Model – North America and United Kingdom Swap rates are generated by a model, the LIBOR Market Model Plus (LMM+), which projects a full swap curve at monthly intervals. Previously the LMM model was used in the UK to generate scenarios. Forward rates are assumed to have a distribution that lies between the log-normal and normal distributions. Although this no longer guarantees non-negative interest rates, it maintains interest rates within a more plausible range than the standard Libor Market Model, and gives a better fit to certain swaption volatility surfaces. The model is calibrated to volatilities for swaptions for ten-year swaps for a range of option terms and strike rates. Swaption volatilities are taken from SuperDerivatives. Tests have been performed to ensure that sufficient scenarios have been used that the result converges to the stochastic value of the business being valued. The total annual return on equities is calculated as the return on one-year swaps plus an excess return. For the US, this excess return is modelled using a log-normal model where volatility varies by time horizon. This allows the model to capture the term structure of implied volatilities. The model is calibrated to at-the-money options of a variety of terms. For the UK, a two-dimensional model is used to capture the term structure of implied volatilities and the projected in the money position. Option volatilities are taken from Markit. Assumptions for correlations between asset classes have been set based on historic data.
Asset classes The significant asset classes for UK participating business are equities, property and long-term fixed rate bonds. The most significant assumptions are the distribution of future long-term interest rates (nominal and real) and swaption implied volatilities. For many businesses, including US, France and Delta Lloyd, the most important assets are fixed rate bonds of various durations.
Summary statistics Swaption implied volatilities The implied volatility is that determined by Black-Scholes formula to reproduce the market price of the option. The following table sets out the swaption implied volatilities.
E18 – Principal assumptions continued Equity implied volatilities The implied volatility is that determined by the Black-Scholes formula to reproduce the market price of the option. The following table sets out the model equity implied volatilities.
E18 – Principal assumptions continued (c) Other assumptions Valuation of debt Borrowings in the MCEV consolidated statement of financial position are valued on an IFRS basis, consistent with the primary financial statements. At 31 December 2011 the market value of the Group’s external debt, subordinated debt, preference shares including General Accident plc preference shares of £250 million (classified as non-controlling interests) and direct capital instrument was £5,782 million (31 December 2010: £7,279 million).
External debt and subordinated debt – MCEV basis 5,255 6,066 Add: Preference shares (including General Accident plc) and direct capital instrument 1,440 1,440
External debt, subordinated debt, preference shares and direct capital instrument – MCEV basis 6,695 7,506 Effect of marking these instruments to market (913) (227)
As reported on page 346 £m increase £m £m increase £m 50bps increase £m 50bps decrease £m
Interest rates 2011 Value of new business (net of tax and non-controlling interest)
As reported on page 340 £m 10bp increase in adjustment to risk-free rates £m £m £m
As reported on page 340 £m £m £m increase £m 50bps increase £m 50bps decrease £m
E19 – Sensitivity analysis continued (b) Non-economic assumptions The following tables below show the sensitivity of the embedded value and the value of new business to the following changes in non-economic assumptions:  10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of £10 p.a. would represent an expense assumption of £9 p.a.). Where there is a ‘look through’ into service company expenses the fee charged by the service company is unchanged while the underlying expense decreases;  10% decrease in lapse rates (a 10% sensitivity on a base assumption of 5% p.a. would represent a lapse rate of 4.5% p.a.); and  5% decrease in both mortality and morbidity rates disclosed separately for life assurance and annuity business.
As reported on page 346 £m 10% decrease in maintenance expenses £m 10% decrease in lapse rates £m 5% decrease in mortality/
Auditor’s responsibility Our responsibility is to express an opinion on the Consolidated MCEV financial statements based on our audit. We conducted our audit in accordance with the International Standards on Auditing (UK and Ireland). Those standards require us to comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Consolidated MCEV financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Consolidated MCEV financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the Consolidated MCEV financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation of the Consolidated MCEV financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Directors, as well as evaluating the overall presentation of the Consolidated MCEV financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion the Consolidated MCEV financial statements, for the year ended 31 December 2011, are prepared, in all material respects, in accordance with the CFO Forum Principles and the basis of preparation set out on pages 328 to 331.
Ernst & Young LLP London 7 March 2012 1 The maintenance and integrity of Aviva plc’s 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. 2 Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Critical illness cover Critical illness cover pays out a lump sum if the insured person is diagnosed with a serious illness that meets the plan definition. The cover is often provided in conjunction with other benefits under a protection contract.
Investment sales Comprise retail sales of mutual fund-type products such as unit trusts, individual savings accounts (ISAs) and open ended investment companies (OEICs).
Monolines Financial companies specialising in a single line of products such as credit cards, mortgages or home equity loans.
Non profits Long-term savings and insurance products sold in the UK other than ‘With profits’ (see definition below) products.
Product definitions cont. Unit trusts A form of open ended collective investment constituted under a trust deed, in which investors can buy and sell units.
UK Corporate Governance Code The UK Corporate Governance Code sets out guidance in the form of principles and provisions on how companies should be directed and controlled to follow good governance practice. The Financial Services Authority (FSA) requires companies with a UK Premium listing to disclose, in relation to the UK Corporate Governance Code, how they have applied its principles and whether they have complied with its provisions throughout the accounting year. Where the provisions have not been complied with, companies must provide an explanation for this.
Independent financial advisers (IFAs) A person or organisation authorised to give advice on financial matters and to sell the products of all financial service providers. In the UK they are legally obliged to offer the product that best suits their clients’ needs. Outside the UK IFAs may be referred to by other names.
Operating profit From continuing operations on an IFRS basis, stated before tax attributable to shareholders’ profits, impairment of goodwill and exceptional items. This is also referred to as adjusted operating profit.
