Start part 3 of 4

Page 35

IFRS financial statements

Page 36

Consolidated income statement

For the year ended 31 December 2018

Page 37

Consolidated statement of comprehensive income

For the year ended 31 December 2018 

Page 38

Consolidated statement of changes in equity

For the year ended 31 December 2018

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

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

For the year ended 31 December 2017

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

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

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

Page 39

Consolidated statement of financial position

As at 31 December 2018

Page 40

Consolidated statement of cash flows

For the year ended 31 December 2018

The cash flows presented in this statement cover all the Group's activities and include flows from both policyholder and shareholder activities. All cash and cash equivalents are available for use by the Group.

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

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

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

Page 41

B1(i) Basis of preparation

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

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

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

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

(b)  Items included in the financial statements of each of the Group's entities are measured in the currency of the primary economic environment in which that entity operates (the functional currency). The consolidated financial statements are stated in pounds sterling, which is the Company's functional and presentational currency. Unless otherwise noted, the amounts shown in these financial statements are in millions of pounds sterling (£m).

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

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

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

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

Page 42

B1(ii) New standards, interpretations and amendments to published standards that have been adopted by the Group

The Group has adopted the following amendments to standards which became effective for the annual reporting period beginning on 1 January 2018:

(i)   Amendments to IFRS 4, Insurance Contracts

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

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

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

(ii)  IFRS 15, Revenue from Contracts with Customers

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

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

· Insurance contracts (IFRS 4)

· Financial instruments (IAS 39)

· Leases (IAS 17)

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

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

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

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

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

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

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

(iv) Annual Improvements to IFRSs 2014-2016

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

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

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

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

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

Page 43

B2 - Presentation changes

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

B3 - Exchange rates

The Group's principal overseas operations during the year were located within the eurozone, Canada and Poland. The results and cash flows of these operations have been translated into sterling at the average rates for the year, and the assets and liabilities have been translated at the year end rates as follows:

Page 44

B4 - Subsidiaries, joint ventures and associates - acquisitions

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

(i)   Wealthify

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

(ii)  Friends First

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

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

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

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

If the acquisition had been effective on 1 January 2018, on a pro-forma basis the contribution to the Group's net earned premiums is estimated at £102 million and profit before tax attributable to shareholders is estimated at £5 million. In determining this amount, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 January 2018. The pro-forma results are provided for information purposes only and do not necessarily reflect the actual results that would have occurred had the acquisition taken place on 1 January 2018, nor are they necessarily indicative of the future results of the combined Group.

Subsequent events

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

Page 45

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

This note provides details of the disposals of subsidiaries, joint ventures and associates that the Group has made during the year, together with details of businesses held for sale at the year end.

(a) Summary

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

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

(b)  Disposals of subsidiaries, joint ventures and associates

The following businesses were disposed of in 2018:

(i)   Italy - Avipop

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

(ii)  Spain

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

(iii) Other

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

Page 46

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

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

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

(iv) Disposals of other investments 

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

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

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

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

(i)   FPI

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

(d)  Remeasurements due to change in control status

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

(e)  Significant restrictions

In certain jurisdictions the ability of subsidiaries to transfer funds to the Group in the form of cash dividends or to repay loans and advances is subject to local corporate or insurance laws and regulations and solvency requirements. There are no protective rights of non-controlling interests which significantly restrict the Group's ability to access or use the assets and settle the liabilities of the Group.