|
—
|
—
|
Foreign exchange rate movements
|
—
|
—
|
—
|
3
|
6
|
9
|
At 31 December 2015
|
—
|
(23)
|
(2)
|
(248)
|
(147)
|
(420)
|
|
|
|
|
|
|
|
Carrying amount
|
|
|
|
|
|
|
At
31 December 2014
|
—
|
316
|
1
|
23
|
17
|
357
|
At 31 December 2015
|
3
|
337
|
1
|
19
|
89
|
449
|
1 Disposals of computer equipment
primarily comprise exhausted assets within Aviva Corporate Services.
Total net fair value gains of £39 million on owner occupied
properties consist of £27 million gains
(2014: £7 million
gains)
which have been taken to other comprehensive income, £13 million reversal of losses taken to the income
statement in previous years and £1 million of losses in the year
(2014: £3 million losses)
which have been taken
to the income statement.
Owner-occupied properties are stated at their
revalued amounts, as assessed by qualified external valuers. These values are assessed in accordance with the relevant parts of
the current Royal Institute of Chartered Surveyors Appraisal and Valuation Standards in the UK, and with current local valuation
practices in other countries. This assessment is in accordance with UK Valuations Standards (‘Red book’), and is the
estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in
an arm’s-length transaction, after proper marketing wherein the parties had acted knowledgeably and without compulsion, on
the basis of the highest and best use of asset that is physically possible, legally permissible and financially feasible. The valuation
assessment adopts market-based evidence and is in line with guidance from the International Valuation Standards Committee and the
requirements of IAS 16,
Property, Plant and Equipment
.
Similar considerations apply to properties under
construction, where an estimate is made of valuation when complete, adjusted for anticipated costs to completion, profit and risk,
reflecting market conditions at the valuation date.
If owner-occupied properties were stated on a
historical cost basis, the carrying amount would be £361 million
(2014:
£329 million
).
The Group has no material finance leases for
property and equipment.
17 – Investment property
This note gives details of the properties we hold for long-term
rental yields or capital appreciation.
|
|
|
2015
|
|
|
2014
|
|
Freehold
£m
|
Leasehold
£m
|
Total
£m
|
Freehold
£m
|
Leasehold
£m
|
Total
£m
|
Carrying value
|
|
|
|
|
|
|
At 1 January
|
7,521
|
1,404
|
8,925
|
8,207
|
1,244
|
9,451
|
Additions
1
|
2,813
|
685
|
3,498
|
606
|
56
|
662
|
Capitalised expenditure on existing properties
|
94
|
22
|
116
|
57
|
6
|
63
|
Fair value gains/(losses)
|
638
|
140
|
778
|
545
|
133
|
678
|
Disposals
|
(1,549)
|
(318)
|
(1,867)
|
(1,733)
|
(29)
|
(1,762)
|
Transfers (to)/from property and equipment (note 16)
|
(42)
|
—
|
(42)
|
—
|
—
|
—
|
Foreign exchange rate movements
|
(103)
|
(4)
|
(107)
|
(161)
|
(6)
|
(167)
|
At 31 December
|
9,372
|
1,929
|
11,301
|
7,521
|
1,404
|
8,925
|
|
1
|
Additions include investment property bought as part of the acquisition of Friends Life in 2015.
|
Please refer to note 18 ‘Fair value methodology’ for further
information on the fair value measurement and valuation techniques of investment property.
The fair value of investment properties leased
to third parties under operating leases at 31 December 2015 was £11,149 million
(2014:
£8,828 million)
. Future contractual aggregate minimum lease rentals receivable under the non-cancellable portion
of these leases are given in note 49(b)(i).
18 – Fair value methodology
This note explains the methodology for valuing our assets and liabilities
measured at fair value, and for fair value disclosures. It also provides an analysis of these according to a ‘fair value
hierarchy’, determined by the market observability of valuation inputs.
(a) Basis for determining fair value
hierarchy
All assets and liabilities for which fair value is measured or disclosed
in the financial statements are categorised within the ‘fair value hierarchy’ described as follows, based on the lowest
level input that is significant to the fair value measurement as a whole:
Level 1
Inputs to Level 1 fair values are quoted prices (unadjusted) in active
markets for identical assets and liabilities that the entity can access at the measurement date.
Level 2
Inputs to Level 2 fair values are inputs other than quoted prices
included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability
has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the instrument. Level
2 inputs include the following:
|
·
|
Quoted prices for similar assets and liabilities in active markets.
|
|
·
|
Quoted prices for identical or similar assets and liabilities in markets that are not active, the prices are not current, or
price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
|
|
·
|
Inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves
observable at commonly quoted intervals, implied volatilities, and credit spreads).
|
|
·
|
Market-corroborated inputs.
|
Where we use broker quotes and no information as to the observability
of inputs is provided by the broker, the investments are classified as follows:
|
·
|
Where the broker price is validated by using internal models with market observable inputs and the values are similar, we classify
the investment as Level 2.
|
|
·
|
In circumstances where internal models are not used to validate broker prices, or the observability of inputs used by brokers
is unavailable, the investment is classified as Level 3.
|
Level 3
Inputs to Level 3 fair values are unobservable inputs for the asset
or liability. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available,
thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement
date. However, the fair value measurement objective remains the same, i.e. an exit price at the measurement date from the perspective
of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs reflect the assumptions the
business unit considers that market participants would use in pricing the asset or liability. Examples are investment properties,
certain private equity investments and private placements.
18 – Fair value methodology continued
The majority of the Group’s assets and liabilities measured
at fair value are based on quoted market information or observable market data. 16.1% of assets and 4.2% of liabilities measured
at fair value are based on estimates and recorded as Level 3. Where estimates are used, these are based on a combination of independent
third-party evidence and internally developed models, calibrated to market observable data where possible. Third-party valuations
using significant unobservable inputs validated against Level 2 internally modelled valuations are classified as Level 3, where
there is a significant difference between the third-party price and the internally modelled value. Where the difference is insignificant,
the instrument would be classified as Level 2.
(b) Changes to valuation techniques
There were no changes in the valuation techniques during the year
compared to those described in the 2014 annual consolidated financial statements, other than those noted below.
(c) Comparison of the carrying amount
and fair values of financial instruments
Set out below is a comparison of the carrying amounts and
fair values of financial assets and liabilities. These amounts may differ where the asset or liability is carried on a measurement
basis other than fair value, e.g. amortised cost.
|
|
2015
|
|
2014
|
|
Fair value
|
Carrying
amount
|
Fair value
|
Carrying
amount
|
|
£m
|
£m
|
£m
|
£m
|
Financial assets
|
|
|
|
|
Loans
1
(note 19(a))
|
22,307
|
22,433
|
25,135
|
25,260
|
Financial Investments (note 22(b))
|
274,217
|
274,217
|
202,638
|
202,638
|
Fixed maturity securities
|
162,964
|
162,964
|
131,661
|
131,661
|
Equity securities
|
63,558
|
63,558
|
35,619
|
35,619
|
Other investments (including derivatives)
|
47,695
|
47,695
|
35,358
|
35,358
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
Non-participating investment contracts (note 37(a))
|
103,125
|
103,125
|
50,013
|
50,013
|
Net asset value attributable to unitholders
|
11,415
|
11,415
|
9,482
|
9,482
|
Borrowings
1
(note 45(a))
|
9,091
|
8,770
|
8,080
|
7,378
|
Derivative liabilities (note 54(b))
|
3,881
|
3,881
|
3,481
|
3,481
|
|
1
|
Within the fair value total, the estimated fair value has been provided for the portion of loans and borrowings that are carried
at amortised cost as disclosed in note 18 (h).
|
Fair value of the following assets and liabilities approximate to
their carrying amounts:
|
·
|
Cash and cash equivalents
|
|
·
|
Payables and other financial liabilities
|
(d) Fair value hierarchy analysis
An analysis of assets and liabilities measured at amortised
cost and fair value categorised by fair value hierarchy is given below.
|
Fair value hierarchy
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Sub-total
fair value
|
Amortised
cost
|
Total
carrying
value
|
2015
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Recurring fair value measurements
|
|
|
|
|
|
|
Investment Property (note 17)
|
—
|
—
|
11,301
|
11,301
|
—
|
11,301
|
Loans (note 19(a))
|
—
|
950
|
18,129
|
19,079
|
3,354
|
22,433
|
Financial investments measured at fair value (note 22(b))
|
|
|
|
|
|
|
Fixed maturity securities
|
89,158
|
59,203
|
14,603
|
162,964
|
—
|
162,964
|
Equity securities
|
62,622
|
—
|
936
|
63,558
|
—
|
63,558
|
Other investments (including derivatives)
|
39,485
|
4,057
|
4,153
|
47,695
|
—
|
47,695
|
Total
|
191,265
|
64,210
|
49,122
|
304,597
|
3,354
|
307,951
|
Financial liabilities measured at fair value
|
|
|
|
|
|
|
Non-participating investment contracts
1
(note 37(a))
|
99,459
|
245
|
3,421
|
103,125
|
—
|
103,125
|
Net asset value attributable to unit holders
|
11,393
|
—
|
22
|
11,415
|
—
|
11,415
|
Borrowings (note 45(a))
|
—
|
781
|
527
|
1,308
|
7,462
|
8,770
|
Derivative liabilities (note 54(b))
|
304
|
2,484
|
1,093
|
3,881
|
—
|
3,881
|
Total
|
111,156
|
3,510
|
5,063
|
119,729
|
7,462
|
127,191
|
|
1
|
In addition to the balances in this table, included within Reinsurance assets in the Statement of financial position and note
39 are £13,967 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition
of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and
are classified as Level 1 assets.
|
18 – Fair value methodology continued
|
Fair value hierarchy
|
|
Level 1
|
Level 2
|
Level 3
|
Total fair value
|
2015
|
£m
|
£m
|
£m
|
£m
|
Non-recurring fair value measurement
1
|
|
|
|
|
Properties occupied by group companies
|
—
|
—
|
337
|
337
|
Total
|
—
|
—
|
337
|
337
|
|
1
|
Non-recurring fair value measurements of assets or liabilities are those fair value measurements that other IFRSs permit or
require in particular circumstances.
|
Owner-occupied properties are stated at their revalued amounts,
as assessed by qualified external valuers in line with the Group’s policy. Further details on the valuation of these properties
can be found in note 16.
|
Fair value hierarchy
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Sub-total
fair value
|
Amortised
cost
|
Total
carrying
value
|
2014
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Recurring fair value measurements
|
|
|
|
|
|
|
Investment Property (note 17)
|
—
|
—
|
8,925
|
8,925
|
—
|
8,925
|
Loans (note 19(a))
|
—
|
3,895
|
17,000
|
20,895
|
4,365
|
25,260
|
Financial investments measured at fair value (note 22(b))
|
|
|
|
|
|
|
Fixed maturity securities
|
75,078
|
45,274
|
11,309
|
131,661
|
—
|
131,661
|
Equity securities
|
35,460
|
—
|
159
|
35,619
|
—
|
35,619
|
Other investments (including derivatives)
|
25,139
|
7,153
|
3,066
|
35,358
|
—
|
35,358
|
Total
|
135,677
|
56,322
|
40,459
|
232,458
|
4,365
|
236,823
|
Financial liabilities measured at fair value
|
|
|
|
|
|
|
Non-participating investment contracts
1
(note 37(a))
|
49,791
|
222
|
—
|
50,013
|
—
|
50,013
|
Net asset value attributable to unit holders
|
9,463
|
—
|
19
|
9,482
|
—
|
9,482
|
Borrowings (note 45(a))
|
—
|
812
|
560
|
1,372
|
6,006
|
7,378
|
Derivative liabilities (note 54(b))
|
180
|
2,310
|
991
|
3,481
|
—
|
3,481
|
Total
|
59,434
|
3,344
|
1,570
|
64,348
|
6,006
|
70,354
|
|
1
|
In addition to the balances in this table, included within Reinsurance assets in the Statement of financial position and note
39 are £2,533 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition
of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and
are classified as level 1 assets.
|
|
Fair value hierarchy
|
|
Level 1
|
Level 2
|
Level 3
|
Total
fair
value
|
2014
|
£m
|
£m
|
£m
|
£m
|
Non-recurring fair value measurement
1
|
|
|
|
|
Properties occupied by group companies
|
—
|
—
|
316
|
316
|
Total
|
—
|
—
|
316
|
316
|
|
1
|
Non-recurring fair value measurements of assets or liabilities are those fair value measurements that other IFRSs permit or
require in particular circumstances.
|
(e) Transfers between levels of the
fair value hierarchy
For financial instruments that are recognised at fair value on a recurring
basis, the Group determines whether transfers have occurred between levels of the fair value hierarchy by re-assessing categorisation
(based on the lowest level input that is significant to the fair value measurement as a whole) at the end of the reporting period.
Transfers between Level 1 and Level 2
For the year ended 31 December 2015, changes in the level of market
activity for certain investments funds have resulted in transfers of financial assets from Level 1 to Level 2 of £0.1 billion
and transfers from Level 2 to Level 1 of approximately £20 million.
Transfer to/from Level 3
Transfers out of Level 3 of £0.6 billion relate principally
to debt securities held by our businesses in the UK and France which were transferred to Level 2 as observable inputs became available.
Transfers of assets into Level 3 of £4.3 billion included:
|
·
|
£2.9 billion of Primary Healthcare, Private Finance Initiative (PFI) and infrastructure loans. During the year, these
loans were valued using a Portfolio Credit Risk Model in place of the previous discounted cash flow model. As the liquidity premium
input in this model has been deemed to be non-market observable and significant, the loans have been classified as Level 3 and
transferred from Level 2.
|
|
·
|
£0.9 billion of debt securities held in the UK and £0.3 billion held in France were transferred from Level 2 due
to the unavailability of significant observable market data or sufficiently significant differences between the valuation provided
by the counterparty and broker quotes and the validation models.
|
|
·
|
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.
|
Transfers of liabilities into and out of Level 3 (£(62) million
and £13 million respectively) relate to non-participating investment contract liabilities where the underlying assets have
been transferred due to a change in the observability of the inputs.
18 – Fair value methodology continued
(f) Valuation approach for fair value assets
and liabilities classified as Level 2
Please see note 18(a) for a description of typical Level 2 inputs.
Debt securities, in line with market practice,
are generally valued using an independent pricing service. These valuations are determined using independent external quotations
from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews
and variance analysis. Pricing services, where available, are used to obtain the third-party broker quotes. Where pricing services
providers are used, a single valuation is obtained and applied. When prices are not available from pricing services, quotes are
sourced from brokers.
Over the counter derivatives are valued using
broker quotes or models such as option pricing models, simulation models or a combination of models. The inputs for these models
include a range of factors which are deemed to be observable, including current market and contractual prices for underlying instruments,
period to maturity, correlations, yield curves and volatility of the underlying instruments.
Unit Trusts and other investment funds included
under the Other investments category are valued using net assets values which are not subject to a significant adjustment for restrictions
on redemption or for limited trading activity.
(g) Further information on Level 3 assets
and liabilities:
The table below shows movement in the Level 3 assets and
liabilities measured at fair value:
|
|
|
|
|
|
Assets
|
|
|
|
Liabilities
|
|
Investment
Property
|
Loans
|
Debt
securities
|
Equity
securities
|
Other
investments
(including
derivatives)
|
Financial
assets of
operations
classified as
held for sale
|
Non
participating
investment
contracts
|
Net asset
value
attributable
to
unitholders
|
Derivative
liabilities
|
Borrowings
|
2015
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Opening balance at 1 January 2015
|
8,925
|
17,000
|
11,309
|
159
|
3,066
|
—
|
—
|
(19)
|
(991)
|
(560)
|
Total net gains/(losses) recognised in the income statement
1
|
898
|
(467)
|
172
|
29
|
236
|
—
|
42
|
4
|
26
|
(60)
|
Purchases
2
|
3,627
|
—
|
4,909
|
993
|
2,227
|
—
|
(3,644)
|
(5)
|
(145)
|
—
|
Issuances
|
—
|
2,464
|
—
|
—
|
—
|
—
|
(79)
|
(2)
|
—
|
—
|
Disposals
|
(2,042)
|
(2,275)
|
(1,916)
|
(242)
|
(1,373)
|
—
|
253
|
—
|
16
|
1
|
Settlements
3
|
—
|
(1,461)
|
(161)
|
—
|
—
|
—
|
69
|
—
|
—
|
92
|
Transfers into Level 3
|
—
|
2,868
|
1,302
|
6
|
75
|
—
|
(62)
|
—
|
—
|
—
|
Transfers out of Level 3
|
—
|
—
|
(624)
|
(2)
|
(22)
|
—
|
13
|
—
|
—
|
—
|
Foreign exchange rate movements
|
(107)
|
—
|
(388)
|
(7)
|
(56)
|
—
|
(13)
|
—
|
1
|
—
|
Balance at 31 December 2015
|
11,301
|
18,129
|
14,603
|
936
|
4,153
|
—
|
(3,421)
|
(22)
|
(1,093)
|
(527)
|
|
1
|
Total net gains/(losses) recognised in the income statement includes realised gains/(losses) on disposals.
|
|
2
|
Purchases include Friends Life’s Level 3 assets and liabilities at the date of acquisition.
|
|
3
|
Settlements include effective settlements of Group holdings.
|
|
|
|
|
|
|
Assets
|
|
|
|
Liabilities
|
|
Investment
Property
|
Loans
|
Debt
securities
|
Equity
securities
|
Other
investments
(including
derivatives)
|
Financial
assets of
operations
classified as
held for sale
|
Non
participating
investment
contracts
|
Net asset
value
attributable to
unitholders
|
Derivative
liabilities
|
Borrowings
|
2014
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Opening balance at 1 January 2014
|
9,451
|
15,362
|
8,879
|
441
|
3,017
|
148
|
—
|
—
|
(201)
|
(482)
|
Total net gains/(losses) recognised in the income statement
1
|
727
|
829
|
209
|
(2)
|
74
|
—
|
—
|
—
|
(135)
|
(92)
|
Purchases
|
725
|
1,675
|
1,550
|
28
|
1,017
|
—
|
—
|
—
|
(400)
|
—
|
Issuances
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(20)
|
—
|
Disposals
|
(1,811)
|
(1,049)
|
(1,482)
|
(292)
|
(998)
|
(148)
|
—
|
—
|
56
|
12
|
Settlements
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Transfers into Level 3
|
—
|
183
|
3,169
|
2
|
19
|
—
|
—
|
(19)
|
(292)
|
—
|
Transfers out of Level 3
|
—
|
—
|
(469)
|
—
|
—
|
—
|
—
|
—
|
—
|
2
|
Foreign exchange rate movements
|
(167)
|
—
|
(547)
|
(18)
|
(63)
|
—
|
—
|
—
|
1
|
—
|
Balance at 31 December 2014
|
8,925
|
17,000
|
11,309
|
159
|
3,066
|
—
|
—
|
(19)
|
(991)
|
(560)
|
|
1
|
Total net gains/(losses) recognised in the income statement includes realised gains/(losses) on disposals.
|
Total net gains recognised in the income statement in the year ended
31 December 2015 in respect of Level 3 assets measured at fair value amounted to £868 million
(2014: net gains of £1,837
million)
with net gains in respect of liabilities of £12 million
(2014: net losses of £227 million)
. £901
million of net gains
(2014: net gains of £1,733 million)
attributable to assets and £27 million net gains
(2014:
net losses of £227 million)
attributable to liabilities relate to those still held at the end of the year.
18 – Fair value methodology continued
The principal assets classified as Level 3, and the valuation techniques
applied to them, are described below.
(i) Investment property
|
·
|
Investment property amounting to £11.3 billion
(2014: £8.9 billion)
is valued in the UK at least annually
by external chartered surveyors in accordance with guidance issued by The Royal Institution of Chartered Surveyors, and using estimates
during the intervening period. Outside the UK, valuations are produced by external qualified professional appraisers in the countries
concerned. Investment properties are valued on an income approach that is based on current rental income plus anticipated uplifts
at the next rent review, lease expiry, or break option taking into consideration lease incentives and assuming no further growth
in the estimated rental value of the property. The uplift and discount rates are derived from rates implied by recent market transactions
on similar properties. These inputs are deemed unobservable.
|
(ii) Loans
|
·
|
Commercial mortgage loans, Primary Healthcare, Infrastructure and PFI loans held by our UK Life business amounting to £10.8
billion
(2014: £10.4 billion)
, were valued using a Portfolio Credit Risk Model (PCRM). This model calculates a Credit
Risk Adjusted Value (CRAV) for each loan. The risk adjusted cash flows are discounted using a yield curve, taking into account
the term dependent gilt yield curve, and global assumptions for the liquidity premium. Loans valued using this model have been
classified as Level 3 as the liquidity premium is deemed to be non-market observable. The liquidity premium used in the discount
rate ranges between 110 bps to 280 bps.
|
|
·
|
Equity release and securitised mortgage loans held by our UK Life business amounting to £6.7 billion
(2014: £5.9
billion)
comprise:
|
|
-
|
£4.3 billion
(2014: £3.6 billion)
of equity release mortgages held by our UK Life annuity business valued
using an internal model. Inputs to the model include property growth rates, mortality and morbidity assumptions, cost of capital
and liquidity premium which are not deemed to be market observable. The assumed property growth is approximately 2% per annum.
|
|
-
|
£2.4 billion
(2014: £2.3 billion)
of securitised and equity release mortgages are valued using a discounted
cash flow model. The inputs include liquidity risk and property risk premium which are deemed unobservable. The liquidity premium
used ranges between 158 bps to 185 bps.
|
|
·
|
Collateralised non-recourse loans of £0.6 billion
(2014: £0.5 billion)
have been valued using internally
developed models incorporating a significant number of modelling assumptions including the probability of counterparty default
and the expected loss in the event of counterparty default. These inputs are deemed unobservable.
|
(iii) Debt securities
|
·
|
Privately placed notes held by our UK Life business of £3.3 billion
(2014: £1.8 billion)
have been valued
using broker quotes or a discounted cash flow model using discount factors based on swap curves of similar maturity, plus internally
derived spreads for credit risk. As these spreads have been deemed to be unobservable these notes have been classified as Level 3.
|
|
·
|
Structured bond-type and non-standard debt products held by our business in France amounting to £5.8 billion
(2014:
£7.4 billion)
and bonds held by our UK business of £2.2 billion
(2014: £1.0 billion)
have no active
market. These debt securities are valued either using counterparty or broker quotes and validated against internal or third-party
models. These bonds have been classified as Level 3 because either (i) the third-party models included a significant unobservable
liquidity adjustment, or (ii) differences between the valuation provided by the counterparty and broker quotes and the validation
model were sufficiently significant to result in a Level 3 classification.
|
|
·
|
Collateralised loan obligations of £0.4 billion
(2014: £0.4 billion)
have been valued using internally developed
discounted cash flow models incorporating a significant number of modelling assumptions and unobservable market data including
assumptions regarding correlation among the underlying loans, a probability of default and liquidity premium.
|
|
·
|
Corporate debt securities held by our French business of £1.5 billion
(2014: £0.3 billion)
and debt securities
of £0.9 billion held by our UK and Asia businesses
(2014: £nil)
which are not traded in an active market have
been valued using third party or counterparty valuations. These prices are considered to be unobservable due to infrequent market
transactions.
|
(iv) Equity securities
|
·
|
Equity securities which primarily comprise private equity holdings of £0.8 billion
(2014: £0.1 billion)
held in the UK are valued by a number of third party specialists. These are valued using a range of techniques, including earnings
multiples, forecast cash flows and price/earnings ratios which are deemed to be unobservable.
|
(v) Other investments
|
·
|
The following Other investments are valued based on external valuation reports received from fund managers:
|
|
-
|
Private equity investment funds amounting to £1.4 billion
(2014: £1.0 billion)
;
|
|
-
|
Other investment funds including property funds amounting to £1.0 billion
(2014: £0.5 billion)
;
|
|
-
|
External hedge funds held principally by businesses in the UK and France amounting to £0.5 billion
(2014: £1.2
billion)
; and
|
|
-
|
Discretionary managed funds held in Asia amounting to £1.2 billion
(2014: £nil)
;
|
Where these valuations are at a date other than balance sheet date,
as in the case of some private equity funds, we make adjustments for items such as subsequent draw-downs and distributions and
the fund manager’s carried interest.
Remaining Level 3 investments amount to £0.7 billion
(2014:
£1.1 billion)
within debt securities, equity securities and other investments held by a number of businesses throughout
the Group.
18 – Fair value methodology continued
Where possible, the Group tests the sensitivity of the fair values
of Level 3 investments to changes in unobservable inputs to reasonable alternatives. Valuations for Level 3 investments are sourced
from independent third parties when available and, where appropriate, validated against internally-modelled valuations, third-party
models or broker quotes. Where third-party pricing sources are unwilling to provide a sensitivity analysis for their valuations,
the Group undertakes, where feasible, sensitivity analysis on the following basis:
|
·
|
For third-party valuations validated against internally-modelled valuations using significant unobservable inputs, the sensitivity
of the internally modelled valuation to changes in unobservable inputs to a reasonable alternative is determined.
|
|
·
|
For third-party valuations either not validated or validated against a third-party model or broker quote, the third-party valuation
in its entirety is considered an unobservable input. Sensitivities are determined by flexing inputs of internal models to a reasonable
alternative, including the yield, NAV multiple or other suitable valuation multiples of the financial instrument implied by the
third-party valuation. For example, for a fixed income security the implied yield would be the rate of return which discounts the
security’s contractual cash flows to equal the third-party valuation.
|
On the basis of the methodology outlined above, the Group
is able to perform sensitivity analysis for £49.0 billion of the Group’s Level 3 assets. For these Level 3 assets,
changing unobservable valuation inputs to a reasonable alternative would result in a change in fair value by + £2.0 billion
/ – £2.1 billion. Of the £0.1 billion Level 3 assets for which sensitivity analysis is not provided, it is estimated
that a 10% change in valuation assumptions downwards of these assets would result in a change in fair value of approximately £10
million.
(vi) Liabilities
The principal liabilities classified as Level 3, and the valuation
techniques applied to them, are:
|
·
|
£3.4 billion
(2014: £nil)
of non-participating investment contract liabilities are classified as Level 3,
either because the underlying unit funds are classified as Level 3 or because the liability relates to unfunded units or other
non-unit adjustments which are based on a discounted cash flow analysis using unobservable market data and assumptions.
|
|
·
|
Derivative liabilities of £0.9 billion
(2014: £1.0 billion)
comprising over the counter derivatives such
as credit default swaps and inflation swaps. These swaps are valued using either discounted cash flow models or other valuation
models. Cash flows within these models may be adjusted based on assumptions reflecting the underlying credit risk and liquidity
risk and these assumptions are deemed to be non-market observable.
|
|
·
|
£0.5 billion
(2014: £0.6 billion)
of securitised mortgage loan notes, presented within Borrowings, are valued
using a similar technique to the related Level 3 securitised mortgage assets.
|
|
·
|
Remaining Level 3 liabilities amount to £0.3 billion
(2014: £nil)
and relate to a range of liabilities held
by a number of businesses throughout the Group.
|
Where possible, the Group tests the sensitivity of the fair values
of Level 3 liabilities to changes in unobservable inputs to reasonable alternatives. Sensitivities are determined by flexing inputs
of internal models to a reasonable alternative, including the yield, NAV multiple or other suitable valuation multiples of the
financial instrument implied by the third-party valuation.
On the basis of the methodology outlined above,
the Group is able to perform sensitivity analysis for £5.1 billion of the Group’s Level 3 liabilities. For these Level
3 liabilities, changing unobservable valuation inputs to a reasonable alternative would result in a change in fair value by approximately
± £0.5 billion.
(h) Assets and liabilities not carried
at fair value for which fair value is disclosed
The table below shows the fair value and fair value hierarchy
for those assets and liabilities not carried at fair value.
|
Fair value hierarchy
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total fair
value
|
2015
|
£m
|
£m
|
£m
|
£m
|
Asset and liabilities not carried at fair value
|
|
|
|
|
Loans
|
—
|
1,046
|
2,181
|
3,227
|
Borrowings
|
7,295
|
176
|
312
|
7,783
|
|
Fair value hierarchy
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total fair
value
|
2014
|
£m
|
£m
|
£m
|
£m
|
Asset and liabilities not carried at fair value
|
|
|
|
|
Loans
|
—
|
984
|
3,256
|
4,240
|
Borrowings
|
5,928
|
402
|
378
|
6,708
|
Borrowings classified as Level 1 have increased by 23% due
to the inclusion of Friends Life Group subordinated debt.
19 – Loans
This note analyses the loans our
Group companies have made, the majority of which are mortgage loans.
(a) Carrying amounts
The carrying amounts of loans at 31 December 2015 and 2014
were as follows:
|
|
|
2015
|
|
|
2014
|
|
At fair value
through profit
or loss other
than trading
£m
|
At amortised
cost
£m
|
Total
£m
|
At fair value
through profit or
loss other than
trading
£m
|
At amortised
cost
£m
|
Total
£m
|
Policy loans
|
1
|
778
|
779
|
1
|
835
|
836
|
Loans to banks
|
572
|
2,151
|
2,723
|
599
|
3,164
|
3,763
|
Healthcare, infrastructure & PFI other loans
1
|
1,246
|
—
|
1,246
|
1,107
|
—
|
1,107
|
UK securitised mortgage loans (see note 20)
|
2,452
|
—
|
2,452
|
2,406
|
—
|
2,406
|
Non-securitised mortgage loans
1
|
14,808
|
—
|
14,808
|
16,782
|
77
|
16,859
|
Loans to brokers and other intermediaries
|
—
|
135
|
135
|
—
|
123
|
123
|
Other
loans
|
—
|
290
|
290
|
—
|
166
|
166
|
Total
|
19,079
|
3,354
|
22,433
|
20,895
|
4,365
|
25,260
|
|
1
|
Following a review of classification of mortgage loans £1.1 billion in 2014 has been reclassified from Non-securitised
loans to Healthcare, Infrastructure and PFI other loans. The net impact on total loans is £nil.
|
Of the above loans, £20,948 million
(2014:
£23,771 million)
are due to be recovered in more than one year after the statement of financial position date.
Loans at fair value
Fair values have been calculated by discounting the future cash flows
using appropriate current interest rates for each portfolio of mortgages. Further details of the fair value methodology are given
in note 18.
The cumulative change in fair value of loans
attributable to changes in credit risk to 31 December 2015 was a £1,994 million loss
(2014: £3,070 million loss)
.
The significant reduction in this figure of £1,076 million
(2014: £361 million increase)
is predominantly owing
to UK Life’s commercial mortgage loans restructure and recovery programme, which completed in October 2015 with the sale
of £2.2 billion of commercial mortgage loans to Lone Star.
Non-securitised mortgage loans include £3.3
billion
(2014 Restated
1
: £3.5 billion)
relating
to UK primary healthcare and PFI businesses which are secured against General Practitioner premises, other primary health-related
premises or other emergency services related premises. For all such loans, government support is provided through either direct
funding or reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially
over the term of the loan. Although the loan principal is not government-guaranteed, the nature of these businesses and premises
provides considerable comfort of an ongoing business model and low risk of default.
Healthcare, Infrastructure and PFI other loans
of £1.2 billion
(2014 Restated
1
: £1.1 billion)
are secured against the income from healthcare and
educational premises.
Loans at amortised cost
The fair value of these loans at 31 December 2015 was £3,228
million
(2014: £4,240 million).
(b) Analysis of loans carried at amortised
cost
|
|
|
2015
|
|
|
2014
|
|
Amortised
Cost
£m
|
Impairment
£m
|
Carrying
Value
£m
|
Amortised
Cost
£m
|
Impairment
£m
|
Carrying
Value
£m
|
Policy loans
|
778
|
—
|
778
|
835
|
—
|
835
|
Loans to banks
|
2,151
|
—
|
2,151
|
3,164
|
—
|
3,164
|
Non-securitised mortgage loans
|
6
|
(6)
|
—
|
138
|
(61)
|
77
|
Loans to brokers and other intermediaries
|
135
|
—
|
135
|
123
|
—
|
123
|
Other Loans
|
290
|
—
|
290
|
166
|
—
|
166
|
Total
|
3,360
|
(6)
|
3,354
|
4,426
|
(61)
|
4,365
|
The movements in the impairment provisions on these
loans for the years ended 31 December 2015 and 2014 were as follows:
|
2015
|
2014
|
|
£m
|
£m
|
At 1 January
|
(61)
|
(151)
|
(Decrease)/increase during the year
|
(2)
|
9
|
Write back following sale or reimbursement
|
57
|
81
|
At 31 December
|
(6)
|
(61)
|
(c) Collateral
Loans to banks include cash collateral received under stock lending
arrangements (see note 55 for further discussion regarding these collateral positions). The obligation to repay this collateral
is included in payables and other financial liabilities (note 46).
The Group holds collateral in respect of loans
where it is considered appropriate in order to reduce the risk of non-recovery. This collateral generally takes the form of liens
or charges over properties and, in the case of policy loans, the underlying policy for the majority of the loan balances above.
In all other situations, the collateral must be in a readily realisable form, such as listed securities, and is held in segregated
accounts.
20 – Securitised mortgages and
related assets
The Group, in its UK Life business has loans receivable, secured by
mortgages, which have then been securitised through non-recourse borrowings. This note gives details of the relevant transactions.
(a) Description of current arrangements
In a UK long-term business subsidiary, Aviva Equity Release UK Limited
(AER), the beneficial interest in certain portfolios of lifetime mortgages has been transferred to five special purpose securitisation
companies (the ERF companies), in return for initial consideration and, at later dates, deferred consideration. The deferred consideration
represents receipts accrued within the ERF companies after meeting all their obligations to the note holders, loan providers and
other third parties in the priority of payments. The purchases of the mortgages were funded by the issue of fixed and floating
rate notes by the ERF companies.
All the shares in the ERF companies are held
by independent companies, whose shares are held on trust. Although AER does not own, directly or indirectly, any of the share capital
of the ERF companies or their parent companies, it has control of the securitisation companies, and they have therefore been treated
as subsidiaries in the consolidated financial statements. AER has no right to repurchase the benefit of any of the securitised
mortgage loans, other than in certain circumstances where AER is in breach of warranty or loans are substituted in order to effect
a further advance.
AER has purchased subordinated notes and granted
subordinated loans to some of the ERF companies. In addition, Group companies have invested in loan notes issued by the ERF companies.
These have been eliminated on consolidation through offset against the borrowings of the ERF companies in the consolidated statement
of financial position.
In all of the above transactions, the Company
and its subsidiaries are not obliged to support any losses that may be suffered by the note holders and do not intend to provide
such support. Additionally, the notes were issued on the basis that note holders are only entitled to obtain payment, of both principal
and interest, to the extent that the available resources of the respective special purpose securitisation companies, including
funds due from customers in respect of the securitised loans, are sufficient and that note holders have no recourse whatsoever
to other companies in the Aviva Group.
On 1 January 2016 a UK subsidiary, Aviva Annuity
UK Limited, securitised £4,179 million of equity release mortgages by transferring them to a wholly owned subsidiary, Aviva
ERFA 15 UK Limited. In return, Aviva Annuity UK Limited received £4,154 million of loan notes issued by Aviva ERFA 15 UK
Limited.
(b) Carrying values
The following table summarises the securitisation arrangements:
|
|
2015
|
|
2014
|
|
Securitised assets
£m
|
Securitised borrowings
£m
|
Securitised assets
£m
|
Securitised borrowings
£m
|
Securitised mortgage loans
|
|
|
|
|
At fair value (note 19)
|
2,452
|
(1,564)
|
2,406
|
(1,539)
|
Other securitisation assets/(liabilities)
|
297
|
(1,185)
|
319
|
(1,186)
|
|
2,749
|
(2,749)
|
2,725
|
(2,725)
|
Loan notes held by third parties are as follows:
|
2015
£m
|
2014
£m
|
Total loan notes issued, as above
|
1,564
|
1,539
|
Less: Loan notes held by Group companies
|
(256)
|
(167)
|
Loan notes held by third parties (note 45(c)(i))
|
1,308
|
1,372
|
21 – Interests in structured
entities
A structured entity is defined as an entity that has been
designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting
rights relate to administrative tasks only, or when the relevant activities are directed by means of contractual arrangements.
The Group has interests in both consolidated and unconsolidated structured entities as described below.
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
Initiative (PFIs).
|
|
·
|
Specialised investment vehicles include Open Ended Investment Companies (OEICs), Property Limited Partnerships (PLPs), Sociétés
d’Investissement a Capital Variable (SICAVs) and other investment vehicles.
|
The Group’s holdings in investment vehicles are subject to the
terms and conditions of the respective investment vehicle’s offering documentation and are susceptible to market price risk
arising from uncertainties about future values of those investment vehicles. The investment manager makes investment decisions
after extensive due diligence of the underlying investment vehicle including consideration of its strategy and the overall quality
of the underlying investment vehicle’s manager.
All of the investment vehicles in the investment
portfolio are managed by portfolio managers who are compensated by the respective investment vehicles for their services. Such
compensation generally consists of an asset-based fee and a performance- based incentive fee, and is reflected in the valuation
of the investment vehicles.
21 – Interests in structured
entities continued
(a) Interests in consolidated structured entities
The Group has determined that where it has control over investment
vehicles, these investments are consolidated structured entities. As at 31 December 2015 the Group has granted loans to consolidated
PLPs for a total of £174 million
(2014: £210 million).
The purpose of these loans is to assist the consolidated PLPs to purchase or construct properties within the funds business activity.
The Group has also provided support, without having a contractual obligation to do so, to certain consolidated PLPs via letters
of support amounting to £121 million
(2014: £124 million).
The Group has commitments to provide funding to consolidated structured entities of £53 million (
2014:
£9 million).
The Group has also given support to the consolidated
structured entity Aviva Equity Release UK Limited (AER). As set out in note 20, at the inception of the securitisation vehicle,
the UK subsidiary, Aviva Equity Release UK Limited (AER), has granted subordinated loan facilities to some of the ERF companies.
AER receives various fees in return for the services provided to the entities. Aviva receives cash management fees based on the
outstanding loan balance at the start of each quarter for the administration of the loan note liabilities. AER receives portfolio
administration fees as compensation for managing the mortgage assets. Refer to note 20 for details of an equity release securitisation
on 1 January 2016.
As at the reporting date, the Group has no intentions
to provide financial or other support in relation to any other investment vehicles.
(b) Interests in unconsolidated structured
entities
As part of its investment activities, the Group invests in unconsolidated
structured entities. As at 31 December 2015, the Group’s total interest in unconsolidated structured entities was £49.6
billion (
2014: £34.4 billion
) on the Group’s statement of financial position, which are classified as financial
investments held at fair value through profit or loss. The increase in the balance is due primarily to the acquisition of Friends
Life.
The Group does not sponsor any of the unconsolidated
structured entities.
As at 31 December 2015, a summary of
the Group’s interest in unconsolidated structured entities is as follows:
|
|
|
|
2015
£m
|
|
|
|
2014
£m
|
|
Interest in,
and loans to,
joint
ventures
|
Interest in,
and loans to,
associates
|
Financial
investments
|
Total assets
|
Interest in,
and loans to,
joint ventures
|
Interest in,
and loans to,
associates
|
Financial
investments
|
Total assets
|
Structured debt securities
1
|
—
|
—
|
4,260
|
4,260
|
—
|
—
|
2,549
|
2,549
|
Other investments
|
1,191
|
258
|
43,907
|
45,356
|
765
|
361
|
30,731
|
31,857
|
Analysed as:
|
|
|
|
|
|
|
|
|
Unit trust and other investment vehicles
|
—
|
—
|
42,641
|
42,641
|
—
|
—
|
29,640
|
29,640
|
PLPs and property funds
|
1,191
|
258
|
960
|
2,409
|
765
|
361
|
754
|
1,880
|
Other funds
|
—
|
—
|
306
|
306
|
—
|
—
|
337
|
337
|
Total
|
1,191
|
258
|
48,167
|
49,616
|
765
|
361
|
33,280
|
34,406
|
|
1
|
Reported within ‘other debt securities’ in note 22.
|
The Group’s maximum exposure to loss related to the interests
presented above is the carrying amount of the Group’s investments.
The majority of debt securities above are investment
grade securities held by the UK business. In some cases, the Group may be required to absorb losses from an unconsolidated structured
entity before other parties when and if Aviva’s interest is more subordinated with respect to other owners of the same security.
At 31 December 2015 the Group has granted loans
to PLPs classified as joint ventures and associates totalling £94 million
(2014:
£73 million).
This amount has been provided for the purpose of short-term liquidity funding. For commitments to
property management joint ventures and associates, please refer to Notes 14 and 15, respectively. The Group has not provided any
other financial or other support in addition to that described above as at the reporting date, and there are no intentions to provide
support in relation to any other unconsolidated structured entities in the foreseeable future.
In relation to risk management, disclosures on
debt securities and investment vehicles are given in note 53(b)(iii). In relation to other guarantees and commitments that the
Group provides in the course of its business, please refer to Note 48(f) ‘Contingent liabilities and other risk factors’.
Aviva’s interest in unconsolidated structured
entities that it also manages at 31 December 2015 is £2.3 billion
(2014:
£2.1 billion)
and the total funds under management relating to these investments at 31 December 2015 is £15.3
billion
(2014: £16.1 billion)
.
21 – Interests in structured
entities continued
(c) Other interests in unconsolidated structured
entities
The Group receives management fees and other fees in respect
of its asset management businesses. The Group does not sponsor any of the funds or investment vehicles from which it receives fees.
Management fees received for investments that the Group manages but does not have a holding in also represent an interest in unconsolidated
structured entities. As these investments are not held by the Group, the investment risk is borne by the external investors and
therefore the Group’s maximum exposure to loss relates to future management fees. The table below shows the assets under
management of entities that the Group manages but does not have a holding in and the fees earned from those entities. The reduction
in total assets under management is primarily the result of a reduction in total pension fund assets managed by Poland.
|
|
2015
|
|
2014
|
|
Assets Under
Management
£m
|
Investment
Management
Fees
£m
|
Assets Under
Management
£m
|
Investment Management
Fees
£m
|
Investment funds
1
|
7,621
|
59
|
10,251
|
92
|
Specialised investment vehicles:
|
2,886
|
11
|
2,831
|
12
|
Analysed as:
|
|
|
|
|
OEICs
|
812
|
6
|
1,185
|
5
|
PLPs
|
2,042
|
5
|
1,609
|
7
|
SICAVs
|
32
|
—
|
37
|
—
|
Total
|
10,507
|
70
|
13,082
|
104
|
|
1
|
Investment funds relate primarily to the Group’s Spanish and Polish pension funds.
|
22 – Financial investments
This note analyses our financial investments by type and shows their
cost and fair value. These will change from one period to the next as a result of new business written, claims paid and market
movements.
(a) Carrying amount
Financial investments comprise:
|
|
|
|
2015
|
|
|
|
2014
|
|
At fair value through
profit or loss
|
|
|
At fair value through
profit or loss
|
|
|
|
Trading
£m
|
Other than
trading
£m
|
Available
for sale
£m
|
Total
£m
|
Trading
£m
|
Other than
trading
£m
|
Available
for sale
£m
|
Total
£m
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
UK government
|
—
|
33,279
|
—
|
33,279
|
—
|
20,590
|
—
|
20,590
|
UK local authorities
|
—
|
18
|
—
|
18
|
—
|
18
|
—
|
18
|
Non-UK government (note 22e)
|
—
|
41,952
|
712
|
42,664
|
—
|
44,140
|
815
|
44,955
|
Corporate bonds
|
|
|
|
|
|
|
|
|
Public utilities
|
—
|
10,634
|
19
|
10,653
|
—
|
8,419
|
24
|
8,443
|
Other corporate
|
—
|
63,012
|
187
|
63,199
|
—
|
47,003
|
182
|
47,185
|
Convertibles and bonds with warrants attached
|
—
|
158
|
—
|
158
|
—
|
170
|
—
|
170
|
Other
|
—
|
10,765
|
—
|
10,765
|
—
|
8,177
|
—
|
8,177
|
|
—
|
159,818
|
918
|
160,736
|
—
|
128,517
|
1,021
|
129,538
|
Certificates of deposit
|
—
|
2,228
|
—
|
2,228
|
—
|
2,123
|
—
|
2,123
|
|
—
|
162,046
|
918
|
162,964
|
—
|
130,640
|
1,021
|
131,661
|
Equity securities
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
|
|
|
|
|
|
|
Public utilities
|
—
|
3,367
|
—
|
3,367
|
—
|
2,929
|
—
|
2,929
|
Banks, trusts and insurance companies
|
—
|
14,016
|
10
|
14,026
|
—
|
7,267
|
8
|
7,275
|
Industrial miscellaneous and all other
|
—
|
45,961
|
3
|
45,964
|
—
|
25,127
|
2
|
25,129
|
|
—
|
63,344
|
13
|
63,357
|
—
|
35,323
|
10
|
35,333
|
Non-redeemable preference shares
|
—
|
201
|
—
|
201
|
—
|
286
|
—
|
286
|
|
—
|
63,545
|
13
|
63,558
|
—
|
35,609
|
10
|
35,619
|
Other investments
|
|
|
|
|
|
|
|
|
Unit trusts and other investment vehicles
|
—
|
42,641
|
—
|
42,641
|
—
|
29,636
|
4
|
29,640
|
Derivative financial instruments (note 54)
|
3,328
|
—
|
—
|
3,328
|
4,088
|
—
|
—
|
4,088
|
Deposits with credit institutions
|
—
|
460
|
—
|
460
|
—
|
539
|
—
|
539
|
Minority holdings in property management undertakings
|
—
|
960
|
—
|
960
|
—
|
754
|
—
|
754
|
Other investments – long-term
|
—
|
305
|
—
|
305
|
—
|
335
|
1
|
336
|
Other investments – short-term
|
—
|
1
|
—
|
1
|
—
|
1
|
—
|
1
|
|
3,328
|
44,367
|
—
|
47,695
|
4,088
|
31,265
|
5
|
35,358
|
Total financial investments
|
3,328
|
269,958
|
931
|
274,217
|
4,088
|
197,514
|
1,036
|
202,638
|
Of the above total, £174,362 million
(2014:
£120,743 million)
is due to be recovered in more than one year after the statement of financial position date.
Other debt securities of £10,765 million
(2014: £8,177 million)
include residential and commercial
mortgage-backed securities, as well as other structured credit securities.
22 – Financial investments continued
(b) Cost, unrealised gains and fair value
The following is a summary of the cost/amortised cost, gross
unrealised gains and losses and fair value of financial investments:
|
|
|
|
2015
|
|
|
|
2014
|
|
Cost/amortised
cost
£m
|
Unrealised
gains
£m
|
Unrealised
losses and
impairments
£m
|
Fair value
£m
|
Cost/
amortised
cost
£m
|
Unrealised
gains
£m
|
Unrealised
losses and
impairments
£m
|
Fair value
£m
|
Fixed maturity securities
|
155,247
|
10,864
|
(3,147)
|
162,964
|
118,245
|
14,130
|
(714)
|
131,661
|
Equity securities
|
60,124
|
7,663
|
(4,229)
|
63,558
|
29,701
|
7,114
|
(1,196)
|
35,619
|
Other investments:
|
|
|
|
|
|
|
|
|
Unit trusts and other investment vehicles
|
41,620
|
2,155
|
(1,134)
|
42,641
|
27,304
|
2,152
|
184
|
29,640
|
Derivative financial instruments
|
928
|
2,698
|
(298)
|
3,328
|
917
|
3,660
|
(489)
|
4,088
|
Deposits with credit institutions
|
460
|
—
|
—
|
460
|
539
|
—
|
—
|
539
|
Minority holdings in property management undertakings
|
938
|
132
|
(110)
|
960
|
740
|
120
|
(106)
|
754
|
Other investments – long-term
|
316
|
20
|
(31)
|
305
|
344
|
22
|
(30)
|
336
|
Other investments – short-term
|
1
|
—
|
—
|
1
|
1
|
—
|
—
|
1
|
|
259,634
|
23,532
|
(8,949)
|
274,217
|
177,791
|
27,198
|
(2,351)
|
202,638
|
These are further analysed as follows:
|
|
|
|
|
|
|
|
|
At fair value through profit or loss
|
258,777
|
23,447
|
(8,938)
|
273,286
|
176,843
|
27,098
|
(2,339)
|
201,602
|
Available for sale
|
857
|
85
|
(11)
|
931
|
948
|
100
|
(12)
|
1,036
|
|
259,634
|
23,532
|
(8,949)
|
274,217
|
177,791
|
27,198
|
(2,351)
|
202,638
|
All unrealised gains and losses and impairments on financial
investments classified as fair value through profit or loss have been recognised in the income statement.
Unrealised gains and losses on financial investments
classified as at fair value through profit or loss, recognised in the income statement in the year, were a net loss of £9,586
million
(2014: £11,161 million net gain).
Of this net
loss, £1,157 million net loss
(2014: £587 million net gain)
related to financial investments designated as trading and £8,429 million net loss
(2014:
£10,574 million net gain)
related to investments designated as other than trading.
The movement in the unrealised gain/loss position
reported in the statement of financial position during the year, shown in the table above, includes foreign exchange movements
on the translation of unrealised gains and losses on financial investments held by foreign subsidiaries, which are recognised in
other comprehensive income, as well as transfers due to the realisation of gains and losses on disposal and the recognition of
impairment losses.
The total accumulated impairment provision for
financial investments classified as available-for-sale included in the table above within unrealised losses and impairments was
£9 million
(2014: £9 million).
(c) Impairment of financial investments
The movements in impairment provisions on available-for-sale
financial investments for the years ended 31 December 2015 and 2014 were as follows:
|
|
|
|
2015
|
|
|
|
2014
|
|
Fixed
maturity
securities
£m
|
Equity
securities
£m
|
Other
Investments
£m
|
Total
£m
|
Fixed maturity
securities
£m
|
Equity
securities
£m
|
Other
Investments
£m
|
Total
£m
|
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
|
—
|
—
|
(9)
|
(9)
|
—
|
—
|
(9)
|
(9)
|
22 – Financial investments continued
(d) Financial investment arrangements
(i) Stock lending arrangements
The Group has entered into stock lending arrangements in the UK and
overseas in accordance with established market conventions. The majority of the Group’s stock lending transactions occur
in the UK, where investments are lent to EEA-regulated, locally domiciled counterparties and governed by agreements written under
English law.
The Group receives collateral in order to reduce
the credit risk of these arrangements, either in the form of securities or cash. See Note 55 for further discussion regarding collateral
positions held by the Group.
(ii) Other arrangements
In carrying on its bulk purchase annuity business, the Group’s
UK Life operation is required to place certain investments in trust on behalf of the policyholders. Amounts become payable from
the trust funds to the trustees if the Group were to be in breach of its payment obligations in respect of policyholder benefits.
At 31 December 2015, £1,501 million
(2014: £1,447 million)
of financial investments were restricted in this way.
Certain financial investments are also required
to be deposited under local laws in various overseas countries as security for the holders of policies issued in those countries.
Other investments are pledged as security collateral for bank letters of credit.
(e) Non-UK Government Debt Securities
(gross of non-controlling interests)
The following is a summary of non-UK government debt by issuer
as at 31 December 2015, analysed by policyholder, participating and shareholder funds.
|
Policyholder
|
Participating
|
Shareholder
|
Total
|
Non-UK Government Debt Securities
|
2015
£m
|
2014
£m
|
2015
£m
|
2014
£m
|
2015
£m
|
2014
£m
|
2015
£m
|
2014
£m
|
Austria
|
14
|
11
|
697
|
705
|
140
|
107
|
851
|
823
|
Belgium
|
34
|
28
|
1,195
|
1,368
|
166
|
165
|
1,395
|
1,561
|
France
|
139
|
103
|
10,673
|
11,182
|
1,846
|
1,950
|
12,658
|
13,235
|
Germany
|
145
|
142
|
1,470
|
1,590
|
590
|
591
|
2,205
|
2,323
|
Greece
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Ireland
|
12
|
5
|
595
|
613
|
100
|
155
|
707
|
773
|
Italy
|
319
|
330
|
6,090
|
6,666
|
442
|
485
|
6,851
|
7,481
|
Netherlands
|
31
|
43
|
1,156
|
1,336
|
302
|
414
|
1,489
|
1,793
|
Poland
|
559
|
571
|
689
|
823
|
399
|
443
|
1,647
|
1,837
|
Portugal
|
7
|
6
|
110
|
173
|
—
|
—
|
117
|
179
|
Spain
|
98
|
104
|
1,093
|
1,263
|
636
|
694
|
1,827
|
2,061
|
European Supranational debt
|
72
|
61
|
2,798
|
2,952
|
1,760
|
1,826
|
4,630
|
4,839
|
Other European countries
|
167
|
133
|
1,107
|
1,040
|
520
|
473
|
1,794
|
1,646
|
Europe
|
1,597
|
1,537
|
27,673
|
29,711
|
6,901
|
7,303
|
36,171
|
38,551
|
Canada
|
49
|
16
|
178
|
164
|
1,917
|
2,376
|
2,144
|
2,556
|
United States
|
323
|
94
|
100
|
48
|
409
|
347
|
832
|
489
|
North America
|
372
|
110
|
278
|
212
|
2,326
|
2,723
|
2,976
|
3,045
|
Singapore
|
16
|
11
|
762
|
598
|
264
|
277
|
1,042
|
886
|
Other
|
648
|
493
|
1,752
|
1,917
|
75
|
63
|
2,475
|
2,473
|
Asia Pacific and other
|
664
|
504
|
2,514
|
2,515
|
339
|
340
|
3,517
|
3,359
|
Total
|
2,633
|
2,151
|
30,465
|
32,438
|
9,566
|
10,366
|
42,664
|
44,955
|
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.
Our direct shareholder asset exposure to government
(non-UK) debt securities amounts to £9.6 billion
(2014: £10.4
billion).
The primary exposures, relative to total shareholder (non-UK) government debt exposure, are to Canadian (20%),
French (19%), Spanish (7%), German (6%) and Italian (5%) government debt securities.
The participating funds exposure to (non-UK)
government debt amounts to £30.5 billion
(2014: £32.4 billion),
a decrease of £1.9 billion. The primary exposures, relative to total (non-UK) government debt exposures included within our
participating funds, are to the (non-UK) government debt securities of France (35%), Italy (20%), Germany (5%), Belgium (4%), Netherlands
(4%) and Spain (4%).
22 – Financial investments continued
(f) Exposure to worldwide banks – debt
securities
Direct shareholder and participating fund assets exposures
to worldwide bank debt securities (net of non-controlling interests, excluding policyholder assets)
|
Shareholder assets
|
Participating fund assets
|
2015
|
Total senior
debt
£bn
|
Total
subordinated
debt
£bn
|
Total
debt
£bn
|
Total senior
debt
£bn
|
Total subordinated
debt
£bn
|
Total
debt
£bn
|
Australia
|
0.2
|
—
|
0.2
|
0.9
|
0.2
|
1.1
|
Denmark
|
—
|
—
|
—
|
1.1
|
—
|
1.1
|
France
|
0.5
|
—
|
0.5
|
2.8
|
0.6
|
3.4
|
Germany
|
0.1
|
—
|
0.1
|
0.4
|
0.2
|
0.6
|
Ireland
|
—
|
—
|
—
|
—
|
—
|
—
|
Italy
|
0.1
|
—
|
0.1
|
0.2
|
—
|
0.2
|
Netherlands
|
0.3
|
0.2
|
0.5
|
1.2
|
0.3
|
1.5
|
Spain
|
0.7
|
—
|
0.7
|
0.7
|
0.1
|
0.8
|
Switzerland
|
—
|
—
|
—
|
1.2
|
—
|
1.2
|
United Kingdom
|
1.3
|
0.5
|
1.8
|
1.2
|
1.0
|
2.2
|
United States
|
1.0
|
0.2
|
1.2
|
1.7
|
0.1
|
1.8
|
Other
|
0.7
|
0.1
|
0.8
|
1.5
|
0.3
|
1.8
|
Total
|
4.9
|
1.0
|
5.9
|
12.9
|
2.8
|
15.7
|
2014
|
2.9
|
0.8
|
3.7
|
10.4
|
2.9
|
13.3
|
Net of non-controlling interests, our direct shareholder
assets exposure to worldwide bank debt securities is £5.9 billion (
2014: £3.7 billion
). The majority of our
holding (83%) is in senior debt. The primary exposures are to UK (31%), US (20%) and Spanish (12%) banks. Net of non-controlling
interests, our direct shareholder asset exposure to worldwide bank equity securities is £99 million
(2014: £75 million)
.
