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RNS
Aviva PLC   -  AV.   

Final Results part 3 of 4

Released 07:00 07-Mar-2019

RNS Number : 0973S
Aviva PLC
07 March 2019
 

Start part 3 of 4

Page 35

IFRS financial statements

In this section

Page

Consolidated financial statements

 

Consolidated income statement

36

Consolidated statement of comprehensive income

37

Consolidated statement of changes in equity

38

Consolidated statement of financial position

39

Consolidated statement of cash flows

40

 

Notes to the consolidated financial statements

 

B1

Basis of preparation

41

B2

Presentation changes

43

B3

Exchange rates

43

B4

Subsidiaries, joint ventures and associates - acquisitions

44

B5

Subsidiaries, joint ventures and associates - disposals and held for sale

45

B6

Segmental information

47

B7

Tax

54

B8

Earnings per share

56

B9

Dividends and appropriations

57

B10

Contracted liabilities and associated reinsurance

58

B11

Insurance liabilities

59

B12

Insurance liabilities methodology and assumptions

64

B13

Liability for investment contracts

68

B14

Reinsurance assets

70

B15

Effect of changes in assumptions and estimates during the year

72

B16

Unallocated divisible surplus

72

B17

Borrowings

73

B18

Pension obligations

73

B19

Related party transactions

75

B20

Risk management

76

B21

Direct capital instrument and tier 1 notes

89

B22

Cash and cash equivalents

90

B23

Contingent liabilities and other risk factors

90

B24

Acquired value of in-force business (AVIF) and other intangible assets

91

B25

Subsequent events

91

 

 

 

 

Page 36

Consolidated income statement

For the year ended 31 December 2018

 

Note

2018
£m

2017
£m

Income

 

 

 

Gross written premiums

 

28,659

27,606

Premiums ceded to reinsurers

 

(2,326)

(2,229)

Premiums written net of reinsurance

 

26,333

25,377

Net change in provision for unearned premiums

 

(81)

(153)

Net earned premiums

 

26,252

25,224

Fee and commission income

 

2,180

2,187

Net investment (expense)/income

 

(10,847)

22,066

Share of profit after tax of joint ventures and associates

 

112

41

Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates

B5 (a)

102

135

 

 

17,799

49,653

Expenses

 

 

 

Claims and benefits paid, net of recoveries from reinsurers

 

(23,142)

(24,113)

Change in insurance liabilities, net of reinsurance

B10 (b)

6,246

(1,074)

Change in investment contract provisions

 

5,321

(13,837)

Change in unallocated divisible surplus

B16

3,237

294

Fee and commission expense

 

(3,393)

(4,329)

Other expenses

 

(3,843)

(3,537)

Finance costs

 

(573)

(683)

 

 

(16,147)

(47,279)

Profit before tax

 

1,652

2,374

Tax attributable to policyholders' returns

B7

477

(371)

Profit before tax attributable to shareholders' profits

 

2,129

2,003

Tax credit/(expense)

B7

35

(728)

Less: tax attributable to policyholders' returns

B7

(477)

371

Tax attributable to shareholders' profits

B7

(442)

(357)

Profit for the year

 

1,687

1,646

 

 

 

 

Attributable to:

 

 

 

Equity holders of Aviva plc

 

1,568

1,497

Non-controlling interests

 

119

149

Profit for the year

 

1,687

1,646

Earnings per share

B8

 

 

Basic (pence per share)

 

38.2p

35.0p

Diluted (pence per share)

 

37.8p

34.6p

 

 

 

Page 37

 

Consolidated statement of comprehensive income

For the year ended 31 December 2018 

 

Note

2018
£m

2017
£m

Profit for the year

 

1,687

1,646

 

 

 

 

Other comprehensive income:

 

 

 

Items that may be reclassified subsequently to income statement

 

 

 

Investments classified as available for sale

 

 

 

Fair value gains/(losses)

 

57

(7)

Fair value gains transferred to profit on disposals

 

(78)

(2)

Share of other comprehensive (loss)/income of joint ventures and associates

 

(10)

6

Foreign exchange rate movements

 

5

68

Aggregate tax effect - shareholder tax on items that may be reclassified subsequently to income statement

B7(b)

8

5

 

 

 

 

Items that will not be reclassified to income statement

 

 

 

Owner-occupied properties - fair value gains/(losses)

 

1

(1)

Remeasurements of pension schemes

 

(279)

(5)

Aggregate tax effect - shareholder tax on items that will not be reclassified subsequently to income statement

B7(b)

43

5

Total other comprehensive income, net of tax

 

(253)

69

Total comprehensive income for the year

 

1,434

1,715

 

 

 

 

Attributable to:

 

 

 

Equity holders of Aviva plc

 

1,310

1,523

Non-controlling interests

 

124

192

 

 

1,434

1,715

 

 

Page 38

 

Consolidated statement of changes in equity

For the year ended 31 December 2018

 

Ordinary share capital
£m

Preference share capital
£m

Capital

reserves1

£m

Treasury shares
£m

Currency translation reserve
£m

Other reserves
£m

Retained earnings
£m

DCI and tier 1 notes
£m

Total equity excluding non-controlling interests
£m

Non-controlling interests
£m

Total
equity
£m

Balance at 1 January

1,003

200

10,195

(14)

1,141

(274)

4,918

731

17,900

1,235

19,135

Profit for the year

-

-

-

-

-

-

1,568

-

1,568

119

1,687

Other comprehensive income

-

-

-

-

28

(50)

(236)

-

(258)

5

(253)

Total comprehensive income for the year

-

-

-

-

28

(50)

1,332

-

1,310

124

1,434

Dividends and appropriations

-

-

-

-

-

-

(1,189)

-

(1,189)

-

(1,189)

Non-controlling interests share of dividends declared in the year

-

-

-

-

-

-

-

-

-

(90)

(90)

Shares purchased in buy-back2

(30)

-

30

-

-

-

(600)

-

(600)

-

(600)

Transfer to profit on disposal of subsidiaries, joint ventures and associates

-

-

-

-

(40)

36

-

-

(4)

-

(4)

Changes in non-controlling interests in subsidiaries

-

-

-

-

(7)

-

1

-

(6)

(306)

(312)

Reserves credit for equity compensation plans

-

-

-

-

-

64

-

-

64

-

64

Shares issued under equity compensation plans

2

-

7

(1)

-

(55)

49

-

2

-

2

Capital contributions from non-controlling interests

-

-

-

-

-

-

-

-

-

3

3

Forfeited dividend income

-

-

-

-

-

-

4

-

4

-

4

Reclassification of tier 1 notes to financial liabilities

-

-

-

-

-

-

-

-

-

-

-

Treasury shares held by subsidiary companies

-

-

-

-

-

-

-

-

-

-

-

Owner-occupied properties fair value gains transferred to retained earnings on disposals

-

-

-

-

-

-

-

-

-

-

-

Aggregate tax effect - shareholder tax

-

-

-

-

-

-

8

-

8

-

8

Balance at 31 December

975

200

10,232

(15)

1,122

(279)

4,523

731

17,489

966

18,455

1    Capital reserves consist of share premium of £1,214 million, a capital redemption reserve of £44 million and a merger reserve of £8,974 million.

2    On 1 May 2018, the Group announced a share buy-back of ordinary shares for an aggregate purchase price of up to £600 million. On completion in 2018 of this buy-back, £600 million of shares had been purchased and shares with a nominal value of £30 million have been cancelled, giving rise to an additional capital redemption reserve of an equivalent amount.

For the year ended 31 December 2017

 

Ordinary share capital
£m

Preference share capital
£m

Capital

reserves1

£m

Treasury shares
£m

Currency translation reserve
£m

Other reserves
£m

Retained earnings
£m

DCI and tier 1 notes
£m

Total equity excluding non-controlling interests
£m

Non-controlling interests
£m

Total equity
£m

Balance at 1 January

1,015

200

10,171

(15)

1,146

(349)

4,835

1,123

18,126

1,425

19,551

Profit for the year

-

-

-

-

-

-

1,497

-

1,497

149

1,646

Other comprehensive income

-

-

-

-

121

(93)

(2)

-

26

43

69

Total comprehensive income for the year

-

-

-

-

121

(93)

1,495

-

1,523

192

1,715

Dividends and appropriations

-

-

-

-

-

-

(1,081)

-

(1,081)

-

(1,081)

Non-controlling interests share of dividends declared in the year

-

-

-

-

-

-

-

-

-

(103)

(103)

Shares purchased in buy-back2

(14)

-

14

-

-

-

(300)

-

(300)

-

(300)

Transfer to profit on disposal of subsidiaries, joint ventures and associates

-

-

-

-

(126)

137

1

-

12

-

12

Changes in non-controlling interests in subsidiaries

-

-

-

-

-

-

-

-

-

(315)

(315)

Reserves credit for equity compensation plans

-

-

-

-

-

77

-

-

77

-

77

Shares issued under equity compensation plans

2

-

10

-

-

(44)

42

-

10

-

10

Capital contributions from non-controlling interests

-

-

-

-

-

-

-

-

-

36

36

Reclassification of tier 1 notes to financial liabilities3

-

-

-

-

-

-

(92)

(392)

(484)

-

(484)

Treasury shares held by subsidiary companies

-

-

-

1

-

-

-

-

1

-

1

Owner-occupied properties fair value gains transferred to retained earnings on disposals

-

-

-

-

-

(2)

2

-

-

-

-

Aggregate tax effect - shareholder tax

-

-

-

-

-

-

16

-

16

-

16

Balance at 31 December

1,003

200

10,195

(14)

1,141

(274)

4,918

731

17,900

1,235

19,135

1    Capital reserves consist of share premium of £1,207 million, a capital redemption reserve of £14 million and a merger reserve of £8,974 million.

2    On 25 May 2017, the Group announced a share buy-back of ordinary shares for an aggregate purchase price of up to £300 million. On completion in 2017 of this buy-back, £300 million of shares had been purchased and shares with a nominal value of £14 million have been cancelled, giving rise to a capital redemption reserve of an equivalent amount.

3    On 28 September 2017, notification was given that the Group would redeem the $650 million fixed rate tier 1 notes. At that date, the instrument was reclassified as a financial liability of £484 million, representing its fair value on translation into sterling on that date. The resulting foreign exchange loss of £92 million has been charged to retained earnings.

 

 

 

Page 39

 

Consolidated statement of financial position

As at 31 December 2018

 

Note

2018
£m

2017
£m

Assets

 

 

 

Goodwill

 

1,872

1,876

Acquired value of in-force business and intangible assets

B24

3,201

3,455

Interests in, and loans to, joint ventures

 

1,214

1,221

Interests in, and loans to, associates

 

304

421

Property and equipment

 

548

509

Investment property

 

11,482

10,797

Loans

 

28,785

27,857

Financial investments

 

297,585

311,082

Reinsurance assets

B14

11,755

13,492

Deferred tax assets

 

185

144

Current tax assets

 

76

94

Receivables

 

8,879

8,285

Deferred acquisition costs

 

2,965

2,906

Pension surpluses and other assets

 

3,341

3,468

Prepayments and accrued income

 

2,947

2,860

Cash and cash equivalents

 

46,484

43,347

Assets of operations classified as held for sale

B5

8,855

10,871

Total assets

 

430,478

442,685

Equity

 

 

 

Capital

 

 

 

Ordinary share capital

 

975

1,003

Preference share capital

 

200

200

 

 

1,175

1,203

Capital reserves

 

 

 

Share premium

 

1,214

1,207

Capital redemption reserve

 

44

14

Merger reserve

 

8,974

8,974

 

 

10,232

10,195

Treasury shares

 

(15)

(14)

Currency translation reserve

 

1,122

1,141

Other reserves

 

(279)

(274)

Retained earnings

 

4,523

4,918

Equity attributable to shareholders of Aviva plc

 

16,758

17,169

Direct capital instrument and tier 1 notes

B21

731

731

Equity excluding non-controlling interests

 

17,489

17,900

Non-controlling interests

 

966

1,235

Total equity

 

18,455

19,135

Liabilities

 

 

 

Gross insurance liabilities

B11

144,077

148,650

Gross liabilities for investment contracts

B13

202,468

203,986

Unallocated divisible surplus

B16

5,949

9,082

Net asset value attributable to unitholders

 

18,125

18,327

Pension deficits and other provisions

 

1,399

1,429

Deferred tax liabilities

 

1,885

2,377

Current tax liabilities

 

254

290

Borrowings

B17

9,420

10,286

Payables and other financial liabilities

 

16,882

16,459

Other liabilities

 

3,043

2,791

Liabilities of operations classified as held for sale

B5

8,521

9,873

Total liabilities

 

412,023

423,550

Total equity and liabilities

 

430,478

442,685

 

 

 

Page 40

 

Consolidated statement of cash flows

For the year ended 31 December 2018

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

2018
£m

2017
£m

Cash flows from operating activities1

 

 

 

Cash generated from operating activities

 

6,405

8,361

Tax paid

 

(447)

(620)

Total net cash from operating activities

 

5,958

7,741

Cash flows from investing activities

 

 

 

Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired

 

192

25

Disposals of subsidiaries, joint ventures and associates, net of cash transferred

 

381

(49)

Purchases of property and equipment

 

(87)

(69)

Proceeds on sale of property and equipment

 

15

5

Purchases of intangible assets

 

(64)

(107)

Total net cash from/(used in) investing activities

 

437

(195)

Cash flows from financing activities

 

 

 

Proceeds from issue of ordinary shares

 

8

12

Shares purchased in buy-back

 

(600)

(300)

Treasury shares purchased for employee trusts

 

(4)

-

New borrowings drawn down, net of expenses

 

3,148

1,320

Repayment of borrowings2

 

(4,181)

(1,904)

Net repayment of borrowings

B17 (b)

(1,033)

(584)

Interest paid on borrowings

 

(551)

(610)

Preference dividends paid

B9

(17)

(17)

Ordinary dividends paid

B9

(1,128)

(983)

Forfeited dividend income

 

4

-

Coupon payments on direct capital instrument and tier 1 notes

B9

(44)

(81)

Capital contributions from non-controlling interests of subsidiaries

 

3

36

Dividends paid to non-controlling interests of subsidiaries

 

(90)

(103)

Other3

 

(13)

-

Total net cash used in financing activities

 

(3,465)

(2,630)

Total net increase in cash and cash equivalents

 

2,930

4,916

Cash and cash equivalents at 1 January

 

43,587

38,405

Effect of exchange rate changes on cash and cash equivalents

 

92

266

Cash and cash equivalents at 31 December

 

46,609

43,587

1    Cash flows from operating activities include interest received of £5,093 million (2017: £5,302 million) and dividends received of £4,648 million (2017: £2,606 million).

2    Repayment of borrowings includes the redemption of €500 million 6.875% subordinated notes and $575 million 7.875% undated subordinated notes, in full at first call dates, and the maturity of €350 million 0.100% senior notes.

3    Includes £10 million relating to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs, and £3 million donation of forfeited dividend income to a charitable foundation.

 

 

 

Page 41

 

B1(i) Basis of preparation

(a)  The results in this preliminary announcement have been taken from the Group's 2018 Annual report and accounts which will be available on the Company's website on 26 March 2019. The consolidated financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU), and those parts of the Companies Act 2006 applicable to those reporting under IFRS.

The basis of preparation and summary of accounting policies applicable to the Group's consolidated financial statements can be found in the Accounting policies section of the 2018 Annual report and accounts. The comparative figures have been restated for the adjustments detailed in note B2. In addition, the Group has adopted new amendments to published standards as described in B1(ii), however, these do not have a significant impact on the Group's consolidated financial statements.

The preliminary announcement for the year ended 31 December 2018 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The results on an IFRS basis for full year 2018 and 2017 have been audited by PricewaterhouseCoopers LLP (PwC). PwC have reported on the 2018 and 2017 consolidated financial statements. Both reports were unqualified and neither contained a statement under section 498 (2) or (3) of the Companies Act 2006. The Group's 2017 report and accounts have been filed with the Registrar of Companies.

After making enquiries, the Directors have a reasonable expectation that the Group as a whole has adequate resources to continue in operational existence over a period of at least 12 months from the date of approval of the financial statements. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

(b)  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).

(c)  The long-term nature of much of the Group's operations means that, for management's decision-making and internal performance management of our operating segments, the Group focuses on Group adjusted operating profit, a non-GAAP alternative performance measure (APM), that incorporates an expected return on investments supporting its long-term and non-long-term businesses.

Group adjusted operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. Variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit. For non-long-term business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer-term return and short-term fluctuations from that level. The exclusion of short-term realised and unrealised investment gains and losses from the Group adjusted operating profit APM reflects the long-term nature of much of our business and presents separately the operating profit APM which is used in managing the performance of our operating segments from the impact of economic factors.

Group adjusted operating profit also excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangibles; amortisation and impairment of acquired value of in-force business; and the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates. These items principally relate to mergers and acquisition activity which we view as strategic in nature, hence they are excluded from the operating profit APM as this is principally used to manage the performance of our operating segments when reporting to the Group's chief decision maker. Other items are those items that, in the Directors' view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group's financial performance. Details of these items, including an explanation of the rationale for their exclusion, are provided in the relevant notes.

