Total remuneration Total remuneration package levels are informed by relevant pay data, in particular the lower quartile to median range of the FTSE 30 and the median to upper quartile range of the FTSE 50. 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 — ABP — OATTV Plan — LTIP — Long-term savings — Aviva Staff Pension Scheme (ASPS) — Benefits — All employee schemes
ABP The ABP is intended to motivate executives to achieve the annual business plan, based on a — Annually, one-third is paid in cash and twoseries of key financial, employee and customer performance indicators (KPIs), which make up thirds in deferred shares.
Two-thirds of bonus is deferred into shares and the deferred shares vest on the third anniversary of the date of grant, subject to the recipient remaining in service. On resignation during the three-year deferral period, all or part of the grant is forfeited (100% in year of grant, 50% in following year and 25% in year after that). Additional shares are awarded at vesting in lieu of the dividends paid on the deferred shares during the deferral period.
— Annually, a proportion of the deferred element of the ABP is matched in shares.
LTIP The LTIP is intended to motivate the achievement of the Company’s longer-term objectives, to aid the retention of key personnel and to align executive interests to those of shareholders.
The Group Chief Executive is eligible to receive an annual award of shares equal to 175% of basic salary. Other EDs are eligible to receive an annual award of shares equal to 150% of basic salary.
No additional shares are awarded for the dividends paid during the three-year performance period on those shares that vest.
ASPS The UK ASPS provides a competitive post retirement package. No ED is currently accruing — Deferred cash payable on retirement in the service-based benefits in the ASPS. form of a lump sum /monthly payment. The scheme provides accrual at 1/30th, 1/45th or 1/60th of annual basic salary depending on seniority and the date of joining the scheme. Lump sum death in service benefit of four times basic salary is provided, as is a spouse’s or partner’s pension equal to two-thirds of actual or, on death in service and in certain other circumstances, prospective pension. Post retirement increases are equivalent to the Retail Price Index up to a maximum of 10%. Retirement benefits can be accessed from age 60.
Directors’ remuneration report continued Performance review Corporate responsibility Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
Overview of the effect on current EDs The effect of these policies in 2009 for current EDs is set out below. It should be emphasised that the figures shown for both the OATTV Plan and the LTIP grant represent the face value of those grants. The LTIP grant would only be realised if very stretching performance conditions were to be met. Details on pension benefits are set out later in this report.
LTIP – Face Value of grant £1,618,750 The face value of the grant represented 175% of basic salary on 28 February 2009.
Other Benefits £19,000 cash car allowance Mr Moss receives 2% of basic salary as a non-pensionable cash 2% basic salary cash supplement provided in consideration of his surrendering his Unapproved supplement Unfunded Retirement Benefit (UURB) promise at the point when accrual in PMI the ASPS ceased.
LTIP – Face Value of grant £900,000 The face value of the grant represented 150% of Mr Scott’s basic salary on 28 February 2009.
ASPS Membership of the ASPS Mr Scott has a fully accrued pension equivalent to two-thirds of his pensionable salary at retirement. He therefore no longer accrues service related benefits but does continue to accrue additional benefits as a result of pensionable salary increases.
* Philip Scott retired from the Board on 26 January 2010. **Percentages do not necessarily add up due to rounding.
Aviva plc Directors’ remuneration report continued Annual Report and Accounts 2009
Basic Salary £520,000 during the year. Mr Hodge s requested not to receive an increase to his basic salary in 2009. On 1 January 2010, his basic salary increased to £600,000 to reflect his increased responsibilities across the UK business. Mr Hodges requested that his basic salary should not be subject to annual review in 2010.
ABP £502,528 (96.6% of basic Mr Hodges’ bonus is a function of the degree of achievement of 2009 salary) targets as follows: (£167,509 delivered in cash and Financial 26.5% (maximum 50%) £335,019 deferred into shares Employee 3.7 % (maximum 10%) for three years) Customer 7.5 % (maximum 10%)
LTIP – Face Value of grant £780,000 The face value of the grant represented 150% of Mr Hodges’ basic salary on 28 February 2009.
Basic Salary €713,333 during the year On appointment to` the Board, Mr Moneta received a basic salary increase (£635,220) from 29 September 2009 of €100,000 (14.7%). As at 1 January 2009 €680,000 Mr Moneta requested that his basic salary should not be subject to annual (£605,537) review in 2010. As at 29 September 2009 €780,000 (£694,587)
LTIP – Face Value of grant €850,000 The face value of the grant represented 125% of Mr Moneta’s basic salary on 28 February 2009.
€82,201 is payable as an exchange rate adjustment for the period 1 July 2008 to 30 June 2009.
€40,000 annual schooling allowance payable up to the end of secondary schooling, grossed up for tax purposes.***
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 37,500 staff completed in 2009. This survey is delivered through an independent third party who is able to provide extensive external benchmark data. The Company’s aspiration is to reach the upper quartile positions compared to the relevant global and national norms on leadership and engagement over time. In 2009, the number of businesses measuring customer advocacy using a consistent robust methodology doubled, and this was measured by an independent global research agency. All business units now have customer advocacy targets in place for 2010. The Company’s aspiration is to reach the upper quartile in the relevant local market benchmark. Internal assurance that the outcomes on employee and customer targets were accurately calculated and reported was provided to the Committee by Group Audit.
Personal objectives based on delivery of key strategic priorities, personal leadership and operating performance of the relevant portion of the business account for up to 30% of annual bonus. Carbon emissions targets are also included as part of the EDs’ personal objectives.
The Group’s performance against its financial, employee and customer KPIs in 2009, as they affected the bonus of the Group Chief Executive, is shown in Table 6.
LTIP – Target Setting The LTIP vests subject to the degree of achievement of two equally weighted performance measures, chosen to reflect shareholders’ long-term interest, in absolute ROCE and relative TSR performance.
TSR Targets Relative TSR determines the vesting of the other 50% of any LTIP award. The comparator group for the assessment of relative TSR performance at the time of the 2009 grant comprised Aegon, Allianz, Axa, Fortis, Friends Provident, Generali, ING, Legal and General, Lloyds Banking Group, Prudential, Royal Bank of Scotland, Royal and Sun Alliance, Standard Life and Zurich. HBOS had been delisted by the time the 2009 grant was made and so was not included in the comparator group. Friends Provident was delisted in November 2009.
TSR vesting operates as set out in Table 8 below: Table 8: TSR vesting schedule for the 2009 award TSR position over the three-year performance period Percentage of shares in award that vests based on achievement of TSR targets
The same targets will apply for the 2010 LTIP awards. The comparator group will remain unchanged other than the removal of Friends Provident which will be replaced by Resolution Limited. The Committee has agreed a shortlist of companies that would be considered for inclusion in the comparator group, subject to final review, should any further member of the group be delisted.
Aviva LTIP 2009 50% Aviva LTIP 2008 50% Aviva LTIP 2007 50%
Since the LTIP has performance conditions attached to it, then one potential outcome is that neither performance condition is met and the whole of the LTIP lapses. Table 10 below has been drawn up to assist in understanding the potential value of the LTIP awards made to EDs in 2010 should the performance conditions be met in part or in whole.
£ £ £ £ Face Value of grant 1,618,750 900,000 780,000 756,900 Threshold Vesting 485,600 270,000 234,000 227,100 Expected Value 936,950 520,900 451,500 438,100 Maximum Vesting 2,154,550 1,197,900 1,038,200 1,007,500 * Figures shown for Mr Moneta have been converted from Euro to Pound Sterling at the average exchange rate for 2009 of €1.12297:£1.00
Assumptions are as follows: — Threshold vesting assumes TSR and ROCE elements vest at the minimum level, producing a 30% vesting of the total award.
The LTIP vesting history is set out in Table 11 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.
Aviva does not award additional shares for the dividends that were paid during the three-year performance period on those shares that vest.
Share Awards Table 12 below sets out the current position of those share-based awards made to EDs under current remuneration arrangements.
At 1 Awards Awards Awards At 31 price at price at January granted vesting lapsing December date awards date awards 2009 during year during year during year 2009 granted1 vested Vesting Number Number Number Number Number Pence Pence Date
Andrew Moss Aviva Long Term Incentive Plan — 2006 87,804 — 49,433 38,371 0 814.0 202.5 Mar-09 — 2007 136,540 — — — 136,540 778.5 Mar-10 — 2008 253,289 — — — 253,289 617.5 Mar-11 — 2009 — 632,324 — — 632,324 245.0 Mar-12
Aviva Annual Bonus Plan — 2006 47,648 11,0248 58,672 — 0 814.0 202.5 Mar-09 — 2007 64,273 — — — 64,273 778.5 Mar-10 — 2008 93,567 — — — 93,567 617.5 Mar-11 — 2009 — 195,876 — — 195,876 245.0 Mar-12
One Aviva Twice the Value Bonus Plan — 2008 52,734 — — — 52,734 598.0 Mar-11 — 2009 — 95,291 — — 95,291 245.0 Mar-12
Aviva Annual Bonus Plan — 2006 32,725 7,5728 40,297 — 0 814.0 202.5 Mar-09 — 2007 37,366 — — — 37,366 778.5 Mar-10 — 2008 55,785 — — — 55,785 617.5 Mar-11 — 2009 — 138,561 — — 138,561 245.0 Mar-12
One Aviva Twice the Value Bonus Plan — 2008 41,838 — — — 41,838 598.0 Mar-11 — 2009 — 103,921 — — 103,921 245.0 Mar-12
Performance graph Table 13 below compares the TSR performance of the Company over the past five years with the TSR of the FTSE 100 Return Index. This index has been chosen because it is a recognised equity market index, of which Aviva is a member.
The companies which comprise the current LTIP comparator group for TSR purposes were chosen on the basis of product and geographic match to Aviva and are listed above. The TSR graph for the comparator group has been plotted using the 20 companies (including Aviva) in the comparator group for pre-2005 grants, the 15 companies (including Aviva) in the comparator group for 2005-07 grants, the 16 companies (including Aviva) in the comparator group for the 2008 grant, and the 15 companies (including Aviva) in the comparator group for the 2009 grant.
Table 13: Aviva plc five-year TSR performance against the FTSE 100 Index and the comparator group
EDs’ service contracts Service contracts agreed with each ED incorporate their terms and conditions of employment. Contracts were last reviewed during 2006 bringing them in line with good market practice. The aim is to strike a fair balance between the Company’s and the employee’s interests taking into account good market practice. The key terms are set out in Table 14 below.
Notice period By the director 6 months By the Company 12 months, rolling. No notice or payment in lieu to be paid where the Company terminates for cause.
Remuneration and benefits As described in this Report the operation of the ABP, the OATTV Plan and LTIP is at the Company’s discretion and, in the case of the long-term savings plans, at the trustees’ discretion.
All employee share plans EDs are eligible to participate in a number of HMRC approved all employee share plans on the same basis as other eligible employees.
The Aviva SAYE allows eligible employees to acquire options over the Company’s shares at a discount of up to 20% of their market value at the date of grant. In order to exercise these options, participants must have saved through a three, five or sevenyear HMRC approved savings contract, subject to a maximum savings limit of £250 per month.
Details of holdings under these plans can be found on page 115.
NEDs The NEDs, including the Chairman, have letters of appointment which set out their duties and responsibilities. The key terms of the appointments are set out in Table 15 below.
Fees are reviewed annually and are set by the Board to attract individuals with the required range of skills and experience. In determining the level of fees paid to the NEDs the Board receives recommendations from the EDs, who consider the NED’s duties and responsibilities, together with the time commitment required in preparing for and attending meetings, and the amounts paid by competitors and similar-sized companies.
NED fees payable from 1 April 2009 are set out in Table 16 below.
Committee Membership – Audit – Corporate Responsibility – Nomination – Remuneration – Risk and Regulatory
3. Figures shown for Mr Moneta have been converted from Euro to Pound Sterling at the average exchange rate for 2009 of €1.12297 : £1.00. Further details of Mr Moneta’s benefits are contained in table 5. The grossed element for schooling and housing as outlined in table 5 will be delivered in 2010.
Fees earned in 2009 by the NEDs are set out in Table 18 below.
Lord Sharman, Chairman £495,000 £495,000 Nikesh Arora £37,714 £2,993 £2,993 £43,700 Wim Dik £20,756 £1,647 £1,647 £24,050 Mary Francis £63,000 £10,000 £10,000 £397 £19,375 £102,772 Richard Goeltz £63,000 £20,000 £10,000 £5,000 £98,000 Euleen Goh £63,000 £10,000 £5,000 £78,000 Carole Piwnica £63,000 £10,000 £10,000 £83,000 Leslie Van de Walle £41,238 £2,623 £1,373 £45,234 Russell Walls £63,000 £35,000 £5,000 £5,000 £108,000 Scott Wheway £63,000 £20,000 £5,000 £88,000
The following changes to NED responsibilities took place during the year: — Nikesh Arora ceased to be a member of the Board, Nomination Committee and Risk and Regulatory Committee on 5 August 2009. — Wim Dik retired from the Board, Corporate Responsibility Committee and Risk and Regulatory Committee on 29 April 2009. — Leslie Van de Walle joined the Board on 6 May 2009 and joined the Remuneration Committee and Risk and Regulatory
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 £61 million (2008: £53 million) and is set out in note 59 to the Accounts.
Andrew Moss Scott Mark Hodges Andrea Moneta £’000 £’000 £’000 £’000
Defined contribution employer contributions during the year — — — 61
No former Directors received any increase in retirement benefits in excess of the amount to which they were entitled, on the later of the date when the Benefits first became payable, or 31 March 1997.
Share incentive plans Details of the EDs who were in office for any part of the financial year, and hold or held options to subscribe for ordinary shares of the Company or hold or held awards over shares in the Company, pursuant to the Company’s share based incentive plans, are set out in Table 20 below.
At 1 January during year during year during year 2009 Price 2009 Number number Number Number Number Pence Exercise Period
The mid-market price of an ordinary share in the Company on 31 December 2009, being the last business day of the year, was 397.9p, and the mid-market prices during the year ranged from 163.3p to 467.5p. During the year, no share options were exercised by directors (2008: nil options exercised).
Table 21: Directors’ interests in Aviva Shares Shares1 ABP2 LTIP3 OATTV Plan4 Options5
The following changes to directors’ interests which relate to shares acquired each month under the partnership element of the AESOP during the period 1 January 2010 to 25 February 2010 have been reported to the Company.
Developments in 2010 Patrick Regan Mr Regan joined the Board of Aviva as Chief Financial Officer on 22 February 2010. As part of the recruitment offer made to Patrick Regan, the Committee agreed to compensate Mr Regan for the loss of unvested Willis Group Holdings Limited restricted shares and stock options and for loss of the bonus which would have been paid to him by Willis Group Holdings Limited for the 2009 financial year. This will be in the form of a restricted share award to the value of £1.65 million which is subject to clawback provisions and will be granted on the earliest permitted date after Mr Regan’s date of joining, a deferred share award to the value of £283,333 which is subject to clawback provisions and will be granted in March 2010 and a cash bonus of £141,667 which is payable in March 2010. Mr Regan’s basic salary is £600,000 per annum and the other elements of his remuneration follow the policies in practice for EDs as outlined earlier in this report.
Philip Scott Philip Scott retired from the Board on 26 January 2010 but will still be employed by Aviva until 31 July 2010. His ABP for 2008 and 2009 will vest immediately. His LTIP and OATTV Plan awards for 2008 and 2009 will vest to the extent the Committee determines that the performance conditions have been met and mirroring the good leaver provisions in accordance with the Plan rules. As discussed in the 2008 Annual Report and Accounts Mr Scott will receive a non-discounted pension with effect from January 2012 and, from 1 October 2010, will be providing consultancy services to the Group for a limited period.
Aviva plc Annual Report and Accounts 2009 Additional information for Shareholders
Major shareholders and related party disclosures Major shareholders The Financial Services Authority Disclosure and Transparency Rules 2006 provide that a person or corporate entity that acquires an interest of 3% or more in Aviva ordinary shares is required to notify us of that interest, whether it is held beneficially or not. Any subsequent increase or decrease of 1% or more must also be notified. Similarly, a notification is required once the interest falls below 3%.
We are required under the Financial Services Authority Listing Rules to disclose in the directors’ report to our annual financial statements all notifications received since our previous annual report. We have summarised below the notifications received during last three financial years: 2007, 2008 and 2009.
The table below summarises the shareholders with at least 3% ownership of our outstanding ordinary shares as of 3 March 2010 according to notifications received from our shareholders. Our major shareholders as listed below have the same voting rights as all our ordinary shareholders.
% of total issued shares/ Total number of shares held % of voting rights
– Non-beneficial interest (shares held nominally on behalf of others) 140,757,642 5.09%
Axa S.A. and its Group companies – Held beneficially 88,336,674 3.19% – Non-beneficial interest 18,451,502 0.67% Legal & General Group plc – Held beneficially 116,354,795 4.24% 1. On 1 December 2009, Barclays Group sold Barclays Global Investors business to BlackRock
Barclays plc – Non-beneficial interest 133,026,405 5.08% Axa S.A. and its Group companies – Held beneficially 28,520,097 1.10% – Non-beneficial interest 230,932,552 8.90% Legal & General Group plc
% of total issued shares/ As at 27 February 2007 Total number of shares held % of voting rights
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.
Income from associates predominantly relates to our investments in the Royal Bank of Scotland (RBS) life and collective investment companies listed in the ‘Financial Statements IFRS – Note 19 – Interest in, and loans to, associates.’ Under management service agreements with these associates, our UK life insurance companies provide administration services, the cost of which is recharged to the RBS companies. In addition, our fund management companies provide fund management services to these associates, for which they charge fees based on the level of funds under management.
We pay our cash dividends in pounds sterling, although our 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 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.
For the 2007 final dividend and previous final and interim dividends, shareholders on record were provided with the opportunity to elect to receive dividends in the form of newly issued ordinary shares through our scrip dividend scheme. For the 2008 interim dividend the scrip dividend scheme was replaced by a dividend reinvestment plan (DRIP). For those shareholders participating in the DRIP, we paid a cash dividend, which was then used to buy existing shares on the open market. For the 2008 final dividend we withdrew the DRIP and reintroduced the scrip dividend scheme.
