Essential read 004 Our customers and communities 006 Chairman’s statement 008 Group CEO’s review 014 Group CFO’s review 016 Aviva worldwide 018 Financial highlights
“ We delivered a strong operating performance in 2011. Despite challenging market conditions we have beaten all our operating targets. We have made good strategic progress focusing on markets where we will grow and earn higher returns.”
p We are a long-term business and, especially with governments under increasing budget pressure in pensions and long-term savings, the prospects are promising.
Dividend for 2011 I am happy to report that the final dividend for 2011 will be 16 pence, bringing the total dividend to 26 pence, an increase of 2% over 2010. We continue to retain the dividend at a sustainable level for business growth.
…and we are paying an increased dividend… In a challenging year, our resilient performance enabled us to pay a total dividend to our shareholders of 26p for 2011, an increase of 2% over 2010.
Aviva Investors p 3% of group operating profits p Canada, China, France, Netherlands,
IFRS total return £m IFRS total returnIFRS total return from continuing operations
UK 48 Europe 32 North America 15 Asia Pacific 2 Aviva Investors 3
Capital and credit market conditions An important part of our business involves investing clients, policyholders and shareholders funds across a wide range of financial investments, including equities, fixed income securities and properties. Our results are sensitive to volatility in the market value of these investments, either directly because we bear some or all of the investment risk, or indirectly because we earn management fees for investments managed on behalf of policyholders. Investment market conditions also affect the demand for a substantial portion of our life insurance products. In general, rising equity price levels have a positive effect on the demand for equity-linked products, such as unit trusts and unit-linked life insurance products, and conversely have a negative effect on the demand for products offering fixed or guaranteed minimum rates of return. Declining equity price levels tend to have the opposite effects. During 2011, the continued market volatility impacted our results of operations. The total adverse life investment variance of £1,616 million (2010: £791 million positive) included a negative variance of £820 million relating to Delta Lloyd for the first four months of the year prior to its deconsolidation. Over the period from the start of 2011 to the partial disposal of Delta Lloyd on 6 May 2011, the AAA collateralised bond spread narrowed by about 80bps as a result of changes in the underlying bond index. This movement was the main driver of the negative variance of £820 million noted above, largely reversing the positive variance reported in the prior year. For continuing operations, the adverse life investment variance of £796 million relates largely to the impact of lower risk-free interest rates, wider credit spreads and increased market volatility in the UK and Europe. Any future increases in credit spreads on corporate and government bonds would cause further negative investment variances. The additional allowances for credit defaults on UK corporate bonds and commercial mortgages remain at overall consistent levels.
Activity in 2011 On 6 May 2011, the Group sold 25 million shares in Delta Lloyd reducing our holding to 42.7% (41.9% as at 31 December 2011) of Delta Lloyd's ordinary share capital, representing 40% (39.3% as at 31 December 2011) of shareholder voting rights. Accordingly, the Group has ceased to consolidate the results of Delta Lloyd in its financial statements. Cash consideration of £380 million was received for the sale of shares, and £8 million of costs were attributable to the disposal transaction. The transaction resulted in the loss of control of a major geographical area of operations, previously presented as 'Delta Lloyd' in the segmental reporting note. The results of Delta Lloyd as a subsidiary for 2011 as well as those for the comparative periods have therefore been classified as discontinued operations. The Group’s share of the profits of its retained interest in Delta Lloyd as an associate are shown separately within continuing operations. On 30 September 2011, the Group sold RAC Limited (RAC) to The Carlyle Group for £977 million, realising a profit of £532 million. Aviva is continuing its commercial relationship with RAC, both as a key underwriter of motor insurance on RAC’s panel and as a partner selling RAC breakdown cover to our customers. The Group has retained the RAC (2003) Pension Scheme which, at 31 December 2011, had an IAS 19 deficit of £51 million. On 1 October 2011, the Group sold its Australian fund management business, Aviva Investors Australia Ltd, to nabInvest, National Australia Bank’s direct asset management business, for £35 million, which includes contingent consideration with a fair value of £3 million. This resulted in a profit on disposal of £20 million, increased to £23 million after recycling £3 million from currency translation reserve to the income statement.
Short-term fluctuation in return on investments on non-long-term business (266) (199) 118
The change in unallocated divisible surplus (UDS) was £2,721 million credit (2010: £362 million). UDS in Italy and certain funds in Spain and France are negative as at 31 December 2011, impacted by increased government bond yields. The change in UDS includes losses of £17 million in Italy and £49 million in Spain relating to negative UDS considered unrecoverable. Fee and commission expense, other expenses and finance costs decreased by £56 million to £8,649 million (2010: £8,705 million). See ‘Financial statements IFRS – Note 6 – Details of expenses’.
General insurance and health The table below presents sales, net written premiums, adjusted operating profit and profit/(loss) before tax attributable to shareholders’ profits under IFRS from our UK general insurance and health business for the three years ended 31 December 2011, 2010 and 2009.
Profit before tax attributable to shareholders’ profits – Asia Pacific 34 39 101
Year ended 31 December 2011 Aviva Investors’ adjusted operating profit for fund management decreased by £9 million, or 9%, to £88 million (2010: £97 million). The fall in adjusted operating profit reflects the impact of ongoing investment in our global infrastructure and clients reevaluating their risk appetite in the face of continuing economic downturn which, in some instances, has lead them to re-allocate towards lower fee-bearing asset classes, with a consequential impact on revenue. Profit before tax attributable to shareholders increased by £10 million, or 16%, to £71 million (2010: £61 million), which benefited from the £23 million profit recognised on the sale of our Australian asset management subsidiary, offset by an impairment charge made against the value of an intangible asset. Aviva Investors’ funds under management, increased by £3 billion, or 1%, to £263 billion (2010: £260 billion). The increase is a result of positive net funded sales, and capital appreciation, partially offset by the impact of the sale of our business in Australia.
