Corporate responsibility report 2013 Find out more about our commitment to acting as a responsible member of the international business community.
A new management team At the beginning of the year, Mark Wilson was appointed as your Group Chief Executive Officer. Mark has strong credentials for this role, and this has since been demonstrated in the changes Mark has made to upgrade significantly the calibre of our management team, as well as the overall performance and financial security of the Company.
Cash flow The first part of our ‘cash flow plus growth’ investment thesis is to convert more of our profits into cash remitted to Group. Higher cash remittances allow for optimal capital allocation and dividend flexibility. In 2013, cash remittances were £1,269 million³, a 40% increase over the 2012 comparative. This represents a remittance ratio of 72% of Operating Capital Generation (OCG) and is progress towards my ambition to get the remittance ratio above 80%.
Operating profit 2013 operating profit increased 6% to £2,049 million (2012: £1,926 million). The stability of our profit stream underlines our ‘cash flow plus growth’ investment proposition. After a £2.9 billion loss last year principally due to the writedown of Aviva USA, our profit after tax increased to £2.2 billion.
Financial strength § Ensure £400 million of expense savings reach the income statement
Canada Our Canadian general insurance business, the second largest in the market, produced a solid result, despite the higher weather losses from floods in Alberta and Toronto. The combined operating ratio in Canada was 94.6% (2012: 93.4%), with personal lines primarily affected by bad weather with a COR of 93.3% (2012: 90.5%). Improvement in commercial lines is, in part, attributable to the early stages of the implementation of predictive analytics.
Cash remittances have increased by 40% from 2012 to £1,269 million with a remittance ratio of 72% of OCG up from 49% in 2012 with both business units in the UK reporting large increases. In UK Life this was due to improved pricing, capital allocation and cost reductions, while in UK GI the improvement was primarily due to the restructure of the intercompany loan. It was also encouraging to see dividends resume from Italy and Ireland and increased dividends from France and Poland.
We are a well known life, general insurance and asset management business
Pace of technology adoption Days to sell one million units iPod
Distribution thesis The distribution thesis ensures that we provide the range of channels through which our customers want to purchase products and services from us
Build digital We plan to enhance performance and improve customer satisfaction by: § Increasing our use of digital across all businesses, both in sales processes and in customer communication and servicing
Read more about our distribution networks in the market focus pages on pages 30–42
Care more At Aviva we care like crazy about our customers, each other, and the communities we operate in.
Never rest At Aviva we are driven every single day to be edgy, to think bigger and do better for our customers and each other.
When Danuta’s daughter announced she was getting married, Danuta wanted to pay for the wedding. But with an epileptic son requiring expensive medication and her husband’s business facing tough times, that was going to be a struggle. Danuta told her Aviva agent that she wanted to cash in a policy to pay for the wedding. The agent advised her only to partially surrender the policy and keep the critical illness and death cover, just in case. The wedding was all paid for thanks to the Aviva policy. Unfortunately, nine months later, Danuta was diagnosed with bilateral kidney cancer. Her critical illness cover guaranteed quick access to treatment which saved her life. “None of us know what the future holds. But I have high hopes. And I have people to live for” she says.
In February 2014, the Financial Conduct Authority (FCA) reported on its review of annuities, with a focus on customer outcomes and a concern that too few customers shop around in the open market. The FCA concluded that many customers are not getting the best available retirement income and is launching a market study on retirement products. This is a view that Aviva supports. We offer the same rates to our existing pension customers and open market customers and have launched a five point plan for the industry to raise standards and help customers get a better deal in their retirement.
§ Providers must obtain medical information and ensure customers understand the potential benefits this can have on increasing their income
§ The limitations of ‘restricted’ panels should be made clear to customers
Our people strategy is designed to foster a high performing culture with a focus on achievement, potential and collaboration. As part of this, we are developing our technical learning programmes and acting upon the results of our internal employee survey. We are also continuing to improve our apprenticeship programme and enhancing our graduate programme.
We have significantly strengthened our senior management team, most notably with the appointments of Maurice Tulloch as CEO in September (Maurice was previously CEO of Aviva in Canada, our second largest general insurance business), Colm Holmes as CFO, Steve Treloar as MD of UK Direct and, most recently, we announced the appointment of Ian Foy as MD Personal Lines.
Full year performance Over the past year we have made significant progress in transforming our European portfolio and have increased cash remittances to Group by 13% to £388 million. Value of New Business (VNB) grew by 12% to £303 million, profitability improved in general insurance and we delivered modest cost savings.
We are focused on operating excellence and we are currently consolidating all our operating platforms into one, to provide better customer interactions, improve efficiency and reduce operational complexity.
During 2013, we further developed our partnership with Banco Popolare SC by launching a telematics-based motor insurance product sold through their branches.
We continue to innovate and offer new products to meet our customers’ needs. In 2014, we will launch ‘Ovation’ nationwide, a product targeted at higher net worth individuals, and ‘Green Assure’, a new insurance enhancement that enables customers to replace their damaged or destroyed property with energy efficient and environmentally-friendly alternatives.
We remain prepared to help our customers when they need us most. The 2013 Calgary and Toronto major weather events show us at our best, working for our customers and partners and highlighting the value of our service.