Net of non-controlling interests, the
participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and
extent of our participation within those funds, is £15.7 billion
(2014: £13.3 billion)
. The majority of the
exposure (82%) is in senior debt. Participating funds are the most exposed to French (22%), UK (14%) and US (11%) banks.
Direct shareholder and participating fund assets exposures
to worldwide bank debt securities (gross of non-controlling interests, excluding policyholder assets)
|
Shareholder assets
|
Participating fund assets
|
2015
|
Total senior
debt
£bn
|
Total
subordinated
debt
£bn
|
Total
debt
£bn
|
Total senior
debt
£bn
|
Total
subordinated
debt
£bn
|
Total
debt
£bn
|
Australia
|
0.2
|
—
|
0.2
|
0.9
|
0.3
|
1.2
|
Denmark
|
—
|
—
|
—
|
1.1
|
—
|
1.1
|
France
|
0.5
|
—
|
0.5
|
3.3
|
0.6
|
3.9
|
Germany
|
0.1
|
—
|
0.1
|
0.5
|
0.2
|
0.7
|
Ireland
|
—
|
—
|
—
|
—
|
—
|
—
|
Italy
|
0.1
|
—
|
0.1
|
0.3
|
—
|
0.3
|
Netherlands
|
0.3
|
0.2
|
0.5
|
1.2
|
0.3
|
1.5
|
Spain
|
0.8
|
—
|
0.8
|
0.8
|
0.1
|
0.9
|
Switzerland
|
—
|
—
|
—
|
1.3
|
—
|
1.3
|
United Kingdom
|
1.3
|
0.5
|
1.8
|
1.3
|
1.0
|
2.3
|
United States
|
1.0
|
0.2
|
1.2
|
1.9
|
0.1
|
2.0
|
Other
|
0.7
|
0.1
|
0.8
|
1.6
|
0.3
|
1.9
|
Total
|
5.0
|
1.0
|
6.0
|
14.2
|
2.9
|
17.1
|
2014
|
3.1
|
0.8
|
3.9
|
11.8
|
3.1
|
14.9
|
Gross of non-controlling interests, our direct shareholder
assets exposure to worldwide bank debt securities is £6.0 billion (
2014: £3.9 billion
). The majority of our
holding (83%) is in senior debt. The primary exposures are to UK (30%), US (20%) and Spanish (13%) banks. Gross of non-controlling
interests, our direct shareholder asset exposure to worldwide bank equity securities is £100 million
(2014: £75
million)
.
Gross of non-controlling interests, the participating
fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our
participation within those funds, is £17.1 billion
(2014: £14.9 billion)
. The majority of the exposure (83%)
is in senior debt. Participating funds are the most exposed to French (23%), UK (13%) and US (12%) banks.
23 – Receivables
This note analyses our total receivables.
|
2015
£m
|
2014
£m
|
Amounts owed by contract holders
|
1,546
|
1,512
|
Amounts owed by intermediaries
|
1,132
|
1,100
|
Deposits with ceding undertakings
|
1,244
|
1,322
|
Amounts due from reinsurers
|
376
|
277
|
Amounts due from brokers for investment sales
|
223
|
69
|
Amounts receivable for cash collateral pledged
|
992
|
512
|
Amounts due from government, social security and taxes
|
437
|
415
|
Dividends receivable
|
56
|
6
|
Other receivables
|
869
|
720
|
Total
|
6,875
|
5,933
|
Expected to be recovered in less than one year
|
6,773
|
5,833
|
Expected to be recovered in more than one year
|
102
|
100
|
|
6,875
|
5,933
|
Concentrations of credit risk with respect to receivables
are limited due to the size and spread of the Group’s trading base. No further credit risk provision is therefore required
in excess of provisions already recognised for doubtful receivables.
24 – Deferred acquisition costs,
other assets, prepayments and accrued income
(a) Deferred acquisition costs and other assets
– carrying amount
The carrying amount comprises:
|
2015
£m
|
2014
£m
|
Deferred acquisition costs in respect of:
|
|
|
Insurance contracts – Long-term business
|
610
|
529
|
Insurance contracts – General insurance and health business
|
812
|
852
|
Participating investment contracts – Long-term business
|
20
|
22
|
Non-participating investment contracts – Long-term business
|
1,017
|
968
|
Retail fund management business
|
5
|
7
|
Total deferred acquisition costs
|
2,464
|
2,378
|
Surpluses in the staff pension schemes (note 44(a))
|
2,523
|
2,695
|
Other assets
|
74
|
18
|
Total
|
5,061
|
5,091
|
Deferred acquisition costs (DAC) on long-term business are
generally recoverable in more than one year whereas such costs on general insurance and health business are generally recoverable
within one year. Of the above total, £1,426 million
(2014: £1,277
million)
is expected to be recovered more than one year after the statement of financial position date. For long-term
business where amortisation of the DAC balance depends on projected profits, the amount expected to be recovered is estimated and
actual experience will differ.
Surpluses in the staff pension schemes and £1
million
(2014: £1 million)
of other assets are recoverable more than one year after the statement of financial position
date.
(b) Deferred acquisition costs –
movements in the year
The movements in deferred acquisition costs (DAC) during
the year were:
|
|
|
|
2015
|
|
|
|
2014
|
|
Long-term
business
£m
|
General
insurance
and health
business
£m
|
Retail fund
management
business
£m
|
Total
£m
|
Long-term
business
£m
|
General
insurance and
health
business
£m
|
Retail fund
management
business
£m
|
Total
£m
|
Carrying amount at 1 January
|
1,519
|
852
|
7
|
2,378
|
1,525
|
868
|
10
|
2,403
|
Acquisition costs deferred during the year
|
240
|
1,952
|
—
|
2,192
|
173
|
2,107
|
—
|
2,280
|
Amortisation
|
(167)
|
(1,950)
|
(2)
|
(2,119)
|
(81)
|
(2,102)
|
(3)
|
(2,186)
|
Impact of assumption changes
|
73
|
—
|
—
|
73
|
(73)
|
—
|
—
|
(73)
|
Effect of portfolio
transfers, acquisitions and disposals
|
—
|
—
|
—
|
—
|
—
|
(4)
|
—
|
(4)
|
Foreign exchange rate movements
|
(18)
|
(42)
|
—
|
(60)
|
(25)
|
(17)
|
—
|
(42)
|
Carrying amount at 31 December
|
1,647
|
812
|
5
|
2,464
|
1,519
|
852
|
7
|
2,378
|
24 – Deferred acquisition costs,
other assets, prepayments and accrued income continued
The balance of deferred acquisition costs for long-term business increased
over 2015, as acquisition costs deferred during the year were partially offset by amortisation.
Where amortisation of the DAC balance depends
on projected profits, changes to economic conditions may lead to a movement in the DAC balance and a corresponding impact on profit.
It is estimated that the movement in the DAC balance would reduce profit by £26 million
(2014: £18 million)
if market yields on fixed income investments were to increase by 1% and increase profit by £36 million
(2014: £31
million)
if yields were to reduce by 1%. At both 31 December 2015 and at 31 December 2014 the DAC balance has been restricted
by the value of projected future profits and hence is more sensitive to changes in the value of those projected profits.
(c) Prepayments and accrued income
Prepayments and accrued income of £3,094 million
(2014: £2,466
million),
includes £88 million
(
2014: £81
million
)
that is expected to be recovered more than one year
after the statement of financial position date.
25 – Assets held to cover linked
liabilities
Certain unit-linked products have been classified as investment
contracts, while some are included within the definition of an insurance contract. The assets backing these unit-linked liabilities
are included within the relevant balances in the consolidated statement of financial position, while the liabilities are included
within insurance and investment contract provisions. This note analyses the carrying values of assets backing these liabilities.
|
2015
£m
|
2014
£m
|
Loans
|
83
|
302
|
Debt securities
|
24,022
|
13,628
|
Equity securities
|
47,394
|
26,324
|
Reinsurance assets
|
14,002
|
2,536
|
Cash and cash equivalents
|
8,705
|
3,514
|
Other
|
47,386
|
31,777
|
|
141,592
|
78,081
|
The increase during the year to £141,592 million
(2014:
£78,081 million)
is primarily due to the acquisition of Friends Life.
26 – Ordinary share capital
This note gives details of Aviva plc’s ordinary share
capital and shows the movements during the year.
|
(a)
|
Details of the Company’s ordinary share capital are as follows:
|
|
2015
£m
|
2014
£m
|
The allotted, called up and
fully paid share capital of the Company at 31 December 2015 was:
4,048,465,173
(2014: 2,950,487,340)
ordinary shares of 25 pence each
|
1,012
|
737
|
At the 2015 Annual General Meeting, the Company was authorised
to allot up to a further maximum nominal amount of:
|
·
|
£492,022,336 of which, £246,011,168 can be in connection with an offer by way of a rights issue
|
|
·
|
£100 million of new ordinary shares in relation to any issue of Solvency II compliant Tier 1 instruments
|
|
(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:
|
|
|
|
2015
|
|
|
2014
|
|
Number of shares
|
Share
Capital
£m
|
Share
Premium
£m
|
Number of shares
|
Share
Capital
£m
|
Share
Premium
£m
|
At 1 January
|
2,950,487,340
|
737
|
1,172
|
2,946,939,622
|
736
|
1,165
|
Shares issued under the Group’s Employee and Executive Share Option Schemes
|
11,651,227
|
3
|
13
|
3,547,718
|
1
|
7
|
Shares issued in relation to the acquisition of Friends Life
|
1,086,326,606
|
272
|
—
|
—
|
—
|
—
|
At 31 December
|
4,048,465,173
|
1,012
|
1,185
|
2,950,487,340
|
737
|
1,172
|
Ordinary shares in issue in the Company rank pari passu with
any new ordinary shares issued in the Company. All the ordinary shares in issue carry the same right to receive all dividends and
other distributions declared, made or paid by the Company.
27 – Group’s share plans
This note describes various equity compensation plans operated by
the Group, and shows how the Group values the options and awards of shares in the Company. Details of other share plans where shares
are acquired and held in trust for the participant from the outset are not set out here but described in the shareholder information
section of page 96.
(a) Description of the plans
The Group maintains a number of active share option and award plans
and schemes (the Group’s share plans). These are as follows:
(i) Savings-related options
These are options granted under the tax-advantaged save as you earn
(SAYE) share option scheme in the UK and Irish revenue-approved SAYE share option scheme in Ireland. The SAYE allows eligible employees
to acquire options over the Company’s shares at a discount of up to 20% of their market value at the date of grant.
Options are normally exercisable during the six-month
period following either the 3rd, 5th or 7th anniversary of the start of the relevant savings contract, subject to a statutory savings
limit, currently £500 per month. From 2012, only 3 and 5 year contracts have been offered and Aviva’s current policy
is to apply a savings limit of £250 per month in the UK and €500 per month in Ireland.
(ii) Aviva long-term incentive plan awards
These awards have been made under the Aviva long-term incentive plan
2011 (LTIP), and are described in section (b) below and in the directors’ remuneration report.
(iii) Aviva annual bonus plan awards
These awards have been made under the Aviva annual bonus plan 2011
(ABP), and are described in section (b) below and in the directors’ remuneration report.
(iv) Aviva recruitment and retention
share plan awards
These are conditional awards granted under the Aviva recruitment and
retention share award plan (RRSAP) in relation to the recruitment or retention of senior managers excluding executive directors.
The awards vest in tranches on various dates and vesting is conditional upon the participant being employed by the Group on the
vesting date and not having served notice of resignation. Some awards can be subject to performance conditions. If a participant’s
employment is terminated due to resignation or dismissal, any tranche of the award which has vested within the 12 months prior
to the termination date will be subject to clawback and any unvested tranches of the award will lapse in full.
(v) Aviva Investors long-term incentive plan awards
These awards have been made under the Aviva Investors Holdings Limited
2009 Long Term Incentive Plan (AI LTIP), a long-term profit sharing arrangement for key Aviva Investors’ employees. Awards
will vest on the 3rd anniversary of grant, subject to achieving performance conditions.
(vi) Aviva Investors deferred share award plan awards
These awards have been made under the Aviva Investors Deferred
Share Award Plan (AI DSAP), where employees can choose to have the deferred element of their bonus deferred into awards over Aviva
shares. The awards vest in three equal tranches on the 2nd, 3rd and 4th year following the year of grant.
(vii) The Aviva Chief Financial Officer Award 2014
Awards were granted to Tom Stoddard under the Aviva Chief
Financial Officer Award 2014 (Aviva CFO Award) following his recruitment to compensate Mr Stoddard for the loss from his previous
employer, on a like for like basis. The awards are described in section (b) below and in the directors’ remuneration report.
No further awards will be made under this plan.
No new Aviva plc ordinary shares will be issued
to satisfy awards made under plans iv, v, vi or vii.
(b) Outstanding options and awards
(i) Share options
At 31 December 2015, options to subscribe for ordinary shares
of 25 pence each in the Company were outstanding as follows:
Aviva savings related share option scheme
|
Option price
p
|
Number
of shares
|
Normally
exercisable
|
Option price
p
|
Number
of shares
|
Normally
exercisable
|
|
410
|
36,354
|
2015
|
268
|
3,051,213
|
2016 or 2018
|
|
316
|
157,482
|
2016
|
312
|
2,221,690
|
2016 or 2018
|
|
310
|
289,794
|
2015 or 2017
|
419
|
2,518,442
|
2017 or 2019
|
|
266
|
1,762,817
|
2015 or 2017
|
380
|
7,456,710
|
2018 or 2020
|
Aviva Ireland savings related share option scheme (in euros)
|
Option price
c
|
Number
of shares
|
Normally
exercisable
|
Option price
c
|
Number
of shares
|
Normally
exercisable
|
|
374
|
2,128
|
2015
|
369
|
93,649
|
2016 or 2018
|
|
304
|
111,470
|
2016
|
527
|
81,430
|
2017 or 2019
|
|
336
|
69,802
|
2015 or 2017
|
518
|
299,418
|
2018 or 2020
|
27 – Group’s share plans
continued
The following table summarises information about options
outstanding at 31 December 2015:
Range of exercise prices
|
Outstanding
options
Number
|
Weighted average
remaining
contractual life
Years
|
Weighted average
exercise price
p
|
£2.66 – £3.65
|
7,760,045
|
2
|
283.21
|
£3.66 – £4.64
|
10,392,354
|
4
|
389.86
|
£4.65 – £5.63
|
—
|
—
|
—
|
The comparative figures as at 31 December 2014 were:
Range of exercise prices
|
Outstanding
options
Number
|
Weighted average
remaining
contractual life
Years
|
Weighted average
exercise price
p
|
£2.66 – £3.65
|
13,176,872
|
2
|
280.26
|
£3.66 – £4.64
|
4,031,026
|
4
|
418.85
|
£4.65 – £5.63
|
33,636
|
—
|
563.00
|
(ii) Share awards
At 31 December 2015, awards issued under the Company’s
executive incentive plans over ordinary shares of 25 pence each in the Company were outstanding as follows:
Aviva long-term incentive plan 2011
|
Number of shares
|
Year of vesting
|
|
9,627,862
|
2016
|
|
7,628,744
|
2017
|
|
9,113,030
|
2018
|
Aviva annual bonus plan 2011
|
Number of shares
|
Year of vesting
|
|
3,045,795
|
2016
|
|
2,305,523
|
2017
|
|
2,932,551
|
2018
|
Aviva recruitment and retention share award plan
|
Number of shares
|
Year of vesting
|
|
830,806
|
2016
|
|
879,867
|
2017
|
|
106,838
|
2018
|
|
3,992
|
2019
|
Aviva Investors Holdings Limited 2009 long-term incentive plan
|
Number of shares
|
Year of vesting
|
|
346,677
|
2016
|
Aviva Investors deferred share award plan
|
Number of shares
|
Year of vesting
|
|
37,053
|
2016
|
|
37,053
|
2017
|
|
11,571
|
2018
|
|
|
|
The Aviva Chief Financial Officer Award 2014
|
Number of shares
|
Year of vesting
|
|
47,151
|
2016
|
|
98,232
|
2017
|
The vesting of awards under the ABP is subject to the attainment
of performance conditions as described in the directors’ remuneration report.
No performance conditions are attached to the awards
under the ABP, AI DSAP, Aviva CFO Award or some of the awards under the RRSAP except as outlined below. Under the RRSAP, some shares
are subject to the attainment of the same performance conditions that apply to the LTIP grants as follows:
|
·
|
321,330 of the shares which vest in 2016 are linked to the same performance conditions that apply to the 2013 grant.
|
|
-
|
96,238 of the shares which vest in 2016 are subject to the performance conditions relating to the performance of the participant’s
previous employer.
|
|
·
|
561,887 of the shares which vest in 2017 are linked to the same performance conditions that apply to the 2014 grant
|
|
-
|
22,222 of the shares which vest in 2017 are subject to the performance conditions relating to the performance of the participant’s
previous employer.
|
|
·
|
39,349 of the shares which vest in 2018 are linked to the same performance conditions that apply to the 2015 grant.
|
|
-
|
22,222 of the shares which vest in 2018 are subject to the performance conditions relating to the performance of the participant’s
previous employer.
|
These performance conditions are as outlined in
the relevant year’s directors’ remuneration report.
The vesting of the awards under the AI LTIP are
subject to Aviva Investors Holdings Limited achieving a return on capital employed (ROCE) of 27% per annum over a three year performance
period.
Shares which do not vest will lapse.
27 – Group’s share plans continued
(iii) Shares to satisfy awards and options
New issue shares are now generally used to satisfy all awards
and options granted under plans that have received shareholder approval and where local regulations permit. Further details are
given in note 28.
(c) Movements in the year
A summary of the status of the option plans as at 31 December
2014 and 2015, and changes during the years ended on those dates, is shown below.
|
2015
|
|
|
2014
|
|
Number of options
|
Weighted
average
exercise
price
p
|
Number of options
|
Weighted
average
exercise
price
p
|
Outstanding at 1 January
|
17,241,534
|
313.21
|
20,069,848
|
286.18
|
Granted during the year
|
7,810,302
|
380.00
|
3,994,548
|
419.00
|
Exercised during the year
|
(5,011,905)
|
275.90
|
(4,626,781)
|
282.30
|
Forfeited during the year
|
(323,950)
|
341.43
|
(1,028,382)
|
277.24
|
Cancelled during the year
|
(1,446,795)
|
401.38
|
(490,267)
|
298.10
|
Expired during the year
|
(116,787)
|
383.40
|
(677,432)
|
412.83
|
Outstanding at 31 December
|
18,152,399
|
344.27
|
17,241,534
|
313.21
|
Exercisable at 31 December
|
1,146,249
|
278.53
|
2,277,929
|
283.83
|
(d) Expense charged to the income
statement
The total expense recognised for the year arising from equity
compensation plans was as follows:
|
2015
£m
|
2014
£m
|
2013
£m
|
Equity-settled expense
|
40
|
39
|
37
|
Cash-settled expense
|
8
|
1
|
2
|
Total
|
48
|
40
|
39
|
(e) Fair value of options and awards
granted after 7 November 2002
The weighted average fair values of options and awards granted during
the year, estimated by using the Binomial option pricing model and Monte Carlo Simulation model, were £0.88 and £4.49
(2014: £1.47 and £4.19)
respectively.
(i) Share options
The fair value of the options was estimated on the date of
grant, based on the following weighted average assumptions:
Weighted average assumption
|
2015
|
2014
|
Share price
|
453p
|
524p
|
Exercise price
|
380p
|
419p
|
Expected volatility
|
26%
|
32%
|
Expected life
|
3.69 years
|
3.73 years
|
Expected dividend yield
|
3.99%
|
2.91%
|
Risk-free interest rate
|
0.94%
|
1.42%
|
The expected volatility used was based on the historical
volatility of the share price over a period equivalent to the expected life of the option prior to its date of grant. The risk-free
interest rate was based on the yields available on UK government bonds as at the date of grant. The bonds chosen were those with
a similar remaining term to the expected life of the options. 5,011,905 options granted after 7 November 2002 were exercised during
the year
(2014: 4,626,781).
(ii) Share awards
The fair value of the awards was estimated on the date of
grant based on the following weighted average assumptions:
Weighted average assumption
|
2015
|
2014
|
Share price
|
560p
|
484p
|
Expected volatility
1
|
25%
|
33%
|
Expected volatility of comparator companies’ share price
1
|
22%
|
29%
|
Correlation between Aviva and comparator competitors’ share price
1
|
44%
|
58%
|
Expected life
1
|
2.85 years
|
2.83 years
|
Expected dividend yield
2
|
3.20%
|
2.94%
|
Risk-free interest rate
1
|
0.56%
|
0.75%
|
|
1
|
For awards with market-based performance conditions.
|
|
2
|
The majority of awards with market based performance conditions include additional shares being provided to employees equal
to dividend rights before vesting. As a result, no dividend yield assumption is required on these awards.
|
The expected volatility used was based on the historical volatility
of the share price over a period equivalent to the expected life of the share award prior to its date of grant. The risk-free interest
rate was based on the yields available on UK government bonds as at the date of grant. The bonds chosen were those with a similar
remaining term to the expected life of the share awards.
28 – Treasury shares
The following table summarises information about treasury
shares at 31 December 2015:
|
|
2015
|
|
2014
|
|
2013
|
|
Number
|
£m
|
Number
|
£m
|
Number
|
£m
|
Shared held by employee trusts
|
1,918,088
|
2
|
2,585,824
|
8
|
8,561,382
|
31
|
Shares held by subsidiary companies
|
5,258,525
|
27
|
—
|
—
|
—
|
—
|
|
7,176,613
|
29
|
2,585,824
|
8
|
8,561,382
|
31
|
(a) Shares held by employee trusts
Prior to 2014, we satisfied awards and options granted under
the Group’s share plans primarily through shares purchased in the market and held by employee share trusts. From 2014 we
primarily issue new shares except where it is necessary to use shares held by an employee share trust. In 2015 however, new shares
were issued to the trust, in order to facilitate the release of shares. This note gives details of the shares held in these trusts.
Movements in the carrying value of shares held by employee trusts comprise:
|
|
2015
|
|
2014
|
|
2013
|
|
Number
|
£m
|
Number
|
£m
|
Number
|
£m
|
Cost debited to shareholders’ funds
|
|
|
|
|
|
|
At 1 January
|
2,585,824
|
8
|
8,561,382
|
31
|
10,053,515
|
32
|
Acquired in the year
|
5,790,872
|
1
|
19,603
|
—
|
7,863,726
|
32
|
Distributed in the year
|
(6,458,608)
|
(7)
|
(5,995,161)
|
(23)
|
(9,355,859)
|
(33)
|
Balance at 31 December
|
1,918,088
|
2
|
2,585,824
|
8
|
8,561,382
|
31
|
The shares are owned by employee share trusts with an undertaking
to satisfy awards of shares in the Company under the Company’s share plans and schemes. Details of the features of the plans
can be found in the directors’ remuneration report and/or in note 27.
These shares were either purchased in the market
or, in 2015, new shares were issued to the trust and are carried at weighted average cost. At 31 December 2015, they had an aggregate
nominal value of £479,522
(2014: £
646,456
)
and a market value of £9,897,334
(2014: £12,528,317).
The trustees have waived their rights to dividends on the shares held in the trusts.
(b) Shares held by subsidiary companies
During 2015, the Group acquired Friends Life, which holds shares in
Aviva plc. The cost of these shares is included within treasury shares and deducted from total shareholders’ equity in accordance
with accounting policy AE. At 31 December 2015, the balance of 5,258,525 shares
(2014: nil)
had an aggregate nominal value
of £1,314,631
(2014: £nil)
and a market value of £27,133,991
(2014: £nil)
.
29 – Preference share capital
This note gives details of Aviva plc’s preference share capital.
The preference share capital of the Company
at 31 December was:
|
2015
£m
|
2014
£m
|
Issued and paid up
|
|
|
100,000,000 8.375% cumulative irredeemable preference shares of £1 each
|
100
|
100
|
100,000,000 8.75% cumulative irredeemable preference shares of £1 each
|
100
|
100
|
|
200
|
200
|
The issued preference shares are non-voting except where
their dividends are in arrears, on a winding up or where their rights are altered.
On a winding up, they carry a preferential
right of return of capital ahead of the ordinary shares. Holders are entitled to receive dividends out of the profits available
for distribution and resolved to be distributed in priority to the payment of dividends to holders of ordinary shares. The Company
does not have a contractual obligation to deliver cash or other financial assets to the preference shareholders and therefore the
directors may make dividend payments at their discretion.
At the 2015 Annual General Meeting, the Company was authorised
to allot the following:
|
·
|
Sterling New Preference Shares, as defined in the Company’s articles of association, up to a maximum nominal value of
£500 million
|
30 – Direct capital instrument
and tier 1 notes
Notional amount
|
2015
£m
|
2014
£m
|
5.9021% £500 million direct capital instrument – issued November 2004
|
500
|
500
|
Direct capital instrument
|
500
|
500
|
8.25% US $650 million fixed rate tier 1 notes – issued May 2012
|
392
|
392
|
6.875% £210 million STICS – issued November 2003 (note 34)
|
231
|
—
|
Total tier 1 notes
|
623
|
392
|
|
1,123
|
892
|
The direct capital instrument (the DCI) was issued on 25
November 2004 and qualifies as Innovative Tier 1 capital, as defined by the PRA in GENPRU Annex 1 ‘Capital Resources’
as at 31 December 2015. The DCI has no fixed redemption date but the Company may, at its sole option, redeem all (but not part)
of the principal amount on 27 July 2020, at which date the interest rate changes to a variable rate, or on any respective coupon
payment date thereafter. The variable rate will be the six month sterling deposit rate plus margin.
The fixed rate tier 1 notes (the FxdRNs) were
issued on 3 May 2012 and also qualify as Innovative Tier 1 capital as at 31 December 2015. The FxdRNs are perpetual but the Company
may, at its sole option, redeem all (but not part) of the FxdRNs at their principal amounts on 3 November 2017, or on any respective
coupon payment date thereafter.
The Step-up Tier one Insurance Capital Securities
(‘STICS’) were issued on 21 November 2003 by Friends Life Holdings plc, and also qualify as innovative tier 1 capital
as at 31 December 2015. The STICS are irrevocably guaranteed on a subordinated basis by Friends Life Limited. On 1 October 2015
Aviva plc replaced Friends Life Holdings plc as issuer which resulted in a reclassification of the STICS from non-controlling interests.
The STICS have no fixed redemption date but the Company may, at its sole option, redeem the instrument (in whole or in part) on
21 November 2019, or on the coupon payment date falling on successive fifth anniversaries from this date. For each coupon period
beginning 21 November 2019, the STICS will bear interest reset every five years at the rate per annum which is the aggregate of
2.97% and the Gross Redemption Yield of the Benchmark Gilt.
The Company has the option to defer coupon payments
on the DCI, FxdRNs or STICS on any relevant payment date.
In relation to the DCI, deferred coupons shall
only be satisfied should the Company exercise its sole option to redeem the instruments.
In relation to the FxdRNs, deferred coupons may
be satisfied at any time, at the sole option of the Company. The Company is required to satisfy deferred coupons on the FxdRNs
upon redemption.
In relation to the STICS, deferred coupons may
be satisfied at any time, at the sole option of the Company. The Company is required to satisfy deferred coupons upon the earliest
of the following:
|
·
|
Resumption of payment of coupons on the STICS; or
|
|
·
|
The commencement of winding up of the issuer.
|
No interest will accrue on any deferred coupon on the DCI or FxdRNs.
Interest will accrue on deferred coupons on the STICS at the then current rate of interest on the STICS.
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.
31 – Merger reserve
Prior to 1 January 2004, certain significant business combinations
were accounted for using the ‘pooling of interests method’ (or merger accounting), which treats the merged groups as
if they had been combined throughout the current and comparative accounting periods. Merger accounting principles for these combinations
gave rise to a merger reserve in the consolidated statement of financial position, being the difference between the nominal value
of new shares issued by the Parent Company for the acquisition of the shares of the subsidiary and the subsidiary’s own share
capital and share premium account.
The merger reserve is also used where more than
90% of the shares in a subsidiary are acquired and the consideration includes the issue of new shares by the Company, thereby attracting
merger relief under the Companies Act 1985 and, from 1 October 2009, the Companies Act 2006.
During 2015, the balance of the merger reserve
has increased by £5,703 million to £8,974 million
(2014:
£3,271 million)
due to the acquisition of Friends Life which attracted merger relief under section 612 of the Companies Act
2006. Refer to note 2(a) for further details regarding the acquisition of Friends Life.
32 – 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
|
Owner
occupied
properties
reserve (see
accounting
policy P)
£m
|
Investment
valuation
reserve (see
accounting
policy T)
£m
|
Hedging
instruments
reserve (see
accounting
policy U)
£m
|
Equity
compensation
reserve (see
accounting
policy AB)
£m
|
Total
£m
|
Balance at 1 January 2013
|
1,272
|
77
|
855
|
(589)
|
60
|
1,675
|
Arising in the year through other comprehensive income:
|
|
|
|
|
|
|
Fair value losses
|
—
|
(2)
|
(196)
|
—
|
—
|
(198)
|
Fair value gains transferred to profit on disposals
|
—
|
—
|
(280)
|
—
|
—
|
(280)
|
Share of other comprehensive income of joint ventures and associates
|
—
|
—
|
(37)
|
—
|
—
|
(37)
|
Impairment losses on assets previously revalued directly through other comprehensive income now taken to income statement
|
—
|
—
|
12
|
—
|
—
|
12
|
Foreign exchange rate movements
|
(34)
|
—
|
—
|
(39)
|
—
|
(73)
|
Aggregate tax effect – shareholders’ tax
|
(6)
|
—
|
161
|
—
|
—
|
155
|
Total other comprehensive income for the year
|
(40)
|
(2)
|
(340)
|
(39)
|
—
|
(421)
|
Tax transferred to income statement
|
30
|
—
|
—
|
—
|
—
|
30
|
Transfer to profit on disposal of subsidiaries, joint ventures and associates
|
(355)
|
(1)
|
(497)
|
50
|
—
|
(803)
|
Reserves credit for equity compensation plans
|
—
|
—
|
—
|
—
|
37
|
37
|
Shares issued under equity compensation plans
|
—
|
—
|
—
|
—
|
(43)
|
(43)
|
Balance at 1 January 2014
|
907
|
74
|
18
|
(578)
|
54
|
475
|
Arising in the year through other comprehensive income:
|
|
|
|
|
|
|
Fair value gains
|
—
|
7
|
62
|
—
|
—
|
69
|
Fair value gains transferred to profit on disposals
|
—
|
—
|
(7)
|
—
|
—
|
(7)
|
Share of other comprehensive income of joint ventures and associates
|
—
|
—
|
22
|
—
|
—
|
22
|
Foreign exchange rate movements
|
(373)
|
—
|
—
|
56
|
—
|
(317)
|
Aggregate tax effect – shareholders’ tax
|
12
|
—
|
(21)
|
—
|
—
|
(9)
|
Total other comprehensive income for the year
|
(361)
|
7
|
56
|
56
|
—
|
(242)
|
Fair value gains transferred to retained earnings on disposals
|
—
|
(2)
|
—
|
—
|
—
|
(2)
|
Transfer to profit on disposal of subsidiaries, joint ventures and associates
|
(12)
|
(2)
|
1
|
—
|
—
|
(13)
|
Reserves credit for equity compensation plans
|
—
|
—
|
—
|
—
|
39
|
39
|
Shares
issued under equity compensation plans
|
—
|
—
|
—
|
—
|
(28)
|
(28)
|
Balance at 31 December 2014
|
534
|
77
|
75
|
(522)
|
65
|
229
|
Arising in the year through other comprehensive income:
|
|
|
|
|
|
|
Fair value gains
|
—
|
27
|
(9)
|
—
|
—
|
18
|
Fair value gains transferred to profit on disposals
|
—
|
—
|
—
|
—
|
—
|
—
|
Share of other comprehensive income of joint ventures and associates
|
—
|
—
|
(14)
|
—
|
—
|
(14)
|
Foreign exchange rate movements
|
(377)
|
—
|
—
|
44
|
—
|
(333)
|
Aggregate
tax effect – shareholders’ tax
|
7
|
—
|
6
|
—
|
—
|
13
|
Total other comprehensive income for the year
|
(370)
|
27
|
(17)
|
44
|
—
|
(316)
|
Fair value gains transferred to retained earnings on disposals
|
—
|
(33)
|
—
|
—
|
—
|
(33)
|
Transfer to profit on disposal of subsidiaries, joint ventures and associates
|
1
|
—
|
—
|
—
|
—
|
1
|
Reserves credit for equity compensation plans
|
—
|
—
|
—
|
—
|
40
|
40
|
Shares
issued under equity compensation plans
|
—
|
—
|
—
|
—
|
(35)
|
(35)
|
Balance at 31 December 2015
|
165
|
71
|
58
|
(478)
|
70
|
(114)
|
33 – Retained earnings
This note analyses the movements in the consolidated retained
earnings during the year.
|
2015
£m
|
2014
£m
|
2013
£m
|
Balance at 1 January
|
4,617
|
2,348
|
1,389
|
Profit for the year attributable to equity shareholders
|
918
|
1,569
|
2,008
|
Remeasurements of pension schemes
|
(235)
|
1,662
|
(674)
|
Dividends and appropriations (note 11)
|
(724)
|
(551)
|
(538)
|
Net shares issued under equity compensation plans
|
19
|
6
|
15
|
Realised loss on redemption of direct capital instrument
|
—
|
(57)
|
—
|
Effect of changes in non-controlling interests in existing subsidiaries
|
—
|
(36)
|
—
|
Fair value gains realised from other reserves
|
33
|
2
|
—
|
Transfer from other reserves on disposal of subsidiaries, joint ventures and associates
|
—
|
2
|
1
|
Aggregate tax effect
|
108
|
(328)
|
147
|
Balance at 31 December
|
4,736
|
4,617
|
2,348
|
The Group’s regulated subsidiaries are required to
hold sufficient capital to meet acceptable solvency levels based on applicable local regulations. Their ability to transfer retained
earnings to the UK parent companies is therefore restricted to the extent these earnings form part of local regulatory capital.
34 – Non-controlling interests
This note gives details of the Group’s non-controlling
interests and shows the movements during the year.
Non-controlling interests at 31 December
comprised:
|
2015
£m
|
2014
£m
|
2013
£m
|
Equity shares in subsidiaries
|
447
|
472
|
641
|
Share of earnings
|
222
|
202
|
321
|
Share of other reserves
|
226
|
242
|
259
|
|
895
|
916
|
1,221
|
Preference shares in General Accident plc
|
250
|
250
|
250
|
|
1,145
|
1,166
|
1,471
|
Movements in the year comprised:
|
2015
£m
|
2014
£m
|
2013
£m
|
Balance at 1 January
|
1,166
|
1,471
|
1,574
|
Profit for the year attributable to non-controlling interests
|
161
|
169
|
143
|
Foreign exchange rate movements
|
(45)
|
(79)
|
34
|
Total comprehensive income attributable to non-controlling interests
|
116
|
90
|
177
|
Capital contributions from non-controlling interests
|
5
|
—
|
1
|
Non-controlling interests share of dividends declared in the year
|
(142)
|
(189)
|
(134)
|
Non-controlling interests in acquired subsidiaries
1
|
504
|
—
|
—
|
Reclassification
of non-controlling interests to liabilities
2
|
(272)
|
—
|
—
|
Reclassification
of non-controlling interests to DCI and Tier 1 notes (note 30)
|
(231)
|
—
|
—
|
Changes
in non-controlling interests in subsidiaries
|
(1)
|
(206)
|
(147)
|
Balance at 31 December
|
1,145
|
1,166
|
1,471
|
|
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 2a 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 Group has no subsidiaries whose non-controlling interest
(NCI) is material on the basis of their share of profit or loss.
35 – Contract liabilities and associated
reinsurance
The following notes explain how the Group calculates its liabilities
to policyholders for insurance and investment products it has sold to them. Notes 36 and 37 cover these liabilities and note 38
details the financial guarantees and options given for some of these products. Note 39 details the reinsurance recoverables on
these liabilities while note 40 shows the effects of changes in the assumptions.
The following is a summary of the contract
provisions and related reinsurance assets as at 31 December.
|
|
|
2015
|
|
|
2014
|
|
Gross
provisions
1
£m
|
Reinsurance
assets
2
£m
|
Net
£m
|
Gross
provisions
£m
|
Reinsurance
assets
£m
|
Net
£m
|
Long-term business
|
|
|
|
|
|
|
Insurance contracts
|
(125,348)
|
5,018
|
(120,330)
|
(98,110)
|
4,032
|
(94,078)
|
Participating investment contracts
|
(78,048)
|
11
|
(78,037)
|
(67,232)
|
3
|
(67,229)
|
Non-participating investment contracts
|
(103,125)
|
13,967
|
(89,158)
|
(50,013)
|
2,533
|
(47,480)
|
|
(306,521)
|
18,996
|
(287,525)
|
(215,355)
|
6,568
|
(208,787)
|
Outstanding claims provisions
|
|
|
|
|
|
|
Long-term business
|
(1,702)
|
38
|
(1,664)
|
(1,343)
|
43
|
(1,300)
|
General insurance and health
|
(7,063)
|
988
|
(6,075)
|
(7,298)
|
724
|
(6,574)
|
|
(8,765)
|
1,026
|
(7,739)
|
(8,641)
|
767
|
(7,874)
|
Provisions for claims incurred but not reported
|
(2,383)
|
607
|
(1,776)
|
(2,578)
|
373
|
(2,205)
|
|
(317,669)
|
20,629
|
(297,040)
|
(226,574)
|
7,708
|
(218,866)
|
Provision for unearned premiums
|
(4,048)
|
289
|
(3,759)
|
(4,107)
|
250
|
(3,857)
|
Provision arising from liability adequacy tests
3
|
(12)
|
—
|
(12)
|
(10)
|
—
|
(10)
|
Total
|
(321,729)
|
20,918
|
(300,811)
|
(230,691)
|
7,958
|
(222,733)
|
Less: Amounts classified as held for sale
|
—
|
—
|
—
|
1
|
—
|
1
|
|
(321,729)
|
20,918
|
(300,811)
|
(230,690)
|
7,958
|
(222,732)
|
|
1
|
Total gross provisions at 31 December 2015 for long-term business includes £95,338 million for Friends Life business.
|
|
2
|
Reinsurance assets at 31 December 2015 for General insurance and health business include the impact of the £659 million
reinsurance asset recognised on completion of an outward reinsurance contract by the UK general insurance business, which provides
significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks. Reinsurance
assets at 31 December 2015 for long-term business include £11,927 million for Friends Life business.
|
|
3
|
Provision arising from liability adequacy tests relates to general insurance business only. Liability adequacy test provisions
for life operations are included in other line items.
|
36 – Insurance liabilities
This note analyses the Group insurance contract liabilities by type
of product and describes how the Group calculates these liabilities and the assumptions used.
(a) Carrying amount
(i) Insurance liabilities (gross of reinsurance) at
31 December comprise:
|
|
|
2015
|
|
|
2014
|
|
Long-term
business
£m
|
General
insurance
and health
£m
|
Total
£m
|
Long-term
business
£m
|
General
insurance and
health
£m
|
Total
£m
|
Long-term business provisions
|
|
|
|
|
|
|
Participating
|
53,875
|
—
|
53,875
|
44,834
|
—
|
44,834
|
Unit-linked non-participating
|
14,768
|
—
|
14,768
|
7,963
|
—
|
7,963
|
Other non-participating
|
56,705
|
—
|
56,705
|
45,313
|
—
|
45,313
|
|
125,348
|
—
|
125,348
|
98,110
|
—
|
98,110
|
Outstanding claims provisions
|
1,702
|
7,063
|
8,765
|
1,343
|
7,298
|
8,641
|
Provision for claims incurred but not reported
|
—
|
2,383
|
2,383
|
—
|
2,578
|
2,578
|
|
1,702
|
9,446
|
11,148
|
1,343
|
9,876
|
11,219
|
Provision for unearned premiums
|
—
|
4,048
|
4,048
|
—
|
4,107
|
4,107
|
Provision arising from liability adequacy tests
|
—
|
12
|
12
|
—
|
10
|
10
|
Total
|
127,050
|
13,506
|
140,556
|
99,453
|
13,993
|
113,446
|
Less: Amounts classified as held for sale
|
—
|
—
|
—
|
—
|
(1)
|
(1)
|
|
127,050
|
13,506
|
140,556
|
99,453
|
13,992
|
113,445
|
(ii) Change in insurance liabilities recognised as
an expense
The purpose of the following table is to reconcile the change
in insurance liabilities, net of reinsurance, shown on the income statement, to the change in insurance liabilities recognised
as an expense in the relevant movement tables in this note. The components of the reconciliation are the change in provision for
outstanding claims on long-term business (which is not included in a separate movement table), and the unwind of discounting on
GI reserves (which is included within finance costs within the income statement). For general insurance and health business, the
change in the provision for unearned premiums is not included in the reconciliation, as within the income statement, this is included
within earned premiums.
2015
|
Gross
£m
|
Reinsurance
1
£m
|
Net
£m
|
Long-term business liabilities
|
|
|
|
Change in long-term business provisions (note 36b(iv))
|
(6,640)
|
252
|
(6,388)
|
Change in provision for outstanding claims
|
179
|
4
|
183
|
|
(6,461)
|
256
|
(6,205)
|
General insurance and health liabilities
|
|
|
|
Change in insurance liabilities (note 36c(iv) and 39c(ii))
|
29
|
(504)
|
(475)
|
Less: Unwind of discount on GI reserves and other
|
(10)
|
9
|
(1)
|
|
19
|
(495)
|
(476)
|
Total change in insurance liabilities (note 5)
|
(6,442)
|
(239)
|
(6,681)
|
|
1
|
The change in reinsurance assets for general insurance and health business includes the impact of the £659 million reinsurance
asset recognised on completion of an outward reinsurance contract by the UK general insurance business, which provides significant
protection against claims volatility from mesothelioma, industrial deafness and other long tail risks.
|
2014
|
Gross
£m
|
Reinsurance £m
|
Net
£m
|
Long-term business liabilities
|
|
|
|
Change in long-term
business provisions (note 36b(iv))
|
5,847
|
(376)
|
5,471
|
Change in provision for outstanding claims
|
128
|
4
|
132
|
|
5,975
|
(372)
|
5,603
|
General insurance and health liabilities
|
|
|
|
Change in insurance
liabilities (note 36c(iv) and 39c(ii))
|
(76)
|
49
|
(27)
|
Less: Unwind of discount on GI reserves and other
|
(9)
|
3
|
(6)
|
|
(85)
|
52
|
(33)
|
Total change in insurance liabilities (note 5)
|
5,890
|
(320)
|
5,570
|
36 – Insurance liabilities continued
(b) Long-term business liabilities
(i) Business description
The Group underwrites long-term business in a number of countries
as follows:
|
-
|
New With-Profits Sub-Fund (NWPSF) of Aviva Life & Pensions UK (UKLAP), where the with-profit policyholders are entitled
to at least 90% of the distributed profits, with the shareholders receiving the balance. Any surplus or deficit emerging in NWPSF
that is not distributed as bonus will be transferred from this sub-fund to the Reattributed Inherited Estate External Support Account
(RIEESA) (see below).
|
|
-
|
Old With-Profits Sub-Fund (OWPSF), With-Profits Sub-Fund (WPSF) and Provident Mutual Sub-Fund (PMSF) of UKLAP, where the with-profit
policyholders are entitled to at least 90% of the distributed profits, with the shareholders receiving the balance.
|
|
-
|
‘Non-profit’ funds of Aviva Annuity UK, UKLAP, Friends Life Limited and Friends Life and Pensions Limited, where
shareholders are entitled to 100% of the distributed profits. Shareholder profits on unitised with-profit business written by WPSF
and on stakeholder unitised with-profit business are derived from management fees and policy charges, and emerge in the non-profit
funds.
|
|
-
|
The RIEESA of UKLAP, which is a non-profit fund where shareholders are entitled to 100% of the distributed profits, but these
cannot be distributed until the ‘lock-in’ criteria set by the Reattribution Scheme have been met. The RIEESA has been
used to write non-profit business and also to provide capital support to NWPSF.
|
|
-
|
The Friends Provident With-Profits Fund (FP WPF) where shareholders are entitled to 10% of the distributed profits, plus 60%
of the surplus arising on pre-demutualisation non-profit and unitised business and non-investment sources of surplus on policies
held by post-demutualisation policyholders. The Friends Provident demutualisation occurred in 2001.
|
|
-
|
The Friends Provident Life Assurance Limited With-Profits Fund (FPLAL WPF), which is closed to new business and where policyholders
are entitled to 100% of the distributed profits.
|
|
-
|
The Friends Life Company Limited New With-Profits Fund (FLC New WPF), the Friends Life Company Limited Old With-Profits Fund
(FLC Old WPF), the Friends Life WL Limited (formally known as Winterthur Life UK Limited) With-Profits Fund (WL WPF) and Friends
Life Assurance Society With-Profits Fund (FLAS WPF) which are closed to new business and where policyholders are entitled to 90%
of the distributed profits aside from certain policies in the FLC New WPF and the FLC Old WPF with guaranteed bonus rates, where
the shareholders do not receive one-ninth of the bonus.
|
|
·
|
In France, the majority of policyholders’ benefits are determined by investment performance, subject to certain guarantees,
and shareholders’ profits are derived largely from management fees. In addition, a substantial number of policies participate
in investment returns, with the balance being attributable to shareholders.
|
|
·
|
In other operations in Europe and Asia, a range of long-term insurance and savings products are written.
|
(ii) Group practice
The long-term business provision is calculated separately for each
of the Group’s life operations. The provisions for overseas subsidiaries have generally been included on the basis of local
regulatory requirements, modified where necessary to reflect the requirements of the Companies Act 2006.
Material judgement is required in calculating
the provisions and is exercised particularly through the choice of assumptions where discretion is permitted. In turn, the assumptions
used depend on the circumstances prevailing in each of the life operations. Provisions are most sensitive to assumptions regarding
discount rates and mortality/morbidity rates. Where discount rate assumptions are based on current market yields on fixed interest
securities, allowance is made for default risk implicit in the yields on the underlying assets.
Bonuses paid during the year are reflected in
claims paid, whereas those allocated as part of the bonus declaration are included in the movements in the long-term business provision.
For UK with-profit life funds falling
within the scope of the PRA realistic capital regime, and hence FRS 27, an amount is recognised for the present value of future
profits (PVFP) on non-participating business written in a with-profit fund where the determination of the realistic value of liabilities
in that with-profit fund takes account, directly or indirectly, of this value. For our UK with-profit funds, other than FLAS, FLC
and WL WPFs, no adjustment for this value is made to the participating insurance and investment contract liabilities or the unallocated
divisible surplus. For FLAS, FLC and WL WPFs the non-profit PVFP is offset against the related participating insurance and investment
contract liabilities.
(iii) Methodology and assumptions
There are two main methods of actuarial valuation of liabilities arising
under long-term insurance contracts – the net premium method and the gross premium method – both of which involve the
discounting of projected premiums and claims.
Under the net premium method, the premium taken
into account in calculating the provision is determined actuarially, based on the valuation assumptions regarding discount rates,
mortality and disability. The difference between this premium and the actual premium payable provides a margin for expenses. This
method does not allow for voluntary early termination of the contract by the policyholder, and so no assumption is required for
persistency.
The gross premium method uses the amount of contractual
premiums payable and includes explicit assumptions for interest and discount rates, mortality and morbidity, persistency and future
expenses. These assumptions can vary by contract type and reflect current and expected future experience.
36 – Insurance liabilities continued
(a) UK
With-profit business
The valuation of with-profit business uses the methodology developed
for the Realistic Balance Sheet, adjusted to remove the shareholders’ share of future bonuses. The key elements of the Realistic
Balance Sheet methodology are the with-profit benefit reserve (WPBR) and the present value of the expected cost of any payments
in excess of the WPBR (referred to as the cost of future policy-related liabilities). The realistic liability for any contract
is equal to the sum of the WPBR and the cost of future policy-related liabilities, which includes the value of any ‘planned
enhancements’ to benefits agreed by the company. The WPBR for an individual contract is generally calculated on a retrospective
basis, and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses
and any other charges levied on the contract.
For a small proportion of business, a prospective
valuation approach is used, including allowance for anticipated future regular and final bonuses.
The items included in the cost of future policy-related
liabilities include:
|
·
|
Guarantees on surrender, including no-MVR (Market Value Reduction) Guarantees and Guarantees linked to inflation;
|
|
·
|
Guaranteed Annuity Options;
|
|
·
|
GMP (Guaranteed Minimum Pension) underpin on Section 32 transfers; and
|
|
·
|
Expected payments under Mortgage Endowment Promise.
|
The cost of future policy-related liabilities is determined using
a market-consistent approach and, in the main, this is based on a stochastic model calibrated to market conditions at the end of
the reporting period. Non-market-related assumptions (for example, persistency, mortality and expenses) are based on experience,
adjusted to take into account future trends.
The principal assumptions underlying the cost
of future policy-related liabilities are as follows:
Future investment return
A ‘risk-free’ rate equal to the spot yield on UK swaps
is used for the valuation of With-Profits business. The rates vary according to the outstanding term of the policy, with a typical
rate as at 31 December 2015 of 2.04%
(2014: 1.88%)
for a policy with ten years outstanding.
Volatility of investment return
Volatility assumptions are set with reference to implied volatility
data on traded market instruments, where available, or on a best estimate basis where not.
Volatility
|
2015
|
2014
|
Equity returns
|
22.6%
|
22.3%
|
Property returns
|
16.0%
|
15.0%
|
Fixed interest yields
|
30.6%
|
27.2%
|
The equity volatility used depends on term, money-ness and
region. The figure shown is for a sample UK equity, at the money, with a ten-year term. Fixed interest yield volatility is also
dependent on term and money-ness. The figure shown is for a ten-year swap option with ten-year term, currently at the money.
Future regular bonuses
Annual bonus assumptions for 2016 have been set consistently
with the year-end 2015 declaration. Future annual bonus rates reflect the principles and practices of each fund. In particular,
the level is set with regard to the projected margin for final bonus and the change from one year to the next is limited to a level
consistent with past practice.
Mortality
Mortality assumptions for with-profit business are set with regard
to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below:
Mortality table used
|
2015
|
2014
|
Assurances, pure endowments and deferred annuities before vesting
|
Nil or Axx00 adjusted
|
Nil or Axx00 adjusted
|
|
|
|
Pensions business after vesting and pensions annuities in payment
|
PCMA00/PCFA00 adjusted plus
allowance for future mortality
improvement
|
PCMA00/PCFA00 adjusted plus
allowance for future mortality
improvement
|
36 – Insurance liabilities continued
Allowance for future mortality improvement is in line with the rates
shown for non-profit business below.
Non-profit business
The valuation of non-profit business is based on regulatory requirements,
adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business. Conventional non-profit
contracts, including those written in the with-profit funds, are valued using gross premium methods which discount projected future
cash flows. The cash flows are calculated using the amount of contractual premiums payable, together with explicit assumptions
for investment returns, inflation, discount rates, mortality, morbidity, persistency and future expenses. These assumptions vary
by contract type and reflect current and expected future experience.
For unit-linked and some unitised with-profit
business, the provisions are valued by adding a prospective non-unit reserve to the bid value of units. The prospective non-unit
reserve is calculated by projecting the future non-unit cash flows on the assumption that future premiums cease, unless it is more
onerous to assume that they continue. Where appropriate, allowance for persistency is based on actual experience.
Valuation discount rate assumptions are set with
regard to yields on the supporting assets and the general level of long-term interest rates as measured by gilt yields. An explicit
allowance for risk is included by restricting the yields for equities and properties with reference to a margin over long-term
interest rates or by making an explicit deduction from the yields on corporate bonds, mortgages and deposits, based on historical
default experience of each asset class. A further margin for risk is then deducted for all asset classes.
The provisions held in respect of guaranteed
annuity options are a prudent assessment of the additional liability incurred under the option on a basis and method consistent
with that used to value basic policy liabilities, and includes a prudent assessment of the proportion of policyholders who will
choose to exercise the option.
Valuation discount rates for business
in the non-profit funds are as follows:
Valuation discount rates
|
2015
|
2014
|
Assurances
|
|
|
Life conventional non-profit
|
1.8%
|
1.7%
|
Pensions conventional non-profit
|
2.3%
|
2.1%
|
Annuities
|
|
|
Conventional immediate and deferred annuities
|
0.9% to 3.6%
|
1.3% to 3.3%
|
Non-unit reserves on Unit Linked business
|
|
|
Life
|
1.8%to 2.9%
|
1.7%
|
Pensions
|
1.8% to 3.5%
|
2.1%
|
Income Protection
|
|
|
Active lives
|
2.0%
|
1.8%
|
Claims in payment – level
|
2.0%
|
1.8%
|
Claims in payment – index linked
|
0.0%
|
(0.9)%
|
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.
Mortality assumptions for non-profit
business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation
are summarised below:
Mortality tables used
|
2015
|
2014
|
Assurances
|
|
|
Non-profit
|
AM00/AF00 or TM00/TF00
adjusted for smoker status
and age/sex specific factors
|
AM00/AF00 or TM00/TF00
adjusted for smoker status
and age/sex specific factors
|
|
|
|
Pure endowments and deferred annuities before vesting
|
AM00/AF00 adjusted
|
AM00/AF00 adjusted
|
|
|
|
Annuities in payment
|
|
|
Pensions business and general annuity business
|
PCMA00/PCFA00 adjusted
plus allowance for future
mortality improvement
|
PCMA00/PCFA00 adjusted
plus allowance for future
mortality improvement
|
36 – Insurance liabilities continued
For the main pensions annuity business in Aviva Annuity UK Limited,
the underlying mortality assumptions for Males are 101.5% of PCMA00
(2014:
101.5% of PCMA00)
with base year 2000; for Females the underlying mortality assumptions are 96.5% of PCFA00
(2014:
96.5% of PCFA00)
with base year 2000. Improvements are based on CMI_2013 with a long-term improvement rate of 1.75%
(2014:1.75%)
for males and 1.5%
(2014: 1.5%)
for females, both with an addition of 0.5%
(2014: 0.5%)
to all
future annual improvement. Year-specific adjustments are made to allow for selection effects due to the development of the Enhanced
Annuity market.