The table below presents adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from Delta Lloyd for the three years ended 31 December 2011, 2010 and 2009.
Adjusted operating profit Long-term insurance and savings business 185 330 277 General insurance and health 1 146 143
Profit/(loss) per share attributable to equity shareholders: Basic (pence per share) 5.8p 50.4p 37.8p (36.8)p 48.9p
Distribution The direct sales force is the main distribution channel for most of the Polish group and is made up of 2,200 tied insurance agents whose work is co-ordinated by a network of our sales branches run by over 220 sales managers. We are developing our bancassurance distribution channel. Our biggest relationship is a joint venture with Bank Zachodni WBK (a subsidiary of Banco Santander) that sells both life and general insurance products through the bank’s network of over 620 branches.19 We also co-operate with independent insurance agencies and brokers. We believe that these insurance brokers play a key role in selling commercial lines general insurance. Our mutual funds are also sold in brokerage houses and our individual products are supported by call centre and website sales. We also have a direct platform (internet and call centre) for distribution of motor insurance.
Market and competition The North American region is home to two of the world’s largest and richest economies, which are served by a large number of insurers in highly fragmented and competitive markets. Our competitors in North America include global insurers such as Allianz, RSA, ING and AEGON and local market competitors such as Intact Financial, John Hancock, Hartford, Pacific Life and American Equity. We consider our competitive advantages in the North America region to be:  skilful product innovation with a clear customer focus;  sophisticated pricing and underwriting capabilities;  the quality of our distribution partnerships;  high-quality investment management; and  financial strength.
United Kingdom Aviva Annuity UK Limited Aviva Central Services UK Limited Aviva Consumer Products UK Limited Aviva Employment Services Limited Aviva Equity Release UK Limited Aviva Health UK Limited Aviva Insurance Limited Aviva Insurance Services UK Limited Aviva International Insurance Limited Aviva Investors Global Services Limited Aviva Investors Pensions Limited Aviva Investors UK Fund Services Limited Aviva Investors UK Funds Limited Aviva Life & Pensions UK Limited Aviva Life Services UK Limited Aviva Risk Management Solutions UK Limited Aviva UKGI Investments Limited Gresham Insurance Company Limited The Ocean Marine Insurance Company Limited
Debt securities We grade debt securities according to external credit ratings issued at the balance sheet date. The credit rating used for each individual security is the second-highest of the available ratings from Standard & Poor’s, Moody’s and Fitch. If a credit rating is available from only one of these three rating agencies then this rating is used. If an individual security has not been given a credit rating by any of these three rating agencies, the security is classified as ‘non-rated’. For the tables below we have expressed our rating using Standard & Poor’s rating scale whereby investment grade debt securities are classified within the range of AAA (extremely strong) to BBB (good) ratings, with AAA being the highest possible rating. Debt securities which fall outside this range are classified as less than BBB. Where we use a rating provided by Moody’s or Fitch, we have expressed it as the Standard & Poor’s equivalent rating. For example, we consider Standard & Poor’s rating of AA (very strong) to be equivalent to Moody’s rating of AA (excellent) and Fitch’s rating of AA (very strong). Despite the market downgrade activity during 2010 and 2011, debt securities with a credit rating of A or above at 31 December 2011 represented 75% of total holdings (2010: 77%). Approximately 39% of total debt security holdings are
Convertibles and bonds with warrants 6 — 36 85 — — 127
Total contractual obligations above 347,559 Effect of discounting contractual cash flows for insurance contracts (46,016) Contractual undiscounted interest payments6 (7,787) Difference between carrying value of borrowings and undiscounted cash flows of principle (281) Contractual cash flows under operating leases and capital commitments (1,246) Difference between derivative liabilities contractual cash flows and carrying value (1,452) Liabilities of operations classified as held for sale 363 Non-contractual/short-term obligations — Unallocated divisible surplus7 650 — Provisions8 992 — Current and deferred tax liabilities 1,403 — Other liabilities 2,828
Principal risks and uncertainties In accordance with the requirements of the FSA Handbook (DTR 4.1.8) we provide a description of the principal risks and uncertainties facing the Group here and in note 56. Our disclosures covering ‘risks relating to our business’ in line with reporting requirements of the Securities Exchange Commission (SEC) provide more detail and can be found in the shareholder information section ‘Risks relating to our business’ on page 155.
 Brand and reputation risk should generally be reduced to as low a level as is commercially sensible
 Reduction in aggregate direct shareholder assets exposure to the governments (and local authorities and agents) of Greece, Ireland, Portugal, Italy and Spain
– Certain subsidiaries, subject to continuing to satisfy standalone capital and liquidity requirements, loan funds to corporate and holding entities. These loans satisfy arm’s-length criteria and all interest payments are made when due.