Interim Interim Final Final dividend dividend dividend dividend per share per share per share per share Year (pence) (cents) (pence) (cents)
Management’s annual report on internal control over financial reporting This Annual Report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.
Code of ethics The company has adopted a code of ethics for its group chief executive, chief financial officer, general auditor and 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.
Regulation Compliance In our insurance business, matters may arise as a result of industry-wide issues, inspection visits or other regulatory activity requiring discussion and resolution with insurance industry regulators. As a result of these matters, we ensure that procedures are in place to address regulatory concerns and that such procedures are properly planned, managed and resourced. We pursue corrective action when necessary and report progress to the regulatory bodies in a timely manner.
Overview of regulation as it affects our business Our principal insurance and investment operations are in the United Kingdom, Europe, North America and the Asia Pacific region. We are therefore subject to financial services regulation in these regions, which is discussed below.
Authorised Firms must at all times meet certain threshold conditions, which include having adequate resources for the carrying on of its business and being a fit and proper person, having regard to all the circumstances. Authorised Firms must also comply with the FSA’s Principles for Business, which are 11 high level principles for conducting financial services business in the UK. These include the 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 built on the basic principle that a firm should have systems and controls, including risk management, which are appropriate to the size, complexity and diversity of its business.
However, the FSA also recognises, and indeed 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, from the operation of the Aviva plc board and its committees down, is thus very much within its regulatory remit.
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 over 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 to 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 (“A”) is acquired if the acquirer holds 10% (or 20% if the Authorised Firm is an insurance intermediary) or more of the shares in A or a parent undertaking of A (“P”); is able to exercise significant influence over the management of A or P by virtue of his shareholding in that company; is entitled to exercise, or control the exercise, of 10% (20% in the case of an insurance intermediary) or more of the voting power of A or P, or is able to exercise significant influence over the management of A or P by virtue of his voting power in that company. Increases in “control”, once they reach thresholds of 20%, 33% and 50% of the shares or voting power of an Authorised Firm or one of its parent undertakings, also requires the consent of the FSA.
FSA conduct of business rules The FSA’s Conduct of Business (COB) Rules apply to every Authorised Firm carrying on regulated activities and regulate the day-to-day conduct of business standards to be observed by Authorised Persons in carrying on regulated activities.
The COB 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 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, controls on 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.
— Maintaining pressure on firms to treat customers fairly. — Playing a full role in modernising the global regulatory framework. — Completing the planned programme of improvements to its supervisory processes.
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 for two main reasons: The structure of the Group means that the great majority of the overseas operations are owned, ultimately, by Aviva International Insurance (AII), a UK regulated insurance company. In its regulation of AII, the FSA has a legitimate interest in the systems and controls by which the Group manages its overseas businesses, to ensure that financial shocks do not flow through to the UK.
Our activities within the EU are subject to the Insurance Groups Directive (as discussed in more detail below). This gives the FSA the additional formal responsibility of acting as lead regulator (ie the cross sector supervisory co-ordinator) for the Group within the EU.
Aviva plc Additional information for Shareholders continued Annual Report and Accounts 2009
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 has increased its desire for a principles based approach to regulation. In line with this FSA continues to place increasing weight on the ‘Treating Customers Fairly’ principle. More recently FSA has rewritten the conduct of business rules to remove many of the more granular requirements.
Intervention and enforcement The FSA has extensive powers to investigate and intervene in the affairs of Authorised Firms and is obliged under FSMA to monitor compliance with the requirements imposed by, and to enforce the provisions of, FSMA, related secondary legislation and the rules made thereunder.
The Financial Services Compensation Scheme (FSCS) The FSCS is intended to compensate individuals and small businesses for claims against an Authorised Firm where the Authorised Firm is unable or unlikely to be able to meet those claims (generally, when it is insolvent or has gone out of business). Under a new funding system that started on 1 April 2008, for the purposes of funding FSCS compensation costs, the FSCS levy is split into five broad classes: — Deposits — Long-term insurance and savings — General insurance — Investments — Home finance
With the exception of the deposits class, each broad class is divided into two sub-classes based on provider/intermediation activities. Each of the ‘sub-classes’ is made up of firms which are providers or intermediaries and engage in similar styles of business with similar types of customer.
The sub-classes are based on the activities a firm undertakes (and are aligned to their FSA permissions). A firm could be allocated to one or more sub-classes according to the activities that it undertakes. In the event of a failure of a market participant, the Authorised Firms in the Group could be required to make contributions to compensate investors.
Capital and solvency rules for insurers Under the FSA Handbook, a UK insurer (including those within the Group) must hold capital resources equal to at least the Minimum Capital Requirement (the ‘MCR’). Insurers with with-profits liabilities of more than £500 million must hold capital equal to the higher of MCR and the Enhanced Capital Requirement (the ECR). The ECR is intended to provide a more risk responsive and “realistic” measure of a with-profits insurer’s capital requirements, whereas the MCR is broadly speaking equivalent to the previous required minimum margin and satisfies the minimum EU standards.
— A calculation of the “realistic” present value of the insurer’s expected future contractual liabilities together with projected ‘fair’ discretionary bonuses to policyholders, plus a risk capital margin, together known as the ‘realistic peak’.
Long-term assets and liabilities Where a UK insurer carries on life insurance business, then longterm business assets and liabilities – namely 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 must be established to hold all receipts of long-term business.
The FSA uses the annual return to monitor the solvency (ability to meet current and future obligations such as claims payments to policyholders) of an insurance company. For general insurance business, the return is also used to assess retrospectively the adequacy of the company’s claims provisions. The directors of an insurance company are required to sign a certificate, which includes a statement as to whether the company has maintained the required minimum margin of solvency throughout the year. The directors must also certify that the company has completed its return to the FSA properly in accordance with the FSA’s instructions and that the directors are satisfied that the company has complied in all material respects with the requirements set out in the FSA Handbook.
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, under section 311 of FSMA, 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 Financial Services Compensation Scheme may take measures for securing the transfer of all or part of the business to another insurance company.
Reinsurance directive On 16 November 2005, the Council and the European Parliament adopted Directive 2005/68/EC on reinsurance (the “Reinsurance Directive”) which member states were obliged to transpose into national law by 10 December 2007. The Reinsurance Directive requires that all reinsurance undertakings be authorised in their home member state. To obtain that authorisation, they will need to meet strict requirements. Once they have done so, they will be free to carry out their activity anywhere in the EU through the single market passport. The FSA has implemented the requirements of the Directive by changing its Handbook with effect from 31 December 2006.
Distance marketing directive Under the Distance Marketing Directive, EU member states are required to implement a framework of rules and guidance in order to protect consumers by: — Setting minimum standards for information that must be provided to consumers before entering into a financial services contract by ‘distance means’.
— Impose minimum requirements, with certain limitations, as regards the content of the information which the insurance intermediaries must make available to their potential customers, and the arrangements for its provision.
The FSAP also included measures towards harmonising conduct of business rules, notably The Insurance Mediation Directive and the Distance Marketing Directive described above.
The Capital Requirement Directive which came into force on 1 January 2007 sets out for the first time directive-based capital requirements for all investment firms brought into regulation by MiFID.
International Financial Reporting Standards (IFRS) The standards drafted by the International Accounting Standards Board (IASB) have been mandatory for about 7,000 EU listed companies since 1 January 2005. For standards on insurance contracts a two phased approach has been adopted by the IASB. Under the interim solution adopted as IFRS 4 Insurance Contracts, insurers apply a variety of existing local accounting practices subject to a number of adjustments. Proposals for a final standard for accounting for insurance contracts are currently under review but might not be agreed before 2011 or later.
Since the approval, the focus has been on the development of the Level 2 implementing measures advice published by the CEIOPS which fill in the detail under Level 1 and focused on technical issues. Aviva has been actively participating in the process by providing responses to the CEIOPS as well as participating in the key European industry working groups who provide the voice of industry in on-going negotiation in Brussels.
The formal CEIOPS consultation process has already closed and the European Commission are now considering the wording on the implementing measures that will be finalised by the end of 2010. Full implementation of Solvency II will be required in October 2012.
In addition to the EU wide initiatives there have also been developments within our major EU markets, including: In France all applicable EU Directives have now been brought together in a single insurance code supervised by the Authorité de Contrôle des Assurances et des Mutuelles (ACAM). In the Netherlands, where Aviva operates under the Delta Lloyd brand, a new Financial Services Act replacing eight former supervision Acts came into force on 1 January 2007. Under the new Act the role of the two market regulators – The Nederlandische Bank (DNB) for prudential issues and the Authority for Financial Markets (AFM) for conduct of business are clearly defined.
Primary EU insurance regulation in Ireland has been implemented through two Acts and supervised by the Financial Regulator. In July 2007 the Consumer Protection Code was introduced, a major legislative development bringing together comprehensive rules to apply across the financial services sector.
In both Spain and Italy where we operate through joint ventures with local banks and savings institutions there has been significant progress in revising local regulation and
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On Poland’s accession to the EU in 2003 the introduction of a number of Acts continued the liberalisation of insurance law started by the Insurance Act of 1990. The 2003 Acts introduced EU law on insurance activities covering areas including licensing, supervision, reserving and technical provisions, financial reporting, selling activities, pension fund supervision and the role of an insurance ombudsman. The 2006 Act on Financial Market Supervision created a single regulator the Polish Financial Supervision Authority (KNF). The process was completed on 1 January 2008 when the KNF assumed responsibility for bank regulation from the National Bank of Poland.
United States We write life and annuity business in the United States through Aviva USA, a wholly owned subsidiary formed by the merger of Aviva Life Insurance Company of America with AmerUS which it acquired in July 2006. Aviva USA is domiciled in Iowa and licensed to conduct business in all 50 states. In New York it operates a wholly owned subsidiary Aviva Life Insurance Company of New York.
There is no federal system of regulation for the insurance businesses. Rather, individual states have authority to pass statutes, adopt regulation or issue directives to regulate insurance activities within their jurisdiction.
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.
On 17 December 2008 the SEC voted in favour of adopting a new rule 151A under the Securities Act of 1933, as amended. The effect of the rule change is to bring indexed annuity products within SEC regulation on a similar basis as the so called ‘variable’ products which are regulated as securities. The rule was set to become effective on 12 January 2011 and apply to equity indexed annuities issued on or after that date. However, after a legal challenge by several life insurers in the US Court of Appeals for the D.C. Circuit, the court remanded rule 151A back to the SEC on 21 July 2009, requesting further technical analysis. One of the life insurers involved requested the Court to delay the effective date of the rule change to two years after SEC completes their analysis. The SEC has now consented to the delay but the court is now considering whether it should set aside the rule entirely. Aviva believes indexed annuities represent an important product within the US savings and retirement market and that we will be able to meet the requirements of the new rule 151A under the Securities Act of 1933.
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.
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.
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 fully complies with the local regulation in each of the countries in which it operates.
Industry regulation across the region typically focuses on financial stability, ie 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.
Intellectual property Our primary brands in the UK (Aviva, Norwich Union, RAC) are registered trade marks in the UK and elsewhere.
We own approximately 300 registered or pending marks in the UK, including Community trade marks having effect in the entire EU.
Separate Opinion in relation to IFRSs As explained in the Accounting Policies to the Group financial statements, the Group, in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB).
In our opinion, the Group financial statements comply with IFRSs as issued by the IASB.
In 2008, the IASB issued a revised version of IFRS 3, Business Combinations, which introduces a number of changes in accounting for such transactions that will impact the amount of goodwill recognised, the reported results in the period an acquisition occurs, and future reported results. A consequential amendment to IAS 27, Consolidated and Separate Financial Statements, requires a change in the ownership interest of a subsidiary (without loss of control) to be accounted for as an equity transaction, rather than giving rise to goodwill or a gain or loss. Other consequential amendments were made to IAS 7, Statement of Cash Flows, IAS 12, Income Taxes, IAS 21, The Effects of Changes in Foreign Exchange Rates, IAS 28, Investments in Associates, and IAS 31, Interests in Joint Ventures. These are applicable prospectively for accounting periods commencing 1 July 2009 or later, and are therefore not applicable for the current accounting period. On adoption, they will impact the areas noted above in the Group’s financial reporting.
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). As supplementary information, consolidated financial information is also presented in euros.
(C) Critical accounting policies and the use of estimates The preparation of financial statements requires the Group to select accounting policies and make estimates and assumptions that affect items reported in the consolidated income statement, statement of financial position, other primary statements and notes to the financial statements.
Merger accounting and the merger reserve Prior to 1 January 2004, certain significant business combinations were accounted for using the “pooling of interests method” (or merger accounting), which treats the merged groups as if they had been combined throughout the current and comparative accounting periods. Merger accounting principles for these combinations gave rise to a merger reserve in the consolidated statement of financial position, being the difference between the nominal value of new shares issued by the Parent Company for the acquisition of the shares of the subsidiary and the subsidiary’s own share capital and share premium account. These transactions have not been restated, as permitted by the IFRS 1 transitional arrangements.
Group holds minority stakes in PLPs, with no disproportionate influence, the relevant investments are carried at fair value through profit and loss within financial investments.
Investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group’s share of that entity’s post-acquisition changes to shareholders’ funds, is included as an asset in the consolidated statement of financial position. As explained in policy N, the cost includes goodwill identified on acquisition. The Group’s share of their post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. Equity accounting is discontinued when the Group no longer has significant influence over the investment.
Some insurance and investment contracts contain a discretionary participating feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts.
As noted in policy A above, insurance contracts and participating investment contracts in general continue to be measured and accounted for under existing accounting practices at the later of the date of transition to IFRS or the date of the acquisition of the entity, in accordance with IFRS 4. Accounting for insurance contracts in UK companies is determined in accordance with the Statement of Recommended Practice issued by the Association of British Insurers, the most recent version of which was issued in December 2005 and amended in December 2006. In certain businesses, the accounting policies or accounting estimates have been changed, as permitted by IFRS 4 and IAS 8 respectively, to remeasure designated insurance liabilities to reflect current market interest rates and changes to regulatory capital requirements. When accounting policies or accounting estimates have been changed, and adjustments to the measurement basis have occurred, the financial statements of that year will have disclosed the impacts accordingly.
(G) Premiums earned Premiums on long-term insurance contracts and participating investment contracts are recognised as income when receivable, except for investment-linked premiums which are accounted for when the corresponding liabilities are recognised. For single premium business, this is the date from which the policy is effective. For regular premium contracts, receivables are taken at the date when payments are due. Premiums are shown before deduction of commission and before any sales-based taxes or duties. Where policies lapse due to non-receipt of premiums, then all the related premium income accrued but not received from the date they are deemed to have lapsed is offset against premiums.
Deposits collected under investment contracts without a discretionary participating feature (non-participating contracts) are not accounted for through the income statement, except for the fee income (covered in policy H) and the investment income attributable to those contracts, but are accounted for directly through the statement of financial position as an adjustment to the investment contract liability.
(I) Other fee and commission income Other fee and commission income consists primarily of fund management fees, income from the RAC’s non-insurance activities, distribution fees from mutual funds, commissions on reinsurance ceded, commission revenue from the sale of mutual fund shares, and transfer agent fees for shareholder record keeping. Reinsurance commissions receivable are deferred in the same way as acquisition costs, as described in policy W. All other fee and commission income is recognised as the services are provided.
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.
Embedded derivatives Embedded derivatives that meet the definition of an insurance contract or correspond to options to surrender insurance contracts for a set amount (or based on a fixed amount and an interest rate) are not separately measured. All other embedded derivatives are separated and measured at fair value, if they are not considered as closely related to the host insurance contract or do not meet the definition of an insurance contract. Fair value reflects own credit risk to the extent the embedded derivative is not fully collateralised.
General insurance and health provisions (i) Outstanding claims provisions General insurance and health outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the statement of financial position date, whether reported or not, together with related claims handling costs. Significant delays are experienced in the notification and settlement of certain types of general insurance claims, particularly in respect of liability business, including environmental and pollution exposures, the ultimate cost of which cannot be known with certainty at the statement of financial position date. Any estimate represents a determination within a range of possible outcomes. Further details of estimation techniques are given in note 38(c).
The fair value liability is determined in accordance with IAS 39, using a valuation technique to provide a reliable estimate of the amount for which the liability could be settled between knowledgeable willing parties in an arm’s length transaction. For unitlinked contracts, the fair value liability is equal to the current unit fund value, plus additional non-unit reserves if required based on a discounted cash flow analysis. For non-linked contracts, the fair value liability is based on a discounted cash flow analysis, with allowance for risk calibrated to match the market price for risk.
(M) Reinsurance The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Premiums on reinsurance assumed are recognised as revenue in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies, using assumptions consistent with those used to account for these policies.
If a reinsurance asset is impaired, the Group reduces the carrying amount accordingly and recognises that impairment loss in the income statement. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.
The amortisation charge for the year is included in the income statement under “Other operating expenses”. For intangibles with finite lives, a provision for impairment will be charged where evidence of such impairment is observed. Intangibles with indefinite lives are subject to regular impairment testing, as described below.
Impairment testing For impairment testing, goodwill and intangibles with indefinite useful lives have been allocated to cash-generating units. The carrying amount of goodwill and intangible assets with indefinite useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. Goodwill and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support its carrying value. Further details on goodwill allocation and impairment testing are given in note 16(b).
(O) Property and equipment Owner-occupied properties are carried at their revalued amounts, which are supported by market evidence, and movements are recognised in other comprehensive income and taken to a separate reserve within equity. When such properties are sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings. These properties are depreciated down to their estimated residual values over their useful lives. All other items classed as property and equipment within the statement of financial position are carried at historical cost less accumulated depreciation.
