Aviva takes its corporate citizenship seriously and recognises the role it plays in the communities in which it operates and the role they play in its business. The Company pays attention to global issues such as the Millennium Development Goals set by the United Nations to focus governments, businesses and civil society on major global concerns, including the local needs of people in the places where the Group operates. The Company works in partnership with field experts across the public and third sector and aims to use the Group’s core capability as it focuses its activity on education, life trauma and financial literacy. A total contribution of over £12.4 million was made in 2011. This includes cash donations, marketing expenditure, the value of volunteering hours by the Group’s employees, non-cash resources committed to community activities, management and project costs. The Group’s employees are entitled to up to three paid days’ leave per year to volunteer and in 2011 the Group delivered over 60,300 hours of volunteering in our communities. There is mutual benefit in the Group’s community development activity as employees feel engaged, communities where the Group operates feel the impact and the Group’s brand reputation is enhanced. The Group’s flagship global community development programme, that embodies the approach above, is ‘Street to School’, which is now in year two of a five-year commitment to help 500,000 children fulfil their potential. At the end of 2011, the Group had already helped 274,000 children through prevention work, community outreach, healthcare, safe housing programmes and a significant focus on education and training projects, delivered in 17 countries. The Group has also partnered with the Office of the High Commissioner for Human Rights to deliver a study to support the implementation of best practice with street children globally. The Group’s community development activity also included grassroots athletics and rugby activity, financial literacy work in schools and adult education. The Group recently renewed its long term partnership with Oxfam 365, helping it respond promptly to emergencies in areas such as Philippines and the Horn of Africa.
Employee practice The Group respects all fundamental human rights and is guided in the conduct of its business by the provisions of the United Nations Universal Declaration of Human Rights and the International Labour Organization core labour standards. The Group also supports the United Nations Global Compact Principles. The Group companies are committed to providing equal opportunities to all employees, irrespective of their gender, sexual orientation, marital status, race, nationality, ethnic origin, disability, age, religion or union membership status. Aviva is an inclusive employer and values diversity among its employees. These commitments extend to recruitment and selection, training, career development, flexible working arrangements, promotion and performance appraisal.
Corporate responsibility The Group has a well-embedded corporate responsibility programme helping to deliver sustainable business practices. The Company continues to use its position as a large procurer, business partner and investor to influence other companies to engage in sustainable behaviour and report on their progress and forward looking strategy. The Company puts its Corporate Responsibility Report, which is included in the Annual Report and Accounts, to an annual advisory vote of shareholders at the Company’s AGM as a means of obtaining feedback on the Report and the Company’s performance in this area. The Report is set out on pages 72 to 88 and details of the resolution for the 2012 AGM are set out in the Notice of AGM.
Corporate Governance Statement In compliance with the Disclosure and Transparency Rules (the DTRs), the disclosures required by DTR 7.2.2 to 7.2.7 can be found in the Corporate Governance Report on pages 97 to 105, which is incorporated into this Directors’ Report by reference.
A resolution will also be proposed authorising the directors to determine the auditor’s remuneration. Details of these resolutions will be set out in the Notice of AGM. As resigning auditor, Ernst & Young LLP has confirmed an intention to resign on completion of the 2011 audit. A ‘statement of circumstances’ will be included as an appendix to the Notice of AGM.
Andrew Moss Group chief executive 7 March 2012 Registered Office: St Helen’s, 1 Undershaft, London EC3P 3DQ Registered in England No. 2468686
The Board The directors are responsible to shareholders for ensuring that the Company is appropriately managed and that it achieves its objectives. The Board meets regularly to determine the Company’s strategic direction, to review the Company’s operating and financial performance, to set the Company’s risk appetite and to provide oversight that the Company is adequately resourced and effectively controlled. The specific duties of the Board are clearly set out in its terms of reference which address a wide range of corporate governance issues and list those items that are specifically reserved for decision by the Board. Matters requiring Board approval include:  Group strategy and business plans;  Financial reporting and controls, capital structure and dividend policy;  Group risk appetite and framework;  Corporate governance;  Remuneration policy;  Significant transactions and expenditure; and  Other matters (e.g. appointment and removal of group company secretary and chief risk officer, Board and Committee succession planning and constitution of Board Committees).
The full terms of reference for the Board are available from the group company secretary. Matters that are not specifically reserved for the Board and its committees under its terms of reference, or for shareholders in general meeting, are delegated to the group chief executive. The Board’s terms of reference also set out those matters that must be reported to the Board, such as senior leadership changes, significant litigation or material regulatory breaches, and cover how matters requiring consideration by the Board that arise between scheduled meetings should be dealt with. The Board and its Committees operate in line with annually agreed work plans. At Board and Committee meetings, directors receive regular reports on the Group’s financial position, risk appetite, risk management, regulatory compliance, key business operations, customer satisfaction, human resources and other material issues. Directors are fully briefed in advance of Board and Committee meetings on all matters to be discussed and the chairs of the Board Committees provide oral updates on Committee discussions to the Board meetings. The group company secretary is responsible for following Board procedures and advising the Board, through the chairman, on governance matters. All directors have access to the group company secretary’s advice and services. The Board has adopted a procedure whereby directors may, in the performance of their duties, seek independent professional advice at the Company’s expense if considered appropriate. During the year, the members of the Remuneration Committee sought independent advice from AON Hewitt New Bridge Street and FIT Remuneration Consultants LLP on issues concerning senior executive remuneration. FIT Remuneration Consultants LLP is an independent consultancy and did not have any other connection with the Company. AON Hewitt New Bridge Street is part of AON, which provided insurance broking services to the Company in 2011. During the year, the Audit Committee and the Risk Committee sought independent advice from Keith Nicholson, a former partner at KPMG LLP.
The directors The Board currently comprises the chairman, ten independent non-executive directors and four executive directors. Each director is required to be elected by shareholders at the AGM following his/her appointment by the Board and thereafter all directors are subject to annual re-election as recommended by the Code.
• Succession planning, Board composition and effectiveness 11 • Group strategy, business plans and performance monitoring 33 • Financial reporting and controls, capital structure and dividend policy 24 • Corporate governance 7 • Group risk management policies, risk appetite and framework 14 • Others 11
Summary of directors’ skills and experience Glyn Barker Mr Barker has extensive experience as a business leader and a senior adviser to the boards of FTSE 100 companies on a wide variety of corporate and finance issues. He brings to the Board a deep understanding of audit and regulatory issues as well as in-depth transactional experience.
Euleen Goh Ms Goh has over 20 years of global executive experience in the financial services industry. In addition, she also has substantial non-executive and board committee experience, including membership of a number of board committees at DBS and Singapore Airlines. She has a strong understanding of risk and product issues in financial services and continues to provide valuable insight to the Company’s operations, particularly in the Asia Pacific region.
Gay Huey Evans Ms Huey Evans has over 30 years of experience within the financial services industry, having held key positions in government and in a number of global financial and banking institutions. In addition to the financial expertise she brings to the Board, her experience at the FSA provides insight on the priorities and focus of the Group’s lead regulator.
John McFarlane OBE Mr McFarlane has substantial global listed company experience and an excellent track record spanning 37 years in the UK and international financial services industry, culminating in ten years as the highly successful CEO of ANZ (Australia and New Zealand Banking Group) and as a director of The Royal Bank of Scotland Group. He has extensive experience in banking, including investment, corporate and retail banking as well as, general management, insurance, strategy, risk and cultural change. His wide-ranging board and executive experience provides him with the requisite skills for his succession to the chairmanship of the Company and the Board upon Lord Sharman’s retirement.
Patrick Regan Mr Regan has extensive global experience in various executive functions within the insurance industry. He also has an excellent track record of driving change programmes and corporate actions to deliver improved profitability. With his significant financial experience and global perspective, he has helped to develop and execute the Group’s strategy in a challenging macroeconomic environment.
Leslie Van de Walle Mr Van de Walle has had a career spanning over 20 years in senior management in addition to his experience as a nonexecutive director. He brings to the Board extensive marketing and brand knowledge together with a wealth of experience in growing and developing businesses. With his multi-sector background and strong analytical ability, he has contributed significantly to the deliberations of the Board.
Senior independent director Under the Code the Board appoints one of the non-executive directors to act as senior independent director. Richard Goeltz has served as the senior independent director since January 2009. The role of the senior independent director is to provide a sounding board for the chairman and to serve as an intermediary for the other directors where necessary. His main responsibility is to be available to shareholders should they have concerns that they have been unable to resolve through normal channels, or when such channels would be inappropriate. The senior independent director is also responsible for leading the Board’s discussion on the chairman’s performance and on the appointment of a new chairman, when appropriate. During the year, the non-executive directors led by the senior independent director have twice met without the chairman present. Mr Goeltz led the process for the selection, assessment and appointment of the chairman designate, John McFarlane.
Board effectiveness The effectiveness of the Board is vital to the success of the Group and the Company undertakes a rigorous evaluation each year in order to assess how well the Board, its Committees, the directors and the chairman are performing. The aim is to improve the effectiveness of the Board and its Committees and the Group’s performance. The process for 2011 was led by the chairman designate and supported by the group company secretary. The review was carried out by Boardroom Review, an independent consultancy with no other connection with the Company and focused on the Board’s role and its approach to its work, the way in which the Board works together and the way in which the Board uses its time. Boardroom Review prepared a report based on interviews with the directors and the overall results of the evaluation will be incorporated into the Board’s processes and activities for 2012. The performance of the chairman was reviewed by the executive and non-executive directors. The chairman’s evaluation was managed by the senior independent director who provided feedback to the chairman. As part of the chairman’s evaluation, the non-executive directors met separately under the chairmanship of the senior independent director. The Board evaluation process assessed the executive directors in their capacities as directors of the Company. They were evaluated in respect of their executive duties through a separate process whereby the chairman and the non-executive directors assessed the group chief executive and the group chief executive assessed the other executive directors. The directors have concluded that the Board and its Committees operate effectively and agreed that the actions identified for improvement in previous reviews had been implemented. Additionally, the chairman has concluded that each director contributes effectively and demonstrates full commitment to his/her duties.
* Resigned on 2 June 2011 ** Appointed on 19 January 2011 ¥ Resigned on 19 January 2011 # Appointed on 20 October 2011 ## Appointed on 1 September 2011 ∞ Appointed on 2 December 2011 Ω Resigned on 1 December 2011 1 This shows the percentage of meetings which the director attended during the year while a member of the Board 2 The director was unable to attend Board meeting(s) due to prior commitments and the meetings being called at short notice
During 2011, there were 15 Board meetings held, of which, nine were scheduled Board meetings and six were additional Board meetings called at short notice. In addition the Board delegated responsibility for certain items to a Committee of the Board and six meetings by such a Committee were held at short notice during 2011.
The chairman and the non-executive directors met several times in the absence of the executive directors and the non-executive directors met in the absence of the chairman, including one meeting chaired by the senior independent director to appraise the chairman’s performance.
Conflicts of interest In line with the Companies Act 2006, the Company’s articles of association allow the Board to authorise potential conflicts of interest that may arise and to impose such limits or conditions as it thinks fit. The decision to authorise a conflict of interest can only be made by non-conflicted directors (those who have no interest in the matter being considered) and in making such a decision the directors must act in a way they consider in good faith will be most likely to promote the Company’s success. The Board has established a procedure whereby actual and potential conflicts of interest are regularly reviewed and for the appropriate authorisation to be sought prior to the appointment of any new director or if a new conflict arises. During 2011 this procedure operated effectively.
Internal Audit Internal Audit reports to the Board (primarily via the Audit and Risk Committees) and management on the effectiveness of the Company’s system of internal control and the adequacy of this system to manage business risk and to safeguard the Group’s assets and resources. Internal Audit is fully centralised and each country/region head of Internal Audit has a direct reporting line to the chief audit officer (with the exception of Delta Lloyd and some of the Group’s joint ventures). The chief audit officer reports to the group chief executive and to the chairman of the Audit Committee. The effectiveness of Internal Audit is reviewed annually by the Audit Committee, against guidance criteria provided by the Institute of Chartered Accountants in England and Wales and by the Institute of Internal Auditors (IIA). An independent review is conducted every five years as required by the IIA standards. The last independent review was conducted in 2008. Throughout 2011, Internal Audit, through the chief audit officer, provided quarterly reporting on issues arising and the status of action items to the Audit Committee and Risk Committee. Similar reporting is undertaken on a regional and business unit basis to local executive management and local audit committees.
Share capital and control The information required to be provided by the directors pursuant to section 992 of the Companies Act 2006 can be found on page 93 of the Directors’ Report.
Communication with shareholders The Company places considerable importance on communication with shareholders and engages with them on a wide range of issues. The Group has an ongoing programme of dialogue and meetings between the executive directors and institutional investors, fund managers and analysts. At these meetings a wide range of relevant issues including strategy, performance, management and governance are discussed within the constraints of information already made public. The Company’s investor relations department is dedicated to facilitating communication with institutional investors. The directors consider it important to understand the views of shareholders and, in particular, any issues which concern them. The Board receives reports on matters that have been raised with management at the regular meetings held with the Company’s major investors. During the year, the chairman and the senior independent director met with some of the Company’s major institutional investors. In addition, the senior independent director is available to meet with major investors to discuss any areas of concern that cannot be resolved through normal channels of investor communication, and arrangements can be made to meet with the senior independent director through the group company secretary. Similarly, arrangements can be made for major investors to meet with newly appointed directors. The Board also consults with shareholders in connection with specific issues where it considers appropriate. In 2011 the Board, through the Remuneration Committee chairman, consulted with institutional investors on executive remuneration and the introduction of new share plans which were put to shareholders at the 2011 AGM. The Board is equally interested in the concerns of private shareholders and, on its behalf, the group company secretary oversees communication with this group of investors. The Company has a dedicated email address to which questions can be sent, in addition to the facility on the Company’s website, which are both highlighted in the shareholder information section of the 2012 Notice of AGM. These can be used by shareholders to put relevant questions, related to the business of the meeting, to the directors. These are considered to be particularly helpful for those shareholders who are unable to attend the AGM. All material information reported to the regulatory news service
New York Stock Exchange listing requirements The Company was admitted to the New York Stock Exchange (NYSE) on 20 October 2009 and its ordinary shares are traded as American Depositary Shares. As a foreign company listed on the NYSE, the Company is required to comply with the NYSE corporate governance rules to the extent that these rules apply to foreign private issuers. As a foreign private issuer, the Company is therefore required to comply with NYSE Rule 303A.11 by making a disclosure of the differences between the Company’s corporate governance practices and the NYSE corporate governance rules applicable to US companies listed on the NYSE. These differences are summarised below: Independence criteria for directors Under the NYSE listing rules applicable to US companies, independent directors must form the majority of the board of directors. The Code requires that at least half the Board, excluding the chairman, should comprise independent non-executive directors, as determined by the Board. The NYSE listing rules for US companies also state that a director cannot qualify as independent unless the Board affirmatively determines that the director has no material relationship with the company, and the NYSE rules prescribe a list of specific factors and tests that US companies must use for determining independence. The Code sets out its own criteria that may be relevant to the independence determination, but permits the Board to conclude affirmative independence notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, so long as it states its reasons.
