We’re here to help people, businesses and communities get back on their feet when the unexpected happens. It is therefore our responsibility to make sure that our 317-year-old business will be there for our customers long into the future.
I believe there is a clear space in the market for a simple proposition: a diversified insurer that can provide sustainable and growing cash flows and that has good options for growth. Whilst many will focus on valuation methodologies – such as MCEV, TEV and EV – Aviva will focus the business on progressive cashflow generation. My intention is that Aviva will have a robust balance sheet with strong and predictable cash flows, diversified earnings and capital, and lower leverage. Following the progress made on the disposal programme, we are now a more focused portfolio of businesses. Some are cash generators, such as the UK, France and Canada, with upside potential whilst others provide opportunities for growth such as Poland, Turkey, and Singapore. Put simply, our investment thesis is about progressive cashflow and growth, in that order.
The de-risking and strengthening of our balance sheet is entirely aligned with our investment thesis and cashflow focus. The immediate priority, therefore, is to reduce the Group’s leverage and to pay an appropriate dividend.
Progress against turnaround plan We have made good progress improving our capital strength and narrowing the Group’s focus.
IFRS loss after tax £mIFRS loss after tax § This measures the total profit or loss during the year including operating profit and non-operating items such as investment variances, profit/loss from disposals and impairments.
General insurance combined operating ratio % (excluding Delta Lloyd and RAC)
General insurance combined operating ratio (COR) § This is a standard industry metric used to measure the profitability of general insurance business. A percentage below 100% indicates that the general insurance business is being written at an underwriting profit.
§ We sell products directly and through partners and third parties
§ Customers invest their savings with us. We manage these investments to provide them with an income for a more secure future
§ Making sure that customers stay with us for the long term is important to the future success of our business
Aviva Spain is the country’s fifth largest long-term insurer by gross written premiums. We sell protection, long-term savings and pensions, health and accident insurance both directly and through bancassurance networks. On a constant currency basis operating profit increased by 7%, while life and pensions sales have decreased by 28%. A substantial part of this reduction has been the result of management action focusing on the efficient use of capital. The business has focused on retaining highly profitable protection business, while developing capital efficient products, including unit linked savings. IRR remains strong at 21% (2011: 23%). In December, we reached a settlement with Bankia to transfer to them our entire holding in Aseval, a Spanish life insurance company.
Group restructuring During the year, the Group undertook the following actions which impacted the overall results and performance:  The Group changed its organisational reporting structure, and the Group’s operating segments were changed to align them with this revised structure. Further details of the reportable segments are given in ‘Financial statements – note 4 – Segmental information’.
Adjusted operating profit for non-long-term insurance business is based on expected investment returns on financial investments backing shareholder funds over the period. Expected investment returns are calculated for equities and properties by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of return. This rate of return is the same as that applied for the long-term business expected returns. The longer-term return for other investments is the actual income receivable for the period. Changes due to market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, are disclosed as non-operating items. The impact of changes in the discount rate applied to claims provisions is also treated outside adjusted operating profit. Adjusted operating profit is not a substitute for profit before income taxes and non-controlling interests in earnings or net income as determined in accordance with IFRS. Our definition of adjusted operating profit may differ from similar measures used by other companies, and may change over time. The table below presents our consolidated adjusted operating profit for the three years ended 31 December 2012, 2011 and 2010, as well as the reconciliation of adjusted operating profit to loss/profit before tax attributable to shareholders’ profits under IFRS.
Italy, Spain and Other 414 334 400 Higher growth markets 202 229 170
Adjusted operating profit before tax (excl Delta Lloyd as an associate) 1,776 1,932 1,824
Short term fluctuations and economic assumption changes on non-long term business of £7 million positive (2011: £266 million negative) reflected favourable market movements. The impairment of goodwill, associates and joint ventures was £60 million in 2012 (2011: £392 million). This includes an impairment of £147 million in respect of the Group’s Indian associate, an impairment of £76 million in relation to goodwill on the Spanish business, an impairment of £33 million in relation to the Italian business and a small write down of £9 million in respect of the Group’s Korean joint venture. These impairments were partly offset by a reversal of the impairment recognised in 2011 in respect of our associate investment in Delta Lloyd of £205 million. Loss on disposal of subsidiaries and associates was £164 million (2011: £565 million profit). This includes a loss of £129 million relating to the disposal of our associate stake in Delta Lloyd. Integration and restructuring costs are £461 million (2011: £261 million). This includes costs relating to restructuring and transformation activity that has been taken to align our business operations with our strategy, including the Group’s Simplify programme (£165 million), £130 million in Ireland which includes expenses associated with the merging of the UK and Irish business, £24 million for restructuring in Aviva Investors, £25 million in respect of restructuring activities and £117 million relating to preparing the businesses for the implementation of Solvency II. Exceptional items in 2012 were £nil (2011: £57 million unfavourable).
Profit before tax attributable to shareholders’ profits 25 551 1,396 1 Following a review of the classification of contracts issued by the Group’s Italian long-term business, certain portfolios have been reclassified from participating insurance to participating investment contracts for all years presented. There is no impact on the result for any year presented as a result of this reclassification.