Investment mix The aggregate investment mix of the assets in the three main with-profit funds at 31 December 2011 was: %
Economic capital We use a risk-based capital model to assess economic capital requirements and to aid in risk and capital management across the Group. The model is based on a framework for identifying the risks to which business units, and the Group as a whole, are exposed. Where appropriate, businesses also supplement these with additional risk models and stressed scenarios specific to their own risk profile. When aggregating capital requirements at business unit and group level, we allow for diversification benefits between risks and between businesses, with restrictions to allow for non-fungibility of capital where appropriate. This means that the aggregate capital requirement is less than the sum of capital required to cover all of the individual risks. The capital requirement reflects the cost of mitigating the risk of insolvency to a 99.5% confidence level over a one year time horizon (equivalent to events occurring in 1 out of 200 years) against financial and non-financial tests.
Operating capital generation: Life in-force profits1 2.3 2.1 General insurance, fund management and non-insurance
Our strategy Our CR strategy is an integral part of the way Aviva does business internally and externally. Our CR strategy has evolved this year to align everything we do to the issues that are most material to our business. We have set ourselves the challenge to develop a sustainability plan that actively leads our environmental, social and ethical agenda to secure the long-term success of Aviva. We have worked together as a group to review our CR strategy, to create a framework and tools that embed sustainability principles and ways of working across the business. We are now implementing the revised strategy to embed sustainability throughout Aviva. We have worked to simplify our language and to clearly state how our approach to corporate responsibility aids the long-term success of Aviva. For example, one of our strategic areas is to support the business in the development of sustainable products and services. The risk if we fail to do this is that we lose a competitive edge in supplying products to the low- carbon economy. Our mitigating actions support a sustainable business and in their nature they are interdependent. The climate change strategy calls for us to develop sustainable products which requires talented people to join; to encourage talented people to stay we need them to be engaged and our community programmes help this. These actions underpin the trust that our employees place in us, investors trust our governance and risk procedures and customers place their trust in us to deliver on our promises. By acting responsibly we ensure that Aviva is here for the long term to provide prosperity and peace of mind.
Our employee survey Each year we ask our employees how we are delivering against our employee promise. Headlines from our 2011 survey include:  strong improvements across the board and particularly on our success in communicating a vision of the future that motivates staff, up 12% from 2010;  up 10% on employee recognition to 71%;  employee engagement in all aspects of our CR agenda has shown increases for the two last years, a 14% uplift since 2009; and
Sustainable supply chain We consider our supply chain to be part of our sphere of influence not only to address the carbon intensity of our supply chain but to encourage our suppliers to be more responsible and sustainable. Aviva is a large procurer, with a £4.4 billion spend and 32,000 suppliers. We have also begun to introduce legally binding clauses covering corporate responsibility within procurement contracts. During 2011 we have developed a ‘Code of behaviour’ for suppliers outlining a mutual moral commitment on which to conduct the supplier relationship. We have also moved from the supplier CR maturity assessment into a Supplier Profile Questionnaire which enables deeper and more meaningful information related to CR for both sourcing activity and ongoing post-contract supply management activities. A good example of our approach to sustainable supply chain management can be seen through a project we have with Rentokil Initial to improve waste management. Our joint effort has won Aviva the prestigious Chairman’s Cup in the City of London Clean City Awards for the second time.
Number of business units that use the ‘supplier hospitality register’ and ‘register of interests’
New KPI 16% 17% 20% Increase the % of employee participation in volunteering
Targets  annual 4% reduction in total waste;  annual recycling rate greater than 80%; and
1 International Federation of the Accountants’ International Standard for Assurance Engagements Other Than Audits or
 We are not aware of any errors that would materially affect the data as presented in the CR Report.
Dividends The directors are recommending a final dividend of 16.00 pence per ordinary share (2010: 16.00 pence), which, together with the interim dividend of 10.00 pence per ordinary share paid on 17 November 2011 (2010: 9.50 pence), produces a total dividend for the year of 26.00 pence per ordinary share (2010: 25.50 pence). The total cost of ordinary dividends paid in 2011, was £738 million (2010: £681 million). Subject to shareholder approval at the 2012 Annual General Meeting (AGM), the final dividend for 2011 will be paid on 17 May 2012 to all holders of ordinary shares on the Register of Members at the close of business on 23 March 2012 (and approximately five business days later for holders of the Company’s American Depositary Receipts).
• 0–3 years 5 • 3–6 years 2 • 6–9 years 4 • +9 years 0
Board committees The Board has established the following standing Committees to oversee and debate important issues of policy and oversight outside the main Board meetings:  Audit Committee;  Corporate Responsibility Committee;  Nomination Committee;  Remuneration Committee; and  Risk Committee.
External background 2011 was a year of two halves. The first six months of 2011 saw economic indicators improving internationally, with asset values generally increasing. The second half was characterised by a rapid deterioration of investor confidence in the Eurozone economic fundamentals, leading to significant falls in European asset prices, and in particular, European government bonds. These external market forces, coupled with significantly increased regulation as the Financial Services Authority sought to introduce and transition towards new operating principles for the Prudential Regulatory Authority, and the continued development of the Solvency II Directive resulted in challenging conditions for the financial services industry as a whole. Against this backdrop, the Committee particularly focused on the management actions necessary to strengthen the Company’s capital base, its capital generation, its liquidity management and its risk management culture.
Share ownership requirement Group chief executive: 175% of basic salary EDs: 150% of basic salary To be fulfilled five years from date of appointment
 Discussions of the FSA’s Remuneration Code 28 February  A review and approval of basic salaries and benefits in kind for EDs and EC members
Table 5: Breakdown of remuneration for group chief executive in 2011
 The conditional share award will vest in three equal tranches on the first dealing day of March 2012, March 2013 and March 2014 subject to Mr Matthews remaining in the employment of the Group and no dealing restrictions being in place on the vesting date.