Until 1 January 2009, borrowing costs directly attributable to the acquisition and construction of property and equipment were expensed as incurred. With effect from 1 January 2009, such costs are capitalised. All repairs and maintenance costs are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the most recently assessed standard of performance of the existing asset will flow to the Group and the renovation replaces an identifiable part of the asset. Major renovations are depreciated over the remaining useful life of the related asset.
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(P) Investment property Investment property is held for long-term rental yields and is not occupied by the Group. Completed investment property is stated at its fair value, which is supported by market evidence, as assessed by qualified external valuers or by local qualified staff of the Group in overseas operations. Changes in fair values are recorded in the income statement in net investment income.
(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.
In general, the FV category is used as, in most cases, the Group’s investment or risk management strategy is to manage its financial investments on a fair value basis. Debt securities and equity securities, which the Group buys with the intention to resell in the short term, are classified as trading, as are non-hedge derivatives (see policy T below). All other securities in the FV category are classified as other than trading. The AFS category is used where the relevant long-term business liability (including shareholders’ funds) is passively managed, as well as in certain fund management and non-insurance operations.
Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values. Debt securities are initially recorded at their fair value, which is taken to be amortised cost, with amortisation credited or charged to the income statement. Investments classified as trading, other than trading and AFS are subsequently carried at fair value. Changes in the fair value of trading and other than trading investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS are recognised in other comprehensive income and recorded in a separate investment valuation reserve within equity.
Investments carried at fair value are measured using a fair value hierarchy, described in note 24(b), with values based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer.
When securities classified as AFS are sold or impaired, the accumulated fair value adjustments are transferred out of the investment valuation reserve to the income statement with a corresponding movement through other comprehensive income.
Financial guarantees are recognised initially at their fair value and are subsequently amortised over the duration of the contract. A liability is recognised for amounts payable under the guarantee if it is more likely than not that the guarantee will be called upon.
Impairment The Group reviews the carrying value of its investments on a regular basis. If the carrying value of an investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. 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, ie 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.
AFS equity securities: An AFS equity security is considered impaired if there is objective evidence that the cost may not be recovered. In addition to qualitative impairment criteria, such evidence includes a significant or prolonged decline in fair value below cost. Unless there is evidence to the contrary, an equity security is considered impaired if the decline in fair value relative to cost has been either at least 20% for a continuous six month period or more than 40% at the end of the reporting period. Evidence to the contrary may include a significant rise in value of the equity security, for example as a result of a merger announced after the period end. We also review our largest equity holdings for evidence of impairment, as well as individual equity holdings in industry sectors known to be in difficulty. Where there is objective evidence that impairment exists, the security is written down regardless of the size of the unrealised loss.
Mortgages and securitised loans: Impairment is measured based on the present value of expected future cash flows discounted at the effective rate of interest of the loan, subject to the fair value of the underlying collateral. When a loan is considered to be impaired, the income statement is charged with the difference between the carrying value and the estimated recoverable amount. Interest income on impaired loans is recognised based on the estimated recoverable amount.
Reversals of impairments are only recognised where the decrease in the impairment can be objectively related to an event occurring after the write-down (such as an improvement in the debtor’s credit rating), and are not recognised in respect of equity instruments.
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 discontinues hedge accounting if the hedging instrument expires, is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation.
(U) Loans Loans with fixed maturities, including policyholder loans, mortgage loans on investment property, securitised mortgages and collateral loans, are recognised when cash is advanced to borrowers. The majority of these loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method. Loans with indefinite future lives are carried at unpaid principal balances or cost.
For certain mortgage loans, the Group has taken advantage of the revised fair value option under IAS 39 to present the mortgages, associated borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for these three items. The fair values of mortgages classified as FV are estimated using discounted cash flow forecasts, based on a risk-adjusted discount rate which reflects the risks associated with these products, calibrated using the margins available on new lending or with reference to the rates offered by competitors. They are revalued at each period end, with movements in their fair values being taken to the income statement.
At each reporting date, we review loans carried at amortised cost for objective evidence that they are impaired and uncollectable, either at the level of an individual security or collectively within a group of loans with similar credit risk characteristics. To the extent that a loan is uncollectable, it is written down as impaired to its recoverable amount, measured as the present value of expected future cash flows discounted at the original effective interest rate of the loan, including any collateral receivable. Subsequent recoveries in excess of the loan’s written down carrying value are credited to the income statement.
Collateral received in the form of cash, which is not legally segregated from the Group, is recognised as an asset in the statement of financial position with a corresponding liability for the repayment in financial liabilities (note 49). Non-cash collateral received is not recognised in the statement of financial position unless the Group either sells or repledges these assets in the absence of default, at which point the obligation to return this collateral is recognised as a liability.
Collateral pledged in the form of cash, which is legally segregated from the Group, is derecognised from the statement of financial position with a corresponding receivable for its return. Non-cash collateral pledged is not derecognised from the statement of financial position unless the Group defaults on its obligations under the relevant agreement, and therefore continues to be recognised in the statement of financial position within the appropriate asset classification.
(W) Deferred acquisition costs and other assets The costs directly attributable to the acquisition of new business for insurance and participating investment contracts (excluding those written in the UK) are deferred to the extent that they are expected to be recoverable out of future margins in revenues on these contracts. For participating contracts written in the UK, acquisition costs are generally not deferred as the liability for these contracts is calculated in accordance with the FSA’s realistic capital regime and FRS 27. For non-participating investment and investment fund management contracts, incremental acquisition costs and sales enhancements that are directly attributable to securing an investment management service are also deferred.
For the purposes of the statement of cash flows, cash and cash equivalents also include bank overdrafts, which are included in payables and other financial liabilities on the statement of financial position.
(Y) Leases Leases, where a significant portion of the risks and rewards of ownership is retained by the lessor, are classified as operating leases. Assets held for use in such leases are included in property and equipment, and are depreciated to their residual values over their estimated useful lives. Rentals from such leases are credited to the income statement on a straight-line basis over the period of the relevant leases. Payments made as lessee under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the relevant leases.
Performance reviewAviva plc Accounting policies continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information the Group). In addition, the difference between the expected return on scheme assets, less investment expenses, and the interest cost of unwinding the discount on the scheme liabilities (to reflect the benefits being one period closer to being paid out) is credited to investment income. All actuarial gains and losses, being the difference between the actual and expected returns on scheme assets, changes in assumptions underlying the liability calculations and experience gains or losses on the assumptions made at the beginning of the period, are recognised immediately in other comprehensive income.
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.
Current and deferred tax relating to items recognised in other comprehensive income and directly in equity are similarly recognised in other comprehensive income and directly in equity respectively. Deferred tax related to fair value re-measurement of available for sale investments, owner-occupied properties and other amounts charged or credited directly to other comprehensive income is recognised in the statement of financial position as a deferred tax asset or liability. Current tax on interest paid on Direct Capital instruments is credited directly in equity.
In addition to paying tax on shareholders’ profits, the Group’s life businesses in the UK, Ireland, Singapore and Australia (prior to its disposal) pay tax on policyholders’ investment returns (‘policyholder tax’) on certain products at policyholder tax rates. Policyholder tax is accounted for as an income tax and is included in the total tax expense. The Group has decided to show separately the amounts of policyholder tax to provide a more meaningful measure of the tax the Group pays on its profits. In the pro forma reconciliations, operating profit has been calculated after charging policyholder tax.
(AF) Earnings per share Basic earnings per share is calculated by dividing net income available to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding the weighted average number of ordinary shares purchased by the Group and held as Treasury shares.
Potential or contingent share issuances are treated as dilutive when their conversion to shares would decrease net earnings per share.
Consolidated income statement For the year ended 31 December 2009 39,420 Gross written premiums 34,690 36,206 (2,927) Premiums ceded to reinsurers (2,576) (1,841)
(31,306) Claims and benefits paid, net of recoveries from reinsurers (27,549) (29,353) (6,457) Change in insurance liabilities, net of reinsurance (5,682) 3,885
(164) Amortisation and impairment of intangibles (see below) (144) (117) 174 Profit on the disposal of subsidiaries and associates 3b 153 7
2,051 Profit/(loss) before tax attributable to shareholders’ profits 1,805 (1,300) Tax attributable to shareholders’ profits 1,494 Profit/(loss) for the year 1,315 (885)
General Fund Long-term insurance manage- Other business and health ment operations Total Year ended 31 December 2008 £m £m £m £m £m
Consolidated statement of comprehensive income For the year ended 31 December 2009 1,494 Profit/(loss) for the year 1,315 (885)
Owner-occupied properties (28) Fair value losses 34 (25) (37) 139 Share of other comprehensive income of joint ventures and associates 34 122 (93)
(1,081) Foreign exchange rate movements 34 & 36b (951) 2,684 (224) Aggregate tax effect – shareholder tax 13b (196) 219
Attributable to: 272 Equity shareholders of Aviva plc 240 (1,104) 105 Minority interests 36b 92 501 377 332 (603) * In accordance with accounting policy S, all fair value gains and losses on available-for-sale investments are recorded in the investment valuation reserve. Where these investments are considered to be impaired, the relevant losses are then transferred from this reserve to the income statement.
Balance at 1 January 664 200 1,234 3,271 (33) 3,685 157 (711) (1,103) 113 3,902 11,379 990 2,204 14,573 Profit for
Owner-occupied properties — — — — — — (1) — — — 1 — — — —
Issues of share capital 1 — — — — — — — — — — 1 — — 1 Shares issued in lieu from minority shareholders — — — — — — — — — — — — — 6 6
Minority interests in acquired subsidiaries — — — — — — — — — — — — — (2) (2)
Changes in minority interests in existing subsidiaries — — — — — — — — — — — — — (111) (111)
Shares acquired by employee trusts — — — — (53) — — — — — — (53) — — (53)
Shares distributed by employee trusts — — — — 18 — — — — — (18) — — — —
Reserves credit for equity compensation plans — — — — — — — — — 56 — 56 — — 56
Consolidated statement of changes in equity continued For the year ended 31 December 2008
Ordinary Preference held by Currency occupied Investment Hedging Equity to Direct share share Share Merger employee translation properties valuation instruments compensation Retained shareholders capital Minority Total capital capital premium reserve trusts reserve reserve reserve reserve reserve earnings of Aviva plc instrument interests equity £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
At 1 January 2008 as reported 655 200 1,223 3,271 (10) 432 192 819 (63) 89 6,338 13,146 990 1,795 15,931 Prior year adjustment (see note 2b(ii)) — — — — — — — — — — 96 96 — — At 1 January 2008 as restated 655 200 1,223 3,271 (10) 432 192 819 (63) 89 6,434 13,242 990 1,795 16,027 Loss for the year — — — — — — — — — — (915) (915) — 30 (885) Other
Issues of share capital 2 — 18 — — — — — — — — 20 — — 20 Shares issued in lieu from minority shareholders — — — — — — — — — — — — — 36 36
Minority share of dividends declared in the year — — — — — — — — — — — — — (106) (106)
Changes in minority interests in existing subsidiaries — — — — — — — — — — — — — (65) (65)
Shares acquired by employee trusts — — — — (29) — — — — — — (29) — — (29)
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786 Ordinary share capital 28 692 664 655 227 Preference share capital 31 200 200 200
Consolidated statement of cash flows For the year ended 31 December 2009
Of the total cash and cash equivalents, £nil was classified as held for sale (2008: £493 million).
(d) An enhanced discussion and analysis of liquidity risk, including a maturity analysis of financial assets held for managing liquidity risk, if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk.
However, the Group has provided comparatives for the analysis of financial assets according to a fair value hierarchy, which we had previously reported.
(iii)As explained in note 3(c), the Group completed the Initial Public Offering (IPO) of its subsidiary, Delta Lloyd NV (Delta Lloyd), in November 2009. Although the Group has remained the majority shareholder after the IPO, Delta Lloyd is now managed separately from our other European operations, reflecting the change in shareholder base. For this reason, the segmental information given in note 4(a) has been modified to show Delta Lloyd and the Aviva Europe operations separately, with comparatives analysed in the same way for consistency.
(ii) During 2009, the Group’s Dutch subsidiary, Delta Lloyd, carried out a review of the way it had been applying IAS 19, Employee Benefits, in its own financial statements where the corridor method of smoothing actuarial gains and losses in its pension schemes is followed; in accounting for its self-insured pension obligations and intercompany eliminations; and in its reporting to Group where the corridor accounting is reversed. The review concluded that errors had been made locally in applying IAS 19 on the transition to IFRS and in subsequent years, such that gains on certain assets had been reported in provisions, to be released over time, rather than through other comprehensive income. The impact of correcting these errors is to reduce other liabilities by £129 million as at 1 January 2008, increase deferred tax liabilities by £33 million and increase retained earnings at that date by £96 million.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 3 – Subsidiaries This note provides details of the acquisitions and disposals of subsidiaries that the Group has made during the year, together with details of businesses held for sale at the year end. The principal Group subsidiaries are listed on pages 33 to 34.
Other goodwill of £5 million has arisen on smaller acquisitions and increases in shareholdings in existing subsidiaries, together with a £16 million reduction for changes in contingent consideration payable on previous acquisitions. None of these is considered material for separate disclosure.
In view of the recent timing of this transaction, accounting for this acquisition is not yet complete and it is currently impractical to comply with the requirements of IFRS 3, Business Combinations and to state with any certainty the fair values of the assets and liabilities acquired, and therefore to estimate the goodwill arising on the transaction.
(b) Disposal of subsidiaries, joint ventures and associates The profit on the disposal of subsidiaries, joint ventures and associates comprises: United Kingdom — (38)
Liabilities Gross insurance liabilities (709) Pension obligations and other provisions (7) Other liabilities (467)
**Other costs of disposal have arisen from the agreement of a call option to purchase the shares of an associate of the Australian businesses in 2010.
(i) Property and equipment held for sale Property and equipment held for sale at 31 December 2008 related to the UK data centres which were sold during 2009.
Gross insurance liabilities (20) (709) (627) Borrowings — — (12) Payables and financial liabilities — (22) (72) Other liabilities (13) (478) (220) Tax liabilities and other provisions — (12) (11)
The operations disclosed as held for sale at 31 December 2008 comprised the Dutch health insurance business and certain UK non-core operations, both of which were sold during 2009. Details are given in section (b) above.
(a) Operating segments The Group has determined its operating segments along regional lines. These reflect the management structure whereby a member of the Executive Management team is accountable to the Group Chief Executive for the operating segment for which he is responsible. The activities of each operating segment are described below: United Kingdom The United Kingdom comprises two operating segments – UK Life and UK General Insurance (UK GI). The principal activities of UK Life are life insurance, long-term health and accident insurance, savings, pensions and annuity business, whilst UK GI provides insurance cover to individuals and 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. UK GI also includes the RAC motor recovery business, the group reinsurance result and the results of run off agency business.
Aviva Investors Aviva Investors operates in most of the regions in which the Group operates, in particular the UK, France, the US and Canada and other international businesses, managing policyholders’ and shareholders’ invested funds, providing investment management services for institutional pension fund mandates and managing a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. Fund management activities of Delta Lloyd are included in the separate operating segment above.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 4 – Segmental information continued (i) Segmental income statement for the year ended 31 December 2009
Claims and benefits paid, net of recoveries from reinsurers (7,313) (3,409) (8,871) (3,567) (4,110) (279) — — (27,549)
Change in insurance liabilities, net of reinsurance 663 531 (2,321) (1,448) (2,895) (212) — — (5,682)
Profit/(loss) before tax 767 434 963 10 244 301 91 (788) 2,022 Tax attributable to policyholders’ returns (156) — (32) — — (29) — — (217)
Operating profit/(loss) before tax attributable to shareholders 659 481 797 399 213 77 115 (719) 2,022 * Total reported income, excluding inter-segment revenue, is split United Kingdom £18,165 million, France £12,890 million, Netherlands £7,335 million, USA £6,350 million and Rest of the World £14,545 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.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 4 – Segmental information continued (ii) Segmental income statement for the year ended 31 December 2008
Change in insurance liabilities, net of reinsurance 2,674 280 4,253 (844) (2,774) 296 — — 3,885
Adjusted for non-operating items: Reclassification of corporate costs and unallocated interest 7 (71) 54 — 15 — — (5) — Investment return variances and economic assumption changes on long-term business 694 — 472 (72) 433 104 — — 1,631 Short-term fluctuation in return on investments backing non-long-term business — 334 37 352 (47) — — 143 819 Economic assumption changes on general insurance and health business — 91 3 — — — — — 94 Impairment of goodwill — — 16 50 — — — — 66 Amortisation and impairment of intangibles 3 33 12 22 44 — 3 — 117 (Profit)/loss on the disposal of subsidiaries and associates — 38 (9) (15) — — — (21) (7) Exceptional items 108 312 7 126 42 — 6 (50) 551 Integration and restructuring costs 60 195 15 23 — — 33 — 326
Operating profit/(loss) before tax attributable to shareholders 723 541 855 286 149 36 114 (407) 2,297 * Total reported income, excluding inter-segment revenue, is split United Kingdom £3,928 million, France £1,005 million, Netherlands £7,711 million, USA £4,954 million and Rest of the World £1,968 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.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 4 – Segmental information continued (iii) Segmental statement of financial position as at 31 December 2009
Insurance liabilities Long-term business and outstanding claims provisions 62,043 5,410 38,422 30,818 27,201 2,062 — — 165,956 Unearned premiums 173 2,240 956 347 1,040 25 — — 4,781 Other insurance liabilities — 79 116 63 98 (1) — — 355
Liability for investment contracts 39,322 — 62,477 3,335 2,911 — 1,970 — 110,015 Unallocated divisible surplus 1,849 — 1,787 150 — 80 — — 3,866 Net asset value attributable to unitholders 875 — 5,257 721 — — — 3,041 9,894 External borrowings 2,518 10 141 6,830 183 — — 5,318 15,000 Other liabilities, including inter-segment liabilities 6,668 (585) 4,282 12,529 2,450 140 320 3,634 29,438
External borrowings by holding companies within the Group which are not allocated to operating companies are included in ‘Other Group activities’.