Non-executive director meetings Pursuant to the NYSE listing standards, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management and, if that group includes directors who are not independent, listed companies should at least once a year schedule an executive session including only independent directors. Under the Code, the chairman should hold meetings with the non-executive directors without the executive directors present.
Directors’ responsibilities The directors are required to prepare financial statements for each accounting period that comply with the relevant provisions of the Companies Act 2006 and the IFRS as adopted by the European Union (EU), and which present fairly the financial position, financial performance and cash flows of the Company and the Group at the end of the accounting period. A fair presentation of the financial statements in accordance with IFRS requires the directors to:  select suitable accounting policies and verify that they are applied consistently in preparing the accounts, on a going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business;  present information, including accounting policies, in a manner that is relevant, reliable, comparable and understandable;  provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company and the Group’s financial position and financial performance; and
The directors are responsible for maintaining proper accounting records, which are intended to disclose with reasonable accuracy, at any time, the financial position of the Company and the Group. They are ultimately responsible for the system of internal control maintained by the Group for safeguarding the assets of the Company and the Group and for the prevention and detection of fraud and other irregularities. Further details of the system of internal controls maintained by the Group are more fully described on pages 101 to 103. The Directors are also responsible for the preparation of the Company’s Annual Report.
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 reviewing the composition of the Board regularly 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:  evaluating and reviewing the balance of skills, knowledge, and experience of the Board, taking into account the Company’s risk appetite and strategy;  monitoring succession plans for the appointment of nonexecutive directors, the group chief executive and other executive directors to the Board;  identifying and nominating 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;  assessing the independence of each of the non-executive directors including any conflicts of interest;  reviewing 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
The full terms of reference for the Committee can be found on the Company’s website, www.aviva.com/terms-of-reference and are also available from the group company secretary.
Committee membership and attendance The following directors served on the Committee during the year: Period
Lord Sharman (Chairman) 6 100% Mary Francis 6 100% Richard Karl Goeltz 6 100% John McFarlane# 1 100% Andrew Moss 6 100% Russell Walls 6 100%
# John McFarlane attended all Committee meetings following his appointment in September 2011. Ω This shows the percentage of meetings which the Committee member attended during the year while a member of the Committee.
Nomination Committee Report This Nomination Committee Report was reviewed and approved by the Board on 7 March 2012.
Committee role and responsibilities The purpose of the Committee is to assist the Board in discharging its responsibilities for the integrity of the Group and Company’s financial statements, the assessment of the effectiveness of the system of internal control and monitoring the effectiveness and objectivity of the internal and external auditors. The key responsibilities of the Committee are:  reviewing the significant issues and judgements of management, and the methodology and assumptions used, in relation to the Group’s financial statements and formal announcements on the Company’s financial performance;  reviewing the Group’s going concern assumptions and the reserving position relating to the Group’s life assurance and general insurance operations;  assessing the effectiveness of the Group’s system of internal control, including financial reporting and the Internal Audit function;  considering and making recommendations to the Board on the appointment, reappointment, dismissal or resignation and remuneration of the external auditor; and
Russell Walls (Chairman) 11 100% Mary Francis 11 100% Richard Karl Goeltz 11 100% Euleen Goh 11 100% Michael HawkerΩ 4 100%
Ω Michael Hawker attended all Committee meetings following his appointment. ¥ This shows the percentage of meetings which the Committee member attended during the year while a member of the Committee.
Committee expertise The Committee members have significant financial experience and expertise. Russell Walls, a Fellow Chartered Certified Accountant, is a former group finance director of BAA plc, Wellcome plc and Coats Viyella plc. Richard Goeltz is a former chief financial officer of American Express Company and NatWest Group plc and a former member of the Accounting Standards Board. Euleen Goh, a Chartered Accountant and member of the Chartered Institute of Taxation, is a former financial controller of Pontiac Land and chief executive of Standard Chartered Bank, Singapore. Michael Hawker, a Senior Fellow of the Financial Services Institute of Australasia, is a former chief executive and managing director of Insurance Australia Group. The Board is satisfied that these directors have ‘recent and relevant financial experience’ as recommended by the Code and the Board has also determined that they are audit committee financial experts for the purposes of section 407 of the SarbanesOxley Act 2002.
Audit Committee report continued appropriateness of significant accounting policies used in their preparation. During the year, the Committee considered the treatment of the sale of RAC, and the deconsolidation of Delta Lloyd following the partial disposal of the Group’s holding in Delta Lloyd, in the Company’s accounts and the accounting assumptions applied to the results. It also considered the fair value of holdings of Group investments. In November, the Committee considered in detail the revised financial statements which were filed in the US in connection with the Company’s issue of $400m hybrid debt in the US retail market and the disclosures made by the directors in the prospectus and prospectus supplement. The Committee was satisfied with the due diligence, control processes and verification exercise which had been undertaken by management, and with accounting policies and judgements used in preparing the revised accounts.
Internal control Each quarter, the Committee received a report from the chief audit officer concerning the Company’s system of internal control, including any significant new issues and actions taken on previously reported issues. During 2011, Internal Audit carried out assurance reviews over inherent risks throughout the Group. Reviews were focused on, but not limited to, areas such as financial risk management, governance and oversight of the Group, the Group compliance framework and major projects including Solvency II and the Aviva Ireland Transformation Programme. Twice during the year, the Committee received reports on the adequacy of the Group’s life assurance and general insurance reserves. The Committee also considered in detail the adequacy of controls over a number of Group programmes and projects, including the implementation of the Solvency II programme and associated internal legal entity restructurings and the rationalisation of the 12 UK general insurance underwriting entities into one main UK underwriter (One GI project). The Committee reported to the Board regarding the effectiveness of the Group’s overall risk management and internal control systems including the risk management system in relation to the financial reporting process. The Committee worked closely with the Risk Committee in its overall review of the Company’s systems of risk management and internal control. The system of internal control also extends to the Group’s major business units, each of which has an audit committee that provides an oversight role for its business. Membership of these local audit committees is mostly comprised of non-executive directors. The chief audit officer attended regional and business unit audit committee meetings throughout the year and reported back on their effectiveness to the Committee. During 2011 the members of the Committee attended several regional and business unit audit committee meetings, including those in Aviva Investors, France, Italy, the UK, the US, Hong Kong and Singapore. In addition, the chairs of the Aviva US and Aviva UK audit committees, and senior management from Aviva Investors, presented to the Committee during the year, giving the Committee a deeper understanding of relevant local issues and the ability to assess the effectiveness of the system of internal control and the effectiveness and objectivity of the internal audit functions in those businesses. The programme of attendance at regional and business unit audit committee meetings and presentations by regional and business unit audit committee chairmen will continue during 2012. The chairs of the regional and business unit audit and risk committees met in early December in a forum which was initiated to align the committees on
Solvency II and the regulatory framework. Revised terms of reference for local audit committees were also discussed and implemented.
External auditor Ernst & Young has been the external auditor of the Company since 2001, having previously been the auditor of Norwich Union plc. Ernst & Young also currently audits all significant subsidiaries of the Group.
Effectiveness During the year, the Committee performed its annual review of the independence, effectiveness and objectivity of the external auditor, assessing the audit firm, the audit partner and audit teams. The process was conducted by means of a questionnaire, completed Group-wide by members of senior management and members of the Group’s finance community and the Committee. The questionnaire sought opinions on the importance of certain criteria and the performance of the external auditor against those criteria. Based on this review, the Committee concluded that the audit service of Ernst & Young was fit for purpose and provided a robust overall examination of the Group’s business and the risks involved.
Audit tender In order to ensure good corporate governance and that the services of the external auditor remained of the highest quality, the Audit Committee recommended that the provision of external audit services be put to tender in 2011. Following a transparent and competitive tender, including presentations from all candidate firms and discussions with management, the Audit Committee recommended to the Board of directors that PricewaterhouseCoopers LLP be appointed to replace Ernst & Young as the external auditor of the Aviva Group commencing with the 2012 financial year.
Audit fees The Group paid £20.0 million to Ernst & Young LLP for audit services in 2011, relating to the statutory audit of the Group and Company financial statements and the audit of Group subsidiaries and associates pursuant to legislation (2010: £18.6 million). The fees for other services, which included MCEV supplementary reporting, advice on accounting and regulatory matters, reporting on internal controls, reporting on the Group’s Individual Capital Assessment, and work on capital transactions, were £8.5 million (2010: £7.0 million), giving a total fee to Ernst & Young LLP of £28.5 million (2010: £25.6 million). The Group paid £2.4 million to Ernst & Young LLP in relation to other non-audit services. This included £0.9 million in relation to two risk management effectiveness reviews. In line with the External Auditor Policy, the Audit Committee satisfied itself that for these engagements, robust controls (including appropriate levels of review) were in place to ensure that Ernst & Young LLP’s objectivity and independence was safeguarded, and concluded that it was in the interests of the Company to purchase these services from Ernst & Young LLP due to its specific expertise. Further details are provided in note 12 to the consolidated IFRS financial statements. In addition, the Group engaged Ernst & Young LLP to provide assurance on the Group’s Corporate Responsibility Report.
Committee role and responsibilities The Committee assists the Board in providing leadership, direction and oversight of the Group’s management of risk. The key responsibilities of the Committee are:  reviewing the Group’s risk appetite and future risk strategy and making recommendations on risk appetite to the Board;  reviewing the Group’s risk profile against its risk appetite and strategy and reviewing the drivers of changes, if any, in the Group’s risk profile;  reviewing the design, completeness and effectiveness of the risk management framework relative to the Group’s activities;  assessing the adequacy and quality of the risk management function and the effectiveness of risk reporting within the Group; and
 working with the Remuneration Committee to ensure that risk is considered in setting the overall remuneration policy for the Group.
Michael Hawker (Chairman)1 10 91% Mary Francis2 10 91% Leslie Van de Walle 11 100% Russell Walls 11 100%
¥ This shows the percentage of meetings which the Committee member attended during the year while a member of the Committee.
Committee activities during 2011 The Committee’s principal functions are: to assist the Board in making decisions on the Group’s risk appetite; to oversee the monitoring and control of risks so that they remain aligned with appetite; to ensure that management is reviewing emerging risks and testing the Group’s resilience through scenario planning and stress testing; to give clear direction to the way the Group assesses its capital requirements and the quality of its assets and to assist the Board in ensuring a balance between risk and reward in relation to executive remuneration. 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. The chart below shows how the Committee allocated its time during 2011.
• Risk appetite, risk management and risk reporting 32 • Group capital, liquidity management and stress testing 24 • Preparation for Solvency II 12 • Regulatory and governance 11 • Business protection and IT security 5 • Others (including internal audit, 2010 Report and Accounts, Corporate & Speciality Risks) 16
During the year the Committee focused on the following areas: Strengthening risk management across the Group At the beginning of 2011, the Committee considered in detail and approved an enhanced comprehensive Risk Plan (the Plan) to provide a step change in the pace of implementation of the Group’s risk management framework. The Plan built on the existing risk operating model to ensure that leading standards of risk management were embedded at all levels of the business and the Committee received regular updates on the implementation of the Plan and the enhancement of the risk awareness culture throughout the business. The Plan placed strong emphasis on the risk function to ensure the embedding of risk-based decision making on economic capital, the setting of clear statements of risk appetite, especially for economic capital and liquidity, and the rigorous management of risk exposures within limits.
Capital and liquidity management Throughout the year, the Committee closely monitored the Group’s economic capital and liquidity positions, particularly in light of the evolving Eurozone uncertainty, and considered in detail the management actions being taken to address the impact of the economic environment.
Preparing for Solvency II Against a changing and evolving regulatory landscape and with an increasing emphasis on economic capital, the Committee continued to have oversight of all aspects of the programme to implement the Solvency II Directive. Throughout the year, the Committee received regular progress reports on the development of the models that are used to calculate economic capital requirements and the stress and scenario testing techniques used to validate the results. The Committee also had oversight of the detailed contingency planning in relation to the Group’s internal model.
Fraud and financial crime The Committee maintained regular oversight of compliance with controls against financial malpractice including fraud, and of the arrangements for employees to report in confidence any concerns about lack of probity (whistleblowing). The Committee also discussed the implications of the Bribery Act which came into force during the year. It paid particular attention to the update of the Group Anti-Bribery and Corruption Standard and the roll-out of an anti-bribery global communications programme and training for the Group’s businesses and employees.
Committee performance and effectiveness The Committee undertook an annual review of its performance and effectiveness. The review concluded that overall the Committee was effective in carrying out its duties.
Risk Committee Report This Risk Committee Report was reviewed and approved by the Board on 7 March 2012.
Gay Huey Evans (Chairman)* 1 100% Euleen Goh 4 100% Andrew Moss1 3 75% Carole Piwnica** 4 100% Lord Sharman1 3 75% Scott Wheway 4 100%
The Committee met on four occasions in 2011 and the members’ attendance record is set out above. The group company secretary or her nominee acts as the secretary to the Committee. The group HR director and group CR director attended, by invitation, all meetings of the Committee. Other members of senior management were also invited to attend as appropriate to present reports. The chairman of the Committee reports 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 2011 The following chart shows how the Committee allocated its time during 2011, with key activities set out in more detail below: CR strategy and performance The Committee reviewed the Group CR strategy and functional plan for 2011–2013. It also monitored the progress made during the year by the Group’s businesses against each of the CR key performance indicators and continued to receive updates on key CR programme activities such as the Street to School programme, business ethics and stakeholder recognition. There was continued emphasis on strengthening CR performance through employee engagement, by influencing key stakeholders and by embedding balanced leadership throughout the organisation.
Risk management The Committee continued to monitor the risks relating to the Group’s CR activities together with associated risk mitigation initiatives.
Corporate Responsibility Report During the year, the Committee reviewed and approved the scope and content of the Company’s 2011 CR Report included in this Annual Report and Accounts. As was the case in 2010 and 2011, the Company will again put its CR Report included in the Annual Report and Accounts to an annual advisory vote of shareholders at the 2012 AGM as a means of obtaining feedback on the report and the Company’s performance in this area. This year’s CR Report is set out on pages 72 to 88 and further details of the relevant resolution are set out in the Notice of AGM.
Corporate Responsibility Committee Report This Corporate Responsibility Committee Report was reviewed and approved by the Board on 7 March 2012.
• CR strategy, reporting and governance 35 • Region review 14 • Stakeholder recognition and business ethics 20 • Street to School programme 14 • Customers and employees 10 • Climate change and environment 7
 Mark Hodges resigned from the Board on 2 June 2011 and left the Company on 9 September 2011.  Igal Mayer was appointed as chief executive, Aviva Europe and joined the Board on 19 January 2011. Details of his annual remuneration are shown in section 11 of this report.  Trevor Matthews joined Aviva and the Board on 2 December 2011, as chief executive, Aviva UK. His annual remuneration is shown in section 11 of this report. He received a share award to compensate him for certain awards which he forfeited on leaving his previous employer. This award will vest in tranches over three years subject to Mr Matthews remaining in the employment of the Group. See further details in section 10 of this report. The Remuneration Committee (the Committee) is satisfied that the Company paid no more than necessary in approving that buy-out.
