Non-executive director meetings 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.
The chairman should hold meetings with the nonexecutive directors without the executive directors present.
The Company is required to have a nomination committee but not a corporate governance committee.
Not required under the Code. 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 of 2002.
Shareholder approval is necessary for certain equity-compensation plans and ‘significant changes’ thereto, subject to certain exceptions. The Code does not provide a detailed definition or explanation of what are considered to be ‘significant changes’.
All new equity-compensation plans or amendments to existing plans that are required to be approved by shareholders under the Code are put to shareholders for approval.
Committee role and responsibilities The Board strongly believes that good governance and strong, responsible, balanced leadership by the Board are critical to creating long-term shareholder value and business success. The Committee assists the Board by regularly reviewing the composition of the Board and conducting a rigorous and transparent process when recommending or renewing the appointment of directors to the Board. The key responsibilities of the Committee are to:  Evaluate and review the balance of skills, knowledge, and experience of the Board, taking into account the Company’s risk appetite and strategy;  Monitor succession plans for the appointment of nonexecutive directors, the group chief executive and other executive directors to the Board;  Identify and nominate suitable candidates for appointment to the Board, including chairmanship of the Board and its Committees, against a specification of the role and capabilities required for the appointment;  Assess the independence of each of the non-executive directors;  Assess directors’ conflicts of interest as they arise;  Review the external interests and time commitments of the directors to ensure that each has sufficient time to undertake his/her duties to the Company; and
 Approve a report on the Committee’s activities for inclusion in the Company’s Annual Report and Accounts.
The full terms of reference for the Committee can be found on the Company’s website at www.aviva.com/terms-of-reference and are also available from the group company secretary.
1 This shows the percentage of meetings which the Committee member attended during the year whilst a member of the Committee. A number of Committee members could not attend meetings called at short notice or where they had a conflict of interest.
2 Attended all meetings, became chairman of the Committee on 1 July 2012. 3 Lord Sharman retired from the Board and as chairman of the Committee on 30 June 2012. 4 Appointed to the Committee on 1 July 2012. 5 Resigned on 3 October 2012. 6 Resigned on 8 May 2012. The Committee notes that the UK Corporate Governance Code does not preclude the group chief executive from membership of the Committee.
The Committee met on six occasions in 2012, of which three were scheduled meetings and three were additional meetings called at short notice. The group company secretary acts as the secretary to the Committee. Members of the Committee took no part in any discussions concerning their own circumstances. The chairman of the Committee reported to meetings of the Board on the Committee’s work and the Board receives a copy of the agenda and the minutes of each meeting of the Committee.
Committee activities during 2012 During 2012 the Committee was principally focused on two particular issues: identifying the successor for the group chief executive and the recruitment of new non-executive directors as part of the continual cycle to refresh the Board and maintain an appropriate balance of skills, knowledge and experience. These issues are discussed in detail below. The chart below shows how the Committee allocated its time during 2012.
Diversity The Committee strongly believes that diversity throughout the Group and at Board and senior management level is a driver of business success. Diversity brings a broader, more rounded perspective to decision making and risk management, making the Board and senior management more effective. During the year, candidate searches were conducted and Board appointments were made, on merit, against the criteria identified by the Committee having regard to the benefits of diversity on the Board, including gender. However, with the retirement of Euleen Goh and Mary Francis during the year to concentrate on other commitments the Board currently only has one female non-executive director, representing 10% of the Board. In its last report the Committee stated that it intends to maintain a minimum of 25% female representation on the Board by the end of 2013. The Company remains committed to having a diverse Board in terms of gender as well as diversity of experience, skills and knowledge, background and nationality. Recruitment of additional non-executive directors is ongoing and the Committee is taking diversity into account in the selection process. At the date of this Report, 29% (2011: 18%) of Group Executive members and 21% (2011: 20%) of senior executives in the Company were female. It is the Company’s intention to increase this number as it is recognised that a higher number of women in senior management will create a stronger talent pipeline and is better for business.
Other activities During the year the Committee recommended Committee composition changes to the Board and has been involved in the ongoing process to recruit a new chief executive officer for Aviva Investors and a new group HR director. The Committee also reviewed the independence of each non-executive director, all directors’ conflicts of interest and the balance of skills, knowledge, experience and diversity on the Board prior to recommending directors’ re-election at the AGM. Following consideration of these issues the Committee recommended the election or re-election of each director standing for election or reelection at the 2013 AGM.
Committee performance and effectiveness The Board undertook an annual review of the Committee’s performance and effectiveness and the results of the review will be incorporated into the Committee’s processes and activities for 2013.
This Report provides details of the role of the Audit Committee and the work it has undertaken during the year.
 Assess the independence and objectivity of the external auditor and approve and monitor the application of the external auditor business standard.
In preparation for the new Code requirement that will apply to Aviva during the 2013 reporting period, revised terms of reference for the Committee were adopted in January 2013. The full terms of reference for the Committee can be found on the Company’s website at www.aviva.com/terms-of-reference and are also available from the group company secretary.
Committee membership and attendance The Committee comprises independent non-executive directors only. The table below shows the Committee members during the year and their attendance at Committee meetings: Membership and attendance
Russell Walls (Chairman) 13 100% Glyn Barker2 3 75% Mary Francis3 9 90% Richard Karl Goeltz 12 92% Euleen Goh4 12 92% Michael Hawker 12 92%
2 Appointed to the Committee on 8 August 2012. 3 Resigned from the Board and the Committee on 3 October 2012. 4 Resigned from the Board and the Committee on 31 December 2012.
The chairman, Group CEO, chief financial officer, chief audit officer and the external auditor normally attended Committee meetings. Other members of senior management were also invited to attend as appropriate to present reports. The Committee regularly held private sessions to discuss issues to be raised with management in the main meeting, and met separately with senior management, with the chief audit officer without management present and with the external auditor without management present during the year. The Committee chairman held regular meetings with management and the chief audit officer, and with the external audit partner to ensure he was aware of issues that needed to be raised at the Committee. The Committee chairman reported to subsequent Board meetings on the Committee’s work and the Board received copies of the agenda and minutes of each Committee meeting. In performing its duties, the Committee had access to the services of the chief audit officer, the group company secretary, senior financial management and external professional advisers.
Financial statements and accounting policies In conjunction with members of management and the internal and external auditors, the Committee reviewed the Group’s financial announcements, including the Annual Report and Accounts and associated documentation, the half year results and the interim management statements, and the going concern statement in relation to the Annual Report and Accounts. The Committee placed particular emphasis on their fair presentation and the reasonableness of the judgement factors and appropriateness of significant accounting policies used in their preparation. During the year, the Committee considered the treatment of various assets in the Group’s accounts and the accounting assumptions applied to the results, including the reclassification of Delta Lloyd from an associate to an investment following a further disposal of the Group’s holding in Delta Lloyd; the ‘held for sale’ classification of Aviva’s US business; the impairment assumptions for the US business and the Group’s Spanish bancassurance joint ventures; and the impact of unwinding the Irish joint venture arrangements with Allied Irish Bank. A number of new accounting standards were issued by the International Accounting Standards Board at the end of 2011 which become effective in 2013 and the Committee monitored the action taken by management to ensure compliance with the new standards. The Committee also considered the changes to the Code and associated guidance relating to audit committees and the Committee’s Report in the 2013 Annual Report and Accounts will include disclosure of the significant issues it has considered in relation to the Group’s financial statements. During the year the Committee also received reports on the adequacy of the Group’s life assurance and general insurance reserves, reviewed the audit representation letters prior to signature on behalf of the Board to ensure that the information provided to the external auditor was complete and appropriate and monitored management’s responsiveness to the external auditor’s findings and recommendations.
Internal audit Internal Audit reports to the Board (primarily via the Audit and Risk Committees) and to management on the effectiveness of the Company’s system of internal controls and the adequacy of this system to manage business risk and to safeguard the Group’s assets and resources.
Internal audit charter and business standard The Committee approved a new Internal Audit charter and an Internal Audit business standard in early 2012. The charter sets out the purpose, functions, scope and responsibilities of the Internal Audit function and how it maintains independence from the first and second line management of the Group. The three main functions of Internal Audit are to:  Assess and report on the effectiveness of the design and operation of the framework of controls which enable risk to be assessed and managed;  Investigate and report on cases of suspected financial crime and employee fraud; and
The Internal Audit business standard sets out the business requirements of senior management across the Group in order to support Internal Audit in achieving its objectives and requires businesses to design and operate processes and controls to satisfy the mandatory requirements in the standard based on the size and complexity of the business and the nature of the risks and challenges it faces. The standard also includes controls around local legal and regulatory risks. Any breaches of the standard must be reported to the chief audit officer and others as appropriate.
Annual plan and focus of reviews in 2012 Internal Audit’s 2012 annual plan was reviewed and approved by the Committee. Planned reviews were prioritised following a risk-based assessment of the business and a review against the Group’s risk policies. The reviews carried out covered an extensive sample of controls over all risk types, business units and regulated entities and covered ‘business as usual’ activities and an assessment of change programmes. The Committee received quarterly reports from the chief audit officer on audit reviews carried out, management’s response to the findings and progress in addressing identified issues. During 2012, Internal Audit carried out assurance reviews over inherent risks throughout the Group. Reviews were focused on, but not limited to, areas such as major projects including Solvency II and the Aviva Ireland Transformation Programme; maintenance of controls during the management restructuring programme; IT availability, security and recoverability; financial reporting and disclosure; financial risk, central liquidity and capital management; and the internal control
Chief audit officer The chief audit officer had direct access to the Board chairman, the Committee chairman and the Committee members. The Committee worked with the chief financial officer to determine the chief audit officer’s objectives and evaluate his levels of achievement, and to approve the chief audit officer’s remuneration. His annual performance related bonus was unconnected to the Group’s financial performance. During the year the chief audit officer became a member of the Group Executive and his reporting line changed from the Group CEO to the chief financial officer. The chief audit officer’s membership of the Group Executive assisted the relationship between Internal Audit and management. Notwithstanding his appointment to the Group Executive, his independence was maintained as the Group Executive, acting as a committee, has no decision making authority and assurances were received from management that adequate safeguards had been put in place to maintain the independence, authority and standing of the chief audit officer and the Internal Audit function. Following the senior management restructuring which took place during the year the Internal Audit function aligned itself to the new structure and the Committee remained satisfied that the Internal Audit function had sufficient resources to undertake its duties.
Audit Committee Report This Audit Committee Report was reviewed and approved by the Board on 6 March 2013.
Committee role and responsibilities The purpose of the Committee is to assist the Board in its oversight of risk within the Group through reviewing the Group’s risk appetite and risk profile, the effectiveness of the Group’s risk management framework and the methodology and assumptions used in determining the Group’s capital requirements. The Committee also works with the Remuneration Committee to ensure that risk is properly considered in setting the Group’s remuneration policy. The Committee oversees all aspects of risk management in the Group, including market, credit, liquidity, insurance and operational risk (including franchise risk), and their impact on both financial and non-financial goals.
Revised Committee terms of reference were adopted in January 2013 following an annual refresh. The full terms of reference for the Committee can be found on the Company’s website at www.aviva.com/terms-of-reference, and are also available from the group company secretary.
Michael Hawker (Chairman) 11 100% Glyn Barker2 7 88% Mary Francis3 8 100% Leslie Van de Walle4 3 100% Russell Walls 11 100%
3 Mary Francis resigned from the Committee on 3 October 2012. 4 Leslie Van de Walle resigned from the Committee on 2 May 2012.
During the year the Committee focused on the following areas: Risk appetite monitoring Against a backdrop of significant market volatility during the year, the Committee received regular detailed reports on key risk exposures, emerging and potential risks, and the drivers of risk throughout the Group. It assessed and challenged the appropriateness of the Group’s overall risk appetite and approved revised economic capital risk appetites by risk type. The Committee monitored the Group’s exposure against these appetites, particularly in relation to European sovereign debt holdings and counterparty and credit exposure and, throughout the year, discussed and agreed the actions to be taken to reduce exposure and to address or mitigate risks that had become out of appetite. It also agreed a comprehensive, revised capital management framework by which capital issues would be escalated to the Committee and the Board. Mindful of the potential economic, social and regulatory impact of a Eurozone default, the Committee monitored significant market and Group level contingency planning to produce tailored ‘financial event response plans’.
Methodology and assumptions In early 2012, the Committee considered and approved the methodology and assumptions used to calculate the economic capital for the 2012 Individual Capital Adequacy (ICA) submission.
Risk management and governance The Committee had an ongoing programme of receiving reports from local risk committee chairmen or chief executive officers on the risk environment and issues arising in the Group’s businesses and in respect of particular product lines. During the year, the Committee received reports on the businesses in Italy, Spain, France, the UK and the European region as a whole, and in respect of the Corporate and Speciality Risks business in the UK and business lines in France. The Committee also received updates on issues concerning IT and data security and on the Group’s reinsurance programme. The Committee received regular reports from the chief risk and capital officer and monitored the effectiveness of the Company’s Risk Management Framework which is described in more detail in the Corporate Governance Report on pages 89 to 94 and in note 56. Throughout the year, the Committee had significant oversight of the development of a comprehensive Group-wide restructuring programme, designed to better align legal and management structures throughout the organisation and to optimise governance practices at Group and subsidiary level. In addition, as part of the annual refresh of the suite of risk policies and business standards which underpin the RMF, the Committee reviewed and approved the updated policies and approved a signoff process in respect of the business standards. At the end of the year, the Committee commenced an analysis of the Group’s asset and investment portfolio and the framework by which business units set their investment strategies. Further analysis will continue in 2013.
Regulatory oversight The Committee maintained oversight of the regulatory risks throughout the organisation and discussed the specific management actions identified to address or mitigate issues which arose during the year. The Committee also considered the impact of the changes in the UK and European regulatory landscape, particularly in light of the shift in UK regulatory focus ahead of the split of the FSA into the Prudential Regulation Authority and the Financial Conduct Authority in 2013, and of increasing policyholder protectionism by European regulators.
Internal controls Working with the Audit Committee, the Committee monitored the adequacy of the RMF. Throughout the year, the Group’s Internal Audit function continued to provide the Committee with independent and objective reports on the appropriateness, effectiveness and sustainability of the Company’s system of internal controls. Key control issues reported by Internal Audit to management and to the Committee members were monitored on a quarterly basis until the related risk exposures had been properly mitigated. More detail on the management of risk is contained in note 56.
This Report provides details of the role of the Corporate Responsibility Committee and the work it has undertaken during the year.
Committee role and responsibilities The purpose of the Committee is to set guidance and direction and to oversee the policies and progress of the Group’s corporate responsibility (CR) activities. The key responsibilities of the Committee are to:  Assist the Board in the development of the Group’s strategy on CR related issues and monitor external developments.  Review the Group’s CR, environment and climate change business standard to ensure it continues to meet the Group’s CR strategy and objectives;  Review and monitor the Group’s CR risks and, working with the Risk Committee, ensure that the Group’s CR risks are properly considered;  Review and approve the CR Report in the Company’s Annual Report and Accounts and provide for an appropriate form of assurance; and
 Review the overall CR content contained within the Group’s financial reports.
Revised terms of reference were adopted in January 2013. The responsibility of the Committee was expanded to include providing oversight for the Board in respect of the Group’s conduct with customers and reviewing the overall corporate governance of the Group and business standards as they relate to the culture, values and reputational risks of the Group. The full terms of reference for the Committee can be found on the Company’s website at www.aviva.com/terms-of-reference and are also available from the group company secretary.
Committee membership and attendance The Committee comprises independent non-executive directors only. The table below shows the Committee members during the year and their attendance at Committee meetings.
2 Euleen Goh resigned from the Committee in December 2012. 3 Andrew Moss resigned from the Committee in May 2012. 4 Lord Sharman retired from the Committee in June 2012.
Committee activities during 2012 The following chart shows how the Committee allocated its time during 2012, with key activities set out in more detail below: Corporate responsibility committee – allocation of agenda time
Assurance In respect of the 2011 reporting year, independent assurance on the Group’s CR and related activities and reporting was provided to the Committee by Ernst & Young LLP. For the 2012 reporting year, PwC was appointed to provide independent assurance. Members of the Committee were interviewed as part of the external assurance process and the subsequent report; and management’s action plan; were reviewed by the Committee to assist in strengthening and setting the future direction of the CR programme. Internal Audit reported to the Committee on any relevant matters from its reviews and will provide support for the Committee going forward.
Corporate Responsibility Report During the year, the Committee approved the scope and content of the Company’s 2012 CR Report, which provides a summary of the Group’s CR performance in 2012. The Report is set out on pages 61 to 76 and can be found at www.aviva.com/reports. The Report will be put to an advisory vote of shareholders at the 2013 AGM and further details of the relevant resolution are set out in the Notice of AGM.