(iv) Segmental statement of financial position as at 31 December 2008
Capital expenditure (excluding business combinations) 36 93 40 32 70 4 5 — 280
Goodwill 71 1,276 841 212 642 40 — — 3,082 Acquired value of in-force business and intangible assets 65 349 1,073 91 1,579 28 12 — 3,197 Interests in, and loans to, joint ventures and associates 2,972 — 342 252 1 215 — — 3,782 Property and equipment 177 317 110 264 28 37 7 2 942 Investment property 10,415 252 1,469 1,592 — 25 966 672 15,391 Loans 20,153 900 807 13,088 1,206 39 — — 36,193 Financial investments 83,504 3,714 77,984 25,677 17,227 3,934 1,993 2,807 216,840 Deferred acquisition costs 1,477 1,188 658 124 828 42 4 — 4,321 Other assets 10,520 5,146 12,645 3,342 2,806 503 667 1,949 37,578
Insurance liabilities Long-term business and outstanding claims provisions 65,017 6,429 33,394 23,111 17,335 1,820 — — 147,106 Unearned premiums 179 3,468 700 273 815 15 — — 5,450 Other insurance liabilities — 92 22 91 78 — — — 283
Liability for investment contracts 41,845 — 47,517 2,034 1,756 1,952 3,140 — 98,244 Unallocated divisible surplus 4,944 — 1,702 136 — 3 — — 6,785 Net asset value attributable to unitholders 758 — 1,567 1,113 — 189 — 2,782 6,409 External borrowings 2,184 12 132 6,021 133 — 6 4,169 12,657 Other liabilities, including inter-segment liabilities 10,474 (320) 4,060 8,973 1,615 160 294 3,109 28,365
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 4 – Segmental information continued (i) Segmental income statement – products and services for the year ended 31 December 2009
Claims and benefits paid, net of recoveries from reinsurers (20,442) (7,107) — — (27,549) Change in insurance liabilities, net of reinsurance (6,229) 547 — — (5,682) Change in investment contract provisions (11,185) — — — (11,185) Change in unallocated divisible surplus (1,547) — — — (1,547) Amortisation of deferred acquisition costs and acquired value of in-force business (249) — — — (249) Depreciation and other amortisation expense (147) (53) (7) (93) (300) Other operating expenses (3,192) (3,465) (554) (1,394) (8,605) Impairment losses (429) (85) — (94) (608) Inter-segment expenses (178) (11) — — (189) Finance costs (278) (24) (58) (976) (1,336)
Profit/(loss) before tax attributable to shareholders 2,204 959 108 (1,466) 1,805 Adjusted for non-operating items (317) 1 25 508 217
Operating profit/(loss) before tax attributable to shareholders’ profits 1,887 960 133 (958) 2,022 * Gross written premiums includes inward reinsurance premiums assumed from other companies amounting to £207 million, of which £51 million relates to property and liability insurance and £156 million relates to long-term business. **General insurance and health business segment includes gross written premiums of £841 million relating to health business. The remaining business relates to property and liability insurance.
Net earned premiums 23,228 11,414 — — 34,642 Fee and commission income 753 160 567 405 1,885 23,981 11,574 567 405 36,527 Net investment (expense)/income (16,671) 425 3 200 (16,043) Inter-segment revenue — — 185 — 185 Share of loss of joint ventures and associates (1,089) (5) (12) (22) (1,128) Profit on the disposal of subsidiaries and associates — — — 7 7
Claims and benefits paid, net of recoveries from reinsurers (21,024) (8,329) — — (29,353) Change in insurance liabilities, net of reinsurance 3,560 325 — — 3,885 Change in investment contract provisions 10,629 — — — 10,629 Change in unallocated divisible surplus 4,482 — — — 4,482 Amortisation of deferred acquisition costs and acquired value of in-force business (333) — — — (333) Depreciation and other amortisation expense (159) (49) (6) (145) (359) Other operating expenses (3,194) (3,914) (599) (388) (8,095) Impairment losses (796) (123) — (121) (1,040) Inter-segment expenses (167) (8) — (10) (185) Finance costs (530) (2) (57) (958) (1,547)
Long- General term insurance Fund business and health management Other Total £m £m £m £m £m
Gross insurance liabilities 153,628 17,464 — — 171,092 Gross liabilities for investment contracts 110,015 — — — 110,015 Unallocated divisible surplus 3,866 — — — 3,866 Net asset value attributable to unit holders 6,841 13 — 3,040 9,894 Borrowings 3,780 89 — 11,131 15,000 Other liabilities, including inter-segment liabilities 13,064 (606) 414 16,566 29,438
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 4 – Segmental information continued (iv) Segmental statement of financial position – products and services as at 31 December 2008
Goodwill 1,827 477 3 1,271 3,578 Acquired value of in-force business and intangible assets 3,542 402 14 80 4,038 Interests in, and loans to, joint ventures and associates 2,810 4 44 125 2,983 Property and equipment 507 118 13 326 964 Investment property 12,953 278 — 1,195 14,426 Loans 28,916 914 1 12,406 42,237 Financial investments 213,379 11,632 73 5,176 230,260 Deferred acquisition costs 4,455 1,489 21 — 5,965 Other assets 39,539 9,876 563 133 50,111
Long- General term insurance Fund Restated business and health management Other Total £m £m £m £m £m
Goodwill 1,414 418 3 1,247 3,082 Acquired value of in-force business and intangible assets 2,628 424 12 133 3,197 Interests in, and loans to, joint ventures and associates 3,509 4 47 222 3,782 Property and equipment 435 70 9 428 942 Investment property 14,701 360 — 330 15,391 Loans 26,600 960 — 8,633 36,193 Financial investments 201,694 10,501 41 4,604 216,840 Deferred acquisition costs 2,711 1,583 27 — 4,321 Other assets 26,683 10,021 611 263 37,578
General insurance and health 9,968 11,934 34,690 36,206 Less: premiums ceded to reinsurers (note 4a & 4b) (2,576) (1,841) Gross change in provision for unearned premiums (note 38e) 645 388 Reinsurers’ share of change in provision for unearned premiums (note 41c(iii)) (86) (111) Net change in provision for unearned premiums 559 277
Fee and commission income Fee income from investment contract business 456 487 Fund management fee income 536 556 Other fee income 473 577 Reinsurance commissions receivable 180 176 Other commission income 138 110 Net change in deferred revenue 6 (21)
Other income from investments designated as other than trading Realised losses on disposals Unrealised gains and losses (see policy J)
Share of (loss) after tax of joint ventures (note 18a) (409) (1,038) Share of loss after tax of associates (note 19a) (95) (90) Share of (loss) after tax of joint ventures and associates (504) (1,128) Profit on disposal of subsidiaries and associates (note 3b) 153 7
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 6 – Details of expenses This note gives further detail on the items appearing in the second section of the consolidated income statement.
Change in insurance liabilities Change in insurance liabilities 5,755 (4,792) Change in reinsurance asset for insurance provisions (73) 907
Commission expenses for insurance and participating investment contracts 2,953 3,521 Change in deferred acquisition costs for insurance and participating investment contracts (536) (513) Deferrable costs for non-participating investment contracts 112 160 Other acquisition costs 1,137 1,337 Change in deferred acquisition costs for non-participating investment contracts (31) 185
Investment income attributable to unitholders 331 (679) Reinsurance commissions and other fee and commission expense 430 400
Staff costs (note 10) 2,659 2,873 Central costs and sharesave schemes 108 141 Depreciation (note 20) 115 131 Impairment losses on property and equipment (note 20) 2 — Impairment of goodwill on subsidiaries (note 16a) 30 48 Amortisation of acquired value of in-force business on insurance contracts (note 17) 249 333 Amortisation of intangible assets (note 17) 142 113 Net impairment of acquired value of in-force business (note 17) 13 2 Impairment of intangible assets (note 17) 12 13 Integration and restructuring costs (see below) 286 326 Exceptional items (see below) 776 247 Other expenses 299 217
Other net foreign exchange losses/(gains) 83 (68) Finance costs (note 7) 1,336 1,547
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 6 – Details of expenses continued Integration and restructuring costs Integration and restructuring costs incurred in the year amounted to £286 million (2008: £326 million). This includes £210 million for the cost savings initiatives in the UK life and general insurance businesses and Europe, which have delivered £170 million annualised cost savings in the year.
Exceptional items Exceptional items totalled £45 million net profit (2008: £551 million net expense) in the year.
For the year ended 31 December 2009, this comprised: — A net exceptional profit before tax of £207 million as a result of the reattribution of the inherited estate (see note 44), of which £674 million is included in “other expenses” and £881 million credit is included in changes in “unallocated divisible surplus”; — A £60 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, which is included in “change in insurance liabilities”; and — A £102 million expense for the migration of all remaining local brands, except Delta Lloyd and RAC, to the single global Aviva brand, which has been implemented over the two year period 2008 to 2009. The cost is included in “other expenses”.
For the year ended 31 December 2008, this comprised: — A £142 million expense for closing or exiting non-core business operations such as the lifetime wrap platform and The British
(see note 38); — A £126 million expense for the settlement agreed by our Netherlands life business for its unit-linked policyholders, following an industry-wide challenge on the level of fees; — Brand migration costs of £37 million (referred to above); and — A £58 million credit from settlement of a disputed Australian tax liability and the consequent release of a provision for interest charges.
The table below sets out the lines of the income statement that the exceptional items have been included in: Change in unallocated divisible surplus (note 43) Change in insurance liabilities, net of reinsurance (note 38) Other expenses (as in the table above)
Impairment of financial investments Group policy is to recognise an impairment on available for sale (AFS) equity securities when there has been a prolonged or significant decline in their fair value below their cost, irrespective of general market movements. Although management believes that these equity securities will ultimately recover their value, there can be no certainty that this will happen as, unlike fixed maturity securities, the value of an equity security cannot be recovered in full by holding it to maturity.
Finance costs comprise: Interest expense on core structural borrowings Subordinated debt 293 229 Debenture loans 29 21 Commercial paper 13 36
Interest expense on operational borrowings Amounts owed to credit institutions 113 82 Securitised mortgage loan notes
Interest on banking customer deposits 390 250 Interest on reinsurance deposits 12 11 Interest on collateral received 47 321 Other similar charges 177 147
Within the 2008 results, the expected rate of investment return was calculated by reference to the one year swap rate in the relevant currency plus an appropriate risk premium for equities and properties. For 2009, the Group considers that the return over the typical duration of the assets held is more appropriate and is more consistent with our expectation of long-term rates of return. The expected return on equities and properties has therefore been calculated by reference to the 10 year swap rate in the relevant currency plus an appropriate risk premium.
If the IFRS operating profit had been calculated by reference to the one year swap rate, this profit would have been £200 million lower. There is no impact on IFRS profit before tax.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 8 – Long-term business economic volatility continued The principal assumptions underlying the calculation of the expected investment return for equities and properties are: Equities Properties
9 – Longer-term investment return and economic assumption changes for non-long-term business For non-long-term business, the total investment income, including realised and unrealised gains, is split between a calculated longer-term return and short-term fluctuations from this. This note gives details of the longer-term return calculation and the relevant assumptions, as well as the economic assumption changes on our general insurance and health business.
Short-term fluctuation in investment return (see (b) below) Economic assumption changes (see (g) below)
The longer-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated longer term return for other investments is the actual income receivable for the year.
(d) The total assets supporting the general insurance and health business, which contribute towards the longer-term return, were £22,844 million (2008 restated: £23,398 million). For other operations, the longer-term return reflects interest income earned in the Netherlands bank and retail mortgage divisions.
The Group has applied the same economic assumptions for equities and properties as are used under MCEV principles to calculate the longer-term investment return for its non-long-term business in 2008 and 2009. In 2007, rates were based on EEV.
Actual return attributable to shareholders Longer-term return credited to operating results
Equities 1% higher/lower Group operating profit before tax 11 17 Properties 1% higher/lower Group operating profit before tax 3 3
(a) Employee numbers The number of persons employed by the Group was: At 31 December
Average for the year 2009 2008 2007 2009 2008 Number Number Number Number Number
* 2007 employee numbers include staff in the offshore operations in Sri Lanka and India. These operations were sold in 2008 and therefore these are not included in the 2008 closing numbers.
Defined benefit schemes (note 47d) 187 175 Defined contribution schemes (note 47d) 73 65
These costs are charged within: Acquisition costs Claims handling expenses Central costs and sharesave schemes 11 – Directors Information concerning individual directors’ emoluments, interests and transactions is given in the Directors’ remuneration report on pages 99 to 116 in the “Corporate Governance” section of this report. For the purposes of the disclosure required by Schedule 5 to the Companies Act 2006, the total aggregate emoluments of the directors in respect of 2009 was £6.7 million (2008: £5.2 million). Employer contributions to pensions for Executive Directors’ for qualifying periods was £123,000 (2008: £234,000). This is only for one ED as the others in the qualifying periods were not receiving any pension contributions by Aviva. The aggregate net value of share awards granted to the directors in the period was £5.256 million (2008: £4.348 million). The net value has been calculated by reference to the market price at the date of grant. During the year, no share options were exercised by directors (2008: nil options exercised).
The total remuneration payable by the Group, excluding VAT and any overseas equivalent thereof, to its principal auditors, Ernst & Young LLP, and its associates is shown below.
AuditAudit related Tax Other Total fees fees services services fees £m £m £m £m £m
Fees payable to Ernst & Young LLP for the statutory audit of the Aviva Group and Company financial statements 1.5 — — — 1.5
AuditAudit related Other Total fees fees Tax services services fees £m £m £m £m £m
Fees for Supplementary reporting are in respect of the audit of the Group’s MCEV reporting. Although embedded value is a primary management reporting basis and our disclosures require a full audit, the relevant fees are not classified as being for statutory audit. These fees have reduced in 2009 to £2.1 million (2008: £3.5 million), as the 2008 fee includes the work undertaken on the Group’s MCEV restatement.
Services relating to corporate finance transactions mainly reflect work undertaken on the partial IPO of Delta Lloyd on Euronext Amsterdam.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 13 – Tax This note analyses the tax charge for the year and explains the factors that affect it.
(a) Tax charged/(credited) to the income statement (i) The total tax charge/(credit) comprises: Current tax For this year 617 527 Prior year adjustments (164) (284)
Deferred tax Origination and reversal of temporary differences 231 (1,814) Changes in tax rates or tax laws 2 (7) Write-down of deferred tax assets 21 95
(ii) The Group, as a proxy for policyholders in the UK, Ireland, Singapore and Australia (prior to disposal), is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Irish, Singapore and Australian life insurance policyholder returns is included in the tax charge. The tax charge attributable to policyholders’ returns included in the charge above is £217 million (2008: £1,068 million credit).
(iii) The tax charge/(credit) can be analysed as follows: (iv) Unrecognised tax losses and temporary differences of previous years were used to reduce current tax expense and deferred tax expense by £59 million and £10 million respectively (2008: £139 million and £19 million respectively).
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 13 – Tax continued (b) Tax charged/(credited) to other comprehensive income (i) The total tax charge/(credit) comprises: Current tax In respect of fair value (losses)/gains on owner-occupied properties — (1)
(ii) The tax charge attributable to policyholders’ returns included above is £nil (2008: £nil).
(d) Tax reconciliation The tax on the Group’s profit/(loss) before tax differs from the theoretical amount that would arise using the tax rate of the home country of the Company as follows: Profit/(loss) before tax 2,022 (2,368)
Profit before tax attributable to shareholders’ profits 2,022 (217) 1,805 Tax attributable to shareholders’ (loss)/profits (547) 57 (490) Profit for the year 1,475 (160) 1,315
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 14 – Earnings per share continued
(ii) Basic earnings per share is calculated as follows: Net of tax, minorities, preference dividends
Net of tax, minorities, preference dividends Before tax and DCI Per share £m £m p
Operating profit attributable to ordinary shareholders 2,297 1,662 62.9 Non-operating items: Investment return variances and economic assumption changes on long-term business (note 8) (1,631) (1,280) (48.4) Short-term fluctuation in return on investments backing non-long-term business (note 9b) (819) (553) (20.9) Economic assumption changes on general insurance and health business (94) (67) (2.5) Impairment of goodwill and other amounts expensed (note 16a) (66) (66) (2.5) Amortisation and net impairment of intangibles (note 17) (117) (89) (3.4) Profit on the disposal of subsidiaries and associates (note 3b) 7 7 0.3 Integration and restructuring costs and exceptional items (note 6) (877) (586) (22.3)
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 14 – Earnings per share continued (b) Diluted earnings per share (i) Diluted earnings per share is calculated as follows: Total £m
Loss attributable to ordinary shareholders Dilutive effect of share awards and options
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 15 – Dividends and appropriations This note analyses the total dividends and other appropriations we have paid during the year. The table below does not include the final dividend proposed after the year end because it is not accrued in these financial statements. The impact of shares issued in lieu of dividends is shown separately in note 35.
Interest on the direct capital instrument issued in November 2004 is treated as an appropriation of retained profits and, accordingly, it is accounted for when paid. Tax relief is obtained at a rate of 28.0% (2008: 28.5%).
16 – Goodwill This note analyses the changes to the carrying amount of goodwill during the year, and details the results of our impairment testing on both goodwill and intangible assets with indefinite lives.
Gross amount At 1 January 3,898 3,273 Acquisitions (note 3a) 5 106 Fair value adjustments and movements in contingent consideration (note 3a) 48 (59) Disposals (9) (84) Transfers from other intangibles — 11 Amounts expensed in the year (see (b)(i) below) (30) — Foreign exchange rate movements (245) 651
Long-term business (see (iv) below) 122 133 101 — — — 122 133 101 General insurance and health (see (v) below) 121 134 81 — — — 121 134 81
Italy Long-term business (see (vi) below) 65 74 46 — 334 254 65 408 300 General insurance and health (see (vii) below) 58 64 42 — 137 132 58 201 174
Delta Lloyd (see (viii) below) 319 279 212 — — — 319 279 212 Spain (long-term business) (see (ix) below) 580 652 552 — — — 580 652 552
United States (long-term business) (see (x) below) 770 865 624 — — — 770 865 624 Canada 42 43 17 — — — 42 43 17
As explained in accounting policy N, the carrying amount of goodwill and intangible assets with indefinite useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. The tests led to impairment of goodwill of £nil in 2009 (2008: £68 million).