Expenses (from continuing operations) Year ended 31 December 2012 Claims and benefits paid net of reinsurance in 2012 decreased by £779 million, or 3%, to £23,601 million (2011: £24,380 million) mainly reflecting lower claims payments in our life businesses. Changes in insurance liabilities in 2012 was a charge of £430 million (2011: £2,284 million charge). This was primarily due to changes in economic and non-economic assumptions. The change in investment contract provisions was a charge of £4,450 million (2011: £1,478 million credit) as a result of improved investment market conditions causing an increase in contract liabilities. The change in unallocated divisible surplus (“UDS”) was a charge of £6,316 million (2011: £2,721 million credit). UDS in certain funds in Italy and Spain were negative as at 31 December 2012. The main driver of the movement is a charge in France due to an increase in fixed interest asset values from lower risk-free rates and credit spreads. Fee and commission expense, other expenses and finance costs increased by £171 million to £8,052 million (2011: £7,881 million). See ‘Financial Statements IFRS – Note 6 – Details of expenses’.
Canada The table below presents sales, adjusted operating profit and IFRS profit before tax attributable to shareholders for the three years ended 31 December 2012, 2011 and 2010.
Year ended 31 December 2011 Long-term insurance and savings sales decreased £1,865 million, or 26%, to £5,181 million (2010: £7,046 million) and was primarily driven by management actions to reduce sales of capital intensive participating business. In Italy, challenging conditions and management actions to focus on capital efficient products and move the product mix led to a fall in participating business sales, with life sales down £1,463 million, or 33%, to £2,993 million (2010: £4,456 million).
Aviva Investors The table below presents the investment sales, adjusted operating profit, profit before tax attributable to shareholders’ profits under IFRS and funds under management of Aviva Investors for the three years ended 31 December 2012, 2011 and 2010. As set out in ‘Financial Statements IFRS – note 3 – Subsidiaries’, the internal asset management operations of Aviva Investors North America are being sold with the US life business and have been classified within discontinued operations.
Fund management operating profit 39 50 60 Long-term insurance and savings business –
Year ended 31 December 2011 Aviva Investors’ adjusted operating profit for fund management was £50 million, a decrease of £10 million, or 17% (2010: £60 million). The fall in adjusted operating profit reflected the impact of ongoing investment in our global infrastructure and clients reevaluating their risk appetite in the face of the continuing economic downturn which, in some instances, lead them to reallocate towards lower fee-bearing asset classes, with a consequential impact on revenue. Profit before tax attributable to shareholders from continuing operations was £36 million, an increase of £7 million, or 24% (2010: £29 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 (including discontinued operations) were £263 billion, an increase of £3 billion, or 1% (2010: £260 billion). The increase was a result of positive net funded sales, and capital appreciation, partially offset by the impact of the sale of our business in Australia.
Delta Lloyd Delta Lloyd is a financial services provider in the Netherlands and Belgium, operating in the life insurance and pensions, general insurance, fund management and selected banking markets. The Group ceased to control Delta Lloyd on 6 May 2011 and its results for 2011 up to that date and prior years are presented as discontinued operations. As explained in ‘Financial Statements IFRS – note 3 – Subsidiaries’, and ‘Financial Statements IFRS – note 19 – Interests in, and loans to, Associates’, for the period from 7 May 2011 to 5 July 2012, the Group had an associate interest in Delta Lloyd. From 6 July 2012, following a further selldown, the Group’s stake was treated as a financial investment. The Group’s share of Delta Lloyd’s results as an associate and its interest in Delta Lloyd as a financial investment are both included in ‘other Group activities’ within continuing operations. In January 2013, the Group sold its remaining stake in Delta Lloyd.
Total Greece, Ireland, Portugal, Italy and Spain 6.1 6.9 0.9 1.3 7.0 8.2
Total capital employed is financed by a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. At 2012 we had £21.4 billion (2011: £20.8 billion) of total capital employed in our trading operations measured on an MCEV basis. In May 2012 we issued US$650 million of Fixed Rate Tier 1 Notes. The Notes are perpetual and may be called from November 2017. The Notes qualify as Innovative Tier 1 capital under current regulatory rules and are expected to be treated as Fixed Rate Tier 1 capital under Solvency II transitional rules. The transaction had a positive impact on Group IGD solvency and Economic Capital measures. In June 2012 US$300 million of Lower Tier 2 floating rate notes were redeemed at first call. Financial leverage, the ratio of external senior and subordinated debt to MCEV capital and reserves, was 35.1% (2011: 36.7%). Fixed charge cover, which measures the extent to which external interest costs, including subordinated debt interest and preference dividends, are covered by MCEV operating profit was 5.1 times (2011: 8.9 times). The impact of the agreement to sell Aviva USA has meant that financial leverage under IFRS is higher at 52.6% (FY11: 37.1%).
Risk and capital management continuedAviva plc Annual report and accounts 2012
Future accounting developments We continue to take an active role in the development of new accounting standards, via industry forums and working parties, and reviewing and providing comment on proposals from the IASB. Phase II of the IASB’s project on insurance contracts continues to be the most significant area of development for us alongside the ongoing project to revise accounting for financial instruments (IFRS 9), given the important interaction between the two. We fully support the timely development of global standards for both insurance contract accounting and financial instruments that reflect the economics of our business, and continue actively to engage in the debate, working directly and through the CFO Forum of leading European insurers to achieve this. We continue to monitor other major IASB projects, including revenue recognition and leasing.
Governance Aviva has a well-established governance structure providing strong leadership and direction. Our Corporate Responsibility Committee is chaired by non-executive director, Gay Huey Evans, and comprises two other non-executive directors, Scott Wheway and Euleen Goh. Ms Goh retired at the end of 2012. The Committee reviews strategy and policy, receives market and functional reports four times a year and approves this report. In 2012, it received a report from all market groups and paid close attention to the embedding environmental, social and governance issues into our mainstream investment practices as well as our policy against investing in cluster munitions manufacturers. The Committee also received reports from the IT and procurement teams, as well as reviewing the health, safety and wellbeing strategy. The Corporate Responsibility Committee’s report can be found on page 103. The Aviva Board receives both annual and ad hoc updates on corporate responsibility strategy, activities and progress. Our corporate responsibility programme is regularly on the agenda at executive management committees. The group and market CEOs have corporate responsibility key performance indicators included in their role profiles. 10% of all senior managers’ bonuses are targeted on leadership and engagement Employee Promise Survey scores.