Committee performance and effectiveness The Committee undertook an annual review of its performance and effectiveness which concluded that overall the Committee was effective in carrying out its duties. Committee members identified areas for greater focus in 2013 and the Committee’s remit will be extended to provide an increased focus on corporate governance, oversight of the brand, values and reputation of the Group and the Group’s conduct with customers.
Corporate Responsibility Committee Report This Corporate Responsibility Committee Report was reviewed and approved by the Board on 6 March 2013.
Dear shareholder On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2012.
Our on-going commitment to shareholders Whilst we have traditionally had good shareholder support for our remuneration policies over many years, we believe in 2011 we clearly got it wrong. As a result, the Committee has worked over the last year to make changes that will give us a better framework for the decisions we take. Specifically, we agreed the following:  We introduced ‘underpin’ metrics to 2012 bonuses to ensure that bonus payouts were more closely aligned to shareholder experience. We will consider these metrics annually until alternative arrangements are agreed;  We will make any future buyouts on the hire of senior executives on a strict ‘like for like’ basis; and
 We will continue a regular dialogue with shareholders and take account of their feedback.
 ACAP/ACDT – the Aviva Capital Accumulation Plan (ACAP) and the Aviva Cash Deferral Trust (ACDT) will close from 31 March 2014. Payments in lieu of pension have been standardised at senior management levels and a small number of individual arrangements above the standard level have been closed from 31 March 2013.
remuneration is heavily weighted towards pay that is dependent on the outcomes against the key performance indicators of our business, notably profit and Return on Equity (ROE);  Build capital and financial strength – variable pay is strongly aligned to the measurement of the financial strength of our business. Furthermore, economic capital performance is carefully considered before bonus payments are made to ensure that the Group’s financial strength continues to improve; and
 Focus on core businesses – through the measurement of a number of key financial, operational and longer term return measures, overall remuneration is closely aligned to the achievement of the Group’s strategic objectives.
We are committed to maintaining an open, transparent dialogue with shareholders. I hope you will find this Report clear and informative.
 Select, appoint and determine terms of reference for independent remuneration consultants to advise the Committee on remuneration policy and levels of remuneration.
The Committee met twelve times during 2012 of which eight were scheduled Committee meetings and four were additional Committee meetings called at short notice to deal with specific issues as they arose during 2012. Lord Sharman and subsequently John McFarlane normally attended all meetings of the Committee. Gay Huey Evans attended two meetings by invitation prior to being appointed to the Committee. The group company secretary acted as secretary to the Committee. The chairman of the Committee reported to meetings of the Board on the Committee’s work and the Board received a copy of the agenda and the minutes of each meeting of the Committee. The persons listed in table 2 materially assisted the Committee in considering executive remuneration and attended meetings by invitation during the year.
Table 2: Attendees of the Committee during 2012 Attendee Position Comments
Lord Sharman Chairman of the Company Attended by invitation John McFarlane Chairman designate and then executive chairman Attended by invitation Andrew Moss Group chief executive Attended by invitation Kirstine Cooper Group general counsel and company secretary Attended as secretary to the Committee John Ainley Group HR director Attended as an executive responsible for advising on remuneration Carole Jones Acting group HR director Attended as an executive responsible for advising on remuneration policy David Hope HR director, centres of expertise Attended as an executive responsible for advising on remuneration policy Tracey O’Rourke Group reward and HR policy director Attended as an executive responsible for advising on remuneration policy Andrew Pooley Executive reward director Attended as an executive responsible for advising on remuneration policy David Rogers Chief accounting officer Attended to advise on matters relating to the performance measures and targets for the Group’s share incentive plans Jason Windsor Chief strategy and planning officer Attended to advise on matters relating to the performance measures and targets for the Group’s share incentive plans Amanda Mackenzie Chief marketing and communications officer Attended to advise on matters relating to customer target setting
Committee activities during 2012 The Committee takes its responsibility to shareholders very seriously and following the 2012 annual general meeting (AGM) undertook an enhanced engagement programme with major institutional shareholders. The Committee considered the following matters during the year: Routine remuneration matters: Consideration of remuneration matters within the Committee’s terms of reference, specifically including:  Consideration and recommendation to the Board of the Group’s policy and practices concerning base salaries and benefits-inkind for EDs and senior management;  Consideration and approval of the level of bonus awards in respect of the 2011 financial year and approval of the associated grant of share awards under the Annual Bonus Plan (ABP) for EDs and senior management;  Performance testing of subsisting Long Term Incentive Plan (LTIP) grants which vested in the 2012 financial year; and subsisting One Aviva Twice the Value (OATTV) Plan grants which did not vest and which expired;  Setting targets for the bonus awards for the 2012 financial year and approving the associated grant of awards under the ABP;  Approval of 2012 LTIP grants to the EDs and senior management and the associated performance conditions for these grants;  Reviewing the likely outcomes against the ABP 2012 targets and agreeing underpin measures;  Approval of the grant of share awards under the Aviva Investors LTIP for the 2012 financial year;  Approval of the award of Free Shares to UK employees in respect of 2011 under the Aviva All Employee Share Ownership Plan
Remuneration policy:  Approval of amendments to the rules of discretionary share plans regarding the reduction in categories of automatic ’good leavers’ and the early vesting of awards;  Review of the policy for buying out unvested awards when recruiting EDs and senior managers;  Review of pension arrangements for senior management, including the approval of recommendations in relation to contributions into the ACAP; and  Approval of the cessation of the free share element of the AESOP and the introduction of a matching shares element in 2013.
Shareholder feedback:  Consultation with major institutional shareholders in respect of their concerns regarding elements of the 2011 Directors’
Governance FSA’s Remuneration Code: Aviva Investors The FSA’s Remuneration Code applies to Aviva Investors and two small ‘firms’ (as defined by the FSA) within the UK & Ireland Life business. These businesses are subject to the requirement of the FSA’s Remuneration Code. Remuneration disclosures for Aviva Investors can be found at www.avivainvestors.com/about_us/our_approach_to_remuneration/index.htm and for the UK & Ireland Life firms at www.aviva.com/media/news/item/fsa-remuneration-code-disclosure-15575/. Aviva’s reward principles and arrangements are designed accurately and appropriately to incentivise and reward employees for achieving stated business goals in a manner that is consistent with the Company’s approach to sound and effective risk management.
Remuneration policy in practice Table 3 below sets out the purpose of key elements of our remuneration structure, how they relate to the Company’s strategy and how they will operate, highlighting any changes from 2012.
Base salary To provide a core reward for undertaking the role, at a level needed to recruit and retain individuals.
Benefits are provided on a market competitive basis and include a cash car allowance, Private Medical Insurance (PMI) and life insurance.
Pension To provide a market competitive level of provision for postretirement income.
Payments will no longer be made into the ACAP or the ACDT after 31 March 2014. These were discretionary savings vehicles into which payments in lieu of pension were made and held for at least five years.
Maximum opportunity of 150% of base salary with 75% of base salary payable for plan performance. Performance is assessed against a range of key financial, employee and customer performance indicators and personal objectives. Two-thirds of any bonus awarded is deferred into shares which vest after three years. Additional shares are awarded at vesting in lieu of dividends paid on the deferred shares. Unvested awards are subject to clawback in the event of misconduct or materially adverse misstatement of accounts.
Bonus payments will take account of achievements in relation to Economic Value Added, Economic Capital, and absolute and relative Total Shareholder Return (TSR) to ensure payouts are closely aligned with the shareholder experience.
The definition of ROE has been refined. The TSR comparator group was reviewed and refocused on the insurance sector. Further details on both of these changes are set out on pages 111 and 112.
To secure the required talent in order for Aviva to deliver its strategic plans whilst ensuring any recruitment award represents good value for shareholders.
Notes: 1 ROE is used as an absolute measure of performance, and is commonly used amongst our peers. Targets are set annually within the context of the Company’s three-year business plan. Vesting depends upon performance over the three-year period against a target return. 2 Relative TSR is a commonly used method of determining performance against a set of suitable peers, providing a view of relative performance against those peers. TSR is calculated by measuring total capital gains (or losses) accruing in the period if shares are held continuously and dividends paid are immediately reinvested in new shares. The impact of short-term increases (or decreases) in share price on TSRs is reduced by averaging share price across the three months prior to the start and end of the performance period.
Consideration of wider employee pay When setting the policy for EDs’ remuneration, the Committee has regard to the pay and employment conditions elsewhere within the Group. In particular, the Committee has sight of:  Salary increases for the general employee population;  Group-wide benefit offerings (including pensions);  Overall spend on annual bonus; and  Participation levels in the annual bonus and LTIP.
Remuneration scenarios The charts below illustrate how much the current EDs could earn under different performance scenarios (assuming a constant share price):  Threshold – Threshold bonus of 25% of base salary and 20% vesting under the LTIP.  Plan – Plan bonus of 75% of base salary and 50% vesting under the LTIP.  Stretch – Stretch bonus of 150% of base salary and maximum vesting under the LTIP.
Mark Wilson Patrick Regan and Trevor Matthews1 Remuneration scenarios – Mark Wilson
Table 4 below sets out the total remuneration earned by each current ED who served during 2012.
Base salary £698,750 £720,000 Annual bonus (cash and deferred elements) — — LTIP vesting (2010 award)1 £607,302 — Pension contributions2 £193,103 £212,304
Total remuneration earned in respect to 2012 £1,533,269 £1,017,674 Notes 1 Patrick Regan’s 2010 LTIP award relates to the three-year performance period ending on 31 December 2012. 69.83% of the award is due to vest in March 2013. An assumed Aviva ordinary share price of 373.00 pence has been used to determine the value of the award. 2 Pension contributions consist of employer contributions into the defined contribution section of the Aviva Staff Pension Scheme, excluding salary exchange contributions made by the employees, plus payments in lieu of pension above the lifetime or annual allowance caps. 3 Mark Wilson joined the board as an ED on 1 December 2012, and became Group CEO on 1 January 2013. He received no emoluments in respect of 2012.
Annual bonus Table 5 below sets out the Group’s performance against its financial, employee and customer KPIs in 2012 and how these would have translated into bonus payments.
(shown at ‘on – plan’) Personal – Common Risk Objective 2.5 5 2.5 *Percentages do not necessarily add up due to rounding.
Solely taking into account Group business and ‘on-plan’ personal measures would have resulted in a bonus of 78% of salary for EDs in respect of 2012 performance, although business unit performance would also be taken into account reflecting the remit of each ED.
The deferred elements of Mr Mayer’s bonuses earned for 2009, 2010 and 2011 were released to him on the first dealing day following his departure date. Mr Mayer received no bonus in respect of the financial year 2012. All unvested LTIP and OATTV plan awards lapsed, with no shares being released from these awards.
Andrew Moss Andrew Moss resigned from the Board on 8 May 2012 and left the Company on 31 May 2012. He is receiving base salary in lieu of 12 months’ notice (less gross base salary paid between 8 May 2012 and 31 May 2012), amounting to £898,462 in accordance with his contractual entitlements. This is being paid in instalments and is subject to mitigation. In addition, he received £300,000 in full and final settlement of all claims that he might have to a bonus under his contract. Mr Moss will retain the benefit of £209,000 (being 5/12ths of the annual payment made in April 2012) under the ACAP (i.e. the equivalent of a money purchase pension plan). He also received payment for half a day accrued but untaken holiday entitlement. The 2010 and 2011 bonuses that were deferred into shares lapsed in accordance with the rules of the ABP, as did outstanding awards under the LTIP and the OATTV plans. 75% of the element of the 2009 bonus that was deferred into shares will vest in accordance with the rules of the relevant plan and 25% lapsed upon Mr Moss leaving the Group.
Legal fees of £25,000 were paid to Mr Moss’s solicitor in respect of advising on his departure. He also claimed for outplacement services of £20,000.
Remuneration for 2013 Shareholder context The result of the shareholder vote at the Company’s 2012 AGM in respect of the 2011 Directors’ Remuneration Report is set out in table 7 below.
LTIP As summarised in table 6, the LTIP vests subject to the degree of achievement of two equally weighted performance measures, absolute ROE and relative TSR performance, which have been chosen to reflect shareholders’ long-term interests. For 2013, a grant of 225% of base salary will be made to Patrick Regan and 300% of base salary to Mark Wilson. No grant will be made to Trevor Matthews who will cease to be a director prior to the 2013 AGM.
Table 9: 2012 LTIP ROE Targets Achievement of ROE targets over the three-year performance period Percentage of shares in award that vest based on achievement of ROE targets1
Between 30% and 37.5% (2011: Between 33% and 40.5%) Pro rata between 10% and 50% on a straight line basis 37.5% and above (2011: 40.5% and above) 50% Notes 1 The percentage of shares in award that vest based on achievement of ROE targets is the same in 2011 and 2012.
TSR targets Relative TSR determines the vesting of the other 50% of any LTIP award. To ensure that Aviva’s performance is measured against appropriate comparators with similar business operations and geographic footprints, some minor changes were made to the TSR comparator group for 2013. Companies focused on banking were excluded and some more relevant comparators within the insurance sector were added to ensure a robust group. For the 2013 LTIP grant, performance will therefore be assessed against the following companies: Aegon, Allianz, AXA, CNP Assurances, Direct Line Group, Generali, Legal & General, MetLife, Old Mutual, Prudential, Resolution Limited, Royal & Sun Alliance, Standard Life and Zurich.
Table 10: TSR vesting schedule for the 2012 LTIP award TSR position over the three-year performance period Percentage of shares in award that vests based on achievement of TSR targets
Basic salary Shareholding excluding restricted shares Value of shareholding based on a share price of 373.00 pence2 Percentage of basic salary Shareholding requirement
Notes 1 Mark Wilson joined the Board as an ED on 1 December 2012 and became Group CEO on 1 January 2013. He is entitled to receive a base salary of £980,000 per annum with effect from 1 January 2013 and did not receive a salary in 2012.
Table12: Aviva plc five-year TSR performance against the FTSE 100 Return Index and the median of the comparator group
Table 13: EDs’ key terms and conditions of employment Provision Policy
Termination payment Pay in lieu of notice up to a maximum of 12 months’ base salary. This may be increased by a discretionary redundancy payment (where appropriate) but any such further termination payment is capped at 12 months’ base salary. Any amount is subject to phased payment and mitigation requirements.
Other benefits Other benefits include PMI and participation in the Company’s staff pension scheme.
Sickness In line with senior management terms, i.e. 100% of base salary for 52 weeks, and 75% thereafter.
Date current contract commenced: 1 January 2013 22 February 2010 2 December 20113 19 January 20111 1 January 20072
Notes 1 Igal Mayer resigned from the Board on 19 April 2012 and left the Company on 31 May 2012. 2 Andrew Moss resigned from the Board on 8 May 2012 and left the Company on 31 May 2012. 3 Trevor Matthews will resign from the Board prior to the 2013 AGM.
External board appointments The Company recognises that its EDs can benefit from serving in a personal capacity as a non-executive director of non-Aviva Group companies. At the same time, it is conscious of the corporate governance recommendations that EDs should take account of the time commitment required by a non-executive director (NED) position and ensure that any such role does not impact their ability to carry out fully their executive duties. The Company therefore has a policy of normally allowing senior executives to serve as a NED of one external company, subject to approval by the Board, and for the individual to retain any board fees. None of the EDs held external NED appointments during 2012. Following the disposal of the Group’s interests in Delta Lloyd N.V. in January 2013, Patrick Regan, who was until that time a Company-nominated member on the supervisory board of Delta Lloyd N.V., continued to be a member of the supervisory board in a personal capacity. From that point he has therefore held an external NED appointment. During the time he was a Company-nominated member on the supervisory board of Delta Lloyd N.V. he did not receive a board fee.
Non-executive directors The NEDs, including the chairman of the Company, have letters of appointment which set out their duties and responsibilities. The key terms of the appointments are set out in table 14 below.
Time commitment Each director must be able to devote sufficient time to the role in order to discharge his or her responsibilities effectively and spend a minimum of 25 days a year on Company business. NEDs spend an average of 41 days a year on Company business, with the chairmen of the Audit, Remuneration and Risk Committees spending substantially more.
Appointment dates Director Date of last appointment on letter of appointment
Following a review of the fees for holding the position of the senior independent director or a committee chairman or in respect of committee membership, the Board agreed to the fee changes shown in table 15 below. These increases were effective from 1 April 2012. The Board does not intend to increase the fees in 2013. The total amount paid to NEDs in 2012 was £1.5 million.