The regulatory landscape continues to evolve with a focus on risk and solvency management as well as greater interest in sales practices. All international insurers, like Aviva, benefit from being able to draw on their experience of other regulatory environments around the world to respond effectively.
Aviva has supported a series of ‘Building Climate Resilience in Cities’ workshops. Insurance industry leaders and city stakeholders in Boston, San Diego and Toronto came together to identify opportunities to collaborate and build the resilience of their cities. Key headlines: § Increasing the resilience of physical infrastructure is a priority
Our general insurance philosophy rules out insuring certain business sectors on ethical and risk grounds – such as tobacco, arms and munitions, and GM crops. Trust is a vital issue for our industry and we are committed to simplifying every aspect of how we deal with customers and making sure our communications with them are straightforward and transparent. This commitment is reflected in our customer thesis and business standard.
In 2013, 27% of employees volunteered time equivalent to 41,223 hours (2012: 56,357). We are continuing to roll out our new volunteering strategy and system which prioritises skills-based volunteering to improve these figures. It was launched in 2012 in the UK, where we have now achieved 58% skills and leadership-based volunteering.
John was appointed to the Board in September 2011 and became Chairman on 1 July 2012. He chairs the Nomination Committee.
He was formerly Vice Chairman, UK of PricewaterhouseCoopers LLP with responsibility for leading the executive team for Europe, Middle East, Africa and India region following a long and successful career with the firm.
Prior to joining Aviva, he was Managing Director in the Financial Institutions Group at Morgan Stanley, with responsibility for the European asset management sector. He also had periods of responsibility for regulatory capital and funding for financial institutions, and a period with a focus on project finance in Asia.
Key activities during 2013 Board The Board has delegated greater authority to its committees during 2013, including expanding the remit of what is now the Governance Committee, and now receives more extensive reporting from the committees. This has allowed the Board to concentrate more on strategy; financial strength and performance; risk management; internal controls and compliance; and succession planning. I believe the Board and management have made good progress in achieving the turnaround aims we set at the beginning of the year. We have agreed a realistic and achievable strategy and plan for the coming years.
§ Annual bonus – a 2013 bonus of 112.5% of basic salary, equivalent to £1,102,500 was approved. The basis for this decision is set out in the remuneration report in the annual report and accounts
Total emoluments of Non-Executive Directors 1,362 1,082 109 149 — — — — — — 1,471 1,231
This Strategic Report was approved by the Board on 5 March 2014.
September and December 2013 respectively. Committee membership is also regularly refreshed and a number of changes have recently been implemented. NEDs need to be able to present objective, rigorous and constructive challenge to management, drawing on their wider experiences to question assumptions and viewpoints and where necessary defend a given position. The NEDs should also assist management in the development of the Company’s strategy. To be effective, a NED needs to acquire a sound understanding of the industry and the Company so as to be able to evaluate properly the information provided. All of the current directors were subject to a formal performance evaluation. The Board, having considered the matter carefully, is of the opinion that all of the current NEDs are independent and free from any relationship or circumstances that could affect, or appear to affect, their independent judgement. Scott Wheway, who has served on the Board for six years, was subject to a particularly rigorous review of his independence. Accordingly, over half of the Board members, excluding the Chairman, are independent NEDs. Biographical details including a summary of the skills and experience the directors bring to the Board are set out in the Strategic report. Each NED must be able to devote sufficient time to the role in order to discharge his or her responsibilities effectively. On average, the NEDs spend at least 41 days a year on Company business, with the chairmen of the Audit, Risk, Governance and Remuneration Committees spending substantially more. The Chairman has recently been appointed as Chairman of FirstGroup plc. The Nomination Committee reviewed the time commitment required for the role and had no objection to the Chairman taking up this appointment.
The Chairman and Group CEO Role profiles are in place for the Chairman, John McFarlane and the Group CEO, Mark Wilson, which clearly set out the duties of each role. The Chairman’s priority is leadership of the Board and ensuring its effectiveness; the Group CEO’s priority is the management of the Group. The Board has delegated the dayto -day running of the Group to the Group CEO within certain limits, above which, matters must be escalated to the Board for consideration and approval.
Board effectiveness The effectiveness of the Board is vital to the success of the Group and the Company undertakes a rigorous evaluation each year in order to assess how well the Board, its committees, the directors and the Chairman are performing. The aim is to improve the effectiveness of the Board and its committees and the Group’s overall performance. For the 2013 evaluation an
Glyn Barker 11 100% Patricia Cross3 1 100% Richard Karl Goeltz4 5 100% Michael Hawker 11 100% Gay Huey Evans2 9 82% John McFarlane2 10 91% Trevor Matthews 4 80% Michael Mire5 4 100% Sir Adrian Montague6 11 100% Patrick Regan 11 100% Bob Stein7 11 100% Russell Walls4 5 100% Scott Wheway2 10 91% Mark Wilson2 10 91%
3 Patricia Cross was appointed on 1 December 2013. 4 Russell Walls and Richard Karl Goeltz retired on 8 May 2013. 5 Michael Mire was appointed on 12 September 2013. 6 Sir Adrian Montague was appointed on 14 January 2013. 7 Bob Stein was appointed on 28 January 2013.
2 John McFarlane did not attend a meeting where his external appointment to FirstGroup plc was the only agenda item. Gay Huey Evans could not attend an ad hoc meeting called at short notice due to a prior commitment.
