Carole Piwnica Mrs Piwnica has extensive business and commercial experience together with significant knowledge of the regulatory environment in the European Union and has made a significant contribution to the discussions of the Board.
Patrick Regan Mr Regan has a deep understanding of, and extensive experience in, various executive functions within the insurance industry. With his significant financial experience and global perspective, he has greatly contributed to the deliberations of the Board.
Scott Wheway Mr Wheway has a wealth of business experience in the retail sector and has been a champion of excellent customer service. He has provided key insights into the Company’s strategy of putting the customer at the heart of business.
Senior independent director Under the Combined Code the Board appoints one of the nonexecutive directors to act as senior independent director. The role of the senior independent director is to provide a sounding board for the Chairman and to serve as an intermediary for the other directors where necessary. His main responsibility is to be available to shareholders should they have concerns that they have been unable to resolve through normal channels, or when such channels would be inappropriate. During the year, and led by the senior independent director, the non-executive directors have twice met without the chairman present. The senior independent director is also responsible for leading the Board’s discussion on the chairman’s performance and the appointment of a new chairman, when appropriate. Richard Goeltz has served as the senior independent director since January 2009.
Board effectiveness The effectiveness of the Board is vital to the success of the Group and the Company undertakes a rigorous evaluation each year in order to assess how well the Board, its committees, the directors and the chairman are performing. The aim is to improve the effectiveness of the Board and its committees and the Group’s performance. The process is led by the chairman and supported by the group company secretary. Once again this year the review was carried out by Boardroom Review, an independent consultancy, and was based on the progress the Board had made on the actions identified in previous effectiveness reviews. Boardroom Review prepared a report based on interviews with the directors and the overall results of the evaluation were presented to, and discussed by, the Board in January 2011. The performance of the chairman was also included in the above process and took into account the views of both the executive and non-executive directors. The chairman’s evaluation was managed by the senior independent director who provided feedback to the chairman. As part of the chairman’s evaluation the non-executive directors met separately under the chairmanship of the senior independent director.
Directors’ attendance The Company requires directors to attend all meetings of the Board and the committees on which they serve and to devote sufficient time to the Company in order to perform their duties. The attendance of the directors at the Board meetings held in 2010 is shown in the table below and the attendance at committee meetings is shown in the committee reports.
Throughout the year the chairman of each committee provided the Board with a summary of the key issues considered at the meetings of the committees and the minutes of the meetings were circulated to the Board. The committees operate within defined terms of reference which are available on the Company’s website, www.aviva.com/investor-relations/corporategovernance /terms-of-reference/, or from the group company secretary upon request. Board committees are authorised to engage the services of external advisers as they deem necessary in the furtherance of their duties at the Company’s expense. Reports of the committee chairmen are set out on pages 109 to 136.
The Risk Committee assists the Board in providing leadership, direction and oversight of risk and risk management across the Group. Oversight of the design, completeness and effectiveness of the risk management framework relative to the Group’s activities is performed on behalf of the Board by the Risk Committee. This includes the oversight of the quality of the risk function and the effectiveness of risk reporting. The committee’s oversight covers all aspects of risk including market, credit, liquidity, general insurance, life insurance, operational, reputational and regulatory risks. 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 and the effectiveness of the system of internal control and for monitoring the effectiveness, performance and objectivity of the internal and external auditors. These committees receive reporting on risk management and internal control procedures and consider where relevant whether appropriate actions have been undertaken as well as monitoring the completion of any Group level actions to a satisfactory conclusion. These committees have clearly defined terms of reference and full reports for these committees are set out on pages 110 to 113. The parts of the governance framework relating to the operational management of the Group’s businesses include limits on the authority delegated by the Board in respect of matters which are necessary for the effective day-to-day running and management of the business. The group chief executive has been delegated operational responsibilities and powers by the Board, and in turn delegates authority to members of the Group Executive Committee including the chief executive officer of each region who report to him for the management of that region. In addition each of those regional chief executives has established delegations and a regional executive committee comprising the region’s most senior executives.
Internal controls over financial reporting A Group Reporting Manual including International Financial Reporting Standards (IFRS) and Market Consistent Embedded Value (MCEV) requirements has been defined and rolled out across the Group. A Financial Reporting Control Framework (FRCF) is in place across the Group. FRCF relates to the preparation of reliable financial reporting and preparation of local and consolidated financial statements in accordance with IFRS and MCEV. FRCF also ensures compliance with the requirements of the Sarbanes-Oxley Act 2002. The FRCF process follows a risk-based approach, with management identification, assessment (documentation and testing), remediation as required, reporting and certification over key financial reporting-related controls. Management quality assurance procedures over the application of the FRCF process and FRCF controls are undertaken regularly. The results of the FRCF process are signed off by business unit and regional chief executives and chief financial officers and at a Group level by the group chief executive and chief financial officer. The Disclosure Committee, which has the role of overseeing 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. This committee is chaired by the chief financial officer and reports to the Audit Committee and the Group Executive Committee. A Group Technical Committee, reporting to the Disclosure Committee is in place, which presides over significant technical matters, reviewing technical decisions including key judgements, issues and application of assumptions.
Communication with shareholders The Company places considerable importance on communication with shareholders and engages with them on a wide range of issues. The Group has an ongoing programme of dialogue and meetings between the executive directors and institutional investors, fund managers and analysts. At these meetings a wide range of relevant issues including strategy, performance, management and governance are discussed within the constraints of information already made public. The Company’s investor relations department is dedicated to facilitating communication with institutional investors. The directors consider it important to understand the views of shareholders and, in particular, any issues which concern them. The Board receives reports on matters that have been raised with management at the regular meetings held with the Company’s major investors. During the year, the chairman and the senior independent director held a meeting with the major institutional investors and attended investor meetings with management. In addition, the senior independent director is available to meet with major investors to discuss any areas of concern that cannot be resolved through normal channels of investor communication, and arrangements can be made to meet with the senior independent director through the group company secretary. Similarly, arrangements can be made for major investors to meet with newly appointed directors. In addition, the Board consults with shareholders in connection with specific issues where it considers appropriate. This year the Board, through the Remuneration Committee chairman, has consulted with institutional investors on the introduction of new share plans which will be put to shareholders at this year’s Annual General Meeting. The Board is equally interested in the concerns of private shareholders and, on its behalf, the group company secretary oversees communication with this group of investors. The Company has a dedicated email address to which questions can be sent, in addition to the facility on the Company’s website, which are both highlighted in the shareholder information section of the Notice of AGM. These can be used by shareholders to put relevant questions, related to the business of the meeting, to the directors. These are considered to be particularly helpful for those shareholders who are unable to attend the Annual General Meeting. Written responses are provided through a leaflet containing answers to the most frequently asked questions, which is also placed on the Company’s website, www.aviva.com/agm and available at the 2011 Annual General Meeting. All material information reported to the regulatory news service is simultaneously published on the Company’s website, affording all shareholders full access to material Company announcements. The Company has taken full advantage of the provisions within the Companies Act 2006 allowing communications to be made electronically to shareholders where they have not requested hard copy documentation. As a result, the Company’s website has become the primary method of communication for the majority of its shareholders. Details of the information available for shareholders on the website can be found in the Shareholder Services section on page 360 and the Shareholder Services section of the website at www.aviva.com/shareholderservices.
Non-executive director meetings Pursuant to the NYSE listing standards, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management and, if that group includes directors who are not independent, listed companies should at least once a year schedule an executive session including only independent directors. Under the Combined Code, the Chairman should hold meetings with the non-executive directors without the executive directors present.
Committees Under the NYSE standards, US companies are required to have a nominating/corporate governance committee. In addition to identifying individuals qualified to become Board members, this committee must develop and recommend to the Board a set of corporate governance principles. The Company’s Nomination Committee’s terms of reference do not require the committee to develop and recommend corporate governance principles for the Company.
Code of business conduct and ethics The NYSE listing standards require US companies to adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. While the Company does not strictly follow this NYSE standard applicable to US companies, it is committed to ensuring that its business is conducted in all respects according to rigorous ethical, professional and legal standards. The Company has adopted a Business Ethics Code to which all employees are bound and a Code of Ethics for senior management, to comply with the Sarbanes-Oxley Act 2002.
Shareholder approval of equity-compensation plans Under the NYSE listing standards, shareholders must be given the opportunity to vote on all equity-compensation plans and ‘material revisions’ to those plans. Under the Combined Code, shareholder approval is also necessary for certain equitycompensation plans and ‘significant changes’ thereto, subject to certain exceptions. The Combined Code does not provide a detailed definition or explanation of what are considered to be ‘significant changes’, in contrast to the detailed definition of ‘material revisions’ provided by the NYSE.
Directors’ responsibilities The directors are required to prepare financial statements for each accounting period that comply with the relevant provisions of the Companies Act 2006 and International Financial Reporting Standards (IFRS) as adopted by the European Union (EU), and which present fairly the financial position, financial performance and cash flows of the Company and the Group at the end of the accounting period. A fair presentation of the financial statements in accordance with IFRS requires the directors to: select suitable accounting policies and verify that they are applied consistently in preparing the accounts, on a going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business; present information, including accounting policies, in a manner that is relevant, reliable, comparable and understandable; provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company and the Group’s financial position and financial performance; and state that the Company and the Group have complied with applicable IFRS, subject to any material departures disclosed and explained in the financial statements.
The directors are responsible for maintaining proper accounting records, which are intended to disclose with reasonable accuracy, at any time, the financial position of the Company and the Group. They are also ultimately responsible for the systems of internal control maintained by the Group for safeguarding the assets of the Company and the Group and for the prevention and detection of fraud and other irregularities. Further details of the systems of internal controls maintained by the Group are more fully described on pages 104 and 105.
Directors’ responsibility statement pursuant to Disclosure and Transparency Rule 4.1.12 Each of the directors listed on pages 94 and 95 confirms that, to the best of their knowledge: (a) the Group and Company financial statements in this report, which have been prepared in accordance with IFRS as adopted by the EU, International Financial Reporting Interpretations Committee’s interpretation and those parts of the Companies Act 2006 applicable to companies reporting under IFRS, give a true and fair view of the assets, liabilities, financial position and results of the Company and of the Group taken as a whole; and
(b) the Directors’ Report includes a fair review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face.
Andrew Moss Pat Regan Group chief executive Chief financial officer 2 March 2011
Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Overview on pages 8 to 16 and the Performance review on pages 18 to 74. The Performance review includes sections on Group Performance (pages 20 to 26), Capital management (pages 70 to 72) and Risk management (pages 66 to 69). In addition, the financial pages include notes on the Group’s borrowings (note 49); its contingent liabilities and other risk factors (note 52); its capital structure and position (notes 55 and 56); management of its risks including market, credit and liquidity risk (note 57); and derivative financial instruments (note 58). The Group has considerable financial resources together with a diversified business model, with a spread of business and geographical reach. As a consequence, the directors believe that the Group is well placed to manage its business risks successfully. After making enquiries, the directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
Lord Sharman (Chairman) 25 January 2006 To date Mary Francis Richard Karl Goeltz
Attendance Number of meetings held 2 Lord Sharman (Chairman) 2 Mary Francis 2 Richard Karl Goeltz 2 Andrew Moss 2 Russell Walls 2
The committee met on two occasions in 2010 and the members’ attendance record is set out above. The group company secretary acts as the secretary to the committee. The committee keeps under review the balance of skills on the Board and the knowledge, experience, length of service and performance of the directors. It also reviews their external interests with a view to identifying any actual, perceived or potential conflicts of interests, including the time available to commit to their duties to the Company. The committee monitors the independence of each non-executive director and makes recommendations concerning such to the Board. The results of these reviews are important when the Board considers succession planning and the re-election of directors. Members of the committee take no part in any discussions concerning their own circumstances. The chart below shows how the committee allocated its time during 2010.
This report provides details of the role of the Audit Committee and the work it has undertaken during the year. The purpose of the committee is to assist the Board in discharging its responsibilities for the integrity of the Group and Company’s financial statements, the assessment of the effectiveness of the systems of internal control and monitoring the effectiveness and objectivity of the internal and external auditors. The full terms of reference for the committee can be found on the Company’s website, www.aviva.com/investorrelations /corporate-governance/terms-of-reference, and are also available from the group company secretary. The following independent non-executive directors, served on the committee during the year: Period
During the year, the committee held several joint meetings with the Risk Committee and one with the members of the business unit audit committee in Spain. This meeting allowed the committee to gain a deeper understanding of the relevant local issues and assess the effectiveness of the systems of internal control and the effectiveness and objectivity of the internal and external auditors in that business. Each of the Group’s other major business units has an audit committee that provides an oversight role for its business. The chief audit officer reviews the papers and minutes from these committees and brings all significant matters to the committee’s attention. The chief audit officer also attends regional and business unit audit committee meetings on a regular basis and reports back on the effectiveness of these committees to the committee. In addition, during 2010 the members of the committee attended several local audit committee meetings, including those in Aviva USA, Aviva UK Life, Aviva UKGI, Aviva Investors, Hong Kong, Singapore, India, and Ireland and the Europe Region Oversight Committee. This programme of attendance at local audit committee meetings will continue during 2011. During the year, a UK Regional Board was formed with a duly constituted UK Audit Committee (UKAC). The chairman (who is a non-executive director), and members of the UKAC (one of whom is also a non-executive director on the UK Regional Board), are appointed by the UK Board with the agreement of the chairman of the committee. Working closely with the UK Risk Committee, the UKAC assists the UK Regional Board in discharging its responsibilities for the integrity of the UK region’s financial statements and the effectiveness of the systems of internal control and risk management and to monitor the effectiveness, performance and objectivity of the internal and
Audit committee report continued external auditors. In addition it provides assurance to the committee that the UK region is discharging its responsibilities in accordance with policies laid down by the Group Board.
Internal audit Internal Audit reports to management on the effectiveness of the Company’s systems of internal control, the adequacy of these systems to manage business risk and to safeguard the Group’s assets and resources. Internal Audit is fully centralised and each country/region head has a full reporting line to the chief audit officer (with the exception of Delta Lloyd and some of the Group’s joint ventures). The chief audit officer reports to the group chief executive and to the chairman of the committee. Through the chief audit officer, Internal Audit provides objective assurance on risk appetite and controls to the committee. The plans, the level of resources, the budget of the Internal Audit function and the remuneration of the chief audit officer are reviewed and approved at least annually by the committee. During 2010 the committee worked closely with management on the appointment of a new chief audit officer. The committee also undertakes an annual review of the effectiveness of Internal Audit against guidance criteria provided by the Institute of Chartered Accountants in England and Wales and by the Institute of Internal Auditors (IIA). Every five years the review is performed by an independent party as required by the IIA standards. The last independent review was performed in 2008. During 2010 Internal Audit carried out assurance reviews over inherent risks throughout the Group. Reviews were focused on, but not limited to, areas such as financial risk management, governance and oversight of the Group, the Group compliance framework and major projects including Quantum and Solvency II.
This report provides details of the role of the Risk Committee and the work it has undertaken during the year. The purpose of the committee is to assist the Board in providing leadership, direction and oversight of the Group’s management of risk. The full terms of reference for the committee can be found on the Company’s website, www.aviva.com/investor-relations/corporate-governance/ terms-of-reference, and are also available from the group company secretary. The following independent non-executive directors served on the committee during the year: Period
Attendance Number of meetings held 7 Mary Francis (Chairman) 7 Michael Hawker 7 Leslie Van de Walle 7 Russell Walls 7
External background During 2010 the economic and market environment remained challenging for the Group and the Board and the committee continued to concentrate on financial risk and capital and liquidity management. In particular the development of the Solvency II Directive and the resultant requirements of the new economic capital regime were an important area of focus.
Committee activities during 2010 The committee oversees all aspects of risk management in the Group, including market, credit, liquidity, insurance and operational, and their impact on both financial and non-financial goals. During the year the committee focused on the following areas: Strengthening risk management across the Group: the committee approved a comprehensive Risk Plan (the Plan) which sets out the further steps needed to deliver leading standards of risk management at all levels of the business. The Plan is based on setting clear statements of risk appetite, especially for economic capital and liquidity, and rigorously managing all risk exposures within these limits. It allocates responsibilities for risk management between the first, second and third lines of defence, with a strong emphasis on the responsibilities of front-line management. The Group’s risk appetite has been thoroughly reviewed by the committee and the Board has approved a Group risk appetite statement which is being cascaded throughout the Group. The chief risk officer has overall responsibility for the Plan and reports regularly to the committee on progress against the Plan.
Preparing for Solvency II: the committee continued to oversee all aspects of the programme to implement the Solvency II Directive by the end of 2012. The Directive requires insurance companies to maintain an adequate surplus of economic capital (i.e. the capital required to ensure that a company’s liabilities can be met after defined risks have materialised). As well as requiring high standards of risk management (delivered by the Risk Plan – see above), the directive entails the development of sophisticated models to calculate economic capital requirements, and stress testing techniques to check and monitor actual levels of economic capital. The committee received regular progress reports on these matters throughout the year. It reviewed and approved the submission of the preapplication qualifying criteria assessment template required by the FSA as part of the Solvency II internal model approval process and reviewed the Quantitative Impact Study 5 results and the likely impact of Solvency II on the Group’s economic capital requirements and businesses.
Group risk management policies: the committee approved significant changes to the Group Distribution policy, the Group Brand and Marketing policy and the Group Customer policy and received regular reports on compliance with Group policies.
Carole Piwnica (Chairman) 14 January 2006 To date Euleen Goh Andrew Moss
Attendance Number of meetings held* 5 Carole Piwnica (Chairman) 5 Euleen Goh 4 Andrew Moss 4 Lord Sharman 5 Scott Wheway 4 *There were four scheduled committee meetings during 2010 and one additional meeting called at short notice.
The Company put its CR Report included in the 2009 annual report and accounts to an advisory vote of shareholders at the 2010 Annual General Meeting and intends to do this annually as a means of obtaining feedback on the report and the Company’s performance in this area. This year’s CR Report is set out on pages 75 to 92 and further details of the relevant resolution are set out in the Notice of AGM.
Members of the committee are interviewed as part of the external assurance process for the CR programme and the subsequent management report, including Aviva’s action plan, is reviewed by the committee to assist in the strengthening and future direction of the programme. In line with the Combined Code requirement, the Board undertook a review of the effectiveness of all its committees during the year, including the Corporate Responsibility Committee. This report was reviewed and approved by the Board on 2 March 2011.
On 26 January 2010, Philip Scott retired from the Board. He continued to be employed by the Group until his retirement in July 2010. Further details of his leaving arrangements are disclosed in this report.