This report covers the following:  The Committee’s objectives, membership and main activities in 2011;  A review of Aviva’s remuneration policy and practice;  Commentary on the alignment between remuneration, risk and Aviva’s business strategy and objectives;  Details of the terms of executive directors’ (EDs) employment contracts;  Aviva’s share ownership policy with respect to EDs;  Aviva’s policy on external board appointments;  Aviva’s UK all employee share plans and executive share plans;  Aviva’s position against dilution limits;  Remuneration of the non-executive directors (NEDs); and  Tables summarising the 2011 position on: – Directors’ remuneration – EDs’ pension arrangements – Share award and option plans – Directors’ interests in shares.
2. Strategic Reward Review implementation Throughout 2010, the Company conducted a comprehensive review of senior executive remuneration, the objectives of which were:  to ensure remuneration is optimally designed to attract and retain senior executives, while avoiding paying more than is necessary;  to ensure remuneration is aligned with, and incentivises the achievement of, our strategic business aims while ensuring appropriate risk management;  to benchmark total compensation against suitable comparator groups to ensure remuneration is appropriately positioned against the market; and  to ensure our reward plans appropriately reflect regulatory requirements and best practice guidelines.
Details of this Strategic Reward Review and the proposed changes in respect of executive remuneration resulting from the Review were outlined in the 2010 Directors’ Remuneration Report, which was endorsed by shareholders at the Company’s 2011 AGM. A summary of how these changes impacted the group chief executive and the other EDs in 2011 is shown below:  Revised benchmarking group: The role of the Committee is to apply appropriate judgement in setting pay levels having considered a range of data, including primarily the 25 FTSE companies either side of Aviva’s market capitalisation. The absolute peer group will be reviewed annually based on the most up-to-date market data available.
 Simplified structure: – Annual bonus: In order to help drive a reward and performance culture, the number of KPIs that comprise the financial bonus element will be ideally kept to a maximum of four. These will be disclosed in the Annual Report and Accounts following the relevant year end and will endeavour to reflect all relevant outcomes, behaviours and risk management actions sought by the Board.
Lower quartile to median of the FTSE 30 and the median to upper quartile of the FTSE 50
Annual Bonus Target 75% of basic salary Maximum 150% of basic salary Multiple financial measures Two-thirds deferred into shares for three years
Unchanged target and maximum opportunity Financial measures limited to four, where possible No change to deferral arrangements
OATTV Plan Group chief executive: Matches 100% of the deferred annual bonus ED: Matches 75% of the deferred annual bonus
Group chief executive: 200% of basic salary EDs: 150% of basic salary EC members: 50% of basic salary EDs, including group chief executive, must retain 50% of net executive share plan releases (EC members 25%) until requirement is met
No significant changes to the policies agreed and communicated to shareholders last year are proposed for 2012.
3. Committee’s role and responsibilities The purpose of the Committee is to:  establish a competitive remuneration package to attract, retain and motivate high-quality leaders while avoiding paying more than is necessary;  promote the achievement of both the Company’s annual plans and its strategic objectives by providing a remuneration package that contains appropriately motivating targets that are within the Group’s risk appetite; and  align senior executives’ remuneration with the interests of shareholders and other stakeholders, including customers and employees.
The Committee’s key responsibilities are to:  recommend to the Board the Group’s remuneration policy for EDs and members of senior management, covering basic salary, bonus, long-term incentives, retirement provisions, long-term wealth creation and other benefits;  work with the Risk Committee to ensure that risk is properly considered in setting the overall remuneration policy for the
 select, appoint and determine terms of reference for independent remuneration consultants to advise the Committee on remuneration policy and levels of remuneration.
Scott Wheway Chairman of the Committee Member since 5 December 2007, chairman since 1 January 2009 Mary Francis Member Member from 25 January 2006 until 1 June 2011 Michael Hawker Member Member since 1 June 2011 Carole Piwnica Member Member from 25 January 2006 until 1 December 2011 Leslie Van de Walle Member Member since 24 September 2009
Lord Sharman Chairman of the Company Attended by invitation Andrew Moss Group chief executive Attended by invitation John McFarlane Non-executive director Attended by invitation John Ainley Group HR director Attended as an executive responsible for advising on the remuneration policy Kirstine Cooper Group company secretary Attended as secretary to the Committee Tracey O’Rourke Group reward and HR policy director Attended as an executive responsible for advising on the remuneration policy Martyn Fisher Group reward director Attended as an executive responsible for advising on the 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 Amanda Mackenzie Chief marketing and communications officer Attended to advise on matters relating to customer target setting Alain Dromer Chief executive, Aviva Investors Attended to advise on matters relating to Aviva Investors’ remuneration policy in relation to the FSA’s Remuneration Code Nigel Clemson Executive HR director, Aviva Investors Attended to advise on matters relating to Aviva Investors’ remuneration policy in relation to the FSA’s Remuneration Code Representatives of AON Hewitt New Bridge Street (AHNBS)*
Scott Wheway (Chairman) 10 100% Mary Francis2 5 71% Michael Hawker3 3 100% Carole Piwnica4 8 89% Leslie Van de Walle5 9 90% 1 This shows the percentage of meetings which the Committee member attended during the year while a member of the Committee. 2 Mary Francis was unable to attend meetings held on 19 January 2011 and 24 May 2011 due to prior commitments and these meetings being called at short notice. Mrs Francis stepped down as a member of the Committee on 1 June 2011 and therefore was no longer a member of the Committee when the last three meetings of 2011 were held. 3 Michael Hawker attended all of the meetings held following his appointment to the Committee on 1 June 2011. 4 Carole Piwnica was unable to attend the meeting held on 30 November 2011 due to a prior commitment. Mrs Piwnica stepped down as a member of the Committee on 1 December 2011 and therefore was no longer a member of the
Committee when the last meeting of 2011 was held. 5 Leslie Van de Walle was unable to attend the meeting held on 26 April 2011 due to a prior commitment and the meeting being called at short notice.
The Committee has a standing calendar of agenda items within its remit. In addition to these items, the Committee discusses matters relating to the operation of the Group’s remuneration policy and emerging market practices. The chart opposite summarises the time allocated to various agenda items during 2011 and Table 4 below sets out the matters discussed by the Committee.
2 February  None  Discussion of communications to institutional investors regarding the Strategic Reward Review
 A review of EDs’ and EC members’ shareholding requirements  A review and approval of the chairman of the Company’s fees
 Approval of the 2011 personal objectives for EDs and EC members
 Approval of amendments to the rules of the Aviva AESOP  Approval of amendments to the Committee’s Terms of
April  None  Discussion and approval of the proposed remuneration package for a newly appointed EC member
Table 4: Matters discussed by the Committee during its 2011 meetings continued
August  A review of dilution limits  Approval of an invitation to UK employees to participate in the Aviva Savings Related Share Option Scheme and to Irish employees to participate in the Aviva Ireland Save As You Earn Scheme (SAYE Schemes)
 Discussion regarding the remuneration benchmarking of EDs and EC members in 2012
 Approval of amendments to the remuneration package and joining arrangements for Trevor Matthews
 Approval of a localisation agreement for an EC member  Approval of amendments to the Aviva Recruitment and
November  Approval of the group chief executive’s personal objectives for 2012
December  None  Discussion of EDs’ and EC members’ personal and risk objectives for 2012
7. Changes to UK pension taxation Following announcements by the UK government during late 2010 and 2011, the Company reviewed its approach to pension provisions for those employees whose pension contributions exceed either the newly reduced annual allowance or, from April 2012, the newly reduced Lifetime Allowance. The Company fully supports, where possible, the continued tax-efficient provision of retirement benefits. In reviewing the ongoing retirement benefit plan changes, no arrangements were entered into which materially increased Company costs. For those employees who are members of the UK Defined Contribution Plan, an option is provided to pay the excess over £50,000 per annum as either a lump sum or a contribution into an Employee Benefit Trust which generates a tax point in five years’ time and has a 12-month risk of forfeiture for those who either resign or are terminated for cause.
 Basic salary: Internal and external equity in basic salary positioning is an important contributor to a motivational remuneration package. A range of market data is used to inform decision making, taking into account the Company’s benchmarking policy including regard to the 25 FTSE companies either side of Aviva’s market capitalisation.
The Committee considers all these elements, plus retirement and other benefits, as a whole. It looks to ensure that an appropriate balance is maintained between the elements to ensure that the need for both short-term success and long-term sustainable growth is recognised. The Committee also ensures that the non-financial business measures and individual objectives reflect adequately the Company’s environmental, social and governance responsibilities.
For the purposes of the charts above, ‘Cash’ includes basic salary and the discretionary ACAP payment. “Variable Cash” is the onethird of bonus paid in cash annually. The share element includes the two-thirds of the annual bonus deferred into shares and the LTIP.  2011 ‘Target’ performance means a target ABP outcome (75% of basic salary) and a 50% vesting of the LTIP
Total remuneration Total remuneration package levels are informed by relevant pay data, in particular for 2011, the median range of the 25 FTSE companies either side of Aviva’s market capitalisation. These reference points are chosen to reflect Aviva’s market capitalisation and comparability to other large, sophisticated multi-national companies and the positioning that is appropriate to Aviva in those different comparator groups.
Basic salary Benchmarked as for total remuneration but with positioning and progression taking account of individual and business performance and the levels of increase provided for the broader UK employee population (basic salaries of the UK employees increased by 2% on average in 2011). The Committee takes seriously institutional investors’ concerns on the upward ratchet of basic salaries and is rigorous in its review of salaries against market position.
ABP The ABP is intended to incentivise executives to achieve the annual business plan, based on a series of key financial, employee and customer performance indicators (KPIs), which make up 70% of the bonus opportunity, and personal objectives which make up 30%. 75% of basic salary is payable for ‘on target’ performance and up to 150% for ‘stretch’ performance. Two-thirds of bonus is deferred into shares and the deferred shares vest on the third anniversary of the date of grant. The vesting of deferred shares is reduced on resignation or in certain other leaver circumstances for deferrals made prior to March 2011. Vesting of deferred shares is forfeited on resignation or in certain other leaver circumstances for deferrals made from March 2011. Additional shares are awarded at vesting in lieu of the dividends paid on the deferred shares during the deferral period. The plan rules give the Committee the authority to cancel unvested awards in the event of misconduct by the participant or a member of their team, or in the event of a materially adverse misstatement of the Company’s financial statements.
 Annually, one-third is paid in cash and two-thirds in deferred shares.
 Annual awards in shares that vest, subject to ROCE and relative TSR performance conditions being met, at the end of a three-year performance period.
ASPS The UK ASPS provides a competitive post-retirement package. Lump sum death in service benefit of four times basic salary is provided, as is a spouse’s or partner’s pension equal to two-thirds of actual or, on death in service and in certain other circumstances, prospective pension. Post-retirement increases are equivalent to the Retail Price Index up to a maximum of 7.5%. Retirement benefits can be accessed from age 60.
 Deferred cash payable on retirement in the form of a lump sum/monthly payment.
Other benefits Other benefits are provided on a market competitive basis.  Cash car allowance
 If Mr Matthews’ employment is terminated due to resignation or dismissal for gross misconduct or gross incompetence, any unvested shares subject to the award will lapse and the Company will reclaim any part of the award which vested during the 12 months prior to the termination date.
 If Mr Matthews’ employment is terminated for any other reason than those outlined above, any unvested shares subject to the award will vest immediately following the termination date.
 Similarly, in the event of a change of control of the Company (by way of general offer or court order) or similar corporate event, any unvested shares subject to the award will vest in full. However, in certain circumstances, the Company may require Mr Matthews to exchange the award for an equivalent award over shares in the acquiring Company.
 The conditional share award is not pensionable. Any amendments to the terms of the award which are to the advantage of the participant (other than certain minor amendments) are subject to shareholder approval.
Table 7: Overview of EDs’ remuneration during 2011 and 2012 Andrew Moss, group chief executive Element Amount Commentary**
Bonus is a function of the degree of achievement of 2011 targets as follows: Financial 39.22% (maximum 50%) Employee 9.38% (maximum 10%) Customer 5.67% (maximum 10%) Personal 26.00% (maximum 30%)
The face value of the 2011 grant represented 275% of basic salary on 28 February 2011 Mr Moss will receive an LTIP grant for 2012 with a face value of £2,640,000, representing the standard award of 275% of his basic salary as at 29 February 2012
Other benefits 2% basic salary cash supplement £19,000 cash car allowance PMI
Table 7: Overview of EDs’ remuneration during 2011 and 2012 continued Patrick Regan, chief financial officer Element Amount Commentary**
Mr Regan received a 5.8% increase from £600,000 to £635,000, effective 1 April 2011 He will receive a further 13.4% increase from £635,000 to £720,000 effective 1 April 2012. Mr Regan has demonstrated outstanding performance in 2010 and 2011 to warrant these increases
£764,572 (120.4% of basic salary). (£254,857 delivered in cash and £509,715 deferred into shares for three years)
Bonus is a function of the degree of achievement of 2011 targets as follows: Financial 39.22% (maximum 50%) Employee 9.38 % (maximum 10%) Customer 5.67% (maximum 10%) Personal 26.00% (maximum 30%)
The face value of the 2011 grant represented 225% of Mr Regan’s basic salary on 28 February 2011 Mr Regan will receive an LTIP grant for 2012 with a face value of £1,428,750, representing the standard award of 225% of his basic salary as at 29 February 2012
Basic salary £605,625 during the period from joining the Board (CAD 959,129)
£631,829 (99.9% of basic salary) (£210,610 delivered in cash and £421,219 deferred into shares for three years)
** Percentages do not necessarily add up due to rounding. ***Under the terms of his letter of appointment, Igal Mayer is entitled to first class return flights between Toronto and London, and a travel allowance of up to £40,000 per annum for his spouse and dependent children for travel to and from
Table 7: Overview of EDs’ remuneration during 2011 and 2012 continued Trevor Matthews, chief executive, Aviva UK* Element Amount Commentary**
Mr Matthews commenced employment on 2 December 2011 with an annual basic salary of £720,000 He will be eligible for a salary review in April 2013
2011 bonus based on an on target payment applied to one month’s basic salary
As compensation for forfeiture of unvested shares and 2011 bonus from previous employer. The conditional share award will vest in three equal tranches on the first dealing day of March 2012, March 2013 and March 2014 subject to Mr Matthews remaining in employment and no dealing restrictions being in place on the vesting date. See section 10 for more details Mr Matthews received legal advice in connection with the terms of his employment * Trevor Matthews joined the Board on 2 December 2011 and the information shown is for the period served as an ED in 2011. ** Percentages do not necessarily add up due to rounding.
Basic salary £33,807 during the period until leaving the Board (€39,000)
Mr Moneta received this payment in accordance with a contractual entitlement
Based on €112,000 annual housing allowance, grossed up for tax purposes*** Based on €30,000 annual schooling allowance payable up to the end of secondary schooling, grossed up for tax purposes*** Mr Moneta received a payment of €50,000 as compensation for loss of employment Legal fees were paid directly to Mr Moneta’s solicitor for advising Mr Moneta on his departure terms * Andrea Moneta resigned from the Board on 19 January 2011 and the information shown is for the period served as an ED in 2011. Figures shown above have been converted from euros to pounds sterling at the average exchange rate for 2011 of €1.1536 : £1.00.
** Percentages do not necessarily add up due to rounding. *** These exceptional other benefits were provided to replicate pre-existing obligations. These benefits were time-limited and ceased in 2011.