(b) France
The majority of reserves arise from single premium savings
products and are based on the accumulated fund values, adjusted to maintain consistency with the value of the assets backing the
policyholder liabilities. For traditional business, the net premium method is used for prospective valuations, in accordance with
local regulation, where the valuation assumptions depend on the date of issue of the contract. The valuation discount rate also
depends on the original duration of the contract and mortality rates are based on industry tables.
|
Valuation discount rates
|
Mortality tables used
|
|
2015 and 2014
|
2015 and 2014
|
|
|
TD73-77, TD88-90,TH00-02
|
|
|
TF00-02, H_AVDBS, F_AVDBS
|
Life assurances
|
0% to 4.5%
|
H_SSDBS, F_SSDBS
|
Annuities
|
0% to 4.5%
|
TGF05/TGH05
|
(c) Other countries
In all other countries, local generally accepted interest rates and
published standard mortality tables are used for different categories of business as appropriate. The tables are based on relevant
experience and show mortality rates, by age, for specific groupings of people.
(iv) Movements
The following movements have occurred in the gross long-term
business provisions during the year:
|
2015
£m
|
2014
£m
|
Carrying amount at 1 January
|
98,110
|
94,972
|
Provisions in respect of new business
|
4,059
|
4,796
|
Expected change in existing business provisions
|
(8,180)
|
(5,806)
|
Variance between actual and expected experience
|
428
|
1,383
|
Impact of operating assumption changes
|
(735)
|
(1,118)
|
Impact of economic assumption changes
|
(2,242)
|
6,819
|
Other movements
|
30
|
(227)
|
Change in liability recognised as an expense (note 36a(ii))
|
(6,640)
|
5,847
|
Effect of portfolio transfers, acquisitions and disposals
1,2
|
35,099
|
(805)
|
Foreign exchange rate movements
|
(1,221)
|
(1,904)
|
Carrying amount at 31 December
|
125,348
|
98,110
|
|
1
|
The movement during 2015 relates to Friends Life, as at the acquisition date.
|
|
2
|
The movement during 2014 includes £103 million related to the disposal of Eurovita, £696 million related to the
disposal of CxG and £6 million related to the restructuring of our operations in Indonesia.
|
For many types of long-term business, including unit-linked and participating
funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.
The impact of operating assumption changes of
£(0.7) billion in 2015 reduces the carrying value of insurance liabilities and relates mainly to expense and mortality releases
in the UK business (with the impact on profit significantly offset by a corresponding reduction in reinsurance assets).
The £(2.2) billion impact of economic assumption
changes reflects an increase in valuation interest rates in response to increased interest rates and widening spreads, primarily
in respect of immediate annuity and participating insurance contracts in the UK.
For participating business, a movement in liabilities
is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption
changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year shown in
note 40, together with the impact of movements in related non-financial assets.
(c) General insurance and health liabilities
(i) Provisions for outstanding claims
Delays occur in the notification and settlement of claims and a substantial
measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known
with certainty at the statement of financial position date. The reserves for general insurance and health business are based on
information currently available. However, it is inherent in the nature of the business written that the ultimate liabilities may
vary as a result of subsequent developments.
Provisions for outstanding claims are established
to cover the outstanding expected ultimate liability for losses and loss adjustment expenses (LAE) in respect of all claims that
have already occurred. The provisions established cover reported claims and associated LAE, as well as claims incurred but not
yet reported and associated LAE.
36 – 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.
The table below shows the split of total
general insurance and health outstanding claim provisions and IBNR provisions, gross of reinsurance, by major line of business.
|
As at 31 December 2015
|
As at 31 December 2014
|
|
Outstanding
claim
provisions
£m
|
IBNR
provisions
£m
|
Total claim
provisions
£m
|
Outstanding
claim
provisions
£m
|
IBNR
provisions
£m
|
Total claim
provisions
£m
|
Motor
|
3,509
|
1,055
|
4,564
|
3,510
|
1,130
|
4,640
|
Property
|
1,339
|
158
|
1,497
|
1,402
|
67
|
1,469
|
Liability
|
1,776
|
1,106
|
2,882
|
1,916
|
1,224
|
3,140
|
Creditor
|
23
|
18
|
41
|
25
|
21
|
46
|
Other
|
416
|
46
|
462
|
445
|
136
|
581
|
|
7,063
|
2,383
|
9,446
|
7,298
|
2,578
|
9,876
|
(ii) Discounting
Outstanding claims provisions are based on undiscounted estimates
of future claim payments, except for the following classes of business for which discounted provisions are held:
|
|
Rate
|
|
Mean term of liabilities
|
Class
|
2015
|
2014
|
2015
|
2014
|
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
|
The gross outstanding claims provision before discounting
was £9,911 million
(2014: £10,326 million).
The
period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of
the underlying claims.
The discount rate that has been applied to latent
claims reserves is based on the relevant swap curve in the relevant currency having regard to the expected settlement dates of
the claims. The range of discount rates used depends on the duration of the claims and is given in the table above. The duration
of the claims span over 35 years, with the average duration being between 6 and 15
years depending on the geographical region. Any change in discount rates between the start and the end of the accounting period
is reflected outside of adjusted operating profit as an economic assumption change.
During 2015, the propensity for new bodily injury
claims settled by periodic payment orders (PPOs) or structured settlements, which are reserved for on a discounted basis, has remained
fairly stable.
(iii) Assumptions
Outstanding claims provisions are estimated based on known facts at
the date of estimation. Case estimates are set by skilled claims technicians and established case setting procedures. Claim technicians
apply their experience and knowledge to the circumstances of individual claims. They take into account all available information
and correspondence regarding the circumstances of the claim, such as medical reports, investigations and inspections. Claims technicians
set case estimates according to documented claims department policies and specialise in setting estimates for certain lines of
business or types of claim. Claims above certain limits are referred to senior claims handlers for estimate authorisation.
No adjustments are made to the claims technicians’
case estimates included in booked claim provisions, except for rare occasions when the estimated ultimate cost of individual large
or unusual claims may be adjusted, subject to internal reserve committee approval, to allow for uncertainty regarding, for example,
the outcome of a court case. The ultimate cost of outstanding claims is then estimated by using a range of standard actuarial claims
projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. The main assumption underlying these techniques
is that a company’s past claims development experience can be used to project future claims development and hence ultimate
claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim
numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed
by accident period, although underwriting or notification period is also used where this is considered appropriate.
Claim development is separately analysed for
each geographic area, as well as by each line of business. Certain lines of business are also further analysed by claim type or
type of coverage. In addition, large claims are usually separately addressed, either by being reserved at the face value of loss
adjuster estimates or separately projected in order to reflect their future development.
The assumptions used in most non-life actuarial
projection techniques, including future rates of claims inflation or loss ratio assumptions, are implicit in the historical claims
development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past
trends may not apply in the future, for example, to reflect one-off occurrences, changes in external or market factors such as
public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal
factors such as portfolio mix, policy conditions and claims handling procedures in order to arrive at a point estimate for the
ultimate cost of claims that represents the likely outcome, from a range of possible outcomes, taking account of all the uncertainties
involved. The range of possible outcomes does not, however, result in the quantification of a reserve range.
36 – Insurance liabilities continued
The following explicit assumptions are made which could materially
impact the level of booked net reserves:
UK mesothelioma claims
The level of uncertainty associated with latent claims is considerable
due to the relatively small number of claims and the long-tail nature of the liabilities. UK mesothelioma claims account for a
large proportion of the Group’s latent claims. The key assumptions underlying the estimation of these claims include claim
numbers, the base average cost per claim, future inflation in the average cost of claims and legal fees.
The best estimate of the liabilities reflects
the latest available market information and studies. Many different scenarios can be derived by flexing these key assumptions and
applying different combinations of the different assumptions. An upper and lower scenario can be derived by making reasonably likely
changes to these assumptions, resulting in an estimate £30 million
(2014:
£245 million)
greater than the best estimate, or £60 million
(2014:
£75 million)
lower than the best estimate. The upper scenario has reduced significantly during 2015 due to reinsurance
purchased by the UK general insurance business to cover a large proportion of these liabilities. These scenarios do not, however,
constitute an upper or lower bound on these liabilities.
Interest rates used to discount latent claim liabilities
The discount rates used in determining our latent claim liabilities
are based on the relevant swap curve in the relevant currency at the reporting date, having regard to the duration of the expected
settlement of latent claims. The range of discount rates used is shown in section (ii) above and depends on the duration of the
claim and the reporting date. At 31 December 2015, it is estimated that a 1% fall in the discount rates used would increase net
claim reserves by approximately £60 million
(2014: £120
million),
excluding the offsetting effect on asset values as assets are not hypothecated across classes of business.
The impact has reduced significantly during 2015 due to reinsurance purchased by the UK general insurance business to cover a large
proportion of these liabilities. The impact of a 1% fall in interest rates across all assets and liabilities of our general insurance
and health businesses is shown in note 53.
Allowance for risk and uncertainty
The uncertainties involved in estimating loss reserves are allowed
for in the reserving process and by the estimation of explicit reserve uncertainty distributions. The reserve estimation basis
for non-life claims requires all non-life businesses to calculate booked claim provisions as the best estimate of the cost of future
claim payments, plus an explicit allowance for risk and uncertainty. The allowance for risk and uncertainty is calculated by each
business unit in accordance with the requirements of the Group non-life reserving policy, taking into account the risks and uncertainties
specific to each line of business and type of claim in that territory. The requirements of the Group non-life reserving policy
also seek to ensure that the allowance for risk and uncertainty is set consistently across both business units and reporting periods.
Changes to claims development patterns can materially
impact the results of actuarial projection techniques. However, allowance for the inherent uncertainty in the assumptions underlying
reserving projections is automatically allowed for in the explicit allowance for risk and uncertainty included when setting booked
reserves.
Lump sum payments in settlement of bodily injury
claims decided by the UK courts are calculated in accordance with the Ogden Tables. The Ogden Tables contain a discount rate that
is set by the Lord Chancellor and that is applied when calculating the present value of loss of earnings for claims settlement
purposes. The process for setting this discount rate is under review.
The timing of the conclusion of this review is
unclear and it is still uncertain whether or by how much the rate will change. However, an allowance has been included in provisions
to reflect the potential for a change in the Ogden discount rates. A reduction in the Ogden discount rates would increase lump
sum payments to UK bodily injury claimants.
(iv) Movements
The following changes have occurred in the general insurance
and health claims provisions during the year:
|
2015
£m
|
2014
£m
|
Carrying amount at 1 January
|
9,876
|
10,298
|
Impact of changes in assumptions
|
115
|
211
|
Claim losses and expenses incurred in the current year
|
5,889
|
5,950
|
Decrease in estimated claim losses and expenses incurred in prior periods
|
(463)
|
(329)
|
Incurred claims losses and expenses
|
5,541
|
5,832
|
Less:
|
|
|
Payments made on claims incurred in the current year
|
(3,153)
|
(3,253)
|
Payments made on claims incurred in prior periods
|
(2,650)
|
(2,933)
|
Recoveries on claim payments
|
281
|
269
|
Claims payments made in the period, net of recoveries
|
(5,522)
|
(5,917)
|
Unwind of discounting
|
10
|
9
|
Changes in claims reserve recognised as an expense (note 36a(ii))
|
29
|
(76)
|
Effect of portfolio transfers, acquisitions and disposals
|
(64)
|
(121)
|
Foreign exchange rate movements
|
(395)
|
(222)
|
Other movements
|
—
|
(3)
|
Carrying amount at 31 December
|
9,446
|
9,876
|
The effect of changes in the main assumptions is given in
note 40.
36 – Insurance liabilities continued
(d) Loss development tables
(i) Description of tables
The tables that follow present the development of claim payments and
the estimated ultimate cost of claims for the accident years 2006 to 2015. The upper half of the tables shows the cumulative amounts
paid during successive years related to each accident year. For example, with respect to the accident year 2006, by the end of
2015 £7,077 million had actually been paid in settlement of claims. In addition, as reflected in the lower section of the
table, the original estimated ultimate cost of claims of £7,533 million was re-estimated to be £7,207 million at 31
December 2015.
The original estimates will be increased or decreased,
as more information becomes known about the individual claims and overall claim frequency and severity.
The Group aims to maintain strong reserves in
respect of its general insurance and health business in order to protect against adverse future claims experience and development.
The Group establishes strong reserves in respect of the current accident year (2015) where the development of claims is less mature
and there is much greater uncertainty attaching to the ultimate cost of claims. As claims develop and the ultimate cost of claims
become more certain, the absence of adverse claims experience will result in a release of reserves from earlier accident years,
as shown in the loss development tables and movements table (c)(iv) above. Releases from prior accident year reserves are also
due to an improvement in the estimated cost of claims.
Key elements of the release from prior accident
year general insurance and health net provisions during 2015 were:
|
·
|
£166 million release from UK & Ireland due to favourable development on personal and commercial motor, commercial
liability and commercial property claims.
|
|
·
|
£109 million release from Canada mainly due to continued favourable experience on motor, following the legislative changes
in Ontario.
|
|
·
|
£52 million release from Europe mainly due to favourable development in France and Italy.
|
There was also a £659 million reduction
in net claim reserves due to the reinsurance purchased during 2015 covering a large proportion of the Group’s latent claim
liabilities.
Key elements of the movement in prior accident year general insurance
and health net provisions during 2014 were:
|
·
|
£112 million release from UK & Ireland due to favourable development on personal and commercial motor, and commercial
property claims.
|
|
·
|
£97 million release from Canada mainly due to continued favourable experience on motor, following the legislative changes
in Ontario.
|
|
·
|
£15 million release from Europe mainly due to favourable development in France and Italy, partly offset by strengthening
of motor third party claims in Turkey.
|
(ii) Gross figures
Before the effect of reinsurance, the loss development table
is:
Accident year
|
All prior
years
£m
|
2006
£m
|
2007
£m
|
2008
£m
|
2009
£m
|
2010
£m
|
2011
£m
|
2012
£m
|
2013
£m
|
2014
£m
|
2015
£m
|
Total
£m
|
Gross cumulative claim payments
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of accident year
|
|
(3,653)
|
(4,393)
|
(4,915)
|
(3,780)
|
(3,502)
|
(3,420)
|
(3,055)
|
(3,068)
|
(3,102)
|
(2,991)
|
|
One year later
|
|
(5,525)
|
(6,676)
|
(7,350)
|
(5,464)
|
(5,466)
|
(4,765)
|
(4,373)
|
(4,476)
|
(4,295)
|
|
|
Two years later
|
|
(5,971)
|
(7,191)
|
(7,828)
|
(6,102)
|
(5,875)
|
(5,150)
|
(4,812)
|
(4,916)
|
|
|
|
Three years later
|
|
(6,272)
|
(7,513)
|
(8,304)
|
(6,393)
|
(6,163)
|
(5,457)
|
(5,118)
|
|
|
|
|
Four years later
|
|
(6,531)
|
(7,836)
|
(8,607)
|
(6,672)
|
(6,405)
|
(5,712)
|
|
|
|
|
|
Five years later
|
|
(6,736)
|
(8,050)
|
(8,781)
|
(6,836)
|
(6,564)
|
|
|
|
|
|
|
Six years later
|
|
(6,936)
|
(8,144)
|
(8,906)
|
(6,958)
|
|
|
|
|
|
|
|
Seven years later
|
|
(7,015)
|
(8,224)
|
(8,986)
|
|
|
|
|
|
|
|
|
Eight years later
|
|
(7,062)
|
(8,257)
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
(7,077)
|
|
|
|
|
|
|
|
|
|
|
Estimate of gross ultimate claims
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of accident year
|
|
7,533
|
8,530
|
9,508
|
7,364
|
6,911
|
6,428
|
6,201
|
6,122
|
5,896
|
5,851
|
|
One year later
|
|
7,318
|
8,468
|
9,322
|
7,297
|
7,006
|
6,330
|
6,028
|
6,039
|
5,833
|
|
|
Two years later
|
|
7,243
|
8,430
|
9,277
|
7,281
|
6,950
|
6,315
|
6,002
|
6,029
|
|
|
|
Three years later
|
|
7,130
|
8,438
|
9,272
|
7,215
|
6,914
|
6,292
|
5,952
|
|
|
|
|
Four years later
|
|
7,149
|
8,409
|
9,235
|
7,204
|
6,912
|
6,262
|
|
|
|
|
|
Five years later
|
|
7,167
|
8,446
|
9,252
|
7,239
|
6,906
|
|
|
|
|
|
|
Six years later
|
|
7,167
|
8,381
|
9,213
|
7,217
|
|
|
|
|
|
|
|
Seven years later
|
|
7,176
|
8,381
|
9,207
|
|
|
|
|
|
|
|
|
Eight years later
|
|
7,184
|
8,378
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
7,207
|
|
|
|
|
|
|
|
|
|
|
Estimate of gross ultimate claims
|
|
7,207
|
8,378
|
9,207
|
7,217
|
6,906
|
6,262
|
5,952
|
6,029
|
5,833
|
5,851
|
|
Cumulative payments
|
|
(7,077)
|
(8,257)
|
(8,986)
|
(6,958)
|
(6,564)
|
(5,712)
|
(5,118)
|
(4,916)
|
(4,295)
|
(2,991)
|
|
|
2,329
|
130
|
121
|
221
|
259
|
342
|
550
|
834
|
1,113
|
1,538
|
2,860
|
10,297
|
Effect of discounting
|
(407)
|
(12)
|
(1)
|
(4)
|
(19)
|
(17)
|
3
|
(6)
|
(2)
|
—
|
—
|
(465)
|
Present value
|
1,922
|
118
|
120
|
217
|
240
|
325
|
553
|
828
|
1,111
|
1,538
|
2,860
|
9,832
|
Cumulative effect of foreign exchange movements
|
—
|
5
|
(1)
|
(28)
|
(32)
|
(47)
|
(65)
|
(76)
|
(77)
|
(76)
|
—
|
(397)
|
Effect of acquisitions
|
7
|
4
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
11
|
Present value recognised in the statement of financial position
|
1,929
|
127
|
119
|
189
|
208
|
278
|
488
|
752
|
1,034
|
1,462
|
2,860
|
9,446
|
36 – Insurance liabilities continued
(iii) Net of reinsurance
After the effect of reinsurance, the loss development table
is:
Accident year
|
All prior
years
£m
|
2006
£m
|
2007
£m
|
2008
£m
|
2009
£m
|
2010
£m
|
2011
£m
|
2012
£m
|
2013
£m
|
2014
£m
|
2015
£m
|
Total
£m
|
Net cumulative claim payments
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of accident year
|
|
(3,612)
|
(4,317)
|
(4,808)
|
(3,650)
|
(3,386)
|
(3,300)
|
(2,925)
|
(2,905)
|
(2,972)
|
(2,867)
|
|
One year later
|
|
(5,442)
|
(6,542)
|
(7,165)
|
(5,286)
|
(5,242)
|
(4,578)
|
(4,166)
|
(4,240)
|
(4,079)
|
|
|
Two years later
|
|
(5,881)
|
(7,052)
|
(7,638)
|
(5,885)
|
(5,637)
|
(4,963)
|
(4,575)
|
(4,649)
|
|
|
|
Three years later
|
|
(6,181)
|
(7,356)
|
(8,094)
|
(6,177)
|
(5,905)
|
(5,263)
|
(4,870)
|
|
|
|
|
Four years later
|
|
(6,434)
|
(7,664)
|
(8,356)
|
(6,410)
|
(6,137)
|
(5,485)
|
|
|
|
|
|
Five years later
|
|
(6,625)
|
(7,852)
|
(8,515)
|
(6,568)
|
(6,278)
|
|
|
|
|
|
|
Six years later
|
|
(6,724)
|
(7,942)
|
(8,626)
|
(6,657)
|
|
|
|
|
|
|
|
Seven years later
|
|
(6,789)
|
(8,004)
|
(8,682)
|
|
|
|
|
|
|
|
|
Eight years later
|
|
(6,831)
|
(8,033)
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
(6,853)
|
|
|
|
|
|
|
|
|
|
|
Estimate of net ultimate claims
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of accident year
|
|
7,430
|
8,363
|
9,262
|
7,115
|
6,650
|
6,202
|
5,941
|
5,838
|
5,613
|
5,548
|
|
One year later
|
|
7,197
|
8,302
|
9,104
|
7,067
|
6,751
|
6,103
|
5,765
|
5,745
|
5,575
|
|
|
Two years later
|
|
7,104
|
8,244
|
9,028
|
7,036
|
6,685
|
6,095
|
5,728
|
5,752
|
|
|
|
Three years later
|
|
6,996
|
8,249
|
9,007
|
6,978
|
6,644
|
6,077
|
5,683
|
|
|
|
|
Four years later
|
|
6,980
|
8,210
|
8,962
|
6,940
|
6,634
|
6,034
|
|
|
|
|
|
Five years later
|
|
6,992
|
8,221
|
8,949
|
6,977
|
6,614
|
|
|
|
|
|
|
Six years later
|
|
6,939
|
8,149
|
8,926
|
6,908
|
|
|
|
|
|
|
|
Seven years later
|
|
6,938
|
8,143
|
8,894
|
|
|
|
|
|
|
|
|
Eight years later
|
|
6,947
|
8,133
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
6,948
|
|
|
|
|
|
|
|
|
|
|
Estimate of net ultimate claims
|
|
6,948
|
8,133
|
8,894
|
6,908
|
6,614
|
6,034
|
5,683
|
5,752
|
5,575
|
5,548
|
|
Cumulative payments
|
|
(6,853)
|
(8,033)
|
(8,682)
|
(6,657)
|
(6,278)
|
(5,485)
|
(4,870)
|
(4,649)
|
(4,079)
|
(2,867)
|
|
|
761
|
95
|
100
|
212
|
251
|
336
|
549
|
813
|
1,103
|
1,496
|
2,681
|
8,397
|
Effect of discounting
|
(116)
|
(12)
|
(1)
|
(4)
|
(19)
|
(17)
|
3
|
(6)
|
(2)
|
—
|
—
|
(174)
|
Present value
|
645
|
83
|
99
|
208
|
232
|
319
|
552
|
807
|
1,101
|
1,496
|
2,681
|
8,223
|
Cumulative effect of foreign exchange movements
|
—
|
5
|
(1)
|
(28)
|
(31)
|
(45)
|
(62)
|
(74)
|
(74)
|
(73)
|
—
|
(383)
|
Effect of acquisitions
|
7
|
4
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
11
|
Present value recognised in the statement of financial position
|
652
|
92
|
98
|
180
|
201
|
274
|
490
|
733
|
1,027
|
1,423
|
2,681
|
7,851
|
In the loss development tables shown above, the cumulative
claim payments and estimates of cumulative claims for each accident year are translated into sterling at the exchange rates that
applied at the end of that accident year. The impact of using varying exchange rates is shown at the bottom of each table. Disposals
are dealt with by treating all outstanding and IBNR claims of the disposed entity as ‘paid’ at the date of disposal.
The loss development tables above include information
on asbestos and environmental pollution claims provisions from business written before 2006. The undiscounted claim provisions,
net of reinsurance, in respect of this business at 31 December 2015 were £237 million
(2014:
£984 million)
. The movement in the year reflects a reduction of £705 million due to the reinsurance purchased
by the UK general insurance business during 2015 covering a large proportion of these liabilities, favourable claims development
of £22 million, claim payments net of reinsurance recoveries and foreign exchange rate movements.
(e) Provision for unearned premiums
Movements
The following changes have occurred in the provision for
unearned premiums (UPR) during the year:
|
2015
£m
|
2014
£m
|
Carrying amount at 1 January
|
4,107
|
4,226
|
Premiums written during the year
|
8,738
|
8,943
|
Less: Premiums earned during the year
|
(8,613)
|
(8,935)
|
Changes in UPR recognised as an (income)/expense
|
125
|
8
|
Gross portfolio transfers and acquisitions
|
—
|
(31)
|
Foreign exchange rate movements
|
(184)
|
(96)
|
Carrying amount at 31 December
|
4,048
|
4,107
|
37 – Liability for investment
contracts
This note analyses our investment contract liabilities by type of
product and describes how the Group calculates these liabilities and the assumptions used.
(a) Carrying amount
The liability for investment contracts (gross of reinsurance)
at 31 December comprised:
|
2015
£m
|
2014
£m
|
Long-term business
|
|
|
Participating contracts
|
78,048
|
67,232
|
Non-participating contracts at fair value
|
103,125
|
50,013
|
Total
|
181,173
|
117,245
|
(b) Long-term business investment
liabilities
Investment contracts are those that do not transfer significant insurance
risk from the contract holder to the issuer, and are therefore treated as financial instruments under IFRS.
Many investment contracts contain a discretionary
participation feature in which the contract holder has a contractual right to receive additional benefits as a supplement to guaranteed
benefits. These are referred to as participating contracts and are measured according to the methodology and Group practice for
long-term business liabilities as described in note 36. They are not measured at fair value as there is currently no agreed definition
of fair valuation for discretionary participation features under IFRS. In the absence of such a definition, it is not possible
to provide a range of estimates within which a fair value is likely to fall. The IASB has deferred consideration of participating
contracts to Phase II of its insurance contracts project.
For participating business, the discretionary
participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated
divisible surplus. Guarantees on long-term investment products are discussed in note 38.
Investment contracts that do not contain a discretionary
participation feature are referred to as non-participating contracts and the liability is measured at either fair value or amortised
cost. We currently have no non-participating investment contracts measured at amortised cost.
Of the non-participating investment contracts
measured at fair value, £101,216 million in 2015 are unit-linked in structure and the fair value liability is equal to the
current unit fund value, including any unfunded units, plus if required, additional non-unit reserves based on a discounted cash
flow analysis. These contracts are generally classified as ‘Level 1’ in the fair value hierarchy, as the unit reserve
is calculated as the publicly quoted unit price multiplied by the number of units in issue, and any non-unit reserve is insignificant.
For unit-linked business, a deferred acquisition
cost asset and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively,
that relate to the provision of investment management services, and which are amortised on a systematic basis over the contract
term. The amount of the related deferred acquisition cost asset is shown in note 24 and the deferred income liability is shown
in note 47.
For non-participating investment contracts acquired
in a business combination, an acquired value of in-force business asset is recognised in respect of the fair value of the investment
management services component of the contracts, which is amortised on a systematic basis over the useful lifetime of the related
contracts. The amount of the acquired value of in-force business asset is shown in note 13, which relates primarily to the
acquisition of Friends Life in 2015.
For non-participating investment contracts, deposits
collected and amounts withdrawn are not shown on the income statement, but are accounted for directly through the statement of
financial position as an adjustment to the gross liabilities for investment contracts. The associated change in investment contract
provisions shown on the income statement consists of the attributed investment return. Participating investment contracts are treated
consistently with insurance contracts with the change in investment contract provisions primarily consisting of the movement in
participating investment contract liabilities (net of reinsurance) over the reporting period.
(c) Movements in the year
The following movements have occurred in the gross provisions
for investment contracts in the year:
(i) Participating investment contracts
|
2015
£m
|
2014
£m
|
Carrying amount at 1 January
|
67,232
|
70,628
|
Provisions in respect of new business
|
3,710
|
4,144
|
Expected change in existing business provisions
|
(4,219)
|
(1,972)
|
Variance between actual and expected experience
|
1,590
|
713
|
Impact of operating assumption changes
|
43
|
14
|
Impact of economic assumption changes
|
97
|
303
|
Other movements
|
49
|
16
|
Change in liability recognised as an expense
|
1,270
|
3,218
|
Effect of portfolio transfers, acquisitions and disposals
1
|
12,245
|
(2,671)
|
Foreign exchange rate movements
|
(2,699)
|
(3,943)
|
Carrying amount at 31 December
|
78,048
|
67,232
|
|
1
|
The movement during 2015 relates to Friends Life, as at the acquisition date and the movement during 2014 relates to the disposal
of Eurovita.
|
37 – Liability for investment contracts
continued
For many types of long-term business, including unit-linked and participating
funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.
The variance between actual and expected experience
of £1.6 billion is primarily driven by favourable equity returns in Europe.
The impact of assumption changes in
the analysis shows the resulting movement in the carrying value of participating investment contract liabilities. For participating
business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and
does not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions
and estimates during the year shown in note 40, together with the impact of movements in related non-financial assets.
(ii) Non-participating investment contracts
|
2015
£m
|
2014
£m
|
Carrying amount at 1 January
|
50,013
|
48,140
|
Provisions in respect of new business
|
2,644
|
2,273
|
Expected change in existing business provisions
|
(2,726)
|
(1,442)
|
Variance between actual and expected experience
|
(2,906)
|
1,575
|
Impact of operating assumption changes
|
32
|
2
|
Impact of economic assumption changes
|
3
|
11
|
Other movements
|
38
|
8
|
Change in liability
|
(2,915)
|
2,427
|
Effect of portfolio transfers, acquisitions and disposals
1
|
56,401
|
(20)
|
Foreign exchange rate movements
|
(374)
|
(534)
|
Carrying amount at 31 December
|
103,125
|
50,013
|
|
1
|
The movement during 2015 relates to Friends Life, as at the acquisition date and the movement during 2014 relates to the disposal
of Eurovita.
|
For unit-linked investment contracts, movements in asset values are
offset by corresponding changes in liabilities, limiting the net impact on profit. The variance between actual and expected experience
of £2.9 billion is primarily driven by the impact of adverse equity returns in the UK.
The impact of assumption changes in the above
analysis shows the resulting movement in the carrying value of non-participating investment contract liabilities. The impacts of
assumption changes on profit are included in the effect of changes in assumptions and estimates during the year shown in note 40,
which combines participating and non-participating investment contracts together with the impact of movements in related non-financial
assets.
38 – Financial guarantees and
options
This note details the financial guarantees and options that the Group
has given for some of our insurance and investment products.
As a normal part of their operating activities,
various Group companies have given guarantees and options, including investment return guarantees, in respect of certain long-term
insurance and fund management products. Further information on assumptions is given in notes 36 and 37.
(a) UK and Ireland Life with-profit
business
In the UK, life insurers are required to comply with the PRA’s
realistic reporting regime for their with-profit funds for the calculation of PRA liabilities. Under the PRA’s rules, provision
for guarantees and options within realistic liabilities are measured at fair value, using market-consistent stochastic models.
A stochastic approach includes measuring the time value of guarantees and options, which represents the additional cost arising
from uncertainty surrounding future economic conditions.
The material guarantees and options to which
this provision relates are:
(i) Maturity value guarantees
Substantially all of the conventional with-profit business and a significant
proportion of unitised with-profit business have minimum maturity values reflecting the sums assured plus declared annual bonus.
In addition, the guarantee fund has offered maturity value guarantees on certain unit-linked products. For some unitised with-profit
life contracts the amount paid after the fifth policy anniversary is guaranteed to be at least as high as the premium paid increased
in line with the rise in RPI/CPI.
(ii) No market valuation reduction (MVR) guarantees
For unitised business, there are a number of circumstances where a
‘no MVR’ guarantee is applied, for example on certain policy anniversaries, guaranteeing that no market value reduction
will be applied to reflect the difference between the accumulated value of units and the market value of the underlying assets.
Certain unitised with-profit policies containing
‘no MVR’ guarantees, similar to those in the UK, have been sold in Ireland.
These guarantees as at 31 December 2015 are ‘out-of-the-money’
(2014: £0.1 million ‘in-the-money’).
This
has been calculated on a deterministic basis as the excess of the current policy surrender value over the discounted value (excluding
terminal bonus) of the guarantees. The value of these guarantees is usually sensitive to the performance of investments held in
the with-profit fund. Amounts payable under these guarantees are determined by the bonuses declared on these policies.
38 – Financial guarantees and options
continued
(iii) Guaranteed annuity options
The Group’s UK with-profit funds have written individual and
group pension contracts which contain guaranteed annuity rate options (GAOs), where the policyholder has the option to take the
benefits from a policy in the form of an annuity based on guaranteed conversion rates. The Group also has exposure to GAOs and
similar options on deferred annuities.
Realistic liabilities for GAOs in the UK with-profit
funds were £2,043 million at 31 December 2015, which includes £968 million relating to the recently acquired Friends
Life business
(2014: £1,198 million).
With the exception of the New With-Profits Sub Fund (NWPSF), movements in the
realistic liabilities in the with-profit 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 NWPSF were £196 million at 31 December 2015
(2014:
£197 million)
.
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.
These GAOs in Ireland are ‘in-the-money’
at current interest rates but the exposure to interest rates under these contracts has been hedged through the use of derivatives
(receiver swaps and payer swaptions).
(iv) Guaranteed minimum pension
The Group’s UK with-profit funds also have certain policies
that contain a guaranteed minimum level of pensions as part of the condition of the original transfer from state benefits to the
policy.
(v) Guaranteed minimum maturity payments on mortgage
endowments
In addition, the with-profit fund companies have made promises to
certain policyholders in relation to their with-profit mortgage endowments. Top-up payments will be made on these policies at maturity
to meet the mortgage value up to a maximum of the 31 December 1999 illustrated shortfall. For UKLAP WP policyholders, these payments
are subject to certain conditions.
(b) UK Life non-profit business
The Group’s UK non-profit funds are evaluated by reference to
statutory reserving rules, including changes introduced in 2006 under FSA Policy Statement 06/14,
Prudential
Changes for Insurers (which was designated by the PRA on 1 April 2013)
.
(i) Guaranteed annuity options
Similar options to those written on with-profit business have been
written in relation to non-profit products. Provision for these guarantees does not materially differ from a provision based on
a market-consistent stochastic model, and amounts to £112 million at 31 December 2015, which includes £86 million relating
to the recently acquired Friends Life business
(2014: £33 million)
.
(ii) Guaranteed unit price on certain products
Certain unit-linked pension products linked to long-term life insurance
funds provide policyholders with guaranteed benefits at retirement or death. No additional provision is made for this guarantee
as the investment management strategy for these funds is designed to ensure that the guarantee can be met from the fund, mitigating
the impact of large falls in investment values and interest rates.
(c) Overseas life businesses
In addition to guarantees written in the Group’s UK and Ireland
life businesses, our overseas businesses have also written contracts containing guarantees and options. Details of the significant
guarantees and options provided by overseas life businesses are set out below.
(i) France
Guaranteed surrender value and guaranteed minimum bonuses
Aviva France has written a number of contracts with such guarantees.
The guaranteed surrender value is the accumulated value of the contract including accrued bonuses. Bonuses are based on accounting
income from amortised bond portfolios, where the duration of bond portfolios is set in relation to the expected duration of the
policies, plus income and releases from realised gains on equity-type investments. Policy reserves are equal to guaranteed surrender
values. Local statutory accounting envisages the establishment of a reserve, ‘Provision pour Aléas Financiers’
(PAF), when accounting income is less than 125% of guaranteed minimum credited returns. No PAF was established at full year 2015.
The most significant of these contracts is the
AFER Eurofund which has total liabilities of £31 billion at 31 December 2015
(2014:
£32 billion).
The guaranteed minimum bonus is agreed between Aviva France and the AFER association at the end
of each year, in respect of the following year. The bonus was 3.05% for 2015
(2014:
3.20%)
compared with an accounting income from the fund of 3.54%
(2014:
3.69%).
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.
38 – Financial guarantees and options
continued
Guaranteed death and maturity benefits
In France, the Group has also sold unit-linked policies where the
death and/or maturity benefit is guaranteed to be at least equal to the premiums paid. The reserve held in the Group’s consolidated
statement of financial position at the end of 2015 for this guarantee is £29 million
(2014:
£28 million).
The reserve is calculated on a prudent basis and is in excess of the economic liability. At the
end of 2015, total sums at risk for these contracts were £44 million
(2014:
£70 million)
out of total unit-linked funds of £16 billion
(2014:
£15 billion).
The average age of policyholders was approximately 54. It is estimated that this liability would
increase by £45 million
(2014: £36 million)
if
yields were to decrease by 1% per annum and by £10 million
(2014:
£12 million)
if equity markets were to decline by 10% from year end 2015 levels. These figures do not reflect
our ability to review the tariff for this option.
(ii) Spain and Italy
Guaranteed investment returns and guaranteed surrender values
The Group has also written contracts containing guaranteed investment
returns and guaranteed surrender values in both Spain and Italy. Traditional profit-sharing products receive an appropriate share
of the investment return, assessed on a book value basis, subject to a guaranteed minimum annual return of up to 6% in Spain and
up to 4% in Italy on existing business, while on new business the maximum guaranteed rate is lower. Liabilities are generally taken
as the face value of the contract plus, if required, an explicit provision for guarantees calculated in accordance with local regulations.
At 31 December 2015, total liabilities for the Spanish business were £1 billion
(2014:
£1 billion)
with a further reserve of £14 million
(2014:
£6 million)
for guarantees.
Total liabilities for the Italian business were £13.8 billion
(2014: £13.9 billion)
, with a further provision of £41 million
(2014: £42 million)
for guarantees.
Liabilities are most sensitive to changes in the level of interest rates. It is estimated that provisions for guarantees would
need to increase by £12 million
(2014: £34 million)
in Spain and £nil
(2014: £nil)
in Italy if interest
rates fell by 1% (subject to a minimum of 0%) from end 2015 values. Under this sensitivity test, the guarantee provision in Spain
is calculated conservatively, assuming a long-term market interest rate of 0.91% and no lapses or premium discontinuances. In the
local valuation there is no allowance for stochastic modelling of guarantees and options.
(d) Sensitivity
In providing these guarantees and options, the Group’s capital
position is sensitive to fluctuations in financial variables including foreign currency exchange rates, interest rates, real estate
prices and equity prices. Interest rate guaranteed returns, such as those available on GAOs, are sensitive to interest rates falling
below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of
return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was made.
39 – Reinsurance assets
This note details the reinsurance recoverables on our insurance and
investment contract liabilities.
(a) Carrying amounts
The reinsurance assets at 31 December comprised:
|
2015
£m
1
|
2014
£m
|
Long-term business
|
|
|
Insurance contracts
|
5,018
|
4,032
|
Participating investment contracts
|
11
|
3
|
Non-participating investment contracts
2
|
13,967
|
2,533
|
|
18,996
|
6,568
|
Outstanding claims provisions
|
38
|
43
|
|
19,034
|
6,611
|
General insurance and health
|
|
|
Outstanding claims provisions
3
|
988
|
724
|
Provisions for claims incurred but not reported
3
|
607
|
373
|
|
1,595
|
1,097
|
Provisions for unearned premiums
|
289
|
250
|
|
1,884
|
1,347
|
Total
|
20,918
|
7,958
|
|
1
|
Reinsurance assets at 31 December 2015 for long-term non-participating investment contracts includes £11,927 million
for Friends Life business.
|
|
2
|
Balances in respect of all reinsurance treaties are included under reinsurance assets, regardless of whether they transfer
significant insurance risk. The reinsurance assets classified as non-participating investment contracts are financial instruments
measured at fair value through profit or loss.
|
|
3
|
Reinsurance assets at 31 December 2015 for General insurance and health business include the impact of the £659 million
reinsurance asset recognised on completion of an outward reinsurance contract by the UK general insurance business, which provides
significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks.
|
Of the above total, £16,341 million
(2014:
£5,974 million)
is expected to be recovered more than one year after the statement of financial position date.
(b) Assumptions
The assumptions, including discount rates, used for reinsurance contracts
follow those used for insurance contracts. Reinsurance assets are valued net of an allowance for their recoverability.
39 – Reinsurance assets continued
(c) Movements
The following movements have occurred in the reinsurance
assets during the year:
(i) In respect of long-term business provisions
|
2015
£m
|
2014
£m
|
Carrying amount at 1 January
|
6,568
|
5,784
|
Assets in respect of new business
|
664
|
316
|
Expected change in existing business assets
|
197
|
7
|
Variance between actual and expected experience
|
(1,007)
|
536
|
Impact of operating assumption changes
|
(351)
|
(585)
|
Impact of economic assumption changes
|
(177)
|
554
|
Other movements
1
|
636
|
34
|
Change in assets
|
(38)
|
862
|
Effect of portfolio transfers, acquisitions and disposals
2
|
12,504
|
(13)
|
Foreign exchange rate movements
|
(38)
|
(65)
|
Carrying amount at 31 December
|
18,996
|
6,568
|
|
1
|
The other movements in 2015 include the reclassification of the UK Life staff pension scheme investments in Blackrock and Schroder
life insurance funds from investments to reinsurance assets.
|
|
2
|
The movement during 2015 relates to Friends Life, as at the acquisition date. The movement during 2014 includes £12 million
related to the disposal of Eurovita and £1 million related to the disposal of CxG.
|
The impact of assumption changes in the above analysis shows
the resulting movement in the carrying value of reinsurance assets and mainly relates to business in the UK, with corresponding
movements in gross insurance contract liabilities. For participating businesses, a movement in reinsurance assets is generally
offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit. Where assumption changes
do impact profit, these are included in the effect of changes in assumptions and estimates during the year shown in note 40, together
with the impact of movements in related liabilities and other non-financial assets.
(ii) In respect of general insurance and health
outstanding claims provisions and IBNR
|
2015
£m
|
2014
£m
|
Carrying amount at 1 January
|
1,097
|
1,164
|
Impact of changes in assumptions
|
14
|
65
|
Reinsurers’ share of claim losses and expenses
|
|
|
Incurred in current year
|
301
|
292
|
Incurred in prior years
1
|
527
|
(105)
|
Reinsurers’ share of incurred claim losses and expenses
|
828
|
187
|
Less:
|
|
|
Reinsurance recoveries received on claims
|
|
|
Incurred in current year
|
(121)
|
(131)
|
Incurred in prior years
|
(225)
|
(173)
|
Reinsurance recoveries received in the year
|
(346)
|
(304)
|
Unwind of discounting
|
8
|
3
|
Change in reinsurance asset recognised as income (note 36a(ii))
|
504
|
(49)
|
Effect of portfolio transfers, acquisitions and disposals
|
(4)
|
(31)
|
Foreign exchange
rate movements
|
(2)
|
8
|
Other
movements
|
—
|
5
|
Carrying amount at 31 December
|
1,595
|
1,097
|
|
1
|
The change in reinsurance assets includes the impact of the £659 million reinsurance asset recognised on completion of
an outward reinsurance contract by the UK general insurance business, which provides significant protection against claims volatility
from mesothelioma, industrial deafness and other long tail risks.
|
(iii) Reinsurers’ share of the provision for UPR
|
2015
£m
|
2014
£m
|
Carrying amount at 1 January
|
250
|
256
|
Premiums ceded to reinsurers in the year
1
|
1,360
|
643
|
Less: Reinsurers’ share of premiums earned during the year
1
|
(1,346)
|
(634)
|
Changes in reinsurance asset recognised as income
|
14
|
9
|
Reinsurers’ share of portfolio transfers and acquisitions
|
33
|
(2)
|
Foreign exchange rate movements
|
(8)
|
(10)
|
Other movements
|
—
|
(3)
|
Carrying amount at 31 December
|
289
|
250
|
|
1
|
Includes £712 million of premiums ceded on completion of the outward reinsurance contract taken out by the UK general
insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and
other long tail risks.
|
40 – Effect of changes in assumptions
and estimates during the year
Certain estimates and assumptions used in determining our
liabilities for insurance and investment contract business were changed from 2014 to 2015, affecting the profit recognised for
the year with an equivalent effect on liabilities. This note analyses the effect of the changes. This note only allows for the
impact on liabilities and related assets, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and AVIF,
and does not allow for offsetting movements in the value of backing financial assets.
|
Effect on
profit
2015
£m
|
Effect on
profit
2014
£m
|
Effect on
profit
2013
£m
|
Assumptions
|
|
|
|
Long-term insurance business
|
|
|
|
Interest
rates
|
2,053
|
(4,578)
|
1,389
|
Expenses
|
248
|
75
|
3
|
Persistency rates
|
(2)
|
15
|
(1)
|
Mortality for assurance contracts
|
1
|
20
|
8
|
Mortality for annuity contracts
|
17
|
283
|
85
|
Tax and other assumptions
|
48
|
75
|
20
|
Investment contracts
|
|
|
|
Interest
rates
|
—
|
(2)
|
—
|
Expenses
|
(4)
|
—
|
—
|
General insurance and health business
|
|
|
|
Change in discount rate assumptions
|
(100)
|
(145)
|
33
|
Change in loss ratio assumptions
|
—
|
—
|
3
|
Change in expense ratio and other assumptions
|
1
|
1
|
—
|
Total
|
2,262
|
(4,256)
|
1,540
|
The impact of interest rates on long-term business relates
primarily to UK annuities, where an increase in the valuation interest rates, reflecting an increase in risk-free rates and widening
of spreads, has reduced liabilities. The overall impact on profit also depends on movements in the value of assets backing the
liabilities, which is not included in this disclosure.
There has been a release of expense reserves
for the UK Life business following actions to reduce the current and long-term cost base. There has been a release of the annuitant
mortality reserves following the annual review of experience in UK Life.
Tax and other assumptions in 2015 includes an
impact of £48 million driven by a reduction in the best estimate allowance for the cost of the Mortgage Protection Guarantee
in the UK.
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
(2013: £33 million favourable)
due to a decrease
in the swap rates used to discount latent claims reserves and periodic payment orders.
41 – Unallocated divisible surplus
An unallocated divisible surplus (UDS) is established where the nature
of policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain at the reporting
date. Therefore the expected duration for settlement of the UDS is not defined.
This note shows the movements in the
UDS during the year.
|
2015
£m
|
2014
£m
|
Carrying amount at 1 January
|
9,467
|
6,709
|
Change in participating contract assets
|
(935)
|
3,087
|
Change in participating contract liabilities
|
(36)
|
299
|
Other movements
|
(13)
|
(22)
|
Change in liability recognised as an expense
|
(984)
|
3,364
|
Effect of portfolio transfers, acquisition and disposals
|
724
|
(131)
|
Foreign exchange rate movements
|
(396)
|
(444)
|
Other movements
|
—
|
(31)
|
|
8,811
|
9,467
|
The amount of UDS has decreased to £8.8 billion at
31 December 2015
(2014: £9.5 billion)
, despite the
acquisition of Friends Life in April 2015 which increased the UDS balance by £724 million. The reduction is driven primarily
by adverse investment market movements in Continental Europe, mainly caused by the increase in interest rates and corporate bond
yields during the year. In addition, the UDS has reduced by £396 million due predominantly to the weakening of the euro.
Negative UDS balances result from an accounting
mismatch between participating assets carried at market value and participating liabilities measured using local practice. Any
negative balances are tested for recoverability using embedded value methodology and in line with local accounting practice. Testing
is conducted at a participating fund-level within each life entity.
In both Italy and Spain, all participating funds
had positive UDS balances at 31 December 2015, and consequently testing of negative UDS was not required. In Italy, the carrying
value of UDS was £840 million positive (
2014: £953 million positive
); in Spain, the carrying value of UDS was
£207 million positive (
2014: £248 million positive).
42 – Tax assets and liabilities
This note analyses the tax assets and liabilities that appear in the
statement of financial position and explains the movements in these balances in the year.
(a) Current tax
Current tax assets recoverable and liabilities payable in more than
one year are £4 million and £50 million
(2014: £15
million and £13 million)
, respectively.
(b) Deferred tax
(i) The balances at 31 December comprise:
|
2015
£m
|
2014
£m
|
Deferred tax assets
|
131
|
76
|
Deferred tax liabilities
|
(2,074)
|
(1,091)
|
Net deferred tax liability
|
(1,943)
|
(1,015)
|
(ii) The net deferred tax liability arises on the following
items:
|
2015
£m
|
2014
£m
|
Long-term business technical provisions and other insurance items
|
1,433
|
2,263
|
Deferred acquisition costs
|
(205)
|
(251)
|
Unrealised gains on investments
|
(2,571)
|
(2,885)
|
Pensions and other post-retirement obligations
|
(354)
|
(499)
|
Unused losses and tax credits
|
247
|
227
|
Subsidiaries, associates and joint ventures
|
(16)
|
(12)
|
Intangibles and additional value of in-force long-term business
|
(814)
|
(170)
|
Provisions and other temporary differences
|
337
|
312
|
Net deferred tax liability
|
(1,943)
|
(1,015)
|
(iii) The movement in the net deferred tax liability
was as follows:
|
2015
£m
|
2014
£m
|
Net liability at 1 January
|
(1,015)
|
(312)
|
Acquisition and disposal of subsidiaries
1
|
(1,338)
|
5
|
Amounts credited/(charged) to income statement (note 9a)
|
339
|
(291)
|
Amounts credited/(charged) to other comprehensive income (note 9b)
|
55
|
(445)
|
Foreign exchange rate movements
|
20
|
28
|
Other movements
|
(4)
|
—
|
Net liability at 31 December
|
(1,943)
|
(1,015)
|
|
1
|
The movement during 2015 relates to the acquisition of Friends Life.
|
Deferred tax assets are recognised to the extent that it is probable
that future taxable profits will be available against which the temporary differences can be utilised. In countries where there
is a history of tax losses, deferred tax assets are only recognised in excess of deferred tax liabilities if there is convincing
evidence that future taxable profits will be available. Where this is the case, the directors have relied on business plans supporting
future profits.
The Group has unrecognised gross tax losses (excluding
capital losses) and other temporary differences of £562 million
(2014:
£694 million)
to carry forward against future taxable income of the necessary category in the companies concerned.
Of these, trading losses of £51 million will expire within the next 20 years. The remaining losses have no expiry date.
In addition, the Group has unrecognised gross
capital losses of £509 million
(2014: £434 million).
These have no expiry date.
There are no temporary differences in respect
of unremitted overseas retained earnings for which deferred tax liabilities have not been recognised at 31 December 2015
(2014:
£nil).
As legislated in Finance (No 2) Act 2015, which
was substantively enacted on 26 October 2015, the UK corporation tax rate will reduce 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. In addition, the calculation of deferred tax assets and liabilities in France
and Italy reflect the reduction in corporation tax rates from 38% to 34.43% (effective 1 January 2016) and from 34.3% to 30.8%
(effective 1 January 2017) respectively. The reduction in the future corporation tax rates in the UK, France and Italy has resulted
in a reduction in the Group’s net deferred tax liabilities of £120 million, comprising a £82 million credit
included in the income statement and a £38 million credit included in the statement of comprehensive income.
On 16 March 2016, the UK Government announced that
the rate of corporation tax will be 17% from 1 April 2020. A 1% reduction in the tax rate applied to the UK deferred tax liability
at 31 December 2015 would reduce the liability by approximately £35 million.
The UK Government also announced changes to
the legislation governing the use of brought forward losses. The proposals would restrict to 50% the amount of profits that can
be offset by carried forward losses. The impact on the recognition of the Group’s deferred tax assets will be assessed when
details of the proposed legislation are known.
43 – Provisions
This note details the non-insurance provisions that the Group
holds, and shows the movements in these during the year.
(a) Carrying amounts
|
2015
£m
|
2014
£m
|
Total IAS 19 obligations to main staff pension schemes (note 44(a))
|
686
|
391
|
Deficits in other staff pension schemes
|
46
|
43
|
Total IAS 19 obligations to staff pension schemes
|
732
|
434
|
Restructuring provisions
|
166
|
97
|
Other provisions
|
518
|
348
|
Total provisions
|
1,416
|
879
|
Other provisions comprise provisions throughout the
Group for obligations such as costs of compensation, litigation and staff entitlements.
(b) Movements on restructuring and other
provisions
|
|
|
2015
|
|
|
2014
|
|
Restructuring
provisions
£m
|
Other
provisions
£m
|
Total
£m
|
Restructuring
provisions
£m
|
Other
provisions
£m
|
Total
£m
|
At 1 January
|
97
|
348
|
445
|
140
|
437
|
577
|
Additional provisions
|
382
|
112
|
494
|
74
|
150
|
224
|
Unused amounts reversed
|
(7)
|
(130)
|
(137)
|
—
|
(118)
|
(118)
|
Change in the discounted amount arising from passage of time
|
1
|
1
|
2
|
—
|
2
|
2
|
Charge/(release) to income statement
|
376
|
(17)
|
359
|
74
|
34
|
108
|
Utilised during the year
|
(307)
|
(108)
|
(415)
|
(115)
|
(112)
|
(227)
|
Acquisition/(disposal) of subsidiaries
|
—
|
297
|
297
|
—
|
(7)
|
(7)
|
Foreign exchange rate movements
|
—
|
(2)
|
(2)
|
(2)
|
(4)
|
(6)
|
At 31 December
|
166
|
518
|
684
|
97
|
348
|
445
|
Movements during 2015 primarily relate to the acquisition
of Friends Life.
Of the total restructuring and other
provisions, £199 million
(2014: £103 million)
is expected to be settled more than one year after the statement
of financial position date.
44 – Pension obligations
(a) Introduction
The Group operates a number of defined benefit and defined
contribution pension schemes. The material defined benefit schemes are in the UK, Ireland, and Canada with the main UK scheme being
the largest. The assets and liabilities of these defined benefit schemes as at 31 December 2015 are shown below.
|
|
|
|
2015
|
|
|
|
2014
|
|
UK
£m
|
Ireland
£m
|
Canada
£m
|
Total
£m
|
UK
£m
|
Ireland
£m
|
Canada
£m
|
Total
£m
|
Total fair value of scheme assets (see b(ii) below)
|
15,445
|
484
|
232
|
16,161
|
14,733
|
483
|
258
|
15,474
|
Present value of defined benefit obligation
|
(13,344)
|
(673)
|
(307)
|
(14,324)
|
(12,079)
|
(748)
|
(343)
|
(13,170)
|
Net IAS19 surpluses/(deficits) in the schemes
|
2,101
|
(189)
|
(75)
|
1,837
|
2,654
|
(265)
|
(85)
|
2,304
|
|
|
|
|
|
|
|
|
|
Surpluses included in other assets (note 24)
|
2,523
|
—
|
—
|
2,523
|
2,695
|
—
|
—
|
2,695
|
Deficits included in provisions (note 43)
|
(422)
|
(189)
|
(75)
|
(686)
|
(41)
|
(265)
|
(85)
|
(391)
|
Net IAS19 surpluses/(deficits) in the schemes
|
2,101
|
(189)
|
(75)
|
1,837
|
2,654
|
(265)
|
(85)
|
2,304
|
This note gives full IAS 19, Employee Benefits, disclosures
for the above material schemes. The smaller ones, while still measured under IAS 19, are included as one total within Provisions
(see note 43). Similarly, while the charges to the income statement for the main schemes are shown in section (b)(i) below, the
total charges for all pension schemes are disclosed in section (d) below.
The assets of the UK, Irish and Canadian schemes
are held in separate trustee-administered funds to meet long-term pension liabilities to past and present employees. In all schemes,
the appointment of trustees of the funds is determined by their trust documentation, and they are required to act in the best interests
of the schemes’ beneficiaries. The long-term investment objectives of the trustees and the employers are to limit the risk
of the assets failing to meet the liabilities of the schemes over the long-term, and to maximise returns consistent with an acceptable
level of risk so as to control the long-term costs of these schemes.
A full actuarial valuation of each of the defined
benefit schemes is carried out at least every three years for the benefit of scheme trustees and members. Actuarial reports have
been submitted for each scheme within this period, using appropriate methods for the respective countries on local funding bases.
44 – Pension obligations continued
The number of scheme members was as follows:
|
United Kingdom
|
|
Ireland
|
|
Canada
|
|
2015
Number
|
2014
Number
|
2015
Number
|
2014
Number
|
2015
Number
|
2014
Number
|
Deferred members
|
56,130
|
51,239
|
1,937
|
1,957
|
715
|
784
|
Pensioners
|
36,799
|
32,360
|
771
|
763
|
1,344
|
1,360
|
Total members
|
92,929
1
|
83,599
|
2,708
|
2,720
|
2,059
|
2,144
|
|
1
|
The net increase in members in the UK is primarily due to the Friend Provident Pension Scheme, which as at 31 December 2015
has 9,688 deferred members and 4,125 pensioners.
|
All schemes are closed to future accrual. Closure of the schemes has
removed the volatility associated with additional future accrual for active members.