On 22 February 2010, Patrick Regan, chief financial officer, joined Aviva and the Board. Therefore, full information on his remuneration appears in this report for the first time.
On 19 January 2011, Andrea Moneta resigned from the Board and left the Company on 28 February 2011. Details of his leaving arrangements are disclosed in this report.
Whilst the Financial Services Authority’s (FSA) Remuneration Code does not directly apply to Aviva plc (see section 6), both the committee and management have been very mindful of the external environment that has been the focus of many regulators across the globe. In particular, careful attention has been paid to the overall gearing of total remuneration (which will reduce in 2011) and the impact that risk has on each element of reward. The Strategic Reward Review concluded in December 2010 and the proposals outlined below will be fully implemented in 2011.
Key changes from Strategic Reward Review: to be implemented from 2011 The implementation of the Remuneration Principles above, has led to a range of changes to the remuneration elements across the Company. The critical changes and a summary of how these changes impact the group chief executive and the other EDs is shown below: Revised benchmarking group: Since the previous reward review in 2005, the relevant benchmarking group for considering total compensation has been the lower quartile to median of the FTSE 30 and the median to upper quartile of the FTSE 50. The committee has decided to benchmark against a more sustainable peer group, ie. the median of a range of companies that are centered on Aviva. Therefore, our total compensation benchmark position from 2011 will be the 25 FTSE companies either side of Aviva’s market capitalisation. The absolute peer group will be reviewed annually based on the most up to date market data available.
Competitive Long Term Incentive Plans: As previously agreed by shareholders at the 2008 AGM, the 2010 One Aviva Twice the Value (OATTV) bonus award was the last award under the plan. Therefore no OATTV award will be made in 2011. The committee has carefully reviewed the total compensation benchmarking data and proposed revised standard long term incentive awards to ensure our packages remain competitive within the relevant market place, as well as representing value for the shareholder.
Table 1: Strategic Reward Review’s key changes to each element of remuneration for the EDs
Lower quartile to median of the FTSE 30 and the Median to upper quartile of the FTSE 50
By reference to the median of 25 FTSE companies either side of Aviva’s market capitalisation
One Aviva Twice the Value CEO: Matches 100% of the deferred annual bonus ED: Matches 75% of the deferred annual bonus
CEO: 275% standard award EDs: 225% standard award Performance measures: 50%Operating IFRS ROCE, 50% Relative TSR (IFRS ROCE is considered a more stable balance sheet measure) 20% vests for threshold performance
CEO: 200% of basic salary EDs: 150% of basic salary EC: 50% of basic salary EDs must retain 50% of net share plan releases (EC 25%) until requirement is met
Directors’ remuneration report continued 3. The committee’s objectives The committee is a committee of the Board. Its terms of reference are available from the group general counsel and company Secretary and can be found on the Company’s website at www.aviva.com/terms-of-reference. The committee’s key objectives are to: Establish a competitive remuneration package to attract, retain and motivate high quality leaders; Promote the achievement of both the Company’s annual plans and its strategic objectives by providing a remuneration package that contains appropriately motivating targets that are within the Group’s risk appetite; and Align senior executives’ remuneration with the interests of shareholders and other stakeholders, including customers and employees.
Chairman of the Board; Recommend to the Board the establishment of any employee share plans and exercise all the Board’s powers in relation to the operation of all share incentive plans, including the granting of awards, the setting and testing of performance conditions (where appropriate), and any discretion on behalf of the Board regarding any material amendments to the plans’ rules not requiring the approval of shareholders; Select, appoint and determine terms of reference for independent remuneration consultants to advise the committee on remuneration policy and levels of remuneration; and
Attended to advise management on relevant remuneration matters. PwC also provided consultancy services to the Group in 2010
No person was present during any discussion relating to their own remuneration. In addition to the members and attendees listed in Table 2 above, Deloitte LLP advised the committee on the calculation of Total Shareholder Return (TSR) in respect of the Long Term Incentive Plan (LTIP) vesting. Deloitte LLP also provided consultancy services to the Group in 2010. In line with Combined Code requirements, the Board undertook a review of the effectiveness of the committee during the year. Additionally, the committee reviewed its own performance and agreed steps to enhance its effectiveness and addressed the issues identified.
Aviva plc Annual Report and Accounts 2010 Directors’ remuneration report continued 5. Committee attendance and activities during 2010 The committee is required by its terms of reference to meet at least three times per year. In 2010, the committee met six times and the number of meetings attended by each committee member is shown in Table 3: Table 3: Attendance
Number of meetings held 6 Scott Wheway (Chairman) 6 Mary Francis 6 Carole Piwnica 5 Leslie Van de Walle 5
The committee members also participated in five workshops throughout the year.
A review and approval of Long Term Incentive Plan (LTIP) grants to the EDs and approval of the performance conditions for the 2010 grants
A performance test of subsisting LTIP grants A review of dilution limits A review and approval of recommendations on contributions into the Aviva Capital Accumulation Plan (ACAP)
Approval of the 2009 Directors’ Remuneration Report Approval of the 2010 One Aviva Twice The Value Bonus
Plan (OATTV) grants EDs’ shareholding requirements A review and approval of the chairman’s fees
Approval of the inclusion of clawback provisions in the rules of the ABP and LTIP
Approval of the rules of the CFO Recruitment Share Awards Plan and the terms of the grants to be made to Patrick Regan
April None Discussion of the performance conditions for the 2010 OATTV grants
June None Approval of the early testing of performance conditions of the LTIP and OATTV Plan grants held by a good leaver
Approval of the Aviva Investors’ Bonus Funding Discussion regarding Group Risk’s input into remuneration arrangements Discussion of the Strategic Reward Review and the approval of bonus weighting targets, benchmarking data and award levels under the LTIP
December Approval of the proposed 2011 financial, employee and customer targets for the operation of the ABP
Discussion regarding the Strategic Reward Review Approval of new share incentive plans subject to shareholder approval
Aviva plc Annual Report and Accounts 2010 Directors’ remuneration report continued 6. FSA Remuneration Code: Aviva Investors The FSA Remuneration Code does not apply to Aviva’s businesses with the exception of Aviva Investors and two small subsidiaries within the UK business. The Company is in full compliance with the Code’s requirements and expects Solvency II and other Europeanbased legislation to further define requirements in this area in the future. Specifically, Aviva Investors’ policy on remuneration takes into account its status as a Tier 4 organisation as defined in the FSA Remuneration Code 2010, and as such is fully compliant with the Code. Aviva Investors’ reward principles and arrangements are designed to accurately and appropriately incentivise and reward employees for achieving stated business goals in a manner that is consistent with our approach to sound and effective risk management. Effective risk management is central to how the company and Aviva Investors perform and the risk profile of each business is also taken into account in compensation decisions. The approach to performance and reward is designed to drive sustainable performance, ensuring that remuneration policies support the business strategy and long term interests of the Company.
8. Alignment with Group strategy and target setting The committee considers alignment between Group strategy and the remuneration of its senior executives, including EDs, to be critical. It believes that senior executives should be highly rewarded (on a market competitive basis) for the delivery of stretching goals but should receive reduced rewards when the business performs poorly. The pay and employment conditions of employees of the Company and the Group were also taken into account when determining directors’ remuneration for the financial year, in addition to the Group Reward policies and framework. To achieve this alignment Aviva’s remuneration package is leveraged, with a suitable percentage of pay ‘at risk’ against the achievement of stretching goals, which is aligned with the Company’s risk profile and employee behaviour. Furthermore two-thirds of any bonus for EDs and EC members and any LTIP grants are delivered in the form of Aviva shares. In 2010, the element of deferred bonus that is matched under the OATTV Plan only vests if very demanding Earnings Per Share (EPS) targets are met. The requirements to defer bonus, participation in the LTIP and the OATTV Plan closely tie the long-term value of executive remuneration to the Company’s share price performance. Senior executives thus have high exposure to the same benefits and drawbacks of share price movement as all shareholders. The belief that senior executives should be shareholders is reinforced through formal guidelines requiring EDs to build up and maintain a significant holding of shares in the Company. Section 2 outlines the critical changes being implemented in 2011, following the Strategic Reward Review. The committee’s considerations shown below relate to reward decisions made in 2010.
OATTV Plan: This plan was introduced to reward the growth in EPS. The plan, approved by shareholders in 2008, expired after the third annual grant. Therefore, the awards made in 2010 were the last awards under the plan.
9. Constituent elements of reward as a percentage of total remuneration Tables 5a and 5b below show how the Group’s remuneration policy translates in practice into the group chief executive’s remuneration package for 2010 and 2011. The tables outline the contribution each element makes to overall compensation at both ‘Target’ and ‘Stretch’ levels of performance. More than half of EDs’ total remuneration is performance related. For the remainder of EDs, 44% of total remuneration is paid in cash for on ‘Target’ performance and 32% for ‘Stretch’ performance (excluding ACAP which EDs participate in to varied degrees, see Table 7).
Tables 5a: Breakdown of remuneration for group chief executive in 2010
Tables 5a and 5b show the breakdown of the group chief executive’s remuneration package into its main constituent elements as well as the proportions of fixed cash, variable cash and shares. For this purpose, fixed cash includes basic salary and the discretionary ACAP payment. Variable cash is the one-third of bonus paid in cash annually. In 2010, the share element includes the two-thirds of the annual bonus deferred into shares, the OATTV Plan match and the LTIP.
The breakdown does not include any share price growth, the dividends payable on the ABP deferred shares and 2011 long-term incentive awards or other benefits (e.g. cash car allowance, value of private medical insurance (PMI) and all employee share ownership plans).
Directors’ remuneration report continued 10. Remuneration policy in practice for EDs Table 6, below, summarises Aviva’s remuneration policy as it is applied in practice to EDs.
Basic salary ABP OATTV Plan (2010 only) LTIP Long-term savings Aviva Staff Pension Scheme (ASPS) Benefits All employee schemes
Basic salary Benchmarked as for total remuneration but with positioning and progression taking account of individual and business performance and the levels of increase provided for the broader UK employee population (basic salaries of the UK staff increased by 2% on average in 2010). The committee takes seriously institutional investors’ concerns on the upward ratchet of basic salaries and is rigorous in its review of market position and salary.
Monthly in cash Reviewed annually in February, with changes taking effect from 1 April.
ABP The ABP is intended to motivate executives to achieve the annual business plan, based on a series of key financial, employee and customer performance indicators (KPIs), which make up 70% of the bonus opportunity, and personal objectives which make up 30%. 75% of basic salary is payable for ‘on target’ performance and up to 150% for ‘stretch’ performance. Two-thirds of bonus is deferred into shares and the deferred shares vest on the third anniversary of the date of grant, subject to reduced vesting for certain leaver circumstances for deferrals made prior to March 2011. For all deferrals made from March 2011, on resignation during the three-year deferral period, all of the grant is forfeited. Additional shares are awarded at vesting in lieu of the dividends paid on the deferred shares during the deferral period.
Annually, a proportion of the deferred element of the ABP is matched in shares. Shares vest based only upon the achievement of demanding EPS growth targets.
Long-term savings The Aviva Capital Accumulation Plan (ACAP) is a long-term savings vehicle which aids retention whilst recognising a need for flexibility in long-term wealth planning. Company contributions are discretionary and vary year on year, but would not normally exceed 50% of basic salary. Contributions for the EDs are shown in the table on page 135. No ED who participates in the ACAP is currently accruing benefits in the ASPS. A resignation or departure for breach of contract generally results in forfeiture of contribution for the relevant year.
ASPS The UK Aviva Staff Pension Scheme (ASPS) provides a competitive post-retirement package. Lump sum death in service benefit of four times basic salary is provided, as is a spouse’s or partner’s pension equal to two-thirds of actual or, on death in service and in certain other circumstances, prospective pension. Post-retirement increases are equivalent to the Retail Price Index up to a maximum of 10%. Retirement benefits can be accessed from age 60.
Deferred cash payable on retirement in the form of a lump sum /monthly payment.
RRSA will vest in three equal tranches on the first, second and third anniversaries of Mr Regan’s employment start date, subject to Mr Regan’s performance being considered to be at least ‘Mid Range’, as assessed by the chairman of the Company and the group chief executive, and no dealing restrictions being in place on the vesting date. Otherwise the principal terms of the RRSA are generally the same as those of the ABP, except that on cessation of employment, Mr Regan’s unvested awards will generally lapse unless he leaves by reason of death, ill-health, injury, disability, redundancy or a sale of an employing subsidiary or business.
Awards granted under the CFO Recruitment Share Awards Plan are not pensionable. Any amendments to the plan which are to the advantage of the participant (other than certain minor amendments) are subject to shareholder approval.
11. Overview of the effect on EDs during 2010 The effect of these policies in 2010 for EDs is set out in Table 7 below. It should be emphasised that the figures shown for both the OATTV Plan and the LTIP grant represent the face value of those awards on the date of grant. The OATTV Plan and LTIP grant would only be realised if very stretching performance conditions were to be met. Details on pension benefits are set out later in this report.
Basic Salary £925,000 during the year Mr Moss requested not to receive an increase to his basic salary in 2010.
The Trustee of the Plan accepted Aviva’s recommendation and made an award into the plan equivalent to 50% of Mr Moss’ basic salary as at 1 April 2010.
Other Benefits £19,000 cash car allowance 2% basic salary cash supplement PMI
Basic Salary £41,935 during the year. Mr Scott requested not to receive an increase to his annual basic salary of £600,000 in 2010.
ASPS Membership of the ASPS Mr Scott has a fully accrued pension equivalent to two-thirds of his pensionable salary at retirement. He therefore no longer accrues service-related benefits but does continue to accrue additional benefits as a result of pensionable salary increases.
Basic Salary £511,539 during the year. Mr Regan commenced employment on 22 February 2010 with an annual basic salary of £600,000.
£668,850 (111.5% of basic salary) (£222,950 delivered in cash and £445,900 deferred into shares for three years)
RRSA was granted over Restricted Shares and will vest in three equal tranches per year over a three-year period. The grant is compensation for the loss of share awards and share options from previous employer (see section 10 for more details). BRDSA was granted over Restricted Shares and will vest on third anniversary of the date of grant (see section 10 for more details). The face value of 75% of the BRDSA. Vests subject to performance condition outcome of 2010 OATTV award (see section 10 for more details).
Other Benefits £13,811 cash car allowance during the year PMI £141,667 compensation for loss of bonus from previous employer
Basic Salary £600,000 during the year. Mr Hodges’ basic salary increased to £600,000 on 1 January 2010 to reflect his increased responsibilities across the UK business.
Bonus is a function of the degree of achievement of 2010 targets as follows: Financial 42.6% (maximum 50%) Employee 0.0% (maximum 10%) Customer 8.1% (maximum 10%) Personal 26.7% (maximum 30%)
OATTV Plan £251,264 The face value of 75% of the two-thirds deferred element of 2009 annual bonus.
The Trustee of the Plan accepted Aviva’s recommendation and made an award into the plan equivalent to 50% of Mr Hodges’ basic salary as at 1 April 2010.
Andrea Moneta, CEO, Aviva Europe, Middle East and Africa* Element Amount Commentary**
Other Benefits €21,500 cash car allowance during the year €400,000 compensation for loss of earnings, options and performance shares from previous employer €112,000 housing allowance per annum for three years €30,000 schooling allowance PMI
(Based on average exchange rate for 2010 of €1.16605 : £1.00)
A further €400,000 compensation is payable for loss of earnings, options and performance shares from a previous employer in March 2011.
€30,000 annual schooling allowance payable up to the end of secondary schooling, grossed up for tax purposes.***
12. Target setting ABP – target setting The financial targets which underpinned the ABP (accounting for 50% of annual bonus) in 2010 were derived from Aviva’s return, growth and capital efficiency/capital generation goals. Employee and customer targets (each accounting for up to 10% of annual bonus) are set taking into account performance to date and aspirations for the future. The employee targets on leadership and engagement are derived from the Group’s employee promise survey in which all business units participate and which over 36,907 staff completed in 2010. This survey is delivered through an independent third party who is able to provide extensive external benchmark data. The Company’s aspiration is to reach the upper quartile positions compared to the relevant global and national norms on leadership and engagement over time. In 2010, all businesses measured customer advocacy using a consistent robust methodology undertaken by an independent global research agency. All business units now have customer advocacy targets in place for 2011. The Company’s aspiration is to reach the upper quartile in the relevant local market benchmark. Internal assurance that the outcomes on employee and customer targets were accurately calculated and reported was provided to the committee by Group Audit.
Personal objectives based on delivery of key strategic priorities, personal leadership and operating performance of the relevant portion of the business account for up to 30% of annual bonus. Carbon emissions targets are also included as part of the EDs’ role profile. The Group’s performance against its financial, employee and customer KPIs in 2010, as they affected the bonus of the Group Chief Executive, is shown in Table 8.
Business measures (70%) Volume – Total long-term savings 2.5 5.0 2.5
TSR Targets Relative TSR determines the vesting of the other 50% of any LTIP award. The comparator group for the assessment of relative TSR performance at the time of the 2010 grant comprised Aegon, Allianz, Axa, Fortis, Generali, ING, Legal and General, Lloyds Banking Group, Prudential, Resolution Limited, Royal Bank of Scotland, Royal and Sun Alliance, Standard Life and Zurich. Friends Provident had been delisted by the time the 2010 grant was made and so was not included in the comparator group. Resolution Limited was added to the comparator group for the 2010 grant. TSR vesting operates as set out in Table 10 below: Table 10: TSR vesting schedule for the 2010 award TSR position over the three-year performance period Percentage of shares in award that vests based on achievement of TSR targets
Below median 0% Median 15% Between median and upper quintile Pro rata between 15% and 50% on a straight line basis Upper quintile and above 50%
The same targets will apply for the 2011 LTIP awards, except ROCE will be measured on an Operating IFRS basis. The comparator group will remain unchanged. The committee has agreed a shortlist of companies that would be considered for inclusion in the comparator group, subject to final review, should any member of the group be delisted. 2011 LTIP and future awards will vest at 20% for threshold performance (down from 30%). Details of subsisting LTIP awards are provided on page 128 and Table 11 below shows the vesting projections (non-audited) of those awards as at 31 December 2010.
