At Aviva, our purpose is to free people from fear of uncertainty, allowing them to get on and lead their lives; so that they can look forward to the future with confidence, knowing they have protected what matters most to them.
In this report, you can read more about how we are changing Aviva to deliver a better future for our customers, our shareholders, our communities and our people.
With the changes we have made, and continue to make, I am confident that Aviva has the necessary foundation to grow.
2013 was a year in which cash flow, earnings and the financial position of the Group improved.
Strategic report Chairman’s statement 04 Group Chief Executive Officer’s statement 06 Chief Financial Officer’s statement 10 Our business model 16 Market context 18 Strategic framework 19 Measuring our performance in 2013 26 Market focus 30 Risks to our business 44 Our wider impact 46 Board of directors 54 Group executive 58 Chairman’s governance letter 62 Extract of directors’ remuneration report 64
IFRS Financial statements Independent auditors’ report 106 Accounting policies 110 Consolidated income statement 124 Consolidated statement of comprehensive income 125 Reconciliation of Group operating profit to profit/(loss) for the year 126 Consolidated statement of changes in equity 128 Consolidated statement of financial position 129 Consolidated statement of cash flows 130 Notes to the consolidated financial statements 131 Financial statements of the Company 238
When young mother Anne Lawlor found a lump in her breast, she was glad she had an Aviva health insurance policy. The tumour was diagnosed in September 2013 and Anne had surgery within two weeks. “When I was diagnosed” she says, “there were loads of things to worry about, like, you’re going to lose your hair and you’re going to have to deal with things that you don’t really expect when you’re 34. But the one thing I wasn’t worried about was what type of treatment I was going to be able to afford and how quickly I was going to be able to access that treatment.”
The Magnien family has been producing wine in Gevrey-Chambertin since 1556. When Charles took over the business from his father François in 2009, the business had several insurance providers. Now they use only Aviva. Charles has placed his personal insurance with Aviva too. “It’s a relationship based on trust,’’ he says. “To me, trust is paramount in insurance. It means I can focus on making a quality product, knowing my business is well protected, so I don’t have to worry.”
A year of transformation 2013 has been a very important year for Aviva and for shareholders.
Operating performance The Group’s adjusted operating profit grew by 6% during the year to £2,049 million. Contributing to this was a continuation of a Group-wide cost reduction programme that has now delivered savings of £360 million out of the £400 million target by the end of 2013, with the full reduction now embedded in the 2014 plan.
The economic capital base and Group liquidity have also been strengthened significantly. This has built our financial strength and lowered the risk of the Group. We plan further strengthening over the coming years, accompanied by a reduction in internal and external leverage.
Management has overseen significant change in the Group’s business portfolio to focus on the most attractive segments.
Share price growth during 2013 15.0p Total dividend 2013 has been a very important year for Aviva and for shareholders. The positive changes made by your Board and management, have begun to rebuild our reputation amongst investors that we traditionally held. Of course, much is yet to be done, but I’m sure shareholders will endorse the progress that has been made, over a relatively short time. I would particularly like to thank my Board colleagues and our management team, for their contribution to this.
Dividend Last year, we made the difficult decision to reduce dividend levels with reference to our earning capacity and cash flows, and eliminate the dilutive scrip dividend programme. Notwithstanding this, shareholders have benefitted from significant share price growth that more than offset the lower dividend.
The Board is able to declare a final dividend of 9.40 pence per share (2012: 9.00 pence). We are also introducing a dividend reinvestment plan (DRIP), which allows shareholders to reinvest their dividend in the Company’s shares through a market purchase rather than a new issue of shares. This avoids the dilutive effect that the previous Scrip dividend scheme had over time.
We also appointed a number of new non-executive directors, with relevant experience in financial services, with the appointment of Bob Stein, Michael Mire and Patricia Cross. Aviva is making good progress in complying with Lord Davies’ proposals which we aim to fulfil with the search, currently in progress, for an additional director.
During the year we have also made a number of changes to Board committees as part of an ongoing programme to refresh membership.
The Board is very grateful for the continued effort and support of our staff in what has been a challenging period.
Aviva Investors also works with fund managers and analysts globally to integrate environmental, social and corporate governance issues into our investment decision-making and analysis to deliver long-term shareholder value for our clients.
Looking ahead Aviva is a very significant company in our sector in the UK and internationally. With the changes we have made, and continue to make, I am confident that Aviva has the necessary foundation to grow, and to generate good returns, at acceptable risks going forward. I believe for us and for our shareholders, the best is yet to come.
Overview Cash flows are up 40%, operating expenses are down 7%, operating profit is up 6% and Value of New Business (VNB) is up 13%. After a £2.9 billion loss after tax last year, Aviva has delivered a £2.2 billion profit after tax.
Aviva has an extraordinary depth of talented people who understand the core insurance businesses and this depth means we have strong core underwriting businesses. Nevertheless, we needed to strengthen some aspects of our skill set and since the start of 2013, Aviva’s senior management pool has been deepened with key appointments in finance, asset management, human resources, IT and transformation, together with numerous internal promotions.
Although we have made progress in 2013, turnarounds are rarely linear and the improving results should be tempered by the realism that the business still has issues to address and is performing nowhere near its full potential.
Expenses Our 2013 operating expense base is now 11% below the 2011 baseline with £360 million of expense reductions coming through operating profit. We are well on track to deliver our £400 million expense reduction target by the end of 2014.
Going forward, we will measure our expense efficiency using a ratio of operating expenses to revenue. The Group expense ratio for 2013 is 54% (2012: 57%). Lower expense ratios are essential for us to offer competitive products to our customers and to produce the necessary returns for our shareholders. It is my intention to show improvement in this ratio year after year.
Value of new business We measure our growth in life insurance by growth in Value of New Business (VNB), which is a good proxy for future cash flows. In 2013, VNB4 increased 13% to £835 million (2012: £738 million) with stand-out performances in France and our growth markets.
Our life cash generators in the UK and France grew VNB 4% and 39% respectively. We have achieved this through better product and business mix and we have initiatives underway to increase productivity in both countries. France in particular, has demonstrated that significant growth is possible in mature markets.
We have made a number of structural changes to our turnaround businesses – such as reducing the capital intensity of our Italian business – that should ensure more focus and better VNB growth.
Combined operating ratio In general insurance, the Combined Operating Ratio (COR) deteriorated slightly to 97.3% (2012: 97.0%), entirely due to adverse weather in the year. Floods in Alberta and Toronto Canada cost the Group £129 million and the December storms in the UK had a £60 million operating profit impact, although the impact of the UK storms was offset by better than expected weather earlier in the year. Bad weather in the UK has persisted in January and February 2014 with claims of approximately £60 million recorded. However, this is broadly in line with our weather expectations for January and February. Our overriding focus is to help our customers affected by the bad weather and our teams of loss adjustors, surveyors and claims experts – the largest in the UK – have been on hand seven days a week, offering advice and support.
Financial strength Strengthening our financial position has been a focus in 2013. Our economic capital surplus has increased to £8.3 billion, which represents a 182% coverage ratio and includes our defined benefit pension on a more conservative fullyfunded basis. We welcome the progress made by our regulators on Solvency II and the level playing field that this is likely to create.
Over the last 12 months there has been substantial focus on the intercompany loan (ICL) and 2013 has seen considerable progress in this area. As at the end of February 2014, the ICL was £4.1 billion (Q1 2013: £5.8 billion), reduced by a cash contribution of £0.45 billion and non-cash measures of £1.25 billion. We have reached agreement with the PRA on the appropriate level and plans for the ICL and will complete implementation of our plans by the end of 2015. Our target level for the loan is £2.2 billion. We plan on using a further £0.45 billion of cash and £1.45 billion of other measures to achieve the £2.2 billion target. The cash is to come from existing liquidity, putting no extra strain on our ongoing cash generation.
I would like to thank Pat Regan for his many contributions to the Group over the past four years and in particular for his support of me over the past year. I wish him well in his future career in Australia.
An essential part of the company’s transformation is embedding a higher performance culture across Aviva. We are introducing a new set of values which will guide the day-to-day actions of our 28,000 people. These values provide the framework on which decisions are being made. These values are: Create legacy, Kill complexity, Never rest and Care more.
Have we made progress? Yes, some. Is it a little faster than anticipated? Maybe.
To read more about our strategic framework, purpose and values, turn to page 19
Improve cash remittances § Cash remittances up 40% to £1,269 million
Complete the disposal of US business § Completed – proceeds higher than originally announced
Reduce intercompany loan § Balance now £4.1 billion at the end of February 2014 from £5.8 billion
Lower external leverage ratio in the medium term § Reducing external debt over the medium term – £240 million to be called in April 2014
Astra Aviva Life will be the preferred provider of a range of life insurance products to Astra and its subsidiaries.
Indonesia has 245 million people, the fourth largest population in the world, and recorded 6.2% gross domestic product growth in 2012.
It is one of the fastest growing life insurance markets globally, with low levels of insurance penetration and a rapidly expanding middle class. During the period 2002–2012 life insurance premiums grew at a compound annual growth rate of 25%.
In 2013 we set out: § A clear strategic framework of four theses: investment, distribution, customer and people
In 2014 we will: Ensure our people understand how they can each contribute to the delivery of the strategy and help us, as an organisation, to live by our values
UK Life In UK Life, our largest business, life operating profit grew 5%, operating expenses were 16% lower, remittances doubled and Value of New Business (VNB) was 4% higher. The VNB growth came despite the difficult comparator in the fourth quarter of 2012, when annuity sales were elevated ahead of the gender directive implementation.
UK General Insurance Our UK General Insurance business (UK GI) grew its underwriting result to £117 million (2012: £48 million) and the combined ratio improved to 97% (2012: 98.3%). Despite a stormy end to 2013, the UK results benefitted from relatively benign weather over the whole year. Remittances from UK GI in respect of 2013 increased to £347 million primarily due to the simplified legal entity structure and the restructure of the internal loan.
A lower Long-Term Investment Result (LTIR) of 3.2% on average assets (2012: 4.2%) brought down the UK GI operating profit to £431 million (2012: £459 million). This lower investment return is primarily due to a reduced interest rate on the intercompany loan which, although it impacts the results of the UK GI business, is offset at Group by lower internal interest costs. The LTIR is expected to continue reducing as we bring down the intercompany loan.
£241bn Aviva Investors assets under management 1 This includes £347 million remitted by UK General Insurance in January 2014 relating to activity in 2013. 2 The pro forma economic capital surplus at 31 December 2012 included the benefit of disposals and an increase in pension scheme risk allowance from five to ten years of stressed contributions.
Personal motor, home and commercial property all achieved improved combined operating ratios. Total commercial COR was 102.9% (2012: 104.0%). Within this, large commercial lines business drove an 11 percentage point improvement in the commercial property COR. However, our commercial motor COR deteriorated 6 percentage points due to unfavourable prior year development.
Aviva Investors The turnaround at Aviva Investors is, as previously communicated, likely to take time. The business had assets under management at the end of 2013 of £241 billion with £5 billion of net outflows experienced in the year.
As we continue to make progress resolving our balance sheet issues, our focus will shift to improving performance.
Solvency II & Global Systemically Important Insurers In November 2013 the EU agreed a set of rules on Solvency II that are due to come into force in early 2016. Solvency II establishes a consistent set of EU-wide capital requirements and risk management standards to increase protection for policyholders. In July 2013 Aviva was one of nine insurers designated a Global Systemically Important Insurer (G-SIIs). G-SIIs will be subject to more intensive supervision, recovery and resolution planning and will have additional capital requirements for systemically risky activities from 2019 onwards. We are engaging with local and international regulators on these consequential measures. Aviva is a traditional insurer and the designation has not had any implications for our customers.
The above costs are included in other operations and the impact of this cost is offset by a gain from the curtailment of the Irish pension scheme.
Economic capital is our preferred measure of capitalisation, especially in anticipation of a transition to Solvency II. Our IGD surplus has reduced modestly to £3.6 billion (2012: £3.8 billion), with positive capital generation more than offset by the reduction in value of in-force as a result of the legislation changes to Polish pensions.
Change from * Continuing operations ** Includes £347 million remitted in January 2014 *** Other includes Aviva Investors and Other Group activities.
The £1.3 billion of remittances are used to fund the dividend, internal and external interest payments along with central costs resulting in a neutral centre operating cash flow in 2013, improving from a deficit in 2012.
Intercompany loan As part of the structural reorganisation of the Group we moved a number of businesses from the UK GI legal entity (AIL6) to be owned by Aviva Group Holdings (AGH). These businesses were paid for by way of an intercompany loan by AIL to AGH of £5.8 billion.
Since then, we have reduced the loan balance by £1.7 billion to £4.1 billion at the end of February 2014 by repaying £450 million in cash and we have also taken actions to reduce the required capital in AIL, which has allowed us to retire a further £1.25 billion of the internal loan.
We plan to achieve our £2.2 billion targeted balance through a further cash repayment of £450 million along with other actions that will bring the loan balance down by £1.45 billion. These planned actions include the funding and de-risking of our pension scheme, along with more effective use of internal reinsurance and other actions to reduce stressed liabilities. We expect the future cash repayment to be funded from our existing central cash balance and future disposal proceeds. We do not expect these actions to have a material adverse impact on Group profitability.
Our overall plan to reduce the loan balance to £2.2 billion has been reviewed and agreed by the PRA.
External leverage External leverage remains broadly unchanged in 2013, with a debt to tangible equity ratio of 50% (2012: 50%). On an S&P basis, our leverage ratio is 32%.
We remain committed to achieving a debt to tangible capital ratio of below 40% over the medium term, and below 30% on an S&P basis, consistent with an AA rating.
Net Asset Value Our 2013 MCEV book value per share7 increased 5% to 445p, primarily due to operating earnings, the effect of the US disposal and positive investment variances, being partially offset by dividend payments, IAS19 pension movements, and integration and restructuring costs.
Our response to the UK floods Flooding gets to the heart of what insurance is all about. For thousands of families across the UK hit by unprecedented flooding and storms during this winter, the day they hoped would never happen arrived. This is the time when insurers step in.
No single person, company or government agency alone can solve flooding. However the public deserves and demands a sustainable and workable solution. That will only happen through a tangible commitment from everyone involved to play their part. During the floods we: § Dealt with tens of thousands of calls
§ A team of loss adjusters was kept on standby, able to reach every part of the country.
7 In preparing MCEV information, the directors have done so in accordance with the MCEV Principles with the exception of stating held for sale operations at their expected fair value as represented by expected sale proceeds less costs to sell.
Banks and other corporate partners Banks and our affinity brands provide a third route to market. In a number of markets, such as Spain, Turkey and Italy, this is how the majority of our products are sold. We have around 100 relationships with banks and affinity brands across our businesses.
It makes excellent business sense for us to keep our customers and our employees for the long term. There are significant costs for us in setting up a new customer and it takes time to recover these. Our strong brand and customer service are key to retaining customers.
General insurance Customers buy general insurance policies to protect themselves from loss in the event of damage to their property or injury. The premiums paid and the income generated from investing these premiums are used to pay claims. After claims have been paid and costs accounted for, the surplus can be used to strengthen the financial reserves we hold or returned to shareholders. These reserves ensure we remain a strong business, and are able to meet our financial obligations to customers.
Independent vendors (IFAs3, brokers) Many of our products have long-term financial implications and customers often prefer to seek expert advice to help them make the right decision. We work closely with IFAs and brokers to help meet the needs of these customers.
Manage assets and liabilities We carefully invest customer premiums to maintain sufficient funds to pay claims. At the same time we reduce risk by using reinsurance and wherever possible we match liabilities to assets. For example, money received for annuities is invested into assets which will continue to pay a return for the long term, such as corporate bonds.
Making sure that customers stay with us for the long term is important to the future success of our business 52% UK & Ireland and other 18% France 6% Italy 5% Spain 7% Poland and Turkey 9% Canada 3% Asia
Adjusted operating pro�t split by geography 3 An Independent Financial Adviser (IFA) is a person or organisation authorised to give independent advice.
§ There are significant opportunities for insurers to meet the developing needs of this segment and to manage their existing wealth
Our purpose and plan Our long-term strategic framework is based on four theses – investment, distribution, customer and people. The following pages outline our strategic direction.
these areas we can deepen our customer relationships, and better identify and meet more of their financial needs.
The following pages provide more detail on our Aviva values, our customer, distribution, people and investment theses. By delivering on our purpose we will make Aviva stronger for our customers, our shareholders, our communities and our people.
Three areas of focus where we will allocate resource: § Digital: We will prioritise investment in digital. This includes digital as a direct channel and also more broadly. Our aim is to increase our share of the direct digital channel and develop more effective use of data and new technology
§ Automation: We will reduce manual interventions in processes, reducing overheads by, for example, increasing auto-settled claims. This will enable us to move to a model of ongoing efficiency improvement that has significant customer benefits.
One of our greatest opportunities is to share expertise across the Aviva Group, and make it simpler for our customers to have all their insurance needs met by us, whenever and however they choose. To help achieve this we have focused our 27,700 people on our common purpose, plan and values. There is already much to be proud of. We have a respected global brand, strong customer service, leading life and general insurance businesses, comprehensive distribution channels and an increasing presence in direct and online channels.
To build on our success and further improve our customer experience we are investing in three key focus areas: digital, predictive analytics and automation. By strengthening our capability in
The investment thesis sets out why investors should choose us. There are compelling reasons for investors to invest in Aviva. We offer both cash flow and growth potential. We will present our results as simply and clearly as possible. Financial simplicity and clear financial priorities are essential for investors to make an informed decision about us.
§ We focus on progressive cash flow back to the Group centre. This is the cash that we use for paying dividends to shareholders
§ We will maintain our balance sheet strength and reduce debt levels over time.
Insurance companies’ financials have been overly complex. We have simplified our financial reporting metrics to focus on five key measures which can be seen in the adjacent table.