Goodwill and intangibles with indefinite useful lives have been tested for impairment in these businesses as follows: United Kingdom (i) Long-term business The United Kingdom long-term business goodwill balance is split across four cash generating units, with no individual balance exceeding £22 million.
The Group acquired Hamilton Life Assurance Company Limited from HFC Bank Limited (HFC) in 2007, and identified £20 million of the purchase price as goodwill in respect of unrecognised deferred tax assets which could not be utilised or recognised at the time. The Group is now able to recognise value for these assets and further consideration of £9 million, included in the "Movements in contingent consideration", is payable to HFC in this respect. As required by paragraph 65 of IFRS 3, Business Combinations, the total £29 million has been charged to expenses, together with £1 million of transaction costs representing the balance of acquired goodwill. Deferred tax assets have increased to recognise this new asset (see note 45(b)(iii)).
(ii) General insurance, RAC and health The recoverable amount of the UK general insurance, RAC and health unit has been determined based on a value in use calculation. The calculation uses cash flow projections based on business plans approved by management covering a three year period and a risk adjusted discount rate of 9.5%. Cash flows beyond that three year period have been extrapolated using a steady 2.5% growth rate. This growth rate is set with regards to past experience and historical statistics of UK premium growth published by the Association of British Insurers.
— Some of the assumptions that underline the budgeted operating profit include market share, customer numbers, premium rate and fee income changes, claims inflation and commission rates; and
For European long-term business cash generating units a key assumption used for the calculation was the embedded value which represents the shareholder interest in the life business and is calculated in accordance with the Market Consistent Embedded Value (MCEV) principles. The embedded value is the total of the net worth and the value of the in-force life business.
General insurance, health and other The recoverable amount of general insurance, health and other non-life cash generating units in the Europe region has been determined based on a value in use calculation. Value in use is calculated for each cash generating unit using a discounted cash flow projection based on business plans and growth assumptions approved by management for each cash generating unit and discounted at a risk discount rate appropriate for each cash generating unit. If the cash flows are expected to grow beyond the period of the initial plan, this growth rate is set with regard to past experience in each market and market expectations of future growth in each country.
(ix) Spain (long-term business) This calculation is based on the embedded value of the business together with the present value of expected profits from future new business. The recoverable amount exceeds the carrying value of the cash generating unit including goodwill.
Key assumptions (in addition to MCEV principles) used for the calculation were: — New business contribution represents the present value of projected future distributable profits generated from business written in a period. This is initially based on the most recent three year business plans approved by management; — Growth rate represents the rate used to extrapolate new business contributions beyond the business plan period, and is based on management’s conservative estimate of future growth of 3.0%. This growth rate is in line with industry expectations; and — Risk adjusted discount rate of 6.5% represents the rate used to discount expected profits from future new business. The discount rate is a combination of a risk-free rate and a risk margin to make prudent allowance for the risk that experience in future years for new business may differ from that assumed. The test performed in the current year estimates the value of future new business on an MCEV basis. This methodology incorporates more of the risk of future new business into the underlying cash flows, and so consequently a lower risk discount rate is applied relative to the prior period.
The recoverable amount for the cash generating unit exceeds its carrying value by £332 million. An increase in the risk adjusted discount rates applied to calculate the embedded value and the present value of future profits from future new business of 60 basis points would result in the recoverable amount being equal to the carrying value.
Cash flow projections To comply with paragraph 33(c) of IAS 36, cash flow projections for the period beyond the three year plan period are extrapolated from the position in the final year of the three year plan period. In all cases we have assumed a steady growth rate for subsequent years, not an increasing growth rate. The steady growth rate in each case is a positive or nil growth rate. The steady growth rate selected for each cash generating unit reflects long-term expectations for the markets in which each cash generating unit participates.
At 31 December 2008 3,524 216 1,224 827 5,791 Additions 17 — 30 — 47 Acquisition of subsidiaries (note (b)) (20) — 3 — (17) Disposals — — (33) (20) (53) Movement in shadow adjustment (484) — — — (484) Transfers (note (c)) — — 431 (431) — Transfers from property and equipment (note 20) — — 23 — 23 Foreign exchange rate movements (329) (17) (71) (50) (467)
(a) Carrying amount (i) The movements in the carrying amount comprised: Goodwill and Equity intangibles interests Loans Total £m £m £m £m
Share of results before tax — (1,029) — (1,029) Share of tax — (3) — (3)
Share of results before tax — (398) — (398) Share of tax — (4) — (4)
Goodwill and Equity intangibles interests Loans Total 2007 £m £m £m £m
Property management undertakings — 2,124 167 2,291 Long-term business undertakings 197 88 — 285
Airport Property Partnership 50.0% 50.0% Ashtenne Industrial Fund Limited Partnership 66.7% 37.4% The Junction Limited Partnership 25.0% 34.2% The Mall Limited Partnership 50.0% 50.5% Queensgate Limited Partnership 50.0% 50.0% Quercus Healthcare Property Partnership Limited 50.0% 35.3% The 20 Gracechurch Limited Partnership 50.0% 50.0%
Aviva-COFCO Life Insurance Co. Limited Ordinary shares of RMB1 each 50.0% China AvivaSA Emeklilik ve Hayat A.S. Ordinary shares of YTL1 each 49.8% Turkey CIMB Aviva Assurance Berhad Ordinary shares of RM1 each 49.0% Malaysia CIMB Aviva Takaful Berhad Ordinary shares of RM1 each 49.0% Malaysia First-Aviva Life Insurance Co., Ltd. Ordinary shares of NT$10 each 49.0% Taiwan Woori Aviva Life insurance Co. Ltd Ordinary shares of KRW 5000 each 46.8% Korea
(i) the policy portfolio existing at the valuation date, and (ii) the future sales based on plans approved by management covering the subsequent three year period. The cash flows from existing policy portfolio is calculated using best estimate assumptions, which have been supported by experience investigation where available and prudent estimates typical for the market where experience investigations are not available; — The calculations use a risk adjusted discount rate of 13.2%; and — New sales beyond the three year period have been extrapolated using a growth rate of 11.0%.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 18 – Interests in, and loans to, joint ventures continued AvivaSA Emeklilik ve Hayat A.S. The Group’s investment in AvivaSA Emeklilik ve Hayat A.S. has been tested for impairment by comparing its carrying value (which includes goodwill which arose on its acquisition) with its recoverable amount.
The recoverable amount has been determined based on a value in use calculation. This calculation is an actuarially-determined appraisal value and is based on the embedded value of the business together with the present value of expected profits from future new business. The recoverable amount exceeds the carrying value of the cash generating unit including goodwill.
Key assumptions used for the calculation were: — Embedded value represents the shareholder interest in the life business and is calculated in accordance with the Market
— Growth rate represents the rate used to extrapolate new business contributions beyond the business plan period, and is based on management’s estimate of future growth of 5.0%.
— Risk adjusted discount rate of 15.0% represents the rate used to discount expected profits from future new business. The discount rate reflects a risk margin to make prudent allowance for the risk that experience in future years for new business may differ from that assumed.
(e) Additional information Summarised aggregate financial information on the Group’s interests in its joint ventures is as follows: Income, including unrealised (losses)/gains on investments (105) (876) 242 Expenses (293) (153) (579)
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 19 – Interests in, and loans to, associates This note analyses our interests in entities which we do not control but where we have significant influence.
Share of results after tax — (63) — (63) Impairment of goodwill and intangibles1 (16) — — (16) Amortisation of acquired value of in-force business (11) — — (11)
Fair value losses taken to other comprehensive income — (81) — (81)
Fair value gains taken to other comprehensive income — 114 — 114
(b) Principal associates The principal associates included above are: Country of incorporation and
(c) Additional information Summarised aggregate financial information on the Group’s interests in its associates is as follows: Share of revenues 216 460 385 Share of results before tax (53) (54) 51 Share of assets 3,013 3,812 3,123 Share of liabilities (2,120) (2,974) (2,324)
The associates have no significant contingent liabilities to which the Group is exposed, nor has the Group any significant contingent liabilities in relation to its interest in them.
The test performed in the current year estimates the value of future new business on an MCEV basis. This methodology incorporates more of the risk of future new business into the underlying cash flows and so consequently a lower risk discount rate is applied relative to the prior period.
The recoverable amount has been determined based on a value in use calculation prepared by an external valuation expert. Value in use was calculated using a discounted cash flow projection based on business plans and growth assumptions approved by management and discounted at an appropriate risk discount rate.
(e) Non-adjusting subsequent event On 17 February 2010, the Group sold its 35% holding in Sogessur SA to that company’s main shareholder, Société Générale, for a consideration of £35 million, realising a profit on disposal of £24 million.
Properties Owner under occupied Motor Computer construction properties vehicles equipment Other assets Total £m £m £m £m £m £m
Cost or valuation At 1 January 2008 45 499 14 772 466 1,796 Additions 22 7 1 97 89 216 Acquisitions of subsidiaries — 37 — 1 2 40 Disposals (15) (31) (3) (34) (24) (107) Transfers (4) 4 — — — — Fair value losses (see below) — (49) — — — (49) Foreign exchange rate movements 13 106 2 40 72 233
Depreciation and impairment At 1 January 2008 — (3) (7) (578) (266) (854) Charge for the year — (1) (2) (93) (35) (131) Disposals — 1 1 33 14 49 Impairment losses charged to restructuring costs — (2) — (8) (40) (50) Foreign exchange rate movements — — — (29) (48) (77)
Impairment losses charged to restructuring costs — — — (1) (1) (2)
Less: Amounts classified as held for sale: Gross amount — — — — (1) (1) Accumulated depreciation and impairment — — — — — —
Fair value losses of £26 million have been charged (2008: £37 million) to other comprehensive income (note 34), with the remainder being charged to the income statement.
Owner-occupied properties are stated at their revalued amounts, as assessed by qualified external valuers or by local qualified staff of the Group in overseas operations, all with recent relevant experience. These values are assessed in accordance with the relevant parts of the current RICS Appraisal and Valuation Standards in the UK, and with current local valuation practices in other countries. This assessment, on the basis of Existing Use Value and in accordance with UK Practice Statement 1.3, is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s­ length transaction, after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion, assuming that the buyer is granted vacant possession of all parts of the property required by the business and disregarding potential alternative uses. The valuation assessment adopts market-based evidence and is in line with guidance from the International Valuation Standards Committee and the requirements of IAS 16, Property, Plant and Equipment.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 21 – Investment property This note gives details of the properties we hold for long-term rental yields or capital appreciation.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 22 – Loans This note analyses the loans our Group companies have made, the majority of which are mortgage loans.
7,384 1,770 9,154 6,797 2,262 9,059 5,476 1,911 7,387 Non-securitised mortgage loans 13,292 8,012 21,304 14,406 7,266 21,672 12,849 4,747 17,596 Loans and advances to bank customers — 1,943 1,943 — 1,886 1,886 — 1,307 1,307 Loans to brokers and other intermediaries — 92 92 — 98 98 — 80 80 Other loans — 1,378 1,378 — 981 981 — 716 716
Loans at fair value Fair values have been calculated by discounting the future cash flows using appropriate current interest rates for each portfolio of mortgages. Further details of the fair value methodology are given in note 24(b).
Amortised Carrying Amortised Carrying Amortised Carrying cost Impairment value cost Impairment value cost Impairment value £m £m £m £m £m £m £m £m £m
Policy loans 1,655 — 1,655 1,861 — 1,861 1,316 — 1,316 Loans to banks 5,339 — 5,339 6,415 — 6,415 7,576 — 7,576 Securitised mortgage loans 1,771 (1) 1,770 2,263 (1) 2,262 1,911 — 1,911 Non-securitised mortgage loans 8,115 (103) 8,012 7,328 (62) 7,266 4,753 (6) 4,747 Loans and advances to bank customers 1,986 (43) 1,943 1,936 (50) 1,886 1,346 (39) 1,307 Loans to brokers and other intermediaries 92 — 92 98 — 98 80 — 80 Other loans 1,379 (1) 1,378 990 (9) 981 725 (9) 716
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 22 – Loans continued The movements in the impairment provisions on these loans for the years ended 31 December 2009 and 2008 were as follows: At 1 January (122) (54) Increase during the year (58) (58) Write back following sale or reimbursement 17 — Write back following recovery in value 5 8 Other movements 2 3 Foreign exchange movements 8 (21)
(b) Collateral The Group holds collateral in respect of loans where it is considered appropriate, in order to reduce the risk of non-recovery.
The amount of collateral received with respect to loans which the Group is permitted to sell or repledge in the absence of default was £3,685 million (2008: £3,880 million, 2007: £6,282 million). No collateral was actually sold or repledged in the absence of default during the year (2008: £nil).
AER has purchased subordinated notes and granted subordinated loans to some of the ERF companies. These have been eliminated on consolidation through offset against the borrowings of the ERF companies in the consolidated statement of financial position.
(ii) Delta Lloyd In three subsidiaries, Delta Lloyd Levensverzekering NV (DLL), Amstelhuys NV (AMS), and Delta Lloyd Bank (Belgium) NV/SA (DLB), the principal benefits of certain portfolios of mortgage loans have been transferred to a number of special purpose securitisation companies, which were funded primarily through the issue of fixed and floating rate notes.
(iii) General In all of the above transactions, the Company and its subsidiaries are not obliged to support any losses that may be suffered by the note holders and do not intend to provide such support. Additionally, the notes were issued on the basis that note holders are only entitled to obtain payment, of both principle and interest, to the extent that the available resources of the respective special purpose securitisation companies, including funds due from customers in respect of the securitised loans, are sufficient and that note holders have no recourse whatsoever to other companies in the Aviva Group.
At fair value (note 22) 5,544 (4,441) 4,936 (4,820) 3,699 (3,706) At amortised cost (note 22) 1,770 (2,656) 2,262 (2,353) 1,911 (2,283)
(a) Carrying amount Financial investments comprise: At fair value through At fair value through At fair value through profit or loss profit or loss profit or loss
Other than Available Other than Available Other than Available Trading trading for sale Total Trading trading for sale Total Trading trading for sale Total £m £m £m £m £m £m £m £m £m £m £m £m
Convertibles and bonds with warrants attached — 586 — 586 — 855 — 855 — 856 — 856 19 134,554 22,872 157,445 56 128,558 20,350 148,964 179 103,827 14,215 118,221 Certificates of deposit — 2,802 8 2,810 — 1,301 10 1,311 — 3,341 26 3,367 Redeemable preference shares — 255 — 255 — 349 110 459 — 3 — 3
Equity securities Ordinary shares Public utilities — 3,665 15 3,680 — 3,933 1 3,934 — 6,165 — 6,165 Banks, trusts and insurance 8 39,832 3,503 43,343 9 37,985 5,417 43,411 46 55,241 3,778 59,065 Other investments Unit trusts and other investment
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 24 – Financial investments continued (b) Fair value methodology (i) For financial assets carried at fair value, we have categorised the measurement basis into a “fair value hierarchy” as follows: Quoted market prices in active markets – (‘Level 1’) Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets. An active market is one in which transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Examples are listed equities in active markets, listed debt securities in active markets and quoted unit trusts in active markets.
The majority of the Group’s financial assets are valued based on quoted market information or observable market data. A small percentage (4%) of total financial assets recorded at fair value, are based on estimates and recorded as Level 3 investments. Where estimates are used, these are based on a combination of independent third-party evidence and internally developed models, calibrated to market observable data where possible. Whilst such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly.
The principal investments classified as Level 3 are: — Structured bond type products held by our businesses in France and Italy amounting to £7.0 billion, for which there is no active market. These bonds are valued either using third party counterparty or broker quotes. These bonds are validated against internal or third party models. Most of these bonds have been classified as Level 3 because either, (i) the third party models included a significant unobservable liquidity adjustment or (ii) differences between the valuation provided by the counterparty and broker quotes and the validation model were sufficiently significant to result in a Level 3 classification. At 31 December 2009, the counterparty and broker quotes used to value these products were less than the modelled valuations.
— Certain direct private equity investments and private placements held by our business in the Netherlands and strategic interests in banking partners held by our Italian business amounting to £0.8 billion. Valuations are based on third-party independent appraisals, or where internally modelled, transactions in similar entities, discounted cash flow techniques and valuation multiples, using public and internal management information.
Sub-total Amortised as held for position Level 1 Level 2 Level 3 fair value cost sale Total £m £m £m £m £m £m £m
Loans — 20,890 — 20,890 20,189 — 41,079 Fixed maturity securities 114,779 36,592 9,139 160,510 — — 160,510 Equity securities 36,774 5,775 794 43,343 — — 43,343 Other investments (including derivatives) 29,572 3.950 1,327 34,849 — (23) 34,826
For the year to 31 December 2009 transfers from fair value hierarchy Level 1 to Level 2 amounted to £886 million, and from Level 2 to Level 1 amounted to £2,181 million. The transfers arose as a result of changes in levels of activity in the markets from which prices are sourced.
Loans — 21,468 — 21,468 20,769 — 42,237 Fixed maturity securities 108,087 40,797 1,850 150,734 — (336)150,398 Equity securities 36,607 5,873 931 43,411 — (60) 43,351 Other investments (including derivatives) 24,655 11,792 64 36,511 — — 36,511
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 24 – Financial investments continued (iii) The tables below show movements in the assets measured at fair value based on valuation techniques for which any significant input is not based on observable market data (Level 3 only).