(i) UK schemes
In the UK, the Group operates three main pension schemes, the Aviva
Staff Pension Scheme (ASPS), the smaller RAC (2003) Pension Scheme which was retained after the sale of RAC Limited in September
2011 and the Friends Provident Pension Scheme (FPPS) which was acquired during the year as part of the Friends Life acquisition.
As the defined benefit section of the UK schemes is now closed to both new members and future accrual, existing deferred members
in active service and new entrants participate in the defined contribution section of the ASPS. The UK schemes operate within the
UK pensions’ regulatory framework.
(ii) Other schemes
Future accruals for the Irish and Canadian defined benefit
schemes ceased with effect from 30 April 2013 and 31 December 2011 respectively. The Irish scheme is regulated by the Pensions
Authority in Ireland. The main Canadian plan is Registered Pension Plan in Canada and as such is registered with the Canada Revenue
Agency and Financial Services Commission of Ontario and is required to comply with the Income Tax of Canada and the various provincial
Pension Acts within Canada.
(b) IAS 19 disclosures
Disclosures under IAS 19 for the material defined benefit schemes
in the UK, Ireland and Canada, are given below. Where schemes provide both defined benefit and defined contribution pensions, the
assets and liabilities shown exclude those relating to defined contribution pensions.
(i) Movements in the scheme deficits and surpluses
Movements in the pension schemes’ surpluses and deficits
comprise:
|
Fair Value of
Scheme
Assets
|
Present
Value of
defined
benefit
obligation
|
IAS 19
Pensions net
surplus/
(deficits)
|
2015
|
£m
|
£m
|
£m
|
Net IAS 19 surplus in the schemes at 1 January
|
15,474
|
(13,170)
|
2,304
|
Past service costs – amendments
|
—
|
1
|
1
|
Administrative expenses
1
|
—
|
(15)
|
(15)
|
Total pension cost charged to net operating expenses
|
—
|
(14)
|
(14)
|
Net interest credited/(charged) to investment income /(finance costs)
2
|
584
|
(504)
|
80
|
Total recognised in income
|
584
|
(518)
|
66
|
|
|
|
|
Remeasurements:
|
|
|
|
Actual return on these assets
|
99
|
—
|
99
|
Less: Interest income on scheme assets
|
(584)
|
—
|
(584)
|
Return on scheme assets excluding amounts in interest income
|
(485)
|
—
|
(485)
|
Gains from change in financial assumptions
|
—
|
234
|
234
|
Gains from change in demographic assumptions
|
—
|
3
|
3
|
Experience gains
|
—
|
13
|
13
|
Total recognised in other comprehensive income
|
(485)
|
250
|
(235)
|
|
|
|
|
Acquisitions – gross surplus
|
1,701
|
(1,633)
|
68
|
Acquisitions – consolidation elimination for non-transferable Group insurance policy
3
|
(631)
|
—
|
(631)
|
Acquisitions – net deficit
|
1,070
|
(1,633)
|
(563)
|
Employer contributions
|
240
|
—
|
240
|
Plan participant contributions
|
3
|
(3)
|
—
|
Benefits paid
|
(656)
|
656
|
—
|
Administrative expenses paid from scheme assets
1
|
(15)
|
15
|
—
|
Foreign exchange rate movements
|
(54)
|
79
|
25
|
Net IAS 19 surplus in the schemes at 31 December
|
16,161
|
(14,324)
|
1,837
|
|
1
|
Administrative expenses are expensed as incurred.
|
|
2
|
Net interest income of £105 million has been credited to investment income and net interest expense of £25 million
has been charged to finance costs (see Note 6).
|
|
3
|
The gross surplus of £68 million on acquisition relates to the FPPS. As the FPPS assets include an insurance policy of
£631 million at acquisition date, issued by a Group company that is not transferable under IAS 19, it is eliminated from
the scheme assets.
|
The present value of unfunded post-retirement benefit obligations
included in the table above is £111 million at 31 December 2015
(2014: £120 million).
44 – Pension obligations continued
The net surplus at 31 December 2015 includes FPPS following
the acquisition of Friends Life. Remeasurements recognised in other comprehensive income reflect reduced asset values driven by
a rise in interest rates in the UK partly offset by a decrease in the defined benefit obligation due to an increase in the UK discount
rate. These impacts were offset in the net surplus by employer contributions.
|
Fair Value of
Scheme
Assets
|
Present Value
of defined
benefit
obligation
|
IAS 19
Pensions net
surplus/
(deficits)
|
2014
|
£m
|
£m
|
£m
|
Net IAS 19 surplus in the schemes at 1 January
|
12,398
|
(12,159)
|
239
|
Administrative expenses
1
|
—
|
(27)
|
(27)
|
Total pension cost charged to net operating expenses
|
—
|
(27)
|
(27)
|
Net interest credited/(charged) to investment income /(finance costs)
2
|
542
|
(522)
|
20
|
Total recognised in income from continuing operations
|
542
|
(549)
|
(7)
|
|
|
|
|
Remeasurements:
|
|
|
|
Actual return on these assets
|
3,135
|
—
|
3,135
|
Less: Interest income on scheme assets
|
(542)
|
—
|
(542)
|
Return on scheme assets excluding amounts in interest income
|
2,593
|
—
|
2,593
|
Losses from change in financial assumptions
|
—
|
(1,063)
|
(1,063)
|
Gains from change in demographic assumptions
|
—
|
150
|
150
|
Experience losses
|
—
|
(18)
|
(18)
|
Total recognised in other comprehensive income from continuing operations
|
2,593
|
(931)
|
1,662
|
|
|
|
|
Employer contributions
|
391
|
—
|
391
|
Plan participant contributions
|
—
|
—
|
—
|
Benefits paid
|
(385)
|
385
|
—
|
Administrative expenses paid from scheme assets
1
|
(27)
|
27
|
—
|
Foreign exchange rate movements
|
(38)
|
57
|
19
|
Net IAS 19 surplus in the schemes at 31 December
|
15,474
|
(13,170)
|
2,304
|
|
1
|
Administrative expenses are expensed as incurred.
|
|
2
|
Net interest income of £33 million has been credited to investment income and net interest expense of £13 million
has been charged to finance costs (see note 6).
|
|
Fair Value of
Scheme
Assets
|
Present Value
of defined
benefit
obligation
|
IAS 19
Pensions net
surplus/
(deficits)
|
2013
|
£m
|
£m
|
£m
|
Net IAS 19 surplus in the schemes at 1 January
|
12,281
|
(11,675)
|
606
|
Current service costs
|
—
|
(4)
|
(4)
|
Past service costs – amendments
1
|
—
|
142
|
142
|
Past service costs – curtailment gain
|
—
|
5
|
5
|
Administrative expenses
2
|
—
|
(18)
|
(18)
|
Total pension cost charged to net operating expenses
|
—
|
125
|
125
|
Net interest credited/(charged) to investment income /(finance costs)
3
|
543
|
(506)
|
37
|
Total recognised in income from continuing operations
|
543
|
(381)
|
162
|
|
|
|
|
Remeasurements:
|
|
|
|
Actual return on these assets
|
366
|
—
|
366
|
Less: Interest income on scheme assets
|
(543)
|
—
|
(543)
|
Return on scheme assets excluding amounts in interest income
|
(177)
|
—
|
(177)
|
Losses from change in financial assumptions
|
—
|
(730)
|
(730)
|
Gains from change in demographic assumptions
|
—
|
186
|
186
|
Experience gains
|
—
|
47
|
47
|
Total recognised in other comprehensive income from continuing operations
|
(177)
|
(497)
|
(674)
|
|
|
|
|
Employer contributions
|
149
|
—
|
149
|
Plan participant contributions
|
1
|
(1)
|
—
|
Benefits paid
|
(371)
|
371
|
—
|
Administrative expenses paid from scheme assets
2
|
(18)
|
18
|
—
|
Foreign exchange rate movements
|
(10)
|
6
|
(4)
|
Net IAS 19 surplus in the schemes at 31 December
|
12,398
|
(12,159)
|
239
|
|
1
|
Includes £145 million gain relating to plan amendments in Ireland.
|
|
2
|
Administrative expenses are expensed as incurred.
|
|
3
|
Net interest income of £57 million has been credited to investment income and net interest expense of £20 million
has been charged to finance costs (see note 6).
|
|
4
|
Total recognised in income from discontinued operations is £nil and total remeasurements recognised in other comprehensive
income from discontinued operations is £nil.
|
44 – Pension obligations continued
(ii) Scheme assets
Scheme assets are stated at their fair values at 31 December
2015.
Total scheme assets are comprised by scheme as follows:
|
|
|
|
2015
|
|
|
|
2014
|
|
UK
£m
|
Ireland
£m
|
Canada
£m
|
Total
£m
|
UK
£m
|
Ireland
£m
|
Canada
£m
|
Total
£m
|
Bonds
|
|
|
|
|
|
|
|
|
Fixed interest
|
5,542
|
216
|
133
|
5,891
|
5,519
|
213
|
130
|
5,862
|
Index-linked
|
5,758
|
114
|
—
|
5,872
|
5,568
|
122
|
—
|
5,690
|
Equities
|
70
|
—
|
—
|
70
|
98
|
—
|
—
|
98
|
Property
|
377
|
7
|
—
|
384
|
328
|
9
|
—
|
337
|
Pooled investment vehicles
|
2,904
|
143
|
96
|
3,143
|
2,010
|
137
|
110
|
2,257
|
Derivatives
|
96
|
—
|
—
|
96
|
584
|
1
|
—
|
585
|
Cash and other
1
|
1,244
|
4
|
3
|
1,251
|
626
|
1
|
18
|
645
|
Total fair value of assets
|
15,991
|
484
|
232
|
16,707
|
14,733
|
483
|
258
|
15,474
|
Less: consolidation elimination for non-transferable Group insurance policy
2
|
(546)
|
—
|
—
|
(546)
|
—
|
—
|
—
|
—
|
Total IAS 19 fair value of scheme assets
|
15,445
|
484
|
232
|
16,161
|
14,733
|
483
|
258
|
15,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Cash and other assets comprise cash at bank, insurance policies, receivables and payables.
|
|
2
|
FPPS assets are included in the UK balances. As at 31 December 2015, the FPPS’s cash and other balances includes an insurance
policy of £546 million issued by a Group company that is not transferable under IAS 19 and is consequently eliminated from
the Group’s IAS 19 scheme assets.
|
Total scheme assets are analysed by those that have a quoted
market price in active market and other as follows:
|
|
|
2015
|
|
|
2014
|
|
Total
Quoted
£m
|
Total
Unquoted
£m
|
Total
£m
|
Total
Quoted
£m
|
Total
Unquoted
£m
|
Total
£m
|
Bonds
|
|
|
|
|
|
|
Fixed interest
|
2,796
|
3,095
|
5,891
|
2,907
|
2,955
|
5,862
|
Index-linked
|
5,436
|
436
|
5,872
|
5,240
|
450
|
5,690
|
Equities
|
70
|
—
|
70
|
74
|
24
|
98
|
Property
|
—
|
384
|
384
|
—
|
337
|
337
|
Pooled investment vehicles
|
291
|
2,852
|
3,143
|
130
|
2,127
|
2,257
|
Derivatives
|
6
|
90
|
96
|
(22)
|
607
|
585
|
Cash and other
1
|
532
|
719
|
1,251
|
432
|
213
|
645
|
Total fair value of assets
|
9,131
|
7,576
|
16,707
|
8,761
|
6,713
|
15,474
|
Less: consolidation elimination for non-transferable Group
insurance policy
2
|
—
|
(546)
|
(546)
|
—
|
—
|
—
|
Total IAS 19 fair value of scheme assets
|
9,131
|
7,030
|
16,161
|
8,761
|
6,713
|
15,474
|
|
1
|
Cash and other assets comprise cash at bank, insurance policies, receivables and payables.
|
|
2
|
FPPS assets are included in the UK balances. As at 31 December 2015, the FPPS’s cash and other balances includes an insurance
policy of £546 million issued by a Group company that is not transferable under IAS 19 and is consequently eliminated from
the Group’s IAS 19 scheme assets.
|
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’.
44
–
Pension obligations continued
(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.
The projected unit credit method
The inherent uncertainties affecting the measurement of scheme liabilities
require these to be measured on an actuarial basis. This involves discounting the best estimate of future cash flows to be paid
out by the scheme using the projected unit credit method. This is an accrued benefits valuation method which calculates the past
service liability to members and makes allowance for their projected future earnings. It is based on a number of actuarial assumptions,
which vary according to the economic conditions of the countries in which the relevant businesses are situated, and changes in
these assumptions can materially affect the measurement of the pension obligations.
Financial assumptions
The main financial assumptions used to calculate scheme liabilities
under IAS 19 are:
|
|
UK
|
|
Ireland
|
|
Canada
|
|
2015
|
2014
|
2015
|
2014
|
2015
|
2014
|
Inflation rate
1
|
3.15%/2.05%
|
3.1%/2.0%
|
1.6%
|
1.5%
|
2.5%
|
2.5%
|
General salary increases
2
|
4.95%
|
4.9%
|
3.1%
|
3.0%
|
3.0%
|
3.0%
|
Pension increases
3
|
3.15%/2.05%
|
3.1%/2.0%
|
0.4%
|
0.4%
|
1.25%
|
1.25%
|
Deferred pension increases
3
|
3.15%/2.05%
|
3.1%/2.0%
|
1.6%
|
1.5%
|
—
|
—
|
Discount rate
4
|
3.75%/
3.6%(pensioners)/
3.8%(deferred)
|
3.7%
|
2.3%
|
2.1%
|
3.75%
|
4.0%
|
Basis of discount rate
|
AA-rated corporate bonds
|
AA-rated corporate bonds
|
AA-rated corporate bonds
|
|
|
|
|
|
|
|
|
|
1
|
For the UK schemes, assumptions provided for RPI/CPI. In the UK, the assumptions for the ASPS and RAC schemes are the single
rates for RPI/CPI; for FPPS, relevant RPI/CPI swap curves are used, which are broadly equivalent to these single rates.
|
|
2
|
In the UK, the only remaining linkage between pension benefits and general salary increases is in respect of a small amount
of Guaranteed Minimum Pension benefits, in line with National Average Earnings.
|
|
3
|
For the UK schemes, assumptions provided for RPI/CPI. In the UK, the assumptions for the ASPS and RAC schemes are single rates
for RPI/CPI; for FPPS, relevant RPI/CPI swap curves are used, which are broadly equivalent to these single rates. The assumptions
are also adjusted to reflect the relevant caps/floors and the inflation volatility.
|
|
4
|
To calculate scheme liabilities in the UK, a single discount rate is used in ASPS/RAC, whereas in FPPS, separate discount rates
are used for the defined benefit obligation for pensioners and deferred.
|
The discount rate and pension increase rate are the two assumptions
that have the largest impact on the value of the liabilities, with the difference between them being known as the net discount
rate. For each country, the discount rate is based on current average yields of high-quality debt instruments taking account of
the maturities of the defined benefit obligations.
Mortality assumptions
Mortality assumptions are significant in measuring the Group’s
obligations under its defined benefit schemes, particularly given the maturity of these obligations in the material schemes. The
assumptions used are summarised in the table below and have been selected to reflect the characteristics and experience of the
membership of these schemes.
The mortality tables, average life expectancy
and pension duration used at 31 December 2015 for scheme members are as follows:
|
|
Life expectancy/(pension
duration) at NRA of a male
|
Life expectancy/ (pension
duration) at NRA of a female
|
Mortality table
|
|
Normal
retirement
age (NRA)
|
Currently
aged NRA
|
20 years
younger
than NRA
|
Currently
aged NRA
|
20 years
younger
than NRA
|
UK– ASPS
|
Club Vita pooled experience, including an allowance for future improvements
|
60
|
89.8
|
91.7
|
90.8
|
92.6
|
|
|
|
(29.8)
|
(31.7)
|
(30.8)
|
(32.6)
|
– RAC
|
SAPS, including allowances for future improvement
|
65
|
87.5
|
90.1
|
89.3
|
91.6
|
|
|
|
(22.5)
|
(25.1)
|
(24.3)
|
(26.6)
|
– FPPS
|
SAPS, including allowances for future improvement
|
60
|
88.6
|
90.2
|
89.6
|
91.9
|
|
|
|
(28.6)
|
(30.2)
|
(29.6)
|
(31.9)
|
Ireland
|
89% PNA00 with allowance for future improvements
|
61
|
88.0
|
91.3
|
90.9
|
94.1
|
|
|
|
(27.0)
|
(30.3)
|
(29.9)
|
(33.1)
|
Canada
|
Canadian Pensioners’ Mortality 2014 Private Table
|
65
|
86.5
|
87.6
|
89.0
|
90.0
|
|
|
|
(21.5)
|
(22.6)
|
(24.0)
|
(25.0)
|
The assumptions above are based on commonly used mortality
tables. The tables make allowance for observed variations in such factors as age, gender, pension amount, salary and postcode-based
lifestyle group, and have been adjusted to reflect recent research into mortality experience. However, the extent of future improvements
in longevity is subject to considerable uncertainty and judgement is required in setting this assumption. In ASPS, which is the
most material to the Group, the allowance for mortality improvement is per the actuarial professions’ CMI 2013 model, with
assumed long-term rates of improvement of 1.75% p.a. for males, and 1.50% p.a. for females.
44
–
Pension obligations
continued
Sensitivity analysis
Significant actuarial assumptions for the determination of
the defined benefit obligation are discount rate, inflation rate and mortality. The sensitivities analyses below have been determined
based on reasonably possible changes of the respective assumptions, holding all other assumptions constant. The following table
summarises how the defined benefit obligation would have increased/(decreased) as a result of the change in the respective assumptions:
Impact on present value of defined benefit obligation
|
Increase in
discount rate
+1%
£m
|
Decrease in
discount rate
-1%
£m
|
Increase in
inflation rate
+1%
£m
|
Decrease in
inflation rate
-1%
£m
|
1 year
younger
1
£m
|
Impact on present value of defined benefit obligation at 31 December 2015
|
(2,398)
|
3,112
|
2,592
|
(2,064)
|
396
|
Impact on present value of defined benefit obligation at 31 December 2014
|
(2,170)
|
2,911
|
2,747
|
(2,081)
|
367
|
|
1
|
The effect of assuming all members in the schemes were one year younger.
|
The sensitivity analyses presented above may not be representative
as in practice it is unlikely that the changes in assumptions would occur in isolation of one another as some of the assumptions
may be correlated. Furthermore, the present value of the defined benefit obligation has been calculated using the projected unit
credit method, which is the same as that applied in calculating the defined benefit obligation liability recognised within the
consolidated statement of financial position. In addition, the sensitivities shown are for liabilities only and ignore the impact
on assets, which would significantly mitigate the net interest rate and inflation sensitivity impact on the net surplus.
Maturity profile of the defined benefit obligation
The discounted scheme liabilities have an average duration of 19
years in ASPS, 21 years in FPPS, 19 years in the RAC scheme, 19 years in the Irish scheme and 12 years in the Canadian scheme.
The expected undiscounted benefits payable from the main UK defined benefit scheme, ASPS, is shown in the chart below:
(iv) Risk management and asset allocation strategy
As noted above, the long-term investment objectives of the trustees
and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long-term, and to
maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes. To meet these
objectives, the schemes’ assets are invested in a portfolio, consisting primarily (approximately 75%) of debt securities
as detailed in section (b)(ii). The investment strategy will continue to evolve over time and is expected to match the liability
profile increasingly closely with swap overlays to improve interest rate and inflation matching. The schemes are generally matched
to interest rate risk relative to the funding basis.
Main UK scheme
The Company works closely with the trustee, who is required to consult
it on the investment strategy.
Interest rate and inflation risks are managed
using a combination of liability-matching assets and swaps. Exposure to equity risk has been reducing over time and credit risk
is managed within risk appetite. Currency risk is relatively small and is largely hedged. The other principal risk is longevity
risk. In 2014, ASPS entered into a longevity swap covering approximately £5 billion of pensioner in payment scheme liabilities.
44 – Pension obligations continued
Other schemes
The other schemes are considerably less material but their
risks are managed in a similar way to those in the main UK scheme. During the year, the RAC pension scheme entered into a longevity
swap covering approximately £600 million of pensioner in payment scheme liabilities.
(v) Funding
Formal actuarial valuations normally take place every three years
and where there is a deficit, the Company and the trustee would agree a deficit recovery plan. The assumptions adopted for triennial
actuarial valuations are determined by the trustee and agreed with the Company and are normally more prudent than the assumptions
adopted for IAS19 purposes, which are best estimate.
For ASPS, following the latest formal actuarial
valuation (with an effective date of 31 March 2012) a deficit recovery plan was agreed, to make good the deficit over a period
of time, consistent with the requirements of the UK pension regulations. As at 31 December 2015, the ASPS was fully funded. The
Company is currently undergoing a triennial actuarial valuation as at 31 March 2015.
Total employer contributions for all schemes
in 2016 are currently expected to be £130 million.
(c) Defined contribution
(money purchase) section of the ASPS
The trustees have responsibility for selecting a range of suitable
funds in which the members can choose to invest and for monitoring the performance of the available investment funds. Members are
responsible for reviewing the level of contributions they pay and the choice of investment fund to ensure these are appropriate
to their attitude to risk and their retirement plans. Members of this section contribute at least 2% of their pensionable salaries
and, depending on the percentage chosen, the Company contributes up to a maximum 14%, together with the cost of the death-in-service
benefits. These contribution rates are unchanged for 2016. The amount recognised as an expense for defined contribution schemes
is shown section (d) below.
(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:
|
2015
|
2014
|
2013
|
|
£m
|
£m
|
£m
|
Continuing operations
|
|
|
|
UK defined benefit schemes
|
12
|
31
|
19
|
Overseas defined benefit schemes
|
1
|
(1)
|
(147)
|
Total defined benefit schemes
|
13
|
30
|
(128)
|
UK defined contribution schemes
|
108
|
94
|
90
|
Overseas defined contribution schemes
|
15
|
16
|
17
|
Total defined contribution schemes
|
123
|
110
|
107
|
Total charge/(credit) from continuing operations
|
136
|
140
|
(21)
|
Total charge from discontinued operations
|
—
|
—
|
9
|
Total charge/(credit) for pension schemes
|
136
|
140
|
(12)
|
There were no significant contributions payable or prepaid
in the consolidated statement of financial position as at either 31 December 2015 or 2014.
45 – Borrowings
Our borrowings are either core structural borrowings or operational
borrowings. This note shows the carrying values and contractual maturity amounts of each type, and explains their main features
and movements during the year.
(a) Analysis of total borrowings
Total borrowings comprise:
|
2015
£m
|
2014
£m
|
Core structural borrowings, at amortised cost
|
6,912
|
5,310
|
Operational borrowings, at amortised cost
|
550
|
696
|
Operational borrowings, at fair value
|
1,308
|
1,372
|
|
1,858
|
2,068
|
|
8,770
|
7,378
|
(b) Core structural borrowings
(i) The carrying amounts of these borrowings are:
|
|
|
|
2015
|
|
|
|
2014
|
|
Upper Tier 2
£m
|
Lower
Tier 2
£m
|
Senior
£m
|
Total
£m
|
Upper Tier 2
£m
|
Lower Tier 2
£m
|
Senior
£m
|
Total
£m
|
Subordinated debt
|
|
|
|
|
|
|
|
|
6.125% £700 million subordinated notes 2036
|
—
|
693
|
—
|
693
|
—
|
692
|
—
|
692
|
5.700% €500 million undated subordinated notes
|
—
|
—
|
—
|
—
|
387
|
—
|
—
|
387
|
6.125% £800 million undated subordinated notes
|
795
|
—
|
—
|
795
|
794
|
—
|
—
|
794
|
6.875% £600 million subordinated notes 2058
|
—
|
594
|
—
|
594
|
—
|
594
|
—
|
594
|
6.875% €500 million subordinated notes 2018
|
—
|
368
|
—
|
368
|
—
|
387
|
—
|
387
|
12.00% £162 million subordinated notes 2021
|
—
|
221
|
—
|
221
|
—
|
—
|
—
|
—
|
8.25% £500 million subordinated notes 2022
|
—
|
615
|
—
|
615
|
—
|
—
|
—
|
—
|
6.625% £450 million subordinated notes 2041
|
—
|
447
|
—
|
447
|
—
|
447
|
—
|
447
|
8.25% $400 million subordinated notes 2041
|
—
|
269
|
—
|
269
|
—
|
252
|
—
|
252
|
7.875% $575 million undated subordinated notes
|
430
|
—
|
—
|
430
|
—
|
—
|
—
|
—
|
6.125% €650 million subordinated notes 2043
|
—
|
477
|
—
|
477
|
—
|
502
|
—
|
502
|
3.875% €700 million subordinated notes 2044
|
—
|
512
|
—
|
512
|
—
|
539
|
—
|
539
|
5.125% £400
million subordinated notes 2050
|
—
|
394
|
—
|
394
|
—
|
—
|
—
|
—
|
3.375% €900 million subordinated notes 2045
|
—
|
654
|
—
|
654
|
—
|
—
|
—
|
—
|
|
1,225
|
5,244
|
—
|
6,469
|
1,181
|
3,413
|
—
|
4,594
|
Debenture Loans
|
|
|
|
|
|
|
|
|
9.5%
guaranteed bonds 2016
|
—
|
—
|
—
|
—
|
—
|
—
|
200
|
200
|
|
—
|
—
|
—
|
—
|
—
|
—
|
200
|
200
|
Commercial paper
|
—
|
—
|
485
|
485
|
—
|
—
|
516
|
516
|
|
1,225
|
5,244
|
485
|
6,954
|
1,181
|
3,413
|
716
|
5,310
|
Less:
Amount held by Group companies
|
(17)
|
(25)
|
—
|
(42)
|
—
|
—
|
—
|
—
|
Total
|
1,208
|
5,219
|
485
|
6,912
|
1,181
|
3,413
|
716
|
5,310
|
The classifications between Upper Tier 2, Lower Tier 2 and
Senior debt shown above are as defined by the PRA in GENPRU Annex 1 ‘Capital Resources’. The Upper Tier 2 and Lower
Tier 2 instruments count as ‘Tier 1 restricted’ and ‘Tier 2’ capital respectively from 1 January 2016 under
the Solvency II Own Funds guidelines issued by the PRA.
All the above borrowings are stated
at amortised cost.
(ii) The contra
c
tual maturity dates of undiscounted
cash flows for these borrowings are:
|
|
|
2015
|
|
|
2014
|
|
Principal
£m
|
Interest
£m
|
Total
£m
|
Principal
£m
|
Interest
£m
|
Total
£m
|
Within one year
|
485
|
394
|
879
|
516
|
304
|
820
|
1 to 5 years
|
—
|
1,577
|
1,577
|
200
|
1,149
|
1,349
|
5 to 10 years
|
662
|
1,731
|
2,393
|
—
|
1,340
|
1,340
|
10 to 15 years
|
1,190
|
1,668
|
2,858
|
1,188
|
1,322
|
2,510
|
Over 15 years
|
4,448
|
3,496
|
7,944
|
3,442
|
2,924
|
6,366
|
Total contractual undiscounted cash flows
|
6,785
|
8,866
|
15,651
|
5,346
|
7,039
|
12,385
|
Borrowings are considered current if the contractual maturity
dates are within a year. Where subordinated debt is undated or loan notes are perpetual, the interest payments have not been included
beyond 15 years. Annual interest payments in future years for these borrowings are £79 million
(2014:
£72 million).
Contractual undiscounted interest payments
are calculated based on underlying fixed interest rates or prevailing market floating rates as applicable. Year-end exchange rates
have been used for interest projections on loans in foreign currencies.
45 – Borrowings continued
(c) Operational borrowings
(i) The carrying amounts of these borrowings are:
|
2015
£m
|
2014
£m
|
Amounts owed to financial institutions
|
|
|
Loans
|
550
|
696
|
Securitised mortgage loan notes
|
|
|
UK lifetime mortgage business
|
1,308
|
1,372
|
Total
|
1,858
|
2,068
|
All the above borrowings are stated at amortised cost, except
for the loan notes issued in connection with the UK lifetime mortgage business of £1,308 million
(2014:
£1,372 million).
These loan notes are carried at fair value, their values are modelled on risk-adjusted cash flows
for defaults discounted at a risk-free rate plus a market-determined liquidity premium, and are therefore classified as either
‘Level 2’ or ‘Level 3’ in the fair value hierarchy, depending on whether observable market prices are available
for the loan note. These have been designated at fair value through profit and loss in order to present the relevant mortgages,
borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This
presentation provides more relevant information and eliminates any accounting mismatch.
The securitised mortgage loan notes
are at various fixed, floating and index-linked rates. Further details about these notes are given in note 20.
(ii) The contractual maturity dates of undiscounted
cash flows for these borrowings are:
|
|
|
2015
|
|
|
2014
|
|
Principal
£m
|
Interest
£m
|
Total
£m
|
Principal
£m
|
Interest
£m
|
Total
£m
|
Within one year
|
204
|
60
|
264
|
342
|
65
|
407
|
1 to 5 years
|
204
|
269
|
473
|
199
|
278
|
477
|
5 to 10 years
|
551
|
283
|
834
|
508
|
307
|
815
|
10 to 15 years
|
652
|
185
|
837
|
702
|
212
|
914
|
Over 15 years
|
498
|
132
|
630
|
625
|
144
|
769
|
Total contractual undiscounted cash flows
|
2,109
|
929
|
3,038
|
2,376
|
1,006
|
3,382
|
Contractual undiscounted interest payments are calculated
based on underlying fixed interest rates or prevailing market floating rates as applicable. Year-end exchange rates have been used
for interest projections on loans in foreign currencies.
(d) Description and features
(i) Subordinated debt
A description of each of the subordinated notes is set out
in the table below:
Notional amount
|
Issue date
|
Redemption date
|
Callable at par at option
of the Company from
|
In the event the Company does not call the notes,
the coupon will reset at each applicable reset date to
|
£700 million
|
14 Nov 2001
|
14 Nov 2036
|
16 Nov 2026
|
5 year Benchmark Gilt + 2.85%
|
€500 million
1
|
29 Sep 2003
|
Undated
|
29 Sep 2015
|
3 month Euribor + 2.35%
|
£800 million
|
29 Sep 2003
|
Undated
|
29 Sep 2022
|
5 year Benchmark Gilt + 2.40%
|
£600 million
|
20 May 2008
|
20 May 2058
|
20 May 2038
|
3 month LIBOR + 3.26%
|
€500 million
|
20 May 2008
|
22 May 2038
|
22 May 2018
|
3 month Euribor + 3.35%
|
£162 million
|
21 May 2009
|
21 May 2021
|
N/A
|
N/A
|
£500 million
|
21 April 2011
|
21 April 2022
|
N/A
|
N/A
|
£450 million
|
26 May 2011
|
3 June 2041
|
3 June 2021
|
6 Month LIBOR + 4.136%
|
$400 million
|
22 November 2011
|
1 December 2041
|
1 December 2016
|
8.25%(fixed)
|
$575 million
|
8 November 2012
|
Undated
|
8 November 2018
|
6 year USD mid-swaps + 6.828%
|
€650 million
|
5 July 2013
|
5 July 2043
|
5 July 2023
|
5 year EUR mid-swaps + 5.13%
|
€700 million
|
3 July 2014
|
3 July 2044
|
3 July 2024
|
5 year EUR mid-swaps + 3.48%
|
£400 million
|
4 June 2015
|
4 June 2050
|
4 December 2030
|
3 month Euribor + 4.022%
|
€900 million
|
4 June 2015
|
4 December 2045
|
4 December 2025
|
3 month Euribor + 3.55%
|
|
1
|
The €500 million subordinated notes were redeemed at their first call date on 29 September 2015.
|
Subordinated notes issued by the Company rank below its senior
obligations and ahead of its preference shares and ordinary share capital. The dated subordinated notes rank ahead of the undated
subordinated notes. The fair value of notes at 31 December 2015 was £6,810 million
(2014:
£5,188 million)
, calculated with reference to quoted prices.
(ii) Debenture loans
The 9.5% guaranteed bonds were redeemed in full
on 18 September 2015, ahead of their 20 June 2016 maturity date, at a redemption price of £218 million including accrued
interest.
The guaranteed bonds were issued by
the Company in 1996 at a discount of £1.1 million.
(iii) Commercial paper
The commercial paper consists of £485 million issued by the
Company
(2014: £516 million)
and is considered core
structural funding.
The fair value of the commercial paper
is considered to be the same as its carrying value and all issuances are repayable within one year.
45 – Borrowings continued
(iv) Loans
Loans comprise:
|
2015
£m
|
2014
£m
|
Non-recourse
|
|
|
Loans to property partnerships (see (a) below)
|
62
|
199
|
UK Life reassurance (see (b) below)
|
160
|
178
|
Other non-recourse loans (see (c) below)
|
208
|
219
|
|
430
|
596
|
Other loans (see (d) below)
|
120
|
100
|
|
550
|
696
|
(a)
As explained in accounting policy D, the UK long-term
business policyholder funds have invested in a number of property funds and structures (the ‘Property Funds’), some
of which have raised external debt, secured on the relevant Property Fund’s property portfolio. The lenders are only entitled
to obtain payment of interest and principal to the extent there are sufficient resources in the relevant Property Fund and they
have no recourse whatsoever to the policyholder or shareholders’ funds of any companies in the Group. Loans of £62
million
(2014: £199 million)
included in the table relate to those Property Funds which have been consolidated as
subsidiaries.
(b)
The UK long-term business entered into a financial reassurance
agreement with Swiss Re in 2008, under which up-front payments are received from Swiss Re in return for 90% of future surpluses
arising. The loan will be repaid as profits emerge on the business.
(c)
Other non-recourse loans primarily include external debt
raised by special purpose vehicles in the UK long-term business. The lenders have no recourse whatsoever to the shareholders’
funds of any companies in the Group.
(d)
Other loans include external debt raised by overseas
long-term businesses to fund operations.
(v) Securitised mortgage loan notes
Loan notes have been issued by special purpose securitisation
companies in the UK. Details are given in note 20.
(e) Movements during the year
Movements in borrowings during the year were:
|
|
|
2015
|
|
|
2014
|
|
Core
Structural
£m
|
Operational
£m
|
Total
£m
|
Core
Structural
£m
|
Operational
£m
|
Total
£m
|
New borrowings drawn down, excluding commercial paper, net of expenses
|
1,045
|
22
|
1,067
|
552
|
1
|
553
|
Repayment of borrowings, excluding commercial paper
|
(833)
|
(161)
|
(994)
|
(241)
|
(372)
|
(613)
|
Movement in commercial paper
1
|
(3)
|
—
|
(3)
|
1
|
—
|
1
|
Net cash inflow/(outflow)
|
209
|
(139)
|
70
|
312
|
(371)
|
(59)
|
Foreign exchange rate movements
|
(106)
|
(2)
|
(108)
|
(132)
|
(5)
|
(137)
|
Borrowings acquired/(loans repaid) for non-cash consideration
|
1,568
|
11
|
1,579
|
—
|
(321)
|
(321)
|
Fair value movements
|
—
|
37
|
37
|
—
|
70
|
70
|
Amortisation of discounts and other non-cash items
|
(27)
|
(17)
|
(44)
|
5
|
(29)
|
(24)
|
Movements in debt held by Group companies
2
|
(42)
|
(100)
|
(142)
|
—
|
1
|
1
|
Movements in the year
|
1,602
|
(210)
|
1,392
|
185
|
(655)
|
(470)
|
Balance at 1 January
|
5,310
|
2,068
|
7,378
|
5,125
|
2,723
|
7,848
|
Balance at 31 December
|
6,912
|
1,858
|
8,770
|
5,310
|
2,068
|
7,378
|
|
1
|
Gross issuances of commercial paper were £982 million in 2015
(2014:
£1,830 million),
offset by repayments of £985 million
(2014:
£1,829 million).
|
|
2
|
Certain subsidiary companies have purchased issued subordinated notes and securitised loan notes as part of their investment
portfolios. In the consolidated statement of financial position, borrowings are shown net of these holdings but movements in such
holdings over the year are reflected in the tables above.
|
All movements in fair value in 2014 and 2015 on securitised
mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions.
(f) Undrawn borrowings
The Group has the following undrawn committed central borrowing
facilities available to them, which are used to support the commercial paper programme:
|
2015
£m
|
2014
£m
|
Expiring within one year
|
575
|
350
|
Expiring beyond one year
|
1,075
|
1,200
|
|
1,650
|
1,550
|
46 – Payables and other financial
liabilities
This note analyses our payables and other financial liabilities
at the end of the year.
|
2015
£m
|
2014
£m
|
Payables arising out of direct insurance
|
1,106
|
948
|
Payables arising out of reinsurance operations
|
443
|
358
|
Deposits and advances received from reinsurers
|
110
|
92
|
Bank overdrafts (see below)
|
506
|
550
|
Derivative liabilities (note 54)
|
3,881
|
3,481
|
Amounts due to brokers for investment purchases
|
341
|
73
|
Obligations for repayment of cash collateral received
|
4,855
|
5,577
|
Other financial liabilities
|
1,206
|
933
|
Total
|
12,448
|
12,012
|
Expected to be settled within one year
|
9,300
|
10,731
|
Expected to be settled in more than one year
|
3,148
|
1,281
|
|
12,448
|
12,012
|
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.
All payables and other financial liabilities
are carried at cost, which approximates to fair value, except for derivative liabilities, which are carried at their fair values.
47 – Other liabilities
This note analyses our other liabilities at the end of the
year.
|
2015
£m
|
2014
£m
|
Deferred income
|
175
|
159
|
Reinsurers’ share of deferred acquisition costs
|
18
|
12
|
Accruals
|
1,159
|
1,167
|
Other liabilities
|
1,450
|
935
|
Total
|
2,802
|
2,273
|
Expected to be settled within one year
|
2,277
|
1,756
|
Expected to be settled in more than one year
|
525
|
517
|
|
2,802
|
2,273
|
48 – Contingent liabilities and
other risk factors
This note sets out the main areas of uncertainty over the calculation
of our liabilities.
(a) Uncertainty over claims provisions
Note 36 gives details of the estimation techniques used by the Group
to determine the general insurance business outstanding claims provisions and of the methodology and assumptions used in determining
the long-term business provisions. These approaches are designed to allow for the appropriate cost of policy-related liabilities,
with a degree of prudence, to give a result within the normal range of outcomes. However, the actual cost of settling these liabilities
may differ, for example because experience may be worse than that assumed, or future general insurance business claims inflation
may differ from that expected, and hence there is uncertainty in respect of these liabilities.
(b) Asbestos, pollution and social
environmental hazards
In the course of conducting insurance business, various companies
within the Group receive general insurance liability claims, and become involved in actual or threatened related litigation arising
there from, including claims in respect of pollution and other environmental hazards. Amongst these are claims in respect of asbestos
production and handling in various jurisdictions, including Europe, Canada and Australia. Given the significant delays that are
experienced in the notification of these claims, the potential number of incidents which they cover and the uncertainties associated
with establishing liability, the ultimate cost cannot be determined with certainty. However, on the basis of current information
having regard to the level of provisions made for general insurance claims and substantial reinsurance cover now in place, the
directors consider that any additional costs arising are not likely to have a material impact on the financial position of the
Group.
(c) Guarantees on long-term savings
products
As a normal part of their operating activities, various Group companies
have given guarantees and options, including interest rate guarantees, in respect of certain long-term insurance and investment
products. Note 38 gives details of these guarantees and options. In providing these guarantees and options, the Group’s capital
position is sensitive to fluctuations in financial variables including foreign currency exchange rates, interest rates, property
values and equity prices. Interest rate guaranteed returns, such as those available on guaranteed annuity options, are sensitive
to interest rates falling below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation
to minimum rates of return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was
made. The directors continue to believe that the existing provisions for such guarantees and options are sufficient.
48 – Contingent liabilities and
other risk factors continued
(d) Regulatory compliance
The Group’s insurance and investment business is subject to
local regulation in each of the countries in which it operates. A number of the Group’s UK subsidiaries are dual regulated
(directly authorised by both the PRA (for prudential regulation) and the FCA (for conduct regulation) whilst others are solo regulated
(regulated solely by the FCA for both prudential and conduct regulation). Between them, the PRA and FCA have broad powers including
the authority to grant, vary the terms of, or cancel a regulated firm’s authorisation; to investigate marketing and sales
practices; and to require the maintenance of adequate financial resources. The Group’s regulators outside the UK typically
have similar powers, but in some cases they also operate a system of ‘prior product approval’.
The Group’s regulated businesses have compliance
resources to respond to regulatory enquiries in a constructive way, and take corrective action when warranted. However, all regulated
financial services companies face the risk that their regulator could find that they have failed to comply with applicable regulations
or have not undertaken corrective action as required.
The impact of any such finding (whether in the
UK or overseas) could have a negative impact on the Group’s reported results or on its relations with current and potential
customers. Regulatory action against a member of the Group could result in adverse publicity for, or negative perceptions regarding,
the Group, or could have a material adverse effect on the business of the Group, its results of operations and/or financial condition
and divert management’s attention from the day-to-day management of the business.
(e) Structured settlements
The Company has purchased annuities from licensed Canadian life insurers
to provide for fixed and recurring payments to claimants. As a result of these arrangements, the Company is exposed to credit risk
to the extent that any of the life insurers fail to fulfill their obligations. The Company’s maximum exposure to credit risk
for these types of arrangements is approximately CAD$1,212 million as at 31 December 2015 (
2014
:
CAD$1,224 million
).
Credit risk is managed by acquiring annuities from a diverse portfolio of life insurers with proven financial stability. This risk
is reduced to the extent of coverage provided by Assuris, the Canadian life insurance industry compensation plan. As at 31 December
2015, no information has come to the Company’s attention that would suggest any weakness or failure in life insurers from
which it has purchased annuities and consequently no provision for credit risk is required.
(f) Other
In the course of conducting insurance and investment business, various
Group companies receive liability claims, and become involved in actual or threatened related litigation. In the opinion of the
directors, adequate provisions have been established for such claims and no material loss will arise in this respect.
In addition, in line with standard business practice,
various Group companies have given guarantees, indemnities and warranties in connection with disposals in recent years of subsidiaries
and associates to parties outside the Aviva Group. In the opinion of the directors, no material unprovisioned loss will arise in
respect of these guarantees, indemnities and warranties.
There are a number of charges registered over
the assets of Group companies in favour of other Group companies or third parties. In addition, certain of the Company’s
assets are charged in favour of certain of its subsidiaries as security for intra-Group loans.
The Group’s insurance subsidiaries pay
contributions to levy schemes in several countries in which we operate. Given the economic environment, there is a heightened risk
that the levy contributions will need to be increased to protect policyholders if an insurance company falls into financial difficulties.
The directors continue to monitor the situation but are not aware of any need to increase provisions at the statement of financial
position date.
49 – Commitments
This note gives details of our commitments to capital expenditure
and under operating leases.
(a) Capital commitments
Contractual commitments for acquisitions or capital expenditures
of investment property and property and equipment, which have not been recognised in the financial statements, are as follows:
|
2015
£m
|
2014
£m
|
Investment property
|
71
|
97
|
Property and equipment
|
61
|
8
|
Other investment vehicles
1
|
202
|
—
|
|
334
|
105
|
|
1
|
Represents commitments for further investment in certain private equity vehicles. Such commitments do not expose the Group
to the risk of future losses in excess of its investment.
|
Contractual obligations for future repairs and maintenance
on investment properties are £nil
(2014: £nil)
.
Note 14 sets out the commitments the Group has to its joint ventures.
(b) Operating lease commitments
(i)
Future contractual aggregate minimum lease rentals receivable under non-cancellable operating
leases are as follows:
|
2015
£m
|
2014
£m
|
Within 1 year
|
318
|
234
|
Later than 1 year and not later than 5 years
|
996
|
732
|
Later than 5 years
|
1,382
|
1,203
|
|
2,696
|
2,169
|
(ii)
Future contractual aggregate minimum lease payments under non-cancellable operating leases are
as follows:
|
2015
£m
|
2014
£m
|
Within 1 year
|
95
|
92
|
Later than 1 year and not later than 5 years
|
329
|
290
|
Later than 5 years
|
493
|
421
|
|
917
|
803
|
Total future minimum sub-lease payments expected to be received under non-cancellable sub-leases
|
45
|
47
|
50 – Group capital structure
The Group maintains an efficient capital structure from a combination
of equity shareholders’ funds, preference capital, subordinated debt and borrowings, consistent with our overall risk profile
and the regulatory and market requirements of our business. This note shows where this capital is employed.
Accounting basis and capital employed
by segment
The table below shows how our capital, on an IFRS basis,
is deployed by segment and how that capital is funded.
|
2015
|
2014
|
|
Capital
employed
|
Capital
employed
|
|
IFRS
basis
£m
|
IFRS
basis
£m
|
Life business
|
|
|
United Kingdom & Ireland
|
11,088
|
5,668
|
France
|
2,151
|
2,234
|
Poland
|
305
|
318
|
Italy
|
849
|
929
|
Spain
|
506
|
557
|
Other Europe
|
72
|
82
|
Europe
|
3,883
|
4,120
|
Asia
|
1,355
|
791
|
|
16,326
|
10,579
|
General insurance & health
|
|
|
United Kingdom & Ireland
|
4,089
|
4,145
|
France
|
506
|
556
|
Italy
|
231
|
276
|
Other Europe
|
63
|
32
|
Europe
|
800
|
864
|
Canada
|
957
|
969
|
Asia
|
24
|
29
|
|
5,870
|
6,007
|
Fund Management
|
411
|
298
|
Corporate & Other Business
1
|
2,537
|
702
|
Total capital employed
|
25,144
|
17,586
|
Financed by
|
|
|
Equity shareholders’ funds
|
15,764
|
10,018
|
Non-controlling interests
|
1,145
|
1,166
|
Direct capital instrument & tier 1 notes
2
|
1,123
|
892
|
Preference shares
|
200
|
200
|
Subordinated debt
3
|
6,427
|
4,594
|
Senior debt
|
485
|
716
|
Total capital employed
|
25,144
|
17,586
|
|
1
|
‘Corporate’ and ‘other Business’ includes centrally held tangible net assets, the main UK staff pension
scheme surplus and also reflects internal lending arrangements. These internal lending arrangements, which net out on consolidation,
include the formal loan arrangement between Aviva Group Holdings Limited and Aviva Insurance Limited (AIL). Internal capital management
in place allocated a majority of the total capital of AIL to the UK general insurance operations with the remaining capital deemed
to be supporting residual (non-operational) Pillar II ICA risks.
|
|
2
|
On 1 October 2015 Friends Life Holdings plc was replaced by Aviva plc as the issuer of the 2003 Step-up Tier 1 Insurance Capital
Securities of £231 million. Following this, these have been included within direct capital instrument & tier 1 notes.
|
|
3
|
Subordinated debt excludes amounts held by Group companies of £42 million.
|
Total capital employed is financed by a combination of equity shareholders’
funds, preference capital, subordinated debt and other borrowings. At the end of 2015 the Group had £25.1 billion
(2014:
£17.6 billion)
of total capital employed in our trading operations measured on an IFRS basis. The increase in
capital employed is driven mainly by the acquisition of Friends Life (see note 2 for further details).
In June 2015 Aviva plc issued €900 million
and £400 million of Lower Tier 2 subordinated debt callable in 2025 and 2030 respectively. The proceeds were used in part
to repay the following instruments: £268 million Step-up Tier 1 Insurance Capital Securities at first call date in July 2015;
€500 million undated subordinated debt at first call date in September 2015; and £200 million debenture loans in September
2015, ahead of the June 2016 maturity.
At the end of 2015 the market value of our external
debt, subordinated debt, preference shares (including both Aviva plc preference shares of £200 million and General Accident
plc preference shares, within non-controlling interests, of £250 million), and direct capital instrument and tier 1 notes
was £9,094 million
(2014: £7,511 million).
51 – Statement of cash flows
This note gives further detail behind the figures in the
statement of cash flows.
(a) The reconciliation of profit
before tax to the net cash inflow from operating activities is:
|
2015
£m
|
2014
£m
|
2013
£m
|
Profit before tax from continuing operations
|
1,172
|
2,663
|
1,472
|
Adjustments for:
|
|
|
|
Share of profits of joint ventures and associates
|
(180)
|
(147)
|
(120)
|
Dividends received from joint ventures and associates
|
45
|
52
|
47
|
(Profit)/loss on sale of:
|
|
|
|
Investment property
|
(120)
|
(49)
|
2
|
Property and equipment
|
(1)
|
(4)
|
—
|
Subsidiaries, joint ventures and associates
|
(2)
|
(174)
|
(115)
|
Investments
|
(3,404)
|
(3,040)
|
(3,047)
|
|
(3,527)
|
(3,267)
|
(3,160)
|
Fair value (gains)/losses on:
|
|
|
|
Investment property
|
(778)
|
(678)
|
(184)
|
Investments
|
9,538
|
(11,228)
|
(1,525)
|
Borrowings
|
37
|
70
|
(4)
|
|
8,797
|
(11,836)
|
(1,713)
|
Depreciation of property and equipment
|
24
|
19
|
31
|
Equity compensation plans, equity settled expense
|
40
|
39
|
37
|
Impairment and expensing of:
|
|
|
|
Goodwill on subsidiaries
|
22
|
—
|
48
|
Financial investments, loans and other assets
|
7
|
(3)
|
32
|
Acquired value of in-force business and intangibles
|
18
|
10
|
14
|
Non-financial assets
|
—
|
26
|
—
|
|
47
|
33
|
94
|
Amortisation of:
|
|
|
|
Premium / discount on debt securities
|
104
|
255
|
144
|
Premium / discount on borrowings
|
(44)
|
(24)
|
(16)
|
Premium / discount on non participating investment contracts
|
237
|
5
|
8
|
Financial instruments
|
12
|
12
|
194
|
Acquired value of in-force business and intangibles
|
390
|
108
|
110
|
|
699
|
356
|
440
|
Change in unallocated divisible surplus
|
(984)
|
3,364
|
(280)
|
Interest expense on borrowings
|
588
|
525
|
589
|
Net finance charge on pension schemes
|
(80)
|
(20)
|
(37)
|
Foreign currency exchange gains
|
(358)
|
(199)
|
(187)
|
|
|
|
|
Changes in working capital
|
|
|
|
(Increase) / Decrease in reinsurance assets
|
180
|
(818)
|
(571)
|
(Increase) / Decrease in deferred acquisition costs
|
(139)
|
(21)
|
90
|
Increase / (Decrease) in insurance liabilities and investment contracts
|
(7,950)
|
11,552
|
3,983
|
(Increase) / Decrease in other assets
|
(1,133)
|
(1,495)
|
5,135
|
|
(9,042)
|
9,218
|
8,637
|
Net sales/(purchases) of operating assets
|
|
|
|
Net purchases of investment property
|
(929)
|
(725)
|
(370)
|
Net proceeds on sale of investment property
|
1,953
|
1,811
|
1,115
|
Net sales / (purchases) of financial investments
|
6,932
|
(1,973)
|
(4,033)
|
|
7,956
|
(887)
|
(3,288)
|
Cash generated from / (used in) operating activities - continuing operations
|
5,197
|
(87)
|
2,562
|
Cash generated from operating activities - discontinued operations
|
—
|
—
|
1,950
|
Cash generated from/(used in) operating activities
|
5,197
|
(87)
|
4,512
|
The cash flows presented in this statement cover all the Group’s
activities and include flows from both policyholder and shareholder activities. Operating cash flows reflect the movement in both
policyholder and shareholder controlled cash and cash equivalent balances.
During the year the net operating cash
inflow reflects a number of factors, including the level of premium income, payments of claims, creditors and surrenders and purchases
and sales of operating assets including financial investments. It also includes changes in the size and value of consolidated cash
investment funds and changes in the Group participation in these funds.
(b) Cash flows in respect of, and
additions to, the acquisition of subsidiaries, joint ventures and associates comprised:
|
2015
£m
|
2014
£m
|
2013
£m
|
Cash consideration for subsidiaries, joint ventures and associates acquired and additions
|
97
|
79
|
1
|
Less: Cash and cash equivalents acquired with subsidiaries
|
(7,880)
|
—
|
28
|
Total cash flow on acquisitions and additions
|
(7,783)
|
79
|
29
|
51 – Statement of cash flows
continued
(c) Cash flows in respect of the disposal
of subsidiaries, joint ventures and associates comprised:
|
2015
£m
|
2014
£m
|
2013
£m
|
Cash proceeds from disposal of subsidiaries, joint ventures and associates
|
6
|
349
|
817
|
Less: Net cash and cash equivalents divested with subsidiaries
|
(9)
|
(239)
|
(440)
|
Cash flows on disposals – continuing operations
|
(3)
|
110
|
377
|
Cash flows on disposal – discontinued operations
|
—
|
(20)
|
(1,582)
|
Total cash flow on disposals
|
(3)
|
90
|
(1,205)
|
The above figures form part of cash flows from investing
activities.
(d) Cash and cash equivalents in the
statement of cash flows at 31 December comprised:
|
2015
£m
|
2014
£m
|
2013
£m
|
Cash at bank and in hand
|
4,496
|
2,855
|
4,103
|
Cash equivalents
|
29,180
|
20,259
|
22,379
|
|
33,676
|
23,114
|
26,482
|
Bank overdrafts
|
(506)
|
(550)
|
(493)
|
|
33,170
|
22,564
|
25,989
|
Cash and cash equivalents reconciles to the statement
of financial position as follows:
|
2015
£m
|
2014
£m
|
2013
£m
|
Cash and cash equivalents (excluding bank overdrafts)
|
33,676
|
23,114
|
26,482
|
Less: Assets classified as held for sale
|
—
|
(9)
|
(351)
|
|
33,676
|
23,105
|
26,131
|
52 – Capital statement
This statement sets out the financial strength of our Group entities
and provides an analysis of the disposition and constraints over the availability of capital to meet risks and regulatory requirements.
The capital statement also provides a reconciliation of shareholders’ funds to regulatory capital.
From 1 January 2016 EU-based insurance groups
are no longer required to disclose their solvency position under the Insurance Groups Directive, as the regulatory framework has
been replaced by the new Solvency II regime. As such, after 31 December 2015 Aviva Group will no longer disclose its capital statement
under FRS 27.
The analysis below sets out the Group’s
available capital resources at 31 December 2015.