Table 7: Overview of EDs’ remuneration during 2011 and 2012 continued Mark Hodges, chief executive, Aviva UK* Element Amount Commentary**
The face value of the 2011 grant represented 225% of Mr Hodges’ basic salary on 28 February 2011. This award lapsed in full upon Mr Hodges’ resignation
Other benefits £6,872 cash car allowance during the period until leaving the Board PMI
12. Target setting ABP – target setting The financial targets which underpinned the ABP (accounting for up to 50% of annual bonus) in 2011 were derived from Aviva’s return, growth and capital efficiency/capital generation goals. Employee and customer targets (each accounting for up to 10% of annual bonus) are set taking into account performance to date and aspirations for the future. The employee targets on leadership and engagement are derived from the Group’s Employee Promise Survey in which all business units participate and which over 34,000 staff completed in 2011. This survey is delivered through an independent third party who is able to provide extensive external benchmark data. The Company’s aspiration is to reach upper quartile positions compared to the relevant global and national norms on leadership and employee engagement over time. In 2011, all businesses measured customer advocacy using a consistent robust methodology undertaken by an independent global research agency. The Company’s aspiration is to reach the upper quartile in the relevant local market benchmark. Internal assurance that the outcomes on employee and customer targets were accurately calculated and reported was provided to the Committee by the Group’s Internal Audit function. Personal targets are based on delivery of key strategic priorities, personal leadership and operating performance of the relevant portion of the business and account for up to 30% of annual bonus; 50% of the personal objectives of the EDs for 2011 was derived from a joint Executive Committee Risk objective. The Group’s performance against its financial, employee and customer KPIs in 2011, as they affected the bonus of the group chief executive, is shown in Table 8.
Table 8: Group performance in 2011 against its KPIs Weighting (% of total bonus opportunity)
Personal – common risk objective 7.5 15.0 11.0 * Percentages do not necessarily add up due to rounding.
The Committee remains sensitive to the external environment in relation to executive pay, and particularly relating to the payment of bonuses in circumstances where financial targets have not been met and share prices have fallen. However, the combination of financial and non-financial measures is central to the structure of the ABP. The Committee aims to ensure a balanced focus on both short-term financial performance and on the objective non-financial measures that are leading indicators of future financial success. This balance is, in the Committee’s view, reflective of good practice in incentive design and is consistent with the FSA’s guidance on creating incentive schemes that have a focus on long-term sustainable performance and are considerate of the risk environment. Aviva appropriately incentivises and rewards employees for achieving stated business goals in a manner that is consistent with our approach to sound and effective risk management. As described above, the Committee took the view that it was important to maintain the integrity of the financial targets for the EDs, and therefore these were not adjusted during the year. In the same way, the Committee believes that it is appropriate to pay bonuses based on pre-agreed rigorous targets when these have been met.
LTIP – target setting The LTIP vests subject to the degree of achievement of two equally weighted performance measures, absolute ROCE and relative TSR performance, which have been chosen to reflect shareholders’ long-term interests.
ROCE targets ROCE targets determine the vesting of 50% of any LTIP award and 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. The Company’s external auditor provides a formal opinion on the IFRS ROCE vesting calculation. The 2011 LTIP award ROCE targets are set out in Table 9 below.
Between 33% and 40.5% Pro rata between 10% and 50% on a straight line basis 40.5% and above 50%
Table 10: TSR vesting schedule for the 2011 LTIP award TSR position over the three-year performance period Percentage of shares in award that vests based on achievement of TSR targets
Details of subsisting LTIP awards are provided in Table 15 of this report. Table 11 below shows the vesting projections (non-audited) of those awards as at 31 December 2011.
Aviva LTIP 2011 50.00% Aviva LTIP 2010 73.33% Aviva LTIP 2009 81.67%
Since the LTIP has performance conditions attached to it, one potential outcome is that neither performance condition is met and the whole of the LTIP lapses. Table 12 below has been produced to illustrate the potential value of the LTIP awards made to EDs in 2011 should the performance conditions be met in part or in whole.
Face value of grant 2,543,750 1,350,000 1,620,000 1,580,950 *Figures shown for Igal Mayer have been converted from Canadian dollars to pounds sterling at the average exchange rate for 2011 of CAD 1.5837 : £1.00.
Assumptions are as follows:  Threshold vesting assumes TSR and ROCE elements vest at the minimum level, producing a 20% vesting of the total award.
 Maximum vesting assumes both TSR and ROCE elements vest in full, producing a 100% vesting. Share price growth of 10% per annum is assumed over the three-year performance period.
LTIP awards vesting in 2011 At the end of the performance period for the 2008 LTIP grant, which vested in 2011; the Company was ranked seventh out of the 16 companies in the TSR comparator group (22.3% vesting of the whole award) and ROCE was 44.3% (50% vesting of the whole award). The total vesting was therefore 72.3%. The 27.7% of the award which did not vest, lapsed. The LTIP vesting history is set out in Table 13 below. Prior to the 2005 award, vesting history is based on an earlier LTIP plan, and the last award made under this plan was in 2004.
Table 14: Aviva plc five-year TSR performance against the FTSE 100 Return Index and the median of the comparator group
Igal Mayer Aviva Long Term Incentive Plan 20083 77,097 — 55,741 21,356 — 617.50 432.80 Mar-11
One Aviva, twice the value bonus plan 20083 25,725 — — 25,725 — 598.00 Mar-11
Trevor Matthews11 Aviva Long Term Incentive Plan 20113 — 373,27112 — — 373,27112 300.80 Mar-14
One Aviva, twice the value bonus plan 20083 41,838 — — 41,838 — 598.00 Mar-11
Andrea Moneta15 Aviva Long Term Incentive Plan 20092 249,023 — — — 249,023 245.00 Mar-12
One Aviva, twice the value bonus plan 20092 119,531 — — — 119,531 245.00 Mar-12
2 The performance periods for these awards begin at the commencement of the financial year in which the award is granted. 3 The performance conditions for awards which were granted or which vested during 2011 are explained elsewhere in this report. The performance periods for these awards begin at the commencement of the financial year in which the award is granted. 4 The award date for the awards granted in 2008 which vested in 2011 was 31 March 2008, the award date for the award granted in 2009 which vested in 2011 was 26 March 2009, and the award date for the award granted in 2010 which vested in 2011 was 11 March 2010. The awards which vested in 2011 were released with the net amount being settled in shares and the balance settled in cash and used to pay the resulting tax liability. The monetary value of awards will be calculated by multiplying the relevant number of shares by the closing middle market price of an ordinary share of the Company at the date of vesting.
The remaining shares will vest on the normal vesting date. 15 Andrea Moneta’s ABP awards vested on 3 March 2011, the first business day after leaving the Company on 28 February 2011. Mr Moneta’s LTIP and OATTV awards were time prorated on his leaving and the remaining shares will vest on the normal vesting date to the extent that the performance conditions have been achieved. 16 The aggregate net value of share awards granted to the directors in the period was £12.1 million (2010: £9.5 million). The net value has been calculated by reference to the closing middle market price of an ordinary share of the Company at the date of grant. This excludes shares issued in lieu of dividends.
Directors’ remuneration report continued 14. Share options Details of the EDs who were in office for any part of the 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 16 below. Savings-related share options in Table 16 refer to options granted under the HMRC-approved Aviva Savings Related Share Option Scheme or Aviva Savings Related Share Option Scheme 2007. Options are normally exercisable during the six-month period following the end of the relevant (three, five or seven-year) savings contract. Executive share options (approved) in Table 16 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.
May 2011 Executive share options (approved) 2010 7,772 — — — 7,772 386.0 March 2013
Executive share options (approved) 2010 7,772 — — — 7,772 386.0 March 2013 Igal Mayer1 Savings-related options 2011 — 5,923 — — 5,923 268.0 December 2018 –
Notes 1 Igal Mayer joined the Board on 19 January 2011 and held no share options on appointment. 2 The information shown for Mark Hodges is as at his resignation from the Board on 2 June 2011. Mr Hodges’ executive share options lapsed on leaving the Company on 9 September 2011.
The closing middle market price of an ordinary share of the Company on 30 December 2011, being the last business day of the year, was 300.8 pence, and the closing middle market price of an ordinary share of the Company during the year ranged from 275.3 pence to 477.9 pence. During the year, no share options were exercised by directors (2010: nil options exercised). EDs did not pay for the award of any share options and options are not subject to performance conditions (the savings related options being granted under an all-employee share scheme and the executive share options being linked to awards under the LTIP which are subject to performance conditions).
15. EDs’ employment contracts The key terms and conditions of the EDs’ employment, as stipulated in their employment contracts, are set out in Table 17 below.
Notice period By the director By the Company 6 months 12 months, rolling. No notice or payment in lieu to be paid where the Company terminates for cause.
Contract dates Director: Andrew Moss Patrick Regan Igal Mayer Trevor Matthews Mark Hodges Andrea Moneta
* Mark Hodges resigned from the Board on 2 June 2011 and left the Company on 9 September 2011. **Andrea Moneta resigned from the Board on 19 January 2011 and left the Company on 28 February 2011.
17. External board appointments Aviva recognises its EDs can benefit from serving in a personal capacity as a non-executive director (NED) of non-Aviva Group companies. It is, at the same time, conscious of the corporate governance recommendations that EDs should take account of the time commitment required by a non-executive director position and ensure 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 to retain any Board fees. None of the EDs held external NED appointments during 2011.
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, with the chairmen of the Audit, Remuneration and Risk Committees spending substantially more.
Non-compete During term of directorship and for six months after leaving
Mary Francis 4 May 2011 AGM 2012 Richard Karl Goeltz 4 May 2011 AGM 2012 Euleen Goh 4 May 2011 AGM 2012 Michael Hawker 4 May 2011 AGM 2012 Gay Huey Evans 20 October 2011 AGM 2012 John McFarlane 1 September 2011 AGM 2012 Carole Piwnica 4 May 2011 AGM 2012* Lord Sharman 4 May 2011 AGM 2012 Leslie Van de Walle 4 May 2011 AGM 2012 Russell Walls 4 May 2011 AGM 2012 Scott Wheway 4 May 2011 AGM 2012 *Carole Piwnica retired from the Board on 1 December 2011.
Committee chairman – Audit £35,000 (inclusive of committee membership fee) – Corporate Responsibility £10,000 (inclusive of committee membership fee) – Remuneration £30,000 (inclusive of committee membership fee) – Risk £35,000 (inclusive of committee membership fee)
Committee membership – Audit £10,000 – Corporate Responsibility £7,500 – Nomination £7,500 – Remuneration £10,000 – Risk £10,000
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 2012 AGM from 10.45am on Thursday 3 May 2012 until the close of the meeting.
Table 21: Directors’ remuneration in 2011 Basic salary/fees Bonuses1 ACAP Benefits2 Total
Non-executive directors8 Mary Francis 113 108 — — — — — — 113 108
Leslie Van de Walle 85 78 — — — — — — 85 78
5 Figures shown for Andrea Moneta have been converted from euros to pounds sterling at the average exchange rate for 2011 of €1.1536 : £1.00. As previously stated, legal fees of £35,000 were paid directly to Mr Moneta’s solicitor and are included in the table above.
6 The Chairman received travel-related benefits. 7 Although no costs were incurred in 2011, under the terms of his letter of appointment, John McFarlane is entitled to be reimbursed for any such costs reasonably incurred in connection with his relocation to the UK during the 12-month period from the date of his appointment, up to a maximum of £125,000 together with any VAT or equivalent tax payable thereon. He is also entitled to the reimbursement of the costs incurred in respect of advice sought on the legal and tax implications of his appointment.
8 NEDs are reimbursed for expenses, and any tax arising on those expenses is settled directly by Aviva. 9 The amount shown for Andrea Moneta is the amount paid in 2011 up to Mr Moneta leaving the Board on 19 January 2011 and for Mark Hodges, it is the amount paid in 2011 up to Mr Hodges leaving the Board on 2 June 2011. 10 For the purposes of the disclosure required by Schedule 5 to the Large & Medium-sized Companies and Groups (Accounts & Reports) Regulations 2008, the total aggregate emoluments of the directors in respect of 2011 was £6.3 million (2010: £6.8 million).
Fees earned in 2011 by the NEDs are set out in Table 22 below.
22. Senior executives’ remuneration The total compensation paid during the year to key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Company, including the Company’s EDs and NEDs (as required to be disclosed by International Accounting Standard 24) was £65 million (2010: £66 million) and is set out in note 59 to the Annual Report and Accounts.
23. EDs’ pension arrangements The positions of the EDs with respect to accumulated pension benefits under the defined benefits section of the ASPS is set out in Table 23 below.
Accrued annual pension at 31 December 20101 21.8 83.6 388.5 — Accrued annual pension at 31 December 20111 22.5 86.2 430.9 — Gross increase in accrued pension over the year 0.7 2.6 42.4 — Increase (decrease) in accrued pension net of inflation over the year — — 33.5 —
Notes 1 ‘Shares’ are the directors’ beneficial holdings in the ordinary shares of the Company and in respect of the EDs include shares held in trust under the Company’s AESOP being shares purchased by them under the partnership element and shares granted under the free share element. In respect of Andrew Moss, it also includes the remaining restricted shares held in trust from his ABP awards, and for Patrick Regan it includes the remaining restricted shares held in trust from his RRSA and BRDSA awarded under the rules of the CFO Recruitment Share Awards Plan.
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 restricted shares or conditional shares and deferred for three years. The transfer of the shares to the director at the end of the period is not subject to the attainment of performance conditions but a proportion of the shares can be forfeited if the executive leaves service before the end of the period. In respect of Andrew Moss, 220,067 of the shares held as at 31 December 2011 are restricted shares. In respect of Patrick Regan, 213,624 of the shares held as at 31 December 2011 represent the RRSA and BRDSA awarded under the rules of the CFO Recruitment Share Awards Plan and are restricted shares. In respect of Trevor Matthews, these shares represent the Conditional Share Award.
 Euro new preference shares of €1 each, which have such rights and terms (including terms related to the redemption of such shares, ranking and entitlement to dividend and capital) as the Board determines.
Issued share capital The Company had aggregate issued and outstanding ordinary share capital of £726 million as of 31 December 2011. The following table sets forth information about the issued and outstanding classes of equity as of 31 December 2011.
Subsidiaries Transactions between the Company and its subsidiaries are eliminated on consolidation. However, the Company has transactions and outstanding balances with certain unit trusts, Open Ended Investment Companies, collateralised debt obligations and similar entities which are not consolidated and where a Group company acts as manager. These entities are regarded as related parties for the purposes of International Accounting Standard (IAS) 24. The balances are included in the Group’s statement of financial position at fair value or amortised cost in accordance with their IAS 39 classifications. The transactions are included in the income statement and include amounts paid on issue of shares or units, amounts received on cancellation of shares or units and paid in respect of the periodic charge and administration fee.
Directors and key management The total compensation to those employees classified as key management, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the executive and non-executive directors is as follows: £m £m
Salary and other short-term benefits 36 36 39 Post-employment benefits 9 7 5 Equity compensation plans 18 21 16
Various directors and key management of Aviva may from time to time purchase insurance, asset management or annuity products, or be granted mortgages marketed by Aviva Group companies in the ordinary course of business on substantially the same terms, including interest rates and security requirements, as those prevailing at the time for comparable transactions with other persons. Apart from the disclosed transactions discussed above and in the ‘Governance’ section of this report, no director had an interest in shares, transactions or arrangements that requires disclosure under applicable rules and regulations.