Customers % of businesses that are in or above the upper quartile relative to the local market average (NPS score)
% of employees who rate us favourably on engagement index 64% 63% 68% 68% Meet/exceed GFS benchmark (2012: 71%)
Relative CO2e data – The relative comparison uses the 2012 basis for reporting (as above), and the adjusted relative data for 2011 encompassing structural changes that occurred in 2011.
Environmental incidents During 2012 there were no environmental incidents as a result of our operations (2011: none).
Indirect impacts Acting in our customers’ best interests is in the best interests of our business. Recent analysis has shown us that there is a strong correlation between customer advocacy and both brand awareness and consideration. There are two key benefits from this: higher awareness and consideration can lead to better business performance through increased new business; and indicates a potentially more sustainable business since a solid reputation creates longer-term protection for a brand. Through the Systems Thinking approach, our UK business has seen improved efficiency as a result of projects to improve customer advocacy. For example, our Direct GI business reduced complaints by 66% as a result of focusing on customer needs and a market leading maturity proposition in the Life business delivered improved NPS, retention and reduced overheads. In the last year, the proportion of our people who say they would recommend our products and services remains slightly below the Global Financial Services benchmark. Our analysis tells us that employee advocacy and customer advocacy are highly correlated, therefore improving our performance is a high priority if we are to build our reputation with our people and our customers.
PwC Independent Assurance Report to the Directors of Aviva plc The Directors of Aviva plc (“Aviva”) engaged us to provide limited assurance on the information described below and set out in Aviva’s Annual Report and Accounts for the year ended 31 December 2012.
Professional standards applied2 and level of assurance3 We have used ISAE 3000 (limited level of assurance) and we have complied with the ICAEW Code of Ethics.
PricewaterhouseCoopers LLP, Chartered Accountants, London 6 March 2013 1 The maintenance and integrity of Aviva’s website is the responsibility of the Directors; the work carried out by us does not involve consideration of these matters and, accordingly, we accept no responsibility for any changes that may have occurred to the reported Selected Information or Reporting Criteria when presented on Aviva’s website.
Kirstine Cooper Group general counsel and company secretary (Born August 1964) Joined Aviva in 1991 and is the group general counsel and company secretary for Aviva plc and heads the Office of the Chairman. She was appointed to the Group Executive in May 2012 and leads the legal and company secretarial function for Aviva globally. She is a lawyer and worked in the legal function at Aviva’s legacy companies before leading the property division of General Accident and the group legal function of CGU for eight years. She was formerly deputy group company secretary and legal counsel of Aviva plc. Since her appointment as group general counsel and company secretary she has created Aviva's first global legal leadership team.
The directors submit their Annual Report and Accounts for Aviva plc, together with the consolidated financial statements of the Aviva group of companies, for the year ended 31 December 2012. The Performance Review on pages 25 to 60, the Corporate Responsibility Report on pages 61 to 76, Shareholder Information on pages 121 to 144 (which includes the risks relating to our business), the Corporate Governance Report on pages 89 to 94, and the Directors’ Remuneration Report on pages 104 to 120 are incorporated into this Directors’ Report by reference and, together with this Directors’ Report constitute the Business Review required under the Companies Act 2006 and the Management Report required under Disclosure and Transparency Rule 4.1.5R. Details of material acquisitions and disposals made by the Group during the year are contained in note 3.
Directors’ interests and indemnity arrangements At no time during the year did any director hold a material interest in any contract of significance with the Company or any of its subsidiary undertakings other than an indemnity provision between each director and the Company and employment contracts between each executive director and a Group company. There is no arrangement or understanding with any shareholder, customer, supplier, or any other external party, to appoint a director or a member of the Group Executive. The Company has purchased and maintained throughout the year, directors’ and officers’ liability insurance in respect of itself and its directors. The directors also have the benefit of the indemnity provision contained in the Company’s articles of association. The Company has executed deeds of indemnity for the benefit of each director of the Company, and each person who was a director of the Company during the year, in respect of liabilities that may attach to them in their capacity as directors of the Company or of associated companies. These indemnities were granted at different times according to the law in place at the time and where relevant are qualifying third-party indemnity provisions as defined by section 234 of the Companies Act 2006. These indemnities were in force throughout the year and are currently in force. Details of directors’ remuneration, service contracts, employment contracts and interests in the shares of the Company are set out in the Directors’ Remuneration Report.