Revised terms of reference for the committee were adopted in December 2013 following an annual refresh. The full terms of reference for the Committee can be found on the Company’s website at www.aviva.com/terms-of-reference and are also available from the Group Company Secretary.
2 Russell Walls chaired the committee until 8 May 2013 when he retired from the Board. 3 Glyn Barker became chairman of the committee on 8 May 2013. 4 Patricia Cross joined the committee on 1 December 2013. 5 Richard Karl Goeltz retired from the Board on 8 May 2013. 6 Sir Adrian Montague joined the committee on 6 March 2013 and was unable to attend one meeting which was called at short notice.
Review and challenge proposed management actions if the Group’s capital or liquidity risk position against appetite reaches the level at which it needs to be escalated to the committee
Committee role and responsibilities The key responsibilities of the committee are to: take a leadership role in shaping the corporate governance principles, culture and ethical values of the Group in line with the Group’s strategic priorities oversee the brand and reputation of the Group ensure that reputational risk is consistent with the risk appetite approved by the Board and the creation of long term shareholder value oversee the Group’s conduct with customers, including the regulatory requirements relating to treating customers fairly and offering of products and services that are fit for purpose and meet customer needs oversee the Group’s conduct in relation to its corporate and societal obligations, including setting the guidance, direction and policies for the Group’s customer and corporate responsibility (CR) agenda and related activities and advising the Board and management on these matters
9% Regulatory and Government 11% Reputation 14% Customer 11% People 20% Community
Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The Performance Review includes the Risk and Capital Management section. In addition, the financial statements sections include notes on the Group’s borrowings (note 50); its contingent liabilities and other risk factors (note 53); its capital structure and position (note 55); management of its risks including market, credit and liquidity risk (note 58); and derivative financial instruments (note 59). The Group has considerable financial resources together with a diversified business model, with a spread of businesses and geographical reach. As a consequence, the directors believe that the Group is well placed to manage its business risks successfully. After making enquiries, the directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
US companies are required to have an audit committee and that one member must meet the requirements to be an audit committee financial expert. The audit committee should also cover risk matters.
The plan rules allow for awards to be made up to a maximum of 350% of basic salary. Threshold performance would result in a vesting level of 20% of maximum. Performance below threshold on both targets would result in the award lapsing in its entirety.
Actual targets for ROE and the appropriate TSR comparator group are agreed by the committee annually and disclosed in the annual remuneration report section.
Notes 1 Patrick Regan tendered his resignation as CFO on 22 January 2014 and will leave the Board and the Group before the AGM. 2 Trevor Matthews resigned from the Board with effect from 8 May 2013 and left the Company on 6 June 2013.
Period In line with the requirement of the UK Corporate Governance Code, all NEDs including the Chairman, are subject to annual re-election by shareholders at each AGM.
Appointment dates Director Date of last appointment on letter of appointment3
John McFarlane Chairman of the Company Attended by invitation Mark Wilson Group Chief Executive Officer Attended by invitation Kirstine Cooper Group General Counsel and Company Secretary Attended as secretary to the committee Christine Deputy Group HR Director Attended as an executive responsible for advising on remuneration policy Carole Jones Acting Group HR Director Attended as an executive responsible for advising on remuneration policy David Hope HR Director, Europe and Reward Attended as an executive responsible for advising on remuneration policy Andrew Pooley Executive Reward Director Attended as an executive responsible for advising on remuneration policy David Rogers Chief Accounting Officer Attended to advise on matters relating to the performance measures and targets for the Group’s share incentive plans Jason Windsor Chief Strategy and Development Officer Attended to advise on matters relating to the performance measures and targets for the Group’s share incentive plans
Return on Equity (ROE) performance over 3 years 50% 33.0% 40.5% 37.6% 34.48%
Pension EDs are eligible to participate in a defined contribution plan under which they can elect to receive 31% of basic salary from the Company minus a personal contribution of 8% of basic salary up to the scheme specific earnings cap (£141,600 in 2013/2014). For any contribution above the HMRC annual or life time allowance cap, a cash alternative in lieu of pension contribution is offered subject to the same limit of 31% of basic salary minus the personal contribution.
Former non-executive directors Russell Walls2 47 129 — 2 47 131 Richard Karl Goeltz2 44 119 — 1 44 120
Trevor Matthews Aviva long term incentive plan5 20116 373,27112 — — — 373,27112,13 300.80 — Mar-14 20126 482,142 — — — 482,14213 331.50 — Mar-15
Governance Regulatory remuneration code The Financial Conduct Authority’s (FCA) remuneration code applies to Aviva Investors and two small ‘firms’ (as defined by the FCA) within the UK & Ireland Life business. These businesses for 2013 were subject to the remuneration code under the Capital Requirements Directive III. From 1 January 2014 a number of these firms are now subject to Capital Requirements Directive IV and the subsequent revised remuneration code. Remuneration code requirements include an annual disclosure. For Aviva Investors this can be found at www.avivainvestors.co.uk/about_us/our_corporate_governance/index.htm and for the UK & Ireland Life firms at www.aviva.com/media/news/item/fsa-remuneration-code-disclosure-17178. Aviva’s reward principles and arrangements are designed to incentivise and reward employees for achieving stated business goals in a manner that is consistent with the Company’s approach to sound and effective risk management.