Performance graph Table 14 below compares the TSR performance of the Company over the past five years with the TSR of the FTSE 100 Return Index. This index has been chosen because it is a recognised equity market index, of which Aviva is a member. The companies which comprise the current LTIP comparator group for TSR purposes are listed in the ‘TSR Targets’ section above. The TSR graph for the comparator group has been plotted using the 20 companies (including Aviva) in the comparator group for pre-2005 grants, the 15 companies (including Aviva) in the comparator group for 2005–2007 grants, the 16 companies (including Aviva) in the comparator group for the 2008 grant, the 15 companies (including Aviva) in the comparator group for the 2009 and 2010 grants, and the 14 companies (excluding Aviva) in the comparator group for the 2011 grant.
Basic salary Shareholding excluding restricted shares Value of shareholding based on a share price of 300.8 pence* Percentage of basic salary Shareholding requirement * 300.8 pence was the closing middle market price of an ordinary share of the Company on 30 December 2011. ** Due to exceptional personal circumstances, the Committee has exercised discretion to waive the share ownership requirement for Andrew Moss for 2011. ***Igal Mayer’s basic salary has been converted from Canadian dollars to pounds sterling at the average exchange rate for 2011 of CAD 1.5837 : £1.00.
Gay Huey Evans 15 — — — — — — — 15 —
Notes 1 The Chairman’s fee increased from £495,000 to £550,000 on 1 April 2011. 2 Mary Francis stepped down as Chairman of the Risk Committee on 1 September 2011 and as a member of the Remuneration Committee on 1 June 2011. 3 Michael Hawker was appointed Chairman of the Risk Committee on 1 September 2011 and became a member of the Remuneration Committee on 1 June 2011, and the Audit Committee on 1 September 2011. 4 Gay Huey Evans joined the Board and became a member of the Corporate Responsibility Committee on 20 October 2011, and Chairman of the Corporate Responsibility Committee on 1 December 2011. 5 John McFarlane joined the Board and became a member of the Nomination Committee on 1 September 2011. 6 Carole Piwnica stepped down from the Board and as Chairman of the Corporate Responsibility Committee and as a member of the Remuneration Committee on 1 December 2011.
There were no changes to the directors’ interests in Aviva shares during the period 1 January 2012 to 1 March 2012.
Share capital The Company has four share classes:  Ordinary shares of 25 pence each which constitute our equity security and hold voting rights;  Cumulative irredeemable preference shares of £1 each, which entitle holders to attend and vote at general meetings only when dividends on such shares are in arrears. Cumulative irredeemable preference shareholders may also attend general meetings and vote on particular proposals when such proposals relate to an alteration of the rights attaching to such shares, a reduction of capital (other than through a redemption or repurchase of shares) or a winding up of business;  Sterling new preference shares of £1 each, which have such rights and terms (including terms related to the redemption of shares, ranking and entitlement to dividend and capital) as the Board determines; and
Shares to satisfy options and awards Prior to March 2003, it was the practice to satisfy options and awards granted under the Group’s share plans through shares purchased in the market and held by employee share trusts which were established for the purpose of satisfying awards under the various Group share plans and funded by the Company. From March 2003 to July 2008, it was generally the Company’s practice to satisfy the awards granted after March 2003 by the issue of new shares at the time of vesting. However, since July 2008, it has been the Company’s practice to satisfy all awards and options using shares purchased in the market and held by employee trusts except where local regulations make it necessary to issue new shares. At 31 December 2011, 13,284,476 shares were held by the employee share trusts as compared to 8,415,487 at 31 December 2010, in both instances following the share purchases and distributions to individual employees throughout the year. These shares have an aggregate nominal value of £3,321,119 and market value £39,959,704 as of 31 December 2011, compared to £2,103,871 and £33,072,864 at 31 December 2010, respectively. Shares held by separate employee share trusts on behalf of specific individuals have not been included in these amounts. Further details are given in ‘Financial statements IFRS – Note 31 – Shares held by employee trusts.’
Shares issued under the Group’s Employee and Executive Share Option Schemes1 1,574,706 Shares issued in lieu of dividends2 83,989,590 1 For more information on our various option schemes, see note 30 in the financial statements. 2 The issue of shares in lieu of cash dividends is considered a bonus issue under the terms of the Companies Act 2006 and the nominal value of the shares is charged to the share premium account.
Related party disclosures Related party transactions For more information relating to related party transactions, including more information about the transactions described below, please see ‘Financial statements IFRS – Note 59 – Related party transactions’.
UK life insurance 200 UK general insurance — Aviva Investors 13 France — Netherlands 51 Poland 102 Ireland — Other Europe — Other operations 228
Consolidated cash flows The cash and cash equivalents consist of cash at banks and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. For the purposes of the cash flow statement, cash and cash equivalents also include bank overdrafts, which are included in payables and other financial liabilities on the balance sheet.
Net cash out flow on financing activities Net cash used in financing activities increased by £420 million to an outflow of £1,773 million (2010: £1,353 million outflow). The increase is due to a higher repayment of borrowings during the year.
