Our products help 34 million customers** enjoy the peace of mind that comes from managing the risks of everyday life. With us, they can save for a more comfortable retirement and protect – with insurance – the people and things that are important to them.
* Based on aggregate 2011 UK life and pensions sales (PVNBP) and general insurance gross written premiums ** On an ongoing basis 2012 Annual report and accounts We provide our annual report online which allows us to reduce the paper we print and distribute.
View our reports online 2012 Corporate responsibility report Find out more about our commitment to acting as a responsible member of the international business community.
Financial statements IFRS Independent auditors’ report 146 Accounting policies 148 Consolidated financial statements 160 Consolidated income statement 160 Consolidated statement of comprehensive income 161 Reconciliation of Group operating profit to (loss)/profit for the year 162 Consolidated statement of changes in equity 164 Consolidated statement of financial position 166 Consolidated statement of cash flows 167 Notes to the consolidated financial statements 168 Financial statements of the Company 267
Aviva has great strengths which we can build on. We have a focused portfolio of businesses under a strong brand; some, such as the UK, France and Canada are great cash generators, while others represent growth potential, such as Poland, Turkey and Singapore.
We will now take Aviva to the next phase of its turnaround.
Narrow focus When we assessed our business we identified 58 distinct revenueearning business areas. 15 of them were performing particularly well. 27 weren’t realising their full potential and 16 were performing below acceptable levels. We decided to: Focus on businesses where we can produce attractive returns Improve underperforming businesses Exit businesses which we do not consider central to our future growth
Improve performance We concluded we must deliver better revenue growth, lower losses and claims, and improved profitability. We decided to: Develop new revenue growth, mainly in our core UK, European and Canadian markets
Mark has started very strongly. His focus going forward is on cash flow, earnings growth, and reducing leverage. This has my full endorsement as well as that of the Board.
Strong progress and momentum in reshaping the Group In mid-2012, we launched a radical repositioning of the Group, setting out a relatively ambitious programme to bring the Group to a stronger, more stable position with improved earnings performance and operating cash generation in 2014 and beyond: § Refocus on core, exit 16 non-core segments, and turnaround 27 segments
Reducing leverage The announced sale of the US, though strategically imperative, nevertheless resulted in a sharp reduction in net assets per share and a consequent increase in tangible leverage from 41% to 50%, which is high relative to the sector. We have therefore revised our forward plans to bring this to below 40%, by increasing retained earnings and by reducing debt.
£1,888m Adjusted operating profit before tax on a continuing basis £1,427m Adjusted operating profit before tax on a continuing basis after integration and restructuring costs £3bn loss Overall, an IFRS loss after tax primarily driven by the write-down from the disposal of our US business 19p Total dividend
New plan of Focus, Strengthen, Perform announced on 5 July 2012
On 1 January 2013, we began the simplification of the Group’s legal structure to improve governance over the UK general insurance business. This, when completed by the end of May 2013 is expected to formalise an interdivisional balance of around £5.8 billion in the form of a collateralised loan. In response to these pressures, we have decided to bring down the level of both internal and external debt to lower, more prudent, levels.
The decision to reduce the dividend At the same time, constraints, including regulatory, on capital and liquidity, are putting greater demands on resources, as does our transformation programme, particularly this year. While central liquidity balances are likely to improve with the settlement with Bankia and the completion of the sale of the US business, Group resources nevertheless contain insufficient provision for unknown risks, our desire to pay down internal and external debt, and to maintain prudent capital and liquidity levels. In the circumstances therefore, we have taken the difficult decision to reduce the dividend to a level that can be cash covered in 2014 and to enhance the availability of resources for important long-term structural requirements. Accordingly we declared a final 2012 dividend of 9 pence per share, bringing the full-year dividend down by 27% to 19 pence from 26 pence and the final by 44% from 16 pence. I regret this has become necessary, but can assure shareholders we took this decision only after examining scrupulously all alternatives. The need to ensure that the current and future dividend is sustainable and covered by operating cash generation is fundamental. The broad transformation of the Group in the midst of continuing economic uncertainty also requires that we maintain and grow the level and flexibility of capital and liquid resources.
Improved outlook The turnaround programme continues apace. We are taking decisive action on costs and in improving business performance. 2013 though remains a transitional year through significant restructuring charges and the loss of earnings from subsidiaries earlier disposed. We have forward business plans to 2015 that are robust, show significant improvement, and that the new dividend level is cash covered. Increased retained earnings and stronger liquidity should also permit reasonable reduction in internal and external debt levels, thus bringing overall leverage to a more reasonable level. Management is demonstrating professional execution as well as prudence. I am confident about the future of Aviva, and for our prospects going forward.
In September 2012, announced the sale of our business in Sri Lanka
Robust balance sheet Our focus is to ensure that we have a robust balance sheet which underpins the cash flows by managing our balance sheet exposures actively, focusing on economic capital as the principal measure. The outstanding issue to be addressed is our internal and external leverage position. We have a clear plan to tackle this.
Financial simplicity The insurance business is perceived as complex. Aviva has also for some time been criticised for the complexity of its financial disclosure and business structure, and this problem has been exacerbated by our internal leverage. Our plans to reduce internal leverage and reorganise our structure will provide some of the clarity our shareholders desire.
Valuation upside from gradual UK & European recovery The majority of Aviva’s business is concentrated in the UK and Europe. Over the last 12 months we have spent considerable time improving our risk profile. As a result, we are well positioned to benefit from a gradual UK and European recovery.
Exposure to growth markets in Europe and Asia We have a number of businesses which offer growth potential in markets such as Poland,
Key statistics in 2012 £23bn Gross written premiums £311bn Total funds under management
Estimated proforma economic capital surplus ratio, as at 31 December 2012
Turkey, and Singapore. These will be managed with a view to value growth under strict capital controls.
Reducing expenses We will continue to focus on improving cost efficiencies and, particularly, on reallocating resources to initiatives where we can earn the highest returns and strong cash flows. We will deliver in excess of £400 million cost savings.
Rebased dividend For our cashflow and growth investment thesis to be delivered we must tackle the issue of leverage. As such we have only one course of action. The dividend needs to be rebased with reference to growth in cash flows and earnings. For analysts covering the stock I am cognisant that there are two schools of thought. On the one hand, we have those that would suggest that with our successful disposal programme we have enough liquidity to pay dividends at the historic rate. Others would suggest that the business earnings are not sufficient to fund the dividend and therefore the dividend is too tight. The reality is that both of these arguments are right – we have enough short term liquidity to be able to pay the dividend, but cash flows from the business are too tight to sustain the historic level. The recent disposals have resulted in our leverage ratio increasing further with the reduction in net assets. This leverage issue must be addressed and leverage will be reduced. As a result of this, we have declared a final 2012 dividend of 9 pence per share, from 16 pence. This brings the full-year dividend down to 19 pence per share, from 26 pence. In addition we have also decided to eliminate the scrip. I acknowledge that whilst rebasing the dividend will disappoint some shareholders, this will be mitigated to some degree by eliminating the dilutive scrip element. This is a difficult decision and is absolutely necessary to ensure Aviva is put on a sound footing for the future. The removal of the scrip will stop further
shareholder dilution, given that the scrip has had a dilutive impact of 16% over the last eight years. This measure improves earnings per share growth, is consistent with improving financial simplicity, and gives clarity to cash flows and the dividend. Looking ahead, Aviva will have a progressive dividend policy, with reference to growth in cash flows and earnings. We would expect the 2013 interim dividend to rebase in line with the percentage reduction in the 2012 final dividend.
Simplicity § Continue to strengthen the management team § Communicate a clear customer proposition § Continue the disposal programme § Strategic realignment of Aviva Investors, a core business
Strength § Reduce external and internal leverage § Maintain economic capital surplus within target range (160%–175%)
Loss after tax The overall result for the year was a loss after tax of £3.1 billion (2011: profit after tax £60 million). For continuing operations, the loss after tax was £202 million.
1 In 2012, operating profit on an underlying basis represents Aviva Group excluding Delta Lloyd and the United States. 2011 operating profit on an underlying basis represents Aviva Group excluding Delta Lloyd, United States and RAC
Net asset value IFRS net asset value per share was 278 pence (2011: 435 pence) reflecting the loss after tax, actuarial movements on the pension scheme, payment of the dividend and adverse foreign exchange movements. On a proforma basis (including the transfer of Aseval to Bankia in Spain) IFRS NAV is 284p. The MCEV net asset value decreased to 422 pence (2011: 441 pence) primarily driven by operating profits, positive investment variances, actuarial movements on the pension scheme, payment of the dividend and adverse foreign exchange movements. The impact of the agreement to sell Aviva USA is positive under MCEV and offsets the goodwill and intangible impairments in other markets.
IGD solvency surplus improved to £3.8bn as at 31 December 2012 £
On a pro forma basis estimated economic capital surplus coverage ratio of 172% as at 31 December 2012
Increased net cash remittances from the businesses to Group to £0.9bn in 2012 £
Net UK funds under management increased by £2.2 billion in 2012. This was driven by strong sales of individual annuities and GPP giving rise to net inflows of £1.2 billion for our non-profit business. Market and other movements were £5.3 billion, offset by net outflows from the UK with-profits book of £4.3 billion. In France, life operating profit increased to £335 million (2011: £323 million) despite the weakening of the euro during the year. Although new business income reduced to £120 million (2011: £142 million) as a result of volume reductions, we reduced expenses and profitability was broadly stable. Participating business income was stable at £333 million with a small increase in average reserves (on a constant currency basis) and improved profitability. In Italy, overall operating profit increased to £159 million (2011: £140 million). Our continued focus on improving product design and capital efficiency in a tough economic environment impacted both new business volumes and profitability. New business income reduced to £64 million (2011: £121 million). This was more than offset by improved expected return of £65 million (2011: £47 million) and lower expenses of £169 million (2011: £232 million). In Spain, overall life operating profit was stable at £215 million (2011: £216 million) despite the weakening of the euro during the year. Within this total underwriting margin increased to £142 million (2011: £139 million) offset by a reduction in investment return to £143 million (2011: £158 million). The continuing difficult economic conditions and contraction in the mortgage market have resulted in a significant reduction in new business volumes. However, new business profitability was maintained and there were stable returns from the in-force portfolio. The agreed transfer of the Aseval business to Bankia will reduce new business volumes following the completion of the transaction in 2013.
General insurance and health General insurance and health operating profit increased marginally to £893 million (2011: £935 million, excluding RAC; £860 million). This is due to good performances in both the UK and Canada driven by the continued progress we have made in underwriting, claims and cost management. The combined operating ratio was 97.0% (2011: 97.5%). In the UK, general insurance profit levels improved by 3%, excluding RAC, and the combined operating ratio was stable at 98% (2011: 98% excluding RAC) despite an increase in weather-related claims of £31 million compared to long-term average and latent claims reserve strengthening of £53 million. Our performance in UK general insurance continues to benefit from our focus on underwriting excellence and active management of claims costs and expenses. Our general insurance business in Canada delivered another strong performance with an improvement in the combined operating ratio to 93% (2011: 95%) and a 9% increase in operating profits to £276 million (2011: £254 million) as a result of favourable prior year
Operating capital generation and dividends paid to Group by business unit * a dividend expected from UK Life of £300 million will be paid in 2013 ** includes Aviva Re, US and Delta Lloyd
§ This measures our operating profitability and excludes non-operating items such as impairments, investment volatility and losses arising on disposals.
Total adjusted operating profit § Adjusted operating profit before tax for 2012 was £2,127 million (2011: £2,503 million).
§ Adjusted operating profit after restructuring costs was £1,659 million (2011: £2,235 million).
§ Operating profit on a continuing basis after restructuring costs was £1,427 million (2011: £1,828 million). This includes restructuring costs of £461 million (2011: £261 million) mainly driven by the transformation of the businesses, the integration of the Ireland and UK businesses and preparations for Solvency II.
§ The largest driver of the overall loss was the agreed sale of our US business. At HY12 we recognised an impairment of goodwill and intangibles of £0.9 billion related to that business, and at the full year we recognised a further impairment of £2.4 billion.
£3,050m loss £60m profit £1,892m profit 1 The Group’s accounting policy for operating profit (also referred to as adjusted operating profit) remains consistent with prior periods and is set out in the basis of preparation.
In the following pages you can read more about our 2012 performance, business model and the context in which we operate.
§ Operating capital generation from the in-force life portfolio was £2.1 billion (2011: £2.3 billion) while non-life contributed £0.6 billion (2011: £0.6 billion), with £0.7 billion (2011: £0.8 billion) invested in new business.
Return on equity shareholders’ funds § Return on equity shareholders’ funds is calculated as total after-tax operating return, on opening equity shareholders’ funds.
Customer advocacy § Our Relationship Net Promoter Score® measures the likelihood of a customer recommending Aviva. It gives us a single, simple measure of customer experience which can drive improvements in customer loyalty.
§ Our 2012 survey shows that the majority of our businesses are on par with, or better than, the market average for insurance companies globally.
Employee engagement and leadership § Employee engagement represents the degree to which people have a favourable opinion of Aviva as a place to work.
§ We measure employees’ views on Aviva through our annual global ‘Employee Promise’ survey and use the results to determine and implement actions with the aim of continuous improvement.
§ Over time, our goal is to meet or exceed the global financial services benchmark norms.
We contributed £11 million to communities in 2012, through volunteering and donations to organisations such as Railway Children, Save the Children and Oxfam. Our own community programme, Street to School, has helped more than 649,000 children across the world since 2009, exceeding our five year target in just three years.
§ We have been in the insurance business for more than 300 years
§ We provide a wide range of health insurance and general insurance products including motor and home
Managing our business: Aviva’s brand attracts and retains customers and employees
While insurance can appear to be a complicated business, the core of what we do is straightforward.
Established and developing life insurance markets present significant opportunities We operate in established insurance markets which provide opportunities for insurers to manage existing wealth, such as in the UK and France. We also operate in fast-growing, developing life insurance markets such as China, Poland and Turkey, which present opportunities for insurers to help customers accumulate assets.
European citizens retiring in 2011–2051 would need to find an additional €1.9 trillion in savings every year to fully close the pensions gap
Source: FSA, FFSA; Swiss Re, growth rates based on local currency.
Aviva is the UK’s leading life insurer. In the UK life business, operating profit was down 3% to £887 million although on an underlying basis this improved by 2% in the year. We improved our life new business IRR to 18% reflecting our focus on improving profitability and capital allocation. This improvement was a result of the UK life business’s focus on capital efficiency, including the withdrawal from large-scale bulk purchase annuities and other products, pricing actions on core products, cost savings and retention. This resulted in a 20% increase in operating capital generation to £662 million. Despite difficult market conditions, long-term sales, excluding bulk purchase annuities, were up slightly at £11,953 million. This was driven by a strong performance in our core markets of “at retirement” (annuities and equity release) and protection where we grew sales respectively by 12% and 20%, which offset a reduction in bond sales. We continued to expand our distribution footprint, including an exclusive five year agreement with Tesco to distribute protection products.
“In 2012, despite difficult economic conditions, we improved the profitability and capital efficiency of our business whilst maintaining a strong trading performance in our core products.
§ UK combined operating ratio of 98% (2011: 98% excluding RAC)
§ UK net written premiums of £4,062m (2011: £4,110m excluding RAC)
“Solid results in the UK, with satisfying progress being made to integrate and transform our Irish business.
France § Life operating profit £335m (2011: £323m) with new business IRR 11% (2011: 11%) and long-term savings sales £3,638m (2011: £4,047m)
§ General insurance and health operating profit £95m (2011: £144m) with net written premiums of £1,002m (2011: £1,016m) and combined operating ratio of 95% (2011: 90%)
Aviva France, the third-largest business in the Aviva Group, produced a solid performance with operating profit of £422 million (2011: £471 million). Life operating profit increased, and, although sales were 4% lower on a local currency basis, we outperformed the individual life market, which fell 10% over the course of the year. Life new business IRR was flat. General insurance sales rose by 6% on a local currency basis, due to an increase in both policy volumes and rates. Although general insurance profits were down compared to the previous year, the combined operating ratio remained strong at 95%. Over the course of the year we increased our customer base to 3.2 million and received several awards for both our life and general insurance products.
Italy § Life operating profit £159m (2011: £140m) with new business IRR 12% (2011: 12%)
§ General insurance profit £20m (2011: loss of £35m) with NWP of £357m (2011: £416m) and COR of 100% (2011: 114%)
Spain § Life operating profit £215m (2011: £216m) § Life new business IRR of 21% (2011: 23%) § Long-term savings sales of £1,295m (2011: £1,926m)
Aviva is Poland’s fourth largest life insurer. A combination of regulatory changes, adverse foreign exchange movements and the impact of the economic environment resulted in lower life insurance sales in 2012. Even so, we focused on becoming more efficient and our profitability in this market remained strong with an IRR of 20%.
§ IFRS operating profit of £276m (2011: £254m) § Combined operating ratio of 93% (2011: 95%) § Net written premiums of £2,176m (2011: £2,083m)
The Canadian insurance business, unlike many other businesses in the Group is mostly intermediated; however we continue to address increasing customer demand for choice, simplicity and self-service by working with our brokers to help them compete with other channels. Aviva Canada is committed to strong distribution relationships and maintained high satisfaction scores among its broker partners in 2012. Customer service has also improved further. Our claims Net Promoter Score® is +47, a strong result. We delivered a strong underwriting result in personal lines due to our disciplined underwriting and lower claims frequency. Our efforts to transform and improve the profitability of the commercial lines business continued as we initiated actions to address underperforming segments.
Hurricane Sandy – looking after customers on both sides of the Atlantic As those affected by Hurricane Sandy came to terms with its impact, our teams in Canada and the UK were busy making sure Aviva’s customers got the help and support they needed. The teams worked together and took a proactive approach using the media, Aviva’s websites and social media sites like Twitter and Facebook, to make sure customers had access to travel advice and assistance. Aviva also automatically extended customers’ policies to give them 14 days’ extra cover and peace of mind until they arrived home safely.
Putting life insurance to work Stomil Sanok, a Polish rubber products company, has over 1,700 employees and all of them are covered by Aviva’s group life insurance. We have a service point on the company’s premises where dedicated insurance advisors are available every day to assist employees with claims. Family benefits are a characteristic of life insurance contracts in Poland and when an employee has a baby Aviva representatives visit the family at home and work out which benefits they are entitled to.
“Our underwriting strength and commitment to our broker partners gives us a strong market position.
Turkey In Turkey, our life and general insurance businesses generated an IFRS operating loss of £22 million (2011: £9 million loss). In life insurance we serve 2 million customers and are well positioned to benefit from our relationship with partner Akbank TAS, and their related banks, Citibank AS and Burgan Bank AS. Protection sales through our bancassurance channel were up by more than 50% compared to 2011.