Available capital resources
|
Old
with-
profits
sub-fund
£m
|
New
with-profits
sub-fund
£m
|
With-
profits
sub-
fund
5
£m
|
Friends Life
FP with-profits fund
£m
|
Other
Friends Life
with-
profits
funds
6
£m
|
Total
UK life
with
-profits funds
£m
|
Other
UK life
operations
£m
|
Overseas
life
operations
£m
|
Total life
operations
£m
|
Other
operations
7
£m
|
2015
Total
£m
|
2014
Total
£m
|
Total shareholders’ funds
|
—
|
(1,174)
|
9
|
—
|
—
|
(1,165)
|
12,226
|
5,203
|
16,264
|
1,968
|
18,232
|
12,276
|
Other sources of capital
1
|
—
|
—
|
—
|
—
|
—
|
—
|
200
|
36
|
236
|
6,003
|
6,239
|
4,623
|
Unallocated divisible surplus
2
|
221
|
—
|
1,685
|
186
|
484
|
2,576
|
(2)
|
6,237
|
8,811
|
—
|
8,811
|
9,467
|
Adjustments onto a regulatory basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ share of accrued bonus
|
(38)
|
419
|
(119)
|
(34)
|
(447)
|
(219)
|
—
|
—
|
(219)
|
—
|
(219)
|
227
|
Goodwill and other intangibles
3
|
—
|
—
|
—
|
(8)
|
—
|
(8)
|
(4,255)
|
(2,038)
|
(6,301)
|
(1,501)
|
(7,802)
|
(2,417)
|
Regulatory valuation and admissibility restrictions
4
|
55
|
2,828
|
(36)
|
8
|
(33)
|
2,822
|
(4,123)
|
2,003
|
702
|
(1,799)
|
(1,097)
|
(2,018)
|
Total available capital resources
|
238
|
2,073
|
1,539
|
152
|
4
|
4,006
|
4,046
|
11,441
|
19,493
|
4,671
|
24,164
|
22,158
|
Analysis of liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Participating insurance liabilities
|
1,652
|
11,325
|
9,395
|
4,493
|
3,215
|
30,080
|
3,400
|
20,395
|
53,875
|
—
|
53,875
|
44,834
|
Unit-linked liabilities
|
—
|
—
|
—
|
—
|
—
|
—
|
10,482
|
4,286
|
14,768
|
—
|
14,768
|
7,963
|
Other non-participating life insurance
|
363
|
3,366
|
559
|
26
|
—
|
4,314
|
50,712
|
3,381
|
58,407
|
—
|
58,407
|
46,656
|
Total insurance liabilities
|
2,015
|
14,691
|
9,954
|
4,519
|
3,215
|
34,394
|
64,594
|
28,062
|
127,050
|
—
|
127,050
|
99,453
|
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
|
Total investment liabilities
|
719
|
3,049
|
6,193
|
3,584
|
5,214
|
18,759
|
94,721
|
67,693
|
181,173
|
—
|
181,173
|
117,245
|
Total liabilities
|
2,734
|
17,740
|
16,147
|
8,103
|
8,429
|
53,153
|
159,315
|
95,755
|
308,223
|
—
|
308,223
|
216,698
|
|
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.
|
|
2
|
Unallocated divisible surplus for overseas life operations is included gross of minority interest.
|
|
3
|
Includes goodwill and other intangibles of £116 million in joint ventures and associates.
|
|
4
|
Includes an adjustment for minorities (except for other sources of capital that are reflected net of minority interest).
|
|
5
|
Includes the Provident Mutual With-Profits Fund and the Ireland With-Profits Sub-Fund.
|
|
6
|
Includes FPLAL WPF, FLC New WPF, FLC Old WPF, FLAS WPF and WL WPF.
|
|
7
|
Other operations include general insurance and fund management business.
|
52 – Capital statement continued
Analysis of movements in capital of long-term
businesses
For the year ended 31 December 2015
|
Old
with-
profits
sub-fund
£m
|
New
with-profits
sub-fund
£m
|
With-
profits
sub-fund
£m
|
Friends Life
FP with
-profits
fund
£m
|
Other
Friends Life
with-profits
funds
£m
|
Total UK
life with
-profits
funds
£m
|
Other
UK life
operations
£m
|
Overseas
life
operations
£m
|
Total life
operations
£m
|
Available capital resources at 1 January
|
253
|
2,111
|
1,583
|
—
|
—
|
3,947
|
2,684
|
13,269
|
19,900
|
Effect of new business
|
—
|
6
|
(4)
|
—
|
—
|
2
|
127
|
(96)
|
33
|
Expected change in available capital resources
|
7
|
85
|
159
|
3
|
4
|
258
|
630
|
587
|
1,475
|
Variance between actual and expected experience
|
(3)
|
(84)
|
(59)
|
11
|
114
|
(21)
|
250
|
(1,075)
|
(846)
|
Effect of operating assumption changes
|
2
|
12
|
(29)
|
(165)
|
(118)
|
(298)
|
495
|
88
|
285
|
Effect of economic assumption changes
|
(15)
|
(70)
|
14
|
(5)
|
71
|
(5)
|
90
|
(11)
|
74
|
Effect of changes in management policy
1
|
1
|
5
|
(191)
|
—
|
—
|
(185)
|
(1,352)
|
2
|
(1,535)
|
Transfers, acquisitions and disposals
2
|
—
|
—
|
164
|
183
|
3
|
350
|
2,196
|
(398)
|
2,148
|
Foreign exchange movements
|
—
|
—
|
12
|
—
|
—
|
12
|
(31)
|
(625)
|
(644)
|
Other movements
|
(7)
|
8
|
(110)
|
125
|
(70)
|
(54)
|
(1,043)
|
(300)
|
(1,397)
|
Available capital resources at 31 December
|
238
|
2,073
|
1,539
|
152
|
4
|
4,006
|
4,046
|
11,441
|
19,493
|
|
1
|
Changes in management policy in other UK life operations include £(1,356) million of internal subordinated debt reclassified
from capital to liabilities during the year.
|
|
2
|
Included within transfers, acquisitions and disposals is £2,076 million reflecting the available capital resources of
Friends Life at acquisition.
|
Further analysis of the movement in the liabilities of the long-term
business can be found in notes 36 and 37.
The analysis of movements in capital provides
an explanation of the movement in available capital of the Group’s life business for the year. This analysis is intended
to give an understanding of the underlying causes of changes in the available capital of the Group’s life business, and provides
a distinction between some of the key factors affecting the available capital.
The negative shareholders’ funds balance
within the UK with-profits funds arises in NWPSF as a result of regulatory valuation and admissibility differences in the reattributed
estate which is valued on a realistic regulatory basis compared to the disclosure on an IFRS basis.
NWPSF is fully supported by the reattributed
estate of £2,073 million (this is known as RIEESA) at 31 December 2015
(31 December 2014: £2,111 million)
held
within NPSF (Non-Profit Sub-Fund within UKLAP included within other UK life operations) in the form of a capital support arrangement.
This support arrangement will provide capital to NWPSF to ensure that the value of assets of NWPSF are at least equal to the value
of liabilities calculated on a realistic regulatory basis, therefore it forms part of the NWPSF available capital resources.
The with-profits funds and the RIEESA use internal
hedging to limit the impacts of equity market volatility.
In aggregate, the Group has at its disposal total
available capital of £24.2 billion
(2014: £22.2 billion)
, representing the aggregation of the solvency capital
of all of our businesses.
This capital is available to meet risks and regulatory
requirements set by reference to local guidance and EU directives.
After effecting the year end transfers to shareholders,
the UK with-profits funds have available capital of £4.0 billion
(2014: £3.9 billion)
(including amounts held
in RIEESA). Subject to certain conditions, the RIEESA capital can be used to write new non-profit business, but the primary purpose
of this capital is to provide support for the UK with-profits business. The capital (including RIEESA) is comfortably in excess
of the required capital margin, and therefore no further support is required by shareholders.
For the remaining life and general insurance
operations, the total available capital amounting to £20.2 billion
(2014: £18.3 billion)
is higher than the
minimum requirements established by regulators and, in principle, the excess is available to shareholders. In practice, management
will hold higher levels of capital within each business operation to provide appropriate cover for risk.
The total available capital of £24.2 billion
is arrived at on the basis of local regulatory guidance, which evaluates assets and liabilities prudently and includes the Group’s
unallocated divisible surplus of overseas life operations. This is a limitation of the Group Capital Statement which, to be more
meaningful, needs to evaluate available capital on an economic basis and compare it with the risk capital required for each individual
operation, after allowing for the considerable diversification benefits that exist in our Group.
Within the Aviva Group there exist intra-group
arrangements to provide capital to particular business units. Included in these arrangements is a subordinated loan of £200
million from Aviva Life Holdings UK Limited to Aviva Annuity Limited to provide capital to support the writing of new business.
The available capital of the Group’s with-profits
funds is determined in accordance with the ‘Realistic balance sheet’ regime prescribed by the PRA’s regulations,
under which liabilities to policyholders include both declared bonuses and the constructive obligation for future bonuses not yet
declared. The available capital resources include an estimate of the value of their respective estates, included as part of the
unallocated divisible surplus. The estate represents the surplus in the fund that is in excess of any constructive obligation to
policyholders. It represents capital resources of the individual with-profits fund to which it relates and is available to meet
regulatory and other solvency requirements of the fund and, in certain circumstances, additional liabilities may arise.
The liabilities included in the balance sheet
for the with-profits funds do not include the amount representing the shareholders’ portion of future bonuses. However, the
shareholders’ portion is treated as a deduction from capital that is available to meet regulatory requirements and is therefore
shown as a separate adjustment in the capital statement.
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.
52 – Capital statement continued
|
|
|
|
|
|
31 December 2015
|
31 December 2014
|
|
Estimated
realistic
assets
£bn
|
Estimated
realistic
liabilities
1
£bn
|
Estimated
realistic
inherited
estate
2
£bn
|
Capital
support
arrangement
3
£bn
|
Estimated
risk capital
margin
£bn
|
Estimated
excess
available
capital
£bn
|
Estimated
excess
available
capital
£bn
|
NWPSF
|
14.0
|
(14.0)
|
—
|
2.1
|
(0.2)
|
1.9
|
1.9
|
OWPSF
|
2.6
|
(2.4)
|
0.2
|
—
|
—
|
0.2
|
0.2
|
WPSF
4
|
16.7
|
(15.2)
|
1.5
|
—
|
(0.3)
|
1.2
|
1.3
|
FP WPF
5
|
7.2
|
(7.0)
|
0.2
|
—
|
(0.2)
|
—
|
—
|
Other Friends Life WPFs
6
|
10.7
|
(10.7)
|
—
|
—
|
—
|
—
|
—
|
Aggregate
|
51.2
|
(49.3)
|
1.9
|
2.1
|
(0.7)
|
3.3
|
3.4
|
|
1
|
Realistic liabilities include the shareholders’ share of accrued bonuses of £0.8 billion
(31 December 2014:
£(0.2) billion)
. Realistic liabilities adjusted to eliminate the shareholders’ share of accrued bonuses are £48.5
billion
(31 December 2014: £33.0 billion)
. These realistic liabilities make provision for guarantees, options and
promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £1.4
billion, £0.3 billion, £3.2 billion, and £0.8 billion for NWPSF, OWPSF, WPSF and FP WPF respectively
(31 December
2014: £1.4 billion, £0.3 billion and £3.0 billion for NWPSF, OWPSF and WPSF respectively)
.
|
|
2
|
Estimated realistic inherited estate at 31 December 2014 was £nil, £0.3 billion and £1.6 billion for NWPSF,
OWPSF and WPSF respectively.
|
|
3
|
The support arrangement represents the reattributed estate (RIEESA) of £2.1 billion at 31 December 2015
(31 December
2014: £2.1 billion)
.
|
|
4
|
The WPSF fund includes the Ireland With-Profits Sub-Fund (IWPSF) and the Provident Mutual (PM) Fund which have realistic assets
and liabilities of £2.4 billion in total, and therefore do not contribute to the realistic inherited estate.
|
|
5
|
For FP WPF the realistic inherited estate is restricted to the estimated risk capital margin with excess available capital
used to enhance asset shares.
|
|
6
|
Includes FPLAL WPF, FLC New WPF, FLC Old WPF, FLAS WPF and WL WPF. For these funds it is assumed that the entire estimated
realistic inherited estate is distributed to policyholders.
|
Under the PRA regulatory regime, UK life with-profits business is
required to hold capital equivalent to the greater of their regulatory requirement based on EU Directives (regulatory peak) and
the PRA realistic bases (realistic peak) described above.
For UK non-participating business, the relevant
capital requirement is the minimum solvency requirement determined in accordance with PRA regulations. The available capital reflects
the excess of regulatory basis assets over liabilities before deduction of capital resources requirement.
For UK general insurance businesses, the relevant
capital requirement is the minimum solvency requirement determined in accordance with the PRA requirements.
For overseas businesses in the European Economic
Area (EEA), Canada, Hong Kong and Singapore, the available capital and the minimum requirement are calculated under the locally
applicable regulatory regimes. The businesses outside these territories are subject to the PRA rules for the purposes of calculation
of available capital and capital resource requirement.
For fund management and other businesses, the
relevant capital requirement is the minimum solvency requirement determined in accordance with the local regulator’s requirements
for the specific class of business.
The available capital resources in each regulated
entity are generally subject to restrictions as to their availability to meet requirements that may arise elsewhere in the Group.
The principal restrictions are:
|
·
|
(i) UK with-profits funds – (NWPSF, OWPSF, WPSF, FP WPF and Other Friends Life WPFs)
– any available surplus
held in each fund can be used to meet the requirements of the fund itself, be distributed to policyholders and shareholders or
in the case of NWPSF and OWPSF, transferred via the capital support arrangement explained above (for OWPSF only to the extent support
has been provided in the past). In most cases, with-profits policyholders are entitled to at least 90% of the distributed profits
while the shareholders receive the balance. The latter distribution would be subject to a tax charge, which is met by the fund.
In the FP WPF, shareholders are additionally entitled to 60% of surplus arising in respect of the pre-demutualisation non-profit
and unitised business written in the fund (excluding the investment elements). Also, post-demutualisation policyholders are only
entitled to surplus from the return on their investments; other sources of surplus are wholly owned by shareholders. In the FPLAL
WPF the surplus may only be distributed to policyholders.
|
|
·
|
(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.
|
|
·
|
(iii) Overseas life operations
– the capital requirements and corresponding regulatory capital held by overseas
businesses are calculated using the locally applicable regulatory regime. The available capital resources in all these businesses
are subject to local regulatory restrictions which may constrain management’s ability to utilise these in other parts of
the Group. In several business units, Group companies and other parties jointly control certain entities; these joint venture operations
may constrain management’s ability to utilise the capital in other parts of the Group. Any transfer of available capital
may give rise to a tax charge subject to availability of tax relief elsewhere in the Group.
|
|
·
|
(iv) General insurance operations
– the capital requirements and corresponding regulatory capital held by overseas
businesses are calculated using the locally applicable regulatory regime. The available capital resources in all these businesses
are subject to local regulatory restrictions which may constrain management’s ability to utilise these in other parts of
the Group. Any transfer of available capital may give rise to a tax charge, subject to availability of tax relief elsewhere in
the Group.
|
53 – Risk management
This note sets out the major risks our businesses and its shareholders
face and describes the Group’s approach to managing these. It also gives sensitivity analyses around the major economic and
non-economic assumptions that can cause volatility in the Group’s earnings and capital position.
(a) Risk management framework
The risk management framework (RMF) in Aviva forms an integral part
of the management and Board processes and decision-making framework across the Group. The key elements of our risk management framework
comprise risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles and
responsibilities; and the processes we use to identify, measure, manage, monitor and report (IMMMR) risks, including the use of
our risk models and stress and scenario testing.
For the purposes of risk identification and measurement,
and aligned to Aviva’s risk policies, risks are usually grouped by risk type: credit, market, liquidity, life insurance (including
long-term health), general insurance (including short-term health), asset management and operational risk. Risks falling within
these types may affect a number of metrics including those relating to balance sheet strength, liquidity and profit. They may also
affect the performance of the products we deliver to our customers and the service to our customers and distributors, which can
be categorised as risks to our brand and reputation or as conduct risk.
To promote a consistent and rigorous approach
to risk management across all businesses we have a set of risk policies and business standards which set out the risk strategy,
appetite, framework and minimum requirements for the Group’s worldwide operations. On a semi-annual basis the business chief
executive officers and chief risk officers sign-off compliance with these policies and standards, providing assurance to the relevant
oversight committees that there is a consistent framework for managing our business and the associated risks.
A regular top-down key risk identification and
assessment process is carried out by the risk function. This includes the consideration of emerging risks and is supported by deeper
thematic reviews. This process is replicated at the business unit level. The risk assessment processes are used to generate risk
reports which are shared with the relevant risk committees.
Risk models are an important tool in our measurement
of risks and are used to support the monitoring and reporting of the risk profile and in the consideration of the risk management
actions available. We carry out a range of stress (where one risk factor, such as equity returns, is assumed to vary) and scenario
(where combinations of risk factors are assumed to vary) tests to evaluate their impact on the business and the management actions
available to respond to the conditions envisaged.
Roles and responsibilities for risk management
in Aviva are based around the ‘three lines of defence model’ where ownership for risk is taken at all levels in the
Group. Line management in the business is accountable for risk management, including the implementation of the risk management
framework and embedding of the risk culture. The risk function is accountable for quantitative and qualitative oversight and challenge
of the IMMMR process and for developing the risk management framework. Internal Audit provides an independent assessment of the
risk framework and internal control processes.
Board oversight of risk and risk management across
the Group is maintained on a regular basis through its Risk Committee and Governance Committee. The Board has overall responsibility
for determining risk appetite, which is an expression of the risk the business is willing to take. Risk appetites are set relative
to capital and liquidity at Group and in the business units.
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.
Further information on the types and management
of specific risk types is given in sections (b) to (j) below.
The risk management framework of a small number
of our joint ventures and strategic equity holdings differs from the Aviva framework outlined in this note. We work with these
entities to understand how their risks are managed and to align them, where possible, with Aviva’s framework. Aviva completed
the acquisition of Friends Life in April 2015. The Friends Life risk management framework was very similar to that of Aviva, but
a formal gap analysis was carried out and the former Friends Life businesses formally adopted the Aviva risk policies and business
standards at the end of 2015.
(b) Credit risk
Credit risk is the risk of financial loss as a result of the default
or failure of third parties to meet their payment obligations to Aviva, or variations in market values as a result of changes in
expectations related to these risks. Credit risk is an area where we can provide the returns required to satisfy policyholder liabilities
and to generate returns for our shareholders. In general we prefer to take credit risk over equity and property risks, due to the
better expected risk adjusted return, our credit risk analysis capability and the structural investment advantages conferred to
insurers with long-dated, relatively illiquid liabilities.
Our approach to managing credit risk recognises
that there is a risk of adverse financial impact resulting from fluctuations in credit quality of third parties including default,
rating transition and credit spread movements. Our credit risks arise principally through exposures to debt security investments,
structured asset investments, bank deposits, derivative counterparties, mortgage lending and reinsurance counterparties.
The Group manages its credit risk at business
unit and Group level. All business units are required to implement credit risk management processes (including limits frameworks),
operate specific risk management committees, and ensure detailed reporting and monitoring of their exposures against pre-established
risk criteria. At Group level, we manage and monitor all exposures across our business units on a consolidated basis, and operate
a Group limit framework that must be adhered to by all.
A detailed breakdown of the Group’s current
credit exposure by credit quality is shown below.
53 – Risk management continued
(i) Financial exposures by credit ratings
Financial assets are graded according to current external
credit ratings issued. AAA is the highest possible rating. Investment grade financial assets are classified within the range of
AAA to BBB ratings. Financial assets which fall outside this range are classified as sub-investment grade. The following table
provides information regarding the aggregated credit risk exposure of the Group for financial assets with external credit ratings.
‘Not rated’ assets capture assets not rated by external ratings agencies.
As at 31 December 2015
|
AAA
|
AA
|
A
|
BBB
|
Below
BBB
|
Not rated
|
Carrying
value
including
held for sale
£m
|
Carrying
value
£m
|
Debt securities
|
12.4%
|
37.4%
|
19.8%
|
21.2%
|
4.0%
|
5.2%
|
162,964
|
162,964
|
Reinsurance assets
|
0.1%
|
88.2%
|
8.0%
|
0.0%
|
0.0%
|
3.7%
|
20,918
|
20,918
|
Other investments
|
0.0%
|
0.1%
|
0.8%
|
0.0%
|
0.0%
|
99.1%
|
47,695
|
47,695
|
Loans
|
0.0%
|
8.2%
|
1.3%
|
0.1%
|
0.0%
|
90.4%
|
22,433
|
22,433
|
Total
|
|
|
|
|
|
|
254,010
|
254,010
|
As at 31 December 2014
|
AAA
|
AA
|
A
|
BBB
|
Below
BBB
|
Not rated
|
Carrying
value
including
held for sale
£m
|
Carrying
value
£m
|
Debt securities
|
13.6%
|
35.6%
|
21.3%
|
21.9%
|
2.1%
|
5.5%
|
131,661
|
131,661
|
Reinsurance assets
|
0.3%
|
71.3%
|
21.9%
|
0.1%
|
0.0%
|
6.4%
|
7,958
|
7,958
|
Other investments
|
0.0%
|
0.1%
|
1.3%
|
0.0%
|
0.2%
|
98.4%
|
35,358
|
35,358
|
Loans
|
1.3%
|
9.0%
|
2.1%
|
0.2%
|
0.0%
|
87.4%
|
25,260
|
25,260
|
Total
|
|
|
|
|
|
|
200,237
|
200,237
|
The majority of non-rated debt securities within shareholder assets
are held by our businesses in the UK. Of these securities most are allocated an internal rating using a methodology largely consistent
with that adopted by an external rating agency, and are considered to be of investment grade credit quality; these include £2.2
billion
(2014: £2.5 billion)
of debt securities held in our UK Life business, predominantly made up of private placements
and other corporate bonds, which have been internally rated as investment grade.
The Group continues to hold a series of macro
credit hedges to reduce the overall credit risk exposure, and has increased these hedges during 2015. The Group’s maximum
exposure to credit risk of financial assets, without taking collateral or these hedges into account, is represented by the carrying
value of the financial instruments in the statement of financial position. These comprise debt securities, reinsurance assets,
derivative assets, loans and receivables. The carrying values of these assets are disclosed in the relevant notes: financial investments
(note 22), reinsurance assets (note 39), loans (note 19) and receivables (note 23). The collateral in place for these credit exposures
is disclosed in note 55; Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar
agreements.
To the extent that collateral held is greater
than the amount receivable that it is securing, the table above shows only an amount equal to the latter. In the event of default,
any over-collateralised security would be returned to the relevant counterparty.
(ii) Financial exposures to peripheral European countries
and worldwide banks
Included in our debt securities and other financial assets are exposures
to peripheral European countries and worldwide banks. We continued in 2015 to limit our direct shareholder and participating assets
exposure to the governments (including local authorities and agencies) and banks of Greece, Portugal, Italy and Spain. Information
on our exposures to peripheral European sovereigns and banks is provided in notes 22(e) and 22(f). We continue to monitor closely
the situation in the eurozone and have had additional restrictions on further investment in place since late 2009 as well as taking
actions to reduce exposure to higher risk assets.
(iii) Other investments
Other investments (including assets of operations classified as held
for sale) include unit trusts and other investment vehicles; derivative financial instruments, representing positions to mitigate
the impact of adverse market movements; and other assets includes deposits with credit institutions and minority holdings in property
management undertakings.
The credit quality of the underlying debt securities
within investment vehicles is managed by the safeguards built into the investment mandates for these funds which determine the
funds’ risk profiles. At the Group level, we also monitor the asset quality of unit trusts and other investment vehicles
against Group set limits.
A proportion of the assets underlying these investments
are represented by equities and so credit ratings are not generally applicable. Equity exposures are managed against agreed benchmarks
that are set with reference to overall appetite for market risk.
(iv) Loans
The Group loan portfolio principally comprises:
|
·
|
Policy loans which are generally collateralised by a lien or charge over the underlying policy;
|
|
·
|
Loans and advances to banks which primarily relate to loans of cash collateral received in stock lending transactions. These
loans are fully collateralised by other securities; and
|
|
·
|
Mortgage loans collateralised by property assets.
|
We use loan to value; interest and debt service cover; and diversity
and quality of the tenant base metrics to internally monitor our exposures to mortgage loans. We use credit quality, based on dynamic
market measures, and collateralisation rules to manage our stock lending activities. Policy loans are loans and advances made to
policyholders, and are collateralised by the underlying policies.
53 – Risk management continued
(v) Credit concentration risk
The long-term and general insurance businesses are generally not individually
exposed to significant concentrations of credit risk due to the regulations applicable in most markets and the Group credit policy
and limits framework, which limit investments in individual assets and asset classes. Credit concentrations are monitored as part
of the regular credit monitoring process and are reported to Group ALCO. With the exception of government bonds the largest aggregated
counterparty exposure within shareholder assets (i.e. excluding potential exposures arising from reinsurance of unit linked funds)
is to the Swiss Reinsurance Company Limited (including subsidiaries), representing approximately 2.2% of the total shareholder
assets.
(vi) Reinsurance credit exposures
The Group is exposed to concentrations of risk with individual reinsurers
due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group
operates a policy to manage its reinsurance counterparty exposures, by limiting the reinsurers that may be used and applying strict
limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that the overall risk is within appetite.
The Group Capital and ALM and Group Risk teams have an active monitoring role with escalation to the Chief Financial Officer (CFO),
Chief Risk Officer (CRO), Group ALCO and the Board Risk Committee as appropriate.
The Group’s largest reinsurance counterparty
is BlackRock Life Ltd (including subsidiaries) as a result of the BlackRock funds offered to UK Life customers via unit linked
contracts. At 31 December 2015, the reinsurance asset recoverable, including debtor balances, from BlackRock Life Ltd was £12,660
million
(2014: £2,048 million)
, which has increased significantly during the year as a result of the acquisition of
Friends Life. Whilst the risk of default is considered remote due to the nature of the arrangement and the counterparty, the Group
is currently considering alternative ways to structure the agreements with BlackRock Life Ltd to reduce or remove this exposure.
(vii) Securities finance
The Group has significant securities financing operations within the
UK and smaller operations in some other businesses. The risks within this activity are mitigated by over-collateralisation and
minimum counterparty credit quality requirements.
(viii) Derivative credit exposures
The Group is exposed to counterparty credit risk through derivative
trades. This risk is mitigated through collateralising almost all trades (the exception being certain foreign exchange trades where
it has historically been the market norm not to collateralise). Residual exposures are captured within the Group’s credit
management framework.
(ix) Unit-linked business
In unit-linked business the policyholder bears the direct market risk
and credit risk on investment assets in the unit funds and the shareholders’ exposure to credit risk is limited to the extent
of the income arising from asset management charges based on the value of assets in the fund.
(x) Impairment of financial assets
In assessing whether financial assets carried at amortised
cost or classified as available for sale are impaired, due consideration is given to the factors outlined in accounting policies
(T) and (V). The following table provides information regarding the carrying value of financial assets subject to impairment testing
that have been impaired and the ageing of those assets that are past due but not impaired. The table excludes assets carried at
fair value through profit or loss.
|
|
Financial assets that are past due but not impaired
|
|
|
At 31 December 2015
|
Neither past
due nor
impaired
£m
|
0–3 months
£m
|
3–6 months
£m
|
6 months–
1 year
£m
|
Greater than
1 year
£m
|
Financial
assets that
have been
impaired
£m
|
Carrying
value
£m
|
Debt securities
|
918
|
—
|
—
|
—
|
—
|
—
|
918
|
Reinsurance assets
|
6,951
|
—
|
—
|
—
|
—
|
—
|
6,951
|
Other investments
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Loans
|
3,353
|
—
|
—
|
—
|
—
|
1
|
3,354
|
Receivables and other financial assets
|
6,775
|
84
|
5
|
7
|
3
|
1
|
6,875
|
|
|
Financial assets that are past due but not impaired
|
|
|
At 31 December 2014
|
Neither past
due nor
impaired
£m
|
0–3 months
£m
|
3–6 months
£m
|
6 months–
1 year
£m
|
Greater than
1 year
£m
|
Financial
assets that
have been
impaired
£m
|
Carrying
value
£m
|
Debt securities
|
1,021
|
—
|
—
|
—
|
—
|
—
|
1,021
|
Reinsurance assets
|
5,425
|
—
|
—
|
—
|
—
|
—
|
5,425
|
Other investments
|
1
|
—
|
—
|
—
|
—
|
4
|
5
|
Loans
|
4,286
|
2
|
2
|
—
|
—
|
75
|
4,365
|
Receivables and other financial assets
|
5,849
|
60
|
9
|
7
|
8
|
—
|
5,933
|
Excluded from the tables above are financial and reinsurance
assets carried at fair value through profit or loss that are not subject to impairment testing, as follows: £162.0 billion
of debt securities
(2014: £130.6 billion)
, £47.7 billion of other investments
(2014: £35.4 billion)
,
£19.1 billion of loans
(2014: £20.9 billion)
and £14.0 billion of reinsurance assets
(2014: £2.5
billion)
.
Where assets have been classed as ‘past
due and impaired’, an analysis is made of the risk of default and a decision is made whether to seek to mitigate the risk.
There were no material financial assets that would have been past due or impaired had the terms not been renegotiated.
53 – Risk management continued
(c) Market risk
Market risk is the risk of adverse financial impact resulting, directly
or indirectly from fluctuations in interest rates, foreign currency exchange rates, equity and property prices. Market risk arises
in business units due to fluctuations in both the value of liabilities and the value of investments held. At Group level, it also
arises in relation to the overall portfolio of international businesses and in the value of investment assets owned directly by
the shareholders. We actively seek some market risks as part of our investment and product strategy. However, we have limited appetite
for interest rate risk as we do not believe it is adequately rewarded.
The management of market risk is undertaken at
business unit and at Group level. Businesses manage market risks locally using the Group market risk framework and within local
regulatory constraints. Group Capital and ALM is responsible for monitoring and managing market risk at Group level and has established
criteria for matching assets and liabilities to limit the impact of mismatches due to market movements.
In addition, where the Group’s long-term
savings businesses have written insurance and investment products where the majority of investment risks are borne by its policyholders,
these risks are managed in line with local regulations and marketing literature, in order to satisfy the policyholders’ risk
and reward objectives. The Group writes unit-linked business in a number of its operations. The shareholders’ exposure to
market risk on this business is limited to the extent that income arising from asset management charges is based on the value of
assets in the fund.
The most material types of market risk that the
Group is exposed to are described below.
(i) Equity price risk
The Group is subject to equity price risk arising from changes in
the market values of its equity securities portfolio.
We continue to limit our direct equity exposure
in line with our risk preferences, albeit the acquisition of Friends Life has resulted in an increase in our equity price risk
exposure relative to other risk types. At a business unit level, investment limits and local investment regulations require that
business units hold diversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have
material holdings of unquoted equity securities.
Equity risk is also managed using a variety of
derivative instruments, including futures and options. Businesses actively model the performance of equities through the use of
risk models, in particular to understand the impact of equity performance on guarantees, options and bonus rates. At 31 December
2015 the Group continues to hold a series of macro equity hedges to reduce the overall shareholder equity risk exposure, and has
increased these hedges during 2015.
Sensitivity to changes in equity prices is given
in section ‘(j) risk and capital management’ below.
(ii) Property price risk
The Group is subject to property price risk directly due to holdings
of investment properties in a variety of locations worldwide and indirectly through investments in mortgages and mortgage backed
securities. Investment in property is managed at business unit level, and is subject to local regulations on investments, liquidity
requirements and the expectations of policyholders.
As at 31 December 2015, no material derivative
contracts had been entered into to mitigate the effects of changes in property prices.
Sensitivity to changes in property prices is
given in section ‘(j) risk and capital management’ below.
(iii) Interest rate risk
Interest rate risk arises primarily from the Group’s investments
in long-term debt and fixed income securities and their movement relative to the value placed on the insurance liabilities. A number
of policyholder product features have an influence on the Group’s interest rate risk. The major features include guaranteed
surrender values, guaranteed annuity options, and minimum surrender and maturity values. Details of material guarantees and options
are given in note 38.
Exposure to interest rate risk is monitored through
several measures that include duration, economic capital modelling, sensitivity testing and stress and scenario testing. The impact
of exposure to sustained low interest rates is considered within our scenario testing.
The Group typically manages interest rate risk
by investing in fixed interest securities which closely match the interest rate sensitivity of the liabilities where such investments
are available. In particular, a key objective is to at least match the duration of our annuity liabilities with assets of the same
duration, and in some cases where appropriate cash flow matching has been used. These assets include corporate bonds, residential
mortgages and commercial mortgages. Should they default before maturity, it is assumed that the Group can reinvest in assets of
a similar risk and return profile, which is subject to market conditions. Interest rate risk is also managed in some business units
using a variety of derivative instruments, including futures, options, swaps, caps and floors.
Some of the Group’s products, principally
participating contracts, expose us to the risk that changes in interest rates will impact on profits through a change in the interest
spread (the difference between the amounts that we are required to pay under the contracts and the investment income we are able
to earn on the investments supporting our obligations under those contracts). The primary markets where Aviva is exposed to this
risk are the UK, France and Italy.
The low interest rate environment in a number
of markets around the world has resulted in our current reinvestment yields being lower than the overall current portfolio yield,
primarily for our investments in fixed income securities and commercial mortgage loans. We anticipate that interest rates may remain
below historical averages for an extended period of time and that financial markets may continue to have periods of high volatility.
Investing activity will continue to decrease the portfolio yield as long as market yields remain below the current portfolio level.
We expect the decline in portfolio yield will result in lower net investment income in future periods.
53 – Risk management continued
Certain of the Group’s product lines, such as protection, are
not significantly sensitive to interest rate or market movements. For unit-linked business, the shareholder margins emerging are
typically a mixture of annual management fees and risk/expense charges. Risk and expense margins will be largely unaffected by
low interest rates. Annual management fees may increase in the short-term as the move towards low interest rates increases the
value of unit funds. However, in the medium term, unit funds will grow at a lower rate which will reduce fund charges. For the
UK annuities business interest rate exposure is mitigated by closely matching the duration of liabilities with assets of the same
duration.
The UK participating business includes contracts
with features such as guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. These
liabilities are managed through duration matching of assets and liabilities and the use of derivatives, including swaptions. As
a result, the Group’s exposure to sustained low interest rates on this portfolio is not material. The Group’s key exposure
to low interest rates arises through its other participating contracts, principally in Italy and France. Some of these contracts
also include features such as guaranteed minimum bonuses, guaranteed investment returns and guaranteed surrender values. In a low
interest rate environment there is a risk that the yield on assets might not be sufficient to cover these obligations. For certain
of its participating contracts the Group is able to amend guaranteed crediting rates. Our ability to lower crediting rates may
be limited by competition, bonus mechanisms and contractual arrangements.
Details of material guarantees and options
are given in note 38. 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.
|
Weighted
average
minimum
guaranteed
crediting
rate
|
Weighted
average
book value
yield on
assets
|
Participating
contract
liabilities
£m
|
France
|
0.79%
|
3.67%
|
61,871
|
Italy
|
1.38%
|
3.69%
|
9,072
|
Other
1
|
N/A
|
N/A
|
60,980
|
Total
|
N/A
|
N/A
|
131,923
|
|
1
|
‘Other’ includes UK participating business
|
Profit before tax on General Insurance and Health Insurance
business is generally a mixture of insurance, expense and investment returns. The asset portfolio is invested primarily in fixed
income securities and the reduction in interest rates in recent years has reduced the investment component of profit. The portfolio
investment yield and average total invested assets in our general insurance and health business are set out in the table below.
|
Portfolio
investment
yield
1
|
Average
assets
£m
|
2013
|
3.10%
|
18,352
|
2014
|
2.76%
|
17,200
|
2015
|
2.58%
|
15,268
|
|
1
|
Before realised and unrealised gains and losses and investment expenses
|
The nature of the business means that prices in certain circumstances
can be increased to maintain overall profitability. This is subject to the competitive environment in each market. To the extent
that there are further falls in interest rates the investment yield would be expected to decrease further in future periods.
Sensitivity to changes in interest rates is given
in section ‘(j) risk and capital management’ below.
(iv) Inflation risk
Inflation risk arises primarily from the Group’s exposure to
general insurance claims inflation, to inflation linked benefits within the defined benefit staff pension schemes and within the
UK annuity portfolio and to expense inflation. Increases in long-term inflation expectations are closely linked to long-term interest
rates and so are frequently considered with interest rate risk. Exposure to inflation risk is monitored through economic capital
modelling, sensitivity testing and stress and scenario testing. The Group typically manages inflation risk through its investment
strategy and, in particular, by investing in inflation linked securities and through a variety of derivative instruments, including
inflation linked swaps.
(v) Currency risk
The Group has minimal exposure to currency risk from financial instruments
held by business units in currencies other than their functional currencies, as nearly all such holdings are backing either unit-linked
or with-profit contract liabilities or hedging.
The Group operates internationally and as a result
is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. Approximately 58%
of the Group’s premium income arises in currencies other than sterling and the Group’s net assets are denominated in
a variety of currencies, of which the largest are euro, sterling and Canadian dollars. The Group does not hedge foreign currency
revenues as these are substantially retained locally to support the growth of the Group’s business and meet local regulatory
and market requirements.
Businesses aim to maintain sufficient assets
in local currency to meet local currency liabilities, however movements may impact the value of the Group’s consolidated
shareholders’ equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally,
against pre-determined limits. These exposures are managed by aligning the deployment of regulatory capital by currency with the
Group’s regulatory capital requirements by currency. Currency borrowings and derivatives are used to manage exposures within
the limits that have been set.
53 – Risk management continued
At 31 December 2015 and 2014, the Group’s total equity
deployment by currency including assets ‘held for sale’ was:
|
Sterling
£m
|
Euro
£m
|
CAD$
£m
|
Other
£m
|
Total
£m
|
Capital 31 December 2015
|
14,333
|
2,011
|
979
|
909
|
18,232
|
Capital 31 December 2014
|
8,050
|
2,392
|
1,016
|
818
|
12,276
|
A 10% change in sterling to euro/Canada$ (CAD$) period-end
foreign exchange rates would have had the following impact on total equity.
|
10% increase
in sterling /
euro rate
£m
|
10% decrease
in sterling /
euro rate
£m
|
10% increase
in sterling /
CAD$ rate
£m
|
10% decrease
in sterling /
CAD$ rate
£m
|
Net assets at 31 December 2015
|
(166)
|
128
|
(33)
|
67
|
Net assets at 31 December 2014
|
(78)
|
210
|
(96)
|
91
|
A 10% change in sterling to euro/Canada$ (CAD$) average
foreign exchange rates applied to translate foreign currency profits would have had the following impact on profit before tax,
including resulting gains and losses on foreign exchange hedges and excluding ‘discontinued operations’.
|
10% increase
in sterling/
euro rate
£m
|
10% decrease
in sterling/
euro rate
£m
|
10% increase
in sterling/
CAD$ rate
£m
|
10% decrease
in sterling/
CAD$ rate
£m
|
Impact on profit before tax 31 December 2015
|
8
|
23
|
25
|
(46)
|
Impact on profit before tax 31 December 2014
|
(44)
|
(25)
|
(15)
|
20
|
The balance sheet changes arise from retranslation of
business unit statements of financial position from their functional currencies into sterling, with above movements being taken
through the currency translation reserve. These balance sheet movements in exchange rates therefore have no impact on profit. Net
asset and profit before tax figures are stated after taking account of the effect of currency hedging activities.
(vi) Derivatives risk
Derivatives are used by a number of the businesses. Activity is overseen
by the Group Capital and ALM and Group Risk teams, which monitor exposure levels and approve large or complex transactions. Derivatives
are primarily used for efficient investment management, risk hedging purposes, or to structure specific retail savings products.
The Group applies strict requirements to the
administration and valuation processes it uses, and has a control framework that is consistent with market and industry practice
for the activity that is undertaken.
(vii) Correlation risk
The Group recognises that lapse behaviour and potential increases
in consumer expectations are sensitive to and interdependent with market movements and interest rates. These interdependencies
are taken into consideration in the internal economic capital model and in scenario analysis.
(d) Liquidity risk
Liquidity risk is the risk of not being able to make payments as they
become due because there are insufficient assets in cash form. The relatively illiquid nature of insurance liabilities is a potential
source of additional investment return by allowing us to invest in higher yielding, but less liquid assets such as commercial mortgages.
The Group seeks to ensure that it maintains sufficient financial resources to meet its obligations as they fall due through the
application of a Group liquidity risk policy and business standard and through the development of its liquidity risk management
plan. At Group and business unit level, there is a liquidity risk appetite which requires that sufficient liquid resources be maintained
to cover net outflows in a stress scenario. In addition to the existing liquid resources and expected inflows, the Group maintains
significant undrawn committed borrowing facilities (£1,650 million) from a range of leading international banks to further
mitigate this risk.
Maturity analyses
The following tables show the maturities of our insurance and investment
contract liabilities, and of the financial and reinsurance assets held to meet them. A maturity analysis of the contractual amounts
payable for borrowings and derivatives is given in notes 45 and 54, respectively. Contractual obligations under operating leases
and capital commitments are given in note 49.
(i) Analysis of maturity of insurance and investment
contract liabilities
For non-linked insurance business, the following table shows the gross
liability at 31 December 2015 and 2014 analysed by remaining duration. The total liability is split by remaining duration in proportion
to the cash-flows expected to arise during that period, as permitted under IFRS 4,
Insurance Contracts.
Almost all linked business and non-linked investment
contracts may be surrendered or transferred on demand. For such contracts, the earliest contractual maturity date is therefore
the current statement of financial position date, for a surrender amount approximately equal to the current statement of financial
position liability. However, we expect surrenders, transfers and maturities to occur over many years, and therefore the tables
below reflect the expected cash flows for these contracts, rather than their contractual maturity date.
53 – Risk management continued
This table includes assets held for sale.
At 31 December 2015
|
Total
£m
|
On demand
or within
1 year
£m
|
1-5 years
£m
|
5-15 years
£m
|
Over 15
years
£m
|
Long-term business
|
|
|
|
|
|
Insurance contracts – non-linked
|
114,533
|
9,847
|
30,715
|
43,513
|
30,458
|
Investment contracts – non-linked
|
63,505
|
4,506
|
13,666
|
25,477
|
19,856
|
Linked business
|
130,185
|
15,221
|
41,442
|
51,368
|
22,154
|
General insurance and health
|
13,506
|
5,844
|
5,160
|
1,992
|
510
|
Total contract liabilities
|
321,729
|
35,418
|
90,983
|
122,350
|
72,978
|
At 31 December 2014
|
Total
£m
|
On demand
or within
1 year
£m
|
1-5 years
£m
|
5-15 years
£m
|
Over 15 years
£m
|
Long-term business
|
|
|
|
|
|
Insurance contracts – non-linked
|
85,723
|
7,980
|
25,318
|
32,534
|
19,891
|
Investment contracts – non-linked
|
55,634
|
3,311
|
10,852
|
23,919
|
17,552
|
Linked business
|
75,341
|
8,141
|
21,444
|
27,673
|
18,083
|
General insurance and health
|
13,993
|
6,014
|
5,400
|
2,115
|
464
|
Total contract liabilities
|
230,691
|
25,446
|
63,014
|
86,241
|
55,990
|
(ii) Analysis of maturity of financial assets
The following table provides an analysis, by maturity date
of the principal, of the carrying value of financial assets which are available to fund the repayment of liabilities as they crystallise.
This table excludes assets held for sale.
At 31 December 2015
|
Total
£m
|
On demand
or within
1 year
£m
|
1-5 years
£m
|
Over
5 years
£m
|
No fixed
term
(perpetual)
£m
|
Debt securities
|
162,964
|
21,912
|
46,551
|
93,753
|
748
|
Equity securities
|
63,558
|
—
|
—
|
—
|
63,558
|
Other investments
|
47,695
|
42,733
|
940
|
2,464
|
1,558
|
Loans
|
22,433
|
1,485
|
2,404
|
18,540
|
4
|
Cash and cash equivalents
|
33,676
|
33,676
|
—
|
—
|
—
|
|
330,326
|
99,806
|
49,895
|
114,757
|
65,868
|
At 31 December 2014
|
Total
£m
|
On demand
or within
1 year
£m
|
1-5 years
£m
|
Over
5 years
£m
|
No fixed
term
(perpetual)
£m
|
Debt securities
|
131,661
|
19,097
|
37,404
|
75,006
|
154
|
Equity securities
|
35,619
|
—
|
—
|
—
|
35,619
|
Other investments
|
35,358
|
29,011
|
940
|
3,553
|
1,854
|
Loans
|
25,260
|
1,489
|
2,517
|
21,249
|
5
|
Cash and cash equivalents
|
23,105
|
23,105
|
—
|
—
|
—
|
|
251,003
|
72,702
|
40,861
|
99,808
|
37,632
|
The assets above are analysed in accordance with the earliest possible
redemption date of the instrument at the initiation of the Group. Where an instrument is transferable back to the issuer on demand,
such as most unit trusts or similar types of investment vehicle, it is included in the ‘On demand or within 1 year’
column. Debt securities with no fixed contractual maturity date are generally callable at the option of the issuer at the date
the coupon rate is reset under the contractual terms of the instrument. The terms for resetting the coupon are such that we expect
the securities to be redeemed at this date, as it would be uneconomic for the issuer not to do so, and for liquidity management
purposes we manage these securities on this basis. The first repricing and call date is normally ten years or more after the date
of issuance. Most of the Group’s investments in equity securities and fixed maturity securities are market traded and therefore,
if required, can be liquidated for cash at short notice.
(e) Life and health insurance risk
Life insurance risk in the Group arises through its exposure to mortality
risk and exposure to worse than anticipated operating experience on factors such as persistency levels, exercising of policy holder
options and management and administration expenses. The Group’s health insurance business (including private health insurance,
critical illness cover, income protection and personal accident insurance, as well as a range of corporate healthcare products)
exposes the Group to morbidity risk (the proportion of our customers falling sick) and medical expense inflation. The Group chooses
to take measured amounts of life and health insurance risk provided that the relevant business has the appropriate core skills
to assess and price the risk and adequate returns are available.
53 – Risk management continued
The acquisition of Friends Life has resulted in an increase in the
Group’s relative exposure to UK Life insurance risks, in particular persistency risk. Adjusting for the impact of the Friends
Life acquisition, the underlying risk profile of our life and health insurance risks, primarily persistency, longevity, mortality
and expense risk, has remained stable during 2015, although the current continued relatively low levels of interest rates have
increased our sensitivity to longevity shocks compared to historical norms. Our economic exposure to longevity risk was reduced
as a result of the RAC Staff Pension Scheme entering into a longevity swap covering £0.6 billion of pensioner in payment
scheme liabilities during 2015, while any significant reduction in individual annuity new business volumes as a result of the UK
Government’s pension reforms, including changes to compulsory annuitisation, will reduce our longevity risks exposure over
the longer-term to the extent not offset by increased bulk purchase annuity volumes. Despite this, longevity risk remains the Group’s
most significant life insurance risk due to the Group’s existing annuity portfolio.
Persistency risk remains significant and continues
to have a volatile outlook with underlying performance linked to some degree to economic conditions. However, businesses across
the Group have continued to make progress with a range of customer retention activities. The Group has continued to write considerable
volumes of life protection business, and to utilise reinsurance to reduce exposure to potential losses. More generally, life insurance
risks are believed to provide a significant diversification against other risks in the portfolio. Life insurance risks are modelled
within the internal economic capital model and subject to sensitivity and stress and scenario testing. The assumption and management
of life and health insurance risks is governed by the group-wide business standards covering underwriting, pricing, product design
and management, in-force management, claims handling, and reinsurance. The individual life and health insurance risks are managed
as follows:
|
·
|
Mortality and morbidity risks are mitigated by use of reinsurance. The Group allows businesses to select reinsurers, from those
approved by the Group, based on local factors, but retains oversight of the overall exposures and monitor that the aggregation
of risk ceded is within credit risk appetite.
|
|
·
|
Longevity risk and internal experience analysis are monitored against the latest external industry data and emerging trends.
Whilst individual businesses are responsible for reserving and pricing for annuity business, the Group monitors the exposure to
this risk and any associated capital implications. The Group has used reinsurance solutions to reduce the risks from longevity
and continually monitors and evaluates emerging market solutions to mitigate this risk further.
|
|
·
|
Persistency risk is managed at a business unit level through frequent monitoring of company experience, and benchmarked against
local market information. Generally, persistency risk arises from customers lapsing their policies earlier than has been assumed.
Where possible the financial impact of lapses is reduced through appropriate product design. Businesses also implement specific
initiatives to improve the retention of policies which may otherwise lapse. The Group has developed guidelines on persistency management.
|
|
·
|
Expense risk is primarily managed by the business units through the assessment of business unit profitability and frequent
monitoring of expense levels.
|
Embedded derivatives
The Group has exposure to a variety of embedded derivatives
in its long-term savings business due to product features offering varying degrees of guaranteed benefits at maturity or on early
surrender, along with options to convert their benefits into different products on pre-agreed terms. The extent of the impact of
these embedded derivatives differs considerably between business units and exposes Aviva to changes in policyholder behaviour in
the exercise of options as well as market risk.
Examples of each type of embedded derivative affecting the Group are:
|
·
|
Options: call, put, surrender and maturity options, guaranteed annuity options, options to cease premium payment, options for
withdrawals free of market value adjustment, annuity options, and guaranteed insurability options.
|
|
·
|
Guarantees: embedded floor (guaranteed return), maturity guarantee, guaranteed death benefit, and guaranteed minimum rate of
annuity payment.
|
|
·
|
Other: indexed interest or principal payments, maturity value, loyalty bonus.
|
The impact of these is reflected in the economic capital model and
MCEV reporting and managed as part of the asset liability framework. Further disclosure on financial guarantees and options embedded
in contracts and their inclusion in insurance and investment contract liabilities is provided in note 38.
(f) General insurance risk
Types of risk
General insurance risk in the Group arises from:
|
·
|
Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations;
|
|
·
|
Unexpected claims arising from a single source or cause;
|
|
·
|
Inaccurate pricing of risks or inappropriate underwriting of risks when underwritten; and
|
|
·
|
Inadequate reinsurance protection or other risk transfer techniques.
|
Aviva has a preference for general insurance risk in measured amounts
for explicit reward, in line with our core skills in underwriting and pricing. The majority of the general insurance business underwritten
by the Group continues to be short tail in nature such as motor, household and commercial property insurances. The Group’s
underwriting strategy and appetite is communicated via specific policy statements, related business standards and guidelines. General
insurance risk is managed primarily at business unit level with oversight at the Group level. Claims reserving is undertaken by
local actuaries in the various general insurance businesses and is also subject to periodic external reviews. Reserving processes
are further detailed in note 36 ‘insurance liabilities’.
The vast majority of the Group’s general
insurance business is managed and priced in the same country as the domicile of the customer.
53 – Risk management continued
Management of general insurance risks
Significant insurance risks will be reported under the risk management
framework. Additionally, the economic capital model is used to assess the risks that each general insurance business unit, and
the Group as a whole, is exposed to, quantifying their impact and calculating appropriate capital requirements.
Business units have developed mechanisms that
identify, quantify and manage accumulated exposures to contain them within the limits of the appetite of the Group. The business
units are assisted by the General Insurance Council which provides technical input for major decisions which fall outside individual
delegated limits or escalations outside group risk preferences, group risk accumulation, concentration and profitability limits.
Reinsurance strategy
Significant reinsurance purchases are reviewed annually at both business
unit and Group level to verify that the levels of protection being bought reflect any developments in exposure and the risk appetite
of the Group. The basis of these purchases is underpinned by analysis of economic capital, earnings and capital volatility, cash
flow and liquidity and the Group’s franchise value.
Detailed actuarial analysis is used to calculate the Group’s
extreme risk profile and then design cost and capital efficient reinsurance programmes to mitigate these risks to within agreed
appetites. For businesses writing general insurance we analyse the natural catastrophe exposure using our own internal probabilistic
catastrophe model which is benchmarked against external catastrophe models widely used by the rest of the (re)insurance industry.
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
.
(g) Asset management risk
Aviva is directly exposed to the risks associated with operating an
asset management business through its ownership of Aviva Investors. The underlying risk profile of our asset management risk is
derived from investment performance, specialist investment professionals and leadership, product development capabilities, fund
liquidity, margin, client retention, regulatory developments, fiduciary and contractual responsibilities. The risk profile is regularly
monitored. Investment performance has remained strong over 2015 despite some positions being impacted by the volatility of global
markets.
A client relationship team is in place to manage
client retention risk, while all new asset management products undergo a review and approval process at each stage of the product
development process, including approvals from legal, compliance and risk functions. Investment performance against client objectives
relative to agreed benchmarks is monitored as part of our investment performance and risk management process, and subject to further
independent oversight and challenge by a specialist risk team, reporting directly to the Aviva Investors’ Chief Risk Officer.
(h) Operational risk
Operational risk is the risk of direct or indirect loss, arising from
inadequate or failed internal processes, people and systems, or external events including changes in the regulatory environment.
We have limited appetite for operational risk and aim to reduce these risks as far as is commercially sensible.
Our business units are primarily responsible
for identifying and managing operational risks within their businesses, within the group-wide operational risk framework including
the risk and control self-assessment process. Businesses must be satisfied that all material risks falling outside our risk tolerances
are being mitigated, monitored and reported to an appropriate level. Any risks with a high potential impact are monitored centrally
on a regular basis. Businesses use key indicator data to help monitor the status of the risk and control environment. They also
identify and capture loss events, taking appropriate action to address actual control breakdowns and promote internal learning.
(i) Brand and reputation risk
We are exposed to the risk that litigation, employee misconduct, operational
failures, the outcome of regulatory investigations, media speculation and negative publicity, disclosure of confidential client
information, inadequate services, whether or not founded, could impact our brands or reputation. Any of our brands or our reputation
could also be affected if products or services recommended by us (or any of our intermediaries) do not perform as expected (whether
or not the expectations are founded) or customers’ expectations for the product change. We seek to reduce this risk to as
low a level as commercially sensible.
The FCA regularly considers whether we are meeting
the requirement to treat our customers fairly and we make use of various metrics to assess our own performance, including customer
advocacy, retention and complaints. Failure to meet these requirements could also impact our brands or reputation.
If we do not manage the perception of our brands
and reputation successfully, it could cause existing customers or agents to withdraw from our business and potential customers
or agents to choose not to do business with us.
53 – Risk management continued
(j) Risk and capital management
(i) Sensitivity test analysis
The Group uses a number of sensitivity tests to understand the volatility
of earnings, the volatility of its capital requirements, and to manage its capital more efficiently. Sensitivities to economic
and operating experience are regularly produced on the Group’s key financial performance metrics to inform the Group’s
decision making and planning processes, and as part of the framework for identifying and quantifying the risks to which each of
its business units, and the Group as a whole, are exposed.
For long-term business in particular, sensitivities
of market consistent performance indicators to changes in both economic and non-economic experience are continually used to manage
the business and to inform the decision making process.
(ii) Life insurance and investment contracts
The nature of long-term business is such that a number of assumptions
are made in compiling these financial statements. Assumptions are made about investment returns, expenses, mortality rates and
persistency in connection with the in-force policies for each business unit. Assumptions are best estimates based on historic and
expected experience of the business. A number of the key assumptions for the Group’s central scenario are disclosed elsewhere
in these statements for both IFRS reporting and reporting under MCEV methodology.
(iii) General insurance and health business
General insurance and health claim liabilities are estimated
by using standard actuarial claims projection techniques. These methods extrapolate the claims development for each accident year
based on the observed development of earlier years. In most cases, no explicit assumptions are made as projections are based on
assumptions implicit in the historic claims.
(iv) Sensitivity test results
Illustrative results of sensitivity testing for long-term
business, general insurance and health business and the fund management and non-insurance business are set out below. For each
sensitivity test the impact of a reasonably possible change in a single factor is shown, with other assumptions left unchanged.