The EU may also impose requirements directly on countries through regulation. EU financial services regulation is based on the principle of ‘home country control’, which makes the home country regulator responsible for monitoring compliance with all applicable regulation. Key directives of particular relevance to the financial services industry, and so to Aviva’s businesses in the EU, include: Third Life and Non-Life Directives These directives implemented the home country control principle for life and non-life insurance business in the mid-1990s and placed the responsibility for such issues as solvency, actuarial reserves, investment of assets, and certain governance issues on the home country regulator. Most companies licensed to conduct insurance business in one member state may rely on its home country regulation to ‘passport’ into all other member states to conduct business without having to be separately licensed in each. The general exception is selling activity which continues to be regulated by the state in which the sale takes place.
Systems errors or regulatory changes may affect the calculation of unit prices or deduction of charges for our unit-linked products which may require us to compensate customers retrospectively. A significant proportion of our product sales are unit-linked contracts, where product benefits are linked to the prices of underlying unit funds. While comprehensive controls are in place, there is a risk of error in the calculation of the prices of these funds due to human error in data entry, IT-related issues or other causes. Additionally, it is possible that policy charges which are deducted from these contracts are taken incorrectly, or the methodology is subsequently challenged by policyholders or regulators and changed retrospectively. Any of these can give rise to compensation payments to customers. Controls are in place to mitigate these risks, but errors could give rise to future liabilities. Payments due to errors or compensation may negatively impact our profits.
Under the Listing Rules we are required to review:  the Directors’ statement, set out on page 105, in relation to going concern;  the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the UK
Aviva plc (the ‘Company’), a public limited company incorporated and domiciled in the United Kingdom (UK), together with its subsidiaries (collectively, the ‘Group’ or ‘Aviva’) transacts life assurance and long-term savings business, fund management and most classes of general insurance and health business through its subsidiaries, associates and branches in the UK, Ireland, continental Europe, United States (US), Canada, Asia and other countries throughout the world. The Group is managed on a regional basis, reflecting the management structure whereby a member of the executive management team is accountable to the group chief executive for the operating segment for which he or she is responsible. Further details of the reportable segments are given in note 4. The principal accounting policies adopted in the preparation of these financial statements are set out below.
(F) Product classification Insurance contracts are defined as those containing significant insurance risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. Contracts can be reclassified as insurance contracts after inception if insurance risk becomes significant. Any contracts not considered to be insurance contracts under IFRS are classified as investment contracts. Some insurance and investment contracts contain a discretionary participating feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts. As noted in policy A above, insurance contracts and participating investment contracts in general continue to be measured and accounted for under existing accounting practices at the later of the date of transition to IFRS or the date of the acquisition of the entity, in accordance with IFRS 4. Accounting for insurance contracts in UK companies is determined in accordance with the Statement of Recommended Practice issued by the Association of British Insurers, the most recent version of which was issued in December 2005 and amended in December 2006. In certain businesses, the accounting policies or accounting estimates have been changed, as permitted by IFRS 4 and IAS 8 respectively, to remeasure designated insurance liabilities to reflect current market interest rates and changes to regulatory capital requirements. When accounting policies or accounting estimates have been changed, and adjustments to the measurement basis have occurred, the financial statements of that year will have disclosed the impacts accordingly. One such example is our adoption of Financial Reporting Standard 27, Life Assurance, (FRS 27) which was issued by the UK’s Accounting Standards Board (ASB) in December 2004. Aviva, along with other major insurance companies and the ABI, signed a Memorandum of Understanding with the ASB, under which we voluntarily agreed to adopt in full the standard from 2005 in the Group’s IFRS financial statements. FRS 27 adds to the requirements of IFRS but does not vary them in any way. The additional requirements of FRS 27 are detailed in policy K below and in note 55.
(Y) Leases Leases, where a significant portion of the risks and rewards of ownership is retained by the lessor, are classified as operating leases. Assets held for use in such leases are included in property and equipment, and are depreciated to their residual values over their estimated useful lives. Rentals from such leases are credited to the income statement on a straight-line basis over the term of the relevant leases. Payments made as lessee under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the term of the relevant leases.
(AA) Employee benefits Annual leave and long service leave Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long service leave as a result of services rendered by employees up to the statement of financial position date.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. In countries where there is a history of tax losses, deferred tax assets are only recognised in excess of deferred tax liabilities if there is convincing evidence that future profits will be available. Deferred tax is provided on temporary differences arising from investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the foreseeable future. Deferred taxes are not provided in respect of temporary differences arising from the initial recognition of goodwill, or from goodwill for which amortisation is not deductible for tax purposes, or from the initial recognition of an asset or liability in a transaction which is not a business combination and affects neither accounting profit nor taxable profit or loss at the time of the transaction. Current and deferred tax relating to items recognised in other comprehensive income and directly in equity are similarly recognised in other comprehensive income and directly in equity respectively. Deferred tax related to fair value re-measurement of available for sale investments, owner-occupied properties and other amounts charged or credited directly to other comprehensive income is recognised in the statement of financial position as a deferred tax asset or liability. Current tax on interest paid on Direct Capital instruments is credited directly in equity. In addition to paying tax on shareholders’ profits, the Group’s life businesses in the UK, Ireland and Singapore pay tax on policyholders’ investment returns (‘policyholder tax’) on certain products at policyholder tax rates. Policyholder tax is accounted for as an income tax and is included in the total tax expense. The Group has decided to show separately the amounts of policyholder tax to provide a more meaningful measure of the tax the Group pays on its profits. In the pro forma reconciliations, operating profit has been calculated after charging policyholder tax.
(AG) Operations held for sale Assets and liabilities held for disposal as part of operations which are held for sale are shown separately in the consolidated statement of financial position. The relevant assets are recorded at the lower of their carrying amount and their fair value, less the estimated selling costs.
