Annual Report • Mar 5, 2015
Annual Report
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RNS Number : 5912G Aviva PLC 05 March 2015 Part 3 of 5 Page 29 Financial supplement Page A Income & expenses 30 B IFRS financial statements and notes 35 C Capital & liquidity 89 D Analysis of assets 99 E VNB & Sales analysis 121 F MCEV financial statements and notes 127 In this section A Income & expenses 30 Reconciliation of Group operating profit to profit after tax - IFRS basis 30 A1 Other operations 31 A2 Corporate centre 31 A3 Group debt costs and other interest 31 A4 Life business: Investment return variances and economic assumption changes 32 A5 Non-life business: Short-term fluctuation in return on investments 33 A6 General insurance and health business: Economic assumption changes 34 A7 Impairment of goodwill, associates, joint ventures and other amounts expensed 34 A8 Profit/loss on the disposal and re-measurement of subsidiaries, joint ventures and associates 34 A9 Exceptional items 34 Page 30 Reconciliation of Group operating profit to profit after tax - IFRS basis For the year ended 31 December 2014 2014 £m 2013 £m Continuing Operations Continuing Operations Discontinued Operations1 Operating profit before tax attributable to shareholders' profits Life business United Kingdom & Ireland 1,039 952 - Europe 852 851 - Asia 87 96 - Other 1 2 272 Total life business 1,979 1,901 272 General insurance and health United Kingdom & Ireland 499 489 - Europe 113 112 - Canada 189 246 - Asia (2) 1 - Other 9 (51) - Total general insurance and health 808 797 - Fund management Aviva Investors 79 68 31 United Kingdom 6 23 - Asia 1 2 - Total fund management 86 93 31 Other Other operations (note A1) (105) (90) (4) Market operating profit 2,768 2,701 299 Corporate centre (note A2) (132) (150) - Group debt costs and other interest (note A3) (463) (502) (9) Operating profit before tax attributable to shareholders' profits 2,173 2,049 290 Integration and restructuring costs (140) (363) (3) Operating profit before tax attributable to shareholders' profits after integration and restructuring costs 2,033 1,686 287 Adjusted for the following: Investment return variances and economic assumption changes on long-term business (note A4) 72 (49) 452 Short-term fluctuation in return on investments backing non-long-term business (note A5) 261 (336) - Economic assumption changes on general insurance and health business (note A6) (145) 33 - Impairment of goodwill, joint ventures and associates and other amounts expensed (note A7) (24) (77) - Amortisation and impairment of intangibles (90) (91) (9) Profit on the disposal and re-measurement of subsidiaries, joint ventures and associates (note A8) 174 115 808 Non-operating items before tax 248 (405) 1,251 Profit before tax attributable to shareholders' profits 2,281 1,281 1,538 Tax on operating profit (561) (534) (83) Tax on other activities (40) 131 (182) (601) (403) (265) Profit after tax 1,680 878 1,273 Profit from discontinued operations 58 1,273 Profit for the year 1,738 2,151 1 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) up until the date of disposal (2 October 2013). Page 31 Other Group Operating Profit Items A1 - Other operations 2014 £m 2013 £m United Kingdom & Ireland Life (4) (14) United Kingdom & Ireland General Insurance 4 (6) Europe (26) (17) Asia (8) (12) Other Group operations1 (71) (41) Total - continuing operations (105) (90) Total - discontinued operations - (4) Total (105) (94) 1 Other Group operations include Group and head office costs. Other operations relate to non insurance activities and primarily include costs associated with our Group and regional head offices, pension schemes expenses, as well as non insurance income. Total costs in relation to non insurance activities have increased by £11 million to £105 million (FY13: £94 million), mainly driven by 'Other Group operations' partly offset by improvements in the United Kingdom and Ireland. In 2013 we found evidence of improper allocation of trades in fixed income securities in Aviva Investors. In the 2013 result, there was a total adverse impact on operating profit from this activity of £132 million reflecting compensation expected to be claimed in respect of these breaches and other associated costs. These amounts are shown in operating profit in 'Other Group operations'. Within the 2013 result, this was more than offset by the gain of £145 million relating to the Ireland pension scheme curtailment gain. In February 2015, Aviva Investors reached a settlement with the FCA for certain systems and controls failings that happened between August 2005 to June 2013 and agreed to pay a fine of £17.6 million. Provision for this expected cost was made at the year end and is fully reflected within the 'Other operations' FY14 result. Excluding these one-offs, 'Other Group operations' costs in relation to non insurance activities of £53 million (FY13: costs of £54 million) were broadly stable. A2 - Corporate centre 2014 £m 2013 £m Project spend (9) (27) Central spend and share award costs (123) (123) Total (132) (150) A3 - Group debt costs and other interest 2014 £m 2013 £m External debt Subordinated debt (289) (305) Other (21) (23) Total external debt (310) (328) Internal lending arrangements (186) (231) Net finance income on main UK pension scheme 33 57 Total - continuing operations (463) (502) Total - discontinued operations - (9) Total (463) (511) Page 32 Non-operating profit items A4 - Life Business: Investment variances and economic assumption changes (a) Definitions Operating profit for life business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions, where not treated as exceptional. Changes due to economic items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit. (b) Economic volatility The investment variances and economic assumption changes excluded from the life operating profit are as follows: Life business 2014 £m 2013 £m Investment variances and economic assumptions - continuing operations 72 (49) Investment variances and economic assumptions - discontinued operations - 452 Investment variances and economic assumptions 72 403 For continuing operations, investment variances were £72 million positive (2013: £49 million negative) mainly driven by lower risk free rates and narrowing credit spreads on government and corporate bonds in Italy and Spain. Adverse variances in the UK were due to the adverse impact of falling reinvestment yields net of improved underlying property values on commercial mortgages partly offset by a change to the model used to value certain equity release assets and the consequential impact on the liabilities that they back. In 2013, for continuing operations, positive variances from narrowing spreads in Italy and Spain were offset by an increase in allowance for credit defaults in the UK. Discontinued operations represent the US business disposed of in 2013, which benefitted from favourable equity market performance on embedded derivatives in 2013. (c) Assumptions The expected rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification under IFRS. The principal assumptions underlying the calculation of the expected investment return for equities and properties are: Equities Properties 2014 % 2013 % 2014 % 2013 % United Kingdom 6.6% 5.4% 5.1% 3.9% Eurozone 5.7% 5.1% 4.2% 3.6% The expected return on equities and properties has been calculated by reference to the opening 10 year swap rate in the relevant currency plus an appropriate risk margin. These are the same assumptions as are used under MCEV principles to calculate the longer-term investment return for the Group's life business. For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average prospective yields for the actual assets held less an adjustment for credit risks; this includes an adjustment for credit risk on all Eurozone sovereign debt. Where such securities are classified as available for sale, the expected investment return comprises the expected interest or dividend payments and amortisation of the premium or discount at purchase. Page 33 A5 - Non-life business: Short-term fluctuation in return on investments General Insurance and health - continuing operations 2014 £m 2013 £m Analysis of investment income: - Net investment income 666 349 - Foreign exchange gains/losses and other charges (8) (35) 658 314 - Longer-term investment return, reported within operating profit 477 557 - Short-term fluctuations in investment return, reported outside operating profit 181 (243) 658 314 Short-term fluctuations: - General insurance and health 181 (243) - Other operations1 80 (93) Total short-term fluctuations 261 (336) 1 For 2014 represents short-term fluctuations on assets backing non-life business in Group centre investments, including the centre hedging programme. For 2013 represents short-term fluctuations on assets backing non-life business in the France holding company and Group centre investments, including the centre hedging programme. The longer-term investment return is calculated separately for each principal non-life business unit. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of investment return. The longer-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated longer-term return for other investments is the actual income receivable for the year. Actual income and longer-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities. Market value movements which give rise to variances between actual and longer-term investment returns are disclosed separately in short term fluctuations outside operating profit. Following the corporate restructure in 2013, the impact of realised and unrealised gains and losses on Group centre investments, including the centre hedging programme which is designed to economically protect the total Group's capital against adverse equity and foreign exchange movements, is now included in short-term fluctuations on other operations instead of general insurance and health. The favourable movement in short-term fluctuation during 2014 compared with 2013 is mainly due to a decrease in risk free rates increasing fixed income security market values and other market movements impacting Group centre investments and the centre hedging programme. The total assets supporting the general insurance and health business, which contribute towards the longer-term return, are: 2014 £m Restated2 2013 £m Debt securities 10,858 10,105 Equity securities 251 339 Properties 223 140 Cash and cash equivalents 1,300 1,982 Other3 3,767 5,435 Assets supporting general insurance and health business 16,399 18,001 Assets supporting other non-long term business1 562 695 Total assets supporting non-long term business 16,961 18,696 1 For 2014 represents assets backing non-life business in Group centre investments, including the centre hedging programme. For 2013 represents assets backing non-life business in the France holding company and Group centre investments, including the centre hedging programme. 2. Restated following adoption of amendments to 'IAS32: Financial Instruments: Presentation'. Refer to note B1 for further information. 3 Includes the internal loan. The principal assumptions underlying the calculation of the longer-term investment return are: Longer-term rates of return on equities Longer-term rates of return on property 2014 % 2013 % 2014 % 2013 % United Kingdom 6.6% 5.4% 5.1% 3.9% Eurozone 5.7% 5.1% 4.2% 3.6% Canada 6.8% 5.8% 5.3% 4.3% The underlying reference rates are shown in F2 within the MCEV financial supplement. Page 34 A6 - General insurance and health business: Economic assumption changes Economic assumption changes of £145 million adverse (FY13: £33 million favourable) arise mainly as a result of a decrease in the swap rates used to discount latent claims reserves and periodic payment orders. A7 - Impairment of goodwill, associates, joint ventures and other amounts expensed Impairment of goodwill, joint ventures and associates from continuing operations is a charge of £24 million (FY13: £77 million charge) as management determined that the goodwill held in respect of the associate in India is not recoverable. A8 - Profit/loss on the disposal and re-measurement of subsidiaries, joint ventures and associates The total Group profit on disposal and re-measurement of subsidiaries, joint ventures and associates from continuing operations is £174 million (FY13: £115 million profit). This includes profits on the disposals of US equity manager River Road Asset Management (£35 million), the Spanish long-term business CxG (£132 million) and the Group's South Korean business Woori Aviva Life Insurance Co. Ltd (£2 million). A gain of £15 million was also recognised on the sale of shares in the Turkey Life business initial public offering. This is partly offset by a loss on the disposal of the Italian long-term business Eurovita (£6 million) and the Turkey general insurance business (£16 million). Additionally, a net gain of £12 million was recognised on re-measurement and disposals of other small operations. Profit on the disposal of subsidiaries relating to discontinued operations is £58 million (FY13: £808 million). Further detail is provided in note B5. A9 - Exceptional items Exceptional 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. Exceptional items for FY14 were £nil (FY13: £nil). Page 35 IFRS financial statements In this section Page Consolidated financial statements 36 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 41 B1(i) Basis of preparation 41 B1(ii) New standards, interpretations and amendments to published standards that have been adopted by the Group 41 B2 Analysis of the impact of new standards and amendments to published standards that have been adopted by the Group 42 B3 Exchange rates 42 B4 Presentation of discontinued operations 42 B5 Subsidiaries 43 B6 Segmental information 47 B7 Tax 55 B8 Earnings per share 57 B9 Dividends and appropriations 58 B10 Insurance liabilities 59 B11 Liability for investment contracts 68 B12 Reinsurance assets 69 B13 Effect of changes in assumptions and estimates during the year 71 B14 Unallocated divisible surplus 72 B15 Borrowings 73 B16 Pension obligations 73 B17 Cash and cash equivalents 75 B18 Related party transactions 75 B19 Risk management 75 B20 Direct capital instruments and fixed rate tier 1 notes 86 B21 Contingent liabilities and other risk factors 87 B22 Subsequent events 88 Page 36 Consolidated income statement For the year ended 31 December 2014 2014 £m 2013 £m Note Continuing operations Continuing operations Discontinued operations1 Income Gross written premiums 21,670 22,035 1,589 Premiums ceded to reinsurers (1,614) (1,546) (100) Premiums written net of reinsurance 20,056 20,489 1,489 Net change in provision for unearned premiums 1 134 - Net earned premiums 20,057 20,623 1,489 Fee and commission income 1,230 1,279 28 Net investment income 21,889 12,509 2,340 Share of profit after tax of joint ventures and associates 147 120 - Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 174 115 808 43,497 34,646 4,665 Expenses Claims and benefits paid, net of recoveries from reinsurers (19,474) (22,093) (2,037) Change in insurance liabilities, net of reinsurance (5,570) 2,493 (312) Change in investment contract provisions (6,518) (7,050) (31) Change in unallocated divisible surplus (3,364) 280 - Fee and commission expense (3,389) (3,975) (438) Other expenses (1,979) (2,220) (293) Finance costs (540) (609) (16) (40,834) (33,174) (3,127) Profit before tax 2,663 1,472 1,538 Tax attributable to policyholders' returns B7 (382) (191) - Profit before tax attributable to shareholders' profits 2,281 1,281 1,538 Tax expense B7 (983) (594) (265) Less: tax attributable to policyholders' returns B7 382 191 - Tax attributable to shareholders' profits (601) (403) (265) Profit after tax 1,680 878 1,273 Profit from discontinued operations 58 1,273 Profit for the year 1,738 2,151 Attributable to: Equity shareholders of Aviva plc 1,569 2,008 Non-controlling interests 169 143 Profit for the year 1,738 2,151 Earnings per share B8 Basic (pence per share) 50.4p 65.3p Diluted (pence per share) 49.6p 64.5p Continuing operations - Basic (pence per share) 48.4p 22.0p Continuing operations - Diluted (pence per share) 47.7p 21.8p 1 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). See note B5 for further details. Page 37 Consolidated statement of comprehensive income For the year ended 31 December 2014 2014 £m 2013 £m Profit for the year from continuing operations 1,680 878 Profit for the year from discontinued operations1 58 1,273 Total profit for the year 1,738 2,151 Other comprehensive income from continuing operations: Items that may be reclassified subsequently to income statement Investments classified as available for sale Fair value gains 62 19 Fair value (losses)/gains transferred to profit on disposals (7) 1 Share of other comprehensive income of joint ventures and associates 22 (37) Foreign exchange rate movements (396) (35) Aggregate tax effect - shareholder tax on items that may be reclassified into profit or loss (9) (14) Items that will not be reclassified to income statement Owner-occupied properties - fair value gains/(losses) 7 (2) Remeasurements of pension schemes 1,662 (674) Aggregate tax effect - shareholder tax on items that will not be reclassified into profit or loss (347) 125 Other comprehensive income, net of tax from continuing operations 994 (617) Other comprehensive income, net of tax from discontinued operations1 - (319) Total other comprehensive income, net of tax 994 (936) Total comprehensive income for the year from continuing operations 2,674 261 Total comprehensive income for the year from discontinued operations1 58 954 Total comprehensive income for the year 2,732 1,215 Attributable to: Equity shareholders of Aviva plc 2,642 1,038 Non-controlling interests 90 177 2,732 1,215 1 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). See note B5 for further details. Page 38 Consolidated statement of changes in equity For the year ended 31 December 2014 Ordinary share capital £m Preference share capital £m Share premium £m Merger reserve £m Shares held by employee trusts £m Other Reserves £m Retained earnings £m Equity attributable to shareholders of Aviva plc £m DCI and fixed rate tier 1 notes £m Non-controlling interests £m Total equity £m Balance at 1 January 736 200 1,165 3,271 (31) 475 2,348 8,164 1,382 1,471 11,017 Profit for the year - - - - - - 1,569 1,569 - 169 1,738 Other comprehensive income - - - - - (242) 1,315 1,073 - (79) 994 Total comprehensive income for the year - - - - - (242) 2,884 2,642 - 90 2,732 Owner-occupied properties fair value gains transferred to retained earnings on disposals - - - - - (2) 2 - - - - Dividends and appropriations - - - - - - (551) (551) - - (551) Non-controlling interests share of dividends declared in the year - - - - - - - - - (189) (189) Transfer to profit on disposal of subsidiaries, joint ventures and associates - - - - - (13) 2 (11) - - (11) Changes in non-controlling interests in subsidiaries - - - - - - (36) (36) - (206) (242) Shares distributed by employee trusts - - - - 23 - (18) 5 - - 5 Reserves credit for equity compensation plans - - - - - 39 - 39 - - 39 Shares issued under equity compensation plans 1 - 7 - - (28) 24 4 - - 4 Aggregate tax effect - shareholder tax - - - - - - 19 19 - - 19 Redemption of direct capital instrument1 - - - - - - (57) (57) (490) - (547) Balance at 31 December 737 200 1,172 3,271 (8) 229 4,617 10,218 892 1,166 12,276 1 £57 million relates to the foreign exchange loss on redemption of €700 million direct capital instrument on 28 November 2014. See Note B20 for further detail. For the year ended 31 December 2013 Ordinary share capital £m Preference share capital £m Share premium £m Merger reserve £m Shares held by employee trusts £m Other Reserves £m Retained earnings £m Equity attributable to shareholders of Aviva plc £m DCI and fixed rate tier 1 notes £m Non-controlling interests £m Total equity £m Balance at 1 January 736 200 1,165 3,271 (32) 1,675 1,389 8,404 1,382 1,574 11,360 Profit for the year - - - - - - 2,008 2,008 - 143 2,151 Other comprehensive income - - - - - (421) (549) (970) - 34 (936) Total comprehensive income for the year - - - - - (421) 1,459 1,038 - 177 1,215 Dividends and appropriations - - - - - - (538) (538) - - (538) Capital contributions from non-controlling interests - - - - - - - - - 1 1 Non-controlling interests share of dividends declared in the year - - - - - - - - - (134) (134) Transfer to profit on disposal of subsidiaries, joint ventures and associates - - - - - (803) 1 (802) - - (802) Changes in non-controlling interests in subsidiaries - - - - - - - - - (147) (147) Shares acquired by employee trusts - - - - (32) - - (32) - - (32) Shares distributed by employee trusts - - - - 33 - (28) 5 - - 5 Reserves credit for equity compensation plans - - - - - 37 - 37 - - 37 Shares issued under equity compensation plans - - - - - (43) 43 - - - - Aggregate tax effect - shareholder tax - - - - - 30 22 52 - - 52 Balance at 31 December 736 200 1,165 3,271 (31) 475 2,348 8,164 1,382 1,471 11,017 Page 39 Consolidated statement of financial position As at 31 December 2014 Note 2014 £m Restated1 2013 £m Restated1 2012 £m Assets Goodwill 1,302 1,476 1,520 Acquired value of in-force business and intangible assets 1,028 1,068 1,084 Interests in, and loans to, joint ventures 1,140 1,200 1,390 Interests in, and loans to, associates 404 267 265 Property and equipment 357 313 391 Investment property 8,925 9,451 9,939 Loans 25,260 23,879 24,537 Financial investments 202,638 194,027 189,651 Reinsurance assets B12 7,958 7,220 6,684 Deferred tax assets 76 244 188 Current tax assets 27 76 67 Receivables 5,933 7,476 8,034 Deferred acquisition costs and other assets 5,091 3,051 3,778 Prepayments and accrued income 2,466 2,635 2,776 Cash and cash equivalents 23,105 26,131 24,213 Assets of operations classified as held for sale 9 3,113 42,603 Total assets 285,719 281,627 317,120 Equity Capital Ordinary share capital 737 736 736 Preference share capital 200 200 200 937 936 936 Capital reserves Share premium 1,172 1,165 1,165 Merger reserve 3,271 3,271 3,271 4,443 4,436 4,436 Shares held by employee trusts (8) (31) (32) Other reserves 229 475 1,675 Retained earnings 4,617 2,348 1,389 Equity attributable to shareholders of Aviva plc 10,218 8,164 8,404 Direct capital instruments and fixed rate tier 1 notes 892 1,382 1,382 Non-controlling interests 1,166 1,471 1,574 Total equity 12,276 11,017 11,360 Liabilities Gross insurance liabilities B10 113,445 110,555 113,091 Gross liabilities for investment contracts B11 117,245 116,058 110,494 Unallocated divisible surplus B14 9,467 6,713 6,931 Net asset value attributable to unitholders 9,482 10,362 9,983 Provisions B16 879 984 1,119 Deferred tax liabilities 1,091 563 547 Current tax liabilities 169 116 112 Borrowings 7,378 7,819 8,179 Payables and other financial liabilities 12,012 11,945 12,051 Other liabilities 2,273 2,472 1,842 Liabilities of operations classified as held for sale 2 3,023 41,411 Total liabilities 273,443 270,610 305,760 Total equity and liabilities 285,719 281,627 317,120 1 The statement of financial position has been restated following the adoption of amendments to IAS 32 'Financial Instruments: Presentation' - see note B2 for details. There is no impact on the result or the total equity for any period presented as a result of this restatement. Page 40 Consolidated statement of cash flows For the year ended 31 December 2014 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. 2014 £m Restated2 2013 £m Cash flows from operating activities Cash (used in)/generated from continuing operations (87) 2,562 Tax paid (457) (463) Net cash (used in)/from operating activities - continuing operations (544) 2,099 Net cash from operating activities - discontinued operations1 - 1,919 Total net cash (used in)/from operating activities (544) 4,018 Cash flows from investing activities Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired (79) (29) Disposals of subsidiaries, joint ventures and associates, net of cash transferred 110 377 New loans to joint ventures and associates (73) (6) Repayment of loans to joint ventures and associates 33 25 Net new loans to joint ventures and associates (40) 19 Purchases of property and equipment (116) (30) Proceeds on sale of property and equipment 19 56 Other cash flow related to intangible assets (122) (59) Net cash (used in)/from investing activities - continuing operations (228) 334 Net cash (used in)/from investing activities - discontinued operations1 (20) (1,588) Total net cash (used in)/from investing activities (248) (1,254) Cash flows from financing activities Redemption of direct capital instrument (547) - Proceeds from issue of ordinary shares 8 - Treasury shares purchased for employee trusts - (32) New borrowings drawn down, net of expenses 2,383 2,201 Repayment of borrowings (2,442) (2,441) Net repayment of borrowings (59) (240) Interest paid on borrowings (527) (605) Preference dividends paid (17) (17) Ordinary dividends paid3 (447) (429) Coupon payments on direct capital instruments and fixed rate tier 1 notes (88) (92) Capital contributions from non-controlling interests of subsidiaries - 1 Dividends paid to non-controlling interests of subsidiaries (189) (134) Changes in controlling interest in subsidiaries4 (89) - Net cash used in financing activities - continuing operations (1,955) (1,548) Net cash from financing activities - discontinued operations1 - 19 Total net cash used in financing activities (1,955) (1,529) Total net (decrease)/increase in cash and cash equivalents (2,747) 1,235 Cash and cash equivalents at 1 January 25,989 24,564 Effect of exchange rate changes on cash and cash equivalents (678) 190 Cash and cash equivalents at 31 December 22,564 25,989 1 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). See note B5 for further details. 