Dividend data The Company’s dividend policy is to sustain a target dividend cover of between one and a half and two times our adjusted operating profit after tax before amortisation of goodwill and adjusting items. Under UK company law, we may only pay dividends if the company has ‘distributable profits’ available. ‘Distributable profits’ are accumulated, realised profits not previously distributed or capitalised, less accumulated, unrealised losses not previously written off based on IFRS. Even if distributable profits are available, we pay dividends only if the amount of our net assets is not less than the aggregate of our called-up share capital and undistributable reserves and the payment of the dividend does not reduce the amount of our net assets to less than that aggregate. As a holding company, the Company is dependent upon dividends and interest from our subsidiaries to pay cash dividends. Many of the Company’s subsidiaries are subject to insurance regulations that restrict the amount of dividends that they can pay to us. Historically, the Company has declared an interim and a final dividend for each year (with the final dividend being paid in the year following the year to which it relates). Subject to the restrictions set out above, the payment of interim dividends on ordinary shares is made at the discretion of our Board, while payment of any final dividend requires the approval of the Company’s shareholders at a general meeting. Preference shares are irredeemable and dividends on preference shares are made at the discretion of our Board. The Company pays cash dividends in pounds sterling, although the articles of association permit payment of dividends on ordinary shares in other currencies and in forms other than cash, such as ordinary shares. If dividends on ordinary shares held by the American Depositary Shares (ADS) depositary are paid in pounds sterling, the ADS depositary will convert the pounds sterling that it receives on behalf of the ADS holders into US dollars according to the prevailing market rate on the date that the ADS depositary actually receives the dividends.
Guarantees, securitised assets and off-balance sheet arrangements As a normal part of our operating activities, various Group companies have given financial guarantees and options, including interest rate guarantees, in respect of certain long-term assurance and fund management products, as set out in ‘Financial statements IFRS – Note 41 – Financial guarantees and options’. These are accounted for on-balance sheet as either part of the host insurance contract or as financial instruments under IFRS. Information on operating lease commitments can be found in ‘Financial statements IFRS – Note 52 – Commitments’. It is standard business practice for our Group companies to give guarantees, indemnities and warranties in connection with disposals of subsidiaries and associates to third parties. As of 31 December 2011, we believe no material loss will arise in respect of these guarantees, indemnities and warranties. Standard financial warranties include the accuracy and completeness of the statement of financial position at the completion date, details of outstanding litigation, the position on tax filings and any outstanding clearance items. In addition, specific clauses cover such matters as regulatory approvals and licences, the adequacy of actuarial insurance liabilities, reinsurance contracts and the status of employee pension plans. Their exact terms are tailored to each disposal and are set out in the respective sale and purchase agreement. Similarly, the open warranty periods, within which the purchaser could claim, and limits on the maximum amount potentially recoverable will vary for each item covered in each disposal. There are a number of outstanding claims on recent disposals, none of which are material. There are also open claim periods on other recent disposals on which we have neither received, nor expect to receive, any such claims. We believe that there is no material exposure in this respect. We have loans receivable, secured by mortgages, which have then been securitised through non-recourse borrowings by special purpose entities in our UK Life business and, prior to its deconsolidation, our Dutch business, as set out in ‘Financial statements IFRS – Note 24 – Securitised mortgages and related assets’. These special purpose entities have been consolidated and included in the statement of financial position, as we retain the residual interest in them.
Limited liability partnerships classified as joint ventures As part of their investment strategy, the UK and certain European long-term business policyholder funds have invested in a number of property limited partnerships (PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a Group subsidiary. Accounting for the PUTs and PLPs as subsidiaries, joint ventures or other financial investments depends on the shareholdings in the GPs and the terms of each partnership agreement. If a partnership is managed by a contractual arrangement agreement such that no party exerts control, notwithstanding that the Group’s partnership share or economic interest in the PLP (including its indirect stake via the relevant PUT and GP) may be greater than 50%, such PUTs and PLPs have been classified as joint ventures. Of the PLPs accounted for as joint ventures at 31 December 2011, the Group’s economic interest exceeded 50% in respect of one partnership, The Mall Limited Partnership, in which the Group had a 50.5% economic interest. ‘Financial statements IFRS – Note 18 – Interests in, and loans to, joint ventures’ provides a list of the principal PLPs accounted for as joint ventures, as well as summarised information on the revenue, expenses, assets and liabilities of the Group’s interests in its joint ventures in aggregate. In respect of these PLPs, there are no significant contingent liabilities to which we are exposed, nor do we have any significant contingent liabilities in relation to our interests in them. External debt raised by the PLPs is secured on their respective property portfolios, and the lenders are only entitled to obtain payment of both interest and principal to the extent there are sufficient resources in the respective PLPs. The lenders have no recourse whatsoever to the policyholder and shareholders’ funds of any companies in the Aviva Group. At 31 December 2011, we had £258 million capital commitments to these PLP joint ventures.
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 officer. Significant changes in policy require, in addition, the approval of the Assets and Liabilities Committee, the Executive Committee and then the Risk and Regulatory Committee of the Board. 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 our working capital is sufficient for our present operational requirements. For additional information, see ‘Financial statements IFRS – 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. At 31 December 2011, total consolidated net cash and cash equivalents net of bank overdrafts amounted to £22,401 million, a decrease of £2,294 million over £24,695 million in 2010. Processes for monitoring and managing liquidity risk, including liquidity stress models, have been enhanced to take into account the extraordinary market conditions, including the impact on policyholder and counterparty behaviour, the ability to sell various investment assets and the ability to raise incremental funding from various sources. Management has taken steps to strengthen liquidity in light of its assessment of the impact of market conditions, such as issuing £450 million long-term subordinated debt in May 2011 and $400 million long-term subordinated debt in November 2011, and intends to continue to monitor liquidity closely.
 manage exposures to movements in exchange rates by aligning the deployment of capital by currency with our capital requirements by currency.
We are subject to a number of regulatory capital tests and employ realistic scenario tests to allocate capital and manage risk. The impact of these regulatory capital tests on our ability to transfer capital around the Group through dividends and capital injections is discussed later in this section under the headings ‘Sources of liquidity’ and ‘Capital injections’. At 31 December 2011, the Group had £20.8 billion (31 December 2010: £26.3 billion) of total capital employed in our trading operations which is financed by a combination of equity shareholders’ funds, preference capital, direct capital instruments, subordinated debt and internal and external borrowings. In 2011, the total capital employed decreased by £5.5 billion. The reduction is primarily driven by the deconsolidation of Delta Lloyd and the impact of financial markets. Over the period the Group has generated post tax profits and benefited from actuarial gains on staff pension schemes. See ‘Financial statements IFRS – Note 54 – Group capital structure’. In addition to external funding sources, we have a number of internal debt arrangements in place. These have allowed the assets supporting technical liabilities to be invested into the pool of central assets for use across the Group. They have also enabled us to deploy cash from some parts of the business to others in order to fund growth. Although intra-Group loans in nature, they are counted as part of the capital base for the purpose of capital management. All internal loans satisfy arm’s length criteria and all interest payments have been made when due.
At 31 December 2011, our total external borrowings, including subordinated debt and securitised mortgage loans, amounted to £8.5 billion (31 December 2010: £14.9 billion). Of the total borrowings, £5.3 billion (31 December 2010: £6.1 billion) are considered to be core borrowings and are included within the Group’s capital employed. The balance of £3.2 billion (31 December 2010: £8.8 billion) represents operational debt issued by operating subsidiaries. We also have substantial committed credit facilities available for our use. At 31 December 2011, we had undrawn committed credit facilities expiring within one year of £1.0 billion (31 December 2010: £1.0 billion) and £1.1 billion in credit facilities expiring after more than one year (31 December 2010: £1.1 billion). Of these facilities, £750 million was allocated in 2011 (31 December 2010: £750 million) to support our commercial paper programme. Further information on the maturity profile, currency and interest rate structure of our borrowings is presented in ‘Financial statements IFRS – Note 48 – Borrowings’. Commercial paper is issued for terms up to six months and is generally reissued at maturity. The earliest repayment date for other debt instruments is a $300 million subordinated debt instrument with a first call date of 19 June 2012 at the option of the company. At this time Aviva will have the option of repaying the debt or accepting a step-up in the coupon and deferring repayment until 2017. The table below presents our debt position for the periods indicated: £m £m
Core structural borrowings Subordinated debt 4,550 4,572 Debenture loans 199 851 Commercial paper 506 643
Operating borrowings Amounts owed to financial institutions 1,889 2,550 Securitised mortgage loans 1,306 6,333
Undrawn borrowings At 31 December 2011, we had £2.1 billion (31 December 2010: £2.1 billion) undrawn committed central borrowing facilities available to us, provided by a range of leading international banks, all of which have investment grade credit ratings. We have allocated £750 million to support the credit rating of Aviva’s commercial paper programme. Undrawn borrowings are analysed below: £m £m
Expiring within one year 955 975 Expiring beyond one year 1,160 1,135
Our committed central borrowing facilities have two financial covenants:  Borrowings (excluding non-recourse indebtedness) may not exceed total shareholders’ funds. At 31 December 2011, borrowings were 53% of total shareholders funds.
 Total shareholders’ funds to exceed 32% of non-life net written premiums for the previous 12 months. At 31 December 2011, total shareholders funds were 140% of non-life net written premiums.
Sources of liquidity In managing our cash flow position, we have a number of sources of liquidity, including:  dividends from operating subsidiaries;  external debt issuance;  internal debt and central assets; and  funds generated by the sale of businesses.
One of our principal sources of liquidity is dividends from our subsidiaries. The level of dividends is based on two primary factors: the financial performance and the local solvency and capital requirements of our individual business units. The table below shows the dividends received from our principal operating subsidiaries in 2011: Amounts received £m
Under UK company law, dividends can only be paid if a company has distributable reserves sufficient to cover the dividend. At 31 December 2011, Aviva plc itself had distributable reserves of £3,116 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 that occurs upon the declaration of bonuses to policyholders of with-profit products. 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 FSA’s 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. For example, the ability of our US insurance subsidiaries to provide inter-company loans is subject to state regulations which restrict the making of loans or require explicit regulatory approval. 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’. Our US subsidiaries are also subject to state laws that limit the dividends payable to the parent company and dividends in excess of these limitations generally require the approval of the state insurance commissioner. 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. We have also received funds from the sale of parts of our businesses. For the year ended 31 December 2011, cash proceeds from the disposal of subsidiaries, joint ventures and associates net of cash transferred from continuing operations amounted to £877 million compared to £222 million for the year ended 31 December 2010. Principal disposals in 2011 and cash consideration received are disclosed in ‘Financial statements IFRS – Note 3 – Subsidiaries’. We have 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 2011, the outstanding debt issued under this programme was £506 million (31 December 2010: £504 million (excludes commercial paper issued by Delta Lloyd)). 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 of conditions. Debt issued under this programme may be senior guaranteed debt or regulatory qualifying debt and may have a fixed or floating interest rate. At 31 December 2011, the outstanding debt issued under this programme was £1,894 million (31 December 2010: £1,458 million).
Year ended 31 December 2011 Net cash from operating activities Total net cash from operating activities decreased by £2,149 million to a £342 million outflow in 2011 (2010: £1,807 million inflow). The decrease is primarily due to higher claims in the long-term business segment.
Net cash from investing activities Net cash from investing activities decreased by £271 million to £78 million (2010: £349 million). The decrease is a result of cash used in discontinued operations. Inflows from continuing operations of £590 million show a slight increase on 2010 (2010: £431 million).
Net cash and cash equivalents At 31 December 2011, total consolidated net cash and cash equivalents, net of bank overdrafts, amounted to £22,401 million, a decrease of £2,294 million over £24,695 million in 2010.
Cover of EU minimum (calculated excluding UK Life funds) 1.3 times 1.6 times
Property and equipment 36 160 255 Intangible assets — — 4
Contractual obligations for future repairs and maintenance on investment properties are £nil (2010: £1 million, 2009: £1 million). We have capital commitments to our joint ventures of £258 million (2010: £45 million, 2009: £nil) and to other investment vehicles of £nil (2010: £nil, 2009: £33 million). These commitments are expected to be funded through operational cash flow without recourse to core structural borrowings.
Code of ethics The Company has adopted a code of ethics for its senior management, including the Board, the Group Executive Committee and the group chief accounting officer as required by the provisions of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules issued by the SEC. There have been no amendments to, or waivers from, the code of ethics relating to any of those officers. The code of ethics was filed on 7 October 2009 as an exhibit to our Form 20-F registration document.
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.
Since 31 December 2006, the group capital resources requirement (the parent undertaking solvency calculation mentioned above) has been a ‘hard’ test (i.e. it constitutes a requirement to maintain the group capital resources, rather than simply to make the calculation) for UK-based companies operating under FSA rules.
Solvency II The agreed Solvency II Level 1 Directive was published in November 2009. Solvency II represents a fundamental change in European regulation and will result in a more sophisticated economic risk-based capital approach. Its objectives are to establish a solvency system that is better aligned to the true risks of insurers, and aims to enable supervisors to protect policyholder interests as effectively as possible in accordance with common principles across the EU. Since approval, the focus has been on developing the technical standards and requirements necessary to determine how the directive will be applied in practice, and expected amendments to the Solvency II Directive (Omnibus II Directive) following the creation of the new European Supervisory Authorities (ESAs) in September 2010. It is still not clear when these developments, including the implementation requirements, will become legislation. One of the new ESAs, the European Insurance and Occupational Pensions Authority (EIOPA), replaced CEIOPS on 1 January 2011. Proposed amendments to the Solvency II Directive were published in January 2011, giving power to EIOPA to issue binding guidance/standards, and delay implementation of Solvency II. Solvency II is currently expected to apply to insurers from 1 January 2014. This highlights the need for continued and engaged industry participation. Aviva continues to actively participate, through the key European industry working groups, who provide the voice of the industry, in ongoing discussions in Brussels.
Future EU developments The ESAs came into force in January 2011 and have powers to make binding rules and drive supervisory consistency and convergence through a single rule book. Their involvement in the colleges of supervisors for cross-border financial institutions, together with broader changes being progressed within Europe relating to financial conglomerates, signals a move towards more focused and intrusive group supervision. The Alternative Investment Fund Managers Directive (AIFMD) is due to come into force in July 2013 and will impact the Aviva Investors group in its capacity as an AIF manager and distributor. The implementing measures, which will provide a fuller understanding of the impact, are currently being drafted by the EC. There are a number of European dossiers that are expected to progress during 2012, including the European Commission’s Consumer Agenda, completion of its work on Packaged Retail Investment Products (PRIPs) to introduce common product disclosure standards and sales conduct rules, completion of its review of the Insurance Mediation Directive (IMD) and Markets in Financial Instruments Directive (MiFID), implementation of the European Market Infrastructure Regulation (EMIR) that will introduce central clearing for standard Over the Counter (OTC) derivatives, a review of the Directive for Institutions of Occupational Retirement Provisions (IORP) that sets rules for occupational pension schemes, and completion of the technical standards by the European Securities and Markets Authority (ESMA) for the Alternative Investment Fund Managers Directive (AIFMD) that will introduce a regime governing the marketing of alternative investments to EU investors.