The Group adjusted operating profit APM should be viewed as complementary to IFRS GAAP measures. It is important to consider Group adjusted operating profit and profit before tax together to understand the performance of the business in the period.

 

 

 

Page 42

 

B1(ii) 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 2018:

(i)   Amendments to IFRS 4, Insurance Contracts

In September 2016, the IASB published amendments to IFRS 4 Insurance Contracts that address the accounting consequences of the application of IFRS 9 to insurers prior to implementing the new accounting standard for insurance contracts, IFRS 17, which replaces IFRS 4. The amendments introduce two options for insurers: the deferral approach and the overlay approach. The deferral approach provides an entity, if eligible, with a temporary exemption from applying IFRS 9. 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. In November 2018 the IASB recommended an amendment to IFRS 17 to defer the effective date to 1 January 2022. At the same time, they recommended an extension to the fixed expiry date for the temporary exemption for insurers from applying IFRS 9 until 1 January 2022. These amendments are subject to IASB's due process and will be included in an exposure draft expected to be published later in 2019.

The carrying amount of the Group's liabilities connected with insurance exceed 90% of the carrying amount of the Group's total liabilities and, as such, the Group is eligible to apply the deferral approach, as defined by the amendments to IFRS 4. The Group has opted to apply this deferral from 2018. Liabilities connected with insurance in the statement of financial position primarily include liabilities arising from contracts within the scope of IFRS 4, non-derivative investment contract liabilities and tax liabilities and payables arising in the course of writing insurance business.

IFRS 9 information relating to entities within the Group which have applied the standard from 1 January 2018 can be found in the entities' publicly available individual financial statements.

(ii)  IFRS 15, Revenue from Contracts with Customers

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers. This standard applies to annual reporting periods beginning on or after 1 January 2018 and has been endorsed by the EU. This standard replaces IAS 18 Revenue.

The scope of IFRS 15 includes all contracts where an Aviva company has agreed to provide goods or services to a customer, except for the following:

· Insurance contracts (IFRS 4)

· Financial instruments (IAS 39)

· Leases (IAS 17)

The adoption of this standards has resulted in the following minor amendments to the Group accounting policies:

· (I) Other investment contract fee revenue - updated to clarify that fees related to investment management services are recognised as revenue over time, as performance obligations are satisfied. Variable consideration, such as performance fees and commission subject to clawback arrangements, are only recorded as revenue to the extent it is highly probable that it will not be subject to significant reversal.

· (J) Other fee and commission income - updated to clarify that all other fee and commission income is recognised over time as the services are provided.

The retrospective impact of the adoption of IFRS 15 on prior reporting periods is not material to the Group, and prior period comparative figures have not been restated as a result. The adoption of IFRS 15 does not have a significant impact on the Group's consolidated financial statements.

The following amendments to existing standards and IFRIC interpretations have been issued, and are effective from 1 January 2018 or earlier, and do not have an impact on the Group's consolidated financial statements as the clarifications are consistent with our existing interpretation.

(iii) Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions

In June 2016, the IASB issued amendments to IFRS 2 Share-based Payment. The amendments were endorsed by the EU in February 2018 and are effective from 1 January 2018.

(iv) Annual Improvements to IFRSs 2014-2016

These improvements consist of amendments to three IFRSs including IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates. The amendment to IFRS 12 was effective for annual reporting periods beginning on or after 1 January 2017. The amendments to IFRS 1 and IAS 28 are effective for annual reporting periods beginning on or after 1 January 2018. The amendments were endorsed by the EU in February 2018.

(v)  Amendments to IAS 40 - Transfers of Investment Property

In December 2016, the IASB published amendments to IAS 40 Investment Property. The amendments are effective from 1 January 2018 and have been endorsed by the EU.

(vi) IFRIC 22, Foreign Currency Transactions and Advance Consideration

In December 2016, the IASB published IFRIC 22 Foreign Currency Transactions and Advance Consideration. The standard is effective for annual reporting beginning on or after 1 January 2018 and has been endorsed by the EU.

 

 

 

Page 43

 

B2 - Presentation changes

During 2018, non-insurance business in the UK which was previously reported within the Other products and services segment, such as the savings business, is now reported within the Long-term business or General insurance and health segments, as appropriate, as this is more reflective of the Group's operating segments and consistent with how the businesses are managed. Comparative information in the products and services segmental note B6(b) has been restated to reflect this change. This resulted in a loss before tax of £80 million (2017: £30 million) and profit before tax of £4 million (2017: £4 million) being transferred from the Other products and services segment to the long-term business and general insurance and health segments respectively. The corresponding net assets amount is £55 million (2017: £140 million). This change has no impact on the Group's operating profit, profit before tax, net assets or on the operating segmental disclosures in note B6(a).

B3 - 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:

 

2018

2017

Eurozone

 

 

Average rate (€1 equals)

£0.88

£0.88

Year end rate (€1 equals)

£0.90

£0.89

Canada

 

 

Average rate ($CAD1 equals)

£0.58

£0.60

Year end rate ($CAD1 equals)

£0.57

£0.59

Poland

 

 

Average rate (PLN1 equals)

£0.21

£0.21

Year end rate (PLN1 equals)

£0.21

£0.21

 

 

 

Page 44

B4 - Subsidiaries, joint ventures and associates - acquisitions

This note provides details of the acquisitions of subsidiaries, joint ventures and associates that the Group has made during the year.

(i)   Wealthify

On 8 February 2018, Aviva acquired a majority shareholding in Wealthify Group Limited, the holding company of Wealthify, for a cash consideration of £17 million. The investment is part of Aviva's strategy to build customer loyalty by providing customers with a wide range of insurance and investment services, all managed through the convenience and simplicity of Aviva's digital hub, MyAviva.

(ii)  Friends First

On 13 November 2017, Aviva plc announced the acquisition of Friends First Life Assurance Company DAC (Friends First), an Irish insurer, for a consideration of €146 million (approximately £129 million). Following completion of the transaction on 1 June 2018, Friends First is now a wholly owned subsidiary. As a result of this acquisition, Aviva is now one of the largest composite insurers in Ireland.

The following table summarises the consideration for the acquisition, the fair value of the assets acquired, liabilities assumed and resulting allocation to goodwill.

 

1 June 2018
Fair Value
£m

Assets

 

Acquired value of in-force business and intangible assets

96

Property and equipment

3

Investment property

424

Financial investments

3,207

Reinsurance assets

502

Receivables

33

Tax assets

3

Cash and cash equivalents

354

Total identifiable assets

4,622

Liabilities

 

Gross Insurance liabilities

1,409

Gross liabilities for investment contracts

2,921

Unallocated divisible surplus

66

Payables and other financial liabilities

33

Other liabilities

28

Total identifiable liabilities

4,457

Net identifiable assets acquired

165

Consideration

129

Negative goodwill arising on acquisition

36

The acquisition resulted in a gain from negative goodwill of £36 million, as the fair value of the net assets acquired of £165 million exceeded the consideration paid of £129 million. The gain arose primarily due to differences between the valuation of the pension scheme liability used to determine the transaction price and the recognition and measurement principles defined by IAS 19. The gain has been recognised immediately in the income statement as required by IFRS 3. The receivables balance of £33 million is made up of other receivables, prepayments and accrued income, measured at fair value and assessed as fully recoverable.

In the period 1 June 2018 to 31 December 2018, the profits of the acquired Friends First company have contributed net earned premiums and fees and commission income of £68 million and a loss before tax attributable to shareholders of £0.4 million.

If the acquisition had been effective on 1 January 2018, on a pro-forma basis the contribution to the Group's net earned premiums is estimated at £102 million and profit before tax attributable to shareholders is estimated at £5 million. In determining this amount, 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 2018. 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 2018, nor are they necessarily indicative of the future results of the combined Group.

Subsequent events

On 30 January 2019, Aviva acquired a majority holding in Neos Ventures Limited for a cash consideration of £9 million.

 

 

 

Page 45

B5 - Subsidiaries, joint ventures and associates - disposals and held for sale

This note provides details of the 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) Summary

The profit on the disposal and remeasurement of subsidiaries, joint ventures and associates comprises:

 

2018
£m

2017
£m

Disposals

113

237

Held for sale remeasurements

(13)

(125)

Remeasurements due to change in control status

2

23

Total profit on disposal and remeasurement

102

135

The profit on disposal in the period of £113 million (2017: £237 million) primarily relates to the disposals of Italy Avipop and three businesses in Spain (see note B5(b)(i) and (ii) below for further details respectively). There has been a £13 million remeasurement loss in relation to Friends Provident International Limited (FPI) (see note B5(c)(i) for further details) and a £2 million remeasurement gain due to change in control status of the Hong Kong business (see note B5(d) for further details).

(b)  Disposals of subsidiaries, joint ventures and associates

The following businesses were disposed of in 2018:

 

Italy -
Avipop (i)
£m

Spain (ii)
 £m

Total
£m

Assets

 

 

 

Goodwill, acquired value of in-force business and intangible assets

439

213

652

Investments

376

457

833

Receivables and other financial assets

17

4

21

Reinsurance assets

75

6

81

Deferred acquisition costs

15

-

15

Prepayments and accrued income

-

6

6

Cash and cash equivalents

42

18

60

Total assets

964

704

1,668

Liabilities

 

 

 

Gross insurance liabilities

376

381

757

Payables and other financial liabilities

2

19

21

Tax liabilities

143

48

191

Other liabilities

6

21

27

Total liabilities

527

469

996

Net assets

437

235

672

Non-controlling interests before disposal

(213)

(128)

(341)

Group's share of net assets disposed

224

107

331

Cash consideration

235

189

424

Less: transaction costs

(3)

(4)

(7)

Net consideration

232

185

417

Reserves recycled to the income statement

16

(14)

2

Profit on disposal

24

64

88

Other small disposals (iii)

 

 

25

Total profit on disposal

 

 

113

(i)   Italy - Avipop

On 29 March 2018, Aviva announced that it had completed the sale of its entire shareholding of Avipop Assicurazioni S.p.A and Avipop Vita S.p.A to Banco BPM for cash consideration of €265 million (approximately £235 million). The transaction resulted in a total gain on disposal of £24 million.

(ii)  Spain

On 11 July 2018, Aviva announced that it had completed the sale of its entire shareholding in life insurance and pension joint ventures Caja Murcia Vida and Caja Granada Vida to Bankia for a total consideration of €203 million (approximately £180 million). In addition, on 1 October 2018, Aviva completed the sale of its entire 50% shareholding in the small life insurance operation Pelayo Vida to Santa Lucia for a total consideration of €10 million (approximately £9 million). These transactions resulted in a total gain on disposal of £64 million.

(iii) Other

On 19 January 2018, Aviva announced that it had completed the sale of its entire 49% shareholding in its joint venture in Taiwan, First Aviva Life (Aviva Taiwan) to Aviva's joint venture partner, First Financial Holding Company Limited (FFH) for cash consideration of $1. The transaction resulted in a gain of £7 million arising from reserves recycled to the Income Statement. Remeasurement losses arising from the classification of Aviva Taiwan as held for sale were recognised in 2017.

 

 

 

Page 46

B5 - Subsidiaries, joint ventures and associates - disposals and held for sale continued

On 5 November 2018, Aviva Investors completed the sale of its Real Estate Multi-Manager business to LaSalle Investment Management and exited its partnership arrangement in Encore+, a pan-European commercial property fund, also with LaSalle. The assets disposed of represent customer related intangible assets. The gain on disposal was £27 million.

The remaining balance of £9 million loss primarily relates to other currency translation reserve recycling adjustments.

(iv) Disposals of other investments 

In the second half of 2018, Aviva France disposed of its investments in the asset management company Primonial Real Estate Investment Management and the breakdown assistance company Opteven. The realised gains on disposal of these investments recognised in net investment income was €107 million (approximately £94 million).

(c)  Assets and liabilities of operations classified as held for sale

The assets and liabilities of operations classified as held for sale as at 31 December 2018 are as follows:

 

2018
£m

2017
£m

Assets

 

 

Goodwill, acquired value of in-force and other intangibles

660

1,467

Property and equipment

5

5

Loans

-

6

Financial investments

7,251

8,306

Reinsurance assets

45

123

Other assets

206

225

Cash and cash equivalents

688

739

Total assets

8,855

10,871

Liabilities

 

 

Gross insurance liabilities

121

914

Gross liability for investment contracts

8,341

8,663

Unallocated divisible surplus

-

19

Other liabilities

59

277

Total liabilities

8,521

9,873

Net assets

334

998

Assets and liabilities of operations classified as held for sale as at 31 December 2018 relate to the expected disposal of the international operations of FPI. See below for further details. Assets and liabilities of operations classified as held for sale during 2017 relate to Italy Avipop, Aviva Taiwan and Spain which were disposed of in 2018 and FPI.

(i)   FPI

On 19 July 2017, Aviva announced the sale of FPI to RL360 Holding Company Limited, a subsidiary of International Financial Group Limited, for a total consideration of £340 million. The conditions defined in IFRS 5 for a subsidiary to be classified as held for sale include the presumption that the sale will be completed within 12 months of the date of reclassification. The transaction remains subject to regulatory approvals and is now expected to complete in the first half of 2019. As such, the subsidiary continues to be classified as held for sale and has been remeasured at fair value based on the expected sale price less costs to sell, calculated as £334 million. This resulted in a total loss on remeasurement of £118 million in 2017, and an additional remeasurement loss of £13 million in 2018. The goodwill attributable to FPI was fully impaired in 2017. The business remains a consolidated subsidiary of Aviva at the balance sheet date.

(d)  Remeasurements due to change in control status

On 13 February 2018, Aviva announced that it has completed the transaction to develop a digital insurance joint venture in Hong Kong (Blue) with Hillhouse Capital Group (Hillhouse) and Tencent Holdings Limited (Tencent). The joint venture commenced operating under its new corporate structure during the first half of 2018. The transaction included the sale of 60% of the shareholding in Aviva Life Insurance Company Limited (Aviva Hong Kong) for cash consideration of HKD 301 million (approximately £29 million). The transaction resulted in a remeasurement gain of £2 million mainly arising through the recycling of reserves to the income statement and, additionally, a loss of £4 million in equity in accordance with IFRS 10 as Aviva has retained control of certain activities under the sale agreement.

(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. 

 

 

Page 47

 

B6 - Segmental information

The Group's results can be segmented either by activity or by geography. Our primary reporting format is along 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.

(a)  Operating segments

United Kingdom

The United Kingdom comprises two operating segments - Life and General Insurance. The principal activities of our UK Life operations are life insurance, long-term health and accident insurance, savings, pensions and annuity business. UK 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.

Canada

The principal activity of our operation in Canada is general insurance. In particular it provides personal and commercial lines insurance products principally distributed through insurance brokers.

France

The principal activities of our operations in France 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 and includes our long-term business in Lithuania.

Italy, Ireland, 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. The principal activities of our operations in Italy and Ireland are long-term business and general insurance. The principal activity of our operation in Spain was the sale of accident and health insurance and a selection of savings products. Our 'Other' operations include our life operations in Turkey. This segment also includes Friends First, which was acquired on 1 June 2018 (see note B4). The results of entities within Spain are included up to the date of disposal (Unicorp Vida and Caja España Vida on 15 September 2017, Caja Murcia Vida and Caja Granada Vida on 11 July 2018 and Pelayo Vida on 1 October 2018) and the results of Avipop, part of our operations in Italy, have been included up to the date of disposal on 29 March 2018 (see note B5).

Asia

Our activities in Asia principally comprise our long-term business operations in China, India, Singapore, Hong Kong, Vietnam, Indonesia, Taiwan (up to 19 January 2018, (see note B5(b))) and FPI (see note B5(c)). This segment also includes general insurance and health operations in Singapore and health operations in Indonesia. This segment includes the results of the digital insurance joint venture in Hong Kong, which commenced operating under its new corporate structure during the first half of 2018.

Aviva Investors

Aviva Investors operates in most of the markets in which the Group operates, in particular the UK, France, North America and Asia Pacific. Aviva Investors manages policyholders' and shareholders' invested funds, provides investment management services for institutional pension fund mandates and manages a range of retail investment products. These include investment funds, unit trusts, open-ended investment companies and individual savings accounts.

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 core structural borrowings and certain tax balances in the segmental statement of financial position. The results of our internal reinsurance and digital broker operations and the Group's interest in Wealthify (see note B4) are also included in this segment, as are the elimination entries for certain inter-segment transactions.