2 The statement of cash flows has been restated following the adoption of amendments to IAS 32 'Financial Instruments: Presentation' - see note B2 for details. 3 Ordinary dividends paid amounted to £449 million. £2 million of unclaimed and waived dividends has been set off against this above. 4 Changes in controlling interests in subsidiaries primarily relate to Italy where we increased our ownership interest in certain existing subsidiaries during 2014. Page 41 B1(i)Basis of preparation (a) The results in this preliminary announcement have been taken from the Group's 2014 Annual report and accounts which will be available on the Company's website on 16 March 2015. The consolidated financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to those reporting under IFRS. 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 2014 Annual report and accounts. The Group has adopted new standards, interpretations and amendments to published standards as described in B1(ii). The preliminary announcement for the year ended 31 December 2014 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The results on an IFRS basis for full year 2014 and 2013 have been audited by PricewaterhouseCoopers LLP (PwC). PwC have reported on the 2014 and 2013 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 2013 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 for the foreseeable future. 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, short-term realised and unrealised investment gains and losses are treated as non-operating items. As a result, the Group focuses on an operating profit measure that incorporates an expected return on investments supporting its long-term and non-long-term businesses. 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. Operating profit also excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of intangibles; the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates; integration and restructuring costs; and exceptional items. B1(ii) New standards, interpretations and amendments to published standards that have been adopted by the Group The Group has adopted the following new standards or amendments to standards which became effective for financial years beginning on or after 1 January 2014. (i) Amendments to IAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities These amendments clarify the meaning of 'currently legally enforceable right to set-off' to reinforce that a right to set-off must not be contingent on any future event, including counterparty default or bankruptcy. Additionally, amendments to IAS 32 clarify that a settlement mechanism must be in place to ensure settlement in practice that is either simultaneous or sufficient to result in insignificant credit and liquidity risk. The amendments to IAS 32 have been applied retrospectively in accordance with the transitional provisions of the standard. The primary impact of the application of the amendments has resulted in the grossing up of certain assets and liabilities related to derivatives and repurchase arrangements in the statement of financial position that were previously reported net. There is no impact on the profit or loss or equity for any period presented. The effect on amounts previously reported at 1 January 2013 and 31 December 2013 is set out in B2. (ii) Amendments to IAS 39, Financial Instruments - Novation of Derivatives and Continuation of Hedge Accounting The amendments provide an exemption from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. These amendments have no impact on the Group's consolidated financial statements as the Group has not novated its derivatives to a central counterparty in the current or prior periods. (iii) Amendments to IFRS 10, IFRS 12 and IAS 27 - Investment Entities Exception The amendments provide an exemption from consolidation of subsidiaries under IFRS 10 Consolidated Financial Statements for entities which meet the definition of an 'investment entity', such as certain investment funds. There are no implications for the Group's consolidated financial statements as the Group does not meet the definition of an investment entity. (iv) IFRIC 21, Levies The interpretation clarifies when an entity recognises a liability for a levy imposed by government in accordance with legislation (other than taxes and fines or other penalties). The adoption of the amendment has no significant impact for the Group's consolidated financial statements. (v) Annual Improvements to IFRSs 2010-2012 These improvements to IFRSs consist of amendments to seven IFRSs including IFRS 2 Share-based Payment, IFRS 3 Business Combinations and IFRS 13 Fair Value Measurement. The amendments clarify existing guidance and there is no significant impact on the Group's consolidated financial statements. Page 42 B2 - Analysis of the impact of new standards and amendments to published standards that have been adopted by the Group Impact of amendments to accounting standards on the consolidated statement of financial position 1 January 2013 31 December 2013 As previously reported £m Effect of amendments to IAS 32 £m Restated £m As previously reported £m Effect of amendments to IAS 32 £m Restated £m Total assets 314,467 2,653 317,120 278,876 2,751 281,627 Effect analysed as: Financial investments 188,743 908 189,651 192,961 1,066 194,027 Receivables 7,476 558 8,034 7,060 416 7,476 Prepayments and accrued income 2,700 76 2,776 2,498 137 2,635 Cash and cash equivalents 23,102 1,111 24,213 24,999 1,132 26,131 Total equity and liabilities 314,467 2,653 317,120 278,876 2,751 281,627 Total liabilities 303,107 2,653 305,760 267,859 2,751 270,610 Effect analysed as: Payables and other financial liabilities 9,398 2,653 12,051 9,194 2,751 11,945 The change in cash and cash equivalents of £1,132 million at 31 December 2013 has been presented in the consolidated statement of cash flows as an increase of opening cash and cash equivalents of £1,111 million as at 1 January 2013, a decrease in net cash flows from operating activities for the year then ended of £8 million and an increase in the effect of exchange rate changes of £29 million. There is no impact from the adoption of these amendments on the consolidated income statement, consolidated statement of comprehensive income or consolidated statement of changes in equity for the year ended 31 December 2013. 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: 2014 2013 Eurozone Average rate (€1 equals) £0.81 £0.85 Period end rate (€1 equals) £0.78 £0.83 Canada Average rate ($CAD1 equals) £0.55 £0.62 Period end rate ($CAD1 equals) £0.55 £0.57 Poland Average rate (PLN1 equals) £0.19 £0.20 Period end rate (PLN1 equals) £0.18 £0.20 United States Average rate ($US1 equals) £0.61 £0.64 Period end rate ($US1 equals) £0.64 £0.60 B4 - Presentation of discontinued operations The sale of the Group's US Life and annuity business and related internal investment management operations ("US Life"), as described in note B5(b)(viii), has been classified as discontinued operations together with the results of US Life for preceding years, as the Group exited from a major geographical area of operation. This is consistent with the presentation in the 2013 Annual Report and Accounts. Page 43 B5 - Subsidiaries This note provides details of the acquisitions and disposals of subsidiaries, joint ventures and associates that the Group has made during the year, together with details of businesses held for sale at the year end. (a) Acquisitions There have been no material acquisitions during the year. On 2 December 2014 Aviva plc and Friends Life Group Limited ("Friends Life") announced they had reached agreement on the terms of a recommended all share acquisition of Friends Life by Aviva plc. The proposed acquisition is subject to a number of conditions including approval from shareholders at a general meeting on 26 March 2015. If the conditions to the proposed transaction are satisfied, it is expected to complete in the second quarter of 2015. (b) Disposal and re-measurements of subsidiaries, joint ventures and associates The profit on the disposal and re-measurement of subsidiaries, joint ventures and associates comprises: 2014 £m 2013 £m Spain - long-term business (see (vi) below) 132 197 Italy - long-term business (see (iii) below) (6) (178) Korea (see (ii) below) 2 (20) Turkey - general insurance (see (vii) below) (16) (9) Aviva Investors (see (iv) below) 35 - Turkey - long-term business (see (v) below) 15 - Indonesia (see (i) below) (3) - Ireland - long-term business - 87 Malaysia - 39 Russia - 1 Czech Republic, Hungary and Romania - 1 Poland - (4) Other small operations 15 1 Profit on disposal and remeasurement from continuing operations 174 115 Profit on disposal and remeasurement from discontinued operations (see (viii) below) 58 808 Total profit on disposal and remeasurement 232 923 (i) Indonesia In the second half of 2013, management decided to restructure existing operations in Indonesia and establish a new joint venture. The Indonesian operations were classified as held for sale at 31 December 2013 as Aviva's holding was to change from a 60% controlling interest, which was consolidated as a subsidiary, to a 50% joint venture accounted for using the equity method. On 17 January 2014, Aviva and PT Astra International Tbk ("Astra") signed an agreement to form the 50-50 joint venture (Astra Aviva Life) which completed in May 2014. As of that date, Aviva and Astra began to share joint control and the Group's holding in Astra Aviva Life was reclassified as a joint venture. A net gain of £1 million was recognised during 2014. Recycling of currency translation and investment valuation reserves of £4 million on completion resulted in an overall net loss on disposal of £3 million. (ii) Korea In 2013, management determined that the value of our long-term business joint venture in South Korea, Woori Aviva Life Insurance Co. Ltd, would be principally recovered through sale and it was classified as held for sale and re-measured at fair value, based on expected sales proceeds less costs to sell of £19 million. On 27 June 2014 the Group completed its disposal of the 47% interest for consideration of £17 million, after transaction costs. Net assets disposed of were £19 million resulting in a loss of £2 million (2013: £20 million loss on re-measurement). Recycling of currency translation and investment valuation reserves of £4 million on completion resulted in an overall net gain in 2014 of £2 million. Page 44 B5 - Subsidiaries continued (iii) Italy - long-term business - Eurovita In the first half of 2013, the Italian long-term business Eurovita Assicurazioni S.p.A ("Eurovita") was classified as held for sale, as a result of management determining that the value of the business would be principally recovered through sale. Finoa Srl ("Finoa"), an Italian holding company in which Aviva owns a 50% share, owned a 77.55% share of Eurovita. Following classification as held for sale, Eurovita was re-measured at fair value based on expected sales proceeds less costs to sell of £39 million with a re-measurement loss of £178 million (Aviva share: £74 million loss) in 2013. On 30 June 2014 Finoa disposed of its entire interest in Eurovita for gross cash consideration of £36 million. The overall loss on the sale of Finoa's 77.55% stake in Eurovita was £6 million analysed as: 2014 £m Loss on disposal attributable to: Aviva 4 Non-controlling interest (10) Total loss on disposal (6) Aviva's £4 million gain was calculated as follows: 2014 £m Assets Financial Investments 2,857 Other assets 4 Cash and cash equivalents 175 Total assets 3,036 Liabilities Insurance liabilities 103 Liability for investment contracts 2,687 Unallocated divisible surplus 123 External borrowings 28 Other liabilities 23 Total liabilities 2,964 Net assets 72 Non-controlling interests before disposal (44) Group's share of net assets disposed of 28 Cash consideration received 18 Less: transaction costs attributable to Aviva (4) Net cash consideration 14 Loan settlement1 9 Currency translation reserve recycled to the income statement 9 Profit on disposal 4 1 A loan between Aviva and Eurovita had been provided against in 2013 as its repayment was uncertain as of 31 December 2013. However, this provision was reversed in 2014 as the loan was repaid in full upon the closing of the sale. (iv) Aviva Investors - River Road On 28 March 2014 Aviva Investors announced its agreement to sell US equity manager River Road Asset Management, LLC ("River Road") to Affiliated Managers Group, Inc. The sale was completed on 30 June 2014 for consideration of £75 million, after transaction costs. Assets disposed of were £40 million, comprised of £38 million of goodwill and intangibles and £2 million of other investments, resulting in a £35 million gain on disposal. (v) Turkey - long-term business - initial public offering On 13 November 2014 Aviva and its joint venture partner Sabanci Holdings completed an initial public offering of a minority share of their Turkish life and pensions joint venture AvivaSA Emeklilik ve Hayat A.S ("Aviva SA"), reducing the Group's holding in Aviva SA from 49.8% to 41.3%. Sabanci and the Group continue to share contractual joint control of Aviva SA and it continues to be equity accounted for as a joint venture. The Group received cash proceeds of £40 million, net of transaction costs, from the share sale resulting in a gain of £23 million. Recycling of currency translation reserves of £8 million on completion resulted in an overall net gain of £15 million. Page 45 B5 - Subsidiaries continued (vi) Spain - long-term business On 19 September 2014 Aviva announced the sale of its 50% holding in CXG Aviva Corporacion Caixa Galicia de Seguros y Reaseguros, S.A. ("CxG") a Spanish life assurance company to NCG Corporacion Industrial S.L. ("NCG Banco") following a decision by the Spanish Arbitration Tribunal which concluded legal proceedings between Aviva and NCG Banco. On 11 December 2014 the Group transferred its entire holding in CxG for cash consideration of £221 million resulting in a net profit on disposal of £132 million, calculated as follows: 2014 £m Assets Goodwill 56 Intangible assets 3 Financial investments 806 Receivables and other assets 5 Prepayments and accrued income 13 Cash and cash equivalents 23 Total assets 906 Liabilities Insurance liabilities 718 Payables and other financial liabilities 24 Other liabilities 7 Total liabilities 749 Net assets 157 Non-controlling interests before disposal (51) Group's share of net assets disposed of 106 Cash consideration received 221 Less: transaction costs attributable to Aviva (1) Net cash consideration 220 Currency translation reserve recycled to the income statement 18 Profit on disposal 132 (vii) Turkey general insurance In the second half of 2013 management committed to sell the Turkey general insurance subsidiary Aviva Sigorta S.A. ("Turkey GI"). At 31 December 2013 the business was remeasured to fair value based on an expected sales price less costs to sell of £2 million resulting in a loss on remeasurement of £9 million in FY13 following its classification as held for sale. In 2014 the underlying carrying value decreased from £11 million to £(2) million. On 18 December 2014 Aviva completed the sale of Turkey GI resulting in a loss on sale of £17 million after transaction costs and post completion adjustments. The net loss recognised within "Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates" in 2014 is calculated as follows: 2014 £m Loss on sale (17) Reversal of 2013 impairment 9 Currency translation reserve recycled to the income statement (8) Net loss on disposal (16) (viii) Discontinued operations - US Life On 21 December 2012, the Group announced that it had agreed to sell US Life for consideration of £1.0 billion including the shareholder loan. Following classification as held for sale, US Life was remeasured to fair value less costs to sell in 2012 resulting in an impairment loss of £2,359 million recognised as a loss on remeasurement of subsidiaries. The sale of US Life completed on 2 October 2013 and the transaction proceeds received were based on the estimated earnings and other improvements in statutory surplus over the period from 30 June 2012 to 30 September 2013. The final purchase price was subject to customary completion adjustments. A profit on disposal of £808 million was recorded in 2013, reflecting management's best estimate of the completion adjustments as of 31 December 2013. In 2014, the Group paid a settlement of £20 million related to the purchase price adjustment. The settlement and the aggregate development of other provisions related to the discontinued operations in 2014 resulted in a net £58 million gain which has been presented as profit on disposal of discontinued operations. Page 46 B5 - Subsidiaries continued (c) Assets and liabilities of operations classified as held for sale During 2014 it was determined that the value of the Group's Taiwan joint venture, First-Aviva Life Insurance Co. Ltd. ("Taiwan"), would no longer be recovered principally through a sale. As a result, the business was reclassified out of "Assets of operations classified as held for sale" and into "Interests in, and loans to, joint ventures". As the recoverable amount at the date it ceased to be held for sale was lower than its carrying value when it was classified as held for sale, no remeasurement gain or loss was recorded following this reclassification. The assets and liabilities of operations classified as held for sale as at 31 December 2014 are as follows: 2014 £m 2013 £m Assets Goodwill - 4 Interests in, and loans to, joint ventures and associates - 29 Financial investments - 2,675 Reinsurance assets - 37 Deferred acquisition costs - 6 Other assets - 196 Cash and cash equivalents 9 351 9 3,298 Additional impairment to write down the disposal group to fair value less costs to sell - (185) Total assets 9 3,113 Liabilities Insurance liabilities (1) (238) Liability for investment contracts - (2,710) Unallocated divisible surplus - 4 Provisions - (3) Deferred tax liabilities - (1) External borrowings - (29) Other liabilities (1) (46) Total liabilities (2) (3,023) Net assets 7 90 Assets and liabilities held for sale at 31 December 2014 relate to small reinsurance operations in the Group. (d) Subsequent events On 25 February 2015, Crédit du Nord, the Group's partner in Antarius S.A. ("Antarius"), exercised its call option to purchase Aviva France's 50% share of Antarius. In accordance with the shareholders agreement, the exercise of the call option starts a period of approximately two years to complete the disposal. In accordance with IFRS 5, the subsidiary will be classified as Held for Sale from the date when the transaction is expected to complete within 12 months. Page 47 B6 - Segmental information The Group's results can be segmented, either by activity or by geography. Our primary reporting format is on market reporting lines, with supplementary information being given by business activity. This note provides segmental information on the consolidated income statement and consolidated statement of financial position. The Group has determined its operating segments along market reporting lines. These reflect the management structure whereby a member of the Executive Management team is accountable to the Group CEO for the operating segment for which they are responsible. United Kingdom & Ireland The United Kingdom and Ireland comprises two operating segments - Life and General Insurance. The principal activities of our UK and Ireland Life operations are life insurance, long-term health (in the UK) and accident insurance, savings, pensions and annuity business. UK and Ireland General Insurance provides insurance cover to individuals and businesses, for risks associated mainly with motor vehicles, property and liability (such as employers' liability and professional indemnity liability) and medical expenses. UK & Ireland General Insurance includes the results of our Ireland Health business. France The principal activities of our French operations are long-term business and general insurance. The long-term business offers a range of long-term insurance and savings products, primarily for individuals, with a focus on the unit-linked market. The general insurance business predominantly sells personal and small commercial lines insurance products through agents and a direct insurer. Poland Activities in Poland comprise long-term business and general insurance operations, including our long-term business in Lithuania. Italy, Spain and Other These countries are not individually significant at a Group level, so have been aggregated into a single reporting segment in line with IFRS 8. This segment includes our operations in Italy (including Eurovita up until the date of disposal in June 2014) and Spain (including Aseval and CxG up until the dates of their disposals in April 2013 and December 2014 respectively). The principal activities of our Italian operations are long-term business and general insurance. The life business offers a range of long-term insurance and savings products, and the general insurance business provides motor and home insurance products to individuals, as well as small commercial risk insurance to businesses. The principal activity of the Spanish operation is the sale of long-term business, accident and health insurance and a selection of savings products. Our Other European operations include our life operations in Turkey (including our reduced joint venture share following IPO in November 2014) and our Turkish general insurance business (up until the date of disposal in December 2014). This segment also includes the results of our Russian and Romanian businesses until the date of their disposals in 2013. Canada The principal activity of the Canadian operation is general insurance. In particular it provides personal and commercial lines insurance products principally distributed through insurance brokers. Asia Our activities in Asia principally comprise our long-term business operations in China, India, Singapore, Hong Kong, Vietnam, Indonesia and Taiwan. This segment also includes the results of Malaysia and Korea until the date of their disposals (in April 2013 and June 2014 respectively). Asia also includes general insurance and health operations in Singapore and health operations in Indonesia. Aviva Investors Aviva Investors operates in most of the markets in which the Group operates, in particular the UK, France, North America, Asia Pacific and other international businesses, managing policyholders' and shareholders' invested funds, providing investment management services for institutional pension fund mandates and managing a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. This segment also includes the results of River Road Asset Management LLC until the date of its disposal in June 2014. Other Group activities Investment return on centrally held assets and head office expenses, such as Group treasury and finance functions, together with certain taxes and financing costs arising on central borrowings are included in 'Other Group activities', along with central core structural borrowings and certain tax balances in the segmental statement of financial position. The results of our reinsurance operations are also included in this segment. Discontinued operations In October 2013 the Group sold its US life operations (including the related internal asset management operations of Aviva Investors), which has been presented as a discontinued operation for the comparative periods in the income statement, statement of comprehensive income and statement of cash flows. As described in note B5(b)(viii) the settlement of the purchase price adjustment, in conjunction with the aggregate development of other provisions is presented as profit from discontinued operations in 2014. Page 48 B6 - Segmental information continued (a) (i) Segmental income statement for the year ended 31 December 2014 United Kingdom & Ireland Europe Life £m GI £m France £m Poland £m Italy, Spain and Other £m Canada £m Asia £m Aviva Investors2 £m Other Group activities3 £m Total £m Gross written premiums 4,306 4,484 5,756 490 3,514 2,176 942 - 2 21,670 Premiums ceded to reinsurers (784) (454) (70) (7) (68) (70) (161) - - (1,614) Internal reinsurance revenue (7) (2) (2) (1) (2) (2) - - 16 - Premiums written net of reinsurance 3,515 4,028 5,684 482 3,444 2,104 781 - 18 20,056 Net change in provision for unearned premiums 23 43 (27) 6 10 (54) (3) - 3 1 Net earned premiums 3,538 4,071 5,657 488 3,454 2,050 778 - 21 20,057 Fee and commission income 398 160 203 87 115 15 9 243 - 1,230 3,936 4,231 5,860 575 3,569 2,065 787 243 21 21,287 Net investment income/(expense) 13,301 362 5,174 147 2,392 180 125 267 (59) 21,889 Inter-segment revenue - - - - - - - 158 - 158 Share of profit/(loss) of joint ventures and associates 139 - 7 4 9 - (12) - - 147 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates - - - - 125 14 (1) 35 1 174 Segmental income1 17,376 4,593 11,041 726 6,095 2,259 899 703 (37) 43,655 Claims and benefits paid, net of recoveries from reinsurers (7,522) (2,745) (4,594) (331) (2,572) (1,276) (362) - (72) (19,474) Change in insurance liabilities, net of reinsurance (3,955) 88 (1,119) (70) (212) (70) (294) - 62 (5,570) Change in investment contract provisions (3,036) - (1,881) 8 (1,347) - - (262) - (6,518) Change in unallocated divisible surplus (62) - (2,182) (6) (1,055) - (59) - - (3,364) Fee and commission expense (462) (1,294) (564) (65) (289) (570) (60) (24) (61) (3,389) Other expenses (674) (228) (232) (59) (127) (81) (61) (332) (185) (1,979) Inter-segment expenses (137) (4) (4) (7) - (4) - - (2) (158) Finance costs (191) (4) (3) - (4) (5) - (2) (331) (540) Segmental expenses (16,039) (4,187) (10,579) (530) (5,606) (2,006) (836) (620) (589) (40,992) Profit/(loss) before tax from continuing operations 1,337 406 462 196 489 253 63 83 (626) 2,663 Tax attributable to policyholders' returns (357) - - - - - (25) - - (382) Profit/(loss) before tax attributable to shareholders' profits from continuing operations 980 406 462 196 489 253 38 83 (626) 2,281 Profit from discontinued operations4,5 58 58 Adjusted for non-operating items from continuing operating: Reclassification of corporate costs and unallocated interest - 11 16 - 1 - - - (28) - Investment return variances and economic assumption changes on long-term business 13 - 9 (4) (101) - 11 - - (72) Short-term fluctuation in return on investments backing non-long-term business - (82) (50) (1) 13 (65) - - (76) (261) Economic assumption changes on general insurance and health business - 145 - - - 3 - - (3) 145 Impairment of goodwill, joint ventures and associates and other amounts expensed - - - - - - 24 - - 24 Amortisation and impairment of intangibles 31 1 - - 17 10 3 11 17 90 (Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates - - - - (125) (14) 1 (35) (1) (174) Integration and restructuring costs 28 11 15 1 1 4 1 4 75 140 Adjusted for non-operating items from discontinued operations5 - - - - - - - - (58) (58) Operating profit/(loss) before tax attributable to shareholders 1,052 492 452 192 295 191 78 63 (642) 2,173 1 Total reported income, excluding inter-segment revenue, includes £20,816 million from the United Kingdom (Aviva plc's country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts were written. 