Approval by the Board This directors’ remuneration report was reviewed and approved by the Board on 5 March 2014.
Valuation of insurance contract liabilities We focused on this area because the directors’ valuation of the provisions for the settlement of future claims involves complex and subjective judgements about future events, both internal and external to the business, for which small changes in assumptions can result in material impacts to the valuation of these liabilities. (Refer to note 41 to the Consolidated financial statements.)
We evaluated the results of the directors’ impairment assessment, including an analysis of the methodology and the assumptions adopted. We performed testing of the appropriateness of the key assumptions used by the directors including performing a sensitivity analysis on the key assumptions used and by considering publicly available data, such as interest rate and economic growth projections.
We assessed the reasonableness of the methodology used by the directors and challenged the assumptions applied in valuing the provision. We tested input data in the calculation of the provision to underlying books and records and/or third party evidence.
ii) IFRS 11, Joint Arrangements IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC13 Jointly-controlled Entities – Non-monetary Contributions by Venturers. IFRS 11 defines and establishes accounting principles for joint arrangements. The standard distinguishes between two types of joint arrangements – joint ventures and joint operations – based on how rights and obligations are shared by parties to the arrangements. The adoption of IFRS 11 has no impact on the consolidated financial statements in the current or prior period.
IAS 27 Consolidated and Separate Financial Statements was superseded by IFRS 10 which addresses the requirements for consolidated financial statements and by revised IAS 27 Separate Financial Statements (2011) which addresses the amended requirements for separate financial statements. IAS 28 has been revised to include the application of the equity method for joint ventures as well as associates. Joint ventures are required to be equity accounted following the issuance of IFRS 11. There are no implications for the Group’s consolidated financial statements.
Investment vehicles In several countries, the Group has invested in a number of specialised investment vehicles such as Open-ended Investment Companies (OEICs) and unit trusts. These invest mainly in equities, bonds, cash and cash equivalents, and properties, and distribute most of their income. The Group’s percentage ownership in these vehicles can fluctuate from day to day according to the Group’s and third-party participation in them. When assessing control over investment vehicles, the Group considers the scope of its decision-making authority including its ability to direct the relevant activities of the fund and exposure to variability of returns from the perspective of an investor in the fund and of the asset manager. In addition, the Group assesses rights held by other parties including substantive removal rights that may affect the Group’s ability to direct the relevant activities and indicate that the group does not have power. Where Group companies are deemed to control such vehicles, they are consolidated, with the interests of parties other than Aviva being classified as liabilities. These appear as ‘Net asset value attributable to unitholders’ in the consolidated statement of financial position. Where the Group does not control such vehicles, and these investments are held by its insurance or investment funds, they are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position.
Equity compensation plans The Group offers share award and option plans over the Company’s ordinary shares for certain employees, including a
Treasury shares Where the Company or its subsidiaries purchase the Company’s share capital or obtain rights to purchase its share capital, the consideration paid (including any attributable transaction costs net of income taxes) is shown as a deduction from total shareholders’ equity. The Group’s only such holding comprises shares purchased by employee trusts to fund certain awards under the equity compensation plans described in accounting policy AB above. Gains and losses on sales of own shares are charged or credited to the treasury share account in equity.
(AF) Fiduciary activities Assets and income arising from fiduciary activities, together with related undertakings to return such assets to customers, are excluded from these financial statements where the Group has no contractual rights in the assets and acts in a fiduciary capacity such as nominee, trustee or agent.
Income 6 Gross written premiums 22,035 1,589 22,744 3,796 Premiums ceded to reinsurers (1,546) (100) (1,571) (207)
Net earned premiums H 20,623 1,489 21,157 3,589 Fee and commission income I & J 1,279 28 1,273 23 Net investment income K 12,509 2,340 21,135 2,241 Share of profit/(loss) after tax of joint ventures and associates 120 — (255) — Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 4b 115 808 (164) (2,359)
Profit/(loss) before tax attributable to shareholders’ profits 1,281 1,538 175 (2,696)
Non-operating items before tax (excluding Delta Lloyd as an associate) (405) 1,251 846 (986) (2,928) (3,914)
United Kingdom & Ireland 952 489 23 125 1,589 France 385 84 — (21) 448 Poland 164 9 — 11 184 Italy, Spain and Other 302 19 — (7) 314 Canada — 246 — — 246 Asia 96 1 2 (12) 87 Aviva Investors 2 — 68 (96) (26) Other Group activities — (51) — (90) (141)
United Kingdom & Ireland 890 502 11 (20) 1,383 France 335 95 — (8) 422 Poland 153 9 — 5 167 Italy, Spain and Other 381 (6) — (10) 365 Canada — 277 — — 277 Asia 69 (5) 1 (12) 53 Aviva Investors 3 — 39 — 42 Other Group activities — 22 — (132) (110)
Balance at 1 January 726 200 1,173 3,271 (43) 1,562 5,954 12,843 990 1,530 15,363 Loss/(Profit) for the year — — — — — — (3,102) (3,102) — 168 (2,934) Other comprehensive income — — — — — (48) (792) (840) — (36) (876) Total comprehensive income for the year — — — — — (48) (3,894) (3,942) — 132 (3,810) Dividends and appropriations — — — — — — (847) (847) — — (847) Shares issued in lieu of dividends 9 — (9) — — — 127 127 — — 127 Capital contributions from non-controlling interests — — — — — — — — — 20 20 Non-controlling interests share of dividends declared in the year — — — — — — — — — (102) (102) Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — — 187 — 187 — — 187 Changes in non-controlling interests in subsidiaries — — — — — — — — — (6) (6) Shares acquired by employee trusts — — — — (33) — — (33) — — (33) Shares distributed by employee trusts — — — — 44 — (36) 8 — — 8 Reserves credit for equity compensation plans — — — — — 42 — 42 — — 42 Shares issued under equity compensation plans 1 — 1 — — (68) 67 1 — — 1 Aggregate tax effect – shareholder tax — — — — — — 18 18 — — 18 Issue of fixed rate tier 1 notes — — — — — — — — 392 — 392
Liabilities Insurance liabilities 2,008 Payables and other financial liabilities 76 Other liabilities 120
Currency translation and investment valuation reserves recycled to the income statement 644
Poland Activities in Poland comprise long-term business and general insurance operations.
