Our purpose People face uncertainty, challenges and choices every day. Life is complex and unpredictable. It’s all too easy to be a bit afraid, a little uncertain.
We are here to make a difference to our customers at their times of need and to make it easier for them to plan for the future. And we have been doing this for the last 318 years.
Annual report and accounts 2013 We provide our annual report online which allows us to reduce the amount of paper we print and distribute.
The turnaround is intensifying but there is still much to do.
Governance Directors’ and corporate governance report 68 Directors’ remuneration report 86
Performance Financial and operating performance 248 Selected consolidated financial data 262 Information on the company 264 Analysis of investments 271 Contractual obligations 275 Risk and capital management 276 Corporate responsibility key performance indicators 280 Corporate responsibility assurance statement 282
Shareholder information Share capital 286 Related party disclosures 288 Guarantees, securitised assets and off-balance sheet arrangements 289 Liquidity and capital resources 289 Regulation 293 Risks relating to our business 299
John McFarlane Chairman proceeds than originally expected, and our businesses in Russia and Malaysia. We sold our remaining holding in Delta Lloyd N.V. and reached a satisfactory settlement with Bankia in Spain.
Aviva’s major interests are now largely concentrated in the UK, France and Canada, but the Group does have attractive businesses elsewhere in Europe and in the faster growth Asia region.
We have strengthened significantly our risk management and audit processes, and have invested heavily in preparing for the implementation of Solvency II in January 2016, and for our being designated a Global Systemically Important Insurer.
Key statistics in 2013 £2.8bn Total IFRS profit before tax increase
New leadership was appointed to UK & Ireland General Insurance, Europe, Aviva Investors and Asia, and to transformation and human resources. A new Chief Information Officer will also join the Group in April 2014.
Business portfolio narrowed Management has overseen significant change in the Group’s business portfolio, to focus on the most attractive segments and where we have the greatest chance of success.
During the year we completed the sales of the US business, for which we received higher
The Group has also worked effectively with our regulators around the world, and particularly with the new Prudential Regulation Authority and the Financial Conduct Authority in the UK.
Board and governance It is an honour for me to serve as your Chairman. During 2013 and more recently, there have been a number of changes to your Board. Sir Adrian Montague was appointed as Senior Independent Director. Sir Adrian has significant experience of the financial services industry and government and regulatory issues.
I believe we have a strong, experienced and diverse Board with a good balance of skills, and remain comfortable that the Board exercises strong and robust challenge as well as strategic oversight to the executive team.
The year saw Russell Walls and Richard Goeltz retire from the Board as non-executive directors, following nine years’ service, and the resignation of Trevor Matthews as executive director. I would like to thank them for their contribution to the Board and committees.
Patrick Regan resigned as Chief Financial Officer on 22 January 2014 and will step down from the Board before the AGM. Pat has been a tremendous support to Mark in Aviva’s financial transformation. He leaves with my best wishes and those of Aviva’s Board.
I am pleased to announce that Tom Stoddard will be joining as the new Chief Financial Officer on 5 May 2014. Tom joins from Blackstone, the global investment and advisory firm, and has experience in advising insurance companies.
Our people It has nevertheless been a challenging year for our workforce in the face of significant cost reduction. However, despite this, our people have retained their focus on the business and delivered very strong results.
The increased certainty and confidence in the business as we move forward will make Aviva a better place to work. We have also aligned employees’ interests with shareholders through share plan schemes and employees will be able to benefit in the Group’s improvement.
Investing in communities We focus our investment in communities on the issues that matter most to our customers and those that are most closely aligned to our business, to maximise the value of our investment. We also provide access to insurance for all areas of society such as affordable contents insurance to low income households, a flexible insurance solution for learner drivers, and the provision of low-cost insurance policies for individuals in the Indian sub-continent on low incomes, for a policy premium of less than £2 a year.
Committee chairmen As at the date of this report, the Board committees are chaired by the following Non-Executive Directors: § Audit Committee: Glyn Barker
The turnaround at Aviva is intensifying We are back in the game but still have much to do. We have focused the business on ‘cash flow plus growth’ and are beginning to see the benefits of this reflected in our performance.
To deliver our investment thesis of ‘cash flow plus growth’ we need to be financially robust. In 2013, we increased economic capital surplus from £7.1 billion¹ to £8.3 billion and liquidity at the Group centre has increased significantly to £1.6 billion at the end of February 2014. With reference to earnings and cash flow improvements, the Board has proposed a 9.4 pence dividend.
Reducing the intercompany loan has been a key priority in 2013. Over the past 12 months, we have reduced the loan by £1.7 billion to £4.1 billion². We have agreed a comprehensive plan to reduce the intercompany loan to £2.2 billion, utilising £450 million of existing cash resources and £1.45 billion of other actions. We have reached agreement with the Prudential Regulation Authority (PRA) and I believe the execution of this plan will take the issue of our intercompany loan off the table.
We have also completed significant disposals in the US, Aseval in Spain, Malaysia, Netherlands and announced a disposal in Italy. I believe Aviva is now more focused and better managed.
Our cash generators, UK, France and Canada, generated a 59% increase in cash remittances, making up 80% of the total cash remitted to Group. Following the resumption of dividends from Ireland and Italy, all our turnaround businesses are now remitting cash to Group.
1 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. The capital requirement is based on Aviva’s own internal assessment and capital management policies, measuring the amount of economic capital at risk in a 1-in-200 year loss event over a one year time horizon. The term ‘economic capital’ does not imply capital as required by regulators or other third parties.
While satisfactory at a Group level, there remain a number of opportunities to improve our operating profit. Declines in our Italian and Spanish life businesses need to be reversed and our growth markets need over time to contribute more to operating profit. Aviva Investors grew its fund management contribution 74%, but at around 3% of Group operating profit and with assets under management of £241 billion, this remains inadequate. Plans are in place to address these issues over the coming years and Euan Munro brings much needed leadership and impetus to Aviva Investors.
There remains significant opportunity to reduce expenses further but some of these additional savings will be reallocated in the near term towards initiatives to manage our existing books of business more efficiently and serve customers more effectively through deploying the latest digital and automation technology. I am confident that whatever reallocation is made will produce attractive returns and a short payback period, without significant disruption to our workforce.
Our future cash generators of Poland, Turkey, China and Asia contributed 21% of Group VNB (2012: 16%) and collectively grew 49%. Our new joint venture in Indonesia is an example of how we can expand our presence in emerging markets, without impacting the cash flow part of our investment thesis.
Value of new business – excl Malaysia and Sri Lanka (£m)
In 2013, we set out five key metrics to measure our performance: To read more about the performance of our markets, turn to page 30 3 This includes £347 million remitted by UK General Insurance in January 2014 relating to activity in 2013. 4 Excluding Malaysia and Sri Lanka.
Our external leverage ratio is at 50% (2012: 50%) of IFRS tangible capital. On a more broadly recognised S&P6 basis, this ratio has reduced to 32% (2012: 33%). We have recently stated our intention to call two tranches of bonds, with principal of £240 million and coupon above 10%. Over time we expect to reduce our external leverage ratio to below 40% of tangible capital.
People One of the priorities in 2013 was to strengthen the management team to bring in new skills into the Group and progress has been made in this area. We have appointed new leaders in asset management, human resources, IT, Europe, Asia, UK General Insurance and transformation through a combination of senior internal promotions and external hires.
We have announced that Tom Stoddard will succeed Pat as CFO. Tom is a high calibre individual who will provide sound judgement and challenge.
One of the strengths of Aviva is the dedication and commitment of our people. This has been exemplary in 2013 and I would like to thank them for their tireless work on behalf of our customers and shareholders.
Outlook In summary, our performance in 2013 shows progress towards delivering what we said we would. Our turnaround is intensifying as we focus more on improving operational performance. We plan on using big data to be more disruptive in predictive analytics, take advantage of our brand strength to grow our digital direct business and drive further efficiency through automation. We will be selective in our investments with a clinical approach to the allocation of capital.
As a business it is important that we build on the progress made in 2013. Aviva is a self-help story with a balanced and increasingly focused portfolio of businesses. The tendency with self-help or turnaround businesses is to focus on the successes rather than the issues and as a result become complacent. I want to guard against this happening at Aviva. Have we made progress? Yes, some. Is it a little faster than anticipated? Probably. Have we unlocked the full potential at Aviva? No, there is more to come.
£4.1bn Intercompany loan as at 28 February 2014 5 The economic surplus represents an estimated unaudited position. The capital requirement is based on Aviva’s own internal assessment and capital management policies, measuring the amount of economic capital at risk in a 1-in-200 year loss event over a one year time horizon. The term ‘economic capital’ does not imply capital as required by regulators or other third parties.
Turnaround Italy, Spain, Ireland and Aviva Investors § Structural progress made, new management appointed
Strengthen our financial position § Economic capital surplus of £8.3 billion
Ensure £400 million expenses savings flow through to the income statement in 2014 § £360 million cost savings achieved by 2013
Reduce restructuring costs in 2014 § Ongoing – 2013 restructuring costs of £363 million
Cash flow § Continue to improve cash remittances § Show improvement in cost income ratio
Growth § Increase VNB in our life businesses through product mix and pricing
§ Improve COR and underwriting in general insurance businesses through predictive analytics
§ Strategic partnerships e.g. Indonesia § Improve efficiency and invest in digital and automation
§ Deliver on remaining divestments § Reduce external leverage over the medium term
Joint venture in Indonesia In January 2014 Aviva signed a joint venture agreement with Astra International, Indonesia’s largest publicly listed company, to sell and distribute life insurance products in the region.
Improved financial position 2013 was a year in which the financial position of the Group improved, cash flow and earnings were higher and we finalised a plan to reduce the intercompany loan to a sustainable level by 2015.
Overview We have sharpened the focus of the Group, completing disposals of our US insurance business, remaining holding in Delta Lloyd, Aseval in Spain and Malaysian business. In addition, we have announced the disposal of our 39% stake in Italian insurer Eurovita.
The financial strength of the Group has improved significantly. At the end of 2013, our economic capital surplus increased to £8.3 billion from a pro forma surplus of £7.1 billion² at the end of 2012. Our IGD surplus has reduced modestly to £3.6 billion (2012: £3.8 billion) and Group liquidity was £1.6 billion at the end of February 2014.
During the year we have increased cash remittances 40% to £1,269 million¹ (2012: £904 million), representing a remittance ratio of 72% of operating capital generation.
The business has adapted well to the Retail Distribution Review (RDR), with strong net flows in our platform and SME-focused corporate pensions offering. Individual protection sales are lower however, as banks have pulled back from advised selling.
Going forward, we expect to capitalise on our market-leading position in annuities, benefit from a partial rebound in protection sales in the bancassurance channel and extract greater efficiency from our back book.
Key statistics in 2013 £2,151m IFRS profit after tax £1.3bn Cash remittances¹
The capital requirement is based on Aviva’s own internal assessment and capital management policies, measuring the amount of economic capital at risk in a 1-in-200 year loss event over a one year time horizon. The term ‘economic capital’ does not imply capital as required by regulators or other third parties.