2 Aviva Investors operating profit includes £2 million profit relating to the Aviva Investors Pooled Pensions business. 3 Other Group activities include Group Reinsurance. 4 Discontinued operations represent the results of the US Life and related internal asset management business (US Life) until the date of disposal (2 October 2013). For further details, see note B5. 5 In 2014, the Group paid a settlement of £20 million related to the purchase price adjustment relating to the disposal of the US Life business in 2013. The settlement and the aggregate development of other provisions related to the discontinued operations in 2014 resulted in a net £58 million gain which has been presented as profit on disposal of discontinued operations. Page 49 B6 - Segmental information continued (a) (ii) Segmental income statement for the year ended 31 December 2013 United Kingdom & Ireland Europe Life £m GI £m France £m Poland £m Italy, Spain and Other £m Canada £m Asia £m Aviva Investors2 £m Other Group activities3 £m Continuing operations £m Discontinued operations4 £m Total £m Gross written premiums 4,971 4,664 5,634 484 3,277 2,318 678 - 9 22,035 1,589 23,624 Premiums ceded to reinsurers (743) (455) (63) (6) (79) (60) (146) - 6 (1,546) (100) (1,646) Internal reinsurance revenue - (9) (6) (3) (5) (8) - - 31 - - - Premiums written net of reinsurance 4,228 4,200 5,565 475 3,193 2,250 532 - 46 20,489 1,489 21,978 Net change in provision for unearned premiums (9) 185 (25) (2) 31 (54) 8 - - 134 - 134 Net earned premiums 4,219 4,385 5,540 473 3,224 2,196 540 - 46 20,623 1,489 22,112 Fee and commission income 424 198 190 60 115 40 14 238 - 1,279 28 1,307 4,643 4,583 5,730 533 3,339 2,236 554 238 46 21,902 1,517 23,419 Net investment income/(expense) 6,898 293 3,332 180 1,628 17 40 148 (27) 12,509 2,340 14,849 Inter-segment revenue - - - - - - - 143 - 143 49 192 Share of (loss)/profit of joint ventures and associates 88 - 8 3 6 - 15 - - 120 - 120 (Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 87 - - (4) 13 - 19 - - 115 808 923 Segmental income1 11,716 4,876 9,070 712 4,986 2,253 628 529 19 34,789 4,714 39,503 Claims and benefits paid, net of recoveries from reinsurers (8,960) (2,818) (4,858) (363) (3,222) (1,342) (489) - (41) (22,093) (2,037) (24,130) Change in insurance liabilities, net of reinsurance 4,102 119 (1,618) (103) (2) (42) 92 - (55) 2,493 (312) 2,181 Change in investment contract provisions (4,829) - (1,725) 34 (386) - - (144) - (7,050) (31) (7,081) Change in unallocated divisible surplus 199 - 426 16 (363) - 2 - - 280 - 280 Fee and commission expense (598) (1,479) (554) (60) (286) (620) (61) (23) (294) (3,975) (438) (4,413) Other expenses (370) (301) (280) (51) (214) (136) (73) (446) (349) (2,220) (293) (2,513) Inter-segment expenses (129) (4) - (7) - (3) - - - (143) (49) (192) Finance costs (224) (6) (4) - (4) (6) - (5) (360) (609) (16) (625) Segmental expenses (10,809) (4,489) (8,613) (534) (4,477) (2,149) (529) (618) (1,099) (33,317) (3,176) (36,493) Profit/(loss) before tax 907 387 457 178 509 104 99 (89) (1,080) 1,472 1,538 3,010 Tax attributable to policyholders' returns (190) - - - - - (1) - - (191) - (191) Profit/(loss) before tax attributable to shareholders' profits 717 387 457 178 509 104 98 (89) (1,080) 1,281 1,538 2,819 Adjusted for non-operating items: Reclassification of corporate costs and unallocated interest - 7 21 - - - - - (28) - - - Investment return variances and economic assumption changes on long-term business 414 - (70) 1 (267) - (29) - - 49 (452) (403) Short-term fluctuation in return on investments on non-long-term business - 74 15 - 12 122 - - 113 336 - 336 Economic assumption changes on general insurance and health business - (28) - - - (4) - - (1) (33) - (33) Impairment of goodwill, joint ventures and associates and other amounts expensed - - - - 48 - 29 - - 77 - 77 Amortisation and impairment of intangibles 21 1 - - 17 15 1 22 14 91 9 100 (Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates (87) - - 4 (13) - (19) - - (115) (808) (923) Integration and restructuring costs 59 24 25 1 8 9 7 41 189 363 3 366 Operating profit/(loss) before tax attributable to shareholders 1,124 465 448 184 314 246 87 (26) (793) 2,049 290 2,339 1 Total reported income, excluding inter-segment revenue, includes £15,862 million from the United Kingdom (Aviva plc's country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts were written. 2 Aviva Investors operating profit includes £2 million profit relating to Aviva Investors Pooled Pensions business. 3 Other Group activities include Group Reinsurance. 4 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). For further details see note B5. Page 50 B6 - Segmental information continued (a) (iii) Segmental statement of financial position as at 31 December 2014 United Kingdom & Ireland Europe Life £m GI £m France £m Poland £m Italy, Spain and Other £m Canada £m Asia £m Aviva Investors £m Other Group activities £m Total £m Goodwill - 1,031 - 8 190 23 50 - - 1,302 Acquired value of in-force business and intangible assets 127 103 96 5 581 60 2 25 29 1,028 Interests in, and loans to, joint ventures and associates 953 - 145 10 82 2 352 - - 1,544 Property and equipment 74 33 214 3 6 9 4 1 13 357 Investment property 5,558 95 1,758 - 1 - - 1,120 393 8,925 Loans 24,178 84 788 - 58 122 30 - - 25,260 Financial investments 97,410 5,415 66,484 2,829 19,959 3,483 3,192 660 3,206 202,638 Deferred acquisition costs 1,310 438 227 23 89 280 4 7 - 2,378 Other assets 19,092 4,895 10,009 171 1,585 937 459 784 4,346 42,278 Assets of operations classified as held for sale - - - - - - - - 9 9 Total assets 148,702 12,094 79,721 3,049 22,551 4,916 4,093 2,597 7,996 285,719 Insurance liabilities Long-term business and outstanding claims provisions 71,619 5,515 16,179 2,444 8,414 2,317 2,598 - 36 109,122 Unearned premiums 225 2,038 402 34 247 1,114 46 - 1 4,107 Other insurance liabilities - 79 46 - - 89 - - 2 216 Liability for investment contracts 57,201 - 48,316 10 9,867 - - 1,851 - 117,245 Unallocated divisible surplus 1,879 - 6,104 71 1,202 - 211 - - 9,467 Net asset value attributable to unitholders 19 - 2,928 - 317 - - - 6,218 9,482 External borrowings 2,016 - - - 52 - - - 5,310 7,378 Other liabilities, including inter-segment liabilities 9,539 (1,787) 3,673 120 662 404 388 377 3,048 16,424 Liabilities of operations classified as held for sale - - - - - - - - 2 2 Total liabilities 142,498 5,845 77,648 2,679 20,761 3,924 3,243 2,228 14,617 273,443 Total equity 12,276 Total equity and liabilities 285,719 Page 51 B6 - Segmental information continued (a) (iv) Segmental statement of financial position as at 31 December 2013 - (Restated)1 United Kingdom & Ireland Europe Life £m GI £m France £m Poland £m Italy, Spain and Other £m Canada £m Asia £m Aviva Investors £m Other Group activities £m Total £m Goodwill - 1,039 - 9 303 49 49 27 - 1,476 Acquired value of in-force business and intangible assets 148 2 122 8 637 58 2 48 43 1,068 Interests in, and loans to, joint ventures and associates 1,001 - 153 9 94 - 210 - - 1,467 Property and equipment 22 20 229 2 5 12 4 1 18 313 Investment property 6,364 7 1,545 - 2 - - 982 551 9,451 Loans 22,629 270 852 - 23 76 29 - - 23,879 Financial investments 90,646 4,696 65,601 3,045 20,469 3,402 2,756 687 2,725 194,027 Deferred acquisition costs 1,316 456 229 23 100 268 4 - 1 2,397 Other assets 19,620 4,167 11,051 220 1,967 1,081 343 532 5,455 44,436 Assets of operations classified as held for sale - - - - 3,042 - 62 - 9 3,113 Total assets 141,746 10,657 79,782 3,316 26,642 4,946 3,459 2,277 8,802 281,627 Insurance liabilities Long-term business and outstanding claims provisions 67,484 5,657 16,185 2,640 9,575 2,372 2,142 - 45 106,100 Unearned premiums 248 2,094 404 43 298 1,088 50 - 1 4,226 Other insurance liabilities - 84 50 - 1 92 - - 2 229 Liability for investment contracts 54,679 - 49,856 14 9,750 - - 1,759 - 116,058 Unallocated divisible surplus 1,857 - 4,292 72 342 - 150 - - 6,713 Net asset value attributable to unitholders 287 - 3,032 - 324 - - - 6,719 10,362 External borrowings 2,620 - - - 72 - - - 5,127 7,819 Other liabilities, including inter-segment liabilities 8,489 (3,337) 3,782 114 963 411 354 272 5,032 16,080 Liabilities of operations classified as held for sale - - - - 3,003 - 20 - - 3,023 Total liabilities 135,664 4,498 77,601 2,883 24,328 3,963 2,716 2,031 16,926 270,610 Total equity 11,017 Total equity and liabilities 281,627 1 The statement of financial position has been restated following the adoption of amendments to IAS 32 'Financial Instruments: Presentation' - see note B2 for details. There is no impact on the result or the total equity for any period presented as a result of this statement. (b) Further analysis by products and services The Group's results can be further analysed by products and services which comprise long-term business, general insurance and health, fund management and other activities. Long-term business Our long-term business comprises life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business. Long-term business also includes our share of the other life and related business written in our associates and joint ventures, as well as lifetime mortgage business written in the UK. General insurance and health Our general insurance and health business provides insurance cover to individuals and to small and medium sized businesses, for risks associated mainly with motor vehicles, property and liability, such as employers' liability and professional indemnity liability, and medical expenses. Fund management Our fund management business invests policyholders' and shareholders' funds and provides investment management services for institutional pension fund mandates. It manages a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. Clients include Aviva Group businesses and third-party financial institutions, pension funds, public sector organisations, investment professionals and private investors. Other Other includes service companies, head office expenses such as Group treasury and finance functions, and certain financing costs and taxes not allocated to business segments. Discontinued operations In the products and services analysis, the results of US Life (including the related internal asset management business) for comparative periods are presented as discontinued operations up to the date of disposal in October 2013. Page 52 B6 - Segmental information continued (b) (i) Segmental income statement - products and services for the year ended 31 December 2014 Long-term business £m General insurance and health2 £m Fund management £m Other £m Total £m Gross written premiums1 12,727 8,943 - - 21,670 Premiums ceded to reinsurers (971) (643) - - (1,614) Premiums written net of reinsurance 11,756 8,300 - - 20,056 Net change in provision for unearned premiums - 1 - - 1 Net earned premiums 11,756 8,301 - - 20,057 Fee and commission income 705 54 256 215 1,230 12,461 8,355 256 215 21,287 Net investment income/(expense) 21,295 666 5 (77) 21,889 Inter-segment revenue - - 158 - 158 Share of profit of joint ventures and associates 144 3 - - 147 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 140 (16) 35 15 174 Segmental income 34,040 9,008 454 153 43,655 Claims and benefits paid, net of recoveries from reinsurers (13,861) (5,613) - - (19,474) Change in insurance liabilities, net of reinsurance (5,604) 34 - - (5,570) Change in investment contract provisions (6,518) - - - (6,518) Change in unallocated divisible surplus (3,364) - - - (3,364) Fee and commission expense (977) (2,247) (26) (139) (3,389) Other expenses (920) (402) (321) (336) (1,979) Inter-segment expenses (148) (10) - - (158) Finance costs (191) (11) (2) (336) (540) Segmental expenses (31,583) (8,249) (349) (811) (40,992) Profit/(loss) before tax from continuing operations 2,457 759 105 (658) 2,663 Tax attributable to policyholder returns (382) - - - (382) Profit/(loss) before tax attributable to shareholders' profits from continuing operations 2,075 759 105 (658) 2,281 Adjusted for: Non-operating items from continuing operations (96) 49 (19) (42) (108) Operating profit/(loss) before tax attributable to shareholders' profits from continuing operations 1,979 808 86 (700) 2,173 Operating profit/(loss) before tax attributable to shareholders' profits 1,979 808 86 (700) 2,173 1 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £164 million, of which £81 million relates to property and liability insurance and £83 million relates to long-term business. 2 General insurance and health business segment includes gross written premiums of £1,146 million relating to health business. The remaining business relates to property and liability insurance. Page 53 B6 - Segmental information continued (b) (ii) Segmental income statement - products and services for the year ended 31 December 2013 Long-term business £m General insurance and health2 £m Fund management £m Other £m Total £m Gross written premiums1 12,674 9,361 - - 22,035 Premiums ceded to reinsurers (905) (641) - - (1,546) Premiums written net of reinsurance 11,769 8,720 - - 20,489 Net change in provision for unearned premiums - 134 - - 134 Net earned premiums 11,769 8,854 - - 20,623 Fee and commission income 656 80 292 251 1,279 12,425 8,934 292 251 21,902 Net investment income/(expense) 12,184 349 3 (27) 12,509 Inter-segment revenue - - 143 - 143 Share of profit of joint ventures and associates 117 3 - - 120 (Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 125 (10) - - 115 Segmental income 24,851 9,276 438 224 34,789 Claims and benefits paid, net of recoveries from reinsurers (16,333) (5,760) - - (22,093) Change in insurance liabilities, net of reinsurance 2,519 (26) - - 2,493 Change in investment contract provisions (7,050) - - - (7,050) Change in unallocated divisible surplus 280 - - - 280 Fee and commission expense (1,078) (2,492) (34) (371) (3,975) Other expenses (764) (495) (369) (592) (2,220) Inter-segment expenses (134) (9) - - (143) Finance costs (219) (11) (4) (375) (609) Segmental expenses (22,779) (8,793) (407) (1,338) (33,317) Profit/(loss) before tax from continuing operations 2,072 483 31 (1,114) 1,472 Tax attributable to policyholder returns (191) - - - (191) Profit/(loss) before tax attributable to shareholders' profits from continuing operations 1,881 483 31 (1,114) 1,281 Adjusted for: Non-operating items from continuing operations 20 314 62 372 768 Operating profit/(loss) before tax attributable to shareholders' profits from continuing operations 1,901 797 93 (742) 2,049 Operating profit/(loss) before tax attributable to shareholders' profits from discontinued operations3 272 - 31 (13) 290 Operating profit/(loss) before tax attributable to shareholders' profits 2,173 797 124 (755) 2,339 1 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £246 million, of which £142 million relates to property and liability insurance and £104 million relates to long-term business. 2 General insurance and health business segment includes gross written premiums of £1,196 million relating to health business. The remaining business relates to property and liability insurance. 3 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). For further details see note B5. Page 54 B6 - Segmental information continued (b) (iii) Segmental statement of financial position - products and services as at 31 December 2014 Long-term business £m General insurance and health £m Fund management £m Other £m Total £m Goodwill 216 1,043 - 43 1,302 Acquired value of in-force business and intangible assets 691 270 25 42 1,028 Interests in, and loans to, joint ventures and associates 1,526 16 - 2 1,544 Property and equipment 230 100 1 26 357 Investment property 8,310 223 - 392 8,925 Loans 25,053 207 - - 25,260 Financial investments 188,094 11,435 23 3,086 202,638 Deferred acquisition costs 1,519 852 7 - 2,378 Other assets 29,839 6,270 657 5,512 42,278 Assets of operations classified as held for sale - 9 - - 9 Total assets 255,478 20,425 713 9,103 285,719 Gross insurance liabilities 99,453 13,992 - - 113,445 Gross liabilities for investment contracts 117,245 - - - 117,245 Unallocated divisible surplus 9,467 - - - 9,467 Net asset value attributable to unitholders 3,264 - - 6,218 9,482 External borrowings 2,068 - - 5,310 7,378 Other liabilities, including inter-segment liabilities 12,689 (952) 354 4,333 16,424 Liabilities of operations classified as held for sale - 2 - - 2 Total liabilities 244,186 13,042 354 15,861 273,443 Total equity 12,276 Total equity and liabilities 285,719 (b) (iv) Segmental statement of financial position - products and services as at 31 December 2013 - (Restated)1 Long-term business £m General insurance and health £m Fund management £m Other £m Total £m Goodwill 328 1,048 27 73 1,476 Acquired value of in-force business and intangible assets 791 160 48 69 1,068 Interests in, and loans to, joint ventures and associates 1,462 5 - - 1,467 Property and equipment 187 91 1 34 313 Investment property 8,760 140 - 551 9,451 Loans 23,523 346 - 10 23,879 Financial investments 180,694 10,742 35 2,556 194,027 Deferred acquisition costs 1,525 862 10 - 2,397 Other assets 31,328 4,845 459 7,804 44,436 Assets of operations classified as held for sale 2,949 164 - - 3,113 Total assets 251,547 18,403 580 11,097 281,627 Gross insurance liabilities 96,153 14,402 - - 110,555 Gross liabilities for investment contracts 116,058 - - - 116,058 Unallocated divisible surplus 6,713 - - - 6,713 Net asset value attributable to unitholders 3,643 - - 6,719 10,362 External borrowings 2,678 - - 5,141 7,819 Other liabilities, including inter-segment liabilities 12,019 (2,574) 346 6,289 16,080 Liabilities of operations classified as held for sale 2,881 142 - - 3,023 Total liabilities 240,145 11,970 346 18,149 270,610 Total equity 11,017 Total equity and liabilities 281,627 1 The statement of financial position has been restated following the adoption of amendments to IAS 32 "Financial Instruments: Presentation' - see note B2 for details. There is no impact on the result or the total equity for any period presented as a result of this statement. Page 55 B7 - Tax This note analyses the tax charge for the year and explains the factors that affect it. (a) Tax charged to the income statement (i) The total tax charge comprises: 2014 £m 2013 £m Current tax For the year 680 517 Prior year adjustments 12 13 Total current tax from continuing operations 692 530 Deferred tax Origination and reversal of temporary differences 315 63 Changes in tax rates or tax laws (17) (13) Write-(back)/down of deferred tax assets (7) 14 Total deferred tax from continuing operations 291 64 Total tax charged to income statement from continuing operations 983 594 Total tax charged to income statement from discontinued operations - 265 Total tax charged to income statement 983 859 (ii) The Group, as a proxy for policyholders in the UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Irish and Singapore life insurance policyholder returns is included in the tax charge. The tax charge attributable to policyholder returns included in the charge above is £382 million (2013: £191 million). (iii) The tax charge can be analysed as follows: 2014 £m 2013 £m UK tax 462 76 Overseas tax 521 783 983 859 (iv) Unrecognised tax losses and temporary differences of previous years were used to reduce the current tax expense and deferred tax expense by £5 million and £nil (2013: £3 million and £57 million), respectively. (v) Deferred tax charged to the income statement represents movements on the following items: 2014 £m 2013 £m Long-term business technical provisions and other insurance items (1,209) (24) Deferred acquisition costs 34 (90) Unrealised gains/(losses) on investments 1,254 145 Pensions and other post-retirement obligations 7 6 Unused losses and tax credits 32 112 Subsidiaries, associates and joint ventures 5 (2) Intangibles and additional value of in-force long-term business (7) (6) Provisions and other temporary differences 175 (77) Deferred tax charged to income statement from continuing operations 291 64 Deferred tax charged to income statement from discontinued operations - 187 Total deferred tax charged to income statement 291 251 Page 56 B7 - Tax continued (b) Tax charged/(credited) to other comprehensive income (i) The total tax charge/(credit) comprises: 2014 £m 2013 £m Current tax from continuing operations In respect of pensions and other post-retirement obligations (77) (15) In respect of foreign exchange movements (12) 6 (89) (9) Deferred tax from continuing operations In respect of pensions and other post-retirement obligations 424 (110) In respect of unrealised gains on investments 21 8 445 (102) Tax charged/(credited) to other comprehensive income arising from continuing operations 356 (111) Tax credited to other comprehensive income arising from discontinued operations - (169) Total tax charged/(credited) to other comprehensive income 356 (280) (ii) The tax charge attributable to policyholders' returns included above is £nil (2013: £nil). (c) Tax credited to equity Tax credited directly to equity in the year amounted to £19 million (2013: £52 million). This comprises £19 million in respect of coupon payments on the direct capital instruments and fixed rate tier 1 notes (2013: £22 million). In 2013, £30 million related to the currency translation reserve recycled to the income statement on the sale of Aviva USA Corporation. (d) Tax reconciliation The tax on