Table 15: NEDs’ fees from 1 April 2012 Role Fee from 1 April 2011 Fee from 1 April 2012
Committee membership – Audit £10,000 £15,000 – Corporate Responsibility £7,500 £10,000
Chairman John McFarlane became chairman designate on 1 January 2012. The fees for his role as chairman of the Company had been set at £550,000 per annum. He became interim executive deputy chairman in May 2012 following Andrew Moss’ departure and executive chairman of the Company on 1 July 2012 until 31 December 2012. Despite the increased responsibilities and time commitment required, John McFarlane indicated that he did not wish to be considered for any additional fee in respect of his role and his fees remained at £550,000 per annum.
Employment contracts and letters of appointment EDs’ employment contracts and NEDs’ letters of appointment are available for inspection at the Company’s registered office during normal hours of business, and at the place of the Company’s 2013 AGM from 10.45am on 9 May 2013 until the close of the meeting.
Directors’ remuneration in 2012 (audited information) Table 16 below sets out the remuneration paid or payable to the directors in respect of the year to 31 December 2012.
Non-executive directors6 Glyn Barker 76 — — — — — 1 — 77 —
Former non-executive directors11 Mary Francis 76 113 — — — — 1 — 77 113
Leslie Van de Walle 30 85 — — — — — — 30 85
4 Trevor Matthews received contributions in lieu of pension above the pension annual allowance limit. The figure shown represents contributions paid or payable for 2012. Cash payments were made for the period January to March 2012. A payment into the ACDT was made in April 2012, covering the period April 2012 to March 2013. The portion of the payment relating to 2012 is shown here.
9 For the purposes of the disclosure required by Schedule 5 to the Large & Medium-sized Companies and Groups (Accounts & Reports) Regulation 2008, the total aggregate emoluments of the directors in respect of 2012 was £6.3 million (2011: £7.7 million). The 2012 figure includes the emoluments for all the directors set out in table 16 and the termination benefits payable to Mr Moss and Mr Mayer as set out in Notes 7 and 8 above. The total aggregate emoluments for 2011 included in table 16 excludes those directors that resigned from office prior to 1 January 2012. Those directors are Mark Hodges (2011 emoluments: £278,722), Andrea Moneta (2011 emoluments: £76,116) and Carole Piwnica (2011 emoluments: £85,000). The total aggregate emoluments for 2011 including those directors was £7.7 million.
10 Mark Wilson joined the Board as an ED on 1 December 2012, and became Group CEO on 1 January 2013. He received no emoluments in respect of 2012 and so is not included in this table. 11 The remuneration figures shown in the table are for or relate to the period during which the director was a director of the Company.
Accrued annual pension at 31 December 20111 431.9 22.5 — — Accrued annual pension at 31 December 20127 447.3 23.6 — — Gross increase in accrued pension over the year 15.4 1.1 — — Increase (decrease) in accrued pension net of inflation over the year 8.5 — — —
Transfer value of accrued pension at 31 December 20114 7,677.5 529.5 Transfer value of accrued pension at 31 December 20124 8,730.9 545.3 — — Change in transfer value during the period less employee contributions3 1,053.4 15.8 — — Transfer value of net increase (decrease) in accrued pension less employee contributions6 166.8 — — —
8 Benefits deriving from additional voluntary contributions (AVCs) paid by directors are excluded from the amounts below.
Aviva Annual Bonus Plan 2011 102,741 — — — 102,741 435.60 Mar-14
Trevor Matthews Aviva Long Term Incentive Plan 20112 373,27110 — — — 373,27110 300.80 Mar-14
Andrew Moss12 Aviva Long Term Incentive Plan 20093 632,324 — 516,419 115,905 — 245.00 344.80 Mar-12
Aviva Annual Bonus Plan 2009 115,365 58,4466 173,811 — — 245.00 344.80 Mar-12
One Aviva, Twice The Value bonus plan 20093 195,876 — — 195,876 — 245.00 Mar-12
Igal Mayer13 Aviva Long Term Incentive Plan 20093 192,871 — 157,517 35,354 — 245.00 344.80 Mar-12
8 The performance target attached to the second tranche of the RRSA was met and this tranche vested on 8 March 2012 being the first dealing day following the normal vesting date where no dealing restrictions were in place. 9 The Conditional Share Award was granted to Trevor Matthews following his recruitment in 2011. As disclosed in the 2011 Directors’ Remuneration Report, this award is not subject to performance conditions and will vest in tranches subject to
Share options (audited information) Details of the EDs who were in office for any part of the 2012 financial year and hold or held options over ordinary shares of the Company pursuant to the Company’s share based incentive plans are set out in table 19 below. Savings-related share options refer to options granted under the HMRC-approved Aviva Savings Related Share Option Scheme 2007. Options are normally exercisable during the six-month period following the end of the relevant (three, five and seven year) savings contract. Executive share options (approved) refer to options granted under the HMRC-approved schedule to the Aviva Executive Share Option Plan 2005. Options will be exercisable on 30 March 2013 to the extent that the LTIP awards granted in 2010 have vested. Any gain made on exercise of these options will be used to reduce the number of shares vesting under the LTIP. Therefore, the vesting of the options will not increase the overall number of shares received by the EDs from their LTIP awards.
Executive share options (approved) 2010 7,772 — — — 7,772 386.0 Mar 13
Andrew Moss1 Executive share options (approved) 2010 7,772 — — — 7,772 386.0 Mar 13
The closing middle market price of an ordinary share of the Company on 31 December 2012 was 373.00 pence, and the closing middle market price of an ordinary share of the Company during the year ranged from 255.30 pence to 384.00 pence. During the year, no share options were exercised by directors (2011: nil).
EDs did not pay for the award of any share options. The savings related options are granted under an all-employee share scheme and are not subject to performance conditions. The executive share options are linked to awards under the LTIP which are subject to performance conditions (ROE and relative TSR). Additional information can be found in the sections titled ‘LTIP’, ‘ROE targets’ and ‘TSR targets’ on pages 111 and 112.
During 2012, loans totalling £21.3 million were made to RBC Trustees (CI) Ltd and loans totalling £11.6 million were made to EES Trustees International Ltd to ensure sufficient shares were available to meet the Company’s on-going liabilities.
The Company monitors the number of shares issued under the Aviva employee share plans and their impact on dilution limits. The Company’s usage of shares compared to the relevant dilution limits set by the Association of British Insurers (ABI) in respect of all share plans (10% in any rolling ten-year period) and executive share plans (5% in any rolling ten-year period) was 3.53% and 2.06% respectively on 31 December 2012.
John McFarlane 10,000 10,000 — — — — — — — —
2 ABP relates to entitlements to shares arising through the Aviva Annual Bonus Plan 2005 and the Aviva Annual Bonus Plan 2011. Under these plans, some of the earned bonuses are paid in the form of conditional shares and deferred for three years. For Andrew Moss, this includes the restricted shares referred to in note 1 above. The transfer of the shares to the director at the end of the period is not subject to the attainment of performance conditions but the shares can be forfeited if the ED leaves service before the end of the period. In respect of Patrick Regan, 213,624 shares held at 1 January 2012 and 128,428 shares held at 31 December 2012 represent the outstanding shares from the RRSA and BRDSA awarded under the rules of the CFO Recruitment Share Awards Plan and are restricted shares. In respect of Trevor Matthews, 653,721 shares held as at 1 January 2012 and 435,814 shares held as at 31 December 2012 represent the unvested shares awarded under the terms of the Conditional Share Award.
3 Awards granted under the LTIP which vest only if the performance conditions are achieved. 4 OATTV Plan awards were granted as a match to the bonus plan awards under the ABP and vest only if the performance conditions are achieved. 5 ‘Options’ are options over shares granted under the SAYE and the Aviva Executive Share Option Plan 2005. 6 In addition to his ordinary shareholding Richard Karl Goeltz held 14,000 8.25% Capital Securities on 1 January 2012 and 31 December 2012. 7 The information given in this column is as at 1 January 2012 or the date of appointment of the director (Glyn Barker: 27 February 2012; Mark Wilson: 1 December 2012). On appointment neither of the directors held any shares, awards or options. 8 The information given in this column is as at 31 December 2012 or the date on which a director ceased to be a director of the Company (Mary Francis: 3 October 2012; Igal Mayer: 19 April 2012; Andrew Moss: 8 May 2012: Lord Sharman: 30 June 2012 and Leslie Van de Walle: 2 May 2012). 9 The interests of connected persons to the directors are included in the directors’ interests given in the table. 10 These shares include the balance of the Conditional Share Award. 11 These shares were awarded as phantom units in 2011 which will be cash settled on vesting and no shares will be transferred or allotted. 12 These shares represent the phantom units awarded as per note 11 and the LTIP award granted in 2012. 13 These shares represent the OATTV awarded under the rules of the CFO Recruitment Share Awards Plan. 14 These shares include 100 American Depository Shares (the equivalent of 200 Aviva ordinary shares). The opening balance figure for Lord Sharman differs from the closing balance figure at 31 December 2011 due to scrip dividend shares issued in November 2011 not being included in the closing balance figure at 31 December 2011. 15 These LTIP awards include 433,296 phantom units which will be cash settled on vesting and for which no shares will be transferred or allotted. 16 The opening balance figure for Leslie Van de Walle differs from the closing balance figure at 31 December 2011 due to scrip dividend shares issued in November 2011, to his spouse through a nominee account, not being included in the closing balance figure at 31 December 2011. In addition to his ordinary shareholding, Leslie Van de Walle held 897,000 5.9021% £500m Direct Capital Instrument (DCI) on 1 January 2012 and 2 May 2012. The DCIs were held by his spouse through a nominee account.
In this section Company address 122 Share capital 122 Related party disclosures 124 Dividend data 124 Guarantees, securitised assets and offbalance sheet arrangements 125 Liquidity and capital resources 125 Regulation 129 Risks relating to our business 135
Company address The Company’s registered office is St Helens, 1 Undershaft, London, EC3P 3DQ. The Company’s telephone number is +44 (0)20 7283 2000.
Million 8.375% Cumulative Irredeemable Preference Shares, nominal value £1 100 100 100 — — — 8.75% Cumulative Irredeemable Preference Shares, nominal value £1 100 100 100 — — —
Share options and awards The Company maintains a number of active stock option and share award schemes. Details of these schemes are set out in ‘Financial statements IFRS – Note 30 – Group’s share plans’.
Share Investment Plan The Company’s UK resident employees of participating companies can buy ordinary shares in the Company by making monthly contributions from their gross salary. Contributions can be a minimum of £5 and 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. There is currently no matching element to this investment by the Company. However a matching element is due to be introduced in April 2013 through which the Company will match every purchased share with two matching shares for the first £40 of a participant’s monthly contribution. Matching shares will be subject to forfeiture if purchased shares are withdrawn from the Aviva All Employee Share Ownership Plan (AESOP) within three years of purchase, as long as the employee remains employed by the Company. From May 2013 participants will also be eligible to receive Dividend Shares through the AESOP.
Shares to satisfy options and awards Since July 2008, it has been the Company’s practice to satisfy all awards and options using shares purchased in the market and held by employee trusts except where local regulations make it necessary to issue new shares. At 31 December 2012, 10,053,515 shares were held by the employee share trusts as compared to 13,284,476 at 31 December 2011, in both instances following the share purchases and distributions to individual employees throughout the year. These shares have an aggregate nominal value of £2,513,379 and market value £37,499,611 as of 31 December 2012, compared to £3,321,119 and £39,959,704 at 31 December 2011, respectively. Shares held by separate employee share trusts on behalf of specific individuals have not been included in these amounts. Further details are given in ‘Financial statements IFRS – Note 31 – Shares held by employee trusts.’
Shares issued under the Group’s Employee and Executive Share Option Schemes1 1,574,706 Shares issued in lieu of dividends2 83,989,590
Related party disclosures Related party transactions For more information relating to related party transactions, including more information about the transactions described below, please see ‘Financial Statements IFRS – Note 59 – Related party transactions’.
Salary and other short-term benefits 4.7 6.7 8.1 Post-employment benefits 1.9 1.7 1.6 Equity compensation plans 4.8 5.9 6.4 Termination benefits 1.5 0.7 — Other long term benefits 0.4 2.8 2.5
Shareholder information continued reintroduced the Aviva Scrip Dividend Scheme. For the 2012 final dividend, the Aviva Scrip Dividend Scheme has been withdrawn. An interim dividend is generally paid in November of each year. A final dividend is proposed by the Company’s Board after the end of the relevant year and generally paid in May. The following table shows certain information regarding the dividends that we paid on ordinary shares for the periods indicated in pounds sterling and converted into US dollars at the noon buying rate in effect on each payment date.
Liquidity and capital resources Treasury function The treasury function of our business is managed by our centralised treasury team, headed by the Group treasurer. The Group treasurer acts as owner of Group business standards for liquidity and foreign exchange risk management within the Group risk governance and oversight framework. Changes in policy require the agreement of the chief risk and capital officer. These policies are independently implemented and monitored by each of our businesses. Our central treasury team is split into distinct functions: a Group team, which develops our overall treasury strategy and our treasury team at Aviva Investors, which manages and monitors our treasury and cash flow positions for our holding companies. Each business unit is responsible for monitoring its own cash and liquidity positions, as well as its ongoing funding requirements. It is our policy to make the majority of our financing arrangements at the parent company level for our business units, primarily through external borrowings and equity offerings. This enables us to achieve the efficiencies afforded by our collective size. A number of our business units also raise debt on their own behalf.
Our principal objective in managing our liquidity and capital resources is to maximise the return on capital to shareholders, while enabling us to pay 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 that our working capital is sufficient for our present operational requirements. For additional information, see ‘Note 56 – Risk management – liquidity risk’.
Extraordinary market conditions Starting in mid-September 2008, the global financial markets experienced unprecedented disruption, adversely affecting the business environment in general, as well as financial services companies in particular. Markets have improved but continue to be fragile, particularly given the Eurozone sovereign debt crisis. A return to adverse financial market conditions could significantly affect our ability to meet liquidity needs and obtain capital, although management believes that we have liquidity and capital resources to meet business requirements under current market conditions.
Management of capital resources We seek to maintain an efficient capital structure using a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. This structure is consistent with our risk profile and the regulatory and market requirements of our business. In managing our capital, we seek to:  Match the profile of our assets and liabilities, taking into account the risks inherent in each business;  maintain financial strength to support new business growth whilst still satisfying the requirements of policyholders, regulators and rating agencies;  retain financial flexibility by maintaining strong liquidity, access to a range of capital markets and significant unutilised committed credit lines;  allocate capital efficiently to support growth and repatriate excess capital where appropriate; and
Core structural borrowings Subordinated debt 4,337 4,550 Debenture loans 199 199 Commercial paper 603 506
In the UK, we have raised non-recourse funding secured against books of mortgages. This funding has been raised through the use of special-purpose entities. The beneficial interest in the books of mortgages has been passed to these special-purpose entities. These entities, which are owned by independent trustees, have funded this transfer through the issue of loan notes. The value of the secured assets and the corresponding nonrecourse funding was £1,332 million (2011: £1,306 million). We continue to receive fees from these special purpose entities in respect of loan administration services. These special purpose entities have been consolidated as we retain the residual interest in them. The transactions and reasons for consolidation are discussed further within ‘Financial statements IFRS – Note 24 – Securitised mortgages and related assets’.
 Total shareholders’ funds to exceed 32% of non-life net written premiums for the previous 12 months. At 31 December 2012, total shareholders funds were 140% of non-life net written premiums.
Aviva plc’s principal sources of liquidity is dividends and liquid resources provided by its subsidiaries, associates and joint ventures. 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 liquid resources provided to Group Centre from operating companies, subsidiaries, associates and joint ventures in 2012: Amounts received £m
UK life insurance 150 UK general insurance 150 Canada 136 France 217 Spain 68 Poland 70 Other operations 153
Subsequent to the year end, the Group has taken action to improve its access to dividends from the Group’s insurance and asset management businesses by undertaking a corporate restructuring whereby Aviva Group Holdings (“AGH”) has purchased from Aviva Insurance Limited (“AIL”) its interest in the majority of its overseas businesses. Under UK company law, dividends can only be paid if a company has distributable reserves sufficient to cover the dividend. At 31 December 2012, Aviva plc itself had distributable reserves of £3,037 million, which would have covered three years of historic dividend payments to our shareholders. In UK Life, our largest operating subsidiary, distributable reserves, which could be paid to Aviva plc via its intermediate holding company, are created mainly by the statutory long-term business profit transfer to shareholders. While the UK insurance regulatory laws applicable to UK Life and our other UK subsidiaries impose no statutory restrictions on an insurer’s ability to declare a dividend, the rules require maintenance of each insurance company’s solvency margin, which might impact their ability to pay dividends to the parent company. Our other life and general insurance, and fund management subsidiaries’ ability to pay dividends and make loans to the parent company is similarly restricted by local corporate or insurance laws and regulations. In all jurisdictions, when paying dividends, the relevant subsidiary must take into account its capital position and must set the level of dividend to maintain sufficient capital to meet minimum solvency requirements and any additional target capital expected by local regulators. These minimum solvency requirements, which are consolidated under the European Insurance Group Directive, are discussed later in this section under the heading ‘Regulatory capital position’. We do not believe that the legal and regulatory restrictions constitute a material limitation on the ability of our businesses to meet their obligations or to pay dividends to the parent company, Aviva plc. The Group has received and expects to receive proceeds on completion of the disposals as disclosed in ‘Financial statements IFRS – Note 3 – Subsidiaries’. Aviva plc has established two main programmes for the issuance of external debt by Aviva plc. For short-term senior debt issuance we have a £2 billion commercial paper programme which allows debt to be issued in a range of currencies. At 31 December 2012, the outstanding debt issued under this programme was £603 million (2011: £506 million excludes commercial paper issued by Delta Lloyd). More details of movements in debt can be found on page 126 in the ‘Management of debt section’. For longer term debt we have established a Euro Medium Term Note (EMTN) programme. This programme has documentation readily available to allow quick issuance of longterm debt with a variety of terms and conditions. Debt issued under this programme may be senior debt or regulatory qualifying debt and may have a fixed or floating interest rate. At 31 December 2012, the outstanding debt issued under this programme was £2,076 million (2011: £1,894 million).