£ £ £ £ Face Value of grant 1,618,750 900,000 900,000 1,003,400 Threshold Vesting 485,650 270,000 270,000 301,000 Expected Value 936,950 520,900 520,900 580,800 Maximum Vesting 2,154,550 1,197,900 1,197,900 1,335,500 * Figures shown for Mr Moneta have been converted from euro to pound sterling at the average exchange rate for 2010 of €1.16605:£1.00
Table 13: Vesting history of LTIP awards Percentage of award vesting
Year of grant Performance period ROCE TSR Total 2002 January 2002 to December 2004 23.3 23.0 46.3 2003 January 2003 to December 2005 30.0 34.9 64.9 2004 January 2004 to December 2006 30.0 34.9 64.9 2005 January 2005 to December 2007 50.0 0.0 50.0 2006 January 2006 to December 2008 41.3 15.0 56.3 2007 January 2007 to December 2009 50.0 0.0 50.0
2008-2010 LTIP and OATTV Plan: Performance outcome for group chief executive The 2008 Annual Report disclosed the face value of the LTIP and OATTV Plan awards granted to all EDs. The face value of the LTIP and OATTV awards granted to the group chief executive were £1,540,000 and £568,891 respectively. The total actual value of the awards that will vest is £719,689, based on the performance condition outcome and assuming a share price of 393p (which was the closing middle market price of an ordinary share of the Company on 31 December 2010).
Performance graph Table 14 below compares the TSR performance of the Company over the past five years with the TSR of the FTSE 100 Return Index. This index has been chosen because it is a recognised equity market index, of which Aviva is a member. The companies which comprise the current LTIP comparator group for TSR purposes were chosen on the basis of product and geographic match to Aviva and are listed above. The TSR graph for the comparator group has been plotted using the 20 companies (including Aviva) in the comparator group for pre-2005 grants, the 15 companies (including Aviva) in the comparator group for 2005–07 grants, the 16 companies (including Aviva) in the comparator group for the 2008 grant, and the 15 companies (including Aviva) in the comparator group for the 2009 and 2010 grants.
Notes 1. The actual price used to calculate the ABP and LTIP awards is based on a three day average closing middle market price of an ordinary share of the Company. These were in 2007: 769p; 2008: 608p; 2009: 256p; 2010: 386p. The three day average closing middle market price of an ordinary share of the Company used to grant the 2008 OATTV Plan awards was 617p; in 2009 was 256p; and in 2010 was 386p. The five day average closing middle market price of an ordinary share of the Company used to grant the RRSA in 2010 was 380.22p.
Andrew Moss Savings-related options 2005 3,279 — — — 3,279 491.0 December 2010 –
May 2011 Executive share options (approved) 2010 — 7,772 — — 7,772 386.0 March 2013 Patrick Regan1
Executive share options (approved) 2010 — 7,772 — — 7,772 386.0 March 2013
The closing middle market price of an ordinary share of the Company on 31 December 2010, being the last business day of the year, was 393p, and the closing middle market price of an ordinary share of the Company during the year ranged from 294.2p to 423.5p. During the year, no share options were exercised by directors (2009: nil options exercised). EDs did not pay for the award of any share options and options were not subject to performance conditions (the savings related options being granted under an all-employee share scheme and the executive share options being linked to awards under the LTIP which are subject to performance conditions).
Notice period By the director By the Company 6 months. 12 months, rolling. No notice or payment in lieu to be paid where the Company terminates for cause.
Remuneration and benefits As described in this report the operation of the ABP, the OATTV Plan and LTIP is at the Company’s discretion and, in the case of the long-term savings plans, at the trustees’ discretion.
Date current contract commenced 1 January 2007 26 June 2008 28 September 2009* 22 February 2010 *Andrea Moneta resigned from the Board on 19 January 2011
Directors’ remuneration report continued 16. Share ownership requirements An internal shareholding requirement was introduced in 2005 that the group chief executive and any ED should build, over a five-year period, a shareholding in the Company equivalent to 175% of basic salary and 150% of basic salary respectively and no specific value per share was designated for the calculation. As outlined in section 2, the shareholding requirement in 2011 is increasing to 200% for the Group Chief Executive. In addition, the EDs will be required to retain 50% of the net share releases from the deferred annual bonuses and LTIPs until the shareholding requirements have been reached, which will not have a target date. Shares held in compulsory bonus deferrals and performance shares held in unvested LTIPs are not taken into account in applying this test. Table 18 shows the position at 31 December 2010, based on that day’s closing middle market price of an ordinary share of the Company of 393 pence.
Basic salary Shareholding excluding restricted shares Value of shareholding Percentage of basic salary Shareholding requirement
Notes 1. Andrew Moss did not meet the internal shareholding requirement target of 150% of salary by April 2010, although he is on target to meet 175% of salary by July 2012 through the vesting of share awards. 2. Patrick Regan and Mark Hodges are on target to meet 150% of salary by their target dates through the vesting of share awards. 3. Andrea Moneta resigned from the Board on 19 January 2011 and therefore no longer has any share ownership requirements.
18. All employee share plans EDs are eligible to participate in a number of HMRC approved all employee share plans on the same basis as other eligible employees. These plans include a free share element of the Aviva All Employee Share Ownership Plan (AESOP). Under this element of the plan, eligible employees can receive up to a maximum of £3,000 per annum in shares based upon the profits of the Company’s UK businesses. The shares are free of tax subject to a retention period. Free shares were not awarded in 2010. In addition, the partnership element of the AESOP, which the Company also operates, allows participants to invest up to £125 per month out of their gross salary in the Company’s shares. There is no matching to this investment by the Company. Shares awarded to, or investments made by, EDs through the AESOP are included in Table 24 below. The Aviva Savings Related Share Option Scheme allows eligible employees to acquire options over the Company’s shares at a discount of up to 20% of their market value at the date of grant. In order to exercise these options, participants must have saved through a three-, five- or seven-year HMRC approved savings contract, subject to a maximum savings limit of £250 per month. Details of options granted to EDs under this scheme can be found in Table 16 above.
Mary Francis 1 October 2008 AGM 2012 Richard Karl Goeltz 28 April 2010 AGM 2011 Euleen Goh 1 January 2009 AGM 2011 Michael Hawker 28 April 2010 AGM 2011 Carole Piwnica 30 May 2009 AGM 2012 Lord Sharman 14 January 2008 AGM 2011 Leslie Van de Walle 28 April 2010 AGM 2011 Russell Walls 28 April 2010 AGM 2011 Scott Wheway 28 April 2010 AGM 2011 * All NEDs will be subject to re-election by shareholders at the 2011 AGM
The Chairman and NEDs do not participate in any incentive or performance plans or pension arrangements and they also do not receive an expense allowance. The Company’s articles of association provide that the total aggregate remuneration paid to the chairman and NEDs will be determined by the Board within the limits set by shareholders. The current aggregate limit of £1.5 million was approved by shareholders at the Company’s 2005 Annual General Meeting. The amount paid in 2010 was £1.2 million. EDs are remunerated under their service contracts and receive no additional fee for serving as directors.
NED fees payable from 1 January 2011 are set out in Table 20 below.
21. Directors’ remuneration in 2010 Table 21 below sets out the remuneration paid or payable to the directors in respect of the year to 31 December 2010. This section (Directors’ remuneration in 2010) and those sections headed ‘EDs’ pension arrangements’ and ‘Share incentive plans’ along with their associated footnotes have been subject to audit.
Table 21: Directors’ Remuneration in 2010 Basic salary/fees Bonuses1 ACAP Benefits2 Total
Executive directors Andrew Moss 925 925 1,031 1,029 463 463 55 74 2,474 2,491 Philip Scott 42 600 26 578 — — 4 34 72 1,212 Patrick Regan 512 — 669 — — — 18 — 1,199 — Mark Hodges 600 520 695 503 300 260 27 66 1,622 1,349 Andrea Moneta3 669 629 429 756 173 82 143 142 1,414 1,609
3. Figures shown for Mr Moneta have been converted from euro to pound sterling at the average exchange rate for 2010 of €1.16605 : £1.00. 4. The Chairman received travel related benefits. 5 NEDs are reimbursed for expenses, and any tax arising on those expenses is settled directly by Aviva. 6 For the purposes of the disclosure required by Schedule 5 to the Companies Act 2006, the total aggregate emoluments of the directors in respect of 2010 was £6.8 million (2009: £6.7 million). 7. No compensation payment for loss of office was made to any director, or former director, during the year. However, as previously stated, legal fees of £2,875 were paid directly to Mr Scott’s solicitor.
Fees earned in 2010 by the NEDs are set out in Table 22 below.
Lord Sharman, Chairman £495,000 £495,000 Mary Francis £63,000 £10,000 £10,000 £5,000 £20,000 £108,000 Richard Karl Goeltz £63,000 £20,000 £10,000 £5,000 £98,000 Euleen Goh £63,000 £10,000 £5,000 £78,000 Michael Hawker* £63,000 £5,000 £68,000 Carole Piwnica £63,000 £10,000 £10,000 £83,000 Leslie Van de Walle £63,000 £10,000 £5,000 £78,000 Russell Walls £63,000 £35,000 £5,000 £5,000 £108,000 Scott Wheway £63,000 £20,000 £5,000 £88,000 *Michael Hawker joined the Board and the Risk Committee on 1 January 2010.
22. Senior executives’ remuneration The total compensation paid during the year to key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Company, including the Company’s EDs and NEDs (as required to be disclosed by International Accounting Standard 24) was £81 million (2009: £61 million) and is set out in note 60 to the Annual Report and Accounts.
Transfer value of accrued pension at 31 December 2009 350.2 1,062.5 — Transfer value of accrued pension at 31 December 2010 365.1 1,091.7 — Change in transfer value during the period less employee contributions 14.9 29.2 — Transfer value of net increase (decrease) in accrued pension less employee contributions — — —
Notes 1. Accrued pensions shown are the amounts that would be paid annually on retirement based on service to the end of the year. 2. Benefits deriving from Additional Voluntary Contributions (AVCs) paid by directors are excluded from the amounts above. 3. The change in transfer value allows for fluctuations in the transfer value due to factors beyond the control of the Company and directors, such as changes in stock market conditions. 4. The transfer values have been calculated in line with the relevant legislation and using actuarial assumptions agreed by the trustee. 5. No former Directors received any increase in retirement benefits in excess of the amount to which they were entitled, on the later of the date when the benefits first became payable, or the 31 March 1997. 6. The transfer value of net increase (decrease) in accrued pension shows the value of the increase (decrease) in accrued pension net of inflation, over the year net of contributions. 7. Philip Scott ceased to accrue benefits in the Aviva Staff Pension Scheme with effect from 30 June 2009. Mr Scott subsequently took early retirement with effect from 1 August 2010. As disclosed in the 2008 and 2009 Annual Report and
8. Andrea Moneta left the Company’s defined contribution scheme in 2009 and therefore did not accrue any further scheme benefits in 2010.
Directors’ remuneration report continued 24. Directors’ interests in Aviva shares The interests held by each person who was a director at the end of the financial year and their connected persons in the ordinary shares of the Company are shown in Table 24 below. All the disclosed interests are beneficial. The table also summarises the interests in shares held through the Company’s various share incentive plans. Details of the options and long-term incentive awards are shown below.
Mary Francis 1,800 4,700 — — — — — — — — Richard Karl Goeltz 2,500 7,500 — — — — — — — — Euleen Goh — — — — — — — — — — Michael Hawker — 5,000 — — — — — — — — Mark Hodges 139,028 348,737 231,712 165,582 459,029 635,297 145,759 210,853 1,705 9,477 Andrea Moneta 394 394 159,375 287,725 249,023 514,448 119,531 215,794 — — Andrew Moss 239,848 601,635 353,716 275,175 1,022,153 1,304,978 289,443 467,213 3,279 11,051 Carole Piwnica 2,500 2,500 — — — — — — — — Patrick Regan6 — 298,820 — 298,8207 — 233,160 — 55,0518 — 10,675 Lord Sharman 33,531 35,654 — — — — — — — — Leslie Van de Walle 2,485 17,485 — — — — — — — — Russell Walls 4,000 4,000 — — — — — — — — Scott Wheway 13,579 13,579 — — — — — — — —
The following changes to directors’ interests which relate to shares acquired each month under the partnership element of the AESOP during the period 1 January 2011 to 1 March 2011 have been reported to the Company.
Aviva plc Annual Report and Accounts 2010 Directors’ remuneration report continued 25. Former directors Philip Scott Mr Scott retired from the Board on 26 January 2010 and left the employment of the Company on 31 July 2010. As disclosed in the 2009 Annual Report and Accounts, the committee exercised its discretion with regard to Mr Scott’s share awards and, on leaving the Company, the outstanding deferred shares granted to Mr Scott under the ABP were released to him. Mr Scott also retained 100% of the LTIP award, and 86.1% of the OATTV award, granted in 2008, and 66.6% of the LTIP award, and 52.8% of the OATTV award, granted in 2009. The retained LTIP and OATTV awards will vest on their normal vesting date subject to the satisfaction of the performance conditions set at the time of grant. Mr Scott will receive a non-discounted pension with effect from January 2012. Mr Scott received a prorated bonus for the 2010 financial year of £27,755 for his period as an ED. A payment of £2,875 was made for legal fees on his departure terms. Mr Scott did not receive any other compensation payments for loss of office. As also disclosed in the 2009 Annual Report and Accounts, Mr Scott has provided consultancy services to the Group since 1 October 2010. Mr Scott will continue to provide this service for a limited period.
Euro New Preference Shares of €1 each, which have such rights and terms (including, terms related to the redemption of such shares, ranking and entitlement to dividend and capital) as the Board determines.
Issued share capital The Company had aggregate issued and outstanding ordinary share capital of £705 million as of 31 December 2010. The following table sets forth information about the issued and outstanding classes of equity as of 31 December 2010.
Share Investment Plan The Company’s UK resident employees of participating companies can buy shares in the Company by making monthly contributions from their gross salary. Contributions can be a minimum of £5 and up to a maximum of £125 per month (or, if less, 10% of gross salary). Contributions are held in a trust by an independent trustee and shares are allocated within 30 days of the employee’s monthly contribution date. Employees can withdraw their shares from the trust at any time on payment of income tax and National Insurance Contributions (NIC). However, after five years shares can be withdrawn from the trust free of income tax and NIC.
Shares issued under the Group’s Employee and Executive Share Option Schemes1 951,455 Shares issued in lieu of dividends2 107,958,295
Shares issued under the Group’s Employee and Executive Share Option Schemes1 722,968 Shares issued in lieu of dividends2 52,814,300
At 31 December 2010 2,820,148,642 1. For more information on our various option schemes, see ‘Governance’ section. 2. The issue of shares in lieu of cash dividends is considered a bonus issue under the terms of the Companies Act 2006 and the nominal value of the shares is charged to the share premium account.
Directors and key management The total compensation to those employees classified as key management, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the executive and non-executive directors is as follows: Salary and other short-term benefits 48 39 38 Post-employment benefits 8 5 3 Equity compensation plans 21 16 9 Termination benefits 4 1 3 Total 81 61 53
Loans to joint ventures We make loans to our property management joint ventures to fund property developments which we undertake with our joint venture partners. Movements in these loans may be found in ‘Financial Statements IFRS – Note 18– Interests in, and loans to, joint ventures’. Total loans at 31 December 2010 and at the end of each of the last three financial years are shown in the table below: £m
These constitute loans to joint ventures to fund shopping, business or distribution centres or properties in Europe, as well as a film studio development in the UK.
Our principal objective in managing our liquidity and capital resources is to maximise the return on capital to shareholders, while enabling us to pay the dividends, service our debt and our holding companies’ cash flows. In the context of a financial services company, where our working capital is largely representative of our liquidity, we believe our working capital is sufficient for our present operational requirements. For additional information, see ‘Financial Statements IFRS – Note 57 – Risk management – liquidity risk’.
At 31 December 2010, the Group had £26.5 billion (31 December 2009: £24.0 billion) of total capital employed in our trading operations which is financed by a combination of equity shareholders’ funds, preference capital, direct capital instruments, subordinated debt and internal and external borrowings. In 2010, the total capital employed increased by £2.5 billion. Over the period the Group has generated post tax profits and benefitted from actuarial gains on staff pension schemes. See ‘Financial statements IFRS – Note 55 – Group capital structure’. In addition to external funding sources, we have a number of internal debt arrangements in place. These have allowed the assets supporting technical liabilities to be invested into the pool of central assets for use across the Group. They have also enabled us to deploy cash from some parts of the business to others in order to fund growth. Although intra-Group loans in nature, they are counted as part of the capital base for the purpose of capital management. All internal loans satisfy arm’s length criteria and all interest payments have been made when due. The presentation of internal lending arrangements depicts a net debt position which represents the upstream of internal loans from business operations to corporate and holding entities net of tangible assets held by these entities. The corporate net liabilities represent the element of the pension scheme deficit held centrally.
Management of debt Aviva plc is the principal financing vehicle in our centralised funding strategy. Our senior debt obligations are supported by guarantees from our principal non-life trading subsidiaries. We also manage our external debt in line with rating agency limits applicable for entities with a rating in the AA range. We aim to maintain a balance of fixed and floating rate debt, and manage the maturity of our borrowings and our undrawn committed facilities to avoid bunching of maturities. We aim to maintain access to a range of funding sources, including the banking market, the commercial paper market and the long-term debt capital markets. We issue debt in a variety of currencies, predominantly sterling, euros and US dollars, based on investor demand at the time of issuance and management of the Group’s foreign exchange translation exposures in the statement of financial position. In November 2010, Delta Lloyd issued a €575 million senior bond repayable in 2017 and €160 million of short term commercial paper. In March 2009, we issued subordinated debt in two tranches comprising £200 million and €50 million, both callable in 2014. In May 2008, we issued subordinated debt in two tranches comprising £400 million callable in 2038, and €400 million callable in 2018. We used £600 million sterling equivalent to repay commercial paper denominated in various currencies. In August 2008, we issued a further £200 million, callable in 2038.
In January 2007, we issued $375 million of commercial paper, which was used to repay senior debt in our US business. In the year ended 31 December 2006 we raised £442 million of new borrowings in order to fund the acquisition of AmerUs and repay senior debt in AmerUs. At 31 December 2010, our total external borrowings, including subordinated debt and securitised mortgage loans, amounted to £14.9 billion. Of the total borrowings £6.1 billion are considered to be core borrowings and are included within the Group’s capital employed. The balance of £8.8 billion represents operational debt issued by operating subsidiaries. We also have substantial committed credit facilities available for our use. At 31 December 2010, we had undrawn committed credit facilities expiring within one year of £1.0 billion compared to £0.6 billion of such facilities at 31 December 2009, and £1.1 billion in credit facilities expiring after more than one year compared to £1.5 billion of such facilities at 31 December 2009. Of these facilities, £1 billion was allocated in both 2010 and 2009 to support our commercial paper programme. Further information on the maturity profile, currency and interest rate structure of our borrowings is presented in ‘Financial statements IFRS – Note 49 – Borrowings’. Commercial paper is issued for terms up to six months and is generally reissued at maturity. The earliest repayment date for other debt instruments is an €800 million subordinated debt instrument with a first call date of 14 November 2011 at the option of the company. At this time Aviva will have the option of repaying the debt or accepting a step-up in the coupon and deferring repayment until 2021. The table below provides presents our debt position for the periods indicated: £m
Core structural borrowings Subordinate debt 4,572 4,638 Debenture loans 851 368 Commercial paper 643 483
Undrawn borrowings At 31 December 2010, we had £2.1 billion undrawn committed central borrowing facilities available to us, provided by a diverse range of 11 leading banks, all but one of which were rated AA. We have allocated £1.0 billion to support the credit rating of Aviva’s commercial paper programme. Undrawn borrowings are analysed below: £m
Total shareholders’ funds to exceed 32% of non-life net written premiums for the previous 12 months. At 31 December 2010 total shareholders funds were 161% of non-life net written premiums.