the Group's profit 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 2014 £m Shareholder £m Policyholder £m 2013 £m Total profit before tax 2,339 382 2,721 2,819 191 3,010 Tax calculated at standard UK corporation tax rate of 21.5% (2013: 23.25%) 503 82 585 656 44 700 Reconciling items Different basis of tax - policyholders - 302 302 - 147 147 Adjustment to tax charge in respect of prior periods (36) - (36) (18) - (18) Non-assessable income and items not taxed at the full statutory rate (22) - (22) (54) - (54) Non-taxable loss/(profit) on sale of subsidiaries and associates (31) - (31) (154) - (154) Disallowable expenses 76 - 76 98 - 98 Different local basis of tax on overseas profits 138 (2) 136 184 - 184 Change in future local statutory tax rates (17) - (17) (9) - (9) Movement in deferred tax not recognised 3 - 3 (21) - (21) Tax effect of (profit)/loss from joint ventures and associates (4) - (4) (10) - (10) Other (9) - (9) (4) - (4) Total tax charged to income statement 601 382 983 668 191 859 The tax charge attributable to policyholder returns is removed from the Group's total profit before tax in arriving at the Group's profit before tax attributable to shareholders' profits. As the net of tax profits attributable to with-profit and unit-linked policyholders is zero, the Group's pre-tax profit attributable to policyholders is an amount equal and opposite to the tax charge attributable to policyholders included in the total tax charge. The difference between the policyholder tax charge and the impact of this item in the tax reconciliation can be explained as follows: 2014 £m 2013 £m Tax attributable to policyholder returns 382 191 UK corporation tax at a rate of 21.5% (2013: 23.25%) in respect of the policyholder tax deduction (82) (44) Different local basis of tax of overseas profits 2 - Different basis of tax - policyholders per tax reconciliation 302 147 UK legislation was substantively enacted in July 2013 to reduce the main rate of corporation tax from 23% to 21% from 1 April 2014, resulting in an effective rate for the year ended 31 December 2014 of 21.5%. A further reduction to 20% was also enacted with effect from 1 April 2015. The 20% rate has been used in the calculation of the UK's deferred tax assets and liabilities as at 31 December 2014. Page 57 B8 - Earnings per share This note shows how we calculate earnings per share, based both on the present shares in issue (the basic earnings per share) and the potential future shares in issue, including conversion of share options granted to employees (the diluted earnings per share). We have also shown the same calculations based on our operating profit as we believe this gives a better indication of operating performance. (a) Basic earnings per share (i) The profit attributable to ordinary shareholders is: 2014 2013 Continuing operations Operating profit £m Non-operating items £m Total £m Operating profit £m Non-operating items £m Total £m Profit/(loss) before tax attributable to shareholders' profits 2,173 108 2,281 2,049 (768) 1,281 Tax attributable to shareholders' profit (561) (40) (601) (534) 131 (403) Profit/(loss) for the year 1,612 68 1,680 1,515 (637) 878 Amount attributable to non-controlling interests (143) (26) (169) (174) 31 (143) Cumulative preference dividends for the year (17) - (17) (17) - (17) Coupon payments in respect of direct capital instruments (DCI) and fixed rate tier 1 notes (net of tax) (69) - (69) (70) - (70) Profit/(loss) attributable to ordinary shareholders from continuing operations 1,383 42 1,425 1,254 (606) 648 Profit attributable to ordinary shareholders from discontinued operations - 58 58 207 1,066 1,273 Profit attributable to ordinary shareholders 1,383 100 1,483 1,461 460 1,921 (ii) Basic earnings per share is calculated as follows: 2014 2013 Continuing operations Before tax £m Net of tax, non-controlling interests, preference dividends and DCI1 £m Per share p Before tax £m Net of tax, non-controlling interests, preference dividends and DCI1 £m Per share p Operating profit attributable to ordinary shareholders 2,173 1,383 47.0 2,049 1,254 42.6 Non-operating items: Investment return variances and economic assumption changes on long-term business 72 4 0.1 (49) (142) (4.8) Short-term fluctuation in return on investments backing non-long-term business 261 197 6.7 (336) (254) (8.6) Economic assumption changes on general insurance and health business (145) (114) (3.9) 33 27 0.9 Impairment of goodwill, joint ventures and associates and other amounts expensed (24) (24) (0.8) (77) (77) (2.6) Amortisation and impairment of intangibles (90) (61) (2.1) (91) (65) (2.2) Profit on disposal and remeasurement of subsidiaries, joint ventures and associates 174 170 5.8 115 220 7.4 Integration and restructuring costs and exceptional items (140) (130) (4.4) (363) (315) (10.7) Profit attributable to ordinary shareholders from continuing operations 2,281 1,425 48.4 1,281 648 22.0 Profit attributable to ordinary shareholders from discontinued operations 58 58 2.0 1,538 1,273 43.3 Profit attributable to ordinary shareholders 2,339 1,483 50.4 2,819 1,921 65.3 1 DCI includes direct capital instruments and fixed rate tier 1 notes. (iii) The calculation of basic earnings per share uses a weighted average of 2,943 million (2013: 2,940 million) ordinary shares in issue, after deducting shares owned by the employee share trusts. The actual number of shares in issue at 31 December 2014 was 2,950 million (2013: 2,947 million) and 2,948 million (2013: 2,938 million) excluding shares owned by the employee share trusts. Page 58 B8 - Earnings per share continued (b) Diluted earnings per share (i) Diluted earnings per share is calculated as follows: 2014 2013 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 1,425 2,943 48.4 648 2,940 22.0 Dilutive effect of share awards and options - 44 (0.7) - 39 (0.2) Diluted earnings per share from continuing operations 1,425 2,987 47.7 648 2,979 21.8 Profit attributable to ordinary shareholders 58 2,943 2.0 1,273 2,940 43.3 Dilutive effect of share awards and options - 44 (0.1) - 39 (0.6) Diluted earnings per share from discontinued operations 58 2,987 1.9 1,273 2,979 42.7 Diluted earnings per share 1,483 2,987 49.6 1,921 2,979 64.5 (ii) Diluted earnings per share on operating profit attributable to ordinary shareholders is calculated as follows: 2014 2013 Total £m Weighted average number of shares million Per share p Total £m Weighted average number of shares million Per share p Operating profit attributable to ordinary shareholders 1,383 2,943 47.0 1,254 2,940 42.6 Dilutive effect of share awards and options - 44 (0.7) - 39 (0.5) Diluted operating profit per share from continuing operations 1,383 2,987 46.3 1,254 2,979 42.1 Operating profit attributable to ordinary shareholders - 2,943 - 207 2,940 7.0 Dilutive effect of share awards and options - 44 - - 39 (0.1) Diluted operating profit per share from discontinued operations - 2,987 - 207 2,979 6.9 Diluted operating profit per share 1,383 2,987 46.3 1,461 2,979 49.0 B9 - Dividends and appropriations This note analyses the total dividends and other appropriations we paid during the year. The table below does not include the final dividend proposed in December 2014 because it is not accrued in these financial statements. 2014 £m 2013 £m Ordinary dividends declared and charged to equity in the year Final 2013 - 9.40 pence per share, paid on 16 May 2014 277 - Final 2012 - 9.00 pence per share, paid on 17 May 2013 - 264 Interim 2014 - 5.85 pence per share, paid on 17 November 2014 172 - Interim 2013 - 5.60 pence per share, paid on 15 November 2013 - 165 449 429 Dividends waived/unclaimed returned to the company (3) - Preference dividends declared and charged to equity in the year 17 17 Coupon payments on direct capital instruments and fixed rate tier 1 notes 88 92 551 538 In December 2014, the directors proposed a final dividend for 2014 of 12.25 pence per ordinary share (2013: 9.40 pence), amounting to £361 million (2013: £277 million) in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 15 May 2015 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2015. Interest payments on the direct capital instruments issued in November 2004 and the fixed rate tier 1 notes issued in May 2012 are treated as an appropriation of retained profits and, accordingly, are accounted for when paid. Tax relief is obtained at a rate of 21.50% (2013: 23.25%). Page 59 B10 - Insurance liabilities This note analyses the Group insurance contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions used. (a) Carrying amount (i) Insurance liabilities (gross of reinsurance) at 31 December comprise: 2014 2013 Long-term business £m General insurance and health £m Total £m Long-term business £m General insurance and health £m Total £m Long-term business provisions Participating 44,834 - 44,834 45,098 - 45,098 Unit-linked non-participating 7,963 - 7,963 8,714 - 8,714 Other non-participating 45,313 - 45,313 41,160 - 41,160 98,110 - 98,110 94,972 - 94,972 Outstanding claims provisions 1,343 7,298 8,641 1,287 7,730 9,017 Provision for claims incurred but not reported - 2,578 2,578 - 2,568 2,568 1,343 9,876 11,219 1,287 10,298 11,585 Provision for unearned premiums - 4,107 4,107 - 4,226 4,226 Provision arising from liability adequacy tests - 10 10 - 10 10 Total 99,453 13,993 113,446 96,259 14,534 110,793 Less: Amounts classified as held for sale - (1) (1) (106) (132) (238) 99,453 13,992 113,445 96,153 14,402 110,555 (ii) Change in insurance liabilities recognised as an expense The purpose of the following table is to reconcile the change in insurance liabilities, net of reinsurance, shown on the income statement, to the change in insurance liabilities recognised as an expense in the relevant movement tables in this note. The components of the reconciliation are the change in provision for outstanding claims on long-term business (which is not included in a separate movement table), and the unwind of discounting on GI reserves (which is included within finance costs within the income statement). For general insurance and health business, the change in the provision for unearned premiums is not included in the reconciliation, as within the income statement, this is included within earned premiums. 2014 Gross £m Reinsurance £m Net £m Long-term business liabilities Change in long-term business provisions (note B10(b)(iv)) 5,847 (376) 5,471 Change in provision for outstanding claims 128 4 132 5,975 (372) 5,603 General insurance and health liabilities Change in insurance liabilities (note B10(c)(iv) and B12(c)(ii)) (76) 49 (27) Less: Unwind of discount on GI reserves and other (9) 3 (6) (85) 52 (33) Total change in insurance liabilities 5,890 (320) 5,570 Continuing Operations Discontinued Operations Total 2013 Gross £m Reinsurance £m Net £m Gross £m Reinsurance £m Net £m Gross £m Reinsurance £m Net £m Long term business liabilities Change in long term business provisions (note B10(b)(iv)) (2,423) (164) (2,587) 331 (19) 312 (2,092) (183) (2,275) Change in provision for outstanding claims 75 (7) 68 (11) 11 - 64 4 68 (2,348) (171) (2,519) 320 (8) 312 (2,028) (179) (2,207) General insurance and health liabilities Change in insurance liabilities (note B10(c)(iv) and B12c(ii)) (33) 64 31 - - - (33) 64 31 Less: Unwind of discount on GI reserves and other (15) 10 (5) - - - (15) 10 (5) (48) 74 26 - - - (48) 74 26 Total change in insurance liabilities (2,396) (97) (2,493) 320 (8) 312 (2,076) (105) (2,181) Page 60 B10 - Insurance liabilities continued (b) Long-term business liabilities (i) Business description The Group underwrites long-term business in a number of countries as follows: · In the UK mainly in: - New With-Profits sub-fund (NWPSF) of Aviva Life & Pensions UK (UKLAP), where the with-profit policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance. Any surplus or deficit emerging in NWPSF that is not distributed as bonus will be transferred from this sub-fund to the Reattributed Inherited Estate External Support Account (RIEESA) (see below). - Old With-Profits sub-fund (OWPSF), With-Profits sub-fund (WPSF) and Provident Mutual sub-fund (PMSF) of UKLAP, where the with-profit policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance. - 'Non-profit' funds of Aviva Annuity UK and UKLAP, where shareholders are entitled to 100% of the distributed profits. Shareholder profits on unitised with-profit business written by WPSF and on stakeholder unitised with-profit business are derived from management fees and policy charges, and emerge in the non-profit funds. - The RIEESA of UKLAP, which is a non-profit fund where shareholders are entitled to 100% of the distributed profits, but these cannot be distributed until the 'lock-in' criteria set by the Reattribution Scheme have been met. The RIEESA has been used to write non-profit business and also to provide capital support to NWPSF. · In France, where the majority of policyholders' benefits are determined by investment performance, subject to certain guarantees, and shareholders' profits are derived largely from management fees. In addition, a substantial number of policies participate in investment returns, with the balance being attributable to shareholders. · In other operations in Europe and Asia, a range of long-term insurance and savings products are written. (ii) Group practice The long-term business provision is calculated separately for each of the Group's life operations. The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, modified where necessary to reflect the requirements of the Companies Act 2006. Material judgment is required in calculating the provisions and is exercised particularly through the choice of assumptions where discretion is permitted. In turn, the assumptions used depend on the circumstances prevailing in each of the life operations. Provisions are most sensitive to assumptions regarding discount rates and mortality/morbidity rates. Where discount rate assumptions are based on current market yields on fixed interest securities, allowance is made for default risk implicit in the yields on the underlying assets. Bonuses paid during the year are reflected in claims paid, whereas those allocated as part of the bonus declaration are included in the movements in the long-term business provision. For UK with-profit life funds falling within the scope of the PRA realistic capital regime, and hence FRS 27, an amount may be recognised for the present value of future profits (PVFP) on non-participating business written in a with-profit fund where the determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value. For our UK with-profit funds, no adjustment for this value is made to the participating insurance and investment contract liabilities or the unallocated divisible surplus. (iii) Methodology and assumptions There are two main methods of actuarial valuation of liabilities arising under long-term insurance contracts - the net premium method and the gross premium method - both of which involve the discounting of projected premiums and claims. Under the net premium method, the premium taken into account in calculating the provision is determined actuarially, based on the valuation assumptions regarding discount rates, mortality and disability. The difference between this premium and the actual premium payable provides a margin for expenses. This method does not allow for voluntary early termination of the contract by the policyholder, and so no assumption is required for persistency. The gross premium method uses the amount of contractual premiums payable and includes explicit assumptions for interest and discount rates, mortality and morbidity, persistency and future expenses. These assumptions can vary by contract type and reflect current and expected future experience. (a) UK With-profit business The valuation of with-profit business uses the methodology developed for the Realistic Balance Sheet, adjusted to remove the shareholders' share of future bonuses. The key elements of the Realistic Balance Sheet methodology are the with-profit benefit reserve (WPBR) and the present value of the expected cost of any payments in excess of the WPBR (referred to as the cost of future policy-related liabilities). The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities. The WPBR for an individual contract is generally calculated on a retrospective basis, and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract. For a small proportion of business, a prospective valuation approach is used, including allowance for anticipated future regular and final bonuses. The items included in the cost of future policy-related liabilities include: · Maturity Guarantees; · Guarantees on surrender, including no-MVR (Market Value Reduction) Guarantees and Guarantees linked to inflation · Guaranteed Annuity Options; · GMP (Guaranteed Minimum Pension) underpin on Section 32 transfers; and · Expected payments under Mortgage Endowment Promise. Page 61 B10 - Insurance liabilities continued The cost of future policy-related liabilities is determined using a market-consistent approach and, in the main, this is based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market-related assumptions (for example, persistency, mortality and expenses) are based on experience, adjusted to take into account future trends. The principal assumptions underlying the cost of future policy-related liabilities are as follows: Future investment return A 'risk-free' rate equal to the spot yield on UK swaps is used for the valuation of With-Profits business. The rates vary according to the outstanding term of the policy, with a typical rate as at 31 December 2014 of 1.88% (2013: 3.11%) 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 2014 2013 Equity returns 22.3% 22.1% Property returns 15.0% 15.0% Fixed interest yields 27.2% 16.3% The equity volatility used depends on term, money-ness and region. The figure shown is for a sample UK equity, at the money, with a ten-year term. Fixed interest yield volatility is also dependent on term and money-ness. The figure shown is for a ten-year swap option with ten-year term, currently at the money. Future regular bonuses Annual bonus assumptions for 2015 have been set consistently with the year-end 2014 declaration. Future annual bonus rates reflect the principles and practices of each fund. In particular, the level is set with regard to the projected margin for final bonus and the change from one year to the next is limited to a level consistent with past practice. Mortality Mortality assumptions for with-profit business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below: Mortality table used 2014 2013 Assurances, pure endowments and deferred annuities before vesting Nil or Axx00 adjusted Nil or Axx00 adjusted Pensions business after vesting and pensions annuities in payment PCMA00/PCFA00 adjusted plus allowance for future mortality improvement PCMA00/PCFA00 adjusted plus allowance for future mortality improvement Allowance for future mortality improvement is in line with the rates shown for non-profit business below. Non-profit business The valuation of non-profit business is based on regulatory requirements, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business. Conventional non-profit contracts, including those written in the with-profit funds, are valued using gross premium methods which discount projected future cash flows. The cash flows are calculated using the amount of contractual premiums payable, together with explicit assumptions for investment returns, inflation, discount rates, mortality, morbidity, persistency and future expenses. These assumptions vary by contract type and reflect current and expected future experience. For unit-linked and some unitised with-profit business, the provisions are valued by adding a prospective non-unit reserve to the bid value of units. The prospective non-unit reserve is calculated by projecting the future non-unit cash flows on the assumption that future premiums cease, unless it is more onerous to assume that they continue. Where appropriate, allowance for persistency is based on actual experience. Valuation discount rate assumptions are set with regard to yields on the supporting assets and the general level of long-term interest rates as measured by gilt yields. An explicit allowance for risk is included by restricting the yields for equities and properties with reference to a margin over long-term interest rates or by making an explicit deduction from the yields on corporate bonds, mortgages and deposits, based on historical default experience of each asset class. A further margin for risk is then deducted for all asset classes. The provisions held in respect of guaranteed annuity options are a prudent assessment of the additional liability incurred under the option on a basis and method consistent with that used to value basic policy liabilities, and includes a prudent assessment of the proportion of policyholders who will choose to exercise the option. Page 62 B10 - Insurance liabilities continued Valuation discount rates for business in the non-profit funds are as follows: Valuation discount rates 2014 2013 Assurances Life conventional non-profit 1.7% 2.5% Pensions conventional non-profit 2.1% 3.2% Annuities Conventional immediate and deferred annuities 1.3% to 3.3% 3.2% to 4.7% Non-unit reserves on Unit Linked business Life 1.7% 2.8% Pensions 2.1% 3.5% Income Protection Active lives 1.8% 2.9% Claims in payment - level 1.8% 3.1% Claims in payment - index linked (0.9)% (0.6)% The above valuation discount rates are after reduction for investment expenses and credit risk. For conventional immediate annuity business the allowance for credit risk comprises long-term assumptions for defaults and downgrades, which vary by asset category and rating, and short-term supplementary allowances for higher expected defaults during the current economic conditions. The credit risk allowance made for corporate bonds and mortgages, including healthcare mortgages, held by Aviva Annuity UK Limited equated to 55 bps and 87 bps respectively at 31 December 2014 (2013: 48 bps and 124 bps respectively). For corporate bonds, the allowance represented c40% of the average credit spread for the portfolio (2013: 44%). The total valuation allowance held by Aviva Annuity UK Limited in respect of corporate bonds and mortgages, including healthcare mortgages, was £1.9 billion (2013: £2.0 billion) over the remaining term of the UK Life corporate bond and mortgage portfolio. Total liabilities for the annuity business were £34 billion at 31 December 2014 (2013: £30 billion). During 2014 there has been a change to the model and assumptions used to value certain equity release assets and the consequential impact on the liabilities that they back. The revised model derives a best estimate view on property growth and explicitly calculates the additional return that would be demanded by investors due to uncertainties in the asset cash flows. This results in a lower value of assets and a corresponding lower value of liabilities due to changes in the valuation interest rate. Changes in the Aviva Annuity UK Limited net asset value are driven by changes in the "No Negative Equity Guarantee" (NNEG) as any changes to asset values that are not driven by NNEG result in a corresponding offset to the liability values through a revised valuation interest rate. As a result the annuity liabilities have reduced by £452 million and the backing equity release mortgages have reduced by £278 million during the year. 