Sensitivity factor
|
Description of sensitivity factor applied
|
Interest rate and investment return
|
The impact of a change in market interest rates by a 1% increase or decrease. The test allows consistently for similar changes to investment returns and movements in the market value of backing fixed interest securities.
|
Credit spreads
|
The impact of a 0.5% increase in credit spreads over risk-free interest rates on corporate bonds and other non-sovereign credit assets. The test allows for any consequential impact on liability valuations.
|
Equity/property market values
|
The impact of a change in equity/property market values by ± 10%.
|
Expenses
|
The impact of an increase in maintenance expenses by 10%.
|
Assurance mortality/morbidity (life insurance only)
|
The impact of an increase in mortality/morbidity rates for assurance contracts by 5%.
|
Annuitant mortality (long-term insurance only)
|
The impact of a reduction in mortality rates for annuity contracts by 5%.
|
Gross loss ratios (non-long-term insurance only)
|
The impact of an increase in gross loss ratios for general insurance and health business by 5%.
|
Long-term business
Sensitivities as at 31 December 2015
2015 Impact on profit before tax (£m)
|
Interest
rates
+1%
|
Interest
rates
-1%
|
Credit
spreads
+0.5%
|
Equity/
property
+10%
|
Equity/
property
-10%
|
Expenses
+10%
|
Assurance
mortality
+5%
|
Annuitant
mortality
-5%
|
Insurance participating
|
30
|
(65)
|
(30)
|
(135)
|
130
|
(25)
|
(10)
|
(50)
|
Insurance non-participating
|
(75)
|
80
|
(495)
|
25
|
(25)
|
(155)
|
(115)
|
(725)
|
Investment participating
|
5
|
(5)
|
—
|
—
|
—
|
(5)
|
—
|
—
|
Investment non-participating
|
(20)
|
20
|
(5)
|
35
|
(35)
|
(20)
|
—
|
—
|
Assets backing life shareholders’ funds
|
(140)
|
85
|
(65)
|
40
|
(40)
|
—
|
—
|
—
|
Total
|
(200)
|
115
|
(595)
|
(35)
|
30
|
(205)
|
(125)
|
(775)
|
2015 Impact on shareholders’ equity before tax (£m)
|
Interest
rates
+1%
|
Interest
rates
-1%
|
Credit
spreads
+0.5%
|
Equity/
property
+10%
|
Equity/
property
-10%
|
Expenses
+10%
|
Assurance
mortality
+5%
|
Annuitant
mortality
-5%
|
Insurance participating
|
30
|
(65)
|
(30)
|
(135)
|
130
|
(25)
|
(10)
|
(50)
|
Insurance non-participating
|
(75)
|
80
|
(495)
|
25
|
(25)
|
(155)
|
(115)
|
(725)
|
Investment participating
|
5
|
(5)
|
—
|
—
|
—
|
(5)
|
—
|
—
|
Investment non-participating
|
(20)
|
20
|
(5)
|
35
|
(35)
|
(20)
|
—
|
—
|
Assets backing life shareholders’ funds
|
(175)
|
120
|
(70)
|
40
|
(40)
|
—
|
—
|
—
|
Total
|
(235)
|
150
|
(600)
|
(35)
|
30
|
(205)
|
(125)
|
(775)
|
53 – Risk management continued
Sensitivities as at 31 December 2014
2014 Impact on profit before tax (£m)
|
Interest
rates
+1%
|
Interest
rates
-1%
|
Credit
spreads
+0.5%
|
Equity/
property
+10%
|
Equity/
property
-10%
|
Expenses
+10%
|
Assurance
mortality
+5%
|
Annuitant
mortality
-5%
|
Insurance participating
|
(10)
|
(60)
|
(20)
|
(175)
|
70
|
(25)
|
(5)
|
(45)
|
Insurance non-participating
|
(155)
|
130
|
(425)
|
40
|
(40)
|
(80)
|
(50)
|
(590)
|
Investment participating
|
(15)
|
—
|
(10)
|
—
|
—
|
(5)
|
—
|
—
|
Investment non-participating
|
(40)
|
30
|
(10)
|
55
|
(60)
|
(35)
|
—
|
—
|
Assets backing life shareholders’ funds
|
(75)
|
45
|
(60)
|
20
|
(20)
|
—
|
—
|
—
|
Total
|
(295)
|
145
|
(525)
|
(60)
|
(50)
|
(145)
|
(55)
|
(635)
|
2014 Impact on shareholders’ equity before tax (£m)
|
Interest
Rates
+1%
|
Interest
rates
-1%
|
Credit
spreads
+0.5%
|
Equity/
property
+10%
|
Equity/
property
-10%
|
Expenses
+10%
|
Assurance
mortality
+5%
|
Annuitant
mortality
-5%
|
Insurance participating
|
(10)
|
(60)
|
(20)
|
(175)
|
70
|
(25)
|
(5)
|
(45)
|
Insurance non-participating
|
(155)
|
130
|
(425)
|
40
|
(40)
|
(80)
|
(50)
|
(590)
|
Investment participating
|
(15)
|
—
|
(10)
|
—
|
—
|
(5)
|
—
|
—
|
Investment non-participating
|
(40)
|
30
|
(10)
|
55
|
(60)
|
(35)
|
—
|
—
|
Assets backing life shareholders’ funds
|
(115)
|
80
|
(65)
|
20
|
(20)
|
—
|
—
|
—
|
Total
|
(335)
|
180
|
(530)
|
(60)
|
(50)
|
(145)
|
(55)
|
(635)
|
Changes in sensitivities between 2015 and 2014 reflect
inclusion of Friends Life in 2015 for the first time and movements in market interest rates, portfolio growth, changes to asset
mix and the relative durations of assets and liabilities and asset liability management actions. The sensitivities to economic
movements relate mainly to business in the UK. In general, a fall in market interest rates has a beneficial impact on non-participating
business, due to the increase in market value of fixed interest securities and relative durations of assets and liabilities; similarly
a rise in interest rates has a negative impact. Mortality and expense sensitivities also relate primarily to the UK.
General insurance and health business sensitivities
as at 31 December 2015
2015 Impact on profit before tax (£m)
|
Interest
rates
+1%
|
Interest
rates
-1%
|
Credit
spreads
+0.5%
|
Equity/
property
+10%
|
Equity/
property
-10%
|
Expenses
+10%
|
Gross loss
ratios
+5%
|
Gross of reinsurance
|
(225)
|
210
|
(130)
|
65
|
(65)
|
(100)
|
(270)
|
|
|
|
|
|
|
|
|
Net of reinsurance
|
(305)
|
300
|
(130)
|
65
|
(65)
|
(100)
|
(260)
|
2015 Impact on shareholders’ equity before tax (£m)
|
Interest
rates
+1%
|
Interest
rates
-1%
|
Credit
spreads
+0.5%
|
Equity/
property
+10%
|
Equity/
property
-10%
|
Expenses
+10%
|
Gross loss
ratios
+5%
|
Gross of reinsurance
|
(225)
|
210
|
(130)
|
70
|
(70)
|
(20)
|
(270)
|
|
|
|
|
|
|
|
|
Net of reinsurance
|
(305)
|
300
|
(130)
|
70
|
(70)
|
(20)
|
(260)
|
Sensitivities as at 31 December 2014
2014 Impact on profit before tax (£m)
|
Interest
rates
+1%
|
Interest
rates
-1%
|
Credit
spreads
+0.5%
|
Equity/
property
+10%
|
Equity/
property
-10%
|
Expenses
+10%
|
Gross loss
ratios
+5%
|
Gross of reinsurance
|
(260)
|
250
|
(130)
|
55
|
(55)
|
(105)
|
(280)
|
|
|
|
|
|
|
|
|
Net of reinsurance
|
(305)
|
295
|
(130)
|
55
|
(55)
|
(105)
|
(270)
|
2014 Impact on shareholders’ equity before tax (£m)
|
Interest
rates
+1%
|
Interest
rates
-1%
|
Credit
spreads
+0.5%
|
Equity/
property
+10%
|
Equity/
property
-10%
|
Expenses
+10%
|
Gross loss
ratios
+5%
|
Gross of reinsurance
|
(260)
|
250
|
(130)
|
60
|
(60)
|
(20)
|
(280)
|
|
|
|
|
|
|
|
|
Net of reinsurance
|
(305)
|
295
|
(130)
|
60
|
(60)
|
(20)
|
(270)
|
For general insurance and health, the impact of the expense
sensitivity on profit also includes the increase in ongoing administration expenses, in addition to the increase in the claims
handling expense provision.
53 – Risk management continued
Fund management and non-insurance business sensitivities
as at 31 December 2015
2015 Impact on profit before tax (£m)
|
Interest
rates
+1%
|
Interest
rates
-1%
|
Credit
spreads
+0.5%
|
Equity/
property
+10%
|
Equity/
property
-10%
|
Total
|
—
|
—
|
10
|
(30)
|
45
|
2015 Impact on shareholders’ equity before tax (£m)
|
Interest
rates
+1%
|
Interest
rates
-1%
|
Credit
spreads
+0.5%
|
Equity/
property
+10%
|
Equity/
property
-10%
|
Total
|
—
|
—
|
10
|
(30)
|
45
|
Sensitivities as at 31 December 2014
2014 Impact on profit before tax (£m)
|
Interest
rates
+1%
|
Interest
rates
-1%
|
Credit
spreads
+0.5%
|
Equity/
property
+10%
|
Equity/
property
-10%
|
Total
|
—
|
—
|
5
|
(15)
|
25
|
2014 Impact on shareholders’ equity before tax (£m)
|
Interest
rates
+1%
|
Interest
rates
-1%
|
Credit
spreads
+0.5%
|
Equity/
property
+10%
|
Equity/
property
-10%
|
Total
|
—
|
—
|
5
|
(15)
|
25
|
Limitations of sensitivity analysis
The above tables demonstrate the effect of a change in a key assumption
while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should
also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated
from these results.
The sensitivity analyses do not take into consideration
that the Group’s assets and liabilities are actively managed. Additionally, the financial position of the Group may vary
at the time that any actual market movement occurs. For example, the Group’s financial risk management strategy aims to manage
the exposure to market fluctuations.
As investment markets move past various trigger
levels, management actions could include selling investments, changing investment portfolio allocation, adjusting bonuses credited
to policyholders, and taking other protective action.
A number of the business units use passive assumptions
to calculate their long-term business liabilities. Consequently, a change in the underlying assumptions may not have any impact
on the liabilities, whereas assets held at market value in the statement of financial position will be affected. In these circumstances,
the different measurement bases for liabilities and assets may lead to volatility in shareholder equity. Similarly, for general
insurance liabilities, the interest rate sensitivities only affect profit and equity where explicit assumptions are made regarding
interest (discount) rates or future inflation.
Other limitations in the above sensitivity analyses
include the use of hypothetical market movements to demonstrate potential risk that only represent the Group’s view of possible
near-term market changes that cannot be predicted with any certainty, and the assumption that all interest rates move in an identical
fashion.
54 – Derivative financial instruments
and hedging
This note gives details of the various financial instruments we use
to mitigate risk.
The Group uses a variety of derivative financial
instruments, including both exchange traded and over-the-counter instruments, in line with our overall risk management strategy.
The objectives include managing exposure to market, foreign currency and/or interest rate risk on existing assets or liabilities,
as well as planned or anticipated investment purchases.
In the narrative and tables below, figures are
given for both the notional amounts and fair values of these instruments. The notional amounts reflect the aggregate of individual
derivative positions on a gross basis and so give an indication of the overall scale of the derivative transaction. They do not
reflect current market values of the open positions. The fair values represent the gross carrying values at the year end for each
class of derivative contract held (or issued) by the Group.
The fair values do not provide an indication
of credit risk, as many over-the-counter transactions are contracted and documented under ISDA (International Swaps and Derivatives
Association, Inc.) master agreements or their equivalent. Such agreements are designed to provide a legally enforceable set-off
in the event of default, which reduces credit exposure. In addition, the Group has collateral agreements in place between the individual
Group entities and relevant counterparties. Refer to note 55 for further information on collateral and net credit risk of derivative
instruments.
(a) Instruments qualifying for hedge
accounting
The Group has formally assessed and documented the effectiveness
of its instruments qualifying for hedge accounting in accordance with IAS 39,
Financial
Instruments: Recognition and Measurement.
(i)
Net investment hedges
To reduce its exposure to foreign currency risk, the Group has designated
a portion of its euro denominated debt as a hedge of the net investment in its European subsidiaries. The carrying value of the
debt at 31 December 2015 was £368 million
(2014: £1,292
million)
and its fair value at that date was £413 million
(2014:
£1,359 million).
The foreign exchange gain of £42
million
(2014: gain of £94 million; 2013: loss of £40 million)
on translation of the debt to sterling at the statement of financial position date has been recognised in the hedging instruments
reserve in shareholders’ equity. This hedge was fully effective throughout the current and prior years.
54 – Derivative financial instruments
and hedging continued
At the end of 2015 the Group entered into a cash flow hedge using
a foreign exchange forward to hedge the currency exposure related to the acquisition of additional shares in its associate Aviva
Life Insurance Company India expected to be completed in the first half of
2016. The fair value
of the hedge as of 31 December 2015 was a £2 million derivative asset. The gain of £2 million has been recognised in
the hedging instruments reserve in shareholders’ equity. The hedge was fully effective in the year.
There were no fair value hedges designated in
the year.
(b) Derivatives not qualifying for
hedge accounting
Certain derivatives either do not qualify for hedge accounting
under IAS 39 or the option to hedge account has not been taken. These are referred to below as non-hedge derivatives.
(i) The Group’s non-hedge derivative activity
at 31 December 2015 and 2014 was as follows:
|
|
|
2015
|
|
|
2014
|
|
Contract/
notional
amount
£m
|
Fair value
asset
£m
|
Fair value
liability
£m
|
Contract/
notional
amount
£m
|
Fair value
asset
£m
|
Fair value
liability
£m
|
Foreign exchange contracts
|
|
|
|
|
|
|
OTC
|
|
|
|
|
|
|
Forwards
|
7,791
|
50
|
(186)
|
5,999
|
54
|
(42)
|
Interest rate and currency swaps
|
5,152
|
133
|
(346)
|
2,237
|
141
|
(153)
|
Options
|
4,800
|
28
|
(16)
|
14,741
|
92
|
(48)
|
Total
|
17,743
|
211
|
(548)
|
22,977
|
287
|
(243)
|
Interest rate contracts
|
|
|
|
|
|
|
OTC
|
|
|
|
|
|
|
Forwards
|
66
|
—
|
(1)
|
356
|
—
|
(42)
|
Swaps
|
48,682
|
1,907
|
(1,826)
|
35,579
|
2,845
|
(2,087)
|
Options
|
675
|
110
|
—
|
2,675
|
186
|
—
|
Swaptions
|
2,828
|
151
|
(22)
|
33,520
|
126
|
(26)
|
Exchange traded
|
|
|
|
|
|
|
Futures
|
2,581
|
18
|
(16)
|
1,943
|
13
|
(33)
|
Total
|
54,832
|
2,186
|
(1,865)
|
74,073
|
3,170
|
(2,188)
|
Equity/Index contracts
|
|
|
|
|
|
|
OTC
|
|
|
|
|
|
|
Options
|
1,225
|
114
|
(15)
|
1,132
|
6
|
(6)
|
Exchange traded
|
|
|
|
|
|
|
Futures
|
6,175
|
87
|
(113)
|
3,764
|
88
|
(46)
|
Options
|
4,414
|
370
|
(19)
|
4,429
|
336
|
(18)
|
Total
|
11,814
|
571
|
(147)
|
9,325
|
430
|
(70)
|
Credit contracts
|
12,968
|
10
|
(155)
|
8,950
|
14
|
(89)
|
Other
|
21,861
|
348
|
(1,166)
|
16,393
|
187
|
(891)
|
Total at 31 December
|
119,218
|
3,326
|
(3,881)
|
131,718
|
4,088
|
(3,481)
|
Fair value assets made up of £2 million in hedge derivatives
and £3,326 million in non-hedge derivatives are recognised as ‘Derivative financial instruments’ in note 22(a),
while fair value liabilities are recognised as ‘Derivative liabilities’ in note 46.
The Group’s derivative risk management
policies are outlined in note 53.
(ii) The contractual undiscounted cash flows
in relation to non-hedge derivative liabilities have the following maturities:
|
2015
£m
|
2014
£m
|
Within 1 year
|
484
|
336
|
Between 1 and 2 years
|
564
|
698
|
Between 2 and 3 years
|
251
|
313
|
Between 3 and 4 years
|
227
|
240
|
Between 4 and 5 years
|
291
|
234
|
After 5 years
|
2,613
|
3,627
|
|
4,430
|
5,448
|
(c) Collateral
Certain derivative contracts, primarily interest rate and currency
swaps, involve the receipt or pledging of cash and non-cash collateral. The amounts of cash collateral receivable or repayable
are included in notes 23 and 46 respectively. Collateral received and pledged by the Group is detailed in note 55.
55 – Financial assets and liabilities
subject to offsetting, enforceable master netting agreements and similar arrangements
(a) Offsetting arrangements
Financial assets and liabilities are offset in the statement of financial
position when the Group has a legally enforceable right to offset and has the intention to settle the asset and liability on a
net basis, or to realise the asset and settle the liability simultaneously.
Aviva mitigates credit risk in derivative contracts
by entering into collateral agreements, where practical, and in ISDA master netting agreements for each of the legal entities to
facilitate Aviva’s right to offset credit risk exposure. The credit support agreement will normally dictate the threshold
over which collateral needs to be pledged by Aviva or its counterparty.
Derivative transactions requiring Aviva or its
counterparty to post collateral are typically the result of over-the-counter derivative trades, comprised mostly of interest rate
swaps, currency swaps and credit default swaps. These transactions are conducted under terms that are usual and customary to standard
long-term borrowing, derivative, securities lending and securities borrowing activities. The derivative assets and liabilities
in the table below are made up of the contracts described in detail in note 54.
Aviva participates in a number of stock lending
and repurchase arrangements. In some of these arrangements cash is exchanged by Aviva for securities and a related receivable is
recognised within ‘Loans to Banks’ (note 19). These arrangements are reflected in the tables below. In instances where
the collateral is recognised on the statement of financial position, the obligation for its return is included within ‘Payables
and other financial liabilities’.
In other arrangements, securities are exchanged
for other securities. The collateral received must be in a readily realisable form such as listed securities and is held in segregated
accounts. Transfer of title always occurs for the collateral received. In many instances, however, no market risk or economic benefit
is exchanged and these transactions are not recognised on the statement of financial position in accordance with our accounting
policies, and accordingly not included in the tables below.
|
Amounts subject to enforceable netting arrangements
|
|
Offset under IAS 32
|
Amounts under a master netting agreement but not offset under IAS 32
|
2015
|
Gross
amounts
|
Amounts
offset
|
Net
amounts
reported
in the
statement of
financial
position
|
Financial
instruments
|
Cash
collateral
|
Securities
collateral
received /
pledged
|
Net
amount
|
Financial assets
|
|
|
|
|
|
|
|
Derivative financial assets
|
3,660
|
(836)
|
2,824
|
(1,793)
|
(640)
|
(243)
|
148
|
Loans to banks and repurchase arrangements
|
2,723
|
—
|
2,723
|
—
|
—
|
(2,723)
|
—
|
Total financial assets
|
6,383
|
(836)
|
5,547
|
(1,793)
|
(640)
|
(2,966)
|
148
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
Derivative financial liabilities
|
(4,030)
|
836
|
(3,194)
|
1,884
|
388
|
543
|
(379)
|
Other financial liabilities
|
(2,219)
|
—
|
(2,219)
|
—
|
—
|
2,219
|
—
|
Total financial liabilities
|
(6,249)
|
836
|
(5,413)
|
1,884
|
388
|
2,762
|
(379)
|
|
Amounts subject to enforceable netting arrangements
|
|
Offset under IAS 32
|
Amounts under a master netting agreement but not offset
under IAS 32
|
2014
|
Gross
amounts
|
Amounts
offset
|
Net amounts
reported in
the statement
of financial
position
|
Financial
instruments
|
Cash
collateral
|
Securities
collateral
received /
pledged
|
Net
amount
|
Financial assets
|
|
|
|
|
|
|
|
Derivative financial assets
|
4,467
|
(1,065)
|
3,402
|
(1,846)
|
(931)
|
(404)
|
221
|
Loans to banks and repurchase arrangements
|
3,763
|
—
|
3,763
|
—
|
—
|
(3,763)
|
—
|
Total financial assets
|
8,230
|
(1,065)
|
7,165
|
(1,846)
|
(931)
|
(4,167)
|
221
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
Derivative financial liabilities
|
(3,725)
|
1,065
|
(2,660)
|
2,108
|
338
|
146
|
(68)
|
Other financial liabilities
|
(1,859)
|
—
|
(1,859)
|
—
|
—
|
1,859
|
—
|
Total financial liabilities
|
(5,584)
|
1,065
|
(4,519)
|
2,108
|
338
|
2,005
|
(68)
|
Derivative assets are recognised as ‘Derivative financial instruments’
in note 22(a), while fair value liabilities are recognised as ‘Derivative liabilities’ in note 46. £504 million
(2014: £686 million)
of derivative assets and £687
million
(2014: £821 million)
of derivative liabilities
are not subject to master netting agreements and are therefore excluded from the table above.
Amounts receivable related to securities lending
and reverse-repurchase arrangements totalling £2,723 million
(2014:
£3,763 million)
are recognised within ‘Loans to banks’ in note 19(a).
Other financial liabilities presented above represent
liabilities related to repurchase arrangements recognised within ‘Obligations for repayment of cash collateral received’
in note 46.
55 – Financial assets and liabilities
subject to offsetting, enforceable master netting agreements and similar arrangements continued
(b) Collateral
In the tables above, the amounts of assets or liabilities presented
in the consolidated statement of financial position are offset first by financial instruments that have the right of offset under
master netting or similar arrangements with any remaining amount reduced by the amount of cash and securities collateral. The actual
amount of collateral may be greater than amounts presented in the tables above in the case of over collateralisation.
The total amount of collateral received which
the Group is permitted to sell or repledge in the absence of default was £22,424 million
(2014:
£20,566 million)
, all of which other than £2,588 million
(2014:
£2,896 million)
is related to securities lending arrangements. £2,915 million
(2014:
£4,036 million)
of collateral has been received related to balances recognised within ‘Loans to banks’
(refer to note 19). The value of collateral that was actually sold or repledged in the absence of default was £nil
(2014:
£nil)
.
The level of collateral held is monitored regularly,
with further collateral obtained where this is considered necessary to manage the Group’s risk exposure.
56 – 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.
The Group undertakes transactions with
related parties in the normal course of business. Loans to related parties are made on normal arm’s-length commercial terms.
Services provided to, and by related
parties
|
|
|
|
2015
|
|
|
|
2014
|
|
|
|
2013
|
|
Income
earned in
the year
£m
|
Expenses
incurred in
the year
£m
|
Payable at
year end
£m
|
Receivable
at year end
£m
|
Income
earned in
the year
£m
|
Expenses
incurred in
the year
£m
|
Payable at
year end
£m
|
Receivable at
year end
£m
|
Income
earned in
the year
£m
|
Expenses
incurred in
the year
£m
|
Payable at
year end
£m
|
Receivable at
year end
£m
|
Associates
|
9
|
(7)
|
—
|
—
|
7
|
(2)
|
—
|
—
|
3
|
(3)
|
—
|
11
|
Joint ventures
|
27
|
—
|
—
|
192
|
28
|
—
|
—
|
154
|
51
|
—
|
—
|
56
|
Employee pension schemes
|
13
|
—
|
—
|
3
|
11
|
—
|
—
|
3
|
12
|
—
|
—
|
9
|
|
49
|
(7)
|
—
|
195
|
46
|
(2)
|
—
|
157
|
66
|
(3)
|
—
|
76
|
Transactions with joint ventures in the UK relate to the
property management undertakings, the most material of which are listed in note 14(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
14(a)(i). Our fund management companies also charge fees to these joint ventures for administration services and for arranging
external finance.
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 2015 and 2014, other transactions with key management personnel were not deemed
to be significant either by size or in the context of their individual financial positions.
Our UK fund management companies manage most
of the assets held by the Group’s main UK staff pension scheme, for which they charge fees based on the level of funds under
management. The main UK scheme holds investments in Group-managed funds and insurance policies with other Group companies, as explained
in note 44(b)(ii). As at 31 December 2015, the Friends Provident Pension Scheme (“FPPS”), acquired during the year
as part of the acquisition of the Friends Life business, held an insurance policy of £546 million issued by a Group Company,
which eliminates on consolidation.
The related parties’ receivables are not
secured and no guarantees were received in respect thereof. The receivables will be settled in accordance with normal credit terms.
Details of guarantees, indemnities and warranties provided on behalf of related parties are given in note 48(f).
Key management compensation
The total compensation to those employees classified as key
management, being those having authority and responsibility for planning, directing and controlling the activities of the Group,
including the executive and non-executive directors is as follows:
|
2015
£m
|
2014
£m
|
2013
£m
|
Salary and other short-term benefits
|
13.3
|
8.9
|
6.7
|
Other long-term benefits
|
5.2
|
4.1
|
1.6
|
Post-employment benefits
|
1.7
|
1.0
|
1.1
|
Equity compensation plans
|
10.6
|
1.9
|
3.3
|
Termination benefits
|
2.0
|
—
|
1.1
|
Total
|
32.8
|
15.9
|
13.8
|
The increase in total key management compensation in 2015
mainly reflects the effect of an increase in the number of employees classified as key management compared to 2014.
Information concerning individual directors’ emoluments,
interests and transactions is given in the Directors’ Remuneration Report.
57 – Organisational structure
The following chart shows, in simplified form, the organisational
structure of the Group as at 31 December 2015. Aviva plc is the holding company of the Group.
Parent company
Aviva plc
Subsidiaries
The principal subsidiaries of the Company are listed below
by country of incorporation.
United Kingdom
Aviva Annuity UK Limited
Aviva Central Services UK Limited
Aviva Employment Services Limited
Aviva Equity Release UK Limited
Aviva Health UK Limited
Aviva Insurance Limited
Aviva International Insurance Limited
Aviva Investors Global Services Limited
Aviva Investors Pensions Limited
Aviva Investors UK Fund Services Limited
Aviva Investors UK Funds Limited
Aviva Life & Pensions UK Limited
Aviva Life Services UK Limited
Aviva Pensions Trustees UK Limited
Aviva UK Digital Limited
Aviva Wrap UK Limited
Gresham Insurance Company Limited
The Ocean Marine Insurance Company Limited
Friends Life Limited
Friends Life and Pensions Limited
Friends Life Management Services Limited
Friends Life Services Limited
Friends Provident International Limited
Barbados
Victoria Reinsurance Company Ltd
Bermuda
Aviva Re Limited
|
|
Canada
Aviva Canada Inc. and its principal subsidiaries:
Aviva Insurance Company of Canada
Elite Insurance Company
Pilot Insurance Company
Scottish & York Insurance Co. Limited
S&Y Insurance Company
Traders General Insurance Company
France
Aviva France SA (99.99%) and its principal subsidiaries:
Antarius S.A. (50%)
Aviva Assurances S.A. (99.9%)
Aviva Investors France S.A. (99.9%)
Aviva Vie SA (99.9%)
Aviva Epargne Retraite (99.9%)
Union Financière de France Banque (Banking)
(74.3%)
Hong Kong
Aviva Life Insurance Company Limited
Ireland
Aviva Health Group Ireland Limited (70%)
|
57 – Organisational structure continued
Italy
Aviva Italia Holding S.p.A and its principal subsidiaries:
Avipop Assicurazioni S.p.A (50%)
Avipop Vita S.p.A (50%)
Aviva S.p.A (51%)
Aviva Assicurazioni Vita S.p.A (80%)
Aviva Italia S.p.A
Aviva Life S.p.A
Aviva Vita S.p.A (80%)
Lithuania
Uždaroji akcin
ė
gyvyb
ė
s draudimo ir pensij
ų
bendrov
ė
‘Aviva Lietuva’
Poland
Aviva Powszechne Towarzystwo Emerytalne Aviva BZ WBK S.A. (90%)
Aviva Towarzystwo Ubezpieczen na Zycie SA (90%)
Aviva Towarzystwo Ubezpieczen Ogolnych SA (90%)
Singapore
Aviva Ltd
Navigator Investment Services Limited
Spain
Aviva Vida y Pensiones, SA de seguros y reaseguros
Caja Espana Vida, Compania de Seguros y Reaseguros (50%)
Caja Granada Vida, de Seguros y Reaseguros, S.A. (25%)
Unicorp Vida, Compania de Seguros y Reaseguros (50%)
Caja Murcia Vida y Pensiones, de Seguros y Reaseguros S.A. (50%)
|
|
Associates and joint ventures
The Group has ongoing interests in the following operations that are
classified as joint ventures or associates. Further details of those operations that were most significant in 2015 are set out
in notes 14 and 15 to the financial statements.
United Kingdom
The Group has interests in several property limited partnerships.
Further details are provided in notes 14, 15 and 21 to the financial statements.
China
Aviva-COFCO Life Insurance Co. Limited (50%)
India
Aviva Life Insurance Company India Limited (26%)
Indonesia
PT Astra Aviva Life (50%)
Taiwan
First-Aviva Life Insurance Co. Limited (49%)
Turkey
AvivaSA Emeklilik ve Hayat A.S (40%)
Vietnam
Vietinbank Aviva Life Insurance Company Limited (50%)
|
58 – Subsequent events
Note 20 details subsequent events relating to securitised mortgages.
Subsequent events relating to the acquisition and disposal of subsidiaries are detailed in Note 2. Subsequent events relating to
tax are detailed in Note 9 and Note 42.
Income statement
For the year ended 31 December 2015
|
|
2015
|
2014
|
2013
|
|
Note
|
£m
|
£m
|
£m
|
Income
|
|
|
|
|
Dividends received from subsidiaries
|
I
|
1,250
|
1,172
|
1,450
|
Interest receivable from group companies
|
I
|
57
|
60
|
103
|
|
|
1,307
|
1,232
|
1,553
|
Expenses
|
|
|
|
|
Net investment expense
|
|
(3)
|
(2)
|
(5)
|
Operating expenses
|
|
(224)
|
(162)
|
(326)
|
Interest payable to group companies
|
I
|
(174)
|
(258)
|
(326)
|
Interest payable on borrowings
|
|
(344)
|
(314)
|
(332)
|
Realised loss on loan
|
|
—
|
—
|
(78)
|
|
|
(745)
|
(736)
|
(1,067)
|
Profit for the year before tax
|
|
562
|
496
|
486
|
Tax
credit
|
C
|
115
|
67
|
116
|
Profit for the year after tax
|
|
677
|
563
|
602
|
Statement of comprehensive income
For the year ended 31 December 2015
|
|
2015
|
2014
|
2013
|
|
Note
|
£m
|
£m
|
£m
|
Profit for the year
|
|
677
|
563
|
602
|
|
|
|
|
|
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
|
2,108
|
|
|
|
|
|
Items that will not be reclassified to income statement
|
|
|
|
|
Remeasurements of pension schemes
|
E
|
—
|
(1)
|
(2)
|
Other
comprehensive income, net of tax
|
|
1,095
|
865
|
2,106
|
Total comprehensive income for the year
|
|
1,772
|
1,428
|
2,708
|
Where applicable, the accounting policies of the Company are the same
as those of the Group on pages 129 to 142. The notes identified alphabetically on pages 255 to 260 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 149 to 250.
Statement of changes in equity
For the year ended 31 December 2015
|
|
Ordinary
share
capital
|
Preference
share
capital
|
Share
premium
|
Merger
reserve
|
Investment
valuation
reserve
|
Equity
compensation
reserve
|
Retained
earnings
|
Equity
|
Direct capital
instrument and
tier 1 notes
|
Total
equity
|
|
Note
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Balance at 1 January
|
|
737
|
200
|
1,172
|
735
|
9,768
|
65
|
3,137
|
15,814
|
892
|
16,706
|
Profit for the year
|
|
—
|
—
|
—
|
—
|
—
|
—
|
677
|
677
|
—
|
677
|
Other comprehensive
income
|
|
—
|
—
|
—
|
—
|
1,095
|
—
|
—
|
1,095
|
—
|
1,095
|
Total comprehensive income for the year
|
|
—
|
—
|
—
|
—
|
1,095
|
—
|
677
|
1,772
|
—
|
1,772
|
Dividends and appropriations
|
11
|
—
|
—
|
—
|
—
|
—
|
—
|
(724)
|
(724)
|
—
|
(724)
|
Reserves credit for equity compensation plans
|
|
—
|
—
|
—
|
—
|
—
|
40
|
—
|
40
|
—
|
40
|
Shares issued under equity compensation plans
|
|
3
|
—
|
13
|
—
|
—
|
(35)
|
19
|
—
|
—
|
—
|
Novation of subsidiary company’s tier 1 notes
|
D
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
224
|
224
|
Issue of share capital – acquisition of Friends Life
|
|
272
|
—
|
—
|
5,703
|
—
|
—
|
—
|
5,975
|
—
|
5,975
|
Redemption of direct capital instrument
|
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Aggregate tax effect
|
|
—
|
—
|
—
|
—
|
—
|
—
|
15
|
15
|
—
|
15
|
Balance at 31 December
|
|
1,012
|
200
|
1,185
|
6,438
|
10,863
|
70
|
3,124
|
22,892
|
1,116
|
24,008
|
For the year ended 31 December 2014
|
|
Ordinary
share
capital
|
Preference
share
capital
|
Share
premium
|
Merger
reserve
|
Investment
valuation
reserve
|
Equity
compensation
reserve
|
Retained
earnings
|
Equity
|
Direct capital
instrument
tier and 1
notes
|
Total
equity
|
|
Note
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Balance at 1 January
|
|
736
|
200
|
1,165
|
735
|
8,902
|
54
|
3,158
|
14,950
|
1,382
|
16,332
|
Profit for the year
|
|
—
|
—
|
—
|
—
|
—
|
—
|
563
|
563
|
—
|
563
|
Other comprehensive income/(expense)
|
|
—
|
—
|
—
|
—
|
866
|
—
|
(1)
|
865
|
—
|
865
|
Total comprehensive income for the year
|
|
—
|
—
|
—
|
—
|
866
|
—
|
562
|
1,428
|
—
|
1,428
|
Dividends and appropriations
|
11
|
—
|
—
|
—
|
—
|
—
|
—
|
(551)
|
(551)
|
—
|
(551)
|
Employee trust shares distributed in the year
|
|
—
|
—
|
—
|
—
|
—
|
—
|
(18)
|
(18)
|
—
|
(18)
|
Reserves credit for equity compensation plans
|
|
—
|
—
|
—
|
—
|
—
|
39
|
—
|
39
|
—
|
39
|
Shares issued under equity compensation plans
|
|
1
|
—
|
7
|
—
|
—
|
(28)
|
24
|
4
|
—
|
4
|
Redemption of direct capital instrument
|
|
—
|
—
|
—
|
—
|
—
|
—
|
(57)
|
(57)
|
(490)
|
(547)
|
Aggregate tax effect
|
|
—
|
—
|
—
|
—
|
—
|
—
|
19
|
19
|
—
|
19
|
Balance at 31 December
|
|
737
|
200
|
1,172
|
735
|
9,768
|
65
|
3,137
|
15,814
|
892
|
16,706
|
For the year ended 31 December 2013
|
|
Ordinary
share
capital
|
Preference
share capital
|
Share
premium
|
Merger
reserve
|
Investment
valuation
reserve
|
Equity
compensation
reserve
|
Retained
earnings
|
Equity
|
Direct capital
instrument
tier and 1
notes
|
Total
equity
|
|
Note
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Balance at 1 January
|
|
736
|
200
|
1,165
|
735
|
6,794
|
60
|
3,060
|
12,750
|
1,382
|
14,132
|
Profit for the year
|
|
—
|
—
|
—
|
—
|
—
|
—
|
602
|
602
|
—
|
602
|
Other comprehensive income/(expense)
|
|
—
|
—
|
—
|
—
|
2,108
|
—
|
(2)
|
2,106
|
—
|
2,106
|
Total comprehensive income for the year
|
|
—
|
—
|
—
|
—
|
2,108
|
—
|
600
|
2,708
|
—
|
2,708
|
Dividends and appropriations
|
11
|
—
|
—
|
—
|
—
|
—
|
—
|
(538)
|
(538)
|
—
|
(538)
|
Employee trust shares distributed in the year
|
|
—
|
—
|
—
|
—
|
—
|
—
|
(33)
|
(33)
|
—
|
(33)
|
Reserves credit for equity compensation plans
|
|
—
|
—
|
—
|
—
|
—
|
37
|
—
|
37
|
—
|
37
|
Shares issued under equity compensation plans
|
|
—
|
—
|
—
|
—
|
—
|
(43)
|
47
|
4
|
—
|
4
|
Aggregate tax effect
|
|
—
|
—
|
—
|
—
|
—
|
|
22
|
22
|
—
|
22
|
Balance at 31 December
|
|
736
|
200
|
1,165
|
735
|
8,902
|
54
|
3,158
|
14,950
|
1,382
|
16,332
|
Where applicable, the accounting policies of the Company
are the same as those of the Group on pages 129 to 142. The notes identified alphabetically on pages 255 to 260 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 149 to 250.
Statement of financial position
At 31 December 2015
|
|
2015
|
2014
|
|
Note
|
£m
|
£m
|
Assets
|
|
|
|
Non-current assets
|
|
|
|
Investments in subsidiaries
|
A
|
42,452
|
33,930
|
Investment in joint venture
|
14a, A
|
322
|
208
|
Loans owed by subsidiaries
|
I
|
553
|
1,330
|
Deferred tax assets
|
C
|
188
|
201
|
Current tax assets
|
C
|
130
|
65
|
|
|
43,645
|
35,734
|
Current assets
|
|
|
|
Loans owed by subsidiaries
|
I
|
—
|
388
|
Other amounts owed by subsidiaries
|
I
|
233
|
274
|
Other assets
|
|
12
|
18
|
Cash and cash equivalents
|
|
188
|
33
|
Total assets
|
|
44,078
|
36,447
|
Equity
|
|
|
|
Ordinary share capital
|
26
|
1,012
|
737
|
Preference share capital
|
29
|
200
|
200
|
Called up capital
|
|
1,212
|
937
|
Share premium
|
26b
|
1,185
|
1,172
|
Merger reserve
|
E
|
6,438
|
735
|
Investment valuation reserve
|
E
|
10,863
|
9,768
|
Equity compensation reserve
|
E
|
70
|
65
|
Retained earnings
|
E
|
3,124
|
3,137
|
Direct capital instrument
and tier 1 notes
|
30
|
1,116
|
892
|
Total equity
|
|
24,008
|
16,706
|
Liabilities
|
|
|
|
Non-current liabilities
|
|
|
|
Borrowings
|
F
|
5,202
|
4,794
|
Loans owed to subsidiaries
|
I
|
10,256
|
10,366
|
Provisions
|
|
40
|
48
|
|
|
15,498
|
15,208
|
Current liabilities
|
|
|
|
Borrowings
|
F
|
485
|
516
|
Other amounts owed to subsidiaries
|
I
|
3,962
|
3,885
|
Other creditors
|
|
125
|
132
|
Total liabilities
|
|
20,070
|
19,741
|
Total equity and liabilities
|
|
44,078
|
36,447
|
Approved by the Board on 29 March 2016.
Thomas D. Stoddard
Chief Financial Officer
Company number: 2468686
Where applicable, the accounting policies of the Company are the same
as those of the Group on pages 129 to 142. The notes identified alphabetically on pages 255 to 260 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 149 to 250.
Statement of cash flows
For the year ended 31 December 2015
All the Company’s operating cash requirements are met
by subsidiary companies and settled through intercompany loan accounts. As the direct method of presentation has been adopted for
these activities, no further disclosure is required. In respect of financing and investing activities, the following items pass
through the Company’s own bank accounts.
|
2015
|
2014
|
2013
|
|
£m
|
£m
|
£m
|
Cash flows from investing activities
|
|
|
|
(Purchase)/sale of financial investments
|
(5)
|
290
|
(294)
|
Interest
received
|
—
|
7
|
—
|
Net cash (used in)/generated from investing activities
|
(5)
|
297
|
(294)
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
Funding provided from subsidiaries
|
721
|
597
|
1,283
|
New borrowings drawn down, net of expenses
|
2,027
|
2,382
|
2,137
|
Repayment of borrowings
|
(1,554)
|
(2,070)
|
(2,179)
|
Net drawdown of borrowings
|
473
|
312
|
(42)
|
Redemption of direct capital instrument
|
—
|
(547)
|
—
|
Preference dividend paid
|
(17)
|
(17)
|
(17)
|
Ordinary dividend paid
|
(635)
|
(447)
|
(429)
|
Interest paid on the direct capital instrument and tier 1 notes
|
(72)
|
(88)
|
(92)
|
Interest paid on borrowings
|
(328)
|
(301)
|
(328)
|
Receipts under equity compensation plans
|
—
|
5
|
7
|
Proceeds
from issue of ordinary shares
|
16
|
8
|
—
|
Treasury shares purchased for employee trusts
|
(1)
|
—
|
(32)
|
Net cash generated/(used in) from financing activities
|
157
|
(478)
|
350
|
Net increase/(decrease) in cash and cash equivalents
|
152
|
(181)
|
56
|
Cash and cash equivalents at 1 January
|
33
|
223
|
152
|
Exchange
gains/(losses) on cash and cash equivalents
|
3
|
(9)
|
15
|
Cash and cash equivalents at 31 December
|
188
|
33
|
223
|
Where applicable, the accounting policies of the Company are the same
as those of the Group on pages 129 to 142. The notes identified alphabetically on pages 255 to 260 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 149 to 250.
A – Investments in subsidiaries
and joint venture
(i)
Movements in the Company’s investments in its subsidiaries are as follows:
|
2015
|
2014
|
|
£m
|
£m
|
Fair value as at 1 January
|
33,930
|
33,095
|
Acquisition of Friends Life
|
5,975
|
—
|
Issuance of shares in Aviva Group Holdings
|
1,566
|
—
|
Movement in fair value
|
981
|
835
|
At 31 December
|
42,452
|
33,930
|
Fair values are estimated using applicable valuation models
underpinned by the Company’s market capitalisation, and are classified as Level 2 in the fair value hierarchy described in
note 18 to the Group consolidated financial statements.
(ii)
At 31 December 2015, the Company has two wholly owned subsidiaries, both incorporated in the UK. These are General Accident
plc and Aviva Group Holdings Limited. Aviva Group Holdings Limited is an intermediate holding company, whilst General Accident
plc has preference shares listed on the London Stock Exchange. The principal subsidiaries of the Aviva Group at 31 December 2015
are set out in note 57 to the Group consolidated financial statements.
(iii) At 31 December 2015, the Company’s investment
in the joint venture, Aviva-COFCO Life Insurance Co. Limited has a fair value of £322 million
(2014: £208 million)
.
B – Subsequent events
Subsequent events relating to tax are detailed in Note C.
C – Tax
(i) Tax credited to the income statement
The total tax charge comprises:
|
2015
|
2014
|
2013
|
|
£m
|
£m
|
£m
|
Current tax
|
|
|
|
For this year
|
(129)
|
(64)
|
(84)
|
Prior
year adjustments
|
1
|
(7)
|
(7)
|
Total current tax
|
(128)
|
(71)
|
(91)
|
Deferred tax
|
|
|
|
Origination and reversal of temporary differences
|
1
|
4
|
(49)
|
Changes in tax
rates or tax laws
|
20
|
—
|
24
|
Write
back of deferred tax assets
|
(8)
|
—
|
—
|
Total deferred tax
|
13
|
4
|
(25)
|
Total tax credited to income statement
|
(115)
|
(67)
|
(116)
|
Unrecognised tax losses
and temporary differences of previous years were used to reduce the deferred tax expense by £8 million
(2014: £nil;
2013: £nil)
.
(ii) Tax charged/(credited) to other
comprehensive income
No tax was charged or credited to other comprehensive income in 2015,
2014 or 2013.
(iii) Tax credited to equity
Tax credited directly to equity in the year amounted to £15
million
(2014: £19 million; 2013: £22 million)
. This comprises coupon payments on the direct capital instrument
and tier 1 notes.
(iv) Tax reconciliation
The tax on the Company’s profit before tax differs
from the theoretical amount that would arise using the tax rate of the home country of the Company as follows:
|
2015
|
2014
|
2013
|
|
£m
|
£m
|
£m
|
Profit before tax
|
562
|
496
|
486
|
Tax calculated at standard UK corporation tax rate of 20.25%
(2014: 21.5%; 2013: 23.25%)
|
114
|
107
|
113
|
Adjustment to tax charge in respect of prior years
|
1
|
(5)
|
(7)
|
Non-assessable dividend income
|
(253)
|
(252)
|
(337)
|
Disallowable expenses
|
10
|
9
|
13
|
Non-taxable loss on settlement of intra group loan
|
—
|
—
|
17
|
Movement in deferred tax not recognised
|
(8)
|
(2)
|
—
|
Different local basis of tax on overseas profits
|
1
|
2
|
—
|
Change in future local statutory tax rates
|
20
|
—
|
32
|
Losses
surrendered intra-group for nil value
|
—
|
74
|
53
|
Total tax credited to income statement
|
(115)
|
(67)
|
(116)
|
UK legislation was substantively enacted in July 2013 to
reduce the UK corporation tax rate from 21% to 20% from 1 April 2015, resulting in an effective rate for the year ended 31 December
2015 of 20.25%. The 20.25% corporation tax rate has been used in the calculation of the UK’s current tax liability for the
year ended 31 December 2015.
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 company’s deferred tax asset
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.
On 16 March 2016, the UK Government announced that the rate
of corporation tax will be 17% from 1 April 2020. A 1% reduction in the tax rate applied to the company’s deferred tax asset
at 31 December 2015 would reduce the asset by £10 million.
(v) Deferred tax
A deferred tax asset of £188 million
(2014:
£201 million)
, principally arising in respect of deferred interest has been recognised at 31 December 2015 at
18%. The Company has unrecognised temporary differences of £nil million
(2014:
£45 million)
to carry forward indefinitely against future taxable income.
(vi) Current tax assets
Current tax assets recoverable in more than one year are £130
million
(2014: £65 million).
D – Direct capital instrument
and tier 1 notes
Details of the direct capital instrument and tier 1 notes are
given in the Group consolidated financial statements, note 30. The 6.875% £210 million STICS are reflected in the Company
financial statements at a value of £224 million following the transfer at fair value from Friends Life Holdings plc on 1
October 2015.
E – Reserves
|
Merger
Reserve
|
Investment
valuation
reserve
|
Equity-
compensation
reserve
|
Retained
earnings
|
|
£m
|
£m
|
£m
|
£m
|
Balance at 1 January 2013
|
735
|
6,794
|
60
|
3,060
|
Arising in the year:
|
|
|
|
|
Profit for the year
|
—
|
—
|
—
|
602
|
Fair value gains on investments in subsidiaries and joint ventures
|
—
|
2,108
|
—
|
—
|
Actuarial gains on pension provision
|
—
|
—
|
—
|
(2)
|
Dividends and appropriations
|
—
|
—
|
—
|
(538)
|
Reserves credit for equity compensation plans
|
—
|
—
|
37
|
—
|
Trust shares distributed in the year
|
—
|
—
|
—
|
(33)
|
Issue of share capital under equity compensation scheme
|
—
|
—
|
(43)
|
47
|
Aggregate tax effect
|
—
|
—
|
—
|
22
|
Balance at 1 January 2014
|
735
|
8,902
|
54
|
3,158
|
Arising in the year:
|
|
|
|
|
Profit for the year
|
—
|
—
|
—
|
563
|
Fair value gains on investments in subsidiaries and joint ventures
|
—
|
866
|
—
|
—
|
Actuarial gains on pension provision
|
—
|
—
|
—
|
(1)
|
Dividends and appropriations
|
—
|
—
|
—
|
(551)
|
Reserves credit for equity compensation plans
|
—
|
—
|
39
|
—
|
Trust shares distributed in the year
|
—
|
—
|
—
|
(18)
|
Issue of share capital under equity compensation scheme
|
—
|
—
|
(28)
|
24
|
Redemption of direct
capital instrument
|
—
|
—
|
—
|
(57)
|
Aggregate tax effect
|
—
|
—
|
—
|
19
|
Balance at 31 December 2014
|
735
|
9,768
|
65
|
3,137
|
Arising in the year:
|
|
|
|
|
Profit for the year
|
—
|
—
|
—
|
677
|
Fair value gains on investments in subsidiaries and joint ventures
|
—
|
1,095
|
—
|
—
|
Premium gained as part of Friends Life acquisition
|
5,703
|
—
|
—
|
—
|
Dividends and appropriations
|
—
|
—
|
—
|
(724)
|
Reserves credit for equity compensation plans
|
—
|
—
|
40
|
—
|
Trust shares distributed in the year
|
—
|
—
|
—
|
—
|
Issue of share capital under equity compensation scheme
|
—
|
—
|
(35)
|
19
|
Redemption of direct
capital instrument
|
—
|
—
|
—
|
—
|
Aggregate
tax effect
|
—
|
—
|
—
|
15
|
Balance at 31 December 2015
|
6,438
|
10,863
|
70
|
3,124
|
Tax of £15 million
(2014:
£19 million; 2013: £22 million)
is deductible in respect of coupon payments of £72 million
(2014:
£88 million; 2013: £92 million)
on the direct capital instrument and tier 1 notes.
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 £735 million to £6,438 million.
Further details of the Merger reserve are given in the Group
consolidated financial statements, note 31.
F – Borrowings
The Company’s borrowings comprise:
|
2015
|
2014
|
|
£m
|
£m
|
Subordinated debt
|
5,202
|
4,594
|
9.5% guaranteed bonds 2016
|
—
|
200
|
Commercial paper
|
485
|
516
|
|
5,687
|
5,310
|
Maturity analysis of contractual undiscounted cash flows:
|
|
|
2015
|
|
|
2014
|
|
Principal
|
Interest
|
Total
|
Principal
|
Interest
|
Total
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Within 1 year
|
485
|
303
|
788
|
516
|
304
|
820
|
1 – 5 years
|
—
|
1,212
|
1,212
|
200
|
1,149
|
1,349
|
5 – 10 years
|
—
|
1,514
|
1,514
|
—
|
1,340
|
1,340
|
10 – 15 years
|
800
|
1,514
|
2,314
|
1,188
|
1,322
|
2,510
|
Over 15 years
|
4,448
|
3,496
|
7,944
|
3,442
|
2,924
|
6,366
|
Total contractual undiscounted cash flows
|
5,733
|
8,039
|
13,772
|
5,346
|
7,039
|
12,385
|
Where subordinated debt is undated, the interest payments
have not been included beyond 15 years. Annual interest payments in future years for these borrowings are £79 million
(2014:
£72 million)
.
The fair value of the subordinated debt at 31
December 2015 was £5,504 million
(2014: £5,188 million)
,
calculated with reference to quoted prices. The 9.5% guaranteed bond 2016 was repaid during 2015. The fair value of the commercial
paper is considered to be the same as its carrying value.
Further details of these borrowings and undrawn
committed facilities can be found in the Group consolidated financial statements, note 45, with details of the fair value hierarchy
in relation to these borrowings in note 18.
G – Contingent liabilities
Details of the Company’s contingent liabilities are given in
the Group consolidated financial statements, note 48.
H – Risk management
Risk management in the context of the Group is considered in the Group
consolidated financial statements, note 53.
The business of the Company is managing its investments
in subsidiary and joint venture operations. Its risks are considered to be the same as those in the operations themselves and full
details of the major risks and the Group’s approach to managing these are given in the Group consolidated financial statements,
note 53. Such investments are held by the Company at fair value in accordance with accounting policy D.
The fair values of the subsidiaries and joint
ventures are estimated using applicable valuation models, underpinned by the Company’s market capitalisation. This uses the
Company’s closing share price at year end. Given that the key input into the valuation model is based on an observable current
share price, and therefore sensitive to movements in that price, the valuation process is not sensitive to non-observable market
assumptions.
Financial assets, other than investments in subsidiaries
and the joint venture, largely consist of amounts due from subsidiaries. As at the balance sheet date, these receivable amounts
were neither past due nor impaired.
Financial liabilities owed by the Company as
at the balance sheet date are largely in respect of borrowings (details of which are provided in note F and the Group consolidated
financial statements, note 45) and loans owed to subsidiaries. Loans owed to subsidiaries were within agreed credit terms as at
the balance sheet date.
Interest rate risk
Loans to and from subsidiaries are at either fixed or floating rates
of interest, with the latter being exposed to fluctuations in these rates. The choice of rates is designed to match the characteristics
of financial investments (which are also exposed to interest rate fluctuations) held in both the Company and the relevant subsidiary,
to mitigate as far as possible each company’s net exposure.
All the Company’s long-term external borrowings
are at fixed rates of interest and are therefore not exposed to changes in these rates. However, for short-term commercial paper,
the Company is affected by changes in these rates to the extent the redemption of these borrowings is funded by the issuance of
new commercial paper or other borrowings. Further details of the Company’s borrowings are provided in note F and the Group
consolidated financial statements, note 45.
The effect of a 100 basis point increase/decrease
in interest rates on floating rate loans due to and from subsidiaries and on refinancing short-term commercial paper as it matures
would be a decrease/increase in profit before tax of £106 million
(2014:
decrease/increase of £100 million)
. The net asset value of the Company’s financial resources is not materially
affected by fluctuations in interest rates.
Currency risk
The Company’s direct subsidiaries are exposed to foreign currency
risk arising from fluctuations in exchange rates during the course of providing insurance and asset management services around
the world. The exposure of the subsidiaries to currency risk is considered from a Group perspective in the Group consolidated financial
statements, note 53.
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 54(a).
Liquidity risk
Liquidity risk is the risk of not being able to make payments as they
become due because there are insufficient assets in cash form. The Company’s main sources of liquidity are liquid assets
held within the Company and its subsidiaries Aviva Group Holdings Limited (AGH) and Friends Life Holdings plc, and dividends received
from the Group’s insurance and asset management businesses. Sources of liquidity in normal markets also includes a variety
of short and long-term instruments including commercial papers and medium and long-term debt. In addition to the existing liquid
resources and expected inflows, the Company maintains significant undrawn committed borrowing facilities (£1,650 million)
from a range of leading international banks to further mitigate this risk.
Maturity analysis of external borrowings and
amounts due to and by subsidiaries are provided in notes F and I respectively.
I – Related party transactions
The Company receives dividend and interest income from subsidiaries
and pays interest and fee expense to those subsidiaries in the normal course of business. These activities are reflected in the
table below.
Loans to and from subsidiaries are made
on normal arm’s-length commercial terms. The maturity analysis of the related party loans is as follows:
Loans owed by subsidiaries
|
2015
|
2014
|
2013
|
Maturity analysis
|
£m
|
£m
|
£m
|
Within 1 year
|
—
|
388
|
42
|
1-5 years
|
369
|
1,136
|
832
|
Over
5 years
|
184
|
194
|
208
|
Total
|
553
|
1,718
|
1,082
|
I – Related party transactions
continued
Loans owed to subsidiaries
Maturity analysis of contractual undiscounted cash flows:
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Principal
|
Interest
|
Total
|
Principal
|
Interest
|
Total
|
Principal
|
Interest
|
Total
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Within 1 year
|
—
|
132
|
132
|
—
|
132
|
132
|
9,975
|
218
|
10,193
|
1-5 years
|
10,256
|
132
|
10,388
|
10,366
|
264
|
10,630
|
563
|
34
|
597
|
Over 5 years
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Total
|
10,256
|
264
|
10,520
|
10,366
|
396
|
10,762
|
10,538
|
252
|
10,790
|
Other related party balances comprise dividends and interest
receivable and payable, as well as intercompany balances for fees and other transactions in the normal course of business.
Dividends, loans, interest
Services provided to related parties
|
|
2015
|
|
2014
|
|
2013
|
|
Income
earned in
year
|
Receivable
at year end
|
Income
earned in
year
|
Receivable
at year end
|
Income
earned in
year
|
Receivable
at year end
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Subsidiaries
|
1,307
|
786
|
1,232
|
1,992
|
1,553
|
1,706
|
The Company incurred expenses in the year of £212,750
(2014: £179,000; 2013: £130,000)
representing
audit fees paid by the Company on behalf of subsidiaries. The Company did not recharge subsidiaries for these expenses.