Total funds Balance at 1 January 1,850 931 64 2,845 Total net gains or losses recognised in the income statement 2 (55) 1 (52) Total net gains or losses recognised in other comprehensive income 107 1 (4) 104 Purchases 820 117 104 1,041 Disposals (247) (133) (5) (385) Settlements — (73) — (73) Transfers into Level 3 7,659 134 1,186 8,979 Transfers out of Level 3 (923) (54) (19) (996) Foreign exchange rate movements (129) (74) — (203)
Of the £52 million net losses recognised in the income statement during the year, £2 million gain relates to net investment income and £54 million loss relating to impairments is included in other expenses.
Fixed maturity securities 159,287 5,872 (4,500) (149)160,510 Equity securities 44,188 4,173 (3,975) (1,043) 43,343 Other investments
These are further analysed as follows: At fair value through profit or loss 210,635 10,506 (8,785) (160)212,196 Available for sale 26,921 1,479 (834) (1,060) 26,506
Fixed maturity securities 156,240 7,634 (12,857) (283)150,734 Equity securities 54,518 2,685 (12,636) (1,156) 43,411 Other investments
Unit trusts and specialised investment vehicles 28,700 1,994 (1,704) (1) 28,989 Derivative financial instruments 1,792 1,761 (643) — 2,910 Deposits with credit institutions 946 — — — 946 Minority holdings in property management undertakings 758 279 (56) (12) 969 Other long-term investments 2,883 209 (402) — 2,690 Other short-term investments 8 — (1) — 7
These are further analysed as follows: At fair value through profit or loss 216,551 13,658 (25,396) (191)204,622 Available for sale 29,294 904 (2,903) (1,261) 26,034
Cost/ amortised Unrealised Unrealised Impairment cost gains losses losses Fair value £m £m £m £m £m
Unit trusts and specialised investment vehicles 28,684 3,106 (382) (2) 31,406 Derivative financial instruments — 1,609 — — 1,609 Deposits with credit institutions 847 — — — 847 Minority holdings in property management undertakings 977 — — — 977 Other long-term investments 1,465 249 (57) — 1,657 Other short-term investments 4 — — — 4
These are further analysed as follows: At fair value through profit or loss 187,179 14,720 (2,929) (31)198,939 Available for sale 17,605 1,266 (419) (235) 18,217
Unrealised gains and losses on financial investments classified as at fair value through profit or loss recognised in the income statement in the year were a net loss of £18,919 million (2008: £25,105 million net loss). Of this, £1,877 million net loss (2008: £108 million net gain) related to financial investments designated as trading and £17,042 million net loss (2008: £25,213 million net loss) related to investments designated as other than trading.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 24 – Financial investments continued (d) Impairment of financial investments The movements in impairment provisions on available-for-sale financial investments for the years ended 31 December 2009 and 2008 were as follows: Fixed maturity Equity Other securities securities investments Total £m £m £m £m
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 25 – Receivables and other financial assets This note analyses our total receivables.
Total 9,652 10,202 9,173 Less: Amounts classified as held for sale (20) (386) (554)
Expected to be recovered in more than one year 647 700 358
26 – Deferred acquisition costs and other assets This note shows the products on which we are deferring some of our acquisition costs and details the movements in the balance during the year.
Carrying amount at 1 January Acquisition costs deferred during the year Amortisation Impact of assumption changes Effect of portfolio transfers, acquisitions and disposals Foreign exchange rate movements Shadow adjustment
The level of capitalised acquisition costs for new long-term business reduced by £390 million in 2009, reflecting lower new business in the US. The amortisation reduced by £214 million in 2009, mainly in the UK where improved asset values impacted on projected profits, particularly management charges on unit-linked funds, leading to lower amortisation.
The shadow adjustments relate to deferred acquisition costs on business in the United States backed by investments classified as available for sale. As explained in accounting policy K, unrealised gains and losses on the AFS investments and the shadow adjustments above are both recognised directly in other comprehensive income.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 27 – Assets held to cover linked liabilities Certain unit-linked products have been classified as investment contracts, while some are included within the definition of an insurance contract. The assets backing these unit-linked liabilities are included within the relevant balances in the consolidated statement of financial position, while the liabilities are included within insurance and investment contract provisions. This note analyses the carrying values of assets backing these liabilities.
(b) During 2009, a total of 108,909,750 ordinary shares of 25 pence each were allotted and issued by the Company as follows: Share Share Number Capital Premium of shares £m £m
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 29 – Equity compensation plans This note describes the various equity compensation plans we use, and shows how we value the options and awards of shares in the Company.
(iv) Long-term incentive plan awards These awards have been made under the Aviva Long Term Incentive Plan 2005 and are described in Section (b) below and in the Directors’ remuneration report.
(vi) One Aviva, twice the value bonus plan awards These are conditional awards first granted under the Aviva Annual Bonus Plan 2005 in 2008, and are described in section (b) below and in the Directors’ remuneration report.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 29 – Equity compensation plans continued
The comparative figures as at 31 December 2008 were: Weighted average Outstanding remaining Weighted average options contractual life exercise price Range of exercise prices Number Years p
(ii) Share awards At 31 December 2009, awards issued under the Company’s executive incentive plans over ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva Long Term Incentive Plan 2005 Number of shares
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 29 – Equity compensation plans continued (c) Movements in the year A summary of the status of the option plans as at 31 December 2009 and 2008, and changes during the years ended on those dates, is shown below.
Outstanding at 1 January 26,278,223 477.82 22,999,532 534.70 Granted during the year 14,863,272 316.00 12,392,826 410.00 Exercised during the year (146,330) 359.55 (2,344,424) 420.90 Forfeited during the year (1,149,764) 459.77 (528,037) 497.32 Cancelled during the year (8,604,422) 433.40 (3,980,590) 483.76 Expired during the year (4,885,886) 513.42 (2,261,084) 561.62
(ii) Share awards The fair value of the awards was estimated on the date of grant, based on the following weighted average assumptions: Weighted average assumption 2009 2008
These shares were purchased in the market and are carried at cost less amounts charged to the income statement in prior years. At 31 December 2009, they had an aggregate nominal value of £4,494,808 (2008: £2,158,896, 2007: £380,266) and a market value of £71,539,364 (2008: £33,678,770, 2007: £10,236,761). The trustees have waived their rights to dividends on the shares held in the trusts.
31 – Preference share capital This note gives details of Aviva plc’s preference share capital.
No interest will accrue on any deferred coupon. Deferred coupons will be satisfied by the issue and sale of ordinary shares in the Company at their prevailing market value, to a sum as near as practicable to (and at least equal to) the relevant deferred coupons. In the event of any coupon deferral, the Company will not declare or pay any dividend on its ordinary or preference share capital.
Movements in the year comprised: Balance at 1 January 3,271 3,271 Movement in the year — —
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 34 – Other reserves This note gives details of the various reserves forming part of the Group’s consolidated equity, and shows the movements during the year.
Movements in the year comprised: Owner Equity Currency occupied Investment Hedging compensa­
(see accounting Restated policy E) policy O) policy S) policy T) policy AA) Total £m £m £m £m £m £m
Balance at 1 January 2008 432 192 819 (63) 89 1,469 Arising in the year: Fair value losses — (37) (2,344) — — (2,381) Fair value gains transferred to profit on disposals Fair value gains transferred to retained earnings on disposals (note 35)
Share of fair value changes in joint ventures and associates taken to other comprehensive income (notes 18a & 19a)
830 Reserves credit for equity compensation plans (note 29d) Shares issued under equity compensation plans (note 35)
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 35 – Retained earnings This note analyses the movements in the consolidated retained earnings during the year.
(b) Movements in the year comprised: Balance at 1 January 2,204 1,795 Profit for the year attributable to minority interests 230 30 Minority share of movements in other reserves 35 — Foreign exchange rate movements (173) 471 Total comprehensive income attributable to minority interests 92 501 Capital contributions from minority shareholders 6 36 Increase in minority interests following Delta Lloyd IPO (note 3c) 1,460 — Minority share of dividends declared in the year (109) (106) Minority interest in acquired subsidiaries (2) 43 Changes in minority interest in existing subsidiaries 11 (65) Reclassification to financial liabilities (see below) (122) —
The minority shareholders in two subsidiaries in France and Italy hold options requiring the Group to purchase their shares. Both sets of minority shareholders have recently indicated that they intend to exercise these options in 2010. We have therefore classified their interest as at 31 December 2009 to financial liabilities in the consolidated statement of financial position.
Gross Reinsurance Gross Reinsurance Gross Reinsurance provisions assets Net provisions assets Net provisions assets Net £m £m £m £m £m £m £m £m £m
Long-term business Insurance contracts (154,058) 4,299 (149,759) (156,188) 4,466 (151,722) (135,312) 4,298 (131,014) Participating investment contracts (66,559) — (66,559) (65,278) 52 (65,226) (53,609) 22 (53,587) Non-participating investment contracts (43,456) 1,258 (42,198) (42,281) 1,047 (41,234) (44,635) 1,461 (43,174)
Long-term business (921) 40 (881) (907) 145 (762) (727) 94 (633) General insurance and health (9,977) 1,194 (8,783) (11,842) 1,737 (10,105) (10,842) 1,634 (9,208)
Totals (282,478) 7,572 (274,906) (284,520) 7,894 (276,626) (252,735) 8,054 (244,681) Less: Amounts classified as held for sale 20 — 20 709 — 709 627 — 627
(b) Long-term business liabilities (i) Business description The Group underwrites long-term business in a number of countries as follows: — In the UK mainly in: – New With-Profits sub-fund (NWPSF) of Aviva Life & Pensions UK (UKLAP), where the with-profit policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance. Any surplus or deficit emerging in NWPSF that is not distributed as bonus will be transferred from this sub-fund to the Reattributed Inherited Estate External Support Account (RIEESA) (see below).
– “Non-profit” funds of Aviva Annuity UK and UKLAP, where shareholders are entitled to 100% of the distributed profits. Shareholder profits on unitised with-profit business written by WPSF and on stakeholder unitised with-profit business are derived from management fees and policy charges, and emerge in the non-profit funds.
— In France, where the majority of policyholders’ benefits are determined by investment performance, subject to certain guarantees, and shareholders’ profits are derived largely from management fees. In addition, a substantial number of policies participate in investment returns, with the balance being attributable to shareholders.
— In the United States, there are two main types of business – protection products and accumulation products. Protection products include interest-sensitive whole life, term life, universal life and indexed life insurance policies. The accumulation product segment includes traditional fixed and indexed deferred annuities for individuals and funding agreements for business customers. In addition, there are two closed blocks of participating contracts arising from demutualisations of subsidiary companies. All products are classified as insurance contracts except for the funding agreements and term certain immediate annuities, which are classified as non-participating investment contracts.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 38 – Insurance liabilities continued (ii) Group practice The long-term business provision is calculated separately for each of the Group’s life operations. The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, mainly using the net premium method, modified where necessary to reflect the requirements of the Companies Act.
(iii) Methodology and assumptions There are two main methods of actuarial valuation of liabilities arising under long-term insurance contracts – the net premium method and the gross premium method – both of which involve the discounting of projected premiums and claims.
(a) UK With-profit business The valuation of with-profit business uses the methodology developed for the Realistic Balance Sheet, adjusted to remove the shareholders’ share of future bonuses. The key elements of the Realistic Balance Sheet methodology are the with-profit benefit reserve (WPBR) and the present value of the expected cost of any payments in excess of the WPBR (referred to as the cost of future policy-related liabilities). The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities. The WPBR for an individual contract is generally calculated on a retrospective basis, and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract.
The principal assumptions underlying the cost of future policy related liabilities are as follows: Future investment return A “risk-free” rate equal to the spot yield on UK Government securities, plus a margin of 0.1% is used. The rates vary, according to the outstanding term of the policy, with a typical rate as at 31 December 2009 being 4.35% (2008: 3.58%) for a policy with 10 years outstanding.
Volatility of investment return Volatility assumptions are set with reference to implied volatility data on traded market instruments, where available or on a best estimate basis where not. These are term-dependent, with specimen values for 10 year terms as follows: Financial statem ents IFRS
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 38 – Insurance liabilities continued Future regular bonuses Annual bonus assumptions for 2010 have been set consistently with the year end 2009 declaration. Future annual bonus rates reflect the principles and practices of the fund. In particular, the level is set with regard to the projected margin for final bonus and the change from one year to the next is limited to a level consistent with past practice.
Assurances, pure endowments and deferred annuities before vesting Nil or Axx00 adjusted Nil or AM92/AF92
Valuation discount rates for business in the non-profit funds are as follows: Valuation discount rates
Deferred annuities Non-profit – in deferment 4.2% 3.8% 4.3% Non-profit – in payment 3.8% to 4.0% 3.4% to 3.6% 3.9% to 4.1%
Annuities in payment Conventional annuity 4.2% to 5.7% 3.8% to 5.4% 4.3% to 5.2%
AM80/AF80 or AM92/AF92 or TM92/TF92 adjusted for smoker status and age/sex specific factors
(b) France The majority of reserves arise from a single premium savings product and is based on the accumulated fund value, adjusted to maintain consistency with the value of the assets backing the policyholder liabilities. The net premium method is used for prospective valuations, in accordance with local regulation, where the valuation assumptions depend on the date of issue of the contract. The valuation discount rate also depends on the original duration of the contract and mortality rates are based on industry tables.
(c) Netherlands On transition to IFRS, the valuation of most long-term insurance and participating investment contracts was changed from existing methods that used historic assumptions to an active basis using current market interest rates. A liability adequacy test is performed in line with IFRS requirements. Where liabilities are based on current market interest rates and assets are valued at market value, the margin in the liability adequacy test is determined by comparison of the liabilities with the present value of best estimate cash flows. The yield curve is constructed from yields on collateralised AAA bonds.
swap rates) Annuities in deferment and in payment Market risk-free yield curves, based on iBoxx index for collateralised AAA bonds
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 38 – Insurance liabilities continued Future policy benefit reserves for universal life insurance, deferred annuity products and funding agreements are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. For the indexed products, the liability held is calculated based on the option budget method and is equal to the host contract and the calculated value of the derivative. The value of the derivative is based on the present value of the difference between the projected fund value and the underlying fund guarantee. The weighted average interest crediting rates for universal life products were 4.27% in 2009 (2008: 4.77%). The range of interest crediting rates for deferred annuity products, excluding sales inducement payouts, was 2.00% to 6.00% in 2009 (2008: 2.50% to 6.00%). An additional liability is established for universal life contracts with death or other insurance benefit features, which is determined using an equally-weighted range of scenarios with respect to investment returns, policyholder lapses, benefit election rates, premium payout patterns and mortality. The additional liability represents the present value of future expected benefits based on current product assumptions.
Deferred income reserves are established for fees charged for insurance benefit features which are assessed in a manner that is expected to result in higher profits in earlier years, followed by lower profits or losses in subsequent years. The excess charges are deferred and amortised using the same assumptions and factors used to amortise deferred acquisition costs. Shadow adjustments may be made to deferred acquisition costs, acquired value of in-force business, deferred income reserves and contract liabilities. The shadow adjustments are recognised directly in other comprehensive income so that unrealised gains or losses on investments that are recognised directly in other comprehensive income affect the measurement of the liability, or related assets, in the same way as realised gains or losses.
(iv) Movements The following movements have occurred in the long-term business provisions during the year: Carrying amount at 1 January 156,188 135,312 Provisions in respect of new business 11,105 13,414 Expected change in existing business provisions (7,625) (6,423) Variance between actual and expected experience 2,154 (9,401) Effect of adjusting to PS06/14 realistic basis — (40) Impact of other operating assumption changes (121) (812) Impact of economic assumption changes (404) (604) Other movements 1,112 (527) Change in liability recognised as an expense 6,221 (4,393) Effect of portfolio transfers, acquisitions and disposals (67) 1,872 Foreign exchange rate movements (8,284) 23,397 154,058 156,188Carrying amount at 31 December
The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of insurance liabilities. The £2.2 billion variance between actual and expected experience is not a change in assumptions. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year shown in note 42, together with the impact of movements in related non-financial assets.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 38 – Insurance liabilities continued Provisions for outstanding claims are established to cover the outstanding expected ultimate liability for losses and loss adjustment expenses (LAE) in respect of all claims that have already occurred. The provisions established cover reported claims and associated LAE, as well as claims incurred but not yet reported and associated LAE.
The gross outstanding claims provision before discounting was £13,576 million (2008: £15,061 million). The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims.
During 2009, we have experienced an increase in the number of bodily injury claims settled by periodic payment orders (PPOs) or structured settlements, especially in the UK, which are reserved for on a discounted basis.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 38 – Insurance liabilities continued No adjustments are made to the claims technicians’ case estimates included in booked claim provisions, except for rare occasions when the estimated ultimate cost of a large or unusual claim may be adjusted, subject to internal reserve committee approval, to allow for uncertainty regarding, for example, the outcome of a court case. The ultimate cost of outstanding claims is then estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. The main assumption underlying these techniques is that a company’s past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed by accident period, although underwriting or notification period is also used where this is considered appropriate.
Interest rates used to discount latent claim liabilities The discount rates used in determining our latent claim liabilities are based on the relevant swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement of latent claims. The range of discount rates used is shown in section (ii) above and depends on the duration of the claim and the reporting date. At 31 December 2009, it is estimated that a 1% fall in the discount rates used would increase net claim reserves by approximately £60 million, excluding the offsetting effect on asset values as assets are not hypothecated across classes of business. The impact of a 1% fall in interest rates across all assets and liabilities of our general insurance and health businesses is shown in note 56(i).