§ We are working hard to turn around the performance of our businesses in Italy, Spain and Ireland and to improve performance at Aviva Investors. We have made good progress in these businesses
Growth in value of new business excluding Malaysia and Sri Lanka (2013 vs 2012)
Key statistics in 2013 31.4m Customers £27.5bn Paid out in claims and benefits during 2013 £8.3bn Economic capital surplus providing security for our customers1 1 The economic capital surplus represents an estimated position. The capital requirement is based on Aviva’s own internal assessment and capital management policies. The term ‘economic capital’ does not imply capital as required by regulators or other third parties.
Historically the relationship between customers and insurance companies has sometimes lacked trust, with the challenge being levelled that insurers don’t understand or care about customers’ lives or needs. Products and communications are viewed as overly complicated, with customers seeing little tangible difference between the products and service available from different companies.
Our Relationship Net Promoter Score® measures the likelihood of a customer recommending us. It gives us a single, simple measure of customer experience which can drive improvements in customer loyalty.
§ Be bold in creating solutions that take away customers’ fears and problems
§ Be a ‘one-stop-shop’ – single conversations, logins and telephone numbers across all the products we offer
For details on our Relationship Net Promoter Score in 2013, turn to page 29
§ Making better use of our experience in other markets when developing new distribution channels.
§ Investing in digital to support the growth of our direct distribution.
Maintain diversification We plan to maintain a diversified distribution mix in each market by: § Ensuring a more balanced distribution portfolio in each country
Distribution today Insurance has always been a ‘people business’ with strong relationships existing between customers, distributors and insurers.
In each of our businesses, the spread of distribution varies from country to country. For example, in Spain the dominant distribution channel is bancassurance, in Canada most customers come to us via brokers and in Poland we have a strong direct sales force. Many UK life customers come to us via Independent Financial Advisers (IFAs) whereas UK general insurance customers are more likely to come to us directly.
Where distribution is going A number of social, technological, regulatory and economic trends are impacting the established routes to market: § In line with other industries, insurance has seen a significant increase in digitally-enabled communications, services and transactions
§ The share of distribution by brokers, IFAs, tied agents and direct sales forces in some of our markets is falling as a result of customer choice.
Where we want Aviva distribution to be § We are targeting a more balanced distribution portfolio in each of our business units
§ We have plans for more digital interaction with customers across all channels.
Achievement, potential, collaboration Supporting people to achieve their potential; enabling us to achieve outstanding performance.
We need to continue recruiting talented colleagues, improving performance management and boosting employee engagement. Our people thesis sets out how we will be different to other employers.
How we’ll be different: the Aviva values Values are the core beliefs at the heart of how we do business. They act as a guide whenever we decide on a course of action. Living our values will enable us to build a better place to work and care more about customers’ real needs.
Achievement To drive performance we will: § Recognise exceptional performance and reward outcomes
§ Ensure our goal setting and reward systems drive improved performance year-on-year
§ Ensure our performance is improved by embracing people who think and act differently
§ Use a single set of global metrics § Work and win together, readily adopting good ideas from others
In the following pages you can read more about our 2013 performance.
Sustainable cash remittances from our businesses to the Group is a key financial priority. This indicator measures the gross amount of dividends paid by businesses to the Group.
Adjusted operating pro�t – total (£m) Adjusted operating pro�t – continuing excluding Delta Lloyd (£m)
Operating profit on a continuing basis was up 6%, principally due to lower operating costs across our markets. The results also include a £129 million adverse impact from the Canadian floods in June and July 2013.
1 The Group’s accounting policy for operating profit (also referred to as adjusted operating profit) remains consistent with prior periods and is set out in ‘IFRS Financial Statements – Accounting Policies’ in the annual report and accounts.
Integration and restructuring costs – continuing (£m) Operating expenses – continuing (£m)
Managing our expense base is essential to delivering our investment thesis to improve competitiveness. Expenses include integration and restructuring costs and operating expenses. Operating expenses include claims handling costs, non-commission acquisition costs and other expenses.
Operating expenses (on a continuing basis) reduced by 7% showing the impact of cost savings initiatives across all markets. The overall 2011 baseline for the Group-wide expense reduction target is £3,366 million, meaning that £360 million of savings out of the £400 million target have been delivered by the end of 2013. On a continuing basis, integration and restructuring costs were 21% lower than 2012 and mainly include expenses associated with the Group’s transformation programme.
Value of new business is a key measure of our growth and the source of future cash flow in our life businesses. VNB is calculated on a Market Consistent Embedded Value (MCEV) basis.
General insurance combined operating ratio (COR) General insurance combined operating ratio (%) excluding Delta Lloyd and RAC
OCG measures the amount of surplus capital generated by our business and is one of the indicators we use to monitor future cash remittances from businesses to Group. OCG in our life business represents surplus on a MCEV basis, after investment in new business. For non-life business, we use after tax operating return adjusted for movements in capital requirements.
This is a measure of the financial strength of our business. A ratio over 100% represents a surplus of available economic capital over our required economic capital.
Economic capital surplus has increased by £3.0 billion in 2013, driven in part by the completion of the US, Delta Lloyd, Aseval and other disposals. In addition, there was a further contribution from profits earned in the year and positive market movements, partly offset by changes in the pension scheme and Polish pension reform.
Return on equity has increased in 2013 principally due to a reduction in opening capital as a result of a write-down of the United States life and annuities business following the announcement to sell this business.
Business ethics Performance 95% of our employees accepted our business ethics code in 2013 (2012: 88%). We aim for 100% each year and continue to work towards this goal.
CO2e data includes emissions from our buildings, business travel, outsourced data centres, water and waste to landfill. Our long-term reduction target remains a 20% reduction from 2010 to 2020.
In 2013, 21% of Group executive members were female (2012: 29%). From April 2014, Monique Shivanandan will be joining the Group executive as Chief Information Officer. We recognise that a diverse senior management team is better for business.
Our Relationship Net Promoter Score® measures the likelihood of a customer recommending Aviva. It gives us a single, simple measure of customer satisfaction which can drive improvements in customer loyalty. Our 2013 survey shows four of our businesses achieved upper quartile, two were at market average and seven were at lower quartile relative to their local markets. Encouragingly, UK General Insurance, one of our largest businesses, has moved into an upper quartile position. Our customer thesis work should improve this measure.
In 2013, we invested £6.2 million (2012: £11 million) into the community including cash, in kind donations and skills-based volunteering.
We offer: Pensions, annuities, protection, bonds and savings, investment sales, private medical insurance 12.9m1
We intend to grow our business by focusing on the needs of our customers at key times in their lives. We have championed the importance of life protection for families, and will develop digital tools to help them choose our products in a simple and informed way.
The retirement market is a crucial area of our business and one we have successfully campaigned on for several years to ensure consumers get the best deal. We work closely with our customers to help them prepare for their retirement and consider their options. This preparation includes assisting customers as they consolidate their pension savings and choose the best way to fund the different stages of their retirement.
We take care of more than £90 billion of assets on behalf of our pensions and investments customers. By managing our existing book of business efficiently we are able to offer continued value-for-money for our customers and shareholders. Customer service is paramount at Aviva, and we are continually looking at ways to improve our service by using more efficient processes and automated tools.
We are also growing our investment platform by helping advisers consolidate their clients’ pension savings.
Consumers’ increasing use of digital tools and mobile devices is providing the impetus for Aviva to develop simple, differentiated software applications which allow customers to interact with us quickly and easily at a time that suits them. In February 2014, we launched a new online portal to enable our customers to access all of their Aviva products from a single login, ensuring they receive the same simple, accessible and high-quality online experience across our businesses in the UK.
In 2013 we delivered solid results across our key financial metrics, despite a challenging macroeconomic and regulatory environment. We increased our dividend to Group to £370 million, improved life operating profits by 7%, reduced operating expenses by 18% to £607 million and improved VNB by 7%. This reflects our focus on cost efficiency and pricing discipline.
The performance of our business in Ireland has started to improve. A dividend of £70 million was paid in July 2013, life operating profit was up at £22 million from £5 million in 2012, VNB was up at £6 million and operating expenses were down 38% to £38 million. The improvements reflect cost reductions and a strategic shift in the business mix to more profitable risk products, away from low margin pensions.
The market in 2014 We are well positioned to take advantage of any market recovery and the long-term structural trends in our target markets.
We are seeing increased activity in the protection market as the mortgage market becomes more buoyant. The annuities market is in a long-term growth phase as the UK population ages, and a greater proportion of employees retire with a defined contribution pension scheme. Automatic enrolment reaches its peak period for new joiners in 2014, whilst our platform business continues to grow as investment funds move to modern platforms.
In 2013, the Department for Work & Pensions published a Workplace Pension charges consultation paper. The paper made a number of proposals relating to charge caps, adviser commission and disclosure of information. The original planned implementation date of April 2014 has now been delayed for at least a year. We expect the impact on us to be immaterial. We took action in 2000 to cap charges on our group and individual pension book, pricing at 1% or less. New schemes are currently being written at charges well below the proposed charge caps.
§ Both existing and open market customers should be given competitive annuity rates
§ Customers should take care when shopping around for an adviser.
Our businesses have performed strongly through significant market, regulatory and economic change, and are well positioned to sustain improvements in cash flow and growth.
UK & Ireland General Insurance We are the UK’s largest general insurer and a leading general insurer in Ireland, providing a wide range of products to personal and commercial customers.
Our strategy We are focused on providing our customers with products that meet their insurance needs. We will support the Group’s investment thesis by delivering cash and profitable growth through our expertise in underwriting, pricing and claims management.
We plan to improve cash flow by reducing our cost base through further efficiencies, increasing average product holdings per customer as part of our digital investment, and extending our reach through targeted growth in commercial business.
We have a diverse distribution model in UK & Ireland General Insurance, selling our products through brokers, partners and directly to customers and we continue to focus on establishing clear and compelling propositions which deliver an excellent customer experience.
Our product range will continue to be guided by customer research, and in addition we will supplement the existing insights with a broader range of customer satisfaction measurements across all distribution channels.
IFRS profit before tax 387 248 *FY13 dividend remitted from UKGI of £347 million was received by Group in January 2014.
Overall performance in 2013 has been good, with improvements seen in most of the key financial metrics that we use to measure progress against our investment thesis of ‘cash flow plus growth’.
Total expenses have fallen by 15% to £842 million (2012: £996 million). This has been driven by a substantial reduction in restructuring costs from 2012, which included the impact of the Ireland transformation programme and simplification of the UK business operation.
Operating profit is marginally lower at £489 million (2012: £502 million), with the impact of the improved underwriting performance offset by a reduction in investment return. This primarily reflects the lower rate of return received on the internal loan in 2013 compared to that previously received in 2012.
We expect further regulatory interest in the conduct of the UK general insurance market and we will continue to build on our strong relationships with the regulators to preserve the competitiveness and accessibility of the UK market.
We will deliver our strategy through maintaining our strong presence in profitable segments in France. We will conclude the turnaround of our Italian and Spanish businesses so they are well-positioned to benefit from recovery in their markets, and capitalise on growth opportunities in Poland and Turkey through a multi-product multi-channel strategy.
This is underpinned by a continuous focus on balancing cost efficiency and investment.
Life operating profit was £851 million (2012: £869 million). Excluding Aseval (which was sold in April 2013), life operating profit is up 5%. This was primarily driven by strong growth in France and Poland as margins improved and expenses reduced. General insurance operating profit increased by 14%, largely driven by the continued turnaround in Italy. Our operating expense base reduced by 3% (7% in local currency) as we continue to focus on efficiency.
We have also successfully reshaped our portfolio, disposing of a number of non-core businesses.
France: cash generator Our strategy and full year performance Our French business is one of Aviva’s main cash generators whilst also delivering profitable growth. Our strategy is focused on delivering sustainable dividends to Group through increasing profitability in our life business, targeted growth in attractive general insurance market segments, and a continuous focus on efficiency and customer service.
In France we have a market share of 4% in life and 2% in general insurance2. We have a well-diversified presence across products, channels and customer segments with over 3.2 million customers and over €80 billion of assets under management.
One of our key strengths is our diverse distribution model. We have a large owned distribution network including more than 900 tied agents and UFF (the largest IFA network with a 10% market share). We distribute our products 1 This represents unique customers and not the number of people who are covered by our policies, which is considerably more. 2 According to Fédération Française des Sociétés d’ Assurances (FFSA), 2012.
We distribute through: AFER, UFF, 900 tied agents, over 1,200 active brokers,
Employees through more than 1,200 active brokers and online through our Eurofil brand. We also have key partnerships with AFER, the largest savers’ association in Europe, and Antarius, our joint venture with Crédit du Nord.
Poland and Turkey: growth markets Our strategy and full year performance Poland and Turkey are markets that offer exciting growth opportunities. They have growing economies with relatively young and under-penetrated insurance markets. According to Swiss Re, life insurance penetration in 2012 in Poland and Turkey is 1.9% and 0.2% of GDP compared to the European average of 3.9%.
We have a direct sales force with 2,300 tied agents and a key relationship with Bank Zachodni WBK (part of the Santander group). Our life business remains centred on unit-linked and life protection sales. Whilst the protection market has seen significant growth in recent years, premium penetration rates remain low.
We will build on our existing relationships and further invest in digital and owned distribution.
Our life business generates most of our operating profit and cash in Poland. The life market remains attractive and we plan to continue to grow our life business in 2014. We will do this by increasing the productivity of our current direct sales force, launching a new branch based network with a focus on a younger demographic, selling both insurance and other financial products (including third-party mortgages and loans), and further developing innovative online solutions.
Our main distribution channel is Akbank, one of the largest private banks in Turkey, part of the Sabanci Group. We have successfully piloted a hybrid distribution arrangement using our sales force to sell in Akbank branches.
In 2013, we increased our bancassurance distribution with three new partnerships with Abank, Odeabank and Burgan Bank.
Our life and pensions business has the largest direct sales force in the market. We are focused on expanding our direct sales force and agency channel, whilst we are also exploring affinity partnerships within the Sabanci Group.
We also have a small, fully owned general insurance business in Turkey that is held for sale at the year end. In 2013 we have reduced premiums to focus on more profitable segments. Performance continues to be unsatisfactory despite 13.2 percentage points improvement in COR.
The political and economic environment in Turkey remains uncertain. However, we believe this market offers strong long-term potential for profitable growth, with its young population, good economic growth and increasing demand for financial products.
In both markets we are well-placed to make the most of the growth opportunities.
Our strategic focus has shifted from targeting volume, to preserving capital and creating value.
In Turkey, we distribute through: Akbank and other partners (1,100 branches), 700 direct sales advisors, 140 agencies 5.6m Customers
In Spain we have increased our focus on standalone protection sales and the profitability of products with guarantees, while improving the efficiency of our operations. In Italy we are exiting non-core, unprofitable distribution, improving profitability of products with guarantees and focusing on protection and general insurance.
Spain In Spain we are a strong bancassurance player, operating through five partnerships. We also have a retail network selling life, pensions and protection products through more than 1,000 brokers and Seguros Pelayo.
Our retail business has been recognised by ADECOSE (the broker and IFA association) as the best insurance company in Spain to work with in the protection and accidents category.
We are the fourth largest protection player with 7% market share1.
In April 2013, we concluded our settlement with Bankia regarding our Spanish business, Aseval. This agreement realised €608 million cash for the Group.
In Spain, operating profit was £151 million (2012: £217 million), with most of the reduction from last year driven by the disposal of Aseval in April 2013. VNB was also impacted by this disposal and the continuing tough economic conditions, reducing to £33 million for the year (2012: £56 million). Cash remittances reduced to £51 million (2012: £68 million, including a one-off dividend payment).
Italy In Italy we have a strong life presence and a profitable general insurance business. We have a successful bancassurance network including relationships with three of the country’s top five banks.
In November 2013, we reached an agreement to sell our entire 39% stake in Italian insurer Eurovita to JC Flowers. This is a significant step towards realising our strategy to focus on more capital efficient, profitable products.
Our product mix is well-balanced with unit-linked accounting for 37% of our total sales. We have re-priced our unit-linked and protection products to increase profitability. We have also led the market with the introduction of zero percent guarantee products.
In general insurance, significant progress has been made implementing pricing actions, exiting underperforming agencies and reducing cost. This has resulted in a significantly improved COR of 95.2% (2012: 99.8%).
In 2013, Italy repaid a loan to Group of €6 million and paid a dividend of €14 million. This represents a key turning point for the business which did not pay a dividend in the preceding two years.
Operating profit was stable at £169 million. For our life business VNB reduced to £15 million, particularly as lower risk-free rates impacted margins in Eurovita (which is held for sale). However, excluding Eurovita, VNB increased by £4 million in the year.
The Italian market is also expected to show early signs of recovery; economic forecasts are improving, although subject to political uncertainty.
The recent trend of general insurers adopting a more technical approach to pricing and focusing on operational efficiencies in Italy is expected to continue. We have taken pricing action in general insurance and made product changes to improve profitability. In life, customer demand for with-profit products will continue but the market is now becoming accustomed to lower/zero percent guarantee products. The protection market is expected to grow as the economy starts to recover.
In Spain, we distribute through: five bancassurance partnerships, Pelayo Vida, 1,000 brokers
In Italy, we distribute through: partnerships with three major banks and other smaller networks advisors, 600 agents and brokers 4.1m Customers
For more information on financial performance see ‘Other Information – Financial and Operating Performance’ in our annual report and accounts
Canada We are the second largest general insurer in Canada, providing personal and commercial insurance products.
Our strategy Our Canadian business is a cash generator with a strong track record of delivering cash returns to Group. This ability is founded on our absolute commitment to customers and a strong underwriting capability where our risk selection and pricing have become a source of competitive advantage. We have a focus on strengthening the performance culture and employee engagement across the business, whilst maintaining and growing strong relationships with our distribution partners.
In 2014, we aim to improve underwriting profits and cash flow as we deliver the benefits of investments in automation. We are enhancing our claims systems for personal lines to deliver a better service for customers and this will also have significant cost benefits. Commercial lines will benefit from significant investments which will deliver improved efficiency combined with greater risk selection and pricing sophistication. Several opportunities for customer growth are being pursued. In particular our growth strategy focuses on western Canada where both the economy and population are expected to grow at rates above the Canadian average.
The Canadian insurance business, unlike many other businesses in the Group, is mostly intermediated. We sell our products through a distribution network of 1,600 independent broker partners.