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 2014 2013 Assurances Non-profit AM00/AF00 or TM00/TF00 adjusted for smoker status and age/sex specific factors AM00/AF00 or TM00/TF00 adjusted for smoker status and age/sex specific factors Pure endowments and deferred annuities before vesting AM00/AF00 adjusted AM00/AF00 adjusted Annuities in payment Pensions business and general annuity business PCMA00/PCFA00 adjusted plus allowance for future mortality improvement PCMA00/PCFA00 adjusted plus allowance for future mortality improvement For the main pensions annuity business in Aviva Annuity UK Limited, the underlying mortality assumptions for Males are 101.5% of PCMA00 (2013: 102.0% of PCMA00) with base year 2000; for Females the underlying mortality assumptions are 96.5% of PCFA00 (2013: 97.5% of PCFA00) with base year 2000. Improvements are materially unchanged from prior year and are based on CMI_2013 with a long-term improvement rate of 1.75% for males and 1.5% for females, both with an addition of 0.5% to all future annual improvement. Year-specific adjustments are made to allow for selection effects due to the development of the Enhanced Annuity market. (b) France The majority of reserves arise from single premium savings products and are based on the accumulated fund values, adjusted to maintain consistency with the value of the assets backing the policyholder liabilities. For traditional business, the net premium method is used for prospective valuations, in accordance with local regulation, where the valuation assumptions depend on the date of issue of the contract. The valuation discount rate also depends on the original duration of the contract and mortality rates are based on industry tables. Valuation discount rates Mortality tables used 2014 and 2013 2014 and 2013 Life assurances 0% to 4.5% TD73-77, TD88-90,TH00-02 TF00-02, H_AVDBS, F_AVDBS H_SSDBS, F_SSDBS Annuities 0% to 4.5% TGF05/TGH05 Page 63 B10 - Insurance liabilities continued (c) Other countries In all other countries, local generally accepted interest rates and published standard mortality tables are used for different categories of business as appropriate. The tables are based on relevant experience and show mortality rates, by age, for specific groupings of people. (iv) Movements The following movements have occurred in the gross long-term business provisions during the year: 2014 £m 20131 £m Carrying amount at 1 January 94,972 131,190 Provisions in respect of new business 4,796 5,671 Expected change in existing business provisions (5,806) (8,015) Variance between actual and expected experience 1,383 2,871 Impact of operating assumption changes (1,118) 428 Impact of economic assumption changes 6,819 (2,812) Other movements (227) (235) Change in liability recognised as an expense 5,847 (2,092) Effect of portfolio transfers, acquisitions and disposals2 (805) (34,441) Foreign exchange rate movements (1,904) 509 Other movements - (194) Carrying amount at 31 December 98,110 94,972 1 The 2013 comparatives include US Life in each line of the analysis up to the "effect of portfolio transfers, acquisitions and disposals" item. 2 The movement during 2014 includes £103 million related to the disposal of Eurovita, £696 million related to the disposal of CxG and £6 million related to the restructuring of our operations in Indonesia. The variance between actual and expected experience of £1.4 billion in 2014 is primarily due to the impact of favourable property returns on liabilities for unit-linked and participating contracts in the UK and Ireland. 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. Less significant variances arise from differences between actual and expected experience for persistency, mortality and other demographic factors in Italy and Spain. The impact of operating assumption changes of £1.1 billion in 2014 reduces the carrying value of insurance liabilities and relates mainly to longevity and expense releases in the UK business (with the impact on profit significantly offset by a corresponding reduction in reinsurance assets). The £6.8 billion impact of economic assumption changes reflects reductions in valuation interest rates, primarily in respect of immediate annuity and participating insurance contracts in the UK. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year shown in note B13, together with the impact of movements in related non-financial assets. (c) General insurance and health liabilities (i) Provisions for outstanding claims Delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the statement of financial position date. The reserves for general insurance and health business are based on information currently available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments. Provisions for outstanding claims are established to cover the outstanding expected ultimate liability for losses and loss adjustment expenses (LAE) in respect of all claims that have already occurred. The provisions established cover reported claims and associated LAE, as well as claims incurred but not yet reported and associated LAE. The Group only establishes loss reserves for losses that have already occurred. The Group therefore does not establish catastrophe equalisation reserves that defer a share of income in respect of certain lines of business from years in which a catastrophe does not occur to future periods in which catastrophes may occur. When calculating reserves, the Group takes into account estimated future recoveries from salvage and subrogation, and a separate asset is recorded for expected future recoveries from reinsurers after considering their collectability. The table below shows the split of total general insurance and health outstanding claim provisions and IBNR provisions, gross of reinsurance, by major line of business. As at 31 December 2014 As at 31 December 2013 Outstanding claim provisions £m IBNR provisions £m Total claim provisions £m Outstanding claim provisions £m IBNR provisions £m Total claim provisions £m Motor 3,510 1,130 4,640 3,724 1,001 4,725 Property 1,402 67 1,469 1,493 180 1,673 Liability 1,916 1,224 3,140 2,035 1,208 3,243 Creditor 25 21 46 26 18 44 Other 445 136 581 452 161 613 7,298 2,578 9,876 7,730 2,568 10,298 Page 64 B10 - Insurance liabilities continued (ii) Discounting Outstanding claims provisions are based on undiscounted estimates of future claim payments, except for the following classes of business for which discounted provisions are held: Rate Mean term of liabilities Class 2014 2013 2014 2013 Reinsured London Market business 2.1% 2.5% 10 years 12 years Latent claims 0.16% to 2.75% 0.36% to 3.76% 6 to 15 years 6 to 15 years Structured settlements 2.0% 2.8% 35 years 35 years The gross outstanding claims provision before discounting was £10,326 million (2013: £10,914 million). The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims. The discount rate that has been applied to latent claims reserves is based on the relevant swap curve in the relevant currency having regard to the expected settlement dates of the claims. The range of discount rates used depends on the duration of the claims and is given in the table above. The duration of the claims span over 35 years, with the average duration being between 6 and 15 years depending on the geographical region. Any change in discount rates between the start and the end of the accounting period is reflected outside of operating profit as an economic assumption change. During 2014, the Group has seen a reduction in the number of new bodily injury claims settled by periodic payment orders (PPOs) or structured settlements, which are reserved for on a discounted basis. (iii) Assumptions Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are set by skilled claims technicians and established case setting procedures. Claim technicians apply their experience and knowledge to the circumstances of individual claims. They take into account all available information and correspondence regarding the circumstances of the claim, such as medical reports, investigations and inspections. Claims technicians set case estimates according to documented claims department policies and specialise in setting estimates for certain lines of business or types of claim. Claims above certain limits are referred to senior claims handlers for estimate authorisation. No adjustments are made to the claims technicians' case estimates included in booked claim provisions, except for rare occasions when the estimated ultimate cost of individual large or unusual claims may be adjusted, subject to internal reserve committee approval, to allow for uncertainty regarding, for example, the outcome of a court case. The ultimate cost of outstanding claims is then estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. The main assumption underlying these techniques is that a company's past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed by accident period, although underwriting or notification period is also used where this is considered appropriate. Claim development is separately analysed for each geographic area, as well as by each line of business. Certain lines of business are also further analysed by claim type or type of coverage. In addition, large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development. The assumptions used in most non-life actuarial projection techniques, including future rates of claims inflation or loss ratio assumptions, are implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in the future, for example, to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy conditions and claims handling procedures in order to arrive at a point estimate for the ultimate cost of claims that represents the likely outcome, from a range of possible outcomes, taking account of all the uncertainties involved. The range of possible outcomes does not, however, result in the quantification of a reserve range. The following explicit assumptions are made which could materially impact the level of booked net reserves: UK mesothelioma claims The level of uncertainty associated with latent claims is considerable due to the relatively small number of claims and the long-tail nature of the liabilities. UK mesothelioma claims account for a large proportion of the Group's latent claims. The key assumptions underlying the estimation of these claims include claim numbers, the base average cost per claim, future inflation in the average cost of claims and legal fees. The best estimate of the liabilities reflects the latest available market information and studies. Many different scenarios can be derived by flexing these key assumptions and applying different combinations of the different assumptions. An upper and lower scenario can be derived by making reasonably likely changes to these assumptions, resulting in an estimate £245 million (2013: £235 million) greater than the best estimate, or £75 million (2013: £70 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 The discount rates used in determining our latent claim liabilities are based on the relevant swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement of latent claims. The range of discount rates used is shown in section (ii) above and depends on the duration of the claim and the reporting date. At 31 December 2014, it is estimated that a 1% fall in the discount rates used would increase net claim reserves by approximately £120 million (2013: £90 million), excluding the offsetting effect on asset values as assets are not hypothecated across classes of business. The impact of a 1% fall in interest rates across all assets and liabilities of our general insurance and health businesses is shown in note B19. Page 65 B10 - Insurance liabilities continued Allowance for risk and uncertainty The uncertainties involved in estimating loss reserves are allowed for in the reserving process and by the estimation of explicit reserve uncertainty distributions. The reserve estimation basis for non-life claims requires all non-life businesses to calculate booked claim provisions as the best estimate of the cost of future claim payments, plus an explicit allowance for risk and uncertainty. The allowance for risk and uncertainty is calculated by each business unit in accordance with the requirements of the Group non-life reserving policy, taking into account the risks and uncertainties specific to each line of business and type of claim in that territory. The requirements of the Group non-life reserving policy also seek to ensure that the allowance for risk and uncertainty is set consistently across both business units and reporting periods. Changes to claims development patterns can materially impact the results of actuarial projection techniques. However, allowance for the inherent uncertainty in the assumptions underlying reserving projections is automatically allowed for in the explicit allowance for risk and uncertainty included when setting booked reserves. Lump sum payments in settlement of bodily injury claims decided by the UK courts are calculated in accordance with the Ogden Tables. The Ogden Tables contain a discount rate that is set by the Lord Chancellor and that is applied when calculating the present value of loss of earnings for claims settlement purposes. The process for setting this discount rate is under review. The timing of the conclusion of this review is unclear and it is still uncertain whether or by how much the rate will change. However an allowance has been included in provisions for a change in the Ogden discount rates. A reduction in the Ogden discount rates would increase lump sum payments to UK bodily injury claimants. (iv) Movements The following changes have occurred in the general insurance and health claims provisions during the year: 2014 £m 2013 £m Carrying amount at 1 January 10,298 10,554 Impact of changes in assumptions 211 (80) Claim losses and expenses incurred in the current year 5,950 6,337 Decrease in estimated claim losses and expenses incurred in prior years (329) (237) Incurred claims losses and expenses 5,832 6,020 Less: Payments made on claims incurred in the current year (3,253) (3,352) Payments made on claims incurred in prior years (2,933) (3,001) Recoveries on claim payments 269 285 Claims payments made in the year, net of recoveries (5,917) (6,068) Unwind of discounting 9 15 Changes in claims reserve recognised as an expense (76) (33) Effect of portfolio transfers, acquisitions and disposals (121) (44) Foreign exchange rate movements (222) (178) Other movements (3) (1) Carrying amount at 31 December 9,876 10,298 The effect of changes in the main assumptions is given in note B13. (d) Loss development tables (i) Description of tables The tables that follow present the development of claim payments and the estimated ultimate cost of claims for the accident years 2005 to 2014. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year. For example, with respect to the accident year 2005, by the end of 2014 £6,537 million had actually been paid in settlement of claims. In addition, as reflected in the lower section of the table, the original estimated ultimate cost of claims of £7,106 million was re-estimated to be £6,612 million at 31 December 2014. The original estimates will be increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity. The Group aims to maintain strong reserves in respect of its general insurance and health business in order to protect against adverse future claims experience and development. The Group establishes strong reserves in respect of the current accident year (2014) where the development of claims is less mature and there is much greater uncertainty attaching to the ultimate cost of claims. As claims develop and the ultimate cost of claims become more certain, the absence of adverse claims experience will result in a release of reserves from earlier accident years, as shown in the loss development tables and movements table (c)(iv) above. Releases from prior accident year reserves are also due to an improvement in the estimated cost of claims. Key elements of the release from prior accident year general insurance and health net provisions during 2014 were: · £112 million release from UK & Ireland due to favourable development in UK & Ireland on personal and commercial motor, and commercial property claims. · £97 million release from Canada mainly due to continued favourable experience on motor, following the legislative changes in Ontario. · £15 million release from Europe mainly due to favourable development in France and Italy, partly offset by strengthening of motor third party claims in Turkey. Key elements of the movement in prior accident year general insurance and health net provisions during 2013 were: · £32 million release from UK & Ireland, including Group reinsurance business, mainly due to favourable development in health, commercial motor and commercial liability in Ireland, slightly offset by a small strengthening in the UK. · £160 million release from Canada mainly due to continued favourable experience on motor, following the legislative changes in Ontario. · £9 million release from Europe mainly due to favourable development across a number of lines of business in France. Page 66 B10 - Insurance liabilities continued (ii) Gross figures Before the effect of reinsurance, the loss development table is: Accident year All prior years £m 2005 £m 2006 £m 2007 £m 2008 £m 2009 £m 2010 £m 2011 £m 2012 £m 2013 £m 2014 £m Total £m Gross cumulative claim payments At end of accident year (3,345) (3,653) (4,393) (4,915) (3,780) (3,502) (3,420) (3,055) (3,068) (3,102) One year later (5,011) (5,525) (6,676) (7,350) (5,464) (5,466) (4,765) (4,373) (4,476) Two years later (5,449) (5,971) (7,191) (7,828) (6,102) (5,875) (5,150) (4,812) Three years later (5,784) (6,272) (7,513) (8,304) (6,393) (6,163) (5,457) Four years later (6,001) (6,531) (7,836) (8,607) (6,672) (6,405) Five years later (6,156) (6,736) (8,050) (8,781) (6,836) Six years later (6,311) (6,936) (8,144) (8,906) Seven years later (6,467) (7,015) (8,224) Eight years later (6,496) (7,062) Nine years later (6,537) Estimate of gross ultimate claims At end of accident year 7,106 7,533 8,530 9,508 7,364 6,911 6,428 6,201 6,122 5,896 One year later 6,938 7,318 8,468 9,322 7,297 7,006 6,330 6,028 6,039 Two years later 6,813 7,243 8,430 9,277 7,281 6,950 6,315 6,002 Three years later 6,679 7,130 8,438 9,272 7,215 6,914 6,292 Four years later 6,603 7,149 8,409 9,235 7,204 6,912 Five years later 6,605 7,167 8,446 9,252 7,239 Six years later 6,591 7,167 8,381 9,213 Seven years later 6,596 7,176 8,381 Eight years later 6,604 7,184 Nine years later 6,612 Estimate of gross ultimate claims 6,612 7,184 8,381 9,213 7,239 6,912 6,292 6,002 6,039 5,896 Cumulative payments (6,537) (7,062) (8,224) (8,906) (6,836) (6,405) (5,457) (4,812) (4,476) (3,102) 2,575 75 122 157 307 403 507 835 1,190 1,563 2,794 10,528 Effect of discounting (447) 3 1 - (4) (3) - - - - - (450) Present value 2,128 78 123 157 303 400 507 835 1,190 1,563 2,794 10,078 Cumulative effect of foreign exchange movements - 8 12 7 (25) (30) (42) (50) (51) (38) - (209) Effect of acquisitions 2 1 4 - - - - - - - - 7 Present value recognised in the statement of financial position 2,130 87 139 164 278 370 465 785 1,139 1,525 2,794 9,876 Page 67 B10 - Insurance liabilities continued (iii) Net of reinsurance After the effect of reinsurance, the loss development table is: Accident year All prior years £m 2005 £m 2006 £m 2007 £m 2008 £m 2009 £m 2010 £m 2011 £m 2012 £m 2013 £m 2014 £m Total £m Net cumulative claim payments At end of accident year (3,281) (3,612) (4,317) (4,808) (3,650) (3,386) (3,300) (2,925) (2,905) (2,972) One year later (4,925) (5,442) (6,542) (7,165) (5,286) (5,242) (4,578) (4,166) (4,240) Two years later (5,344) (5,881) (7,052) (7,638) (5,885) (5,637) (4,963) (4,575) Three years later (5,671) (6,181) (7,356) (8,094) (6,177) (5,905) (5,263) Four years later (5,892) (6,434) (7,664) (8,356) (6,410) (6,137) Five years later (6,039) (6,625) (7,852) (8,515) (6,568) Six years later (6,188) (6,724) (7,942) (8,626) Seven years later (6,245) (6,789) (8,004) Eight years later (6,294) (6,831) Nine years later (6,318) Estimate of net ultimate claims At end of accident year 6,982 7,430 8,363 9,262 7,115 6,650 6,202 5,941 5,838 5,613 One year later 6,818 7,197 8,302 9,104 7,067 6,751 6,103 5,765 5,745 Two years later 6,688 7,104 8,244 9,028 7,036 6,685 6,095 5,728 Three years later 6,544 6,996 8,249 9,007 6,978 6,644 6,077 Four years later 6,476 6,980 8,210 8,962 6,940 6,634 Five years later 6,448 6,992 8,221 8,949 6,977 Six years later 6,397 6,939 8,149 8,926 Seven years later 6,372 6,938 8,143 Eight years later 6,385 6,947 Nine years later 6,384 Estimate of net ultimate claims 6,384 6,947 8,143 8,926 6,977 6,634 6,077 5,728 5,745 5,613 Cumulative payments (6,318) (6,831) (8,004) (8,626) (6,568) (6,137) (5,263) (4,575) (4,240) (2,972) 1,623 66 116 139 300 409 497 814 1,153 1,505 2,641 9,263 Effect of discounting (287) 3 1 - (4) (3) - - - - - (290) Present value 1,336 69 117 139 296 406 497 814 1,153 1,505 2,641 8,973 Cumulative effect of foreign exchange movements - 7 12 7 (25) (29) (40) (48) (50) (35) - (201) Effect of acquisitions 2 1 4 - - - - - - - - 7 Present value recognised in the statement of financial position 1,338 77 133 146 271 377 457 766 1,103 1,470 2,641 8,779 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 2005. The undiscounted claim provisions for continuing operations, net of reinsurance, in respect of this business at 31 December 2014 were £984 million (2013: £976 million). The movement in the year reflects reclassification from other commercial liability provisions of £65 million partly offset by favourable claims development of £12 million in the UK (2013: £5 million strengthening), other decreases in undiscounted provisions of £12 million (2013: £2 million), claim payments net of reinsurance recoveries and foreign exchange rate movements. (e) Provision for unearned premiums Movements The following changes have occurred in the provision for unearned premiums (UPR) during the year: 2014 £m 2013 £m Carrying amount at 1 January 4,226 4,441 Premiums written during the year 8,943 9,361 Less: Premiums earned during the year (8,935) (9,497) Change in UPR recognised as income 8 (136) Gross portfolio transfers and disposals (31) - Foreign exchange rate movements (96) (79) Carrying amount at 31 December 4,107 4,226 Page 68 B11 - Liability for investment contracts This note analyses our investment contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions used. (a) Carrying amount The liability for investment contracts (gross of reinsurance) at 31 December comprised: Long-term business 2014 £m 2013 £m Participating contracts 67,232 70,628 Non-participating contracts at fair value 50,013 48,140 Non-participating contracts at amortised cost - - 50,013 48,140 Total 117,245 118,768 Less: Amounts classified as held for sale - (2,710) 117,245 116,058 (b) Long-term business investment liabilities Investment contracts are those that do not transfer significant insurance risk from the contract holder to the issuer, and are therefore treated as financial instruments under IFRS. Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts and are measured according to the methodology and Group practice for long-term business liabilities as described in note B10. They are not measured at fair value as there is currently no agreed definition of fair valuation for discretionary participation features under IFRS. In the absence of such a definition, it is not possible to provide a range of estimates within which a fair value is likely to fall. The IASB has deferred consideration of participating contracts to Phase II of its insurance contracts project. For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated divisible surplus. 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. Following the disposal of the US, we currently have no non-participating investment contracts measured at amortised cost. Of the non-participating investment contracts measured at fair value, £49,737 million in 2014 are unit linked in structure and the fair value liability is equal to the unit reserve plus additional non-unit reserves, if required, on a fair value basis. 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, deposits collected and amounts withdrawn are not shown on the income statement, but are accounted for directly through the statement of financial position as an adjustment to the gross liabilities for investment contracts. The associated change in investment contract provisions shown on the income statement consists of the attributed investment return. Participating investment contracts are treated consistently with insurance contracts with the change in investment contract provisions primarily consisting of the movement in participating investment contract liabilities (net of reinsurance) over the reporting period. (c) Movements in the year The following movements have occurred in the gross provisions for investment contracts in the year: (i) Participating investment contracts 2014 £m 2013 £m Carrying amount at 1 January 70,628 66,849 Provisions in respect of new business 4,144 3,421 Expected change in existing business provisions (1,972) (2,243) Variance between actual and expected experience 713 1,085 Impact of operating assumption changes 14 329 Impact of economic assumption changes 303 (301) Other movements 16 (47) Change in liability recognised as an expense 3,218 2,244 Effect of portfolio transfers, acquisitions and disposals1 (2,671) (39) Foreign exchange rate movements (3,943) 1,380 Other movements2 - 194 Carrying amount at 31 December 67,232 70,628 1 The movements during 2014 related to the disposal of Eurovita. 2 Other movements (outside change in liability recognised as an expense) in 2013 of £194 million represented the reclassification of liabilities from insurance to participating investment in Eurovita. Page 69 B11 - Liability for investment contracts continued For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The variance between actual and expected experience of £0.7 billion is driven by favourable property returns on liabilities in the UK. Additionally, minor variances arise from differences between actual and expected experience for persistency, mortality and other demographic factors. The impact of assumption changes in the analysis shows the resulting movement in the carrying value of participating investment contract liabilities. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year shown in note B13, together with the impact of movements in related non-financial assets. (ii) Non-participating investment contracts 2014 £m 20131 £m Carrying amount at 1 January 48,140 47,699 Provisions in respect of new business 2,273 3,386 Expected change in existing business provisions (1,442) (2,698) Variance between actual and expected experience 1,575 3,122 Impact of operating assumption changes 2 4 Impact of economic assumption changes 11 1 Other movements 8 46 Change in liability 2,427 3,861 Effect of portfolio transfers, acquisitions and disposals2 (20) (3,785) Foreign exchange rate movements (534) 365 Carrying amount at 31 December 50,013 48,140 1 The 2013 comparatives include US business in each line of the analysis up to the effect of portfolio transfers, acquisitions and disposals item. 2 The movements during 2014 relate primarily to the disposal of Eurovita. 2013 related to the disposals of US Life and Ark Life. For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The variance between actual and expected experience of £1.6 billion is primarily driven by the impact of favourable movements in property returns on liabilities for unit linked contracts in UK and Ireland. In addition there are variances in Italy due to lower lapses than expected. 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 B13, which combines participating and non-participating investment contracts together with the impact of movements in related non-financial assets. B12 - Reinsurance assets This note details the reinsurance recoverables on our insurance and investment contract liabilities. (a) Carrying amounts The reinsurance assets at 31 December comprised: 2014 £m 2013 £m Long-term business Insurance contracts 4,032 3,734 Participating investment contracts 3 2 Non-participating investment contracts1 2,533 2,048 6,568 5,784 Outstanding claims provisions 43 53 6,611 5,837 General insurance and health Outstanding claims provisions 724 849 Provisions for claims incurred but not reported 373 315 1,097 1,164 Provisions for unearned premiums 250 256 1,347 1,420 7,958 7,257 Less: Amounts classified as held for sale - (37) Total 7,958 7,220 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. Of the above total, £5,974 million (2013: £5,553 million) is expected to be recovered more than one year after the statement of financial position date. (b) Assumptions The assumptions, including discount rates, used for reinsurance contracts follow those used for insurance contracts. Reinsurance assets are valued net of an allowance for their recoverability. Page 70 B12 - Reinsurance assets continued (c) Movements The following movements have occurred in the reinsurance asset during the year: (i) In respect of long-term business provisions 2014 £m 2013 £m Carrying amount at 1 January 5,784 5,972 Asset in respect of new business 316 268 Expected change in existing business asset 7 19 Variance between actual and expected experience 536 454 Impact of operating assumption changes (585) 247 Impact of economic assumption changes 554 (426) Other movements 34 81 Change in asset 862 643 Effect of portfolio transfers, acquisitions and disposals1 (13) (873) Foreign exchange rate movements (65) 42 Carrying amount at 31 December 6,568 5,784 1 The movements during 2014 includes £12 million related to the disposal of Eurovita and £1 million related to the disposal of CxG. Prior year movements primarily relates to the disposal of US Life in 2013. The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of reinsurance assets. The changes to the reinsurance asset from assumption changes mainly relates to business in the UK and Ireland, 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 on 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 B13, together with the impact of movements in related liabilities and other non-financial assets. (ii) In respect of general insurance and health outstanding claims provisions and IBNR 2014 £m 2013 £m Carrying amount at 1 January 1,164 1,254 Impact of changes in assumptions 65 (45) Reinsurers' share of claim losses and expenses Incurred in current year 292 312 Incurred in prior years (105) (32) Reinsurers' share of incurred claim losses and expenses 187 280 Less: Reinsurance recoveries received on claims Incurred in current year (131) (169) Incurred in prior years (173) (140) Reinsurance recoveries received in the year (304) (309) Unwind of discounting 3 10 Change in reinsurance asset recognised as income (49) (64) Effect of portfolio transfers, acquisitions and disposals (31) (9) Foreign exchange rate movements 8 (11) Other movements 5 (6) Carrying amount at 31 December 1,097 1,164 (iii) Reinsurers' share of the provision for UPR 2014 £m 2013 £m Carrying amount at 1 January 256 248 Premiums ceded to reinsurers in the year 643 641 Less: Reinsurers' share of premiums earned during the year (634) (643) Change in reinsurance asset recognised as income 9 (2) Reinsurers' share of portfolio transfers and acquisitions (2) 7 Foreign exchange rate movements (10) - Other movements (3) 3 Carrying amount at 31 December 250 256 Page 71 B13 - Effect of changes in assumptions and estimates during the year Certain estimates and assumptions used in determining our liabilities for insurance and investment contract business were changed from 2013 to 2014, affecting the profit recognised for the year with an equivalent effect on liabilities. This note analyses the effect of the changes. This note only allows for the impact on liabilities and related assets, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and AVIF, and does not allow for offsetting movements in the value of backing financial assets. Effect on profit 2014 £m Effect on profit 2013 £m Assumptions Long-term insurance business Interest rates (4,578) 1,389 Expenses 75 3 Persistency rates 15 (1) Mortality for assurance contracts 20 8 Mortality for annuity contracts 283 85 Tax and other assumptions 75 20 Investment contracts Interest rates (2) - Expenses - - Persistency rates - - Tax and other assumptions - - General insurance and health business Change in loss ratio assumptions - 3 Change in discount rate assumptions (145) 33 Change in expense ratio and other assumptions 1 - Total (4,256) 1,540 The impact of interest rates on long-term business relates primarily to UK annuities, where a reduction in the valuation interest rates has increased liabilities. The overall impact on profit also depends on movements in the value of assets backing the liabilities, which is not included in this disclosure. There has been a release of expense reserves for the UK annuity business as a result of continuing restructuring and process improvements, reducing the current and long term cost base and a release of mortality reserves following the annual review of experience, most of which relates to annuitant mortality. Tax and other assumptions includes the effect of changes in the equity release default assumptions used to derive the valuation interest rate for UK annuities resulting in a £163 million reduction in annuity liabilities (changes in other default risk assumptions are included within "interest rate" changes). This is partially offset by a write down of DAC in the UK in part to include the impact of the DWP announcement of a 0.75% charge cap and ban on active member discounts. The adverse change in discount rate assumptions on general insurance and health business of £145 million (FY13: £33 million favourable) arises mainly as a result of a decrease in the swap rates used to discount latent claims reserves and periodic payment orders. Page 72 B14 - Unallocated divisible surplus An unallocated divisible surplus (UDS) is established where the nature of policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain at the reporting date. Therefore the expected duration for settlement of the UDS is not defined. This note shows the movements in the UDS during the year. 2014 £m 2013 £m Carrying amount at 1 January 6,709 6,986 Change in participating contract assets 3,087 (262) Change in participating contract liabilities 299 (22) Other movements (22) 4 Change in liability recognised as an expense 3,364 (280) Effect of portfolio transfers, acquisitions and disposals (131) (115) Foreign exchange rate movements (444) 118 Other movements (31) - Carrying amount at 31 December 9,467 6,709 Less: Amounts classified as held for sale - 4 9,467 6,713 The amount of UDS has increased to £9.5 billion at 31 December 2014 (2013: £6.7 billion) driven primarily by positive investment market movements in Continental Europe. These have mainly been caused by the significant appreciation of assets due to the fall in Eurozone government and corporate bond yields during the year. Negative UDS balances result from an accounting mismatch between participating assets carried at market value and participating liabilities measured using local practice. Any negative balances are tested for recoverability using embedded value methodology and in line with local accounting practice. Testing is conducted at a participating fund-level within each life entity. Following the reversal of previous losses, all Italian participating funds at 31 December 2014 had positive UDS balances with the exception of one very small fund. The method for estimation of the recoverable negative UDS balance uses a real-world embedded value method, with a risk-discount rate of 5.00% (2013: 6.60%). The embedded value method includes an implicit allowance for the time value of options and guarantees. The negative UDS balance in Italy was tested for recoverability and £0.1 million of negative UDS was considered irrecoverable (2013: £42 million, of which £39 million was for Eurovita). Following this there are no longer any negative UDS balances in Italy at 31 December 2014. The total UDS balance in Italy was £953 million positive at 31 December 2014 (2013: £205 million positive). In Spain, all participating funds had positive UDS balances at 31 December 2014, and consequently testing of negative UDS was not required. The carrying value of UDS was £248 million positive (2013: £132 million positive). Page 73 B15 - Borrowings Our borrowings are either core structural borrowings or operational borrowings. This note shows the carrying values and contractual maturity amounts of each type, and explains their main features and movements during the year. (a) Analysis of total borrowings Total borrowings comprise: 2014 £m 2013 £m Core structural borrowings, at amortised cost 5,310 5,125 Operational borrowings, at amortised cost 696 1,410 Operational borrowings, at fair value 1,372 1,313 2,068 2,723 7,378 7,848 Less: Amounts classified as held for sale - (29) 7,378 7,819 (b) Movements during the year Movements in borrowings during the year were: 2014 2013 Core Structural £m Operational £m Total £m Core Structural £m Operational £m Total £m New borrowings drawn down, excluding commercial paper, net of expenses 552 1 553 554 184 738 Repayment of borrowings, excluding commercial paper (241) (372) (613) (546) (347) (893) Movement in commercial paper1 1 - 1 (50) - (50) Net cash inflow/(outflow) 312 (371) (59) (42) (163) (205) Foreign exchange rate movements (132) (5) (137) 24 (42) (18) Borrowings acquired/(loans repaid) for non-cash consideration2 - (321) (321) - (183) (183) Fair value movements - 70 70 - (4) (4) Amortisation of discounts and other non-cash items 5 (29) (24) 5 (21) (16) Movements in debt held by Group companies3 - 1 1 (1) (49) (50) Movements in the year 185 (655) (470) (14) (462) (476) Balance at 1 January 5,125 2,723 7,848 5,139 3,185 8,324 Balance at 31 December 5,310 2,068 7,378 5,125 2,723 7,848 1 Gross issuances of commercial paper were £1,830 million in 2014 (2013: £1,583 million), offset by repayments of £1,829 million (2013: £1,633 million). 2 Includes borrowings disposed of / repaid as part of the disposal of US Life in 2013 of £179 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 2013 and 2014 on securitised mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions. B16 - 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 with the main UK scheme being the largest. The assets and liabilities of these defined benefit schemes as at 31 December 2014 are shown below. 2014 2013 UK £m Ireland £m Canada £m Total £m UK £m Ireland £m Canada £m Total £m Total fair value of scheme assets 14,733 483 258 15,474 11,734 431 233 12,398 Present value of defined benefit obligation (12,079) (748) (343) (13,170) (11,185) (640) (334) (12,159) Net surpluses/(deficits) in the schemes 2,654 (265) (85) 2,304 549 (209) (101) 239 Surpluses included in other assets 2,695 - - 2,695 606 - - 606 Deficits included in provisions (41) (265) (85) (391) (57) (209) (101) (367) 2,654 (265) (85) 2,304 549 (209) (101) 239 Page 74 B16 - Pension obligations continued Movements in the scheme deficits and surpluses Movements in the pension schemes' surpluses and deficits comprise: 2014 Fair Value of Scheme Assets £m Present Value of defined benefit obligation £m IAS 19 Pensions net surplus/ (deficits) £m Net surplus in the schemes at 1 January 12,398 (12,159) 239 Administrative expenses1 - (27) (27) Total pension cost charged to expenses - (27) (27) Net interest credited/(charged) to investment income/(finance costs)2 542 (522) 20 Total recognised in income from continuing operations 542 (549) (7) Remeasurements: Actual return on scheme assets 3,135 - 3,135 Less: Interest income on scheme assets (542) - (542) Return on scheme assets excluding amounts in interest income 2,593 - 2,593 Losses from change in financial assumptions - (1,063) (1,063) Gains from change in demographic assumptions - 150 150 Experience losses - (18) (18) Total remeasurements recognised in other comprehensive income from continuing operations 2,593 (931) 1,662 Employer contributions 391 - 391 Employee contributions - - - Benefits paid (385) 385 - Administrative expenses paid from scheme assets1 (27) 27 - Foreign exchange rate movements (38) 57 19 Net surplus in the schemes at 31 December 15,474 (13,170) 2,304 1 Administrative expenses are expensed as incurred. 2 Net interest income of £33 million has been credited to investment income and net interest expense of £13 million has been charged to finance costs. 3 Total recognised in income from discontinued operations is £nil and total remeasurements recognised in other comprehensive income from discontinued operations is £nil. The increase in the net surplus in the pension schemes was primarily due to positive asset performance driven by a fall in interest rates. This was partially offset by an increase in the defined benefit obligation due to a fall in discount rate. Within the discount rate the adverse impact from the fall in interest rates was partly countered by the benefit from a widening of the spread between UK corporate bond yields and gilt yields. 2013 Fair Value of Scheme Assets £m Present Value of defined benefit obligation £m IAS 19 Pensions net surplus/ (deficits) £m Net surplus in the schemes at 1 January 12,281 (11,675) 606 Current service costs - (4) (4) Past service costs - amendments1 - 142 142 Past service costs - curtailment gain - 5 5 Administrative expenses2 - (18) (18) Total pension cost charged to net operating expenses - 125 125 Net interest credited/(charged) to investment income/(finance costs)3 543 (506) 37 Total recognised in income from continuing operations 543 (381) 162 Remeasurements: Actual return on scheme assets 366 - 366 Less: Interest income on scheme assets (543) - (543) Return on scheme assets excluding amounts in interest income (177) - (177) Losses from change in financial assumptions - (730) (730) Gains from change in demographic assumptions - 186 186 Experience gains - 47 47 Total remeasurements recognised in other comprehensive income from continuing operations (177) (497) (674) Employer contributions 149 - 149 Employee contributions 1 (1) - Benefits paid (371) 371 - Administrative expenses paid from scheme assets2 (18) 18 - Foreign exchange rate movements (10) 6 (4) Net surplus in the schemes at 31 December 12,398 (12,159) 239 1 Includes £145 million gain relating to plan amendments in Ireland. 2 Administrative expenses are expensed as incurred. 3 Net interest income of £57 million has been credited to investment income and net interest expense of £20 million has been charged to finance costs. 4 Total recognised in income from discontinued operations is £nil and total remeasurements recognised in other comprehensive income from discontinued operations is £nil. Page 75 B17 - Cash and cash equivalents Cash and cash equivalents in the statement of cash flows at 31 December comprised: 2014 £m Restated1 2013 £m Cash and cash equivalents 23,105 26,131 Cash and cash equivalents of operations classified as held for sale 9 351 Bank overdrafts (550) (493) Net cash and cash equivalents at 31 December 22,564 25,989 1 The statement of cash flows and the statement of financial position have been restated for the adoption of amendments to IAS 32 'Financial Instruments: Presentations' - see note B2 for details. B18 - 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 2014 2013 Income earned in period £m Expenses incurred in period £m Payable at period end £m Receivable at period end £m Income earned in period £m Expenses incurred in period £m Payable at period end £m Receivable at period end £m Associates 7 (2) - - 3 (3) - 11 Joint ventures 28 - - 154 51 - - 56 Employee pension schemes 11 - - 3 12 - - 9 46 (2) - 157 66 (3) - 76 Transactions with joint ventures in the UK relate to the property management undertakings. Our interest in these joint ventures comprises a mix of equity and loans, together with the provision of administration services and financial management to many of them. Our UK life insurance companies earn interest on loans advanced to these entities. Our fund management companies also charge fees to these joint ventures for administration services and for arranging external finance. Our UK fund management companies manage most of the assets held by the Group's main UK staff pension scheme, for which they charge fees based on the level of funds under management. The main UK scheme holds investments in Group-managed funds and insurance policies with other Group companies. 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. B19 - Risk management This note sets out the major risks our businesses and its shareholders face and describes the Group's approach to managing these. It also gives sensitivity analyses around the major economic and non-economic assumptions that can cause volatility in the Group's earnings and capital position. (a) Risk management framework The risk management framework (RMF) in Aviva forms an integral part of the management and Board processes and decision-making framework across the Group. The key elements of our risk management framework comprise risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles and responsibilities; and the processes we use to identify, measure, manage, monitor and report (IMMMR) risks, including the use of our risk models and stress and scenario testing. For the purposes of risk identification and measurement, and aligned to Aviva's risk policies, risks are usually grouped by risk type: credit, market, liquidity, life insurance, general insurance, asset management and operational risk. Risks falling within these types may affect a number of metrics including those relating to balance sheet strength, liquidity and profit. They may also affect the performance of the products we deliver to our customers and the service to our customers and distributors, which can be categorised as risks to our brand and reputation or as conduct risk. To promote a consistent and rigorous approach to risk management across all businesses we have a set of risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements for the Group's worldwide operations. On a semi-annual basis the business chief executive officers and chief risk officers sign-off compliance with these policies and standards, providing assurance to the relevant oversight committees that there is a consistent framework for managing our business and the associated risks. A regular top-down key risk identification and assessment process is carried out by the risk function. This includes the consideration of emerging risks and is supported by deeper thematic reviews. This process is replicated at the business unit level. The risk assessment processes are used to generate risk reports which are shared with the relevant risk committees. Risk models are an important tool in our measurement of risks and are used to support the monitoring and reporting of the risk profile and in the consideration of the risk management actions available. We carry out a range of stress (where one risk factor, such as equity returns, is assumed to vary) and scenario (where combinations of risk factors are assumed to vary) tests to evaluate their impact on the business and the management actions available to respond to the conditions envisaged. Page 76 B19 - Risk management continued Roles and responsibilities for risk management in Aviva are based around the 'three lines of defence model' where ownership for risk is taken at all levels in the Group. Line management in the business is accountable for risk management, including the implementation of the risk management framework and embedding of the risk culture. The risk function is accountable for quantitative and qualitative oversight and challenge of the IMMMR process and for developing the risk management framework. Internal Audit provides an independent assessment of the risk framework and internal control processes. Board oversight of risk and risk management across the Group is maintained on a regular basis through its Risk Committee and Governance Committee. The Board has overall responsibility for determining risk appetite, which is an expression of the risk the business is willing to take. Risk appetites are set relative to capital, liquidity and franchise value at Group and in the business units. Economic capital risk appetites are also set for each risk type. The Group's position against risk appetite is monitored and reported to the Board on a regular basis. The oversight of risk and risk management at the Group level is supported by the Asset Liability Committee (ALCO), which focuses on business and financial risks, and the Operational Risk Committee (ORC) which focuses on operational and reputational risks. Similar committee structures with equivalent terms of reference exist in the business units. Further information on the types and management of specific risk types is given in sections (b) - (j) below. The risk management framework of a small number of our joint ventures and strategic equity holdings differs from the Aviva framework outlined in this note. We work with these entities to understand how their risks are managed and to align them, where possible, with Aviva's framework. (b) Credit risk Credit risk is the risk of financial loss as a result of the default or failure of third parties to meet their payment obligations to Aviva, or variations in market values as a result of changes in expectations related to these risks. Credit risk is an area where we can provide the returns required to satisfy policyholder liabilities and to generate returns for our shareholders. In general we prefer to take credit risk over equity and property risks, due to the better expected risk adjusted return, our credit risk analysis capability and the structural investment advantages conferred to insurers with long-dated, relatively illiquid liabilities. Our approach to managing credit risk recognises that there is a risk of adverse financial impact resulting from fluctuations in credit quality of third parties including default, rating transition and credit spread movements. Our credit risks arise principally through exposures to debt security investments, structured asset investments, bank deposits, derivative counterparties, mortgage lending and reinsurance counterparties. The Group manages its credit risk at business unit and Group level. All business units are required to implement credit risk management processes (including limits frameworks), operate specific risk management committees, and ensure detailed reporting and monitoring of their exposures against pre-established risk criteria. At Group level, we manage and monitor all exposures across our business units on a consolidated basis, and operate a Group limit framework that must be adhered to by all. A detailed breakdown of the Group's current credit exposure by credit quality is shown below. (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, excluding assets 'held for sale'. 