One of our principal sources of liquidity is dividends from our subsidiaries. The level of dividends is based on two primary factors: the financial performance and the local solvency and capital requirements of our individual business units. The table below shows the dividends received from our principal operating subsidiaries in 2010: 2010 Amounts received £m
Capital injections We make capital injections into our businesses where necessary to ensure that they meet their local solvency requirements and also to support development of their operations. Capital is provided either by equity or, where a local holding company is in place, maybe via loans with the holding company subsequently injecting equity capital in the regulated operating company. Each capital injection is subject to review by our central Group Approvals Committee and needs to meet our required internal rates of return. To the extent capital injections are provided or funded by regulated entities, then we have to consider the impact on regulatory capital of the capital injection. Otherwise our ability to make capital injections into our businesses is not materially limited by applicable legal and regulatory restrictions. Total capital injections into the business units were £333 million and £612 million in 2010 and 2009 respectively.
Year ended 31 December 2009 Net cash from operating activities Total net cash from operating activities decreased by £5,410 million to £2,685 million in 2009 (2008: £8,095 million). The decrease is due to lower pension and annuity sales, predominately in the UK, and lower general insurance and health sales.
Net cash used in investing activities Net cash from investing activities decreased by £37 million to £432 million utilised (2008: £395 million utilised). Principal acquisitions and disposals in 2008 and cash consideration paid and received are disclosed in ‘Financial statements IFRS – Note 3 – Subsidiaries’.
Net cash out flow on financing activities Net cash used in financing activities was £1,566 million lower at £571 million (2008: £2,137 million). The decrease is a result of the proceeds from the IPO of our Dutch business Delta Lloyd, lower interest payments on borrowing and a decrease in ordinary dividends paid.
Cover of EU minimum (calculated excluding UK Life funds) 1.6 times 1.7 times
IGD solvency surplus at 31 December 2009 4.5 Operating profits net of income and other expenses 1.0 Dividends net of scrip (0.5) Market movements including foreign exchange (0.2) Pension scheme funding (0.3) Increase in Capital Resource Requirement (0.3) Acquisitions (River Road and other small transactions) (0.2) Other (0.2)
Capital commitments Contractual commitments for acquisitions or capital expenditures of investment property, property and equipment and intangible assets, which have not been recognised in our consolidated financial statements, are as follows: £m
Contractual obligations for future repairs and maintenance on investment properties are £1 million (2009: £1 million, 2008: £1 million). We have capital commitments to our joint ventures of £nil (2008: £nil, 2007: £nil) and to other investment vehicles of £nil million (2008: £33 million, 2008: £48 million). These commitments are expected to be funded through operational cash flow without recourse to core structural borrowings.
Insurance Groups Directive (IGD) The IGD requires member states to introduce the following measures to strengthen supervision of insurance companies which are part of a group: an adjustment to the solvency calculation in relation to participating interest in other insurance undertakings in order to eliminate ‘double-gearing’ (the use of the same regulatory capital in more than one entity of a group).
the introduction of new solo supervision requirements, including rules as to internal control within the insurance undertaking regarding the production of information relevant to supplementary supervision, the exchange of information within the group and the supervision of intragroup transactions.
Since 31 December 2006 the group capital resources requirement (the parent undertaking solvency calculation mentioned above) has been a ‘hard’ test (i.e. it constitutes a requirement to maintain the group capital resources, rather than simply to make the calculation) for UK-based companies operating under FSA rules.
Distance Marketing Directive Under the Distance Marketing Directive, EU member states are required to implement a framework of rules and guidance in order to protect consumers by: setting minimum standards for information that must be provided to consumers before entering into a financial services contract by ‘distance means’.
for certain products and services, giving a cooling-off period in which a consumer may cancel a contract without penalty.
Insurance Mediation Directive This requires EU member states to establish a framework to: ensure that insurance and reinsurance intermediaries have been registered on the basis of a minimum set of professional and financial requirements.
ensure that registered intermediaries will be able to operate in other member states by availing themselves of the freedom to provide services or by establishing a branch.
The FSA’s regulation of the Group A number of the Group’s UK subsidiaries are directly authorised and regulated by the FSA, including our insurance companies (e.g. the UK Life and UK General Insurance companies), asset managers (Aviva Investors) and intermediaries (UK Healthcare and RAC Motoring Services). Aviva plc, although not directly authorised by the FSA, does itself come within the scope of some regulation, as the ultimate insurance holding company in the Group. As Aviva is a UK-based group, the FSA has the responsibility of acting as lead regulatory (i.e. the cross-sector supervisory co-ordinator) for the Group within the EU.
FSA conduct of business rules The FSA’s Conduct of Business (COB) and Insurance: Conduct of Business (ICOB) Rules apply to every Authorised Firm carrying on relevant regulated activities, and regulate the day to day conduct of business standards to be observed by all Authorised Persons in carrying out regulated activities. The COB and ICOB Rules are principle based, and the scope and range of obligations imposed on an Authorised Firm will vary according to the scope of its business and range of the Authorised Firm’s clients. Generally speaking, however, the obligations imposed on an Authorised Firm by the COB and ICOB Rules will include the need to classify its clients according to their level of sophistication, provide them with information about the Authorised Firm, meet certain standards of product disclosures (including fee and remuneration arrangements), ensure that promotional material which it produces is clear, fair and not misleading, assess suitability when advising on certain products, control the range and scope of advice given, manage conflicts of interest, report appropriately to its clients and provide certain protections in relation to client assets.
a more proactive and intensive approach to supervision, through implementation of its Core Prudential Programme for Insurers (CPPI).
Intervention and enforcement The FSA has extensive powers to investigate and intervene in the affairs of Authorised Firms and is obliged under FSMA to monitor compliance with the requirements imposed by, and to enforce the provisions of, FSMA, related secondary legislation and the rules made thereunder. The FSA’s enforcement powers, which may be exercised against both Authorised Firms and Approved Persons, include public censure, imposition of unlimited fines and, in serious cases, the variation or revocation of permission to carry on regulated activities or of an Approved Person’s status. The FSA may also vary or revoke an Authorised Firm’s permissions to protect the interests of consumers or potential consumers, if the Authorised Firm has not engaged in regulated activity for 12 months, or if it is failing to meet the threshold conditions for authorisation. The FSA has further powers to obtain injunctions against Authorised Persons and to impose or seek restitution orders where consumers have suffered loss. In addition to applying sanctions for market abuse, the FSA has the power to prosecute criminal offences arising under FSMA and insider dealing under Part V of the Criminal Justice Act 1993, and breaches of money laundering regulations. The FSA’s stated policy is to pursue criminal prosecution in all appropriate cases.
Federal initiatives While the National Association of Insurance Commissioners (NAIC) has no statutory powers, its members are the insurance commissioners in each state and it acts as a forum to develop and propose model laws and regulations. Each state then decides whether to adopt the NAIC model laws or regulations and each state may make changes to the adoption process. However, the models are generally widely adopted. An example is the ‘Suitability in Annuity Transactions Model Act’ which has been widely adopted by states for a broad range of transactions. NAIC has a commitment to modernising the state-based system of insurance regulation and is pushing forward an action plan aimed at achieving consistency of approach between states on a number of issues including consumer protection, licensing, solvency and changes in insurance company control. The American Council of Life Insurers (ACLI) has, in the past, proposed an optional federal charter (OFC) under which life insurers could choose to be federally regulated instead of state regulated. However, the OFC has not been widely supported or adopted. In 2010 Congress passed a law adopting significant federal regulatory reforms for the financial services industry in the US. The new law will impose stricter prudential standards on systemically significant financial companies, higher risk financial activities and introduce new mechanisms for resolving failures of significant financial companies. The law requires additional stress testing and reporting on a regular basis. In addition, a Federal Insurance Office (FIO) has been established within the Treasury Department to monitor the insurance industry, co-ordinate federal policy and, along with the US Trade Representative, enter into international agreements on prudential insurance matters. While the FIO will have no direct regulatory authority over the business of insurance such international agreements could preempt inconsistent state insurance laws. The FIO will also be required to conduct a study of how to improve and modernise insurance regulation and report to Congress within one year. The new law does not currently have any immediate and significant impact on the Company and the FIO is still in the process of being organised. However, we continue to monitor the FIO and related rulemaking developments. Additionally, there is active discussion within the NAIC of moving to a principles-based valuation system for the setting of reserves and capital for life insurance companies. This could change our statutory reserve and capital requirements significantly and it is not possible to estimate the impact on our financial condition and results of operation at this time.
Canada We write property and casualty business in Canada via a number of wholly owned companies. Insurance business in Canada is regulated federally by the Office of the Superintendent of Financial Institutions (OSFI) with the focus very much on prudential supervision, i.e. capital adequacy, solvency, etc. OSFI derives its powers from the federal Insurance Companies Act (Canada) which governs the structure and operation of federally incorporated insurance companies. The capital adequacy of insurance companies is monitored under the Minimum Capital Test (MCT) – a risk-based framework allowing for capital to be assessed on the basis of an individual company’s risk profile taking account of the investments held and insurance business being written. Companies have their own internal MCT target as well as being expected to maintain capital in excess of 150% of the OSFI minimum requirement. There are also ten individual provincial regulators each regulating predominantly conduct of business issues such as policy terms and conditions, pricing and underwriting of companies they have licensed to write business in the province.
Intellectual property Our primary brands in the UK (Aviva, RAC) are registered trade marks in the UK and elsewhere. Aviva owns approximately 300 registered or pending marks in the UK, including Community trade marks having effect in the entire EU. Aviva has an active programme of review of marks and watching for infringements. There are no material infringements in the UK known to us as at the date of this report, either by the Group or third parties.
Risks relating to our business You should carefully review the following risk factors together with other information contained in this Annual Report before making an investment decision in our ordinary shares or ADSs. Our business, financial position, results of our operations and cash flow could be materially affected by any of these risks, the trading price of our ordinary shares or ADSs could decline due to any of these risks and investors may lose part or all of their investment.
Changes in interest rates may cause policyholders to surrender their contracts, reduce the value of our investment portfolio and impact our asset and liability matching, which could adversely affect our results of operation and financial condition. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. Certain of our life insurance businesses may be exposed to disintermediation risk. Disintermediation risk refers to the risk that our policyholders may surrender their contracts in a rising interest rate environment or for liquidity reasons, requiring us to liquidate assets in an unrealised loss position. Due to the long-term nature of the liabilities associated with certain of our life insurance businesses, and guaranteed benefits on certain long-term insurance and fund management products, sustained declines in long-term interest rates may subject us to reinvestment risks and increased hedging costs. In other situations, declines in interest rates may result in increasing the duration of certain life insurance liabilities, creating asset liability duration mismatches. Our investment portfolio also contains interest rate sensitive instruments, such as fixed income securities, which may be adversely affected by changes in interest rates from governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. A rise in interest rates would increase the net unrealised loss position of our investment portfolio, offset by our ability to earn higher rates of return on funds reinvested. Conversely, a decline in interest rates would decrease the net unrealised loss position of our investment portfolio, offset by lower rates of return on funds reinvested. Our mitigation efforts with respect to interest rate risk are primarily focused on maintaining an investment portfolio with diversified maturities that has a weighted average duration approximately equal to the duration of our estimated liability cash flow profile. However, it may not be possible to hold assets which will provide cash flows to exactly match those relating to policyholder liabilities, in particular in jurisdictions with undeveloped bond markets and in certain markets where regulated surrender value or maturity values are set with reference to the interest rate environment prevailing at the time of policy issue. This is due to the duration and uncertainty of the liability cash flows and the lack of sufficient assets of suitable duration. This results in a residual asset/liability mismatch risk which can be managed but not eliminated. In addition, our estimate of the liability cash flow profile may be inaccurate and we may be forced to liquidate investments prior to maturity at a loss in order to cover the liability. See ‘Financial statements IFRS – Note 57 – Risk management’.
We are exposed to possible widening in credit spreads which could increase the net unrealised loss portion of the investment portfolio and adversely affect our results of operations. Our exposure to credit spreads primarily relates to market price and cash flow variability associated with changes in credit spreads in our investment portfolio which is largely held to maturity. Market volatility can make it difficult to value certain of our securities if trading becomes less frequent. Accordingly, valuations of investments may include assumptions or estimates that may have significant period to period changes due to market conditions, which could have a material adverse effect on our consolidated results of operations or financial condition.
Fluctuations in the fixed income and equity markets could affect the levels of regulatory capital that we must hold for regulatory solvency purposes and for pension obligations, which could materially impact our results of operations and shareholders’ equity. The value of our investment assets fluctuates, which can impact the capital levels supporting our business. We are required to hold an excess amount of our capital over a minimum solvency amount. Our IGD solvency surplus decreased from £4.5 billion as of 31 December 2009 to £3.8 billion as of 31 December 2010. Of this movement, £0.3 billion relates to additional funding contributions to the Aviva pension scheme. An inability to meet regulatory capital requirements in the future would be likely to lead to intervention by the Financial Services Authority (FSA), which could require the Group to restore regulatory capital to acceptable levels. See ‘Liquidity and capital resources’ section in the report. We are also exposed to interest rate and equity risk based upon the discount rate and expected long-term rate of return assumptions associated with our pension and other postretirement benefit obligations. Sustained declines in long-term interest rates or equity returns would have a negative effect on the funded status of these plans. See ‘Financial statements IFRS – Note 48 – Pension obligations’.
Defaults in our bond, residential and commercial mortgage and structured credit portfolios may have an adverse impact on our profitability and shareholders’ equity. We have a significant exposure to credit risk through our investments in corporate bonds, residential and commercial mortgages and structured credit assets, as well as second order exposures through counterparty risks in our derivatives contracts and reinsurance placements. The risks in these assets and exposures may be borne by Aviva plc and our shareholders or by the policyholders whose policies the assets back, or a mixture of the two, where we hold some residual risk. We held a total of £370 billion of assets on our statement of financial position at 31 December 2010, of which £148 billion are assets where Aviva plc and our shareholders bear the risk. Such assets included as of 31 December 2010: £57,886 million invested in bonds, of which £19,149 million are issued by government-related entities, and the remaining are from corporate bonds; £30,109 million invested in mortgages, of which £12,943 million are commercial mortgages, £8,850 million are residential mortgages (including equity release) and the remaining are securitised mortgages, for which the majority of the risk have been sold to third parties, and Aviva plc and our shareholders only retain exposure to approximately £1,300 million; £4,616 million invested in policy loans, loans and advances to banks and other loans; £7,606 million invested in structured credit assets, of which £1,628 million is US Agency backed RMBS, £896 million is non-Agency RMBS, £2,185 million is CMBS and the remaining are CDOs, other ABS and wrapped credit assets; £9,061 million invested in other Financial Assets including equities and other investments;
A decline in equity markets or an increase in volatility in equity markets may adversely affect sales of our investment products, our fund management business, our profitability and the market value of our assets invested for our defined benefit pension scheme. Significant downturns and volatility in equity markets could have a material adverse effect on our financial condition and results of operations in several ways. Downturns in equity markets will depress equity prices and have a negative impact on our capital position in that unrealised losses in our net investment portfolio will increase, and our defined benefit pension scheme deficit will increase as the market value of scheme assets invested in equities decreases. Downturns and volatility in equity markets can have a material adverse effect on the revenues and returns from our unit-linked, participating and fund management business. Because our unitlinked and fund management business depends on fees related primarily to the value of assets under management, a decline in the equity markets could reduce our revenues by reducing the value of the investment assets we manage. Likewise, because investment risk in our participating business is shared with policyholders a decline in the equity markets could reduce our revenues by reducing the funds investment return. Profits could also be reduced as a result of current investors withdrawing funds or reducing their rates of ongoing investment with our fund management companies or as a result of our fund management companies failing to attract funds from new investors. We provide certain guarantees within some of our products that protect policyholders against significant downturns in the equity markets. For example, we offer certain long-term insurance products with guaranteed features. In volatile or declining equity market conditions, we may need to increase liabilities for future policy benefits and policyholder account balances, negatively affecting net income. Additional provisions for guarantees were decreased by £90 million in 2010 in relation to minimum death benefits for unit-linked contracts in France and guaranteed minimum returns at maturity for unit-linked and segregated fund business in the Netherlands. For a discussion of guarantees we have given for our insurance and investment products, please see ‘Financial statements IFRS – Note 41 – Financial guarantees and options’. In our US business in particular, market downturns and volatility may discourage purchases of accumulation products, such as equity-indexed annuities and equity-indexed life insurance that have returns linked to the performance of the equity markets and may cause some of our existing customers to withdraw cash values or reduce investments in those products. A sustained weakness in the markets will decrease revenues and earnings in these types of products.
Fluctuations in currency exchange rates may adversely affect our operating results and financial position. We operate internationally and are thus exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. As of December 2010, over half of our premium income arises in currencies other than sterling, and our
Market fluctuations may cause the value of options and guarantees embedded in some of our life insurance products to exceed the value of the assets backing their reserves and as a consequence, negatively affect the profitability of the business. Guarantees within certain of our products that protect policyholders against significant downturns in equity markets may decrease our earnings, increase the volatility of our results if hedging or risk management strategies prove ineffective, result in higher hedging costs and expose us to increased financial risk. As a normal part of their operating activities, various Group companies have given guarantees, including interest rate guarantees, in respect of certain long-term insurance, unit-linked and fund management products. At the present time, guarantees and options are in force in the UK, continental Europe, the US and Asia. In providing these guarantees and options, our capital position is sensitive to fluctuations in financial variables including interest rates, credit spreads, real estate prices and equity prices. Interest rate guaranteed returns, such as those available on guaranteed annuity options (GAOs), are sensitive to interest rates falling below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was made. Periods of significant and sustained downturns in equity markets, increased equity volatility or reduced interest rates could result in an increase in the valuation of the future policy benefit or policyholder account balance liabilities associated with such products, resulting in a reduction to net income. We use reinsurance in combination with derivative instruments to mitigate the liability exposure and the volatility of net income associated with these liabilities, and while we believe that these and other actions have mitigated the risks related to these benefits, we remain liable for the guaranteed benefits in the event that reinsurers or derivative counterparties are unable or unwilling to pay. We are also subject to the risk that the cost of hedging these guaranteed minimum benefits increases, resulting in a reduction to net income. In addition, we are subject to the risk that hedging and other management procedures prove ineffective or that unanticipated policyholder behaviour or mortality, combined with adverse market events, produces economic losses beyond the scope of the risk management techniques employed. These, individually or collectively, may have a material adverse effect on net income, financial condition or liquidity.