 

 

 

Page 48

B6 - 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 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 2018

 

United Kingdom

 

 

 

Europe

 

 

 

 

 

Life
 £m

GI
 £m

Canada2

 £m

France
£m

Poland
£m

Italy, Ireland, Spain and Other
£m

Asia
£m

Aviva

Investors3

£m

Other Group

activities4

£m

Total
£m

Gross written premiums

7,302

4,504

3,047

5,584

616

6,504

1,102

-

-

28,659

Premiums ceded to reinsurers

(1,666)

(317)

(119)

(77)

(12)

(113)

(20)

-

(2)

(2,326)

Internal reinsurance revenue

-

6

-

-

-

(2)

(7)

-

3

-

Premiums written net of reinsurance

5,636

4,193

2,928

5,507

604

6,389

1,075

-

1

26,333

Net change in provision for unearned premiums

14

(87)

27

(38)

7

9

(13)

-

-

(81)

Net earned premiums

5,650

4,106

2,955

5,469

611

6,398

1,062

-

1

26,252

Fee and commission income

939

122

24

313

94

113

202

368

5

2,180

 

6,589

4,228

2,979

5,782

705

6,511

1,264

368

6

28,432

Net investment (expense)/income

(6,693)

16

51

(2,302)

(73)

(1,111)

(286)

37

(486)

(10,847)

Inter-segment revenue

-

-

-

-

-

-

-

259

-

259

Share of profit of joint ventures and associates

78

-

1

9

-

10

14

-

-

112

Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates

-

-

-

-

-

89

(5)

27

(9)

102

Segmental income1

(26)

4,244

3,031

3,489

632

5,499

987

691

(489)

18,058

Claims and benefits paid, net of recoveries from reinsurers

(10,184)

(2,731)

(1,989)

(4,659)

(356)

(2,595)

(570)

-

(58)

(23,142)

Change in insurance liabilities, net of reinsurance

6,184

351

(133)

557

148

(872)

(40)

-

51

6,246

Change in investment contract provisions

7,540

-

-

27

-

(2,249)

42

(39)

-

5,321

Change in unallocated divisible surplus

270

-

-

1,754

12

1,063

138

-

-

3,237

Fee and commission expense

(741)

(1,225)

(791)

(484)

(146)

(343)

(199)

(33)

569

(3,393)

Other expenses

(1,687)

(220)

(182)

(256)

(106)

(188)

(272)

(449)

(483)

(3,843)

Inter-segment expenses

(232)

(5)

(6)

(1)

(6)

(7)

-

-

(2)

(259)

Finance costs

(157)

(1)

(5)

(1)

-

(5)

(3)

-

(401)

(573)

Segmental expenses

993

(3,831)

(3,106)

(3,063)

(454)

(5,196)

(904)

(521)

(324)

(16,406)

Profit/(loss) before tax

967

413

(75)

426

178

303

83

170

(813)

1,652

Tax attributable to policyholders' returns

469

-

-

-

-

1

7

-

-

477

Profit/(loss) before tax attributable to shareholders' profits

1,436

413

(75)

426

178

304

90

170

(813)

2,129

Adjusting items:

 

 

 

 

 

 

 

 

 

 

Reclassification of corporate costs and unallocated interest

-

(16)

31

48

-

(1)

-

5

(67)

-

Life business: Investment variances and economic assumption changes

115

-

-

(6)

10

57

21

-

-

197

Non-life business: Short-term fluctuation in return on investments

-

172

45

44

2

57

-

-

156

476

General insurance and health business: Economic assumption changes

-

4

-

(5)

-

-

-

-

-

(1)

Impairment of goodwill, joint ventures, associates and other amounts expensed

-

-

-

-

2

-

3

-

8

13

Amortisation and impairment of intangibles

73

32

46

2

7

3

13

3

30

209

Amortisation and impairment of AVIF

285

-

-

2

-

6

130

-

3

426

(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates

-

-

-

-

-

(89)

5

(27)

9

(102)

Other5

-

(190)

-

-

-

(36)

-

-

(5)

(231)

Group adjusted operating profit/(loss) before tax attributable to shareholders' profits after integration and restructuring costs

1,909

415

47

511

199

301

262

151

(679)

3,116

Integration and restructuring costs

-

-

-

-

-

-

-

-

-

-

Group adjusted operating profit/(loss) before tax attributable to shareholders' profits

1,909

415

47

511

199

301

262

151

(679)

3,116

1    Total reported income, excluding inter-segment revenue, includes £4,412 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    Canada operating profit includes £1 million relating to non-insurance activities.

3    Aviva Investors operating profit includes £1 million profit relating to Aviva Investors Pooled Pensions business.

4    Other Group activities include Group Reinsurance and net expenses of £99 million associated with supporting the development of the Group's digital business written through its UK insurance intermediary which places business primarily on behalf of UK General Insurance.

5    Other includes a movement in the discount rate used for estimating lump sum payments in settlement of bodily injury claims which resulted in a gain of £190 million (see note B12(b)), a provision release of £78 million relating to the sale of Aviva USA in 2013, a gain of £36 million relating to negative goodwill on the acquisition of Friends First (see note B4), a charge of £63 million relating to the UK defined benefit pension scheme as a result of the requirement to equalise members' benefits for the effects of Guaranteed Minimum Pension (see note B18) and a charge of £10 million relating to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs.

 

 

 

Page 49

 

B6 - Segmental information continued

(a) (ii) Segmental income statement for the year ended 31 December 2017

 

United Kingdom

 

 

 

Europe

 

 

 

 

 

Life
£m

GI
£m

Canada
£m

France
 £m

Poland
 £m

Italy, Ireland, Spain and Other
 £m

Asia
 £m

Aviva

Investors2

£m

Other Group

activities3

£m

Total
£m

Gross written premiums

6,872

4,355

3,138

5,692

594

5,923

1,032

-

-

27,606

Premiums ceded to reinsurers

(1,531)

(271)

(110)

(78)

(11)

(101)

(127)

-

-

(2,229)

Internal reinsurance revenue

-

(6)

-

-

-

(9)

(10)

-

25

-

Premiums written net of reinsurance

5,341

4,078

3,028

5,614

583

5,813

895

-

25

25,377

Net change in provision for unearned premiums

-

(63)

(84)

23

3

(21)

(11)

-

-

(153)

Net earned premiums

5,341

4,015

2,944

5,637

586

5,792

884

-

25

25,224

Fee and commission income

906

121

24

316

83

141

193

407

(4)

2,187

 

6,247

4,136

2,968

5,953

669

5,933

1,077

407

21

27,411

Net investment income

16,202

138

86

2,613

292

811

1,465

136

323

22,066

Inter-segment revenue

-

-

-

-

-

-

-

239

-

239

Share of profit/(loss) of joint ventures and associates

72

-

-

14

-

12

(57)

-

-

41

Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates

-

-

-

216

16

28

(118)

-

(7)

135

Segmental income1

22,521

4,274

3,054

8,796

977

6,784

2,367

782

337

49,892

Claims and benefits paid, net of recoveries from reinsurers

(10,783)

(2,547)

(1,902)

(5,145)

(397)

(2,799)

(526)

-

(14)

(24,113)

Change in insurance liabilities, net of reinsurance

1,380

78

(221)

(804)

(134)

(928)

(450)

-

5

(1,074)

Change in investment contract provisions

(9,041)

-

-

(1,591)

-

(2,121)

(947)

(137)

-

(13,837)

Change in unallocated divisible surplus

195

-

-

153

(2)

85

(137)

-

-

294

Fee and commission expense

(496)

(1,268)

(796)

(703)

(134)

(421)

(144)

(39)

(328)

(4,329)

Other expenses

(1,385)

(221)

(178)

(281)

(102)

(229)

(298)

(418)

(425)

(3,537)

Inter-segment expenses

(207)

(8)

(6)

2

(6)

(12)

-

-

(2)

(239)

Finance costs

(233)

(1)

(5)

(1)

-

(7)

(3)

-

(433)

(683)

Segmental expenses

(20,570)

(3,967)

(3,108)

(8,370)

(775)

(6,432)

(2,505)

(594)

(1,197)

(47,518)

Profit/(loss) before tax

1,951

307

(54)

426

202

352

(138)

188

(860)

2,374

Tax attributable to policyholders' returns

(330)

-

-

-

-

(4)

(37)

-

-

(371)

Profit/(loss) before tax attributable to shareholders' profits

1,621

307

(54)

426

202

348

(175)

188

(860)

2,003

Adjusting items:

 

 

 

 

 

 

 

 

 

 

Reclassification of corporate costs and unallocated interest

-

(12)

28

48

-

-

-

5

(69)

-

Life business: Investment variances and economic assumption changes

(323)

-

-

249

(7)

12

38

-

(3)

(34)

Non-life business: Short-term fluctuation in return on investments

-

56

7

(26)

(3)

27

-

-

284

345

General insurance and health business: Economic assumption changes

-

18

(2)

(9)

-

-

-

-

-

7

Impairment of goodwill, joint ventures, associates and other amounts expensed

-

-

2

-

-

-

47

-

-

49

Amortisation and impairment of intangibles

74

31

50

1

7

5

9

5

15

197

Amortisation and impairment of AVIF

327

-

-

2

-

1

154

-

11

495

(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates

-

-

-

(216)

(16)

(28)

118

-

7

(135)

Group adjusted operating profit/(loss) before tax attributable to shareholders' profits after integration and restructuring costs

1,699

400

31

475

183

365

191

198

(615)

2,927

Integration and restructuring costs

65

11

15

25

-

11

-

3

11

141

Group adjusted operating profit/(loss) before tax attributable to shareholders' profits

1,764

411

46

500

183

376

191

201

(604)

3,068

1    Total reported income, excluding inter-segment revenue, includes £26,949 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 operating profit includes £1 million profit relating to the Aviva Investors Pooled Pensions business.

3    Other Group activities include Group Reinsurance and net expenses of £48 million associated with supporting the development of the Group's digital business written through its UK insurance intermediary which places business primarily on behalf of UK General Insurance.

 

 

 

Page 50

 

B6 - Segmental information continued

(a) (iii) Segmental statement of financial position as at 31 December 2018

 

United Kingdom

 

 

 

Europe

 

 

 

 

 

Life
 £m

GI
£m

Canada
£m

France
£m

Poland
 £m

Italy, Ireland, Spain and Other
£m

Asia
 £m

Aviva Investors £m

Other Group activities
 £m

Total
£m

Goodwill

663

924

82

-

27

125

51

-

-

1,872

Acquired value of in-force business and intangible assets

2,424

154

220

98

72

96

25

5

107

3,201

Interests in, and loans to, joint ventures and associates

859

-

8

117

-

55

479

-

-

1,518

Property and equipment

71

29

50

258

4

5

5

4

122

548

Investment property

6,124

436

-

3,595

-

807

-

616

(96)

11,482

Loans

27,619

-

164

710

-

255

37

-

-

28,785

Financial investments

169,221

3,627

4,696

71,903

3,423

32,842

5,422

343

6,108

297,585

Deferred acquisition costs

1,361

489

367

354

124

259

11

-

-

2,965

Other assets

38,240

5,311

1,225

8,355

304

4,840

525

1,267

13,600

73,667

Assets of operations classified as held for sale

-

-

-

-

-

-

8,855

-

-

8,855

Total assets

246,582

10,970

6,812

85,390

3,954

39,284

15,410

2,235

19,841

430,478

Insurance liabilities

 

 

 

 

 

 

 

 

 

 

Long-term business and outstanding claims provisions

94,181

4,914

3,455

16,778

3,068

12,646

4,069

-

4

139,115

Unearned premiums

214

2,104

1,517

501

109

410

91

-

-

4,946

Other insurance liabilities

-

16

-

-

-

-

-

-

-

16

Gross liabilities for investment contracts

123,406

-

-

54,159

4

23,874

-

1,025

-

202,468

Unallocated divisible surplus

2,244

-

-

3,518

55

(78)

210

-

-

5,949

Net asset value attributable to unitholders

25

-

-

2,427

-

-

-

-

15,673

18,125

External borrowings

1,660

10

-

-

-

46

-

-

7,704

9,420

Other liabilities, including inter-segment liabilities

13,667

(255)

1,011

5,350

230

944

801

589

1,126

23,463

Liabilities of operations classified as held for sale

-

-

-

-

-

-

8,521

-

-

8,521

Total liabilities

235,397

6,789

5,983

82,733

3,466

37,842

13,692

1,614

24,507

412,023

Total equity

 

 

 

 

 

 

 

 

 

18,455

Total equity and liabilities

 

 

 

 

 

 

 

 

 

430,478

(a) (iv) Segmental statement of financial position as at 31 December 2017

 

United Kingdom

 

 

 

Europe

 

 

 

 

 

Life
£m

GI
£m

Canada
 £m

France
 £m

Poland
 £m

Italy, Ireland, Spain and Other
£m

Asia
 £m

Aviva Investors
 £m

Other Group activities
 £m

Total
 £m

Goodwill

663

924

84

-

29

124

52

-

-

1,876

Acquired value of in-force business and intangible assets

2,751

152

258

90

78

4

26

4

92

3,455

Interests in, and loans to, joint ventures and associates

936

-

9

184

-

68

445

-

-

1,642

Property and equipment

52

30

46

253

4

3

8

4

109

509

Investment property

6,242

324

-

3,322

-

215

-

788

(94)

10,797

Loans

26,695

5

180

739

7

197

34

-

-

27,857

Financial investments

184,428

4,184

4,592

72,886

3,775

27,403

5,007

400

8,407

311,082

Deferred acquisition costs

1,364

487

383

322

118

222

8

2

-

2,906

Other assets

38,800

5,370

1,338

8,567

244

3,591

765

1,020

11,995

71,690

Assets of operations classified as held for sale

-

-

-

-

-

1,685

9,186

-

-

10,871

Total assets

261,931

11,476

6,890

86,363

4,255

33,512

15,531

2,218

20,509

442,685

Insurance liabilities

 

 

 

 

 

 

 

 

 

 

Long-term business and outstanding claims provisions1

100,183

5,360

3,449

17,213

3,275

10,110

4,056

-

11

143,657

Unearned premiums

228

2,003

1,578

458

119

520

74

-

-

4,980

Other insurance liabilities1

-

13

-

-

-

-

-

-

-

13

Gross liabilities for investment contracts

130,890

-

-

53,529

2

18,335

-

1,230

-

203,986

Unallocated divisible surplus

2,514

-

-

5,239

68

922

339

-

-

9,082

Net asset value attributable to unitholders

57

-

-

2,472

-

-

-

-

15,798

18,327

External borrowings

1,566

-

-

1

-

70

-

-

8,649

10,286

Other liabilities, including inter-segment liabilities

14,234

(294)

971

4,927

253

869

618

392

1,376

23,346

Liabilities of operations classified as held for sale

-

-

-

-

-

1,021

8,852

-

-

9,873

Total liabilities

249,672

7,082

5,998

83,839

3,717

31,847

13,939

1,622

25,834

423,550

Total equity

 

 

 

 

 

 

 

 

 

19,135

Total equity and liabilities

 

 

 

 

 

 

 

 

 

442,685

1    Following a review, 2017 comparative amounts have been amended, with a reclassification of £244 million made from 'Other insurance liabilities' to 'Long-term business and outstanding claims provisions' in order to align with note B11(a).

 (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. Non-insurance businesses in the UK previously included within 'Other', such as the savings business, have been reclassified to the long-term business or general insurance and health segments, as appropriate, as this presentation is consistent with how the business is managed (see note B2 for further details). Results for the year ended 31 December 2017 have been restated accordingly.

 

 

 

Page 51

 

B6 - Segmental information continued

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, open-ended investment companies and individual savings accounts. Clients include Aviva Group businesses and third-party financial institutions, pension funds, public sector organisations, investment professionals and private investors.

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 and elimination entries for certain inter-segment transactions.

(b) (i) Segmental income statement - products and services for the year ended 31 December 2018

 

Long-term

business2

£m

General  
 insurance  

and health2,3

 £m  

Fund management £m

Other2,4

£m  

Total
 £m

Gross written premiums1

18,140

10,519 

-

- 

28,659

Premiums ceded to reinsurers

(1,775)

(551) 

-

- 

(2,326)

Premiums written net of reinsurance

16,365

9,968 

-

- 

26,333

Net change in provision for unearned premiums

-

(81) 

-

- 

(81)

Net earned premiums

16,365

9,887 

-

-

26,252

Fee and commission income

1,496

138 

365

181 

2,180

 

17,861

10,025 

365

181 

28,432

Net investment (expense)/income

(10,375)

63 

(1)

(534) 

(10,847)

Inter-segment revenue

-

- 

263

- 

263

Share of profit/(loss) of joint ventures and associates

112

- 

-

- 

112

Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates

84

- 

27

(9) 

102

Segmental income

7,682

10,088 

654

(362) 

18,062

Claims and benefits paid, net of recoveries from reinsurers

(16,540)

(6,602) 

-

- 

(23,142)

Change in insurance liabilities, net of reinsurance

6,044

202 

-

- 

6,246

Change in investment contract provisions

5,321

- 

-

- 

5,321

Change in unallocated divisible surplus

3,237

- 

-

- 

3,237

Fee and commission expense

(1,248)

(2,592) 

(31)

478 

(3,393)

Other expenses

(2,152)

(596) 

(461)

(634) 

(3,843)

Inter-segment expenses

(249)

(12) 

-

(2) 

(263)

Finance costs

(164)

(6) 

-

(403) 

(573)

Segmental expenses

(5,751)

(9,606) 

(492)

(561) 

(16,410)

Profit/(loss) before tax

1,931

482 

162

(923) 

1,652

Tax attributable to policyholders' returns

477

-

-

- 

477

Profit/(loss) before tax attributable to shareholders' profits

2,408

482

162

(923) 

2,129

Adjusting items

591

222

(16)

190 

987

Group adjusted operating profit/(loss) before tax attributable to shareholders' profits

2,999

704

146

(733) 

3,116

1    Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £56 million, which all relates to property and liability insurance.