Adjusted for non-operating items: Reclassification of corporate costs and unallocated interest 7 32 25 — 6 — — 1 (71) — — — Investment return variances and economic assumption changes on life business 663 — (28) (13) — — (2) — — 620 (342) 278
Net income from investment properties Rent 647 551 Expenses relating to these properties (42) (47) Realised (losses)/gains on disposal (2) 7 Fair value gains/(losses) on investment properties (note 22) 184 (475) 787 36 Realised losses on loans — (9) Foreign exchange gains and losses on investments other than trading 109 132 Other investment expenses (48) (51)
Fee and commission expense Acquisition costs Commission expenses for insurance and participating investment contracts 2,264 2,393 Change in deferred acquisition costs for insurance and participating investment contracts 184 131 Deferrable costs for non-participating investment contracts 82 126 Other acquisition costs 872 970 Change in deferred acquisition costs for non-participating investment contracts (93) 85 Investment income attributable to unitholders 347 441 Reinsurance commissions and other fee and commission expense 319 311
Current tax from continuing operations In respect of pensions and other post-retirement obligations (15) (28) In respect of foreign exchange movements 6 (17) (9) (45) Deferred tax from continuing operations In respect of pensions and other post-retirement obligations (110) (160) In respect of fair value gains on owner-occupied properties — (1) In respect of unrealised gains on investments 8 9 (102) (152) Tax credited to other comprehensive income arising from continuing operations (111) (197) Tax (credited)/charged to other comprehensive income arising from discontinued operations (169) 107
Notes to the consolidated financial statements continued 18 – Acquired value of in-force business (AVIF) and intangible assets This note shows the movements in cost and amortisation of the in-force business and intangible assets acquired when the Group has purchased subsidiaries.
The majority of investment property in the UK is valued at least annually by external chartered surveyors in accordance with the guidance issued by The Royal Institution of Chartered Surveyors or using internal valuations and estimates during the intervening period. For other investment property, valuations are produced by local qualified staff of the Group or external qualified professional valuers in the countries concerned. In the event of a material change in market conditions between the valuation date and balance sheet date, adjustments are made to reflect any material changes in fair value. Values are calculated using a discounted cash flow approach and are based on current rental income plus anticipated uplifts at the next rent review, lease expiry, or break option taking into consideration lease incentives and assuming no further growth in the estimated rental value of the property. This uplift and the discount rate are derived from rates implied by recent market transactions on similar properties where available. The fair value of investment properties leased to third parties under operating leases at 31 December 2013 was £9,447 million (2012: £10,822 million). Future contractual aggregate minimum lease rentals receivable under the non-cancellable portion of these leases are given in note 54(b)(i).
Also included within transfers into Level 3 loans are £0.8 billion of non-recourse loans held by the UK business that were reclassified from Level 2 to Level 3. This was due to the enhancement of the valuation model to include an illiquidity premium which is deemed to be an unobservable input. For the year to 31 December 2013, transfers of financial liabilities between fair value hierarchies included the reclassification of £0.5 billion (2012: £nil) of securitised mortgage loan notes from Level 2 to Level 3 in line with the reclassification of the related securitised mortgage loans referred to above.
Structured bond-type and non-standard debt products held by our business in France amounting to £7.1 billion (2012: £8.6 billion), for which there is no active market. These bonds are valued either using counterparty or broker quotes. These bonds are validated against internal or third-party models. These bonds have been classified as Level 3 because either (i) the thirdparty models included a significant unobservable liquidity adjustment or (ii) differences between the valuation provided by the counterparty and broker quotes and the validation model were sufficiently significant to result in a Level 3 classification. At 31 December 2013, the values reported in respect of these products were the lower of counterparty and broker quotes and internally modelled valuations.
Notes to the consolidated financial statements continued 24 – Loans This note analyses the loans our Group companies have made, the majority of which are mortgage loans.