Application of funds We use funds to pay dividends to our shareholders, to service our debt and to pay our central Group cash flows. In 2012, total cash paid by the Company as ordinary and preference dividends and coupon payments on direct capital instruments and Fixed Rate Tier 1 notes amounted to £720 million, compared with £506 million in 2011. In 2012, our total interest costs on central borrowings were £317 million. This compared with £324 million of interest paid on central borrowings in 2011. Total corporate centre expenses in 2012 were £136 million compared with £138 million in 2011. An additional application of our funds is the acquisition of businesses. In 2012, cash paid for the acquisition of subsidiaries, joint ventures and associates from continuing operations net of cash acquired amounted to £129 million, compared with cash paid of £114 million in 2011.
Net cash used in investing activities Net cash from investing activities decreased by £271 million to £78 million utilised (2010: £349 million utilised). The decrease is a result of cash used in discontinued operations.
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 £m
The European Union In addition to its UK businesses, Aviva is active in other EU member states through wholly owned subsidiary and joint venture companies. These companies are subject to the laws and regulations of the EU member state in which they are based, but are also affected by higher level EU legislation, which will continue to have a significant influence on the legislative environment in the UK and other EU markets. The EU operates by promulgating directives that must be implemented into local national legislation within each EU member country. These directives set minimum standards for national legislatures to meet, with each legislature able to decide how they should be implemented. National governments may not pass laws which fail to meet the minimum standards set out in a directive, but are generally free to impose legal requirements which go beyond those required. Directives are written at a fairly high level, with more detail being provided at national level through legislation developed in accordance with the local legal system. Even greater detail may be imposed through the rules and regulations of national regulators and, for financial services businesses these rules can be extensive. The EU may also impose requirements directly on countries through regulation. EU financial services regulation is based on the principle of ‘home country control’, which makes the home country regulator responsible for monitoring compliance with all applicable regulation. Key directives of particular relevance to the financial services industry, and so to Aviva’s businesses in the EU include: Third Life and Non-Life Directives These directives implemented the home country control principle for life and non-life insurance business in the mid-1990s and placed the responsibility for such issues as solvency, actuarial reserves, investment of assets, and certain governance issues on the home country regulator. Most companies licensed to conduct insurance business in one member state may rely on their home country regulation to ‘passport’ into all other member states to conduct business without having to be separately licensed in each. The general exception is selling activity which continues to be regulated by the state in which the sale takes place.
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’; and
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; and
Capital and solvency rules for insurers The FSA rules require that a UK insurer (including those within the Group) must hold capital resources equal to at least the Minimum Capital Requirement (MCR). Insurers with with-profits liabilities of more than £500 million (which is the case with Aviva’s withprofits fund) must hold capital equal to the higher of MCR and the Enhanced Capital Requirement (ECR). The ECR is intended to provide a more risk responsive and ‘realistic’ measure of a withprofits insurer’s capital requirements, whereas the MCR is broadly equivalent to the previous required minimum margin, and satisfies the minimum EU standards. Determination of the ECR involves the comparison of two separate measurements of the Authorised Firm’s financial resources requirements, which the FSA refers to as the ‘twin peaks’ approach. The two separate peaks are:  the requirement comprised by the mathematical reserves plus the ‘long term insurance capital requirement’ (the LTICR), together known as the ‘regulatory peak’; and
 a calculation of the ‘realistic’ present value of the insurer’s expected future contractual liabilities together with projected ‘fair’ discretionary bonuses to policyholders, plus a risk capital margin, together known as the ‘realistic peak’.
Given our size and our share of the UK retail market, a major issue within our business which causes concern for the FSA may have a significant impact on these objectives. The FSA therefore maintains a ‘close and continuous’ relationship with us, with day-to-day supervision of Aviva conducted by a dedicated team within its Prudential and Conduct Business Units. In practice, this means that a wide range of Group, regional and UK business unit senior managers have regular scheduled meetings with the FSA, and other meetings and discussions on specific issues take place as the need occurs. This adds up to weekly or even daily FSA interaction at UK region, business unit and Group level, and the sharing of detailed information about the Group. The FSA has also, periodically, conducted formal Advanced Risk-Responsive Operating framework (ARROW) reviews of Aviva to assess the level of risk posed by the Group to each of the FSA’s objectives. The last full risk assessment was conducted in 2011/2012. Areas of potential risk or weakness where the FSA particularly requires Aviva to focus attention are formally set out in a Risk Mitigation Plan (RMP), with both risk assessment and RMP issues up-dated on an ongoing basis between each ARROW review. The majority of RMP actions set by the FSA after the 2011/2012 ARROW review have been actioned by Aviva, and the remainder are being progressed in accordance with timescales agreed with the FSA. The FSA has highlighted in its Business Plan 2012/2013 that its key focus areas for 2012/2013 would be:  delivering the regulatory reform programme;  continuing to influence the international and European policy agenda;  delivering financial stability by maintaining ongoing supervision of firms in a period of continued fragility in markets including business model analysis, capital/liquidity assessments, recovery and resolution planning and the Significant Influence Function regime;  delivering market confidence and credible deterrence; and  delivering on the principal FSA initiatives to improve consumer protection – early product intervention, the Retail Distribution Review (RDR) and Mortgage Market Review (MMR).
Outside of the UK, each Aviva business is regulated by its own national regulator(s). However, overseas operations are also within the remit of the FSA to the extent that they have an interest in the systems and controls by which the Group manages its overseas businesses to mitigate the risk of financial shocks arising overseas flowing through to the UK. The FSA monitors the strategy and performance of the Group’s international businesses through its programme of regular meetings and thematic reviews. The FSA aims to play a leading role in the development of both EU and international regulation. It is, in particular, in the vanguard of the movement towards risk-based insurance regulation. The FSA continues to place weight on the ‘Treating Customers Fairly’ principle.
The Financial Services Compensation Scheme (FSCS) The FSCS is intended to compensate individuals and small businesses for claims against an Authorised Firm where the Authorised Firm is unable or unlikely to be able to meet those claims (generally, when it is insolvent or has gone out of business). The FSCS funding system, for the purposes of meeting FSCS compensation costs, has been reviewed to take into account the replacement of the FSA by the PRA and the FCA in 2013. Following this review the FSCS levy is to split into eight broad classes:  the deposits class;  the life and pensions provision class;  the general insurance provision class;  the investment provision class;  the life and pensions intermediation class;  the home finance intermediation class;  the investment intermediation class; and  the general insurance intermediation class.
Distribution of profits and with-profits business For UK authorised life insurers carrying on with-profits business, such as Aviva Life and Pensions UK Ltd (‘AVLAP’), the FSA’s rules require that where a firm decides to make a distribution of surplus from the with-profits fund it must distribute at least the required percentage (as defined in the FSA Handbook) of the total amount distributed to policyholders, with the balance of the total amount to be distributed being payable to the shareholders. In addition, at least once a year the AVLAP Board must consider whether a distribution is required to be made from the Old WPSF inherited estate. Such a distribution will ordinarily be required if the level of the inherited estate of the OWPSF exceeds the Required Distribution Threshold as described in the Reattribution Scheme of Transfer effective from 1 October 2009 (‘The Scheme’) on any such annual investigation from the third such investigation after 1 October 2009. Annual investigation may also be carried out to determine if a Release to shareholders can be made from the RIEESA. Releases can only be made:  if the Reattributed Inherited Estate exceeds the Permitted
Release Threshold as defined in the Scheme;  the AVLAP Board (based on appropriate actuarial advice including that of the With-Profits Actuary) are of the opinion that the Release will not give rise to a significant risk that the New WPSF (including the RIEESA) would be unable to meet its obligations to policyholders and its capital requirements or the Old WPSF would be unable to meet its obligations to policyholders; and
UK winding up rules The general insolvency laws and regulations applicable to UK companies are modified in certain respects in relation to UK insurance companies where direct insurance claims will have priority over the claims of other unsecured creditors (with the exception of preferred creditors), including reinsurance creditors, on a winding up by the court or a creditors’ voluntary winding up of the insurance company. Furthermore, instead of making a winding-up order when an insurance company has been proved unable to pay its debts, a UK court may reduce the amount of one or more of the insurance company’s contracts on terms and subject to conditions (if any) which the court considers fit. Where an insurance company is in financial difficulties but not in
United States During 2012 we wrote life and annuity business in the United States through Aviva USA Corporation (Aviva USA), a wholly owned subsidiary formed by the merger of Aviva Life Insurance Company of America with AmerUS which it acquired in July 2006. Aviva USA is domiciled in Iowa and is the holding company for Aviva Life and Annuity Company which is licensed to conduct business in all states except New York and Washington D.C. In New York it operates a wholly owned subsidiary, Aviva Life Insurance Company of New York. Aviva plc reached agreement, in December 2012, to sell Aviva USA and, subject to regulatory approval, the sale is expected to close during 2013. The US insurance industry is regulated primarily on a state- by-state basis. Individual states have authority to pass statutes, adopt regulation or issue directives to regulate insurance activities within their jurisdiction. Consequently, life insurance companies are subject to regulation both in their domicile state as well as in each state in which they operate. State regulation can vary from state to state. All have laws and regulations covering the financial aspects of the insurance business, including standards of solvency, reserves, reinsurance and capital adequacy. In addition, most states have specific regulation governing licensing and the conduct of selling agents as well as the approval of products and associated product forms and literature.
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 model laws during the adoption process. However, the models are generally widely adopted; an example being the ‘Suitability in Annuity Transactions Model Regulation’. 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 risk management and the solvency regulatory framework . 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 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 is also required, among other things, to conduct a study of how to improve and modernise insurance regulation and to report to Congress. The new law does not currently have any immediate and significant impact on the Company and the FIO is still in the process of drafting its required report. We will continue to monitor the FIO and its activities. 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.
Risk-based capital The NAIC has developed risk-based capital standards for life insurance companies as well as a model act for state legislatures to enact. The model act requires that life insurance companies report on a formula-based, risk-based capital standard that they calculate by applying factors to various asset, premium and reserve items. The formula takes into account the risk characteristics of a company, including asset risk, insurance risk, interest rate risk and business risk. The NAIC designed the formula as an early-warning tool to identify potentially inadequately capitalised companies for the purposes of initiating regulatory action. The model act imposes broad confidentiality requirements on those engaged in the insurance business (including insurers, agents, brokers and others) and on state insurance departments as to the use and publication of risk-based capital data. Any state adopting the model act gives the state insurance commissioner explicit regulatory authority to require various actions by, or take various actions against, insurance companies whose adjusted capital does not meet minimum risk-based capital standards. The Iowa Insurance Commissioner takes into account the NAIC’s risk-based capital standards to determine adequate compliance with Iowa insurance law. Effective 31 December 2005, the NAIC implemented new requirements, referred to as C-3 Phase II, for calculating riskbased capital in connection with variable annuity products with death and living benefit guarantees. These changes did not have a material effect on our US operations, and at 31 December 2012, the Company’s total adjusted capital under the NAIC’s definition substantially exceeded Iowa standards.
Asia We operate in Asia through a network of subsidiary companies either wholly owned or established as a joint venture with a local partner. Our business is predominantly long-term and savings business, with small general insurance and health operations. There are wholly owned businesses in Singapore and Hong Kong. During 2012 Aviva also operated businesses in China, India, Malaysia, Sri Lanka, Taiwan, Korea, Indonesia and Vietnam which, depending on the nature and extent of the control exerted by Aviva, were accounted for as subsidiaries, joint ventures or associates. Aviva plc reached agreement in 2012 to sell its business in Sri Lanka, and in January 2013 also reached agreement to sell its business in Malaysia, subject to regulatory approval. The Asia area is made up of a number of widely differing and independent markets. The markets tend to be at different stages in their development but each has its own regulatory structures and Aviva complies with the local regulation in each of the countries in which it operates. Industry regulation typically focuses on financial stability, i.e. minimum capital and the basis for calculating solvency, reserves and policyholder liability. In many of the markets regulators have the power to revoke operating licences, regulate shareholder structures and the participation in and the payment of dividends. Asia markets are moving quickly to modernise insurance regulation with an increasing focus on governance and conduct of business.
Intellectual property Our primary brands (the Aviva name and Logo) are registered trademarks in the UK and are registered or pending in all other countries where Aviva has operations. 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.
Ongoing difficult conditions in the global financial markets and the economy generally may adversely affect our business and results of operations, and these conditions may continue. Our results of operations are materially affected by uncertainty in the worldwide financial markets and macro-economic conditions generally. A wide variety of factors, including concerns over slowing growth, high sovereign debt within, and to a lesser degree outside, the Eurozone, the stability and solvency of financial institutions, longer-term low interest rates in developed markets, inflationary threats as well as geopolitical issues in the Middle East and North Africa, have contributed to increased volatility in the financial markets and diminished expectations for the global economy going forward. Global fixed income markets continue to experience periods of both volatility and limited market liquidity, which have affected a broad range of asset classes and sectors. Factors relating to general economic conditions, such as consumer spending, business investment, government spending, the volatility and strength of both debt and equity markets, and inflation, all affect the profitability of our business. In a sustained economic phase of low growth and high public debt, characterised by higher unemployment, lower household income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our financial and insurance products could be adversely affected. In addition, we may experience an elevated incidence of claims or surrenders of policies. Any potential material adverse affect will also be dependent upon customer behaviour and confidence.
As a global business, we are exposed to various local political, regulatory and economic conditions, business risks and challenges which may affect the demand for our products and services, the value of our investment portfolios and the credit quality of local counterparties. We offer our products and services in Europe (including the UK), North America and the Asia Pacific region through wholly owned and majority-owned subsidiaries, joint ventures, companies in which we hold non-controlling equity stakes, agents and independent contractors. Our international operations expose us to different local political, regulatory, business and financial risks and challenges which may affect the demand for our products and services, the value of our investment portfolio, the required levels of capital and surplus, and the credit quality of local counterparties. These risks include, for example, political, social or economic instability in countries in which we operate, discriminatory regulation, credit risks of our 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 markets in which we are present 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, regulatory and political conditions.
Credit risks relating to Aviva’s business Market developments and government actions regarding the sovereign debt crisis in Europe, particularly in Greece, Ireland, Italy, Portugal and Spain, could have a material adverse effect on our results of operations, financial condition and liquidity. The continued uncertainty over the outcome of various EU and international financial support programs and the possibility that other EU member states may experience similar financial pressures could further disrupt global markets. In particular, this crisis has disrupted and could further disrupt equity and fixed income markets and result in volatile bond yields on the sovereign debt of EU members. The issues arising out of the current sovereign debt crisis may transcend Europe, cause investors to lose confidence in the safety and soundness of European financial institutions and the stability of European member economies, and likewise affect UK and USbased financial institutions, the stability of the global financial markets and any economic recovery. The Group holds investments in UK and non-UK securities. See ‘Performance Review – Analysis of Investments’ for more information. If an EU member state were to default on its obligations or seek to leave the Eurozone, or if the Eurozone were broken up entirely, the impact on the financial and currency markets would be significant and could impact materially all financial institutions, including the Group. Such events could adversely affect our business and results of operations, financial condition and liquidity.
Changes in short or long term inflation may cause policyholders to surrender their contracts, increase the size of our claims payments and expenses and reduce the value of our investments, which could adversely affect our results of operations and financial condition. We are subject to inflation risk through our holdings of fixed interest and other investments and as a result of the potential for the cost of claims and expenses to rise faster than anticipated in our pricing or reserving. Changes in inflation could also affect the value perceived to be offered by our policies and so adversely affect persistency levels.