2    Non-insurance business in the UK previously included within 'Other operations', such as the savings business, have been reclassified to long-term business and general insurance and health segments as this presentation is consistent with how the business is managed. See note B2 for further details. The impact of this change was to reduce long-term operating profit by £80 million and increase general insurance and health operating profit by £4 million.

3    General insurance and health business segment includes gross written premiums of £879 million relating to health business. The remaining business relates to property and liability insurance.

4    Other includes net expenses of £99 million associated with supporting the development of the Group's digital business written through its UK insurance intermediary which places business primarily on behalf of UK General Insurance.

 

 

 

Page 52

 

B6 - Segmental information continued

(b) (ii) Segmental income statement - products and services for the year ended 31 December 2017 - restated1

 

Long-term business
£m

General insurance and

health3

£m

Fund management £m

Other4

£m

Total
 £m

Gross written premiums2

17,083

10,523

-

-

27,606

Premiums ceded to reinsurers

(1,741)

(488)

-

-

(2,229)

Premiums written net of reinsurance

15,342

10,035

-

-

25,377

Net change in provision for unearned premiums

-

(153)

-

-

(153)

Net earned premiums

15,342

9,882

-

-

25,224

Fee and commission income

1,486

134

369

198

2,187

 

16,828

10,016

369

198

27,411

Net investment income/(expense)

21,468

331

(1)

268

22,066

Inter-segment revenue

-

-

244

-

244

Share of profit of joint ventures and associates

41

-

-

-

41

Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates

100

42

-

(7)

135

Segmental income

38,437

10,389

612

459

49,897

Claims and benefits paid, net of recoveries from reinsurers

(17,791)

(6,322)

-

-

(24,113)

Change in insurance liabilities, net of reinsurance

(863)

(211)

-

-

(1,074)

Change in investment contract provisions

(13,837)

-

-

-

(13,837)

Change in unallocated divisible surplus

294

-

-

-

294

Fee and commission expense

(1,210)

(2,668)

(36)

(415)

(4,329)

Other expenses

(1,919)

(626)

(425)

(567)

(3,537)

Inter-segment expenses

(226)

(15)

-

(3)

(244)

Finance costs

(240)

(6)

-

(437)

(683)

Segmental expenses

(35,792)

(9,848)

(461)

(1,422)

(47,523)

Profit/(loss) before tax

2,645

541

151

(963)

2,374

Tax attributable to policyholders' returns

(371)

-

-

-

(371)

Profit/(loss) before tax attributable to shareholders' profits

2,274

541

151

(963)

2,003

Adjusting items

578

163

13

311

1,065

Group adjusted operating profit/(loss) before tax attributable to shareholders' profits

2,852

704

164

(652)

3,068

1    Non-insurance business in the UK previously included within 'Other', such as the savings business, have been reclassified to the long-term business and general insurance and health segments as this presentation is consistent with how the business is managed. See note B2 for further details. The impact of this change was to reduce long-term operating profit by £30 million and increase general insurance and health operating profit by £4 million.

2    Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £91 million, of which £73 million relates to property and liability insurance and £18 million relates to long-term business.

3    General insurance and health business segment includes gross written premiums of £914 million relating to health business. The remaining business relates to property and liability insurance.

4    Other includes net expenses of £48 million associated with supporting the development of the Group's digital business written through its UK insurance intermediary which places business primarily on behalf of UK General Insurance.

(b) (iii) Segmental statement of financial position - products and services as at 31 December 2018

 

Long-term

business1

£m

General insurance and

 health1

£m

Fund management £m

Other1

£m

Total
£m

Goodwill

722

1,083

-

67

1,872

Acquired value of in-force business and intangible assets

2,688

403

5

105

3,201

Interests in, and loans to, joint ventures and associates

1,502

8

-

8

1,518

Property and equipment

260

147

4

137

548

Investment property

10,995

584

-

(97)

11,482

Loans

28,620

165

-

-

28,785

Financial investments

280,130

11,279

66

6,110

297,585

Deferred acquisition costs

1,877

1,088

-

-

2,965

Other assets

49,316

9,243

1,117

13,991

73,667

Assets of operations classified as held for sale

8,855

-

-

-

8,855

Total assets

384,965

24,000

1,192

20,321

430,478

Gross insurance liabilities

127,709

16,368

-

-

144,077

Gross liabilities for investment contracts

202,468

-

-

-

202,468

Unallocated divisible surplus

5,949

-

-

-

5,949

Net asset value attributable to unitholders

2,451

-

-

15,674

18,125

External borrowings

1,706

10

-

7,704

9,420

Other liabilities, including inter-segment liabilities

19,124

1,373

574

2,392

23,463

Liabilities of operations classified as held for sale

8,521

-

-

-

8,521

Total liabilities

367,928

17,751

574

25,770

412,023

Total equity

 

 

 

 

18,455

Total equity and liabilities

 

 

 

 

430,478

1    Non-insurance business in the UK previously included within 'Other', such as the savings business, have been reclassified to the long-term business and general insurance and health segments as this presentation is consistent with how the business is managed. See note B2 for further details.

 

 

 

Page 53

 

B6 - Segmental information continued

(b) (iv) Segmental statement of financial position - products and services as at 31 December 2017 - restated1

 

Long-term business
 £m

General insurance and health
 £m

Fund management £m

Other
£m

Total
 £m

Goodwill

720

1,084

3

69

1,876

Acquired value of in-force business and intangible assets

2,922

439

4

90

3,455

Interests in, and loans to, joint ventures and associates

1,617

9

-

16

1,642

Property and equipment

240

136

4

129

509

Investment property

10,392

499

-

(94)

10,797

Loans

27,671

186

-

-

27,857

Financial investments

290,840

11,934

54

8,254

311,082

Deferred acquisition costs

1,804

1,100

2

-

2,906

Other assets

49,118

9,283

905

12,384

71,690

Assets of operations classified as held for sale

10,552

319

-

-

10,871

Total assets

395,876

24,989

972

20,848

442,685

Gross insurance liabilities

131,987

16,663

-

-

148,650

Gross liabilities for investment contracts

203,986

-

-

-

203,986

Unallocated divisible surplus

9,082

-

-

-

9,082

Net asset value attributable to unitholders

2,529

-

-

15,798

18,327

External borrowings

1,601

-

-

8,685

10,286

Other liabilities, including inter-segment liabilities

18,828

1,413

376

2,729

23,346

Liabilities of operations classified as held for sale

9,694

179

-

-

9,873

Total liabilities

377,707

18,255

376

27,212

423,550

Total equity

 

 

 

 

19,135

Total equity and liabilities

 

 

 

 

442,685

1    Non-insurance business in the UK previously included within 'Other', such as the savings business, have been reclassified to the long-term business and general insurance and health segments as this presentation is consistent with how the business is managed. See note B2 for further details.

 

 

 

Page 54

 

B7 - Tax

This note analyses the tax charge for the year and explains the factors that affect it.

(a)  Tax (credited)/charged to the income statement

(i)   The total tax (credit)/charge comprises:

 

2018
£m

2017
£m

Current tax

 

 

For the period

559

651

Prior period adjustments

(49)

(46)

Total current tax

510

605

Deferred tax

 

 

Origination and reversal of temporary differences

(531)

134

Changes in tax rates or tax laws

(13)

(8)

Write (back) of deferred tax assets

(1)

(3)

Total deferred tax

(545)

123

Total tax (credited)/charged to income statement

(35)

728

(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, Ireland and Singapore life insurance policyholder returns is included in the tax charge. The tax credit attributable to policyholder returns included in the credit above is £477 million (2017: charge of £371 million).

(iii) The tax credit above, comprising current and deferred tax, can be analysed as follows:

 

2018
£m

2017
£m

UK tax

(236)

528

Overseas tax

201

200

 

(35)

728

(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce the current tax expense and deferred tax credit by £nil and £nil (2017: £13 million and £nil), respectively.

(v)  Deferred tax (credited)/charged to the income statement represents movements on the following items:

 

2018
£m

2017
£m

Long-term business technical provisions and other insurance items

907

37

Deferred acquisition costs

3

(2)

Unrealised (losses) on investments

(1,453)

(33)

Pensions and other post-retirement obligations

2

19

Unused losses and tax credits

7

19

Subsidiaries, associates and joint ventures

(7)

(4)

Intangibles and additional value of in-force long-term business

(64)

(85)

Provisions and other temporary differences

60

172

Total deferred tax (credited)/charged to income statement

(545)

123

(b)  Tax (credited) to other comprehensive income

(i)   The total tax (credit) comprises:

 

2018
£m

2017
£m

Current tax

 

 

In respect of pensions and other post-retirement obligations

(59)

(45)

In respect of foreign exchange movements

(1)

4

 

(60)

(41)

Deferred tax

 

 

In respect of pensions and other post-retirement obligations

16

42

In respect of fair value (losses) on owner-occupied properties

-

(2)

In respect of unrealised (losses) on investments

(7)

(9)

 

9

31

Total tax (credited) to other comprehensive income

(51)

(10)

(ii)  The tax charge attributable to policyholders' returns included above is £nil (2017: £nil).

 

 

 

Page 55

 

B7 - Tax continued

(c)  Tax credited to equity

Tax credited directly to equity in the year in respect of coupon payments on the direct capital instrument and tier 1 notes amounted to £8 million (2017: £16 million).

(d)  Tax reconciliation

The tax on the Group'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:

 

Shareholder £m

Policyholder £m

2018
£m

Shareholder £m

Policyholder £m

2017
£m

Total profit before tax

2,129

(477)

1,652

2,003

371

2,374

 

 

 

 

 

 

 

Tax calculated at standard UK corporation tax rate of 19.00% (2017: 19.25%)

405

(91)

314

386

71

457

Reconciling items

 

 

 

 

 

 

Different basis of tax - policyholders

-

(385)

(385)

-

301

301

Adjustment to tax charge in respect of prior periods

(16)

-

(16)

(44)

-

(44)

Non-assessable income and items not taxed at the full statutory rate

(4)

-

(4)

(47)

-

(47)

Non-taxable profit on sale of subsidiaries and associates

(59)

-

(59)

(27)

-

(27)

Disallowable expenses

50

-

50

47

-

47

Different local basis of tax on overseas profits

71

(1)

70

82

(1)

81

Change in future local statutory tax rates

-

-

-

(36)

-

(36)

Movement in deferred tax not recognised

(3)

-

(3)

(3)

-

(3)

Tax effect of profit from joint ventures and associates

(6)

-

(6)

(3)

-

(3)

Other

4

-

4

2

-

2

Total tax (credited)/charged to income statement

442

(477)

(35)

357

371

728

The tax (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-profits and unit-linked policyholders is zero, the Group's pre-tax profit attributable to policyholders is an amount equal and opposite to the tax charge/(credit) attributable to policyholders included in the total tax charge.

Finance Act 2016 introduced legislation reducing the UK corporation tax rate from 1 April 2020 to 17%. In addition, in France the rate of corporation tax was reduced from 34.43% to 32.02% from 1 January 2019, to 27.37% from 1 January 2021 and 25.83% from 1 January 2022. These reduced rates were used in the calculation of the Group's deferred tax assets and liabilities as at 31 December 2018 and 31 December 2017.

 

 

 

Page 56

 

B8 - Earnings per share

This note shows how to calculate earnings per share on profit attributable to ordinary shareholders, 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). We have also shown the same calculations based on our Group adjusted operating profit as we believe this gives an important indication of operating performance. Consideration of both these measures gives a full picture of the performance of the business in the period.

(a)  Basic earnings per share

(i)   The profit attributable to ordinary shareholders is:

 

 

 

2018

 

 

2017

 

Group adjusted operating profit
 £m

Adjusting items
£m

Total
 £m

Group
adjusted operating
profit
 £m

Adjusting
 items
 £m

Total
 £m

Profit before tax attributable to shareholders' profits

3,116

(987)

2,129

3,068

(1,065)

2,003

Tax attributable to shareholders' profit

(647)

205

(442)

(639)

282

(357)

Profit for the year

2,469

(782)

1,687

2,429

(783)

1,646

Amount attributable to non-controlling interests

(100)

(19)

(119)

(134)

(15)

(149)

Cumulative preference dividends for the year

(17)

-

(17)

(17)

-

(17)

Coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax)

(36)

-

(36)

(65)

-

(65)

Profit attributable to ordinary shareholders

2,316

(801)

1,515

2,213

(798)

1,415

(ii) Basic earnings per share is calculated as follows:

 

 

 

2018

 

 

2017

 

Before tax
£m

Net of tax, NCI, preference dividends and

 DCI1

£m

Per share
p

Before tax
£m

Net of tax, NCI, preference dividends and

 DCI1

 £m

Per share
p

Group adjusted operating profit attributable to ordinary shareholders

3,116

2,316

58.4

3,068

2,213

54.8

Integration and restructuring costs

-

-

-

(141)

(111)

(2.8)

Group adjusted operating profit attributable to ordinary shareholders after integration and restructuring costs

3,116

2,316

58.4

2,927

2,102

52.0

Adjusting items:

 

 

 

 

 

 

Investment variances and economic assumption changes

(197)

(198)

(5.0)

34

86

2.1

Non-life business: Short-term fluctuation in return on investments

(476)

(378)

(9.6)

(345)

(250)

(6.3)

General insurance and health business: Economic assumption changes

1

(1)

-

(7)

(6)

(0.1)

Impairment of goodwill, joint ventures, associates and other amounts expensed

(13)

(13)

(0.3)

(49)

(49)

(1.2)

Amortisation and impairment of intangibles

(209)

(172)

(4.3)

(197)

(151)

(3.7)

Amortisation and impairment of acquired value of in-force business

(426)

(371)

(9.4)

(495)

(430)

(10.6)

Profit on disposal and remeasurement of subsidiaries, joint ventures and associates

102

102

2.6

135

113

2.8

Other2

231

230

5.8

-

-

-

Profit attributable to ordinary shareholders

2,129

1,515

38.2

2,003

1,415

35.0

1    DCI includes the direct capital instrument and tier 1 notes.

2    Other includes a movement in the discount rate used for estimating lump sum payments in the settlement of bodily injury claims which resulted in a gain of £190 million (see note B12(b)), a provision release of £78 million relating to the sale of Aviva USA in 2013, a gain of £36 million relating to negative goodwill on the acquisition of Friends First (see note B4), a charge of £63 million relating to the UK defined pension scheme as a result of the requirement to equalise members' benefits for the effects of Guaranteed Minimum Pension (see note B18) and a charge of £10 million relating to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs.

(iii) The calculation of basic earnings per share uses a weighted average of 3,963 million (2017: 4,041 million) ordinary shares in issue, after deducting treasury shares. The actual number of shares in issue at 31 December 2018 was 3,902 million (2017: 4,013 million) and 3,899 million (2017: 4,010 million) excluding treasury shares.

(iv) On 1 May 2018 Aviva announced a share buy-back of ordinary shares for an aggregate purchase price of up to £600 million (2017: £300 million), which was carried out in full during the period from 1 May 2018 to 17 September 2018. The number of shares in issue has reduced by 119 million as at 31 December 2018 in respect of shares acquired and cancelled under the buy-back programme. Net of new shares issued during the period, the number of shares in issue reduced by 110 million (2017: 49 million).

 

 

 

Page 57

 

B8 - Earnings per share continued

(b)  Diluted earnings per share

(i)   Diluted earnings per share is calculated as follows:

 

 

 

2018

 

 

2017

 

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

1,515

3,963

38.2

1,415

4,041

35.0

Dilutive effect of share awards and options

-

47

(0.4)

-

48

(0.4)

Diluted earnings per share

1,515

4,010

37.8

1,415

4,089

34.6

(ii) Diluted earnings per share on Group adjusted operating profit attributable to ordinary shareholders is calculated as follows:

 

 

 

2018

 

 

2017

 

Total
£m

Weighted average number of shares
million

Per share
p

Total
£m

Weighted average number of shares
 million

Per share
p

Group adjusted operating profit attributable to ordinary shareholders

2,316

3,963

58.4

2,213

4,041

54.8

Dilutive effect of share awards and options

-

47

(0.6)

-

48

(0.7)

Diluted group adjusted operating profit per share

2,316

4,010

57.8

2,213

4,089

54.1

B9 - Dividends and appropriations

This note analyses the total dividends and other appropriations 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.

 

2018
£m

2017
£m

Ordinary dividends declared and charged to equity in the year

 

 

Final 2017 - 19.00 pence per share, paid on 17 May 2018

764

-

Final 2016 - 15.88 pence per share, paid on 17 May 2017

-

646

Interim 2018 - 9.25 pence per share, paid on 24 September 2018

364

-

Interim 2017 - 8.40 pence per share, paid on 17 November 2017

-

337

 

1,128

983

Preference dividends declared and charged to equity in the year

17

17

Coupon payments on DCI and tier 1 notes

44

81

 

1,189

1,081

Subsequent to 31 December 2018, the directors proposed a final dividend for 2018 of 20.75 pence per ordinary share (2017: 19.00 pence), amounting to £810 million (2017: £764 million) in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 30 May 2019 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2019.

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 19% (2017: 19.25%).