The UK Corporate Governance Code As a UK listed company, Aviva seeks to comply with the UK Corporate Governance Code 2010 (the Code). An amended version of the Code was issued in September 2012 which is applicable to companies with a UK premium listing with financial years beginning on or after 1 October 2012; the Company will report on its compliance with the 2012 version of the Code in its 2013 Annual Report and Accounts. It is the Board’s view that the Company has been fully compliant throughout the accounting period with the relevant provisions of the Code with the exception of the following:  Provision A.2.1 states that the roles of chairman and chief executive should not be exercised by the same individual and provision A.3.1 states that the chairman should be independent on appointment to the Board. John McFarlane joined the Board as chairman designate in 2011 with the intention that he would take over the chairmanship of the Company on the retirement of Lord Sharman in June 2012. However, due to the unforeseen departure of Andrew Moss in May 2012, the Board asked John McFarlane to take on executive responsibility for running the Company in the interim period until a new Group CEO was appointed. As a result from 1 July 2012 until 1 January 2013 John McFarlane acted as executive chairman. He became non-executive chairman on 1 January 2013 on the appointment of Mark Wilson as Group CEO. The Board believes that this noncompliance with the Code was justified in the circumstances given the timing of Andrew Moss’ departure and the need to ensure the continued effective operation of the Company until a new Group CEO could be identified and appointed. The Board was satisfied that there was a sufficient balance between executive and non-executive directors on the Board during this period to ensure that no one individual had unfettered decision-making powers.
Third line The Internal Audit function provides independent and objective assessment on the robustness of the RMF and the appropriateness and effectiveness of internal control to the Audit and Risk Committees, business unit audit committees and the Board. Further information on the activities of the Internal Audit function is contained within the Audit Committee Report.
The independent non-executive directors meet without executive directors present at least once annually.
This Report provides details of the role of the Risk Committee and the work it has undertaken during the year.
Committee activities during 2012 The work of the Committee followed an agreed annual work plan, which evolved throughout the year in response to the changing macro-economic and regulatory environment and changes in the Company’s strategy. The group company secretary and the group chief capital and risk officer assisted the Committee chairman in planning the Committee’s work, and ensured that the Committee received information and papers in a timely manner.
Preparing for Solvency II The Committee closely monitored the evolving position in relation to the implementation of the Solvency II Directive. Notwithstanding the eventual agreement in October 2012 to delay implementation until 2014, the Committee continued to have oversight of all aspects of the Group’s programme to implement the Solvency II Directive. Throughout the year, the Committee received detailed progress reports on the development of the models used to calculate economic capital requirements and the techniques used to validate the results. The Committee also reviewed the detailed contingency plans in relation to the Group’s internal model and had oversight of the programme of board training and preparations for legal entity sign-off to the Group’s Internal Model Approval Process (IMAP) submission. Following confirmation of the delay to implementation of the Solvency II Directive, the Committee reviewed the revised management programme to deliver enhancements to the economic capital model in the interim period.
Committee performance and effectiveness The Committee undertook an annual review of its performance and effectiveness which concluded that overall the Committee was effective in carrying out its duties. In addition to undertaking its agreed annual programme of activities, the Committee agreed that its priorities for 2013 should be to continue to focus on capital and liquidity issues; to monitor the Group’s preparedness for Solvency II; to review the quality and mix of the Group’s asset portfolio; to monitor the Group’s customer agenda and to oversee management actions to improve IT resilience.
Linking pay to the Group’s strategic plan We believe our remuneration policy and practice is now more closely linked to the main strategic priorities of the Group:  Improve financial performance –
Scott Wheway (Chairman) 12 100% Michael Hawker2 10 83% Gay Huey Evans3 8 100% Leslie Van de Walle4 4 100% Notes 1 This shows the percentage of meetings which the Committee member attended during the year whilst a member of the Committee. 2 Michael Hawker was unable to attend two meetings held in April 2012 due to prior commitments and the meetings being called at short notice. 3 Gay Huey Evans attended all of the meetings held following her appointment to the Committee on 2 May 2012. 4 Leslie Van de Walle resigned from the Committee on 2 May 2012.
Table 4: Total ED remuneration in respect of 2012 Patrick Regan Trevor Matthews
Further explanatory notes, and information on former EDs who served during 2012, are set out on page 110.
Aviva recognises that pay was not sufficiently linked to performance in 2011. As set out in the Remuneration Committee chairman’s letter, following consultation with our major institutional shareholders, a number of changes have been made:  We introduced ‘underpin’ metrics in respect of bonuses for 2012 and have committed to consider these ‘underpin’ metrics for future years (until any alternative arrangements are agreed following consultation) to ensure annual bonus pay-outs are more closely aligned to the shareholder experience. Taking into account performance against these measures, the Remuneration Committee will use its discretion to revise bonus outcomes where appropriate. Such discretion, if applied, would only be used to reduce the outcome;  Future buyouts will be made on a ‘like-for-like’ basis in line with best market practice; and  We have also reviewed and changed senior management contracts and the ‘good leaver’ definition in our share plan rules.
Period In line with the requirement of the UK Corporate Governance Code, all NEDs are subject to annual reelection by shareholders at each AGM.
Table 18: LTIP, ABP, OATTV Plan, CFO Recruitment Share Awards Plan and Conditional Share Award
One Aviva, Twice The Value bonus plan 20093 64,486 — — 64,486 — 245.00 Mar-12
Lord Sharman 38,42614 40,17614 Leslie Van de Walle 17,48516 17,48516 Russell Walls 8,000 8,000 — — — — — — — — Scott Wheway 13,579 13,579 — — — — — — — — Mark Wilson — — — — — — — — — —
Net cash and cash equivalents At 31 December 2012, total consolidated net cash and cash equivalents, net of bank overdrafts, amounted to £23,248 million, a increase of £847 million over £22,401 million in 2011.