Falls in equity or property prices could have an adverse impact on our investment portfolio and impact our results of operations and shareholders’ equity. We are subject to equity and property price risk due to holdings of equities and investment properties in a variety of locations worldwide. 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 surplus/deficit will reduce/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. The unit-linked and fund management business depends on fees related primarily to the value of assets under management and would therefore be reduced by declines in equity and property markets. 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 switching to lower risk funds generating lower income, or as a result of our fund management companies failing to attract funds from new investors. Similarly, bonuses credited to participating policyholders will reduce, following declines in equity and property markets and this will generally also lead to reductions in transfers to shareholders. Downturns in equity markets may also have a material adverse effect on our regulatory capital surplus as measured under the EU Insurance Groups Directive. We provide certain guarantees within some of our products that protect policyholders against significant downturns in the equity markets. 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. For a discussion of guarantees we have given for our insurance and investment products, see ‘Financial statements IFRS – Note 41 – Financial guarantees and options’.
Fluctuations in currency exchange rates may adversely affect our results of operations and financial condition. We operate internationally and are exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. For the year ended 31 December 2012, over half of our premium income arises in currencies other than sterling, and our net assets are denominated in a variety of currencies, of which the largest are the euro, sterling and US dollar. In managing our foreign currency exposures, we do not hedge revenues as these are substantially retained locally to support the growth of the business and meet local regulatory and market requirements. Nevertheless, the effect of exchange rate fluctuations on local operating results could lead to significant fluctuations in our consolidated financial statements upon translation of the results into sterling. Although we take certain actions to address this risk, foreign currency exchange rate fluctuation could materially adversely affect our reported results due to unhedged positions or the failure of hedges to effectively offset the impact of the foreign currency exchange rate fluctuation. Any adverse foreign currency exchange fluctuation may also have a material adverse effect on our regulatory capital surplus based on the EU Insurance Groups Directive. For a discussion of the impact of changes in foreign exchange rates on our results of operations, see ‘Financial statements IFRS – Note 56 – Risk management’.
Liquidity risks relating to Aviva’s business Adverse capital and credit market conditions may affect our ability to meet liquidity needs and to access capital which could adversely affect our results of operations or financial condition. At a Group level, we need our subsidiaries to remit dividends to the Group to meet operating expenses, taxes, interest on our debt, dividends on our capital stock and repay maturing debt. Dividends from subsidiaries can become constrained by adverse business experience, regulatory actions etc which could have a material adverse effect on our business. At an operational level we also need liquidity to meet our liabilities. Without sufficient liquidity, we could be forced to curtail our operations and our business would suffer. The principal sources of our liquidity are insurance premiums, annuity considerations, deposit funds and cash flow from our investment portfolio and assets, consisting mainly of cash or assets that are readily convertible into cash. Sources of liquidity in normal markets also include a variety of short and long-term instruments, including repurchase agreements, commercial paper, medium and long-term debt, junior subordinated debt, securities, capital securities and stockholders’ equity. We hold certain investments that may lack liquidity such as privately placed fixed-maturity securities, and unlisted equities, and other investments where the inputs used for their valuation are not directly observable in the market. These asset classes represented approximately 5.3.% of the total assets held at fair value as of 31 December 2012 (6.3% excluding assets held for sale). As has been the case across the industry, even some of our higher-quality assets have been more illiquid as a result of the recent challenging market conditions. The reported value of our relatively illiquid types of investments, our investments in the asset classes described in the paragraph above and, at times, our higher-quality, generally liquid asset classes, do not necessarily reflect the lowest current market price for each asset. If we were forced to sell certain of our assets in the current market, there can be no certainty that we would be able to sell them for the prices at which we have recorded them and we may be forced to sell them at significantly lower prices. We may need to seek additional financing in the event internal resources are not sufficient to meet our needs. The availability of additional financing would depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry and the market’s perception of our financial condition. Disruptions and uncertainty or volatility in the capital and credit markets may exert downward pressure on availability of liquidity and credit capacity for certain issuers and may limit our access to capital required to operate and grow our business. Such market conditions may limit our ability to replace, in a timely manner, maturing debt, satisfy statutory capital requirements and generate fee income and market-related revenue to meet liquidity needs. As such, we may be forced to delay raising capital, issue shorterterm securities than we prefer, or bear an unattractive cost of capital which could decrease our profitability and reduce our financial flexibility. Our results of operations, financial condition and cash flows could be materially adversely affected.
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 are exposed to the risk of catastrophic mortality, such as a pandemic or other event that causes a large number of deaths. 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. 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. Catastrophic events could also harm the financial condition of our reinsurers and thereby increase the probability of default on reinsurance recoveries and could also reduce our ability to write new business. 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 our business if our business continuity plans fail to cope with the scale or nature of the catastrophe. Such events could adversely affect our business, results or operations, corporate reputation and financial condition for a substantial period of time. Furthermore, market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase. Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable terms, which could adversely affect our ability to write future business.
Operational risks relating to Aviva’s business All of our businesses are subject to operational risks, including the risk of direct or indirect loss resulting from inadequate or failed internal and external processes, systems and human error or from external events. Our business is dependent on processing a large number of complex transactions across numerous and diverse products. Furthermore, the long-term nature of the majority of our business means that accurate records have to be maintained for significant periods. We also outsource several operations, including certain servicing and IT functions and are therefore partially reliant upon the operational processing performance of our outsourcing partners. Our systems and processes on which we are dependent to serve our customers are designed to appropriately identify and address the operational risks associated with our activities. However, they may nonetheless fail due to IT malfunctions, human error, intentional disruption or hacking of IT systems by third parties, business interruptions, non-performance by third parties or other external events. This could disrupt business operations resulting in material reputational damage and the loss of customers, and have a consequent material adverse effect on our results of operations and financial condition. Although we
Moves to simplify the operating structure and activities of the Group increases the reliance placed on core businesses and is subject to execution risk. As part of the Group’s move to a more simplified structure, a number of business disposals and operational restructures have taken place and may continue to occur in the future. This includes the removal of the regional organisational structure and the potential sale of a number of non-core businesses. These changes are expected to reduce the operational costs of the Group and allow resources to be re-deployed in more capital efficient businesses. There is no assurance that these expected benefits will be realised. These changes may reduce operating profits in the short-term and will lead to changes in the geographical and product risk profile of the Group. The execution risk including the risks relating to securing the regulatory approvals necessary to complete our planned business disposals, could result in the failure to achieve cost savings, the loss of key staff, and disruption to core business activities and governance structures which could have a material adverse effect on our business, results of operations and financial condition.
We are dependent on the strength of our brand, the brands of our partners and our reputation with customers and agents in the sale of our products and services. Our results are, to a certain extent, dependent on the strength of our brand and reputation. 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 true or not, could impact our brand or reputation. Our brand and 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. Such a change to our brand strength could adversely affect our results of operations and financial condition.
We may not be able to protect our intellectual property and may be subject to infringement claims by a third party. Our primary brand (Aviva) is a registered trade mark in the UK and elsewhere. We own other registered or pending trade marks in the UK, including Community trade marks having effect in the entire EU. We rely on a combination of contractual rights, copyright and trademark laws to establish and protect our intellectual property. Although we use a broad range of measures to protect our intellectual property rights, third parties may infringe or misappropriate our intellectual property. The loss of intellectual property protection or the inability to secure or enforce the protection of our intellectual property assets could have a material adverse effect on our business and our ability to compete. Third parties may have, or may eventually be issued, patents or other protections that could be infringed by our products, methods, processes or services or could limit our ability to offer certain product features. In recent years, there has been increasing intellectual property litigation in the financial services industry challenging, among other things, product designs and business processes. If a third party were to successfully assert an intellectual property infringement claim against us, or if we were otherwise precluded from offering certain features or designs, or utilising certain processes, it could have a material effect on our business, results of operation and financial condition.
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 insurance subsidiaries worldwide are subject to detailed and comprehensive government regulation in each of the jurisdictions in which they conduct business. Regulatory agencies have broad administrative power over many aspects of the insurance business, which may include premium rates, marketing and selling practices, advertising, licensing agents, policy forms, capital adequacy and permitted investments. Government regulators are concerned primarily with the protection of policyholders rather than our shareholders or creditors. In the UK, our business is subject to regulation by the FSA, which has broad powers under the FSMA, including the authority to grant, vary the terms of, or cancel a regulated firm’s authorisation, to investigate marketing and sales practices and to require the maintenance of adequate financial resources. The FSA has the power to take a range of investigative, disciplinary or enforcement actions, including public censure, restitution, fines or sanctions and to award compensation. The FSA is being replaced by twin regulators, the Prudential Regulation Authority and the Financial Conduct Authority. This change will take effect on 1 April 2013. The FSA may make enquiries of the companies which it regulates regarding compliance with regulations governing the operation of business and, similar to the other UK regulated financial services companies, we face the risk that the FSA could find that we have failed to comply with applicable regulations or have not undertaken corrective action as required. Issues and disputes may arise from time to time from the way in which the insurance industry or fund management industry has sold or administered an insurance policy or other product or in the way in which they have treated policyholders or customers, either individually or collectively. Where larger groups or matters of public policy are concerned, the FSA may intervene directly. There have been several industry-wide issues in recent years in which the FSA has intervened directly, including the sale of personal pensions, the sale of mortgage-related endowments and investments in split capital investment trusts and payment protection insurance. Outside of the UK, our business is regulated by local regulators that often have similar powers to the FSA and could therefore have a similar negative impact on perceptions of our business or have a material adverse effect on our business. Furthermore, various jurisdictions in which we operate, including the UK, have created investor compensation schemes that require mandatory contributions from market participants in some instances in the event of a failure of another market participant. As a major participant in the majority of our chosen markets, circumstances could arise where we, along with other companies, may be required to make such contributions. A determination that we have failed to comply with applicable regulation could have a negative impact on our results of operations or on our relations with current and potential customers. Regulatory action against a member of the Group could result in adverse publicity for, or negative perceptions regarding, the Group, or could have a material adverse effect on our business, our results of operations and financial condition and divert management’s attention from the day-to-day management of the business. We will not always be able to predict 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 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, dividends payable by subsidiaries and, consequently, results and financing requirements. 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. The Solvency II Directive (‘Solvency II’), an insurance industry regulation agreed by the European Parliament in 2009, will require European domiciled insurers to move to more risk-based capital requirements. The implementation date for Solvency II has been extended to January 2014 and may be extended further. There continue to be material uncertainties around the impact of the more detailed technical requirements of Solvency II and there is a risk that this could lead to a significant increase in the capital required to support our business.
We are involved in various legal proceedings, regulatory investigations and examinations and may be involved in more in the future. We have been named as defendants in lawsuits, including class actions and individual lawsuits. We have been subject to regulatory investigations or examinations in the various jurisdictions where we operate. These actions arise in various contexts, including in connection with our activities as an insurer, securities issuer, employer, investment adviser, investor and taxpayer. Certain of these lawsuits and investigations seek significant or unspecified amounts of damages, including punitive damages, and certain of the regulatory authorities involved in these proceedings have substantial powers over the conduct and operations of our business. Due to the nature of certain of these lawsuits and investigations, we cannot make an estimate of loss or predict with any certainty the potential impact of these lawsuits or investigations. In the course of conducting insurance business, we receive general insurance liability claims, and become involved in actual or threatened related litigation arising there from, including claims in respect of pollution and other environmental hazards. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents that they cover and the uncertainties associated with establishing liability and the availability of reinsurance, the ultimate cost cannot be determined with certainty. Additionally, it is possible that a regulator in one of our major markets may conduct a review of products previously sold, either as part of an industry-wide review or specific to us. The result of this review may be to compensate customers for losses they have incurred as a result of the products they were sold. All of the above could adversely impact our results of operations or financial condition.
From time to time, changes in the interpretation of existing tax laws, amendments to existing tax rates or the introduction of new tax legislation may adversely impact our business. We operate in numerous tax jurisdictions around the world and face risks associated with changes in tax law, interpretation of tax law, changes in tax rates and the risk of failure to comply with procedures required by tax authorities. Failure to manage tax risks could lead to an additional tax charge or a financial penalty. If, as a result of a particular tax risk materialising, the tax costs associated with certain transactions are greater than anticipated, it could affect the profitability of those transactions. There are also specific rules governing the taxation of policyholders. We are unable to predict accurately the impact of future changes in tax law on the taxation of life insurance and pension policies in the hands of policyholders. Amendments to existing legislation, particularly if there is the withdrawal of any
Shareholder information continued tax relief, or an increase in tax rates, or the introduction of new rules, may affect the future long-term business and the decisions of policyholders. The impact of such changes upon us might depend on the mix of business in-force at the time of such change. The design of life insurance products by our life insurance companies takes into account a number of factors, including risks and taxation. The design of long-term insurance products is based on the tax legislation in force at that time. Changes in tax legislation or in the interpretation of tax legislation 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 US dollar equivalent of cash dividends paid in pound sterling on our ordinary shares represented by our ADSs.
Agreement; or  take any action based upon the advice of, or information from, legal counsel, accountants, any person presenting ordinary shares for deposit, any person in whose name the ADSs are registered on the books of the depository, any person or entity having a beneficial interest deriving from the ownership of ADRs, or any other person believed by us or the depositary in good faith to be competent to give such advice or information.
The ADR and ordinary share price of Aviva has been, and may continue to be volatile. The share price of our ADRs and ordinary shares has been volatile in the past and the share price and trading volume of our ADRs may continue to be subject to significant fluctuations due, in part, to changes in our actual or forecast operating results and the inability to fulfil the profit expectations of securities analysts, as well as to the high volatility in the securities markets generally and more particularly in shares of financial institutions. Other factors, besides our financial results, that may impact our share price include, but are not limited to:  market expectations of the performance and capital adequacy of financial institutions in general;  investor perceptions of the success and impact of our strategies;  a downgrade or review of our credit ratings;  potential litigation or regulatory action involving Aviva or sectors we have exposure to through our insurance and fund management activities;  the operations, accounting practices or regulatory investigations, and share price performance of other companies in the insurance and fund management markets in which the Group operates; and
Aviva plc is an English company and it may be difficult to enforce judgments against us or our directors and executive officers. Aviva plc is incorporated under the laws of England and Wales and our business is based in the UK. In addition, certain of our directors and officers reside outside the US, and a substantial portion of our assets and the assets of such persons are located in jurisdictions outside the US. As such, it may be difficult or impossible to effect service of process within the US upon us or those persons or to recover against us or them on judgments of US courts, including judgments predicated upon civil liability provisions of the US federal securities laws.
Notes to the consolidated financial statements 1 Exchange rates 168 2 Presentation changes 168 4 Segmental information 171 5 Details of income 179 6 Details of expenses 180 7 Finance costs 181 8 Long-term business economic volatility 182 9 Longer-term investment return and economic assumption changes for non-long-term business 183 10 Employee information 184 12 Auditors’ remuneration 186 14 (Loss)/earnings per share 189 15 Dividends and appropriations 190 17 Acquired value of in-force business
We have audited the Group and Parent Company financial statements of Aviva plc for the year ended 31 December 2012 which comprise the Accounting policies, the Consolidated income statement, the Consolidated statement of comprehensive income, the Reconciliation of Group operating profit to (loss)/profit for the year, the Consolidated and Parent Company statements of changes in equity, the Consolidated and Parent Company statements of financial position, the Consolidated and Parent Company statements of cash flows, and the related notes 1 to 59 and A to K. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union, and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
Separate opinion in relation to IFRSs as issued by the IASB 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.
Opinion on other matters prescribed by the Companies Act 2006 In our opinion:  the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006;  the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements.
David Law (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 1 The maintenance and integrity of the Aviva plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
(A) Basis of presentation The consolidated financial statements and those of the Company have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to those reporting under IFRS. In addition to fulfilling their legal obligation to comply with IFRS as adopted by the EU, the Group and Company have also complied with IFRS as issued by the IASB and applicable at 31 December 2012. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit and loss. In accordance with IFRS 4, Insurance Contracts, the Group has applied existing accounting practices for insurance and participating investment contracts, modified as appropriate to comply with the IFRS framework and applicable standards. Further details are given in accounting policy F . Items included in the financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (the functional currency). The consolidated financial statements are stated in sterling, which is the Company’s functional and presentation currency. Unless otherwise noted, the amounts shown in these financial statements are in millions of pounds sterling (£m). The separate financial statements of the Company are on pages 267 to 272. See note 2 for presentation changes to the consolidated financial statements.
New standards, interpretations and amendments to published standards that have been adopted by the Group The Group has adopted the following new amendments to standards which became effective for financial years beginning on or after 1 January 2012. Neither of these amendments has a material impact on these financial statements. (i) Amendment to IFRS 7, Financial Instruments – Disclosures, relating to the transfer of financial assets. (ii) Amendment to IAS 12, Income Taxes, relating to deferred tax.