 

 

 

Page 58

 

B10 - Contract liabilities and associated reinsurance

The Group's liabilities for insurance and investment contracts it has sold, and the associated reinsurance, is covered in the following notes:

· Note B11 covers insurance liabilities

· Note B12 covers the methodology and assumptions used in calculating the insurance liabilities

· Note B13 covers liabilities for investment contracts

· Note B14 details the associated reinsurance assets on these liabilities

· Note B15 shows the effects of changes in the assumptions on the liabilities

(a)  Carrying amount

The following is a summary of the contract liabilities and related reinsurance assets as at 31 December.

 

 

 

2018

 

 

2017

 

Gross provisions
£m

Reinsurance assets
£m

Net
£m

Gross provisions
£m

Reinsurance assets
 £m

Net
£m

Long-term business

 

 

 

 

 

 

Insurance liabilities

(125,829)

5,836

(119,993)

(130,972)

5,469

(125,503)

Liabilities for participating investment contracts

(90,455)

1

(90,454)

(87,654)

2

(87,652)

Liabilities for non-participating investment contracts

(120,354)

4,009

(116,345)

(124,995)

6,094

(118,901)

 

(336,638)

9,846

(326,792)

(343,621)

11,565

(332,056)

Outstanding claims provisions

(2,001)

89

(1,912)

(1,798)

64

(1,734)

 

(338,639)

9,935

(328,704)

(345,419)

11,629

(333,790)

General insurance and health

 

 

 

 

 

 

Outstanding claims provisions

(9,046)

789

(8,257)

(8,964)

845

(8,119)

Provisions for claims incurred but not reported

(2,360)

822

(1,538)

(2,837)

884

(1,953)

 

(11,406)

1,611

(9,795)

(11,801)

1,729

(10,072)

Provision for unearned premiums

(4,946)

254

(4,692)

(4,980)

257

(4,723)

Provision arising from liability adequacy tests1

(16)

-

(16)

(13)

-

(13)

 

(16,368)

1,865

(14,503)

(16,794)

1,986

(14,808)

Total

(355,007)

11,800

(343,207)

(362,213)

13,615

(348,598)

Less: Amounts classified as held for sale

8,462

(45)

8,417

9,577

(123)

9,454

 

(346,545)

11,755

(334,790)

(352,636)

13,492

(339,144)

1    Provision arising from liability adequacy tests relates to general insurance business only. Liability adequacy test provisions for life operations, where applicable, are included in other line items. At 31 December 2018 this provision is nil for the life operations.

(b)  Change in contract liabilities, net of reinsurance, recognised as an expense

The purpose of the following table is to reconcile the change in insurance liabilities, net of reinsurance, to the change in insurance liabilities recognised as an expense in the relevant movement tables in the following notes. 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 general insurance reserves (which is included within finance costs in the income statement). For general insurance and health, 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.

2018
 

Gross
£m

Reinsurance £m

Net
£m

Long-term business

 

 

 

Change in insurance liabilities (note B11(b)(iii))

(6,284)

61

(6,223)

Change in provision for outstanding claims

190

(11)

179

 

(6,094)

50

(6,044)

General insurance and health

 

 

 

Change in insurance liabilities (note B11(c)(iii) and B14(c)(ii))1

(313)

111

(202)

Less: Unwind of discount

(8)

8

-

 

(321)

119

(202)

Total change in insurance liabilities

(6,415)

169

(6,246)

1    Includes £(190) million in the UK General Insurance and health business relating to a change in the discount rate used for estimating lump sum payments in the settlement of bodily injury claims.

2017
 

Gross
£m

Reinsurance £m

Net
£m

Long-term business

 

 

 

Change in insurance liabilities (note B11(b)(iii))

624

315

939

Change in provision for outstanding claims

(65)

(11)

(76)

 

559

304

863

General insurance and health

 

 

 

Change in insurance liabilities (note B11(c)(iii) and B14(c)(ii))

73

138

211

Less: Unwind of discount

(9)

9

-

 

64

147

211

Total change in insurance liabilities

623

451

1,074

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. For participating investment contracts, the change in investment contract provisions on the income statement primarily consists of the movement in participating investment contract liabilities (net of reinsurance) over the reporting period.

 

 

 

Page 59

 

B11 - Insurance liabilities

This note analyses the Group's gross insurance contract liabilities for the long-term and general insurance and health business, describes how the Group calculates these liabilities and presents the movement in these liabilities during the year.

(a)  Carrying amount

Insurance liabilities (gross of reinsurance) at 31 December comprised:

 

2018
£m

2017
£m

Long-term business

 

 

Participating insurance liabilities

40,840

49,928

Unit-linked non-participating insurance liabilities

14,480

16,040

Other non-participating insurance liabilities

70,509

65,004

 

125,829

130,972

Outstanding claims provisions

2,001

1,798

 

127,830

132,770

General insurance and health

 

 

Outstanding claims provisions

9,046

8,964

Provision for claims incurred but not reported

2,360

2,837

 

11,406

11,801

Provision for unearned premiums

4,946

4,980

Provision arising from liability adequacy tests1

16

13

 

16,368

16,794

Total

144,198

149,564

Less: Amounts classified as held for sale

(121)

(914)

 

144,077

148,650

1    Provision arising from liability adequacy tests relates to general insurance business only. Liability adequacy test provisions for life operations, where applicable, are included in other line items. At 31 December 2018 this provision is nil for the life operations.

(b)  Long-term business liabilities

(i)   Business description

The Group underwrites long-term business in a number of countries as follows:

· In the UK, long-term business is mainly written in the 'Non-Profit' fund and in a number of 'With-Profits' sub-funds. In the 'Non-Profit' fund shareholders are entitled to 100% of the distributed profits. In the 'With-Profits' sub-funds the with-profits policyholders are entitled to between 40% and 100% of distributed profits, depending on the fund rules. There is also the Reattributed Inherited Estate External Support Account (RIEESA), which does not itself underwrite any business, but provides capital support to one of the with-profits sub-funds and receives any surplus or deficit emerging from it. In the RIEESA, 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.

· 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 liabilities are 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 liabilities 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, mortality and 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 liabilities.

A description of the main methodology and most material valuation assumptions can be found in note B12.

 

 

 

Page 60

 

B11 - Insurance liabilities continued

(iii) Movements

The following movements have occurred in the gross long-term business liabilities during the year:

 

2018
£m

2017
£m

Carrying amount at 1 January

130,972

137,218

Liabilities in respect of new business

6,190

5,731

Expected change in existing business

(7,952)

(7,747)

Variance between actual and expected experience

(1,844)

1,520

Impact of operating assumption changes

(1,456)

(1,175)

Impact of economic assumption changes

(959)

2,115

Other movements recognised as an expense1

(263)

180

Change in liability recognised as an expense (note B10(b))

(6,284)

624

Effect of portfolio transfers, acquisitions and disposals2

788

(8,124)

Foreign exchange rate movements

413

1,252

Other movements3

(60)

2

Carrying amount at 31 December

125,829

130,972

1    Other movements during 2017 and 2018 primarily relate to a special bonus distribution to with-profits policyholders in the UK.

2    The movement during 2018 includes the acquisition of Friends First in Ireland offset by the disposal of Spain and Avipop in Italy. The movement during 2017 primarily relates to the disposal of Antarius in France and a major share of the business in Spain offset by the consolidation of the Poland and Vietnam joint ventures.

3    Other movements during 2018 include the reclassification in France from insurance to participating investment contracts (£(56)m).

For many types of long-term business, including unit-linked and participating insurance liabilities, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The gross long-term business liabilities decreased by £5.1 billion during 2018 (2017: £6.2 billion decrease) mainly driven by the variance between actual and expected experience of £(1.8) billion, which was mainly due to adverse equity returns in France and the reduction in with-profits and unit-linked liabilities in the UK; the impact of non-economic assumption changes of £(1.5) billion mainly due to updates to longevity assumptions (with the impact on profit partially offset by a corresponding reduction in reinsurance assets) in the UK; and the economic assumption changes of £(1.0) billion, which reflects an increase in valuation interest rates in response to widening credit spreads, primarily in respect of immediate annuity and participating insurance contracts in the UK.

For participating insurance liabilities, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit. Where assumption changes impact profit, these are included in the effect of changes in assumptions and estimates during the year (shown in note B15), together with the impact of movements in related non-financial assets.

(c)  General insurance and health liabilities

(i)   Business description

The Group underwrites general insurance and health business in a number of countries as follows:

· In the UK, providing individual and corporate customers with a wide range of insurance products

· In Canada, providing a range of personal and commercial lines products

· In Europe and Asia, providing a range of general insurance and health products

(ii)  Group practice

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 liabilities 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.

The Group only establishes 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.

 

 

 

Page 61

 

B11 - Insurance liabilities continued

The table below shows the total general insurance and health liabilities split by outstanding claim provisions and provision for claims incurred but not reported (IBNR provisions), gross of reinsurance, by major line of business.

 

As at 31 December 2018

As at 31 December 2017

 

Outstanding claim provisions
£m

IBNR provisions
 £m

Total claim provisions
 £m

Outstanding claim provisions
 £m

IBNR provisions £m

Total claim provisions
£m

Motor

5,019

963

5,982

5,039

1,339

6,378

Property

1,833

104

1,937

1,734

114

1,848

Liability

1,856

1,164

3,020

1,814

1,270

3,084

Creditor

4

7

11

24

11

35

Other

334

122

456

353

103

456

 

9,046

2,360

11,406

8,964

2,837

11,801

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:

 

 

Discount rate

 

Mean term of liabilities

Class

2018

2017

2018

2017

Reinsured London Market business

1.0% to 2.9%

0.7% to 2.6%

10 years

9 years

Latent claims

1.0% to 2.6%

0.7% to 1.9%

11 to 18 years

8 to 17 years

Structured settlements

1.0% to 3.0%

0.5% to 3.0%

9 to 37 years

7 to 39 years

The gross outstanding claims provision before discounting was £10,955 million (2017: £11,346 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 and reinsured London Market business is based on the 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 10 and 18 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 Group adjusted operating profit as an economic assumption change.

(iii) Movements in general insurance and health claims liabilities

The following changes have occurred in the general insurance and health claims liabilities during the year:

 

2018
£m

2017
£m

Carrying amount at 1 January

11,801

11,709

Impact of changes in assumptions1

(22)

(7)

Claim losses and expenses incurred in the current year

7,158

6,890

Decrease in estimated claim losses and expenses incurred in prior periods

(544)

(172)

Incurred claims losses and expenses

6,592

6,711

Less:

 

 

Payments made on claims incurred in the current year

(3,927)

(3,642)

Payments made on claims incurred in prior periods

(3,343)

(3,283)

Recoveries on claim payments

357

278

Claims payments made in the period, net of recoveries

(6,913)

(6,647)

Unwind of discounting

8

9

Changes in claims reserve recognised as an expense (note B10(b))

(313)

73

Effect of portfolio transfers, acquisitions and disposals2

(29)

3

Foreign exchange rate movements

(53)

16

Carrying amount at 31 December

11,406

11,801

1    Shown gross of reinsurance. The impact of reinsurance was £23 million, resulting in a net impact of £1 million as per B15.

2    The movement during 2018 relates to the disposal of Avipop in Italy.

(iv) Movements in general insurance and health unearned premiums

The following changes have occurred in the liabilities for unearned premiums (UPR) during the year:

 

2018
£m

2017
£m

Carrying amount at 1 January

4,980

4,766

Premiums written during the year

10,519

10,523

Less: Premiums earned during the year

(10,421)

(10,365)

Changes in UPR recognised as an expense/(income)

98

158

Gross portfolio transfers and acquisitions1

(103)

46

Foreign exchange rate movements

(29)

10

Carrying amount at 31 December

4,946

4,980

1    The movement during 2018 relates to the disposal of Avipop in Italy. The £46 million in respect of 2017 relates to the full consolidation of the Poland Joint Venture.

 

 

 

Page 62

 

B11 - Insurance liabilities continued

(v)  Analysis of general insurance and health claims development

The tables that follow present the development of claims payments and the estimated ultimate cost of claims for the accident years 2009 to 2018. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year, while the lower section of the tables shows the original estimated ultimate cost of claims and how these original estimates have increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity.

Key elements of the development of prior accident year general insurance and health net provisions during 2018 were:

· £372 million release from the UK due to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims (for further details see note B12) and favourable claims experience in Personal and Commercial motor

· £78 million release from Canada primarily due to favourable claims experience on personal motor and aligning RBC claims practices with that of the Aviva book

· £127 million release from Europe (including Ireland) mainly due to continued favourable development in France

Key elements of the development of prior accident year general insurance and health net provisions during 2017 were:

· £107 million release from UK due to favourable claims experience in Personal Motor offset by the less favourable experience in 2017 of Commercial Liability claims and large claims in Personal and Commercial Property

· £2 million strengthening from Canada due to the better than expected claims experience following the 2010 Ontario auto reforms tailing off, unfavourable development in the Ontario Accident Benefits coverage in the RBC book in 2017, deterioration of experience in Alberta Auto Bodily Injury and Newfoundland Auto Bodily Injury

· £79 million release from Europe (including Ireland) mainly due to continued favourable development in France and Italy

Gross of reinsurance

Before the effect of reinsurance, the loss development table is:

Accident year

All prior years
 £m

2009
£m

2010
£m

2011
£m

2012
£m

2013
£m

2014
£m

2015
 £m

2016
£m

2017
£m

2018
£m

Total
£m

Gross cumulative claim payments

 

 

 

 

 

 

 

 

 

 

 

 

At end of accident year

 

(3,780)

(3,502)

(3,420)

(3,055)

(3,068)

(3,102)

(2,991)

(3,534)

(3,517)

(3,769)

 

One year later

 

(5,464)

(5,466)

(4,765)

(4,373)

(4,476)

(4,295)

(4,285)

(4,972)

(4,952)

 

 

Two years later

 

(6,102)

(5,875)

(5,150)

(4,812)

(4,916)

(4,681)

(4,710)

(5,435)

 

 

 

Three years later

 

(6,393)

(6,163)

(5,457)

(5,118)

(5,221)

(4,974)

(4,997)

 

 

 

 

Four years later

 

(6,672)

(6,405)

(5,712)

(5,376)

(5,467)

(5,244)

 

 

 

 

 

Five years later

 

(6,836)

(6,564)

(5,864)

(5,556)

(5,645)

 

 

 

 

 

 

Six years later

 

(6,958)

(6,649)

(5,978)

(5,635)

 

 

 

 

 

 

 

Seven years later

 

(7,043)

(6,690)

(6,032)

 

 

 

 

 

 

 

 

Eight years later

 

(7,078)

(6,718)

 

 

 

 

 

 

 

 

 

Nine years later

 

(7,100)

 

 

 

 

 

 

 

 

 

 

Estimate of gross ultimate claims

 

 

 

 

 

 

 

 

 

 

 

 

At end of accident year

 

7,364

6,911

6,428

6,201

6,122

5,896

5,851

6,947

6,894

7,185

 

One year later

 

7,297

7,006

6,330

6,028

6,039

5,833

5,930

6,931

6,796

 

 

Two years later

 

7,281

6,950

6,315

6,002

6,029

5,865

5,912

6,864

 

 

 

Three years later

 

7,215

6,914

6,292

5,952

6,067

5,842

5,814

 

 

 

 

Four years later

 

7,204

6,912

6,262

6,002

6,034

5,772

 

 

 

 

 

Five years later

 

7,239

6,906

6,265

5,979

5,996

 

 

 

 

 

 

Six years later

 

7,217

6,926

6,265

5,910

 

 

 

 

 

 

 

Seven years later

 

7,256

6,913

6,223

 

 

 

 

 

 

 

 

Eight years later

 

7,228

6,877

 

 

 

 

 

 

 

 

 

Nine years later

 

7,227

 

 

 

 

 

 

 

 

 

 

Estimate of gross ultimate claims

 

7,227

6,877

6,223

5,910

5,996

5,772

5,814

6,864

6,796

7,185

 

Cumulative payments

 

(7,100)

(6,718)

(6,032)

(5,635)

(5,645)

(5,244)

(4,997)

(5,435)

(4,952)

(3,769)

 

 

2,388

127

159

191

275

351

528

817

1,429

1,844

3,416

11,525

Effect of discounting

(411)

(14)

(25)

(2)

-

(1)

-

-

-

-

-

(453)

Present value

1,977

113

134

189

275

350

528

817

1,429

1,844

3,416

11,072

Cumulative effect of foreign exchange movements

-

-

(1)

2

6

12

31

101

(7)

(12)

-

132

Effect of acquisitions

11

(1)

2

12

15

17

38

57

51

-

-

202

Present value recognised in the statement of financial position

1,988

112

135

203

296

379

597

975

1,473

1,832

3,416

11,406

 

 

 

Page 63

 

B11 - Insurance liabilities continued

Net of reinsurance

After the effect of reinsurance, the loss development table is:

Accident year

All prior years
£m

2009
£m

2010
 £m

2011
 £m

2012
 £m

2013
 £m

2014
 £m

2015
£m

2016
£m

2017
£m

2018
£m

Total
£m

Net cumulative claim payments

 

 

 

 

 

 

 

 

 

 

 

 

At end of accident year

 

(3,650)

(3,386)

(3,300)

(2,925)

(2,905)

(2,972)

(2,867)

(3,309)

(3,483)

(3,718)

 

One year later

 

(5,286)

(5,242)

(4,578)

(4,166)

(4,240)

(4,079)

(4,061)

(4,591)

(4,843)

 

 

Two years later

 