Singapore § Life operating profit £65m (2011: £52m) § Life new business IRR 25% (2011: 31%) § Long-term savings sales £817m (2011: £724m)
Aviva is a top five life insurer in Singapore with over half a million customers, and one of the biggest providers of employee benefits and healthcare insurance. Long-term savings sales increased 28% on the previous year with bancassurance sales and sales of retirement products contributing significantly to this growth. Our 11-year relationship with DBS, Singapore’s largest bank, continues to go from strength to strength. Life operating profit and value of new business were up significantly on the previous year driven by strong protection sales and increased scale.
§ 69% of institutional funds performed above benchmark (where a benchmark exists) with 68% of funds ahead of peer group
In a challenging investment environment Aviva Investors’ operating profit on a continuing basis (which excludes contribution from asset management activities undertaken for Aviva USA)
was £42 million (2011: £53 million) with lower performance fees partially offset by cost savings from the strategic review. Investment performance was ahead of target on both benchmark and peer group measures. We maintained or improved client satisfaction, meeting or exceeding our targets on all client surveys in 2012. Net sales fell year-on-year as a result of the refocus of our product offering.
An integrated response to sustainability As a long-term investor, Aviva Investors recognises the positive impact that embedding long-term sustainability into a business strategy can have on shareholder value. In 2012 Aviva Investors began to integrate the consideration of environmental, social and governance (ESG) issues on all the asset classes in which it invests. This includes appointing ESG champions on our investment desks.
In this section Financial and operating performance 26 Selected consolidated financial data 40 Information on the company 41 Organisational structure 48 Analysis of investments 50 Contractual obligations 55 Risk and capital management 56 Basis of preparation 60
Aviva plc Annual report and accounts 2012 Financial and operating performance
Financial and operating performance Our main activities are the provision of products and services in relation to long-term insurance and savings, fund management and general insurance.
Factors affecting results of operations Our financial results are affected, to some degree, by a number of external factors, including demographic trends, general economic and market conditions, government policy and legislation and exchange rate fluctuations. See ‘Performance review – Risk and capital management’ for more information on these and other risk factors. In addition, our financial results are affected by corporate actions taken by the Group, including acquisitions, disposals and other actions aimed at achieving our stated strategy. We believe that all of these factors will continue to affect our results in the future.
 The Group also announced a number of disposals during the year, including the Group’s US life and related internal asset management businesses (‘US Life’) which have been classified as discontinued operations for reporting of financial performance, and held for sale in the statement of financial position.
As a result of the held for sale classification, US Life has been written down to fair value less costs to sell which is the main driver for the loss from discontinued operations of £2,848 million and the Group’s loss for the year of £3,050 million. Further details are given in ‘Financial statements – note 3 – Subsidiaries’.
Demographic trends Our results are affected by the demographic make-up of the countries in which we operate. The types of products that we sell reflect the needs of our customers. For example, in countries with a high proportion of older people, a larger proportion of our sales will reflect their needs for pre- and post-retirement planning. Our sales levels will also be impacted by our ability to help provide useful information to such policyholders on retirement planning and to offer products that are competitive and respond to such policyholders’ needs. In our long-term insurance and savings business we make assumptions about key non-economic factors, such as the mortality rate that we expect to be experienced by our policyholders. In countries where the life expectancy is growing, this will need to be reflected in our pricing models as lower mortality rates will increase profitability of life insurance products but will reduce the returns on annuity products. We review our assumptions against our own experience and industry expectations.
Economic conditions Our results are affected by the economic conditions in our geographic markets and, consequently, by economic cycles in those markets. High levels of general economic activity typically result in high levels of demand for, and sales of, our products and services. Economic activity in turn is affected by government monetary and fiscal policy as well as by global trading conditions and external shocks such as terrorist activity, war and oil price movements. During 2012, conditions remained challenging with continued concerns over levels of sovereign debt within the eurozone. Towards the year end, market sentiment started to improve which saw improvements in credit spreads. However, the challenging conditions in the economies of major European markets (including the UK) has led to lower demand for savings products. During 2011, concerns over slowing economic growth, higher levels of sovereign debt within, and to a lesser degree outside the eurozone, the stability and solvency of financial institutions, longer-term low interest rates in developed markets, inflationary threats as well as geopolitical issues contributed to increased volatility in the financial markets. The continued market volatility across global financial markets saw customers reassert their preference for less complex products and reduce their exposure to investment markets. The European economies where the Group has operations were impacted in 2012 by forecast low or negative growth including: UK (-0.1%)1; France (0.2%)1; Spain (-1.3%)1; and Italy (-2.2%)1.
The positive variance of £342 million for discontinued operations relates to the US, driven by reductions in interest rates and credit spreads and the impact of favourable equity market performance on embedded derivatives. The prior period negative variance (2011: £719 million negative) includes the result for Delta Lloyd up to the partial disposal on 6 May 2011 of £820 million negative.
Natural and man-made disasters Our general insurance and health business results are affected by the amount of claims we need to pay out which, in turn, can be subject to significant volatility depending on many factors, including natural and man-made disasters. Natural disasters arise from adverse weather, earthquakes and other such natural phenomena. Man-made disasters include accidents and intentional events, such as acts of terrorism. These events are difficult to predict with a high degree of accuracy, although they generally occur infrequently at a material level. Our exposure to large disasters is somewhat reduced through our focus on personal lines business and small to medium sized commercial risks in the general insurance business. The Group cedes much of its worldwide catastrophe risk to third-party reinsurers but retains a pooled element for its own account gaining diversification benefit. See ‘Financial statements IFRS – Note 56 – Risk management’. In 2012, the UK and Ireland were impacted by flood losses and France by a severe freeze. In 2011, France and Ireland were impacted by storm and flood losses and Canada incurred losses from a wildfire in Slave Lake.
Government policy and legislation Changes in government policy and legislation applicable to our business in many of the markets in which we operate, particularly in the UK, may affect the results of our operations. These include changes to the tax treatment of financial products and services, government pension arrangements and policies, the regulation of selling practices and the regulation of solvency standards. Such changes may affect our existing and future business by, for example, causing customers to cancel existing policies, requiring us to change our range of products and services, forcing us to redesign our technology, requiring us to retrain our staff or increase our tax liability. As a global business, we are exposed to various local political, regulatory and economic conditions, and business risks and challenges which may affect the demand for our products and services, the value of our investments portfolio and the credit quality of local counterparties. Our regulated business is subject to extensive regulatory supervision both in the UK and internationally. For details please refer to the section ‘Shareholder information – Regulation’.
Exchange rate fluctuations We publish our consolidated financial statements in pounds sterling. Due to our substantial non-UK operations, a significant portion of our operating earnings and net assets are denominated in currencies other than sterling, most notably the euro and the US dollar. As a consequence, our results are exposed to translation risk arising from fluctuations in the values of these currencies against sterling. Total foreign currency translation recognised in the income statement was a gain of £128 million (2011: £35 million loss). We generally do not hedge foreign currency revenues, as we prefer to retain revenue locally in each business to support business growth, to meet local and regulatory market requirements and to maintain sufficient assets in local currency to match local currency liabilities. Movements in exchange rates may affect the value of consolidated shareholders’ equity, which is expressed in sterling. Exchange differences taken to other comprehensive income arise on the translation of the net investment in foreign subsidiaries, associates and joint ventures. This aspect of foreign exchange risk is monitored centrally against limits that we have set to control the extent to which capital deployment and capital requirements are not aligned. We use currency borrowings and derivatives when necessary to keep currency exposures within these predetermined limits, and to hedge specific foreign exchange risks when appropriate; for example, in any acquisition or disposal activity.
Acquisitions and disposals Over the last two years we have completed and announced a number of transactions, some of which have had a material impact on our results. These transactions reflect our strategic objectives of narrowing our focus to businesses where we can produce attractive returns and exit businesses which we do not consider central to our future growth.
Activity in 2012 In March Aviva’s distribution arrangement with Allied Irish Bank (“AIB”) for long term business ceased and the bancassurance partnership with AIB is being unwound. A strategic review is underway to determine the most effective distribution channels going forward. In July the Group sold 37.2 million shares in Delta Lloyd for £313 million (net of transaction costs), reducing our holding to 19.8% of Delta Lloyd’s ordinary share capital, representing 18.6% of shareholder voting rights. As the Group no longer had significant influence over Delta Lloyd, we ceased to account for that company as an associate from 5 July 2012. Subsequent to the 2012 year end we disposed of our entire remaining holding. In July, the Group sold its life businesses in the Czech Republic, Hungary and Romania to MetLife Inc., for £37 million. The sale of our Romania pensions business is still subject to regulatory approval and is expected to complete later in 2013. In December we sold our controlling 58.4% interest in AVIVA NDB Holdings Lanka to a subsidiary of AIA group for a consideration of £31 million. On 18 December we reached an agreement with Bankia S.A. to transfer our holding in our Spanish joint venture Aseval to Bankia for £494 million. The transfer is subject to regulatory approval and is expected to be completed no later than 30 April 2013. Due to the announced sale, Aseval has been treated as held for sale at the balance sheet date. During the year the Group entered into negotiations to dispose of Aviva ZAo, its Russian long-term business subsidiary, and the requirements for that business to be classified as held for sale were met. The disposal of the business was announced in February 2013 for consideration of €35 million and is expected to complete in the first half of 2013. In December 2012 the Group announced the disposal of its US life and related internal fund management business to Athene Holding Ltd for £1.0 billion, including the shareholder loan. The transaction is due to complete in 2013, subject to regulatory approvals. As a result of this announcement the results of the business for 2012 and comparative periods have been classified as a discontinued operation and it is held for sale at the balance sheet date. Further details can be found in the section ‘Financial statements IFRS – Note 3 –Subsidiaries’.
Subsequent events In January 2013, we announced the sale of our 49% stake in CIMB Aviva Assurance Berhad and CIMB Aviva Takaful Berhad (together “CIMB-Aviva”) to Sun Life Assurance Company of Canada for a consideration of £152 million. Further details can be found in ‘Financial statements IFRS – Note 3c –Subsidiaries’ and ‘Financial statements – Note 18 – Interests in, and loans to, joint ventures’. On 8 January 2013, we sold the remainder of our stake in Delta Lloyd at €12.65 per share resulting in total cash proceeds for Aviva of £353 million.
Activity in 2011 On 6 May 2011, the Group sold 25 million shares in Delta Lloyd reducing our holding to 42.7% (41.9% as at 31 December 2011) of Delta Lloyd's ordinary share capital, representing 40% (39.3% as at 31 December 2011) of shareholder voting rights. Accordingly, the Group ceased to consolidate the results of Delta Lloyd in its financial statements. Cash consideration of £380 million was received for the sale of shares, and £8 million of costs were attributable to the disposal transaction. The transaction resulted in the loss of control of a major geographical area of operations, previously presented as 'Delta Lloyd' in the segmental reporting note. The results of Delta Lloyd as a subsidiary for 2011 as well as those for the comparative periods were therefore classified as discontinued operations. The Group’s share of the profits of its retained interest in Delta Lloyd as an associate are shown separately within continuing operations. On 30 September 2011, the Group sold RAC Limited (“RAC”) to The Carlyle Group for £977 million, realising a profit of £532 million. Aviva is continuing its commercial relationship with RAC, both as a key underwriter of motor insurance on RAC’s panel and as a partner selling RAC breakdown cover to our customers. The Group has retained the RAC (2003) Pension Scheme which, at 31 December 2011, had an IAS 19 deficit of £51 million. On 1 October 2011, the Group sold its Australian fund management business, Aviva Investors Australia Ltd, to nabInvest, National Australia Bank’s direct asset management business, for £35 million, which included contingent consideration with a fair value of £3 million. This resulted in a profit on disposal of £20 million, increased to £23 million after recycling £3 million from currency translation reserve to the income statement.
Long-term insurance and savings business For most of our life insurance businesses, such as those in the UK and France, operating earnings are generated principally from our in-force books of business. Our in-force books consist of business written in prior years and on which we continue to generate profits for shareholders. Nevertheless new business written in these markets, with the exception of our UK with-profits business which is discussed below, has a significant direct effect on our operating earnings. Under IFRS, certain costs incurred in acquiring new business must be expensed thereby typically giving rise to a loss in the period of acquisition, though the degree of this effect will depend on the pricing structure of product offerings. In certain higher growth markets, current year sales have a more significant effect on current year operating earnings.
UK with-profits business With-profits products are designed to pay policyholders smoother investment returns through a combination of regular bonuses and final 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 our with-profits funds that are not distributed as bonuses and related shareholders’ profit is transferred from the income statement to the unallocated divisible surplus. Conversely, if a shortfall arises one year, for example because of insufficient investment return, a transfer out of the unallocated divisible surplus finances bonus declarations and related shareholders’ profit. The unallocated divisible surplus consists of future (as yet undetermined) policyholder benefits, associated shareholders’ profit and the orphan estate. The orphan estate serves as working capital for our with-profits funds. It affords the with-profits fund a degree of freedom to invest a substantial portion of the funds’ assets in investments yielding higher returns than might otherwise be obtainable without being constrained by the need to absorb the cash-flow strain of writing large volumes of new business and the need to demonstrate solvency.
Fund management Fund management operating earnings consist of fees earned for managing policyholder funds and external retail and institutional funds on behalf of clients, net of operating expenses. Arrangements for the management of proprietary funds are conducted on an arm’s length basis between our fund management and insurance businesses. Such arrangements exist mainly in the UK, France, Ireland, and Canada. Proprietary insurance funds in other countries are externally managed.
Financial highlights The following analysis is based on our consolidated financial statements and should be read in conjunction with those statements. In order to fully explain the performance of our business, we discuss and analyse the results of our business in terms of certain financial measures which are based on ‘nonGAAP measures’ and which we use for internal monitoring and for executive remuneration purposes. We review these in addition to GAAP measures, such as profit before and after tax. The remainder of the financial performance section focuses on the activity of the Group’s continuing operations. Details of the performance of the United States which has been classified as discontinued can be found in the market performance section.
Non-GAAP measures Sales The total sales of the Group consist of long-term insurance and savings new business sales and general insurance and health net written premiums.
– This includes traditional life insurance, annuity business and with-profits business.
Sales is a non-GAAP financial measure and key performance indicator that we report to our key decision makers in the businesses in order to assess the value of new business from our customers and compare performance across the markets in which we operate. We consider sales to be a critical indicator of new business, and is the basis on which we provide analysis of our results to our shareholders and analysts. The non-GAAP measure of sales is also currently used internally in the determination of bonus awards as an executive performance measure. For long-term insurance and savings new business, we define sales as the sum of the present value of new business premiums (PVNBP) of life, pension and savings products and investment sales. PVNBP is equal to total single premium sales received in the year plus the discounted value of annual premiums expected to be received over the terms of newly incepted contracts and is calculated as at the date of sale. We adjust annual premiums to reflect the expected stream of business coming from this new business over future years. In the view of management, this performance measure better recognises the relative economic value of regular premium contracts compared with single premium contracts. PVNBP is a European insurance industry standard measure of new business. For our long-term insurance and savings business, we believe that sales is an important measure of underlying performance and a better measure for new business than IFRS net written premiums. We consider that the use of sales over IFRS net written premiums provides a:  Consistent treatment of long-term insurance and investment contracts: IFRS net written premiums do not include deposits received on non-participating investment contracts. Longterm insurance contracts and participating investment contracts both contain a deposit component, which are included in IFRS net written premiums, in addition to an insurance risk component. Therefore, to assess the revenue generated on a consistent basis between types of contracts, we evaluate the present value of new business sales of longterm insurance and investment products on the basis of total premiums and deposits collected, including sales of mutual fund type products such as unit trusts and Open ended investment companies (OEICs).
 Better reflection of the relative economic value of regular premium contracts compared to single premium contracts: Sales recognise the economic value of all expected contractual cash flows for regular premium contracts in the year of inception, whereas IFRS net written premiums only recognise premiums received in the year.
General insurance and health sales General insurance and health sales are defined as IFRS net written premiums, which are premiums written during the year net of amounts reinsured with third parties. For sales reporting, we use the GAAP measure for general insurance and health business.
Less: Effect of capitalisation factor on regular premium long-term business (5,935) (6,079) (5,482) Share of long-term new business sales from
JVs and associates (592) (604) (1,446) Annualisation impact of regular premium long-term business (239) (533) (357) Deposits taken on non-participating investment contracts and equity release contracts (4,607) (4,573) (3,795)
Retail sales of mutual fund type products (investment sales) (4,586) (3,473) (3,387)
Add: IFRS gross written premiums from existing long-term business 3,936 4,305 3,547
Less: long-term insurance and savings business premiums ceded to reinsurers (930) (959) (855)
 Effect of capitalisation factor on regular premium long-term business PVNBP is derived from the single and regular premiums of the products sold during the financial period and is expressed at the point of sale. The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts. The discounted value of regular premiums is calculated using the market consistent embedded value methodology proposed by the CFO Forum Principles. The discounted value reflects the expected income streams over the life of the contract, adjusted for expected levels of persistency, discounted back to present value. The discounted value can also be expressed as annualised regular premiums multiplied by a weighted average capitalisation factor (WACF). The WACF varies over time depending on the mix of new products sold, the average outstanding term of the new contracts and the projection assumptions.
 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.
 Deposits taken on non-participating investment contracts and equity release contracts Under IFRS, non-participating investment contracts are recognised in the Statement of Financial position by recording the cash received as a deposit and an associated liability and are not recorded as premiums received in the Income Statement. Only the margin earned is recognised in the Income Statement.
 IFRS gross written premiums from existing long-term business The non-GAAP measure of long-term and savings sales focuses on new business written in the year under review whilst the IFRS income statement includes premiums received from all business, both new and existing.
Share of Delta Lloyd’s operating profit (before tax) as an associate 112 157 —
(Loss)/profit before tax attributable to shareholders’ profits – discontinued operations (2,696) (464) 1,044
Adjusting items (from continuing operations) Year ended 31 December 2012 The negative investment return variances and economic assumption changes of £620 million (2011: £897 million negative) mainly relates to the UK, where the allowance for credit defaults on UK commercial mortgages has increased to reflect uncertainty in the macroeconomic environment and the cost of de-risking activity. Elsewhere, positive variances in Spain and France were offset by a negative variance in Italy.