'Not rated' assets capture assets not rated by external ratings agencies. As at 31 December 2014 AAA AA A BBB Speculative grade Not rated Carrying value including held for sale Less: Amounts classified as held for sale Carrying value £m Debt securities 13.6% 35.6% 21.3% 21.9% 2.1% 5.5% 131,661 - 131,661 Reinsurance assets 0.3% 71.3% 21.9% 0.1% 0.0% 6.4% 7,958 - 7,958 Other investments 0.0% 0.1% 1.3% 0.0% 0.2% 98.4% 35,358 - 35,358 Loans 1.3% 9.0% 2.1% 0.2% 0.0% 87.4% 25,260 - 25,260 Total 200,237 - 200,237 As at 31 December 2013 restated1 AAA AA A BBB Speculative grade Not rated Carrying value including held for sale Less: Amounts classified as held for sale Carrying value £m Debt securities 13.0% 33.1% 20.8% 24.9% 2.8% 5.4% 126,805 (2,420) 124,385 Reinsurance assets 0.3% 53.6% 37.1% 1.1% 0.1% 7.8% 7,257 (37) 7,220 Other investments 0.0% 0.2% 0.7% 1.0% 0.1% 98.0% 32,517 (201) 32,316 Loans 3.8% 12.1% 1.2% 0.0% 0.3% 82.6% 23,879 - 23,879 Total 190,458 (2,658) 187,800 1 Restated for the adoption of amendments to IAS 32 'Financial Instruments: Presentation' - see note B2 for details. Page 77 B19 - Risk management continued (ii) Financial exposures to peripheral European countries and worldwide banks Included in our debt securities and other financial assets are exposures to peripheral European countries and worldwide banks. We continued in 2014 to limit our direct shareholder and participating assets exposure to the governments (including local authorities and agencies) and banks of Greece, Portugal, Italy and Spain, which has benefitted from an increase in market values. The completion of the disposal of the Group's interest in Eurovita has resulted in a reduction of our exposure to Italian sovereign and corporate debt. In light of the improving economic situation in Ireland, we have made a modest increase in our exposure to Irish sovereign debt during 2014. Information on our exposures to peripheral European sovereigns and banks is provided in notes D.3.3.5. We continue to monitor closely the situation in the eurozone and have had additional restrictions on further investment in place since late 2009 as well as taking actions to reduce exposure to higher risk assets. (iii) Other investments Other investments (including assets of operations classified as held for sale) include unit trusts and other investment vehicles; derivative financial instruments, representing positions to mitigate the impact of adverse market movements; and other assets includes deposits with credit institutions and minority holdings in property management undertakings. The credit quality of the underlying debt securities within investment vehicles is managed by the safeguards built into the investment mandates for these funds which determine the funds' risk profiles. At the Group level, we also monitor the asset quality of unit trusts and other investment vehicles against Group set limits. A proportion of the assets underlying these investments are represented by equities and so credit ratings are not generally applicable. Equity exposures are managed against agreed benchmarks that are set with reference to overall appetite for market risk. (iv) Loans The Group loan portfolio principally comprises: · Policy loans which are generally collateralised by a lien or charge over the underlying policy; · Loans and advances to banks which primarily relate to loans of cash collateral received in stock lending transactions. These loans are fully collateralised by other securities; and · Mortgage loans collateralised by property assets. We use loan to value; interest and debt service cover; and diversity and quality of the tenant base metrics to internally monitor our exposures to mortgage loans. We use credit quality, based on dynamic market measures, and collateralisation rules to manage our stock lending activities. Policy loans are loans and advances made to policyholders, and are collateralised by the underlying policies. (v) Credit concentration risk The long-term and general insurance businesses are generally not individually exposed to significant concentrations of credit risk due to the regulations applicable in most markets and the Group credit policy and limits framework, which limit investments in individual assets and asset classes. Credit concentrations are monitored as part of the regular credit monitoring process and are reported to Group ALCO. With the exception of government bonds the largest aggregated counterparty exposure within shareholder assets (i.e. excluding potential exposures arising from reinsurance of unit linked funds) is approximately 1.6% of the total shareholder assets (gross of 'held for sale'). (vi) Reinsurance credit exposures The Group is exposed to concentrations of risk with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures, by limiting the reinsurers that may be used and applying strict limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that the overall risk is within appetite. The Group ALM and Group Risk teams have an active monitoring role with escalation to the Chief Financial Officer (CFO), Chief Risk Officer (CRO), Group ALCO and the Board Risk Committee as appropriate. The Group's largest reinsurance counterparty is BlackRock Life Ltd (including subsidiaries) as a result of the BlackRock funds offered to UK Life customers via unit linked contracts. At 31 December 2014, the reinsurance asset recoverable, including debtor balances, from BlackRock Life Ltd was £2,048 million. (vii) Securities finance The Group has significant securities financing operations within the UK and smaller operations in some other businesses. The risks within this activity are mitigated by over-collateralisation and minimum counterparty credit quality requirements which are designed to minimise residual risk. The Group operates strict standards around counterparty quality, collateral management, margin calls and controls. (viii) Derivative credit exposures The Group is exposed to counterparty credit risk through derivative trades. This risk is mitigated through collateralising almost all trades (the exception being certain foreign exchange trades where it has historically been the market norm not to collateralise). Residual exposures are captured within the Group's credit management framework. (ix) Unit-linked business In unit-linked business the policyholder bears the direct market risk and credit risk on investment assets in the unit funds and the shareholders' exposure to credit risk is limited to the extent of the income arising from asset management charges based on the value of assets in the fund. Page 78 B19 - Risk management continued (x) 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 or 'held for sale'. Financial assets that are past due but not impaired At 31 December 2014 Neither past due nor impaired £m 0-3 months £m 3-6 months £m 6 months- 1 year £m Greater than 1 year £m Financial assets that have been impaired £m Carrying value £m Debt securities 1,021 - - - - - 1,021 Reinsurance assets 5,425 - - - - - 5,425 Other investments 1 - - - - 4 5 Loans 4,286 2 2 - - 75 4,365 Receivables and other financial assets 5,849 60 9 7 8 - 5,933 Financial assets that are past due but not impaired At 31 December 2013 Restated1 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 1,133 - - - - - 1,133 Reinsurance assets 5,172 - - - - - 5,172 Other investments 7 - - - - 6 13 Loans 5,263 - - - - 139 5,402 Receivables and other financial assets 7,350 56 26 18 22 4 7,476 1 Restated for the adoption of amendments to IAS32 'Financial Instruments - Presentation' - see note B2 for details. In addition, restated to exclude reinsurance assets measured at fair value through profit or loss. 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, 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 ALM is responsible for monitoring and managing market risk at Group level and has established criteria for matching assets and liabilities to limit the impact of mismatches due to market movements. In addition, where the Group's long-term savings businesses have written insurance and investment products where the majority of investment risks are borne by its policyholders, these risks are managed in line with local regulations and marketing literature, in order to satisfy the policyholders' risk and reward objectives. The Group writes unit-linked business in a number of its operations. The shareholders' exposure to market risk on this business is limited to the extent that income arising from asset management charges is based on the value of assets in the fund. The most material types of market risk that the Group is exposed to are described below. (i) Equity price risk The Group is subject to equity price risk arising from changes in the market values of its equity securities portfolio. We continue to limit our direct equity exposure in line with our risk preferences. At a business unit level, investment limits and local asset admissibility regulations require that business units hold diversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have material holdings of unquoted equity securities. Equity risk is also managed using a variety of derivative instruments, including futures and options. Businesses actively model the performance of equities through the use of risk models, in particular to understand the impact of equity performance on guarantees, options and bonus rates. At 31 December 2014 the Group's shareholder funds held £2 billion notional of equity hedge put spreads, with up to 9 months to maturity with an average strike of 81-61% of the prevailing market levels on 31 December 2014. Sensitivity to changes in equity prices is given in section '(j) risk and capital management' below. Page 79 B19 - Risk management continued (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 asset admissibility, liquidity requirements and the expectations of policyholders. As at 31 December 2014, no material derivative contracts had been entered into to mitigate the effects of changes in property prices. Sensitivity to changes in property prices is given in section '(j) risk and capital management' below. (iii) Interest rate risk Interest rate risk arises primarily from the Group's investments in long-term debt and fixed income securities and their movement relative to the value placed on the insurance liabilities. A number of policyholder product features have an influence on the Group's interest rate risk. The major features include guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. Exposure to interest rate risk is monitored through several measures that include duration, economic capital modelling, sensitivity testing and stress and scenario testing. The impact of exposure to sustained low interest rates is considered within our scenario testing. The Group typically manages interest rate risk by investing in fixed interest securities which closely match the interest rate sensitivity of the liabilities where this is available. Interest rate risk is also managed in some business units using a variety of derivative instruments, including futures, options, swaps, caps and floors. Sensitivity to changes in interest rates is given in section '(j) risk and capital management' below. (iv) Inflation risk Inflation risk arises primarily from the Group's exposure to general insurance claims inflation, to inflation linked benefits within the defined benefit staff pension schemes and within the UK annuity portfolio and to expense inflation. Increases in long-term inflation expectations are closely linked to long-term interest rates and so are frequently considered with interest rate risk. Exposure to inflation risk is monitored through economic capital modelling, sensitivity testing and stress and scenario testing. The Group typically manages inflation risk through its investment strategy and, in particular, by investing in inflation linked securities and through a variety of derivative instruments, including inflation linked swaps. (v) Currency risk The Group has minimal exposure to currency risk from financial instruments held by business units in currencies other than their functional currencies, as nearly all such holdings are backing either by unit-linked or with-profit contract liabilities or hedging. The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. Approximately half of the Group's premium income arises in currencies other than sterling and the Group's net assets are denominated in a variety of currencies, of which the largest are euro, sterling and Canadian dollars. The Group does not hedge foreign currency revenues as these are substantially retained locally to support the growth of the Group's business and meet local regulatory and market requirements. Businesses aim to maintain sufficient assets in local currency to meet local currency liabilities, however movements may impact the value of the Group's consolidated shareholders' equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. These exposures are managed by aligning the deployment of regulatory capital by currency with the Group's regulatory capital requirements by currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set. At 31 December 2014 and 2013, 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 2014 8,050 2,392 1,016 818 12,276 Capital 31 December 2013 4,942 4,178 987 910 11,017 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 2014 (78) 210 (96) 91 Net assets at 31 December 2013 (260) 360 (81) 99 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, excluding 'discontinued operations'. 10% increase in sterling/ euro rate £m 10% decrease in sterling/ euro rate £m 10% increase in sterling/ CAD$ rate £m 10% decrease in sterling/ CAD$ rate £m Impact on profit before tax 31 December 2014 (44) (25) (15) 20 Impact on profit before tax 31 December 2013 (restated)1 (3) (1) (8) 2 1 Restated to disclose the impact of a 10% change in the average exchange rate applied to translate foreign currency profits into sterling. In previous years, the sensitivity of profit before tax to changes in foreign exchange rates was calculated on the basis of a 10% change in the period-end exchange rate which was used to calculate the average exchange rate applied to translate foreign currency profits. We consider the change in basis of calculation better reflects the sensitivity of profit before tax to foreign currency risk. Page 80 B19 - Risk management continued The balance sheet changes arise from retranslation of business unit statements of financial position from their functional currencies into sterling, with above movements being taken through the currency translation reserve. These balance sheet movements in exchange rates therefore have no impact on profit. Net asset and profit before tax figures are stated after taking account of the effect of currency hedging activities. (vi) Derivatives risk Derivatives are used by a number of the businesses. Activity is overseen by the Group ALM and Group Risk teams, which monitor exposure levels and approves large or complex transactions. Derivatives are primarily used for efficient investment management, risk hedging purposes, or to structure specific retail savings products. The Group applies strict requirements to the administration and valuation processes it uses, and has a control framework that is consistent with market and industry practice for the activity that is undertaken. (vii) Correlation risk The Group recognises that lapse behaviour and potential increases in consumer expectations are sensitive to and interdependent with market movements and interest rates. These interdependencies are taken into consideration in the internal economic capital model and in scenario analysis. (d) Liquidity risk Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form. The relatively illiquid nature of insurance liabilities is a potential source of additional investment return by allowing us to invest in higher yielding, but less liquid assets such as commercial mortgages. The Group seeks to ensure that it maintains sufficient financial resources to meet its obligations as they fall due through the application of a Group liquidity risk policy and business standard and through the development of its liquidity risk management plan. At Group and business unit level, there is a liquidity risk appetite which requires that sufficient liquid resources be maintained to cover net outflows in a stress scenario. In addition to the existing liquid resources and expected inflows, the Group maintains significant undrawn committed borrowing facilities (£1,550 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 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 2014 and 2013 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. We expect surrenders, transfers and maturities to occur over many years, and the tables reflect the expected cash flows for these contracts. However, contractually, the total liability for linked business and non-linked investment contracts would be shown in the 'within 1 year' column below, and previously the total liability for linked business was shown in the 'within 1 year' column. Changes in durations between 2013 and 2014 reflect evolution of the portfolio, and changes to the models for projecting cash-flows. This table includes assets held for sale. At 31 December 2014 Total £m On demand or within 1 year £m 1-5 years £m 5-15 years £m Over 15 years £m Long-term business Insurance contracts - non-linked 85,723 7,980 25,318 32,534 19,891 Investment contracts - non-linked 55,634 3,311 10,852 23,919 17,552 Linked business 75,341 8,141 21,444 27,673 18,083 General insurance and health 13,993 6,014 5,400 2,115 464 Total contract liabilities 230,691 25,446 63,014 86,241 55,990 At 31 December 2013 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 81,458 7,900 25,223 29,620 18,715 Investment contracts - non-linked 60,111 2,098 10,422 17,594 29,997 Linked business 73,458 6,244 16,403 23,483 27,328 General insurance and health 14,534 6,350 5,591 2,197 396 Total contract liabilities 229,561 22,592 57,639 72,894 76,436 Page 81 B19 - Risk management continued (ii) Analysis of maturity of financial assets The following table provides an analysis, by maturity date of the principal, of the carrying value of financial assets which are available to fund the repayment of liabilities as they crystallise. This table excludes assets held for sale. At 31 December 2014 Total £m On demand or within 1 year £m 1-5 years £m Over 5 years £m No fixed term (perpetual) £m Debt securities 131,661 19,097 37,404 75,006 154 Equity securities 35,619 - - - 35,619 Other investments 35,358 29,011 940 3,553 1,854 Loans 25,260 1,489 2,517 21,249 5 Cash and cash equivalents 23,105 23,105 - - - 251,003 72,702 40,861 99,808 37,632 At 31 December 2013 Restated1 Total £m On demand or within 1 year £m 1-5 years £m Over 5 years £m No fixed term (perpetual) £m Debt securities 124,385 15,146 35,624 73,613 2 Equity securities 37,326 - - - 37,326 Other investments 32,316 28,227 812 1,382 1,895 Loans 23,879 2,029 3,909 17,920 21 Cash and cash equivalents 26,131 26,131 - - - 244,037 71,533 40,345 92,915 39,244 1 Restated for the adoption of amendments to IAS 32 'Financial Instruments: Presentation' - see note B2 for details. 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 insurance risk Life insurance risk in the Group arises through its exposure to mortality and morbidity risks 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 chooses to take measured amounts of life insurance risk provided that the relevant business has the appropriate core skills to assess and price the risk and adequate returns are available. The underlying risk profile of our life insurance risks, primarily persistency, longevity, mortality and expense risk, has remained stable during 2014, although the current continued relatively low levels of interest rates have increased our sensitivity to longevity shocks compared to historical norms. Our economic exposure to longevity risk was reduced as a result of the Aviva Staff Pension Scheme entering into a longevity swap covering £5 billion of pensioner in payment scheme liabilities on 5 March 2014, while any significant reduction in individual annuity new business volumes as a result of the UK budget changes to compulsory annuitisation will also reduce our longevity risks exposure over the longer term to the extent not offset by increased bulk purchase annuity volumes. Despite this longevity risk remains the Group's most significant life insurance risk due to the Group's existing annuity portfolio. Persistency risk remains significant and continues to have a volatile outlook with underlying performance linked to some degree to economic conditions. However, businesses across the Group have continued to make progress with a range of customer retention activities. The Group has continued to write considerable volumes of life protection business, and to utilise reinsurance to reduce exposure to potential losses. More generally, life insurance risks are believed to provide a significant diversification against other risks in the portfolio. Life insurance risks are modelled within the internal economic capital model and subject to sensitivity and stress and scenario testing. The assumption and management of life 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 insurance risks are managed as follows: · Mortality and morbidity risks are mitigated by use of reinsurance. The Group allows businesses to select reinsurers, from those approved by the Group, based on local factors, but retains oversight of the overall exposures and monitor that the aggregation of risk ceded is within credit risk appetite. · Longevity risk and internal experience analysis are monitored against the latest external industry data and emerging trends. Whilst individual businesses are responsible for reserving and pricing for annuity business, the Group monitors the exposure to this risk and any associated capital implications. The Group has used reinsurance solutions to reduce the risks from longevity and continually monitors and evaluates emerging market solutions to mitigate this risk further. · Persistency risk is managed at a business unit level through frequent monitoring of company experience, and benchmarked against local market information. Generally, persistency risk arises from customers lapsing their policies earlier than has been assumed. Where possible the financial impact of lapses is reduced through appropriate product design. Businesses also implement specific initiatives to improve the retention of policies which may otherwise lapse. The Group has developed guidelines on persistency management. · Expense risk is primarily managed by the business units through the assessment of business unit profitability and frequent monitoring of expense levels. Page 82 B19 - Risk management continued Embedded derivatives The Group has exposure to a variety of embedded derivatives in its long-term savings business due to product features offering varying degrees of guaranteed benefits at maturity or on early surrender, along with options to convert their benefits into different products on pre-agreed terms. The extent of the impact of these embedded derivatives differs considerably between business units and exposes Aviva to changes in policyholder behaviour in the exercise of options as well as market risk. Examples of each type of embedded derivative affecting the Group are: · Options: call, put, surrender and maturity options, guaranteed annuity options, options to cease premium payment, options for withdrawals free of market value adjustment, annuity options, and guaranteed insurability options. · Guarantees: embedded floor (guaranteed return), maturity guarantee, guaranteed death benefit, and guaranteed minimum rate of annuity payment. · Other: indexed interest or principal payments, maturity value, loyalty bonus. The impact of these is reflected in the economic capital model and MCEV reporting and managed as part of the asset liability framework. (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 B10 '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 economic capital model is used to assess the risks that each general insurance business unit, and the Group as a whole, is exposed to, quantifying their impact and calculating appropriate capital requirements. Business units have developed mechanisms that identify, quantify and manage accumulated exposures to contain them within the limits of the appetite of the Group. The business units are assisted by the General Insurance Council which provides technical input for major decisions which fall outside individual delegated limits or escalations outside group risk preferences, group risk