Profit for the year — — — — — — — — — — 1,463 1,463 — 429 1,892 Other comprehensive
Aggregate tax effect – shareholder tax (note 13(c)) — — — — — — — — — — 17 17 — — 17
Continuing operations United Kingdom RAC Limited (see (i) below) 532 — RBS Life and RBS Collective — 128 Non-core operations — 4 France — 26 Australia (see (ii) below) 23 — Other small operations 10 5
The shareholders’ agreement with AIB specifies that calculation of the Ark exit value should be based on the embedded value of the business at 31 December 2011. This is estimated as £360 million, which is lower than its carrying value following the above impairments. As a result, a further charge to profit of £40 million has been recognised in 2011. The Irish business is currently reported within Europe in our segmental disclosures in note 4(a). The obligation created by the put options over AIB’s minority share in ALHI has led to our recognition of a financial liability of £205 million and an equal reduction in non-controlling interests within equity, as explained in note 37(b).
Asia Pacific Our activities in Asia Pacific principally comprise our long-term business operations in China, India, Singapore, Hong Kong, Sri Lanka, Taiwan, Malaysia, South Korea, Vietnam and Indonesia.
Adjusted for non-operating items: Reclassification of corporate costs and unallocated interest — (5) 32 8 — 2 — (37) — — — Investment return variances and economic assumption changes on long-term business 435 — 442 (101) 20 — — — 796 820 1,616 Short-term fluctuation in return on investments backing non-long-term business — 54 201 (64) — — — 75 266 60 326 Economic assumption changes on general insurance and health business — 85 1 4 — — — — 90 — 90 Impairment of goodwill, associates and joint ventures 29 — 131 — 15 — 217 — 392 — 392 Amortisation and impairment of intangibles 23 9 63 65 1 10 — — 171 5 176 (Profit)/loss on the disposal of subsidiaries and associates — (528) (50) — — (23) 3 33 (565) 32 (533)
Inter-segment revenue — — 216 — 216 Share of profit/(loss) of joint ventures and associates 180 — (5) (34) 141 Profit on the disposal of subsidiaries and associates 130 1 — 32 163
Other income from investments designated as other than trading Realised gains on disposals 1,746 1,296 Unrealised gains and losses (see policy J) (Losses)/gains arising in the year (3,849) 8,253 (Gains) recognised previously and now realised (1,746) (1,296)
Deferred tax from continuing operations In respect of pensions and other post-retirement obligations 260 (3) In respect of fair value gains on owner-occupied properties (1) 2 In respect of unrealised gains on investments 98 151
Profit before tax attributable to shareholders’ profits 2,026 (481) 1,545 Tax attributable to shareholders’ profits (529) 206 (323)
Preference dividends declared and charged to equity in the year 17 17 Coupon payments on direct capital instruments 58 59
United Kingdom Long-term business (see (i) below) — 29 — — — 29 General insurance and health (see (ii) below) 924 1,208 — 201 924 1,409 Europe France (long-term business) (see (iii) below) — — 52 53 52 53 Ireland Long-term business (see (iv) below) — 118 — — — 118 General insurance and health (see (v) below) 116 119 — — 116 119 Italy Long-term business (see (vi) below) 64 65 — — 64 65 General insurance and health (see (vii) below) 44 56 — — 44 56 Delta Lloyd — 307 — — — 307 Spain (long-term business) (see (viii) below) 542 556 — — 542 556
Deconsolidation of Delta Lloyd 98 — 117 — 215 Foreign exchange rate movements — 3 (4) — (1)
Notes to the consolidated financial statements continued 18 – Interests in, and loans to, joint ventures continued The Group’s principal interests in property management joint ventures are listed below.
CIMB Aviva Assurance Berhad and CIMB Aviva Takaful Berhad are developing businesses and the recoverability of value is reliant on the achievement of future projected growth. These projections are inherently uncertain and dependent on local economic conditions.
Fair value losses taken to other comprehensive income — (27) — (27) Dividends received — (63) — (63) Reclassification to financial investments — (9) — (9) Foreign exchange rate movements (2) (17) (1) (20)
(b) Principal associates The principal associates included above are: Company Type of business Proportion held
(i) Aviva Life Insurance Company India Limited The Group’s investment in Aviva Life Insurance Company India Limited has been tested for impairment by comparing its carrying value (which includes goodwill which arose on their acquisition) with its recoverable amount. The recoverable amount has been determined based on a value in use calculation. This calculation is an actuarially determined appraisal value and is based on the embedded value of the business together with the present value of expected profits from future new business. The recoverable amount exceeds the carrying value of the investment. Key assumptions used for the calculation were:  Cash flow projections based on: (i) the policy portfolio existing at the valuation date; and (ii) the future sales based on plans approved by management covering the subsequent three-year period. The cash flows from the existing policy portfolio are calculated using best estimate assumptions, which have been supported by experience investigations where available and prudent estimates typical for the market where experience investigations are not available; (iii) New sales beyond the three-year period have been extrapolated using an implied growth rate of 3.2% (2010: 14% for seven years and 10% thereafter).
Discussion on the valuation techniques applied to value financial liabilities carried at fair value is included in the relevant footnote disclosure for the financial liability. For the year to 31 December 2011, transfers of financial assets from fair value hierarchy Level 1 to Level 2 amounted to £2.2 billion (2010: £517 million), and £9 million (2010: £289 million) from Level 2 to Level 1. The transfers from Level 1 to Level 2 arose primarily in France (£1.9 billion) and the UK (£0.3 billion) as a result of changes in the level of activity and environment in the markets from which prices are sourced. For the year to 31 December 2011, there were no transfers of financial liabilities between fair value hierarchy levels (2010: £2,305 million of borrowings moved from Level 2 to Level 1).