Sales (from continuing operations) Year ended 31 December 2012 Total sales from continuing operations decreased £2,497 million or 7% to £34,126 million (2011: £36,623 million). This decrease was mainly driven by lower life and pension sales in the UK, Italy, and Spain, partly offset by higher investment sales. Sales in the UK and Ireland decreased for long-term insurance and savings, by £1,088 million, or 8%, to £12,772 million (2011: £13,860 million). The decline in UK sales reflects lower sales of bulk purchase annuities following our decision to withdraw from this market, as well as falls in bonds and savings products. These were partly offset by increased sales of individual annuities and protection products. In Ireland, life sales are down due to the closure to new business of our joint venture with AIB from April 2012. General insurance and health sales decreased by £297 million, or 6%, to £5,018 million (2011: £5,315 million) mainly as a result of the disposal of RAC in 2011. Results across Europe have also been adversely impacted by the weakness of the euro and zloty. In our European operations, long term sales in France decreased £409 million, or 10% (4% decrease on a local currency basis), to £3,638 million (2011: £4,047 million) due to lower sales in the AFER (Association Francaise d’Epargne et de Retraite) product. Sales in Italy, Spain and Other decreased by £1,756 million, or 34% (29% decrease on a local currency basis) to £3,425 million (2011: £5,181 million) reflecting lower sales of protection and savings products due to the challenging economic environment. General insurance and health sales in France decreased by £14 million, or 1%, to £1,002 million (2011: £1,016 million) whilst sales in Italy and Other were down £60 million, or 12%, to £424 million (2011: £484 million) primarily due to declining credit protection and motor sales. Sales in Canada increased by £93 million, or 4%, to £2,176 million (2011: £2,083 million) due to a combination of improved retention levels and rate increases across both personal and commercial lines. Total sales in Higher growth markets decreased by £95 million, or 3%, to £2,944 million (2011: £3,039 million) with higher long-term sales in Singapore more than offset by lower sales in other markets. Aviva Investors sales increased by £1,129 million or 71%. The opening of distribution offices in Europe contributed to most of this growth.
Year ended 31 December 2011 Sales in 2011 were £36,623 million, a decrease of £738 million, or 2%, from £37,361 million in 2010. Sales in the UK and Ireland for long-term insurance and savings were £13,860 million, an increase of £1,337 million, or 11%, from £12,523 million in 2010 and general insurance and health was £5,315 million, an increase of £380 million, or 8%, from £4,935 million in 2010. Long term sales in France decreased by £871 million, or 18% to £4,047
Financial and operating performance continued million (2010: £4,918 million) and Italy, Spain and other decreased by £1,865 million, or 26%, to £5,181 million (2010: £7,046 million). The decrease in sales in France and Italy was primarily driven by management actions to reduce sales of participating business. Sales in France for general insurance and health increased by £48 million, or 5%, to £1,016 million (2010: £968 million) while sales in Italy and other increased £46 million or 11% to £484 million (2011: £438 million). General insurance sales in Canada increased by £125 million, or 6%, to £2,083 million (2010: £1,958 million). Total sales in Higher Growth markets increased £80 million, or 3%, to £3,039 million (2010: £2,961 million) due to higher life and pension sales from bancassurance channels in Asia. The table below presents our consolidated income statement from continuing operations under IFRS for the three years ended 31 December 2012, 2011 and 2010, before the effects of taxation to shareholder profit.
Income Gross written premiums 22,744 26,255 27,192 Premiums ceded to reinsurers (1,571) (1,548) (1,606)
Premiums written net of reinsurance 21,173 24,707 25,586 Net change in provision for unearned
Net earned premiums 21,157 24,471 25,514 Fee and commission income 1,273 1,465 1,451 Net investment income 21,106 4,341 16,746 Share of (loss)/profit of joint ventures and
Change in investment contract provisions (4,450) 1,478 (9,212) Change in unallocated divisible surplus (6,316) 2,721 362 Fee and commission expense (4,472) (4,326) (5,500)
Income (from continuing operations) Year ended 31 December 2012 Net written premiums for continuing operations decreased by £3,534 million, or 14%, to £21,173 million (2011: £24,707 million). Long-term insurance and savings decreased by £3,266 million, or 21%, to £12,279 million (2011: £15,545 million) mainly reflecting lower sales in the UK and continental Europe. General and health insurance decreased by £268 million, or 3%, to £8,894 million (2011: £9,162 million). Excluding RAC in 2011, sales were broadly in line.
Year ended 31 December 2011 Net written premiums in 2011 were £24,707 million, a decrease of £879 million, or 3% (2010: £25,586 million). Long-term insurance and savings were £15,545 million, a decrease of £1,519 million, or 9% (2010: £17,064 million), driven by lower sales in Ireland, France and Italy. General and health insurance was £9,162 million, an increase of £640 million, or 8% (2010: £8,522 million), with growth primarily in the UK, France and Canada.
Net investment income (from continuing operations) Year ended 31 December 2012 Net investment income for the year increased by £16,765 million, or 386%, to £21,106 million (2011: £4,341 million) reflecting positive market performance and narrowing credit spreads on assets as market sentiment improved in the Eurozone. This led to significant increases in net unrealised gains on investments.
Year ended 31 December 2011 Net investment income was £4,341 million, a decrease of £12,405 million, or 74% (2010: £16,746 million). Investment returns were impacted by market volatility in 2011 resulting in higher unrealised losses on investments.
Other income (from continuing operations) Year ended 31 December 2012 Other income, which consists of fee and commission income, share of loss after tax of joint ventures and associates, and (loss)/profit on disposal of subsidiaries and associates, decreased by £1,075 million, or 56%, to £832 million in 2012 (2011: £1,907 million). 2011 benefited from the profit on disposal of RAC (£532 million), whilst 2012 has seen a loss on disposal of our associate stake in Delta Lloyd, lower fee and commission income and higher losses from our share of JV’s and associates.
Year ended 31 December 2011 Other income increased by £152 million, or 9%, to £1,907 million in 2011 (2010: £1,755 million). The increase was primarily due to the profit on disposal of RAC of £532 million, which was partly offset by a loss from Aviva’s share of joint ventures and associates of £123 million (2010: £141 million profit).
Year ended 31 December 2011 Claims and benefits paid net of reinsurance in 2011 increased by £2,140 million, or 10%, to £24,380 million (2010: £22,240 million) reflecting increased claims payments in our life businesses. Changes in insurance liabilities in 2011 was a charge of £2,284 million (2010: £2,837 million). This was primarily due to changes in economic and non-economic assumptions. The change in investment contract provisions was a £1,478 million credit (2010: £9,212 million charge) as a result of deteriorating investment market conditions across our regions causing a decrease in contract liabilities. The change in UDS was a £2,721 million credit (2010: £362 million). UDS in Italy and certain funds in Spain and France were negative as at 31 December 2011, impacted by increased government bond yields. The change in UDS included losses of £17 million in Italy and £49 million in Spain relating to negative UDS considered unrecoverable. Fee and commission expense, other expenses and finance costs decreased by £417 million to £7,881 million (2010: £8,298 million). See ‘Financial Statements IFRS – Note 6 – Details of expenses’.
Profit/(loss) before tax attributable to shareholders’ profits (from continuing operations) Year ended 31 December 2012 Profit before tax attributable to shareholders was £25 million (2011: £551 million profit). The decrease was primarily due to the increased tax charge attributable to policyholders’ returns.
Year ended 31 December 2011 Profit before tax attributable to shareholders in 2011 was £551 million (2010: £1,396 million profit). The decrease was primarily due to the drop in net investment income.
Market performance UK & Ireland life The table below presents sales, net written premiums, adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from our UK and Ireland long-term businesses for the three years ended 31 December 2012, 2011 and 2010.
Adjusted operating profit before tax after integration and restructuring costs 823 931 930
UK & Ireland general insurance and health The table below presents sales, net written premiums, adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from our UK and Ireland general insurance and health businesses for the three years ended 31 December 2012, 2011 and 2010.
Year end 31 December 2012 UK and Ireland general insurance and health NWP decreased by £352 million, or 7%, to £4,490 million (2011: £4,842 million), mainly as a result of the disposal of RAC. Excluding RAC, NWP decreased by £48 million, or 1%, to £4,062 million (2011: £4,110 million). The UK has seen growth in personal motor, corporate and speciality risks and personal speciality lines. This has been offset by management actions to reduce exposure in unprofitable business segments. Adjusted general insurance and health operating profit in 2012 decreased by £75 million, or 14%, to £477 million (2011: £552 million). Our UK general insurance operation has seen a decrease of £60 million, or 12%, to £448 million (2011: £508 million) reflecting the RAC which was sold in 2011. Excluding the RAC contribution of £75 million in 2011, this represented a like for like increase of 3% with the 2012 result benefiting from a favourable movement on prior year claims and an increase in long term investment return. 2012 was the second wettest year on record and whilst UKGI had more flood claims, weather-related claims were broadly in line with long-term average compared to the favourable experience in 2011. In Ireland, general insurance adjusted operating profit has decreased by £11 million, or 34%, to £21 million (2011: £32 million) reflecting the difficult environment with intense competition and the adverse effect of the economy on premium volumes. Restructuring costs have increased £117 million to £154 million (2011: £37 million), mainly due to the transformation of the Irish business and the program to simplify the organisational structure within the UK. Profit before tax decreased by £600 million, or 74%, to £206 million (2011: £806 million). 2011 benefited from the profit on disposal of RAC of £532 million. This combined with the increase in restructuring costs described above accounts for the majority of the year on year decrease.
Year end 31 December 2011 UK and Ireland general insurance and health NWP was £4,842 million, an increase of £335 million, or 7% (2010: £4,507 million). Performance was driven by the UK general insurance operation where NWP increased by £323 million, or 8%, to £4,371 million (2010: £4,048 million). In personal motor, NWP (excluding RAC) was £1,126 million, an increase of £272 million, or 32% (2010: £854 million) reflecting rating action, strong growth in direct sales and the roll out of direct pricing to brokers.
Adjusted operating profit before tax Long-term insurance and savings business 335 323 319 General insurance and health 95 144 76
Adjusted operating profit before tax after integration and restructuring costs 411 441 353
Year ended 31 December 2012 Total sales in France were down £423 million, or 8%, to £4,640 million (2011: £5,063 million) mainly due to a reduction in long-term insurance and savings sales. Total life and pensions sales decreased 10% to £3,638 million (2011: £4,047 million), a reduction of 4% on a local currency basis, with sales in the AFER product declining and sales through the Bancassurance channel remaining broadly flat. France’s net written premium was £4,702 million, down £531 million, or 10% (2011: £5,233 million) driven by the decrease in AFER sales and relatively flat sales in general insurance. Adjusted operating profit for long-term insurance and savings business in 2012 was £335 million (2011: £323 million), an increase of £12 million or 4%. General insurance and health adjusted operating profit decreased by £49 million, or 34%, to £95 million (2011: £144 million) due in part to the one-off release in 2011 of surplus reserve margins of £45 million. There was also adverse claims experience from the February 2012 freeze, partly offset by a decrease in personal motor bodily injury claims. Restructuring costs in France were down £19 million, or 63%, to £11 million (2011: £30 million). 2011 included higher costs from the previous European restructuring programme. Profit before tax attributable to shareholders’ profits was £482 million, an increase of £215 million, or 81% (2011: £267 million).
Year ended 31 December 2011 In France, our focus on value over volume resulted in a decrease of £871 million, or 18%, in life and pension sales to £4,047 million (2010: £4,918 million). Sales in AFER decreased by £1,007 million, or 38%, to £1,639 million (2010: £2,646 million) offset by strong sales through Credit du Nord which increased by 13% to £1,407 million. Our general insurance and health sales increased £48 million, or 5%, to £1,016 million (2010: £968 million) driven by pricing actions as we focused on value generation. Health net written premiums decreased £7 million, or 3%, to £227 million (2010: £234 million) reflecting customers reducing protection cover in a difficult economic environment. France’s net written premiums decreased £746 million, or 12%, to £5,233 million (2010: £5,979 million) primarily driven by lower sales. Total adjusted operating profit increased £110 million, or 30%, to £471 million (2010: £361 million). Our adjusted operating profit for long-term insurance and savings business in 2011 was £323 million (2010: £319 million). General insurance and health adjusted operating profit increased by £68 million, or 89%, to £144 million (2010: £76 million) driven mainly by reserve margin releases. France’s profit before tax attributable to shareholders’ profits was £267 million, down £120 million (2011: £387 million).
Italy, Spain and Other The table below presents sales and net written premiums, adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from our operations in Italy, Spain and Other for the three years ended 31 December 2012, 2011 and 2010.
Adjusted operating profit before tax after integration and restructuring costs 402 324 375
In Spain, sales decreased by £158 million, or 8%, to £1,926 million (2010: £2,084 million). Our general insurance sales increased by £46 million, or 11%, to £484 million (2010: £438 million). Net written premiums decreased by £1,153 million, or 20%, to £4,512 million (2010: £5,665 million) primarily driven by lower sales as described above. Total adjusted operating profit decreased £47 million, or 12% to £334 million (2010: £381 million). Loss before tax attributable to shareholders’ profits was £48 million in 2011 (2010: £224 million profit). The loss primarily reflected negative investment variances. In Italy, the UDS balance was £1,449 million negative as at 31 December 2011 (2010: £420 million negative). The method for estimation of the recoverable negative UDS balance was changed in 2011 to a real-world embedded value method. Further details on this including the impact of this change are set out in section ‘Financial statements IFRS – Note 44 – Unallocated divisible surplus’.
Higher growth markets The table below presents the sales, net written premiums, adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS of Higher growth markets for the three years ended 31 December 2012, 2011 and 2010.
Sales Long-term insurance and savings business Asia 1,765 1,782 1,617 Poland (including Lithuania) 373 487 603
General insurance and health Asia 120 108 72 Poland (including Lithuania) 65 65 51
Adjusted operating profit before tax Long-term insurance and savings business Poland (including Lithuania) 153 167 157
Year ended 31 December 2011 Total sales increased by £78 million, or 3%, to £3,039 million (2010: £2,961 million) despite uncertain economic conditions and regulatory climates in China and India. The strong performance in Asia, up 10%, reflects the success of our existing bancassurance partnerships. Life and pension sales in Poland decreased 19% to £467 million as a result of legislation changes. Net written premiums increased by £25 million, or 2%, to £1,215 million (2010: £1,190 million). Adjusted operating profit increased by £57 million, or 33%, to £229 million (2010: £172 million). This includes a reserving change benefit in Hong Kong of £25 million in 2011. Profit before tax increased by £17 million, or 11%, to £178 million (2010: £161 million).
Adjusted operating profit before tax after integration and restructuring costs 9 23 35
Assets under management (including discontinued operations) 274,484 262,506 259,787 1 Aviva Investors operating profit includes profit relating to the Aviva Investors Pooled Pension business.
Corporate centre and Group debt costs and other interest (from continuing operations) The table below presents corporate centre and Group debt costs and other interest from continuing operations for the three years ended 31 December 2012, 2011 and 2010.
Group debt costs and other interest (659) (648) (644) Other Group operations (204) (204) (176)
Year ended 31 December 2011 Corporate centre costs were £138 million, a decrease of £5 million, or 3% (2010: £143 million). The decrease principally reflected a reduction in project spend of £18 million in the year, and was offset by central spend which increased by £11 million arising from continued commitment to meeting increased regulatory and reporting requirements. Group debt and other interest costs were £648 million, an increase of £4 million, or 1% (2010: £644 million). This increase principally related to higher interest costs on internal lending arrangements driven by changes in internal loan balances throughout the year.
Group debt costs and other interest included net pension charge of £46 million (2010: £87 million). This represented the difference between the expected return on pension scheme assets and the interest charge on pension scheme liabilities. Other Group operations incurred costs of £204 million (2010: £176 million).
Year ended 31 December 2011 Adjusted operating profit increased by £265 million, or 15%, to £2,089 million (2010: £1,824 million) for the reasons set out above.
Discontinued operations United States In December 2012 the Group announced the sale of its United States life and related internal asset management businesses (US Life) to Athene Holding Ltd for £1.0 billion after the repayment of an external loan. The transaction is expected to be completed in 2013. See ‘Financial statements IFRS – Note 3 – Subsidiaries’ for further details. As a result of this announcement the results of US Life for 2012 and comparative periods have been classified as discontinued operations. The table below presents sales, net written premiums, adjusted operating profit and IFRS profit/(loss) before tax attributable to shareholders for the three years ended 31 December 2012, 2011 and 2010.
Adjusted operating profit before tax after integration and restructuring costs 232 216 193
Year ended 31 December 2012 Sales increased by 3% to £4,039 million (2011: £3,932 million). Life sales were up 32% to £1,441 million (2011: £1,093 million) as the business focussed on accelerating the growth of the life insurance business. Sales of our annuity products declined by 8% to £2,598 million (2011: £2,839 million) as a result of pricing actions taken throughout the year. Net written premiums decreased by 1% to £3,589 million (2011: £3,620 million) as higher sales were offset by increased outward reinsurance premiums. Adjusted operating profit increased by £16 million, or 7%, to £239 million (2011: £223 million). Long-term insurance and savings adjusted operating profit remained broadly flat at £200 million (2011: £197 million). Fund management operations generated profits of £55 million (2011: £37 million). Loss before tax attributable to shareholders was £2,696 million (2011: £262 million profit) which mainly relates to the impairment to write the value of the business down to fair value less costs to sell.
Year ended 31 December 2011 Sales decreased by £796 million, or 17%, to £3,932 million (2010: £4,728 million). Annuity sales in 2011 declined by £890 million, or 24%, to £2,839 million (2010: £3,729 million), primarily driven by a focus on value over volume, with strong annuity price competition and increased consumer demand for variable annuity products in the first half of 2011. Life sales increased by £94 million, or 9%, to £1,093 million (2010: £999 million) reflecting a focus on growth in life business. Net written premiums decreased by £865 million, or 19%, to £3,620 million (2010: £4,485 million) due to lower annuity sales. Adjusted operating profit increased by £21 million, or 10%, to £223 million (2010: £202 million) as our in-force book grew and we maintained strong spread management and disciplined pricing in a competitive environment. Profit before tax attributable to shareholders’ profits increased by £113 million, or 76%, to £262 million (2010: £149 million). The increase was mainly as a result of improved operating results and favourable short term investment variances.