(5,885)

(5,637)

(4,963)

(4,575)

(4,649)

(4,432)

(4,452)

(5,012)

 

 

 

Three years later

 

(6,177)

(5,905)

(5,263)

(4,870)

(4,918)

(4,720)

(4,725)

 

 

 

 

Four years later

 

(6,410)

(6,137)

(5,485)

(5,110)

(5,159)

(4,973)

 

 

 

 

 

Five years later

 

(6,568)

(6,278)

(5,626)

(5,289)

(5,324)

 

 

 

 

 

 

Six years later

 

(6,657)

(6,361)

(5,740)

(5,371)

 

 

 

 

 

 

 

Seven years later

 

(6,708)

(6,411)

(5,798)

 

 

 

 

 

 

 

 

Eight years later

 

(6,744)

(6,440)

 

 

 

 

 

 

 

 

 

Nine years later

 

(6,771)

 

 

 

 

 

 

 

 

 

 

Estimate of net ultimate claims

 

 

 

 

 

 

 

 

 

 

 

 

At end of accident year

 

7,115

6,650

6,202

5,941

5,838

5,613

5,548

6,489

6,714

6,997

 

One year later

 

7,067

6,751

6,103

5,765

5,745

5,575

5,635

6,458

6,591

 

 

Two years later

 

7,036

6,685

6,095

5,728

5,752

5,591

5,608

6,377

 

 

 

Three years later

 

6,978

6,644

6,077

5,683

5,733

5,559

5,517

 

 

 

 

Four years later

 

6,940

6,634

6,034

5,717

5,689

5,490

 

 

 

 

 

Five years later

 

6,977

6,614

6,005

5,680

5,653

 

 

 

 

 

 

Six years later

 

6,908

6,624

6,003

5,631

 

 

 

 

 

 

 

Seven years later

 

6,897

6,615

5,967

 

 

 

 

 

 

 

 

Eight years later

 

6,896

6,590

 

 

 

 

 

 

 

 

 

Nine years later

 

6,901

 

 

 

 

 

 

 

 

 

 

Estimate of net ultimate claims

 

6,901

6,590

5,967

5,631

5,653

5,490

5,517

6,377

6,591

6,997

 

Cumulative payments

 

(6,771)

(6,440)

(5,798)

(5,371)

(5,324)

(4,973)

(4,725)

(5,012)

(4,843)

(3,718)

 

 

907

130

150

169

260

329

517

792

1,365

1,748

3,279

9,646

Effect of discounting

(157)

(12)

(21)

3

-

4

-

-

-

-

-

(183)

Present value

750

118

129

172

260

333

517

792

1,365

1,748

3,279

9,463

Cumulative effect of foreign exchange movements

-

-

(1)

1

6

11

30

99

(6)

(12)

-

128

Effect of acquisitions

12

(1)

2

12

15

17

39

57

51

-

-

204

Present value recognised in the statement of financial position

762

117

130

185

281

361

586

948

1,410

1,736

3,279

9,795

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 2008. The undiscounted claim provisions, net of reinsurance, in respect of this business at 31 December 2018 were £94 million (2017: £95 million). The movement in the year reflects a reduction of £6 million due to favourable claims development, claim payments net of reinsurance recoveries and foreign exchange movements.

 

 

 

Page 64

 

B12 - Insurance liabilities methodology and assumptions

(a)  Long-term business

The main method used for the actuarial valuation of long-term insurance liabilities is the gross premium method which involves the discounting of projected future cash flows. The cash flows are calculated using the contractual premiums payable together with explicit assumptions for investment returns, discount rates, inflation, mortality, morbidity, persistency and future expenses. These assumptions can vary by contract type and reflect current and expected future experience with an allowance for prudence.

The methodology and assumptions described below relate to the UK and France insurance businesses only.

(i)   UK

Non-profit business

The valuation of non-profit business is based on grandfathered regulatory requirements under IFRS 4 prior to the adoption of Solvency II, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business. Conventional non-profit contracts, including those written in the with-profits funds, are valued using the gross premium method. For non-profit business in the ex. Friends Life with-profits funds, the liabilities are measured on a realistic basis with implicit recognition of the present value of future profits.

For unit-linked and some unitised with-profits 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 using prudent assumptions and on the assumption that future premiums cease, unless it is more onerous to assume that they continue.

Discount rates

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 making an explicit deduction from the yields on corporate bonds, mortgages and deposits, based on historical default experience of each asset class. For equity release assets, the risk allowances are consistent with those used in the fair value asset methodology. A further margin for risk is then deducted for all asset classes.

Valuation discount rates for business in the non-profit funds are as follows:

Valuation discount rates

(Gross of investment expenses)

2018

2017

Assurances

 

 

Life conventional non-profit

0.9% to 2.6%

0.8% to 2.5%

Pensions conventional non-profit

1.1% to 2.1%

1.0% to 2.4%

Annuities

 

 

Conventional immediate and deferred annuities

1.2% to 3.0%

1.0% to 2.8%

Non-unit reserves on unit-linked business

 

 

Life

0.9% to 1.3%

0.8% to 1.2%

Pensions

0.9% to 1.6%

0.8% to 1.5%

Income Protection

 

 

Active lives

1.1% to 2.6%

1.0% to 2.5%

Claims in payment (level and index linked)

1.3% to 1.6%

1.0% to 1.5%

The valuation discount rates are after a reduction for risk, but before allowance for investment expenses. For conventional immediate annuity business, the allowance for risk comprises long-term assumptions on a prudent basis for defaults or (in the case of equity release assets) expected losses arising from the No-Negative-Equity Guarantee. These allowances vary by asset category and for some asset classes by rating.

The risk allowances made for corporate bonds, mortgages (including healthcare mortgages, commercial mortgages and infrastructure assets), and equity release equated to 50 bps, 39-41 bps, and 112 bps respectively at 31 December 2018 (2017: 47-48 bps, 33- 40 bps, and 102 bps respectively).

The total valuation allowance in respect of corporate bonds and mortgages, including healthcare mortgages but excluding equity release, was £1.9 billion (2017: £1.8 billion) over the remaining term of the portfolio at 31 December 2018. The total valuation allowance in respect of equity release assets was £1.3 billion at 31 December 2018 (2017: £1.2 billion). Total liabilities for the annuity business were £53.7 billion at 31 December 2018 (2017: £52.0 billion).

Expenses

Maintenance expense assumptions for non-profit business are generally expressed as a 'per policy' charge set with regards to an allocation of current year expense levels by broad category of business and using the policy counts for in-force business. The assumptions also include an allowance for prudence and increase by future expense inflation over the lifetime of each contract. Expense inflation is assumed to be in line with RPI, and in line with external agreements for business administered externally. An additional liability is held if projected per-policy expenses in future years are expected to exceed current assumptions. Further, explicit project expense liabilities are held for non-discretionary project costs that typically relate to mandatory requirements. Expense-related liabilities are only held where expenses are not covered by anticipated future profits in the liability methodology, notably for unit-linked contracts. Investment expense assumptions are generally expressed as a proportion of the assets backing the liabilities.

 

 

 

Page 65

 

B12 - Insurance liabilities methodology and assumptions continued

Mortality

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

2018

2017

Assurances

 

 

Non-profit

AM00/AF00 or TM08/TF08 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

PMA08 HAMWP/PFA08 HAMWP adjusted plus allowance for future mortality improvement

PCMA00/PCFA00 adjusted plus allowance for future mortality improvement

Bulk purchase annuities

CV2

PCMA00/PCFA00/CV2

For the largest portfolio of pensions annuity business, the underlying mortality assumptions for males are 105.8% of PMA08 HAMWP adjusted (2017: 104.0% of PCMA00 adjusted) with base year 2008; for females the underlying mortality assumptions are 99.0% of PFA08 HAMWP adjusted (2017: 94.5% of PCFA00 adjusted) with base year 2008.

Improvements are based on 'CMI_2017 (S=7.5) Advanced with adjustments' (2017: 'CMI_2016 (S=7.5) Advanced with adjustments') with a long-term improvement rate of 1.75% (2017: 1.75%) for males and 1.5% (2017: 1.5%) for females, both with an additional improvement for prudence of 0.5% (2017: 0.5%) to all future annual improvement adjustments. The CMI_2017 tables have been adjusted by adding 0.25% (2017: 0.25%) and 0.35% (2017: 0.35%) to the initial rate of mortality improvements for males and females respectively (to allow for greater mortality improvements in the annuitant population relative to the general population on which CMI_2017 is based), and uses the advanced parameters to taper the long-term improvement rates to zero between ages 90 and 115 (the 'core' parameters taper the long-term improvement rates to zero between ages 85 and 110). In addition, on a significant proportion of individual annuity business, year-specific adjustments are made to allow for potential selection effects due to the development of the Enhanced Annuity market and covering possible selection effects from pension freedom reforms.

With-profits business

The Group's UK with-profits funds are evaluated by reference to FRS 27, which was grandfathered under IFRS 4, prior to the adoption of Solvency II. This uses an approach of calculating the realistic liabilities for the contracts. The realistic liabilities include the with-profits benefit reserve (WPBR), and an additional provision for the expected cost of any guarantees and options in excess of the WPBR.

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.

Provisions for guarantees and options within realistic liabilities are measured 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. Non-market-related assumptions (for example, persistency, mortality and expenses) are assessed on a best estimate basis with reference to Company and wider industry experience, adjusted to take into account future trends.

The with-profits business is valued by adjusting Solvency II Best Estimate Liabilities and results in a valuation in accordance with FRS 27.

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 2018 of 1.44% (2017: 1.29%) 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

2018

2017

Equity returns

18.0%

20.9%

Property returns

15.8%

16.4%

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.

 

 

 

Page 66

 

B12 - Insurance liabilities methodology and assumptions continued

Future regular bonuses

Annual bonus assumptions for 2019 have been set consistently with the year-end 2018 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-profits 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

2018

2017

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

PMA08 HAMWP/PFA08 HAMWP adjusted plus allowance for future mortality improvement

PCMA00/PCFA00 adjusted plus allowance for future mortality improvement

Allowance for future mortality improvement is in line with the rates for non-profit business.

Expenses

Maintenance expense assumptions for with-profits business are generally expressed as a fixed 'per policy' charge in line with agreements between Aviva Life Services UK Limited (UKLS) and Aviva Life & Pensions UK Limited (AVLAP). The assumptions increase by a future inflation charge over the lifetime of each contract, which is 50% RPI, 100% RPI or 100% RPI + 1% depending on product type. Any excess of expenses charged by UKLS to AVLAP over the charges specified by the agreements is borne by the non-profit business.

Guarantees and options

The provisions held in respect of guaranteed annuity options for the with-profits and the non-profit business 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.

(ii)  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

 

2018

2017

2018 and 2017

 

 

 

TD73-77,TD88-90,TH00-02

 

 

 

TF00-02,H_AVDBS,F_AVDBS

Life assurances

0% to 4.5%

0% to 4.5%

H_SSDBS, F_SSDBS

Annuities

0% to 2%

0% to 2%

TGF05/TGH05

(b)  General insurance and health

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. 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. Historical claims development is mainly analysed by accident period, although underwriting or notification period is also used where this is considered appropriate.

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 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. The following explicit assumptions are made which could materially impact the level of booked net reserves:

 

 

 

 

Page 67

 

B12 - Insurance liabilities methodology and assumptions continued

UK mesothelioma claims

The level of uncertainty associated with latent claims is considerable due to the relatively small number of claims and the long-tail nature of the liabilities. UK mesothelioma claims account for a large proportion of the Group's latent claims. The key assumptions underlying the estimation of these claims include claim numbers, the base average cost per claim, future inflation in the average cost of claims and legal fees.

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 these assumptions. An upper and lower scenario can be derived by making reasonably likely changes to these assumptions, resulting in an estimate of £20 million (2017: £35 million) greater than the best estimate, or £30 million (2017: £40 million) lower than the best estimate. These scenarios do not, however, constitute an upper or lower bound on these liabilities.

Interest rates used to discount latent claim liabilities and structured settlements

The discount rates used in determining our latent claim liabilities and structured settlements are based on the swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement of claims. The range of discount rates used (for further details see note B11(c)(ii)) depends on the duration of the claim and the reporting date. At 31 December 2018, it is estimated that a 1% fall in the discount rates used would increase net claim reserves by approximately £104 million (2017: £110 million), excluding the offsetting effect on asset values as assets are not hypothecated across classes of business.

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 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.

Lump sum payments in settlement of bodily injury claims that are decided by the UK courts are calculated in accordance with the Ogden Tables and discount rate. The Ogden discount rate is set by the Lord Chancellor and is applied when calculating the present value of future care costs and loss of earnings for claims settlement purposes. Following the announcement by the Ministry of Justice on 27 February 2017 to decrease the Ogden rate from 2.75% to -0.75%, balance sheet reserves have been calculated using a rate of -0.75%. On 20 March 2018, the Government announced that it will introduce the Civil Liability Bill (the Bill), which includes provisions to amend the discount rate. In December 2018 the Bill became an Act of Parliament, meaning that a new Ogden discount rate will be set by the Lord Chancellor in 2019.

Based upon this, there is certainty that there will be a change in the Ogden rate in 2019, but uncertainty remains around the amount and timing of the final rate. At December 2018, the claim reserves in the UK have been calculated using a discount rate of 0.00% (2017: -0.75%) resulting in a release of £190 million, though the rate to be announced by the Lord Chancellor later this year may result in a different discount rate. By way of illustration, should the Ogden discount rate announced in the future be 0.50% then this would be expected to reduce reserves by approximately £80 million with an equivalent positive impact on profit before tax. Alternatively, should the Ogden discount rate announced in the future be -0.50% then this would be expected to increase reserves by approximately £110 million with an equivalent negative impact on profit before tax.

 

 

 

Page 68

 

B13 - Liabilities for investment contracts

This note analyses our gross liabilities for investment contracts by type of product and describes the calculation of these liabilities.

(a)  Carrying amount

The liabilities for investment contracts (gross of reinsurance) at 31 December comprised:

 

2018
£m

2017
£m

Long-term business

 

 

Liabilities for participating investment contracts

90,455

87,654

Liabilities for non-participating investment contracts

120,354

124,995

Total

210,809

212,649

Less: Amounts classified as held for sale

(8,341)

(8,663)

 

202,468

203,986

(b)  Group practice

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 for long-term business liabilities as described in note B12. 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 deferred consideration of participating contracts to the IFRS 17 insurance standard, which is expected to be implemented on 1 January 2022.

For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated divisible surplus, except for the with-profits sub-fund supported by the RIEESA.

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, £119,402 million at 31 December 2018 (2017: £123,916 million) 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.

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 B24, which relates primarily to the acquisition of Friends Life in 2015 and Friends First in 2018.

(c)  Movements in the year

The following movements have occurred in the gross provisions for investment contracts in the year:

(i)   Participating investment contracts

 

2018
£m

2017
£m

Carrying amount at 1 January

87,654

89,739

Liabilities in respect of new business

6,301

5,193

Expected change in existing business

(4,491)

(4,986)

Variance between actual and expected experience

(1,441)

2,072

Impact of operating assumption changes

59

10

Impact of economic assumption changes

(40)

411

Other movements recognised as an expense1

152

(16)

Change in liability recognised as an expense2

540

2,684

Effect of portfolio transfers, acquisitions and disposals3

427

(7,243)

Foreign exchange rate movements

774

2,452

Other movements4

1,060

22

Carrying amount at 31 December

90,455

87,654

1    Other movements during 2018 and 2017 primarily relate to a special bonus distribution to with-profits policyholders in UK Life.

2    Total interest expense for participating investment contracts recognised in profit or loss is £(419) million (2017: £2,489 million).

3    The movement during 2018 relates to the acquisition of Friends First in Ireland. The movement during 2017 relates to the disposal of Antarius in France.

4    The movement during 2018 relates to the reclassification in France from non- participating investment contracts to participating investment contracts (£151 million) and from insurance to participating investment contracts (£56 million) and to a reclassification from non-participating investment contracts to participating investment contracts in the UK (£853 million).

 

 

 

Page 69

 

B13 - Liabilities 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 in 2018 of £(1.4) billion is primarily driven by adverse equity returns in the UK and France.

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 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 B15, together with the impact of movements in related non-financial assets.

(ii)  Non-participating investment contracts

 

2018
£m

2017
£m

Carrying amount at 1 January

124,995

114,531

Liabilities in respect of new business

4,869

4,484

Expected change in existing business

(5,509)

(4,427)

Variance between actual and expected experience

(5,539)

10,115

Impact of operating assumption changes

(10)

2

Impact of economic assumption changes

(81)

(1)

Other movements recognised as an expense

6

10

Change in liability

(6,264)

10,183

Effect of portfolio transfers, acquisitions and disposals1

2,494

(4)

Foreign exchange rate movements

133

277

Other movements2

(1,004)

8

Carrying amount at 31 December

120,354

124,995

1    The movement during 2018 relates to the acquisition of Friends First in Ireland. The movement during 2017 relates to the disposal of Antarius in France.

2    The movement during 2018 relates to the reclassification in France from non- participating investment contracts to participating investment contracts (£(151) million) and to a reclassification from non-participating investment contracts to participating investment contracts in the UK (£(853) million).