France Our French life business had a particularly strong year. Operating profit was up 15%, value of new business up 39%, and cash remittances up 16%. Although our overall market share is relatively modest, we have an attractive distribution offering with a large owned sales network and existing key partnerships including AFER, the largest savers’ association in Europe. This has seen us accumulate over €80 billion of assets, which generate a stable revenue stream. Much of the success of 2013 has come from a shift in focus away from capital intensive savings products to unit-linked and protection products.
Growth markets In the growth markets of Poland, Turkey and Asia³, VNB improved by 46%, 23% and 65% respectively and collectively contributed 21% of total Group VNB.
As previously communicated, the partial nationalisation of the Polish pensions market will have negligible impact on our growth prospects. In addition to strong new business growth, Poland remitted £85 million in cash to Group. In Asia, in addition to achieving strong growth in Singapore and China we have also established a joint venture with Astra International, Indonesia’s largest conglomerate, which we expect to fuel future growth. Our focus in growth markets remains in life businesses.
Turnaround businesses Progress has been made in our turnaround businesses of Italy, Spain and Ireland, although there remains significant room for improvement. In Spain and Italy we are moving our product mix away from more capital intensive savings products towards unit-linked and protection products. We have resumed dividend payments from Italy and Ireland.
In 2013, we found evidence of improper allocation of trades in fixed income securities in Aviva Investors by two former employees. This occurred prior to 2013. The relevant regulatory authorities have been notified. A thorough review of internal control processes relating to the dealing policy has been carried out by management and reviewed by PricewaterhouseCoopers (PwC). Measures to improve controls have been implemented. There is a total adverse impact on operating profit from this activity of £132 million. We are taking steps to ensure that customers will not ultimately be disadvantaged as a result of these breaches of the dealing policy.
Capital and liquidity Our 2013 economic capital surplus4 is £8.3 billion with a coverage ratio of 182% (2012: pro forma £7.1 billion5). This includes the impact of moving the pension scheme calibration to a fully funded basis, which reduced the surplus by approximately £0.7 billion. We have increased the economic capital surplus during the year by a combination of product mix changes, capital allocation, asset optimisation, hedging, expense reductions and completion of disposals.
In 2013 we were included on the list of nine Global Systemically Important Insurers and will work closely with the regulators to understand the implications of this.
Key statistics in 2013 £3.6bn IGD surplus £1.8bn Operating capital generation
Patrick Regan Chief Financial Officer 4 The economic capital surplus represents an estimated unaudited position. The term ‘economic capital’ relates to Aviva’s own internal assessment and capital management policies and does not imply capital as required by regulators or other third parties.
5 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. 6 Aviva Insurance Limited.
We have agreed with the Prudential Regulation Authority (PRA) the appropriate long-term level of the internal loan between AGH and AIL. That level has been set such that AIL places no reliance on the loan to meet its stressed insurance liabilities assessed on a 1:200 basis. The PRA agree with this approach. The effect of this will be to reduce the internal loan balance from its current level of £4.1 billion to approximately £2.2 billion. We will complete this reduction by the end of 2015.
In February 2014, we announced our intention to call a £200 million 10.6725% and a €50 million 10.464% hybrid bond on their respective April 2014 call dates.
The IFRS book value declined 3%, primarily due to movement in the IAS19 position of our pension schemes and in the first half of 2013, we increased the provision for default in our commercial mortgage portfolio by £300 million. These reductions more than offset positive contributions from operating profit and higher proceeds from the US disposal.
Closing NAV per share at 31 December 2013 270p 445p * Net of tax and non-controlling interests.
We have agreed the target for the long-term level of the intercompany loan.
Patrick Regan Chief Financial Officer To read more about how we performed in each market, turn to pages 30–42
The immediate challenge was to look after those whose lives were turned upside down and those under threat of rising flood waters and gales. The longerterm challenge is to define what steps we can take as a country to minimise flood damage and disruption in the future. We can’t stop the weather, but we can act in unison to minimise the impact of extreme events.
When Charlie Baker-Collingwood’s father passed away, Charlie started thinking about putting money into a pension because, as a self employed business owner, nobody else was going to do it for him. Charlie runs a tailoring business on London’s Savile Row which delivers suits using branded Vespa scooters. “Seeing my father, when he was not well, having his pension was very inspiring for me; it was the impetus for me in organising my own pension” says Charlie. “Now it’s hopefully something I can just sit back and relax a little bit about. When I need it, my pension will be there to provide for me and my family.”
In March 2013, factory owner Mr Miu suffered severe chest pains. Hospital doctors confirmed he was having a heart attack and performed emergency heart bypass surgery. While recovering in hospital, Mr Miu was visited by his agent who explained that his critical illness policy may entitle him to a payment. Although Mr Miu couldn’t find the policy document his agent ensured the claim was paid quickly. Mr Miu says: “Everyone is afraid of uncertainty. There are some things in life we just can’t control. But my illness was a gift because it’s made me recognise the most cherished people and things in my life.” Once returned to full health, Mr Miu married Zheng Lina and they are looking forward to their new life together.
Asset management and pensions Customers trust us with their money, and we invest it on their behalf to generate investment return. Profit is generated by the difference between the charge levied on funds under management and the costs incurred in acquiring and managing assets. Although margins are small for each pound invested, we create value from having significant scale.
Aviva is the largest general insurer1 and a leading life insurer in the UK
Our customers are served through: Direct – sales people and online Customers expect to be able to buy our products when and where they want to. Online self-service and over-the-telephone service are primary channels for us. In many of the markets we operate in, we have a strong direct sales force and agency presence selling face-to-face to our customers.
We provide a wide range of general insurance and health insurance products including motor and home insurance
We sell products directly to customers and through partners and third parties such as banks
Customers invest their savings with us. We manage these investments to provide them with an income for a more secure future
We also invest the insurance premiums we receive to generate income to meet our obligations to customers and to generate value for shareholders
Managing risk and investments is fundamental to what we do and how we generate returns 1 Datamonitor analysis of market share based on 2012 gross written premiums. 2 In continuing operations, as at 31 December 2013.
We provide: Life insurance Customers take out life policies and annuities to protect themselves from uncertainty. That uncertainty might be whether savings will last through retirement or the risk of losing the family income after an accident. The premiums paid and the income generated from investing these premiums are used to pay claims and benefits, cover costs and reinvest in the business. What is left generates profit for shareholders.
Managing our business: Underwrite risk Underwriting and pricing expertise, coupled with the data we hold, allow us to write profitable business within our risk appetite. Our underwriters assess each customer’s risk to ensure that on aggregate we can cover claims, cover our costs and make a profit, all while remaining as competitive as possible.
Where the world is going Many social and economic factors provide opportunities for the insurance and asset management industry. Here are some of them.
§ We also operate in fast-growing, developing life insurance markets, which present opportunities for insurers to help new customers to accumulate assets.
The digital world and increasing availability of data § The increased volume, variety and velocity of data allows for greater use of predictive analytics
§ Automation of processes is likely to significantly reduce operating costs and fundamentally change the nature of the interaction we have with our customers
§ Customers are increasingly open to digital sales channels and digital interaction. Mobile technology is prevalent and customers increasingly expect to manage their insurance on the move at a time and in a place that suits them.
2012: of all global data – 23% useful if analysed; only 0.5% analysed 2012: of all global data – 23% useful if analysed; only 0.5% analysed
Ageing world population Number of persons aged 60 or over (millions)
§ Predictive analytics: We will focus on enhancing our analytics capabilities, increasing the use of internal and external data to drive superior performance across the business including underwriting, pricing and claims
At Aviva, our purpose is to free people from fear of uncertainty, allowing them to get on with their lives.
A key priority is to make sure we remain financially strong, so that we can pay claims and deliver on the promises we have made to our customers, shareholders and business partners. To make this possible, we have focused on improving our capital position to place the company on a sound financial footing and give us financial flexibility. Today our economic capital surplus is double the level of two years ago.
Investment thesis The investment thesis sets out why investors should choose us, enabling investors to make an informed decision about our business
Customer thesis The customer thesis identifies how we will meet customers’ needs better than our competitors, so that we become the insurer of choice in our chosen markets
People thesis The people thesis is about changing our culture, supporting our people to achieve their potential so they can best serve our customers
Our values “Having the right values is essential to achieving success. These values are important to us and will be at the heart of how we do business. The values will act as a guide whenever we decide on a course of action. Living the Aviva values will help us achieve our purpose.”
Cash flow We have businesses able to produce significant cash flow: § We have three core business lines with scale – life insurance, general insurance and our asset management business, Aviva Investors
§ Our business model gives us significant diversification benefits. The different mix of businesses reduces the impact on us of any market shocks
Growth We have businesses that offer growth potential in value of new business which is a good proxy for future cash flow: § We are driving cash flow growth in our established markets, for example in the UK, France and in Canada
§ We have businesses in selected growth markets in Europe and Asia
§ There are still expense and efficiency opportunities to realise. We remain on track to reduce expenses by £400 million in 2014 (vs. 2011 expense base).
The market focus shows how each market performed against the key metrics. Read more on pages 30–42
Look at the KPI pages to see how we performed against our five key metrics. Read more on pages 26–29 1 This includes £347 million remitted by UK general insurance in January 2014 relating to activity in 2013.
Simplicity, your way We start with what our customers really need and deliver it more simply than anyone else.
Our role is to ensure that customers feel confident in their purchase decisions and secure that the product they have chosen meets their needs. This means making sure our products, service and communications are simple and transparent, and enable customers to feel in control of their financial future.
Additionally customers, quite rightly, want to interact with their insurer in the most convenient way. We need to ensure that our purchase and claims processes and the products themselves are as transparent and straightforward as possible.
The customer thesis represents our ambition to meet these customer needs better than our competitors, so that we become the insurer of choice.
in upper quartile at or above market average below market average
Simplicity To create simplicity for our customers, we strive to: § Remain financially strong so that we are there to deliver on our promises to customers. This is our first priority
§ Be obsessive about understanding the real needs of our customers and helping them to make the best decisions
§ Ensure our products always do ‘what they say on the tin’ – customers will get exactly what they expect
§ Simplify every aspect of our relationship with the customer – contracts, processes, products and communications
Implementing the customer thesis The customer thesis has been rolled out to all 27,700 of our employees to inspire our people to really focus on what will make the biggest difference for customers.
There won’t be any ‘big bang’ changes – this is an evolution rather than a revolution.
In 2014, we will start to see a change in propositions, loyalty and online customer experience.
Access to customers Our goal is to grow the share of business generated from our own channels by: § Increasing sales through proprietary channels
§ Building best practice capabilities in bancassurance and broker channels and supporting partners by launching innovative products and technology.
Increase direct access to customers, build digital, maintain diversification We will increase the share of business generated in our own channels, introduce new technology for distributors and customers, and maintain a diversified distribution mix in each market.
