Our approach We help protect almost every aspect of peoples’ lives; their homes, cars, families, health and their financial futures. For over 300 years, we’ve helped people protect what they have today and to plan, invest and save for their futures. It’s our ability to understand and meet our customers’ needs that has led more than 53 million people, and one in three UK households to put their trust in us. We’re there for our customers, we’re flexible and we’re committed to acting in their best interests. We know that when they do business with Aviva, they want it to be simple and that, if something does go wrong, we’ll fix it. Everyone in our business understands the difference they can make to peoples’ lives, particularly in times of need.
We are a clear leader in bancassurance, driving sales growth of 9% during 2010
We are carbon neutral worldwide focusing firstly on reduction and then using offsetting schemes – just one step in our programme to reduce our impact on the environment
Aviva Premiership Rugby sponsorship Aviva has become the new title sponsor of English rugby union’s top-flight league. Under the four-year £20 million deal, the worldleading rugby union competition became Aviva Premiership Rugby from September 2010. When combined with our sponsorship of UK Athletics it provides year-round visibility of the Aviva brand. The Aviva Premiership includes more than 135 games each season, watched by 1.7 million people at the grounds and many more on Sky, ITV and ESPN. The deal also allows Aviva to extend its grassroots programme designed to encourage young people to get involved in sport. The 12 rugby clubs in the Aviva Premiership are committing 15,000 man hours to work with 36,000 pupils at 600 primary schools in England, as well as providing them with equipment and teacher training.
Strategy Our strategy is to invest and deepen our presence in Europe, with a clear focus on managing for value. Our Quantum Leap transformation programme is implementing a truly pan-European operating model across our markets. It underpins our operational achievements in the past year and continues to progress well. We will take advantage of demographic opportunities by leveraging our scale, strong market positions and local expertise: Offering a range of life, pensions, general and health insurance and asset management products, providing the diversity and competitive strength that a combination of life and general insurance provides.
Improving our position and profitability in a key region The North America region is home to two of the world’s largest and richest economies. Aviva North America consists of two businesses: our life insurance and annuity business in the United States and our general insurance business in Canada – both serve their respective home markets with support from our regional headquarters in Chicago.
Strong investment performance and further improvements in client service At the end of 2010, 73% of institutional funds where a benchmark is specified, performed above benchmark over the one year and three year horizon (equally weighted). For portfolios measured against a relevant peer group, 70% performed above median over one and three years at the end of December 2010, with 33% in the top quartile over one year and 42% in the top quartile over the three year period. Our focus on client-centricity enabled us to deliver further improvements in client service rankings for Aviva UK, UK institutional and for UK/European financial institutions in 2010 according to independent surveys undertaken by Investit. Rankings in UK pensions, measured by Greenwich Associates, slipped slightly in comparison with 2009 from 1st quartile to 2nd, but we remain in a strong position competitively.
History and development of Aviva General We are a public limited company incorporated under the laws of England and Wales. We are one of the world’s leading global insurance groups. We are the sixth largest insurance group in the world, based on gross written premiums for the 2009 year. We are one of the top five providers of long-term insurance and savings products in the UK, Ireland, the Netherlands, Poland and Spain and one of the top ten providers of long-term insurance and savings products in France and Italy for 2009. More detail is provided within the operating segment review later in this section. Our main activities are the provision of products and services in relation to long-term insurance and savings, general insurance and fund management.
Aviva plc Annual Report and Accounts 2010 Information on the company continued measure in the UK and is the total of new annual premiums plus 10% of single premiums. Long-term insurance and savings products in the UK represented 25% of our worldwide sales for the year ended 31 December 2010. Long-term insurance products from our European businesses (excluding the UK) represented 40% of total Group worldwide sales for the year ended 31 December 2010. In North America our life and annuity business is a leading provider of both fixed indexed life and fixed indexed annuity products, according to reports in 2010 from LIMRA and AnnuitySpecs. In the Asia Pacific region we operate in nine countries with businesses at different stages of development.
United Kingdom Aviva General Insurance Business overview and strategy Aviva is a leading general insurer in the UK, with a market share in 2009 of over 10% according to Datamonitor. We focus on personal and commercial insurance and are also a leading provider of motoring services through the RAC, as voted by the JD Power survey since 2006. Our key strengths include underwriting excellence and product and distribution leadership. We aim to maintain a market-leading position while focusing on insurance fundamentals to maximise returns through the insurance cycle. We seek to provide excellent customer service, maintain disciplined underwriting and pricing and control the impact of claims inflation.
Delta Lloyd Delta Lloyd is one of the top five financial services providers in the Netherlands, with a growing operation in Belgium. Delta Lloyd has been listed on the NYSE Euronext Amsterdam since 3 November 2009. At the time of listing we retained 58.3% of the ordinary share capital and 54.0% of the voting rights in Delta Lloyd. The IPO raised £1 billion of gross disposal proceeds and since then the strategic management of our investment in Delta Lloyd has been managed independently from other operations. During 2010 Delta Lloyd offered scrip dividends in exchange for cash dividends. We did not exercise this option which resulted in the dilution of our shareholding by 0.7% to 57.6% at 31 December 2010.
Business overview and strategy Delta Lloyd operates in the life insurance and pensions, general insurance, fund management and selected banking markets in the Netherlands and Belgium. The group employs approximately 5,800 permanent staff as of 31 December 2010. The German life insurance operations are no longer considered core business by management and we ceased writing new business in Germany in the third quarter of 2010. We identified ‘Delivering sustainable value for shareholders through long-term focus’ as being core to our strategy. To realise this strategy the following initiatives have been implemented: Simplify organisational structure in 2010, with the aim of reducing costs by 2012 compared with the 2010 cost level.
Distribution We operate in Canada through a distribution network primarily focused on approximately 1,700 independent retail brokers who distribute our core personal and commercial lines. In addition, we work closely with both independent and wholly owned specialty brokers to distribute group insurance and specialty personal lines, such as insurance for antique cars.
Market We believe that the fundamentals of the Asian markets are attractive. Asia’s economies are reverting to pre-crisis levels. The economic forecast from Asian Development Bank predicts GDP growth for emerging markets in Asia of 8.2% in 2010 and 7.3% in 2011. (Asian Development outlook 2010 update, 28 September 2010). Asian economic growth is expected to continue to outpace the West, most notably in China and India. In our view, we expect Asia to be the fastest growing region for life insurance globally over the next decade. We also believe that we are well-positioned to continue delivering strong growth in both volumes and margins in our Asia Pacific business. Recent IPOs and M&A transactions have evidenced favourable valuations. While competition is increasing as a result of many international competitors focusing on Asia for growth and domestic leaders leveraging strong brands, we believe that our opportunity to create franchise value through organic growth in Asia is unprecedented.
Asset classes Aviva Investors offers a wide range of investment across all asset classes and in all significant financial centres worldwide. Where we do not directly manage assets, we believe we have the skills and experience to select the right third-party asset managers to complement our own products. Our investment capabilities, products and services comprise: Alternatives – We offer a range of alternative investment products from private equity fund of funds to hedge funds.