We continue to work closely with our broker partners to help them integrate digital technology and faster quoting tools into their businesses. This will help enable them to address increasing customer demand for choice, simplicity and self-service.
1 This represents unique customers and not the number of people who are covered by our policies, which is considerably more.
During the year total cash remitted to Group was £130 million and this is in line with the cash remitted in 2012 on a local currency basis.
Business volumes have increased during 2013, with net written premiums up 3% to £2,250 million (2012: £2,176 million, 5% growth on a local currency basis), driven by rating increases in personal and commercial property and growth in new business volumes across most lines, with particularly strong growth seen in western Canada.
The market in 2014 In 2014 we expect that industry premiums will grow at a low single digit rate. Overall premium growth is likely to be tempered by the proposed auto rate reductions in Ontario, as part of regulatory motor reform. We expect any potential impact on profitability from the lower rates to be largely offset by cost reduction measures and other initiatives that form part of the regulatory reform.
In personal property, we expect the current hard market conditions to continue due to severe and catastrophic weather events in recent summers which have negatively impacted the industry’s results.
We expect to see further market consolidation amongst both insurance carriers and brokers, reshaping our competition.
We are entering into 2014 with good momentum, with a focus on providing solutions to our customers.
Our community fund Every year Aviva donates CAN$1 million in funding to community projects through the Aviva Community Fund competition in Canada. Projects are invited to compete for funding and the winners are announced each January. Last year’s winner was the Riehl Skatepark in Pelham, Ontario, named after Isaac Riehl, a 14 year-old boy who died after being hit by a car while skateboarding. One of his classmates applied to the fund to build a skateboard park. Aviva awarded the project CAN$115,000 and the sum was immediately matched by local government. The park has now been built, and local children can skate in safety.
Asia In Asia we are focused on growth, primarily in China and South East Asia.
In order to contribute to Aviva’s future growth, our primary goal is to meet the needs of customers in China and South East Asia. We want to grow our businesses in a sustainable way, over the long term.
We are making it easier and simpler for customers to come to us direct by growing and enhancing our product portfolio, for example offering convenient protection and savings products. In China we recently launched an ‘all-in-one’ protection product. This product makes it simpler to buy comprehensive life cover as we have bundled together benefits relating to life and critical illness into one product.
We’re responding to customers’ increased use of technology and providing new ways of buying our products in China and Singapore. An example of this is our travel insurance app in Singapore which allows customers to buy travel insurance on the move, for example on their way to the airport, using their mobile devices. We are one of the first insurers in Singapore to launch an online only, direct-to-consumers general insurance offering, which we continue to strengthen.
In order to deliver more to our customers we are helping our people to reach their full potential by setting clear performance goals and providing personal growth and learning opportunities. We are focused on attracting, developing and retaining key talent. We remain strongly committed to helping our people move into and across the region, building growth and knowledge from across Aviva.
Growing VNB is the critical performance objective in Asia and we achieved 65% growth in 2013 to £91 million (2012: £55 million). Life operating profit also grew by 39% to £96 million (2012: £69 million).
China grew VNB by 74% to £16 million as a result of a focus on more profitable protection products and repricing action in the less profitable bancassurance and broker channels. A notable success in China was the launch of our ‘all-in-one’ protection product in September.
The relatively high general insurance combined operating ratio of 108.1% is due to an increase in reserves in Singapore’s motor book following a change in the reserving methodology.
We have continued to strengthen our management team in Asia. In 2013 we appointed Khor Hock Seng as Chief Executive of Aviva Asia. Khor has over 30 years’ experience of the Asian insurance market and has the requisite market and cultural knowledge that is critical to success in the region. During the year we also appointed a highly experienced human resources director, Margaret Chiu; Ken Rappold will be joining us shortly as our Asia Regional CFO; and we have appointed Trang Nguyen Ngoc as CEO of our Vietnamese business.
The combination of favourable demographic trends, low insurance penetration and the region’s rapidly expanding middle class makes Asia attractive to life insurance companies.
China is currently the fourth largest life insurance market in the world, and is expected to overtake Japan as Asia’s largest market in the next decade4. Singapore has recently been growing at an average annual growth rate of 15% for new business5.
Indonesia is one of the world’s fastest growing life insurance markets with a population of 245 million, making it the fourth largest population in the world6. It also has low insurance penetration and a growing consumer class.
In 2013 we paid a dividend to Group of £14 million (2012: £15 million). Aviva Investors fund management operating profit was £68 million (2012: £39 million) driven by higher revenues reflecting positive market movements and performance fees together with reduced operating expenses as a result of cost savings initiatives.
General insurance risk: Includes risks arising from loss events (fire, flooding, windstorms, accidents etc.) covered under the policies we underwrite.
Such operational failures may adversely impact our reputation with the public, customers, agents and regulators, and impair our ability to attract new business.
Line management in the business is accountable for risk management, which together with the risk function and internal audit form our ‘three lines of defence’ of risk management.
Having identified and measured the risks of our business, depending on our risk appetite, we either accept these risks or take action to reduce, transfer or mitigate them.
Our appetite is to retain most of our exposure to these risks due to the better risk-adjusted returns we expect to earn compared to accepting other risks, and our expertise in managing them.
This appetite is supported in part by our belief that longevity risk diversifies well against other risks we retain (i.e. has little or no correlation). While assuming credit risk enables us to take advantage of the structural investment advantages enjoyed by insurers with long-dated, relatively illiquid liabilities to earn superior investment returns.
We manage credit and equity risk through rigorous research and analysis at the point of investment, and continuous monitoring of our exposures and setting investment limits to our exposure by asset class, counterparty, geography, sector and other pre-established risk criteria, such as credit rating. We monitor longevity risk against the latest external industry data and emerging trends.
Read about how we address the risks of climate change through our corporate responsibility programmes overleaf
Achievement Recognising exceptional performance and rewarding outcomes; providing clarity and enabling accountability through the way we structure the organisation and the way we operate.
Potential Inspiring our people to dream more, learn more, do more and become more; recognising that our performance is improved by embracing people who think and act differently.
Trust and transparency Strengthening Aviva’s ethical practice and reputation, clearly demonstrating our sustainability.
Collaboration Inviting challenge and asking fierce questions with the right intent; winning together by readily adopting good ideas from others; enabling conversations that are transparent and engaging regardless of hierarchy.
Our people thesis and corporate responsibility (CR) strategy ensure that we meet our commitments to the issues which are material to our employees, the environment, and the communities in which we operate.
As the transformation of Aviva continues, we are focused on maximising our contribution to society while improving financial performance and building resilience.
We focus on attracting the best talent and making the most of their potential. We understand people need to be recognised and appreciated, so we encourage our employees to tell us how we’re doing, through regular dialogue and our annual Employee Promise Survey (EPS). Our commitment to ensuring consistency in our people management is reflected in our business standard.
Learning and development In 2013, we focused on supporting our leaders at transition points in their career, so 15% of our senior leaders enrolled in our new Leadership Transitions programme with the Saïd Business School, University of Oxford.
Ireland, Canada, Singapore and the UK now use a common Learning Management System. This enables 20,000 employees to access shared learning materials and create and track personal development plans online.
We consider our apprenticeship programme in the UK to be a credible alternative to higher education. We better aligned our recruitment advertising to the university application calendar and local schools outreach programmes. A further 17 apprentices joined our programme this year.
Women make up 51% of our employees globally. We still have some way to go to reflect that in our senior management. In 2013, the percentage of women in senior management remains at 21%, 21% of our Group Executive, and 18% of the Board were women. We’re committed to achieving 25% female Board membership by the end of 2015.
Employee engagement Our annual engagement survey helps us to understand our people and identify where we can do more. This year it told us our employees understand our vision, what is expected of them (93%), and they feel safe to speak up and challenge the way we do things. In 2013, we saw the biggest decline in pride in working at Aviva following a period of restructuring and job losses. There was also a clear request for opportunities to grow and develop their careers.
Our wider impact continued spend time hosting ‘town halls’ where they share their response to the results and commit to actions they will take as an executive. To support conversations with employees about changes in the business, we have employee consultative forums in both the UK and Europe.
Employee involvement in business performance is encouraged through a number of share plans including Save As You Earn, share matching plan and share awards are given as a long-term incentive for some senior managers.
Safety and wellbeing We provide a safe and healthy environment for all our employees, contractors and people on our premises. This is reflected in our health and safety business standard. We aim to provide a supportive working culture and we encourage a healthy work/life balance. We operate flexible working practices including career break options and employee assistance programmes.
Environment and climate change We judge the importance of environmental issues based on the impact on our customers, on direct and indirect business impacts and stakeholder concerns. Climate change is society’s most pressing environmental challenge. We have a commercial interest in making sure certain risks don’t become uninsurable and in understanding the potential long-term impacts on our investments.
Our strategy to mitigate impacts on climate change includes improving energy efficiency, investing in the low-carbon economy and understanding our indirect impacts as an asset owner. We are building environmental considerations into our products, such as Aviva Canada’s new Green Assure which offers more environmentally responsible replacements to damaged or destroyed property.
Total net emissions 0 (6,325) (8,256) Scope 1 – operational emissions from owned sources eg. gas, vehicle fleet as part of product/service.
*Limited assurance provided by PricewaterhouseCoopers LLP. ** carbon offsetting through the acquisition and surrender of emissions units on the voluntary market.
Aviva has also reported on its Scope 3 emissions which goes beyond the requirements of the 2013 Regulations.
§ District level collaboration can be more effective than action at an asset level
§ Resilience ratings could help assess and recognise improvements made by stakeholders
§ This combination of activities could preserve and enhance the insurability of assets.
In 2013, Aviva France launched a partnership with the Red Cross to improve community resilience to natural disasters. The project educates people and professional bodies on how to rebuild and work together after a natural disaster, such as a flood.
We uphold the highest stardards in managing our business and this commitment is set out in our business ethics code. In 2013, 95% of Aviva employees agreed to abide by the code (2012: 88%). We aim for 100%, with a 5% variation allowed for employees on long-term leave etc.
Financial crime Financial crime including insurance fraud costs the insurance industry billions of pounds every year. This increases costs to customers industry-wide. It’s our responsibility to manage the risks of financial crime so these extra costs are not incurred by the customer. Our financial crime business standard ensures we manage the risks to our global business and customers. Our employees receive training on financial crime prevention including anti-money laundering and fraud.
There has been no material litigation arising from cases reported through our malpractice reporting service in 2013.
As the largest private micro-insurer on the Indian sub-continent, Aviva provides low-cost insurance policies which cover the lives, health, crops and property of people on low incomes for less than £2 a year.
In 2013, for the first time, we have been able to measure the additional benefits our carbon offset have had on local communities. Two such projects have positively impacted the lives of more than 200,000 people.
Trust and transparency As a long-term business with long-term commitments, we create legacy through the jobs we create, the products and services we offer, and our investment in community infrastructure. We are focusing on making our products, services and expertise more beneficial and accessible.
In 2013, we paid out more than 99.2% of critical illness claims.
Scope 3 – Aviva influences Greenhouse gases emitted indirectly from all other sources
Leading responsible investment As a founding signatory to the UN Principles for Responsible Investment, we believe that companies conducting their business in a sustainable and responsible manner are more likely to succeed. Our dedicated Global Responsible Investment team at Aviva Investors is on-hand to work with fund managers and analysts globally and across all asset classes, to help them integrate environmental, social and corporate governance (ESG) issues into our investment decision-making and analysis, to deliver long-term shareholder value for our clients.
Promoting low carbon Aviva Investors is targeting long-term profitability with a reduced risk appetite by investing in low-carbon economy infrastructure projects. In 2013, key acquisitions included: § a 12.3 megawatt portfolio of residential photovoltaic systems, which convert sunlight directly into electricity, installed on 4,000 UK domestic houses
§ an 8.6 megawatt portfolio of residential solar photovoltaic systems installed on over 3,000 properties across the UK.
We are funding one of the UK’s largest NHS energy centres with the UK Green Investment Bank, a UK Government initiative which aims to accelerate the transition to a green economy. This will provide around £36 million for a new energy innovation centre at Addenbrooke’s Hospital in Cambridge.
In the UK investment property portfolio, we aim to have energy performance certificates in place for our entire real estate portfolio by 2018.
Community development Aviva has a rich legacy of community investment. By focusing on the issues that matter most to our customers and those that are most closely aligned to our expertise, we will maximise the value of our investment. This year our community development contribution was £6.2 million, a reduction of £4.8 million due to divestments and reshaping our community investment agenda in the UK.
Street to School We launched Street to School in 2009. It now operates in 17 countries and has helped over 800,000 street-connected children.
The third International Day for Street Children took place in April 2013 to raise awareness of the global issue. Since 2011, the number of countries participating has grown from 30 to 128.
Community: Our corporate responsibility, climate change and environment practices are aligned to the UNUDHR, ILO core labour standards and UN Global Compact principles.
Investment: We embed the Principles of Responsible Investment across all asset classes. Where human rights risks are identified in our holdings, we engage with companies to address our concerns. We do not invest in companies which manufacture cluster munitions.
Grocery delivery service Ocado minimises its insurance costs and reduces risk by putting video cameras in its delivery vans. The cameras, triggered by an accelerometer or the driver, film the road ahead and the driver, and were an important consideration when the company agreed its insurance cover with Aviva. The van-cams speed up liability decisions, which helps Ocado to control costs. They have also helped to combat ‘crash for cash’ incidents, in which fraudsters cause road accidents to make insurance claims – even leading to a successful prosecution. “The cameras encourage safer driving, which reduces our accident rate and they are great for training” says trainer, Steve Grant.
Board of directors We have a strong, experienced and diverse Board with a good balance of skills.
Front (left to right): Sir Adrian Montague CBE, Mark Wilson, John McFarlane, Patrick Regan
He has recently been appointed Chairman of FirstGroup plc (transport operator), and is a Non-Executive Director of Westfield Holdings Ltd (retail mall developer and operator) and Old Oak Holdings Ltd (financial holding company).
Previously, John was Chief Executive Officer of Australia and New Zealand Banking Group Ltd (banking), Executive Director at Standard Chartered plc (banking), Managing Director of Citicorp Investment Bank Ltd and later head of Citicorp and Citibank in the UK and Ireland (banking).
Formerly a Non-Executive Director of National Westminster Bank plc (banking), The Royal Bank of Scotland Group plc (banking), the London Stock Exchange and Capital Radio plc (media). He was also a Non-Executive Director of the Securities Association (UK securities regulator), the Auditing Practices Board (auditing regulator) and the Business Council of Australia.
He was formerly Chief Executive Officer and President of AIA Group (insurance) which he repositioned into the leading pan-Asian insurance company, improved its market valuation and successfully navigated the company through the global financial crisis and prepared it for an IPO. The company emerged as a stronger and significantly more valuable independent entity, leading to the largest IPO in corporate history in Hong Kong.
Mark has over 25 years of operational and executive experience in the insurance industry across life assurance, general insurance and asset management, in both mature and growth markets. He has extensive experience of leading major international insurance companies and has an excellent track record as a focused and inspirational business leader.
Prior to joining Aviva, Patrick had been Group Chief Financial Officer and Chief Operating Officer at Willis Group (insurance). He was also Chairman of Willis Capital Markets and Advisory, the investment banking business which he established.
Patrick was also Group Financial Controller at Royal & Sun Alliance plc (insurance), and finance and claims director for UK general insurance at AXA SA (insurance). He began his career in General Electric Capital (financial services), and at Grant Thornton (professional services).
Sir Adrian was appointed to the Board in January 2013 and became Senior Independent Director in May 2013. He is a member of the Audit, Governance and Nomination Committees.
He was also previously Chief Executive of the Treasury Taskforce and a trustee of Historic Royal Palaces.
Glyn was appointed to the Board in February 2012 and is Chairman of the Audit Committee and a member of the Risk and Nomination Committees.
He is currently Chairman of Irwin Mitchell (law firm), a Non-Executive Director of Transocean Limited (offshore drilling), Berkeley Group Holdings plc (construction) and a trustee of English National Opera.
Gay was appointed to the Board in October 2011, is a member of the Risk, Remuneration and Nomination Committees, and chaired the Governance Committee until February 2014.
She is currently a Non-Executive Director of ConocoPhillips (exploration and production), Falcon Private Wealth Ltd (wealth management), Bank Itaú BBA International Ltd (banking), and the Financial Reporting Council. Gay is also a member of the management board of the panel of finance experts of the Panel of Recognised International Market Experts in Finance and a Trustee of Wellbeing of Women (UK).
Michael was appointed to the Board in January 2010 and is Chairman of the Risk Committee and a member of the Audit and Nomination Committees.
Patricia was formerly a Non-Executive Director of Qantas Airways Ltd (airline) and National Australia Bank Ltd (NAB) (financial services). She was a Non-Executive Director at Wesfarmers Ltd (conglomerate including insurance), Suncorp-Metway Ltd (insurance and banking) and AMP Ltd (wealth management and life insurance). She was formerly Chairman of the Qantas Superannuation Fund (pension fund), Deputy Chairman of Victoria’s Transport Accident Commission (statutory insurer, Australia) and served in honorary Australian Government roles including the Australian Financial Centre Forum and the Financial Sector Advisory Council, as well as on numerous charities.
He is currently the Senior Independent Director at the Care Quality Commission (the UK’s independent hospital and adult social care regulator). Michael was a senior partner at McKinsey & Company (consultancy) where he worked for more than 30 years until July 2013. Initially an associate in the financial services practice at McKinsey, he became a partner in 1984 and senior partner in 1991 and his career focused on financial services, retail and transformation programmes.
Bob was appointed to the Board in January 2013 and is a member of the Nomination, Risk and Remuneration Committees. He is currently a Non-Executive Director and Chair of the audit committee of Assurant, Inc (US specialty insurance) and is a trustee emeritus of the Board of trustees of the US Actuarial Foundation.
Scott has a wealth of business experience in the retail sector and his understanding of customer priorities has been greatly beneficial in driving the customer agenda and excellence in customer service within the business. He has chaired the Remuneration Committee with vigour and has rebuilt the Group’s standing with its significant investors in relation to the Group’s remuneration policy. Following the issues raised at the 2012 Annual General Meeting, he led an extensive consultation exercise with the Company’s major shareholders and a significant review of the Group’s remuneration policies and practices.