§ Bancassurance, the distribution of our products through partners, remains a key channel globally, with fast growth especially in Asia and Eastern Europe
§ We will support our bancassurance and broker partners by building best practice capabilities
In our 318-year history, the important things have never changed – people matter to us. There are a number of trends affecting workplaces across the globe and these are impacting our global workforce.
Key social and demographic trends include increased cultural diversity, ageing workforces and a scarcity of talent in some areas. Digital trends impacting the workplace include the ubiquity of mobile technology and a culture of constant connectivity.
§ Constantly seek new knowledge and better ways of doing things
Potential To reach our full potential we will: § Attract and develop people who are the envy of the industry
§ Inspire our people to dream more, learn more, do more and become more
§ Identify and invest in people who are critical to our future success
Collaboration To encourage teamwork we will: § Invite challenge and ask fierce questions with the right intent
At Aviva we are obsessed with making things simpler for our customers and each other – we manage complexity so our customers don’t have to.Create legacy At Aviva we strive to create a future for our customers and each other, which is every bit as bright and sustainable as others created before.
For more information on our responsibility to our employees, turn to page 46
In 2013 southern Alberta suffered devastating floods and High River was badly affected. The waters rose so quickly that the Finlays left with only the clothes they stood in. Their first priority was to ensure their two young sons, Degan and Khail, were safe. Aviva sent a loss adjuster without delay who helped get the family into another house, allowing them to rebuild their lives. Husband D’Arcy Finlay says: “Life’s full of uncertainties and major challenges; for us, after the flood, it became whether we’d even have a home. Fortunately, Aviva had our backs. Our boys are safe and now we’re looking forward to making the new house into a family home.”
The overall improvement in cash remittances was driven by increases from UK & Ireland Life and UK General Insurance. The remittance from UK General Insurance was received in January 2014, although in future we expect to receive remittances in the fourth quarter each year. We continue to take action on capital efficiency to increase these cash remittances.
This measures our operating profitability on an International Financial Reporting Standards (IFRS) basis. It excludes non-operating items such as restructuring costs, impairments, short-term investment volatility and profits or losses arising on disposals.
This measures the total IFRS profit or loss during the year including operating profit and non-operating items such as restructuring costs, impairments, short-term investment volatility and profits or losses arising on disposals.
The IFRS profit before tax was £2.8 billion for the year. This includes a £0.8 billion profit on the disposal of our US Life business (including recycling of reserves of £0.6 billion on completion). Excluding the impact of the US disposal, expense efficiencies achieved across the Group have driven an increase in profit before tax. The loss in 2012 reflected the write-down of £3.3 billion in the value of our US business.
2 The Group adopted the amendments to IAS19 during the year and the requirements of the revised standard have been applied retrospectively. Comparatives have been restated accordingly.
Value of new business (VNB) Value of new business – excluding Malaysia and Sri Lanka (£m)
Value of new business increased 13%, primarily driven by France, Asia1, Poland and the UK. Growth in these markets was partly offset by reductions in Italy, which was impacted by lower product margins, and Spain, where volumes and margins were affected by difficult local market conditions and the disposal of Aseval.
COR measures the profitability of general insurance business. A percentage below 100% indicates that the general insurance business has delivered an underwriting profit. COR is calculated as net incurred claims expressed as a percentage of net earned premiums, plus written commissions and expenses expressed as a percentage of net written premiums.
OCG on a continuing basis is down 5% impacted by losses incurred in the Canada floods, partly offset by expense savings across the Group. The life business contributed £1.2 billion (2012: £1.3 billion) and the non-life business contributed £0.6 billion (2012: £0.6 billion) to OCG in 2013.
This shows the return generated on the capital we have invested. Return on equity is calculated as total after tax operating return divided by opening equity shareholders’ funds.
1 The Group adopted the amendments to IAS19 during the year and the requirements of the revised standard have been applied retrospectively. 2 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 third parties.
There were 638 senior managers at Aviva, including those in Aviva’s subsidiary Boards. Of this number, 502 were male and 136 were female.
We measure employees’ views on Aviva through our annual global Employee Promise Survey and two of our key measures are engagement and enablement. We know that we need to increase our employees’ sense of engagement and enablement. Our employees should feel they can build a future career at Aviva and trust their senior leaders after a period of instability. We need to demonstrate that we value our employees and are focused on creating an environment in which they can thrive.
Our strategy By focusing on providing our customers with competitive products that meet their changing needs, we aim to continue to improve cash generation and deliver profitable growth. Our overall business is focused on risk products and long-term savings.
Our expertise across a comprehensive range of risk products, including protection, annuities, equity release and private medical insurance, is underpinned by our underwriting and investment management expertise, as well as our strong distribution networks and our brand.
We also intend to grow our award-winning private medical insurance business.
Retaining our customers remains a priority for us. For instance, in the area of automatic enrolment and workplace pensions we are helping employers prepare for the date when their automatic enrolment duties come into force for their businesses.
We need to have a deep understanding of our customers, including their attitudes, behaviour, lifestyle and health to help us innovate and price fairly in the market. Our use of data from our extensive customer base and external sources is invaluable to this understanding.
Our employees shape our customers’ experience. Our focus is to build on our employee engagement and drive improved effectiveness, as well as develop and retain our key talent. We recognise there has been a period of uncertainty for our employees as we have transformed our UK & Ireland Life business and remain committed to developing a workplace that fulfils individuals’ career aspirations and supports their wellbeing.
UK & Ireland Life Aviva is a leading life insurer in the UK and Ireland, offering retirement, risk and savings products to both individuals and groups.
1 This figure represents the total unique customers in the UK and Ireland and does not include the number of people covered by our policies, which is considerably more.
UK & Ireland Life operating profit increased by 7% primarily due to greater efficiency and an improved result in our Irish life business. Our large back book of business ensures an element of earnings stability and gives the opportunity for future efficiency improvements.
During the year, we increased the provisions for commerical mortgage defaults by £300 million due to impairments above the long-term trend. Following an extensive review, we reorganised our commercial finance team.
Our focus on achieving our financial targets has not reduced our commitment to our customers. Despite the level of transformational change seen during 2013, our Customer Transaction Net Promoter Score® has increased to +23, four points higher than 2012. We continue to receive external recognition for improvements to service, winning 47 awards during 2013, including Best Protection Provider (Money Marketing), Best Annuity Provider (Professional Adviser), six gold awards (Money Marketing Service), and Health Insurance company of the Year for a fourth year running at the Health Insurance Awards.
Whilst these trends are positive, the unprecedented regulatory focus on the UK life insurance industry continues.
We are leading the debates affecting our customers and are confident our underlying strengths and commitment to our customers position us well in 2014.
Our five point plan on annuities At Aviva, we encourage customers to shop around for the best annuity. However many more people could get better deals. We are calling on the industry to help customers get a better deal on their retirement income. This is our plan: § Consumers must be given clear guidance to help them understand the choices available and the importance of comparing rates
We offer: Personal home and motor insurance, general insurance for businesses, corporate and speciality risks 12.9m1
We are investing in the latest technology to serve our customers more effectively. In 2014, we will accelerate our use of predictive analytics, which uses advanced modelling techniques to identify trends in a variety of data. We will make full use of this to improve pricing sophistication, target growth in profitable lines of business, improve fraud detection in both underwriting and claims, and be more informed in how we target customer communications.
In commercial lines we are implementing Guidewire, an insurance software solution, across our policy administration and claims activities. The increased automation this provides will improve accuracy and efficiency of processing and will enable us to build products that better reflect changing customer needs.
Customers are our top priority. Their feedback continues to be our richest source of insight. In 2013 we redesigned existing products and created new ones following extensive customer research and the introduction of independent third-party and customer online rating and review tools. As a result, our personal home and motor products are now Defaqto five-star rated. In addition, a new online portal will 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 life and general insurance businesses in the UK.
We continue to work on the turnaround of the Irish general insurance business. Our strategy in Ireland is to focus on strengthening our position as a leading broker-based insurer and increase our retail market share through a digital offering that puts the customer at the centre of everything we do.
Ireland general insurance 1 This figure represents the total unique customers in the UK and Ireland and does not include the number of people covered by our policies, which is considerably more.
Our dividend has risen to £347 million (2012: £150 million), benefitting in part from the one-off impact of the Group restructuring undertaken during 2013.
The combined operating ratio has improved to 97.2% (2012: 98.6%), reflecting a combination of more disciplined underwriting, favourable weather experience compared to 2012 (despite the stormy end to 2013) and lower expenses.
In July we appointed Alison Burns as CEO of our Irish business and John Quinlan as MD of our general insurance company in Ireland. We expect this strong leadership team to drive the business forward.
The market in 2014 Market conditions for private motor and home insurance remain highly competitive in the UK and Ireland and we expect this to continue throughout 2014. Consumers are price conscious and we do not expect this to change. Our market- leading capabilities in predictive analytics will become increasingly important as success in this environment depends on being able to price risk, and serve customers effectively.
In the UK motor insurance market, legal reforms such as the ban on referral fees may reduce claims settlement costs and reduce premiums. However there is uncertainty over the impact of these reforms and the Competition Commission review. This uncertainty will remain until a new ‘normal’ for claims patterns and costs establishes itself.
In commercial lines, the fragile economic environment has stifled business investment and growth in recent years, and whilst the economic ‘green shoots’ are likely to give welcome uplift to business volumes, we expect the rating environment to remain generally soft in 2014. We continue to see capital flowing into the market which has the effect of suppressing commercial rates.
We continue to be an active participant with the Association of British Insurers on the design and implementation of Flood Re, whose primary purpose is to ensure that flood insurance remains accessible and affordable to those domestic properties at high risk of flood. The severe flood events of the winter only serve to re-emphasise the importance of this market solution to all parties: customers, insurers and Government.
Aviva Drive app We have re-entered the telematics market with ’Aviva Drive’, a new app which won the Insurance Times ‘Innovation of the Year’ award. It provides discounts on motor premiums based on customers’ individual driving habits. Over the course of 2013 the app was downloaded 215,000 times and we recorded nearly four million miles’ worth of driving data. In 2014, we will build on this data to provide enhanced rating insight, increase customer engagement and improve personalisation.
We are investing in the latest technology to serve our customers more effectively.
We offer: Pensions, protection, annuities, bonds and savings, personal and commercial general insurance, health insurance 12.9m1
Europe We are focused on five markets: France, a strong cash generator; Poland and Turkey, growth markets; and Spain and Italy which we are turning around.
Our strategy Our strategy for the European business is to continue improving operational performance and to deliver sustainable and reliable cash remittances to Group. We focus on capital efficient products that meet the needs of our customers.
Our European businesses should benefit both from any macroeconomic recovery and also from our strategic focus on value and capital efficiency.
In 2013 we made strong progress improving our life product mix, focusing on capital efficient products. Unit-linked savings and life protection VNB increased by 130% and 35% respectively.
In 2014 we are continuing this trend, launching new unit-linked funds and other innovative solutions, for example Eurocroissance (a hybrid with-profit and unit-linked product). We also plan to launch new protection products and simplify underwriting procedures.