Contractual obligations for future repairs and maintenance on investment properties are £nil (2011: £nil, 2010: £1 million). We have capital commitments to our joint ventures of £157 million
We have a significant exposure to third parties that owe us money, securities or other assets who may not perform under their payment obligations. These parties include private sector and government (or government-backed) issuers whose debt securities we hold in our investment portfolios (including mortgage-backed, asset-backed, government bonds and other types of securities), borrowers under residential and commercial mortgages and other loans, re-insurers to which we have ceded insurance risks, customers, trading counterparties, and counterparties under swap and other derivative contracts. We also execute transactions with other counterparties in the financial services industry, including brokers and dealers, commercial and investment banks, hedge funds and other investment funds, insurance groups and institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty. In addition, with respect to secured transactions, our credit risk may be increased when the collateral held by us cannot be realised or is liquidated at prices insufficient to recover the full amount of the loan or other value due. Losses or impairments to the carrying value of these assets could materially and adversely affect our financial condition and results of operations. We use reinsurance and hedging programs to hedge various risks, including certain guaranteed minimum benefits contained in many of our long-term insurance and fund management products. These programs cannot eliminate all of the risks and no assurance can be given as to the extent to which such programs will be effective in reducing such risks. Our obligations under our fund management and insurance products are not changed by our hedging activities and we are liable for our obligations even if our derivative counterparties do not pay us. Defaults by such counterparties could have a material adverse effect on our financial condition and results of operations. We are also susceptible to an adverse financial outcome from a change in third-party credit standing. As well as having a potential impact on spreads, rating movements can trigger solvency and accounting impacts. For additional information about our investments, see ‘Performance review – Analysis of investments’.
As a holding company, we are dependent on our operating subsidiaries to cover operating expenses and dividend payments. As a holding company, Aviva plc has no substantial operations of its own. Its principal sources of funding are dividends from subsidiaries, shareholder-backed funds and any amounts that may be raised through the issuance of debt and commercial paper. Our insurance and fund management operations are generally conducted through direct and indirect subsidiaries. Certain subsidiaries have regulatory restrictions that may limit the payment of dividends, which in some circumstances could limit our ability to pay dividends to shareholders. The inability of our subsidiaries to pay dividends in an amount sufficient to enable us to meet our cash requirements at the holding company level could have a material adverse effect on our business.
(AVIF) and intangible assets 193 18 Interests in, and loans to, joint ventures 194 19 Interests in, and loans to, associates 196 20 Property and equipment 197 21 Investment property 198 22 Fair value methodology 198 24 Securitised mortgages and related assets 203 25 Financial investments 204 27 Deferred acquisition costs, other assets, prepayments and accrued income 208 28 Assets held to cover linked liabilities 209 29 Ordinary share capital 210 30 Group‘s share plans 210 31 Shares held by employee trusts 214 32 Preference share capital 214 33 Direct capital instruments and fixed rate tier 1 notes 215 34 Merger reserve 215 35 Other reserves 216 36 Retained earnings 216 37 Non-controlling interests 217 38 Contract liabilities and associated reinsurance 217 39 Insurance liabilities 218 40 Liability for investment contracts 228 41 Financial guarantees and options 229 42 Reinsurance assets 232 43 Effect of changes in assumptions and estimates during the year 233 44 Unallocated divisible surplus 234 45 Tax assets and liabilities 235 47 Pension obligations 237 49 Payables and other financial liabilities 246 50 Other liabilities 246 51 Contingent liabilities and other risk factors 246 53 Group capital structure 248 54 Statement of cash flows 249 55 Capital statement 251 56 Risk management 253 57 Derivative financial instruments and hedging 264 58 Assets under management 266 59 Related party transactions 266 Financial statements of the Company 267 Statement of changes in equity 267 Statement of financial position 268 Statement of cash flows 269 Notes to the Company’s financial statements 270
(iv) IFRS 11, Joint Arrangements IFRS 11 defines and establishes accounting principles for joint arrangements. It distinguishes between two types of joint arrangements – joint ventures and joint operations – based on how rights and obligations are shared by parties to the arrangements. The full impact of the changes has yet to be fully assessed but is not expected to have a significant impact on the Group’s equity and profit before tax for the year. The standard has been endorsed by the EU.
Investment vehicles In several countries, the Group has invested in a number of specialised investment vehicles such as Open-ended Investment Companies (OEICs) and unit trusts. These invest mainly in equities, bonds, cash and cash equivalents, and properties, and distribute most of their income. The Group’s percentage ownership in these vehicles can fluctuate from day to day according to the Group’s and third-party participation in them. Where Group companies are deemed to control such vehicles, with control determined based on an analysis of the guidance in IAS 27 and SIC 12, they are consolidated, with the interests of parties other than Aviva being classified as liabilities. These appear as ‘Net asset value attributable to unitholders’ in the consolidated statement of financial position. Where the Group does not control such vehicles, and these investments are held by its insurance or investment funds, they do not meet the definition of associates (see below) and are, instead, carried at fair value through profit and loss within financial investments in the consolidated statement of financial position, in accordance with IAS 39, Financial Instruments: Recognition and Measurement. As part of their investment strategy, the UK and certain European long-term business policyholder funds have invested in a number of property limited partnerships (PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a Group subsidiary. Accounting for the PUTs and PLPs as subsidiaries, joint ventures or other financial investments depends on the shareholdings in the GPs and the terms of each partnership agreement. Where the Group exerts control over a PLP, it has been treated as a subsidiary and its results, assets and liabilities have been consolidated. Where the partnership is managed by a contractual agreement such that there is joint control between the parties, notwithstanding that the Group’s partnership share in the PLP (including its indirect stake via the relevant PUT and GP) may be greater than 50%, such PUTs and PLPs have been classified as joint ventures. Where the Group holds minority stakes in PLPs, with no significant influence or control over their associated GPs, the relevant investments are carried at fair value through profit and loss within financial investments.