accumulation, concentration and profitability limits. Reinsurance strategy Significant reinsurance purchases are reviewed annually at both business unit and Group level to verify that the levels of protection being bought reflect any developments in exposure and the risk appetite of the Group. The basis of these purchases is underpinned by analysis of economic capital, earnings and capital volatility, cash flow and liquidity and the Group's franchise value. Detailed actuarial analysis is used to calculate the Group's extreme risk profile and then design cost and capital efficient reinsurance programmes to mitigate these risks to within agreed appetites. For businesses writing general insurance we analyse the natural catastrophe exposure using external probabilistic 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. The total Group potential loss from its most concentrated catastrophe exposure peril (Northern Europe Windstorm) is approximately £150 million, for a one in ten year annual loss scenario, compared to approximately £260 million when measured on a one in a hundred year annual loss scenario. (g) Asset management risk Aviva is directly exposed to the risks associated with operating an asset management business through its ownership of Aviva Investors. The underlying risk profile of our asset management risk is derived from investment performance, specialist investment professionals and leadership, product development capabilities, fund liquidity, margin, client retention, regulatory developments, fiduciary and contractual responsibilities. The risk profile is regularly monitored. Investment performance has remained strong over 2014 despite some positions being impacted by the volatility of global markets. A client relationship team is in place to manage client retention risk, while all new asset management products undergo a review and approval process at each stage of the product development process, including approvals from legal, compliance and risk functions. Investment performance against client objectives relative to agreed benchmarks is monitored as part of our investment performance and risk management process, and subject to further independent oversight and challenge by a specialist risk team, reporting directly to the Aviva Investors' CRO. Page 83 B19 - Risk management continued (h) Operational risk Operational risk is the risk of direct or indirect loss, arising from inadequate or failed internal processes, people and systems, or external events including changes in the regulatory environment. We have limited appetite for operational risk and aim to reduce these risks as far as is commercially sensible. Our business units are primarily responsible for identifying and managing operational risks within their businesses, within the group-wide operational risk framework including the risk and control self-assessment process. Businesses must be satisfied that all material risks falling outside our risk tolerances are being mitigated, monitored and reported to an appropriate level. Any risks with a high potential impact are monitored centrally on a regular basis. Businesses use key indicator data to help monitor the status of the risk and control environment. They also identify and capture loss events, taking appropriate action to address actual control breakdowns and promote internal learning. (i) Brand and reputation risk We are exposed to the risk that litigation, employee misconduct, operational failures, the outcome of regulatory investigations, media speculation and negative publicity, disclosure of confidential client information, inadequate services, whether or not founded, could impact our brands or reputation. Any of our brands or our reputation could also be affected if products or services recommended by us (or any of our intermediaries) do not perform as expected (whether or not the expectations are founded) or customers' expectations for the product change. We seek to reduce this risk to as low a level as commercially sensible. The FCA regularly considers whether we are meeting the requirement to treat our customers fairly and we make use of various metrics to assess our own performance, including customer advocacy, retention and complaints. Failure to meet these requirements could also impact our brands or reputation. If we do not manage the perception of our brands and reputation successfully, it could cause existing customers or agents to withdraw from our business and potential customers or agents to choose not to do business with us. (j) Risk and capital management (i) Sensitivity test analysis The Group uses a number of sensitivity tests to understand the volatility of earnings, the volatility of its capital requirements, and to manage its capital more efficiently. Sensitivities to economic and operating experience are regularly produced on the Group's key financial performance metrics to inform the Group's decision making and planning processes, and as part of the framework for identifying and quantifying the risks to which each of its business units, and the Group as a whole, are exposed. For long-term business in particular, sensitivities of market consistent performance indicators to changes in both economic and non-economic experience are continually used to manage the business and to inform the decision making process. (ii) Life insurance and investment contracts The nature of long-term business is such that a number of assumptions are made in compiling these financial statements. Assumptions are made about investment returns, expenses, mortality rates and persistency in connection with the in-force policies for each business unit. Assumptions are best estimates based on historic and expected experience of the business. A number of the key assumptions for the Group's central scenario are disclosed elsewhere in these statements for both IFRS reporting and reporting under MCEV methodology. (iii) General insurance and health business General insurance and health claim liabilities are estimated by using standard actuarial claims projection techniques. These methods extrapolate the claims development for each accident year based on the observed development of earlier years. In most cases, no explicit assumptions are made as projections are based on assumptions implicit in the historic claims. (iv) Sensitivity test results Illustrative results of sensitivity testing for long-term business, general insurance and health business and the fund management and non-insurance business are set out below. For each sensitivity test the impact of a reasonably possible change in a single factor is shown, with other assumptions left unchanged. Page 84 B19 - Risk management continued Sensitivity factor Description of sensitivity factor applied Interest rate and investment return The impact of a change in market interest rates by a 1% increase or decrease. The test allows consistently for similar changes to investment returns and movements in the market value of backing fixed interest securities. Credit spreads The impact of a 0.5% increase in credit spreads over risk-free interest rates on corporate bonds and other non-sovereign credit assets. The test allows for any consequential impact on liability valuations Equity/property market values The impact of a change in equity/property market values by ± 10%. Expenses The impact of an increase in maintenance expenses by 10%. Assurance mortality/morbidity (life insurance only) The impact of an increase in mortality/morbidity rates for assurance contracts by 5%. Annuitant mortality (long-term insurance only) The impact of a reduction in mortality rates for annuity contracts by 5%. Gross loss ratios (non-long-term insurance only) The impact of an increase in gross loss ratios for general insurance and health business by 5%. Long-term business Sensitivities as at 31 December 2014 2014 Impact on profit before tax (£m) Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Expenses +10% Assurance mortality +5% Annuitant mortality -5% Insurance participating (10) (60) (20) (175) 70 (25) (5) (45) Insurance non-participating (155) 130 (425) 40 (40) (80) (50) (590) Investment participating (15) - (10) - - (5) - - Investment non-participating (40) 30 (10) 55 (60) (35) - - Assets backing life shareholders' funds (75) 45 (60) 20 (20) - - - Total (295) 145 (525) (60) (50) (145) (55) (635) 2014 Impact on shareholders' equity before tax (£m) Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Expenses +10% Assurance mortality +5% Annuitant mortality -5% Insurance participating (10) (60) (20) (175) 70 (25) (5) (45) Insurance non-participating (155) 130 (425) 40 (40) (80) (50) (590) Investment participating (15) - (10) - - (5) - - Investment non-participating (40) 30 (10) 55 (60) (35) - - Assets backing life shareholders' funds (115) 80 (65) 20 (20) - - - Total (335) 180 (530) (60) (50) (145) (55) (635) Sensitivities as at 31 December 2013 2013 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) - (60) (10) (20) (30) (5) (40) Insurance non-participating (145) 140 (415) (5) 10 (80) (60) (450) Investment participating (10) 5 (5) 5 (5) (10) - - Investment non-participating (20) 20 (5) 5 (5) (15) - - Assets backing life shareholders' funds (35) 55 (25) 40 (45) - - - Total (255) 220 (510) 35 (65) (135) (65) (490) 2013 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) - (60) (10) (20) (30) (5) (40) Insurance non-participating (145) 140 (415) (5) 10 (80) (60) (450) Investment participating (10) 5 (5) 5 (5) (10) - - Investment non-participating (20) 20 (5) 5 (5) (15) - - Assets backing life shareholders' funds (75) 100 (35) 45 (45) - - - Total (295) 265 (520) 40 (65) (135) (65) (490) Page 85 B19 - Risk management continued Changes in sensitivities between 2014 and 2013 reflect movements in market interest rates, portfolio growth, changes to asset mix and the relative durations of assets and liabilities and asset liability management actions. The sensitivities to economic movements relate mainly to business in the UK. In general, a fall in market interest rates has a beneficial impact on non-participating business due to the increase in market value of fixed interest securities and the relative durations of assets and liabilities. Similarly a rise in interest rates has a negative impact. Mortality and expense sensitivities also relate primarily to the UK. General insurance and health business sensitivities as at 31 December 2014 2014 Impact on profit before tax (£m) Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Expenses +10% Gross loss ratios +5% Gross of reinsurance (260) 250 (130) 55 (55) (105) (280) Net of reinsurance (305) 295 (130) 55 (55) (105) (270) 2014 Impact on shareholders' equity before tax (£m) Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Expenses +10% Gross loss ratios +5% Gross of reinsurance (260) 250 (130) 60 (60) (20) (280) Net of reinsurance (305) 295 (130) 60 (60) (20) (270) Sensitivities as at 31 December 2013 2013 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 (245) 235 (125) 50 (50) (110) (300) Net of reinsurance (295) 295 (125) 50 (50) (110) (285) 2013 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 (245) 235 (125) 50 (50) (25) (300) Net of reinsurance (295) 295 (125) 50 (50) (25) (285) For general insurance and health, the impact of the expense sensitivity on profit also includes the increase in ongoing administration expenses, in addition to the increase in the claims handling expense provision. Fund management and non-insurance business sensitivities as at 31 December 2014 2014 Impact on profit before tax (£m) Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Total - - 5 (15) 25 2014 Impact on shareholders' equity before tax (£m) Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Total - - 5 (15) 25 Sensitivities as at 31 December 2013 2013 Impact on profit before tax (£m) Interest rates +1% Interest Rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Total - - 20 (5) 15 2013 Impact on shareholders' equity before tax (£m) Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Total - - 20 (5) 15 Page 86 B19 - Risk management continued Limitations of sensitivity analysis The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The sensitivity analyses do not take into consideration that the Group's assets and liabilities are actively managed. Additionally, the financial position of the Group may vary at the time that any actual market movement occurs. For example, the Group's financial risk management strategy aims to manage the exposure to market fluctuations. As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation, adjusting bonuses credited to policyholders, and taking other protective action. A number of the business units use passive assumptions to calculate their long-term business liabilities. Consequently, a change in the underlying assumptions may not have any impact on the liabilities, whereas assets held at market value in the statement of financial position will be affected. In these circumstances, the different measurement bases for liabilities and assets may lead to volatility in shareholder equity. Similarly, for general insurance liabilities, the interest rate sensitivities only affect profit and equity where explicit assumptions are made regarding interest (discount) rates or future inflation. Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Group's view of possible near-term market changes that cannot be predicted with any certainty, and the assumption that all interest rates move in an identical fashion. B20 - Direct capital instruments and fixed rate tier 1 notes Notional amount 2014 £m 2013 £m Issued November 2004 5.9021% £500 million direct capital instrument 500 500 4.7291% €700 million direct capital instrument - 490 500 990 Issued May 2012 8.25% US $650 million fixed rate tier 1 notes 392 392 892 1,382 The euro and sterling direct capital instruments (the DCIs) were issued on 25 November 2004 and qualify as Innovative Tier 1 capital, as defined by the PRA in GENPRU Annex 1 'Capital Resources'. On 28 November 2014 the Company exercised its option to redeem the euro DCI on its first redemption date. The remaining sterling DCI has no fixed redemption date but the Company may, at its sole option, redeem all (but not part) of the principal amount on 27 July 2020, at which date the interest rate changes to a variable rate, or on any respective coupon payment date thereafter. The sterling DCI variable rate will be the six month sterling deposit rate plus margin. The fixed rate tier 1 notes (the FxdRNs) were issued on 3 May 2012 and also qualify as Innovative Tier 1 capital. The FxdRNs are perpetual but are subject to a mandatory exchange into non-cumulative preference shares in the Company after 99 years. The Company may, at its sole option, redeem all (but not part) of the FxdRNs at their principal amounts on 3 November 2017, or on any respective coupon payment date thereafter. On the occurrence of a Capital Disqualification Event as defined in the terms and conditions of the issue for both the DCI and FxdRNs, the Company may at its sole option substitute at any time not less than all of the DCI or FxdRNs for, or vary the terms of the DCI so that they become, Qualifying Tier 1 Securities or Qualifying Upper Tier 2 Securities. In addition, on the occurrence of a Substitution Event as defined in the terms and conditions of the issue for the DCI, the Company may at its sole option substitute not less than all of the DCI for fully paid non-cumulative preference shares in the Company. These preference shares can only be redeemed on 27 July 2020, or on any dividend payment date thereafter. For the FxdRNs, having given the required notice, the Company has the right to substitute not less than all of the notes for fully paid non-cumulative preference shares at any time. These preference shares can only be redeemed on 3 November 2017, or on any dividend payment date thereafter. The Company has the right to choose whether or not to pay any dividend on the new shares, and any such dividend payment will be non-cumulative. Page 87 B20 - Direct capital instruments and fixed rate tier 1 notes continued The Company has the option to defer coupon payments on the DCI or FxdRNs on any relevant payment date. In relation to the DCI, deferred coupons shall be satisfied only in the following circumstances, all of which occur at the sole option of the Company: · Redemption; or · Substitution by, or variation so they become, alternative Qualifying Tier 1 Securities or Qualifying Upper Tier 2 Securities; or · Substitution by preference shares. In relation to the FxdRNs, deferred coupons may be satisfied at any time, at the sole option of the Company. The Company is required to satisfy deferred coupons on the FxdRNs only in the following circumstances: · Redemption; or · Substitution by preference shares. No interest will accrue on any deferred coupon. Deferred coupons will be satisfied by the issue and sale of ordinary shares in the Company at their prevailing market value, to a sum as near as practicable to (and at least equal to) the relevant deferred coupons. In the event of any coupon deferral, the Company will not declare or pay any dividend on its ordinary or preference share capital. These instruments have been treated as equity. B21 - Contingent liabilities and other risk factors This note sets out the main areas of uncertainty over the calculation of our liabilities. (a) Uncertainty over claims provisions Note B10 gives details of the estimation techniques used by the Group to determine the general insurance business outstanding claims provisions and of the methodology and assumptions used in determining the long-term business provisions. These approaches are designed to allow for the appropriate cost of policy-related liabilities, with a degree of prudence, to give a result within the normal range of outcomes. However, the actual cost of settling these liabilities may differ, for example because experience may be worse than that assumed, or future general insurance business claims inflation may differ from that expected, and hence there is uncertainty in respect of these liabilities. (b) Asbestos, pollution and social environmental hazards In the course of conducting insurance business, various companies within the Group receive general insurance liability claims, and become involved in actual or threatened related litigation arising there from, including claims in respect of pollution and other environmental hazards. Amongst these are claims in respect of asbestos production and handling in various jurisdictions, including Europe, Canada and Australia. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents which they cover and the uncertainties associated with establishing liability and the availability of reinsurance, the ultimate cost cannot be determined with certainty. However, on the basis of current information having regard to the level of provisions made for general insurance claims, the directors consider that any additional costs arising are not likely to have a material impact on the financial position of the Group. (c) Guarantees on long-term savings products As a normal part of their operating activities, various Group companies have given guarantees and options, including interest rate guarantees, in respect of certain long-term insurance and investment products. In providing these guarantees and options, the Group's capital position is sensitive to fluctuations in financial variables including foreign currency exchange rates, interest rates, property values and equity prices. Interest rate guaranteed returns, such as those available on guaranteed annuity options, are sensitive to interest rates falling below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was made. The directors continue to believe that the existing provisions for such guarantees and options are sufficient. (d) Regulatory compliance The Group's insurance and investment business is subject to local regulation in each of the countries in which it operates. A number of the Group's UK subsidiaries are "dual regulated" (directly authorised by both the PRA (for prudential regulation) and the FCA (for conduct regulation) whilst others are solo regulated (regulated solely by the FCA for both prudential and conduct regulation). Between them, the PRA and FCA have broad powers including the authority to grant, vary the terms of, or cancel a regulated firm's authorisation; to investigate marketing and sales practices; and to require the maintenance of adequate financial resources. The Group's regulators outside the UK typically have similar powers, but in some cases they also operate a system of 'prior product approval'. The Group's regulated businesses have compliance resources to respond to regulatory enquiries in a constructive way, and take corrective action when warranted. However, all regulated financial services companies face the risk that their regulator could find that they have failed to comply with applicable regulations or have not undertaken corrective action as required. The impact of any such finding (whether in the UK or overseas) could have a negative impact on the Group's reported results or on its relations with current and potential customers. Regulatory action against a member of the Group could result in adverse publicity for, or negative perceptions regarding, the Group, or could have a material adverse effect on the business of the Group, its results of operations and/or financial condition and divert management's attention from the day-to-day management of the business. Page 88 B21 - Contingent liabilities and other risk factors (e) Structured settlements The Company has purchased annuities from licensed Canadian life insurers to provide for fixed and recurring payments to claimants. As a result of these arrangements, the Company is exposed to credit risk to the extent that any of the life insurers fail to fulfill their obligations. The Company's maximum exposure to credit risk for these types of arrangements is approximately $1,224 million as at 31 December 2014 (2013: $1,119 million). Credit risk is managed by acquiring annuities from a diverse portfolio of life insurers with proven financial stability. This risk is reduced to the extent of coverage provided by Assuris, the life insurance industry compensation plan. As at 31 December 2014, no information has come to the Company's attention that would suggest any weakness or failure in life insurers from which it has purchased annuities and consequently no provision for credit risk is required. (f) Other In the course of conducting insurance and investment business, various Group companies receive liability claims, and become involved in actual or threatened related litigation. In the opinion of the directors, adequate provisions have been established for such claims and no material loss will arise in this respect. In addition, in line with standard business practice, various Group companies have given guarantees, indemnities and warranties in connection with disposals in recent years of subsidiaries and associates to parties outside the Aviva Group. In the opinion of the directors, no material loss will arise in respect of these guarantees, indemnities and warranties. There are a number of charges registered over the assets of Group companies in favour of other Group companies or third parties. In addition, certain of the Company's assets are charged in favour of certain of its subsidiaries as security for intra-Group loans. The Group's insurance subsidiaries pay contributions to levy schemes in several countries in which we operate. Given the economic environment, there is a heightened risk that the levy contributions will need to be increased to protect policyholders if an insurance company falls into financial difficulties. The directors continue to monitor the situation but are not aware of any need to increase provisions at the statement of financial position date. B22 - Subsequent events In February 2015, Aviva Investors reached a settlement with the FCA for certain systems and controls failings that happened between August 2005 to June 2013 and agreed to pay a fine of £17.6 million. The impact of this has been fully provided for within the FY14 result. On 25 February 2015, Crédit du Nord, the Group's partner in Antarius S.A. ("Antarius"), exercised its call option to purchase Aviva France's 50% share of Antarius. In accordance with the shareholders agreement, the exercise of the call option starts a period of approximately two years to complete the disposal. In accordance with IFRS 5, the subsidiary will be classified as Held for Sale from the date when the transaction is expected to complete within 12 months. End of part 3 of 5 This information is provided by RNS The company news service from the London Stock Exchange END FR XZLLBEXFEBBF
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