We are also focused on strengthening our product range for small businesses with new dedicated products for health and retirement. In 2013 we increased health premiums from small and medium sized businesses by 15%.
We have recently introduced a ‘systems thinking’ approach, empowering our employees to meet customer requirements more effectively through simplifying and improving our processes.
To do this, we are investing in the development of our customer-facing people, providing them with the skills and training to have greater autonomy and discretion when serving customers. We are importing this approach from our UK business where it has been highly successful in improving customer service and reducing cost.
Our business in France showed strong growth on most key financial metrics. Total operating profit improved by 6% to £448 million (2012: £422 million) and cash remittances grew by 16% to £235 million (2012: £202 million). In addition, there was particularly strong growth in VNB, which increased by 39% to £166 million. While our reported COR increased in the year to 97.1% (2012: 94.9%), underlying profitability, excluding adverse weather events and reserve movements improved.
The market in 2014 France is a stable market with a large, well-developed insurance sector. We expect higher growth in the protection, health and retirement sectors as a result of changes in customer needs and the role of the government in the provision of social welfare.
Our focus in these markets continues to be growing VNB by strengthening existing distribution networks and relationships, and broadening our distribution channels.
Poland We are the second largest insurer by profit in Poland with over 3.5 million customers and over £17 billion assets under management. Our life business has a 7% market share, whilst our general insurance business is small but growing. We also operate a life subsidiary in Lithuania where we are the second largest life insurer and third largest pension provider.
We have launched a virtual branch selling life investment products directly to customers, set up agreements with price comparison sites to sell our products, and invested in social media engagement. We are one of the biggest direct general insurance providers with a 15% market share¹.
We are the second largest pension provider based on assets under management. The Polish government has now introduced legislation changing the pensions system; however our pensions business has been closed to new customers since 2011, therefore the impact of the changes on VNB will be marginal.
Operational efficiency has continued to improve, driven by automation and digitalisation of core processes and implementation of customer self-service tools. This is an area we plan to invest more in over the next few years.
In Poland, VNB increased strongly to £51 million (2012: £35 million) driven by higher sales and improvements in product mix. Total operating profit increased to £184 million (2012: £167 million) and there was also an increased dividend of £85 million (2012: £70 million).
Turkey Our life business in Turkey, which operates through a joint venture with Sabanci Group, continued to show strong growth in 2013. VNB increased 23% to £37 million (up 28% in local currency). Life protection premiums increased year-on-year by 33% and pension contributions by 80% driven by favourable regulatory developments.
The market in 2014 The economy in Poland remains resilient with insurance penetration forecast to continue to increase from current low levels.
In Poland, we distribute through: Two joint ventures and six bank partners, 2,300 tied agents, 600 multi-agencies, 800 brokers
We continue to improve cost efficiency through standardising processes and leveraging shared services between our bancassurance and retail businesses.
Our Italian business made good strategic progress in 2013, exiting underperforming and non-core distribution agreements.
The market in 2014 Although still challenging, the Spanish economy has stabilised and started to show signs of improvement, with a return to positive GDP growth, falling unemployment and improving investment sentiment. Our focus remains on further improving the mix towards protection and capital efficient saving products and improving operating efficiency.
We offer: Personal home and motor insurance, general insurance for businesses 2.6m1
We are also continuing to develop our world-class predictive analytics capabilities. Significant opportunities to improve underwriting results exist, for example by combating fraudulent claims. Fraud costs all customers and our shareholders. We are deploying sophisticated predictive tools that review claims and activity across all elements of the claims process. The potential for improved claims management and service delivery is significant and we intend to embed further these capabilities into our underwriting processes.
General insurance operating profit was £246 million (2012: £277 million), an 11% reduction compared with the prior year (9% reduction on a local currency basis). The reduction was driven by the impact of the severe weather events seen during 2013. The floods in Alberta and Toronto were the first and third largest insurance catastrophe loss events ever to hit the industry in Canada.
As a result there has been a 2.3 percentage point deterioration in the combined operating ratio for personal and commercial property. This was partially offset by lower expenses and when normalising catastrophe activity and excluding the two 1-in-100 year severe weather events, the COR would have been 92.3%.
Operating expenses were £378 million (2012: £401 million), a reduction of 6% reflecting the continued focus on expense management and the benefits of cost savings initiatives.
In October 2013 we announced the appointment of Greg Somerville as President and CEO of Aviva Canada. Greg has extensive experience in the property and casualty insurance industry and has been part of the Aviva Canada Executive Committee since 2004.
In commercial lines, we believe that the elevated level of catastrophes in 2013 together with improving economic conditions, particularly in the manufacturing sector, will translate into a firmer market.
Distribution trends continue to point towards customers increasingly preferring self-service. This favours direct-to-customer models. The broker channel is now beginning to adapt to self-serve consumer needs whilst still offering advice and choice.
In 2014, we expect competitors to increase significantly their usage based insurance product lines such as pay-as-you-drive, an area in which we have experience. This, together with personal auto rate reductions in Ontario, will drive further marketing investment by our competitors.
Our strategy Our Asian businesses are future cash generators. Our strategy is to expand profitably into selected areas of this growing market, supporting growth in the Value of New Business (VNB), a key element of the investment thesis. We continue to review our product and distribution mix to maximise value of new business, growing in channels, product lines and locations which offer the greatest opportunities.
Alongside the rapid growth of our business in Singapore and China, in January 2014, we announced plans, subject to regulatory approval, to form an equal joint venture partnership with Astra International, Indonesia’s largest publicly listed company, to sell and distribute life insurance products in Indonesia. The partnership will also be the preferred life insurer for Astra’s 179 affiliated companies including PermataBank2, one of Indonesia’s top ten banks.
In Singapore, to complement our successful bancassurance business, we have a leading position in the financial advisory channel.
In China, to get closer to our customers, our strategy is to grow our multi-distribution channels in second and third tier cities and we are a leading foreign insurer in five of the 12 provinces in which we operate, with a presence in 54 cities.
We are also servicing and approving policies faster and more efficiently by using straight-through processing technology which means information comes to us directly no matter where our customers purchased our product.
We continue to review our product and distribution mix to maximise value of new business.
Khor Hock Seng CEO, Aviva Asia 1 This represents unique customers and not the number of people who are covered by our policies, which is considerably more. 2 Subject to regulatory approval. 3 OECD: General assessment of the current economic situation November 2013. 4 Swiss Re Sigma: World insurance in 2012.
Value of New Business (VNB) – excluding Malaysia & Sri Lanka 91 55
Overall operating performance in Asia has been strong, with satisfactory growth in the value of new business and operating profit.
Singapore and China were the main contributors to both VNB and operating profit growth. Singapore grew VNB by 52% to £64 million through a combination of sales growth across all distribution channels and a shift in product mix to protection sales.
The market in 2014 South East Asia and China are expected to deliver relatively good GDP growth in 20143. Importantly, life insurance penetration remains low in these markets, ranging from 0.6% in Vietnam to 4.4% in Singapore4, and we expect this to increase over the coming years.
Taken together, these trends underline the attractiveness of holding selective positions in Asia, where significant growth over the long term is possible.
Street to school programme Aviva Asia takes its responsibilities to society very seriously and supports some of the region’s most vulnerable citizens – street-connected children. This year the Asian business helped over 130,000 children and our employees and customers dedicated over 15,000 hours of work to voluntary projects for Aviva’s Street to School programme. Over the year we entered into new community projects in Indonesia to help street children in Jakarta, held an awareness campaign on the plight of left-behind children in China and hosted a round table with the United Nations in Singapore on the rights of street children in South East Asia, to name just a few of our initiatives.
Aviva Investors We are Aviva’s investment management business, managing funds for Aviva and external clients. We have £241 billion of assets under management.
Our strategy We aim to increase our contribution to the Group by capitalising on our expertise managing Aviva’s own funds to become a strong third-party manager. We are focused on capabilities and propositions that build on our experience in managing long-term savings. This includes our expertise in fixed income, real estate, and multi-asset funds.
In January 2014 Euan Munro joined as chief executive. Euan brings substantial expertise in fixed income and multi-asset investing. In the latter area of investing he gained his reputation as the architect and principal manager of the UK’s largest absolute return fund. His appointment underlines our commitment to growing our asset management business.
During 2013 we reviewed our strategy with a view to building a stronger, more profitable business with increased third-party business. At the heart of this is a focus on offering investment propositions which deliver predictable returns with low volatility. Future success will be driven by serving Aviva customers and external clients even better, and sharpening the performance of the business.
Aviva Investors will use its existing global, multi-channel distribution network to promote investment strategies and capabilities identified during the strategic review.
In 2013, we identified some breaches of the dealing policy which occurred between 2006 and 2012. The relevant regulatory authorities were notified. A thorough review of internal control processes relating to the trading activities has been carried out.
There is a total adverse impact on Aviva Investors operating profit from this activity of £96 million, reflecting the compensation expected to be claimed in respect of these breaches and associated costs.
The market in 2014 We are operating in a low interest rate environment and investor risk appetite is slowly returning. However, institutional investor risk appetite is likely to remain subdued. This is due to regulatory factors, giving us the opportunity to help clients achieve more predictable returns with limited risk.
Aviva Investors was the principal investor in the regeneration of an unloved part of the city of Bath, a World Heritage site. The 460,000 sq ft shopping area with 99 residential apartments was designed with environmental sustainability in mind, from conception through to design, planning and construction. Flagged with the distinctive local stone, it is the first major city centre development in Bath since the 1970s. Chris Paterson, real estate fund manager at Aviva Investors, says: “We’ve created a legacy for Bath in this sustainable, long-term investment. The design complements the city’s historic architecture and will stand the test of time, so we won’t have to create carbon waste by continually redeveloping it to keep it contemporary.”
Our risks Our focus on three core business lines with scale – life, general insurance and asset management – means we have chosen to accept and manage the risks inherent to these lines of business.
Our business is about protecting our customers from the impact of risk. We receive premiums which we invest in order to maximise risk adjusted returns, so that we can fulfil our promises to customers while providing a return to our shareholders. In doing so, we accept the risks set out below.
Life insurance risk: Includes longevity risk (annuitants living longer than we expect), mortality risk (customers with life protection dying), expense risk (cost to service contracts) and persistency risk (customers not renewing their policies).
Some of our life and savings products provide guaranteed minimum investment returns to customers. As a result we accept from them investment type risks such as credit and market risk in order to offer upside potential but providing them with protection against the downside.
Uncertain returns on our investments as a result of credit risk (actual defaults and market expectation of defaults) and market risks (resulting from fluctuations in asset values, including equity prices, property prices, foreign exchange rates and interest rates) affect our ability to fund our promises to customers and other creditors, as well as pay a return to our shareholders.
Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form. The relatively illiquid nature of insurance liabilities is a potential source of additional investment return, by allowing us to invest in higher yielding, but less liquid, assets.
Operational risk is the risk of direct or indirect loss, arising from inadequate or failed internal processes, people and systems, or external events including changes in the regulatory environment.