Contract liabilities Deposits collected under non-participating investment contracts are not accounted for through the income statement, except for the investment income attributable to those contracts, but are accounted for directly through the statement of financial position as an adjustment to the investment contract liability. The majority of the Group’s contracts classified as nonparticipating investment contracts are unit-linked contracts and are measured at fair value. Certain liabilities for non-linked nonparticipating contracts are measured at amortised cost. The fair value liability is determined in accordance with IAS 39, using a valuation technique to provide a reliable estimate of the amount for which the liability could be settled between knowledgeable willing parties in an arm’s length transaction, subject to a minimum equal to the surrender value. For unit-linked contracts, the fair value liability is equal to the current unit fund value, plus additional non-unit reserves if required based on a discounted cash flow analysis. For non-linked contracts, the fair value liability is based on a discounted cash flow analysis, with allowance for risk calibrated to match the market price for risk. Amortised cost is calculated as the fair value of consideration received at the date of initial recognition, less the net effect of payments such as transaction costs and front-end fees, plus or minus the cumulative amortisation (using the effective interest rate method) of any difference between that initial amount and the maturity value, and less any write-down for surrender payments. The effective interest rate is the one that equates the discounted cash payments to the initial amount. At each reporting date, the amortised cost liability is determined as the value of future best estimate cash flows discounted at the effective interest rate.
(P) Investment property Investment property is held for long-term rental yields and is not occupied by the Group. Completed investment property is stated at its fair value, which is supported by market evidence, as assessed by qualified external valuers or by local qualified staff of the Group in overseas operations. Changes in fair values are recorded in the income statement in net investment income. As described in accounting policy O above, investment properties under construction are included within property and equipment, and are stated at cost less any impairment in their values until construction is completed or fair value becomes reliably measurable.
Treasury shares Where the Company or its subsidiaries purchase the Company’s share capital or obtain rights to purchase its share capital, the consideration paid (including any attributable transaction costs net of income taxes) is shown as a deduction from total shareholders’ equity. The Group’s only such holding comprises shares purchased by employee trusts to fund certain awards under the equity compensation plans described in accounting policy AA above. Gains and losses on sales of own shares are charged or credited to the treasury share account in equity.
(AF) (Loss)/earnings per share Basic losses/earnings per share is calculated by dividing net income available to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding the weighted average number of ordinary shares purchased by the Group and held as Treasury shares. Earnings per share has also been calculated on the adjusted operating profit before impairment of goodwill and other adjusting items, after tax, attributable to ordinary shareholders, as the directors believe this figure provides a better indication of operating performance. Details are given in note 14. For the diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares, such as convertible debt and share options granted to employees. Potential or contingent share issuances are treated as dilutive when their conversion to shares would decrease net (losses) earnings per share.
Other comprehensive income/(expense) from continuing operations: Investments classified as available for sale
Total comprehensive (expense)/income for the year from continuing operations (1,030) 813 Total comprehensive (expense)/income for the year from discontinued operations1 (2,780) (57)
Other: Group debt costs and other interest (659) (12) (671) (648) (13) (661)
Adjusted for the following: Investment return variances and economic assumption changes
Cash generated from continuing operations 54a 2,676 111 Tax paid (428) (425)
Operating profit/(loss) before tax attributable to shareholders 977 501 471 254 334 229 53 (730) 2,089 414 2,503 1 Impairment losses, and reversal of such losses, recognised directly in other comprehensive income were £2 million and £nil respectively. 2 Discontinued operations represent the operations of the United States Life assurance and related asset management activities, and the results of Delta Lloyd up until its deconsolidation in May 2011. 3 Aviva Investors operating profit includes £3 million profit relating to the Aviva Investors Pooled Pension business. 4 Following a review of the classification of contracts issued by the Group’s Italian long-term business, certain portfolios have been reclassified from participating insurance to participating investment contracts for all years presented. There is no impact on the result for any year presented as a result of this reclassification. 5 Other group activities include Delta Lloyd as an associate.
Impairment losses on AVIF and tangible assets (37) (43) — — (80) Inter-segment expenses (116) (11) — — (127)
Assets of operations classified as held for sale 42,564 11 28 — 42,603
Other liabilities, including inter-segment liabilities 8,778 (2,661) 334 6,611 13,062 Liabilities of operations classified as held for sale 41,237 2 13 159 41,411
Other liabilities, including inter-segment liabilities 12,430 (3,170) 374 6,819 16,453 Liabilities of operations classified as held for sale 363 — — — 363
Employees in continuing operations 31,211 34,608 33,639 37,038 Employees in discontinued operations 1,911 1,954 1,941 3,802
Results of impairment testing Following the impairment business review conducted during the year the US long-term cash generating unit was tested for impairment and the Directors concluded that the goodwill associated with this cash generating unit was no longer recoverable. As a result, an impairment of £782 million was recognised during the period, reducing the carrying value of goodwill to £nil. Subsequently, the US business was classified as held for sale and recorded at its fair value less costs to sell (see Note 3). Management concluded that the goodwill associated with the Spanish long-term cash generating unit, excluding Aseval which is held for sale, is no longer fully recoverable. An impairment of £76 million has been recognised reducing the carrying value of this cash generating unit to its recoverable amount as a result of a reduction to management’s estimates for future profitability due to current economic circumstances. Similarly, as a result of the test of the Italian long-term and general businesses, impairments of £27 million and £6 million respectively have been recognised. Other than the CGUs noted above, the recoverable amount exceeds the carrying value of the cash generating units including goodwill.
23 – Loans This note analyses the loans our Group companies have made, the majority of which are mortgage loans.