The Group holds redeemable shares or units in investment vehicles, which consist of: Debt securities which comprise securitisation vehicles that Aviva does not originate. These securities consist of: Residential Mortgage-Backed Securities (RMBS), Commercial Mortgage-Backed Securities (CMBS), Asset Backed Securities (ABS), Asset Backed Commercial Papers (ABCP) and Wrapped credits securities. The Group also has extremely limited exposure to Collateralised Debt Obligation (CDO) and Collateralised Loan Obligation (CLO) securities.
(c) Other interests in unconsolidated structured entities The Group receives management fees and other fees in respect of its asset management businesses. The Group does not sponsor any of the funds or investment vehicles from which it receives fees. Management fees received for investments that the Group manages but does not have a holding in also represent an interest in unconsolidated structured entities. As these investments are not held by the Group, the investment risk is borne by the external investors and therefore the Group’s maximum exposure to loss relates to future management fees. The table below shows the assets under management of entities that the Group manages but does not have a holding in and the fees earned from those entities.
Austria 9 14 636 634 133 123 778 771 Belgium 29 45 1,475 1,342 154 172 1,658 1,559 France 108 189 9,714 9,073 1,909 1,944 11,731 11,206 Germany 146 217 1,922 2,390 763 957 2,831 3,564 Greece — — 1 — — — 1 — Ireland 21 35 364 363 28 26 413 424 Italy 255 263 8,458 8,518 628 617 9,341 9,398 Netherlands 43 65 1,222 1,194 399 228 1,664 1,487 Poland 649 673 885 1,015 490 445 2,024 2,133 Portugal — — 187 257 — — 187 257 Spain 101 36 1,355 1,317 930 854 2,386 2,207 European Supranational debt 89 136 2,612 2,928 1,583 1,470 4,284 4,534 Other European countries 91 238 587 646 359 421 1,037 1,305
Notes to the consolidated financial statements continued 31 – Ordinary share capital This note gives details of Aviva plc’s ordinary share capital and shows the movements during the year.
At 1 January 2,945,972,261 736 1,165 2,905,712,938 726 1,173 Shares issued under the Group’s Employee and Executive
The expected volatility used was based on the historical volatility of the share price over a period equivalent to the expected life of the option prior to its date of grant. The risk-free interest rate was based on the yields available on UK government bonds as at the date of grant. The bonds chosen were those with a similar remaining term to the expected life of the options. 2,442,874 options granted after 7 November 2002 were exercised during the year (2012: 2,862,952).
(ii) Share awards The fair value of the awards was estimated on the date of grant based on the following weighted average assumptions: Weighted average assumption 2013 2012
£51 million release from Europe mainly due to favourable development of personal motor and commercial property claims in France.
£122 million release from Canada mainly due to continued favourable experience on motor, following the legislative changes in Ontario.
Net cumulative claim payments At end of accident year (2,870) (3,281) (3,612) (4,317) (4,808) (3,650) (3,386) (3,300) (2,925) (2,905) One year later (4,378) (4,925) (5,442) (6,542) (7,165) (5,286) (5,242) (4,578) (4,166) Two years later (4,712) (5,344) (5,881) (7,052) (7,638) (5,885) (5,637) (4,963) Three years later (4,986) (5,671) (6,181) (7,356) (8,094) (6,177) (5,905) Four years later (5,163) (5,892) (6,434) (7,664) (8,356) (6,410) Five years later (5,327) (6,039) (6,625) (7,852) (8,515) Six years later (5,430) (6,188) (6,724) (7,942) Seven years later (5,491) (6,245) (6,789) Eight years later (5,524) (6,294) Nine years later (5,541) Estimate of net ultimate claims At end of accident year 6,602 6,982 7,430 8,363 9,262 7,115 6,650 6,202 5,941 5,838 One year later 6,266 6,818 7,197 8,302 9,104 7,067 6,751 6,103 5,765 Two years later 6,082 6,688 7,104 8,244 9,028 7,036 6,685 6,095 Three years later 5,882 6,544 6,996 8,249 9,007 6,978 6,644 Four years later 5,709 6,476 6,980 8,210 8,962 6,940 Five years later 5,699 6,448 6,992 8,221 8,949 Six years later 5,639 6,397 6,939 8,149 Seven years later 5,624 6,372 6,938 Eight years later 5,613 6,385 Nine years later 5,600 Estimate of net ultimate claims 5,600 6,385 6,938 8,149 8,949 6,940 6,644 6,095 5,765 5,838 Cumulative payments (5,541) (6,294) (6,789) (7,942) (8,515) (6,410) (5,905) (4,963) (4,166) (2,905)
Net surplus in the scheme at 31 December 12,281 (11,675) 606 1 Following the adoption of the revised IAS 19 “Employee Benefits”, the Group has retrospectively applied the changes to the comparative periods. The key impact of the standard is the replacement of interest cost on the defined benefit obligation and the expected return on plan assets with a net interest cost based on the net defined benefit asset or liability and the discount rate at the beginning of the year. This has resulted in an increase of £150 million recognised in income and a corresponding decrease in remeasurements recognised in other comprehensive income.