The impairment of other financial institutions, service providers and business partners could adversely affect us. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, hedge funds and other investment funds, other insurance groups and other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty. In addition, with respect to secured transactions, our credit risk may be exacerbated when the collateral held by us cannot be realised upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to it. We also have exposure to these financial institutions in the form of unsecured debt instruments, derivative transactions and equity investments. There can be no assurance that any such losses or impairments to the carrying value of these assets would not materially and adversely affect our business and results of operations. In addition, we use derivative instruments to hedge various risks, including certain guaranteed minimum benefits contained in many of our equity indexed annuity and life products. We enter into a variety of derivative instruments, including options, forwards, interest rate and currency swaps with a number of counterparties. Our obligations under our equity indexed annuity and life products are not changed by our hedging activities and we are liable for our obligations even if our derivative counterparties do not pay us. This is a more pronounced risk to us in view of the recent stresses suffered by financial institutions. Defaults by such counterparties could have a material adverse effect on our financial condition and results of operations. We are also susceptible to risks associated with the potential financial instability of the service providers and business partners (such as our bancassurance partners in certain international locations) on which we rely or partially rely to provide services and grow our business.
Financial strength ratings The insurance financial strength ratings of Aviva’s core operating subsidiaries are AA- (‘Very Strong’) with a stable outlook (Standard & Poor’s), Aa3 (‘Excellent’) with a stable outlook (Moody’s), and A (‘Excellent’) with a positive outlook (AM Best). These ratings represent the second highest of nine ratings categories for the Standard & Poor’s rating and the lowest within the category based on modifiers (i.e. AA+, AA and AA- are ‘Very Strong’); the second highest of nine ratings categories for the Moody’s rating and the lowest within the category based on modifiers (i.e. Aa1, Aa2 and Aa3 are ‘Excellent’); the second highest of nine rating categories for the AM Best rating and the highest within the category based on modifiers (i.e. A and A- are ‘Excellent’). The foregoing ratings reflect each rating agency’s opinion of the financial strength, operating performance and the ability to meet obligations for Aviva plc and Aviva’s core operating subsidiaries. These ratings are not evaluations relating to our common stock or the protection of our shareholders. Rating organisations assign ratings based upon several factors. While most of the factors relate to the rated company, some of the factors relate to general economic conditions and circumstances outside the rated company’s control. In view of the difficulties experienced recently by many financial institutions, including our competitors in the insurance industry, we believe it is possible that the rating agencies, including Standard & Poor’s, Moody’s and AM Best, will heighten the level of scrutiny that they apply to such institutions, will increase the frequency and scope of their credit reviews, will request additional information from the companies that they rate and may adjust upward the capital and other requirements employed in their models for maintenance of certain ratings levels. We cannot predict what actions rating agencies may take, or what actions we or others may take in response to the actions of rating agencies, which could adversely affect our business. As with other companies in the insurance industry, our ratings could be downgraded at any time and without any notice by any rating agency. A downgrade may adversely affect relationships with broker-dealers, banks, agents, wholesalers and other distributors of our products and services, which may negatively impact new sales and adversely affect our ability to compete and thereby have a material adverse effect on our business, results of operations and financial condition. In addition, the interest rates we pay on our borrowings are affected by our debt credit ratings.
Our businesses are conducted in highly competitive environments and our continued profitability depends on management’s ability to respond to these pressures. There are many factors which affect our ability to sell our products, including price and yields offered, financial strength and ratings, range of product lines and product quality, brand strength and name recognition, investment management performance and historical bonus levels. In some of our markets, the Group faces competitors that are larger, have greater financial resources or a greater market share, offer a broader range of products or have higher bonus rates or claims-paying ratios. Further, heightened competition for talented and skilled employees with local experience, particularly in the emerging, high-growth markets, may limit our potential to grow our business as quickly as planned. Our principal competitors in the life market include many of the major financial services businesses including, in particular, Axa, Allianz, Generali, Prudential and Standard Life. Our principal competitors in the general insurance market include Royal Bank of Scotland Insurance, RSA, Zurich, Axa and Allianz. We also face competitors who specialise in many of the niche markets in which we operate, for example bulk annuities in the UK. We believe that competition will intensify across all regions in response to consumer demand, technological advances, the impact of consolidation, regulatory actions and other factors. Our ability to generate an appropriate return depends significantly upon our capacity to anticipate and respond appropriately to these competitive pressures.
We are dependent on the strength of our brands, the brands of our partners and our reputation with customers and agents in the sale of our products and services. Our success and results are, to a certain extent, dependent on the strength of our brands and reputation. As part of our ongoing ‘One Aviva, Twice the Value’ strategy, we have been working to create a global Aviva brand, as well as rebrand businesses in the UK, Ireland and Poland under the Aviva name. While we as a Group are well recognised, we are vulnerable to adverse market and customer perception. We operate in an industry where integrity, customer trust and confidence are paramount. We are exposed to the risk that litigation, employee misconduct, operational failures, the outcome of regulatory investigations, press speculation and negative publicity, disclosure of confidential client information, inadequate services, amongst others, whether or not founded, could impact our brands or reputation. Any of our brands or our reputation could also be affected if products or services recommended by us (or any of our intermediaries) do not perform as expected (whether or not the expectations are founded) or in line with the customers’ expectations for the product range.
When establishing their liabilities, our life insurance companies allow for changes in the assumptions made, monitor their experience against the actuarial assumptions used and assess the information gathered to refine their long-term assumptions, together with taking actual claims experience into account. However, it is not possible to determine precisely the amounts in total that will ultimately be necessary to pay liabilities under the policies written by the business. Amounts may vary from estimates, particularly in light of the long-term nature of the life insurance business. Changes in assumptions may also lead to changes in the level of capital required to be maintained. If the assumptions underlying our reserving methodology were to prove incorrect, we may need to increase the amount of our reserves, which could have a material adverse impact on the Group’s value, the results of our operation and/or financial condition and our ability to manage our businesses in an efficient manner. Examples of our reserving assumptions, which could prove to be incorrect, would include: actual claims experience being less favourable than the underlying assumptions; a higher than anticipated rate of future claims; or actual levels of future persistency being significantly lower than previously assumed. Additionally, our management of the general insurance business requires the general insurance companies to make a number of assumptions in relation to the business written. These assumptions include the costs of writing the business and settling claims, and the frequency and severity of claims. The assumptions may turn out to be incorrect. In relation to certain key risks such as weather catastrophes (e.g. a UK flood or Northern European windstorm), if actual claims experience is less favourable than the underlying assumptions, this would have an adverse impact on our profit. Additionally, man-made disasters including accidents and intentional events are difficult to predict with a high degree of accuracy. These would also have an adverse impact on our profit due to higher than expected claims. Furthermore, outstanding claims provisions for the general insurance business are based on the best-estimate ultimate cost of all claims incurred but not settled at a given date, both reported and incurred but not reported (IBNR), together with the direct costs incurred in settling each claim (e.g. legal fees). Any provisions for re-opened claims are also included. A range of methods, including stochastic projections, may be used to determine these provisions. Underlying these methods are a number of explicit or implicit assumptions relating to the expected settlement amount and settlement pattern of claims. If the assumptions underlying the reserving basis were to prove incorrect or actual claims experience were to be less favourable than the underlying assumptions, we might have to increase the amount of the general insurance provisions. If claims exceed insurance reserves financial results could be significantly affected.
We may face losses if there are significant deviations from our assumptions regarding the persistency of our insurance policies and annuity contracts. A significant proportion of our profitability arises from our inforce portfolio of business. The prices and expected future profitability of our insurance and deferred annuity products are based in part upon expected patterns of premiums, expenses and benefits, using a number of assumptions, including those related to persistency, which is the probability that a policy or contract will remain in force from one period to the next. The effect of persistency on profitability varies for different products. For most of our life insurance and deferred annuity products, actual persistency that is lower than our persistency assumptions could have an adverse impact on profitability. Customers are often able to surrender their contracts early, which will generally reduce the future flow of profits. In addition some contracts have a variety of options which the customer is able to choose to exercise. In setting reserves, assumptions have been made about the proportion of customers exercising options. If more customers choose to exercise options at times when they are most valuable, then our net income will be adversely affected. Significant deviations in experience from pricing expectations regarding persistency could have an adverse effect on the profitability of our products.
Aviva plc Annual Report and Accounts 2010 Shareholder information continued discriminatory regulation, credit risks of our local borrowers and counterparties, lack of local business experience in certain markets, risks associated with exposure to insurance industry insolvencies through policyholder guarantee funds or similar mechanisms set up in foreign markets and, in certain cases, risks associated with the potential incompatibility with foreign partners, especially in countries in which we are conducting business through entities we do not control. Some of our international insurance operations are, and are likely to continue to be, in emerging markets where these risks are heightened. Our overall success as a global business depends, in part, upon our ability to succeed in different economic, social and political conditions. Finally, our results of operations and financial condition may be materially affected from time to time by the general economic conditions such as the levels of employment, consumer lending, prevailing interest rates, or inflation, in the countries in which we operate.
If our business does not perform well or if actual experience versus estimates used in valuing and amortising Deferred Acquisition Costs (DAC) and Acquired value of in-force business (AVIF) vary significantly, we may be required to accelerate the amortisation and/or impair the DAC and AVIF which could adversely affect our results of operations or financial condition. We incur significant costs in connection with acquiring new and renewal business. Those costs that vary with and are, in particular, related to the production of new and renewal business in respect of certain UK non-profit insurance business and certain US insurance business are deferred and referred to as DAC. The recovery of DAC is dependent upon the future profitability of the related business. The amount of future profit or margin is dependent principally on investment returns in excess of the amounts credited to policyholders, mortality, morbidity, persistency, interest crediting rates and expenses to administer the business. Of these factors, we anticipate that investment margins are most likely to impact the rate of amortisation of such costs. The aforementioned factors enter into management’s estimates of gross profits or margins, which generally are used to amortise such costs. If the estimates of gross profits or margins were overstated, then the amortisation of such costs would be accelerated in the period the actual experience is known and would result in a charge to income. Significant or sustained equity market declines could result in an acceleration of amortisation of the DAC related to UK unit-linked business, resulting in a charge to income. Such adjustments could have a material adverse effect on our results of operations or financial condition. AVIF, arising primarily in our US business, reflects the estimated fair value of certain in-force contracts in a life insurance company acquired either directly or through the purchase of a subsidiary and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the insurance and investment contracts in-force at the acquisition date. AVIF is based on actuarially determined projections. Actual experience may vary from the projections. Revisions to estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in an impairment and a charge to income. Also, as AVIF is amortised similarly to DAC, an acceleration of the amortisation of AVIF would occur if the estimates of gross profits or margins were overstated. Accordingly, the amortisation of such costs would be accelerated in the period in which the actual experience is known and would result in a charge to net income. Such adjustments could have a material adverse effect on our results of operations or financial condition.
If our business does not perform well, we may be required to recognise an impairment of our goodwill, intangibles with indefinite useful lives or intangibles with finite lives, which could adversely affect our results of operations or financial condition. Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. We test goodwill and intangible assets with indefinite useful lives at least annually for impairment or when circumstances or events indicate there may be uncertainty over this value. We test intangibles with finite lives when circumstances or events indicate there may be uncertainty over this value. For impairment testing, goodwill and intangibles have been allocated to cash-generating units by geographical reporting unit and business segment. The fair value of the reporting unit is impacted by the performance of the business. Goodwill and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support its carrying value. Such write downs could have a material adverse effect on our results of operations or financial position.
Aviva plc Annual Report and Accounts 2010 Shareholder information continued be less than the value at which the investments may be ultimately sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within our consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results of operations or financial condition.
The determination of the amount of allowances and impairments taken on our investments is highly subjective and could materially impact our results of operations or financial position. The determination of the amount of allowances and impairments vary by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Furthermore, additional impairments may need to be taken or allowances provided for in the future. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. If the carrying value of an investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. There can be no assurance that our management has accurately assessed the level of impairments taken and allowances reflected in our financial statements.
Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business. Management of risk requires, among other things, policies and procedures to record properly and verify a large number of transactions and events. We have devoted significant resources to develop our risk management policies and procedures and expect
Aviva plc Annual Report and Accounts 2010 Shareholder information continued to continue to do so in the future. Nonetheless, our policies and procedures may not be comprehensive. Many of our methods for managing risk and exposures are based upon the use of observed historical market behaviour or statistics based on historical models. As a result, these methods may not fully predict future exposures, which can be significantly greater than our historical measures indicate, particularly in unusual markets and environments. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that is publicly available or otherwise accessible to us. This information may not always be accurate, complete, up to date or properly evaluated.
Catastrophic events, which are often unpredictable by nature, could result in material losses and abruptly and significantly interrupt our business activities. Our business is exposed to volatile natural and man-made disasters such as pandemics, hurricanes, windstorms, earthquakes, terrorism, riots, fires and explosions. Over the past several years, changing weather patterns and climatic conditions have added to the unpredictability and frequency of natural disasters in certain parts of the world and created additional uncertainty as to future trends and exposure. Our life insurance operations, in particular, are exposed to the risk of catastrophic mortality, such as a pandemic or other event that causes a large number of deaths. Significant influenza pandemics have occurred three times in the last century, but neither the likelihood and timing, nor the severity of a future pandemic can be predicted. The effectiveness of external parties, including governmental and non-governmental organisations, in combating the spread and severity of such a pandemic could have a material impact on the losses experienced by us. These events could cause a material adverse effect on our results of operations in any period and, depending on their severity, could also materially and adversely affect our financial condition. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, pandemics, hurricanes, earthquakes and man-made catastrophes may produce significant damage in larger areas, especially those that are heavily populated. Claims resulting from natural or man-made catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or harm our financial condition. Also, catastrophic events could harm the financial condition of our reinsurers and thereby increase the probability of default on reinsurance recoveries. Our ability to write new business could also be affected. Furthermore, pandemics, natural disasters, terrorism and fires could disrupt our operations and result in significant loss of property, key personnel and information about our clients and us. If our business continuity plans have not included effective contingencies for such events they could adversely affect our business, results of operations, corporate reputation and financial condition for a substantial period of time.
Inconsistent application of directives by regulators in different European Union (EU) member states may place our business at a competitive disadvantage to other European financial services groups. Insurance regulation in the UK is largely based on the requirements of EU directives. Inconsistent application of directives by regulators in different EU member states may place our business at a competitive disadvantage to other European financial services groups. In addition, changes in the local regulatory regimes of designated territories could affect the calculation of our solvency position.
Our businesses are subject to regulatory risk, including adverse changes in the laws, regulations, policies and interpretations in the markets in which we operate. We will not always be able to predict accurately the impact of future legislation or regulation or changes in the interpretation or operation of existing legislation or regulation on our business, results of operations and/or financial condition. Changes in government policy, legislation or regulatory interpretation applying to companies in the financial services and insurance industries in any of the markets in which we operate, which may be applied retrospectively, may adversely affect our product range, distribution channels, capital requirements and, consequently, results and financing requirements. Such changes could include, for example, alterations to the regulatory framework for pension arrangements and policies or the regulation of selling practices and solvency requirements (including the implementation of the EU solvency framework for insurers, ‘Solvency II’). We may face increased compliance costs due to the need to set up additional compliance controls or the direct cost of such compliance because of changes to financial services legislation or regulation. We face significant compliance challenges because our regulatory environment is evolving rapidly and supervisory authorities around the world are assuming an increasingly active and aggressive role in interpreting and enforcing regulations in the jurisdictions in which we operate, for example in the UK, the extent of the regulator’s interpretation of the principle of ‘treating customers fairly’.
Aviva plc Annual Report and Accounts 2010 Shareholder information continued may therefore, when applied to such products, have a material adverse effect on the financial condition of the relevant long-term business fund of the company in which the business was written.
The governance arrangements in place with Delta Lloyd N.V. could impact on how we can direct the day-to-day management of the internal operations of this subsidiary. Delta Lloyd N.V. is one of the Group’s majority-owned subsidiaries consolidated in the Aviva plc IFRS financial statements. Delta Lloyd N.V. is subject to the provisions of Dutch corporate law and particularly the Dutch ‘full large company’ regime. Under this regime, Delta Lloyd has a two-tier Board structure consisting of an Executive Board and a Supervisory Board. The Executive Board is the executive body and is responsible for day-to-day management of Delta Lloyd and for its strategy, policy and operations. The Supervisory Board advises and supervises Delta Lloyd’s Executive Board and is the body having the right to appoint and dismiss that Board. The Supervisory Board’s approval is required for certain important decisions of the Executive Board. For governance purposes, our interests are represented through our two members of the Supervisory Board, which has a duty to a wide variety of stakeholders, including its shareholders. The members of the Supervisory Board are appointed by the General meeting based on nominations by the Supervisory Board directors, taking into account recommendations of the shareholders and the Works Council. These arrangements could impact on how we can influence the day-to-day management of Delta Lloyd’s internal operations.
Compliance with the Sarbanes-Oxley Act entails significant expenditure and managerial attention, and non-compliance with the Sarbanes-Oxley Act may adversely affect us. The US Sarbanes-Oxley Act of 2002 and related regulations subsequently implemented by the SEC and the NYSE require changes to some of our accounting and corporate governance practices, including the requirement to provide our first management report as required by Section 404 of the SarbanesOxley Act on our internal control over financial reporting for the year ending 31 December 2010 and for future years. In the event that we are unable to maintain compliance with Section 404 and other provisions of the Sarbanes-Oxley Act and related rules, such non-compliance may adversely affect us. As a UK listed company, we have been operating a control framework that involves regular self-assessments of internal controls to ensure we meet existing compliance requirements applicable to us under the Combined Code on Corporate Governance and the Turnbull Guidance on Internal Control. This control framework was based on the criteria established in ‘Internal Control – Integrated Framework’ issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Results of these assessments are reported twice a year to our Audit Committee and our external auditors. Given our continued commitment to improve our internal control over financial reporting, and following our listing on a US stock exchange, we have continued our implementation of an enhanced control framework, referred to as the Financial Reporting Control Framework (FRCF), which meets the requirements of Section 404 of the Sarbanes-Oxley Act. We expect that compliance with these rules and regulations will continue to require significant management attention and there will be substantial costs associated with this. Our internal controls over financial reporting will also have to be updated to reflect any changes to our business such as internal restructuring, corporate development, significant IT projects or other developments in future years.