Allowance for risk and uncertainty The uncertainties involved in estimating loss reserves are allowed for in the reserving process and by the estimation of explicit reserve uncertainty distributions. The reserve estimation basis for non-life claims adopted by the Group at 31 December 2009 requires all non-life businesses to calculate booked claim provisions as the best estimate of the cost of future claim payments, plus an explicit allowance for risk and uncertainty. The allowance for risk and uncertainty is calculated by each business unit in accordance with the requirements of the Group non-life reserving policy, taking into account the risks and uncertainties specific to each line of business and type of claim in that territory. The requirements of the Group non-life reserving policy also seek to ensure that the allowance for risk and uncertainty is set consistently across both business units and reporting periods.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 38 – Insurance liabilities continued (iv) Movements The following changes have occurred in the general insurance and health claims provisions during the year: Carrying amount at 1 January Impact of changes in assumptions Claim losses and expenses incurred in the current year Decrease in estimated claim losses and expenses incurred in prior years Exceptional strengthening of general insurance latent claims provisions (see below)
Incurred claims losses and expenses Less: Payments made on claims incurred in the current year Payments made on claims incurred in prior years Recoveries on claim payments
Claims payments made in the year, net of recoveries Unwind of discounting Other movements in the claims provisions
In 2008 the Institute of Actuaries’ Asbestos Working Party report contributed to our view that experience variances, which we had previously perceived as normal short-term volatility, reflected a real worsening of expected ultimate claims experience. The market trend in mesothelioma claims was fully reflected as a significant one-off strengthening of gross latent claims reserves in 2008 of £356 million, with a corresponding increase of £52 million in reinsurance recoverable. The net increase of £304 million comprised £668 million on an undiscounted basis and discounting of £364 million.
(d) Loss development tables (i) Description of tables The tables that follow present the development of claim payments and the estimated ultimate cost of claims for the accident years 2001 to 2009. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year. For example, with respect to the accident year 2002, by the end of 2009 £5,767 million had actually been paid in settlement of claims. In addition, as reflected in the lower section of the table, the original estimated ultimate cost of claims of £6,250 million was re-estimated to be £6,044 million at 31 December 2009.
In 2005, the year of adoption of IFRS, only five years were required to be disclosed. This is being increased in each succeeding additional year, until 10 years of information is included.
Key elements of the release from prior accident year general insurance and health net provisions during 2009 were: — £230 million from the UK, including group reinsurance business, mainly due to an improved view of group reinsurance liabilities, and favourable development on personal and commercial motor claims, and commercial property and commercial liability large claims.
— £237 million from Europe mainly due to favourable development of personal motor and commercial property, especially in respect of large claims.
Gross cumulative claim payments At end of accident year (3,029) (2,952) (2,819) (2,971) (3,345) (3,653) (4,393) (4,915) (3,780) One year later (4,766) (4,486) (4,190) (4,561) (5,011) (5,525) (6,676) (7,350) Two years later (5,303) (4,921) (4,613) (4,981) (5,449) (5,971) (7,191) Three years later (5,701) (5,233) (4,972) (5,263) (5,784) (6,272) Four years later (5,966) (5,466) (5,258) (5,448) (6,001) Five years later (6,121) (5,618) (5,409) (5,617) Six years later (6,223) (5,715) (5,527) Seven years later (6,294) (5,767) Eight years later (6,350)
Estimate of gross ultimate claims At end of accident year 6,590 6,250 6,385 6,891 7,106 7,533 8,530 9,508 7,364 One year later 6,770 6,372 6,172 6,557 6,938 7,318 8,468 9,322 Two years later 6,775 6,287 6,124 6,371 6,813 7,243 8,430 Three years later 6,798 6,257 6,036 6,178 6,679 7,130 Four years later 6,754 6,205 5,932 6,008 6,603 Five years later 6,679 6,122 5,853 6,003 Six years later 6,630 6,056 5,813 Seven years later 6,576 6,044 Eight years later 6,600
Present value recognised in the statement of financial position 2,580 292 317 386 479 724 1,026 1,390 1,931 3,571 12,696
Net cumulative claim payments At end of accident year (2,970) (2,913) (2,819) (2,870) (3,281) (3,612) (4,317) (4,808) (3,650) One year later (4,624) (4,369) (4,158) (4,378) (4,925) (5,442) (6,542) (7,165) Two years later (5,088) (4,779) (4,565) (4,712) (5,344) (5,881) (7,052) Three years later (5,436) (5,064) (4,924) (4,986) (5,671) (6,181) Four years later (5,648) (5,297) (5,180) (5,163) (5,892) Five years later (5,763) (5,424) (5,325) (5,327) Six years later (5,841) (5,508) (5,442) Seven years later (5,896) (5,552) Eight years later (5,954)
Estimate of net ultimate claims At end of accident year 6,186 6,037 6,218 6,602 6,982 7,430 8,363 9,262 7,115 One year later 6,333 6,038 6,093 6,266 6,818 7,197 8,302 9,104 Two years later 6,321 5,997 6,037 6,082 6,688 7,104 8,244 Three years later 6,329 5,973 5,942 5,882 6,544 6,996 Four years later 6,286 5,912 5,851 5,709 6,476 Five years later 6,219 5,855 5,772 5,699 Six years later 6,173 5,786 5,683 Seven years later 6,109 5,754 Eight years later 6,130
Estimate of net ultimate claims 6,130 5,754 5,683 5,699 6,476 6,996 8,244 9,104 7,115 Cumulative payments (5,954) (5,552) (5,442) (5,327) (5,892) (6,181) (7,052) (7,165) (3,650)
Present value recognised in the statement of financial position 1,456 211 244 336 461 699 972 1,327 1,895 3,452 11,053
Changes in UPR recognised as income (645) (388) Gross portfolio transfers and acquisitions — (11) Foreign exchange rate movements (67) 408
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 39 – Liability for investment contracts This note analyses our investment contract liabilities by type of product and describes how we calculate these liabilities and what assumptions we have used.
Of the non-participating investment contracts measured at fair value, £39,686 million are unit-linked in structure and the fair value liability is equal to the unit reserve plus additional non-unit reserves if required on a fair value basis. These contracts are classified as ‘Level 1’ in the fair value hierarchy, as the unit reserve is calculated as the publicly quoted unit price multiplied by the number units in issue, and any non-unit reserve is insignificant. Of the remaining non-participating contracts measured at fair value at 31 December 2009, £238 million are classified as ‘Level 1’, £1,203 million are classified as ‘Level 2’ and £162 million are classified as ‘Level 3’ in the fair value hierarchy. ‘Level 3’ investment contracts had a fair value of £178 million at 31 December 2008, with the movement in the year represented by foreign exchange movements of £19 million offset by new policy issuances of £3 million. We believe that changing one or more of the assumptions that support the ‘Level 3’ valuation to reasonably possible alternative assumptions would not change the fair value significantly. In respect of investment contracts carried at fair value there were no transfers between different levels of the fair value hierarchy during 2009.
For unit-linked business, a deferred acquisition cost asset and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively, that relate to the provision of investment management services, and which are amortised on a systematic basis over the contract term. The amount of the related deferred acquisition cost asset is shown in note 26 and the deferred income liability is shown in note 50.
In the United States, funding agreements consist of one to ten year fixed rate contracts. These contracts may not be cancelled by the holders unless there is a default under the agreement, but may, subject to a call premium, be terminated by Aviva at any time. Aviva issued no new funding agreements in 2009. The weighted average interest rates for fixed-rate and floating-rate funding agreements as at 31 December 2009 were 4.79% and 0.37% respectively. Funding agreements issued before 2008 are measured at fair value equal to the present value of contractual cash flows, and for business issued since 2008 are measured at amortised cost. Most funding agreements are fully collateralised and therefore their fair values are not adjusted for own credit risk. Funding agreements carried at fair value total £1,093 million and are classified as ‘Level 2’ in the fair value hierarchy.
The fair value of contract liabilities measured at amortised cost is not materially different from the amortised cost liability.
Carrying amount at 1 January 65,278 53,609 Provisions in respect of new business 5,973 3,391 Expected change in existing business provisions (1,256) (1,909) Variance between actual and expected experience 2,469 (4,661) Impact of operating assumption changes (49) (166) Impact of economic assumption changes (57) 244 Other movements (1,316) 13 Change in liability recognised as an expense 5,764 (3,088) Effect of portfolio transfers, acquisitions and disposals (246) 2,181 Foreign exchange rate movements (4,256) 12,576 Other movements 19 —
Carrying amount at 1 January 42,281 44,635 Provisions in respect of new business 3,045 5,314 Expected change in existing business provisions (1,847) (2,273) Variance between actual and expected experience 2,495 (9,503) Impact of operating assumption changes 107 (28) Impact of economic assumption changes 4 5 Other movements 370 (169) Change in liability 4,174 (6,654) Effect of portfolio transfers, acquisitions and disposals (1,596) (14) Foreign exchange rate movements (1,403) 4,314
Realistic liabilities for GAOs in the UK with-profit funds were £760 million at 31 December 2009 (2008: £1,093 million, 2007: £1,161 million). With the exception of the New With-Profits Sub Fund (NWPSF), movements in the realistic liabilities in the with-profit funds are offset by a corresponding movement in the unallocated divisible surplus, with no net impact on IFRS profit. Realistic liabilities for GAOs in the NWPSF were £109 million at 31 December 2009 (2008 and 2007: not applicable).
(b) UK Life non-profit business The Group’s UK non-profit funds are evaluated by reference to statutory reserving rules, including changes introduced in 2006 under FSA Policy Statement 06/14 Prudential Changes for Insurers.
(i) Guaranteed annuity options Similar options to those written in the with-profit fund have been written in relation to non-profit products. Provision for these guarantees does not materially differ from a provision based on a market-consistent stochastic model, and amounts to £28 million at 31 December 2009 (2008: £27 million, 2007: £36 million).
(i) France Guaranteed surrender value and guaranteed minimum bonuses Aviva France has written a number of contracts with such guarantees. The guaranteed surrender value is the accumulated value of the contract including accrued bonuses. Bonuses are based on accounting income from amortised bond portfolios, where the duration of bond portfolios is set in relation to the expected duration of the policies, plus income and releases from realised gains on equity-type investments. Policy reserves are equal to guaranteed surrender values. Local statutory accounting envisages the establishment of a reserve, “Provision pour Aléas Financiers” (PAF), when accounting income is less than 125% of guaranteed minimum credited returns. No PAF was established at the end of 2008.
Guaranteed death and maturity benefits In France, the Group has also sold unit-linked policies where the death and/or maturity benefit is guaranteed to be at least equal to the premiums paid. The reserve held in the Group’s consolidated statement of financial position at the end of 2009 for this guarantee is £97 million (2008: £113 million, 2007: £30 million). The reserve is calculated on a prudent basis and is in excess of the economic liability. At the end of 2009, total sums at risk for these contracts were £372 million (2008: £1,279 million, 2007: £63 million) out of total unit-linked funds of £14 billion (2008: £14 billion, 2007: £15 billion). The average age of policyholders was approximately 54. It is estimated that this liability would increase by £71 million (2008: £59 million, 2007: £17 million) if yields were to decrease by 1% per annum and by £25 million (2008: £22 million, 2007: £7 million) if equity markets were to decline by 10% from year end 2009 levels. These figures do not reflect our ability to review the tariff for this option.
(ii) Delta Lloyd Guaranteed minimum return at maturity In the Netherlands, it is market practice to guarantee a minimum return at maturity on traditional savings and pension contracts. Guarantees on older lines of business are 4% per annum while, for business written since 1 September 1999, the guarantee is 3% per annum. On Group pensions business, it is often possible to recapture guarantee costs through adjustments to surrender values or to premium rates.
On transition to IFRS, Delta Lloyd changed the reserving basis for most traditional contracts to reflect current market interest rates, for consistency with the reporting of assets at market value. The cost of meeting interest rate guarantees is allowed for directly in the liabilities. Although most traditional contracts are valued at market interest rate, the split by level of guarantee shown below is according to the original underlying guarantee.
Delta Lloyd has certain unit-linked contracts which provide a guaranteed minimum return at maturity from 4% pa to 2% pa. Provisions consist of unit values plus an additional reserve for the guarantee. The additional provision for the guarantee was £246 million (2008: £226 million, 2007: £70 million). An additional provision of £33 million (2008: £121 million, 2007: £19 million) in respect of investment return guarantees on group segregated fund business is held. It is estimated that the provision would increase by £180 million (2008: £255 million, 2007: £211 million) if yields were to reduce by 1% pa and by £42 million (2008: £56 million, 2007: £21 million) if equity markets were to decline by 10% from year end 2009 levels.
(iii) Ireland Guaranteed annuity options Products with similar GAOs to those offered in the UK have been issued in Ireland. The current net of reinsurance provision for such options is £214 million (2008: £180 million, 2007: £160 million). This has been calculated on a deterministic basis, making conservative assumptions for the factors which influence the cost of the guarantee, principally annuitant mortality option take-up and long-term interest rates.
These guarantees are currently ‘in-the-money’ by £10 million (2008: ‘in-the-money’ by £16 million, 2007: ‘out-of-the-money’ by £53 million). This has been calculated on a deterministic basis as the excess of the current policy surrender value over the discounted value (excluding terminal bonus) of the guarantees. The value of these guarantees is usually sensitive to the performance of investments held in the with-profit fund. Amounts payable under these guarantees are determined by the bonuses declared on these policies. It is estimated that the guarantees would be ‘in-the-money’ by £10 million (2008: ‘in-the-money’ by £16 million, 2007: ‘out-of-the-money’ by £46 million) if yields were to increase by 1% per annum and by £10 million (2008: ‘in-the-money’ by £16 million, 2007: ‘out-of-the-money’ by £29 million) if equity markets were to decline by 10% from year end 2009 levels. There is no sensitivity to either interest rates or equity markets since there is no longer any exposure to equity in these funds and a matching strategy has been implemented for bonds.
Return of premium guarantee Until 2005, Hibernian Life wrote two tranches of linked bonds with a return of premium guarantee, or a price floor guarantee, after five or six years. The provision for these over and above unit and sterling reserves, at the end of 2009 is £11 million (2008: £18 million, 2007: £0.1 million).
It is estimated that the provision would increase by £4 million (2008: £4 million, 2007: £1 million) if equity markets were to decline by 10% from the year end 2009 levels. However, the provision increase would be broadly off-set by an increase in the value of the hedging assets that were set up on sale of these policies. We would not expect any significant impact on this provision as a result of interest rate movements. It is estimated that the provision would increase by £2 million if property values were to decline by 10% from year end 2009 levels. This would be offset by an increase in the value of the hedging assets by £0.4 million, the difference reflecting the fact that only the second tranche was hedged for property exposure.
(iv) Spain and Italy Guaranteed investment returns and guaranteed surrender values The Group has also written contracts containing guaranteed investment returns and guaranteed surrender values in both Spain and Italy. Traditional profit-sharing products receive an appropriate share of the investment return, assessed on a book value basis, subject to a guaranteed minimum annual return of up to 6% in Spain and 4% in Italy on existing business, while on new business the maximum guaranteed rate is lower. Liabilities are generally taken as the face value of the contract plus, if required, an explicit provision for guarantees calculated in accordance with local regulations. At 31 December 2009, total liabilities for the Spanish business were £3 billion (2008: £5 billion, 2007: £4 billion) with a further reserve of £11 million (2008: £19 million, 2007: £16 million) for guarantees. Total liabilities for the Italian business were £6 billion (2008: £5 billion, 2007: £4 billion), with a further provision of £52 million (2008: £55 million, 2007: £48 million) for guarantees. Liabilities are most sensitive to changes in the level of interest rates. It is estimated that provisions for guarantees would need to increase by £46 million (2008: £59 million, 2007: £66 million) in Spain and £16 million (2008: £5 million, 2007: £14 million) in Italy if interest rates fell by 1% from end 2009 values. Under this sensitivity test, the guarantee provision in Spain is calculated conservatively, assuming a long-term market interest rate of 1.6% and no lapses or premium discontinuances.
A portion of each premium is used to purchase derivatives to hedge the growth in interest credited to the policyholder.
The risk adjustment calculation is based on market spreads on senior long-term unsecured Aviva plc debt with a reduction to reflect policyholder priority over other creditors in case of default. The amount of change in the fair value of these embedded options resulting from the risk adjustment in 2009 is an increase of £313 million (2008: £514 million decrease), and is principally attributable to market factors rather than instrument specific credit risk. There were no significant gains or losses attributable to the risk adjustment or instrument specific credit risk. At 31 December 2009, the total liabilities for indexed products were £17 billion (2008: £15 billion, 2007: £8 billion), including liabilities for the embedded option of £1.7 billion (2008: £1.9 billion, 2007: £1.2 billion). If interest rates were to increase by 1%, the provision for embedded options would decrease by £59 million (2008: £138 million, 2007: £89 million) and, if interest rates were to decrease by 1%, the provision would increase by £86 million (2008: £155 million, 2007: £86 million).
The Group offers an optional lifetime guaranteed income benefit focused on the retirement income segment of the deferred annuity marketplace to help customers manage income during both the accumulation stage and the distribution stage of their financial life. At 31 December 2009, a total of £4.9 billion (2008: £3.2 billion, 2007: £0.7 billion) in indexed deferred annuities have elected this benefit taking steps to guarantee retirement income.
General insurance and health Outstanding claims provisions 1,194 1,737 1,634 Provisions for claims incurred but not reported 449 29 29 1,643 1,766 1,663 Provision for unearned premiums 332 418 511 Other technical provisions — — 5
Of the above total, £4,493 million (2008: £6,097 million, 2007: £4,796 million) is expected to be recovered more than one year after the statement of financial position date.
The increase in the reinsurers' share of provisions for claims incurred but not reported during 2009 is due to a revised allocation between outstanding claims and IBNR of reinsurance assets in respect of certain discontinued run-off business.
Carrying amount at 1 January 5,565 5,781 Asset in respect of new business 412 235 Expected change in existing business asset (57) 243 Variance between actual and expected experience (35) (1,141) Impact of other operating assumption changes (189) (761) Impact of economic assumption changes (250) 306 Other movements 486 (231)
Change in asset 367 (1,349) Effect of portfolio transfers, acquisitions and disposals (41) 140 Foreign exchange rate movements (334) 993 Carrying amount at 31 December 5,557 5,565
The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of reinsurance assets. The reduction in the reinsurance asset from assumption changes mainly relates to Ireland, with a corresponding reduction made to gross insurance contract liabilities. For participating businesses, a movement in reinsurance assets is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact profit, these are included in the effect of changes in assumptions and estimates during the year shown in note 42, together with the impact of movements in related liabilities and other non-financial assets.