David has 20 years in financial services including roles in sales, marketing, operations and business transformation at organisations including Eagle Star, Prudential and Morgan Grenfell.
Paul was the first Chief Executive of the Financial Reporting Council (FRC), the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance.
Kirstine is a lawyer and held a number of legal roles within Aviva’s legacy companies before leading the property division of General Accident and the Group legal function of CGU for eight years.
She currently sits as a director on the boards of Aviva Insurance Limited and Aviva France SA.
Christine has a significant track record of leading human resources functions and being responsible for the delivery of successful cultural change programmes across a number of businesses.
She was formerly senior vice president, Chief Human Resources Officer at Dunkin’ Brands Group; held a number of roles at Starbucks Coffee Company, culminating in being Vice President, Partner Resources, Asia Pacific and Greater China Regions, and held a number of roles at Thomas Cook Group (Canada) culminating in being Vice President Human Resources.
RSA and Fellow and past President of the Marketing Society. Amanda has over 25 years of commercial experience, including director roles at British Airways Airmiles, BT and British Gas. She is also a Non-Executive Director and audit committee member of Mothercare plc. She is on the board of the National Youth Orchestra and is a member of Lord Davies’ steering group to increase the number of women on boards. Amanda was awarded an OBE in the 2014 New Year Honours List for services to marketing.
Left to right: Khor Hock Seng, Jason Windsor, Amanda Mackenzie OBE, David McMillan, John Lister, Maurice Tulloch, Mark Wilson, Christine Deputy, David Barral, Pat Regan, Kirstine Cooper, Euan Munro, Paul Boyle OBE, Nick Amin
John joined Aviva in 1986 and is the Group Chief Risk and Capital Officer with responsibility for managing capital across Aviva, preparing the business for Solvency II and ensuring that an appropriate risk management framework is in place.
He has more than 25 years’ experience working in the UK Life business. He is an actuary and spent the first nine years of his career in a variety of senior actuarial roles across the UK Life business before becoming its Chief Actuary in 2005. In 2009 John became Finance Director of Aviva UK Life, and in July 2012 he was appointed Group Chief Risk and Capital Officer.
He was previously Group Transformation Director with responsibility for managing the implementation of Aviva’s strategic plan across the Group, refocusing and optimising the Group’s business portfolio, achieving financial strength, improving performance, and building a high-performance ethic across Aviva. He was previously Chief Executive Officer, Aviva UK General Insurance, Chief Operating Officer for Aviva UK General Insurance, Chairman of Aviva Global Services and
Non-Executive Director of Aviva Health. He began his career with Aviva as Director of Partnerships (bancassurance).
David has 12 years’ experience in management consulting with PricewaterhouseCoopers LLP where he led projects spanning mergers and acquisitions, retail banking, organisational strategy and change.
Khor joined the Group as Chief Executive Officer, Aviva Asia in March 2013. Khor was formerly Chief Executive and Managing Director of AIA’s Malaysian business and regional executive. From 2008 he successfully drove the transformation of AIA Malaysia leading the business to capitalise on development opportunities, generating strong growth in value and cash flow, despite the difficult economic environment.
Maurice joined Aviva in 1992 and is Chief Executive Officer, Aviva UK & Ireland General Insurance with responsibility for leading Aviva’s largest general insurance business.
He was previously President and Chief Executive Officer of Aviva Canada with responsibility for the strategic direction and operation of Canada’s second largest property and casualty insurer. Prior to that he was Executive Vice President and Chief Operating Officer, Aviva Ontario and specialty distribution and has held several senior management positions in the Group.
Jason has spent his entire career in financial services, building significant knowledge of insurance, asset management and banking.
When Mr and Mrs Harley downsized to a bungalow they had to downsize one of their clocks too; they replaced an inherited grandfather clock with an antique Viennese clock. In June 2013, the new clock fell off the wall and was badly damaged. Aviva arranged for the clock to be expertly repaired and it now hangs in its rightful place in the hall, keeping better time than ever. “Without insurance, I would be on edge all the time” says Paul. “You can’t always know what’s going to happen, but insurance gives you a sense of relief.”
The Board ensures through its oversight that the Group’s values are adhered to in everything we do. We care about our customers and endeavour to ensure that we provide them with products that meet their needs and that their dealings with us are undertaken in an efficient, simple and fair manner.
For the Board and Board committees this means ensuring we have high standards of internal control and risk management; that we comply with all relevant laws and regulations; that we run our businesses with integrity; that we use our capital efficiently; that we deliver on our strategy; and that we always put our customers first. If we can be consistent in all of these areas we will be able to deliver strong, sustainable returns to our shareholders.
Governance Committee During the year we reviewed the purpose and responsibilities of the Corporate Responsibility Committee and decided to significantly expand its remit. It has been renamed the Governance Committee and now covers the following areas: § Shareholder (Governance); § Regulatory and Government; § Reputation; § Customer; and § People and Community.
Board composition in 2013 1 Chairman 2 Executive directors 8 Non-executive directors
Remuneration Committee Directors’ remuneration continues to be an area of focus for investors and a hot topic in the media. Further to the work carried out following the 2012 AGM, and with the mandatory vote on remuneration policy being introduced this year, the committee has spent considerable time reviewing our remuneration policy and we engaged with institutional investors ahead of publishing the Group’s policy in this report. I believe that the policy is clear and aligns executive remuneration with the Company’s performance and shareholder outcomes. I hope that you will support the policy at this year’s AGM.
Risk Committee During the year the Group was designated a Global Systemically Important Insurer (G-SII), which brings the Group within scope of the policy requirements issued by the International Association of Insurance Supervisors (IAIS). The consequences of this include the development by July 2014 of a Systemic Risk Management Plan; the development of recovery and resolution plans; and from January 2019 additional loss absorbency capital requirements, if the Group remains a G-SII.
The committee has closely monitored the Group’s capital and liquidity position throughout the year and reviewed all significant transactions with a capital and liquidity impact ahead of Board approval. This included the sale of the US life business and actions taken to reduce leverage. The committee continues to monitor plans to achieve compliance with Solvency II and the EIOPA interim measures effective 1 January 2014.
UK Corporate Governance Code The Company has adopted the new provisions of the 2012 version of the UK Corporate Governance Code (the Code), and is compliant with all provisions. We disclose details of how we comply with the Code throughout the Directors’ and Corporate Governance Report and the Directors’ Remuneration Report in the annual report and accounts.
Dear shareholder On behalf of the Board, the Remuneration Committee is pleased to present an extract of the Directors’ Remuneration Report (DRR) for the year ended 31 December 2013.
In addition, we have consulted widely with shareholders on the contents of our new directors’ remuneration policy and, following consideration of their comments, we have made a number of amendments in this final version.
§ Build capital and financial strength – the expenditure on variable pay is very much aligned to the measurement of the financial strength of our business. The Remuneration Committee assures itself that any bonus proposed is justifable based on the business being sustainable over the long term
§ Long-Term Incentive Plan (LTIP) – an LTIP grant in 2014 with a face value of £2,940,000 which is 300% of basic salary
Continuing the shareholder dialogue We have met our major institutional shareholders and the main proxy agencies regularly in the course of 2013.
Remuneration reward review Our remuneration policy report reflects our reward framework as we will apply it for senior executive remuneration in 2014.
If that review leads to proposed changes to our remuneration policy, we expect to consult with shareholders in the latter half of 2014.
Any movement in basic salary takes account of performance. Purpose and link to strategy
Element Awards are based on performance in the year. Targets are set annually and pay-out levels are determined by the committee based on performance against those targets. Two-thirds of any bonus awarded is deferred into shares which vest after three years. Additional shares are awarded at vesting in lieu of dividends paid on the deferred shares. Unvested awards are subject to reduction for misconduct or materially adverse misstatement of accounts. Discretion remains with the committee to amend the bonus payout taking account of financial, market and other considerations. In particular the committee will review the alignment of bonus awards with the experience of shareholders.
Element Shares are awarded which vest dependent on the achievement of performance conditions over a three year period. Additional shares are awarded at vesting in lieu of dividends on any shares which vest. Unvested awards are subject to reduction in the event of misconduct or materially adverse misstatement of accounts. The committee has discretion to amend vesting downwards depending on business or individual performance or conduct.
To motivate EDs to achieve the Company’s longer-term objectives, to align ED’s interests with those of shareholders and to aid the retention of key personnel.
The level of benefit takes account of the seniority of EDs and of the local market. Ordinarily, the employer contribution to pension benefits under UK contracts does not exceed 31% of basic salary, minus an employee contribution of 8% of the ‘Scheme Specific Earnings Cap’, (£141,600 for 2013/14).
Set at a level which the committee considers is appropriate against comparable roles in companies of a similar size and complexity to provide a reasonable level of benefit. Cost would normally be limited to providing a cash car allowance, private medical insurance, life insurance, and reasonable travel benefits, including the tax cost where applicable. In addition, there may be one-off or exceptional items on a case by case basis, which would be reported in the DRR.
To provide EDs with suitable core benefits as part of a competitive remuneration package, which enables us to attract and retain the right level of talent necessary to deliver the Company’s strategy.
Element Employees who are relocated or re-assigned either in country or internationally receive relevant benefits to assist them and their dependants in moving home and settling in to the new location.
Total emoluments of All Directors 3,373 2,501 401 268 1,103 — 450 490 584 405 5,911 3,664
8 Benefits for John McFarlane include the entitlement previously agreed for him to be reimbursed against evidenced expenditure for reasonable and appropriate costs associated with his relocation to the
UK, up to a maximum of £125,000, inclusive of any tax liability, which was rolled forward to 2013. 9 Richard Karl Goeltz and Russell Walls retired from the Board with effect from 8 May 2013. The remuneration figures shown in the table are for or relate to the period during which they were a director of the Company.
Corporate governance report This Report sets out the role and activities of the Board and explains how the Group is governed.
The UK Corporate Governance Code As a UK premium listed company, Aviva seeks to comply with the UK Corporate Governance Code 2012 (the Code). Further details of how the Company has applied the Code principles, and complied with its provisions, are set out in this Report and the Directors’ Remuneration Report. Further information on the Code can be found on the Financial Reporting Council’s website at www.frc.org.uk. It is the Board’s view that the Company has been fully compliant throughout the accounting period with the relevant provisions of the Code.
The Board’s terms of reference also set out those matters that must be reported to the Board, such as senior leadership changes, significant litigation or material regulatory breaches, and explain how matters requiring consideration by the Board that arise between scheduled meetings should be dealt with.
Balance of executive and non-executive directors 1 Chairman 2 Executive directors 8 Non-executive directors
Allocation of Board agenda time 6% Succession planning, Board composition and effectiveness 25% Group strategy, business plans and performance monitoring 19% Financial reporting and controls, capital structure and dividend policy 12% Corporate governance 8% Group risk management policies, risk appetite and framework 14% Transactions 16% Other
The Board monitored the performance of the Group and its compliance with the governance framework described below through regular: Group CEO reports, which included updates on the implementation of the revised strategy and the new theses; updates on ongoing corporate transactions and disposals; reports on financial performance; changes in senior management; regulatory developments; and the control environment
CFO reports, which included the financial results and forecasts; reports on operational performance; competitor results; the Group’s operational plan; treasury activities; and progress against Solvency II
Reports and recommendations from each Board committee Presentations from business units and functions
Agreed a new strategy and the four strategic theses Agreed a new set of values and behaviours to support a culture that will enable the Group to achieve the strategy Approved an early repayment of £300 million of the intra-
Group loan to reduce internal debt Approved the final terms of the disposal of the US Life business Approved a new, sustainable dividend policy Approved the entering into of negotiations with Pt Astra
The Board held one meeting in Canada during the year to gain a deeper understanding of the operations of the Canadian business.
Directors’ attendance The Company requires directors to attend all meetings of the Board and the committees on which they serve and to devote sufficient time to the Company in order to perform their duties. The attendance of the directors at the Board meetings held in 2013 is shown in the following table and the attendance at committee meetings is shown in the committee reports.
Risk Management Framework The Risk Management Framework (RMF) is designed to identify, measure, manage, monitor and report the significant risks to the achievement of the Group’s business objectives and is embedded throughout the Group. The RMF has been in place for the year under review and up to the date of approval of the Annual report and accounts. It is codified through risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements for the Group’s worldwide operations. Further details on procedures for the management of risks are given in note 58.
Internal controls Internal controls facilitate effective and efficient business operations, the development of robust and reliable internal reporting and compliance with laws and regulations. A Group Reporting Manual including International Financial Reporting Standards (IFRS) requirements and a Financial Reporting Control Framework (FRCF) are in place across the Group. FRCF relates to the preparation of reliable financial reporting and preparation of local and consolidated financial statements in accordance with IFRS and with the requirements of the Sarbanes-Oxley Act of 2002. The FRCF process follows a risk-based approach, with management identification, assessment (documentation and testing), remediation (as required), reporting and certification over key financial reporting-related controls. Management regularly undertakes quality assurance procedures over the application of the FRCF process and FRCF controls. The Board has delegated to the Group CEO the day-to-day management of the Company and approval of specific issues up to set financial limits, including limits on revenue and capital expenditure, reinsurance spend and the settlement of claims. In turn the Group CEO has delegated some of his authority to his direct reports. There is a similar delegated authority framework in place throughout the Group.
First line Management are responsible for the application of the RMF, for implementing and monitoring the operation of the system of internal control and for providing assurance to the Audit Committee, the Risk Committee, the Governance Committee and the Board. The Group Executive members and each business unit Chief Executive Officer are responsible for the implementation of Group strategies, plans and policies, the monitoring of operational and financial performance, the assessment and control of financial, business and operational risks and the maintenance and ongoing development of a robust control framework and environment in their areas of responsibility. The CFO has established the Asset Liability Committee (ALCO) which assists him in discharging his responsibilities in relation to management of the Group’s balance sheet within risk appetite and to provide financial risk management oversight. This includes recommending financial and insurance risk appetites and limit frameworks, evaluating the asset and liability impact of strategies and business plans, financial risk oversight, monitoring and management of the Group’s capital and liquidity position, transaction risk oversight, stress and scenario testing, and identification of emerging financial risks. The Disclosure Committee is chaired by the CFO and reports to the Audit Committee. It oversees the design and effectiveness of the Group’s disclosure controls, for both financial and non-financial information, evaluates the Group’s disclosure controls and reviews and endorses the Group’s key periodic external reports, including the consolidated financial statements. The results of the FRCF process are signed off by business unit Chief Executive Officers and Chief Financial Officers and compliance with the FRCF is reported to the Disclosure Committee and the Audit Committee.
Third line The Internal Audit function provides independent and objective assessment on the robustness of the RMF and the appropriateness and effectiveness of internal control to the Audit, Governance and Risk Committees, business unit audit committees and the Board. Further information on the activities of the Internal Audit function is contained within the Audit Committee Report.
Further details on procedures for the management of risk operated by the Group are given in note 58.
The Chief Risk Officer of each business unit must certify that: The Risk function has reviewed and challenged the process supporting the business unit Chief Executive Officer’s certification, and is satisfied that it can provide reasonable assurance of the material accuracy and completeness of the business unit Chief Executive Officer’s assessment
No material gaps exist in the RMF, as it applies to the business unit
Committee membership and attendance The committee comprises the Chairman and all the Company’s NEDs. The table below shows the committee members during the year and their attendance at committee meetings: Membership and attendance
John McFarlane (Chairman)2 4 80% Glyn Barker 5 100% Patricia Cross3 1 100% Richard Karl Goeltz4 2 100% Michael Hawker 5 100% Gay Huey Evans2 4 80% Michael Mire5 2 100% Sir Adrian Montague6 4 100% Bob Stein6 4 100% Russell Walls4 2 100% Scott Wheway 5 100%
3 Patricia Cross joined the committee on 1 December 2013. 4 Richard Karl Goeltz and Russell Walls retired from the committee on 8 May 2013. 5 Michael Mire joined the committee on 12 September 2013. 6 Sir Adrian Montague and Bob Stein joined the committee on 6 March 2013.
The committee met on five occasions in 2013, of which two were additional meetings called at short notice due to new Board appointments during the year. The Group Company Secretary acts as the secretary to the committee. Members of the committee took no part in any discussions concerning their own circumstances. The chairman of the committee reported to subsequent meetings of the Board on the committee’s work and the Board received a copy of the agenda and the minutes of each meeting of the committee.
Non-executive director search The committee continued the process to refresh the Board and engaged The Zygos Partnership and Egon Zehnder to identify and review suitable candidates. Comprehensive candidate search briefs were prepared and approved by the committee and shortlisted candidates were interviewed by the Chairman, the Senior Independent Director and two NEDs. All the NEDs had the opportunity to meet with the preferred candidates before their appointment. Following regulatory approval, the Board accepted the committee’s recommendations and appointed Michael Mire and Patricia Cross as NEDs with effect from 12 September and 1 December 2013 respectively. The committee considered the cross-directorships of Patricia Cross and Michael Hawker in Macquarie Group Ltd and Macquarie Bank Ltd and was satisfied that this did not compromise their independence. The Group uses The Zygos Partnership to identify suitable non-executive director candidates for Group subsidiary companies and Egon Zehnder for senior executive recruitment.
Diversity The committee strongly believes that diversity throughout the Group and at Board and senior management level is a driver of business success. Diversity brings a broader, more rounded perspective to decision-making and risk management, making the Board and senior management more effective. During the year, candidate searches were conducted and Board appointments were made, on merit, against the criteria identified by the committee, having regard to the benefits of diversity on the Board, including gender. The committee and the Board believe that diversity also includes criteria such as nationality, race, age and experience of different businesses. With the appointment of Patricia Cross there is now 18% female representation on the Board. The Board remains committed to achieving a minimum of 25% female representation on the Board as soon as possible. Recruitment of a further NED is therefore ongoing and we aim to meet this target during 2014, which will be ahead of Lord Davies’ target of 25% by 2015. At the date of this Report, 21% (2012: 29%) of Group Executive members and 21% (2012: 21%) of senior executives in the Company were female. It is the Company’s intention to increase this number as it is recognised that a greater number of women in senior management will create a stronger talent pipeline and is better for business. There is also a policy to encourage senior executives to take up one nonexecutive position at other organisations and Amanda
Committee performance and effectiveness The Board undertook an annual review of the committee’s performance and effectiveness as part of the Board effectiveness review and the results of the review will be incorporated into the committee’s processes and activities for 2014.