Standards, interpretations and amendments to published standards that are not yet effective and have not been adopted early by the Group The following new standards, amendments to existing standards and interpretations have been issued, are effective for accounting periods beginning on or after the following dates and have not been adopted by the Group: Effective for annual periods beginning on or after 1 July 2012 Amendment to IAS 1, Financial Statement Presentation The amendment requires entities to group items presented in other comprehensive income according to whether they will subsequently be reclassified to profit and loss. The adoption of the amendment will change the presentation of the consolidated statement of comprehensive income in the financial statements. The amendment has been endorsed by the EU.
Effective for annual periods beginning on or after 1 January 2013 (i) Amendment to IAS 19, Employee Benefits The amendment revises requirements for pensions and other post-retirement benefits, termination benefits and other employee benefits. The key changes include the revision of the calculation of the finance cost, enhanced disclosures surrounding the characteristics and risk profile of defined benefit plans, and a requirement to include all actuarial gains and losses immediately in other comprehensive income which is already in line with the Group’s current policy. The amended standard will impact finance costs as the concept of expected return is removed and replaced with interest on scheme assets, which is calculated using the same interest rate that is applied for the purposes of discounting the defined benefit obligation. The difference between interest income on scheme assets and the actual return is included in other comprehensive income. If this amendment had been adopted for the year ended 31 December 2012, the net impact would have been an increase in profit before tax and a corresponding decrease in other comprehensive income of £145 million. This is the difference between the current expected return on scheme assets and the interest income on scheme assets calculated using the discount rate. The amendment has been endorsed by the EU.
(ii) Amendment to IFRS 7, Financial Instruments – Disclosures The amendment includes enhanced disclosures to enable users of the financial statements to evaluate the effect or potential effect of netting arrangements in the statement of financial position. The amendments will not have a significant impact for the Group. The amendment has been endorsed by the EU.
(iii) IFRS 10, Consolidated Financial Statements IFRS 10 replaces the portion of IAS 27 Consolidated and
Separate Financial Statements that addresses the accounting for consolidated financial statements. IFRS 10 establishes a single control model that applies to all entities including special purpose entities, based on the concept of power, exposure or rights to variable returns and their linkage. This will replace the current approach which emphasises the power to govern the financial and operating policies, and exposure to risks and rewards, depending on the nature of the entity. IFRS 10 defines and prescribes how to apply the principle of control in determining which entities are required to be consolidated in the consolidated financial statements. The standard has been endorsed by the EU.
(v) IFRS 12, Disclosure of Interests in Other Entities IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. The standard is expected to have a significant impact on the level of disclosure in respect of these interests. The standard has been endorsed by the EU.
(vi) IAS 27, Separate Financial Statements (2011) IAS 27 has been revised to remove the requirements for consolidated financial statements which are superseded by the issue of IFRS 10. The standard has been endorsed by the EU.
. (ix) Improvements to IFRSs 2009-2011 Improvements to IFRSs 2009-2011 details amendments to five IFRSs, including IAS 1, Presentation of Financial Statements, IAS 32, Financial Instruments – Presentation, and IAS 34, Interim Financial Reporting. The amendments clarify existing guidance and do not give rise to a change in existing accounting practice. There are no implications for the Group’s consolidated financial statements. The amendments have yet to be endorsed by the EU.
Effective for annual periods beginning on or after 1 January 2014 (i) Amendment to IAS 32, Financial Instruments –
Presentation The amendment to IAS 32 clarifies the requirements for offsetting financial assets and financial liabilities on the statement of financial position. The impact of the adoption of the amendment has yet to be fully assessed but is not expected to have significant implications for the Group financial statements. The amendment has been endorsed by the EU.
(ii) Amendments to IFRS 10, IFRS 12 and IAS 27 (2011) The amendments provide an exemption from consolidation of subsidiaries under IFRS 10 'Consolidated Financial Statements' for entities which meet the definition of an 'investment entity', such as certain investment funds. Instead, such entities would measure their investment in particular subsidiaries at fair value through profit or loss in accordance with IFRS 9 'Financial Instruments' or IAS 39 'Financial Instruments: Recognition and Measurement'. There are no implications for the Group’s consolidated financial statements. The amendments have yet to be endorsed by the EU.
Recognition and Measurement. Under IFRS 9, all recognised financial assets that are currently within the scope of IAS 39 will be measured at either amortised cost or fair value. The basis of classification will depend on the business model and the contractual cash flow characteristics of the financial asset. All equity instruments will be measured at fair value. A debt instrument is measured at amortised cost only if it is held to collect the contractual cash flows and the cash flows represent principal and interest, otherwise it is measured at fair value through profit and loss (FVTPL). For financial liabilities designated as at FVTPL, the change in the fair value attributable to changes in the liability’s credit risk is recognised in other comprehensive income unless it gives rise to an accounting mismatch in profit or loss.
We have not yet completed our assessment of the impact of the adoption of IFRS 9 on the Group which, to a large extent, will need to take into account the finalisation of the standard and the interaction of the requirements of IFRS 9 with the IASB’s ongoing insurance contracts accounting project. The standard has not yet been endorsed by the EU.
(B) Operating profit The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management, short-term realised and unrealised investment gains and losses are treated as non-operating items. The Group focuses instead on an operating profit measure (also referred to as adjusted operating profit) that incorporates an expected return on investments supporting its long-term and nonlong -term businesses. Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. Variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit. For non-long-term business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer-term return and shortterm fluctuations from that level. Further details of this analysis and the assumptions used are given in notes 8 and 9. Operating profit also excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangibles; the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates; integration and restructuring costs; and exceptional items. Exceptional items are those items that, in the Directors’ view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group’s financial performance. Details of these items are provided in the relevant notes.
Associates and joint ventures Associates are entities over which the Group has significant influence, but which it does not control. Generally, it is presumed that the Group has significant influence if it has between 20% and 50% of voting rights. Joint ventures are entities whereby the Group and other parties undertake an economic activity which is subject to joint control arising from a contractual agreement. In a number of these, the Group’s share of the underlying assets and liabilities may be greater than 50% but the terms of the relevant agreements make it clear that control is not exercised. Such jointly controlled entities are referred to as joint ventures in these financial statements. Gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s
Accounting policies continued interest in the associates and joint ventures. Losses are also eliminated, unless the transaction provides evidence of an impairment of the asset transferred between entities. Investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group’s share of that entity’s post-acquisition changes to shareholders’ funds, is included as an asset in the consolidated statement of financial position. As explained in accounting policy N, the cost includes goodwill identified on acquisition. The Group’s share of their post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. Equity accounting is discontinued when the Group no longer has significant influence or joint control over the investment. If the Group’s share of losses in an associate or joint venture equals or exceeds its interest in the undertaking, the Group does not recognise further losses unless it has incurred obligations or made payments on behalf of the entity.
(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 accounting policy A above, insurance contracts and participating investment contracts in general continue to be measured and accounted for under existing accounting practices at the later of the date of transition to IFRS or the date of the acquisition of the entity, in accordance with IFRS 4. Accounting for insurance contracts in UK companies is determined in accordance with the Statement of Recommended Practice issued by the Association of British Insurers, the most recent version of which was issued in December 2005 and amended in December 2006. In certain businesses, the accounting policies or accounting estimates have been changed, as permitted by IFRS 4 and IAS 8 respectively, to remeasure designated insurance liabilities to reflect current market interest rates and changes to regulatory capital requirements. When accounting policies or accounting estimates have been changed, and adjustments to the measurement basis have occurred, the financial statements of that year will have disclosed the impacts accordingly. One such example is our adoption of Financial Reporting Standard 27, Life Assurance, (FRS 27) which was issued by the UK’s Accounting Standards Board (ASB) in December 2004. Aviva, along with other major insurance companies and the ABI, signed a Memorandum of Understanding with the ASB, under which we voluntarily agreed to adopt in full the standard from 2005 in the Group’s IFRS financial statements. FRS 27 adds to the requirements of IFRS but does not vary them in any way. The additional requirements of FRS 27 are detailed in accounting policy K below and in note 55.
(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 accounting policy S). Dividends on equity securities are recorded as revenue on the exdividend 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.
Long-term business provisions Under current IFRS requirements, insurance and participating investment contract liabilities are measured using accounting policies consistent with those adopted previously under existing accounting practices, with the exception of liabilities remeasured to reflect current market interest rates to be consistent with the value of the backing assets, and those relating to UK with-profit and non-profit contracts. For liabilities relating to UK with-profit contracts, the Group has adopted FRS 27, Life Assurance, as described in policy F above, in addition to the requirements of IFRS. In the United States, shadow adjustments are made to the liabilities or related deferred acquisition costs and are recognised directly in other comprehensive income. This means that the measurement of these items is adjusted for unrealised gains or losses on the backing assets such as AFS financial investments (see accounting policy S), that are recognised directly in other comprehensive income, in the same way as if those gains or losses had been realised. The long-term business provisions are calculated separately for each life operation, based either on local regulatory requirements or existing local GAAP at the later of the date of transition to IFRS or the date of the acquisition of the entity, and actuarial principles consistent with those applied in the UK. Each calculation represents a determination within a range of possible outcomes, where the assumptions used in the calculations depend on the circumstances prevailing in each life operation. The principal assumptions are disclosed in note 39(b). For liabilities of the UK with-profit funds, FRS 27 requires liabilities to be calculated as the realistic basis liabilities as set out by the UK’s Financial Services Authority (FSA), adjusted to remove the shareholders’ share of future bonuses. For UK non-profit insurance contracts, the Group applies the realistic regulatory basis as set out in the FSA Policy Statement 06/14, Prudential Changes for Insurers, where applicable.
Embedded derivatives Embedded derivatives that meet the definition of an insurance contract or correspond to options to surrender insurance contracts for a set amount (or based on a fixed amount and an interest rate) are not separately measured. All other embedded derivatives are separated and measured at fair value if they are not considered as closely related to the host insurance contract or do not meet the definition of an insurance contract. Fair value reflects own credit risk to the extent the embedded derivative is not fully collateralised.
Liability adequacy At each reporting date, an assessment is made of whether the recognised long-term business provisions are adequate, using current estimates of future cash flows. If that assessment shows that the carrying amount of the liabilities (less related assets) is insufficient in light of the estimated future cash flows, the
General insurance and health provisions 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.
Impairment testing For impairment testing, goodwill and intangibles with indefinite useful lives have been allocated to cash-generating units. The carrying amount of goodwill and intangible assets with indefinite useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. Goodwill and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support its carrying value. Further details on goodwill allocation and impairment testing are given in note 16.
(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 until construction is completed or fair value becomes reliably measurable. 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:  Properties under construction No depreciation  Owner-occupied properties, and related mechanical and electrical equipment 25 years
The assets’ residual values, useful lives and method of depreciation are reviewed regularly, and at least at each financial year end, and adjusted if appropriate. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount. Borrowing costs directly attributable to the acquisition and construction of property and equipment are capitalised. All repairs and maintenance costs are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the most recently assessed standard of performance of the existing asset will flow to the Group and the renovation replaces an identifiable part of the asset. Major renovations are depreciated over the remaining useful life of the related asset.
(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 ‘passthrough ’ arrangement.
(S) Financial investments The Group classifies its investments as either financial assets at fair value through profit or loss (FV) or financial assets available for sale (AFS). The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. The FV category has two subcategories – those that meet the definition as being held for trading and those the Group chooses to designate as FV (referred to in this accounting policy as ‘other than trading’). In general, the other than trading category is used as, in most cases, the Group’s investment or risk management strategy is to manage its financial investments on a fair value basis. Debt securities and equity securities, which the Group buys with the intention to resell in the short term, are classified as trading, as are non-hedge derivatives (see accounting policy T below). The AFS category is used where the relevant long-term business liability (including shareholders’ funds) is passively managed, as well as in certain fund management and non-insurance operations. Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values. Debt securities are initially recorded at their fair value, which is taken to be amortised cost, with amortisation credited or charged to the income statement. Investments classified as trading, other than trading and AFS, are subsequently carried at fair value. Changes in the fair value of trading and other than trading investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS are recognised in other comprehensive income and recorded in a separate investment valuation reserve within equity. Investments carried at fair value are measured using a fair value hierarchy, described in note 22, with values based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. When securities classified as AFS are sold or impaired, the accumulated fair value adjustments are transferred out of the investment valuation reserve to the income statement with a corresponding movement through other comprehensive income.
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, or been in an unrealised loss position for a continuous period of more than 12 months at the end of the reporting period. 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 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. 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.
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
Accounting policies continued borrowers. The majority of these loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method. Loans with indefinite future lives are carried at unpaid principal balances or cost. For certain mortgage loans, the Group has taken advantage of the fair value option under IAS 39 to present the mortgages, associated borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for these three items. The fair values of mortgages classified as FV are estimated using discounted cash flow forecasts, based on a risk-adjusted discount rate which reflects the risks associated with these products, calibrated using the margins available on new lending or with reference to the rates offered by competitors. They are revalued at each period end, with movements in their fair values being taken to the income statement. At each reporting date, we review loans carried at amortised cost for objective evidence that they are impaired and uncollectable, either at the level of an individual security or collectively within a group of loans with similar credit risk characteristics. To the extent that a loan is uncollectable, it is written down as impaired to its recoverable amount, measured as the present value of expected future cash flows discounted at the original effective interest rate of the loan, taking into account the fair value of the underlying collateral. Subsequent recoveries in excess of the loan’s written-down carrying value are credited to the income statement.
(Y) Leases Leases, where a significant portion of the risks and rewards of ownership is retained by the lessor, are classified as operating leases. Where the Group is the lessee, payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the term of the relevant leases. Where the Group is the lessor, lease income from operating leases is recognised in the income statement on a straight-line basis over the lease term. When assets are subject to finance leases, the present value of the lease payments, together with any unguaranteed residual value, is recognised as a receivable. The Group has not entered into any material finance lease arrangements either as lessor or lessee.
Pension obligations The Group operates a large number of pension schemes, 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). In addition, the difference between the expected return on scheme assets, less investment expenses, and the interest cost of unwinding the discount on the scheme liabilities (to reflect the benefits being one period closer to being paid out) is credited to investment income. All actuarial gains and losses, being the difference between the actual and expected returns on scheme assets, changes in assumptions underlying the liability calculations and experience gains or losses on the assumptions made at the beginning of the period, are recognised immediately in other comprehensive income.
Equity compensation plans The Group offers share award and option plans over the Company’s ordinary shares for certain employees, including a Save As You Earn plan (SAYE plan), details of which are given in the Directors’ Remuneration Report and in note 30. The Group accounts for options and awards under equity compensation plans, which were granted after 7 November 2002, until such time as they are fully vested, using the fair value based method of accounting (the ‘fair value method’). Under this method, the cost of providing equity compensation plans is based on the fair value of the share awards or option plans at date of grant, which is recognised in the income statement over the expected vesting period of the related employees and credited to the equity compensation reserve, part of shareholders’ funds. In certain jurisdictions, awards must be settled in cash instead of shares, and the credit is taken to liabilities rather than reserves. The fair value of these cash-settled awards is recalculated each year, with the income statement charge and liability being adjusted accordingly. As described in accounting policy AD below, shares purchased by employee share trusts to fund these awards are shown as a deduction from shareholders’ funds at their original cost. When the options are exercised and new shares are issued, the proceeds received, net of any transaction costs, are credited to share capital (par value) and the balance to share premium. Where the shares are already held by employee trusts, the net proceeds are credited against the cost of these shares, with the difference between cost and proceeds being taken to retained earnings. In both cases, the relevant amount in the equity compensation reserve is then credited to retained earnings.
Dividends Interim dividends on ordinary shares are recognised in equity in the period in which they are paid. Final dividends on these shares are recognised when they have been approved by shareholders. Dividends on preference shares are recognised in the period in which they are declared and appropriately approved.
(AG) Operations held for sale Assets and liabilities held for disposal as part of operations which are held for sale are shown separately in the consolidated statement of financial position. Operations held for sale are recorded at the lower of their carrying amount and their fair value less the estimated selling costs.
Consolidated income statement For the year ended 31 December 2012 £m 2011 £m
Premiums written net of reinsurance 21,173 3,589 24,707 5,663 Net change in provision for unearned premiums (16) — (236) (56)
Fee and commission income H & I 1,273 23 1,465 111
(Loss)/earnings per share AF & 14 Basic (pence per share) (113.1)p 5.8p Diluted (pence per share) (113.1)p 5.7p
Consolidated statement of comprehensive income For the year ended 31 December 2012
Fair value gains/(losses) 27 (5) Fair value gains transferred to profit on disposals 1 1 Impairment losses on assets previously revalued through other comprehensive income now taken to the income statement — 2
Attributable to: Equity shareholders of Aviva plc (3,942) 923 Non-controlling interests 132 (167)
1 Discontinued operations in the current period represents the results of the US life and related internal asset management businesses (US Life), and in the prior period represents the results of US Life and Delta Lloyd to 6 May 2011.