Incurred in current year (138) (107) Incurred in prior years (202) (257)
Change in reinsurance asset recognised as income (128) (27) Effect of portfolio transfers, acquisitions and disposals 57 27 Foreign exchange rate movements (50) 105 Other movements (2) (2)
Carrying amount at 1 January 418 511 Premiums ceded to reinsurers in the year 775 798 Less: Reinsurers’ share of premiums earned during the year (861) (909) Changes in reinsurance asset recognised as income (86) (111) Reinsurers’ share of portfolio transfers and acquisitions 5 8 Foreign exchange rate movements (5) 10
Carrying amount at 31 December 332 418 42 – Effect of changes in assumptions and estimates during the year Certain estimates and assumptions used in determining our liabilities for insurance and investment contract business were changed from 2008 to 2009, affecting the profit recognised for the year with an equivalent effect on liabilities. This note analyses the effect of the changes. This disclosure only allows for the impact on liabilities and related assets, such as reinsurance, deferred acquisition costs and AVIF, and does not allow for offsetting movements in the value of backing financial assets.
Assumptions Long-term insurance business Interest rates (363) (521) Expenses 69 24 Persistency rates — 2 Mortality for assurance contracts 11 44 Mortality for annuity contracts 6 26 Tax and other assumptions (49) 93 Investment contracts Interest rates 20 (75) Expenses 40 (27) Persistency rates — 2 Tax and other assumptions (89) 36 General insurance and health business Change in loss ratio assumptions (2) (1) Change in discount rate assumptions 57 (94) Change in expense ratio and other assumptions (21) —
Other assumption changes include the effect of business migration and expense inflation adjustments in the UK, and reserve releases in Asia.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 43 – Unallocated divisible surplus An unallocated divisible surplus (UDS) is established where the nature of policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain. This note shows the movements in this surplus during the year.
The following movements have occurred in the year: Carrying amount at 1 January 2,325 6,785 Change in participating contract assets (1,314) (12,022) Change in participating contract liabilities 3,836 7,699 Effect of special bonus to with-profit policyholders (see note 44a) (69) (89) Effect of reattribution of inherited estate (see note 44b) (881) — Other movements (25) (70) Change in liability recognised as an expense 1,547 (4,482) Effect of portfolio transfers, acquisitions and disposals (4) — Movement in respect of change in pension scheme deficit (note 47c(i)) (24) (78) Foreign exchange rate movements 43 88 Other movements (21) 12
(b) Impact of the reattribution of the inherited estate On 1 October 2009 a reorganisation of the with-profit funds of CGNU Life Assurance Limited (CGNU) and Commercial Union Life Assurance Company Limited (CULAC) was approved by the Board and became effective. The reorganisation is achieved through a reattribution to shareholders of the inherited estates of these funds. As part of the reorganisation the two funds were merged and transferred to Aviva Life & Pensions UK Limited (UKLAP).
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 44 – Special bonus and reattribution of the inherited estate continued Initial impact The initial impact of the reorganisation on the IFRS income statement and balance sheet at 1 October 2009 was: Impact Note £m
Other expenses Policyholder incentive payments (b) (471) Project costs (c) (208)
Income Statement. (d)A deferred tax liability has been recognised in accordance with IAS 12 on the temporary difference between the carrying value of the reattributed estate for tax and IFRS purposes.
The initial impact of the reorganisation on profit before tax was £202 million, of which a loss of £5 million is recognised in operating profit, reflecting the value derived from the reorganisation. The remaining £207 million is recognised outside operating profit, off-setting the shareholder tax attributable to the transaction.
Ongoing impact The reattribution has an ongoing impact arising from profits generated in the NWPSF that are attributable to shareholders. Included within profit before tax for the year of £2,022 million is £51 million that has been recognised as profit as a result of the reattribution of the inherited estate which comprises £56 million relating to the ongoing impact offset by a £5 million charge from the initial impact of the reattribution. Previously this profit would have been transferred to the unallocated distributable surplus.
The Group has unrecognised tax losses and other temporary differences of £2,975 million (2008: £2,961 million) to carry forward against future taxable income of the necessary category in the companies concerned. Of these, trading losses of £127 million will expire within the next 15 years. The remaining losses have no expiry date.
In addition, the Group has unrecognised capital losses of £462 million (2008: £556 million). Of these, £345 million will expire within the next 15 years. The remaining capital losses have no expiry date.
Total IAS 19 obligations to staff pension schemes Restructuring provision Other provisions
Of the total, £3,375 million (2008: £2,328 million, 2007: £1,277 million) is expected to be settled more than one year after the statement of financial position date.
At 1 January 2008 as reported 135 572 707 Additional provisions 355 307 662 Unused amounts reversed (9) (73) (82) Change in the discounted amount arising from passage of time — 5 5
At 31 December 2008 Additional provisions Unused amounts reversed Change in the discounted amount arising from passage of time
(a) Introduction The Group operates a large number of defined benefit and defined contribution pension schemes around the world. The only material defined benefit schemes are in the UK, the Netherlands, Canada and Ireland and, of these, the main UK scheme is by far the largest.
The assets of the main UK, Irish and Canadian schemes are held in separate trustee-administered funds to meet long-term pension liabilities to past and present employees. In the Netherlands, the main scheme is held in a separate foundation which invests in the life funds of the Group. In all schemes, the appointment of trustees of the funds is determined by their trust documentation, and they are required to act in the best interests of the schemes’ beneficiaries. The long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes.
(b) Membership The number of scheme members at 31 December 2009 was as follows: United Kingdom Netherlands
(d) Charges to the income statement The total pension costs of the Group’s defined benefit and defined contribution schemes were: UK defined benefit schemes 84 115
There were no significant contributions outstanding or prepaid as at either 31 December 2007, 2008 or 2009.
(e) IAS 19 disclosures Disclosures under IAS 19 for the material defined benefit schemes in the UK, the Netherlands, Canada and Ireland are given below. Where schemes provide both defined benefit and defined contribution pensions, the assets and liabilities shown exclude those relating to defined contribution pensions. Total employer contributions for these schemes in 2010, including the ASPS deficit funding, are expected to be £565 million.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 47 – Pension obligations continued There is a small buy-out market in Ireland, largely restricted to pensions currently in payment and it is not clear whether current capacity would enable an immediate buy-out of our Irish pension liabilities at present. The Canadian defined benefit plan’s liabilities represent the likely limit on what the Canadian group annuity market could absorb at normal competitive group annuity prices if the entire plan were subject to a buy-out valuation. There is in fact a reasonably high chance that only a portion of the plan’s liabilities could be absorbed in one tranche.
IAS 19 requires us to use the projected unit credit method to measure our pension scheme liabilities. Neither of the alternative methods is considered appropriate in presenting fairly the Group’s obligations to the members of its pension schemes on an ongoing basis, so they are not considered further.
Valuations and assumptions The valuations used for accounting under IAS 19 have been based on the most recent full actuarial valuations, updated to take account of that standard’s requirements in order to assess the liabilities of the material schemes at 31 December 2009. Scheme assets are stated at their fair values at 31 December 2009.
Inflation rate 3.6% 2.9% 3.4% 2.1% 2.0% 2.0% General salary increases 5.4% 4.7% 5.2% 3.1%* 3.0%* 3.0%* Pension increases 3.6% 3.1% 3.4% 2.1%/1.9%** 2.0%/1.3%** 2.0%/2.4%** Deferred pension increases 3.6% 3.1% 3.4% 2.1%/1.9%** 2.0%/1.3%** 2.0%/2.4%** Discount rate 5.7% 6.2% 5.8% 5.2% 5.7% 5.5% Basis of discount rate AA-rated corporate bonds AA-rated corporate bonds * Age-related scale increases plus 3.1% (2008: 3%, 2007: 3%). **2.1% until 2011 and 1.9% thereafter (2008: 2.0% and 1.3% respectively, 2007: 2.0% and 2.4% respectively).
The discount rate and pension increase rate are the two assumptions that have the largest impact on the value of the liabilities, with the difference between them being known as the net discount rate. For each country, the discount rate is based on current average yields of high quality debt instruments taking account of the maturities of the defined benefit obligations. A 1% increase in this rate (and therefore the net discount rate) would reduce the liabilities by £1.8 billion and the service cost for the year by £31 million.
Netherlands CRC8b, which includes allowance for future improvements up to 2050 65 82.5 (17.5)
The assumptions above are based on commonly-used mortality tables. In the UK, the standard mortality tables have been adjusted to reflect recent research into mortality experience. However, the extent of future improvements in longevity is subject to considerable uncertainty and judgement is required in setting this assumption. In the UK schemes, which are by far the most material to the Group, the assumptions include an allowance for future mortality improvement, based on the actuarial profession’s medium cohort projection table and incorporating underpins to the rate of future improvement equal to 1.5% p.a. for males and 1.0% p.a. for females. The effect of assuming all members were one year younger would increase the above schemes’ liabilities by £248 million and the service cost for the year by £5 million.
(ii) Assumptions on scheme assets The expected rates of return on the schemes’ assets are: UK Netherlands Canada Ireland
The overall rates of return are based on the expected returns within each asset category and on current asset allocations. The expected returns for equities and properties have been aligned with the rates used for the longer-term investment return assumptions, other than in the Netherlands, where they have been developed in conjunction with external advisers due to the characteristics of the scheme. The figures for the total expected return on scheme assets in the following section are stated after deducting investment expenses.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 47 – Pension obligations continued (iii) Investments in Group-managed funds and insurance policies Plan assets include investments in Group-managed funds in the consolidated statement of financial position of £101 million (2008: £99 million, 2007: £150 million) in the UK scheme, and insurance policies with other Group companies of £157 million and £1,351 million (2008: £150 million and £1,402 million, 2007: £143 million and £1,025 million) in the UK and Dutch schemes respectively. The Dutch insurance policies are considered non-transferable under the terms of IAS 19 and so have been treated as other obligations to staff pension schemes within provisions (see note 46).
The treatment of the relevant parts of the financial statements is as follows: Plan assets – The treatment of these funds and policies in the consolidated statement of financial position is described above.
Pension expense – To avoid double-counting of investment income on scheme assets and the assets backing the underlying policies, adjustments have been made to the former in the tables in section (iv) below.
(iv) Pension expense As noted above, plan assets in the UK and Dutch schemes include insurance policies with other Group companies. To avoid double-counting of investment income on scheme assets and the assets backing the underlying policies, adjustments have been made to the former as shown in the tables below.
Expected return on scheme assets 466 706 Less: Income on insurance policy assets accounted for elsewhere (see (iii) above) (58) (64)
Expected return on scheme assets (466) (706) Actual positive/(negative) return on these assets 1,009 (1,245)
Actuarial gains/(losses) on scheme assets 543 (1,951) Less: losses on insurance policy assets accounted for elsewhere (see (iii) above) 18 58
Fair value of scheme assets at the end of the year 8,754 7,936 8,814 8,137 7,334 Present value of scheme liabilities at the end of the year (11,812) (9,951) (10,017) (10,196) (9,680)
Inflation risk – the effect of inflation rising faster than expected on the value of the plan liabilities.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 47 – Pension obligations continued (vii) Recognition in the statement of financial position The assets and liabilities of the schemes, attributable to defined benefit members, including investments in Group insurance policies (see footnote below), at 31 December 2009 were: UK Netherlands Canada Ireland Total £m
Deficits in the schemes included in provisions (note 46) (445) (15) (68) (85) (613)
Other assets comprise cash at bank, derivative financial instruments, receivables and payables. Plan assets in the table above include investments in Group-managed funds and insurance policies, as described in section (iii)
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 47 – Pension obligations continued (viii) Movements in the scheme deficits and surpluses Movements in the pension schemes’ deficits and surpluses comprise: Adjust for Pension Group IAS 19
Scheme Scheme scheme insurance pensions assets liabilities deficits policies deficits £m £m £m £m £m
Deficits in the schemes at 31 December 9,338 (9,951) (613) (1,402) (2,015)
Subordinated debt 6.125% £700 million subordinated notes 2036 690 £ 5.750% €800 million subordinated notes 2021 710 € 5.250% €650 million subordinated notes 2023 539 € 5.700% €500 million undated subordinated notes 441 € 6.125% £800 million undated subordinated notes 791 £ Floating rate US$300 million subordinated notes 2017 186 US$ 6.875% £400 million subordinated notes 2058 395 £ 6.875% £200 million subordinated notes 2058 199 £ 6.875% €500 million subordinated notes 2038 442 € 10.6726% £200 million subordinated notes 2019 200 £ 10.464% €50 million subordinated notes 2019 44 €
— — — — — — — — — — —
Subordinated debt 6.125% £700 million subordinated notes 2036 689 £ — — — — 700 700 5.750% €800 million subordinated notes 2021 772 € — — — 773 — 773 5.250% €650 million subordinated notes 2023 593 € — — — 628 — 628 5.700% €500 million undated subordinated notes 480 € — — — — 483 483 6.125% £800 million undated subordinated notes 790 £ — — — — 800 800 Floating rate US$300 million subordinated notes 2017 208 US$ — — 209 — — 209 6.875% £400 million subordinated notes 2058 394 £ — — — — 400 400 6.875% £200 million subordinated notes 2058 199 £ — — — — 200 200 6.875% €500 million subordinated notes 2038 481 € — — — — 483 483
Debenture loans 9.5% guaranteed bonds 2016 199 £ — — 200 — — 200 2.5% subordinated perpetual loan notes 166 € — — — — 474 474 Other loans 14 various — 14 — — — 14 885 1,260 1,907 2,740 6,198 12,990 Total contractual undiscounted cash flows for core structural borrowings
Carrying Denominated Within 1 1–5 5–10 10–15 Over 15 value currency year years years years years Total £m £m £m £m £m £m £m £m
Subordinated debt is stated at net of notes held by Group companies of £35 million (2008: £33 million; 2007: £nil). Where subordinated debt is undated or loan notes are perpetual, the interest payments have not been included beyond 15 years. Annual interest payments for these borrowings are £75 million (2008: £89 million). Contractual undiscounted interest payments are calculated based on underlying fixed interest rates or prevailing market floating rates as applicable. Year end exchange rates have been used for interest projections on loans in foreign currencies. All the above borrowings are stated at amortised cost.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 48 – Borrowings continued (c) Operational borrowings The following table provides information about the carrying amounts and maturity periods of these borrowings. Borrowings are considered current if the contractual maturity dates are within a year.
Securitised mortgage loan notes UK lifetime mortgage business 1,444 £ 11 71 130 379 1,061 1,652 Dutch domestic mortgage business 5,885 € — — — — 6,094 6,094 509 1,527 1,761 1,423 9,565 14,782Total contractual undiscounted cash flows
Amounts owed to credit institutions Bank loans 1,891 various 353 842 152 154 390 1,891
Securitised mortgage loan notes UK lifetime mortgage business 1,590 £ 9 40 66 — 1,529 1,644 Dutch domestic mortgage business 6,195 € — — — — 7,913 7,913 882 3,029 2,726 2,614 23,035 32,286Total contractual undiscounted cash flows
Total contractual undiscounted cash flows 749 1,712 2,144 1,661 16,015 22,281
The securitised mortgage loan notes are at various fixed, floating and index-linked rates. Further details about these notes are given in note 23.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 48 – Borrowings continued (ii) Debenture loans The 9.5% guaranteed bonds were issued by the Company at a discount of £1.1 million. This discount and the issue expenses are being amortised over the full term of the bonds. Although these bonds were issued in sterling, the loans have effectively been converted into euro liabilities through the use of financial instruments in a subsidiary.
(iii) Commercial paper The commercial paper consists of £483 million in the Company (2008: £535 million, 2007: £918 million) and £nil in France (2008: £5 million, 2007: £4 million). All of this is considered core structural funding.
(d) Other loans includes €500 million 10.44% subordinated notes due 2019 of which €400 million of the loan was issued by Delta Lloyd Levensverzekering and €100m by Delta Lloyd Schadeverzekering
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 48 – Borrowings continued (v) Securitised mortgage loan notes Loan notes have been issued by special purpose securitisation companies in the UK and the Netherlands. Details of these securitisations are given in note 23.
Net cash inflow 193 214 407 Foreign exchange rate movements (232) (566) (798) Fair value movements — 187 187 Amortisation of discounts and other non-cash items 3 — 3
Movements in the year (36) (165) (201) Balance at 1 January 5,525 9,676 15,201
Movements in borrowings during the previous year were: Core Total structural Operational 2008 £m £m £m
Movements in the year 1,214 1,318 2,532 Balance at 1 January 4,311 8,358 12,669
(f) Undrawn borrowings The Group and Company have the following undrawn committed central borrowing facilities available to it, of which £1,000 million (2008: £1,000 million, 2007: £1,000 million) is used to support the commercial paper programme: Expiring within one year Expiring beyond one year
Payables arising out of direct insurance 1,585 1,716 1,731 Payables arising out of reinsurance operations 544 499 410 Deposits and advances received from reinsurers 928 1,014 1,294 Bank overdrafts 926 605 621 Derivative liabilities (note 57) 2,099 2,024 633 Bank customer accounts 4,618 4,510 2,460 Bank deposits received from other banks 1,933 1,780 1,288 Amounts due to brokers for investment purchases 793 757 901 Obligations for repayment of collateral received (notes 24e(i) & 57c) 3,602 5,497 6,545 Obligations under stock repurchase arrangements (note 24e(ii)) 664 383 358 Other financial liabilities 2,850 2,077 1,891 20,542 20,862 18,132 Less: Amounts classified as held for sale — (22) (72)
Expected to be settled in more than one year 560 2,372 1,963
We have used the following measurement basis to fair value derivative liabilities: Level 1 – Quoted market prices in active markets 117 Level 2 – Modelled with significant observable market inputs 1,968 Level 3 – Modelled with significant unobservable market inputs 14 50 – Other liabilities This note analyses our other liabilities at the end of the year.
Expected to be settled in more than one year 439 1,380 851