Review the Group’s going concern assumptions Assess the effectiveness of the Group’s system of internal controls, including financial reporting, financial controls and the Internal Audit function
Consider and make recommendations to the Board on the appointment, reappointment, dismissal or resignation, effectiveness and remuneration of the external auditor
The committee met on 13 occasions in 2013, of which three meetings were called at short notice. During the year the committee members attended meetings of business unit audit committees in UK Life, Ireland Life, Ireland Health, Aviva Investors, Canada, France and Italy. The Chairman, Group CEO, CFO, CAO and the external auditor normally attended committee meetings. Other members of senior management were also invited to attend as appropriate to present reports. During the year the committee
Financial statements and accounting policies In conjunction with members of management and the internal and external auditors, the committee reviewed the Group’s financial announcements, the Annual report and accounts and associated documentation, the half year results and the interim management statements, and the going concern assumptions in relation to the Annual report and accounts and half year results. The committee placed particular emphasis on their fair presentation and the reasonableness of the judgement factors and appropriateness of significant accounting policies used in their preparation.
Audit Committee – allocation of agenda time 15% Financial reporting 15% External audit, auditor engagement and policy 20% Internal audit 20% Control improvements 20% Financial reporting control framework and financial reporting developments 10% Others (including governance, tax, treasury and dividends)
The committee considered a number of significant issues in relation to the financial statements including judgements, methodology and assumptions which are described below.
Commercial mortgages In the Half Year 2013 results the Company announced a net increase in the credit default allowance on the commercial mortgage portfolio by £300 million to £1.5 billion. This resulted from recognition of the risk of default on the riskier mortgages in the portfolio. The committee called an ad hoc meeting specifically to discuss this issue in July 2013 and challenged management on whether the proposed reserve increase was sufficient. The committee was satisfied with management’s review. The committee agreed the net increase in allowance was appropriate based on current facts. At Full Year 2013 the total allowances for commercial mortgage defaults was £1.3 billion (2012: £1.2 billion including an implicit investment margin of £0.2 billion) against the risk of default on our riskier mortgages. The value of the commercial mortgage portfolio at 31 December 2013 was £11.1 billion. The allowance was reassessed by the committee in February 2014 and the committee was satisfied that the allowance remained appropriate. Given the significance of the estimate the committee will continue to monitor this issue closely.
Insurance liabilities The committee reviewed the key assumptions used in calculating long-term business contract liabilities, including the annuitant mortality assumptions and the credit default allowance on the corporate bond portfolio adopted by the UK Life business. The committee was satisfied with management’s review of these assumptions. The Group’s general insurance reserves were reviewed including understanding the key developments, risks and uncertainties and providing appropriate challenge. The committee was satisfied with management’s analysis and believes that the methodology and assumptions applied in calculating the year end liabilities for that business are appropriate.
Aviva Investors In 2013 we found evidence of improper allocation of trades in fixed income securities in Aviva Investors which occurred between 2006 – 2012 and a thorough investigation was carried out by Internal Audit. The committee considered the valuation of the provision for potential client compensation arising from these breaches of the dealing policy.
Valuation of investments The Committee has reviewed management’s judgements on the Group’s fair value hierarchy of disclosures. The Committee approved management’s proposal to change the classification level for financial assets, in particular, commercial mortgage assets which have been classified as Level 3. Further detail is contained in note 23.
Internal audit Internal Audit reports to the Board (primarily via the Audit Committee) and to management on the effectiveness of the Company’s system of internal controls and the adequacy of this system to manage business risk and to safeguard the Group’s assets and resources.
Internal audit charter and business standard The charter sets out the purpose, functions, scope and responsibilities of the Internal Audit function and how it maintains independence from the first and second line management of the Group. The three main functions of Internal Audit are to: Assess and report on the effectiveness of the design and operation of the framework of controls which enable risk to be assessed and managed
The Internal Audit business standard sets out the requirements for management across the Group to support Internal Audit in achieving its objectives. It requires businesses to design and operate processes and controls to satisfy the mandatory requirements in the standard based on the size and complexity of the business and the nature of the risks and challenges it faces. Any breaches of the standard must be reported to the CAO and others as appropriate.
Annual plan and focus of reviews in 2013 Internal Audit’s 2013 annual plan was reviewed and approved by the committee. Planned reviews reflected the priorities in the Group’s 2013-2015 Operational Plan and were prioritised following a risk-based assessment of the business and a review against the Group’s risk policies. The reviews carried out covered an extensive sample of controls over all risk types, business units and regulated entities and covered ‘business as usual’ activities and an assessment of change programmes. Reviews included the implementation of corporate decisions; maintenance of adequate financial strength and resilience; the effectiveness of governance, decision making and risk management; treating customers fairly; the availability, security and recoverability of IT systems; and the improper allocation of trades in fixed income securities at Aviva Investors. The committee received quarterly reports from the CAO on audit reviews carried out, management’s response to the findings and progress in addressing identified issues. The CAO prompted management to increase focus throughout the year on closing overdue audit issues and on areas where further improvement is still required.
Effectiveness of the internal audit function The committee commissioned an independent review of the effectiveness of the Internal Audit function against the standards published by the Institute of Internal Auditors (IIA). Overall, the independent reviewers found that the Internal Audit function complies with the IIAs standards, code of ethics and conduct and is fit for purpose. The function demonstrates expertise in insurance governance, and risk and control. A number of recommendations were made as to how the function could develop further, including enhancing the use of data analytics and related IT tools, and developments to the audit reports such as including management’s view of risks and controls. The Internal Audit function intends to implement all of the recommendations and the committee will oversee progress.
Chief Audit Officer The CAO had direct access to the Board Chairman, the committee chairman and the committee members. The committee worked with the Group CEO to determine the CAO’s objectives and evaluate his levels of achievement, and to approve the CAO’s remuneration. His annual performance related bonus was unconnected to the Group’s financial performance. During the year the CAO’s reporting line changed from the CFO to the Group CEO. Whilst he is a member of the Group Executive, the committee is satisfied that the CAO’s independence has been maintained as adequate safeguards are in place to maintain the independence, authority and standing of the CAO and the Internal Audit function. The committee remained satisfied that the Internal Audit function had sufficient resources during the year to undertake its duties.
Committee performance and effectiveness The committee undertook an annual review of its performance and effectiveness which concluded that overall the committee was effective in carrying out its duties. The committee agreed that its priorities for 2014 should include: monitoring implementation of compliance with the requirements of being classified as a Global Systemically Important Insurer; continuing to monitor improvements in the control environment; greater oversight of management actions to reduce operational risk; and increasing the level of reporting from business unit audit committees.
Risk Committee report Committee role and responsibilities The purpose of the committee is to assist the Board in its oversight of risk within the Group through reviewing the Group’s risk appetite and risk profile in relation to capital and liquidity, the effectiveness of the Group’s Risk Management Framework (RMF), the methodology and assumptions used in determining the Group’s capital requirements, and the monitoring of prudential regulatory requirements. The committee also works with the Remuneration Committee to ensure that risk management is properly considered in setting the Group’s remuneration policy. During the year the committee oversaw all aspects of risk management in the Group, including market, credit, liquidity, insurance and operational risk (including franchise risk), and their impact on both the financial and non-financial goals of the Company. In late 2013, oversight of franchise risk was transferred to the Governance Committee.
Review and challenge the Group’s forward-looking risk profile against its risk strategy and capital and liquidity risk appetite and review the drivers of changes, if any, in the Group’s risk profile
Review the design, completeness and effectiveness of the RMF relative to the Group’s activities
Assess the adequacy and quality of the risk management function and the effectiveness of risk reporting within the Group
Review the Group’s investment risk strategy, credit limit framework and approve individual counterparty exposures in excess of limits
Review and approve risk policies Satisfy itself that risks to the Group’s business plan and any capital implications are adequately identified and assessed by management and that appropriate mitigating actions are in place
Review relationships with prudential regulatory authorities in relevant jurisdictions and developments in the prudential regulatory environment, and review significant actual or potential breaches of prudential regulation and actions being taken to address these
Revised committee terms of reference were adopted in December 2013 following an annual refresh. The full terms of reference for the committee can be found on the Company’s website at www.aviva.com/terms-of-reference, and are also available from the Group Company Secretary.
2 Michael Mire joined the committee on 12 September 2013. 3 Bob Stein joined the committee on 6 March 2013. 4 Russell Walls retired from the committee on 8 May 2013.
The committee met on seven occasions in 2013. The Chairman of the Company, Group CEO, CRCO, CFO and the CAO normally attended all committee meetings. Other members of senior management were also invited to attend as appropriate to present reports. The committee has held regular private sessions with the CRCO and the CAO to enable them to raise any matters of concern to them without any other members of management present. The Group Company Secretary acted as the secretary to the committee. The chairman of the committee reported to subsequent meetings of the Board on the committee’s work and the Board received a copy of the agenda and the minutes of each meeting of the committee. The committee chairman also sat on the Audit Committee throughout the year and the Remuneration Committee until 8 May 2013 to ensure that risk considerations were fully reflected in the decisions of those committees. Bob Stein is currently a member of both the Risk Committee and the Remuneration Committee, Glyn Barker is a member of the Risk Committee and Chairman of the Audit Committee and Michael Mire is a member of the Risk Committee and the Governance Committee which ensures the committee is linked to the work of the other Board committees. In performing its duties, the committee had access to the services of the CRCO, CAO, the Group Company Secretary and external professional advisers. The chairman followed a programme of attending meetings of business unit risk committees and, during the year, members of the committee attended meetings in the UK Life, Ireland Life and Healthcare, Canadian, French and Italian business units. In November 2013, the committee chairman hosted a two-day conference for the chairmen of the risk and audit committees of the Group’s principal subsidiaries and their Chief Risk Officers. The agenda included discussions on what it means to be a Global Systemically Important Insurer (GSII); Solvency II; raising the bar on internal controls and moving to integrated assurance; key operational risks and management’s response to them; cyber crime; conduct risk; and what makes an effective audit or risk committee. The committee chairman, with the CRCO, holds a series of semi-annual conference calls with the major subsidiary board risk committee chairmen and their Chief Risk Officers, to ensure that there are no significant risks occurring in the business that have not been raised through normal reporting routes.
External environment Financial market conditions during 2013 were more benign than recent years, benefiting from the maintenance of expansionary monetary policies followed by central banks across a number of economies. Whilst some Western economies are beginning to grow, high levels of debt will continue to act as a brake on growth and the low interest rate environment compared to historic norms is likely to persist in the immediate future at least. There are, however, still several sources of macroeconomic and
Committee activities during 2013 The work of the committee followed an agreed annual work plan, which evolved throughout the year in response to the changing macro-economic and regulatory environment and changes in the Company’s strategy. The Group Company Secretary and the CRCO assisted the committee chairman in planning the committee’s work, and ensured that the committee received information and papers in a timely manner. The chart below shows how the committee allocated its time during 2013.
Risk Committee – allocation of agenda time 22% Risk appetite, risk management and risk reporting 23% Group capital, liquidity management and stress testing 10% Economic Capital Infrastructure Programme oversight 10% Business unit and functional updates 8% Risk review of Group plan 12% Regulatory and governance 10% Asset portfolio monitoring 5% Other (including internal audit)
Actions included the sale of the US Life business, sale of the Group’s remaining interest in Delta Lloyd N.V., and actions to reduce the Group’s internal and external debt. The committee received regular one-year liquidity forecasts and closely monitored the Group’s ability to satisfy the 2012 final, 2013 interim and 2013 final dividend. The committee requested that management develop a plan to address the potential capital impact of future events such as being classified as a GSII and the transition to Solvency II and what contingent actions could or should be taken. During the year the committee recommended to the Board, approval of a new unguaranteed Euro Commercial Paper Programme and issuance of new hybrid debt and considered options to reduce the Group’s debt.
Risk management and governance The committee had an ongoing programme of receiving reports from local risk committee chairmen or Chief Executive Officers on the risk environment and issues arising in the Group’s businesses and in respect of particular product lines. During the year, the committee received reports on the businesses in Italy, Spain, France, the UK and the European region as a whole, and in respect of the Corporate and Speciality Risks business in the UK and business lines in UK Life, Ireland Life, Poland, France and Aviva Investors. The committee also received updates on issues concerning IT and data security and UK with-profits policies. The committee received regular reports from the CRCO and monitored the effectiveness of the Company’s RMF which is described in more detail in the Corporate Governance Report and in note 58. The committee assessed a customer culture review carried out at the Group centre and in the UK Life and General Insurance businesses and requested that the Risk function review whether customer risks had been appropriately identified in business plans, that sufficient processes were in place to monitor such risks and that customer risks be included in the strategic planning process. The committee reviewed an internal assessment of the adequacy, quality and effectiveness of the Risk and Compliance functions and was satisfied that overall, the function was effective although the level or quality of resource needed to be increased in some business units.
Fraud and financial crime The committee reviewed compliance with controls against financial malpractice including fraud, and the arrangements for employees to report in confidence any concerns about lack of probity (whistleblowing). It oversaw the roll out of a financial crime plan and an upgraded system to screen for sanctions and politically exposed persons.
Gay Huey Evans (Chairman) 6 100% Michael Mire2 1 100% Sir Adrian Montague3 4 100% Scott Wheway 6 100%
2 Michael Mire joined the committee on 12 September 2013. 3 Sir Adrian Montague joined the committee on 6 March 2013.
Committee activities during 2013 Whilst they are not mutually exclusive, the following categories have been developed for the committee meeting agendas to ensure that sufficient coverage is given to each element of the committee’s remit: Shareholder (Governance); Regulatory and Government; Reputation; Customer; People and Community. The following chart shows how the committee allocated its time during 2013, with key activities set out below:
Reputation The committee received regular reports concerning the reputational risks affecting the Group. The committee considered the potential reputational issues arising from the Group’s conduct and franchise risks and discussed relevant developments in the media and in the area of public policy which could impact the Group.
Community The committee reviewed and approved the Group CR strategy for 2014-2016 and monitored progress made by the Group’s businesses against each of the CR non-financial metrics. Updates were given on the Street to School programme and health and safety within the Group.
Assurance In respect of the 2013 reporting year, independent assurance on the Group’s CR and related activities and reporting was provided to the committee by PwC. Members of the committee were interviewed as part of the external assurance process and the subsequent report and management’s action plan were reviewed by the committee to assist in strengthening and setting the future direction of the CR programme.
Corporate Responsibility Report The committee approved the Group’s CR non-financial metrics that can be found in the Strategic Report and the Company’s CR report that can be found at www.aviva.com/corporateresponsibility /reports.
Committee performance and effectiveness The committee undertook an annual review of its performance and effectiveness which concluded that overall the committee was effective in carrying out its duties. Further work will be undertaken in 2014 to develop the work of the committee in view of its expanded remit.
Other statutory information The directors submit their Annual report and accounts for Aviva plc, together with the consolidated financial statements of the Aviva group of companies, for the year ended 31 December 2013. The Directors’ Report required under the Companies Act 2006 comprises this Directors’ and Corporate Governance Report, the Directors’ Remuneration Report and the following disclosures in the ‘Our wider impact’ section of the Strategic report: Greenhouse gas emissions Health and safety practices Employment of disabled persons Employee involvement
The Management Report required under Disclosure and Transparency Rule 4.1.5R comprises the Strategic report, Shareholder Information (which includes the risks relating to our business), and details of material acquisitions and disposals made by the Group during the year in note 4.
Results The Group’s results for the year are shown in the consolidated income statement on page 124.
Dividends The directors are recommending a final dividend of 9.4 pence per ordinary share (2012: 9.00 pence), which, together with the interim dividend of 5.6 pence per ordinary share paid on 15 November 2013 (2012: 10.00 pence), produces a total dividend for the year of 15.0 pence per ordinary share (2012: 19.00 pence). The total cost of ordinary dividends paid in 2013 was £429 million (2012: £757 million). Subject to shareholder approval at the 2014 AGM, the final dividend for 2013 will be paid on 16 May 2014 to all holders of ordinary shares on the Register of Members at the close of business on 4 April 2014 (approximately five business days later for holders of the Company’s American Depositary Receipts).
Political donations At the 2013 AGM, shareholders passed a resolution, on a precautionary basis, to authorise the Company to make political donations and/or incur political expenditure (as such terms are defined in sections 362 to 379 of the Companies Act 2006), in each case in amounts not exceeding £100,000 in aggregate. As the authority granted will expire on 30 April 2014, renewal of this authority will be sought at this year’s AGM. Further details are available in the Notice of AGM. The definitions of political donations and political expenditure used in the Companies Act 2006 are broad in nature and this authority is sought to ensure that any activities undertaken throughout the Group, which could otherwise be construed to fall within these provisions, can be undertaken without inadvertently infringing them. It is not the policy of the Company to make donations to EU political organisations or to incur any other political expenditure. Aviva has not made any political donations during 2013.
Disclosure of information to the auditor In accordance with section 418 of the Companies Act 2006, the directors in office at the date of approval of this Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor, PwC, is unaware and each director has taken all steps that ought to have been taken as a director to be aware of any relevant audit information and to establish that PwC is aware of that information.
Related party transactions Details of related party transactions are disclosed in note 61 which is incorporated into this Report by reference.
Articles of association Unless expressly stated to the contrary in the article of association, the Company’s articles of association may only be amended by special resolution of the shareholders. The Company’s current articles of association were adopted on 3 May 2012.
State whether applicable IFRS as adopted by the EU have been followed, subject to any material departures disclosed and explained in the financial statements
Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business
The Strategic Report and the Directors’ and Corporate Governance Report include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces
The majority of the Board comprises independent non-executive directors who are deemed independent under the Code and meet the independence criteria in the NYSE rules.