Poland Aviva Powszechne Towarzystwo Emerytalne Aviva BZ WBK S.A. (90.0%) Aviva Towarzystwo Ubezpieczen Na Zycie SA (90.0%) Aviva Towarzystwo Ubezpieczen Ogolnych SA (90.0%)
Expenses Claims and benefits paid, net of recoveries from reinsurers (29,152) (27,549) (29,353) (27,121) (23,444) Change in insurance liabilities, net of reinsurance (7,177) (5,682) 3,885 (3,508) (2,594) Change in investment contract provisions (8,741) (11,185) 10,629 (2,018) (6,002) Change in unallocated divisible surplus 329 (1,547) 4,482 2,922 (558) Fee and commission expense (5,867) (4,396) (4,411) (4,244) (5,461) Other expenses (3,537) (5,366) (5,416) (3,473) (3,557) Finance costs (1,422) (1,519) (1,547) (1,217) (856)
UK with-profits business With-profits products are designed to pay policyholders smoother investment returns through a combination of annual bonuses and terminal bonuses. Shareholders’ profit emerges from this business in direct proportion to policyholder bonuses, as shareholders receive up to one-ninth of the value of each year’s bonus declaration to policyholders. Accordingly, the smoothing inherent in the bonus declarations provides for relatively stable annual shareholders’ profit from this business. The most significant factors that influence the determination of bonus rates are the return on the investments of the with-profits funds and expectations about future investment returns. Actual and expected investment returns are affected by, among other factors, the mix of investments supporting the with-profits fund, which in turn is influenced by the extent of the inherited estate within the with-profits fund. The annual excess of premiums and investment return over operating expenses, benefit provisions and claims payments within
Other long-term insurance and savings business Non-profit business falls mainly into two categories: investment type business and risk cover business. Investment type business, which accounts for most of our non-profit business, includes predominantly unit-linked life and pensions business, where the risk of investing policy assets is borne entirely by the policyholder. In addition investment type business also includes life and pensions business where the risk of investing policy assets is typically shared between policyholders and shareholders, subject to a minimum rate of investment return guaranteed to policyholders. Operating earnings arise from unit-linked business when fees charged to policyholders based on the value of the policy assets exceed costs of acquiring new business and administration costs. In respect of remaining investment type business, investment return generated from policy assets has an effect on operating earnings though this is often nonproportional. Finally in respect of all investment type business, shareholders bear the risk of investing shareholder capital in support of these operations. Risk cover business includes term assurance, or term life insurance business. The risk of investing policy assets in this business is borne entirely by the shareholders. Operating earnings arise when premiums, and investment return earned on assets supporting insurance liabilities and shareholder capital, exceed claims costs, costs of acquiring new business and administration costs.
General insurance and health sales General insurance and health sales are defined as IFRS net written premiums, being those premiums written during the year net of amounts reinsured with third parties, as set out in the segmental analysis of results in ‘Financial Statements IFRS – Note 4 – Segmental information’. For sales reporting, we use the GAAP measure for general insurance and health business. The table below presents our consolidated sales for the years ended 31 December 2010, 2009 and 2008, as well as the reconciliation of sales to net written premiums in IFRS.
Annualisation impact of regular premium long-term business: As noted above, the calculation of PVNBP includes annualised regular premiums. The impact of this annualisation is removed in order to reconcile the non-GAAP new business sales to IFRS premiums and will vary depending on the volume of regular premium sales during the year.
United Kingdom 16,385 14,261 18,756 Europe 21,810 21,750 21,806 North America 6,686 6,345 7,316 Asia Pacific 2,178 2,712 3,499
Net earned premiums 34,336 32,673 34,642 Fee and commission income 1,782 1,789 1,885 Net investment income/(expense) 21,993 25,155 (16,043) Share of profit / (loss) of joint ventures and
Profit/(loss) before tax 2,834 2,022 (2,368) Tax attributable to policyholders’ returns (394) (217) 1,068
Adjusting items Year ended 31 December 2010 The long-term insurance and savings business investment variances and economic assumption changes was a gain of £791 million (2009: £75 million charge). The favourable change is mainly driven by differing movements in asset and liability yield curves. The short-term fluctuations and economic assumption changes on the non-life business were a £304 million charge (2009: £152 million credit). This is due to unfavourable market movements in a number of our regions.
Aviva Investors Aviva Investors, our fund management business, operates across all four regions providing fund management services to thirdparty investors and supporting our long-term insurance and savings and general insurance operations. The table below presents the adjusted operating profit, profit before tax attributable to shareholders’ profits under IFRS and funds under management of Aviva Investors for the years ended 31 December 2010, 2009 and 2008.
Contractual obligations Contractual obligations with specified payment dates at 31 December 2010 included the following: Less than one year £m
Risk management responsibilities, policies and procedures Aviva operates a ‘three lines of defence’ model. Primary responsibility for the application of the RMF lies with business management (the first line of defence). Support for and challenge on the risk management activities (including the identification, measurement, monitoring, management and reporting of risk) are performed by a specialist, independent risk function (the second line of defence) acting as the ‘critical friend’ to the first line of defence. The design of the RMF is also primarily the responsibility of the second line of defence. Independent and objective assurance on the robustness of the RMF and the appropriateness and effectiveness of internal control is provided by Group internal audit (the third line of defence). To promote a consistent and rigorous approach to risk management across all the businesses and locations in which we operate, we have a set of formal risk management policies. These risk policies set out risk management and control standards for the Group’s worldwide operations. As our business responds to changing market conditions and customer needs, we regularly monitor the appropriateness of our risk policies to ensure that they remain up-to-date.
Risk governance and oversight Board oversight of risk and risk management across the Group is maintained on a regular basis through its Risk Committee (RC). The RC reviews the Group’s risk appetite and future risk strategy and makes recommendations on risk appetite to the Board. It also reviews the risk profile against the risk appetite, the principal risk policies for consistency with the Group’s risk appetite, and approves any material changes to these policies, and reviews the Group’s internal models and stress and scenario testing. The executive oversight of risk management is the responsibility of the Group Executive Committee (GEC). It is assisted by a number of committees at Group centre with the Asset Liability Committee (ALCO) and the Operational Risk Committee (ORC) providing a key focus on financial and operational risks respectively. The Group centre committees are in turn supported by similar governance structures in the regions. These relationships are summarised in the diagram below. These committees review the Group’s risk profile against its risk appetite and the Group’s strategy, provide challenge and recommend risk management activity and ensure that our risk policies are used to manage risk to agreed standards. The group chief risk officer is a member of the Group Executive Committee and has a reporting line to the group chief executive and to the RC with access to the RC chairman, assuring independence of the function. Similarly, the regional CROs are members of the regional executive committees.
Solvency II The development of Solvency II continues in 2011. The European Commission is focused on concluding the development of the Level 2 implementing measures that will establish the technical requirements governing the practical application of Solvency II. The European Commission has published a draft directive (‘Omnibus II’) proposing some changes, including as expected a change to the date for implementation of Solvency II from 31 October 2012 to 31 December 2012. Aviva continues to actively participate in the development of the requirements through the key European industry working groups and engaging with the FSA and HM Treasury to influence the on-going negotiations in Brussels. The European Commission is now giving further consideration to the wording of the implementing measures and is expected to finalise these during 2011.