The related parties’ receivables
are not secured and no guarantees were received in respect thereof. The receivables will be settled in accordance with normal credit
terms.
Services provided by related parties
|
|
2015
|
|
2014
|
|
2013
|
|
Expense
incurred in
year
|
Payable
at year end
|
Expense
incurred in
year
|
Payable
at year end
|
Expense
incurred in
year
|
Payable
at year end
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Subsidiaries
|
174
|
14,218
|
258
|
14,251
|
326
|
14,260
|
The related parties’ payables are not secured and no
guarantees were received in respect thereof. The payables will be settled in accordance with normal credit terms. Details of guarantees,
indemnities and warranties given by the Company on behalf of related parties are given in note 48(f).
Following the acquisition of Friends Life, Aviva
plc transferred 100% of its newly acquired shares to Aviva Group Holdings Ltd in exchange for an issue of £5,975 million in ordinary shares of AGH.
On 31 December 2015, Aviva Group Holdings Ltd
issued 155,685 additional ordinary shares with a par value of £10,000 per share to Aviva plc, in exchange for the full settlement
of the intercompany balance.
The directors and key management of the Company
are considered to be the same as for the Group. Information on both the Company and Group key management compensation can be found
in note 56.
Additional disclosures for
SEC
In this section
|
Page
|
Exchange rate information
|
262
|
Record holders
|
262
|
Listing and markets
|
262
|
Major shareholders
|
262
|
Significant changes
|
262
|
General insurance and health claims reserves
|
263
|
IFRS critical accounting policies
|
267
|
Articles of Association
|
273
|
Exchange controls and other limitations affecting security holders
|
278
|
Taxation
|
278
|
Dividends and paying agents
|
280
|
Where you can find more information
|
280
|
Description of securities other than equity securities
|
281
|
Purchase of equity securities by Aviva plc and affiliated purchasers
|
282
|
Statement of differences from NYSE corporate governance practices
|
282
|
Legal proceedings
|
282
|
Employees
|
282
|
Controls and procedures
|
282
|
Code of ethics
|
283
|
Exchange rate information
The following table sets forth the average exchange rate as quoted
by Bloomberg for pounds sterling expressed in US dollars per pound sterling for each of the five most recent fiscal years. The
average exchange rate is calculated by using the average of the exchange rates on the last day of each month during the period.
We have not used these rates to prepare our consolidated financial statements.
Year ended 31 December
|
|
2011
|
1.6043
|
2012
|
1.6255
|
2013
|
1.5849
|
2014
|
1.6458
|
2015
|
1.5249
|
The following table sets forth the high and low exchange rates for
pounds sterling expressed in US dollars per pound sterling for the last six months:
|
High
|
Low
|
September 2015
|
1.5659
|
1.5108
|
October 2015
|
1.5509
|
1.5108
|
November 2015
|
1.5497
|
1.4994
|
December 2015
|
1.5252
|
1.4727
|
January 2016
|
1.4816
|
1.4080
|
February 2016
|
1.4668
|
1.3836
|
On 24 March 2016, the closing exchange rate as quoted by Bloomberg
was £1.00 = $1.4181.
Record holders
On 24 March 2016, 394,939 of the Company’s ordinary shares,
representing 0.01 per cent of the issued and outstanding ordinary shares as of such date, were held by 1,199 ordinary shareholders
of record in the United States. In addition, 40,524,624 ordinary shares, representing 1.0 per cent of the issued and outstanding
ordinary shares of such date, were held by 20 registered American Depositary Receipt holders.
Listing and markets
The principal trading market for the Company’s ordinary shares
and preference shares is the London Stock Exchange. The Company’s American Depositary Shares (ADSs) are listed on the NYSE,
each representing the right to receive two ordinary shares under the symbol “AV” deposited pursuant to the deposit
agreement with Citibank N.A. and the registered holders from time to time of the ADSs. For a detailed description of the rights
and obligations attached to Aviva plc ADSs, see “Description of securities other than equity securities”.
The following table sets forth, for the periods
indicated, the reported highest and lowest closing prices for the Company’s ordinary shares on the London Stock Exchange
and ADSs on
the NYSE:
|
Ordinary Shares
(pence)
|
Aviva ADS
(US dollars)
|
Year
|
High
|
Low
|
High
|
Low
|
2011
|
477.9
|
275.3
|
15.80
|
8.60
|
2012
|
384.0
|
255.3
|
12.63
|
7.86
|
2013
|
449.7
|
294.1
|
15.15
|
9.05
|
2014
|
539.0
|
436.7
|
17.93
|
13.77
|
2015
|
571.5
|
428.4
|
17.52
|
13.17
|
|
|
Ordinary shares
(pence)
|
Aviva ADS
(US dollars)
|
Pence
|
|
Quarter 1
|
Quarter 2
|
Quarter 3
|
Quarter 4
|
Quarter 1
|
Quarter
2
|
Quarter
3
|
Quarter 4
|
2013
|
High
|
388.4
|
346.5
|
419.8
|
449.7
|
12.63
|
10.78
|
13.61
|
15.15
|
|
Low
|
296.2
|
294.1
|
342.5
|
407.5
|
9.09
|
9.05
|
10.44
|
13.26
|
2014
|
High
|
523.5
|
534.0
|
535.5
|
539.0
|
16.85
|
17.94
|
17.94
|
16.76
|
|
Low
|
436.7
|
487.8
|
483.2
|
463.9
|
13.77
|
15.91
|
16.30
|
14.50
|
2015
|
High
|
571.5
|
561.5
|
535.5
|
521.0
|
17.52
|
17.10
|
16.80
|
15.65
|
|
Low
|
463.3
|
492.5
|
428.4
|
449.7
|
14.05
|
15.54
|
13.17
|
13.72
|
Ordinary
shares (pence)
|
September
2015
|
October
2015
|
November
2015
|
December
2015
|
January
2016
|
February
2016
|
High
|
477.4
|
486.0
|
514.0
|
521.0
|
516.0
|
475.5
|
Low
|
428.4
|
449.7
|
478.3
|
482.0
|
450.3
|
400.5
|
Aviva ADS (US dollars)
|
September
2015
|
October
2015
|
November
2015
|
December
2015
|
January
2016
|
February
2016
|
High
|
14.73
|
14.90
|
15.56
|
15.65
|
15.21
|
13.77
|
Low
|
13.17
|
13.72
|
14.55
|
14.77
|
13.01
|
11.63
|
Major shareholders
The disclosure of certain major shareholdings in the share capital
of the Company is governed by the Companies Act 2006, the Financial Conduct Authority’s Disclosure and Transparency
Rules (DTR) and the US Securities Exchange Act of 1934.
We have set out in the tables below the holdings
of each major shareholder as notified to the Company under the DTRs or filed with the SEC as at the latest practicable date for
the last three financial years. Our major shareholders as listed below have the same voting rights as all our ordinary shareholders.
As at 24 March 2016
|
Total number of shares held
|
% of total issued shares/
% of voting rights
|
BlackRock, Inc and its subsidiaries
|
277,469,941
|
6.9%
|
As at 13 March 2015
|
Total number of shares held
|
% of total issued shares/
% of voting rights
|
Franklin Resources, Inc and its subsidiaries and affiliates
|
150,571,371
|
5.1%
|
BlackRock, Inc and its subsidiaries
|
190,285,115
|
over 5%
|
As at 21 March 2014
|
Total number of shares held
|
% of total issued shares/
% of voting rights
|
Franklin Resources, Inc and its subsidiaries and affiliates
|
213,911,420
|
7.3%
|
BlackRock, Inc and its subsidiaries
|
147,549,063
|
over 5%
|
Legal & General Group plc
|
90,203,524
|
3.06%
|
The Capital Group Companies Inc
|
90,225,692
|
3.06%
|
Significant changes
No significant changes have occurred since the balance sheet date,
other than as disclosed in the financial statements.
General insurance and health claims reserves
Provisions for outstanding claims
We establish provisions for outstanding claims to cover the outstanding
expected ultimate liability for losses and loss adjustment expenses (“LAE”) in respect of all claims that have already
occurred. The provisions established cover reported claims and associated LAE, as well as claims incurred but not yet reported
and associated LAE.
Delays occur in the notification and settlement
of claims and a substantial measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate
cost of which cannot be known with certainty at the statement of financial position date. Additionally, we are required by applicable
insurance laws and regulations and generally accepted accounting principles to establish reserves for outstanding claims (claims
which have not yet been settled) and associated claims expenses from our insurance operations. The reserves for general insurance
and health are based on information currently available; however, it is inherent in the nature of the business written that the
ultimate liabilities may vary as a result of subsequent developments.
Outstanding claims provisions are based on undiscounted
estimates of future claim payments, except for the following classes of business for which discounted provisions are held:
|
|
Rate
|
|
Mean term of liabilities
|
Class
|
2015
|
2014
|
2015
|
2014
|
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
|
The gross outstanding claims provision before discounting was £9,911
million
(2014: £10,326 million)
and after discounting was £9,446 million
(2014: £9,876 million)
.
The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns
of the underlying claims.
The discount rate that has been applied to latent
claims reserves is based on the swap rate in the relevant currency having regard to the expected settlement dates of the claims.
The range of discount rates used depends on the duration of the claims and is given in the table above. The duration of the claims
span over 35 years, with the average duration between 6 and 15 years depending on the geographical region.
During 2015, the propensity for new bodily injury
claims settled by periodic payment orders (PPOs) or structured settlements, which are reserved for on a discounted basis, has remained
fairly stable.
The uncertainties involved in estimating loss
reserves are allowed for in the reserving process and by the estimation of explicit reserve uncertainty distributions. We have
adopted a reserve estimation basis for non-life claims at 31 December 2015 that is calculated as the best estimate of the cost
of future claim payments, plus an explicit allowance for risk and uncertainty. The allowance for risk and uncertainty targets a
minimum confidence level that provisions will be sufficient for all business in each country. The adequacy of loss reserves is
assessed and reported locally and is aggregated and reported to the Chief Financial Officer (CFO) on a quarterly basis.
For additional information on the assumptions
and changes that have occurred related to the general insurance and health claims provisions, see ”IFRS Financial statements
– note 36 – Insurance liabilities”. The effect on profit of changes in the main assumptions for the general insurance
and health business can be found within “IFRS Financial statements – note 40 – Effect of changes in assumptions
and estimates during the year”.
Reinsurance
We reinsure a portion of the risks we underwrite to control our exposure
to losses and stabilise earnings. We use reinsurance to help reduce the financial impact of large or unusually hazardous risks
and to manage the volatility of our earnings.
Our reinsurance strategy is to purchase reinsurance
in the most cost-effective manner from reinsurers who meet our established security standards. The level of reinsurance sought
is determined by using extensive financial modelling and analysis to ensure we understand the large or unusually hazardous risks
and to ensure we get maximum benefit for the cost of the reinsurance cover provided.
At 31 December 2015, the total reinsurance asset
recoverable in respect of life, general and health insurance was £20,918 million, representing 6.5% of the total gross technical
provisions of £321,729 million. In respect of premium income written during 2015, £2,890 million was ceded to reinsurers,
representing 13.2% of the total gross written premium of £21,925 million.
The Group is exposed to concentrations of risk
with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable
credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures, by limiting the reinsurers that may
be used and applying strict limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that
the overall risk is within appetite. The Group Capital and Asset Liability Management (ALM) and Group Risk teams have an active
monitoring role with escalation to the CFO, Chief Risk Officer (CRO), Group Asset Liability Committee (ALCO) and the Board Risk
Committee as appropriate.
The Group’s largest reinsurance counterparty
is BlackRock Life Ltd (including subsidiaries) as a result of the BlackRock funds offered to UK Life customers via unit linked
contracts. At 31 December 2015, the reinsurance asset recoverable, including debtor balances, from BlackRock Life Ltd was £12,660
million
(2014: £2,048 million)
, which has increased significantly during the year as a result of the acquisition of
Friends Life. Whilst the risk of default is considered remote due to the nature of the arrangement and the counterparty, the Group
is currently considering alternative ways to structure the agreements with BlackRock Life Ltd to reduce or remove this exposure.
Additional information on our reinsurance strategy
and a discussion on concentration risk and reinsurance credit risk can be found within “IFRS Financial statements –
note 53 – Risk management”.
Loss Reserve Development
The loss reserve development tables below present the historical development
of the property & casualty reserves that we established in 2006 and subsequent years.
The top line of the tables shows the reserves
for unpaid losses and LAE as at each statement of financial position date. These reserves are the estimated future payments to
be made for losses and LAE in respect of claims occurring in that year and all prior years.
The “Paid (cumulative)” data represents
the cumulative amounts paid as at each subsequent year end against the reserves for losses and LAE held at each statement of financial
position date. The “Reserve re-estimated” shows the re-estimate of the reserves, as initially recorded at each statement
of financial position date, as at each subsequent year end. The re-estimated reserve changes as a greater proportion of the actual
losses for which the initial reserves were set up are paid and more information becomes known about those claims still outstanding.
The “Cumulative redundancy/(deficiency)”
line represents the overall change in the estimate since the initial reserve was established, and is equal to the initial reserve
less the re-estimated liability as at 31 December 2015. Reserves for losses and LAE at each statement of financial position date
represent the amounts necessary to settle all outstanding claims as at that date. The year-end balances in the tables should not
be added as they include amounts in respect of both the current and prior years.
In our non-UK property & casualty operations,
reserves are established and monitored in the local currency in which the property & casualty entity operates. For the purpose
of the tables, claims reserves and payments with respect to each year are translated into pounds sterling at the rates that applied
when the initial reserves on the statement of financial position for each year were established. The only exception to this are
reserves established in currencies other than an operation’s local currency, for which claims reserves are converted to pounds
sterling at year-end exchange rates and claims payments are converted at the average of the exchange rates that applied during
the relevant year.
The following table presents our consolidated
loss development before reinsurance of reserves measured on an IFRS basis for the last ten financial years.
31 December
|
2006
£m
|
2007
£m
|
2008
£m
|
2009
£m
|
2010
£m
|
2011
1
£m
|
2012
£m
|
2013
£m
|
2014
£m
|
2015
£m
|
Initial net reserves per statement of financial position
|
10,788
|
11,277
|
12,594
|
11,053
|
10,705
|
9,376
|
9,300
|
9,134
|
8,779
|
7,851
|
Effect of discounting
|
223
|
216
|
447
|
451
|
501
|
302
|
293
|
373
|
290
|
174
|
Initial net reserves for unpaid losses and LAE
|
11,011
|
11,493
|
13,041
|
11,504
|
11,206
|
9,678
|
9,593
|
9,507
|
9,069
|
8,025
|
Initial retroceded reserves
|
2,050
|
1,946
|
2,020
|
2,072
|
1,973
|
1,742
|
1,411
|
1,407
|
1,257
|
1,886
|
Initial gross reserves for unpaid losses and LAE
|
13,061
|
13,439
|
15,061
|
13,576
|
13,179
|
11,420
|
11,004
|
10,914
|
10,326
|
9,911
|
|
|
|
|
|
|
|
|
|
|
|
Paid (cumulative) as of:
|
|
|
|
|
|
|
|
|
|
|
One year later
|
3,433
|
4,017
|
4,474
|
3,645
|
4,579
|
3,421
|
2,922
|
2,992
|
2,803
|
|
Two years later
|
5,053
|
5,836
|
6,462
|
6,274
|
6,673
|
5,034
|
4,548
|
4,634
|
|
|
Three years later
|
6,275
|
7,190
|
8,535
|
7,939
|
7,905
|
6,237
|
5,769
|
|
|
|
Four years later
|
7,240
|
8,470
|
9,917
|
8,856
|
8,834
|
7,161
|
|
|
|
|
Five years later
|
8,087
|
9,494
|
10,555
|
9,547
|
9,511
|
|
|
|
|
|
Six years later
|
8,875
|
9,905
|
11,095
|
10,057
|
|
|
|
|
|
|
Seven years later
|
9,170
|
10,300
|
11,483
|
|
|
|
|
|
|
|
Eight years later
|
9,476
|
10,595
|
|
|
|
|
|
|
|
|
Nine years later
|
9,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
One year later
|
12,146
|
13,349
|
14,653
|
13,380
|
13,110
|
11,368
|
10,945
|
10,646
|
10,176
|
|
Two years later
|
12,114
|
13,149
|
14,505
|
13,213
|
13,156
|
11,470
|
10,763
|
10,556
|
|
|
Three years later
|
12,006
|
13,086
|
14,343
|
13,314
|
13,262
|
11,317
|
10,678
|
|
|
|
Four years later
|
11,956
|
12,974
|
14,509
|
13,445
|
13,143
|
11,278
|
|
|
|
|
Five years later
|
11,893
|
13,178
|
14,643
|
13,337
|
13,132
|
|
|
|
|
|
Six years later
|
12,069
|
13,308
|
14,498
|
13,330
|
|
|
|
|
|
|
Seven years later
|
12,260
|
13,223
|
14,513
|
|
|
|
|
|
|
|
Eight years later
|
12,180
|
13,248
|
|
|
|
|
|
|
|
|
Nine years later
|
12,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative redundancy/(deficiency)
|
852
|
191
|
548
|
246
|
47
|
142
|
326
|
358
|
150
|
|
|
1
|
Delta Lloyd not consolidated from financial year 2011 onwards following the partial disposal on 6 May 2011.
|
Tables showing the consolidated gross loss development for the last
ten individual accident years, as opposed to loss development of total gross reserves for claims at the end of each of the last
ten financial years above, are provided within “IFRS Financial statements – note 36 – Insurance liabilities”.
The following table presents our consolidated loss development after
reinsurance of reserves measured on an IFRS basis for the last ten financial years.
31 December
|
2006
£m
|
2007
£m
|
2008
£m
|
2009
£m
|
2010
£m
|
2011
1
£m
|
2012
£m
|
2013
£m
|
2014
£m
|
2015
2
£m
|
Initial net reserves per statement of financial position
|
10,788
|
11,277
|
12,594
|
11,053
|
10,705
|
9,376
|
9,300
|
9,134
|
8,779
|
7,851
|
Effect of discounting
|
223
|
216
|
447
|
451
|
501
|
302
|
293
|
373
|
290
|
174
|
Initial net reserves for unpaid losses and LAE
|
11,011
|
11,493
|
13,041
|
11,504
|
11,206
|
9,678
|
9,593
|
9,507
|
9,069
|
8,025
|
|
|
|
|
|
|
|
|
|
|
|
Paid (cumulative) as of:
|
|
|
|
|
|
|
|
|
|
|
One year later
|
3,221
|
3,783
|
4,267
|
3,386
|
4,232
|
2,811
|
2,728
|
2,726
|
3,159
|
|
Two years later
|
4,674
|
5,485
|
6,041
|
5,773
|
5,779
|
4,310
|
4,158
|
4,806
|
|
|
Three years later
|
5,795
|
6,647
|
7,900
|
6,908
|
6,896
|
5,344
|
5,847
|
|
|
|
Four years later
|
6,595
|
7,771
|
8,751
|
7,734
|
7,658
|
6,747
|
|
|
|
|
Five years later
|
7,315
|
8,306
|
9,346
|
8,259
|
8,846
|
|
|
|
|
|
Six years later
|
7,643
|
8,695
|
9,723
|
9,300
|
|
|
|
|
|
|
Seven years later
|
7,924
|
8,943
|
10,675
|
|
|
|
|
|
|
|
Eight years later
|
8,104
|
9,832
|
|
|
|
|
|
|
|
|
Nine years later
|
8,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
One year later
|
10,115
|
11,334
|
12,480
|
11,264
|
11,112
|
9,425
|
9,456
|
9,270
|
8,816
|
|
Two years later
|
10,055
|
10,959
|
12,269
|
11,076
|
10,999
|
9,494
|
9,316
|
9,043
|
|
|
Three years later
|
9,786
|
10,848
|
12,104
|
11,033
|
11,025
|
9,393
|
9,078
|
|
|
|
Four years later
|
9,678
|
10,744
|
12,118
|
11,090
|
10,953
|
9,198
|
|
|
|
|
Five years later
|
9,628
|
10,804
|
12,205
|
11,041
|
10,799
|
|
|
|
|
|
Six years later
|
9,679
|
10,920
|
12,116
|
10,907
|
|
|
|
|
|
|
Seven years later
|
9,867
|
10,875
|
12,050
|
|
|
|
|
|
|
|
Eight years later
|
9,832
|
10,847
|
|
|
|
|
|
|
|
|
Nine years later
|
9,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative redundancy/(deficiency)
|
1,194
|
646
|
991
|
597
|
407
|
480
|
515
|
464
|
253
|
|
|
1
|
Delta Lloyd not consolidated from financial year 2011 onwards following the partial disposal on 6 May 2011.
|
|
2
|
In 2015 the UK general insurance business completed an outward reinsurance contract which covers a large proportion of its
claims in respect of mesothelioma, industrial deafness and other long tail risks.
|
Tables showing the consolidated loss development, net of reinsurance,
for the last ten individual accident years, as opposed to loss development of total net reserves for claims at the end of each
of the last ten financial years above, are provided under “IFRS Financial statements – Note 36 – Insurance liabilities”.
The loss development tables above include
information on asbestos and environmental pollution claims provisions from business written before 2006. The undiscounted
claim provisions, net of reinsurance, in respect of this business at 31 December 2015 were £237 million
(2014:
£984 million)
. The movement in the year reflects a reduction of £705 million due to the reinsurance purchased
by the UK general insurance business during 2015 covering a large proportion of these liabilities, favourable claims
development of £22 million, claim payments net of reinsurance recoveries and foreign exchange rate movements.
In 2008 the Institute of Actuaries’ Asbestos
Working Party report contributed to our view that experience variances, which we had previously perceived as normal short-term
volatility, reflected a real worsening of expected ultimate claims experience. The market trend in mesothelioma claims was fully
reflected as a significant one-off strengthening of gross latent claims reserves in 2008 of £356 million, with a corresponding
increase of £52 million in reinsurance recoverable. The net increase of £304 million comprised £668 million on
an undiscounted basis and discounting of £364 million.
Following the partial disposal on 6 May 2011,
Delta Lloyd was not consolidated in the loss reserve development tables shown above for financial years 2011 onwards. The Group
disposed of its remaining share of Delta Lloyd during 2013.
Reserves for Asbestos and Environmental Losses
The tables below show the historical development of the asbestos and
environmental (“A&E”) reserves as at 31 December 2013 and subsequent years. The tables include all indemnity claims
arising from injuries and diseases due to asbestos and all claims arising from injuries due to toxic waste, hazardous substances
and other environmental pollutants, including damages in respect of hazardous waste site clean-up costs. Litigation costs in relation
to these claims are also included in the tables. Claims relating to smoking, physical abuse, silicon implants and other health
hazards and latent injuries are not included as our exposure is not material.
We have exposure to liabilities for A&E claims
arising from the sale of commercial liability and multi-peril policies prior to 1987. After 1987 policy terms and conditions in
many cases excluded these types of claims, thereby considerably reducing our potential for loss.
Reserving for A&E claims is subject to many
uncertainties, such as very long reporting delays, unresolved legal issues and the number and identity of insureds, and these uncertainties
are generally much greater than those present on other types of claims. As a result, traditional loss reserving techniques cannot
be entirely relied upon. We therefore employ special techniques to determine reserves using all available information. However,
new legislation or legal precedents could result in ultimate outstanding losses being adversely affected in future periods.
A large proportion of our gross A&E liabilities
relate to the London Market business we wrote and are therefore covered by our reinsurance with National Indemnity. As of 31 December
2000, management of these claims transferred to Berkshire Hathaway. During 2015 our UK general insurance business completed an
outward reinsurance contract which provides cover for a large proportion of its remaining A&E liabilities. Our net A&E
reserves mainly relate to asbestos production and handling in various jurisdictions, including the United Kingdom, Canada, Ireland
and Australia.
The following table presents the development
of our asbestos and environmental reserves before reinsurance measured on an IFRS basis.
31 December
|
2015
£m
|
2014
£m
|
2013
£m
|
Initial net reserves per statement of financial position
|
135
|
736
|
648
|
Effect of discounting
|
102
|
248
|
328
|
Initial net reserves for unpaid losses and LAE
|
237
|
984
|
976
|
Initial retroceded reserves
|
1,150
|
594
|
682
|
Initial gross reserves for unpaid losses and LAE
|
1,387
|
1,578
|
1,658
|
|
|
|
|
Paid (cumulative) as of:
|
|
|
|
One year later
|
|
72
|
57
|
Two years later
|
|
|
129
|
|
|
|
|
Reserve re-estimated as of:
|
|
|
|
One year later
|
|
1,555
|
1,637
|
Two years later
|
|
|
1,613
|
|
|
|
|
Cumulative redundancy/(deficiency)
|
|
23
|
45
|
The following table presents the development of our A&E reserves
after reinsurance measured on an IFRS basis.
31 December
|
2015
£m
|
2014
£m
|
2013
£m
|
Initial net reserves per statement of financial position
|
135
|
736
|
648
|
Effect of discounting
|
102
|
248
|
328
|
Initial net reserves for unpaid losses and LAE
|
237
|
984
|
976
|
|
|
|
|
Paid (cumulative) as of:
|
|
|
|
One year later
|
|
17
|
38
|
Two years later
|
|
|
54
|
|
|
|
|
Reserve re-estimated as of:
|
|
|
|
One year later
|
|
962
|
1,023
|
Two years later
|
|
|
1,000
|
|
|
|
|
Cumulative redundancy/(deficiency)
|
|
22
|
(24)
|
IFRS critical accounting policies
Our discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have been prepared in accordance with International Financial
Reporting Standards (‘‘IFRS’’) as issued by the International Accounting Standards Board.
In preparing our financial statements, we are
required to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to life
insurance business and non-life and health business provisioning, the fair value of assets and the declaration of with-profits
business bonus rates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable
under the current circumstances. These estimates form the basis for making judgements about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates to the extent that actual conditions
arising deviate from assumed conditions.
Critical accounting policies are those that reflect
significant judgements and uncertainties and potentially may lead to materially different results under different assumptions and
conditions.
Critical accounting policies
The major areas of judgement on policy application are summarised
below:
Item
|
Critical accounting judgement assumption
|
Accounting policy
|
Consolidation
|
Assessment of whether the Group controls the underlying entities including consideration of its decision making authority and the rights to variable returns from the entity
|
D
|
Insurance and participating investment contract liabilities
|
Assessment of the significance of insurance risk transferred to the Group in determining whether a contract should be accounted for as insurance or investment contract
|
G
|
Financial investments
|
Classification of investments including the application of the fair value options
|
T
|
Use of estimates
All estimates are based on management’s knowledge of current
facts and circumstances, assumptions based on that knowledge and their predictions of future events and actions. Actual results
may differ from those estimates, possibly significantly.
The table below sets out those items we consider
particularly susceptible to changes in estimates and assumptions, and the relevant accounting policy. These policies and notes
can be found in the IFRS Financial Statements.
Item
|
Critical accounting assumptions
|
Accounting policy
|
IFRS Note
|
Measurement of insurance and participating investment contract liabilities
|
Principal assumptions will include those in respect of mortality, morbidity, persistency, expense, valuation interest rates, credit default allowances on corporate bonds and valuation of guarantees
|
L
|
36(b)
|
AVIF and intangible assets
|
AVIF is recognised, amortised and tested for impairment by reference to the present value of estimated future profits. Other acquired intangible assets are recognised and tested for impairment using an income approach method. Significant estimates include forecast cash flows and discount rates.
|
O
|
13
|
Fair value of financial investments, derivative financial instruments and investment property
|
Where quoted market prices are not available, valuation techniques are used to value financial investments, derivatives and investment property. These include broker quotes and models using both observable and unobservable market inputs.
|
F,T,U
|
18,22
|
Impairment of financial investments
|
Factors considered when assessing whether there is objective evidence of impairment include industry risk factors, financial condition, credit rating and whether there has been a significant or prolonged decline in fair value.
|
T,V
|
19,22
|
Deferred acquisition costs
|
Management use estimation techniques to determine the amortisation profile and impairment test by reference to the present value of estimated future profits.
|
X
|
24
|
Provisions and contingent liabilities
|
When evaluating whether a provision or a contingent liability should be recognised the Group assesses the likelihood of a constructive or legal obligation to settle a past event and whether the amount can be reliably estimated. The amount of provision is determined based on the Group’s estimation of the expenditure required to settle the obligation at the statement of financial position date.
|
AA
|
43,48
|
Pension obligations
|
The Group uses a number of estimates when calculating its pension obligations, including mortality assumptions, discount rates and inflation rates.
|
AB
|
44
|
Deferred income taxes
|
Calculation and recognition of temporary differences giving rise to deferred tax balances includes estimates of the extent to which future taxable profits are available against which the temporary differences can be utilised.
|
AC
|
42
|
Additional information on Investments
For an overview of our investments, see “Performance review
– Analysis of investments”. See “IFRS Financial statements – note 18 – Fair value methodology”
for further details on fair value methodology.
The fair values of financial investments are
primarily based on prices obtained from third parties, who use market standard valuation methodologies based on observable market
data where possible.
Valuations obtained from third party sources
are often the proprietary information of the third party provider, and therefore, while the third party providers may discuss with
us their methodologies and sources of inputs, we are unable to re-perform their valuations. However, these valuations are subject
to a number of monitoring controls, which include, but are not limited to reviewing the bid/ask spreads to assess activity, stale
price reviews and determination of the observability of inputs used in estimating fair values. Where we believe uncertainty exists
over the reliability of the third party valuation, we validate third party valuations against other third party pricing providers,
broker quotes or our own internal models where possible.
Where estimates are used, these are based on
a combination of independent third party evidence and internally developed models, calibrated to market observable data where possible.
Whilst such valuations are sensitive to estimates, we believe that changing one or more of the assumptions for reasonably possible
alternative assumptions would not change fair value significantly. Sensitivity analysis for Level 3 investments is detailed in
“IFRS Financial Statements – note 18(g) – Fair value methodology”.
The fair values of our financial investments
are subject to market risk and credit risks, primarily interest rate, equity price, property price and foreign currency exchange
risks. “IFRS Financial statements – note 53 – Risk management” provides disclosure and discussion of the
impact of changes in market assumptions and information regarding the aggregated credit risk exposure of the Group’s financial
assets with external credit ratings.
Fixed maturity securities – Valuation techniques
The table below provides an analysis at 31 December 2015 of debt securities
by pricing source.
|
Fair value hierarchy
|
2015
|
Level 1
£m
|
Level 2
£m
|
Level 3
£m
|
Total
£m
|
Third party sources
|
89,158
|
58,638
|
11,894
|
159,690
|
Internal models
|
—
|
565
|
2,709
|
3,274
|
|
89,158
|
59,203
|
14,603
|
162,964
|
The majority of our fixed maturity securities are valued based on
the prices obtained from third parties. Variations in the proportion of securities classified as Levels 1, 2 and 3 in different
countries reflect different valuation sources used and different levels of liquidity. 90% of Level 2 fixed maturity securities
are held by our businesses in the UK and Ireland, France and Canada, of which the UK and Ireland represent 81%. 98% of Level 3
fixed maturity securities are held by our businesses in France and the UK.
Valuations sourced from third parties
Valuations obtained from third party sources, classified as Level
1, are unadjusted.
Structured bond-type and non-standard products
held by our business in France amounting to £5.8 billion and bonds held by our UK business of £2.2 billion, are valued
either using counterparty or third-party broker quotes. Where possible, they are validated against internal or third-party models.
They have been classified as Level 3 because either (i) the third-party model included a significant unobservable liquidity adjustment
or (ii) differences between the valuation provided by the counterparty and broker quotes and the validation model were sufficiently
significant to result in a Level 3 classification. At 31 December 2015, the values reported in respect of these products were the
lower of counterparty and broker quotes and modelled valuations.
Corporate debt securities held by our French
business of £1.5 billion and debt securities of £0.9 billion held by our UK and Asia businesses are also valued using
third-party or counterparty valuation. These prices are considered to be unobservable due to infrequent market transactions.
Private placement notes amounting to £1.5
billion are valued using third-party broker quotes. As the observability inputs used by the third-party is unavailable, these notes
have been classified as Level 3.
Internal valuations models
In our UK Life business, we used internal models to value private
placement notes of £1.8 billion at 31 December 2015 where the credit spread inputs have been derived internally. These inputs
have been deemed unobservable and as a result the notes have been classified as Level 3.
A collateralised loan obligation of £0.4
billion and bonds of £0.5 billion, held by our UK business, were valued using an internally developed cash flow model with
inputs that are considered to be unobservable and therefore classified as Level 3.
Adjustments for credit and liquidity risk
Our internal models and the models used by third-party pricing vendor
services incorporate credit risk by adjusting the spread above swap curves or yield curves for government treasury securities of
similar maturity for the appropriate amount of credit risk for each issuer, based on observable market information, where available.
These models also incorporate liquidity premiums by adjusting the market spread above the yield curve for the appropriate amount
of liquidity risk for each issuance, based on observable market information, where available.
Equity securities – Valuation techniques
The table below provides an analysis at 31 December 2015 of equity
securities by pricing source.
|
Fair value hierarchy
|
2015
|
Level 1
£m
|
Level 2
£m
|
Level 3
£m
|
Total
£m
|
Third party sources
|
62,622
|
—
|
897
|
63,519
|
Internal models
|
—
|
—
|
39
|
39
|
|
62,622
|
—
|
936
|
63,558
|
Valuations obtained from third party sources, classified as Level
1 above, are unadjusted.
Equity securities classified as Level 3 are principally
direct private equity investments held by our UK business. The majority of Level 3 valuations are based on third-party specialists.
Where internally modelled, valuations are based on discounted cash flow approach and valuation multiples using inputs which are
deemed to be unobservable.
Other investments (including derivatives) – Valuation
techniques
The table below provides an analysis at 31 December 2015 of other
investments by pricing source.
|
Fair value hierarchy
|
2015
|
Level 1
£m
|
Level 2
£m
|
Level 3
£m
|
Total
£m
|
Third party sources
|
39,485
|
4,057
|
3,471
|
47,013
|
Internal models
|
—
|
—
|
682
|
682
|
|
39,485
|
4,057
|
4,153
|
47,695
|
Valuations obtained from third party sources, classified as Level
1 above, are unadjusted.
Other investments classified as Level 2 principally
relate to derivative financial instruments amounting to £2.7 billion and unit trusts and other investment vehicles amounting
to £1.4 billion.
All valuations for derivatives are sourced from
third parties. For most non-exchange traded derivatives, we either obtain prices from derivative counterparties and corroborate
these prices using internal models where possible, or source prices from a third-party vendor and corroborate these prices to non-binding
broker quotes. Credit risk is considered in the valuation but the presence of collateral usually mitigates any non-performance
risk related to the derivatives. Refer to “IFRS Financial Statements – note 55 - Financial assets and liabilities subject
to offsetting, enforceable master netting arrangements and similar agreements” for further details regarding the net credit
exposures related to derivatives. Unit trust and other investment vehicles classified as Level 2 are valued based on third party
sources supported by observable market data.
Other investments classified as Level 3 include
discretionary managed funds held in Asia amounting to £1.2 billion, other investment funds including property funds amounting
to £1.0 billion and external hedge funds amounting to £0.5 billion. In valuing its interest in these funds, the Group
utilises net asset values or valuations received from fund managers, which are based on the market value of the underlying fund
assets. In certain instances, the market values of the underlying assets may be determined by the hedge fund managers using internal,
proprietary models.
In addition other investments classified as Level
3 include private equity investment funds of £1.4 billion. These funds are valued based on investment valuation reports received
from fund managers or internal models based on these reports. Where these valuations are at a date other than balance sheet date,
we make adjustments for items such as subsequent draw-downs, distributions and the fund manager’s carried interest.
Loans – Valuation techniques
The table below provides an analysis at 31 December 2015 of loans
carried at fair value by pricing source.
|
Fair value hierarchy
|
2015
|
Level 1
£m
|
Level 2
£m
|
Level 3
£m
|
Total
£m
|
Third party sources
|
—
|
—
|
—
|
—
|
Internal models
|
—
|
950
|
18,129
|
19,079
|
|
—
|
950
|
18,129
|
19,079
|
All of our loans carried at fair value are valued using internal models.
These loans in our UK Life business include:
Commercial mortgage loans, Primary Healthcare,
PFI and infrastructure loans of £10.8 billion are valued using a Portfolio Credit Risk Model (PCRM) which calculates a Credit
Risk Adjusted Value (CRAV) for each mortgage. The risk adjusted cash flows are discounted using a yield curve, taking into account
the term dependent gilt yield curve and global assumptions for the liquidity premium. The liquidity premium is deemed to be non-market
observable and therefore these loans are classified as Level 3 in the fair value hierarchy.
Equity release and securitised mortgage loans
amounting to £7.3 billion are valued using internal models. Inputs to the model include property growth rates, mortality
and morbidity assumptions, cost of capital and liquidity premium. £6.7 billion of these mortgage loans are classified as
Level 3 where these inputs are not deemed to be market observable.
Collateralised non-recourse loans of £0.6
billion have been valued using internally developed models incorporating a significant number of modelling assumptions including
the probability of counterparty default and the expected loss in the event of counterparty default. These inputs are deemed to
be unobservable.
Investment Property – Valuation techniques
The table below provides an analysis at 31 December 2015 of investment
property carried at fair value, by pricing source.
|
Fair value hierarchy
|
2015
|
Level 1
£m
|
Level 2
£m
|
Level 3
£m
|
Total
£m
|
Third party sources
|
—
|
—
|
11,301
|
11,301
|
Internal models
|
—
|
—
|
—
|
—
|
|
—
|
—
|
11,301
|
11,301
|
Valuations sourced from third parties
Valuations obtained from third party sources, disclosed above, are
unadjusted. In the UK, investment property is valued at least annually by external chartered surveyors in accordance with guidance
issued by The Royal Institution of Chartered Surveyors, and using estimates during the intervening period. Outside the UK, valuations
are produced by external qualified professional appraisers in the countries concerned. Investment properties are valued on an income
approach that is based on current rental income plus anticipated uplifts at the next rent review, lease expiry, or break option
taking into consideration lease incentives and assuming no further growth in the estimated rental value of the property. This uplift
and the discount rate are derived from rates implied by recent market transactions on similar property. These inputs are deemed
unobservable.
Duration and amount of unrealised losses on available-for-sale
securities
|
0 - 6 months
|
|
7 - 12 months
|
|
more than 12 months
|
|
Total
|
|
2015
|
Fair value
1
£m
|
Gross
unrealised
£m
|
Fair value
1
£m
|
Gross
unrealised
£m
|
Fair value
1
£m
|
Gross
unrealised
£m
|
Fair value
1
£m
|
Gross
unrealised
£m
|
Less than 20% loss position:
|
|
|
|
|
|
|
|
|
Debt securities
|
5
|
—
|
8
|
—
|
34
|
(1)
|
47
|
(1)
|
Equity securities
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Other investments
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
5
|
—
|
8
|
—
|
34
|
(1)
|
47
|
(1)
|
20%-50% loss position:
|
|
|
|
|
|
|
|
|
Debt securities
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Equity securities
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Other investments
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Greater than 50% loss position:
|
|
|
|
|
|
|
|
|
Debt securities
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Equity securities
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Other investments
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Total
|
|
|
|
|
|
|
|
|
Debt securities
|
5
|
—
|
8
|
—
|
34
|
(1)
|
47
|
(1)
|
Equity securities
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Other investments
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
5
|
—
|
8
|
—
|
34
|
(1)
|
47
|
(1)
|
Assets of operations classified as held for sale
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Total (excluding assets held for sale)
|
5
|
—
|
8
|
—
|
34
|
(1)
|
47
|
(1)
|
|
1
|
Only includes AFS securities that are in unrealised loss positions.
|
|
0 - 6 months
|
|
7 - 12 months
|
|
more than 12 months
|
|
Total
|
|
2014
|
Fair value
1
£m
|
Gross
unrealised
£m
|
Fair value
1
£m
|
Gross
unrealised
£m
|
Fair value
1
£m
|
Gross
unrealised
£m
|
Fair value
1
£m
|
Gross unrealised
£m
|
Less than 20% loss position:
|
|
|
|
|
|
|
|
|
Debt securities
|
9
|
—
|
11
|
—
|
17
|
(1)
|
37
|
(1)
|
Equity securities
|
—
|
—
|
—
|
—
|
3
|
—
|
3
|
—
|
Other investments
|
—
|
—
|
—
|
—
|
1
|
—
|
1
|
—
|
|
9
|
—
|
11
|
—
|
21
|
(1)
|
41
|
(1)
|
20%-50% loss position:
|
|
|
|
|
|
|
|
|
Debt securities
|
—
|
—
|
—
|
—
|
3
|
(2)
|
3
|
(2)
|
Equity securities
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Other investments
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
—
|
—
|
—
|
—
|
3
|
(2)
|
3
|
(2)
|
Greater than 50% loss position:
|
|
|
|
|
|
|
|
|
Debt securities
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Equity securities
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Other investments
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Total
|
|
|
|
|
|
|
|
|
Debt securities
|
9
|
—
|
11
|
—
|
20
|
(3)
|
40
|
(3)
|
Equity securities
|
—
|
—
|
—
|
—
|
3
|
—
|
3
|
—
|
Other investments
|
—
|
—
|
—
|
—
|
1
|
—
|
1
|
—
|
|
9
|
—
|
11
|
—
|
24
|
(3)
|
44
|
(3)
|
Assets of operations classified as held for sale
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Total (excluding assets held for sale)
|
9
|
—
|
11
|
—
|
24
|
(3)
|
44
|
(3)
|
|
1
|
Only includes AFS securities that are in unrealised loss positions.
|
Where factors specific to an issuer have resulted
in an unrealised loss, we have considered whether the security is impaired and recognised an impairment charge where necessary.
The impairment expense during FY15 relating to
AFS debt securities and other investments was £nil (
FY14: £nil
) and £nil (
FY14: £2 million
)
respectively.
At 31 December 2015, the AFS debt securities
above were held by our businesses in France and Poland.
Receivables and other financial assets
We manage the credit quality of receivables and other financial assets
at the level of each subsidiary entity. Each subsidiary entity reviews the carrying value of its receivables at each reporting
period. If the carrying value of a receivable or other financial asset is greater than the recoverable amount, the carrying value
is reduced to the recoverable amount and a corresponding impairment charge is recognised in the income statement.
Where assets have been classed as ‘past
due and impaired’, an analysis is made of the risk of default and a decision is made whether to seek to mitigate the risk.
There were no material financial assets that would have been past due or impaired had the terms not been renegotiated.
Financial liabilities fair valued through profit
or loss
We have made use of the fair value option under IAS 39 to designate
non-participating investment contracts of £103,125 million and securitised borrowings of £1,308 million as fair value
through profit or loss, as these are managed with associated financial assets and derivatives as a portfolio on a fair value basis.
We believe such a presentation provides more relevant information and eliminates any accounting mismatch. In addition, IFRS requires
us to fair value derivative liabilities of £3,881 million through profit or loss.
Under IFRS, we are required to reflect own credit
risk in valuations for those financial liabilities fair valued through profit or loss where this risk would be considered by market
participants. Other than the embedded option in indexed life and annuity contracts, we have not included own credit risk as a factor
in fair valuing these liabilities for the following reasons:
|
·
|
In the case of derivative contracts they are mostly fully collaterised;
|
|
·
|
In the case of investment contracts which are unit-linked in structure, our liability to policyholders is linked to a segregated
pool of assets, and have priority over other creditors in event of default; and
|
|
·
|
In the case of securitised borrowing, the issued loan notes are secured on ring-fenced mortgage assets which effectively act
as collateral. Noteholders are only entitled to obtain payment, of both principle and interest, to the extent that the available
resources of the special purpose securitisation companies are sufficient. Noteholders have no recourse whatsoever to other companies
in the Aviva Group.
|
Articles of Association
The Company adopted a new set of Articles of Association with effect
from the conclusion of the annual general meeting (“AGM”) held on 29 April 2015. The following is a summary of the
rights of the holders of our shares and of certain significant provisions of our Articles of Association and relevant laws and
regulations of various regulatory bodies. Because it is a summary, it does not contain all the information that may be important
to you. For more complete information you should read our Articles of Association. A complete copy of our Articles of Association
can be obtained from our website on www.aviva.com/investor-relations/corporate-governance/articles-of-association.
The deposit agreement between us, Citibank N.A.
and the registered holders from time to time of the ADSs, will govern the rights of holders of ADSs as described in “Description
of securities other than equity securities” below. You should be aware that these rights are different from the rights of
the holders of our ordinary shares.
Organisation and register
Our registered company number in England is 2468686. The various entities
that comprise Aviva have histories of considerable duration. Hand in Hand was established in 1696, Commercial Union was established
in 1861, General Accident was founded in 1885 and Norwich Union was founded in 1797. However, the Group’s current structure
dates back to 9 February 1990, when Commercial Union plc was incorporated as the listed holding company for the Commercial Union
Group.
On 10 April 2015, the Group completed the acquisition of Friends Life
Group Limited through an all share exchange.
Directors
The number of our directors is not less than two, nor more than twenty.
We may, in a general meeting by ordinary resolution, increase or reduce the maximum and the minimum number of the directors. Our
Articles of Association do not contain an age restriction applicable to directors.
Powers of our Board and election of directors
Our Board manages the business and affairs of the Company. However,
our shareholders must approve certain matters, such as changes to the share capital and the election of directors. Directors are
appointed subject to our Articles of Association. At every AGM, all the directors will be subject to re-election as provided in
the UK Corporate Governance Code.
Under English law, shareholders of a public company
may, by ordinary resolution, appoint a person who is willing to be a director either to fill a vacancy or, subject to any limit
provided in the company’s Articles of Association, as an additional director. Shareholders may also remove any director before
the end of his or her term of office by ordinary resolution and may appoint another person in his or her place. In addition, under
our Articles of Association, our Board also has the power to appoint a director to fill a vacancy on our Board or to serve as an
additional director, provided that a director so elected may only serve until the next following AGM of the Company, at which time
the director may be elected by shareholders.
Directors’ interests
Section 175 of the UK Companies Act 2006 (the
Act) states that a director of a company must avoid a situation in which the director has a direct or indirect interest that conflicts
with the interests of the company. However, in accordance with that legislation, and as provided by the Articles of Association,
the Board may authorise any matter proposed or declared to it which would, if not so authorised, have resulted in the director
being in breach of that duty.
Section 177 of the Act provides that a director
who is directly or indirectly interested in a contract or proposed contract or arrangement or proposed arrangement connected to
us or any of our subsidiaries must declare the nature of his interest at a meeting of our Board. In the case of a proposed contract
or proposed arrangement, the declaration must be made at the meeting of our Board at which the question of entering into the contract
or arrangement is first taken into consideration or, if the director was not at the date of the meeting interested in the proposed
contract or arrangement, at the next meeting of our Board held after he became so interested. In a case where the director becomes
interested in a contract after it is entered into or an arrangement after it is made, the declaration must be made at the first
meeting of our Board held after the director becomes so interested.
If the contract was entered into or the arrangement
made or the proposed contract or arrangement was considered before the director was appointed or elected, the declaration must
be made at the first meeting of our Board following the appointment or election of the director or, if the director was not then
aware of the existence of the contract or arrangement or proposed contract or arrangement, at the next meeting following the director
becoming so aware.
A director may hold any other office (other than
that of auditor) in any other company in which he is in any way interested in conjunction with his office of director for such
period and on such terms (as to remuneration and otherwise) as our Board may determine, and no person is disqualified from appointment
or election as a director by reason of his holding any office (other than that of auditor).
No director or director candidate is disqualified
by his or her office from contracting either with regard to his or her tenure of any such office, nor is any such contract to be
avoided, nor is any director so contracting or being so interested to be liable to account to us for any profit realised by any
such contract or arrangement by reason of such director holding that office or of the fiduciary relationship established by his
directorship.
Directors’ remuneration
A director is not required to hold any shares by way of qualification.
However, under internal guidelines the Group Chief Executive Officer (Group CEO) is required to build up a shareholding in the
Company equivalent to 300% of annual base salary, Executive Directors are required to build up a shareholding in the Company equivalent
to 150% of annual base salary and other Group Executive members are required to build up a shareholding in the Company equivalent
to 50% of annual base salary. In addition, the Executive Directors, including the Group CEO, are required to retain 50% of the
net shares released from deferred annual bonuses and Long Term Incentive Plan awards until the shareholding requirements have been
met. The shareholding requirement needs to be built up over a five-year period.
The Non-Executive Directors as a body are remunerated
for their services in an amount not exceeding £2,000,000 per annum in aggregate, to be determined by our Board, or at such
other rate that the Company, in general meeting, may determine by ordinary resolution. Such remuneration is to be divided amongst
the directors in such proportions and manner that the Board determines and, in default of such determination, equally. The remuneration
payable accrues from day to day. A director is entitled to be repaid all reasonable travelling, hotel and other expenses incurred
by such director in or about the performance of his or her duties as director, including any expenses incurred in attending meetings
of our Board or of Committees of our Board or general meetings, whether incurred in the UK or in any overseas country.
The remuneration of the Chairman and Executive
Directors is recommended to the Board by the Remuneration Committee. The remuneration of the Non-Executive Directors is determined
by the Board. For further details see “Governance – Directors’ remuneration report”.
Proceedings of our Board and committees
Our Board may meet together for the dispatch of business, adjourn
and otherwise regulate its meetings as it thinks fit and decide the quorum necessary for the transaction of business. Unless and
until otherwise decided, the quorum is four directors. No business may be transacted without the requisite quorum. Questions arising
at any meeting are decided by a majority of votes. In case of an equality of votes, the Chairman of the meeting has a second or
casting vote.
Two directors may and, upon request of two directors,
the Secretary shall summon a Board meeting at any time, by notice given to all of the directors. Notice of a meeting of our Board
is deemed to be duly given to a director if it is given to him personally, by word of mouth, by electronic communication to an
address given by him for that purpose or sent in writing to him at his last-known address or another address given by him for that
purpose.
Our Board may from time to time appoint one or
more directors as Managing Director, Executive Director, joint Managing Directors or joint Executive Directors either for a fixed
or an indefinite term and may from time to time, without prejudice to the terms of any agreement entered into in any particular
case, remove or dismiss any directors so appointed from office and appoint another director in his or her place.
Liabilities of directors and officers
English law does not permit a company to exempt any director or other
officer of the company, or any person employed by the company as auditor, from any liability that by virtue of any rule of law
would otherwise attach to him or her in respect of any negligence, default, breach of duty or breach of trust of which he or she
may be guilty in relation to the company. English law enables companies to purchase and maintain insurance for directors, officers
and auditors against any such liability. We maintain such insurance for our directors and executive officers. Our Articles of Association
provide that our directors and officers, among others, are entitled to indemnification by Aviva out of our own funds against all
costs, charges, losses, expenses and liabilities incurred by such person in connection with the discharge of his or her duties
or the exercise of his or her powers.
Debt limitations
Our Articles of Association grant our
Board authority to exercise our power to borrow money and to mortgage or charge our undertaking, property and uncalled capital,
or any part thereof, and to issue debentures and other securities, whether outright or as security for any debt, liability or obligation
of ours or of any third party. The aggregate amount of debt borrowed or secured by us or any of our subsidiaries (to the extent
our Board can procure through voting and other powers of control and excluding borrowings between subsidiary undertakings and between
the Company and its subsidiary undertakings) must not, without the prior approval of the shareholders in a general meeting, exceed
twice the aggregate of our share capital and consolidated reserves, subject to certain adjustments set forth in our Articles of
Association.
Special share rights
Subject to any special rights previously conferred on the holders
of any shares or class of shares, we may issue any share with such preferred, deferred or other special rights or such restrictions,
whether in regard to dividend, voting, return of capital or otherwise.
If any class of shares has any preferential right
to dividend or return of capital, the conferring on other shares of rights to either dividend or return of capital ranking either
before or
pari passu
with that class is generally deemed a variation of the rights attached to that class of shares.
Subject to legislation and unless otherwise expressly
provided by the terms on which shares of that class are held, any of the rights attached to any class of shares may be varied or
abrogated with the written consent of the holders of not less than three-fourths in nominal value of the issued shares of that
class or with the sanction of a special resolution passed at a separate general meeting of the holders of such shares. The provisions
of the Articles of Association as to general meetings of the Company apply, with any necessary modifications, to a variation of
class rights meeting, except that the necessary quorum is two persons present holding at least one-third in nominal value of the
issued shares of the class or, for an adjourned meeting, one person present holding shares of the class in question, and where
a person is present by proxy or by proxies, that person is treated as holding only the shares in respect of which those proxies
are authorised to exercise voting rights.
We may issue and allot new preference shares
in one or more separate series, each of which may constitute a separate class, and the new preference shares comprising each such
series or class will rank
pari passu
and have such rights and terms as may be attached by our Board prior to allotment.
Sterling new preference shares, new preference shares and euro new preference shares will have such rights and terms as the Board
may determine in accordance with the terms of their respective capital instruments as well as such further rights and terms as
may be determined by the Board prior to their issue. For details on the rights of our preference shares, see “IFRS Financial
statements – note 29 – Preference share capital”.
Allotment of securities
Our Board has the general power to allot equity securities for cash
pursuant to the general authority for the first period and each subsequent period.
Our Board may at any time after the allotment
of a share, but before a person has been entered in the register as the holder of the share, recognise a renunciation of the share
by the allottee in favour of another person and may grant to an allottee a right to effect a renunciation on the terms and conditions
our Board thinks fit.
Pre-emptive rights
Under English law, the issue for cash of equity securities or rights
to subscribe for or convert into equity securities must be offered in the first instance to the existing equity shareholders in
proportion to the respective nominal values of their holdings in the class of equity securities being offered, unless a special
resolution has been passed in a general meeting of shareholders dis-applying (whether generally or specifically) this requirement.
As is the custom of many companies listed on the Official List of the UK Listing Authority, we generally obtain authority annually
from our shareholders to allot up to a specified amount of equity share capital for cash, instead of allotting pro rata to our
existing shareholders.
Calls on shares
Our Board may from time to time make calls on the shareholders in
respect of any monies unpaid on their shares or on any class of their shares, whether on account of the nominal value of the shares
or by way of premium, and not by the conditions of allotment thereof made payable at fixed times. Each shareholder will be required,
subject to the shareholder having been given at least fourteen days’ notice specifying the time or times and place of payment,
to pay at the time and place so specified the amount called on such shareholder’s shares. A call may be made payable by instalments,
may be revoked by our Board before receipt of any sum due or postponed as our Board may decide and be deemed to have been made
at the time when the resolution of our Board authorising the call was passed. A person upon whom a call is made remains liable
for calls made upon him or her notwithstanding the subsequent transfer of the shares.
Forfeiture of shares
If the whole or any part of any call or instalment of a call in regard
to a share is not paid by the date fixed for payment, our Board may, at any time thereafter during such time as any part of the
call or instalment remains unpaid, serve a notice on the shareholder in whose name the share is registered requiring payment of
so much of the call or instalment as is unpaid, together with any interest and expenses which may have accrued by reason of such
Non-payment.
Should the notice not be complied with, the Board
may resolve that the shares in respect of which the notice was given shall be forfeited.
Lien on shares
We have a first and paramount lien and charge on every share that
has not been fully paid for all monies, whether presently payable or not, called or payable at a fixed time in respect of that
share.