(a) Capital commitments Contractual commitments for acquisitions or capital expenditures of investment property and property and equipment, which have not been recognised in the financial statements, are as follows: Investment property 3 6 Property and equipment 24 36
Participating investment liabilities 667 3,057 6,098 9,822 2,606 12,428 58,200 70,628 — 70,628 66,849 Non-participating investment liabilities (3) (19) — (22) 38,429 38,407 9,733 48,140 — 48,140 47,699 Amounts classified as held for sale — — — — — — (2,710) (2,710) — (2,710) (4,054)
2 Estimated realistic inherited estate at 31 December 2012 was £nil, £0.3 billion and £1.8 billion for NWPSF, OWPSF and WPSF respectively. 3 This represents the reattributed estate of £1.1 billion at 31 December 2013 (31 December 2012: £0.7 billion) held within NPSF1 (a non-profit fund within UKLAP included within other UK life operations). 4 The WPSF fund includes the Provident Mutual (PM) fund, which has realistic assets and liabilities of £1.5 billion and therefore does not impact the realistic inherited estate.
(v) Credit concentration risk The long-term and general insurance businesses are generally not individually exposed to 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 is approximately 1.9% of the total shareholder assets (gross of ‘held for sale’).
in sterling/ euro rate £m in sterling/ euro rate £m in sterling/ CAD$ rate £m in sterling/ CAD$ rate £m
Impact on profit before tax 31 December 2013 8 7 (5) (4) Impact on profit before tax 31 December 2012 (32) 32 (20) 5
(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 2013 and 2012 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. Changes in durations between 2012 and 2013 reflect evolution of the portfolio, and changes to the models for projecting cash-flows. This table includes amounts held for sale.
Debt securities 128,160 16,953 36,009 75,195 3 Equity securities 33,065 — — — 33,065 Other investments2 27,518 24,195 866 7 2,450 Loans 24,537 5,358 1,780 17,329 70 Cash and cash equivalent 23,102 23,102 — — —
(ii) The contractual undiscounted cash flows in relation to non-hedge derivative liabilities have the following maturities: Within 1 year 245 534 Between 1 and 2 years 156 434 Between 2 and 3 years 115 158 Between 3 and 4 years 86 387 Between 4 and 5 years 41 113 After 5 years 785 1,787
Aviva plc has a 50% interest in the joint venture *** Incorporated in Scotland **** Includes certain investment management businesses
Income Dividends receivable from subsidiaries I 1,450 1,585 Interest receivable from Group companies I 103 107
Sales Long-term insurance and savings business 486 373 487 General insurance and health net written
Net written premiums were £433 million, down £35 million, or 7% (2011: £468 million) driven by lower unit-linked and pensions sales. General insurance sales were stable at £65 million (2011: £65 million). Adjusted operating profit for long-term insurance and savings business in 2012 was £153 million (2011: £167 million), a decrease of £14 million or 8%. General insurance adjusted operating profit increased by £14 million to £9 million (2011: £5 million loss). Profit before tax attributable to shareholders’ profits was £176 million, an increase of £19 million, or 12% (2011: £157 million).
Other Group activities (from continuing operations) The table below presents net written premiums, adjusted operating losses and loss before tax attributable to shareholders’ profits from other group activities for the three years ended 31 December 2013, 2012 and 2011.
Our business Overview During the year, the Group’s operating segments were changed to align them with the revised management reporting structure. The operating segments are: UK & Ireland; France; Poland; Italy, Spain and Other; Canada; Asia; and Aviva Investors. In October the Group completed the sale of its United States life, savings and related internal fund management business, which is classified as a discontinued operation for the purposes of reporting financial performance. Due to the size of the UK & Ireland segment, it has been split into separate Life and General Insurance segments, which undertake long-term insurance and savings business and general insurance and health business, respectively. Aviva Investors, our fund management business, operates across most markets providing fund management services to third-party investors and to our long-term insurance businesses and general insurance operations. Our business operates across three main market sectors – life insurance and savings; general and health insurance; and fund management.
Protection – is an insurance contract that protects the policyholder or his or her dependants against financial loss on death or ill-health. Our product ranges include term 2 APE is a recognised sales measure in the UK and is the total of new regular premiums plus 10% of single premiums.
Brands and products Our general insurance business operates under the Aviva brand globally and concentrates on the following products: Personal lines – motor, household, travel and creditor; Commercial lines – fleet, liability and commercial property insurance; Health insurance – private health insurance, income protection and personal accident insurance, as well as a range of corporate healthcare products; and
Products We provide a wide range of general insurance products both in the UK and Ireland. In the UK we have a business mix of approximately 60% personal lines and 40% commercial lines. Our UK personal products include motor, home and travel insurance. Our UK commercial products include motor, property and liability insurance for small and medium size enterprises (SMEs) and the larger UK Corporate and Speciality Risks market. In Ireland our products include property, motor, travel, farm and business insurance and our health insurance business provides products for both the personal and company sector.
premium life insurance, other savings and pensions products and a range of accident and health insurance products.
General insurance and health business The general insurance and health business is comprised of shorter-term liabilities than the long-term insurance business. Furthermore, all the risk attaching to the investments is borne by our shareholders. As a result, the investment portfolio held to cover general insurance liabilities contains a higher proportion of fixed income securities than the portfolio held to cover life insurance liabilities.