Asset management risk is the risk of customers redeeming funds, not investing with us or switching funds, resulting in reduced fee income. We manage funds on behalf of our customers, so they do not have to manage the credit, market and operational risks themselves.
Risks arising from our operations and other business risks 1 The economic surplus represents an estimated unaudited position. The capital requirement is based on Aviva’s own internal assessment and capital management policies, measuring the amount of economic capital at risk in a 1-in-200 year loss event over a one year time horizon. The term ‘economic capital’ does not imply capital as required by regulators or other third parties.
How we manage our risks Our core expertise is understanding and managing these risks, so that we can competitively price our products, deliver on our promises to customers and provide sustainable earnings growth to our shareholders.
We manage risk through our choice of business strategy, underpinned by our business culture and values, continuously seeking to identify opportunities to maximise risk-adjusted returns. Rigorous and consistent risk management is embedded across the Group through our risk management framework, comprising: § Our risk appetite: The risks that we select in pursuit of return, the risks that we accept but seek to minimise and the risks we seek to avoid or transfer, including quantitative expressions of the level of risk we can support (e.g. the amount of capital we are prepared to put at risk)
§ Our risk governance: Includes risk policies and business standards, risk oversight committees and roles and responsibilities
§ Our processes: The processes we use to identify, measure, manage, monitor and report risks, including the use of our risk models, and stress and scenario testing.
While we have appetite for our top three risks by type, we transfer or mitigate specific risks within these categories, where the risk-adjusted returns are insufficient or where we believe that we have excess exposure. Specific risk transfer and mitigation solutions which we employ to manage these and other risks include: § Reinsurance, to transfer insurance risks including longevity risk
Emerging risks We also manage and monitor risks which may impact our ability to write profitable new business over the longer term. For example, such risks include: § Climate change: potentially resulting in higher than expected weather related claims and inaccurate pricing of general insurance risk
§ New technologies: failure to understand and react to the impact of new technology and its effect on customer behaviour and how we distribute products could potentially result in our business model becoming obsolete
US disposal – bolstering our financial strength and reducing our credit and interest rate risk exposure In October 2013 we successfully disposed of our US Life business, resulting in an increase in the Group’s economic capital surplus coverage ratio by 19 percentage points (or the economic capital surplus by approximately £1.2 billion). The sale reduced the Group’s exposure to credit and interest rate risk, and also reduced the sensitivity of the Group’s economic capital results to credit spread movements.
The disposal means the Group is now within its risk appetite for total required economic capital and credit risk.
Read about how we address the risks and the opportunities presented by new technologies through our strategic framework on page 19
Our wider impact In the following section, we describe our strategy in relation to our employees, the environment, climate change, as well as social, community and human rights issues.
We are the only insurer listed in the Global Compact 100 Index
We are one of the top global organisations in the FTSE4Good
Environment and climate change Controlling our impacts and influencing the actions of others; creating quantifiable positive environmental change with financial and social benefits.
Community development Acting responsibly in our communities, extending our positive impact through insight, expertise and partnership.
Living wage We are proud to be a partner of the Living Wage Foundation. We’ve been a London Living Wage (LLW) employer since 2005 and, in 2013, we became an accredited London Living Wage employer. For the rest of the UK, our minimum pay for direct staff exceeds the UK national living wage. We are discussing payment of the Living Wage for onsite contractors with our suppliers, following the value the LLW has brought to our contracted relationships in London.
Our people Being a responsible business is a vital differentiator. We want to recognise exceptional performance in our people and invite collaboration – key components of our people thesis. Building our leadership capability is critical to achieving this.
Organisational change has had a significant impact on our people. Engaging them is a priority for rebuilding pride.
Values-based culture In 2013 we challenged ourselves to ensure we have the right values as a company in light of the environment in which we operate, the culture which we wish to nurture and our strategic priorities. Following extensive consultation with our employees across all levels of the organisation in November 2013, we introduced four new values with associated behaviours as part of our people thesis: care more, kill complexity, never rest, create legacy.
Attracting talent We take a long-term view of the people we need to meet our future priorities and assess individuals’ performance and long-term potential.
Diversity We aim for a culture which respects difference and recognises individuality. We support people who think and act differently which is essential to reaching our full potential.
In 2013, 75% of employees reported that we are an organisation where people from diverse backgrounds can succeed. We are the only insurer in the 2014 Stonewall Workplace Equality Index which benchmarks Britain’s most gay-friendly employers.
It is important that we appoint the most appropriate person for the job and that opportunities for development and promotion are available to everyone. Full and fair consideration is given to applications for employment by disabled persons. We are committed to supporting employees who become disabled during their employment including any adaptations to their working life and providing suitable training. All employees are encouraged to agree a training plan with their manager to help them achieve their career goals. Our fairness and equality policies ensure that all employees adhere to these principles.
People managers are required to have honest conversations with their teams about their results, and work together to prioritise areas of focus. Aviva’s senior executives have an objective focused on taking action against the EPS results to improve engagement and enablement, and
Extreme weather events pose a serious risk to our business, with the potential for fluctuations in claims and challenges to risk pricing. We are using our expertise as insurers, such as our knowledge of historical weather events and cutting-edge predictive modelling to map future scenarios, reducing the risk to our business and our customers. For example, Canada suffered two 1-in-100 year flood events within two months of each other in 2013. Due to our effective risk management approach, in these cases we were able to pay customer claims, deliver great service and still make a profit in our insurance business.
Controlling our impact We publish annual Group performance data for CO2e emissions, waste and water consumption. Our carbon footprint boundaries identify the scope of the data we monitor and the emissions we offset. We also use Accounting for Sustainability’s connected reporting framework.
Scope 3 – business activity emissions from non-owned sources – eg. business travel.
We report on all of the Greenhouse Gas (GHG) emission sources on a carbon dioxide emissions equivalents (CO2e) required under the Companies Act 2006 (Strategic Report and Directors’ Reports) 2013 Regulations, which are material to our business operations. We report our emissions using the operational control approach as defined by our organisational boundary. We do not have responsibility for any emission sources that are not included in our business operations or included in our carbon footing boundaries.
Our reporting follows the GHG Protocol Corporate Accounting and Reporting Standard, and emission factors from UK Government’s GHG Conversion Factors for Company Reporting 2013.
We have used the two most appropriate intensity measures to our business CO2e per employee and CO2e per £ million GWP which are expressed in the table above.
We purchase 48% of our electricity from renewable sources round the world. However, the UK Government conversion factors require that the CO2e element of UK renewable electricity should be reported as grid average. For our unavoidable remaining carbon emissions we offset these to the value of 100% through the acquisition and surrender of emission units on the voluntary carbon market (VERs).
Climate-resilient communities We believe in a more joined-up approach to help build resilience against climate change.
Should a breach of policy occur, our global confidential malpractice reporting service allows employees to report by email, via the internet or in our larger businesses, over the telephone. All cases are referred for independent investigation. In 2013, 27 cases reached conclusion and four cases remain under investigation.
Access to insurance We increase our social and economic impact by promoting access to insurance for all areas of society. We invest in social housing and help low-income households access affordable home contents insurance.
We launched a new flexible insurance solution for learner drivers in 2013 in the UK. Dayinsure Learner provides short-term cover from just one day up to three months to allow provisional licence holders to access affordable insurance.
We are liable under the CRC Energy Efficiency Scheme. The boundaries of measurement and reporting differ from our global operations emissions, being restricted to the UK businesses emissions from building energy and including the property portfolio of our investment funds managed by Aviva Investors. Our annual CRC Report 2012–13 showed total emissions of 108,013 tonnes which cost £1,296 million in the purchase of Government allowances.
Our target is to cut CO2e emissions by 20% between 2010 and 2020. We aim for a 5% year-on-year reduction. In 2013, we cut our emissions by 7.5% compared with 2012, and we’ve achieved a 12% reduction since 2010.
In 2013, we radically expanded our critical illness cover for new customers to ensure as many cases as possible will be paid. Our cover includes 57 conditions. We also extended the scope under which people will qualify for three of the five most claimed for conditions: multiple sclerosis, stroke and heart attack.
Scope 2 – Aviva controls indirectly Greenhouse gases emitted indirectly from consumption of purchased electricity, heat or steam
Waste Water Rental cars * Greenhouse gas leaks from air-conditioning systems. ** Personal business mileage.
In 2013, Aviva Investors was recognised at the Sustainable City Awards convened by the City of London Corporation, winning the Leadership in Sustainability Award.
Leading public debate We take a leadership role in tackling the big social issues relating to our sector through research and open debate with consumers, industry bodies, Government and other stakeholders. In 2013, we carried out our 10th Customer Attitudes Survey, in 13 countries, and we have surveyed more than 250,000 people since 2004 when the survey first started. The three greatest concerns facing people and their finances include: unexpected expenses, significant increases in the price of basic necessities, and serious illness. We also conduct other studies: § Our Family Finances Report looks into the financial experiences of different family types
§ Our biannual Small and Medium Enterprise (SME) Pulse identifies the trends and challenges facing small business owners
§ Aviva Spain’s Savings and Pensions Institute encourages consumers to save more for their future.
Human rights Respect for human rights should go beyond policy setting. It has to become part of the culture and decision-making ethos of an organisation. Aviva is committed to upholding globally accepted human rights principles reflected in standards and other instruments including: § United Nations Universal Declaration of Human Rights (UNUDHR)
§ United Nations Global Compact LEAD § UN Women’s Empowerment Principles § UNICEF, Global Compact and Save the Children ‘Business and Child Rights Principles’.
During 2013, we refreshed our human rights policy in light of the UN Guiding Principles for Business and Human Rights. Our due diligence and risk assessments have shown that our most material human rights risks relate to the five stakeholder groups shown on the next page.
£500m Immediate allocation of £500 million in the UK’s economic growth plan as part of the insurance industry’s commitment of £25 billion to infrastructure investment £28m Over £28 million for student accommodation in York £3m £3 million for a new medical centre in Salford £32m £32 million to help build 11 new fire stations
Employee involvement 75% of Aviva employees agree we do a good job of contributing to communities. We encourage all our employees to take up to three days of paid volunteering leave a year. As well as contributing towards our community targets, this improves the motivation, wellbeing and skills-base of our people.
We are proud to have achieved the UK Government’s payroll giving Gold Standard award. In 2013, 27% of employees made financial donations through payroll giving (2012: 28%) totalling £536,639.
The round table brought together Government representatives with UN agencies, academia and business, to discuss issues related to the rights of street-connected children. The round table discussion was a recommendation of the 2012 OHCHR report on street children, supported by Aviva.
Oxfam 365 Aviva supports global emergency relief charity Oxfam 365, which provides immediate help to communities suffering life trauma, such as the devastation caused in the Philippines by Typhoon Haiyan. In 2013, our contribution to Oxfam 365 exceeded £1 million.
PASSPORT 2012 was the first global study to include the views of children involved in the Street to School programme. They were positive about the benefits they have received, including improved wellbeing and better future prospects.