We are reliant on IT systems and there are risks that our current and legacy systems cannot be made to adapt to growth in the business or new styles of doing business. Key IT initiatives may not deliver what is required either on time or within budget or provide the performance levels required to support the current and future needs of the business. Significant resources are devoted to maintaining and developing our IT systems to keep pace with developments within the insurance and fund management industries. Failure to do so could result in the inability to gather information for pricing, underwriting and reserving, and to attract and retain customers. We could also incur higher administrative costs both from the processing of business and potentially remediation of disputes.
The trading price of our ADSs and dividends paid on our ADSs may be materially adversely affected by fluctuations in the exchange rate for converting sterling into US dollars. An ADS is a negotiable US security, representing ownership in one share. An ADR is denominated in US dollars and represents ownership of any number of ADSs. ADRs are publicly traded shares in a non-US corporation, quoted and traded in US dollars in the US securities market. Any dividends are paid to investors in US dollars. ADRs were specifically designed to facilitate the purchase, holding and sale of non-US securities by US investors. The term ADR is often used to mean both the certificates and the securities themselves. Fluctuations in the exchange rate for converting pound sterling into US dollars may affect the value of our ADSs. Specifically, as the relative value of the pound sterling against the US dollar declines, each of the following values will also decline: the US dollar equivalent of the pound sterling trading price of our ordinary shares on the London Stock Exchange which may consequently cause the trading price of our ADSs in the US to also decline; the US dollar equivalent of the proceeds that a holder of our ADSs would receive upon the sale in the UK of any our ordinary shares withdrawn from the depositary; and the US dollar equivalent of cash dividends paid in pound sterling on our ordinary shares represented by our ADSs.
Judgements of US courts may not be enforceable against us. Judgements of US courts, including those predicated on the civil liability provisions of the Federal securities laws of the US, may not be enforceable in courts in the United Kingdom. As a result, our shareholders who obtain a judgement against us in the US may not be able to require us to pay the amount of the judgement.
Consolidated statement of changes in equity 187 Consolidated statement of financial position 189 Consolidated statement of cash flows 190
Notes to the consolidated financial statements 1 Exchange rates 191 2 Presentation changes 191 3 Subsidiaries 192 4 Segmental information 195 5 Details of income 202 6 Details of expenses 203 7 Finance costs 205 8 Long-term business economic volatility 206 9 Longer-term investment return and economic assumption changes for non-long-term business 10 Employee information 208 11 Directors 209 12 Auditors’ remuneration 210 13 Tax 211 14 Earnings per share 212 15 Dividends and appropriations 215 16 Goodwill 215 17 Acquired value of in-force business (AVIF) and intangible assets 18 Interests in, and loans to, joint ventures 220 19 Interests in, and loans to, associates 223 20 Property and equipment 225 21 Investment property 226 22 Fair value methodology 227 23 Loans 231
Page 24 Securitised mortgages and related assets 232 25 Financial investments 234 26 Receivables 237 27 Deferred acquisition costs and other assets 237 28 Assets held to cover linked liabilities 239 29 Ordinary share capital 239 30 Equity compensation plans 240 31 Shares held by employee trusts 243 32 Preference share capital 243 33 Direct capital instruments 244 34 Merger reserve 244 35 Other reserves 245 36 Retained earnings 246 37 Non-controlling interests 246 38 Contract liabilities and associated reinsurance 39 Insurance liabilities 248 40 Liability for investment contracts 258 41 Financial guarantees and options 260 42 Reinsurance assets 263 43 Effect of changes in assumptions and estimates during the year 44 Unallocated divisible surplus 265 45 Special bonus and reattribution of the inherited estate 46 Tax assets and liabilities 266 47 Provisions 267 48 Pension obligations 268 49 Borrowings 276 50 Payables and other financial liabilities 280 51 Other liabilities 280 52 Contingent liabilities and other risk factors 281 53 Commitments 282 54 Statement of cash flows 283 55 Group capital structure 284 56 Capital statement 285 57 Risk management 288 58 Derivative financial instruments 302 59 Assets under management 304 60 Related party transactions 305 Financial statements of the Company 306
Separate Opinion in relation to IFRSs As explained in the Accounting Policies to the Group financial statements, the Group, in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion, the Group financial statements comply with IFRSs as issued by the IASB.
Under the Listing Rules we are required to review: the Directors’ statement, set out on page 108, in relation to going concern; and the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review; and certain elements of the report to shareholders by the Board on Directors’ remuneration.
Aviva plc (the ‘Company’), a public limited company incorporated and domiciled in the United Kingdom (UK), together with its subsidiaries (collectively, the ‘Group’ or ‘Aviva’) transacts life assurance and long-term savings business, fund management and most classes of general insurance and health business through its subsidiaries, associates and branches in the UK, Ireland, continental Europe, United States (US), Canada, Asia, Australia and other countries throughout the world. The Group is managed on a regional basis, reflecting the management structure whereby a member of the Executive Management team is accountable to the group chief executive for the operating segment for which he is responsible. Further details of the reportable segments are given in note 4. The principal accounting policies adopted in the preparation of these financial statements are set out below.
(D) Consolidation principles Subsidiaries Subsidiaries are those entities (including special purpose entities) in which the Group, directly or indirectly, has power to exercise control over financial and operating policies in order to gain economic benefits. Subsidiaries are consolidated from the date on which effective control is transferred to the Group and are excluded from consolidation from the date the Group no longer has effective control. All inter-company transactions, balances and unrealised surpluses and deficits on transactions between Group companies have been eliminated. From 1 January 2004, the date of first time adoption of IFRS, the Group is required to use the acquisition method of accounting to account for the acquisition of subsidiaries. Under this method, the cost of an acquisition is measured as the fair value of assets given up, shares issued or liabilities undertaken at the date of acquisition, plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill (see policy N below). Any surplus of the acquirer’s interest in the subsidiary’s net assets over the cost of acquisition is credited to the income statement. For business combinations for which the acquisition date is on or after 1 January 2010, the Group is required to use the acquisition method of accounting. Under this method, the cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any non-controlling interest in the acquiree. For each business combination, the Group has the option to measure the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. The excess of the consideration transferred over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. Acquisition-related costs incurred are expensed as incurred. Transactions that do not result in a loss of control are treated as equity transactions with non-controlling interests.’
Investment vehicles In several countries, the Group has invested in a number of specialised investment vehicles such as Open-ended Investment Companies (OEICs) and unit trusts. These invest mainly in equities, bonds, cash and cash equivalents, and properties, and distribute most of their income. The Group’s percentage ownership in these vehicles can fluctuate from day to day according to the Group’s and third-party participation in them. Where Group companies are deemed to control such vehicles, with control determined based on an analysis of the guidance in IAS 27 and SIC 12, they are consolidated, with the interests of parties other than Aviva being classified as liabilities. These appear as ‘Net asset value attributable to unitholders’ in the consolidated statement of financial position. Where the Group does not control such vehicles, and these investments are held by its insurance or investment funds, they do not meet the definition of associates (see below) and are, instead, carried at fair value through profit and loss within financial investments in the consolidated statement of financial position, in accordance with IAS 39, Financial Instruments: Recognition and Measurement. As part of their investment strategy, the UK and certain European long-term business policyholder funds have invested in a number of property limited partnerships (PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a Group subsidiary.
(F) Product classification Insurance contracts are defined as those containing significant insurance risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. Contracts can be reclassified as insurance contracts after inception if insurance risk becomes significant. Any contracts not considered to be insurance contracts under IFRS are classified as investment contracts. Some insurance and investment contracts contain a discretionary participating feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts. As noted in policy A above, insurance contracts and participating investment contracts in general continue to be measured and accounted for under existing accounting practices at the later of the date of transition to IFRS or the date of the acquisition of the entity, in accordance with IFRS 4. Accounting for insurance contracts in UK companies is determined in accordance with the Statement of Recommended Practice issued by the Association of British Insurers, the most recent version of which was issued in December 2005 and amended in December 2006. In certain businesses, the accounting policies or accounting estimates have been changed, as permitted by IFRS 4 and IAS 8 respectively, to remeasure designated insurance liabilities to reflect current market interest rates and changes to regulatory capital requirements. When accounting policies or accounting estimates have been changed, and adjustments
Aviva plc Annual Report and Accounts 2010 to the measurement basis have occurred, the financial statements of that year will have disclosed the impacts accordingly. One such example is our adoption of Financial Reporting Standard 27, Life Assurance, (FRS 27) which was issued by the UK’s Accounting Standards Board (ASB) in December 2004. Aviva, along with other major insurance companies and the ABI, signed a Memorandum of Understanding with the ASB, under which we voluntarily agreed to adopt in full the standard from 2005 in the Group’s IFRS financial statements. FRS 27 adds to the requirements of IFRS but does not vary them in any way. The additional requirements of FRS 27 are detailed in policy K below and in note 56.
(J) Net investment income Investment income consists of dividends, interest and rents receivable for the year, movements in amortised cost on debt securities, realised gains and losses, and unrealised gains and losses on FV investments (as defined in policy S). Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest income is recognised as it accrues, taking into account the effective yield on the investment. It includes the interest rate differential on forward foreign exchange contracts. Rental income is recognised on an accruals basis. A gain or loss on a financial investment is only realised on disposal or transfer, and is the difference between the proceeds received, net of transaction costs, and its original cost or amortised cost as appropriate. Unrealised gains and losses, arising on investments which have not been derecognised as a result of disposal or transfer, represent the difference between the carrying value at the year end and the carrying value at the previous year end or purchase value during the year, less the reversal of previously recognised unrealised gains and losses in respect of disposals made during the year. Realised gains or losses on investment property represent the difference between the net disposal proceeds and the carrying amount of the property.
General insurance and health provisions (i) Outstanding claims provisions General insurance and health outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the statement of financial position date, whether reported or not, together with related claims handling costs. Significant delays are experienced in the notification and settlement of certain types of general insurance claims, particularly in respect of liability business, including environmental and pollution exposures, the ultimate cost of which cannot be known with certainty at the statement of financial position date. Any estimate represents a determination within a range of possible outcomes. Further details of estimation techniques are given in note 39(c). Provisions for latent claims are discounted, using rates based on the relevant swap curve, in the relevant currency at the reporting date, having regard to the expected settlement dates of the claims. The discount rate is set at the start of the accounting period with any change in rates between the start and end of the accounting period being reflected below operating profit as an economic assumption change. The range of discount rates used is described in note 39(c). Outstanding claims provisions are valued net of an allowance for expected future recoveries. Recoveries include non-insurance assets that have been acquired by exercising rights to salvage and subrogation under the terms of insurance contracts.
Intangible assets Intangibles consist primarily of brands, certain of which have been assessed as having indefinite useful lives, and contractual relationships such as access to distribution networks and customer lists. The economic lives of the latter are determined by considering relevant factors such as usage of the asset, typical product life cycles, potential obsolescence, maintenance costs, the stability of the industry, competitive position and the period of control over the assets. These intangibles are amortised over their useful lives, which range from five to 30 years, using the straight-line method. The amortisation charge for the year is included in the income statement under ‘Other operating expenses’. For intangibles with finite lives, a provision for impairment will be charged where evidence of such impairment is observed. Intangibles with indefinite lives are subject to regular impairment testing, as described below.
(O) Property and equipment Owner-occupied properties are carried at their revalued amounts, which are supported by market evidence, and movements are recognised in other comprehensive income and taken to a separate reserve within equity. When such properties are sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings. These properties are depreciated down to their estimated residual values over their useful lives. All other items classed as property and equipment within the statement of financial position are carried at historical cost less accumulated depreciation. Investment properties under construction are included within property and equipment until completion, and are stated at cost less any provision for impairment in their values. Depreciation is calculated on the straight-line method to write-down the cost of other assets to their residual values over their estimated useful lives as follows: Land No depreciation Properties under construction No depreciation Owner-occupied properties, and related mechanical and electrical equipment 25 years Motor vehicles Three years, or lease term if longer Computer equipment Three to five years Other assets Three to five years
(R) Derecognition and offset of financial assets and financial liabilities A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: The rights to receive cash flows from the asset have expired. The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement. The Group has transferred its rights to receive cash flows from the asset and has either transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
AFS equity securities: An AFS equity security is considered impaired if there is objective evidence that the cost may not be recovered. In addition to qualitative impairment criteria, such evidence includes a significant or prolonged decline in fair value below cost. Unless there is evidence to the contrary, an equity security is considered impaired if the decline in fair value relative to cost has been either at least 20% for a continuous six-month period or more than 40% at the end of the reporting period. Evidence to the contrary may include a significant rise in value of the equity security, for example as a result of a merger announced after the period end. We also review our largest equity holdings for evidence of impairment, as well as individual equity holdings in industry sectors known to be in difficulty. Where there is objective evidence that impairment exists, the security is written down regardless of the size of the unrealised loss. For both debt and equity AFS securities identified as being impaired, the cumulative unrealised net loss previously recognised within the investment valuation reserve is transferred to realised losses for the year with a corresponding movement through other comprehensive income. Any subsequent increase in fair value of these impaired securities is recognised in other comprehensive income and recorded in the investment valuation reserve, unless this increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement. In such an event, the reversal of the impairment loss is recognised as a gain in the income statement.
Mortgages and securitised loans: Impairment is measured based on the present value of expected future cash flows discounted at the effective rate of interest of the loan, subject to the fair value of the underlying collateral. When a loan is considered to be impaired, the income statement is charged with the difference between the carrying value and the estimated recoverable amount. Interest income on impaired loans is recognised based on the estimated recoverable amount. Reversals of impairments on any of these assets are only recognised where the decrease in the impairment can be objectively related to an event occurring after the write-down (such as an improvement in the debtor’s credit rating), and are not recognised in respect of equity instruments.
Interest rate futures, forwards and options contracts Interest rate futures are exchange-traded instruments and represent commitments to purchase or sell a designated security or money market instrument at a specified future date and price. Interest rate forward agreements are OTC contracts in which two parties agree on an interest rate and other terms that will become a reference point in determining, in concert with an agreed notional principal amount, a net payment to be made by one party to the other, depending what rate in fact prevails at a future point in time. Interest rate options, which consist primarily of caps and floors, are interest rate protection instruments that involve the potential obligation of the seller to pay the buyer an interest rate differential in exchange for a premium paid by the buyer. This differential represents the difference between current rate and an agreed rate applied to a notional amount. Exposure to gain or loss on all interest rate contracts will increase or decrease over their respective lives as interest rates fluctuate.
Derivative instruments for hedging On the date a derivative contract is entered into, the Group designates certain derivatives as either: (i) a hedge of the fair value of a recognised asset or liability (fair value hedge) (ii) a hedge of a future cash flow attributable to a recognised asset or liability, a highly probable forecast transaction or a firm commitment (cash flow hedge); or (iii) a hedge of a net investment in a foreign operation (net investment hedge)
Hedge accounting is used for derivatives designated in this way, provided certain criteria are met. At the inception of the transaction, the Group documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and the strategy for undertaking the hedge transaction. The Group also documents its assessment of whether the hedge is expected to be, and has been, highly effective in offsetting the risk in the hedged item, both at inception and on an ongoing basis. Changes in the fair value of derivatives that are designated and qualify as net investment or cash flow hedges, and that prove to be highly effective in relation to the hedged risk, are recognised in other comprehensive income and a separate reserve within equity. Gains and losses accumulated in this reserve are included in the income statement on disposal of the relevant investment or occurrence of the cash flow as appropriate. Changes in the fair value of derivatives that are designated and qualify as fair value hedges against assets carried at amortised cost are adjusted against the carrying value of the hedged asset to the extent those changes relate to the hedged risk. This adjustment is then amortised to the income statement over the anticipated remaining life of the hedged instrument. Where the hedge is against the value of AFS securities, changes in its value are recognised in the income statement, partially or wholly offset by a transfer from the investment valuation reserve for the change in value of the hedged item. The Group discontinues hedge accounting if the hedging instrument expires, is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation. For a variety of reasons, certain derivative transactions, while providing effective economic hedges under the Group’s risk management positions, do not qualify for hedge accounting under the specific IFRS rules and are therefore treated as derivatives held for trading. Their fair value gains and losses are recognised immediately in other trading income.
Pension obligations The Group operates a large number of pension schemes around the world, whose members receive benefits on either a defined benefit basis (generally related to a member’s final salary and length of service) or a defined contribution basis (generally related to the amount invested, investment return and annuity rates), the assets of which are generally held in separate trustee-administered funds. The pension plans are generally funded by payments from employees and the relevant Group companies. For defined benefit plans, the pension costs are assessed using the projected unit credit method. Under this method, the cost of providing pensions is charged to the income statement so as to spread the regular cost over the service lives of employees. The pension obligation is measured as the present value of the estimated future cash outflows, using a discount rate based on market yields for high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability. The resulting pension scheme surplus or deficit appears as an asset or liability in the consolidated statement of financial position. Costs charged to the income statement comprise the current service cost (the increase in pension obligation resulting from employees’ service in the current period, together with the schemes’ administration expenses), past service cost (resulting from changes to benefits with respect to previous years’ service), and gains or losses on curtailment (when the employer materially reduces the number of employees covered by the scheme) or on settlements (when a scheme’s obligations are transferred outside the Group).