Reconciliation of Group operating profit to (loss)/profit for the year For the year ended 31 December 2012 £m 2011 £m
Operating profit before tax attributable to shareholders’ profits Long-term business 1,831 200 2,031 1,926 382 2,308
Operating profit before tax attributable to shareholders’ profits (excluding Delta Lloyd as an associate) 1,776 239 2,015 1,932 414 2,346
Operating profit before tax attributable to shareholders’ profits 1,888 239 2,127 2,089 414 2,503
Share of Delta Lloyd’s non-operating items (before tax) as an associate (523) — (523) 10 — 10
Non-operating items before tax (1,509) (2,928) (4,437) (1,243) (871) (2,114) Share of Delta Lloyd’s tax expense, as an associate 107 — 107 (34) — (34)
(Loss)/profit for the year (202) (2,848) (3,050) 417 (357) 60 1 Discontinued operations in the current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd to the 6 May 2011.
Reconciliation of Group operating profit to (loss)/profit for the year continued Operating profit can be further analysed into the following segments (details of segments can be found in note 4): Year ended 31 December 2012
Dividends and appropriations — — — — — — — — — — (847) (847) — — (847)
Non-controlling interests share of dividends declared in the year — — — — — — — — — — — — — (102) (102)
Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — — 91 — 96 — — — 187 — — 187
Shares acquired by employee trusts — — — — (33) — — — — — — (33) — — (33)
Shares distributed by employee trusts — — — — 44 — — — — — (36) 8 — — 8
Reserves credit for equity compensation plans — — — — — — — — — 42 — 42 — — 42
Owner-occupied properties fair value gains transferred to retained earnings on disposals — — — — — — (6) — — — 6 — — — —
Effect of deconsolidation of Delta Lloyd — — — — — (485) (2) (115) — — 2 (600) — (1,770) (2,370)
Reserves credit for equity compensation plans — — — — — — — — — 48 — 48 — — 48
Shares issued under equity compensation plans — — — — — — — — — (61) 61 — — — —
Deferred tax assets AB 188 238 Current tax assets 67 140
Gross insurance liabilities K & 39 113,091 147,379 Gross liabilities for investment contracts L & 40 110,494 113,366 Unallocated divisible surplus K & 44 6,931 650 Net asset value attributable to unitholders D 11,146 10,352
Deferred tax liabilities AB 547 1,171 Current tax liabilities 112 232
Liabilities of operations classified as held for sale AG & 3c 41,411 363
Total equity and liabilities 315,689 312,376 1 Following a review of the classification of contracts issued by the Group’s Italian long-term business, certain portfolios have been reclassified from participating insurance to participating investment contracts for all years presented. There is no impact on the result for any year presented as a result of this reclassification.
Net cash from/(used in) operating activities – continuing operations 2,248 (314) Net cash from/(used in) operating activities – discontinued operations 46 (28)
Net cash (used in)/from investing activities – continuing operations (5) 607 Net cash (used in) investing activities – discontinued operations (10) (529)
Net cash (used in) financing activities – continuing operations (1,092) (1,215) Net cash (used in) financing activities – discontinued operations (27) (558)
Total foreign currency translations from continuing operations amounted to a gain of £128 million (2011: £35 million loss) in the income statement. These result from the settlement of transactions and translations of assets and liabilities denominated in foreign currencies.
2 – Presentation changes (a) Discontinued operations As described in note 3c, the Group’s US life and annuity business and associated investment management operations (together ‘US Life’), have been classified as held for sale. As the Group will exit from a major geographical area of operations, previously presented as ‘United States’ in the segmental reporting note, the results of US Life for the year, as well as those for preceding years, have been classified as discontinued operations. The results presented as discontinued operations for 2011 and preceding years also include the results of Delta Lloyd N.V. as a subsidiary, which was deconsolidated during 2011.
3 – Subsidiaries This note provides details of the acquisitions and disposals of subsidiaries that the Group has made during the year, together with details of businesses held for sale at the year end. The principal Group subsidiaries are listed in the performance review section.
(b) Disposal and remeasurement of subsidiaries, joint ventures and associates The (loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates comprises: £m £m
(Loss)/profit on disposal and remeasurement from continuing operations (164) 565 Loss on disposal and remeasurement from discontinued operations (see note 3c(i) below) (2,359) (32)
(iii) Delta Lloyd associate On 5 July 2012, the Group sold 37.2 million shares in Delta Lloyd for £313 million (net of transaction costs), reducing our holding at that date to 19.8% of Delta Lloyd’s ordinary share capital, representing 18.6% of shareholder voting rights. As the Group no longer had significant influence over Delta Lloyd, the Group ceased to account for that company as an associate from 5 July 2012. From that date, our holding was classified as a financial investment, held at fair value through profit and loss. The loss on disposal is calculated as follows: £m
On 8 January 2013 the Group announced the sale of its remaining shareholding in Delta Lloyd, resulting in gross cash proceeds of £353 million.
(iv) Sri Lanka On 4 December 2012, the Group sold its controlling 58.4% interest in Aviva NDB Holdings Lanka (Private) Limited (“Aviva NDB”), to AIA Group Limited for consideration of £31 million. Net assets of the business were £16 million (comprising gross assets of £205 million and liabilities of £189 million). After recycling of currency translation reserves of £3 million the profit on disposal amounted to £12 million.
Notes to the consolidated financial statements continued 3 – Subsidiaries continued The businesses classified as held for sale comprise: (i) US long term business On 8 November 2012 the Group confirmed it was in discussions with external parties with respect to its US life operations, consisting of Aviva Life and Annuity Company and the associated internal asset management operations of Aviva Investors North America, Inc (“US Life”) and these have been classified as held for sale. On 21 December 2012 the Group announced that it had agreed to sell US Life to Athene Holding Ltd for consideration of £1.0 billion including the shareholder loan (£1.1 billion including repayment of an external loan). There is uncertainty in the ultimate consideration, which depends on the development of statutory surplus between the announcement of sale and ultimate completion date. The transaction is expected to complete in 2013. Following classification as held for sale, US Life has been re-measured to fair value less costs to sell resulting in an impairment loss of £2,359 million, recognised within “Loss on the disposal and re-measurement of subsidiaries and associates” in the income statement, as a component of the result of discontinued operations. An impairment of £126 million has reduced the carrying value of property and equipment, investments in associates and prepayments within US Life to nil. The remaining impairment of £2,233 million reduces the value of the US Life disposal group so that the carrying value of this business is equal to its fair value less costs to sell of £367 million. As described in Note 2a, the results of US Life for the year, as well as those for preceding years, have been classified as discontinued operations in the income statement. Other comprehensive income, net of tax from discontinued operations of £68 million includes £528 million fair value gains on available for sale financial investments, £(235) million fair value gains on available for sale financial investments transferred to the income statement on disposal, £(130) million foreign exchange losses, £12 million of impairment losses transferred to the income statement, and £(107) million aggregate shareholder tax effect. On completion of the disposal the currency translation reserves and investment valuation reserves relating to the US Life operations, currently recognised within equity, will be recycled to the income statement.
(ii) Irish long-term business – Ark Life Irish long-term business is carried out through a subsidiary, Aviva Life Holdings Ireland Limited (“ALHI”), which is 75% owned by Aviva and 25% owned by Allied Irish Bank (“AIB”). ALHI holds four subsidiaries, one of which is Ark Life Assurance Company Limited (“Ark Life”) which carries out bancassurance business via a distribution agreement with AIB. The original distribution agreement was renewable in 2011 but, on 15 December 2011, AIB notified the Group that they did not wish to renew it and the existing shareholders’ agreement governing ALHI was terminated. The termination of this agreement triggered the ability for both parties to exercise put and call options that will result in the unwind of the original structure such that the Ark Life business returns 100% to AIB and the Group will purchase the 25% minority stake in ALHI. The formal exercise of these options was approved on 17 January 2012 and, as a result, the Ark Life business became held for sale on that date. Completion of the transaction is subject to agreement of terms with AIB and regulatory approval. Completion is expected in the next 12 months. Management’s current best estimate of the disposal proceeds for the Ark Life business is £232 million net of transaction costs, which is lower than its carrying value following impairments charged in 2011. A further charge to profit of £111 million has been recognised during 2012 reflecting revised expected disposal proceeds. The exercise of the put options in January 2012 over AIB’s non-controlling interest in ALHI led to our reclassifying this noncontrolling interest from equity to financial liabilities as at 31 December 2011. Our current estimate of the liability as at 31 December 2012 is £122 million. A credit to the income statement of £76 million has been recognised in 2012 reflecting the revised expected purchase liability. The net impact of these two movements is a charge to profit of £35 million, before exchange movements, recognised within net investment income. Finalisation of the exit value for Ark Life and the purchase value for the minority share in ALHI is subject to the conclusion of discussions with AIB.
(iv) Russian long-term business During the year the Group entered into negotiations to dispose of Aviva Russia. On 27 February 2013 the Group announced the sale of the business to Blagosostoyanie for consideration of €35 million. The transaction is expected to complete in the first half of 2013. The business is included in the statement of financial position at its carrying value.
(v) Other Other businesses classified as held for sale comprise joint ventures in Taiwan and Malaysia, details of which are given in note 18(a), and the Group’s pensions business subsidiary in Romania.
Notes to the consolidated financial statements continued 4 – Segmental information The Group’s results can be segmented, either by activity or by geography. Our primary reporting format is on market reporting lines, with supplementary information being given by business activity. This note provides segmental information on the consolidated income statement and consolidated statement of financial position.
United Kingdom & Ireland The United Kingdom and Ireland comprises two operating segments – Life and General Insurance. The principal activities of our UK and Ireland Life operations are life insurance, long-term health and accident insurance, savings, pensions and annuity business and Health in the UK, whilst UK and Ireland General Insurance 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 & Ireland General Insurance business also includes the results of Ireland Health. For the period to its disposal on 30 September 2011, UK and Ireland General Insurance also included the RAC motor recovery business.
Italy, Spain and Other These countries are not individually significant at a Group level, so have been aggregated into a single reporting segment in line with IFRS8. This segment includes our operations in Italy and Spain (including Aseval which is held for sale as at 31 December 2012). The principal activities of our Italian operations are long-term business and general insurance. The life business offers a range of long-term insurance and savings products, and the general insurance business provides motor and home insurance products to individuals, as well as small commercial risk insurance to businesses. The principal activity of the Spanish operation is the sale of long-term business, accident and health insurance and a selection of savings products. This segment also includes the results of our Czech, Hungarian and Romanian life businesses up until the date of their sale in July 2012 as well as our Reinsurance and Run Off businesses.
Discontinued operations In December 2012 the Group announced it had agreed to sell its US life operations (including the related internal asset management operations of Aviva Investors) and therefore it has been classified as a discontinued operation for presentation in the income statement and held for sale in the statement of financial position. On 6 May 2011 the Group ceased to hold a majority of the shareholder voting rights in Delta Lloyd and therefore the results of Delta Lloyd up to 6 May 2011 are presented as discontinued operations for 2011 and prior years. After this date, the Group ceased to consolidate Delta Lloyd.
Measurement basis The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are on normal commercial terms and market conditions. The Group evaluates performance of operating segments on the basis of: (i) profit or loss from operations before tax attributable to shareholders (ii) profit or loss from operations before tax attributable to shareholders, adjusted for non-operating items outside the segment management’s control, including investment market performance and fiscal policy changes
Notes to the consolidated financial statements continued 4 – Segmental information continued a (i) Segmental income statement for the year ended 31 December 2012
Claims and benefits paid, net of recoveries from reinsurers (9,224) (2,908) (5,272) (1,268) (3,916) (1,013) — — (23,601) (2,721) (26,322)
Short-term fluctuation in return on investments backing non-long- term business — (36) (68) 10 (56) (1) — 144 (7) — (7)
Economic assumption changes on general insurance and health business — 20 — — 1 — — — 21 — 21
Impairment of goodwill, associates and joint ventures (1) — — — 108 — — (47) 60 782 842
(Profit)/loss on the disposal of subsidiaries and associates 2 21 — — (7) (12) — 160 164 2,359 2,523
Profit/(loss) on the disposal and remeasurement of subsidiaries and associates — 528 37 — — — 23 (23) 565 (32) 533
Notes to the consolidated financial statements continued 4 – Segmental information continued a (iii) Segmental statement of financial position as at 31 December 2012
Assets of operations classified as held for sale 3,490 — — 36,187 — 2,631 267 28 — 42,603
Assets of operations classified as held for sale — — — — — 414 12 — — 426
Net asset value attributable to unitholders 1,279 — 3,362 — — 18 — — 5,693 10,352
Capital expenditure (excluding business combinations) 55 79 5 21 8 17 9 20 — 214 1 Other group activities include Delta Lloyd as an associate. 2 Following a review of the classification of contracts issued by the Group’s Italian long-term business, certain portfolios have been reclassified from participating insurance to participating investment contracts for all years presented. There is no impact on the result for any year presented as a result of this reclassification.
Discontinued operations and Delta Lloyd In the products and services analysis, the results of US Life (including the related internal asset management business) for all periods presented and Delta Lloyd up to 6 May 2011 are presented as discontinued operations. Between 6 May 2011 and 5 July 2012, the Group’s share of the results of its interest in Delta Lloyd as an associate and, from 5 July 2012 to the year-end, as a financial investment, are shown only within other activities within continuing operations.
Claims and benefits paid, net of recoveries from reinsurers (17,839) (5,762) — — (23,601) Change in insurance liabilities, net of reinsurance (359) (71) — — (430) Change in investment contract provisions (4,450) — — — (4,450) Change in unallocated divisible surplus (6,316) — — — (6,316) Amortisation of acquired value of in-force business (43) — — — (43) Impairment of goodwill and other intangibles, depreciation and other
Operating profit/(loss) before tax attributable to shareholders’ profits 2,031 893 106 (903) 2,127 1 Gross written premiums includes inward reinsurance premiums assumed from other companies amounting to £370 million, of which £130 million relates to property and liability insurance and £240 million relates to long-term business. 2 General insurance and health business segment includes gross written premiums of £1,164 million relating to health business. The remaining business relates to property and liability insurance. 3 Other includes Delta Lloyd as an associate to 5 July 2012, head office expenses such as group treasury and finance functions, and certain financing costs and taxes not allocated to business segments. 4 Discontinued operations represent the operations of the United States Life business and related internal asset management activities.
Net written premiums 15,545 9,162 — — 24,707 Net change in provision for unearned premiums — (236) — — (236)
Inter-segment revenue — — 156 — 156 Share of (loss)/profit of joint venture and associates (10) — (2) (111) (123) (Loss)/profit on the disposal and remeasurement of subsidiaries and associates — (28) 24 569 565
Impairment losses on AVIF and tangible assets (17) (60) — (19) (96) Inter-segment expenses (145) (11) — — (156)
Operating profit/(loss) before tax attributable to shareholders’ profits from continuing operations 1,926 935 61 (833) 2,089 Operating profit/(loss) before tax attributable to shareholders’ profits from discontinued operations4 382 1 49 (18) 414
Notes to the consolidated financial statements continued 4 – Segmental information continued b (iii) Segmental statement of financial position – products and services as at 31 December 2012
Assets of operations classified as held for sale 426 — — — 426
Gross insurance liabilities 132,138 15,241 — — 147,379 Gross liabilities for investment contracts 113,366 — — — 113,366 Unallocated divisible surplus 650 — — — 650 Net asset value attributable to unitholders 4,659 — — 5,693 10,352
From financial instruments designated as trading and other than trading 5,737 6,088 From AFS investments and financial instruments at amortised cost 83 83
Dividend income 1,652 1,627 Other income from investments designated as trading Realised (losses)/gains on disposals (667) (388) Unrealised gains and losses (policy J)
(Losses)/gains arising in the year (697) (319) Losses/(gains) recognised in prior periods and now realised 667 388
Expenses relating to these properties (57) (39) Realised gains on disposal 7 8 Fair value (losses)/gains on investment properties (492) 148
Realised (losses)/gains on loans (9) — Foreign exchange gains and losses on investments other than trading 132 (12) Other investment (expenses) (136) (105)
Share of (loss) after tax of joint ventures (38) (38) Share of (loss) after tax of associates (239) (85) Share of (loss) after tax of joint ventures and associates (277) (123) (Loss)/profit on disposal of subsidiaries and associates (note 3b) (164) 565
Insurance contracts 12,382 12,250 Participating investment contracts 6,500 6,835 Non-participating investment contracts 33 38
Claims and benefits paid, net of recoveries from reinsurers 23,601 24,380
Participating investment contracts (note 40) 759 (944) Non-participating investment contracts 525 (174)
Investment income attributable to unitholders 456 252 Reinsurance commissions and other fee and commission expense 311 375
Staff costs (note 10b) 1,122 1,160 Central costs and sharesave schemes 136 138
Impairments Net impairment on loans 43 62 Net impairment on financial investments — 2 Net impairment on receivables and other financial assets 3 31 Net impairment on non-financial assets — 1
Expenses from continuing operations 42,849 30,346 Expenses from discontinued operations 6,190 8,264
Exceptional items Exceptional items relating to continuing operations totalled £nil million (2011: £57 million net credit) in the year. For the year ended 31 December 2011, this comprised:  £22 million provision for compensation scheme costs for the leveraged property fund in Ireland; and  £35 million expense for the discounted cost of strengthening latent claims provisions in the UK.