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 in 2018 of £(5.5) billion is primarily driven by the impact of negative equity returns in the UK and Ireland.

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 B15, which combines participating and non-participating investment contracts together with the impact of movements in related non-financial assets.

 

 

 

Page 70

 

B14 - Reinsurance assets

This note details the reinsurance assets on our insurance and investment contract liabilities.

(a)  Carrying amount

The reinsurance assets at 31 December comprised:

 

2018
£m

2017
£m

Long-term business

 

 

Insurance contracts

5,836

5,469

Participating investment contracts

1

2

Non-participating investment contracts1

4,009

6,094

 

9,846

11,565

Outstanding claims provisions

89

64

 

9,935

11,629

General insurance and health

 

 

Outstanding claims provisions

789

845

Provisions for claims incurred but not reported

822

884

 

1,611

1,729

Provisions for unearned premiums

254

257

 

1,865

1,986

 

11,800

13,615

Less: Amounts classified as held for sale

(45)

(123)

Total

11,755

13,492

1    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. During 2018, £3,840 million of reinsurance assets have been reclassified as collective investments in unit-linked funds following a restructure of a reinsurance treaty in UK Life. This is a continuation of activity undertaken in 2017 (£14,353 million).

Of the above total, £10,800 million (2017: £12,302 million) is expected to be recovered more than one year after this statement of financial position.

(b)  Assumptions

The assumptions, including discount rates, used for reinsurance contracts follow those used for insurance liabilities. Reinsurance assets are valued net of an allowance for recoverability.

(c)  Movements

The following movements have occurred in the reinsurance assets during the year:

(i)   Long-term business liabilities

 

2018
£m

2017
£m

Carrying amount at 1 January

11,565

24,554

Assets in respect of new business

1,766

1,004

Expected change in existing business assets

(22)

(786)

Variance between actual and expected experience

431

2,264

Impact of non-economic assumption changes

(460)

(634)

Impact of economic assumption changes

21

94

Other movements1

(3,877)

(14,529)

Change in assets2

(2,141)

(12,587)

Effect of portfolio transfers, acquisitions and disposals3

399

(410)

Foreign exchange rate movements

23

8

Carrying amount at 31 December

9,846

11,565

1    The movement during 2018 includes £3,840 million of reinsurance assets being reclassified as collective investments in unit-linked funds following the restructure of a reinsurance treaty in UK Life. This is a continuation of activity undertaken in 2017 (£14,353 million).

2    Change in assets does not reconcile with values in note B10(b) due to the inclusion of reinsurance assets classified as non-participating investment contracts where, for such contracts, deposit accounting is applied on the income statement.

3    The movement during 2018 primarily relates to the acquisition of Friends First in Ireland. The movement during 2017 primarily relates to the disposal of Antarius in France.

The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of reinsurance assets, 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 impact profit, these are included in the effect of changes in assumptions and estimates during the year (shown in note B15), together with the impact of movements in related liabilities and other non-financial assets.

 

 

 

 

Page 71

 

B14 - Reinsurance assets continued

(ii)  General insurance and health claims liabilities

 

2018
£m

2017
£m

Carrying amount at 1 January

1,729

1,885

Impact of changes in assumptions

(22)

(15)

Reinsurers' share of claim losses and expenses

 

 

Incurred in current year

176

179

Incurred in prior years

40

15

Reinsurers' share of incurred claim losses and expenses

216

194

Less:

 

 

Reinsurance recoveries received on claims

 

 

Incurred in current year

(54)

(32)

Incurred in prior years

(259)

(293)

Reinsurance recoveries received in the year

(313)

(325)

Unwind of discounting

8

8

Change in reinsurance asset recognised as income (note B10(b))

(111)

(138)

Effect of portfolio transfers, acquisitions and disposals1

(9)

-

Foreign exchange rate movements

2

(18)

Carrying amount at 31 December

1,611

1,729

1    The movement during 2018 relates to the proportion of reinsurance assets held by Avipop sold by Italy GI.

(iii) General insurance and health unearned premiums

 

2018
£m

2017
£m

Carrying amount at 1 January

257

250

Premiums ceded to reinsurers in the year

392

489

Less: Reinsurers' share of premiums earned during the year

(375)

(484)

Changes in reinsurance asset recognised as income

17

5

Reinsurers' share of portfolio transfers and acquisitions1

(21)

-

Foreign exchange rate movements

1

2

Carrying amount at 31 December

254

257

1    The movement during 2018 relates to the proportion of Avipop sold by Italy GI that was ceded to reinsurers. 

 

 

Page 72

 

B15 - Effect of changes in assumptions and estimates during the year

Estimates and assumptions used in determining the liabilities for insurance and investment contracts were changed from 2017 to 2018, affecting the liabilities with an equivalent impact on profit recognised during the year. This note analyses the impact of these changes on liabilities for insurance and investment contracts, and related assets and liabilities, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and acquired value of in-force business, and does not allow for offsetting movements in the value of backing financial assets.

 

Effect on profit 2018
£m

Effect on profit 2017
£m

Assumptions

 

 

Long-term insurance business

 

 

Interest rates

1,061

(1,720)

Expenses

9

(128)

Persistency rates

23

(79)

Mortality and morbidity for assurance contracts

24

113

Mortality for annuity contracts

780

779

Tax and other assumptions

18

2

Long-term investment business

 

 

Expenses

(1)

-

General insurance and health business

 

 

Change in discount rate assumptions

1

(7)

Total

1,915

(1,040)

The impact of interest rates on long-term business relates primarily to annuities in the UK (including any change in credit default and reinvestment risk provisions), where an increase in the valuation interest rate in response to widening of credit spreads, has decreased liabilities.

The impact of mortality for annuitant contracts on long-term business relates primarily to the UK. In 2018, there has been a reduction in reserves due to longevity assumptions and modelling which include: updates to mortality to reflect recent experience including the 2008 series tables for individual annuities of £345 million, updates to the rate of mortality improvements including CMI 2017 of £251 million, refinements to modelling of bulk purchase annuities together with a change to base mortality and improvements of £132 million and other less significant movements of £24 million. In Ireland and Singapore there was a slight reduction in the reserves of £28 million following a review of recent experience.

In 2017 the impact of mortality for annuitant contracts on long-term business relates primarily to the UK. This resulted in a reduction in reserves due to recognition of benefits from changes in longevity assumptions including: the impact of completing our review of the allowance for anti-selection risk of £170 million, updates reflecting our recent experience of £200 million, updates to the rate of historic and future mortality improvements, including the adoption of CMI 2016, of £340 million, and other less significant movements of £31 million. In Ireland there was a reduction of £38 million following a review of recent experience.

B16 - 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 undefined.

This note shows the movements in the UDS during the year.

 

2018
£m

2017
£m

Carrying amount at 1 January

9,101

10,208

Change in participating fund assets

(4,139)

406

Change in participating fund liabilities

902

(710)

Other movements

-

10

Change in liability recognised as an expense

(3,237)

(294)

Effect of portfolio transfers, acquisition and disposals1

48

(1,076)

Foreign exchange rate movements

37

263

 

5,949

9,101

Less: Amounts classified as held for sale2

-

(19)

Carrying amount at 31 December

5,949

9,082

1    The movement during 2018 relates to the acquisition of Friends First (£66 million), and the disposal of the remainder of the Spanish business (£18 million). The movement during 2017 relates to the disposal of Antarius (£832 million) and majority of Spanish business (£244 million).

2    The amount classified as held for sale in 2017 relates to the remainder of the Spanish business (£19 million).

The amount of UDS at 31 December 2018 has decreased to £5.9 billion (2017: £9.1 billion). The decrease is mainly due to adverse market movements in Europe with credit spreads widening and a reduction in equity markets.

Where the aggregate amount of participating assets is less than the participating liabilities within a fund then the shortfall may be held as negative UDS, subject to recoverability testing as part of the liability adequacy requirements of IFRS 4. As at 31 December 2018 there is negative UDS in five funds in Italy totalling £355 million (2017: no negative UDS). These balances were tested for recoverability and all but one is considered to be recoverable by comparing the excess of IFRS participating liabilities net of any related DAC or AVIF over the adjusted Solvency II best estimate liabilities for the relevant contracts. The Solvency II best estimate liabilities were adjusted where Solvency II does not represent a best estimate of shareholders' interests consistent with the impairment test for goodwill for long-term business and for AVIF on insurance contracts. An impairment of £8 million was applied to one fund to reflect no recoverability.

 

 

 

Page 73

 

B17 - Borrowings

Our borrowings are classified as either core structural borrowings, which are included within the Group's capital employed, or operational borrowings drawn by operating subsidiaries. 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:

 

2018
£m

2017
£m

Core structural borrowings, at amortised cost

7,699

8,640

Operational borrowings, at amortised cost

496

466

Operational borrowings, at fair value

1,225

1,180

 

1,721

1,646

 

9,420

10,286

(b)  Movements during the year

Movements in borrowings during the year were:

 

 

 

2018

 

 

2017

 

Core Structural
£m

Operational £m

Total
£m

Core Structural £m

Operational
 £m

Total
£m

New borrowings drawn down, excluding commercial paper, net of expenses

649

126

775

-

55

55

Repayment of borrowings, excluding commercial paper1

(1,178)

(211)

(1,389)

(488)

(151)

(639)

Movement in commercial paper2

(419)

-

(419)

-

-

-

Net cash outflow

(948)

(85)

(1,033)

(488)

(96)

(584)

Foreign exchange rate movements

42

6

48

104

(17)

87

Borrowings reclassified/(loans repaid) for non-cash consideration

-

65

65

484

(13)

471

Fair value movements

-

89

89

-

108

108

Amortisation of discounts and other non-cash items

(35)

-

(35)

(37)

(16)

(53)

Movements in debt held by Group companies3

-

-

-

-

(38)

(38)

Movements in the year

(941)

75

(866)

63

(72)

(9)

Balance at 1 January

8,640

1,646

10,286

8,577

1,718

10,295

Balance at 31 December

7,699

1,721

9,420

8,640

1,646

10,286

1    On 28 September 2017, notification was given that the Group would redeem the $650 million fixed rate tier 1 notes. At that date, the instrument was reclassified as a financial liability of £484 million, representing its fair value on translation into Sterling at that date. On 3 November 2017 the instrument was redeemed in full at a cost of £488 million.

2    Gross issuances of commercial paper were £2,372 million in 2018 (2017: £1,265 million), offset by repayments of £2,791 million (2017: £1,265 million).

3    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 2017 and 2018 on securitised mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions.

B18 - Pension obligations

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. The assets and liabilities of these defined benefit schemes as at 31 December 2018 are shown below.

 

 

 

 

2018

 

 

 

2017

 

UK
 £m

Ireland
 £m

Canada
 £m

Total
 £m

UK
 £m

Ireland
 £m

Canada
 £m

Total
 £m

Total fair value of scheme assets

17,059

775

249

18,083

17,744

658

276

18,678

Present value of defined benefit obligation

(14,246)

(950)

(324)

(15,520)

(14,824)

(847)

(372)

(16,043)

Net IAS 19 surpluses/(deficits) in the schemes

2,813

(175)

(75)

2,563

2,920

(189)

(96)

2,635

 

 

 

 

 

 

 

 

 

Surpluses included in other assets

3,256

-

-

3,256

3,399

-

-

3,399

Deficits included in provisions

(443)

(175)

(75)

(693)

(479)

(189)

(96)

(764)

Net IAS 19 surpluses/(deficits) in the schemes

2,813

(175)

(75)

2,563

2,920

(189)

(96)

2,635

 

 

 

 

Page 74

 

B18 - Pension obligations continued

Movements in the scheme surpluses and deficits

Movements in the pension schemes' surpluses and deficits comprise:

2018

Fair Value of Scheme Assets
£m

Present Value of defined benefit obligation
£m

IAS 19 Pensions
net surplus/
(deficits)
£m

Net IAS 19 surplus in the schemes at 1 January

18,678

(16,043)

2,635

Past service costs - amendments1

-

(63)

(63)

Administrative expenses2

-

(19)

(19)

Total pension cost charged to net operating expenses

-

(82)

(82)

Net interest credited/(charged) to investment income/(finance costs)3

442

(375)

67

Total recognised in income

442

(457)

(15)

 

 

 

 

Remeasurements:

 

 

 

Actual return on these assets

(182)

-

(182)

Less: Interest income on scheme assets

(442)

-

(442)

Return on scheme assets excluding amounts in interest income

(624)

-

(624)

Gains from change in financial assumptions

-

622

622

Losses from change in demographic assumptions

-

(185)

(185)

Experience losses

-

(93)

(93)

Total recognised in other comprehensive income

(624)

344

(280)

 

 

 

 

Acquisitions

87

(96)

(9)

Employer contributions

236

-

236

Plan participant contributions

9

(9)

-

Benefits paid

(724)

724

-

Administrative expenses paid from scheme assets2

(23)

19

(4)

Foreign exchange rate movements

2

(2)

-

Net IAS 19 surplus in the schemes at 31 December

18,083

(15,520)

2,563

1    Past service costs include a charge of £63 million relating to the estimated additional liability arising in the UK defined benefit pension schemes as a result of the requirement to equalise members' benefits for the effects of Guaranteed Minimum Pension (GMP). This additional liability has arisen following the High Court judgement in October 2018 in the case involving Lloyds Banking Group.

2    Administrative expenses are expensed as incurred.

3    Net interest income of £89 million has been credited to investment income and net interest expense of £22 million has been charged to finance costs.

The decrease in the surplus during the period is primarily due to remeasurements recognised in other comprehensive income relating to updated demographic assumptions in the ASPS, partially offset by employer contributions paid into the schemes.

2017

Fair Value of Scheme Assets
£m

Present Value of defined benefit obligation
£m

IAS 19 Pensions net surplus/
(deficits)
£m

Net IAS 19 surplus in the schemes at 1 January

19,694

(17,347)

2,347

Past service costs - amendments

-

(1)

(1)

Administrative expenses1

-

(18)

(18)

Total pension cost charged to net operating expenses

-

(19)

(19)

Net interest credited/(charged) to investment income/(finance costs)2

470

(407)

63

Total recognised in income

470

(426)

44

 

 

 

 

Remeasurements:

 

 

 

Actual return on these assets

740

-

740

Less: Interest income on scheme assets

(470)

-

(470)

Return on scheme assets excluding amounts in interest income

270

-

270

Losses from change in financial assumptions

-

(182)

(182)

Losses from change in demographic assumptions

-

(30)

(30)

Experience losses

-

(63)

(63)

Total recognised in other comprehensive income

270

(275)

(5)

 

 

 

 

Employer contributions

259

-

259

Plan participant contributions

9

(9)

-

Benefits paid

(2,021)

2,021

-

Administrative expenses paid from scheme assets1

(21)

18

(3)

Foreign exchange rate movements

18

(25)

(7)

Net IAS 19 surplus in the schemes at 31 December

18,678

(16,043)

2,635

1    Administrative expenses are expensed as incurred.

2    Net interest income of £87 million has been credited to investment income and net interest expense of £24 million has been charged to finance costs.

 

 

 

Page 75

 

B19 - 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

 

 

 

 

2018

 

 

 

2017

 

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

1

-

-

2

4

(4)

-

-

Joint ventures

49

-

(1)

2

49

-

-

2

Employee pension schemes

10

-

-

7

12

-

-

14

 

60

-

(1)

11

65

(4)

-

16

Transactions with joint ventures in the UK relate to the property management undertakings. The Group has equity interests in these joint ventures, together with the provision of administration services and financial management to many of them. 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 2018, 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 at 31 December 2018, the Friends Provident Pension Scheme ('FPPS'), acquired in 2015 as part of the acquisition of the Friends Life business, held an insurance policy of £620 million (2017: £630 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.

 

 

 

Page 76

 

B20 - Risk management

This note sets out the major risks our businesses and our shareholders face and describes the Group's approach to managing these. It also gives sensitivity analysis 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 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 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. The business chief executive officers make an annual declaration supported by an opinion from the business chief risk officers that the system of governance and internal controls was effective and fit for purpose for their business throughout the year.

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. For those risk types managed through the holding of capital, being our principal risk types except for liquidity risk, we measure and monitor our risk profile on the basis of the Solvency II solvency capital requirement.

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 risk identification, measurement, monitoring, management and reporting processes 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.

Risk appetites, requiring management action if breached, are also set for interest rate and foreign exchange risk (calculated on the basis of the Solvency II solvency capital requirement), and liquidity risk (based on stressing forecast central liquid assets and cash inflows and outflows over a specified time horizon). For other risk types the Group sets Solvency II capital tolerances. The Group's position against risk appetite and capital tolerances 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, which focuses on business and financial risks, and the Operational Risk Committee which focuses on operational and reputational risks. Similar committee structures with equivalent terms of reference exist in the business units.

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.

Further information on the types and management of specific risk types is given in sections (b) to (j) below.

 

 

 

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B20 - Risk management continued

(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 taken so that 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.