(AB) Income taxes The current tax expense is based on the taxable profits for the year, after any adjustments in respect of prior years. Tax, including tax relief for losses if applicable, is allocated over profits before taxation and amounts charged or credited to components of other comprehensive income and equity as appropriate. Provision is made for deferred tax liabilities, or credit taken for deferred tax assets, using the liability method, on all material temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. The principal temporary differences arise from depreciation of property and equipment, revaluation of certain financial assets and liabilities including derivative contracts, provisions for pensions and other post-retirement benefits and tax losses carried forward; and, in relation to acquisitions, on the difference between the fair values of the net assets acquired and their tax base. The rates enacted or substantively enacted at the statement of financial position date are used to determine the deferred tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. In countries where there is a history of tax losses, deferred tax assets are only recognised in excess of deferred tax liabilities if there is convincing evidence that future profits will be available. Deferred tax is provided on temporary differences arising from investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the foreseeable future. Deferred taxes are not provided in respect of temporary differences arising from the initial recognition of goodwill, or from goodwill for which amortisation is not deductible for tax purposes, or from the initial recognition of an asset or liability in a transaction which is not a business combination and affects neither accounting profit nor taxable profit or loss at the time of the transaction. Current and deferred tax relating to items recognised in other comprehensive income and directly in equity are similarly recognised in other comprehensive income and directly in equity respectively. Deferred tax related to fair value re-measurement of available for sale investments, owner-occupied properties and other amounts charged or credited directly to other comprehensive income is recognised in the statement of financial position as a deferred tax asset or liability. Current tax on interest paid on Direct Capital instruments is credited directly in equity. In addition to paying tax on shareholders’ profits, the Group’s life businesses in the UK, Ireland and Singapore (and Australia prior to its disposal in 2009) pay tax on policyholders’ investment returns (‘policyholder tax’) on certain products at policyholder tax rates. Policyholder tax is accounted for as an income tax and is included in the total tax expense. The Group has decided to show separately the amounts of policyholder tax to provide a more meaningful measure of the tax the Group pays on its profits. In the pro forma reconciliations, operating profit has been calculated after charging policyholder tax.
(AE) Fiduciary activities Assets and income arising from fiduciary activities, together with related undertakings to return such assets to customers, are excluded from these financial statements where the Group has no contractual rights in the assets and acts in a fiduciary capacity such as nominee, trustee or agent.
Expenses 6 (34,296) Claims and benefits paid, net of recoveries from reinsurers (29,152) (27,549)
(8,444) Change in insurance liabilities, net of reinsurance (7,177) (5,682) (10,284) Change in investment contract provisions (8,741) (11,185)
387 Change in unallocated divisible surplus 329 (1,547) (6,902) Fee and commission expense (5,867) (4,396) (4,161) Other expenses (3,537) (5,366) (1,673) Finance costs 7 (1,422) (1,519)
3,000 IFRS operating profit before adjusting items and tax attributable to shareholders’ profits 2,550 2,022
(254) Amortisation and impairment of intangibles (see below) (216) (144) 187 Profit on the disposal and re-measurement of subsidiaries and associates 3b 159 153
Amortisation and impairment of intangibles arise in: (236) Subsidiaries 17 (201) (139)
UK 850 579 3 (21) 1,411 Aviva Europe 893 109 — (104) 898 Delta Lloyd 330 146 103 (43) 536 North America 174 222 — (20) 376 Asia Pacific 71 (6) (2) (32) 31 Aviva Investors — — 97 — 97
Consolidated statement of comprehensive income For the year ended 31 December 2010 2,226 Profit for the year 1,892 1,315
Other comprehensive income Investments classified as available for sale 815 Fair value gains 693 1,011 (188) Fair value gains transferred to profit on disposals (160) (310)
Owner-occupier properties (54) Fair value losses (46) (25) (31) Share of other comprehensive income of joint ventures and associates (26) 122 1,175 Actuarial gains/(losses) on pension schemes 48e(iv) 999 (1,140) (21) Actuarial losses on pension schemes transferred to unallocated divisible surplus and other movements 48c(i) (18) 24 (92) Foreign exchange rate movements 35 & 37b (78) (951)
Attributable to: 3,471 Equity shareholders of Aviva plc 2,950 240 439 Non-controlling interests 37b 373 92
Consolidated statement of changes in equity For the year ended 31 December 2010
Balance at 1 January 692 200 1,207 3,271 (68) 2,224 104 163 (771) 109 3,425 10,556 990 3,540 15,086 Profit for the year — — — — — — — — — — 1,463 1,463 — 429 1,892 Other comprehensive income — — — — — (38) (21) 411 78 — 1,057 1,487 — (56) 1,431 Total comprehensive income for the year — — — — — (38) (21) 411 78 — 2,520 2,950 — 373 3,323 Dividends and appropriations — — — — — — — — — — (757) (757) — — (757) Shares issued in lieu of dividends 13 — (13) — — — — — — — 209 209 — — 209 Capital contributions from non-controlling interests — — — — — — — — — — — — — 42 42 Dilution of shareholding in
Delta Lloyd — — — — — (3) — (1) — — (4) (8) — 8 — Non-controlling interests’ share of dividends declared in the year — — — — — — — — — — — — — (187) (187)
Shares distributed by employee trusts — — — — 50 — — — — — (50) — — — —
The accounting policies (identified alphabetically) on pages 170 to 182 and notes (identified numerically) on pages 191 to 305 are an integral part of these financial statements.
Consolidated statement of changes in equity continued For the year ended 31 December 2009
Issues of share capital 1 — — — — — — — — — — 1 — — 1 Shares issued in lieu of dividends 27 — (27) — — — — — — — 299 299 — — 299 Capital contributions from noncontrolling interests — — — — — — — — — — — — — 6 6 Transfers to non-controlling interests following Delta Lloyd IPO — — — — — (351) (26) (156) — — 3 (530) — 1,460 930
Changes in non-controlling interests in existing subsidiaries — — — — — — — — — — — — — (111) (111)
Assets 3,943 Goodwill N & 16 3,391 3,381 3,263 Acquired value of in-force business and intangible assets N & 17 2,806 2,860 2,319 Interests in, and loans to, joint ventures D & 18 1,994 1,701 748 Interests in, and loans to, associates D & 19 643 1,281 872 Property and equipment O & 20 750 753 335 Deferred tax assets AB &46b 288 218 230 Current tax assets 46a 198 359 9,645 Receivables 26 8,295 9,632 7,060 Deferred acquisition costs and other assets W & 27 6,072 5,621 4,292 Prepayments and accrued income 27d 3,691 3,604 29,599 Cash and cash equivalents X & 54d 25,455 25,176 16 Assets of operations classified as held for sale AG & 3c 14 53
(37) Shares held by employee trusts 31 (32) (68) 2,610 Other reserves 35 2,245 1,829 6,292 Retained earnings 36 5,411 3,425 15,109 Equity attributable to shareholders of Aviva plc 12,994 10,556 1,151 Direct capital instrument 33 990 990 4,350 Non-controlling interests 37 3,741 3,540
Consolidated statement of cash flows For the year ended 31 December 2010
Cash flows from operating activities 54a Cash generated from operations 2,213 3,286 Tax paid (406) (601)
Cash flows from investing activities Acquisitions of subsidiaries, joint ventures and associates, net of cash acquired 54b 477 (596) Disposals of subsidiaries, joint ventures and associates, net of cash transferred 54c 251 201 Disposal of non-controlling interest in subsidiary 15 — New loans to joint ventures and associates (64) (145) Repayment of loans to joint ventures and associates 5 99 Net new loans to joint ventures and associates 18a & 19a (59) (46) Purchases of property and equipment 20 (225) (149) Proceeds on sale of property and equipment 61 188 Purchases of intangible assets 17 (156) (30)
Aviva plc Annual Report and Accounts 2010 1 – Exchange rates The Group’s principal overseas operations during the year were located within the Eurozone and the United States. The results and cash flows of these operations have been translated into sterling at an average rate for the year of €1 = £0.85 (2009: €1 = £0.88) and £1 = US$1.55 (2009: £1= US$1.57). Assets and liabilities have been translated at the year-end rate of €1 = £0.86 (2009: €1 = £0.88) and £1 = US$1.57 (2009: £1= US$1.61). Total foreign currency movements during 2010 resulted in a gain recognised in the income statement of £34 million (2009: £154 million gain).
(a) Acquisitions (i) River Road Asset Management On 24 February 2010, the Group acquired 100% of River Road Asset Management (River Road), a US equity manager, to support the expansion of Aviva Investors’ third-party institutional asset management business. The total consideration was estimated as £83 million (US$128 million), of which £37 million (US$57 million) was paid in cash on completion. The balance comprises undiscounted contingent consideration. The contingent consideration arrangement requires the Group to pay additional amounts, based on a multiple of the earnings (1.0792 times) during the next five years, up to a maximum of £70 million (US$108 million). The potential undiscounted amount of all future payments that the Group could be required to make under the contingent consideration arrangement is between £26 million (US$41 million) and £53 million (US$82 million). A fair value liability of £24 million, using a discount rate of 17%, has been recognised for potential consideration that is payable in 2014, 2015 and 2016. The acquisition has given rise to goodwill of £29 million, calculated as follows: £m
Purchase cost: Cash paid 37 Contingent consideration arrangement (fair value) 24
Assets Intangible assets — 31 31 Receivables and other assets 3 — 3
(ii) RBS Life Investments Limited During the year, the Group reviewed its relationship with RBS Group plc (RBSG) which comprised interests in two associates, RBS Life Investments Limited (RBS Life) and RBSG Collective Investments Limited (RBS Collective), and a distribution arrangement for the products of these companies. The parties agreed that, with effect from 31 December 2010, the Group would take ownership of the back book of RBS Life in exchange for RBSG taking 100% ownership of RBS Collective through a share-for-share exchange. Separately, a new distribution agreement would be signed between our UK Life business and RBSG, with the new structure providing more flexibility in our long-term business operations. On 31 December 2010, the Group acquired 50.01% of the shares of RBS Life from RBSG. Combined with our existing 49.99% interest, the Group now owns all the ordinary shares of that entity, and has full control. It is being consolidated as a subsidiary from that date. As consideration for the acquisition, the Group transferred its 49.99% shareholding in RBS Collective to RBSG, together with cash of £3 million for 2010 performance variance. In addition, the existing distribution agreement ceased. Because of the nature of the transaction, the Group’s pre-existing interests in RBS Life and RBS Collective were re-measured to fair value as at the transaction date.
Aviva plc Annual Report and Accounts 2010 3 – Subsidiaries continued This transaction has given rise to a profit of £128 million, arising from the difference between the values of both interests prior to the exchange and their carrying values, calculated as follows: £m
The disposal of the Group’s interest in RBS Collective and the acquisition of a controlling stake in RBS Life are linked transactions and are therefore taken together in determining the profit arising from the restructuring, as we believe this most appropriately reflects the commercial substance of the arrangement. The fair value of RBS Life was estimated using MCEV principles and with regard to current market conditions. The estimated book and fair values of the assets and liabilities of RBS Life at the acquisition date were: Book value £m
Liabilities Insurance liabilities (1,349) — (1,349) Liabilities for investment contracts (1,905) — (1,905) Payables and other financial liabilities (60) — (60) Other liabilities (109) — (109) Total liabilities (3,423) — (3,423)
UK non-core operations On 30 June 2010, the Group sold its wholly owned subsidiaries, RAC France SA and RAC Service Europe SA, to their executive management for a consideration of £17 million. These companies had total assets of £48 million (comprising investments of £25 million, receivables of £20 million and other assets of £3 million) and total liabilities of £36 million (insurance liabilities of £23 million and other liabilities of £13 million), giving net assets of £12 million and a profit on disposal after transaction costs of £4 million. The Group’s French subsidiary, Aviva Assurances SA, has acquired 17.5% of the shares in both companies and the profit is stated after eliminating the effect of this purchase.
(c) Assets and liabilities of operations classified as held for sale The assets and liabilities of operations classified as held for sale as at 31 December 2010 relate to a joint venture in Taiwan and are as follows: £m
Gross insurance liabilities and liabilities for investment contracts — (20) Other liabilities — (13) Total liabilities — (33)
The operations held for sale at 31 December 2009 comprised the UK non-core operations and an associate in Australia, both of which were sold in 2010.
Aviva plc Annual Report and Accounts 2010 4 – Segmental information The Group’s results can be segmented, either by activity or by geography. Our primary reporting format is on regional reporting lines, with supplementary information being given by business activity. This note provides segmental information on the consolidated income statement and statement of financial position.
(a) Operating segments The Group has determined its operating segments along regional lines. These reflect the management structure whereby a member of the executive management team is accountable to the group chief executive for the operating segment for which he is responsible. The activities of each operating segment are described below: United Kingdom The United Kingdom comprises two operating segments – UK Life and UK General Insurance (UK GI). The principal activities of UK Life are life insurance, long-term health and accident insurance, savings, pensions and annuity business, whilst UK GI provides insurance cover to individuals and businesses, for risks associated mainly with motor vehicles, property and liability, such as employers’ liability and professional indemnity liability, and medical expenses. UK GI also includes the RAC motor recovery business, the Group reinsurance result and the results of run-off agency business.
Delta Lloyd The activities of Delta Lloyd comprise long-term business operations in the Netherlands, Belgium and Germany and general insurance, fund management and banking operations in the Netherlands.
Asia Pacific Our activities in Asia Pacific principally comprise our long-term business operations in China, India, Singapore, Hong Kong, Sri Lanka, Taiwan, Malaysia, South Korea and Indonesia. 2009 comparatives also include Australia (prior to its sale on 1 October 2009).
Net earned premiums 5,887 4,093 12,973 4,338 6,472 573 — — 34,336 Fee and commission income 302 248 512 332 41 6 341 — 1,782 6,189 4,341 13,485 4,670 6,513 579 341 — 36,118 Net investment income 10,945 424 3,961 3,244 2,223 211 171 814 21,993 Inter-segment revenue — — — — — — 214 — 214 Share of profit/(loss) of joint ventures and associates 128 — (14) (10) — 33 3 (9) 131 Profit/(loss) on the disposal of subsidiaries and associates 128 5 26 (4) 1 — — 3 159
Profit/(loss) before tax 1,168 457 611 895 309 46 61 (713) 2,834 Tax attributable to policyholders’ returns (384) — (3) — — (7) — — (394)
Net earned premiums 4,777 4,519 12,439 4,347 6,141 450 — — 32,673 Fee and commission income 261 272 558 226 55 121 296 — 1,789 5,038 4,791 12,997 4,573 6,196 571 296 — 34,462 Net investment income 8,199 568 10,196 3,245 2,249 586 157 (45) 25,155 Inter-segment revenue — — — — — — 202 — 202 Share of loss of joint ventures and associates (416) — (36) (41) — (11) — — (504) Profit on the disposal of subsidiaries and associates — — — 31 — 122 — — 153
Profit/(loss) before tax attributable to shareholders 611 434 931 10 244 272 91 (788) 1,805
Adjusted for non-operating items: Reclassification of corporate costs and unallocated interest 1 (10) 13 29 10 — 1 (44) — Investment return variances and economic assumption changes on long-term business
Capital expenditure (excluding business combinations) 379 11 20 88 68 6 12 — 584
Goodwill 31 1,208 959 319 812 50 2 — 3,381 Acquired value of in-force business and intangible assets 17 249 1,190 71 1,302 19 12 — 2,860 Interests in, and loans to, joint ventures and associates 1,957 — 348 379 2 277 15 4 2,982 Property and equipment 112 127 105 282 111 5 10 1 753 Investment property 7,369 89 1,342 2,183 6 — 698 735 12,422 Loans 18,348 600 992 18,797 2,177 35 5 125 41,079 Financial investments 73,788 2,477 95,086 32,009 27,371 2,169 1,095 4,684 238,679 Deferred acquisition costs 1,313 717 732 198 2,348 8 — — 5,316 Other assets 14,942 3,847 19,169 4,364 3,030 379 654 534 46,919
Insurance liabilities Long-term business and outstanding claims provisions 62,043 5,410 38,422 30,818 27,201 2,062 — — 165,956 Unearned premiums 173 2,240 956 347 1,040 25 — — 4,781 Other insurance liabilities — 79 116 63 98 (1) — — 355 Liability for investment contracts 39,322 — 62,477 3,335 2,911 — 1,970 — 110,015 Unallocated divisible surplus 1,849 — 1,787 150 — 80 — — 3,866 Net asset value attributable to unitholders 875 — 5,257 721 — — — 3,041 9,894 External borrowings 2,518 10 141 6,830 183 — — 5,318 15,000 Other liabilities, including inter-segment liabilities 6,668 (585) 4,282 12,529 2,450 140 320 3,634 29,438
Aviva plc Annual Report and Accounts 2010 4 – Segmental information continued (b) Further analysis by products and services The Group’s results can be further analysed by products and services which comprise long-term business, general insurance and health, fund management and other activities.
Gross written premiums* 25,805 10,469 — — 36,274 Premiums ceded to reinsurers (1,093) (770) — — (1,863)
Profit/(loss) before tax attributable to shareholders 2,454 729 164 (907) 2,440 Adjusted for non-operating items (136) 321 37 (112) 110
Aviva plc Annual Report and Accounts 2010 4 – Segmental information continued (ii) Segmental income statement – products and services for the year ended 31 December 2009
Gross written premiums* 24,722 9,968 — — 34,690 Premiums ceded to reinsurers (1,801) (775) — — (2,576)
Net earned premiums 22,921 9,752 — — 32,673 Fee and commission income 703 131 548 407 1,789 23,624 9,883 548 407 34,462 Net investment (expense)/income 23,148 1,310 10 687 25,155 Inter-segment revenue — — 189 — 189 Share of loss of joint ventures and associates (449) 2 (16) (41) (504) Profit on the disposal of subsidiaries and associates (4) — — 157 153
Claims and benefits paid, net of recoveries from reinsurers (20,442) (7,107) — — (27,549) Change in insurance liabilities, net of reinsurance (6,229) 547 — — (5,682) Change in investment contract provisions (11,185) — — — (11,185) Change in unallocated divisible surplus (1,547) — — — (1,547) Amortisation of acquired value of in-force business (249) — — — (249) Depreciation and other amortisation expense (147) (53) (7) (93) (300) Other operating expenses (3,192) (3,465) (554) (1,394) (8,605) Impairment losses (429) (85) — (94) (608) Inter-segment expenses (178) (11) — — (189) Finance costs (300) (62) (62) (1,095) (1,519)
Operating profit/(loss) before tax attributable to shareholders’ profits 1,887 960 133 (958) 2,022 * Gross written premiums includes inward reinsurance premiums assumed from other companies amounting to £207 million, of which £51 million relates to property and liability insurance and £156 million relates to long-term business. ** General insurance and health business segment includes gross written premiums of £841 million relating to health business. The remaining business relates to property and liability insurance.