United Kingdom The Financial Services Authority In the UK, the FSA is currently the single regulator for those individuals and firms conducting defined regulated activities in the financial services sector. The FSA has the authority to make rules and issue guidance, taking into account relevant EU directives, in relation to a wide sphere of activity encompassing the governance of the conduct of business by, and the prudential supervision of, individuals and firms authorised by the FSA to conduct such business (‘Authorised Persons’ or ‘Authorised Firms’). Under the Financial Services and Markets Act 2000 (FSMA) no person may carry on, or purport to carry on, a regulated activity by way of business in the UK unless he is an Authorised Person or an exempt person. A firm granted permission by the FSA to carry on regulated activities becomes an Authorised Person for the purposes of FSMA. ‘Regulated activities’ are prescribed in the FSMA (Regulated Activities) Order 2001 and include banking, insurance and investment business, stakeholder pension schemes, insurance mediation and certain mortgage mediation and lending activities. Authorised Firms must at all times meet specified threshold conditions, including possession of adequate resources for the carrying on of their business, and being fit and proper to conduct that business, having regard to all the circumstances. Authorised Firms must also operate in accordance with the FSA’s Principles for Business. These are 11 high-level principles for conducting financial services business in the UK, including maintenance of adequate systems and controls, treating customers fairly, and communicating with customers in a manner that is clear, fair and not misleading. The FSA regime is based on the principle that firms should have effective systems and controls, including robust risk management, which are appropriate to the size, complexity and diversity of their business.
Approved persons and controllers The FSA places great emphasis on the principle of senior management responsibility. The directors of, and senior managers carrying out FSA-defined controlled function roles in, any of the Group’s regulated entities are individually registered with the FSA under the ‘Approved Person’ regime, and can be held directly accountable to the FSA for control failings in those entities. A number of senior managers at Group level have also been registered as Approved Persons for the regulated subsidiaries, even though they are neither directors nor senior managers of these firms. This recognises that these managers exert significant influence over the regulated subsidiaries, because they are responsible for key parts of the Group’s control framework on which the regulated subsidiaries place reliance. The FSA regulates from a legal entity perspective, even though Aviva tends to operate within Regions by Business Unit. However, the FSA also expects that Aviva’s regulated subsidiaries operate within an overall framework of Group governance and controls. Its rules expressly provide that any systems and controls which operate on a Group basis will be taken into account in determining the adequacy of a regulated subsidiary’s systems and controls. The robustness of these Group controls is therefore subject to scrutiny and challenge by the FSA. The FSA regulates the acquisition and increase of control over Authorised Firms. Under FSMA, any person proposing to acquire control of, or increase control over certain thresholds of, an Authorised Firm must first obtain the consent of the FSA. The Authorised Firm must also inform the FSA of any such proposed acquisition or increase. In considering whether to grant or withhold its approval of the acquisition or increase of control, the FSA must be satisfied both that the acquirer is a fit and proper person and that the interests of consumers would not be threatened by this acquisition or increase of control. Control over a UK Authorised Firm is acquired if the acquirer:  holds 10% (or 20% if the Authorised Firm is an insurance intermediary) or more of the shares, or voting power, in that firm, or a parent undertaking of the firm; or
FSA conduct of business rules The FSA’s Conduct of Business (COB) and Insurance: Conduct of Business (ICOB) Rules apply to every Authorised Firm carrying on relevant regulated activities, and regulate the day-to-day conduct of business standards to be observed by all Authorised Persons in carrying out regulated activities. The COB and ICOB Rules are principle based, and the scope and range of obligations imposed on an Authorised Firm will vary according to the scope of its business and range of the Authorised Firm’s clients. Generally speaking, however, the obligations imposed on an Authorised Firm by the COB and ICOB Rules will include the need to classify its clients according to their level of sophistication, provide them with information about the Authorised Firm, meet certain standards of product disclosures (including fee and remuneration arrangements), ensure that promotional material which it produces is clear, fair and not misleading, assess suitability when advising on certain products, control the range and scope of advice given, manage conflicts of interest, report appropriately to its clients and provide certain protections in relation to client assets.
Day-to-day supervision The FSA takes a risk-based approach to its regulatory activity, concentrating its resources on those firms and activities which it assesses pose the greatest potential threats to its four statutory objectives of:  maintaining confidence in the UK financial system;  contributing to the protection and enhancement of stability of the UK financial system;  securing the appropriate degree of protection for consumers; and  reducing the extent to which it is possible for a regulated business to be used for a purpose connected with financial crime.
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 Insurance Division. 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 also periodically conducts a formal Advanced RiskResponsive Operating framework (ARROW) review of Aviva to assess the level of risk that the Group poses to each of the FSA objectives. The last full risk assessment was conducted in 2009 and an up-to-date risk assessment, which commenced in the third quarter of 2011, is currently in progress. 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 FSA has highlighted in its 2011 Business Plan that its key focus area for 2011/2012 would be:  preparing for transition to the new supervisory authorities structure, to become effective in 2013;  continuing to ensure firms are soundly run, with effective risk management in place, through close scrutiny of corporate governance, financial reporting, remuneration arrangements, recovery and resolution plans, and firms’ ability to identify and mitigate risk;  maintaining its proactive and intensive approach to supervision, including development of its understanding of the business models, consumer strategy and products of the highest impact retail firms;  maintaining pressure on firms to treat customers fairly;  playing a full role as an international leader in financial regulation; and  Solvency II, which remains central to our engagement with the FSA as the industry and the regulator prepare for the application of this new regulatory regime.
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 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, at the vanguard of the movement towards risk-based insurance regulation. The FSA continues to place weight on the ‘Treating Customers Fairly’ principle.
Long-term assets and liabilities Where a UK insurer carries on life insurance business, its longterm business assets and liabilities – i.e. those assets and liabilities relating to life and health insurance policies – must be segregated from the assets and liabilities attributable to non-life insurance business or to shareholders. Separate accounting and other records must be maintained and a separate fund established to hold all receipts of long-term business. The extent to which long-term fund assets may be used for purposes other than long-term business is restricted by the FSA rules. Only the ‘established surplus’, which is the excess of assets over liabilities in the long-term fund as determined by actuarial investigation, may be transferred so as to be available for other purposes. Restrictions also apply to the payment of dividends by the insurance company, as described below. FSA rules also require insurers to maintain sufficient assets in the separate long-term insurance fund to cover the actuarially determined value of the insurance liabilities.
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;  any contingent loan from the Old WPSF to the RIEESA has been repaid in full; and
 following the sixth annual investigation after 1 October 2009 or later investigation and provided that investigation and investigations made in the previous two years determined that the Reattributed Inherited Estate exceeded the Permitted Release Threshold.
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 liquidation, the FSCS may take measures to secure the transfer of all or part of the business to another insurance company. FSMA provides further protection to policyholders of insurance companies effecting or carrying out contracts of longterm insurance. Unless the court orders otherwise, a liquidator and/or administrator must carry on the insurer’s business so far as it consists of carrying out the insurer’s contracts of long-term insurance with a view to it being transferred as a going concern to a person who may lawfully carry out those contracts. In carrying on the business, the liquidator/administrator may agree to the variation of any contracts of insurance in existence when the winding-up order is made, but must not effect any new contracts of insurance.
Consequently, life insurance companies are subject to regulation both in the state in which they are domiciled as well as in each of the individual states 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 adoption process. However, the models are generally widely adopted. An example is the ‘Suitability in Annuity Transactions Model Act’ which has been widely adopted by states for a broad range of transactions. NAIC has a commitment to modernising the state-based system of insurance regulation and is pushing forward an action plan aimed at achieving consistency of approach between states on a number of issues including 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 being organised. However, we continue to monitor the FIO and related rulemaking developments. Additionally, there is active discussion within the NAIC of moving to a principles-based valuation system for the setting of reserves and capital for life insurance companies. This could change our statutory reserve and capital requirements significantly and it is not possible to estimate the impact on our financial condition and results of operation at this time.
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 2011, the Company’s total adjusted capital under the NAIC’s definition substantially exceeded Iowa standards.
Canada We write property and casualty business in Canada via a number of wholly owned companies. Insurance business in Canada is regulated federally by the Office of the Superintendent of Financial Institutions (OSFI) with the focus on prudential supervision (i.e. capital adequacy, solvency, etc). OSFI derives its powers from the federal Insurance Companies Act (Canada) which governs the structure and operation of federally incorporated insurance companies. The capital adequacy of insurance companies is monitored under the Minimum Capital Test (MCT), a risk-based framework allowing for capital to be assessed on the basis of an individual company’s risk profile taking account of the investments held and insurance business being written. Companies have their own internal MCT target as well as being expected to maintain capital in excess of 150% of the OSFI minimum requirement. There are also ten individual provincial regulators each regulating predominantly conduct of business issues such as policy terms and conditions, and pricing and underwriting of companies they have licensed to write business in the province.
Asia Pacific We operate within the Asia Pacific region through a network of subsidiary companies either wholly owned or established as a joint venture with a local partner. Our business in the region is predominately long-term and savings business, with small general insurance and health operations. There are wholly owned businesses in Singapore and Hong Kong. Aviva operates businesses in China, India, Malaysia, Sri Lanka, Taiwan, Korea, Indonesia and Vietnam which, depending on the nature and extent of the control we are able to exert, are either accounted for as subsidiaries, joint ventures or associates. The Asia Pacific region 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 across the region typically focuses on financial stability, i.e. minimum capital and the basis for calculating solvency, reserves and policyholder liability. In many of the markets across the region regulators have the power to revoke operating licences, regulate shareholder structures and the participation in and the payment of dividends. Markets within the region are moving quickly to modernise insurance regulation with an increasing focus on governance and conduct of business.
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 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. Global markets and economic conditions recently have been negatively impacted by the ability of certain European Union (EU) member states to service their sovereign debt obligations. 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 US based 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 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.
Credit spread volatility may adversely affect the net unrealised value of the investment portfolio and our results of operations. Our exposure to credit spreads primarily relates to market price variability associated with changes in credit spreads in our investment portfolio, which is largely held to maturity. Credit spread moves may be caused by changes in the perception of the credit worthiness of the issuer, or from market factors such as the markets risk appetite and liquidity. A widening of credit spreads will generally reduce the value of fixed income securities we hold. Conversely, credit spread tightening will generally increase the value of fixed income securities we hold. It can be difficult to value certain of our securities if trading becomes less liquid. Accordingly, valuations of investments may include assumptions or estimates that may have significant period to period changes that could have a material adverse effect on our consolidated results of operations or financial condition. Downturns in the net unrealised value of our investment portfolio may also have a material adverse effect on our regulatory capital surplus based on the EU Insurance Groups Directive. Although our financial statements reflect the market value of assets, our priority remains the management of assets and liabilities over the longer term.
We have a significant exposure to third parties that owe us money, securities or other assets who may not perform under their payment obligations. These parties include private sector and government (or government-backed) issuers whose debt securities we hold in our investment portfolios (including mortgage-backed, asset-backed, government bonds and other types of securities), borrowers under residential and commercial mortgages and other loans, re-insurers to which we have ceded insurance risks, customers, trading counterparties, and counterparties under swap and other derivative contracts. We also execute transactions with other counterparties in the financial services industry, including brokers and dealers, commercial and investment banks, hedge funds and other investment funds, insurance groups and institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty. In addition, with respect to secured transactions, our credit risk may be increased when the collateral held by us cannot be realised or is liquidated at prices insufficient to recover the full amount of the loan or other value due. We also have exposure to these financial institutions in the form of unsecured debt instruments and derivative transactions. Such losses or impairments to the carrying value of these assets could materially and adversely affect our financial condition and results of operations. We use reinsurance and hedging programs to hedge various risks, including certain guaranteed minimum benefits contained in many of our long-term insurance and fund management products. These programs cannot eliminate all of the risks and no assurance can be given as to the extent to which such programs will be effective in reducing such risks. We enter into a variety of derivative instruments, including options, forwards, interest rate and currency swaps, with a number of counterparties. Our obligations under our fund management and life products are not changed by our hedging activities and we are liable for our obligations even if our derivative counterparties do not pay us. Defaults by such counterparties could have a material adverse effect on our financial condition and results of operations. We are also susceptible to an adverse financial outcome from a change in third-party credit standing. As well as having a potential impact on spreads, rating movements can trigger solvency and accounting impacts and can drive management actions and the realisation of losses, particularly where investment mandates set counterparty and portfolio limits based on ratings. For additional information about our investments, see ‘Performance review – Analysis of investments’.
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
Shareholder information continued 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 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’. In our US business in particular, market downturns and volatility may discourage purchases of accumulation products, such as equity-indexed annuities and equity-indexed life insurance, that have returns linked to the performance of the equity markets and may cause some of our existing customers to withdraw cash values or reduce investments in those products. A sustained weakness in the markets will decrease revenues and earnings in these types of products. For property investment, we are subject to counterparty, valuation and liquidity risks. These investments may be adversely affected by weakness in property markets and increased mortgage delinquencies. We are also subject to property risk indirectly in our investments in residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS). There is the risk that the underlying collateral may fall in value causing the investment in securities to fall in value. The markets for these property investments and instruments can become illiquid, and issues relating to counterparty credit ratings and other factors may increase pricing and valuation uncertainties.
Shareholder information continued intangible assets with indefinite useful lives at least annually for impairment or when circumstances or events indicate there may be uncertainty over this value. We test intangibles with finite lives when circumstances or events indicate there may be uncertainty over this value. For impairment testing, goodwill and intangibles have been allocated to cash-generating units by geographical reporting unit and business segment. The fair value of the reporting unit is impacted by the performance of the business. Goodwill, negative unallocated divisible surplus and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support its carrying value. Such write downs could have a material adverse effect on our results of operations or financial condition.
Insurance risks relating to Aviva’s business The cyclical nature of the insurance industry may cause fluctuations in our results. Historically, the insurance industry has been cyclical and operating results of insurers have fluctuated because of volatile and sometimes unpredictable developments, many of which are beyond the direct control of any insurer. Although we have a geographically diverse group of businesses providing a wide range of products, we expect to experience the effects of this cyclical nature, including changes in sales and premium levels. The unpredictability and competitive nature of the general insurance business has contributed historically to significant quarter-toquarter and year-to-year fluctuations in underwriting results and net earnings.
We have a significant exposure to annuity business and a significant life insurance risk is associated with longevity. Longevity statistics are monitored in detail, compared with emerging industry trends, and the results are used to inform both the reserving and pricing of annuities. It is likely that uncertainty will remain in the development of future longevity that cannot be mitigated. A strengthening in the longevity assumption, either to reflect changes in the underlying life expectancy of the population or of our particular portfolio used to calculate our long-term business liabilities, would result in an increase in these reserves and reduce our shareholders’ equity. See ‘Financial statements IFRS – Note 56 – Risk management’.
Shareholder information continued from their policies. The outcome of such activities may be cash payments requiring the sale of invested assets, including illiquid assets, at a price that may result in realised investment losses. These cash payments to policyholders would result in a decrease in total invested assets and a decrease in net income. Among other things, early withdrawals may also cause us to accelerate amortisation of policy acquisition costs, which would reduce net income. A rating downgrade may also impact sales volumes, particularly in the US where there is more focus on ratings when evaluating similar products. The ratings provided by AM Best are widely considered to be the most important for distribution in the US, and a downgrade could lead to a significant loss of sales. Similarly, a rating downgrade may increase our cost of borrowing or limit our access to some forms of financing.