Corporate responsibility Aviva plc Annual Report and Accounts 2010 Corporate responsibility continued providing a narrative CR report we prepare an Accounting for Sustainability statement using the Connected Reporting Framework to demonstrate the costs associated with our energy, natural resource use and waste management. We also use this statement to demonstrate the financial impacts of our community investment and customer advocacy commitments. The Accounting for Sustainability statement is provided on page 86. We are also committed to providing full disclosure to investors on our CR programme and as such respond to EIRIS, SAM, Sustainalytics and Vigeo for inclusion in the FTSE4Good, Dow Jones Sustainability Indices, Ethibel and ECPI indices. Some of our senior managers are involved in the promotion of transparent reporting: Tim Harris, deputy chief financial officer, is working with the International Accounting Standards Board to drive forward a globally consistent high-quality standard of reporting (International Financial Reporting Standards (IFRS)) and Steve Waygood, head of sustainability research at Aviva Investors, is part of the team progressing the International Integrated Reporting Committee which aims to present a more rounded view of responsible reporting. The work Aviva Investors has been developing over the past two years on the Sustainable Stock Exchange initiative continued to gather prominence during 2010. Building on this, looking towards 2011 and the 2012 Rio Earth Summit, Aviva has taken a position to highlight the need for long-termism in investment decision making. Open dialogue with our stakeholders also helps us to define priorities and shape our approach. We have increased our engagement with governmental stakeholders this year in order to respond to consultations relating specifically to changes proposed to corporate governance and reporting. We are keen to actively engage in dialogue with government, sharing our insight as both the owner and investor of capital, giving a useful double perspective to aid their public policy development. Specifically we have responded to: UK Department for Business (BIS) ‘Future of Narrative Reporting’
In Canada, the Aviva Community Fund gives members of the public the opportunity to turn great ideas into action to benefit their local communities. This innovative use of social media encouraged two million members of the community to vote on their preferred project.
— — 16% 17% Increase the % of employee participation in volunteering
Business ethics: This data excludes Delta Lloyd employees. While we aim for 100% of employees to sign the code on induction to the Company it is inevitable that some new businesses will take some time to implement this requirement. We are currently revising our business ethics code. From 2011 the code will require annual sign-off. Some businesses have this process in place already and we have reported this percentage here.
Our performance, strategy and targets Our global community development (CD) strategy, focusing on financial literacy, education and life trauma, aligns to our corporate vision and channels financial support and the expertise of our employees into projects where we can see positive societal impacts. Our total investment was £3.4 million higher than in 2009. Three key factors contributed to this; significant investment in our first Global CD and cause related marketing initiative Street to School which donated funds and used our marketing reach to raise awareness of the issue; improvement in the scope and accuracy of the way we record CD data according to LBG guidelines and the increasing engagement of our people in CD activity with 29% now involved in payroll giving. We delivered over 57,250 hours of volunteering in 2010. This is a drop back in volume due to the removal of paid intermediaries to broker opportunities and the limited volunteering options when working with vulnerable children. We are addressing this by providing more volunteering choice for employees in 2011. Overall we have a significant 4% uplift 4 See www.lbg-online.net for more information in employees believing we act responsibly in our communities and 8% uplift (2009: 66%, 2010: 74%) in those believing our commitment to CR is genuine. Our flagship Street to School initiative to get young people off the streets and into education and training has started to deliver tangible benefits in engaging our people, impacting the lives of vulnerable young people and in creating the right brand associations for Aviva. Our clear focus on this programme, with at least 50% of CD activity happening in this sphere gives us the opportunity to make a deep and lasting difference. The Street to School programme is in operation in 17 markets and we have developed a rigorous measurement framework together with our partners to allow us to govern and demonstrate the activity, its inputs and outputs. From this we know that we have helped over 128,000 people in our programmes. We have seen a number of cause related marketing pilots comes to fruition and we will continue to push ahead with further cause related marketing around Street to School in 2011.
Scope 1 63,784 42,224 52,847 Scope 2* 68,628 81,994 90,591 Scope 3 15,839 30,508 21,952 Gross CO2 emissions* 148,251 154,726 165,390 Absolute CO2 footprint 127,685 104,351 125,400 Carbon offsetting (133,049) (109,568) (132,000) Total net emissions (6,336) (5,217) (6,600)
Across our regions: In North America, we have seen strong improvements in the US business.
We also set up the Future Prosperity Panel in 2010, a group of independent international thinkers, to develop fresh thinking on the whole area of saving and how this can build prosperity globally.
We do receive customer complaints and these are dealt with by our customer complaints management system. Further details of our customer related risks are found within our Customer Policy at www.aviva.com/corporate-responsibility/our-crpolicy /#customer
We are not aware of any matters that would lead us to conclude that Aviva has not applied the responsiveness principle in considering the matters to be reported.
Nothing has come to our attention that causes us to believe that the data relating to the above topics has not been collated properly from Group-wide systems.
The CR Report includes examples of corporate responsibility performance in key markets. In future Reports it will be important to use these examples to show a balanced picture of performance, including challenges faced in relation to corporate responsibility across all markets.
7. Richard Karl Goeltz Senior independent non-executive director (Age 68) Appointed to the Board in May 2004. Currently a non-executive director of the Warnaco Group, Inc. (clothing), the New Germany Fund (investment trust), the Central Europe and Russia Fund (investment trust), the European Equity Fund (investment trust) and a member of the Council and Court of Governors of The London School of Economics and Political Science. Former vice-chairman and chief financial officer of American Express Company (financial services) and director and chief financial officer of NatWest Group plc (banking). Former non-executive director of Delta Air Lines, Inc. (transport) and Federal Home Loan Mortgage Corporation (Freddie Mac) (financial services) and a former member of the Accounting Standards Board (UK). Member of the Audit and Nomination committees.
Directors The following persons served as directors of the Company during the year and up to the date of this report: Mary Francis Richard Karl Goeltz Euleen Goh Michael Hawker Mark Hodges Igal Mayer (appointed 19 January 2011) Andrea Moneta (resigned 19 January 2011) Andrew Moss Carole Piwnica Patrick Regan Philip Scott (retired 26 January 2010) Lord Sharman of Redlynch Leslie Van de Walle Russell Walls Scott Wheway
Health and safety The health and safety of the Group’s employees is a priority and is reviewed at regular intervals. Each business within the Group has an appointed health and safety representative, whose role is to bring to the attention of senior management any areas of concern that should be addressed within the health and safety programme. Information on health and safety matters is communicated to staff through the normal communication channels. Under the Group’s Health and Safety Policy the Group chief executive is accountable for health and safety.
Creditor payment policy and practice It is the Group’s policy to pay creditors when they fall due for payment. Terms of payment are agreed with suppliers when negotiating each transaction and the policy is to abide by those terms, provided that the suppliers also comply with all relevant terms and conditions. In respect of Group activities in the UK, the amounts due to trade creditors at 31 December 2010 represented 20.8 days of average daily purchases through the year (2009: 23 days).