Employees: We manage our risks by delivering on our commitment to respecting and promoting fair reward, diversity and inclusion, equal opportunities, labour relations and freedom of association.
Supply chain: We request suppliers disclose their human rights policies and engage with them where necessary to address any concerns. Our procurement contracts require suppliers to commit to ILO core labour standards and uphold the universal declaration of human rights.
Customers: Our business ethics code requires us to conduct business in a way which respects human rights. This includes being clear in our communications, ensuring accessibility to our expert staff and privacy of their data.
Mehmet was involved in a serious car accident and spent over two months in intensive care. He suffered serious head injuries, and is now blind and partially deaf. Before the accident Mehmet had taken out an Aviva credit-linked life insurance policy to support a loan. This policy paid for his recuperation and allowed him to take time to recover and plan for the future, without the worry of putting financial pressure on his family. Losing his sight has meant making changes to many aspects of Mehmet’s life, including having to install specialist software on the laptop computer from which he is rarely parted. “To be frank, I never really believed in things like insurance before, but Aviva proved me wrong,’’ he says.
Read the Chairman’s governance letter for committee information, turn to page 62
Back (left to right): Glyn Barker, Gay Huey Evans, Michael Hawker AM, Patricia Cross, Michael Mire, Bob Stein, Scott Wheway
He has extensive experience in banking, including investment, corporate and retail banking, and in general management, insurance, strategy, risk and cultural change.
Mark joined the Board in December 2012 and became Group Chief Executive Officer on 1 January 2013.
Patrick joined the Board in February 2010 as Chief Financial Officer.
He is currently a member of the supervisory board of Delta Lloyd NV (insurance) which was formerly an associate company of Aviva plc.
Patrick has extensive global experience in various executive functions within the insurance industry. He has been instrumental in improving the Group’s financial strength, resilience and performance against the backdrop of a challenging macroeconomic and regulatory environment.
Patrick resigned on 22 January 2014 and will step down from the Board and leave the Group before the AGM.
He is currently Chairman of 3i Group plc (private equity), Anglian Water Group Ltd (utilities) and The Point of Care Foundation (charity) and a non-executive director of Skanska AB (construction) and Cellmark Holdings AB (forest products).
He was formerly Chairman of Friends Provident plc (life insurance), British Energy Group plc (utilities), Michael Page International plc (recruitment), and Cross London Rail Links Ltd (Crossrail) and was formerly Deputy Chairman of Network Rail Ltd (railway network provider), Partnerships UK plc (public private partnership) and UK Green Investment Bank plc (investment bank).
Sir Adrian has significant experience in the financial services industry and in government and regulatory circles.
He is a qualified solicitor and was formerly a partner at Linklaters & Paines.
Glyn has extensive experience as a business leader and a trusted adviser to FTSE100 companies and their boards on a wide variety of corporate and financial issues.
He possesses a deep understanding of accounting and regulatory issues together with in-depth transactional and financial services experience.
She was formerly Chairman of the Board of International Swaps and Derivatives Association, Inc (ISDA), Vice Chairman, Investment Banking & Investment Management at Barclays Capital (banking), a Non-Executive Director of The London Stock Exchange Group plc (stock exchange) and a trustee of The Wigmore Hall Trust (charity). Prior to that, Gay held senior management positions at Citi Alternative Investments (investments) and Bankers Trust Company (banking).
Michael is Chairman and Non-Executive Director of the Australian Rugby Union and SANZAR Pty Ltd (rugby union) and is a member of the International Rugby Board Council and Executive Committee.
He was formerly Chief Executive and Managing Director of Insurance Australia Group (insurance), Group Chief Executive of business and consumer banking at Westpac Banking Corporation (banking) and Chairman of the Insurance Council of Australia (insurance representative body).
Michael brings to the Board a wealth of knowledge and experience gained over a long career in the banking and insurance industries, in both executive and non-executive roles in Europe, Asia and Australia.
Patricia joined the Board in December 2013. She chairs the Remuneration Committee and is a member of the Audit and Nomination Committees. She is currently a Non-Executive Director of Macquarie Group Limited (banking) and Macquarie Bank Ltd (banking). She is a Director of the Grattan Institute (Australian think tank) and an Ambassador for the Australian Indigenous Education Foundation (charity).
She was also Executive General Manager, wholesale banking and finance at NAB, and held a number of senior executive positions at Chase Manhattan Bank and Banque Nationale de Paris (banking).
Patricia has significant experience as both an executive and non-executive director across a wide range of financial services and other regulated industries in the US, Europe and Australia.
Michael was appointed to the Board in September 2013 and is a member of the Governance, Risk and Nomination Committees.
Michael has extensive experience of advising companies on the implementation of transformation programmes and also has an in-depth understanding of the financial services sector.
Scott was appointed to the Board in December 2007, is Chairman of the Governance Committee and is a member of the Audit and Nomination Committees.
He is currently a Non-Executive Director of Santander UK plc (retail bank).
He was formerly Chief Executive Officer of Best Buy Europe (retail services), director of The Boots Company plc (now known as The Boots Company Ltd) (pharmacy), Managing Director and Retail Director of Boots the Chemist at Alliance Boots plc and Director of the British Retail Consortium (trade association for the UK retail industry). He has previously held a number of senior executive positions at Tesco plc, including Chief Executive of Tesco in Japan.
David Barral Chief Executive Officer, Aviva UK & Ireland Life Insurance b.1962
David joined Aviva in 1999 and is Chief Executive Officer, Aviva UK & Ireland Life.
He was previously Aviva’s Director of Independent Financial Advisor Business and was appointed Distribution Director in 2005 covering independent financial advisor (IFA), retail, partnership and employee benefit channels. In 2008 he was appointed Marketing Director and led the Aviva rebrand for the UK Life business and then became Chief Operating Officer for Aviva UK Life responsible for customer propositions, pricing and customer operations. During his time at Aviva, he has spearheaded much of the UK Life and pensions business’ activities to champion the customer, including supporting a move to the open market option for UK annuity customers.
He is also currently a director of the Financial and Legal Skills Partnership and JSSP (licensed sector skills councils).
Whilst in this role, he led the establishment of the International Forum of Independent Audit Regulators, serving as its Chairman and Vice Chairman.
He has also held senior management roles in WH Smith Group plc and Cadbury Schweppes plc.
Kirstine joined Aviva in 1991 and is the Group General Counsel and Company Secretary and heads the Office of the Chairman.
She established the legal and company secretarial function as a global team and is responsible for the provision of legal services to the Group, legal risk management, and compliance with UK and US listing requirements.
She also supports the Chairman and the Board in the discharge of their responsibilities.
She was formerly Deputy Group Company Secretary and Legal Counsel of Aviva plc before securing her current role.
Nick joined as Group Transformation Director in April 2013 and currently has responsibility for Group Operations. He has a strong international background in consumer banking and insurance, having most recently held a number of senior management roles within AIA Group. He has significant experience of general management, business operations and transformation projects over a 40 year career history.
Within the AIA Group, he was Executive Vice President and Group Chief Administration Officer, responsible for the execution of AIA’s transformation strategy which resulted in AIA’s successful IPO; Senior Vice President and Chief Transformation Officer; and Senior Vice President, strategic initiatives. He was previously an advisory principal to buy-side private equity transactions, most recently in Asia but also previously in the UK and Europe. He was also previously President and Chief Operating Officer at CIGNA Asia Pacific and senior vice president and Chief Executive Officer of CIGNA Latin America, and has held a number of management roles at Citibank within Europe.
The Group executive is made up of the executive directors and the senior executives whose biographies are below. The Group executive meets broadly twice a month as a forum for the Group CEO to discuss the strategic, financial, reputational and commercial aspects of the Group. The forum does not have decision-making authority in its own right and authority rests with each of the members (within their respective remits), subject to the control and oversight of the Board.
Christine joined Aviva in March 2013 as the Group HR Director with responsibility for developing the global HR strategy.
She was most recently head of HR, global retail and business banking at Barclays where she took a leadership role in the cultural change programme.
Amanda joined Aviva in 2008 to oversee the rebrand from Norwich Union and to set up a global marketing and communications function. She has responsibility for customer, marketing, brand, corporate & public affairs and corporate responsibility. She is also the executive sponsor for diversity. Amanda has a BSc in Psychology from the University of London, is a graduate of the Insead Advanced Management Programme, a Life Fellow of the
Euan joined Aviva in January 2014 and is Chief Executive Officer, Aviva Investors with responsibility for capitalising on Aviva Investors expertise in managing Aviva’s own funds, becoming a stronger third-party manager and increasing Aviva Investors profit contribution to the Group.
He was most recently global head of multi-asset investing and fixed income teams at Standard Life Investments with responsibility for the management of all the assets of Standard Life Assurance Company and Standard Life Investments’ fixed income and multi-asset investment funds.
He was also a member of Standard Life Investments’ board and Standard Life plc’s executive leadership team.
Euan has significant experience in fixed income and multi-asset management in an insurance environment.
Maurice Tulloch Chief Executive Officer, Aviva UK & Ireland General Insurance b.1966
Prior to moving to the UK Maurice was Chair of the Insurance Bureau of Canada (IBC), the Property & Casualty Insurance Compensation Corporation (PACICC) Board, and the Insurance Institute of Canada (IIC) Board and a member of a number of other Canadian insurance bodies.
Jason joined Aviva in August 2010 and is the Chief Strategy and Development Officer. He has responsibility for the development of Aviva’s strategic agenda and plans as well as the ongoing monitoring of the financial performance of the Group’s portfolio of businesses.
He also oversees the Group’s mergers, acquisitions and disposals activity and has led the Group’s recent disposal programme, including the sale of Aviva USA.
Jason was previously Strategy and M&A Director with responsibility for M&A, the Group’s strategic plan and the oversight of Aviva’s Investor Relations function.
Dear shareholder The role of the Board is to set the tone from the top on the Group’s governance, culture and values.
Our values were in action during the year when we found evidence of late allocation of trades on a number of funds within Aviva Investors. The Audit Committee led a thorough investigation of the issue and reviewed the potential financial impact on the investors in the funds, and has agreed and monitored the implementation of measures to improve the controls to prevent a reoccurrence. We engaged the relevant authorities at an early stage and have kept them fully apprised of the issue. We are taking steps to ensure that customers will not ultimately be disadvantaged as a result of these breaches of the dealing policy.
Audit Committee The Audit Committee has continued to monitor the integrity of the Company’s financial statements; the system of internal controls and issues arising through internal audits. It has an open and transparent relationship with the Company’s auditor. One area of focus for the committee throughout the year has been the oversight of the project to ‘raise the bar’ on the internal control environment and the committee is satisfied that good progress is being made. Glyn Barker, the committee chairman, also commissioned an external evaluation of the quality and effectiveness of the Group’s internal audit function and the committee. The significant issues discussed by the committee during the year are disclosed in the Audit Committee report in the annual report and accounts in line with the new requirements in the UK Corporate Governance Code.