MCEV Aviva’s Market Consistent Embedded Value (MCEV) methodology which is in accordance with the MCEV Principles published by the CFO Forum in June 2008 as amended in October 2009.
Net written premiums Total gross written premiums for the given period, minus premiums paid over or ‘ceded’ to reinsurers.
‘Soft’ insurance market A term used to describe the state of the general insurance market. A ‘soft’ insurance market is characterised by low levels of profitability and market competition driving premium rates lower. Soft insurance markets generally occur when there is excess capital and are the opposite of ‘hard’ insurance markets.
CFO Forum The CFO Forum (www.cfoforum.nl) is a high-level group formed by the chief financial officers of major European listed and non-listed insurance companies. Its aim is to discuss issues relating to proposed new accounting regulations for their businesses and how they can create greater transparency for investors.
Cost of non-hedgeable risks This is the cost of undertaking those risks for which a deep and liquid market in which to hedge that risk does not exist. This can include both financial risks and nonfinancial risks such as mortality, persistency and expense.
Statutory basis The valuation basis and approach used for reporting financial statements to local regulators.
Value of new business Is calculated using economic assumptions set at the start of each quarter and the same operating assumptions as those used to determine the embedded values at the end of the reporting period and is stated after the effect of any frictional costs. Unless otherwise stated, it is also quoted net of tax and minority interests.
Shareholder profile as at 31 December 2011 By category of shareholder Number of shareholders % Number of shares %
Banks and nominee companies 15,563 2.61 2,597,758,882 89.40 Pension fund managers and insurance companies 241 0.04 2,357,297 0.08
*Please note that the ADR local payment date will be approximately five business days after the proposed dividend date for ordinary shares.
Annual General Meeting (AGM)  The 2012 Aviva AGM will be held at The Barbican Centre,
 Details of all the resolutions to be considered at the AGM are given in the Notice of AGM, which is available on the Company’s website at www.aviva.com/agm.
by post.  The voting results for the 2012 AGM, including proxy votes and votes withheld, will be accessible on the Company’s website at www.aviva.com/agm shortly after the meeting.
 If you are unable to attend the AGM but would like to ask the directors a question regarding the business of the meeting, please send an email to avivashareholders@aviva.com. We will endeavour to provide a formal response to all questions submitted by shareholders.
Dividends  Dividends on Aviva ordinary shares are normally paid in May and November; please see the table above for the key dates in respect of the 2011 final dividend.
Direct credit of dividend payments: If you would like to have your cash dividends paid directly into your bank or building society account, please visit www.aviva.com/dividendmandate for more information or contact Computershare on the telephone number listed overleaf.
Do you receive duplicate documents? A number of shareholders still receive duplicate documentation and split dividend payments as a result of having more than one account on the Aviva Register of Members. If you think you fall into this group and would like to combine your accounts, please contact the Company’s Registrar, Computershare, on the telephone number listed overleaf.
Online Shareholder Services Centre – www.aviva.com/shareholderservices The online shareholder services centre has been designed to provide useful information for holders of Aviva ordinary shares, preference shares and ADRs, and includes features to allow shareholders to manage their Aviva shareholdings easily and efficiently. Within the online centre you will be able to find a shareholders’ guide, current and historic ordinary share and ADR prices, share dealing information, news, updates and, when available, presentations from Aviva’s senior management. You will also be able to download an electronic copy of recent Company reports. The Shareholders’ Guide contains answers to a range of frequently asked questions on holding shares in Aviva.
Aviva share price information  For ordinary shares and ADRs, please visit www.aviva.com/shareprice  For preference shares, please visit www.londonstockexchange.com
Contact details Ordinary and preference shares – Computershare Shareholders will be aware that Aviva changed its Registrar from Equiniti Limited to Computershare Investor Services plc in July 2011. For any queries regarding your shareholding, or to advise of changes to your personal details, please contact Computershare: In writing: Computershare Investor Services plc, The Pavilions, Bridgwater Road, Bristol BS99 6ZZ
By telephone: 1 877 248 4237 (free phone for callers within the US) +1 781 575 4555 (for callers outside the US non-free phone).
Manage your holdings online You can view and manage your shareholding online by visiting www.aviva.com/ecomms. To log in you will require your 11-digit Shareholder Reference Number (SRN), which you will find on your proxy or voting card, latest dividend stationery, or any share certificate issued since 4 July 2011. Shareholders can elect to receive electronic communications by registering their email address online, or by contacting Computershare directly. Making this election will save on printing and distribution costs and has environmental benefits.
Be on your guard – beware of fraudsters! Shareholders are advised to be very wary of any unsolicited telephone calls or correspondence offering to buy shares at a discount or offering free financial advice or company reports. If you receive any unsolicited calls or advice:  make sure you get the correct name of the person and organisation;  check that they are properly authorised by the Financial Services Authority (FSA) by visiting www.fsa.gov.uk/register/; and  if the calls persist, hang up.
For more information please visit the ‘warning to shareholders’ page at: www.aviva.com/shareholderservices.
ShareGift If you have a small number of shares which you consider uneconomical to sell, you may wish to consider donating them to ShareGift (Registered Charity: 1052686), a charity that specialises in accepting such unwanted small shareholdings. Donated shares are aggregated and sold, with the proceeds being used to support a wide range of UK registered charities. You can find out more about ShareGift by visiting www.sharegift.org or by calling them on +44 (0)207 930 3737. If you would like to donate your shares to ShareGift, please contact Computershare.
“ They saw us not only as insurers, but also and most importantly as human beings who were there to help them.” Gaël Roux
Gaël Roux When Hurricane Xynthia cut a swathe of destruction across west France, in its wake came Aviva adviser Gaël Roux, ready to help. He arranged advance payments so that Aviva customers could start repairing the damage without delay. www.aviva.com/2011ar