Loans at fair value Fair values have been calculated by discounting the future cash flows using appropriate current interest rates for each portfolio of mortgages. Further details of the fair value methodology are given in note 22. The change in fair value of these loans during the year, attributable to a change in credit risk, was £491 million loss (2011: £555 million loss). The cumulative change attributable to changes in credit risk to 31 December 2012 was £2,665 million loss (2011: £2,174 million loss). Non-securitised mortgage loans include £4.1 billion (2011: £3.7 billion) relating to UK primary healthcare and PFI businesses which are secured against General Practitioner premises, other primary health-related premises or other emergency services related premises. For all such loans, government support is provided through either direct funding or reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially over the term of the loan. Although the loan principal is not government-guaranteed, the nature of these businesses and premises provides considerable comfort of an ongoing business model and low risk of default.
(a) Description of current arrangements In a UK long-term business subsidiary, Aviva Equity Release UK Limited (AER), the beneficial interest in certain portfolios of lifetime mortgages has been transferred to five special purpose securitisation companies (the ERF companies), in return for initial consideration and, at later dates, deferred consideration. The deferred consideration represents receipts accrued within the ERF companies after meeting all their obligations to the note holders, loan providers and other third parties in the priority of payments. The purchases of the mortgages were funded by the issue of fixed and floating rate notes by the ERF companies. All the shares in the ERF companies are held by independent companies, whose shares are held on trust. Although AER does not own, directly or indirectly, any of the share capital of the ERF companies or their parent companies, it retains control of the majority of the residual or ownership risks and rewards related to the assets of the securitisation companies, and they have therefore been treated as subsidiaries in the consolidated financial statements. AER has no right to repurchase the benefit of any of the securitised mortgage loans, other than in certain circumstances where AER is in breach of warranty or loans are substituted in order to effect a further advance. AER has purchased subordinated notes and granted subordinated loans to some of the ERF companies. In addition, Group companies have invested in loan notes issued by the ERF companies. These have been eliminated on consolidation through offset against the borrowings of the ERF companies in the consolidated statement of financial position. 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.
Acquisition costs deferred during the year 841 2,221 4 3,066 1,012 2,414 5 3,431
(vi) Recruitment and retention share award plan awards These are conditional awards granted under the Aviva Recruitment and Retention Share Award Plan in relation to the recruitment or retention of senior managers excluding Executive Directors. The awards vest in tranches on various dates and vesting is conditional upon the participant being employed by the Group on the vesting date and not having served notice of resignation. If a participant’s employment is terminated due to resignation or dismissal, any tranche of the award which has vested within the 12 months prior to the termination date will be subject to clawback and any unvested tranches of the award will lapse in full. No new Aviva plc ordinary shares will be issued or transferred from treasury to satisfy vested awards under this plan.
Recruitment and Retention Share Award Plan Number of shares Vesting period
Cost debited to shareholders’ funds At 1 January 13,284,476 43 8,415,487 32 Acquired in the year 10,269,904 33 9,396,602 29 Distributed in the year (13,500,865) (44) (4,527,613) (18)
(iv) United States Indexed and total return strategy products In the United States, the Group writes indexed life and deferred annuity products. These products guarantee the return of principal to the policyholder and credit interest based on certain indices, primarily the Standard & Poor’s 500 Composite Stock Price Index. A portion of each premium is used to purchase derivatives to hedge the growth in interest credited to the policyholder. The derivatives held by the Group and the options embedded in the policy are both carried at fair value. The US Treasury swap curve plus a risk adjustment of 1.06% (2011: 2.48%) for indexed life and 1.57% (2011: 2.51%) for indexed deferred annuities is used as the discount rate to calculate the fair value of the embedded options. The risk adjustment calculation is based on market spreads on senior long-term unsecured Aviva plc debt with a reduction to reflect policyholder priority over other creditors in case of default. The amount of change in the fair value of these embedded options resulting from the risk adjustment in 2012 is an increase of £269 million (2011: £453 million), and is principally attributable to market factors rather than instrument specific credit risk. At 31 December 2012, the total liabilities for indexed products were £23 billion (2011: £22 billion), including liabilities for the embedded option of £2.7 billion (2011: £2.6 billion). If interest rates were to increase by 1%, the provision for embedded options would decrease by £151 million (2011: £152 million) and, if interest rates were to decrease by 1%, the provision would increase by £167 million (2011: £167 million). The Group has certain products that credit interest based on a total return strategy, whereby policyholders are allowed to allocate their premium payments to different asset classes within the general account. The Group guarantees a minimum return of premium plus approximately 3% interest over the term of the contracts. The linked general account assets are fixed maturity securities, and both the securities and the contract liabilities are carried at fair value. At 31 December 2012, the liabilities for total return strategy products were £0.8 billion (2011: £0.9 billion). The Group offers an optional lifetime guaranteed income benefit focused on the retirement income segment of the deferred annuity marketplace to help customers manage income during both the accumulation stage and the distribution stage of their financial life. At 31 December 2012, a total of £11.0 billion (2011: £10.1 billion) in indexed deferred annuities have elected this benefit, taking steps to guarantee retirement income.
Carrying amount at 31 December 248 245 43 – Effect of changes in assumptions and estimates during the year Certain estimates and assumptions used in determining our liabilities for insurance and investment contract business were changed from 2011 to 2012, affecting the profit recognised for the year with an equivalent effect on liabilities. This note analyses the effect of the changes. This note only allows for the impact on liabilities and related assets, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and AVIF, and does not allow for offsetting movements in the value of backing financial assets.