The chairman should hold meetings with the non-executive directors without the executive directors present.
The Company has a Nomination Committee and a Governance Committee. The Board as a whole is ultimately responsible for the corporate governance of the Group and oversees this through reports to the Board and its committees.
Dear shareholder On behalf of the Board, the Remuneration Committee is pleased to present the Directors’ Remuneration Report (DRR) for the year ended 31 December 2013.
Responding to new requirements Aviva’s 2013 DRR reflects the new reporting requirements introduced by the Department for Business, Innovation & Skills (BIS) regulations. We have endeavoured to reflect the letter and the spirit of those new requirements in this report. We have drawn on the guidance produced, notably by the GC100 and Investor Group, in its preparation. In addition, we have consulted widely with shareholders on the contents of our new directors’ remuneration policy and, following consideration of their comments, we have made a number of amendments in this final version. We believe our DRR is a full disclosure of our policies and practices in line with the requirements of the new regulations. However, this is the first year in which companies are reporting in this form and we are aware that new best practice will emerge. We will review the results of this reporting round prior to our next DRR and will aim to meet what will be evolving good practice.
Build capital and financial strength – The expenditure on variable pay is very much aligned to the measurement of the financial strength of our business. The Remuneration Committee assures itself that any bonus proposed is justifiable based on the business being sustainable over the long term
Annual bonus – a 2013 bonus of 112.5% of basic salary, equivalent to £1,102,500 was approved. The basis for this decision is set out in the remuneration report. The committee will continue to assure itself that there is strong alignment between bonus outcomes for our Group CEO and other senior staff and shareholder experience
LTIP – an LTIP grant in 2014 with a face value of £2,940,000 which is 300% of basic salary.
Basic salary To provide core market related pay to attract and retain the required level of talent.
Annual review, with changes normally taking effect from 1 April each year. The review is informed by: Relevant pay data including market practice among the 25 FTSE listed companies either side of Aviva in terms of market capitalisation
The committee is aware of shareholder concern on ED basic salary ratcheting and would consult on proposed increases if they were significantly to exceed the general level of increases for UK staff.
Awards are based on performance in the year. Targets are set annually and pay-out levels are determined by the committee based on performance against those targets. Two-thirds of any bonus awarded is deferred into shares which vest after three years. Additional shares are awarded at vesting in lieu of dividends paid on the deferred shares. Unvested awards are subject to reduction for misconduct or materially adverse misstatement of accounts. Discretion remains with the committee to amend the bonus payout taking account of financial, market and other considerations. In particular the committee will review the alignment of bonus awards with the experience of shareholders.
Performance is assessed against a range of relevant financial, employee and customer targets and personal objectives as set by the committee. For example in 2013 the financial KPI’s were: Net capital returns IFRS profit before tax MCEV value of new business Combined operating ratio Total expenses
Financial performance is the major factor in considering overall expenditure on bonuses.
Shares are awarded which vest dependent on the achievement of performance conditions over a three year period. Additional shares are awarded at vesting in lieu of dividends on any shares which vest. Unvested awards are subject to reduction in the event of misconduct or materially adverse misstatement of accounts. The committee has discretion to amend vesting downwards depending on business or individual performance or conduct.
The level of benefit takes account of the seniority of EDs and of the local market. Ordinarily, the employer contribution to pension benefits under UK contracts does not exceed 31% of basic salary, minus an employee contribution of 8% of the “Scheme Specific Earnings Cap” (£141,600 for 2013/14).
Approach to recruitment remuneration On hiring a new ED, the committee would align the remuneration package with our remuneration policy. In determining the actual remuneration for a new ED, the committee would consider the package in totality, taking into account elements such as the likely contribution of the individual, local market benchmarks, remuneration practice, and the existing remuneration of other senior executives. The committee would ensure any arrangements agreed would be in the best interests of Aviva and its shareholders. It would seek not to pay more than necessary to secure the right candidate. The committee may make awards on hiring an external candidate to ‘buyout’ remuneration arrangements forfeited on leaving a previous employer. In doing so the committee would take account of relevant factors including any performance conditions attached to these awards, the form in which they were granted (e.g. cash or shares) and the timeframe of awards. It would seek to structure buyout awards on a “like for like” basis when compared to awards forfeited. The maximum level of variable pay which could be awarded to a new ED, excluding any buyouts, would be in line with the policy set out above and would therefore be no more than 500% of basic salary (150% of basic salary annual bonus opportunity and 350% of basic salary as the face value of a LTIP grant). On hiring a new non-executive director, the committee would align the remuneration package with the remuneration policy for NEDs, outlined below in table 3, including fees and travel benefits.
Illustration of the policy The charts below illustrate how much EDs could earn under different performance scenarios in one financial year: Minimum – basic salary, pension or cash in lieu of pension and benefits, no bonus and no vesting of the LTIP Target – basic salary, pension or cash in lieu of pension, benefits, bonus of 75% of basic salary and 50% vesting of the LTIP Stretch – basic salary, pension or cash in lieu of pension, benefits, stretch bonus of 150% of basic salary and 100% vesting of the LTIP
Employment contracts and letters of appointment ED employment contracts and NED letters of appointment are available for inspection at the Company’s registered office during normal hours of business, and at the place of the Company’s 2014 AGM from 10.45 am on 30 April 2014 until the close of the meeting. The key employment terms and conditions of the current EDs, and those who served during the year, as stipulated in their employment contracts, are set out in table 2 below.
Private medical insurance Private medical insurance is provided for the ED and his family. The ED can choose to opt out of this benefit or take a lower level of cover. However, no payments are made in lieu of reduced or no cover.
Non-compete During employment and for six months after leaving without the prior written consent of the Company.
Date current contract commenced: 1 January 2013 22 February 2010 2 December 2011
Consideration of wider employee pay and shareholder views When determining the remuneration policy and arrangements for our EDs, the committee considers: Pay and employment conditions elsewhere in the Group to ensure that pay structures are suitably aligned and that levels of remuneration remain appropriate. The committee reviews levels of basic salary increases for other employees and executives based in the UK. It reviews changes in overall bonus pool funding and long term incentive grants. The committee does not directly consult with employees on pay issues but it does consider feedback from the employee opinion survey. The committee also takes into account information provided by the HR function and external advisers
Table 3: Remuneration policy for non-executive directors – overview Element Purpose and link to strategy Operation Maximum opportunity Performance measures
The Company’s articles of association provide that the total aggregate remuneration paid to the Chairman of the Company and NEDs will be determined by the Board within the limits set by shareholders. The current aggregate limit of £2 million was approved by shareholders at the Company’s 2012 AGM.
Reasonable costs of travel and accommodation for business purposes are reimbursed to NEDs. On the limited occasions when it is appropriate for a NED’s spouse or partner to attend, such as to a business event, the Company will meet these costs. The Company will meet any tax liabilities that may arise on such expenses.
Expenses Reimbursement of travel and other expenses reasonably incurred in the performance of their duties. Also, in respect of the Chairman, the committee rolled forward to 2013 the entitlement previously agreed for him to be reimbursed against evidenced expenditure for reasonable and appropriate costs associated with his relocation to the UK, up to a maximum of £125,000, inclusive of any tax liability.
Glyn Barker 3 May 2012 AGM 2014 Patricia Cross 1 December 2013 AGM 2014 Richard Karl Goeltz1 3 May 2012 AGM 2013 Michael Hawker 3 May 2012 AGM 2014 Gay Huey Evans 3 May 2012 AGM 2014 John McFarlane 3 May 2012 AGM 2014 Michael Mire 7 August 2013 AGM 2014 Sir Adrian Montague 15 January 2013 AGM 2014 Bob Stein 15 January 2013 AGM 2014 Russell Walls2 3 May 2012 AGM 2013 Scott Wheway 3 May 2012 AGM 2014 Notes 1 Richard Karl Goeltz retired from the Board with effect from 8 May 2013. 2 Russell Walls retired from the Board with effect from 8 May 2013. 3 The dates shown above reflect actual appointment dates where agreed following signature of the letter as all appointments are subject to regulatory approval.
Annual remuneration report This section of the report sets out how Aviva has implemented its remuneration policies for directors in the course of 2013 and how the remuneration policy will be implemented for 2014. This is in accordance with the requirements of the Large & Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended). Where new requirements have been introduced, Aviva has taken account of the guidance produced by the GC100 and Investor Group and emerging good practice.
Alignment of Group strategy with executive remuneration The committee considers alignment between Group strategy and the remuneration of its EDs is critical. Our remuneration policy provides market competitive remuneration, and incentivises EDs to achieve both the annual business plan and longer term strategic objectives of the Group. Significant levels of deferral and a shareholding requirement align EDs’ interests with those of shareholders and aid retention of key personnel. As well as rewarding the achievement of objectives, variable remuneration can be reduced potentially to zero if performance thresholds are not met.
Scott Wheway (Chairman) 10 100% Michael Hawker2 4 100% Gay Huey Evans3 9 90% Bob Stein4 7 100% Patricia Cross5 1 100% Notes 1 This shows the percentage of meetings which the committee member attended during the year whilst a member of the committee. 2 Michael Hawker resigned from the committee with effect from 8 May 2013. 3 Gay Huey Evans was not able to attend one of the additional committee meetings. 4 Bob Stein joined the committee with effect from 6 March 2013. 5 Patricia Cross joined the committee with effect from 1 December 2013 and became Chairman of the committee on 19 February 2014.
Table 6: Attendees of the committee during 2013 Attendee Position Comments
In addition to the attendees listed above, Sir Adrian Montague and Michael Mire as NEDs, attended at least one committee meeting during the year as part of their induction following their appointment as a NED. They were not present when their own remuneration was being discussed. During the year, the committee received advice on executive remuneration matters from Deloitte LLP which is a member of the Remuneration Consultants Group and adheres to its Code of Conduct. Deloitte LLP was appointed by the committee as its adviser with effect from 4 December 2012 following a competitive tender process and reappointed with effect from 4 November 2013 following an assessment by the committee of the quality of the advice provided. In addition, the Group received advice on remuneration matters, taxation and other consulting services (including advice in relation to Solvency II and the Economic Capital Infrastructure Programme (ECIP)) from Deloitte LLP and from Linklaters LLP on remuneration matters during the year. Deloitte LLP were paid fees totalling £196,980 during the year for the provision to the committee of advice on general HR and remuneration matters, benchmarking advice on market practice and views on shareholder perspectives. Fees were charged on a time plus expenses basis. The committee reflects on the quality of the advice provided and whether this properly addresses the issues under consideration as part of its normal deliberations. The committee is satisfied that the advice received during the year was objective and independent.
Remuneration Committee – allocation of agenda time 5% Shareholder liaison 29% Remuneration policy/Governance/ Regulatory issues/Reporting 28% Share plans operation/Performance testing/Targets 38% Senior management objectives/Remuneration/ Succession planning
Annual bonus The maximum annual bonus opportunity will remain at the levels set out in the policy section of this report. Annual bonus performance measures and weightings will be broadly in line with those for 2013. Whilst we are not disclosing 2014 bonus targets due to commercial sensitivity, we will provide an explanation of 2014 bonus payments together with performance against measures and targets in the 2014 report. This is in line with the approach we have taken this year.
Single total figures of remuneration for 2013 – executive directors (audited information) Table 8 below sets out in the required form the total 2013 remuneration for each of our EDs who served with the Company during 2013.
Table 8: Total 2013 remuneration – Executive Directors Basic salary Benefits Annual bonus4 LTIP5 Pension7 Total
Executive Directors Mark Wilson1 980 — 239 — 1,103 — — — 293 — 2,615 — Patrick Regan2 720 699 37 34 — — — 4906 199 193 956 1,416 Former executive director Trevor Matthews3 311 720 16 85 — — 450 — 92 212 869 1,017
Total emoluments of executive directors 2,011 1,419 292 119 1,103 — 450 490 584 405 4,440 2,433
Additional disclosures in respect of the single total figure of remuneration table (audited information) Benefits The benefits disclosure includes the cost where relevant of private medical insurance, life insurance, accommodation, travel and car benefits. In the case of Patrick Regan this also includes benefits resulting from the Aviva Savings Related Share Option Scheme (SAYE Scheme), as described below, which has been valued based on the monthly savings amount (£250) and the discount provided (20%). All the numbers disclosed include the tax charged on the benefits, where applicable. As disclosed in the 2012 DRR, Mark Wilson was able to claim benefits of £200,000 inclusive of benefit-in-kind charges, against appropriate receipts or other evidence of expenditure, in respect of his relocation from Hong Kong to the UK.
Net capital returns 10 13.75 12.47 IFRS profit before tax 7.5 20 20.00 MCEV value of new business 3.5 7.75 7.75 Combined operating ratio 1.5 3.5 0 Total expenses 2.5 5 5 Customer 5 10 2.32 Employee 5 10 0
One third of the bonus award for Mark Wilson will be delivered in cash, with two thirds being deferred into shares for three years. As reported in the 2012 DRR, the Committee agreed with shareholders that it would consider additional “underpin” metrics in 2012 and 2013 once bonuses had been calculated to assure themselves of continuing alignment between bonuses paid and shareholder experience. Those metrics were measures of Economic Value Added, Economic Capital and TSR. The Committee considered Aviva’s performance against those metrics for 2013 and was satisfied that the progress made did not require any adjustment to bonus outcomes.
All employee share plans EDs are eligible to participate in two HMRC approved all employee share plans on the same basis as other eligible employees. These plans include a partnership share element of the all employee share option plan (AESOP) under which eligible employees can invest up to the statutory limits, currently £125 per month, out of their gross salary in the Company’s ordinary shares. A matching element was introduced in April 2013 through which the Company matches every purchased share with two matching shares for the first £40 of a participant’s monthly contribution. Matching shares are subject to forfeiture if the purchased shares are withdrawn from the AESOP within three years of purchase, as long as the participant remains employed by the Company. From May 2013 participants were also eligible to receive Dividend Shares through the AESOP. Shares awarded to, or investments made by, EDs through the AESOP are included in table 20 of this Report. The Aviva 2007 SAYE Scheme allows eligible employees to acquire options over the Company’s shares at a discount of up to 20% of their market value at the date of grant. In order to exercise these options, participants must have saved through a 3, 5 or 7 year HMRC approved savings contract, subject to a statutory savings limit, currently £250 per month. From 2012, only 3 and 5 year contracts have been offered. Details of options granted to EDs under these schemes are included in table 23.
Total emoluments of NEDs 1,362 1,082 109 149 1,471 1,231 Notes 1 Benefits for John McFarlane include the entitlement previously agreed for him to be reimbursed against evidenced expenditure for reasonable and appropriate costs associated with his relocation to the UK, up to a maximum of £125,000, inclusive of any tax liability, which was rolled forward to 2013. 2 Richard Karl Goeltz and Russell Walls retired from the Board with effect from 8 May 2013. The remuneration figures shown in the table are for or relate to the period during which they were a director of the Company.
Table 14: 2013 LTIP ROE targets Achievement of ROE targets over the three-year performance period Percentage of shares in award that vests based on achievement of ROE targets
Less than 41% 0% 41% 10% Between 41% and 50% Pro rata between 10% and 50% on a straight line basis 50% and above 50%
ROE is calculated as the IFRS profit after tax and non-controlling interest, excluding the impact of investment variances and economic assumption changes, over average IFRS equity (excluding pension scheme net surplus/deficit) attributable to the ordinary shareholders of the Company.
Table 15: TSR vesting schedule for the 2013 LTIP award TSR position over the three-year performance period Percentage of shares in award that vests based on achievement of TSR targets
Mr Matthews received pay in lieu of notice for the balance of his notice period (8 months) of £480,000, paid in 8 equal monthly instalments
He received no bonus in respect of 2013, and no LTIP award was made for the year The deferred element of Mr Matthews’ 2011 bonus vested on termination of his employment. The value realised was £34,196
Legal fees of £10,000 were paid to Mr Matthews’ solicitor in connection with advice on the terms of his departure
Historical TSR performance and CEO remuneration outcomes Table 16 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 are listed in the ‘TSR Targets’ section above.
Aviva plc five-year TSR performance against the FTSE 100 Index and the median of the comparator group
Table 17 summarises the Group CEO single figure for total remuneration, annual bonus pay-out and LTIP vesting as a percentage of maximum opportunity over this period.
All UK-based employees 2.69% 75.57%1 3.65% Notes 1 The increase in bonus awards for all UK based employees in 2013 reflects a significant improvement in the performance of the UK businesses against their targets compared with 2012, when overall Group performance impacted bonus budgets. Given this high level of performance in 2013, bonus awards for 2014 are not likely to continue at this level.
Relative importance of spend on pay The table below outlines adjusted operating profit before tax attributable to shareholders’ profits after integration and restructuring costs, dividends paid to shareholders and buybacks compared to overall spend on pay (in total and per capita). The measure of profit has been chosen as a straightforward measure reflecting the performance of the Company, showing both gross income, and also taking into account integration and restructuring costs.
Mark Wilson 150,000 983,277 — — — 200 69 No Patrick Regan 413,469 1,278,088 254,441 — 2,903 150 258 Yes Trevor Matthews6 218,241 482,142 226,835 — — — — — Notes 1 Based on the closing middle-market price of an ordinary share of the Company on 31 December 2013 of 449.7 pence. 2 Shares ‘Owned outright’ are the directors’ beneficial holdings in the ordinary shares of the Company including any shares held in trust under the AESOP, being shares purchased by them under the partnership element of the AESOP
and any shares granted under the free share or matching share element of the AESOP. This information includes holdings of any connected persons. 3 Shares ‘Unvested and subject to performance conditions’ are awards granted under the Aviva LTIP which vest only if the performance conditions are achieved. 4 Shares ‘Unvested and subject to continued employment’ are awards arising through the Aviva Annual Bonus Plan 2011. Under these plans, some of the earned bonuses are paid in the form of conditional shares and deferred for three years. The transfer of the shares to the director at the end of the period is not subject to the attainment of performance conditions but the shares can be forfeited if the ED leaves service before the end of the period. 5 ‘Options vested but not exercised’ are options over shares granted under the Aviva SAYE Scheme. In respect of Patrick Regan, his Aviva SAYE Scheme option reached maturity on 1 December 2013 and he has six months from the maturity date to exercise his option. 6 Trevor Matthews ceased to be a director of the Company with effect from 8 May 2013 and the information is shown as at this date.