• Group strategy, business plans and performance monitoring 51 • Financial reporting and controls, capital structure and dividend policy 21 • Group risk management policies, risk appetite and framework 8 • Corporate governance 9 • Others (shareholder documentation, ! Board and committee succession planning, constitution of Board committees, Board effectiveness review,committee reports and key business policies) 11
The Board’s policy is to appoint and retain non-executive directors, who can apply their wider knowledge and experiences to their understanding of the Aviva Group, and to review and refresh regularly the skills and experience the Board requires through a programme of rotational retirement. Several nonexecutive directors, including the Company chairman, are due to retire in 2012 and 2013, after serving on the Board for up to nine years, in line with the Combined Code. The Nomination Committee continued succession planning for the Board during the year to ensure that an appropriate balance of skills and experience is maintained and that there is progressive refreshing of the Board. As part of the process for the appointment of new directors, the Nomination Committee, on behalf of the Board, considers the diversity of the Board, including gender. The diverse nationalities which currently make up the Board ensure an international perspective, which is invaluable for the Group as a global business. In addition to the strengths of experience, diversity and an international perspective, the Board also complies with the requirements of the Combined Code on the independence of directors. The aim is that the Board as a whole should have an appropriate balance of skills, experience, independence and knowledge to enable each director and the Board as a whole to discharge their duties and responsibilities effectively. Each director must be able to devote sufficient time to the role in order to discharge his or her responsibilities effectively and on average spend at least 44 days a year on company business, with the chairmen of the Audit and Risk committees spending substantially more. The process for appointing new directors is conducted by the Nomination Committee whose report, including a description of its duties, is set out on page 109. The Combined Code requires that at least half the Board, excluding the chairman, should comprise independent nonexecutive directors as determined by the Board. The Nomination Committee performs an annual review of directors’ interests in which all potential or perceived conflicts, including time commitments, length of service and other issues relevant to their independence, are considered. Where a director has served on the Board for up to nine years, the Board, through the Nomination Committee, will assess whether such a director remains independent in character and judgement. The Board will disclose reasons why it believes that the director remains independent if the assessment reached that conclusion, notwithstanding that the director has been on the Board for more than nine years. It is the Board’s view that an independent non-executive director also needs to be able to present an objective, rigorous and constructive challenge to management, drawing on his/her wider experiences to question assumptions and viewpoints and where necessary defend their beliefs. The independent nonexecutive directors should also assist management in the development of the Company’s strategy. To be effective, an independent director needs to acquire a sound understanding of the industry and the Company so as to be able to evaluate properly the information provided. Having considered the matter carefully, the Board is of the opinion that all of the current nonexecutive directors are independent and free from any relationship or circumstances that could affect, or appear to affect, their independent judgement. Accordingly, over half of the Board members, excluding the chairman, are independent nonexecutive directors. All of the directors have been subject to a formal performance evaluation and took part in a peer evaluation review during 2010. In particular, directors who have served on the Board for more than six years were subject to particularly rigorous review and there was consideration of the need for progressive refreshing of the Board. As at the date of this report, there are four non-executive directors who have served on the Board for more than six years. More details about the directors standing for election and re-election at this year’s Annual General Meeting are set out in the Notice of AGM and their biographical details are set out on pages 94 and 95. Below is a summary of some of the skills and experience they possess which they bring to the Board.
Internal control statement The Board has overall responsibility for maintaining the Group’s system of internal control and for reviewing its effectiveness. To discharge this responsibility, the Board has established frameworks for internal governance and risk management. The Group’s system of internal control plays a key role in the management of risks that may impact the fulfilment of its objectives. Internal control facilitates effective and efficient operations, the development of robust and reliable internal reporting and compliance with laws and regulations. This system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or losses. The system is regularly reviewed and complies with the revised guidance for directors on the Combined Code, October 2005 (the Turnbull Guidance) published by the Financial Reporting Council. The Audit Committee, working closely with the Risk Committee, on behalf of the Board, last reviewed the effectiveness of the system of internal control in February 2011, covering all material controls, including financial, operational and compliance controls and risk management systems. The necessary actions have been or are being taken to remedy any significant failings and weaknesses identified from these reviews. The Board confirms that there is an ongoing process for identifying, measuring, managing, monitoring and reporting the significant risks faced by the Group, which has been in place for the year under review and up to the date of approval of the Annual Report and Accounts. The principal features of the system of internal control and methods by which the Board satisfies itself that this system operates effectively are set out below.
Independent and objective assurance on the robustness of the risk management framework and the appropriateness and effectiveness of internal control is provided by the Internal Audit (the third line of defence) to the Audit and Risk committees, regional and business unit audit committees, Board members and the Group Executive Committee.
Highlights During 2010, the Company undertook a Strategic Reward Review which was overseen by the Remuneration Committee and which comprehensively examined all elements of senior executive remuneration. This has allowed the Company to put to the 2011 Annual General Meeting proposals that reflect a thorough review of the Company’s remuneration package taking into account changing market and regulatory practice and the requirement to ensure that the package remains competitive. Details of these proposals are outlined in Section 2 of this report. The highlights of the changes are: – Fully revised remuneration principles; – Revised benchmarking group; – Simplified annual bonus structure; – Competitive Long Term Incentive Plans; and – New share ownership requirements.
This report covers the following: The committee’s objectives, membership and main activities in 2010; A review of Aviva’s remuneration policy and practice; Commentary on the alignment between remuneration, risk and Aviva’s business strategy and objectives; Details of the terms of executive directors’ (EDs) service contracts; Aviva’s share ownership policy with respect to EDs; Aviva’s policy on external board appointments; Aviva’s UK all employee share plans and share incentive plans; Aviva’s position against dilution limits; Remuneration of the non-executive directors (NEDs), and; Tables summarising the 2010 position on: – Directors’ remuneration – EDs’ pension arrangements – Share incentive plans – Directors’ interests in shares 2. Strategic Reward Review Throughout 2010 the Company conducted a comprehensive review of senior executive remuneration. This was last conducted in 2005. The objectives of the review were: To ensure remuneration is optimally designed to attract and retain senior executives To ensure remuneration is aligned with, and incentivise the achievement of, our strategic business aims whilst ensuring appropriate risk taking To benchmark total compensation against suitable comparator groups to ensure remuneration is appropriately positioned against market To ensure our reward plans comply with regulatory requirements
The committee’s main responsibilities are to: Recommend to the Board the Group’s remuneration policy for the EDs and members of senior management, covering basic salary, bonus, long-term incentives, retirement provisions, long-term wealth creation and other benefits; Strike an appropriate balance between (i) the fixed and variable components and (ii) the cash, equity and equity related components of the total remuneration package; Ensure the remuneration package is congruent with, and provides the incentives to realise, short and long term goals; Review and determine the terms of employment and remuneration of the individual EDs, including any specific recruitment or severance terms; Assess and, within the broad policy from time to time approved by the Board, determine the remuneration terms of the
Table 4: Matters discussed by the committee during its 2010 meetings Meeting Standing agenda items Other agenda items
Discretionary payments into a trust where they are held for a minimum of five years.
Other benefits Other benefits are provided on a market competitive basis.
One Aviva, Twice the Value Award (OATTV) with a grant value of 75% of the BRDSA.
OATTV Plan £686,196 The face value of 100% of the two-thirds deferred element of 2009 annual bonus.
LTIP – Face Value of grant £900,000 The face value of the grant represented 150% of Mr Hodges’ basic salary on 28 February 2010.
OATTV Plan €424,330 The face value of 75% of the two-thirds deferred element of 2009 annual bonus.
Table 12: Potential value of 2010 LTIP awards (rounded to nearest £50) LTIP Andrew Moss Patrick Regan Mark Hodges Andrea Moneta*
Assumptions are as follows: Threshold vesting assumes TSR and ROCE elements vest at the minimum level, producing a 30% vesting of the total award. No share price growth is assumed; Expected value, based on the vesting assumption made for accounting purposes, assumes TSR and ROCE elements vest at a combined rate of 50% of the total award. Share price growth of 5% per annum is assumed over the three-year performance period; Maximum vesting assumes both TSR and ROCE elements vest in full, producing a 100% vesting. Share price growth of 10% per annum is assumed over the three-year performance period.
Aviva plc Annual Report and Accounts 2010 Directors’ remuneration report continued 13. Share awards Table 15 below sets out the current position of those share-based awards made to EDs under current remuneration arrangements.