As the table indicates 23.4% of total investments can be directly attributed to shareholders. The apportionment of our shareholder assets is predominantly weighted towards debt securities and loans. In comparison, policyholder and participating funds contain a greater proportion of equities and other investments (e.g. unit trusts), reflecting the underlying investment mandates. We carry investments on our statement of financial position at either fair value or amortised cost. At 31 December 2013, approximately 98% of the Group’s investment property, loans and financial investments were carried at fair value on the statement of financial position. Financial investment balances included in the remainder of these disclosures include financial investments of operations classified as held for sale. For more information about financial investments analysed according to their accounting classification and valuation approach, as well as the cost, unrealised gains and losses, impairments, fair value and other information concerning financial investments, see ‘IFRS Financial statements – note 27 – Financial investments’.
Debt securities Participating fund asset and shareholder debt securities analysed by credit rating and sector Participating fund asset and shareholder debt securities analysed by credit rating and product type as at 31 December 2013 are set out in the table below. Government and corporate debt securities are further analysed by type of issuer.
3 Amounts shown in respect of general insurance contracts are based on undiscounted estimates of future claim payments, including for those classes of business for which discounted provisions are held, see ‘IFRS Financial statements – Note 41 – Insurance liabilities’. The timing of cash flows reflects a best estimate of when claims will be settled.
Ethics Code annually; and all employees in Aviva France who agree to comply with the Business Ethics Code as a term of their employment when they join the Company.
People: The data reflected here are from our annual employee survey. The results reflect the wider organisational change of our business. Our targets are external benchmarks which we are working towards.
Estimated IGD solvency surplus at 31 December 2013 3.6 1 Market movements include the impact of equity, credit spread, interest rate and foreign exchange movements net of the effect of hedging instruments.
Insurance Capital Standard (ICS) The Financial Stability Board (FSB) has stated that a sound capital and supervisory framework for the insurance sector is essential for supporting financial stability. In this respect the IAIS will develop a work plan to develop a comprehensive, group wide supervisory and regulatory framework for Internationally Active Insurance Groups (IAIGs), including a quantitative capital standard. The ICS will be incorporated into the global framework for the supervision of internationally active insurance groups (ComFrame) that the IAIS is developing. The IAIS has indicated that it will develop the ICS by 2016 for implementation in 2019 along with the rest of ComFrame.
Intellectual property Our primary brands (the Aviva name and logo) are registered trademarks in the UK and are registered or pending in all other countries where Aviva has operations. Aviva has an active programme of review of marks and watching for infringements. There are no material infringements in the UK known to us as at the date of this report, either by the Group or third parties.
Credit spread volatility may adversely affect the net unrealised value of our investment portfolio and the results of our operations. Our exposure to credit spreads primarily relates to market price variability associated with changes in credit spreads in our investment portfolio, which is largely held to maturity. Credit spread moves may be caused by changes in the perception of the credit worthiness of the issuer, or from market factors such as the market’s risk appetite and liquidity. A widening of credit spreads will generally reduce the value of fixed income securities we hold. Conversely, credit spread tightening will generally increase the value of fixed income securities we hold. It can be difficult to value certain of our securities if trading becomes less liquid. Accordingly, valuations of investments may include assumptions or estimates that may have significant period to period changes that could have a material adverse effect on our consolidated results of operations or financial condition. Downturns in the net unrealised value of our investment portfolio may also have a material adverse effect on our regulatory capital surplus based on the EU Insurance Groups Directive and under the Individual Capital Assessment required by the Prudential Regulation Authority (“PRA”) in the UK. Although our financial statements reflect the market value of assets, our priority remains the management of assets and liabilities over the longer term.
Losses due to defaults by counterparties, including potential sovereign debt defaults or restructurings, could adversely affect the value of our investments and reduce our profitability and shareholders’ equity. We choose to take and manage credit risk through investment assets partly to increase returns to policyholders whose policies the assets back, and partly to optimise the return for shareholders.
The holders of our ADRs in the US may not be able to participate in offerings of rights, warrants or similar securities to holders of our ordinary shares on the same terms and conditions as holders of our ordinary shares. In the event that we offer rights, warrants or similar securities to the holders of our ordinary shares or distribute dividends payable, in whole or in part, in securities, the Deposit Agreement provides that the depositary (after consultation with us) shall have discretion as to the procedure to be followed in making such rights or other securities available to ADR holders, including disposing of such rights or other securities and distributing the net proceeds in US dollars to ADR holders. Given the significant number of our ADR holders in the US, we generally would be required to register with the SEC any public offering of rights, warrants or other securities made to our ADR holders unless an exemption from the registration requirements of the US securities laws is available. Registering such an offering with the SEC can be a lengthy process which may be inconsistent with the timetable for a global capital raising operation. Consequently, we have in the past elected and may in the future elect not to make such an offer in the US, including to our ADR holders in the US, and rather only conduct such an offering in an ‘offshore’ transaction in accordance with ‘Regulation S’ under the US Securities Act of 1933, as amended (the ‘Securities Act’). Therefore, there can be no assurance that our ADR holders will be able to participate in such an offering in the same manner as our ordinary shareholders.
Deferred annuities An annuity (or pension) due to be paid from a future date or when the policyholder reaches a specified age. A deferred annuity may be funded by a policyholder by payment of a series of regular contributions or by a capital sum.
UK Corporate Governance Code The code sets out guidance in the form of principles and provisions on how companies should be directed and controlled to follow good governance practice.
November – please see the table above for the key dates in respect of the 2013 final dividend.