There were no changes to the current directors’ interests in Aviva shares during the period 1 January 2014 to 4 March 2014.
Glyn Barker — 11,700 Richard Karl Goeltz1 17,500 17,500 Patricia Cross — — Michael Hawker 5,000 10,000 Gay Huey Evans — 5,000 John McFarlane 10,000 10,000 Michael Mire — 7,500 Sir Adrian Montague 5,144 21,503 Bob Stein — 7,000 Russell Walls 8,000 8,000 Scott Wheway 13,579 13,579 Notes 1 In addition to his ordinary shareholding Richard Karl Goeltz held 14,000 8.25% Capital Securities on 1 January 2013 and 8 May 2013, the day he ceased to be a director of the Company. 2 The information given in this column is as at 1 January 2013 or the date of appointment of the director (Patricia Cross: 1 December 2013, Michael Mire: 12 September 2013, Sir Adrian Montague: 14 January 2013, Bob Stein: 28 January 2013). On appointment none of these directors held any shares except Sir Adrian Montague. 3 The information given in this column is as at 31 December 2013 or the date on which a director ceased to be a director of the Company (Russell Walls: 8 May 2013 and Richard Goeltz: 8 May 2013). 4 This information includes holdings of any connected persons.
Share awards (audited information) Table 22 below sets out the EDs’ outstanding share awards.
Aviva annual bonus plan 2011 102,741 — — — 102,741 435.60 — Mar-14 2012 151,700 — — — 151,700 331.50 — Mar-15
CFO Recruitment share awards plan8 2010 (RRSA)9,10 85,197 — 107,14511 — — 394.20 314.80 Feb-13 2010 (BRDSA)9 43,231 — 53,80811 — — 387.70 301.00 Mar-13 2010 (OATTV)6,7 55,051 — — 55,051 — 387.70 — Mar-13
Mark Wilson Aviva long term incentive plan5 20136,7 — 983,277 — — 983,277 294.20 — Apr-16 Notes 1 The aggregate net value of share awards granted to the directors in the period was £4.5 million (2012: £8.9 million). The net value has been calculated by reference to the closing middle-market price of an ordinary share of the
3 The information given in this column is at 31 December 2013 or the date on which a director ceased to be a director of the Company (Trevor Matthews: 8 May 2013). 4 The actual price used to calculate the ABP and LTIP awards is based on a three day average closing middle-market price of an ordinary share of the Company. These were in 2010: 386 pence, 2011: 434 pence, 2012: 336 pence and 2013; 299 pence. The three day average closing middle-market price of an ordinary share of the Company used to grant the 2010 One Aviva Twice the Value Bonus Plan (OATTV) award was 386 pence. The five day average closing middle-market price of an ordinary share of the Company used to grant the RRSA in 2010 was 380.22 pence. The three day average closing middle-market price of an ordinary share of the Company used to grant the BRDSA in 2010 was 386 pence. The three day average closing middle-market price of an ordinary share of the Company used to grant the Conditional Share Award (CSA) in 2011 was 309 pence.
6 The performance periods for these awards begin at the commencement of the financial year in which the award is granted. 7 The performance conditions for awards which were granted or which vested during 2013 are explained elsewhere in this Report. 8 The awards under the CFO Recruitment Share Awards Plan were granted to Patrick Regan following his recruitment in 2010. As disclosed in the 2010 DRR, the RRSA vested in tranches subject to Mr Regan meeting his personal performance targets, the OATTV was subject to the same performance conditions as the OATTV Plan awards granted to other EDs in 2010 and the BRDSA was not subject to performance conditions and vested on the third anniversary of the date of grant.
Patrick Regan Savings-related options 2010 2,903 — — — 2,903 310.0 Dec 13 – May 14 Executive share options (approved) 2010 7,772 — — 7,772 — 386.0 Mar 13 Notes 1 Any unexercised options will lapse at the end of the exercise period.
Statement of voting at AGM The result of the shareholder vote at the Company’s 2013 AGM in respect of the 2012 directors’ remuneration report is set out in table 24 below.
Table 24: Result of the vote on the directors’ remuneration report at 2013 AGM Votes Cast For Against Votes withheld
The Remuneration Committee consulted extensively with institutional shareholders in the course of 2012/13 following the loss of the directors’ remuneration vote in 2012 and implemented a number of changes to approach and policy as set out in our 2012 DRR. Following the result of the 2013 vote, the committee has continued its active engagement to understand and address any remaining concerns. In particular, the committee has discussed with shareholders terms for the departure arrangements of Mr Trevor Matthews and discussed our policies to gain comment and insight when reviewing and drafting our policy report. That active engagement will continue.
Notes to the consolidated financial statements 1 Analysis of the impact of new standards and amendments to published standards that have been adopted by the Group 131 2 Exchange rates 132 3 Presentation changes 133 5 Segmental information 138 6 Details of income 146 7 Details of expenses 147 8 Finance costs 148 9 Long-term business economic volatility 148 10 Longer-term investment return and economic assumption changes for non-long-term business 149 11 Employee information 151 13 Auditors’ remuneration 152 15 Earnings per share 155 16 Dividends and appropriations 156 18 Acquired value of in-force business
This opinion is to be read in the context of what we say in the remainder of this report.
Separate opinion in relation to IFRSs as issued by the IASB As explained in the Accounting policies to the Consolidated financial statements, the Group, in addition to applying IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the Consolidated financial statements comply with IFRSs as issued by the IASB.
The financial reporting framework that has been applied in their preparation comprises applicable law and IFRSs as adopted by the European Union and as issued by the IASB. Certain disclosures required by the financial reporting framework have been presented elsewhere in the Annual report and accounts (the “Annual Report”), rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
Valuation of the provision for client compensation arising from breaches in the dealing policy relating to the improper allocation of trades in fixed income securities in Aviva Investors We focused on this area given the subjective nature of the valuation of the provision in the context of the Consolidated financial statements. (Refer also to note 41 and 53 to the Consolidated financial statements.)
Going Concern Under the Listing Rules we are required to review the directors’ statement, set out on pages 83 and 84, in relation to going concern. We have nothing to report having performed our review. As noted in the directors’ statement, the directors have concluded that it is appropriate to prepare the Consolidated and the Company’s financial statements using the going concern basis of accounting. The going concern basis presumes that the Group and Parent Company have adequate resources to remain in operation, and that the directors intend them to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s and the Parent Company’s ability to continue as a going concern.
Opinions on other matters prescribed by the Companies Act 2006 In our opinion: the information given in the Strategic Report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
Directors’ remuneration Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law have not been made. We have no exceptions to report arising from this responsibility.
Corporate Governance Statement Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the Parent Company’s compliance with nine provisions of the UK Corporate Governance Code (‘the Code’). We have nothing to report having performed our review. On page 84 of the Annual Report, as required by the Code Provision C.1.1, the directors state that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s performance, business model and strategy. On pages 75 and 76 as required by C.3.8 of the Code, the Audit Committee has set out the significant issues that it considered in relation to the financial statements, and how they were addressed. Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: the statement given by the directors is materially inconsistent with our knowledge of the Group acquired in the course of performing our audit; or the section of the Annual Report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Directors’ responsibilities statement set out on pages 83 and 84, the directors are responsible for the preparation of the Consolidated and the Company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Consolidated and the Company financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Aviva plc (the ‘Company’), a public limited company incorporated and domiciled in the United Kingdom (UK), together with its subsidiaries (collectively, the ‘Group’ or ‘Aviva’) transacts life assurance and long-term savings business, fund management and most classes of general insurance and health business through its subsidiaries, associates and branches in the UK, Ireland, continental Europe, Canada, Asia and other countries throughout the world, and until October 2013, the United States (US). The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.
New standards, interpretations and amendments to published standards that have been adopted by the Group The Group has adopted the following new standards or amendments to standards which became effective for financial years beginning on or after 1 January 2013.
i) IFRS 10, Consolidated Financial Statements IFRS 10 replaces the portion of IAS 27 Consolidated and
v) IAS 1, Presentation of Financial Statements (Amended) The amendments to IAS 1 require the grouping of items presented in other comprehensive income according to whether they will subsequently be reclassified (or recycled) to income statement in the future. The criteria when items are required to be reclassified from other comprehensive income to income statement are set out in the accounting policies below. The adoption of the amendments to IAS 1 results in a revised presentation of the statement of comprehensive income and is applied retrospectively. It has no impact on the profit or loss for the current or prior period or on equity reported.
Accounting policies continued is the replacement of the interest cost on the defined benefit obligation and the expected return on plan assets with a net interest income (or expense). This is based on the net defined benefit asset (or liability) at the start of the year multiplied by the discount rate used at that point to measure the pension obligation. There is no change in the method to determine the discount rate. Net interest income is credited to investment income, whereas net interest expense is charged to finance costs. The revised standard has introduced a new term “remeasurements” comprised of actuarial gains and losses and the difference between actual investment returns less investment expenses and the return implied by the net interest cost. These are recognised in other comprehensive income with no subsequent recycling to the income statement. Amounts recorded in the income statement are therefore limited to service costs, and the net interest income/expense. The revised standard has been applied retrospectively in accordance with the transitional provision of the standard. This has resulted in an increase in profit before tax of £150 million for the year ended 31 December 2012 with a corresponding decrease in other comprehensive income as the discount rate applied to assets is higher than the previously applied expected return on assets. There is no impact on reported equity in the current or prior period. The effect on amounts previously reported is set out in note 1.
(vii) Amendments to IFRS 7, Financial Instruments – Disclosures The amendments include enhanced disclosures to enable users of the financial statements to evaluate the effect or potential effect of netting arrangements in the statement of financial position. The new disclosures are required for all recognised financial instruments that are set off in accordance with IAS 32, Financial Instruments: Presentation. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement. The standard has been applied retrospectively but has no impact on the Group’s profit for the current or prior period or on the equity reported. The new disclosures are presented in note 60.
(ix) Improvements to IFRSs 2009-2011 These improvements to IFRSs consist of amendments to five IFRSs, including IAS 1 Presentation of Financial Statements, IAS 32 Financial Instruments – Presentation, and IAS 34 Interim Financial Reporting. The amendments clarify existing guidance and do not give rise to a change in existing accounting practice. There is no impact on the Group’s consolidated financial statements.
(iii) Amendments to IAS 39, Financial Instruments – Recognition and Measurement The amendments provide an exception to the requirement to discontinue hedge accounting in certain circumstances of novations in which there is a change in counterparty to a hedging instrument in order to achieve clearing for that instrument. The impact of the adoption of the amendment is not expected to have a significant impact on the Group’s consolidated financial statements. The amendments have been endorsed by the EU.
(iv) IFRIC 21, Levies The interpretation clarifies when an entity recognises a liability for a levy imposed by government in accordance with legislation (other than taxes and fines or other penalties). The impact of the adoption of the amendment has yet to be fully assessed but is not expected to be significant for the Group’s consolidated financial statements. The amendments have yet to be endorsed by the EU.
(vi) Improvements to IFRSs 2010-2012 and 2011-2013 These improvements to IFRSs consist of amendments to nine IFRSs. The amendments clarify existing guidance and do not give rise to significant changes in existing accounting practice. The improvements have yet to be fully assessed but are not expected to have significant implications for the Group’s consolidated financial statements. The amendments have yet to be endorsed by the EU.
The IASB has issued new hedge accounting requirements, aligning these more closely with an entity’s risk management activities. In addition, the IASB published amendments to IFRS 9, removing the mandatory effective date of 1 January 2015 and allowing an entity to early adopt the requirements to recognise changes in fair value from an entity’s own credit risk in OCI without having to adopt the whole standard.
(B) Operating profit The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management, short-term realised and unrealised investment gains and losses are treated as non-operating items. The Group focuses instead on an operating profit measure (also referred to as adjusted operating profit) that incorporates an expected return on investments supporting its long-term and non-long-term businesses. Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. Variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit. For non-long-term business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer-term return and short-term fluctuations from that level. Further details of this analysis and the assumptions used are given in notes 9 and 10. Operating profit also excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangibles; the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates; integration and restructuring costs; and exceptional items. Exceptional items are those items that, in the Directors’ view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group’s financial performance. Details of these items are provided in the relevant notes.
(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, consolidated statement of financial position, other primary statements and notes to the consolidated financial statements.
Insurance and participating investment contract liabilities G&L Goodwill, AVIF and intangible assets O Fair values of financial investments F&T Impairment of financial investments T Fair value of derivative financial instruments F&U Deferred acquisition costs and other assets X Provisions and contingent liabilities AA Pension obligations AB Deferred income taxes AC Operations held for sale AH
The Company’s investments In the Company statement of financial position, subsidiaries, associates and joint ventures are stated at their fair values, estimated using applicable valuation models underpinned by the Company’s market capitalisation. These investments are classified as available for sale (AFS) financial assets, with changes in their fair value being recognised in other comprehensive income and recorded in a separate investment valuation reserve within equity.
(H) 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
Accounting policies continued recognised at the date when payments are due. Premiums are shown before deduction of commission and before any salesbased 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. General insurance and health premiums written reflect business incepted during the year, and exclude any sales-based taxes or duties. Unearned premiums are those proportions of the premiums written in a year that relate to periods of risk after the statement of financial position date. Unearned premiums are calculated on either a daily or monthly pro rata basis. Premiums collected by intermediaries, but not yet received, are assessed based on estimates from underwriting or past experience, and are included in premiums written. Deposits collected under investment contracts without a discretionary participation feature (non-participating contracts) are not accounted for through the income statement, except for the fee income (covered in accounting policy I) 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 investment contract fee revenue Investment contract policyholders are charged fees for policy administration, investment management, surrenders or other contract services. The fees may be for fixed amounts or vary with the amounts being managed, and will generally be charged as an adjustment to the policyholder’s balance. The fees are recognised as revenue in the period in which they are collected unless they relate to services to be provided in future periods, in which case they are deferred and recognised as the service is provided. Initiation and other ‘front-end’ fees (fees that are assessed against the policyholder balance as consideration for origination of the contract) are charged on some non-participating investment and investment fund management contracts. Where the investment contract is recorded at amortised cost, these fees are deferred and recognised over the expected term of the policy by an adjustment to the effective yield. Where the investment contract is measured at fair value, the front-end fees that relate to the provision of investment management services are deferred and recognised as the services are provided.
(K) Net investment income Investment income consists of dividends, interest and rents receivable for the year, movements in amortised cost on debt securities, realised gains and losses, and unrealised gains and losses on FV investments (as defined in accounting policy T). Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest income is recognised as it accrues, taking into account the effective yield on the investment. It includes the interest rate differential on forward foreign exchange contracts. Rental income is recognised on an accruals basis, and is recognised on a straight line basis unless there is compelling evidence that benefits do not accrue evenly over the period of the lease. A gain or loss on a financial investment is only realised on disposal or transfer, and is the difference between the proceeds received, net of transaction costs, and its original cost or amortised cost, as appropriate. Unrealised gains and losses, arising on investments which have not been derecognised as a result of disposal or transfer, represent the difference between the carrying value at the year end and the carrying value at the previous year end or purchase value during the year, less the reversal of previously recognised unrealised gains and losses in respect of disposals made during the year. Realised gains or losses on investment property represent the difference between the net disposal proceeds and the carrying amount of the property.
(L) Insurance and participating investment contract liabilities Claims Long-term business claims reflect the cost of all claims arising during the year, including claims handling costs, as well as policyholder bonuses accrued in anticipation of bonus declarations. General insurance and health claims incurred include all losses occurring during the year, whether reported or not, related handling costs, a reduction for the value of salvage and other recoveries, and any adjustments to claims outstanding from previous years. Claims handling costs include internal and external costs incurred in connection with the negotiation and settlement of claims. Internal costs include all direct expenses of the claims department and any part of the general administrative costs directly attributable to the claims function.
Liability adequacy At each reporting date, the Group reviews its unexpired risks and carries out a liability adequacy test for any overall excess of expected claims and deferred acquisition costs over unearned premiums, using the current estimates of future cash flows under its contracts after taking account of the investment return expected to arise on assets relating to the relevant general business provisions. If these estimates show that the carrying amount of its insurance liabilities (less related deferred acquisition costs) is insufficient in light of the estimated future cash flows, the deficiency is recognised in the income statement by setting up a provision in the statement of financial position.
(N) 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
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 17.
Computer equipment Three to five years Other assets Three to five years
The assets’ residual values, useful lives and method of depreciation are reviewed regularly, and at least at each financial year end, and adjusted if appropriate. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount. Borrowing costs directly attributable to the acquisition and construction of property and equipment are capitalised. All repairs and maintenance costs are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in
Accounting policies continued 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.
(S) Derecognition and offset of financial assets and financial liabilities A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: The rights to receive cash flows from the asset have expired. The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘passthrough ’ arrangement.
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.
(T) Financial investments The Group classifies its investments as either financial assets at fair value through profit or loss (FVTPL) or financial assets available for sale (AFS). The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. The FVTPL category has two subcategories – those that meet the definition as being held for trading and those the Group chooses to designate as FVTPL (referred to in this accounting policy as ‘other than trading’) upon initial recognition. In general, the other than trading category is used as, in most cases, the Group’s investment or risk management strategy is to manage its financial investments on a fair value basis. Debt securities and equity securities, which the Group acquires with the intention to resell in the short term, are classified as trading, as are non-hedge derivatives (see accounting policy U below). The AFS category is used where the relevant long-term business liability (including shareholders’ funds) is passively managed, as well as in certain fund management and non-insurance operations. Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values. Debt securities are initially recorded at their fair value, which is taken to be amortised cost, with amortisation credited or charged to the income statement. Investments classified as trading, other than trading and AFS, are subsequently carried at fair value. Changes in the fair value of trading and other than trading investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS are recognised in other comprehensive income and recorded in a separate investment valuation reserve within equity. Investments carried at fair value are measured using the methodology outlined in note 23, with values based on the quoted price within the bid-ask spread that is most representative of fair value or based on cash flow models using market observable inputs or unobservable inputs. 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.