17. External Board appointments Aviva recognises its EDs can benefit from serving in a personal capacity as a NED of non-Aviva Group companies. It is, at the same time, conscious of the corporate governance recommendations that EDs should take account of the time commitment required by a NED position and ensure any such role does not impact their ability to carry out fully their executive duties. The Company therefore has a policy of normally allowing senior executives to serve as a NED of one external company, subject to approval by the Board, and to retain any board fees. The only ED who held an external NED appointment during 2010 was Philip Scott, who was appointed to the board of Diageo plc on 17 October 2007 and, following the announcement of his intended retirement from the Company, to the board of Royal Bank of Scotland Group plc on 1 November 2009. As a NED of Diageo plc, Mr Scott received fees totalling £10,274 in the period from 1 January 2010 until his retirement from the Aviva plc Board on 26 January 2010. As a NED of Royal Bank of Scotland Group plc, Mr Scott received fees totalling £6,849 in the period from 1 January 2010 until his retirement from the Aviva plc Board on 26 January 2010.
Prior to the introduction of the UK Corporate Governance Code, NEDs were appointed on a three-year term which could be extended by mutual consent. Commencing at the 2011 AGM, NEDs will be subject to reelection by shareholders at each AGM.
Each director must be able to devote sufficient time to the role in order to discharge his or her responsibilities effectively and on average spend at least 44 days a year on Company business, with the chairmen of the Audit and Risk committees spending substantially more.
Committee membership – Audit – Corporate Responsibility – Nomination – Remuneration – Risk
Igal Mayer On 19 January 2011, Mr Mayer was appointed chief executive, Aviva Europe and joined the Board. Previously Mr Mayer was CEO of the North American region and lives in Canada. Mr Mayer will receive a basic salary of C$1,001,500 with an On Target annual bonus of 75%, maximum 150%. He will be eligible to receive long-term incentive awards at a standard rate of 250% of basic salary, in recognition of his prior grants in North America, where market levels of awards differ from Aviva’s regular practice. Mr Mayer’s family will remain in Canada and suitable accommodation and necessary travel will be provided.
Subsidiaries Transactions between the Company and its subsidiaries are eliminated on consolidation. However, the Company has transactions and outstanding balances with certain unit trusts, Open Ended Investments Companies, collateralised debt obligations and similar entities which are not consolidated and where a Group company acts as manager. These entities are regarded as related parties for the purposes of International Accounting Standard (IAS) 24. The balances are included in the Group’s statement of financial position at fair value or amortised cost in accordance with their IAS 39 classifications. The transactions are included in the income statement and include amounts paid on issue of shares or units, amounts received on cancellation of shares or units and paid in respect of the periodic charge and administration fee.
UK life insurance 190 UK general insurance — Aviva Investors 30 France 123 Netherlands 72 Poland 67 Ireland 44 Other Europe 39 Other operations 138
Net cash used in investing activities Net cash from investing activities increased by £796 million to £364 million (2009: £432 million utilised). The increase is a result of a £930 million reclassification within the statement of cash flows described further in note 2(b). The underlying increase is a result of cash and cash equivalents acquired as part of the RBS Life acquisition described further in note 3(a).
Key directives of particular relevance to the financial services industry, and so to Aviva’s businesses in the European Union 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.
Governmental initiatives intended to alleviate the current financial crisis that have been adopted may not be effective and, in any event, are expected to be accompanied by other initiatives, including new capital requirements or other regulations, that could materially affect our results of operations, financial condition and liquidity in ways that we cannot predict. In a number of countries in which we operate legislation has been passed in an attempt to stabilise the financial markets, including bank stabilisation programmes by the government and Bank of England in the UK. These programmes, as well as accompanying actions, such as monetary or fiscal actions, of comparable authorities in the US, UK, Eurozone and other countries, may not achieve their intended objectives and may have unintended consequences. These proposals or actions may have other consequences, including material effects on interest rates and foreign exchange rates, which could materially affect our investments, results of operations and liquidity in ways that we cannot predict. The failure to effectively implement, or to withdraw as appropriate, proposals or actions could also increase constraints on the liquidity available in the banking system and financial markets and increase pressure on stock prices, any of which could materially and adversely affect our results of operations, financial condition and liquidity. In the event of future material deterioration in business conditions, we may need to raise additional capital or consider other transactions to manage our capital position or liquidity. In addition, we are subject to extensive laws and regulations that are administered and enforced by a number of different governmental authorities and non-governmental self-regulatory agencies, including the FSA and other regulators. In light of financial conditions, some of these authorities are or may in the future consider enhanced or new regulatory requirements intended to prevent future crises or otherwise assure the stability of institutions under their supervision. These authorities may also seek to exercise their supervisory or enforcement authority in new or more robust ways. All of these possibilities, if they occurred, could affect the way we conduct our business and manage our capital, and may require us to satisfy increased capital requirements, any of which in turn could materially affect our results of operations, financial condition and liquidity.
In the event that the assumptions and calculations underlying the endowments business were materially wrong, a significant change in the provisions required could have a material adverse effect on our business, results of operations and/or financial condition. In December 1999, the FSA announced the findings of its review of mortgage endowments and expressed concern as to whether, given decreases in expected future investment returns, such policies could be expected to cover the full repayment of mortgages. In August 2004, we confirmed our intention to introduce time barring on mortgage endowment complaints, under FSA rules. We now include details of our endowment policyholders’ time bar position within the annual re-projection mailings. Customers will be given at least 12 months’ individual notice before a time bar becomes applicable – double the six months’ notice required by the FSA. Until such time as all claims under such policies are either time-barred or determined, the provisions held by companies in the Group are based on a combination of experience and modelling and are, therefore, only estimates of the expected final outcome. Our aggregate exposure to potential endowment mis-selling claims is linked to the performance of the underlying investments. While our principal exposure to mis-selling claims is in the UK, we sell endowment products in other countries in which we operate, and are therefore also exposed to potential mis-selling claims in these countries.
Our regulated business is subject to extensive regulatory supervision both in the UK and internationally. Our insurance subsidiaries worldwide are subject to detailed and comprehensive government regulation in each of the jurisdictions in which they conduct business. Regulatory agencies have broad administrative power over many aspects of the insurance business, which may include premium rates, marketing and selling practices, advertising, licensing agents, policy forms, capital adequacy and permitted investments. Government regulators are concerned primarily with the protection of policyholders rather than our shareholders or creditors. Insurance laws, regulations and policies currently affecting us and our subsidiaries may change at any time in ways having an adverse effect on our business. Furthermore, we cannot predict the timing or form of future regulatory initiatives. In the UK, our business is subject to regulation by the FSA, which has broad powers under the Financial Services and Markets Act (FSMA), including the authority to grant, vary the terms of, or cancel a regulated firm’s authorisation, to investigate marketing and sales practices and to require the maintenance of adequate financial resources. The FSA has the power to take a range of investigative, disciplinary or enforcement actions, including public censure, restitution, fines or sanctions and to award compensation. The FSA may make enquiries of the companies which it regulates regarding compliance with regulations governing the operation of business and like all UK regulated financial service companies, we face the risk that the FSA could find that we have failed to comply with applicable regulations or have not undertaken corrective action as required. Issues and disputes may arise from time to time from the way in which the insurance industry or fund management industry has sold or administered an insurance policy or other product or in the way in which they have treated policyholders or customers, either individually or collectively. In the UK, any such issues or disputes are typically resolved by the Financial Ombudsman Service (FOS) in the UK, or by litigation for individual policyholders. The FSA may intervene directly, however, where larger groups or matters of public policy are concerned. There have been several industry-wide issues in recent years in which the FSA has intervened directly, including the sale of personal pensions, the sale of mortgage-related endowments and investments in split capital investment trusts. We have successfully completed the reattribution of the ‘inherited estate’ in the UK. The inherited estate refers to the assets of the long-term with-profit funds less the realistic reserves for non-profit policies, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs and guarantees. Following the reattribution, shareholders are exposed to more risk and potential reward. This additional exposure is subject to the same risk management processes that we generally apply. Outside of the UK, our business is regulated by local regulators that often have similar powers to the FSA and could therefore have a similar negative impact on perceptions of us or have a material adverse effect on our business, our results and/or financial condition and divert management’s attention from the day-to-day management of the business. Furthermore, various jurisdictions in which we operate, including the UK, have created investor compensation schemes
Independent auditor’s report 168 Accounting policies 170 Consolidated financial statements 183 Consolidated income statement 183 Pro forma reconciliation of Group operating profit to profit before tax
Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: adequate accounting records have not been kept by the Parent company, or returns adequate for our audit have not been received from branches not visited by us; or the Parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit; or a Corporate Governance Statement has not been prepared by the Company.