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, among 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 in the UK (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 affect 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.
Our businesses are conducted in highly competitive environments. There are many factors which affect our ability to sell our products, including fiscal incentives, price and yields offered, financial strength and ratings, range of product lines and product quality, brand strength and name recognition, investment management performance and historical bonus levels. In some of our markets, the Group faces competitors that are larger, have greater financial resources or greater market share, offer a broader range of products, benefit from more advantageous tax treatments, or have higher bonus rates or claims-paying ratios. Further, heightened competition for talented and skilled employees with local experience, particularly in the emerging, high-growth markets, may limit our potential to grow our business as quickly as planned. Our principal competitors in the life market include many of the major financial services businesses including, in particular, Axa, Allianz, Generali, Prudential and Standard Life. Our principal competitors in the general insurance market include Royal Bank of Scotland Insurance, RSA, Zurich, Axa and Allianz. We also face competitors who specialise in many of the niche markets in which we operate. We believe that competition will intensify across all regions in response to consumer demand, technological advances, the impact of consolidation, regulatory actions and other factors. Our ability to generate an appropriate return depends significantly upon our capacity to anticipate and respond appropriately to these competitive pressures.
Our regulated business is subject to extensive regulatory supervision both in the UK and internationally. We are subject to extensive laws and regulations that are administered and enforced by a number of different governmental authorities and non-governmental self-regulatory agencies, including the FSA and other regulators. In light of wider financial and economic conditions, some of these authorities are considering, or may in the future consider, enhanced or new regulatory requirements intended to prevent future crises or otherwise assure the stability of institutions under their supervision. These authorities may also seek to exercise their supervisory or enforcement authority in new or more robust ways. All of these possibilities, if they occurred, could affect the way we conduct our business and manage our capital, and may require us to satisfy increased capital requirements. 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 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
Shareholder information continued 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. 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. 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 therefrom, 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 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.
Risks related to ownership of the ADSs and ordinary shares As a holding company, we are dependent on our operating subsidiaries to cover operating expenses and dividend payments. Our insurance and fund management operations are generally conducted through direct and indirect subsidiaries. As a holding company, Aviva plc’s principal sources of funding are dividends from subsidiaries, shareholder-backed funds and any amounts
Shareholder information continued that may be raised through the issuance of debt and commercial paper. Certain subsidiaries have regulatory restrictions that may limit the payment of dividends, which in some circumstances could limit our ability to pay dividends to shareholders. In the current economic environment, such restrictions could become more stringent.
The trading price of our ADSs and dividends paid on our ADSs may be materially adversely affected by fluctuations in the exchange rate for converting sterling into US dollars. An ADS is a negotiable US security representing ownership in one share. An ADR is denominated in US dollars and represents ownership of any number of ADSs. ADRs are publicly traded shares in a non-US corporation, quoted and traded in US dollars in the US securities market. Any dividends are paid to investors in US dollars. ADRs were specifically designed to facilitate the purchase, holding and sale of non-US securities by US investors. The term ADR is often used to mean both the certificates and the securities themselves. Fluctuations in the exchange rate for converting pound sterling into US dollars may affect the value of our ADSs. Specifically, as the relative value of the pound sterling against the US dollar declines, each of the following values will also decline:  the US dollar equivalent of the pound sterling trading price of our ordinary shares on the London Stock Exchange which may consequently cause the trading price of our ADSs in the US to also decline;  the US dollar equivalent of the proceeds that a holder of our ADSs would receive upon the sale in the UK of any our ordinary shares withdrawn from the depositary; and
The holders of our ADSs may not be able to exercise their voting rights due to delays in notification to, and by, the depositary. The depositary for our ADSs may not receive voting materials for our ordinary shares represented by our ADSs in time to ensure that holders of our ADSs can instruct the depositary to vote their shares. In addition, the depositary’s liability to holders of our ADSs for failing to carry out voting instructions or for the manner of carrying out voting instructions is limited by the Deposit Agreement governing our ADR facility. As a result, holders of our ADSs may not be able to exercise their right to vote and may have limited recourse against the depositary or us, if their shares are not voted according to their request.
Agreement; or  take any action based upon the advice of, or information from, legal counsel, accountants, any person presenting ordinary shares for deposit, any holder or owner of an Aviva plc ADR or any other person believed by us or the depositary in good faith to be competent to give such advice or information.
These provisions of the Deposit Agreement will limit the ability of holders of our ADSs to obtain recourse if we or the depositary fail to meet our obligations under the Deposit Agreement or if they wish to involve us or the depositary in a legal proceeding.
As a ‘foreign private issuer’ in the US we are exempt from certain rules under the US securities laws and are permitted to file less information with the SEC than US companies. As a ‘foreign private issuer’ we are exempt from certain rules under the US Securities Exchange Act of 1934, as amended (the ‘Exchange Act’), that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and ‘shortswing ’ profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their
Shareholder information continued purchases and sales of our ordinary shares and ADRs. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as US companies whose securities are registered under the Exchange Act. In addition, we are not required to comply with Regulation FD, which restricts the selective disclosure of material information. Although we must comply with UK listing rules on insider reporting of share ownership and on protection of inside information, there may be less publicly available information concerning us than there is for US public companies.
Page 24 Securitised mortgages and related assets 236 27 Deferred acquisition costs and other assets 244 28 Assets held to cover linked liabilities 245 29 Ordinary share capital 245 30 Group‘s share plans 246 31 Shares held by employee trusts 249 32 Preference share capital 250 33 Direct capital instruments 250 37 Non-controlling interests 252 38 Contract liabilities and associated reinsurance 253 40 Liability for investment contracts 263 41 Financial guarantees and options 265 43 Effect of changes in assumptions and estimates during the year 269 44 Unallocated divisible surplus 270 45 Tax assets and liabilities 271 49 Payables and other financial liabilities 285 51 Contingent liabilities and other risk factors 286 53 Statement of cash flows 288 54 Group capital structure 289 57 Derivative financial instruments and hedging 308 58 Assets under management 310 59 Related party transactions 310
We have audited the Group and Parent Company financial statements (the ‘financial statements’) of Aviva plc for the year ended 31 December 2011 which comprise the Accounting Policies, the Consolidated and Parent Company Income Statements, the Pro Forma Reconciliation of Group Operating Profit to Profit before Tax, the Consolidated and Parent Company Statements of Comprehensive Income, the Consolidated and Parent Company Statements of Changes in Equity, the Consolidated and Parent Company Statements of Financial Position, the Consolidated and Parent Company Cash Flow Statements, and the related notes 1 to 59 and A to I. 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. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 to the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
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.
James W Dean (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor 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.
(A) Basis of presentation Since 2005, all European Union (EU) listed companies have been required to prepare consolidated financial statements using International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and endorsed by the EU. The date of transition to IFRS was 1 January 2004. 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 2011. During 2009 and 2010, the IASB issued amendments to IFRS 1, First Time Adoption of IFRS, IAS 24, Related Party Disclosures, and IAS 32, Financial Instruments – Presentation, and the results of its annual improvements project, all of which have been endorsed by the EU. In addition, IFRIC interpretation 19, Extinguishing Financial Liabilities with Equity Instruments, and an amendment to interpretation 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, issued in 2008 and 2009 respectively, have now been endorsed by the EU. These are all applicable for the first time in the current accounting period and are now reflected in the Group’s financial reporting, with no material impact. Further amendments to IFRS 1, IFRS 7, Financial Instruments – Disclosures, IAS 12, Income Taxes, and IAS 32 have been issued but have not yet been endorsed. These are applicable prospectively for accounting periods commencing 1 July 2011 or later, and are therefore not applicable for the current accounting period. On adoption, they will not have any material impact on the Group’s financial reporting. In 2009, the IASB issued IFRS 9, Financial Instruments – Classification and Measurement, followed by additional requirements on accounting for financial liabilities in 2010. These are the first two parts of a replacement standard for IAS 39. They are applicable prospectively for accounting periods commencing 1 January 2015 or later, and are therefore not applicable for the current accounting period. IFRS 9 has not yet been endorsed by the EU but, on adoption, will require us to review the classification of certain financial instruments while allowing us to retain fair value measurement as we deem necessary. We have not yet completed our assessment of its impact which is, to a large extent, dependent on the finalisation of the IASB’s insurance contracts accounting project. During 2011, the IASB issued IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IFRS 12, Disclosure of Interests in Other Entities, IFRS 13, Fair Value Measurement, and reissued IAS 27, Separate Financial Statements, and IAS 28, Investments in Associates and Joint Ventures. It also issued amendments to IAS 1, Presentation of Financial Statements, and IAS 19, Employee Benefits. They are applicable for accounting periods commencing 1 July 2012 or later, and are therefore not applicable for the current accounting period. None of these has yet been endorsed by the EU but, on adoption, IFRS 10 will require us to review the entities we classify as subsidiaries, and we are currently assessing its impact. The other new and amended standards deal mainly with disclosures and we are currently assessing the changes required to our current financial statement disclosures. IFRIC interpretation 20, Stripping Costs in the Production Phase of a Surface Mine, was issued in 2011 but has not yet been endorsed by the EU. It is applicable prospectively for accounting periods commencing 1 January 2013 or later, and is therefore not applicable for the current accounting period. On adoption, it will not have any impact on our financial reporting. 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 policy F below. 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 312 to 320.
Insurance and participating investment contract liabilities F&K Goodwill, AVIF and intangible assets N Fair values of financial investments S Impairment of financial investments S Fair value of derivative financial instruments T Deferred acquisition costs and other assets W Provisions and contingent liabilities Z Pension obligations AA Deferred income taxes AB
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 and those relating to UK with-profit and non-profit contracts, to be consistent with the value of the backing assets. 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 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.
Present value of future profits on non-participating business written in a with-profit fund For UK with-profit life funds falling within the scope of the FSA realistic capital regime, and hence FRS 27, an amount may be recognised for the present value of future profits (PVFP) on non-participating business written in a with-profit fund where the determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value. This amount is recognised as a reduction in the liability rather than as an asset in the statement of financial position, and is then apportioned between the amounts that have been taken into account in the measurement of liabilities and other amounts which are shown as an adjustment to the unallocated divisible surplus.
Unallocated divisible surplus In certain participating long-term insurance and investment business, the nature of the policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain. Amounts whose allocation to either policyholders or shareholders has not been determined by the end of the financial year are held within liabilities as an unallocated divisible surplus. If the aggregate carrying value of liabilities for a particular participating business fund is in excess of the aggregate carrying value of its assets, then the difference is held as a negative unallocated divisible surplus balance, subject to recoverability from margins in that fund’s participating business. Any excess of this difference over the recoverable amount is charged to net income in the reporting period.
(iii) Liability adequacy At each reporting date, the Group reviews its unexpired risks and carries out a liability adequacy test for any overall excess of expected claims and deferred acquisition costs over unearned premiums, using the current estimates of future cash flows under its contracts after taking account of the investment return expected to arise on assets relating to the relevant general business provisions. If these estimates show that the carrying amount of its insurance liabilities (less related deferred acquisition costs) is insufficient in light of the estimated future cash flows, the deficiency is recognised in the income statement by setting up a provision in the statement of financial position.
(R) Derecognition and offset of financial assets and financial liabilities A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where:  The rights to receive cash flows from the asset have expired.  The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement.  The Group has transferred its rights to receive cash flows from the asset and has either transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Impairment The Group reviews the carrying value of its loans and receivables and AFS investments on a regular basis. If the carrying value of a loan, receivable or AFS investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. The following policies are used to determine the level of any impairment, some of which involve considerable judgement: AFS debt securities: An AFS debt security is impaired if there is objective evidence that a loss event has occurred which has impaired the expected cash flows, i.e. where all amounts due according to the contractual terms of the security are not considered collectible. An impairment charge, measured as the difference between the security’s fair value and amortised cost, is recognised when the issuer is known to be either in default or in financial difficulty. Determining when an issuer is in financial difficulty requires the use of judgement, and we consider a number of factors including industry risk factors, financial condition, liquidity position and near-term prospects of the issuer, credit rating declines and a breach of contract. A decline in fair value below amortised cost due to changes in risk-free interest rates does not necessarily represent objective evidence of a loss event. 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 unless this increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement. In such an event, the reversal of the impairment loss is recognised as a gain in the income statement.
(T) Derivative financial instruments and hedging Derivative financial instruments include foreign exchange contracts, interest rate futures, currency and interest rate swaps, currency and interest rate options (both written and purchased) and other financial instruments that derive their value mainly from underlying interest rates, foreign exchange rates, credit indices, commodity values or equity instruments. All derivatives are initially recognised in the statement of financial position at their fair value, which usually represents their cost. They are subsequently remeasured at their fair value, with the method of recognising movements in this value depending on whether they are designated as hedging instruments and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. Premiums paid for derivatives are recorded as an asset on the statement of financial position at the date of purchase, representing their fair value at that date. Derivative contracts may be traded on an exchange or over-the-counter (OTC). Exchange-traded derivatives are standardised and include certain futures and option contracts. OTC derivative contracts are individually negotiated between contracting parties and include forwards, swaps, caps and floors. Derivatives are subject to various risks including market, liquidity and credit risk, similar to those related to the underlying financial instruments. Many OTC transactions are contracted and documented under International Swaps and Derivatives Association (ISDA) master agreements or their equivalent, which are designed to provide legally enforceable set-off in the event of default, reducing the Group’s exposure to credit risk. The notional or contractual amounts associated with derivative financial instruments are not recorded as assets or liabilities on the statement of financial position as they do not represent the fair value of these transactions. These amounts are disclosed in note 57. The Group has collateral agreements in place between the individual Group entities and relevant counterparties. Accounting policy V below covers collateral, both received and pledged, in respect of these derivatives.
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 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.