Delta Lloyd On 6 May 2011, the Group sold 25 million shares in Delta Lloyd, reducing our holding at that date to 42.7% of Delta Lloyd’s ordinary share capital, representing 40% of shareholder voting rights. As the Group no longer commanded a majority of shareholder voting rights, it no longer controlled Delta Lloyd. Accordingly, from 6 May 2011, the Group ceased to consolidate the results and net assets of Delta Lloyd and its results up to that date were shown as discontinued operations. For the period from 6 May 2011 to 5 July 2012, the Group had an associate interest in Delta Lloyd. In July 2012, following a further sell-down, the Group’s holding fell to 19.8% of Delta Lloyd’s ordinary share capital representing 18.6% of shareholder voting rights and for the remainder of 2012 it was treated as a financial investment. In January 2013, the Group sold the remainder of its holding in Delta Lloyd. The table below presents sales, net written premiums, adjusted operating profit and IFRS (loss)/profit before tax for Delta Lloyd as a subsidiary for the three years ended 31 December 2012, 2011 and 2010.
Sales Long-term insurance and savings business — 1,255 3,793 General insurance and health — 557 1,177
Year ended 31 December 2012 The Group’s share of the loss of its associate interest in Delta Lloyd to 5 July 2012 was £304 million.
This data is derived from our consolidated financial statements which have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU). In December 2012 the Group announced the sale of its US Life and related internal asset management operations, which have been classified as held for sale in the statement of financial position and their results shown as discontinued operations. The results presented as discontinued operations for 2011 and preceding years also include the results of Delta Lloyd N.V. which was deconsolidated during 2011. Between May 2011 and July 2012 Delta Lloyd was accounted for as an associate within continuing operations. In July 2012, following a further sell-down, the Group’s shareholding fell below 20% and from July 2012 Delta Lloyd was treated as a financial investment within continuing operations at fair value through profit and loss. Following a review of the classification of contracts issued by the Italian Life business, certain portfolios have been reclassified from participating insurance to participating investment contracts. This change has been reflected for all years in the table below. There is no impact on the result for any period as the result of this reclassification.
Share of (loss)/profit after tax of joint ventures and associates (277) (123) 141 (463) (1,101) (Loss)/profit on the disposal and remeasurement of subsidiaries and associates (164) 565 163 122 (8)
History and development of Aviva General Aviva, a public limited company incorporated under the laws of England and Wales, provides customers with long-term insurance and savings, general and health insurance, and fund management products and services. Over the last few years we have simplified and streamlined Aviva, focusing on markets where we can produce attractive returns. We are committed to serving our customers well in order to build a strong, sustainable business which makes a positive contribution to society and which our people are proud to work for.
Our history The Group was formed by the merger of CGU plc and Norwich Union plc on 30 May 2000. CGU plc was renamed CGNU plc on completion of the merger, and subsequently renamed Aviva plc on 1 July 2002. CGU plc and Norwich Union plc were both major UK-based insurers operating in the long-term insurance business and general insurance markets. Both companies had long corporate histories. Hand in Hand, which was incorporated in 1696, was acquired by Commercial Union in 1905, which itself was incorporated in 1861. General Accident plc was incorporated in 1865. Norwich Union plc was founded as a mutual society in 1797 and operated as such until 1997 when it demutualised and became an English public limited company. CGU plc was formed in 1998 from the merger of Commercial Union plc and General Accident plc. In 2011 and 2012 the Group has undertaken and announced a number of disposals as we have continued the process of streamlining our business. Further details of these can be found in the sections ‘Financial statements IFRS – note 3 – Subsidiaries’ , ‘note 18 – Interests in, and loans to, joint ventures’ and ‘note 19 – Interests in, and loans to, associates’.
Our business Overview Following the announcement in the second quarter of 2012 relating to the restructuring of the Group, the Group’s operating segments were changed to align them with the new management reporting structure. The new operating segments are: UK & Ireland; France; Canada; Italy, Spain and Other; Higher growth markets and Aviva Investors. In December we announced the sale of our United States life, savings and related internal fund management business and this has been classified as a discontinued operation for the purposes of reporting financial performance.
Life insurance and savings business Long-term insurance and savings business from continuing operations accounted for approximately 74% of our total business based on worldwide total sales from continuing operations for the year ended 31 December 2012. We reported total long-term insurance and savings new business sales from continuing operations of £20.6 billion and investment sales of £4.6 billion for the year ended 31 December 2012. Our focus remains on growing our business profitably and improving our operational efficiency so that we can fully benefit as our major markets return to economic growth.
Market position In the UK we are a market leader and have a market share of 12% based on annual premium equivalent (APE)1 according to the Association of British Insurers (ABI) data as at 30 September 2012. Sales of life, investment and general insurance products in the UK represented 49% of our worldwide sales for the year ended 31 December 2012. Further details of our position in each market are set out in the market sections below.
 Protection – is an insurance contract that protects the policyholder or his or her dependants against financial loss on death or ill-health. Our product ranges include term assurance, mortgage life insurance, flexible whole life and critical illness cover.
 Investment sales - comprise retail sales of mutual fund type products such as unit trusts, individual savings accounts (“ISAs”) and open ended investment companies (“OEICs”).
Some of our insurance and investment contracts contain a discretionary participation feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts.
Market position Aviva Investors was ranked 43rd globally by assets under management, according to the Towers Watson World 500 largest asset managers study 2011 ranking of asset managers by assets under management. Total worldwide funds managed by Aviva Investors at 31 December 2012 was £274 billion, including £38 billion relating to the United States Life and related internal asset management operations which are classified as discontinued operations in the financial statements. The substantial majority of this relates to Aviva’s insurance and savings operations.
Brands and products Aviva Investors operates under a single brand across our markets. Our business invests in most significant asset classes on behalf of institutional, pension fund and retail clients. In the US, Aviva Investors also own an asset management company called River Road Asset Management LLC.
Developed markets UK & Ireland life Business overview and strategy In 2012, Aviva began combining its UK and Irish life insurance businesses under a single management structure, with the aim of allowing Ireland to leverage the scale and expertise that exists in the UK. The UK business is a leading long-term insurance and savings provider with an overall market share of 12%, based on third quarter 2012 ABI returns. The Irish business is a large life and pension provider in Ireland. Our strategy is to hold leading positions in workplace savings, individual annuities and protection whilst delivering strong margins and an Internal Rate of Return (IRR) in excess of the Group’s target, overall and at a product level. Our Irish long-term business is carried out through a subsidiary, Aviva Life Holdings Ireland Limited (“ALHI”), which is 75% owned by Aviva and 25% owned by Allied Irish Bank (“AIB”). ALHI holds four subsidiaries, one of which is Ark Life Assurance Company Limited (“Ark Life”) which carries out bancassurance business via a distribution agreement with AIB. The original distribution agreement was renewable in 2011 but, on 15 December 2011, AIB notified the Group that they did not wish to renew it and the existing shareholders’ agreement governing ALHI was terminated. The termination of this agreement triggered the ability for both parties to exercise put and call options that will result in the unwind of the original structure such that the Ark Life business returns 100% to AIB and the Group will purchase the 25% minority stake in ALHI. The formal exercise of these options was approved on 17 January 2012 and, as a result, the Ark Life business became held for sale on that date. Completion of the transaction is subject to agreement of terms with AIB and regulatory approval. Completion is expected in the next 12 months.
Products In the UK, we provide a comprehensive product range focused on both the consumer and corporate market with an approximate 70:30 split. The pensions and `at retirement’ products we offer include stakeholder and personal pensions, equity release, annuities, income drawdown and with-profits products. Our annuity offerings include immediate life, enhanced, fixed-term annuities and with-profits pension annuities. We provide a number of traditional life insurance products, including level-term, decreasing-term (with or without critical illness), guaranteed whole life insurance, and guaranteed lifelong protection plans. Our savings and investment products include ISAs, investment bonds, funds, base rate trackers, investments with guarantees and with-profits products. In Ireland, our long-term insurance and savings business offers a wide range of protection, bonds, savings and pension products. Our protection products include life insurance, mortgage protection, specified illness and guaranteed and whole life cover products. The pension range covers retirement and investment products including government personal retirement savings accounts (PRSA) schemes.
Distribution We have a multi-distribution strategy, which means we sell our products through intermediaries, corporate partners, in the workplace, and directly to customers. We are a leading provider in the UK intermediary market with a 12.5% share.2 In 2012, in the UK, we agreed an exclusive distribution deal with Tesco for the sale of protection products, following the extension of our distribution agreements with Santander and Barclays in 2011. We are also the provider of choice to the Royal Bank of Scotland and other leading organisations including the Post Office. We remain committed to building on our existing relationships and distribution partnerships as well as to growing our workplace and direct channels.
Market The UK is the third largest insurance market in the world. 5 In 2011, the top four companies had a 32%3 share of the general insurance market. The UK and Ireland general insurance markets are cyclical in nature and remain very competitive, particularly in personal lines, where the market is highly commoditised.
Distribution We have a multi-distribution strategy. Our personal products are sold directly to customers over the phone and through our websites www.aviva.co.uk, www.aviva.ie and www.quotemehappy.com, via brokers and through corporate partnerships. Our Quotemehappy insurance products are also available through price comparison websites. For commercial insurance, we focus on broker distribution and believe that independent brokers remain the best source of advice for business customers. In Ireland, to deliver further efficiency benefits, we closed our network of high street branches and transferred customers to both One Direct and strategic broker partners, which ensured they retained access to local face-to-face solutions for their insurance needs.
Aviva plc Annual report and accounts 2012 market. In our opinion, the market has now entered a phase of price increases that currently makes up the majority of its marginal growth.
Distribution Aviva France has developed a multi-distribution model combining retail, direct and bancassurance networks through owned distribution channels, independent networks and partnerships. Our retail networks sell through 896 tied agents, a direct sales force made up of more than 280 advisors and 700 Union Financiere de France (UFF) consultants (Aviva France also holds a majority stake in UFF) and more than 1,000 active brokers in the life, health and construction markets. Direct distribution is sold through Eurofil for personal general insurance, Aviva Direct for health and protection and Epargne Actuelle for the AFER product. Eurofil is the second largest direct general insurer and Aviva Direct is the leading provider of direct protection in France according to the FFSA as at December 2011. We operate in the bancassurance market through our partnership with Crédit du Nord, a subsidiary of Société Générale, selling life, savings, protection and general insurance products. This partnership gives Aviva access to over 1.9 million customers, as at December 2011.
Market As the eighth largest8 in the world, Canada’s general insurance market is established and stable. The four largest provinces generate around 89% of total premiums with Ontario, the largest, representing 48% of total Canadian premiums.9 7 MSA Research Inc., 2011 online database. 8 New Swiss Re Sigma Study (World insurance 2011) 9 MSA Research Inc., 2011 online database
The Canadian general insurance industry is highly fragmented with many small players and no dominant consumer brand. Steady consolidation has resulted in the top five companies representing 40% of the market and the top two companies, Intact Financial and Aviva, controlling 24% of the market.9 The rest of the industry includes several national carriers as well as smaller, provincially based or niche companies. Whilst direct and affinity channels are gradually increasing in market share, the traditional broker channel accounts for over 65% of distribution.10 In addition to the growth of direct and affinity channels, insurance carriers are increasingly supporting and controlling distribution through investment in brokers.
 Niche personal insurance products including holiday and park model trailers, hobby farms, boats as well as antique, classic and custom cars.
Market The Italian life market is dominated by the top 10 providers which represent around 79% of the total market share13. The life insurance industry in Italy reported a decline in volumes as of 30 September 2012 with gross written premiums down by 10.2% compared to the same period in 2011, whilst the the general insurance segment decreased by 2.1% in the same period14. In 2012 the Italian insurance industry went through three major changes:  The Italian government introduced new legislation (Decreto
Monti) which has led insurance companies to transform both their product ranges and their customer relationships (eg. separate private area for customers on the company website; black box service for motor insurance; new quotation tools);  Two of the leading general insurance companies announced their merger: Unipol and Fondiaria Sai; 10 Axco Insurance Report for Canada 11 Associazione Nazionale fra le Imprese Assicuratrici (ANIA) 12 ANIA as at 31 December 2011 13 ANIA: www.ania.it/PUBBLICAZIONI/Premi_del_Lavoro_diretto_Italiano_.html 14 I VASS (Istituto per la Vigilanza sulle Assicurazioni)
15 Investigación Cooperativa entre Entidades Aseguradoras y Fondos de Pensiones (ICEA). 16 ICEA in the publication ‘Canales de Distribución - Estadística 2011’.
Distribution Through bancassurance partnerships we have established subsidiaries to distribute our products with each of the banks as set out below:  Unicorp Vida – in conjunction with Unicaja since 2001;  CxG – in conjunction with Caixa Galicia since 2001;  Caja España Vida – in conjunction with Caja España since 2001;  Caja Granada Vida – in conjunction with Caja Granada since 2002;  Cajamurcia Vida – in conjunction with Cajamurcia since 2007; and  Aseval – in conjunction with Bancaja (now Bankia) since 2000 (sale announced December 2012 as set out in ‘Financial statements IFRS – note 3 – Subsidiaries’).
Other The Italy, Spain and Other segment also includes our Romanian pensions business, which is held for sale as at 31 December 2012, our reinsurance and run-off businesses and the results of our life businesses in Hungary, the Czech Republic and Romania up until the date of sale in July 2012.
Higher growth markets Business overview and strategy The higher growth markets segment covers our operations in nine markets in Asia as well as Poland, Lithuania, Turkey and Russia. As at 30 June 2012, our Singapore subsidiary ranks fifth by APE according to the Life Insurance Association,18 providing employee benefits and healthcare insurance. In Singapore, we have a strong relationship with the Development Bank of Singapore (DBS). In China, through our 50% joint venture with COFCO Ltd, we are ranked in the top five among the foreign life insurers in terms of APE.19 We have a presence in 12 provinces and over 50 branches. Due to regulatory changes in bancassurance, we are developing alternative distribution channels to reach high net worth customers. In India, with a distribution network of 140 branches, we operate in partnership with the Dabur Group through a 26% interest in Aviva Life Insurance Company India Ltd. Tighter regulations on unit-linked products are driving an industry shift towards traditional products such as endowment and health policies. As at 31 August 2012, we ranked ninth among the 17 ICEA at 30 September 2012 18 Life Insurance Association 19 APE data released by National Insurance Industry Communication Club
Aviva plc Annual report and accounts 2012 private life insurance companies in India based on APE according to the Insurance Regulatory and Development Authority (IRDA).20 In Asia we are focused on creating franchise value through organic growth. Increasing the value of our new business remains our first priority. We are achieving this through scale benefits and by focusing our product mix on higher margin products. As of 30 June 2012, our Polish life operation is the fourth largest overall life insurer in Poland (including JV Life), with a market share of 7% based on total premium income according to the Polish Financial Supervision Authority (KNF).21 Our product strategy for pensions in Poland is to retain our status as one of the market leaders in terms of assets and customers. We have updated our pay and bonus structure for our sales force to link compensation directly with the value generated by the sale. We also operate in Turkey (offering both general insurance and life products) and Russia (life operations). Russia is held for sale at 31 December 2012 and we announced the disposal in February 2013.
Distribution Across Higher growth markets we operate a multi-distribution strategy. In Singapore, we have a core bancassurance relationship with DBS Bank. In China and South Korea, we distribute the majority of our products through bancassurance and IFAs. In Hong Kong, India and Malaysia, bancassurance is the main distribution channel. We are investing in other channels, such as direct marketing, to diversify our sources of revenue. Outside of Asia, the direct sales force and bancassurance is the main distribution channel for most of the Polish group and is made up of 2,200 tied insurance agents. Our biggest relationship is a joint venture with Bank Zachodni WBK (a subsidiary of Banco Santander) that sells both life and general insurance products through the bank’s network of over 620 branches.23 We also cooperate with independent insurance agencies and brokers. Our mutual funds are also sold in brokerage houses and our individual products are supported by call centre and website sales. We also have a direct platform (internet and call centre) for distribution of motor insurance. In Turkey, we operate through a multi-channel distribution framework consisting of bancassurance, direct sales force, corporate sales, agencies, telemarketing and brokers. In Russia we focus on bancassurance, where we sell through 21 banks and through brokers.
Aviva Investors Business overview and strategy Aviva Investors was established in 2008 when the Aviva Group combined all of its major fund management components into a single global fund management business. As at 31 December 2012, we had £274 billion in assets under management including £38 billion relating to the United States Life and related internal asset management operations which are classified as discontinued operations in the financial statements. Aviva Investors offers a range of investment management services, most notably in the UK, Europe, the US and Asia Pacific. Our largest clients are the long-term insurance, savings, and general insurance businesses of Aviva, to whom we provide bespoke asset management services across a broad spectrum of asset classes. We provide external clients with bespoke segregated solutions or offer access to a variety of fund ranges. Our principal target clients for the larger segregated solutions tend to be large pension funds and financial institutions such as insurance companies and banks. Our strategy is to grow our share of higher-margin, external business, offering client-focused solutions and products to our customers across our international network.
Products and distribution Our products cover a broad range of asset classes. In Europe, we have a range of SICAVs (open-ended collective investment schemes), which are domiciled in France, Luxembourg and Poland. These funds have different share classes depending on the size and type of investor. Our traditional distribution model for these funds focuses on wholesale distributors, asset allocators and small to mid-size institutional investors. In the UK, we largely sell segregated mandates and specialist funds to pension schemes, local authorities and insurance companies. We also supply products to the retail and wholesale markets, principally through UK domiciled equity, bond and real estate funds. These are promoted to investors via IFAs, fund platforms, fund supermarkets and discretionary asset managers. In addition, we have a range of pooled pension funds which are aimed at the smaller pension fund market. These funds are normally defined benefit schemes and tend to be advised by investment consultants.
We manage hedge funds in the UK and the US. These funds are generally registered offshore and are promoted to institutional clients, family offices and wealth managers. They include both fund of fund and single strategy funds across fixed interest and convertibles markets. In the US we also have an asset management company called River Road Asset Management LLC. We also have a range of specialist property funds. These funds are targeted at specialist real estate buyers and large institutions (mostly pension funds and local authorities), and provide real estate solutions to a wide range of risk appetites, ranging from secure income generating funds to leveraged growth funds. We have six money market funds, domiciled in Dublin and Paris, addressing the sterling and euro money market segments. These funds are sold by a specialist sales team and target corporate treasury functions.
Market Aviva USA is a leading provider of fixed indexed life insurance and fixed indexed annuities in the USA. According to AnnuitySpecs.com, as of 30 September 2012, Aviva USA is ranked first in the market for the sale of fixed indexed life products with a 14% market share, and second for the sale of fixed indexed annuities with a 13% market share.24
Distribution Aviva USA uses a multi-channel distribution strategy by focusing on more than 50 key distribution partners. Its distribution channels include career marketing organisations, independent marketing organisations, brokerage general agents and personal producing agents. Its network covers all 50 states with agents largely contracted through key distribution partners.