(ii) The principal investments classified as Level 3, and the valuation techniques applied to them, are:  Structured bond-type products held by our business in France amounting to £6.1 billion, for which there is no active market.
 Other Level 3 investments amount to £0.8 billion and relate to a diverse range of different types of securities held by a number of businesses throughout the Group.
(a) Carrying amounts The carrying amounts of loans at 31 December 2011 and 2010 were as follows: At fair value through profit or loss other than trading £m
(c) Collateral The Group holds collateral in respect of loans where it is considered appropriate in order to reduce the risk of non-recovery. This collateral generally takes the form of liens or charges over properties and, in the case of policy loans, the underlying policy for the majority of the loan balances above. In all other situations, the collateral must be in a readily realisable form, such as listed securities, and is held in segregated accounts. Transfer of title for the collateral received always occurs in such cases, although no market risk or benefit is taken. In the event of a default, the Group is able to sell or repledge the collateral. The amount of collateral received with respect to loans which the Group is permitted to sell or repledge in the absence of default was £4,601 million (2010: £4,542 million). No collateral was actually sold or repledged in the absence of default during the year (2010: £nil).
Notes to the consolidated financial statements continued 25 – Financial investments continued (c) Impairment of financial investments The movements in impairment provisions on available-for-sale financial investments for the years ended 31 December 2010 and 2011 were as follows: Fixed maturity securities £m
Charge for the year taken to the income statement (79) (100) — (179) Write back following sale or reimbursement 48 175 — 223 Write back following recovery in value 1 1 — 2 Foreign exchange rate movements (2) 33 — 31
Notes to the consolidated financial statements continued 25 – Financial investments continued (e) Non-UK government debt securities (gross of non-controlling interests) The following is a summary of non-UK government debt by issuer as at 31 December 2011 analysed by policyholder, participating and shareholder funds.
Belgium — — — — — — — — — — — —
Long-term business provisions Participating 55,594 — 55,594 64,043 — 64,043 Unit-linked non-participating 10,168 — 10,168 21,450 — 21,450
Carrying amount at 1 January 4,855 4,781 Premiums written during the year 10,364 10,469 Less: Premiums earned during the year (10,099) (10,424)
Carrying amount at 1 January 5,115 5,557 Asset in respect of new business 187 358 Expected change in existing business asset 7 (208) Variance between actual and expected experience 290 81 Impact of operating assumption changes (9) (443) Impact of economic assumption changes 433 (25) Other movements (260) (318)
The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of reinsurance assets. The increase in the reinsurance asset from economic assumption changes mainly relates to the impact of a reduction in valuation interest rate assumptions in the UK and Ireland, with a corresponding increase made to 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 43, together with the impact of movements in related liabilities and other non-financial assets.
Persistency rates (4) 2 Mortality for assurance contracts 35 71 Mortality for annuity contracts (21) (637) Tax and other assumptions 99 167 Investment contracts Interest rates (82) 1 Expenses — 1 Persistency rates — (21) Tax and other assumptions 28 (3) General insurance and health business Change in loss ratio assumptions 5 (4) Change in discount rate assumptions (90) (61) Change in expense ratio and other assumptions 22 38
As noted below, the final salary sections of both UK schemes were closed to future accrual with effect from 1 April 2011.
Total fair value of assets 9,361 387 216 1,452 11,416 Present value of scheme liabilities (9,044) (551) (362) (1,462) (11,419)
(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: £m £m
– Certain subsidiaries, subject to continuing to satisfy standalone capital and liquidity requirements, loan funds to corporate and holding entities. These loans satisfy arm’s length criteria and all interest payments are made when due.
A 10% change in sterling to euro/US$ foreign exchange rates would have had the following impact on total equity: in sterling/ euro rate £m in sterling/ euro rate £m in sterling/ US$ rate £m in sterling/ US$ rate £m
Management of life insurance risks The risk profile of our life insurance risks, primarily persistency, longevity, mortality and expense risk, has remained stable during 2011. 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 strong volumes of life protection business, and to utilise reinsurance to reduce exposure to potential losses. More generally, life insurance risks are believed to benefit from a significant diversification against other risks in the portfolio. The individual life insurance risks are managed as follows:  Mortality and morbidity risks are mitigated by use of reinsurance. The Group allows business units to select reinsurers, from those approved by the Group, based on local factors, but assesses the overall programme to manage group-wide risk exposures and monitor that the aggregation of risk ceded to individual reinsurers is within appetite for credit risk.
Sensitivities as at 31 December 2010 Impact on profit before tax (£m)
(c) Collateral Certain derivative contracts, primarily interest rate and currency swaps, involve the receipt or pledging of cash and non-cash collateral. The amounts of cash collateral receivable or repayable are included in notes 26 and 49 respectively.
Loans owed to subsidiaries H 502 514 Other amounts owed to subsidiaries H 647 465 Other creditors 97 121
(ii) At 31 December 2011, the Company has two wholly owned subsidiaries, both incorporated in the UK. These are General Accident plc and Aviva Group Holdings Limited. Aviva Group Holdings Limited is an intermediate holding company, while General Accident plc no longer carries out this function. The principal subsidiaries of the Aviva Group at 31 December 2011 are listed on pages 50 and 51.