The impact of interest rates for long-term business relates primarily to the UK and Ireland driven by the reduction in valuation interest rates. This had the effect of increasing liabilities and hence a negative impact on profit. The overall impact on profit also depends on movements in the value of assets backing the liabilities, which is not included in this disclosure. The impact of tax and other assumptions relates mainly to strengthening of credit default assumptions for commercial mortgages backing UK annuity business.
(iii) The movement in the net deferred tax liability was as follows: £m £m
– RAC SAPS series 1, including allowances for future improvement 65 87.9 90.9 89.9 91.9
Canada UP1994, with Projection Scale AA applied on a generational basis 65 84.7 86.2 87.1 87.9
Actuarial (losses)/gains from continuing operations (830) 996 Actuarial gains from discontinued operations — 11
Notes to the consolidated financial statements continued 49 – Payables and other financial liabilities This note analyses our payables and other financial liabilities at the end of the year.
Total future minimum sub-lease payments expected to be received under non-cancellable sub-leases 53 56 53 – Group capital structure The Group maintains an efficient capital structure from a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings, consistent with our overall risk profile and the regulatory and market requirements of our business. This note shows where this capital is employed.
Change in unallocated divisible surplus 6,316 (2,721) Interest expense on borrowings 653 689 Net finance charge on pension schemes 82 87 Foreign currency exchange (gains)/losses (128) 35
(a) Risk management framework The risk management framework (RMF) in Aviva forms an integral part of the management and Board processes and decision-making framework across the Group. The key elements of our risk management framework comprise risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles and responsibilities; and the processes we use to identify, measure, manage, monitor and report (IMMMR) risks, including the use of our risk models and stress and scenario testing. For the purposes of risk identification and measurement, and aligned to Aviva’s risk policies, risks are usually grouped by risk type: credit, market, liquidity, life insurance, general insurance, asset management and operational risk. Risks falling within these types may affect a number of metrics including those relating to balance sheet strength, liquidity and profit. They may also affect the performance of the products we deliver to our customers and the service to our customers and distributors, which can be categorised as risks to our brand and reputation. To promote a consistent and rigorous approach to risk management across all businesses we have a set of risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements for the Group’s worldwide operations. On a semi-annual basis the business chief executive officers and chief risk officers sign-off compliance with these policies and standards, providing assurance to the relevant oversight committees that there is a consistent framework for managing our business and the associated risks. A regular top-town key risk identification and assessment process is carried out by the risk function. This includes the consideration of emerging risks and is supported by deeper thematic reviews. This process is replicated at the business unit level. The risk assessment processes are used to generate risk reports which are shared with the relevant risk committees. Risk models are an important tool in our measurement of risks and are used to support the monitoring and reporting of the risk profile and in the consideration of the risk management actions available. We carry out a range of stress (where one risk factor, such as equity returns, is assumed to vary) and scenario (where combinations of risk factors are assumed to vary) tests to evaluate their impact on the business and the management actions available to respond to the conditions envisaged. Roles and responsibilities for risk management in Aviva are based around the ‘three lines of defence model’ where ownership for risk is taken at all levels in the Group. Line management in the business is accountable for risk management, including the implementation of the risk management framework and embedding of the risk culture. The risk function is accountable for quantitative and qualitative oversight and challenge of the IMMMR process and for developing the risk management framework. Internal Audit provides an independent assessment of the risk framework and internal control processes. Board oversight of risk and risk management across the Group is maintained on a regular basis through its Risk Committee. The Board has overall responsibility for determining risk appetite, which is an expression of the risk the business is willing to take. Risk appetites are set relative to capital, liquidity and franchise value at Group and in the business units. Economic capital risk appetites are also set for each risk type. The Group’s position against risk appetite is monitored and reported to the Board on a regular basis. The oversight of risk and risk management at the Group level is supported by the Asset Liability Committee (ALCO), which focuses on business and financial risks, and the Operational Risk Reputation Committee (ORRC) which focuses on operational and reputational risks. Similar committee structures with equivalent terms of reference exist in the business units.
(iv) Loans The Group loan portfolio principally comprises:  Policy loans which are generally collateralised by a lien or charge over the underlying policy;  Loans and advances to banks which primarily relate to loans of cash collateral received in stock lending transactions.
Net of reinsurance excluding Delta Lloyd (300) 285 (125) 50 (50) (25) (285)
Net of reinsurance excluding Delta Lloyd (275) 275 (125) 50 (55) (130) (290)
Shares issued in lieu of dividends 29 & 36 21 — (21) — — — 307 307 — 307 Employee trust shares distributed
Called up capital 936 926 905 Share premium account 29b 1,165 1,173 1,194
(ii) Deferred tax A deferred tax asset of £180 million has been recognised in the Company at 31 December 2012 at 23% (2011: £nil). As announced in the 2012 Autumn Statement, the rate is expected to reduce further to 21% from 1 April 2014 and this would reduce the deferred tax asset to £164 million. The Company has gross unrecognised tax losses of £nil (2011: £296 million) and other temporary differences of £50 million (2011: £245 million).
Maturity analysis of contractual undiscounted cash flows Principal £m Interest £m Total £m Principal £m Interest £m Total £m Principal £m Interest £m Total £m
 Details of each resolution to be considered at the meeting are provided in the Notice of AGM, which is available on the Company’s website at www.aviva.com/agm.
Direct credit of dividend payments  If you would like to have your cash dividends paid directly into your bank or building society account, please visit www.aviva.com/dividendmandate for more information or contact Computershare using the contact details overleaf.
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