Impairment The Group reviews the carrying value of its AFS investments on a regular basis. If the carrying value of an AFS investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. The following policies are used to determine the level of any impairment, some of which involve considerable judgement: AFS debt securities: An AFS debt security is impaired if there is objective evidence that a loss event has occurred which has impaired the expected cash flows, i.e. where all amounts due according to the contractual terms of the security are not considered collectible. An impairment charge, measured as the difference between the security’s fair value and amortised cost, is recognised when the issuer is known to be either in default or in financial difficulty. Determining when an issuer is in financial difficulty requires the use of judgement, and we consider a number of factors including industry risk factors, financial condition, liquidity position and near-term prospects of the issuer, credit rating declines and a breach of contract. A decline in fair value below amortised cost due to changes in risk-free interest rates does not necessarily represent objective evidence of a loss event. For securities identified as being impaired, the cumulative unrealised loss previously recognised within the investment valuation reserve is transferred to realised losses for the year, with a corresponding movement through other comprehensive income. Any subsequent increase in fair value of these impaired securities is recognised in other comprehensive income and recorded in the investment valuation reserve unless this increase represents a decrease in the impairment loss that can be objectively related to an event occurring after the impairment loss was recognised in the income statement. In such an event, the reversal of the impairment loss is recognised as a gain in the income statement.
(U) Derivative financial instruments and hedging Derivative financial instruments include foreign exchange contracts, interest rate futures, currency and interest rate swaps, currency and interest rate options (both written and purchased) and other financial instruments that derive their value mainly from underlying interest rates, foreign exchange rates, credit or equity indices, commodity values or equity instruments. All derivatives are initially recognised in the statement of financial position at their fair value, which usually represents their cost. They are subsequently remeasured at their fair value, with the method of recognising movements in this value depending on whether they are designated as hedging instruments and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. Premiums paid for derivatives are recorded as an asset on the statement of financial position at the date of purchase, representing their fair value at that date. Derivative contracts may be traded on an exchange or overthe -counter (OTC). Exchange-traded derivatives are standardised and include certain futures and option contracts. OTC derivative contracts are individually negotiated between contracting parties and include forwards, swaps, caps and floors. Derivatives are subject to various risks including market, liquidity and credit risk, similar to those related to the underlying financial instruments. Many OTC transactions are contracted and documented under International Swaps and Derivatives Association (ISDA) master agreements or their equivalent, which are designed to provide legally enforceable set-off in the event of default, reducing the Group’s exposure to credit risk. The notional or contractual amounts associated with derivative financial instruments are not recorded as assets or liabilities on the statement of financial position as they do not represent the fair value of these transactions. These amounts are disclosed in note 59(b). The Group has collateral agreements in place between the individual Group entities and relevant counterparties.
Interest rate and currency swaps Interest rate swaps are contractual agreements between two parties to exchange fixed rate and floating rate interest by means of periodic payments, computed on a specified notional amount and defined interest rates. Most interest rate swap payments are netted against each other, with the difference between the fixed and floating rate interest payments paid by one party. Currency swaps, in their simplest form, are contractual agreements that involve the exchange of both periodic and final amounts in two different currencies. Both types of swap contracts may include the net exchange of principal. Exposure to gain or loss on these contracts will increase or decrease over their respective lives as a function of maturity dates, interest and foreign exchange rates, and the timing of payments.
Changes in the fair value of derivatives that are designated and qualify as net investment or cash flow hedges, and that prove to be highly effective in relation to the hedged risk, are recognised in other comprehensive income and a separate reserve within equity. Gains and losses accumulated in this reserve are included in the income statement on disposal of the relevant investment or occurrence of the cash flow as appropriate. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in the income statement. The gain or loss on the hedged item that is attributable to the hedged risk is recognised in the income statement. This applies even if the hedged item is an available for sale financial asset or is measured at amortised cost. If a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment made to the carrying amount of the hedged item is amortised to the income statement, based on a recalculated effective interest rate over the residual period to maturity. In cases where the hedged item has been derecognised, the cumulative adjustment is released to the income statement immediately. For a variety of reasons, certain derivative transactions, while providing effective economic hedges under the Group’s risk management positions, do not qualify for hedge accounting under the specific IFRS rules and are therefore treated as derivatives held for trading. Their fair value gains and losses are recognised immediately in net investment income.
(Z) Leases Leases, where a significant portion of the risks and rewards of ownership is retained by the lessor, are classified as operating leases. Where the Group is the lessee, payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the term of the relevant leases. Where the Group is the lessor, lease income from operating leases is recognised in the income statement on a straight-line basis over the lease term. When assets are subject to finance leases, the present value of the lease payments, together with any unguaranteed residual value, is recognised as a receivable. The Group has not entered into any material finance lease arrangements either as lessor or lessee.
Pension obligations The Group operates a number of pension schemes, whose members receive benefits on either a defined benefit or defined contribution basis. Under a defined contribution plan, the Group’s legal or constructive obligation is limited to the amount it agrees to contribute to a fund and there is no obligation to pay further contributions if the fund does not hold sufficient assets to pay benefits. A defined benefit pension plan is a pension plan that is not a defined contribution plan and typically defines the amount of pension benefit that an employee will receive on retirement. The defined benefit obligation is calculated by independent actuaries using the projected unit credit method. The pension obligation is measured as the present value of the estimated future cash outflows, using a discount rate based on market yields for high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability. The resultant net surplus or deficit recognised as an asset or liability on the statement of financial position is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. If the fair value of plan assets exceeds the present value of the defined benefit obligation, the resultant asset is limited to the asset ceiling defined as present value of economic benefits available in the form of future refunds from the plan or reductions in contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in the Group. Remeasurements of defined benefit plans comprise actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions, the return on plan assets (excluding net interest) and the effect of the asset ceiling (if any). The Group recognises remeasurements immediately in other comprehensive income and does not reclassify them to the income statement in subsequent periods. Service costs comprising current service costs, past service costs, gains and losses on curtailments and net interest expense/(income) are charged or credited to the income statement. Past service costs are recognised at the earlier of the date the plan amendment or curtailment occurs or when related restructuring costs are recognised. The Group determines the net interest expense/(income) on the net defined benefit liability/(asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period of the net defined benefit liability/(asset). Net interest expense is charged to finance costs, whereas net interest income is credited to investment income. For defined contribution plans, the Group pays contributions to publicly or privately administered pension plans. Once the contributions have been paid, the Group, as employer, has no further payment obligations. The Group’s contributions are charged to the income statement in the year to which they relate and are included in staff costs.
Save As You Earn plan (SAYE plan), details of which are given in the Directors’ Remuneration Report and in note 32. The Group accounts for options and awards under equity compensation plans, which were granted after 7 November 2002, until such time as they are fully vested, using the fair value based method of accounting (the ‘fair value method’). Under this method, the cost of providing equity compensation plans is based on the fair value of the share awards or option plans at date of grant, which is recognised in the income statement over the expected vesting period of the related employees and credited to the equity compensation reserve, part of shareholders’ funds. In certain jurisdictions, awards must be settled in cash instead of shares, and the credit is taken to liabilities rather than reserves. The fair value of these cashsettled awards is recalculated each year, with the income statement charge and liability being adjusted accordingly. As described in accounting policy AE below, shares purchased by employee share trusts to fund these awards are shown as a deduction from shareholders’ funds at their original cost. When the options are exercised and new shares are issued, the proceeds received, net of any transaction costs, are credited to share capital (par value) and the balance to share premium. Where the shares are already held by employee trusts, the net proceeds are credited against the cost of these shares, with the difference between cost and proceeds being taken to retained earnings. In both cases, the relevant amount in the equity compensation reserve is then credited to retained earnings.
(AD) Borrowings Borrowings are classified as being for either core structural or operational purposes. They are recognised initially at their issue proceeds less transaction costs incurred. Subsequently, most borrowings are stated at amortised cost, and any difference between net proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest rate method. All borrowing costs are expensed as they are incurred except where they are directly attributable to the acquisition or construction of property and equipment as described in accounting policy P above. Where loan notes have been issued in connection with certain securitised mortgage loans, the Group has taken advantage of the revised fair value option under IAS 39 to present the mortgages, associated liabilities 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 which would otherwise arise from using different measurement bases for these three items.
Expenses 7 Claims and benefits paid, net of recoveries from reinsurers (22,093) (2,037) (23,601) (2,721) Change in insurance liabilities, net of reinsurance 41 a(ii) 2,493 (312) (430) (1,566) Change in investment contract provisions (7,050) (31) (4,450) (77) Change in unallocated divisible surplus 46 280 — (6,316) — Fee and commission expense (3,975) (438) (4,457) (498) Other expenses (2,220) (293) (2,843) (1,307) Finance costs 8 (609) (16) (653) (21)
Attributable to: Equity shareholders of Aviva plc 2,008 (3,102) Non-controlling interests 39 143 168
Earnings/(loss) per share AG & 15 Basic (pence per share) 65.3p (109.1)p Diluted (pence per share) 64.5p (109.1)p
Continuing operations – Basic (pence per share) 22.0p (11.2)p Continuing operations – Diluted (pence per share) 21.8p (11.2)p 1 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). For further details see note 4. 2 Following the adoption of the revised IAS 19 ‘Employee benefits’ the Group has retrospectively applied the changes to the comparative period in these financial statements. This has led to an increase in profit before tax for continuing operations of £150 million for 2012 with a corresponding decrease in other comprehensive income. For further detail of the impact of the restatement please see note 1. 3 Following the adoption of IFRS 10 ‘Consolidated financial statements’ the Group has retrospectively applied the change to the comparative period in these financial statements. For further details of the impact of the restatement please see note 1.
Profit/(loss) for the year from continuing operations 878 (86) Profit/(loss) for the year from discontinued operations1 1,273 (2,848)
Other comprehensive income from continuing operations: Items that may be reclassified subsequently to income statement Investments classified as available for sale Fair value gains 19 27 Fair value gains transferred to profit on disposals 1 1 Share of other comprehensive income of joint ventures and associates (37) 14 Foreign exchange rate movements (35) (200) Aggregate tax effect – shareholder tax on items that may be reclassified subsequently to the income statement (14) 8
Total comprehensive income for the year from continuing operations 261 (1,030) Total comprehensive income for the year from discontinued operations1 954 (2,780)
Attributable to: Equity shareholders of Aviva plc 1,038 (3,942) Non-controlling interests 177 132 1,215 (3,810) 1 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). For further details see note 4. 2 Following the adoption of the revised IAS 19 ‘Employee benefits’ the Group has retrospectively applied the changes to the comparative period in these financial statements. This has led to an increase in profit before tax of £150 million for 2012 with a corresponding decrease in other comprehensive income. For further details of the impact of the restatement please see note 1.
Operating profit before tax attributable to shareholders' profits after integration and restructuring costs 1,686 287 1,973 1,577 232 1,809
Share of Delta Lloyd's non-operating items (before tax) as an associate — — — (523) — (523)
Profit/(loss) before tax attributable to shareholders' profits 1,281 1,538 2,819 175 (2,696) (2,521) Tax on operating profit 15a(i) (534) (83) (617) (499) (78) (577) Tax on other activities 15a(i) 131 (182) (51) 238 (74) 164 (403) (265) (668) (261) (152) (413)
Profit/(loss) for the year 878 1,273 2,151 (86) (2,848) (2,934) 1 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). For further details see note 4. 2 Following the adoption of the revised IAS 19 ‘Employee benefits’ the Group has retrospectively applied the changes to the comparative period in these financial statements. This has led to an increase in profit before tax of £150 million for 2012 with a corresponding decrease in other comprehensive income. For further details of the impact of the restatement please see note 1.
Reconciliation of Group operating profit to profit/(loss) for the year continued Operating profit can be further analysed into the following segments (details of segments can be found in note 5): Year ended 31 December 2013
Corporate centre (150) Group debt costs and other interest (502) Share of operating profit (before tax) of Delta Lloyd as an associate —
Total – continuing operations 2,049 Total – discontinued operations 290 2,339
Balance at 1 January 736 200 1,165 3,271 (32) 1,675 1,389 8,404 1,382 1,574 11,360 Profit for the year — — — — — — 2,008 2,008 — 143 2,151 Other comprehensive income — — — — — (421) (549) (970) — 34 (936) Total comprehensive income for the year — — — — — (421) 1,459 1,038 — 177 1,215 Dividends and appropriations — — — — — — (538) (538) — — (538) Capital contributions from non-controlling interests — — — — — — — — — 1 1 Non-controlling interests share of dividends declared in the year — — — — — — — — — (134) (134) Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — — (803) 1 (802) — — (802) Changes in non-controlling interests in subsidiaries — — — — — — — — — (147) (147) Shares acquired by employee trusts — — — — (32) — — (32) — — (32) Shares distributed by employee trusts — — — — 33 — (28) 5 — — 5 Reserves credit for equity compensation plans — — — — — 37 — 37 — — 37 Shares issued under equity compensation plans — — — — — (43) 43 — — — — Aggregate tax effect – shareholder tax — — — — — 30 22 52 — — 52 Balance at 31 December 736 200 1,165 3,271 (31) 475 2,348 8,164 1,382 1,471 11,017
Assets Goodwill O & 17 1,476 1,520 Acquired value of in-force business and intangible assets O & 18 1,068 1,084 Interests in, and loans to, joint ventures D & 19 1,200 1,390 Interests in, and loans to, associates D & 20 267 265 Property and equipment P & 21 313 391 Investment property Q & 22 9,451 9,939 Loans V & 24 23,879 24,537 Financial investments S, T, U & 27 192,961 188,743 Reinsurance assets N & 44 7,220 6,684 Deferred tax assets AC 244 188 Current tax assets 76 67 Receivables 28 7,060 7,476 Deferred acquisition costs and other assets X & 29 3,051 3,778 Prepayments and accrued income 2,498 2,700 Cash and cash equivalents Y & 56d 24,999 23,102 Assets of operations classified as held for sale AH & 4c 3,113 42,603
Equity attributable to shareholders of Aviva plc 8,164 8,404 Direct capital instruments and fixed rate tier 1 notes 35 1,382 1,382 Non-controlling interests 39 1,471 1,574
Total equity and liabilities 278,876 314,467 1 The statement of financial position has been restated following the adoption of IFRS 10 ‘Consolidated Financial Statements’ – see note 1 for details. There is no impact on the result for any year presented as a result of this restatement.
Consolidated statement of cash flows For the year ended 31 December 2013
Cash flows from operating activities Cash generated from continuing operations 56a 2,541 2,881 Tax paid (463) (428)
Net cash from operating activities – continuing operations 2,078 2,453 Net cash from operating activities – discontinued operations2 1,919 46
Cash flows from investing activities Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired 56b — (129) Disposals of subsidiaries, joint ventures and associates, net of cash transferred 56c 377 421 New loans to joint ventures and associates 19a(i) (6) (4) Repayment of loans to joint ventures 25 12 Net new loans to joint ventures and associates 19 8 Purchases of property and equipment (30) (220) Proceeds on sale of property and equipment 56 43 Purchases of intangible assets (59) (128)
Cash flows from financing activities Proceeds from issue of ordinary shares and fixed rate tier 1 notes, net of transaction costs — 392 Treasury shares purchased for employee trusts (32) (33) New borrowings drawn down, net of expenses 2,201 2,529 Repayment of borrowings (2,441) (2,513) Net (repayment)/ drawdown of borrowings (240) 16 Interest paid on borrowings (605) (665) Preference dividends paid 16 (17) (17) Ordinary dividends paid (429) (630) Coupon payments on direct capital instruments and fixed rate tier 1 notes 16 (92) (73) Capital contributions from non-controlling interests of subsidiaries 39 1 20 Dividends paid to non-controlling interests of subsidiaries (134) (102)
Cash and cash equivalents at 31 December 56d 24,857 23,453 1 The statement of cash flows has been restated following the adoption of IFRS 10 ‘Consolidated Financial Statements’ – see note 1 for details. 2 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). For further details see note 4.
Total income 43,095 (34) 85 43,146 Effect of change in policy analysed as: Net investment income 21,106 (56) 85 21,135 Share of loss after tax of joint ventures
Total expenses (42,849) 34 65 (42,750) Effect of change in policy analysed as: Fee and commission expense (4,472) 15 — (4,457) Other expenses (2,845) 2 — (2,843) Finance costs (735) 17 65 (653)
Profit before tax 246 — 150 396 Tax attributable to policyholders’ returns (221) — — (221) Tax attributable to shareholders’ profits (227) — (34) (261)
Earnings per share1 Basic earnings per share (113.1)p — 4.0p (109.1)p Diluted earnings per share (113.1)p — 4.0p (109.1)p 1 From continuing and discontinued operations.
(b) Impact of changes in accounting policies/standards on the consolidated statement of comprehensive income
Total comprehensive income for the year (3,810) — — (3,810) Comprises: Total loss for the year (3,050) — 116 (2,934) Total other comprehensive income, net of tax (760) — (116) (876)
Total other comprehensive income, net of tax analysed as: From continuing operations (828) — (116) (944) From discontinued operations 68 — — 68
Notes to the consolidated financial statements continued 1 – Analysis of the impact of new standards and amendments to published standards that have been adopted by the Group continued (c) Impact of changes in accounting policies on the consolidated statement of financial position
Total assets 315,689 (1,222) — 314,467 Effect of change in policy analysed as: Interests in, and loans to, joint ventures and associates 1,708 (53) — 1,655 Investment property 10,815 (876) — 9,939 Financial investments 189,078 (335) — 188,743 Receivables 7,617 (141) — 7,476 Deferred acquisition costs and other assets 3,799 (21) — 3,778 Prepayments and accrued income 2,701 (1) — 2,700 Cash and cash equivalents 22,897 205 — 23,102
Total cash flows from operating activities 2,294 205 — 2,499 Effect of change in policy analysed as: Profit before tax from continuing operations 246 — 150 396
Total net cash flow used in investing activities (15) — — (15)
Total net cash flows used in financing activities (1,119) — — (1,119)