The key activities that the committee has undertaken during the year include: strengthening subsidiary governance; monitoring reputational issues; initiating a programme of work to develop a greater insight into product governance; reviewing and contributing to the development of the Customer and People theses and reviewing and approving the Group’s Corporate Responsibility Plan.
Nomination Committee The Nomination Committee led the process for the appointment of Michael Mire and Patricia Cross as non-executive directors and has also considered and recommended to the Board a number of committee membership changes and Sir Adrian’s appointment as senior independent director. We are conscious that we currently have only 18% female representation on the Board and increasing this is a priority for the committee. The committee has considered each non-executive director’s independence and each director’s contribution to the Board during the year, and their suitability for election or re-election at the 2014 AGM, and fully supports the election or re-election of all Board members.
Subsidiary governance Governance is important at all levels of the organisation. We apply many of the provisions of the Code to our subsidiaries to ensure that we maintain the same high standards of governance throughout the Group. We have appointed non-executive directors to the boards of all our principal subsidiaries and each principal subsidiary also has a board audit and risk committee. This strengthens the degree of oversight and challenge to the business and also provides a mechanism for information flows up and down the organisation both between management and non-executive directors, and subsidiary and Group non-executive directors.
We care about our customers, and endeavour to ensure that we provide them with products that meet their needs.
Responding to new requirements Aviva’s 2013 DRR reflects the new reporting requirements introduced by the Department for Business, Innovation & Skills regulations. We have endeavoured to reflect the letter and the spirit of those new requirements in the DRR. We have drawn on the guidance, notably by the GC100 Investor Group, in its preparation.
Paying for performance We believe there is a clear link between the performance of the Group, the value we add for shareholders and the remuneration of our most senior executives. Our remuneration policy and practice reflects performance against the Group’s main strategic priorities, which are: § Improve financial performance – total remuneration is heavily weighted towards pay dependent on outcomes against the Key Performance Indicators (KPIs) of our business, notably cash flow, profit and Return On Equity (ROE)
§ Focus on core businesses – through the measurement of a number of key financial, operational and longer-term return measures, overall remuneration is closely aligned to the achievement of the Group’s strategic objectives
Our reward approach in practice The application of our policies and practices in the 2014 reward round has resulted in the following outcomes for the Group Chief Executive Officer (Group CEO): § Basic pay – basic salary of £980,000 will remain unchanged
Appointment of new CFO The Board announced on 28 February 2014 the appointment of Tom Stoddard as CFO. Mr Stoddard will join on 5 May 2014. Details of his remuneration arrangements were included in the announcement of his appointment, and are set out in the DRR.
We believe this regular contact is proving beneficial for both parties in increasing mutual understanding, addressing and resolving issues of concern and helping informed decision making. We remain committed to continuing that dialogue.
Usual practice would be that our remuneration policy is put to a vote every three years, although we expect to conduct a strategic review of our executive remuneration in 2014 to ensure our reward frameworks, policies and practices remain fit for purpose, aligned with the wider talent market and compliant with relevant regulation.
Subject to the outcomes of that consultation, we will aim to put proposals to shareholders at our 2015 Annual General Meeting (AGM) for approval.
Directors’ remuneration policy for Executive Directors (EDs) Element Operation and recovery provisions (if applicable) Maximum opportunity Performance measures
Basic salary 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
Current basic salaries are disclosed in the full DRR. There is no maximum increase within the policy. However, basic salary increases take account of the average basic salary increase awarded to UK employees. Different levels of increase may be agreed in certain circumstances at the committee’s discretion, such as: § An increase in job scope and responsibility
The committee is aware of shareholder concern on ED basic salary racheting and would consult on proposed increases if they were to significantly exceed the general level of increases for UK staff.
To provide core, market related pay to attract and retain the required level of talent.
Maximum bonus opportunity is 150% of basic salary with 75% of basic salary payable for performance in line with target. Threshold performance would result in a bonus payment of no more than 25% of basic salary. Performance below threshold would result in no bonus being paid.
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 KPIs were: § Net capital returns § IFRS profit before tax § MCEV value of new business § Combined operating ratio § Total expenses
To incentivise EDs to achieve the annual business plan. Deferral provides alignment with shareholder interests and aids retention of key personnel.
Currently, performance targets over three years are: § 50% vest based on targets for absolute ROE performance
§ 50% vest based on relative Total Shareholder Return (TSR) against a comparator group.
Element EDs are eligible to participate in a defined contribution plan up to the annual limit. Any amounts above the annual or lifetime limits are paid in cash.
To give a market competitive level of provision for post-retirement income.
Element Benefits are provided on a market related basis. The Company reserves the right to deliver benefits to EDs depending on their individual circumstances, which may include a cash car allowance, life insurance and private medical insurance. In the case of non-UK executives, the committee may consider additional allowance in line with standard relevant market practice. EDs employed under UK contracts are eligible to participate in any HMRC-approved all employee share plans operated by the Company on the same basis as other eligible employees.
Element A requirement to build a shareholding in the Company equivalent to 200% of basic salary for the Group CEO and 150% of basic salary for other EDs.
Single total figures of remuneration for 2013 – Executive Directors and Non-Executive Directors (audited information) The table below sets out in the required form the total 2013 remuneration for each of our Directors who served with the Company during 2013.
Total 2013 Remuneration – Executive Directors and Non-Executive Directors Basic salary / Fees Benefits Annual bonus4 LTIP5 Pension7 Total
Sir Adrian Montague 113 — 2 — — — — — — — 115 —
Notes 1 Mark Wilson joined the board with effect from 1 December 2012, and became Group CEO on 1 January 2013. He received no emoluments in respect of 2012. 2 Patrick Regan tendered his resignation as Chief Financial Officer on 22 January 2014 and will leave the Board and the Group prior to the AGM and so received no bonus award for 2013. His LTIP awards granted in 2011, 2012 and 2013 will lapse.
3 Trevor Matthews left Aviva on 6 June 2013 and so 2013 figures represent the period up to that date. 4 Bonus payable in respect of the financial year including any deferred element at face value at date of award.
5 Value of the LTIP for 2013 relates to the 2011 award, which had a three year performance period ending on 31 December 2013. 34.48% of the award will vest in March 2014. An assumed Aviva ordinary share price of 431.9 pence has been used to determine the value of the award based on the average share price over the final quarter of the 2013 financial year. 6 The LTIP value for Patrick Regan for 2012 has been updated to reflect the actual value at vesting of the award. The figure previously disclosed was £607,302. 7 Pension contributions consist of employer contributions into the defined contribution section of the Aviva Staff Pension Scheme, excluding salary exchange contributions made by the employees, plus payments in lieu of pension above the lifetime or annual allowance caps.
In this section Directors’ and Corporate governance report 68 Directors’ remuneration report 86
The Board The Board’s role is to provide entrepreneurial leadership of the Company within a framework of prudent and effective controls which enable risk to be assessed and managed. The Board believes that a strong system of governance throughout the Group is essential to help the business run smoothly and to aid effective decision making and support the achievement of the Group’s objectives. The Board is responsible to shareholders for promoting the long-term success of the Company and, in particular, for setting the Group’s strategic aims, monitoring management’s performance against those strategic aims, setting the Group’s risk appetite and ensuring the Group is adequately resourced and that effective controls are in place. The Board also sets the values, and supports the culture, of the Group. The specific duties of the Board are clearly set out in its terms of reference which address a wide range of corporate governance issues and list those items that are specifically reserved for decision by the Board. Matters requiring Board approval include: Group strategy and business plans Financial reporting and controls, capital structure and dividend policy Group risk appetite and framework Remuneration policy Significant transactions and expenditure Corporate governance issues (e.g. appointment and removal of the Group Company Secretary and Chief Risk and Capital Officer (CRCO), Board and committee succession planning and the constitution of Board committees)
The directors As at the date of this Report the Board comprises the Chairman, Group Chief Executive Officer (Group CEO), Chief Financial Officer (CFO) and eight Independent Non-Executive Directors (NEDs). The following charts show the balance of the Board between executive and non-executive representation, length of tenure and the diversity of the Board in terms of gender and nationality.
The Board’s policy is to appoint and retain non-executive directors, who can apply their wider business knowledge and experiences to their oversight of the Group, and to review and refresh regularly the skills on the Board. In line with Code requirements regarding the independence of NEDs, Russell Walls and Richard Goeltz retired from the Board on 8 May 2013 having completed nine years’ service. The Report of the Nomination Committee sets out the work carried out during the year on succession planning which culminated in the appointment of Michael Mire and Patricia Cross as NEDs in
Senior Independent Director Sir Adrian Montague became the Senior Independent Director on 8 May 2013 when Richard Goeltz retired from the Board. The role of a senior independent director is to provide a sounding board for the Chairman, to serve as an intermediary for the other directors where necessary and to be available to shareholders should they have concerns that they have been unable to resolve through normal channels, or when such channels would be inappropriate. During the year, the NEDs, led by Richard Goeltz and then Sir Adrian Montague, have met several times without the Chairman present and Sir Adrian Montague led the review of the Chairman’s performance during the year.
Board activities during 2013 The work of the Board follows an agreed annual work plan and principally falls under six main areas. The following chart shows how the Board allocated its time during 2013.
Reports from the CRCO on the Group’s capital and liquidity position; regulatory issues; risk appetite; and compliance with business standards and controls
As part of its annual work plan, the Board reviewed and approved all financial results announcements, the Annual report and accounts, the operational plan and dividend payments, all changes to the composition of the Board and its committees, and received regular updates on progress against the strategy and the transformation programme. In addition, the Board undertook the following specific activities during the year: Approved the disposal of the Group’s remaining holding in Delta Lloyd N.V.
Approved a proposal to reduce the complexity of the Group’s corporate structure to give a greater degree of direct control over subsidiaries
Directors’ and Corporate governance report continued external review was facilitated by Independent Board Evaluation and supported by internal questionnaires to the Board committees. The results were discussed by the Board and each of the committees and actions agreed. Overall the Board was found to function well with a collaborative and professional atmosphere around the board table. Areas for greater Board focus in 2014 included making more time on the Board agendas for the evolving business strategy; adding diversity to the Board; and further developing the induction process for new directors. The focus for the Board committees in 2014 are detailed in each committee’s report. Independent Board Evaluation have no other connection with the Company. The review of the performance of the Chairman, led by the Senior Independent Director, concluded that the Chairman is an inclusive leader, welcoming contributions from all Board members and works well with the Group CEO. He has built a cohesive Board and continues to make a valuable contribution to Board discussions. The Chairman and Independent Board Evaluation assessed the performance of the NEDs and the executive directors in their capacity as directors. The Chairman concluded that each director contributes effectively and demonstrates full commitment to his/her duties. To assess the Group CEO in respect of his executive duties a separate process was carried out by the Chairman and in respect of the CFO, by the Group CEO. The process involved measuring performance against each executive director’s role objectives.
1 This shows the percentage of meetings which the director attended during the year whilst a member of the Board.
2 The director was unable to attend Board meeting(s) due to prior commitments, the meetings being called at short notice or where a conflict of interest prevented the director from taking part in the meeting.