(S) Financial investments The Group classifies its investments as either financial assets at fair value through profit or loss (FV) or financial assets available for sale (AFS). The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. The FV category has two subcategories – those that meet the definition as being held for trading and those the Group chooses to designate as FV (referred to in this accounting policy as ‘other than trading’). In general, the FV category is used as, in most cases, the Group’s investment or risk management strategy is to manage its financial investments on a fair value basis. Debt securities and equity securities, which the Group buys with the intention to resell in the short term, are classified as trading, as are non-hedge derivatives (see policy T below). All other securities in the FV category are classified as other than trading. The AFS category is used where the relevant long-term business liability (including shareholders’ funds) is passively managed, as well as in certain fund management and non-insurance operations. Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values. Debt securities are initially recorded at their fair value, which is taken to be amortised cost, with amortisation credited or charged to the income statement. Investments classified as trading, other than trading and AFS are subsequently carried at fair value. Changes in the fair value of trading and other than trading investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS are recognised in other comprehensive income and recorded in a separate investment valuation reserve within equity. Investments carried at fair value are measured using a fair value hierarchy, described in note 22, with values based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. When securities classified as AFS are sold or impaired, the accumulated fair value adjustments are transferred out of the investment valuation reserve to the income statement with a corresponding movement through other comprehensive income. Financial guarantees are recognised initially at their fair value and are subsequently amortised over the duration of the contract. A liability is recognised for amounts payable under the guarantee if it is more likely than not that the guarantee will be called upon.
Equity compensation plans The Group offers share award and option plans over the Company’s ordinary shares for certain employees, including a Save As You Earn plan (SAYE plan), details of which are given in the Directors’ Remuneration Report and in note 30. The Group accounts for options and awards under equity compensation plans, which were granted after 7 November 2002, until such time as they are fully vested, using the fair value based method of accounting (the ‘fair value method’). Under this method, the cost of providing equity compensation plans is based on the fair value of the share awards or option plans at date of grant, which is recognised in the income statement over the expected vesting period of the related employees and credited to the equity compensation reserve, part of shareholders’ funds. Shares purchased by employee share trusts to fund these awards are shown as a deduction from shareholders’ funds at their original cost. When the options are exercised and new shares are issued, the proceeds received, net of any transaction costs, are credited to share capital (par value) and the balance to share premium. Where the shares are already held by employee trusts, the net proceeds are credited against the cost of these shares, with the difference between cost and proceeds being taken to retained earnings. In both cases, the relevant amount in the equity compensation reserve is then credited to retained earnings.
Pro forma reconciliation of Group operating profit to profit before tax continued Operating profit can be further analysed into the following segments: Year ended 31 December 2010 Long-term business £m
Deemed consideration for existing 49.99% interests (equal to fair value of 100% of RBS Life) 727 Carrying value of RBS Collective and RBS Life prior to transaction (586) Cash consideration (3) Attributable costs (10)
Interest in associate 14 6 Investments and property and equipment — 26 Receivables and other financial assets — 20 Prepayments and accrued income — 1 Total assets 14 53
Net investment income Interest and similar income From financial instruments designated as trading and other than trading 6,914 7,258 From AFS investments and financial instruments at amortised cost 2,215 2,150 9,129 9,408 Dividend income 1,616 1,753 Other income from investments designated as trading Realised gains on disposals 292 693 Unrealised gains and losses (policy J) Gains/(losses) arising in the year 689 (1,184) (Gains)/losses recognised in prior periods and now realised (292) (693) 397 (1,877) 689 (1,184) Other income from investments designated as other than trading Realised gains/(losses) on disposals 1,633 (2,561) Unrealised gains and losses (see policy J) Gains arising in the year 9,192 14,481 (Gains)/losses recognised previously and now realised (1,633) 2,561 7,559 17,042 9,192 14,481 Realised gains and losses on AFS investments Gains recognised previously as unrealised in equity (see policy S and note 35) 160 310 Other gains/(losses) arising in the year — — 160 310 Net income from investment properties Rent 921 908 Expenses relating to these properties (51) (47) Realised gains on disposal 45 339 Fair value gains/(losses) on investment properties (note 21) 421 (1,084) 1,336 116 Realised gains on loans 12 24 Foreign exchange gains and losses on investments other than trading (54) 238 Other investment (expenses)/income (87) 9
Deferred tax In respect of pensions and other post-retirement obligations (23) (45) In respect of fair value losses on owner-occupied properties (10) — In respect of unrealised gains on investments 179 241 146 196
(vii) Italy (non-life) The recoverable amount exceeds the carrying value of the cash-generating unit including goodwill. Key assumptions used for the calculation were: Budgeted operating profit for an initial three-year period represents the operating profit in the most recent business plans, approved by management and as such reflects the best estimate of future profits based on both historical experience and expected growth rates for the Italian economy; Growth rate of 3% represents the rate used to extrapolate future cash flows beyond the business plan period; and A risk-adjusted discount rate of 10.8%.
Gross amount At 1 January 2009 3,524 216 1,224 827 5,791 Additions 17 — 30 — 47 Acquisition of subsidiaries (20) — 3 — (17) Disposals — — (33) (20) (53) Movement in shadow adjustment (484) — — — (484) Transfers — — 431 (431) — Transfers from property and equipment (note 20) — — 23 — 23 Foreign exchange rate movements (329) (17) (71) (50) (467)
Share of results before tax — (53) — (53) Share of tax — (1) — (1)
(c) Additional information Summarised aggregate financial information on the Group’s interests in its associates is as follows: £m
Financial investments and loans (notes 25 and 23) Loans — 21,028 — 21,028 22,046 — 43,074 Fixed maturity securities 116,577 42,196 8,709 167,482 — — 167,482 Equity securities 43,455 4,649 972 49,076 — — 49,076 Other investments (including derivatives) 29,982 4,080 2,668 36,730 — — 36,730
Financial liabilities Non-participating investments contracts (note 40) 39,924 1,203 162 41,289 2,167 — 43,456 Borrowings (note 49) — 5,108 — 5,108 9,892 — 15,000 Derivative liabilities (note 50) 117 1,968 14 2,099 — — 2,099
(iii) General In all of the above transactions, the Company and its subsidiaries are not obliged to support any losses that may be suffered by the note holders and do not intend to provide such support. Additionally, the notes were issued on the basis that note holders are only entitled to obtain payment, of both principal and interest, to the extent that the available resources of the respective special purpose securitisation companies, including funds due from customers in respect of the securitised loans, are sufficient and that note holders have no recourse whatsoever to other companies in the Aviva Group.
RRSA 255,589 2010, 2011 and 2012 BRDSA 43,231 2010 to 2012 OATTV 55,051 2010 to 2012
(iii) Shares to satisfy awards and options Prior to March 2003, it was the practice to satisfy awards and options 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 Group’s 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. Further details are given in note 31.