Transfer of shares
Subject to such restrictions in our Articles of Association as may
apply, any shareholder may transfer all or any of his or her certificated shares by written instrument, in any usual form or in
any other form which our Board may approve, executed by or on behalf of the transferor and, in the case of a transfer of a share
not fully paid, by or on behalf of the transferee.
Transmission of shares
In case of the death of a shareholder, the survivor or survivors where
the deceased was a joint holder, and the legal personal representatives of the deceased where such person was a sole or only surviving
holder, will be the only persons recognised by us as having any title to such shares, but nothing in the Articles of Association
shall release the estate of the deceased shareholder from any liability, whether sole or joint, in respect of any share which has
been solely or jointly held by the deceased shareholder.
Any person becoming entitled to a share as a
result of the death or bankruptcy of a shareholder may, upon production of sufficient evidence of his or her right, either elect
to be registered as a shareholder or to nominate some person as a registered shareholder in respect of the share.
Shareholders resident abroad
If a shareholder has not provided us with an address in the UK, we
are not required to send notices to such shareholder directly. Notices to such shareholders may be posted in our registered office
and are then deemed to be given to those shareholders on the date when they are first posted. Unless otherwise required by law
or our Articles of Association, we may also give notices by advertisement published once in at least one leading UK daily newspaper.
Alternatively, so long as a shareholder has so agreed, we may give notice of a general meeting by posting on our website, provided
we have notified the shareholder of the posting in a manner agreed with us. There are no limitations on Non-resident or foreign
shareholders’ rights to own our securities or exercise voting rights where such rights are given under English company law.
For holders of ADSs, please see
“Description of securities other than equity securities”.
Equity share capital – rights of
purchase and redemption
Under English law, a company may issue redeemable shares if
authorised by its Articles of Association and subject to the conditions stated therein. Our Articles of Association authorise
the issue of redeemable shares. Although our cumulative irredeemable preference shares are not subject to redemption like our ordinary shares, our Articles of Association permit the purchase of our own shares and we may purchase our
cumulative irredeemable preference shares. An English company may purchase its own shares, including any redeemable shares,
if so authorised by its Articles of Association and provided that the purchase must be previously approved by a general or
specific ordinary resolution of its shareholders in the case of an on-market purchase (although the Investment Association
prefers a special resolution), or a special resolution in the case of an off-market purchase. The shares may be redeemed or
repurchased only if fully paid and, in the case of public companies such as us, only out of distributable profits or the
proceeds of a new issue of shares issued for the purpose of the purchase or redemption.
As with many other companies listed on the Official
List of the UK Listing Authority, we regularly seek authority at AGMs to approve on-market purchases of our ordinary shares subject
to specified limitations. When a company purchases its own shares wholly out of profits, an amount equal to the nominal amount
of the shares purchased and subsequently cancelled must be transferred to the capital redemption reserve, which is generally treated
as paid-up share capital. In addition, any amount payable by the company on purchase of its shares in excess of the par value may
be paid out of the proceeds of a new issue of shares up to an amount equal to whichever is the lesser of (i) the aggregate of the
original premiums received by the company on the issue of those shares or (ii) the amount of the company’s share premium
account as at the time of the repurchase, including any sum transferred to that account in respect of premiums on the new issue.
The UK Listing Authority usually requires that on-market purchases of 15% or more of a company’s equity share capital pursuant
to a general shareholder authority must be made through either a tender or partial offer to all shareholders (or to all shareholders
of the relevant class), and in the case of a tender offer, at a stated maximum or fixed price. Purchases pursuant to a general
shareholder authority below the 15% threshold may be made through the market in the ordinary way, provided that the price is not
more than 5% above the average of the market value of the company’s shares for the five business days before the purchase
date.
Winding up
In the event of a winding up, holders of preference shares have priority
over holders of ordinary shares. This applies to all types of preference shares. We are subject to the general insolvency law applicable
to UK companies, which is described within “Shareholder information – Regulation”.
Dividends and reserves
Our dividends are based on our profits and are paid out to shareholders
for each share they hold, and do not generally have any restrictions. Our dividends are usually paid as cash to both UK and overseas
shareholders. Our dividends can be paid by cheque or as a direct bank transfer.
We generally pay any dividends on our ordinary
shares twice a year following the announcement of our full year and half year results. We normally pay a final dividend in May
and an interim dividend in November on our ordinary shares. Lost dividend cheques can be re-issued. A shareholder may obtain a
replacement cheque from our registrar. We may declare dividends but no dividend may exceed the amount recommended by our Board.
Our Board may pay to the shareholders such interim dividends (including the fixed dividends payable on any preference or other
shares) as appear to our Board to be justified by our profits and, provided that our Board acts in good faith, it shall not incur
any responsibility to the holders of any shares conferring a preference which may at any time be issued for any damage they may
suffer by reason of the lawful payment of an interim dividend on any shares ranking after such preference shares. No dividend payable
in respect of a share shall bear interest against the Company. Any dividend unclaimed after a period of twelve years from the date
fixed for payment will be forfeited and revert to the Company. All dividends unclaimed may be invested or otherwise made use of
by the Board for the benefit of the Company until claimed and the Company is not a trustee in respect of this. Our Articles of
Association do not contain any sinking fund provisions. Further details regarding dividends for our ADSs are set out in “Description
of securities other than equity securities” and for our preference shares within “IFRS Financial statements –
note 29 – Preference Share Capital”.
General meetings
We hold an AGM within six months following our accounting reference
date. English company law provides for shareholders to exercise their power to decide on corporate matters at general meetings.
Our Articles of Association require that we hold a general meeting annually to declare dividends, to receive and consider the statutory
accounts and the reports by the auditor and the directors, to elect directors, approve the appointment and remuneration of the
auditor and approve the Directors’ remuneration report. The quorum required for a general meeting is ten shareholders present
in person or by proxy.
Convening and notice of meetings
Our Board may convene a general meeting as our AGM. Our Board may
convene a general meeting whenever it thinks fit. The time and place of any AGM or other general meeting called by our Board shall
be decided by our Board.
Our Board will convene a general meeting upon
receiving requests to do so from shareholders representing at least five percent of such of the paid-up capital of the Company
as carries the right of voting at general meetings (excluding any paid-up capital held as treasury shares). A request to call a
general meeting must state the general nature of the business to be dealt with at the proposed meeting. A request may include the
text of a resolution, which may be properly moved at the proposed meeting. A request must be in hard copy or electronic form and
must be authenticated by the person or persons making it.
Our Board will call any AGM by at least twenty
one days' notice in accordance with our Articles of Association. Any other general meeting will be called by at least fourteen
days’ notice also in accordance with our Articles of Association. The notice period calculation under our Articles of Association
excludes the day of the relevant meeting and the day on which the notice of meeting is given. Notice of every general meeting will
be given in any manner authorised by our Articles of Association to the auditor, the directors and to every shareholder holding
shares conferring the right to attend and vote at the meeting who, at the time of the convening of the meeting, has paid all calls
or other sums presently payable by such shareholder in respect
of all shares held by such shareholder.
Constitution of meetings
No business is transacted at a general meeting unless the requisite
quorum is present at the commencement of the business. The quorum for all purposes of a general meeting is ten persons present
and entitled to vote upon the business to be transacted, each being a shareholder, a person authorised to act as a representative
(in relation to the meeting) of a corporation that is a shareholder or a person appointed as a proxy of a shareholder in relation
to the meeting, except that two persons only acting as representatives of a single corporation that is a shareholder or two persons
only appointed as proxies of a single shareholder does not constitute a requisite quorum.
Voting
Under English law, the voting rights of shareholders are governed
by the Company’s Articles of Association, and are subject to the statutory rights of shareholders, including the right to
demand a poll. Voting at any meeting of shareholders is by a show of hands unless a poll is demanded. On a show of hands, each
shareholder present in person or by a corporate representative or proxy has one vote. On a poll, each shareholder who is present
in person or by a corporate representative or by proxy has one vote for every ordinary share held. Subject to any special rights
or restrictions attached to any class of shares and to the provisions of our Articles of Association, on a show of hands every
shareholder present in person or by proxy will have one vote and on a poll every shareholder present in person or by proxy will
have one vote for each Ordinary Share of 25 pence each held by such shareholder. A person entitled to more than one vote on a poll
need not use all his or her votes or cast all his or her votes in the same way. Cumulative irredeemable preference shares entitle
their holders to attend and vote at general meetings only when dividends on such shares are in arrears, however this does not apply
to holders of Sterling New Preference Shares. Only the holders of ordinary shares on which all sums payable have been paid are
entitled to attend meetings and vote. If more than one joint holder votes, only the vote of the shareholder whose name appears
first in the register is counted. Any shareholder who is entitled to attend and vote at a meeting is entitled to appoint one or
more proxies to attend and vote at the meeting on his or her behalf.
Shareholder Proposals
Under English law, shareholders may requisition a resolution to be
voted on at a general meeting if:
|
·
|
the requisition is made by a holder or the holders of shares that represent not less than 5% of the total voting rights of
all shareholders having at the date of the requisition a right to vote at the meeting to which the requisition relates; or
|
|
·
|
the requisition is made by not less than 100 shareholders
holding shares on which there has been paid up an average sum, per shareholder, of not less than £100.
|
The requisition must be deposited at the company’s registered
office not less than one week before the general meeting to which it relates unless the general meeting is called after the requisition
is deposited. At any general meeting, the appointment of two or more persons as directors of a public company (such as us) by a
single resolution (and not by a separate resolution for each proposed director) may not be proposed unless a resolution approving
its proposal is passed by the general meeting with no dissenting votes.
Proxies
A shareholder may appoint more than one proxy in relation to a general
meeting, provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that shareholder.
A form of proxy is, unless otherwise stated, valid for any adjournment of the meeting to which it relates. When two or more valid
but differing forms of proxy are delivered or received for the same share for use at the same meeting, the one which is last validly
delivered or received (regardless of its date or the date of its execution) is be treated as replacing and revoking the other or
others as regards that share. If we are unable to determine which form of proxy was last validly delivered or received, none of
them is treated as valid.
Accounts
Our Board decides whether and to what extent the accounts and books
or any of them are to be open to the inspection of shareholders who are not directors. No shareholder who is not a director or
an officer has any right of inspecting any account or book or document except as conferred by statute or authorised by our Board
or by us in general meeting.
A copy of our annual accounts and reports is,
not less than twenty-one clear days before the date of the AGM, sent or supplied to every shareholder and to every holder of debentures
or debenture or loan stock and every person entitled to receive notice of general meeting. The required number of printed copies
of every such document is at the same time sent to the London Stock Exchange and to any other stock exchange which has granted
a quotation for, or a listing of, any of the shares, as required by their regulations.
Notices
A notice, document or other information may be given to any shareholder
either personally or by sending it in hard copy form by post to the shareholder at his or her registered address or, if the shareholder
has no registered address within the UK to the address (if any) in the UK supplied by the shareholder for the giving of notices
to such shareholder or by advertisement or by giving notice in electronic form to an address supplied to us by the shareholder
for that purpose or by any other means authorised in writing by the shareholder concerned.
Change of control
There is no specific provision in our Articles of Association that
would have an effect of delaying, deferring or preventing a change in control and that would operate only with respect to a merger,
acquisition or corporate restructuring involving us or any of our subsidiaries.
However, English law provides for schemes of
arrangement. These are arrangements or compromises between a company and its shareholders, creditors, any class of its shareholders,
or any class of its creditors, and are used for certain types of reconstructions, amalgamations, capital reorganisations or takeovers.
They require sanction of the court and the approval at a meeting of the company convened by an order of the court of a majority
of the shareholders or creditors or class of shareholders or creditors representing not less than 75% in value of the capital or
debt held by the shareholders or creditors or class present and voting, either in person or by proxy. Once the scheme becomes effective,
all shareholders or creditors (or, if it applies to a class, the shareholders or creditors of the relevant class) are bound by
the terms of the scheme.
Under the rules of the UK Listing Authority,
shareholder approval is required for an acquisition or disposal by a listed company if the gross assets of the company or the business
to be acquired or disposed of represent 25% or more of the gross assets of the company or if various other size ratios prescribed
by the Listing Rules of the UK Listing Authority are satisfied. Shareholder approval is also required in some circumstances relating
to the giving by the listed company of indemnities and similar arrangements. Where the size of the acquisition or disposal falls
below the 25% threshold, information may nevertheless be required to be published. Shareholder approval may also be required for
an acquisition or disposal of assets between a listed company and related parties including:
|
·
|
directors of the company or its subsidiaries;
|
|
·
|
holders
of 10% or more of the nominal value of any class of the company’s or any holding company’s or subsidiary’s shares
having the right to vote in all circumstances at general meetings of the relevant company; or
|
|
·
|
any associate of persons described in the two preceding
bullet points above.
|
English law also provides that where a takeover offer is made for
the shares of a company incorporated in the UK and the offeror has acquired or unconditionally contracted to acquire not less than
nine-tenths in value of the shares of any class to which the offer relates and, where the shares to which the offer relates are
voting shares, not less than nine-tenths of the voting rights carried by those shares, the offeror may, within three months of
the last day on which the offer could be accepted, by notice require shareholders who have not accepted the offer to transfer their
shares to the offeror on the terms of the offer. A dissenting shareholder may apply to the court within six weeks of the date on
which the notice was given objecting to the transfer or its proposed terms. The court is unlikely, absent unfair treatment, fraud
or oppression, to exercise its discretion to order that the transfer shall not take effect, but it may specify the terms of the
transfer as it finds appropriate. Where an offeror has reached such nine-tenths level, a minority shareholder is also entitled
to require the offeror to acquire his shares on the terms of the offer ("sell-out right") within three months of the
last day on which the offer could be accepted or, if later, three months from the date on which the offeror served notice on the
minority shareholder notifying him of the sell-out right.
Mergers are sometimes effected through the use
of a members' voluntary liquidation of a company pursuant to the Insolvency Act 1986, which provides for the transfer of the whole
or part of the assets of that company to another company in return for shares in the transferee company. To effect the transfer,
a resolution must be passed by at least 75% of shareholders conferring authority on the liquidator. Any shareholder who does not
vote in favour of the resolution may express his dissent by writing to the liquidator within seven days after the passing of the
resolution, requiring the liquidator either to abstain from carrying the resolution into effect or to purchase the shareholder’s
interest at a price to be determined by agreement or by arbitration under the Insolvency Act 1986. The liquidator may apply to
the court if it disputes the shareholder’s contention and the court may make such an order on the application as it thinks
just.
Major shareholding and disclosure of
interests
Our Articles of Association do not contain any provisions requiring
disclosure of shareholdings over and above that which is required by English law. Further details are available under “Major
shareholders”.
The basic disclosure requirement under English
law and the DTRs promulgated by the FCA imposes an obligation on a person to notify the FCA and us of the percentage of the voting
rights in Aviva such person holds or controls directly or indirectly. The DTRs set out the circumstances in which an obligation
of disclosure arises as well as certain exemptions from those obligations for specified persons. This obligation is triggered if
the percentage of voting rights reaches, exceeds or falls below three percent and any subsequent whole percentage figure as a result
of an acquisition or disposal reaches, exceeds or falls below any such threshold as a result of any change in the number of voting
rights attached to our shares. The DTRs also deal with the disclosure by certain persons including directors, of interests in shares
of the listed companies of which they are directors, and in derivatives and other financial instruments relating to those shares.
We may, under English law require a person that we know or have cause to believe is or was during the three years preceding the
date of notice interested in our shares to indicate whether or not that is the case and to provide certain information as is permitted
under the law.
The City Code on Takeovers and Mergers also imposes
strict disclosure requirements with regard to dealings in the securities of an offeror or offeree company on all parties to a takeover
and also on their respective associates during the course of an offer period.
In addition under Section 13 of the US Securities
Exchange Act of 1934 (“Exchange Act”), investment managers that have discretion or beneficially own more than certain
amounts of US equity securities registered under the Exchange Act, may have to report these holdings to the US Securities and Exchange
Commissions.
Exchange controls and other limitations
affecting security holders
So far as the company is aware, other than requirements to report
designated events and transactions under sanctions and other laws in effect from time to time, there are currently no UK laws,
decrees or regulations that restrict the export or import of capital, including, but not limited to, foreign exchange controls,
or that affect the remittance of dividends or other payments to Non-UK residents or to US holders of our securities except as otherwise
set forth in “–Taxation” below. There are no limitations under our Articles of Association restricting voting
or shareholding.
Taxation
This section discusses certain material US federal income tax and
UK tax consequences to a US Holder that owns Aviva ordinary shares and ADSs.
For the purposes of this description, a “US
Holder” includes any beneficial owner of the Aviva ordinary shares or ADSs that is, for US federal income tax purposes:
|
·
|
a citizen or individual resident of the United States;
|
|
·
|
a corporation (or other entity treated as a corporation for US federal income tax purposes) created or organised in or under
the laws of the United States or organised under the laws of any state thereof, or the District of Columbia; or
|
|
·
|
an estate the income of which is subject to US federal income taxation regardless of its source; or a trust if (1) a court
within the United States is able to exercise primary supervision over its administration and one or more United States persons
have the authority to control all of the substantial decisions of such trust; or (2) such trust has a valid election in effect
to be treated as a United States person for US federal income tax purposes.
|
A “Non-US Holder” is any beneficial owner of the Aviva
ordinary shares or ADSs that is not a US Holder.
This section does not purport to be a comprehensive
description of all of the tax considerations that may be relevant to any particular investor. This discussion assumes that you
are familiar with the tax rules applicable to investments in securities generally, and with any special rules to which you may
be subject. In particular, the discussion deals only with investors that will hold Aviva ordinary shares or ADSs as capital assets,
and does not address the tax treatment of investors that are subject to special rules, such as banks, financial institutions, insurance
companies, dealers or traders in securities or currencies, persons that elect mark-to-market treatment, tax-exempt entities (including
401 pensions plans), real estate investment trusts, regulated investment companies or grantor trusts, individual retirement and
other tax-deferred accounts, persons that received Aviva ordinary shares or ADSs as compensation for the performance of services,
persons who own, directly, indirectly through Non-US entities or by attribution by application of the constructive ownership rules
of section 958(b) of the US Internal Revenue Code, 10% or more of Aviva voting shares, persons that are residents of the United
Kingdom for UK tax purposes or that conduct a business or have a permanent establishment in the United Kingdom, persons that hold
Aviva ordinary shares or ADSs as a position in a straddle, hedging, conversion, integration, constructive sale, or other risk reduction
transaction, certain former citizens or long-term residents of the United States, partnerships and their partners and persons whose
functional currency is not the US dollar. The discussion is based on laws, treaties, judicial decisions, and regulatory interpretations
in effect on the date hereof, all of which are subject to change. Beneficial owners of ADSs will be treated as owners of the underlying
shares for US federal income tax purposes and for purposes of the double tax treaty between the United States and the United Kingdom
which came into effect on 31 March 2003 (the “Treaty”). Deposits and withdrawals of shares in exchange for ADSs will
not result in the realisation of gain or loss for US federal income tax purposes.
You are urged to consult with your own advisers regarding
the tax consequences of the acquisition, ownership, and disposition of Aviva ordinary shares or ADSs in the light of your particular
circumstances, including the effect of any state, local, or other national laws.
UK Taxation of Dividends
Under current UK tax law, no tax is required to be withheld in the
United Kingdom at source from cash dividends paid to US resident holders.
UK Taxation of Capital Gains
Subject to the comments in the following paragraph (‘temporary
not resident’), a holder of Aviva ordinary shares or ADSs who, for UK capital gains tax purposes, is considered not resident
in the UK will not be liable for UK taxation on capital gains realised on the disposal of Aviva ordinary shares or ADSs unless
at the time of the disposal:
|
·
|
the holder carries on a trade, or in the case of an individual, a profession or vocation in the United Kingdom through, in
the case of an individual, a branch or agency, or, in the case of a company, a permanent establishment, and
|
|
·
|
the Aviva ordinary shares or ADSs are or have been used, held, or acquired for the purpose of such trade, profession, vocation,
branch, agency or permanent establishment.
|
However, a holder of Aviva ordinary shares or ADSs acquired before
leaving the UK and who is considered a ‘temporary not resident’ individual, will continue to potentially be liable
to UK Capital Gains Tax on disposal of these shares or ADSs following leaving the UK. This applies where the following four conditions
are satisfied:
|
·
|
the individual has become resident in the UK for at least some part of a tax year and is not Treaty Non-resident (‘referred
to as the year of return’);
|
|
·
|
the individual was previously resident and not Treaty Non-resident at some earlier time before he became not resident (referred
to as the year of departure’);
|
|
·
|
there are fewer than five complete tax years between the year of departure from and year of return to the UK. These years are
referred to as intervening years;
|
|
·
|
the individual was resident and not Treaty Non-resident in the UK for any part of at least four out of the seven tax years
before the year of departure.
|
Where this applies, gains and losses which arise in a tax year during
the whole of which an individual was considered not resident in the UK (an intervening year) are treated as arising, and therefore
taxable or allowable, in the year of return.
Strictly, if you leave or arrive in the UK part way through a tax
year then because you were resident for part of the tax year you can be taxed on all gains which arise in that year, even if you
were not resident in the UK when the gains arose. Subject to certain conditions, ‘Split year’ treatment allows gains
which arise after you cease to be resident, or before you become resident, not to be taxable. This applies only to the tax year
in which you arrive in or depart from the UK.
Different countries may have different fiscal
years and residency rules, so an individual may be resident in the UK under its domestic law as well as resident in another country
under its laws. Where an individual is a resident of both countries, the Double Taxation Agreement between the countries will provide
tie-breaker rules to enable residence for the purposes of the agreement to be determined. If the tie-breaker rules determine the
residence to be in the other country for a period, this is a period of Treaty Non-residence in the UK.
UK Inheritance Tax
Aviva ordinary shares are assets situated in the United Kingdom for
the purposes of UK inheritance tax (the equivalent of US estate and gift tax). Aviva ADSs are likely to be treated in the same
manner. Subject to the discussion of the UK-US estate tax treaty below, UK inheritance tax may apply if an individual who holds
Aviva ordinary shares or ADSs gifts them or dies even if he or she is neither domiciled in the United Kingdom nor deemed to be
domiciled there under UK law. For inheritance tax purposes, a transfer of Aviva ordinary shares or ADSs at less than full market
value may be treated as a gift for these purposes.
Special inheritance tax rules apply (1) to gifts
if the donor retains some benefit, (2) to close companies and (3) to trustees of settlements.
However, as a result of the UK-US estate tax
treaty, Aviva ordinary shares or ADSs held by an individual who is domiciled in the United States for the purposes of the UK-US
estate tax treaty and who is not a UK national will not be subject to UK inheritance tax on that individual’s death or on
a gift of the Aviva ordinary shares or ADSs unless the ordinary shares or ADSs:
|
·
|
are part of the business property of a permanent establishment in the United Kingdom, or
|
|
·
|
pertain to a fixed base in the United Kingdom used for the performance of independent personal services.
|
The UK-US estate tax treaty provides a credit mechanism if the Aviva
ordinary shares or ADSs are subject to both UK inheritance tax and to US estate and gift tax.
UK Stamp Duty and Stamp Duty Reserve
Tax
UK stamp duty is payable on the transfer of Aviva ordinary shares
to a nominee or agent of the depositary in exchange for Aviva ADRs representing ADSs.
Furthermore, UK stamp duty reserve tax is payable
upon the transfer of Aviva ordinary shares to a nominee or agent of the depositary in exchange for Aviva ADRs representing ADSs.
For this purpose, the current rate of stamp duty and stamp duty reserve tax is 1.5% (rounded up, in the case of stamp duty, to
the nearest £5). The rate is applied, in each case, to the amount or value of the consideration given for the Aviva ordinary
shares or, in some circumstances, to the value of the Aviva ordinary shares at the time of transfer. The Finance Bill 2016 is expected
to provide that shares transferred to a clearance service or depositary receipt issuer as a result of the exercise of an option
will be subject to stamp duty or stamp duty reserve tax at a rate of 1.5% of the higher market value of the shares or the option
strike price. To the extent that such stamp duty is paid on any such transfer of Aviva ordinary shares, no stamp duty reserve tax
should be payable on that transfer. Provided that the instrument of transfer is not executed in the United Kingdom and remains
at all subsequent times outside the United Kingdom, no UK stamp duty will be required to be paid on any transfer of Aviva ADRs
representing ADSs. An agreement to transfer Aviva ADRs will not give rise to a liability to stamp duty reserve tax.
The transfer for value of Aviva ordinary shares,
as opposed to Aviva ADRs, will generally give rise to a charge to UK stamp duty or stamp duty reserve tax at the rate of 0.5% (rounded
up, in the case of stamp duty, to the nearest £5, with transfers for a value not exceeding £1,000 being exempt). The
rate is applied to the price payable for the relevant Aviva ordinary shares. Stamp duty reserve tax is generally the liability
of the purchaser and UK stamp duty is usually paid by the purchaser.
US Taxation of Distributions
The gross amount of any distributions made by us to a US Holder will
generally be subject to US federal income tax as dividend income to the extent paid or deemed paid out of our current or accumulated
earnings and profits, as determined under US federal income tax principles. Such dividends will not be eligible for the dividends
received deduction generally allowed to US corporations with respect to dividends received from other US corporations. To the extent
that an amount received by a US Holder exceeds its allocable share of our current and accumulated earnings and profits, such excess
would, subject to the discussion below, be treated first as a tax-free return of capital which will reduce such US Holder’s
tax basis in his Aviva ordinary shares or ADSs and then, to the extent such distribution exceeds such US Holder’s tax basis,
it will be treated as capital gain.
Subject to applicable holding period and other
limitations, the US dollar amount of dividends received on the Aviva ordinary shares or ADSs by certain Non-corporate US Holders
will be subject to taxation at a maximum rate of 15% if the dividends are “qualified dividends” and certain other requirements
are met. Dividends paid on the Aviva ordinary shares or ADSs will be treated as qualified dividends if: (i) we are eligible for
the benefits of the Treaty or the ADSs are readily tradeable on an established US securities market and (ii) we were not, in the
year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign
investment company (“PFIC”). Although we currently believe that distributions on the Aviva ordinary shares or ADSs
that are treated as dividends for US federal income tax purposes should constitute qualified dividends, no assurance can be given
that this will be the case. US Holders should consult their tax advisers regarding the tax rate applicable to dividends received
by them with respect to the Aviva ordinary shares or ADSs, as well as the potential treatment of any loss on a disposition of Aviva
ordinary shares or ADSs as long-term capital loss regardless of the US Holders’ actual holding period for the Aviva ordinary
shares or ADSs.
We have not maintained and do not plan to maintain
calculations of earnings and profits under US federal income tax principles. Accordingly, it is unlikely that US Holders will be
able to establish whether a distribution by us is in excess of our accumulated earnings and profits (as computed under US federal
income tax principles). If US Holders are unable to establish that distributions are in excess of our accumulated earnings and
profits as determined under US federal income tax principles, any distribution by us may be treated as taxable in its entirety
as a dividend to US Holders for US federal income tax purposes.
For foreign tax credit computation purposes,
dividends will generally constitute foreign source income, and with certain exceptions, will constitute “passive category
income”.
US Taxation of Capital Gains
Gain or loss realised by a US Holder on the sale or other disposition
of Aviva ordinary shares or ADSs will be subject to US federal income taxation as capital gain or loss in an amount equal to the
difference between the US Holder’s adjusted tax basis in the Aviva ordinary shares or ADSs and the amount realised on the
disposition. Such gain or loss generally will be treated as long-term capital gain or loss if the Aviva ordinary shares or ADSs
have been held for more than one year. Any such gain or loss realised will generally be treated as US source gain or loss. In the
case of a US Holder who is an individual, capital gains are currently subject to federal income tax at preferential rates if specified
minimum holding requirements are met. The deductibility of capital losses is subject to significant limitations.
Passive Foreign Investment Company Considerations
We believe that we should not be treated as a PFIC for US federal
income tax purposes for the current taxable year and do not expect to become a PFIC in future years. However, because PFIC status
is determined on an annual basis and because our income and assets and the nature of our activities may vary from time to time,
we cannot assure US Holders that we will not be considered a PFIC for any taxable year.
We would be a PFIC for US federal income tax
purposes in any taxable year if 75% or more of our gross income would be passive income, or on average at least 50% of the gross
value of our assets is held for the production of, or produces, passive income. In making the above determination, we are treated
as earning our proportionate share of any income and owning our proportionate share of any asset of any company in which we are
considered to own, directly or indirectly, 25% or more of the shares by value. If we were considered a PFIC at any time when a
US Holder held the Aviva ordinary shares or ADSs, we generally should continue to be treated as a PFIC with respect to that US
Holder, and the US Holder generally will be subject to special rules with respect to (a) any gain realised on the disposition of
the Aviva ordinary shares or ADSs and (b) any “excess distribution” by us to the US Holder in respect of the Aviva
ordinary shares or ADSs. Under the PFIC rules: (i) the gain or excess distribution would be allocated ratably over the US Holder’s
holding period for the Aviva ordinary shares or ADSs, (ii) the amount allocated to the taxable year in which the gain or excess
distribution was realised or to any year before we became a PFIC would be taxable as ordinary income and (iii) the amount allocated
to each other taxable year would be subject to tax at the highest tax rate in effect in that year and an interest charge generally
applicable to underpayments of tax would be imposed in respect of the tax attributable to each such year. Because a US Holder that
is a direct (and in certain cases indirect) shareholder of a PFIC is deemed to own its proportionate share of interests in any
lower-tier PFICs, US Holders should be subject to the foregoing rules with respect to any of our subsidiaries characterised as
PFICs, if we are deemed a PFIC. A US Holder may be able to avoid many of these adverse tax consequences if it elects to mark the
Aviva ordinary shares or ADSs to market on an annual basis. However, any such mark to market election would not be available for
a lower-tier PFIC. US Holders are urged to consult their tax advisers about the PFIC rules, including the advisability, procedure
and timing of making a mark-to-market election and the US Holder’s eligibility to file such an election (including whether
the Aviva ordinary shares or ADSs are treated as ‘‘publicly traded’’ for such purpose).
Dividends and paying agents
A US Holder may be subject to information reporting to the IRS and
possible backup withholding with respect to dividends paid on, or proceeds of the sale or other disposition of, Aviva ordinary
shares or ADSs unless such US Holder qualifies within certain categories of exempt recipients or provides a taxpayer identification
number and certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. Amounts withheld under these rules may be credited against the US Holder’s US federal income
tax liability and a US Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the
appropriate IRS forms and furnishing any required information. A US Holder who does not provide a correct taxpayer identification
number may be subject to penalties imposed by the IRS.
A Non-US Holder generally will not be subject
to information reporting or backup withholding with respect to dividends on Aviva ordinary shares or ADSs, unless payment is made
through a paying agent (or office) in the United States or through certain US-related financial intermediaries. However, a Non-US
Holder generally may be subject to information reporting and backup withholding with respect to the payment within the United States
of dividends on Aviva ordinary shares or ADSs, unless such Non-US Holder provides a taxpayer identification number, certifies under
penalties of perjury as to its foreign status, or otherwise establishes an exemption.
Where you can find more information
As a result of filing a registration statement with respect to our
ADSs and ordinary shares, we are subject to the informational requirements of the Exchange Act and file reports and other information
with the Securities and Exchange Commission. You may read and copy this information at the following location: Public Reference
Room, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
Public Reference Room. Copies of these materials can also be obtained by mail at prescribed rates from the Public Reference Room
and are available on the Securities and Exchange Commission’s website at http://www.sec.gov.
Our ADSs are listed on the NYSE, and consequently,
our periodic reports and other information filed by us with the SEC can be inspected at the offices of the New York Stock Exchange,
11 Wall Street, New York, New York 10005, and on the NYSE’s website at http://www.nyse.com.
We also file reports and other documents with
the London Stock Exchange. This information may be viewed on the London Stock Exchange’s website at http://www.londonstockexchange.com
and is also available for public inspection on the National Storage Mechanism at http://www.morningstar.co.uk/uk/NSM. All reports
and other documents filed with the London Stock Exchange are also published on our website at http://www.aviva.com.
Description of securities other than
equity securities
The ordinary shares underlying our “ADSs” were registered
under the Exchange Act in October 2009. The ADSs are represented by “ADRs” for trading on the NYSE under the symbol
“AV”. One ADR represents two ordinary shares.
Fees and expenses for ADS holders
ADS holders are required to pay the following fees to the depositary
bank:
Service
|
Fees
|
Issuance of ADSs
|
Up to US 5c per ADS issued
|
Cancellation of ADSs
|
Up to US 5c per ADS cancelled
|
Distribution of cash dividends
or other cash distributions
|
Up to US 2c per ADS held
|
Distribution of ADSs pursuant
to stock dividends, free stock distributions or exercise of rights.
|
Up to US 5c per ADS held
|
Distribution of securities other than ADSs or rights to purchase additional ADSs
|
Up to US 5c per ADS held
|
Depositary Services
|
Up to US 5c per ADS held on the applicable record date(s) established by the Depositary
|
ADS holders will also be responsible for paying certain fees and expenses
incurred by the depositary bank and certain taxes and governmental charges such as:
|
·
|
Fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares
in England and Wales (i.e., upon deposit and withdrawal of ordinary shares);
|
|
·
|
Expenses incurred for converting foreign currency into US dollars;
|
|
·
|
Expenses for cable, telex and fax transmissions and for delivery of securities;
|
|
·
|
Taxes and duties upon the transfer of securities (i.e., when ordinary shares are deposited or withdrawn from deposit);
|
|
·
|
Fees and expenses incurred in connection with compliance with exchange control regulations or other regulatory requirements
applicable to the ordinary shares; and
|
|
·
|
Fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit.
|
Depositary fees payable upon the issuance and cancellation of ADSs
are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly issued ADSs from the
depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The
brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities
to holders and the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable
ADS record date.
The Depositary fees payable for cash distributions
are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend, rights),
the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of
ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary bank
sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC),
the depositary bank generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of
the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their
clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary
banks.
In the event of refusal to pay the depositary
fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received
or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
Note that the fees and charges ADS holders may
be required to pay may vary over time and may be changed by us and by the depositary bank. ADS holders will receive prior notice
of such changes.
The depositary bank may reimburse us for certain
expenses incurred by us in respect of the ADR programme established pursuant to the deposit agreement upon such terms and conditions
as we and the depositary bank may agree from time to time.
Depositary payment to Aviva plc
The depositary bank may reimburse us for certain expenses incurred
by us in respect of the ADR programme established pursuant to the deposit agreement upon such terms and conditions as we and the
depositary bank may agree from time to time. In respect of the year from 1 January 2015 to 31 December 2015, we received from the
depositary bank sums totaling US$954,106.38 for standard out-of-pocket maintenance costs for the ADRs (consisting of the expenses
of postage and envelopes for mailing for our AGM, calculation of dividend payments, printing and distributing dividend cheques,
electronic filing of US Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls)
and legal fees.
The depositary bank has agreed to reimburse us
for expenses as they occur in the future that are related to establishment and maintenance expenses of the ADR programme. The depositary
bank has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage
and envelopes for mailing for the AGM, calculation of dividend payments, printing and distributing dividend cheques, electronic
filing of US Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls.
There are limits on the amount of expenses for
which the depositary will reimburse us, but the amount of reimbursement available to us is not necessarily tied to the amount of
fees the depositary collects from investors.
Purchase of equity securities by Aviva
plc and affiliated purchasers
The following table sets forth information with respect to purchases
made by or on behalf of Aviva plc or any ‘affiliated purchasers’, as that term is defined in Rule 10b-18(a)(3) under
the Exchange Act of Aviva’s ordinary shares or ADSs for the year ended 31 December 2015.
Period
|
Total Number
of Shares
Purchased
1,2
|
Average
Price Paid
per Share £
|
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans
or Programmes
|
Maximum
Number of
Shares that
May Yet be Purchased
Under the
Plans or
Programmes
|
January
|
224,475
|
4.91
|
n/a
|
n/a
|
February
|
209,756
|
5.40
|
n/a
|
n/a
|
March
|
196,560
|
5.55
|
n/a
|
n/a
|
April
|
377,172
|
5.51
|
n/a
|
n/a
|
May
|
274,861
|
5.25
|
n/a
|
n/a
|
June
|
204,254
|
5.14
|
n/a
|
n/a
|
July
|
214,308
|
5.28
|
n/a
|
n/a
|
August
|
221,004
|
5.11
|
n/a
|
n/a
|
September
|
232,213
|
4.67
|
n/a
|
n/a
|
October
|
245,600
|
4.72
|
n/a
|
n/a
|
November
|
275,516
|
4.97
|
n/a
|
n/a
|
December
|
225,555
|
4.93
|
n/a
|
n/a
|
|
1
|
The shares listed in this column were acquired by employee benefit trusts or nominees during the year to satisfy future obligations
to deliver shares under the Company’s executive and employee share plans.
|
|
2
|
This table excludes Aviva plc shares purchased by investment funds managed by Aviva Investors in accordance with investment
strategies that are established by Aviva Investors acting independently of Aviva plc.
|
Statement of differences from NYSE
corporate governance practices
Under Section 303(A) of the NYSE Listed Company Manual, the Company
must provide a brief description of any significant differences between its corporate governance practices, which are informed
by UK law in the case of the Company, and those followed by US companies under the NYSE listing standards. The description need
not set forth all differences between UK law and US law; rather, the focus is on the Company’s practices.
The Company’s statement of differences
is set out in the Governance section of this report.
Legal proceedings
We are involved in litigation in the ordinary course of business,
including litigation in which plaintiffs seek compensatory or punitive damages and mass or class relief. Information on various
legal proceedings is set out in “IFRS Financial Statements – note 48 – Contingent liabilities and other risk
factors”.
The directors do not believe that any current
pending or threatened litigation or dispute will have a material adverse effect on the Group’s financial position, although
there can be no assurance that losses resulting from any pending or threatened litigation or dispute will not materially affect
the Group’s financial position for any period.
Employees
Membership of our employees in trade unions varies from country to
country, and we have entered into various collective bargaining agreements or appropriate employee consultation arrangements, or
both, in most of the countries in which we operate where required. It is our practice to renew or replace our various labour arrangements
relating to continuing operations as and when they expire and we are not aware of any material arrangement whose expiry is pending
and which is not expected to be satisfactorily renewed or replaced in a timely manner. We have not experienced any significant
work stoppages or strikes in the past three years. We believe that relations with our employees are generally good.
Controls and procedures
Disclosure controls and procedures
Management has evaluated, with the participation of Aviva’s
Group CEO and CFO, the effectiveness of the disclosure controls and procedures as at 31 December 2015. Based upon Aviva’s
evaluation, the Group CEO and CFO concluded that, as of 31 December 2015, Aviva’s disclosure controls and procedures were
effective to provide reasonable assurance that information required to be disclosed by Aviva in the reports which Aviva files and
submits under the Exchange Act is recorded, processed, summarised and reported, within the time periods specified in the applicable
rules and forms and that it is accumulated and communicated to Aviva’s management, including the Group CEO and CFO, as appropriate
to allow timely decisions regarding required disclosure.
Management’s annual report on internal
control over financial reporting
Management, including Aviva’s Group CEO
and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of its financial statements for external purposes in accordance with IFRS.
Internal
control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit the preparation of financial statements in accordance with IFRS; (iii) provide reasonable assurance
that receipts and expenditures are being made only in accordance with the authorisation of management and directors of Aviva Group;
and (iv) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition
of Aviva Group’s assets that could have a material effect on the financial statements.
Due
to its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections
of any evaluation of effectiveness of future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with policies and procedures may deteriorate. Aviva Group’s management assessed
the effectiveness of the internal control over financial reporting as at 31 December 2015 using the criteria set forth by the Committee
of Sponsoring Organisations of the Treadway Commission (COSO) in its report ‘Internal Control – Integrated Framework
(2013)’. Based on its assessment, management concluded that, as at 31 December 2015, Aviva Group’s internal control
over financial reporting was effective based on the COSO criteria. The effectiveness of Aviva Group’s internal control over
financial reporting as at 31 December 2015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report which is included on page 128.
In April 2015, the Group completed the
acquisition of the Friends Life Group (“Friends Life”). In accordance with the SEC’s published guidance,
the acquired Friends Life business has been excluded from management’s assessment of the effectiveness of internal
control over financial reporting as of 31 December 2015. Friends Life had an established framework of financial reporting
controls in place at the time of acquisition and work is now underway to align this with the Aviva Group’s Financial
Reporting Controls Framework (“FRCF”). This work will be completed in 2016 in advance of management’s
assessment of the effectiveness of the internal controls over financial reporting as of 31 December 2016. Within Aviva
Group’s consolidated financial statements Friends Life contributed adjusted operating profit and loss before tax
attributable to shareholders for the period 10 April 2015 to 31 December 2015 of £554 million and £371 million
loss respectively and total assets of £106 billion at 31 December 2015.
Changes
in internal control over financial reporting
There have been no changes in Aviva Group’s internal control over financial reporting that occurred
during the period covered by this annual report that have materially affected, or is reasonably likely to materially affect, Aviva
Group’s internal control over financial reporting. See the Audit Committee report for further details.
Code of ethics
The Company has adopted a Code of Ethics for Senior Management (Ethics
Code), including the Board, the Group Executive and the Group Chief Accounting Officer as required by the provisions of Section
406 of the Sarbanes-Oxley Act of 2002 and the rules issued by the SEC. There have been no waivers from the Ethics Code relating
to any of those officers during the year. The Ethics Code was amended in October 2014 to make a number of other administrative
amendments. The current Ethics Code can be found on the website at http://www.aviva.com/investor-relations/corporate-governance/code-of-ethics/
and copies may be obtained free of charge from the Group Company Secretary at the Company’s registered office address. The
Ethics Code is incorporated by reference to Exhibit 11.1 of the Aviva plc 2014 Annual Report filed on Form 20-F on 16 March 2015.
.
Other information
In this section
|
Page
|
Glossary
|
285
|
Signatures
|
288
|
Exhibits
|
289
|
Glossary
Product definitions
Annuities
A type of policy that pays out regular amounts of benefit, either
immediately and for the remainder of a person’s lifetime, or deferred to commence from a future date. Immediate annuities
may be purchased for an individual and his or her dependants or on a bulk purchase basis for groups of people. Deferred annuities
are accumulation contracts, which may be used to provide benefits in retirement. Annuities may be guaranteed, unit-linked or index-linked.
Bonds and savings
These are accumulation products with single or regular premiums and
unit-linked or guaranteed investment returns.
Critical illness cover
Pays out a lump sum if the insured person is diagnosed with a serious
illness that meets the plan definition.
Deferred annuity
An annuity (or pension) due to be paid from a future date or when
the policyholder reaches a specified age. A deferred annuity may be funded by a policyholder by payment of a series of regular
contributions or by a capital sum.
Equity Release
Equity Release Mortgages allow a homeowner to receive a lump sum in
return for a mortgage secured on their house. No interest is payable on the loan; instead, interest is rolled-up on the loan, and
the loan and accrued interest are repayable at redemption (upon death or moving into long-term care).
General insurance
Also known as Non-life or property and casualty insurance. Property
insurance covers loss or damage through fire, theft, flood, storms and other specified risks. Casualty insurance primarily covers
losses arising from accidents that cause injury to other people or damage the property of others.
Group pension
A pension plan that covers a group of people, which is typically purchased
by a company and offered to their employees.
Health insurance
Provides cover against loss from illness or bodily injury. Can pay
for medicine, visits to the doctor, hospital stays, other medical expenses and loss of earnings, depending on the conditions covered
and the benefits and choices of treatment available on the policy.
Income drawdown
The policyholder can transfer money from any pension fund to an income
drawdown plan from which they receive an income. The remainder of the pension fund continues to be invested, giving it the potential
for growth.
Investment sales
Comprise retail sales of mutual fund-type products such as unit trusts,
individual savings accounts (ISAs) and open ended investment companies (OEICs).
Individual savings account (ISAs)
Tax-efficient plans for investing in stocks and shares, cash deposits
or life insurance investment funds, subject to certain limits.
Mortgage endowment
An insurance contract combining savings and protection elements which
is designed to repay the principal of a loan or mortgage.
Mortgage life insurance
A protection contract designed to pay off the outstanding amount of
a mortgage or loan in the event of death of the insured.
Open ended investment company (OEIC)
A collective investment fund structured as a limited company in which
investors can buy and sell shares.
Pension
A means of providing income in retirement for an individual and possibly
his/her dependants.
Personal pension
A pension plan tailored to the individual policyholder, which includes
the options to stop, start or change their payments.
Protection
An insurance contract that protects the policyholder or his/her dependants
against financial loss on death or ill-health.
Regular premium
A series of payments are made by the policyholder, typically monthly
or annually, for part of or all of the duration of the contract.
Collective investment scheme (SICAVs)
This is an open-ended investment fund, structured as a legally independent
joint stock company, whose units are issued in the form of shares.
Single premium
A single lump sum is paid by the policyholder at commencement of the
contract.
Stakeholder pensions
Low cost and flexible pension plans available in the UK, governed
by specific regulations.
Term assurance
A simple form of life insurance, offering cover over a fixed number
of years during which a lump sum will be paid out if the life insured dies.
Unit trusts
A form of open ended collective investment constituted under a trust
deed, in which investors can buy and sell units.
Whole life
A protection policy that remains in force for the insured’s
whole life; a lump sum will be paid out on death. Traditional whole life contracts have fixed premium payments that typically cannot
be missed without lapsing the policy. Flexible whole life contracts allow the policyholder to vary the premium and/or amount of
life cover, within certain limits.
General terms
Adjusted operating profit
It is a non-GAAP measure based on expected investment returns and
stated before tax and before non-operating items including impairment of goodwill and amortisation and impairment of acquired value
of in-force business and other items.
Annual premium equivalent (APE)
Used as a measure of annual sales, taking the annual premium of regular
premium contracts plus 10% of single premium contracts.
Available for sale (AFS)
Securities that have been acquired neither for short-term sale nor
to be held to maturity. These are shown at fair value on the statement of financial position and changes in value are taken straight
to equity instead of the income statement.
Association of British Insurers (ABI)
A major trade association for UK insurance companies, established
in July 1985.
Acquired value of in force business
(AVIF)
The present value of future profits on a portfolio of long-term insurance
and investment contracts, acquired either directly or through the purchase of a subsidiary.
Bancassurance
An arrangement whereby banks and building societies sell insurance
and investment products to their customers on behalf of other financial providers.
Best Estimate Liabilities (BEL)
The expected present value of future cash flows for a company’s
current insurance obligations, calculated using best estimate assumptions, projected over the contract’s run-off period,
taking into account all up-to-date financial market and actuarial information.
Cash remittances
Amounts paid by our businesses to the Group, comprising dividends
and interest on internal loans.
Deferred acquisition costs (DAC)
The costs directly attributable to the acquisition of new business
for insurance and investment contracts may be deferred to the extent that they are expected to be recoverable out of future margins
in revenue on these contracts.
Economic capital
A measure of the financial strength of the business; an economic capital
surplus represents the excess of available economic capital over required economic capital where the capital requirement is capital
where the 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 third parties.
Excess centre cash flow
A measure of excess cash flow at the Group centre holding companies
level, calculated by deducting operating expenses and debt financing costs paid by the Group centre holding companies from cash
remitted by business units to the Group centre holding companies. It therefore differs from the Group and parent company operating
cash flows on an IFRS basis.
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).
Financial Conduct Authority (FCA)
The FCA is a company limited by guarantee and is independent of the
Bank of England. It is responsible for the conduct business regulation of all firms (including those firms subject to prudential
regulation by the PRA) and the prudential regulation of firms not regulated by the PRA. The FCA has three statutory objectives:
securing an appropriate degree of protection for consumers, protecting and enhancing the integrity of the UK financial system and
promoting effective competition in the interests of consumers.
Financial Reporting Council Guidance
on Internal Control
The Guidance on Risk Management, Internal Control and Related Financial
and Business Reporting sets out best practice on internal controls for UK listed companies, and provides additional guidance in
applying certain sections of the UK Corporate Governance Code.
Funds under management
Represents all assets actively managed or administered by or on behalf
of the Group including those funds managed by third parties.
Gross written premiums
The total earnings or revenue generated by sales of insurance products,
before any reinsurance is taken into account. Not all premiums written will necessarily be treated as income in the current financial
year, because some of them could relate to insurance cover for a subsequent period.
Independent Financial Advisers (IFAs)
A person or organisation, authorised under the FCA, to give independent
advice on financial matters.
Internal rate of Return (IRR)
A discount rate used to measure profitability. The rate used is that
which will bring a series of cash flows to a net present value of nil.
International financial reporting standards
(IFRS)
These are accounting regulations designed to ensure comparable financial
statements preparation and disclosure issued by the International Accounting Standards Board (IASB) and are the standards that
all publicly listed companies in the European Union are required to use.
Inherited estate
In the UK, the assets of the long-term with-profit funds less the
realistic reserves for Non-profit policies written within the with-profit funds, less asset shares aggregated across the with-profit
policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect
of smoothing costs and guarantees.
Latent claims
General insurance claims that are often not made until many years
after the period of cover provided, due to the impact of perils or causes not becoming evident for a number of years. Sources of
latent claims include asbestos-related diseases, environmental pollution and industrial deafness.
Long-term and savings business
Collective term for life insurance, pensions, savings, investments
and related business.
Minimum capital requirement (MCR)
The Minimum Capital Requirement is the minimum amount of capital
that an insurer needs to hold to cover its risks under the Solvency II regulatory framework. If an insurer's capital falls below
the MCR then authorisation will be withdrawn by the regulator unless a firm is able to meet the MCR within a short period of time.
Net written premiums
Total gross written premiums for the given period, minus premiums
paid over or ‘ceded’ to reinsurers.
Operating expenses
The day-to-day expenses involved in running a business, such as sales
and administration, as opposed to production costs.
Operating expense ratio
The Group operating expense ratio is calculated as the
Group’s operating expenses from continuing operations expressed as a percentage of the Group’s adjusted operating
profit from continuing operations before Group debt costs and operating expenses.
Own Funds
The amount of capital a firm actually holds under Solvency II
on a market value basis. This is the sum of the economic value of assets less the economic value of liabilities. Basic own funds
are calculated as the difference between the assets (including transitional measure on technical provisions) and liabilities (including
subordinated liabilities) calculated on a combination of best estimate and market consistent assumptions. Available own funds are
calculated as basic own funds with any adjustments including off-balance sheet own funds approved by the regulator (known as ancillary
own funds). Eligible own funds reflect any tiering restrictions and are the amount of own funds eligible to cover the SCR and MCR.
Present value of new business premiums
(PVNBP)
Present value of new regular premiums plus 100% of single
premiums, calculated using assumptions consistent with those used to determine the value of new business under Market Consistent
Embedded Value (MCEV) principles published by the CFO Forum.
Prudential Regulatory Authority (PRA)
The PRA is a part of the Bank of England and is responsible for the
prudential regulation of deposit taking institutions, insurers and major investment firms. The PRA has two statutory objectives:
to promote the safety and soundness of these firms and, specifically for insurers, to contribute to the securing of an appropriate
degree of protection for policyholders.
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.
Solvency II
These are insurance regulations designed to harmonise EU insurance
regulation. Primarily this concerns the amount of capital that European insurance companies must hold under a measure of capital
and risk. Solvency II became effective from 1 January 2016.
Solvency Capital Requirement (SCR)
The Solvency Capital Requirement is the amount of capital the Regulator
requires an insurer to hold to meet the requirements under the Solvency II regulatory framework. Holding capital in excess of the
SCR demonstrates an insurer has adequate financial resources in place to meet all its liabilities as and when they fall due and
that there is sufficient capital to absorb significant losses. Firms may use their own internal model, the European Insurance and
Occupational Pensions Authority (EIOPA) prescribed standard formula or a partial internal model to determine SCR.
Total shareholder return
A measure of company performance based on the overall value to shareholders
of their investment in a stock over a given period of time. Includes movement in the share price and dividends paid and reinvested,
expressed as a percentage of the initial value of the investment or share price at the beginning of the period.
UK Corporate Governance Code
The code sets out guidance in the form of principles and provisions
on how companies should be directed and controlled to follow good governance practice.
Value of new business (VNB)
Value of new business is the present value of future profits from
new business written at the point of sale. It is calculated on a market consistent basis using economic assumptions set at the
start of each quarter or more frequently and the same operating assumptions as those used to determine the embedded value at the
end of the reporting period and is stated after the effect of any frictional costs.
Signatures
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorised the undersigned to sign this annual report on its behalf.
Aviva plc
(Registrant)
Dated 29 March 2016
/s/ Mark Wilson
Mark Wilson
Group Chief Executive Officer
Exhibits
Exhibits
The following exhibits have been filed as part of this Annual
Report:
Exhibit 1.1
|
Articles of Association of Aviva plc adopted by special resolution passed on 29 April 2015
|
Exhibit 2.1
|
Form of Deposit Agreement among Aviva plc, Citibank, as depositary, and holders and beneficial owners from time to time of ADRs issued thereunder, including the form of ADR (incorporated by reference to Exhibit 2.1 of the Aviva plc Registration Statement on Form 20-F filed on 7 October 2009)
|
Exhibit 2.2
|
The total amount of long term debt securities of Aviva plc authorised under any instrument does not exceed 10 percent of the total assets of the Company on a consolidated basis. Aviva plc hereby agrees to furnish to the Securities and Exchange Commission, upon its request, a copy of any instrument defining the rights of holders of long-term debt of Aviva plc or of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed
|
Exhibit 4.1
|
Aviva Capital Accumulation plan rules (incorporated by reference to Exhibit 4.1 of the Aviva plc Registration Statement on Form 20-F filed on 7 October 2009)
|
Exhibit 4.1.1
|
Addendum Aviva Capital Accumulation plan rules dated 22 December 2010 (incorporated by reference to Exhibit 4.1.1 of the Aviva plc 2012 Annual Report filed on Form 20-F on 25 March 2013)
|
Exhibit 4.1.2
|
Addendum Aviva Capital Accumulation plan rules dated 8 December 2010 (incorporated by reference to Exhibit 4.1.2 of the Aviva plc 2012 Annual Report filed on Form 20-F on 25 March 2013)
|
Exhibit 4.2
|
Aviva Long Term Incentive Plan 2011 rules (amended November 2015)
|
Exhibit 4.3
|
Aviva Annual Bonus Plan 2011 rules (amended November 2015)
|
Exhibit 4.4
|
Aviva Recruitment and Retention Share Award Plan rules (amended March 2015) (incorporated by reference to Exhibit 4.4 of the Aviva plc 2014 Annual Report filed on Form 20-F on 16 March 2015)
|
Exhibit 4.5
|
Aviva Chief Financial Officer Award 2014 rules (amended March 2015) (incorporated by reference to Exhibit 4.5 of the Aviva plc 2014 Annual Report filed on Form 20-F on 16 March 2015)
|
Exhibit 4.6
|
Rules of the Friends Life Group plc long term incentive plan
|
Exhibit 8.1
|
Schedule of subsidiaries of Aviva plc
|
Exhibit 11.1
|
Code of ethics (amended October 2014) (incorporated by reference to Exhibit 11.1 of the Aviva plc 2014 Annual Report filed on Form 20-F on 16 March 2015)
|
Exhibit 12.1
|
Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
Exhibit 12.2
|
Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
Exhibit 13.1
|
Certification of the Company’s Chief Executive Officer pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002
|
Exhibit 13.2
|
Certification of the Company’s Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002
|
Aviva Plc (NYSE:AVV.CL)
Graphique Historique de l'Action
De Juin 2024 à Juil 2024
Aviva Plc (NYSE:AVV.CL)
Graphique Historique de l'Action
De Juil 2023 à Juil 2024