(iii) Segmental statement of financial position – products and services as at 31 December 2010
Gross insurance liabilities 160,579 17,121 — — 177,700 Gross liabilities for investment contracts 117,787 — — — 117,787 Unallocated divisible surplus 3,428 — — — 3,428 Net asset value attributable to unit holders 5,892 8 — 3,132 9,032 Borrowings 3,653 86 139 11,071 14,949 Other liabilities, including inter-segment liabilities 14,334 (1,129) 1,361 14,920 29,486
Aviva plc Annual Report and Accounts 2010 4 – Segmental information continued (iv) Segmental statement of financial position – products and services as at 31 December 2009
Gross insurance liabilities 153,628 17,464 — — 171,092 Gross liabilities for investment contracts 110,015 — — — 110,015 Unallocated divisible surplus 3,866 — — — 3,866 Net asset value attributable to unitholders 6,841 13 — 3,040 9,894 Borrowings 3,780 89 — 11,131 15,000 Other liabilities, including inter-segment liabilities 13,064 (606) 414 16,566 29,438
Aviva plc Annual Report and Accounts 2010 5 – Details of income This note gives further detail on the items appearing in the first section of the consolidated income statement.
Gross written premiums (note 4a & 4b) Long-term: Insurance contracts 18,315 16,692 Participating investment contracts 7,490 8,030 General insurance and health 10,469 9,968 36,274 34,690 Less: premiums ceded to reinsurers (note 4a & 4b) (1,863) (2,576) Gross change in provision for unearned premiums (note 39e) (45) 645 Reinsurers’ share of change in provision for unearned premiums (note 42c(iii)) (30) (86) Net change in provision for unearned premiums (75) 559
Share of profit/(loss) after tax of joint ventures (note 18a) 149 (409) Share of loss after tax of associates (note 19a) (18) (95) Share of profit/(loss) after tax of joint ventures and associates 131 (504) Profit on disposal of subsidiaries and associates (note 3b) 159 153
Claims and benefits paid Claims and benefits paid to policyholders on long-term business Insurance contracts 17,761 16,973 Participating investment contracts 5,338 4,264 Non-participating investment contracts 39 67 Claims and benefits paid to policyholders on general insurance and health business 7,194 7,444 30,332 28,748 Less: Claim recoveries from reinsurers Insurance contracts (1,030) (1,083) Participating investment contracts (150) (116)
Other net foreign exchange (gains)/losses (88) 83 Finance costs (note 7) 1,422 1,519
For the year ended 31 December 2010, this comprised: £549 million recognised in Delta Lloyd which comprises of the cost of adopting new mortality tables of £483 million, German business closure, unit-linked insurance compensation scheme costs and compensation costs in defined contribution pension schemes of £66 million £286 million benefit from the closure of the final salary section of the UK staff pension scheme to future accruals. £10 million expense for the strengthening of reserves is in respect of several specific discontinued commercial liability risks written in Canada a significant number of years ago.
A £102 million expense for the migration of all remaining local brands, except Delta Lloyd and RAC, to the single global Aviva brand, which was implemented over the two-year period 2008 to 2009. This cost was included in ‘other expenses’.
Aviva plc Annual Report and Accounts 2010 7 – Finance costs This note analyses the interest costs on our borrowings (which are described in note 49) and similar charges. Finance costs comprise: £m
9 – Longer-term investment return and economic assumption changes for non-long-term business For non-long-term business, the total investment income, including realised and unrealised gains, is split between a calculated longerterm return and short-term fluctuations from this. This note gives details of the longer-term return calculation and the relevant assumptions, as well as the economic assumption changes on our general insurance and health business.
Net investment income 719 1,373 Internal charges included under other headings 55 (193)
(c) The longer-term investment return is calculated separately for each principal non-long-term business unit. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of investment return. The longer-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated longer-term return for other investments is the actual income receivable for the year. Actual income and longer-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities. For other operations, the longer-term return reflects interest income earned in the Netherlands bank and retail mortgage divisions.
(d) The total assets supporting the general insurance and health business, which contribute towards the longer-term return, are: £m
Debt securities 11,404 11,649 Equity securities 918 1,239 Properties 146 200 Cash and cash equivalents 1,787 2,078 Other 4,021 3,490
Aviva plc Annual Report and Accounts 2010 9 – Longer-term investment return and economic assumption changes for non-long-term business continued The principal assumptions underlying the calculation of the longer-term investment return are: Longer-term rates of return Equities
United Kingdom 7.8 7.0 6.3 5.5 France 7.2 7.3 5.7 5.8 Ireland 7.2 7.3 5.7 5.8 Netherlands 7.2 7.3 5.7 5.8 Canada 7.5 6.1 6.0 4.6
(f) The table below shows the sensitivity of the Group’s non-long-term business operating profit before tax to changes in the longerterm rates of return: Movement in investment return for By Change in 2010 £m
Equities 1% higher/lower Group operating profit before tax 12 11 Properties 1% higher/lower Group operating profit before tax 2 3
(a) Employee numbers The number of persons employed by the Group was: December Average for the year
Aviva plc Annual Report and Accounts 2010 10 – Employee information continued (b) Staff costs Total staff costs were: £m
Wages and salaries 1,864 1,860 Social security costs 260 272 Post-retirement obligations Defined benefit schemes (note 48d) (175) 187 Defined contribution schemes (note 48d) 70 73 Profit sharing and incentive plans 147 135 Equity compensation plans (note 30d) 50 56 Termination benefits 23 76
The credit for the defined benefit pension schemes arises from the £286 million gain on the closure of the UK schemes to future accrual, described in note 48(c). These costs are charged within: £m
Fees payable to Ernst & Young LLP for the statutory audit of the Aviva Group and Company financial statements 1.5 — — — 1.5 Fees payable to Ernst & Young LLP and its associates for other services to Group companies: Audit of Group subsidiaries pursuant to legislation 11.9 — — — 11.9 Additional fees related to the prior year audit of Group subsidiaries pursuant to legislation 1.5 — — — 1.5 Other services pursuant to legislation 3.0 — — — 3.0 Audit of Group pension scheme — 0.1 — — 0.1 Supplementary reporting — 2.1 — — 2.1 Tax services — — 0.1 — 0.1 All other fees: Services relating to corporate finance transactions — 1.2 — 1.8 3.0 Other supplementary services — 7.9 — 2.9 10.8
For the first time in 2010, Audit fees includes the fees payable for attestation under Section 404 of the US Sarbanes-Oxley Act 2002. In 2009, the fees for assurance services provided in connection with the IFRS component of the Group’s Financial Reporting Control Framework were included in Other supplementary services. Fees payable for the audit of the Group’s subsidiaries pursuant to legislation include fees for the statutory audit of the subsidiaries, both inside and outside the UK, and for the work performed by Ernst & Young LLP in respect of the subsidiaries for the purpose of the consolidated financial statements of the Group. Other services pursuant to legislation comprise services in relation to statutory and regulatory filings. These include audit services for the audit of FSA returns in the UK and review of interim financial information under the Listing Rules of the UK Listing Authority. Fees for Supplementary reporting are in respect of the audit of the Group’s MCEV reporting. Although embedded value is a primary management reporting basis and our disclosures require a full audit, the relevant fees are not classified as being for statutory audit. The 2010 fees for Other supplementary services include £0.7 million (2009: £5.7 million) for assurance services in connection with the Group’s Financial Reporting Control Framework; £1.1 million (2009: £1.2 million) for examination of the Group’s Individual Capital Assessment (ICA); and £2.7 million (2009: £3.9 million) for other services, which includes £0.8 million relating to two engagements at Delta Lloyd Bank Belgium. The 2009 figures for other services included fees for work undertaken on the listing on the New York Stock Exchange and the reattribution of the inherited estate in the UK. The 2009 figure for services relating to corporate finance transactions reflected work undertaken on the partial IPO of Delta Lloyd on Euronext Amsterdam.
Current tax For this year 590 617 Prior year adjustments (46) (164)
(d) Tax reconciliation The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the tax rate of the home country of the Company as follows: £m
(a) Basic earnings per share (i) The profit attributable to ordinary shareholders is: Operating profit £m
Profit before tax attributable to shareholders’ profits 2,550 (110) 2,440 Tax attributable to shareholders’ profits (625) 77 (548)
Aviva plc Annual Report and Accounts 2010 14 – Earnings per share continued
Profit before tax attributable to shareholders’ profits 2,022 (217) 1,805 Tax attributable to shareholders’ profits (547) 57 (490)
Operating profit attributable to ordinary shareholders 2,550 1,534 55.1 Non-operating items: Investment return variances and economic assumption changes on long-term business (note 8) 791 243 8.7 Short-term fluctuation in return on investments backing non-long-term business (note 9a) (243) (167) (6.0) Economic assumption changes on general insurance and health business (note 9a) (61) (44) (1.6) Impairment of goodwill (note 16a) (24) (24) (0.9) Amortisation and net impairment of intangibles (note 17) (216) (128) (4.6) Profit on the disposal of subsidiaries and associates (note 3b) 159 161 5.8 Integration and restructuring costs and exceptional items (note 6) (516) (171) (6.1) Profit attributable to ordinary shareholders 2,440 1,404 50.4
Operating profit attributable to ordinary shareholders 2,022 1,221 45.1 Non-operating items: Investment return variances and economic assumption changes on long-term business (note 8) (75) (120) (4.4) Short-term fluctuation in return on investments backing non-long-term business (note 9a) 95 158 5.8 Economic assumption changes on general insurance and health business 57 41 1.5 Impairment of goodwill and other amounts expensed (note 16a) (62) (62) (2.3) Amortisation and net impairment of intangibles (note 17) (144) (38) (1.4) Profit on the disposal of subsidiaries and associates (note 3b) 153 153 5.7 Integration and restructuring costs and exceptional items (note 6) (241) (329) (12.2)
Aviva plc Annual Report and Accounts 2010 14 – Earnings per share continued (b) Diluted earnings per share (i) Diluted earnings per share is calculated as follows: Total £m
Profit attributable to ordinary shareholders 1,024 2,705 37.8 Dilutive effect of share awards and options — 25 (0.3)
Ordinary dividends declared and charged to equity in the year Final 2009 – 15.00 pence per share, paid on 17 May 2010 415 — Final 2008 – 19.91 pence per share, paid on 15 May 2009 — 527 Interim 2010 – 9.50 pence per share, paid on 17 November 2010 266 — Interim 2009 – 9.00 pence per share, paid on 17 November 2009 — 248 681 775 Preference dividends declared and charged to equity in the year 17 17 Coupon payments on direct capital instruments 59 61
Gross amount At 1 January 3,667 3,898 Acquisitions (note 3a) 29 5 Fair value adjustments and movements in contingent consideration (4) 48 Disposals (4) (9) Amounts expensed in the year — (30) Foreign exchange rate movements (17) (245)
Accumulated impairment At 1 January (286) (315) Other impairment losses charged to expenses (3) — Write back of impairment related to disposals — 3 Foreign exchange rate movements 9 26
United Kingdom Long-term business (see (i) below) 29 31 — — 29 31 General insurance, RAC and health (see (ii) below) 1,208 1,208 201 201 1,409 1,409 Europe France (long-term business) (see (iii) below) — — 53 55 53 55 Ireland Long-term business (see (iv) below) 118 122 — — 118 122 General insurance and health (see (v) below) 119 121 — — 119 121 Italy Long-term business (see (vi) below) 65 65 — — 65 65 General insurance and health (see (vii) below) 56 58 — — 56 58 Delta Lloyd (see (viii) below) 307 319 — — 307 319 Spain (long-term business) (see (ix) below) 556 580 — — 556 580 Other 12 15 — — 12 15 North America United States (long-term business) (see (x) below) 795 770 — — 795 770 United States (fund management) 28 — — — 28 — Canada 44 42 — — 44 42 Asia Pacific Various 54 50 — — 54 50
(ii) General insurance, RAC and health The recoverable amount of the UK General Insurance, RAC and health business exceeds the carrying value of the cash-generating unit including goodwill. The recoverable amount of the UK general insurance, RAC and health unit has been determined based on a value in use calculation. The calculation uses cash flow projections based on business plans approved by management covering a three-year period. Cash flows beyond that three-year period have been extrapolated using a steady 2.5% growth rate and a risk-adjusted discount rate of 9.3%. This growth rate is set with regards to past experience and historical statistics of UK premium growth published by the Association of British Insurers. Key assumptions used for the calculation were: Budgeted operating profit represents the operating profit in the business plans, approved by management, and as such reflects the best estimate of future profits based on both historical experience and expected growth rates for the relevant UK industry sectors; Some of the assumptions that underline the budgeted operating profit include market share, customer numbers, premium rate and fee income changes, claims inflation and commission rates; and
Growth rates represent the rates used to extrapolate future cash flows beyond the business plan period and have been based upon latest information available regarding future and past growth rates, including external sources of data such as ABI Annual Market Statistics.
Europe Long-term business The recoverable amount of long-term business cash-generating units in the Europe region has been determined based on a value in use calculation. The first step of the test was to compare the carrying value of each cash-generating unit, including goodwill, to the Market Consistent Embedded Value (MCEV) of that cash-generating unit. If the MCEV is less than the carrying value of a cash generating unit the present value of profits from expected new business for that cash-generating unit is considered. If the value of profits from expected new business for a cash-generating unit is expected to grow beyond the period of the initial plan, this growth rate is set with regard to past experience in each market and market expectations of future growth in each country.
Aviva plc Annual Report and Accounts 2010 16 – Goodwill continued For European long-term business cash-generating units a key assumption used for the calculation was the embedded value which represents the shareholder interest in the life business and is calculated in accordance with the Market Consistent Embedded Value (MCEV) principles. The embedded value is the total of the net worth and the value of the in-force life business.
General insurance, health and other The recoverable amount of general insurance, health and other non-life cash-generating units in the Europe region has been determined based on a value in use calculation. Value in use is calculated for each cash-generating unit using a discounted cash flow projection based on business plans and growth assumptions approved by management for each cash-generating unit and discounted at a risk discount rate appropriate for each cash-generating unit. If the cash flows are expected to grow beyond the period of the initial plan, this growth rate is set with regard to past experience in each market and market expectations of future growth in each country.
(iii) France (long-term business) The recoverable amount of the indefinite life intangible asset has been assessed as part of the recoverable amount of the French longterm business cash-generating unit. The MCEV of the French long-term business was significantly greater than its carrying value, including indefinite life intangible assets.
(v) Ireland (general insurance and health) The recoverable amount of the Irish general insurance and health business exceeds the carrying value of the cash-generating unit including goodwill. Key assumptions used for the calculation were: Budgeted operating profit for an initial three-year period which represents the operating profit in the business plans, approved by management and reflecting the best estimate of future profits based on both historical experience and expected growth rates for the Irish economy. The assumptions that underline the budgeted operating profit include market share, premium rate changes, claims inflation and commission rates; Future cash flows are extrapolated beyond the three-year business plan period assuming nil growth for general insurance business and a 7% growth rate for the health business; and
(vi) Italy (long-term business) The recoverable amount of the Italian long-term business exceeds the carrying value of the cash-generating unit including goodwill. This calculation is an actuarially determined appraisal value and is based on the embedded value of the business together with the present value of expected profits from future new business. Key assumptions (in addition to MCEV principles) used for the calculation were: New business contribution represents the present value of projected future profits generated from business written in a period. This is initially based on the most recent three-year business plans approved by management; Growth rate represents the rate used to extrapolate new business contributions beyond the business plan period, and is based on management’s estimate of future growth of 3%; and
Discount rate of 6.5% represents the rate used to discount expected profits from future new business. The discount rate is a combination of a risk-free rate and a risk margin to make prudent allowance for the risk that experience in future years for new business may differ from that assumed. The MCEV principles applied to project future cash flows include allowance for many of the risks associated with these cash flows, and therefore these risks are not also reflected in the discount rate applied to calculate a present value of future cash flows.
Aviva plc Annual Report and Accounts 2010 16 – Goodwill continued (viii) Delta Lloyd (long-term, general insurance, health and fund management) The recoverable amount of Delta Lloyd exceeds the carrying value of the cash-generating unit including goodwill. The recoverable amount of the Delta Lloyd life and general insurance and health cash-generating units has been determined on the basis of a value in use calculation. This calculation is an appraisal value and is based on the discounted expected future cash flows from the operations over their expected useful life. Expected cash flows for future periods have been obtained from the plan figures for a three-to-five-year period, depending on the management plan period of the unit. Expected cash flows for later periods have been extrapolated, taking into account the growth rate. Key assumptions used for the calculation were: Expected cash flows for future periods have been obtained from the plan figures for a three-to-five-year period; For the year following the end of the management plan period cash flows are extrapolated at a growth rate of nil to 3.7%
(ix) Spain (long-term business) The recoverable amount of the Spanish long-term business exceeds the carrying value of the cash-generating unit including goodwill. This calculation is an actuarially determined appraisal value and is based on the embedded value of the business together with the present value of expected profits from future new business. Key assumptions (in addition to MCEV principles) used for the calculation were: New business contribution represents the present value of projected future profits generated from business written in a period. This is initially based on the most recent three-year business plans approved by management; Growth rate represents the rate used to extrapolate new business contributions beyond the business plan period, and is based on management’s conservative estimate of future growth of 3%; and
(x) United States (long-term business) The recoverable amount of the United States long-term business exceeds the carrying value of the cash-generating unit including goodwill. The recoverable amount of the United States long-term cash-generating unit has been determined based on a value in use calculation. This calculation is an actuarially determined appraisal value and is based on an embedded value of the business (the total of the net worth of the life business and the value of the in-force business) together with the present value of expected profits from future new business. Key assumptions used for the calculation were: Embedded value represents the shareholder interest in the life business and is based on projected cash flows of the business including expected investment returns; Risk-adjusted discount rate of 8% is used to calculate the embedded value; New business contribution represents the present value of projected future profits generated from business written in a period.
Accumulated amortisation At 1 January 2009 (1,062) (92) (344) — (1,498) Amortisation for the year (249) (15) (127) — (391) Disposals — — 21 — 21 Transfers from property and equipment (note 20) — — (3) — (3) Foreign exchange rate movements 105 7 24 — 136
At 31 December 2009 (1,206) (100) (429) — (1,735) Amortisation for the year (174) (17) (180) — (371) Disposals — — 6 — 6 Liquidations (note (e)) 25 — — — 25 Transfers from property and equipment (note 20) — — (57) — (57) Foreign exchange rate movements (7) 4 (3) — (6)
Accumulated impairment At 1 January 2009 (96) — (55) (95) (246) Disposals — — — 20 20 Impairment losses charged to expenses (13) — (12) — (25) Foreign exchange rate movements 1 — — 5 6
At 31 December 2009 (108) — (67) (70) (245) Disposals — — 12 — 12 Impairment losses charged to expenses (note (d)) — — (21) — (21) Foreign exchange rate movements — — — 1 1
Carrying amount At 1 January 2009 2,366 124 825 732 4,047 At 31 December 2009 1,394 99 1,111 256 2,860