Premiums written net of reinsurance 28,327 2,043 30,071 4,340 Net change in provision for unearned premiums (236) (56) (73) (2)
Fee and commission income H & I 1,479 97 1,450 332
Expenses 6 Claims and benefits paid, net of recoveries from reinsurers (26,934) (1,475) (24,918) (4,234) Change in insurance liabilities, net of reinsurance (3,730) (909) (6,608) (569) Change in investment contract provisions 1,224 (94) (8,693) (48) Change in unallocated divisible surplus 2,721 (19) 362 (33) Fee and commission expense (4,554) (192) (5,433) (434)
Less: tax attributable to policyholders’ returns 13 (178) — 394 — Tax attributable to shareholders’ profits (229) 202 (323) (225)
Pro forma reconciliation of Group operating profit to profit before tax For the year ended 31 December 2011 £m
Operating profit before tax attributable to shareholders’ profits (excluding Delta Lloyd as an associate) 2,155 191 2,346 2,026 524 2,550 Share of operating profit (before tax) of Delta Lloyd as an associate 157 — 157 — — —
Operating profit before tax attributable to shareholders’ profits 2,312 191 2,503 2,026 524 2,550
Adjusted for the following: Investment return variances and economic assumption changes on long-term business 8 (796) (820) (1,616)
Economic assumption changes on general insurance and health business 9a (90) — (90)
Pro forma reconciliation of Group operating profit to profit before tax continued Operating profit can be further analysed into the following segments: Year ended 31 December 2011 Long-term business £m
Consolidated statement of comprehensive income For the year ended 31 December 2011
Other comprehensive income from continuing operations: Investments classified as available for sale
Fair value gains 414 505 Fair value gains transferred to profit on disposals (148) (73) Impairment losses on assets previously revalued through other comprehensive income now taken to the income statement 21 78 Owner-occupied properties
Other comprehensive income, net of tax from continuing operations 614 1,495 Other comprehensive income, net of tax from discontinued operations 82 (64)
Consolidated statement of changes in equity For the year ended 31 December 2011
Profit for the year — — — — — — — — — — 225 225 — (165) 60 Other comprehensive
Capital contributions from non-controlling interests — — — — — — — — — — — — — 68 68
Effect of deconsolidation of Delta Lloyd — — — — — (485) (2) (115) — — 2 (600) —
Transfer to profit on disposal of subsidiaries — — — — — (3) — — — — — (3) — — (3)
Changes in noncontrolling interests in existing subsidiaries — — — — — — — — — — — — — (11) (11)
Aggregate tax effect – shareholder tax (note 13(c)) — — — — — — — — — — 16 16 — — 16
Total comprehensive income for the year — — — — — (38) (21) 411 78 — 2,520 2,950 — 373 3,323
Changes in noncontrolling interests in existing subsidiaries — — — — — — — — — — — — — (38) (38)
Shares issued under equity compensation plans — — — — — — — — — (51) 51 — — — —
Acquired value of in-force business and intangible assets N & 17 2,021 2,806 Interests in, and loans to, joint ventures D & 18 1,700 1,994 Interests in, and loans to, associates D & 19 1,118 643 Property and equipment O & 20 510 750
Deferred acquisition costs and other assets W & 27 6,444 6,072 Prepayments and accrued income 27d 3,235 3,691 Cash and cash equivalents X & 53d 23,043 25,455 Assets of operations classified as held for sale AG & 3c 426 14
Ordinary share capital 29 726 705 Preference share capital 32 200 200
Gross insurance liabilities K & 39 150,101 177,700 Gross liabilities for investment contracts L & 40 110,644 117,787 Unallocated divisible surplus K & 44 650 3,428 Net asset value attributable to unitholders D 10,352 9,032
Deferred tax liabilities AB & 45b 1,171 1,758 Current tax liabilities 45a 232 314
Liabilities of operations classified as held for sale AG & 3c 363 —
Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired 53b (114) 542 Disposals of subsidiaries, joint ventures and associates, net of cash transferred 53c 877 222 New loans to joint ventures (18) (64) Repayment of loans to joint ventures 17 5 Net new loans to joint ventures 18a & 19a (1) (59) Purchases of property and equipment 20 (97) (161) Proceeds on sale of property and equipment 48 18 Purchases of intangible assets 17 (123) (131)
Total net (decrease)/increase in cash and cash equivalents (2,037) 803 Cash and cash equivalents at 1 January 24,695 24,251 Effect of exchange rate changes on cash and cash equivalents (257) (359)
Notes to the consolidated financial statements 1 – Exchange rates The Group’s principal overseas operations during the year were located within the Eurozone and the United States. The results and cash flows of these operations have been translated into sterling at the average rates for the year and the assets and liabilities have been translated at the year-end rates as follows: Eurozone – Average rate (€1 equals) £0.87 £0.85 – Period end rate (€1 equals) £0.84 £0.86
United States – Average rate (US$1 equals) £0.63 £0.65 – Period end rate (US$1 equals) £0.65 £0.64
(ii) Other goodwill arising Goodwill on acquisitions and additions, as shown in note 16(a) was £13 million, of which £8 million arose on the acquisition of an insurance broker in Canada and £5 million from additional capital in our Indonesian life and health subsidiary.
(b) Disposal and remeasurement of subsidiaries, joint ventures and associates The profit on the disposal and remeasurement of subsidiaries, joint ventures and associates comprises: £m £m
Loss on disposal from discontinued operations (see (iii) below) (32) (4)
Notes to the consolidated financial statements continued 3 – Subsidiaries continued (c) Assets and liabilities of operations classified as held for sale The assets and liabilities of operations classified as held for sale as at 31 December 2011 relate to our subsidiaries in the Czech Republic, Hungary and Romania and a joint venture in Taiwan, and are as follows: £m £m
During 2011, the Group decided to sell, and was actively marketing, its operations in the Czech Republic, Hungary and Romania. On 30 January 2012, we announced the sale of these businesses to MetLife, Inc. The transaction, which is subject to regulatory approvals in each jurisdiction, is expected to be completed in 2012. The assets and liabilities of these businesses have therefore been classified as held for sale at their expected disposal proceeds in the consolidated statement of financial position at 31 December 2011. The operations held for sale at 31 December 2010 related to our interest in the Taiwan joint venture, details of which are given in note 18(a).
North America Our activities in North America principally comprise our long-term business operation in the US and general insurance business operation in Canada.
Other Group activities Investment return on centrally held assets and head office expenses, such as Group treasury and finance functions, together with certain taxes and financing costs arising on central borrowings are included in ‘Other Group activities’. Similarly, central core structural borrowings and certain tax balances are included in ‘Other Group activities’ in the segmental statement of financial position. Also included in ‘Other Group activities’ are consolidation and elimination adjustments.
Share of Delta Lloyd’s non-operating items (before tax), as an associate — — — — — — (10) — (10) — (10) Share of Delta Lloyd’s tax expense, as an associate — — — — — — 34 — 34 — 34
Operating profit/(loss) before tax attributable to shareholders 931 503 937 433 70 91 157 (810) 2,312 191 2,503 * Total reported income from continuing operations, excluding inter-segment revenue, is split United Kingdom £17,508 million, France £4,504 million, USA £5,290 million and Rest of the World £8,701 million. Income is attributed on the basis of geographical origin which does not materially differ from revenue by geographical destination, as most risks are located in the countries where the contracts were written. ** Impairment losses, and reversal of such losses, recognised directly in other comprehensive income were £21 million and £nil respectively. # United Kingdom General Insurance includes the Group Reinsurance business, agency run-off business and the non-insurance business for the RAC prior to its disposal.
Notes to the consolidated financial statements continued 4 – Segmental information continued (ii) Segmental income statement for the year ended 31 December 2010
Net change in provision for unearned premiums (12) (16) (68) 29 (6) — — (73) (2) (75)
Inter-segment revenue — — — — — 214 — 214 — 214 Share of profit/(loss) of joint ventures and associates 128 — (14) — 33 3 (9) 141 (10) 131 Profit/(loss) on the disposal of subsidiaries and associates 128 5 26 1 — — 3 163 (4) 159
Adjusted for non-operating items: Reclassification of corporate costs and unallocated interest 99 148 7 5 — 12 (271) — — — Investment return variances and economic assumption changes on long-term business 87 — 154 (10) (12) — — 219 (1,010) (791) Short-term fluctuation in return on investments backing non-long-term business — (31) 47 (44) — — 227 199 44 243 Economic assumption changes on general insurance and health business — 60 1 — — — — 61 — 61 Impairment of goodwill, associates and joint ventures 4 — 9 — 1 — 9 23 1 24 Amortisation and impairment of intangibles 68 7 37 75 1 5 — 193 23 216 (Profit)/loss on the disposal of subsidiaries and associates (128) (5) (26) (1) — — (3) (163) 4 (159)
Operating profit/(loss) before tax attributable to shareholders 856 514 898 376 31 97 (746) 2,026 524 2,550 * Total reported income, excluding inter-segment revenue, is split United Kingdom £22,160 million, France £8,748 million, Netherlands £7,782 million, USA £6,497 million and Rest of the World £13,214 million. Income is attributed on the basis of geographical origin which does not materially differ from revenue by geographical destination, as most risks are located in the countries where the contracts were written. ** Impairment losses, and reversal of such losses, recognised directly in other comprehensive income were £78 million and £nil million respectively. # United Kingdom General Insurance includes the Group Reinsurance business, agency run-off business and the non-insurance business for the RAC.
Notes to the consolidated financial statements continued 4 – Segmental information continued (iii) Segmental statement of financial position as at 31 December 2011
Insurance liabilities Long-term business and outstanding claims provisions 69,029 5,121 35,511 33,235 2,441 — — — 145,337
Net asset value attributable to unitholders 1,279 — 3,380 — — — — 5,693 10,352
Other liabilities, including inter-segment liabilities 8,156 (3,638) 5,289 2,662 134 309 — 3,904 16,816
Capital expenditure (excluding business combinations) 55 78 27 29 5 20 — — 214
Insurance liabilities Long-term business and outstanding claims provisions 66,261 5,136 37,165 30,240 31,218 2,482 — — 172,502
Notes to the consolidated financial statements continued 4 – Segmental information continued (b) Further analysis by products and services The Group’s results can be further analysed by products and services which comprise long-term business, general insurance and health, fund management and other activities.
Long-term business Our long-term business comprises life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business and our share of the other life and related business written in our associates and joint ventures, as well as lifetime mortgage business written in the UK.
General insurance and health Our general insurance and health business provides insurance cover to individuals and to small and medium-sized businesses for risks associated mainly with motor vehicles, property and liability, such as employers’ liability and professional indemnity liability and medical expenses.
Inter-segment revenue — — 227 — 227 Share of (loss) of joint ventures and associates (10) — (2) (111) (123) Profit/(loss) on the disposal of subsidiaries and associates — (28) 24 569 565
Claims and benefits paid, net of recoveries from reinsurers (20,989) (5,945) — — (26,934) Change in insurance liabilities, net of reinsurance (3,727) (3) — — (3,730) Change in investment contract provisions 1,224 — — — 1,224 Change in unallocated divisible surplus 2,721 — — — 2,721 Amortisation of acquired value of in-force business on insurance contracts (269) — — — (269) Depreciation and other amortisation expense (332) (19) (16) (64) (431)
Operating profit/(loss) before tax attributable to shareholders’ profits from continuing operations 2,123 935 99 (845) 2,312 Operating profit/(loss) before tax attributable to shareholders’ profits from discontinued operations 185 1 11 (6) 191
Operating profit/(loss) before tax attributable to shareholders’ profits 2,308 936 110 (851) 2,503 * Gross written premiums includes inward reinsurance premiums assumed from other companies amounting to £243 million, of which £110 million relates to property and liability insurance and £133 million relates to long-term business. ** General insurance and health business segment includes gross written premiums of £1,107 million relating to health business. The remaining business relates to property and liability insurance.
Gross written premiums* 22,600 9,205 — — 31,805 Premiums ceded to reinsurers (1,051) (683) — — (1,734)
Claims and benefits paid, net of recoveries from reinsurers (18,909) (6,009) — — (24,918) Change in insurance liabilities, net of reinsurance (6,997) 389 — — (6,608) Change in investment contract provisions (8,693) — — — (8,693) Change in unallocated divisible surplus 362 — — — 362 Amortisation of acquired value of in-force business in insurance contracts (162) — — — (162) Depreciation and other amortisation expense (177) (27) (10) (50) (264)
Profit/(loss) before tax from continuing operations 2,066 550 63 (740) 1,939 Tax attributable to policyholder returns (394) — — — (394)
Profit/(loss) before tax attributable to shareholders from continuing operations 1,672 550 63 (740) 1,545 Adjusted for non-operating items 316 354 35 (224) 481
Acquired value of in-force business and intangible assets 1,742 145 44 90 2,021 Interests in, and loans to, joint ventures and associates 2,035 5 — 778 2,818
Gross insurance liabilities 134,860 15,241 — — 150,101 Gross liabilities for investment contracts 110,644 — — — 110,644 Unallocated divisible surplus 650 — — — 650 Net asset value attributable to unitholders 4,659 — — 5,693 10,352
Notes to the consolidated financial statements continued 4 – Segmental information continued (iv) Segmental statement of financial position – products and services as at 31 December 2010
Gross insurance liabilities 160,579 17,121 — — 177,700 Gross liabilities for investment contracts 117,787 — — — 117,787 Unallocated divisible surplus 3,428 — — — 3,428 Net asset value attributable to unitholders 5,892 8 — 3,132 9,032
Notes to the consolidated financial statements continued 5 – Details of income This note gives further detail on the items appearing in the income section of the consolidated income statement.
Gross written premiums (notes 4a & 4b) Long-term: Insurance contracts 15,671 15,455 Participating investment contracts 4,579 7,145 General insurance and health 9,750 9,205
Net investment income Interest and similar income From financial instruments designated as trading and other than trading 6,122 5,922 From AFS investments and financial instruments at amortised cost 1,699 1,631
Dividend income 1,630 1,324 Other income from investments designated as trading Realised (losses)/gains on disposals (517) 369 Unrealised gains and losses (policy J) (Losses)/gains arising in the year (449) 436 Losses/(gains) recognised in prior periods and now realised 517 (369)
Net income from investment properties Rent 690 780 Expenses relating to these properties (39) (22) Realised gains on disposal 10 41 Fair value gains on investment properties (note 21) 148 464
Realised gains/(losses) on loans 1 (1) Foreign exchange gains and losses on investments other than trading (12) (52) Other investment (expenses) (108) (100)
Share of (loss)/profit after tax of joint ventures (note 18a) (38) 149 Share of (loss) after tax of associates (85) (18) Share of (loss)/profit after tax of joint ventures and associates (123) 141 Profit on disposal of subsidiaries and associates (note 3b) 565 163
Income from continuing operations 36,003 50,501 Income from discontinued operations 2,516 7,900
Less: Claim recoveries from reinsurers Insurance contracts (969) (947) Participating investment contracts (175) (150)
Claims and benefits paid, net of recoveries from reinsurers 26,934 24,918
Other expenses Other operating expenses Staff costs (note 10) 1,280 1,236 Central costs and sharesave schemes 138 144
Impairments Net impairment on loans 64 10 Net impairment on financial investments 21 76 Net impairment on receivables and other financial assets 33 (4) Net impairment on non-financial assets 1 (1)
Other net foreign exchange (gains)/losses 23 (88) Finance costs (note 7) 798 699
Notes to the consolidated financial statements continued 6 – Details of expenses continued Integration and restructuring costs Integration and restructuring costs were £268 million (2010: £225 million). This includes costs associated with preparing the businesses for Solvency II implementation of £96 million, a £30 million charge in the UK relating to the reattribution of the inherited estate and expenditure relating to the Quantum Leap project in Europe of £51 million. Expenditure relating to other restructuring exercises across the Group amounted to £91 million.
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.
For the year ended 31 December 2010, this comprised:  £286 million benefit from the closure of the final salary section of the UK staff pension scheme to future accruals; and  £10 million expense for the strengthening of reserves in respect of several specific discontinued commercial liability risks written in Canada a significant number of years ago.
Interest expense on core structural borrowings Subordinated debt 302 290 Long term senior debt 19 20 Commercial paper 3 1
Interest expense on operational borrowings Amounts owed to financial institutions 128 57 Securitised mortgage loan notes at fair value 88 88
Interest on reinsurance deposits 4 8 Interest on collateral received 33 20 Net finance charge on pension schemes (note 47e(iv)) 87 127 Unwind of discount on GI reserves 24 22 Other similar charges 110 66
Total finance costs from continuing operations 798 699 Total finance costs from discontinued operations 262 723