Long-term business Insurance contracts (160,946) 3,650 (157,296) (154,058) 4,299 (149,759) Participating investment contracts (69,482) 2 (69,480) (66,559) — (66,559) Non-participating investment contracts (48,305) 1,463 (46,842) (43,456) 1,258 (42,198)
Long-term business provisions Participating 64,043 — 64,043 64,702 — 64,702 Unit-linked non-participating 21,450 — 21,450 21,268 — 21,268 Other non-participating 75,453 — 75,453 68,088 — 68,088
(a) UK With-profit business The valuation of with-profit business uses the methodology developed for the Realistic Balance Sheet, adjusted to remove the shareholders’ share of future bonuses. The key elements of the Realistic Balance Sheet methodology are the with-profit benefit reserve (WPBR) and the present value of the expected cost of any payments in excess of the WPBR (referred to as the cost of future policyrelated liabilities). The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities. The WPBR for an individual contract is generally calculated on a retrospective basis, and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract. For a small proportion of business, a prospective valuation approach is used, including allowance for anticipated future regular and final bonuses. The items included in the cost of future policy-related liabilities include: Maturity Guarantees; Guaranteed Annuity Options; GMP underpin on Section 32 transfers; and Expected payments under Mortgage Endowment Promise.
In the Provident Mutual and With-Profits sub-funds in UKLAP, this is offset by the expected cost of charges to WPBR to be made in respect of guarantees. The cost of future policy-related liabilities is determined using a market-consistent approach and, in the main, this is based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market-related assumptions (for example, persistency, mortality and expenses) are based on experience, adjusted to take into account future trends. The principal assumptions underlying the cost of future policy-related liabilities are as follows: Future investment return A ‘risk-free’ rate equal to the spot yield on UK government securities, plus a margin of 0.1% is used. The rates vary, according to the outstanding term of the policy, with a typical rate as at 31 December 2010 being 3.78% (2009: 4.35%) for a policy with ten years outstanding.
(iii) Assumptions Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are generally set by skilled claims technicians, applying their experience and knowledge to the circumstances of individual claims. They take into account all available information and correspondence regarding the circumstances of the claim, such as medical reports, investigations and inspections. Claims technicians set case estimates according to documented claims department policies and specialise in setting estimates for certain lines of business or types of claim. Claims above certain limits are referred to senior claims handlers for authorisation.
Key elements of the release from prior accident year general insurance and health net provisions during 2010 were: £101 million from the UK, including group reinsurance business, mainly due to an improved view of group reinsurance liabilities, and favourable development on personal property claims, and commercial property and commercial liability large claims.
Present value 2,293 182 210 169 221 421 591 916 1,438 1,809 3,392 11,642 Cumulative effect of foreign exchange movements — 29 31 47 52 85 122 111 (16) 17 — 478 Effect of acquisitions — 7 8 50 10 18 15 27 8 — — 143
Aviva plc Annual Report and Accounts 2010 41 – Financial guarantees and options continued The most significant of these contracts is the AFER Eurofund which has total liabilities of £34 billion at 31 December 2010 (2009: £33 billion). Up to 2010, the guaranteed bonus on this contract equalled 75% of the average of the last two years’ declared bonus rates. Starting from year end 2010, Aviva France and the AFER association will agree the guaranteed bonus on this contract at every year end for the following year. This bonus was 3.55% for 2010 (2009: 3.67%) compared with an accounting income from the fund of 4.01% (2009: 4.62%). Non-AFER contracts with guaranteed surrender values had liabilities of £13 billion at 31 December 2010 (2009: £12 billion) and all guaranteed annual bonus rates are between 0% and 4.5%.
The discount rate and pension increase rate are the two assumptions that have the largest impact on the value of the liabilities, with the difference between them being known as the net discount rate. For each country, the discount rate is based on current average yields of high-quality debt instruments taking account of the maturities of the defined benefit obligations. A 1% increase in this rate (and therefore the net discount rate) would reduce the liabilities by £1.6 billion and the service cost for the year by £36 million. It would also reduce the interest cost on those liabilities by £2 million.
Aviva plc Annual Report and Accounts 2010 48 – Pension obligations continued (iii) Investments in Group-managed funds and insurance policies Plan assets include investments in Group-managed funds in the consolidated statement of financial position of £116 million (2009: £101 million) in the UK scheme, and insurance policies with other Group companies of £160 million and £1,445 million (2009: £157 million and £1,351 million) in the UK and Dutch schemes respectively. The Dutch insurance policies are considered nontransferable under the terms of IAS 19 and so have been treated as other obligations to staff pension schemes within provisions (see note 47). The treatment in the relevant parts of the financial statements is as follows: Plan assets – The treatment of these funds and policies in the consolidated statement of financial position is described above.
Current service cost (160) (131) Past service cost (10) (25) Gains on curtailments 347 38 Gains on settlements — 11
Aviva plc Annual Report and Accounts 2010 48 – Pension obligations continued (viii) Movements in the scheme deficits and surpluses Movements in the pension schemes’ deficits and surpluses comprise: Scheme assets £m
Deficits in the schemes at 1 January 9,338 (9,951) (613) (1,402) (2,015) Employer contributions 294 — 294 (62) 232 Employee contributions 18 (18) — (8) (8) Benefits paid (392) 392 — 46 46 Current and past service cost (see (iv) above) — (156) (156) — (156) Gains/(losses) on curtailments (see (iv) above) (19) 68 49 — 49 Credit/(charge) to finance costs (see (iv) above) 466 (591) (125) (58) (183) Actuarial gains/(losses) (see (iv) above) 543 (1,701) (1,158) 18 (1,140) Transfers (1) 1 — 2 2 Exchange rate movements on foreign plans (142) 144 2 113 115
Core structural borrowings, at amortised cost 6,066 5,489 Operational borrowings, at amortised cost 4,193 4,404 Operational borrowings, at fair value 4,690 5,107 8,883 9,511
Payables arising out of direct insurance 1,426 1,585 Payables arising out of reinsurance operations 571 544 Deposits and advances received from reinsurers 773 928 Bank overdrafts 760 926 Derivative liabilities (note 58) 2,382 2,099 Bank customer accounts 4,780 4,618 Bank deposits received from other banks 1,772 1,933 Amounts due to brokers for investment purchases 498 793 Obligations for repayment of collateral received (notes 25d(i) & 58c) 4,825 3,602 Obligations under stock repurchase arrangements (note 25d(ii)) 853 664 Other financial liabilities 1,652 2,850
Long-term savings 21,793 20,792 General insurance and health 5,613 4,562 Fund management 465 269 Other business 178 (246) Corporate1 (1,521) (1,327)
Derivative financial instruments of £2,274 million, representing positions to mitigate the impact of adverse market movements. Other assets of £1,936 million, includes deposits with credit institutions and minority holdings in property management undertakings.
Reinsurance credit exposures The Group is exposed to concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures, by limiting the reinsurers that may be used and applying strict limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that the overall risk is within appetite. The Credit Approvals Committee has a monitoring role over this risk. The Group’s largest reinsurance counterparty is Swiss Reinsurance Company Ltd (including subsidiaries). At 31 December 2010, the reinsurance asset recoverable, including debtor balances, from Swiss Reinsurance Company Ltd was £1,284 million.
Long-term business Insurance contracts – non-linked 132,400 12,025 42,609 50,206 27,560 Investment contracts – non-linked 63,197 3,254 13,970 26,901 19,072 Linked business 82,769 82,769 — — — General insurance and health 17,121 7,222 6,453 2,872 574
Aviva plc Annual Report and Accounts 2010 57 – Risk management continued Management of life insurance risks 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 the aggregation of risk ceded to individual reinsurers is within appetite for credit risk.