The table below sets out the lines of the income statement in which the exceptional items have been included: £m £m
Interest expense on core structural borrowings Subordinated debt 294 302 Long term senior debt 19 19 Commercial paper 4 3
Interest on collateral received 27 33 Net finance charge on pension schemes (note 47e(iv)) 82 87 Unwind of discount on GI reserves 21 24 Other similar charges 87 95
Total finance costs from continuing operations 735 776 Total finance costs from discontinued operations 21 284
(a) Definitions Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions, where not treated as exceptional. Changes due to economic items, such as market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.
Investment variances and economic assumptions – continuing operations (620) (897) Investment variances and economic assumptions – discontinued operations 342 (719)
For continuing operations, negative investment variances of £620 million (2011: £897 million negative) mainly relate to the UK. The total for the UK includes increasing the allowance for credit defaults on UK commercial mortgages together with some adverse current year experience on this portfolio, and the cost of de-risking activity. Elsewhere, positive variances in Spain and France were offset by a negative variance in Italy. In the prior period, the negative variance resulted from market falls and increased volatility in asset values in all major markets. The positive variance of £342 million for discontinued operations relates to the US, driven by reductions in interest rates and credit spreads and the impact of favourable equity market performance on embedded derivatives. The prior period negative variance (2011: £719 million negative) also includes the result for Delta Lloyd up to the partial disposal on 6 May 2011 of £820 million. Liabilities in Delta Lloyd are discounted using a yield curve based on a fully collateralised AAA bond portfolio. Over the period up to the partial disposal, the AAA collateralised bond credit spread narrowed by about 80bps as a result of changes in the underlying bond index, which was the main driver of the negative variance.
(d) Assumptions The expected rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification under IFRS. The principal assumptions underlying the calculation of the expected investment return for equities and properties are: Equities Properties
The expected return on equities and properties is calculated by reference to the 10-year swap rate in the relevant currency plus an appropriate risk margin. These are the same assumptions as are used under MCEV principles to calculate the longer-term investment return for the Group’s long-term business. For fixed interest securities classified as fair value, the expected investment returns are based on average prospective yields for the actual assets held less an adjustment for credit risks. Where such securities are classified as AFS, such as in the US, the expected investment return comprises the expected interest or dividend payments and amortisation of the premium or discount at purchase.
Notes to the consolidated financial statements continued 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, which is included in operating profit, and short-term fluctuations from this, which are disclosed outside operating profit but are included in profit before tax. 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.
1 Represents assets backing non-long-term business held by the France holding company.
(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 assets backing non-long-term business held in the France holding company.
Total assets supporting non-long-term business 18,948 19,133 Figures for 2011 have been restated to include loan balances supporting general insurance and health business, which contribute to the longer-term investment return 1 Represents assets in France holding company backing non-long-term business.
Movement in investment return for By Change in £m 2011 £m
Notes to the consolidated financial statements continued 10 – Employee information continued (b) Staff costs
Wages and salaries 1,324 1,421 Social security costs 205 219 Post-retirement obligations
Profit sharing and incentive plans 112 126 Equity compensation plans (note 30d) 47 58 Termination benefits 41 21
Staff costs from continuing operations 1,850 1,989 Staff costs from discontinued operations 145 343
Notes to the consolidated financial statements continued 12 – Auditors’ remuneration This note shows the total remuneration payable by the Group to our auditors. PricewaterhouseCoopers LLP (PwC) replaced Ernst & Young LLP (E&Y) as the Group’s principal auditor for the 2012 financial year. The total remuneration payable by the Group, excluding VAT and any overseas equivalent thereof, to its principal auditors and their associates is shown below.
Total audit fees 11.8 Audit related assurance 2.3 Other assurance services 7.2
Fees payable to E&Y LLP and its associates for the statutory audit of the Aviva Group and Company financial statements 2.5 Fees payable to E&Y LLP and its associates for other services: Audit of Group subsidiaries 10.3 Additional fees related to the prior year audit of Group subsidiaries 0.9
Fees payable to E&Y LLP and its associates for services to Group companies classified as continuing operations 24.2
Fees payable to E&Y LLP and its associates for audit of Group subsidiaries 3.6 Fees payable to E&Y LLP and its associates for other assurance services to Group subsidiaries 0.5 Fees payable to E&Y LLP and its associates for other non-audit services to Group subsidiaries 0.2
(a) Tax charged/(credited) to the income statement (i) The total tax charge/(credit) comprises: £m £m
Total tax charged/(credited) to income statement from continuing operations 448 (44) Total tax charged/(credited) to income statement from discontinued operations 152 (107)
(iii) The tax charge/(credit) can be analysed as follows: £m £m
(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce the current tax expense and deferred tax expense by £7 million and £11 million (2011: £25 million and £108 million), respectively.
Long-term business technical provisions and other insurance items (1,868) 916 Deferred acquisition costs 254 (3) Unrealised gains/(losses) on investments 2,312 (1,265) Pensions and other post-retirement obligations (7) 6 Unused losses and tax credits (30) 22 Subsidiaries, associates and joint ventures — 1 Intangibles and additional value of in-force long-term business (12) (10) Provisions and other temporary differences (670) (236)
Current tax from continuing operations In respect of pensions and other post-retirement obligations (14) (88) In respect of foreign exchange movements (17) (8)
In respect of pensions and other post-retirement obligations (140) 260 In respect of fair value gains on owner-occupied properties (1) (1) In respect of unrealised gains on investments 9 (3)
Tax (credited)/charged to other comprehensive income arising from continuing operations (163) 160
(d) Tax reconciliation The tax on the Group’s (loss)/profit before tax differs from the theoretical amount that would arise using the tax rate of the home country of the Company as follows: Shareholder £m Policyholder £m Total £m Shareholder £m Policyholder £m Total £m
Tax calculated at standard UK corporation tax rate of 24.5% (2011: 26.5%) (654) 54 (600) 23 (47) (24) Reconciling items
Different basis of tax – policyholders — 170 170 — (129) (129) Adjustment to tax charge in respect of prior years (20) — (20) (25) — (25)
Non-taxable loss/(profit) on sale of subsidiaries and associates 872 — 872 (135) — (135)
Total tax charged/(credited) to income statement 379 221 600 27 (178) (151)
Tax attributable to policyholder returns 221 (178) UK corporation tax at a rate of 24.5% (2011: 26.5%) in respect of the policyholder tax deduction (54) 47 Different local basis of tax of overseas profits 3 2
The UK corporation tax rate reduced to 24% from 1 April 2012. A subsequent reduction in the UK corporation tax rate to 23% was substantively enacted on 3 July 2012 and will apply from 1 April 2013. The substantively enacted rate of 23% has been used in the calculation of the UK’s deferred tax assets and liabilities. As announced in the 2012 Autumn Statement, the rate is expected to reduce further to 21% from 1 April 2014. The aggregate impact of the reduction in rate from 23% to 21% would reduce the deferred tax assets and liabilities and increase IFRS net assets by approximately £31 million and will be recognised when the legislation is substantively enacted. Finance Act 2012 included initial legislation introducing considerable changes to the regime for taxing UK life insurance companies applicable from 1 January 2013. The impact of the legislation has been included in the results of the Group for the year ended 31 December 2012 but has not had a material impact.
Profit/(loss) before tax attributable to shareholders' profits 1,888 (1,970) (82) 2,089 (1,504) 585 Share of Delta Lloyd's tax expense as an associate (28) 135 107 (39) 5 (34)
Tax attributable to shareholders' profit/(loss) (465) 238 (227) (487) 353 (134)
Profit/(loss) for the year 1,395 (1,597) (202) 1,563 (1,146) 417 Amount attributable to non-controlling interests (184) 16 (168) (150) 109 (41) Cumulative preference dividends for the year (17) — (17) (17) — (17) Coupon payments in respect of direct capital instruments (DCI) and fixed rate tier 1 notes (net of tax) (55) — (55) (43) — (43)
Profit/(loss) attributable to ordinary shareholders from continuing operations 1,139 (1,581) (442) 1,353 (1,037) 316
Operating profit attributable to ordinary shareholders 1,888 1,139 39.2 2,089 1,353 47.6 Non-operating items: Investment return variances and economic assumption changes on long-term business (620) (499) (17.2) (897) (599) (21.1)
Short-term fluctuation in return on investments backing non-long-term business 7 9 0.3 (266) (198) (7.0) Economic assumption changes on general insurance and health business (21) (16) (0.6) (90) (67) (2.3) Impairment of goodwill, associates and joint ventures (60) (60) (2.1) (392) (359) (12.6) Amortisation and net impairment of intangibles (128) (84) (2.9) (116) (141) (5.1) (Loss)/profit on disposal of subsidiaries and associates (164) (164) (5.6) 565 552 19.5 Integration and restructuring costs and exceptional items (461) (379) (13.0) (318) (240) (8.4)
(Loss)/profit attributable to ordinary shareholders from continuing operations 25 (442) (15.2) 551 316 11.1
(Loss)/profit attributable to ordinary shareholders (2,671) (3,290) (113.1) 87 165 5.8 1 DCI includes direct capital instruments and fixed rate tier 1 notes
Diluted (loss)/earnings per share from continuing operations1 (442) 2,954 (15.2) 316 2,895 10.9
(Loss)/profit attributable to ordinary shareholders (2,848) 2,910 (97.9) (151) 2,845 (5.3) Dilutive effect of share awards and options — 44 — — 50 —
Operating profit attributable to ordinary shareholders 1,139 2,910 39.2 1,353 2,845 47.5 Dilutive effect of share awards and options — 44 (0.6) — 50 (0.8)
Diluted operating profit per share from continuing operations 1,139 2,954 38.6 1,353 2,895 46.7
Diluted operating profit per share from discontinued operations 161 2,954 5.4 178 2,895 6.2
Diluted operating profit per share 1,300 2,954 44.0 1,531 2,895 52.9 15 – Dividends and appropriations This note analyses the total dividends and other appropriations we paid during the year. The table below does not include the final dividend proposed after the year end because it is not accrued in these financial statements. The impact of shares issued in lieu of dividends is shown separately in note 36.
Preference dividends declared and charged to equity in the year 17 17 Coupon payments on direct capital instruments and fixed rate tier 1 notes 73 58
Gross amount At 1 January 2,850 3,671 Acquisitions and additions 1 13
Accumulated impairment At 1 January (210) (280) Impairment losses charged to expenses (891) (160) Disposals 10 — Deconsolidation of Delta Lloyd — 226 Foreign exchange rate movements 20 4
Carrying amount of intangibles with indefinite useful lives (detailed in note 17) Total £m £m £m 2012 £m £m
United Kingdom – general insurance and health 924 924 — — 924 924 Ireland – general insurance and health 112 116 — — 112 116 France – long-term business — — 51 52 51 52 Italy
Goodwill in all business units is tested for impairment by comparing the carrying value of the cash generating unit to which the goodwill relates to the recoverable value of that cash generating unit. The recoverable amount is the value in use of the cash generating unit unless otherwise stated.
Notes to the consolidated financial statements continued 16 – Goodwill continued generating unit. The underlying assumptions of these projections include market share, customer numbers, mortality, morbidity and persistency. Future new business profits for the remainder of the given period beyond the initial three years are extrapolated using a steady growth rate. Growth rates and expected future profits are set with regards to management estimates, past experience and relevant available market statistics. Expected profits from future new business are discounted using a risk adjusted discount rate. 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. See results of impairment testing for US long-term cash generating unit. For other businesses classified as held for sale the recoverable amount was assessed based on the fair value less costs to sell of the business, based on the expected net disposal proceeds of the businesses.
United Kingdom general insurance and health 1.3 1.3 8.0 8.2 Ireland general insurance and health 2.0 2.0 10.6 13.7 Italy general insurance and health 2.0 – 3.0 2.0 – 3.0 9.0 – 11.4 9.2 – 10.3 United States (fund management) 3.0 3.0 17.0 17.0
Impairment losses charged to expenses (note 6) (34) (39) (152) — (225)
Less: Assets classified as held for sale (443) (39) (9) — (491)
(b) Other intangible assets with finite useful lives consist primarily of the value of bancassurance and other distribution agreements. Acquisitions of intangible assets with finite lives relate to Canadian broker businesses. Disposals include the derecognition of exhausted assets which are fully amortised or impaired with nil carrying value. Impairment losses on intangible assets with finite lives of £152 million arise from impairments of capitalised software in US
long-term operations, UK long-term operations and UK general insurance operations of £102 million, £25 million and £22 million respectively, and £3 million in relation to other businesses. Impairment tests were conducted as described in note 16(b).
Excluding assets classified as held for sale, AVIF on insurance and investment contracts is generally recoverable in more than one year. Of the total AVIF of £172 million (£127 million on insurance contracts, £45 million on investment contracts), £131 million (2011: £713 million) is expected to be recovered more than one year after the statement of financial position date.
Share of results before tax — (19) — (19) — (14) — (14)
Share of results after tax — (23) — (23) — (17) — (17)
Share of profit/loss after tax (15) (23) — (38) (21) (17) — (38)
Reduction in Group interest — — — — — (1) — (1)
Less: Amounts classified as held for sale (54) (72) — (126) — (12) — (12)
Airport Property Partnership 50.00% 50.00% The Ashtenne Industrial Fund Limited Partnership 67.70% 43.66% The Mall Limited Partnership 50.00% 50.52% Paddington Central IV Unit Trust 50.00% 50.00% Queensgate Limited Partnership 50.00% 50.00% Quercus Healthcare Property Partnership Limited 50.00% 29.33% The Southgate Limited Partnership 50.00% 50.00%
All the above entities perform property ownership and management activities, and are incorporated and operate in the UK. All these investments are held by subsidiary entities.
Notes to the consolidated financial statements continued 18 – Interests in, and loans to, joint ventures continued (c) Long-term business undertakings The principal joint ventures are as follows: Company Proportion held Country of incorporation and operation
Aviva-COFCO Life Insurance Co. Limited 50.00% China AvivaSA Emeklilik ve Hayat A.S. 49.83% Turkey CIMB Aviva Assurance Berhad 49.00% Malaysia CIMB Aviva Takaful Berhad 49.00% Malaysia First-Aviva Life Insurance Co., Ltd. 49.00% Taiwan Vietinbank Aviva Life Insurance Limited 49.99% Vietnam Woori Aviva Life insurance Co. Ltd 47.31% Korea
All investments in the above companies are unlisted and are held by subsidiaries, except for the shares in Aviva-COFCO Life Insurance Co. Limited which are held by the Company. The Group’s share of net assets of that company is £141 million (2011: £150 million) which have a fair value of £141 million (2011: £150 million).
(d) Impairment testing Joint ventures are tested for impairment by comparing the carrying value of the cash generating unit to which the goodwill relates to the recoverable value of that cash generating unit. The recoverable amount of long-term business undertakings is the value in use of the joint venture. This is calculated according to the methodology for the calculation of the value in use of long-term business cash generating units for the impairment testing of goodwill, as set out in note 16(b). The recoverable amount for joint ventures classified as held for sale (CIMB Aviva Assurance Berhad, CIMB Aviva Takaful Berhad & First-Aviva Life Insurance Co., Ltd.) is the fair value less costs to sell for each entity, based on the expected net disposal proceeds. The recoverable amount of property management undertakings is the fair value less costs to sell of the joint venture, measured in accordance with the Groups accounting policy for Investment Property (See: Accounting Policy P).
Aviva-COFCO Life Insurance Co. Limited MCEV MCEV n/a1 n/a1 n/a1 n/a1
Results of impairment testing Following the impairment test of Woori Aviva Life Insurance Co. Ltd an impairment of £9 million has been recognised fully impairing the goodwill to £nil, reflecting local economic conditions.
Share of results before tax — (295) (295) — 196 196
Share of results after tax — (297) (297) — 160 160 Impairment – see notes (i) and (ii) below (147) 205 58 — (217) (217)