France Aviva France SA and its principal subsidiaries: Antarius S.A. (50.0%) Aviva Assurances S.A. (99.9%) Aviva Investors France S.A. (99.9%) Aviva Vie SA (99.9%) Aviva Epargne Retraite (99.9%) Eurofil S.A. (99.9%) Union Financière de France Banque (Banking) (74.3%)
Italy Aviva Italia Holding S.p.A and its principal subsidiaries: Avipop Assicurazioni S.p.A (50.0%) Avipop Vita S.p.A (50.0%) Aviva S.p.A (51.0%) Aviva Assicurazioni Vita S.p.A (50.0%) Aviva Italia S.p.A Aviva Previdenza S.p.A (55.0%) Aviva Vita S.p.A (25.5%) Eurovita Assicurazioni S.p.A (41.0%)
Spain Aseguradora Valenciana S.A., de Seguros y Reaseguros (Aseval) (50.0%) Aviva Vida y Pensiones, SA de seguros y reaseguros Caja Espana Vida, Compania de Seguros y Reaseguros (50.0%) Caja Murcia Vida y Pensiones, de Seguros y Reaseguros S.A. (50.0%) Caja Granada Vida, de Seguros y Reaseguros, S.A. (25.0%) CxG Aviva Corporación CaixaGalicia de Seguros y Reaseguros, S.A. (50.0%) Unicorp Vida, Compania de Seguros y Reaseguros (50.0%)
United States Aviva USA Corporation and its principal subsidiaries: Aviva Life and Annuity Company Aviva Investors North America, Inc. River Road Asset Management, LLC
Malaysia CIMB Aviva Assurance Berhad (49.0%) CIMB Aviva Takaful Berhad (49.0%)
Group Restructuring On 28 February 2013, a major restructuring of the Group was completed, which will have economic effect from 1 January 2013. Prior to the restructure, Aviva Insurance Limited (“AIL”) acted both as the main UK general insurance underwriter as well as a holding company for the Group’s non-UK operations. In order to enhance the governance relating to AIL and reduce the UK general insurance policyholders exposure to the non-UK operations, Aviva International Holdings Limited (“AIH”), the owner of the majority of the non-UK operations has been transferred to Aviva Group Holdings Limited (“AGH”) in consideration for a loan from AIL, secured on the non-UK operations by way of the shareholding in the UK holding companies including AIH. At the same time, the shares in AIL, held by Aviva International Insurance Limited (“AII”) were transferred to AGH in consideration for a loan secured on the shares of AIL. The impact of the above restructuring is to reduce the complexity of the current Group corporate structure resulting in a greater degree of direct control of subsidiaries creating a flatter, more transparent corporate structure. The following chart shows, in simplified form, the organisational structure of the Group after the completion of the restructure: Aviva – COFCO Life Insurance Company Limited
Long-term insurance and savings business As stated above, we aim to optimise investment returns whilst ensuring that sufficient assets are held to meet future liabilities and regulatory requirements. As different types of life insurance business vary in their cash flows and in the expectations placed upon them by policyholders, we need to hold different types of investments to meet these different cash flows and expectations. The UK with-profits business is comprised largely of long-term contracts with some guaranteed payments. We are therefore able to invest a significant proportion of the funds supporting this business in equities and real estate. This is because the long-term nature of these contracts allows us to take advantage of the long-term growth potential within these classes of assets, whilst the level of guaranteed payments is managed to mitigate the level of risk that we bear in relation to the volatility of these classes of assets. Non-UK participating business, annuities and non-participating contracts in all countries, have a high level of guaranteed future payments. We endeavour to match the investments held against these types of business to future cash flows. We therefore have a policy of generally holding fixed income securities and mortgage loans with appropriate maturity dates. With unit-linked business, the primary objective is to maximise investment returns, subject to following an investment policy consistent with the representations that we have made to our unit-linked product policyholders.
As the table indicates, approximately 33.2% of total investments can be directly attributed to shareholders. The apportionment of our shareholder assets is predominantly weighted towards debt securities and loans. In comparison, policyholder and participating funds contain a greater proportion of equities and other investments (e.g. unit trusts), reflecting the underlying investment mandates. We carry investments on our statement of financial position at either fair value or amortised cost. At 31 December 2012, approximately 97% of the Group’s total investments were carried at fair value on the statement of financial position. Financial investment balances included in the remainder of these disclosures include financial investments of operations classified as held for sale. For more information about financial investments analysed according to their accounting classification and valuation approach, as well as the cost, unrealised gains and losses, impairments, fair value and other information concerning financial investments, see ‘Financial statements IFRS – Note 25 – Financial investments’.
We grade debt securities according to external credit ratings issued at the balance sheet date. The credit rating used for each individual security is the median rating of the available ratings from the major credit rating agencies. If a credit rating is available from only one of these rating agencies then this rating is used. If an individual security has not been given a credit rating by any of the major rating agencies, the security is classified as ‘non-rated’. For the table above we have expressed our rating using a rating scale whereby investment grade debt securities are classified within the range of AAA (extremely strong) to BBB (good) ratings, with AAA being the highest possible rating. Debt securities which fall outside this range are classified as less than BBB. This rating scale is analogous with that used by major rating agencies. At 31 December 2012, the proportion of our shareholder debt securities that are investment grade increased to 88.1% (2011: 86.9%). The remaining 11.9% of shareholder debt securities that do not have an external rating of BBB or higher can be split as follows:  3.1% are debt securities that are rated as below investment grade;  3.7% are US private placements which are not rated by the major rating agencies, but are rated as investment grade by the
 5.1% are not rated by the major rating agencies or the NAIC.
Rating without insurance guarantee 2012 Fair value £m % of total Fair value £m % of total Fair value £m
Exposures to peripheral European countries Included in our debt securities and other financial assets are exposures to peripheral European countries. All of these assets are valued on a mark to market basis under IAS 39, and therefore our statement of financial position and income statement already reflect any reduction in value between the date of purchase and the balance sheet date. The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds. Net of non-controlling interests, our direct shareholder and participating fund asset exposure to the government (and local authorities and agencies) of Italy is £4.9 billion (2011: £6.4 billion), a decrease of £1.5 billion. Gross of non-controlling interests, 82% of our shareholder asset exposure to Italy arises from investment exposure of our Italian business.
Participating Shareholder Total 31 December 2012 £bn 31 December 2011 £bn 31 December 2012 £bn 31 December 2011 £bn
Total Greece, Ireland, Portugal, Italy and Spain 10.5 11.3 1.5 1.9 12.0 13.2
At 31 December 2012, shareholder investment in equity securities amounted to £1,423 million. The investments include a strategic holding in Italian banks of £289 million (£148 million net of non-controlling interests). Of our £7,258 million exposure to equity investments in banks, trusts and insurance companies, £959 million relates to shareholder investments, which includes our strategic holding as mentioned above.
Deposits and credit institutions 515 44 180 739 Minority holdings in property management undertakings 14 555 15 584
As of 31 December 2012, we owned and occupied land and buildings for our own use with a total book value of £245 million (2011: £215 million). We believe that these facilities are adequate for our present needs in all material respects. We also hold other properties, both directly and indirectly, for investment purposes, valued at £9,075 million at 31 December 2012 (2011: £9,848 million).
Insurance and investment contracts Long-term business — Insurance contracts – non-linked1 7,044 15,195 11,633 75,415 109,287 — Investment contracts – non-linked2 57,547 — — — 57,547 — Linked business2 66,099 — — — 66,099
Payables and other financial liabilities5 8,567 289 345 1,606 10,807 Net asset value attributable to unitholders 11,146 — — — 11,146
Total contractual obligations above 288,243 Effect of discounting contractual cash flows for insurance contracts (24,804) Contractual undiscounted interest payments6 (7,910) Difference between carrying value of borrowings and undiscounted cash flows of principal (611) Contractual cash flows under operating leases and capital commitments (1,186) Difference between derivative liabilities contractual cash flows and carrying value (1,366) Liabilities of operations classified as held for sale 41,411 Non-contractual/short-term obligations — Unallocated divisible surplus7 6,931 — Provisions8 1,119 — Current and deferred tax liabilities 659 — Other liabilities 1,843
3 Amounts shown in respect of general insurance contracts are based on undiscounted estimates of future claim payments, including for those classes of business for which discounted provisions are held, see ‘Financial statements IFRS – Note 39 – Insurance liabilities’. The timing of cash flows reflects a best estimate of when claims will be settled.
4 The Group has no material finance leases for property and equipment. 5. Includes obligations for repayment of collateral received under stock lending arrangements and derivative transactions amounting to £4,460 million. 6. When subordinated debt is undated or loan notes perpetual, the interest payments have not been included beyond 15 years. Annual interest payments for these borrowings are £72 million. Contractual undiscounted interest payments are calculated using fixed interest rates or prevailing market floating rates as applicable. 7. The unallocated divisible surplus represents the excess of assets over liabilities, including policyholder ‘asset share’ liabilities in the UK, which reflect the amount payable under the realistic Peak 2 reporting regime of the FSA. Although accounted for as a liability, as permitted by IFRS 4, there is currently no expected payment date for the unallocated divisible surplus. 8. Provisions include pension obligations, which have been excluded from the contractual obligations table above, due to the uncertainty of the amount and timing of future cash flows. The Group operates both funded defined benefit and funded defined contribution pension schemes, full details of which are provided in ‘Financial Statements IFRS – Note 47 – Pension obligations’. We have a contractual obligation to fund these schemes. However, the amount and timing of the Group’s cash contributions to these schemes is uncertain and will be affected by factors such as future investment returns and demographic changes. Our cash funding of defined contribution schemes is based on percentages of salary. Our cash contribution to defined benefit schemes is agreed in advance with scheme trustees. The Company and trustees have agreed to a long-term funding plan where contributions, together with anticipated growth on scheme investments are expected to eliminate the funding deficits over time. Contributions to these and the other schemes are regularly reviewed in light of changes in expectations of investment returns and other assumptions. The discounted scheme liabilities have an average duration of 20 years in the main UK scheme, 21 years in the RAC scheme, 22 years in the Irish scheme and 13 years in the Canadian scheme.
Risk and capital management Aviva plc Annual report and accounts 2012
Risk management objectives As a global insurance group, risk management is at the heart of what we do and is the source of value creation as well as a vital form of control. It is an integral part of maintaining financial stability for our customers, shareholders and other stakeholders. Our sustainability and financial strength are underpinned by an effective risk management process which helps us identify major risks to which we may be exposed, establish appropriate controls and take mitigating actions for the benefit of our customers and investors. The Group’s risk strategy is to invest its available capital to optimise the balance between return and risk whilst maintaining an appropriate level of economic (i.e. riskbased ) capital and regulatory capital in accordance with our risk appetite. Consequently, our risk management objectives are to:  Embed rigorous risk management throughout the business, based on setting clear risk appetites and staying within these;  Allocate capital where it will make the highest returns on a risk-adjusted basis; and
Aviva’s risk management framework has been designed and implemented to support these objectives. The key elements of our risk management framework comprise our risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles & 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. These elements are expanded in the Financial statements IFRS – Note 56.
Risk environment Financial market conditions during 2012 were volatile although positive overall, benefiting from the expansionary monetary policies followed by central banks across a number of economies in the second half of the year. However, the continued political and economic uncertainty relating to the Eurozone combined with the high levels of debt in many western economies continues to act as a brake on economic growth and raises the likelihood of a low growth, low interest rate environment persisting for some time. Reflecting the wider financial and economic conditions, both UK and international regulatory authorities have implemented, or are in the process of considering, enhanced regulatory requirements intended to prevent future crises arising or assure the stability of institutions under their supervision. A good example of this in the UK is the Prudential Regulatory Authority’s (PRA) proposed focus on ensuring that firms have adequate resolution arrangements in place. Further regulatory uncertainty arose from the ongoing discussions regarding the technical standards for, and the implementation date of, Solvency II. Aviva continues to actively participate in the development of Solvency II through key European industry working groups.
Risk profile The types of risk to which the Group is exposed have not changed significantly over the year and remain credit, market, insurance, asset management, liquidity, operational and reputational risks as described in note 56 of the IFRS financial statements. Reflecting Aviva’s objective of building financial strength and reducing capital volatility, the Group has taken steps to amend its risk profile. These include a net sell down of approximately €3.6 billion (gross of minority interests) Italian government bonds, a reduction in credit exposure to European financial institutions and a move towards a more general reduction in credit risk predominantly achieved through the sale of the Group’s US subsidiary (which remains subject to regulatory approval). Restrictions on non-domestic investment in sovereign and corporate debt from Greece, Ireland, Italy, Portugal and Spain remain in place and balance sheet volatility was further reduced through the sell down of Delta Lloyd in July 2012. As described in note 56, a number of foreign exchange rate, credit and equity hedges are also in place. The reduction in credit and equity exposure noted above also reflects a broader move towards a more balanced risk profile. Subsequent to the year end, the Group has also taken action to improve its access to dividends from the Group’s insurance and asset management businesses by undertaking a corporate restructuring whereby Aviva Group Holdings (AGH) has purchased from Aviva Insurance Limited (AIL) its interest in the majority of its overseas businesses. This purchase has been funded by intercompany loans. It is planned to pay down the intercompany loan balances over time, in addition to meeting the Groups normal operating expenses, taxes, interest on our external debt, dividends and repayment of maturing debt. Going forward, the Groups focus is on fewer businesses as is reflected in the sale of Aviva’s Czech Republic, Hungarian and Romanian life businesses, the sale of Aviva’s interest in our Sri Lankan joint venture, our remaining stake in Delta Lloyd and the agreed sale of the US business, the Romanian pensions business, Aviva Russia, and our stake in the Malaysian joint venture CIMB. The process of exiting these non-core businesses will reduce the amount of the Group’s capital employed in less economically profitable areas, decrease balance sheet volatility and required capital, and will allow capital to be re-employed in businesses that enhance the Group’s return on risk based capital. Execution risk is inherent in the completion of all strategic transactions, with a corresponding potential impact on capital requirements and liquidity. As a result of the sale of businesses (in particular the US), the Group’s future earnings have been reduced and the tangible net asset value of the Group has fallen (leading to an increase in the leverage ratio to close to 50%). We have plans in place to improve earnings through managing the deployment of capital to maximise return and expense reduction (though clearly execution risk remains). These additional earnings, combined with higher retained profits, should enable us to reduce our external leverage ratio to 40% in the medium term and reduce internal leverage.
Capital management Capital management objectives The primary objective of capital management is to optimise the balance between return and risk, whilst maintaining economic and regulatory capital in accordance with risk appetite. Aviva’s capital and risk management objectives are closely interlinked, and support the dividend policy and earnings per share growth, whilst also recognising the critical importance of protecting policyholder and other stakeholder interests. Overall capital risk appetite, which is reviewed and approved by the Aviva Board, is set and managed with reference to the requirements of a range of different stakeholders including shareholders, policyholders, regulators and rating agencies. Risk appetite is expressed in relation to a number of key capital and risk measures, and includes an economic capital risk appetite of holding sufficient capital resources to enable the Group to meet
Risk and capital management continued its liabilities in extreme adverse scenarios, on an ongoing basis, calibrated at a level consistent with a AA range credit rating. In managing capital we seek to:  maintain sufficient, but not excessive, financial strength in accordance with risk appetite, to support new business growth and satisfy the requirements of our regulators and other stakeholders giving both our customers and shareholders assurance of our financial strength;  optimise our overall debt to equity structure to enhance our returns to shareholders, subject to our capital risk appetite and balancing the requirements of the range of stakeholders;  retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit facilities and access to a range of capital markets;  allocate capital rigorously across the Group, to drive value adding growth through optimising risk and return; and
Accounting basis: Capital employed by segment and financing of capital The table below shows how our capital, on an MCEV basis26, is deployed by segment and how that capital is funded.
Long-term savings 16,337 14,148 General insurance and health 6,089 5,875 Fund management 225 184 Other business (1,059) (1,102)
Financed by: Equity shareholders’ funds 12,434 12,829 Non-controlling interests 2,214 1,476 Direct capital instruments and fixed rate tier 1 notes 1,382 990 Preference shares 200 200 Subordinated debt 4,337 4,550 External debt 802 705
Total capital employed 21,369 20,750 1 ‘Corporate’ includes centrally held tangible net assets, the staff pension scheme surplus and also reflects internal lending arrangements. These internal lending arrangements, which net out on consolidation, arise in relation to the following: – Aviva Insurance Limited (AI) acts as both a UK general insurer and as the primary holding company for our foreign subsidiaries. Internal capital management mechanisms in place allocate a portion of the total capital of the company to the UK general insurance operations, giving rise to notional lending between the general insurance and holding company activities. These mechanisms also allow for some of the assets of the general insurance business to be made available for use across the Group.
Regulatory capital – overview Individual regulated subsidiaries measure and report solvency based on applicable local regulations, including in the UK the regulations established by the Financial Services Authority (FSA). These measures are also consolidated under the European Insurance Groups Directive (IGD) to calculate regulatory capital adequacy at an aggregate Group level, where we have a regulatory obligation to have a positive position at all times. This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in the UK and Ireland with-profit life funds. The minimum solvency requirement for our European businesses is based on the Solvency 1 Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked life reserves respectively and for our general insurance portfolio of business is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our major non-European businesses (the US and Canada) a risk charge on assets and liabilities approach is used.
Cover of EU minimum (calculated excluding UK Life funds) 1.7 times 1.3 times
The EU Insurance Groups Directive (IGD) regulatory capital solvency surplus has increased by £1.6 billion since 31 December 2011 to £3.8 billion. The key movements over the period are set out in the following table: £bn
IGD solvency surplus at 31 December 2011 2.2 Operating profits net of other income and expenses 0.9 Dividend and appropriations, net of shares issued in lieu of dividends (0.7) Market movements including foreign exchange1 1.3 Pension scheme funding (0.2) Movement in hybrid debt 0.2 UK reinsurance transactions 0.1 Increase in Capital Resources Requirement (0.1) Other regulatory adjustments 0.1
Regulatory capital – UK Life with-profits fund The available capital of the with-profits funds is represented by the realistic inherited estate. The estate represents the assets of the long-term with-profits funds less the realistic liabilities for nonprofit policies within the funds, less asset shares aggregated across the with-profits 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, guarantees and promises. Realistic balance sheet information is shown below for the three main UK with-profit funds: Old With-Profit Sub-Fund (OWPSF), New With-Profit Sub-Fund (NWPSF) and With-Profit Sub-Fund (WPSF). These realistic liabilities have been included within the long-term business provision and the liability for insurance and investment contracts on the consolidated IFRS statement of financial position at 31 December 2012 and 31 December 2011.