A reduction in the UK corporation tax rate from 28% to 26% was substantively enacted in March 2011 and is effective from 1 April 2011. A further reduction from 26% to 25% was substantively enacted in July 2011 and will be effective from 1 April 2012. In addition, the Government announced its intention to further reduce the UK corporation tax rate to 24% from 1 April 2013 and to 23% from 1 April 2014. There is no impact on the Company’s net assets from the reduction in the rate as the Company has no deferred tax assets or liabilities.
Operating profit before tax attributable to shareholders’ profits 3,254 283 3,537 3,473 287 3,760
Equity attributable to ordinary shareholders of Aviva plc 12,829 15,038 Preference share capital and direct capital instruments 1,190 1,190 Non-controlling interests1 1,476 3,977
Payables and other financial liabilities 11,230 20,292 Other liabilities 2,828 4,179 Liabilities of operations classified as held for sale 363 —
Net worth The net worth is the market value of the shareholders’ funds and the shareholders’ interest in the surplus held in the non-profit component of the long-term business funds, determined on a statutory solvency basis and adjusted to add back any non-admissible assets, and consists of the required capital and free surplus. Required capital is the market value of assets attributed to the covered business over and above that required to back liabilities for covered business, for which distribution to shareholders is restricted. Required capital is reported net of implicit items permitted on a local regulatory basis to cover minimum solvency margins which are assessed at a local entity level. The level of required capital for each business unit is generally set equal to the higher of:  the level of capital at which the local regulator is empowered to take action;  the capital requirement of the business unit under the Group’s economic capital requirements; and  the target capital level of the business unit.
US capital solutions Credit has been taken within the US embedded value, and value of new business, for the anticipated reduction in capital requirements based on management’s intention to enact transactions which allow recognition of additional assets that can be held against certain reserves, reducing shareholder capital requirements. By the end of 2011 transactions have been enacted for business written from 2006 to 2011.
Earnings from existing business – expected existing business contribution (reference rate) 169 98 12 13 74 34 13 244 20 20 453 49 502 – expected existing business contribution (in excess of reference rate) 425 183 30 34 25 76 9 357 401 25 1,208 181 1,389
– project and other related expenses1 (22) (10) — — — (1) (1) (12) (11) (3) (48) 2 (46)
Expected return on shareholders’ net worth 91 167 — 258 5 12 — 17 275 1 Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. 2 Other non-operating variances are described under Exceptional items in note E5. 3 Included within capital and dividend flows is the transfer to Life and related businesses from other segments consisting of service company profits and losses during the reported period that have emerged from the value of in-force. Since the
E18 – Principal assumptions continued Model – Europe (excluding Delta Lloyd) and Asia Pacific Swap rates are generated by a model, the LIBOR Market Model (LMM),that projects a full swap curve at monthly intervals. Forward rates are assumed to have a log-normal distribution which guarantees non-negative interest rates. The model is calibrated to at-themoney swaptions of a variety of terms and tenors. Swaption volatilities are taken from SuperDerivatives. Tests have been performed to ensure that sufficient scenarios have been used that the result converges to the stochastic value of the business being valued. The total annual return on equities is calculated as the return on one-year swaps plus an excess return. This excess return is generally modelled using a log-normal model where volatility varies by time horizon. This allows the model to capture the term structure of implied volatilities. The model is calibrated to at-the-money options of a variety of terms. Option volatilities are taken from Markit. The model also generates property total returns and real yield curves, although these are not significant asset classes for Aviva outside the UK. In the absence of liquid market data, the volatilities of these asset classes are based on historic data. Assumptions for correlations between asset classes have been set based on historic data.
Non-hedgeable risk For the balance sheet and operating profit, a charge of 3.3% has been applied to the group-diversified capital required on a 1-in-200 one-year basis over the remaining lifetime of in-force business.The charge is set so as to give an aggregate allowance that is in excess of the expected operational risk costs arising from the in-force covered business over its remaining lifetime. The capital levels used are projected to be sufficient to cover non-hedgeable risks at the 99.5% confidence level one-year after the valuation date. The capital is equal to the capital from the ICA results for those risks considered. The capital has been projected as running off over the remaining life of the in-force portfolio in line with the drivers of the capital requirement. In addition to the operational risk allowance, financial non-hedgeable risks and other product level asymmetries have been allowed for. These allowances are not material as significant financial non-hedgeable risks and product level asymmetries are either modelled explicitly and included in the TVOG or are included in the PVFP through the use of appropriate best estimate assumptions.
Life MCEV The MCEV balance sheet value of covered business as at the reporting date. Excludes non-covered business including pension schemes and goodwill.
Risk-free rate (reference rate in CFO Forum terminology) The risk-free rate is taken as swaps except for all contracts that contain features similar to immediate annuities and are backed by appropriate assets, including paid-up group deferred annuities and all other contracts in the Netherlands, and deferred annuities and all other contracts in the US. The adjusted risk-free rate is taken as swaps plus the additional return available for products and where backing asset portfolios can be held to maturity.
+The number of registered ordinary shares represented by ADRs. Please note that each Aviva ADR represents two (2) ordinary Aviva shares.
Silk Street, London EC2Y 8DS, on Thursday, 3 May 2012 at 11am.
Group company secretary Shareholders may contact the Group company secretary as follows: In writing: Kirstine Cooper, Group Company Secretary, St Helen’s, 1 Undershaft, London EC3P 3DQ