(ii) At 31 December 2010, the Company has two wholly owned subsidiaries, both incorporated in Great Britain. These are General Accident plc and Aviva Group Holdings Limited. Aviva Group Holdings Limited is an intermediate holding company, whilst General Accident plc no longer carries out this function. The principal subsidiaries of the Aviva Group at 31 December 2010 are listed on pages 40 and 41.
(iii) Tax credited to equity Tax credited to equity comprises £17 million (2009: £17 million) in respect of coupon payments on the direct capital instruments.
Within 1 year 504 306 810 483 328 811 1 to 5 years — 1,214 1,214 — 1,235 1,235 5 to 10 years 634 1,402 2,036 1,074 1,540 2,614 10 to 15 years 1,243 1,062 2,305 1,288 1,349 2,637 Over 15 years 2,956 2,171 5,127 2,544 1,092 3,636
Where subordinated debt is undated, the interest payments have not been included beyond 15 years. Annual interest payments for these borrowings are £73 million (2009: £74 million). The fair value of the subordinated debt at 31 December 2010 was £4,370 million (2009: £4,372 million). The fair value of the 9.5% guaranteed bonds 2016 at 31 December 2010 was £248 million (2009: £238 million). The fair value of the commercial paper is considered to be the same as its carrying value. Further details of these borrowings and undrawn committed facilities can be found in the Group consolidated financial statements, note 49.
5,363 Regional operating profit 4,559 4,336 (168) Corporate centre (143) (108) (772) Group debt costs and other interest (656) (636)
Assets 3,943 Goodwill 3,391 3,381 3,263 Acquired value of in-force business and intangible assets 2,806 2,860 3,182 Additional value of in-force long-term business1 2,737 3,475 2,319 Interests in, and loans to, joint ventures 1,994 1,701 748 Interests in, and loans to, associates 643 1,281 872 Property and equipment 750 753 335 Deferred tax assets 288 218 230 Current tax assets 198 359 9,645 Receivables 8,295 9,632 7,060 Deferred acquisition costs and other assets 6,072 5,621 4,292 Prepayments and accrued income 3,691 3,604 29,599 Cash and cash equivalents 25,455 25,176 16 Assets of operations classified as held for sale 14 53
The reduced adjustment for share of joint ventures and associates follows the purchase of the remaining shares in RBS Life. The adjustment for assets to regulatory value relates mainly to the US, where the larger negative adjustment in 2010 reflects the increased market value of bonds under IFRS. The DAC and DIR adjustment relates mainly to the UK and US, where DAC balances held for IFRS increased. The difference in technical provisions relates mainly to Delta Lloyd and the US, reflecting differences between the IFRS and local solvency reserving bases.
E2 – Geographical analysis of MCEV operating earnings continued Asia Pacific MCEV operating earnings were 8% higher at £109 million (2009: £101 million, £45 million excluding the contribution from Australia) as higher value of new business was partly offset by lower other operating variances.
Operating assumption changes: – maintenance expense5 83 31 (3) (11) 140 132 — 289 220 509 (88) 8 512 – project and other related expenses5 (92) — — — — — — — (6) (6) — — (98) – mortality/morbidity6 2 57 7 1 7 (2) — 70 (470) (400) (64) 17 (445) – lapses7 (3) (12) (17) 39 13 (49) (7) (33) (52) (85) 6 (12) (94) – other (8) 4 — (2) 8 — 2 12 (12) — — — (8)
Opening group MCEV 2,204 7,546 5,308 15,058 New business value (1,250) 901 707 358 Expected existing business contribution (reference rate) — — 318 318 Expected existing business contribution (in excess of reference rate) — — 852 852 Transfers from VIF and required capital to the free surplus 1,811 (587) (1,224) — Experience variances 107 76 (148) 35 Assumption changes (147) (21) 158 (10) Expected return on shareholders’ net worth 126 192 — 318 Other operating variances 47 7 274 328
E10 – Geographical analysis of value of new business The value generated by new business written during the period is the present value of the projected stream of after-tax distributable profit from that business, including expected profit between point of sale and the valuation date. The value of new business has been calculated using economic assumptions at the point of sale which has been implemented with the assumptions being taken as those appropriate to the start of each quarter. For contracts that are re-priced more frequently, weekly or monthly economic assumptions have been used. The operating assumptions are consistent with those used to determine the embedded value. The value of new business is shown after the effect of the frictional costs of holding required capital, and after the effect of the costs of residual nonhedgeable risks on the same basis as for the in-force covered business.
E18 – Principal assumptions (a) Economic assumptions – Deterministic calculations Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each reporting period. In setting the risk-free rate we have, wherever possible, used the mid-price swap yield curve for an AA-rated bank. The curve is extrapolated if necessary to get rates suitable to the liabilities. For markets in which there is no reliable swap yield curve the relevant government bond yields are used. For certain business, swap rates are adjusted for a ‘liquidity premium’ in deriving the risk-free rates, and these adjustments are shown below the reference rate table. Required capital is shown as a multiple of the EU statutory minimum solvency margin or equivalent. The principal economic assumptions used are as follows: Reference rate (spot, swap rates) and expense inflation
Expense assumptions Management expenses and operating expenses of holding companies attributed to life and related businesses have been included in the MCEV calculations and split between expenses relating to the acquisition of new business, the maintenance of business in-force and project expenses. Future expense assumptions include an allowance for maintenance expenses and a proportion of recurring project expenses. Certain expenses of an exceptional nature, when they occur, are identified separately and are generally charged as incurred. No future productivity gains have been anticipated. Where subsidiary companies provide administration, investment management or other services to our life businesses, the value of profits or losses arising from these services have been included in the embedded value and value of new business.
Borrowings excluding non-recourse funding – MCEV basis 8,617 7,671 Less: Operational financing by businesses (2,551) (2,182)
United Kingdom 254 25 (22) 28 (39) 65 France 100 — (6) 6 (15) 6 Ireland 1 — 1 (1) 2 (2) Italy 42 — (3) 2 (6) 1 Poland 29 — (2) 2 (4) 5 Spain 43 1 (2) 2 (4) 1 Other Europe 15 — (1) 1 (2) 3 Aviva Europe 230 1 (13) 12 (29) 14 Delta Lloyd (41) 1 11 (12) 17 (31) Europe 189 2 (2) — (12) (17) North America (126) 15 (10) 4 (40) (16) Asia Pacific 41 — 13 (20) 22 (61)
Scope of the audit of the consolidated MCEV financial statements An audit involves obtaining evidence about the amounts and disclosures in the consolidated MCEV financial statements sufficient to give reasonable assurance that the consolidated MCEV financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the consolidated MCEV financial statements.
Look-through basis Inclusion of the capitalised value of profits and losses arising from subsidiary companies providing administration, investment management and other services to the extent that they relate to covered business.
Dividends Dividends on Aviva ordinary shares are normally paid in May and November; please see the table below for dividend dates in respect of the financial year ended 31 December 2010. Dividends paid on Aviva preference shares are normally paid in March, June, September and December; please visit www.aviva.com/preferenceshares for the latest dividend payment dates. Holders of ordinary and preference shares receive any dividends payable in sterling and holders of ADRs will receive any dividends payable in US dollars.
ADRs Aviva has a sponsored ADR facility administered by Citibank, NA. Any queries regarding Aviva ADRs can be directed to Citibank by post, telephone or email.