(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 2018

AAA

AA

A

BBB

Below BBB

Not rated

Carrying value including held for sale
£m

Less: Amounts classified as held for sale £m

Carrying value £m

Debt securities

10.3%

33.6%

18.2%

25.1%

6.5%

6.3%

169,686

(397)

169,289

Reinsurance assets

-

83.1%

10.0%

2.7%

-

4.2%

11,800

(45)

11,755

Other investments

0.2%

0.1%

0.3%

0.1%

-

99.3%

52,812

(6,644)

46,168

-

5.6%

-

-

-

94.4%

28,785

-

28,785

Total

 

 

 

 

 

 

263,083

(7,086)

255,997

 

As at 31 December 2017

AAA

AA

A

BBB

Below BBB

Not rated

Carrying value including held for sale
£m

Less: Amounts classified as held for sale
£m

Carrying value £m

Debt securities

10.6%

32.5%

20.0%

23.3%

7.8%

5.8%

175,948

(1,140)

174,808

Reinsurance assets

-

87.3%

8.2%

1.9%

-

2.6%

13,615

(123)

13,492

Other investments

-

0.2%

0.3%

0.1%

-

99.4%

53,277

(6,971)

46,306

Loans

-

7.1%

-

-

-

92.9%

27,863

(6)

27,857

Total

 

 

 

 

 

 

270,703

(8,240)

262,463

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 £3.6 billion (2017: £2.0 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 following table provides information on the Group's exposure by credit ratings to financial assets that meet the definition of 'solely payment of principal and interest' (SPPI).

 

AAA
£m

AA
£m

A
£m

BBB
£m

Below BBB
£m

Not rated
£m

Loans

-

1,620

-

-

-

894

Receivables

6

213

294

214

-

5,122

Accrued income & interest

-

-

18

-

-

175

Other financial assets

-

-

10

-

-

-

Total

6

1,833

322

214

-

6,191

At the period end, the Group held cash and cash equivalents of £13,246 million that met the SPPI criteria, of which £13,231 million is placed with financial institutions with issuer ratings within the range of AAA to BBB. Further information on the extent to which unrated receivables, including those that meet the SPPI criteria, are past due may be found in section (ix) of this note.

The Group continues to hold a series of macro credit hedges to reduce the overall credit risk exposure. 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.

 

 

 

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B20 - Risk management continued

(ii)  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, including 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.

(iii) 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;

· Healthcare, infrastructure and PFI loans secured against healthcare, education, social housing and emergency services related premises; 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.

(iv) Credit concentration risk

The long-term and general insurance businesses are generally not individually exposed to significant concentrations of credit risk due to the regulations applicable in most markets and the Group credit policy and limits framework, which limit investments in individual assets and asset classes. Credit concentrations are monitored as part of the regular credit monitoring process and are reported to the Group Asset Liability Committee (ALCO). With the exception of government bonds the largest aggregated counterparty exposure within shareholder assets is to the Swiss Reinsurance Company Ltd (including subsidiaries), representing approximately 2.3% of the total shareholder assets.

(v)  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 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 Swiss Reinsurance Company Ltd (including subsidiaries). At 31 December 2018, the reinsurance asset recoverable, including debtor balances, from Swiss Reinsurance Company Ltd was £2,835 million (2017: £2,902 million). Up until late 2018, BlackRock Life Ltd had been the Group's largest reinsurance counterparty as a result of the BlackRock funds offered to UK Life customers via unit-linked contracts. However, as a result of action taken to restructure the agreements with BlackRock Life Ltd the reinsurance asset recoverable, including debtor balances, from BlackRock Life Ltd as at 31 December 2018 has been reduced to £2,457 million (2017: £5,307 million).

(vi)    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 collateralisation and minimum counterparty credit quality requirements.

(vii)          Derivative credit exposures

The Group is exposed to counterparty credit risk through derivative trades. This risk is generally mitigated through holding collateral for most trades. Residual exposures are captured within the Group's credit management framework.

(viii) 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.

 

 

 

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B20 - Risk management continued

(ix)    Impairment of financial assets

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 and held for sale.

 

 

Financial assets that are past due but not impaired

 

 

As at 31 December 2018

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

1,675

-

-

5

-

-

1,680

Reinsurance assets

7,791

-

-

-

-

-

7,791

Other investments

1

-

-

-

-

-

1

Loans

3,259

-

-

-

-

-

3,259

Receivables and other financial assets

8,776

74

16

11

2

-

8,879

 

 

 

Financial assets that are past due but not impaired

 

 

As at 31 December 2017

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

1,726

-

-

-

-

-

1,726

Reinsurance assets

7,521

-

-

-

-

-

7,521

Other investments

1

-

-

-

-

-

1

Loans

3,465

-

-

-

-

-

3,465

Receivables and other financial assets

8,185

78

12

5

5

-

8,285

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: £168.0 billion of debt securities (2017: £174.2 billion), £52.8 billion of other investments (2017: £53.3 billion), £25.5 billion of loans (2017: £24.4 billion) and £4.0 billion of reinsurance assets (2017: £6.1 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.

(c)  Market risk

Market risk is the risk of adverse financial impact resulting, directly or indirectly from fluctuations in interest rates, inflation, 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 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.

 

 

 

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B20 - Risk management continued

(i)   Equity price risk

The Group is subject to direct equity price risk arising from changes in the market values of its equity securities portfolio. Our most material indirect equity price risk exposures are to policyholder unit-linked funds, which are exposed to a fall in the value of the fund thereby reducing the fees we earn on those funds, and participating contracts, which are exposed to a fall in the value of the funds thereby increasing our costs for policyholder guarantees. We also have some equity exposure in shareholder funds through equities held to match inflation-linked liabilities.

We continue to limit our direct equity exposure in line with our risk preferences. 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. An equity hedging strategy remains in place to help control the Group's overall direct and indirect exposure to equities. At 31 December 2018 the Group continues to hold a series of macro equity hedges to reduce the overall shareholder equity risk exposure.

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 2018, no material derivative contracts had been entered into to mitigate the effects of changes in property prices. Exposure to property risk on equity release mortgages from sustained underperformance in the UK House Price Index (HPI) is mitigated by capping loan to value on origination at low levels and regularly monitoring the performance of the mortgage portfolio.

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.

Exposure to interest rate risk is monitored through several measures that include duration, 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.

Despite the continued pick up in market interest rates from the historical lows experienced in 2016, the continued 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. As long as market yields remain below the current portfolio level, the portfolio yield, and as a result net investment income, will continue to decline. While we anticipate interest rates may remain below historical averages before the 2008 financial crisis for some time to come, it is also possible that further future increases in interest rates or market anticipation of such increases, if larger and more rapid than expected, could adversely impact market values of our portfolio of fixed income securities and increase the risk of credit defaults and downgrades.

Other product lines of the Group, 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.

 

 

 

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B20 - Risk management continued

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.

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 2018 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

0.70%

2.67%

67,956

Italy

0.48%

3.52%

19,010

Other1

N/A

N/A

44,329

Total

N/A

N/A

131,295

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 over the last decade has reduced the investment component of profit, although in 2018 there was a small partial reversal in this long term trend. 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

yield1

Average
assets
£m

2016

2.47%

14,369

2017

2.07%

14,770

2018

2.28%

14,651

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 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.

 

 

 

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B20 - Risk management continued

(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-profits contract liabilities or are hedged. As a result the foreign exchange gains and losses on investments are largely offset by changes in unit-linked and with-profits liabilities and fair value changes in derivatives attributable to changes in foreign exchange rates recognised in the income statement.

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 59% 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 sterling, euro 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. However, the Group does use foreign currency forward contracts to hedge planned dividends from its subsidiaries.

Businesses aim to maintain sufficient assets in local currency to meet local currency liabilities, however movements may impact the value of the Group's consolidated shareholders' equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. These exposures are managed by aligning the deployment of regulatory capital by currency with the Group's regulatory capital requirements by currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set. Except where the Group has applied net investment hedge accounting, foreign exchange gains and losses on foreign currency borrowings are recognised in the income statement, whereas foreign exchange gains and losses arising on consolidation from the translation of assets and liabilities of foreign subsidiaries are recognised in other comprehensive income. At 31 December 2018 and 2017, the Group's total equity deployment by currency including assets 'held for sale' was:

 

Sterling
£m

Euro
£m

CAD$
 £m

Other
£m

Total
£m

Capital 31 December 2018

15,720

611

311

1,813

18,455

Capital 31 December 2017

16,776

444

309

1,606

19,135

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 2018

(61)

77

(31)

31

Net assets at 31 December 2017

(44)

44

(31)

31

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.

 

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 2018

(60)

85

8

(9)

Impact on profit before tax 31 December 2017

(78)

95

6

(7)

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. Derivatives are primarily used for efficient investment management, risk hedging purposes, or to structure specific retail savings products. Activity is overseen by the Group Capital and Group Risk teams, which monitor exposure levels and approve large or complex transactions.

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 capital model and in scenario analysis.

 

 

 

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B20 - Risk management continued

(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 and infrastructure loans. 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.

(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 2018 and 2017 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. This table includes amounts held for sale.

As at 31 December 2018

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

106,622

8,421

25,940

40,548

31,713

Investment contracts - non-linked

75,158

5,547

19,199

28,572

21,840

Linked business

156,859

15,559

23,901

52,656

64,743

General insurance and health

16,368

6,859

6,758

2,217

534

Total contract liabilities

355,007

36,386

75,798

123,993

118,830

 

As at 31 December 2017

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

109,900

10,105

27,278

41,720

30,797

Investment contracts - non-linked

71,948

5,370

17,088

26,300

23,190

Linked business

163,571

17,609

27,632

55,519

62,811

General insurance and health

16,794

6,877

6,838

2,462

617

Total contract liabilities

362,213

39,961

78,836

126,001

117,415

(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.

As at 31 December 2018

Total
 £m

On demand or within 1 year £m

1-5 years
 £m

Over 5 years £m

No fixed term (perpetual)
 £m

Debt securities

169,289

31,282

43,876

92,985

1,146

Equity securities

82,128

-

-

-

82,128

Other investments

46,168

41,027

77

4,301

763

Loans

28,785

2,089

4,236

22,457

3

Cash and cash equivalents

46,484

46,484

-

-

-

 

372,854

120,882

48,189

119,743

84,040

 

As at 31 December 2017

Total
 £m

On demand or within 1 year £m

1-5 years
 £m

Over 5 years
 £m

No fixed term (perpetual)
£m

Debt securities

174,808

28,037

47,289

99,078

404

Equity securities

89,968

-

-

-

89,968

Other investments

46,306

40,500

364

4,680

762

Loans

27,857

1,651

5,053

21,149

4

Cash and cash equivalents

43,347

43,347

-

-

-

 

382,286

113,535

52,706

124,907

91,138

 

 

 

 

Page 84

 

B20 - Risk management continued

The assets above are analysed in accordance with the earliest possible redemption date of the instrument at the initiation of the Group. Where an instrument is transferable back to the issuer on demand, such as most unit trusts or similar types of investment vehicle, it is included in the 'On demand or within 1 year' column. Debt securities with no fixed contractual maturity date are generally callable at the option of the issuer at the date the coupon rate is reset under the contractual terms of the instrument. The terms for resetting the coupon are such that we expect the securities to be redeemed at this date, as it would be uneconomic for the issuer not to do so, and for liquidity management purposes we manage these securities on this basis. The first repricing and call date is normally ten years or more after the date of issuance. Most of the Group's investments in equity securities and fixed maturity securities are market traded and therefore, if required, can be liquidated for cash at short notice.

(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 policyholder 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. The Group's underwriting strategy and appetite is communicated via specific policy statements, related business standards and guidelines. Life insurance risk is managed primarily at business unit level with oversight at the Group level.

The underlying risk profile of our life and health insurance risks, primarily persistency, longevity, mortality and expense risk, has remained stable during 2018, although the current continued relatively low levels of interest rates have increased our sensitivity to longevity shocks compared to historical norms. We are also exposed to longevity risk through the Aviva Staff Pension Scheme, to which our economic exposure has been reduced since 2014 by entering into a longevity swap covering approximately £5 billion of pensioner in payment scheme liabilities. Longevity risk remains the Group's most significant life insurance risk, while 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 capital model and subject to sensitivity and stress and scenario testing. Our UK Life business is in the process of implementing a new actuarial modelling system for non-profit business. During the year ended 31 December 2018, annuities and certain protection products were transferred into the new modelling system which had minimal financial impact.

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 monitors 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 is exposed to the risk of changes in policyholder behaviour due to the exercise of options, guarantees and other product features embedded in its long-term savings products. These product features offer policyholders 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 capital model and managed as part of the asset liability framework.

 

 

 

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B20 - Risk management continued

(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 B11 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.

Management of general insurance risks

Significant insurance risks will be reported under the risk management framework. Additionally, the 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 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, and has reinsured 100% of its latent exposures to its historic UK employers' liability and public liability business written prior to 31 December 2000.

(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. Funds invested in illiquid assets such as commercial property are particularly exposed to liquidity risk. The risk profile is regularly monitored.

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.

 

 

 

Page 86

 

B20 - Risk management continued

The increasing importance to our strategy of digital interaction with our customers and advanced data analytics, the conduct, data protection and financial crime agenda of the European institutions, the FCA and other regulators, as well as the increasing cyber security threat, as evidenced by continuing instances of high profile cyber security breaches for other corporates in the UK and elsewhere, mean that the Group's inherent risk exposure to risks such as data theft, conduct regulatory breaches (including financial crime) and customer service interruption due to IT systems failure increased in 2018 and is expected to continue to increase into the future. The risk of customer service interruption is increased by the age and complexity of the Group's IT infrastructure, which at times during the first half of 2018 resulted in disruption to continuous service to our customers, while our UK long-term savings business also experienced some functionality issues during its update of its platform capability. During 2018 we have continued to take action to reduce our residual exposure to these risks and improve our operational resilience through our conduct risk management framework, financial crime risk mitigation programme and significant investment in upgrading our IT infrastructure (including migrations to a new data centre infrastructure provider and to the Cloud) and IT Security Transformation programme, and by ensuring appropriate consideration of IT infrastructure and security risks in developing our digital strategy, and will continue to do so into the future.

(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.

(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.

(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.

(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%.

 

 

 

Page 87

 

B20 - Risk management continued

Long-term business

Sensitivities as at 31 December 2018

31 December 2018 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

(75)

35

(15)

(105)

70

(20)

(5)

(5)

Insurance non-participating

(975)

1,130

(695)

(125)

105

(210)

(115)

(865)

Investment participating

(40)

40

(10)

(15)

(15)

(15)

-

-

Investment non-participating

-

-

-

10

(25)

(20)

-

-

Assets backing life shareholders' funds

(95)

105

(25)

20

(20)

-

-

-

Total

(1,185)

1,310

(745)

(215)

115

(265)

(120)

(870)

 

31 December 2018 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

(75)

35

(15)

(105)

70

(20)

(5)

(5)

Insurance non-participating

(975)

1,130

(695)

(125)

105

(210)

(115)

(865)

Investment participating

(40)

40

(10)

(15)

(15)

(15)

-

-

Investment non-participating

-

-

-

10

(25)

(20)

-

-

Assets backing life shareholders' funds

(145)

150

(25)

25

(25)

-

-

-

Total

(1,235)

1,355

(745)

(210)

110

(265)

(120)

(870)

Sensitivities as at 31 December 2017

31 December 2017 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

(45)

25

(15)

(20)

(40)

(25)

(5)

(10)

Insurance non-participating

(475)

485

(790)

(135)

115

(215)

(105)

(905)

Investment participating

-

10

(5)

(5)

-

(15)

-

-

Investment non-participating

-

(10)

(5)

10

(10)

(30)

-

-

Assets backing life shareholders' funds

(90)

115

(25)

20

(20)

-

-

-

Total

(610)

625

(840)

(130)

45

(285)

(110)

(915)

 

31 December 2017 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

(45)

25

(15)

(20)

(40)

(25)

(5)

(10)

Insurance non-participating

(475)

485

(790)

(135)

115

(215)

(105)

(905)

Investment participating

-

10

(5)

(5)

-

(15)

-

-

Investment non-participating

-

(10)

(5)

10

(10)

(30)

-

-

Assets backing life shareholders' funds

(150)

175

(35)

20

(20)

-

-

-

Total

(670)

685

(850)

(130)

45

(285)

(110)

(915)

Changes in sensitivities between 2018 and 2017 reflect underlying movements in the value of assets and liabilities, the relative duration of assets and liabilities and asset liability management actions. The sensitivities to economic and demographic movements relate mainly to business in the UK. Our sensitivity to interest rates has increased over the period mainly due to the impacts of our hedging programme which protects Solvency II capital and increased exposure in the UK, predominantly as a result of surplus assets originated in 2018 to back new business in 2019 that would otherwise be invested in cash.

 

 

 

Page 88

 

B20 - Risk management continued

General insurance and health business sensitivities as at 31 December 2018

31 December 2018 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

(240)

235

(115)

165

(165)

(120)

(325)

Net of reinsurance

(305)

295

(115)

165

(165)

(120)

(315)

 

31 December 2018 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

(240)

235

(115)

170

(170)

(25)

(325)

Net of reinsurance

(305)

295

(115)

170

(170)

(25)

(315)

Sensitivities as at 31 December 2017

31 December 2017 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

(285)

300

(130)

165

(165)

(120)

(335)

Net of reinsurance

(345)

355

(130)

165

(165)

(120)

(325)

 

31 December 2017 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

(285)

300

(130)

165

(165)

(25)

(335)

Net of reinsurance

(345)

355

(130)

165