Estimated risk capital margin £bn 2012 Estimated excess available capital £bn
2 Estimated realistic inherited estate at 31 December 2011 was £nil, £0.3 billion and £1.6 billion for NWPSF, OWPSF and WPSF respectively.
3 This represents the reattributed estate of £0.7 billion at 31 December 2012 (31 December 2011: £1.1 billion) held within NPSF1 (a non-profit fund within UKLAP included within other UK life operations).
The equity backing ratios, including property, supporting withprofit asset shares are 71% in NWPSF and OWPSF, and 64% in WPSF.
Economic capital We use a risk-based capital model to assess economic capital requirements and to aid in risk and capital management across the Group. The model is based on a framework for identifying the risks to which business units, and the Group as a whole, are exposed. Where appropriate, businesses also supplement these with additional risk models and stressed scenarios specific to their own risk profile. When aggregating capital requirements at business unit and Group level, we allow for diversification benefits between risks and between businesses, with restrictions to allow for non-fungibility of capital where appropriate. This means that the aggregate capital requirement is less than the sum of capital required to cover all of the individual risks. The capital requirement reflects the cost of mitigating the risk of insolvency to a 99.5% confidence level over a one year time horizon (equivalent to events occurring in 1 out of 200 years) against financial and non-financial tests. The financial modelling techniques employed in economic capital enhance our practice of risk and capital management. They enable understanding of the impact of the interaction of different risks allowing us to direct risk management activities appropriately. These same techniques are employed to enhance product pricing and capital allocation processes. Unlike more traditional regulatory capital measures, economic capital also recognises the value of longer-term profits emerging from inforce and new business, allowing for consideration of longer-term value emergence as well as shorter-term net worth volatility in our risk and capital management processes. We continue to develop our economic capital modelling capability for all our businesses as part of our development programme to increase the focus on economic capital management and meeting the emerging requirements of the Solvency II framework and external agencies.
Rating agency Credit ratings are an important indicator of financial strength and support access to debt markets as well as providing assurance to business partners and policyholders over our ability to service contractual obligations. In recognition of this we have solicited relationships with a number of rating agencies. The agencies generally assign ratings based on an assessment of a range of financial factors (e.g. capital strength, gearing, liquidity and fixed charge cover ratios) and non-financial factors (e.g. strategy, competitive position, and quality of management). Certain rating agencies have proprietary capital models which they use to assess available capital resources against capital requirements as a component in their overall criteria for assigning ratings. Managing our capital and liquidity position in accordance with our target rating levels is a core consideration in all material capital management and capital allocation decisions. The Group’s overall financial strength is reflected in our credit ratings. The Group’s rating from Standard and Poor’s is A+ (“strong”) with a Stable outlook; Aa3 (“excellent”) with a Negative outlook from Moody’s; and A (”excellent”) with a Stable outlook from A.M. Best.
Financial flexibility The Group’s borrowings are comprised primarily of long dated hybrid instruments with maturities spread over many years, minimising refinancing risk. In addition to central liquid asset holdings of £1.4 billion, the majority of which was held within Aviva Insurance Limited at the 2012 year end, the Group also has access to unutilised committed credit facilities of £2.1 billion provided by a range of leading international banks.
Operating capital generation: Life in-force profits1 2.1 2.3 General insurance, fund management and non-insurance profits 0.6 0.6
Operating capital generation after investment in new business 2.0 2.1 1 The Life in-force profits in 2012 exclude the negative impact of a true up relating to a prior estimate of required capital, which is included in the MCEV Free Surplus Emergence, as this does not impact the actual capital generated in 2012.
Operating capital generation comprises the following components: – Operating Free surplus emergence, including release of required capital, for the life in-force business (net of tax and non-controlling interests); – Operating profits for the general insurance and non-life businesses (net of tax and non-controlling interests).; – Capital invested in new business. For life business this is the impact of initial and required capital on free surplus. For general insurance business this reflects the movement in required capital, which has been assumed to equal the regulatory minimum multiplied by the local management target level. Where appropriate movements in capital requirements exclude the impact of foreign exchange and other movements deemed to be non-operating in nature.
– Post disposal on 6 May 2011, all Delta Lloyd capital generation, including life business, has been included within general insurance, fund management and other operations profits on an IFRS basis.
Interest, corporate and other costs (0.8) (0.6) External dividend net of scrip (0.7) (0.5)
Basis of preparation This review complies with the recommendations of the European Union (“EU“) Modernisation Directive, the Companies Act 2006 (Contents of Directors’ Report: Business Review) and is in line with current best practice. It is addressed to, and written for, the members of Aviva plc with the aim of providing a fair review of our business development, performance and position at the current time. In producing this review, we aim to present a view that is balanced and comprehensive and that is consistent with the size and complexity of our business. The review is written in the context of the risks and uncertainties facing our business. We anticipate that the format and content of the review will evolve over time, along with developments in our business and the external environment.
Key performance indicators The Companies Act requires that a fair review of the business contains financial and, where applicable, non-financial key performance indicators (“KPIs”). We consider that our financial KPIs are those that communicate to the members the financial performance and strength of the Group as a whole. These KPIs comprise:  adjusted operating profit, before and after integration and restructuring costs;  IFRS profit/loss after tax;  life internal rate of return  general insurance combined operating ratio  economic capital surplus;  net operating capital generation; and  return on equity shareholders funds.
Management also use a variety of other performance indicators (“OPIs”) in both running and assessing the performance of individual business segments and units, rather than the Group as a whole. OPIs include measures such as new business margin and value of new business. In addition to reporting on our financial performance, it is important that as a forward-thinking company we are aware of our wider responsibilities and report on the non-financial aspects of our performance. We consider that our employees and customers are fundamental to the success of our business; as such, they form the basis for our non-financial measures, and include:  employee engagement and leadership; and  customer advocacy.
27 MCEV: market consistent embedded value: In preparing the MCEV information, the directors have done so in accordance with the MCEV principles with the exception of stating held for sale operations at their expected fair value, as represented by expected sale proceeds, less cost to sell..
In this section 2012 Highlights 62 Our corporate responsibility strategy 62 Trust and transparency 64 Attracting and retaining talent 66 Community development 67 Climate change and environment 68 Key indicators 70 Accounting for Sustainability 72 Indices and benchmarks 75 Independent Assurance Report 76
Aviva aims to be trusted, respected, sustainable and recognised for making a real contribution to society. Our corporate responsibility strategy supports these aims. Providing peace of mind is our social purpose and central to our overall business strategy. Aviva recognises, as an insurer that we have a fundamental part to play in society in enabling business growth, by providing protection and in tackling global issues such as climate change. In this report we highlight how we are addressing the issues that are material to our business and help us address issues in society as a whole. We focus on trust and transparency, attracting and retaining talent, environment and climate change, and community development. The report that follows contains a summary of the progress and performance of our corporate responsibility strategy, aligned to these material issues, in 2012. A more detailed review is available online at www.aviva.com/corporate-responsibility/reports The highlights below are directly related to our key performance indicators and give a snapshot of our performance during 2012.
Highlights from 2012 include:  Helped over 649,000 children since 2009 through our Street to School campaign.  Community investment of £11 million including cash, in kind donations, and skills based volunteering.  One of the top 4 global organisations in the FTSE4Good,
Silver in the DJSI SAM Yearbook, and ranked 32nd in the Stonewall equality index.
Our corporate responsibility strategy Our business of insurance has underpinned the development of market economies, enabling business growth and building more resilience into people’s lives. In addition to the social benefits of increased insurance penetration we seek to deepen our impact on society through the way we invest the talent of our people, as well as financial resources. Aviva’s approach to corporate responsibility is a key pillar of our business strategy. It underwrites our ability to deliver on our promises to our customers and to extend the positive contribution we make to society. As a responsible corporation we deal with matters in society relevant to our business. We therefore focus on:  being trusted and transparent; demonstrating our sustainability to our stakeholders  attracting and retaining the right people by creating a work environment that inspires pride and that enables people to give of their best
 To be the employer of choice for our people – employees tell us that if we create an environment where they feel they can make a difference, can thrive and be proud of what we stand for then they are more likely to deliver high performance, exceptional customer service and develop their career with us
 To be a partner of choice, with superior service, responsiveness and innovation – partners tell us to keep influencing product and service design to encourage customer behaviour change, in a way that demonstrates we are experts at managing risk
We believe that when corporate responsibility is embedded in the business, it drives trust and gives a sustainable competitive advantage, creating differentiation and market penetration. During 2012 we have continued our journey towards truly embedded corporate responsibility. In the execution of our strategy we seek to enable the whole Aviva business to embed sustainability considerations into business strategy, processes, products and services and the way we manage risk. Our corporate responsibility strategy is underpinned by a globally consistent corporate responsibility Business Standard. We have continued the roll out of our framework and tools to equip the business and unlock innovation in a sustainable way. Finally, we have created a new structure with an enhanced role for corporate responsibility business partners to work even more closely with the leadership of our markets and functions. These things help all of us at Aviva to turn this strategy into meaningful action and the kind of socially and commercially valuable outcomes described in this report.
Stakeholder communications and engagement Open dialogue with our stakeholders helps us to define priorities and shape our approach. By being open and transparent about what we do and how we run our business we believe we demonstrate a high degree of integrity. This in turn, helps the process of continuing to build trust in Aviva for all of our stakeholders. We report here about our engagement with investors and governments, as well as our senior leadership participation on external forums. Engagement with our employees is discussed under Attracting and retaining talent, and our customer engagement is covered in our Customer section. Key to this is the way that we report our corporate responsibility commitments and performance. We prepare standalone detailed annual reports for the Carbon Disclosure Project, UN Global Compact, ClimateWise, and Principles for Responsible Investment. As well as providing a narrative corporate responsibility 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 72. We are committed to providing full disclosure to investors and as such respond to EIRIS, SAM, Sustainalytics and Vigeo for inclusion in the FTSE4Good, Dow Jones Sustainability Indices, Ethibel and ECPI indices. This year we have again been ranked as one of the top four companies in the FTSE4Good ESG ratings. We hold a similarly high position in the STOXX ESG Global Leaders index. As a large investor we engage with companies to promote transparent and effective governance and engagement among the companies we invest in. We have supported the development of good governance in the UK and beyond for many years, and we take our own stewardship responsibilities seriously, complying with all the principles of the Financial Reporting Council’s UK Stewardship Code. In particular, we use proxy voting to challenge poor management approaches and to protect the value of investments. While we aim to support the companies we invest in, we intervene strongly where we believe more sustainable practices should be implemented. We know that our investors want us to be open and clear about our future strategy. We believe this includes commentary on our sustainability practices, which aims to help us become the most trusted, respected and sustainable insurance company, recognised for making a real contribution to society. We encourage companies, especially publicly listed and large companies, to consider integrating sustainability information into their reporting cycle. We encourage industry, interested governments and relevant stakeholders with the support of the United Nations system, as appropriate, to develop models for best practice and facilitate action for the integration of sustainability reporting. Aviva has shown longstanding leadership within Principles for Responsible Investment (PRI), where Paul Abberley sits on the Advisory Council, and Sustainable Stock Markets. In addition Aviva provided a significant contribution to the UN Global Compact input and recommendations for the Rio+20 Summit regarding sustainability reporting. The Aviva convened Corporate Sustainability Reporting Coalition were successful in securing text in the outcome document and are now keen to continue UN collaboration to see implementation.
We believe that collaboration with international partners and our peers is vital to progress the issues of business and society today. This year we have helped to develop the UN Principles for Sustainable Insurance and co-sponsored a publication on the rights of children working and/or living on the street. Our senior leaders continue to be represented on industry and global forums. We have advanced our work with the Chief Risk Officer (CRO) Forum, represented by John Lister, chief risk and capital officer, raising awareness within the industry of sustainability challenges and reputational risks related to cluster munitions and oil sands. Following the Davies review, chief marketing and communications officer, Amanda Mackenzie has continued to engage in the debate on women on Boards. In December she took part in a round table discussion in Brussels with Commissioner Reading and MEPs. Our Chairman John McFarlane is part of the City UK advisory board which seeks to increase trust in financial services. We have senior level representation at the CBI with our Chairman sitting on the Presidents Committee and CEO of Aviva Investors on the Infrastructure Committee. We are also pleased to have been able to support the Prime Minister’s Dementia Challenge Champion Group during the year. As a long-term business, we help Governments tackle some of their key issues – fiscal, demographic, the savings gap, and infrastructure. We have continued to engage closely with governments this year, 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:  The House of Lords EU Select Committee B inquiry on
Women on Boards  The Environmental Audit Committee Inquiry into the outcomes of the Rio+20 Earth Summit  The Business, Innovation and Skills Select Committee inquiry into Corporate Long-termism and the equity markets  The European Commission’s Rio outcomes consultation –
Customer research As the leading insurer in the UK with a significant international market presence we are actively involved in the issues facing the insurance market. We engage in broad ranging research and discussion topics with consumers, our industry bodies, the Financial Services Authority (FSA) and governmental stakeholders. This year we have published reports into three main areas, family finances, real retirement, and the pensions gap. In addition to this we have led discussion and published research on behavioural economics, the open market option and workplace savings. We continue to work to understand the perceptions and needs in our markets. Once again we have conducted our wide-ranging Aviva Customer Attitudes survey – now running for over nine years, in 25 countries, asking more than 220,000 people what they think about risk, savings, retirement, financial advice and other important issues. By listening carefully to what consumers tell us, and responding quickly and effectively to meet their needs we can build better, more trusting, relationships with customers. The latest results show that consumers remain cautious about the general economic situation and are nervous about taking high levels of risk, for example:  43% of people think that the general economic situation in their country will get worse in the next 12 months  26% of people globally are relying on their savings to live day by day  28% agree that they have enough savings/investments to cope with the unexpected  57% state that they are worried that they won't have enough money when they retire to provide an adequate standard of living
 Empower people with an interactive tool (such as a pension calculator) demonstrating how saving more earlier in life can improve their retirement income
Our Family finances report shows the typical UK family could afford to save an extra £53 a month however, saving is not top of families’ priority lists. While most families admit they could put something extra aside, their savings experience tends to be more “as and when” rather than a conscious part of their regular financial planning. Please see
Business ethics We aspire to the highest standards of conduct and set out our principles in our business ethics code. This stipulates fairness, honesty and transparency in all we do. The Code is one of the tools we have to remind all employees of the behaviour expected which in turn drives the culture at Aviva. Employees in all countries in which we operate are required to uphold the laws of the host country and to conduct themselves according to the business ethics code. Everyone at Aviva has a part to play in upholding our standards and we raise awareness of these responsibilities through our induction programmes. The Code is made available to all employees who are required to read and sign it on an annual basis. In Aviva France all employees agree to adhere to the Code in their employment contract and take part in annual training. We aim for a sign-off of 100% of employees. This year we have not met our target, and the achieved outcome is lower than we aim for at 88%. The corporate responsibility committee recognise that this is not good enough and we will focus on achieving the target in 2013. In addition to our business ethics code, Aviva has a code of ethics for senior management as required by section 406 of the Sarbanes-Oxley Act 2002 and the rules issued by the Securities and Exchange Commission. This code can be found on Aviva’s website: www.aviva.com/investor-relations/corporategovernance /code-of-ethics
Financial crime Aviva has a zero-tolerance approach to financial crime including bribery and corruption, fraud, money laundering and sanctions violations. We require our global businesses to comply with the Financial Crime Standard. This Standard sets out mandatory requirements to ensure businesses implement and maintain riskbased, comprehensive financial crime prevention programmes. The Standard and financial crime prevention programmes are reviewed and updated consistent with legal and regulatory developments. Every instance of financial crime, both internal and external fraud, is recorded and investigated independently. We encourage our employees to raise any concerns they might have through their managers or Right Call – an Aviva-wide malpractice reporting service. Right Call enables all employees to report any suspicions or concerns in a confidential manner for independent investigation. During 2012, 63 incidents (2011: 69) were recorded across the Group, 24 internal, 17 external and 22 after further investigation were not considered as financial fraud. All cases were referred for independent investigation with 52 reaching conclusion and 11 cases currently remaining under investigation.
Responsible investment As an insurer we have a fiduciary responsibility to look after our customer’s money. We seek to do that in a responsible and ethical manner to the benefit of the customer and society as a whole. In April 2012 we revised our investment approach to implement environmental, social and governance (ESG) considerations into our investment decisions. This refreshed strategy is ongoing; by the end of 2012 33% of funds under management are covered by this approach. We plan to complete the roll out to all funds by year end 2013. Aviva maintains a list of companies that we do not invest in due to ethical reasons. During 2012 we delivered a project to divest from holding organisations involved in cluster munitions and anti-personnel mine manufacture. We have held such a policy since 2008 and have now extended this policy to all policyholder funds. We believe well-governed companies operating responsibly and sustainably should have the mechanisms in place to support their long-term growth and shareholder value. With this in mind, we promote transparent and effective governance and engagement with the companies in which we invest. Our ESG voting policy is used to engage with companies regarding, environment, climate change, health and safety, supply chain labour standards, human rights and bribery and corruption issues. Our voting covers over 1,800 companies in the MSCI universe. This year we saw an increase from ‘against’ to ‘abstain’ in our voting trends suggesting an improvement in companies ESG reporting. As mentioned earlier in this report, Aviva is very active in advocating for better disclosure of ESG issues from listed companies. Our work with the Sustainable Stock Exchanges initiative aligns to this with regards to encouraging greater corporate transparency.
Attracting and retaining talent As a global financial services organisation we recognise our role in attracting, developing and retaining talent within our workforce in order to deliver our strategic priorities, and ensure that we create an engaging and high performance orientated culture, that potential employees want to join and where our employees want to stay to develop their careers. Delivering on our strategic imperatives requires a compelling vision and strong leadership which harnesses the energy, dedication and belief of all our employees. At Aviva we believe that everyone has a role in creating and contributing to our culture, although our senior leaders will undoubtedly set the tone. Supported by a strong global HR function Aviva has a clear purpose – to bring to life our employee promise in order to deliver exceptional business performance. At the heart of our approach are the fundamental principles of:  Differentiating and rewarding our top performers  Collaborating, encouraging innovation and seeking to do things once, globally  Developing our internal capability through appropriate stretch opportunities  Building an emerging talent pipeline, and  Taking personal accountability
In 2012, we have continued to advance our people agenda by maintaining one global approach to talent management, performance management, leadership, and embarking upon enabling a values-driven culture to be at the heart of everything we do.
 Ensuring there is a direct relationship between an employees’ performance and their reward
 Developing our leadership capability, particularly at the point of key transitions
 Ensuring our employees are able to thrive, through appropriate engagement and wellbeing programmes, and
 Continuing to ensure that our talent pipeline support both our capability and diversity ambition, whilst contributing positively to the government’s wider youth employment agenda.
 Capability: we want our leaders to have the skills and capabilities required to build high-performing teams in a diverse business environment
 Culture: we want to be ‘most recommended’, not only by our customers but also by our people. To do that, we need a culture and work environment that builds pride among our people
Community development We know that a sustainable business must make a real contribution to the society it operates in. As well as providing employment to 31,211 people we also provide peace of mind to our 38 million customers. Our approach to community development is based on building partnerships across three main strategic themes of our business: education, life trauma and financial literacy. We are actively contributing to the Millennium Development Goals and we demonstrate our commitment to being at the leading edge of addressing environmental, social, and governance issues through our UN Global Compact LEAD membership. Globally, we contributed over £11 million in cash, gifts inkind, project and volunteering costs to community development in 2012, a 12% decrease from 2011 (2011: £12.4 million) a reduction due to the reducing scale of our business and a shift in our global marketing strategy. Our contribution is magnified by the wider investment we leverage together with our stakeholders such as employee fundraising. Employees are allocated three days volunteering leave per year and in 2012 we built our volunteering offering into our HR systems. This takes advantage of the skills development that can be gained, as well as the value contributed to our communities, and embeds the CR Standard further in to our day to day work. In 2012, 18% of employees took part in volunteering equating to 56,357 hours. There was also a 3%
increase in the number of employees contributing through payroll giving, totalling £939,176. This increase in participation is significant because we know it demonstrates pride in working for Aviva. We have continued to improve our measurement approach in recording our inputs and outputs more accurately, in order to demonstrate the wider benefit of our investment and to support the continuous improvement of our programmes. Aviva has a clear track record of working with field experts in community development across the public and charity sector. We recognise the importance of our partnerships with organisations such as the UN Office of the High Commissioner for Human Rights, UK Athletics, Save the Children, Consortium for Street Children, and Oxfam to enable us to develop and share best practice programmes and to work effectively in areas of community advocacy. This partnership work helped us to develop our Child Safeguarding guidelines as an aid to employees working or volunteering with children on Aviva’s behalf. We recognise the mutual benefit of our community development activity; our employees feel engaged and proud, our communities benefit and our brand reputation is enhanced.
Street to School Aviva’s Street to School programmes help young people move away from the street and into education and training. We focus on education because we know that education is insurance. Street to School has now helped over 649,000 children around the world, exceeding our five-year target in just three years. Since the programme started in 2009 we have invested over £13 million in cash and in-kind donations. We commit at least 50% of our community development budget to Street to School. 2012 saw us increase the depth and breadth of our Street to School work. We have continued to create innovative cause related marketing opportunities. In the UK a child runs away from home and into danger every five minutes. Aviva, Railway Children and Mumsnet have created an online space that helps parents talk to their children about this difficult subject and find guidance. For every interaction on the Mumsnet site, we are donating £2 to Railway Children to help vulnerable young people at risk on Britain’s streets. In Indonesia we have created a partnership with PLAN UK to work in conjunction with the Ministry of Social Affairs raising awareness of birth registration for street children. The Ministry have identified that around 230,000 children in street situations in Indonesia. The project aims to register 1,500 children living or working on the streets over a two year period. We have also stepped up our advocacy, supporting the International Day for Street Children and delivering a pioneering partnership with the UN High Commissioner for Human Rights. The report we co-sponsored on the rights of children working and/or living on the street was welcomed by the Human Rights Council in March 2012. We are now actively working with our partners to turn the report’s recommendations into global action. Over the next few years we want to help drive real change in the cause and act as a catalyst to inspire others to join us in raising awareness of the issues and ensuring children involved with the street have the same rights and opportunities as all children, especially their right to education.
Community projects The other half of our community development approach can be found in the following examples:  Aviva was one of the first companies to sign up to the
Aviva plc – operational carbon footprint covering 100% of employees GHG Emissions data from 1 Jan 2012 to 31 Dec 2012
Absolute CO2 footprint* 126,502 165,115 Carbon offsetting (132,827) (173,371) Total net emissions (6,325) (8,256)
The role of insurers in climate change The insurance industry has a fundamental part to play in society’s responses to climate change. As a major insurer Aviva has firsthand understanding of the impact of extreme weather events on our customers. On their behalf, we are committed to help mitigate the threat of climate change and support everyone in society to adapt to changes caused by man-made emissions already in the atmosphere. Our industry can also draw on its knowledge of historical weather data to identify patterns of change, applying our understanding of risk to map future temperature scenarios and determine likely impacts. We believe that climate change must be tackled now. As extreme weather events become more frequent and more severe, they become more challenging to insure. It is in everyone’s interest that insurance remains affordable and available so that people affected by severe weather events can recover quickly from unavoidable impacts. Aviva fully supports the ABI’s discussions with Government on finding a viable solution to keep insurance affordable and available for those at high risk of flooding, when the Statement of Principles ends in June. Regardless of the outcome of these discussions, we firmly believe that all parties – including central and local Government, insurers and home owners – need to play their part in protecting homeowners who are living in fear of flooding. We have been able to respond well to the extreme rainfall experienced in the UK in 2012, answering calls to our call centres within an average of eight seconds and even being able to go door-to-door where imminent flooding is expected to advise customers to move valuable and sentimental items upstairs to avoid damage.
Corporate responsibility continued choices that support the environment. Following the launch of our insurance cover for the environmental goods and services section, for UK ClimateWeek 2012 we conducted a survey to understand intermediary attitudes to environmental management within their own business and whether they believed focusing on it further would win business for them. 20% of brokers advised they had seen an increased interest in the demand for products in support of the environmental goods and services sector. 69% thought that they could take more advantage of the interest seen in this area.
Investing in low carbon energy infrastructure In a challenging macro-economic environment institutional investors are looking for diversified sources of stable income. In August 2012, Aviva Investors acquired a residential solar project totalling 23 megawatts of capacity making it the largest investment of this kind in the UK and the company’s first of this type. The assets are spread across 7,000 homes. The assets are held in the Realm Infrastructure Funds, which are mainly targeted at UK pension fund investors and is in keeping with the strategy of producing long term profitability with a reduced appetite for risk. Aviva Investors also acquired the Almatret wind farm near Lerida in Spain in the same month.
CO2e emissions (tonnes) – absolute 104,351 127,685 165,115 126,502 CO2e emissions (tonnes) – relative n/a n/a 144,550 126,502 Reduce relative CO2e emissions by 5% Water consumption (m³) – absolute 751,750 690,369 509,657 559,144 Reduce water use by 4% Waste generated (tonnes) – absolute 11,812 12,042 8,645 10,153 Reduce waste generated by 4% Proportion of recycled waste 79% 75% 73% 71% 80% or above
% of employees who feel that Aviva makes business choices that support the environment
New KPI New KPI New KPI 42% Meet/exceed GFS benchmark (2012: 50%)
% of employees who feel we have created an environment where people with diverse backgrounds can succeed
Suppliers % of “Managed Supply” spend where supplier accepted Code of Behaviour – UK only
% of “Managed Supply” spend where supplier has successfully completed the CR element of the Supplier process – UK only
Number of business units that use the ‘Supplier Hospitality register’ and ‘Register of Interests’
% of employees participating in volunteering 16% 17% 20% 18% Increase the % of employee participation in volunteering
Customers: Using NPS methodology we calculate the performance of businesses relative to their local market. Our Customer Advocacy section on page 74 outlines this further. Following changes to our overall business structure, the number of markets now ranked within the upper quartile is 39% – one market less than the previous year.
Baseline change – Due to the sale of our businesses in USA, Sri Lanka and Malaysia it is now necessary to revisit our 2010 baseline and restate it to account for these material structural changes. Our restated 2010 baseline, which we use to understand our progress on a long term basis is 132,244 CO2e. Our long term reduction target remains at 20% reduction by 2020, from this restated baseline
Water consumption – In 2012 improvements in the scope of local environmental reporting has meant that Ireland, Hong Kong, Aviva Investors North America and Solus Accident Repair Centres are reporting water for the first time. Hence the increase in total water consumption reported.
(9)%  Meet/exceed GFS benchmark 0%  Meet/exceed GFS benchmark n/a
Hospitality register: this figure has remained static however, more Aviva businesses are now compliant with this KPI, and we have removed those businesses we have divested.
Greenhouse gas emissions Direct Company impacts Cash flow performance The most material direct environmental impact that Aviva creates are greenhouse gas emissions. We emit greenhouse gases through our company operations generated from energy used in our buildings, fugitive emissions, business travel, water and disposal of waste to landfill. We also include emissions from our outsourced data centres in the UK and Canada. The scope of Aviva’s emissions includes all operations where we have day to day control; including joint ventures. 126,502 tonnes of carbon dioxide (tCO2e) or equivalent were emitted by Aviva into the atmosphere in 2012. Carbon offsets from the voluntary carbon market have been purchased to cover our footprint plus an additional 5% extra to allow for any inconsistencies in reporting. The cost of offsetting, £530,000, will be funded by the areas of the business that have created the emissions on a ‘polluter pays’ basis.
To nn es p er e m pl oy ee 2, 2, 7, 7, 6, 6, 4, 4, 5, 5,
Performance, strategy and targets Aviva's relative emissions have reduced this year by 12%. This is a combination of improvements in energy efficiency and increased use of technology. Our renewable electricity on a worldwide basis is 24% (2011: 7%) of our total electricity consumption. Due to structural changes to the business we set a new baseline in 2010 for our long term carbon reduction target. Following the sale of the Aviva businesses in the USA, Sri Lanka and Malaysia we are restating our 2010 to account for these. As a result our restated baseline is 132,244 tCO2e. Our long term target to 2020 remains at a 20% reduction using this baseline year figure. Our Group annual carbon reduction target still stands at 5%. Our use of communication technologies has continued to increase in 2012. 2,717 meetings were held by telepresence in 2012 (2011: 2,579), as well as 12,844 webexs and other technologies. We have estimated the cost of travel avoidance from the use of telepresence in 2012 as £2.7 million and 1,988 tonnes in carbon savings. Our business travel kilometers have reduced overall by 5%, however air travel has increased by 2% on the year.
Waste Direct company impacts Hazardous and non-hazardous waste Total disposal cost for hazardous and non-hazardous waste in the UK was £681,000 (2011: £596,000), which includes UK landfill tax and capital expenditure. On a worldwide basis the cost of offsetting the greenhouse gas emissions related to waste is approximately £2,056. In the UK, total capital expenditure for storage and recycling of waste was £100,000 (2011: zero). Overall total waste increased by 17% over the period, and waste diverted from landfill decreased to 71% (2011: 73%). In the UK, this rose to 95% from a figure of 94% last year. We have failed to meet our UK target of zero to landfill by end 2012 due to the lack of suitable recycling infrastructure in some areas of the country.
Performance, strategy and targets Due to the improved quality of reporting our total waste has increased by 17% to 10,153 tonnes. The total of actual waste recycled however, has increased from 6,358 tonnes in 2011 to 7,217 tonnes.
Indirect impacts Products/suppliers/investors In an effort to reduce the amount of waste generated through our claims fulfilment processes, we continue to work with peers through an ABI working group to understand how we can raise standards in this area across the industry.
Industry benchmark information  200kg of waste per employee per year; and  recycling rate of 60–70% (BRE Office toolkit).
Resource usage Direct Company impacts Water The operating cost of water is £1.2million (2011: £1.1 million) with a CO2 equivalent of 586 tCO2 (2011: 503tCO2). On a worldwide basis the cost of offsetting the greenhouse gas emissions related to water is approximately £2,000.
Energy intensity The total cost of buildings related energy in 2012 was £17.3 million (2011: £18.3 million). The equivalent cost per square metre is £21.66. The cost of UK CRCEES regulation of £1.1 million is an additional cost (2011: £1.3 million).
3, 5, 9, 1, 9, 0m 3 p er e m pl oy ee
Industry benchmark information  Water: 4 cubic metres per employee per year (Water Key
Performance Indicators and benchmarks for offices and hotels. C657 CIRIA www.ciria.org).
Customer advocacy Direct company impacts At Aviva, the Net Promoter Score® is how we track our progress towards our ambition to become the most recommended insurer. This KPI is derived from the annual benchmarked Relationship NPS survey conducted across all markets. This measure is widely regarded as a predictor of future growth, with analysis showing connections to retention, repeat purchase and referrals.
Our performance, strategy and targets The 2012 Relationship Net Promoter Score (RNPS) survey results show that the vast majority of markets are on par with or better than the market average – a slight improvement on the prior year. Following changes to our overall business structure, the number of markets now ranked within the upper quartile is 39% – one market less than the previous year. Building customer advocacy is core to our business objectives with our long term target to have all markets in the upper quartile relative to their local competition. To achieve this, analysis of the survey highlights key drivers and priorities by market, which markets use to develop an action plan. The 2013 action plans show some common areas of improvement, including how we engage with customers through ongoing communications, how we build products that customers need and understand, and ensuring that we are available to customers through the service channels they choose (such as digital and mobile).
Community development Direct company impacts Our global investment in charitable and community development projects in 2012 was £11 million (2011: £12.4 million). This includes cash, time and in-kind donations as well as project and volunteering costs calculated using the London Benchmarking Group (LBG) model. We also helped leverage an additional £3 million of investment where our activity attracted further contributions from our wide network of stakeholders (2011: £2.8 million) including employees.
Our performance, strategy and targets Our global community development 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 £1.5 million lower than in 2011 due to a reduction in the scale of our business and a change in marketing strategy that had previously contributed a significant percentage of our total investment. This cause related marketing, used to deliver community development advocacy will rise again in 2013. We delivered 56,357 hours of volunteering in 2012 (2011: 60,392) and we have maintained a high score for employee engagement regarding the way we act in our communities placing us 14% above the Global Financial Services benchmark. Our rigorous social impact measurement also helped us to achieve a top ranking in the FTSE4Good index and improve our DJSI scoring in this area by 25%. Due to the changes in our business structure the community media value and reach has been less well measured. This will be corrected in 2013 as the business benefits are an important element of our work in this area. Overall we have positively impacted 2 million (2011: 1.3 million) due to the momentum of Street to School and the addition of grass roots rugby. Our flagship Street to School initiative has now impacted over 649,000 children since it started in 2009 (target 500,000 by 2015).
Aviva are a member of the Dow Jones sustainability index. This year we increased our score to become a silver member of the SAM sustainability yearbook.
Oekom We have been rated as a prime investment by Oekom.
Our conclusions As a result of our procedures nothing has come to our attention that indicates the Selected Information for the year ended 31 December 2012 has not been prepared in all material respects with the Reporting Criteria.
How the information is assessed (“Reporting Criteria”) We assessed the Selected Information using Aviva’s Reporting Criteria as set out at www.aviva.com/corporateresponsibility /reports1.
Work done Considering the risk of material misstatement of the Selected Information, we:  made enquiries of Aviva’s management, including the
CR team and those with responsibility for CR management and Group CR reporting;  evaluated the design of the key structures, systems, processes and controls for managing, recording and reporting the Selected Information. This included visiting two markets, the UK and Canada, and analysing a further seven markets selected on the basis of their inherent risk and materiality to the Group, to understand the key processes and controls for reporting site performance data to the Group CR team;  performed limited substantive testing on a selective basis of the Selected Information at corporate head office and in relation to the UK and Canada markets to check that data had been appropriately measured, recorded, collated and reported; and
2 We have complied with International Standard on Assurance Engagements 3000 – ‘Assurance Engagements other than Audits and Reviews of Historical Financial Information’ issued by the IAASB, and with the applicable independence and competency requirements of the Institute of Chartered Accountants in England and Wales (ICAEW) Code of Ethics. To comply with those standards, our work was carried out by an independent and multi-disciplinary team of sustainability and assurance specialists.
In this section Chairman’s governance letter 78 Board of directors 80 Group Executive 83 Directors’ report 85 Corporate governance report 89 Nomination Committee report 95 Audit Committee report 97 Risk Committee report 100 Corporate Responsibility Committee report 103 Directors’ remuneration report 104
I have taken corporate governance incredibly seriously throughout my career as a leader of major financial services organisations around the world, and will continue to do so at Aviva. This is also firmly the position of our Board. A system of good governance keeps shareholder interests front of mind, and ensures a balanced outcome for stakeholders in general. Tone is always set from the top, and we have therefore made a number of changes in 2012 to enhance but also simplify the Group’s governance arrangements. As a cornerstone of this, the way authority is delegated throughout the Group was revised to give greater empowerment to businesses whilst strengthening central controls over the major risks in the Company, and these are subject to regular scrutiny by the Board Committees.
UK Corporate Governance Code The UK Corporate Governance Code (Code) sets out the standards of corporate governance that UK premium listed companies must meet. The Company aims to meet all the Code requirements and I am pleased to confirm that the Company has complied with most of the principles and provisions of the Code throughout the year. However, there is one area of non-compliance to which I should draw your attention and which relates to my role as executive chairman for part of the year. I joined the Board as chairman designate in September 2011 with the intention of learning about the Group and the business in order to succeed Lord Sharman as chairman on 1 July 2012. However, as we approached the 2012 annual general meeting, the Company came under strong shareholder pressure to accelerate change, and the Board asked me, as a former seasoned CEO, to take executive responsibility for the Group, and to seek and appoint a new Group Chief Executive Officer (Group CEO). Consequently, in the period from 1 July to 31 December 2012 whilst we did not comply with the Code requirement for the separation of the roles of chief executive and chairman, this was clearly in the interest of shareholders, and firm action was taken during this period to put the Group on to a firmer footing, that may not otherwise have taken place in such a short timeframe. This included major changes to the composition of the Board. We appointed Mark Wilson as Group CEO from 1 January 2013 and this regularised the position, such that we are now compliant with the Code. Further details of how the Company has applied the Code principles and complied with its provisions are set out in the Corporate Governance Report on pages 89 to 94.
Board changes There have been a number of changes to the Board during the year and in early 2013:  Lord Sharman retired from the Board and as chairman on 30 June 2012. He chaired the Board during a period of significant economic uncertainty, bringing extensive experience in the international financial services industry to bear during his tenure.
 Andrew Moss, group chief executive, left the Group in May 2012 having led the consolidation of our international presence and the integration of 40 brands into the very powerful single Aviva brand.
Europe, resigned in April 2012 when the Group was restructured into Developed Markets and Higher Growth Markets.
Board in October 2012 to pursue other interests. Mary had previously been chairman of the Risk Committee.
 Euleen Goh resigned from the Board at the end of the year to concentrate on her commitments in Asia.
 Trevor Matthews, executive director and chairman, Developed Markets, will step down from the Board prior to the 2013 AGM.
 Richard Goeltz, senior independent director, and Russell Walls, chairman of the Audit Committee, will both have completed nine years service in May 2013 and will retire from the Board on 8 May 2013. Both have been senior and valuable members of the Board.
 Glyn Barker joined the Board as a nonexecutive director in February 2012 and will become chairman of the Audit Committee on 8 May 2013.
At the same time, we are actively refreshing the Board with new non-executive appointments:  Sir Adrian Montague joined the Board in
January 2013 bringing strong insurance and plc credentials, and will become senior independent director on 8 May 2013.
 Bob Stein joined the Board in January 2013 bringing strong insurance and actuarial skills.
Patrick Regan Chief financial officer (Born March 1966) Appointed to the Board in February 2010 as chief financial officer and, since April 2012, has assumed responsibility for Aviva USA. He is chairman of Aviva Investors and is currently a member of the supervisory board of Delta Lloyd N.V. Formerly group chief financial officer and chief operating officer of Willis Group Holdings Ltd (insurance broking), group financial controller for RSA Insurance Group plc (insurance) and finance and claims director, UK general insurance for AXA Insurance (insurance). He also held a number of senior management positions at GE Capital (financial services) and specialised in corporate finance and investigations at Grant Thornton (professional services). He has extensive global experience in various executive functions within the insurance industry. He also has an excellent track record of driving change programmes and corporate actions to deliver improved profitability. He has been instrumental in improving the Group’s financial strength, resilience and performance against the backdrop of a challenging macroeconomic and regulatory environment. He has brought his significant financial acumen and analytical skills to bear in driving forward the change agenda and in successfully delivering the Group’s strategic priorities.
Richard Karl Goeltz Senior independent non-executive director (Born September 1942) Appointed to the Board in May 2004 and became senior independent non-executive director in January 2009. Currently a nonexecutive director of the New Germany Fund (investment trust), the Central Europe and Russia Fund (investment trust) and the European Equity Fund (investment trust), and is also a member of the Council and Court of Governors of the London School of Economics and Political Science. Former non-executive director of the Warnaco Group Inc. (clothing), 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). He has a strong financial background and has over 20 years’ experience in the financial services industry. He has held a broad range of executive and nonexecutive positions in major global corporations. His experience of audit and governance committees has been invaluable in providing effective oversight as a member of the Company’s Audit Committee. He is currently a member of the Audit and Nomination Committees and will retire from the Board, as senior independent non-executive director, and from the Audit and Nomination Committees after nine years of service to the Board on 8 May 2013.
Gay Huey Evans Independent non-executive director (Born July 1954) Appointed to the Board in October 2011. Currently a non-executive director of the London Stock Exchange Group plc (financial services), Clariden Leu (Europe) Ltd (financial services), Bank Itau BBA International Limited (banking) and the Financial Reporting Council. Member of the management board and of the panel of finance experts of the Panel of Recognised International Market Experts in Finance (PRIME Finance), and a trustee of Wellbeing of Women (UK) (charity) and The Wigmore Hall Trust (charity). Formerly chair of the International Swaps and Derivatives Association, Inc. (ISDA) (financial trade association), vice-chairman, investment banking & investment management at Barclays Capital (banking) and she held senior management positions at Citi Alternative Investments (EMEA) (banking), the Financial Services Authority (UK regulator) and Bankers Trust Company (banking). She is chairman of the Corporate Responsibility Committee and a member of the Nomination and Remuneration Committees. She has over 30 years of experience within the financial services industry, having held key positions in government and in a number of global financial and banking institutions. In addition to the financial expertise she brings to the Board, her experience at the Financial Services Authority continues to provide an insight into the priorities and focus of the Group’s lead regulator.
Russell Walls Independent non-executive director (Born February 1944) Appointed to the Board in May 2004. Currently non-executive director of Biocon Ltd (biopharmaceuticals), Signet Jewelers Ltd (retail), Syngene Ltd (contract research pharmaceuticals), and Mytrah Energy Ltd (wind power producer). Former group finance director of BAA plc (transport), Wellcome plc (pharmaceuticals) and Coats Viyella plc (textiles), treasurer and trustee of the British Red Cross (charity) and a member of the Finance Commission of the International Federation of the Red Cross (charity). Formerly senior independent director and chairman of the audit committee of Stagecoach Group plc (transport) and Hilton Group plc (leisure) and a non-executive director of Delphic Diagnostics Ltd (medical), and Mersey Docks and Harbour Company (transport). He has a strong financial background and a wealth of international experience across a range of sectors. With his deep financial acumen, analytical approach and extensive audit experience over a long financial career, he has been a robust Audit Committee chairman against a backdrop of macro-economic instability and changes to the audit environment. He is currently chairman of the Audit Committee and a member of the Nomination and Risk Committees and will retire from the Board, as Audit Committee chairman and from the Nomination and Risk Committees after nine years of service to the Board on 8 May 2013.
The Group Executive is made up of the executive directors and the senior executives whose biographies appear below. The Group Executive meets weekly as a forum for the Group CEO to discuss the strategic, financial, reputational and commercial aspects of the Group. The forum does not have decision-making authority in its own right and authority rests with each of the members (within their respective remits).
David Barral Chief executive officer, Aviva UK & Ireland Life (Born March 1962) Appointed chief executive officer, Aviva UK Life in June 2011. In March 2012 he took on additional responsibility for Aviva's Life business in Ireland, becoming chief executive officer, Aviva UK & Ireland Life. He became a member of the Group Executive in April 2012. He was formerly chief operating officer for Aviva UK Life responsible for customer propositions, pricing and customer operations. He joined Aviva in 1999 as director of independent financial advisor business and was appointed distribution director in 2005 covering independent financial advisor (IFA), retail, partnership and employee benefit channels. In 2008 he was appointed marketing director and led the Aviva rebrand for the UK Life business. During his time at Aviva, he has spearheaded much of the UK Life and pensions business’ activities to champion the customer, including supporting a move to the open market option for UK annuity customers. Prior to joining Aviva, he spent 20 years in financial services including roles in sales, marketing, operations and business transformation at organisations including Eagle Star, Prudential and Morgan Grenfell.
David McMillan Chief executive officer, Aviva Europe (Born February 1966) Joined Aviva in November 2002 and is chief executive officer Aviva Europe with accountability for the Group’s businesses in Italy, Lithuania, Poland, Russia, Spain and Turkey. He is also chairman of Aviva France SA. He joined the Group Executive in April 2012. He was previously group transformation director with responsibility for managing the implementation of Aviva’s strategic plan across the Group, refocusing and optimising the Group’s business portfolio, achieving financial strength, improving performance, and building a high-performance ethic across Aviva. He was previously chief executive officer, Aviva UK & Ireland General Insurance, chief operating officer for Aviva UK General Insurance, chairman of Aviva Global Services and non-executive director of Aviva Health and began his career with Aviva as director of partnerships (bancassurance). Prior to joining Aviva, he spent 12 years as director of management consultancy with PricewaterhouseCoopers LLP. His role involved leading projects spanning mergers and acquisitions, retail banking, organisational strategy and change.
Jason Windsor Chief strategy and development officer (Born August 1972) Joined Aviva in May 2010 and is the chief strategy and development officer, with additional executive responsibility for overseeing Aviva Investors. He joined the Group Executive in February 2013. He was formerly chief strategy & planning officer with responsibility for mergers, acquisitions and disposals, the Group’s strategic financial plan and oversight of Aviva’s Investor Relations function. Prior to joining Aviva, he was managing director in the Financial Institutions Group at Morgan Stanley, with management responsibility for the European asset management sector.
Principal activity The Company is the holding company of the Aviva plc group of companies (Group) whose principal activities are the provision of general insurance, life assurance, long term savings and fund management services.
Dividends The directors are recommending a final dividend of 9.00 pence per ordinary share (2011: 16.00 pence), which, together with the interim dividend of 10.00 pence per ordinary share paid on 16 November 2012 (2011:10.00 pence), produces a total dividend for the year of 19.00 pence per ordinary share (2011: 26.00 pence). The total cost of ordinary dividends paid in 2012 was £757 million (2011: £738 million). Subject to shareholder approval at the 2013 Annual General Meeting, the final dividend for 2012 will be paid on 17 May 2013 to all holders of ordinary shares on the Register of Members at the close of business on 22 March 2013 (and approximately five business days later for holders of the Company’s American Depositary Receipts).
Share capital and control The issued ordinary share capital of the Company was increased by 40,259,323 ordinary shares during the year. 3,335,566 shares were allotted under the Group’s employee share and incentive plans and 36,923,757 shares were allotted under the Aviva Scrip Dividend Scheme for the May 2012 and November 2012 dividends. At 31 December 2012 the issued ordinary share capital totalled 2,945,972,261 shares of 25 pence each and the issued preference share capital totalled 200 million shares of £1 each. Accordingly, the issued and paid-up ordinary share capital constituted 79% of the Company’s total issued share capital and the issued preference share capital constituted 21% of the Company’s total issued share capital at 31 December 2012. All the Company’s shares in issue are fully paid up and the ordinary and preference shares have a Premium and Standard listing respectively on the London Stock Exchange. The Company is listed on the New York Stock Exchange (NYSE) in the form of American Depositary Shares, referenced to ordinary shares, under a depositary agreement with Citibank. Details of the Company’s share capital and shares under option at 31 December 2012 and shares issued during the year are given in notes 29 to 32. The rights and obligations attaching to the Company’s ordinary shares and preference shares, together with the powers of the Company’s directors, are set out in the Company’s articles of association, copies of which can be obtained from Companies House and the Company’s website at www.aviva.com/investorrelations /corporate-governance/articles-of-association, or by writing to the group company secretary.
Employee practice The Group respects all fundamental human rights and is guided in the conduct of its business by the provisions of the United Nations Universal Declaration of Human Rights and the International Labour Organization core labour standards. The Group also supports the United Nations Global Compact Principles. The Group is committed to providing equal opportunities to all employees, irrespective of their gender, sexual orientation, marital status, race, nationality, ethnic origin, disability, age, religion or union membership status. Aviva is an inclusive employer and values diversity among its employees. These commitments extend to recruitment and selection, training, career development, flexible working arrangements, promotion and performance appraisal.
Creditor payment policy and practice It is the Group’s policy to pay creditors when they fall due for payment and the Company follows the government endorsed Prompt Payment Code which can be found at www.promptpaymentcode.org.uk. Terms of payment are agreed with suppliers when negotiating each transaction and the
Disclosure of information to the auditor In accordance with section 418 of the Companies Act 2006, the directors in office at the date of approval of this Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor, PricewaterhouseCoopers LLP (PwC), is unaware and each director has taken all steps that ought to have been taken as a director to be aware of any relevant audit information and to establish that PwC is aware of that information.
Annual General Meeting The 2013 AGM of the Company will be held on Thursday, 9 May 2013 at the Barbican Centre, Silk Street, London EC2Y 8DS at 11am. The Notice of AGM convening the meeting describes the business to be conducted thereat.
Related party transactions Details of related party transactions are disclosed in note 59 which is incorporated into this Report by reference.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Directors’ responsibility statement Each of the directors listed on pages 80 to 82 confirm that, to the best of their knowledge:  The Group financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit/(loss) of the Group; and
This Report sets out the role and activities of the Board, its effectiveness, and how the Group is governed. The Board’s role is to provide entrepreneurial leadership of the Company within a framework of prudent and effective controls which enables risk to be assessed and managed. The Board believes that a strong system of governance is essential to help the business run smoothly and aid effective decision making in order to support the achievement of the Group’s objectives.
 Provision E.1.1 states that the senior independent director should attend sufficient meetings with a range of major shareholders to listen to their views in order to help develop a balanced understanding of the issues and concerns of major shareholders. Whilst Richard Goeltz did not meet with major shareholders during 2012, throughout the year John McFarlane and, separately, the chairman of the Remuneration Committee, undertook a programme of meetings with major shareholders to take soundings regarding the Company and to understand their concerns.
The Board’s terms of reference also set out those matters that must be reported to the Board, such as senior leadership changes, significant litigation or material regulatory breaches, and cover how matters requiring consideration by the Board that arise between scheduled meetings should be dealt with.
The Board’s policy is to appoint and retain non-executive directors who can apply their wider business knowledge and experiences to their understanding of the Aviva Group, and to review and refresh regularly the skills of the Board. In line with Code requirements regarding the independence of non-executive directors, several non-executive directors, including the chairman, retired in 2012 or are due to retire in 2013. The Report of the Nomination Committee sets out the work carried out during the year on succession planning which culminated in the appointment of Sir Adrian Montague and Bob Stein as non-executive directors in January 2013 and Mark Wilson joining the Board in December 2012 and becoming Group CEO on 1 January 2013. It is the Board’s view that independent non-executive directors need to be able to present objective, rigorous and constructive challenge to management, drawing on their wider experiences to question assumptions and viewpoints and where necessary defend a given position. The independent non-executive 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 non-executive 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 non-executive directors. All of the current directors that served during 2012 were subject to a formal performance evaluation during 2012 except Mark Wilson as he only joined the Board in December 2012. Non-executive directors who had served on the Board for more than six years were subject to a particularly rigorous review of their independence. As at the date of this Report, Richard Goeltz and Russell Walls have served on the Board for more than six years and they will both be retiring from the Board on 8 May 2013 having completed nine years of service. Biographical details including a summary of the skills and experience the directors bring to the Board are set out on pages 80 to 82. Each director must be able to devote sufficient time to the role in order to discharge his or her responsibilities effectively. On average, directors spend at least 41 days a year on Company business, with the chairmen of the Audit, Risk and Remuneration Committees spending substantially more.
The Board held one meeting in France during the year to gain a deeper understanding of the operations of the French business.
Richard Karl Goeltz 15 100% Euleen Goh (retired 31 December 2012) 15 100% Michael Hawker 14 93%2
Lord Sharman (retired 30 June 2012) 8 100% Leslie Van de Walle (retired 2 May 2012) 3 60%2
1 This shows the percentage of meetings which the director attended during the year whilst a member of the Board. 2 The director was unable to attend Board meeting(s) due to prior commitments and the meetings being called at short notice or where a conflict of interest prevented the director from taking part in the meeting.
During 2012, there were fifteen Board meetings held, of which, eight were scheduled Board meetings and seven were additional Board meetings called at short notice. In addition the Board delegated responsibility for certain items, such as giving final approval to proposals broadly agreed by the full Board, to specially created sub-Committees of the Board which met seven times during 2012. The chairman and the non-executive directors met several times in the absence of the executive directors and the nonexecutive directors met in the absence of the chairman, including one meeting chaired by the senior independent director to appraise the chairman’s performance.
Conflicts of interest In line with the Companies Act 2006, the Company’s articles of association allow the Board to authorise potential conflicts of interest that may arise and to impose such limits or conditions as it thinks fit. The decision to authorise a conflict of interest can only be made by non-conflicted directors (those who have no interest in the matter being considered) and in making such a decision the directors must act in a way they consider in good faith will be most likely to promote the Company’s success. The Board’s procedure to regularly review and approve actual and potential conflicts of interest as they arise and prior to the appointment of new directors operated effectively during the year.
First line Management are responsible for the application of the RMF, for implementing and monitoring the operation of the system of internal control and for providing assurance to the Audit Committee, the Risk Committee and the Board. The Group Executive members and each business unit chief executive officer are responsible for the implementation of group strategies, plans and policies, the monitoring of operational and financial performance, the assessment and control of financial, business and operational risks and the maintenance and ongoing development of a robust control framework and environment in their areas of responsibility. The chief financial officer has established the Asset Liability Committee (ALCO) which assists him in discharging his responsibilities in relation to management of the Group’s balance sheet within risk appetite and to provide financial risk management oversight. This includes recommending financial and insurance risk appetites and limit frameworks, evaluating the asset and liability impact of strategies and business plans, financial risk oversight, monitoring and management of the Group’s capital and liquidity position, transaction risk oversight, stress and scenario testing, and identification of emerging financial risks. Management regularly undertakes quality assurance procedures over the application of the FRCF process and FRCF controls. The results of the FRCF process are signed off by business unit chief executives and chief financial officers and FRCF compliance is reported up to the Disclosure Committee and the Audit Committee. The Disclosure Committee is chaired by the chief financial officer and reports to the Audit Committee. It oversees the design and effectiveness of the Group’s disclosure controls, for both financial and non-financial information, evaluates the Group’s disclosure controls and reviews and endorses the Group’s key periodic external reports, including the consolidated financial statements.
Board oversight The Risk Committee assists the Board in its oversight of risk and risk management across the Group and makes recommendations on risk appetite to the Board. The responsibilities and activities of the Risk Committee are set out in the Risk Committee Report on pages 100 to 102. The Audit Committee, working closely with the Risk Committee, is responsible for assisting the Board in discharging its responsibilities for the integrity of the Company’s financial statements, the effectiveness of the system of internal financial controls and for monitoring the effectiveness, performance and objectivity of the internal and external auditors. The responsibilities and activities of the Audit Committee are set out in the Audit Committee Report on pages 97 to 99. Both the Audit and Risk Committees report regularly to the Board on their activities and make recommendations and escalate significant risk exposures to the Board as appropriate. They ensure that mitigating actions are taken when risks are, or are expected to move, out of appetite. The chart below shows the Board and Committee structure that oversees the Company’s frameworks for risk management and internal control.
 Material existing or emerging risks within the business have been identified and assessed and the business operates in a manner which conforms to the minimum requirements outlined in Group risk policies and business standards.
New York Stock Exchange listing requirements The Company’s ordinary shares are admitted to the New York Stock Exchange (NYSE) and are traded as American Depositary Shares. As a foreign company listed on the NYSE, the Company is required to comply with the NYSE corporate governance rules to the extent that these rules apply to foreign private issuers. As a foreign private issuer, the Company is therefore required to comply with NYSE Rule 303A.11 by making a disclosure of the differences between the Company’s corporate governance practices and NYSE corporate governance rules applicable to US companies listed on NYSE. These differences are summarised below together with Aviva’s approach to compliance: NYSE Listing Rules UK Corporate Governance Code Aviva approach
Independence criteria for directors Independent directors must form the majority of the board of directors. A director cannot qualify as independent unless the Board affirmatively determines that the director has no material relationship with the company. NYSE rules prescribe a list of specific factors and tests that US companies must use for determining independence.
At least half the Board, excluding the chairman, should comprise independent non-executive directors, as determined by the Board. The Code sets out its own criteria that may be relevant to the independence determination, but the Board is permitted to conclude affirmative independence notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, so long as it states its reasons.