During 2013, there were 11 Board meetings held, of which, eight were scheduled Board meetings and three were additional Board meetings called at short notice. In addition the Board delegated responsibility for certain items, such as giving final approval to proposals broadly agreed by the full Board, to specially created committees of the Board which met seven times during 2013. The Chairman and the NEDs met several times in the absence of the executive directors and the NEDs met in the absence of the Chairman, including one meeting chaired by the Senior Independent Director to appraise the Chairman’s performance.
Conflicts of interest In line with the Companies Act 2006, the Company’s articles of association allow the Board to authorise potential conflicts of interest that may arise and to impose such limits or conditions as it thinks fit. The decision to authorise a conflict of interest can only be made by non-conflicted directors (those who have no interest in the matter being considered) and in making such a decision the directors must act in a way they consider in good faith will be most likely to promote the Company’s success. The Board’s procedure to regularly review and approve actual and potential conflicts of interest as they arise, and prior to the appointment of new directors, operated effectively during the year.
Governance structure The Board is responsible for promoting the long-term success of the Company for the benefit of shareholders. This includes ensuring that an appropriate system of governance is in place throughout the Group. To discharge this responsibility, the Board has established frameworks for risk management and internal control using a ‘three lines of defence’ model and reserves to itself the setting of the Group’s risk appetite. In-depth monitoring of the establishment and operation of prudent and effective controls in order to assess and manage risks associated with the Group’s operations is delegated to the Audit Committee, the Risk Committee and the Governance Committee which report regularly to the Board. However, the Board retains ultimate responsibility for the Group’s systems of internal control and risk management and their effectiveness. These frameworks play a key role in the management of risks that may impact the fulfillment of the Board’s objectives. They are designed to identify and manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or losses. These frameworks are regularly
Directors’ and Corporate governance report continued reviewed and comply with the Financial Reporting Council’s Internal Control: Revised Guidance for Directors.
Second line The Risk function is accountable for the quantitative and qualitative oversight and challenge of the identification, measurement, monitoring and reporting of significant risks and for developing the RMF. As the business responds to changing market conditions and customer needs, the Risk function regularly monitors the appropriateness of the Company’s risk policies and the RMF to ensure they remain up to date. This helps to provide assurance to the various risk oversight committees that there are appropriate controls in place for all core business activities, and that the processes for managing risk are understood and followed consistently across the Group. To assist with the execution of his duties the CRCO has established the Operational Risk and Reputation Committee (ORRC) which oversees operational risks and reputational impacts arising from activities across the Group. It oversees the operational risk elements of the implementation and maintenance of the risk policies and business standards, the Group’s adherence to the Operational Risk Policy, and the adequacy and implementation of the RMF throughout the Group.
Board oversight The Risk Committee assists the Board in its oversight of risk and risk management across the Group and makes recommendations on risk appetite to the Board. The responsibilities and activities of the Risk Committee are set out in the Risk Committee Report. The Audit Committee, working closely with the Risk Committee, is responsible for assisting the Board in discharging its responsibilities for the integrity of the Company’s financial statements, the effectiveness of the system of internal financial controls and for monitoring the effectiveness, performance and objectivity of the internal and external auditors. The responsibilities and activities of the Audit Committee are set out in the Audit Committee Report. The Governance Committee also works closely with the Risk Committee and is responsible for assisting the Board in its oversight of operational risk across the Group, particularly in respect of behavior and the Group’s relationship with customers. The Audit, Governance and Risk Committees report regularly to the Board on their activities and make recommendations and escalate significant risk exposures to the Board as appropriate. They ensure that mitigating actions are taken when risks are, or are expected to move, out of appetite. The chart overleaf shows the Board and committee structure that oversees the Company’s frameworks for risk management and internal control.
Effectiveness of controls To support an assessment of the effectiveness of the Group’s governance, internal control and risk management requirements, the Chief Executive Officer of each business unit is required to certify that: There are sound risk management and internal control systems that are effective and fit for purpose in place across the business
Any material risks not previously identified, control weaknesses or non-compliance with the Group’s risk policies and business standards or local delegations of authority, must be highlighted as part of this process. This is then supplemented by investigations carried out at Group level and ultimately a Group CEO and CRCO certification for Aviva plc. The effectiveness assessment also draws on the regular cycle of assurance activity carried out during the year. The results of the certification process and details of any significant failings or weaknesses are reported to the Audit Committee and the Board annually to enable them to carry out an effectiveness assessment. The Audit Committee, working closely with the Risk Committee, on behalf of the Board, last carried out a full review of the effectiveness of the systems of internal control and risk management in March 2014, covering all material controls, including financial, operational and compliance controls and the RMF and processes. The necessary actions have been or are being taken to remedy any significant failings and weaknesses identified from these reviews.
Nomination Committee report Committee role and responsibilities The Board strongly believes that good governance and strong, responsible, balanced leadership by the Board are critical to creating long-term shareholder value and business success. The committee assists the Board by regularly reviewing the composition of the Board and conducting a rigorous and transparent process when recommending or renewing the appointment of directors to the Board. The key responsibilities of the committee are to: Evaluate and review the structure, size and composition of the Board including the balance of skills, knowledge, experience and diversity of the Board, taking into account the Company’s risk appetite and strategy
Identify and nominate suitable candidates for appointment to the Board, including chairmanship of the Board and its committees, and appointment of the Senior Independent Director, against a specification of the role and capabilities required for the position, including relevant financial experience for Audit Committee members
Assess the independence of each of the NEDs Assess directors’ conflicts of interest as they arise Review the external interests and time commitments of the directors to ensure that each has sufficient time to undertake his/her duties to the Company
Approve a report on the committee’s activities for inclusion in the Company’s Annual report and accounts
The full terms of reference for the committee can be found on the Company’s website at www.aviva.com/terms-of-reference and are also available from the Group Company Secretary.
Committee activities during 2013 During 2013 the committee was principally focused on the recruitment of new non-executive directors as part of the continual cycle to refresh the Board and maintain an appropriate balance of skills, knowledge and experience. These issues are discussed in detail below. The chart below shows how the committee allocated its time during 2013.
Nomination Committee – allocation of agenda time 64% Board composition and succession planning 7% Independence and conflicts of interest 29% Others (including corporate governance)
Mackenzie, Chief Marketing and Communications Officer, is a Non-Executive Director of Mothercare Plc.
Other activities During the year the committee reviewed the composition of the Board’s committees and recommended changes to the Board for approval. In addition the committee made the recommendation to appoint Sir Adrian Montague as the Senior Independent Director following the retirement of Richard Goeltz from the Board. The committee was involved in the process to recruit a new Chief Executive Officer for Aviva Investors which resulted in the appointment of Euan Munro who joined in January 2014. Several committee members met Christine Deputy prior to her appointment as Group HR Director and the committee discussed potential candidates to succeed the Chief Executive Officer of Aviva Canada and provided advice on executive succession matters to the Group CEO. The committee reviewed and agreed to John McFarlane’s appointment as Chairman of FirstGroup plc, taking into account the time commitment involved. The committee also reviewed the independence of each NED, all directors’ conflicts of interest and the balance of skills, knowledge, experience and diversity on the Board prior to recommending the directors’ election or re-election at the AGM. Following consideration of these issues the committee recommended each director standing for election or re-election at the 2014 AGM. Following Patrick Regan’s resignation in January 2014, the committee appointed Spencer Stuart to search for suitable CFO candidates. Spencer Stuart also carries out other executive search activities for the Group.
Consider and review the performance of the Chief Audit Officer (CAO), and agree with management his effectiveness and his remuneration
Committee membership and attendance The committee comprises independent NEDs only. The Group Company Secretary acts as the secretary to the committee. The table below shows the committee members during the year and their attendance at committee meetings: Membership and attendance
Russell Walls (Chairman2) 6 100% Glyn Barker (Chairman3) 13 100% Patricia Cross4 1 100% Richard Karl Goeltz5 6 100% Sir Adrian Montague6 9 90% Michael Hawker 13 100%
Directors’ and Corporate governance report continued regularly held private sessions to discuss issues to be raised with management in the main meeting, and met separately with senior management, and with the CAO and the external auditor without management present. The committee chairman held regular meetings with management, the CAO and with the external audit partner to ensure he and the committee were aware of issues that needed to be raised at 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. In performing its duties, the committee had access to the services of the CAO, the Group Company Secretary, senior financial management and external professional advisers.
Committee expertise Glyn Barker is a chartered accountant and has held a number of senior positions at PricewaterhouseCoopers LLP (PwC) where, most recently, he was UK-Vice Chairman. Michael Hawker, a senior fellow of the Financial Services Institute of Australasia, is a former Chief Executive Officer and Managing Director of Insurance Australia Group. Patricia Cross has held a number of senior executive roles at National Australia Bank, Chase Manhattan Bank and Banque Nationale de Paris in addition to non-executive roles at a number of financial services companies and has held honorary roles on the Australian Financial Centre Forum and Financial Sector Advisory Council. Sir Adrian Montague was formerly Chairman of Friends Provident plc and Deputy Chairman of UK Green Investment Bank plc and has significant experience in the financial services industry. The Board is satisfied that Glyn Barker and Michael Hawker each have recent and relevant financial experience and that Glyn Barker meets the US requirements to be an audit committee financial expert. Glyn Barker succeeded Russell Walls as committee chairman on 8 May 2013. As former Vice-Chairman of PwC, Glyn Barker has a recent connection with the Group’s current auditor. However, in the two years prior to his retirement he did not perform any audit work and had no responsibility for the audit business of PwC and has confirmed that he does not have any significant ongoing financial connection with the firm. As he retired from PwC before PwC was appointed as the Company’s auditor and, as he complies with the rules of the US Securities and Exchange Commission and the Auditing Practices Board’s Ethical Standards on auditor independence, the committee is satisfied that PwC is independent of the Company.
US sale The sale of the Aviva USA business completed on 2 October 2013 and the transaction proceeds received were based on the estimated earnings and other improvements in statutory surplus over the period from 30 June 2012 to 30 September 2013. The final purchase price is subject to customary completion adjustments. The process to agree completion adjustments is on-going and is expected to complete by mid-2014. Until the outcome of this process is known there remains uncertainty on the final determination of the completion adjustment. The committee considers the fair value less costs to sell reflected in the 2013 Annual report and accounts to be appropriate.
Other matters The committee also considered the carrying value of goodwill in the Group’s Spanish business and the classification of a number of businesses as held for sale, including Eurovita, Taiwan, Korea, Indonesia and Turkey general insurance as disclosed in note 4. With regard to the Group’s accounts on the Market Consistent Embedded Value basis, the committee considered and challenged the key assumptions presented by management.
Internal control During the year the committee received quarterly updates on the effectiveness of the Group’s financial reporting control framework and discussed rectification of any deficiencies in controls. The controls improvement programme at Aviva Investors was monitored closely and made good progress during the year. In addition, the committee commissioned PwC to review how the improper trading in fixed income securities at Aviva Investors was allowed to happen and whether the controls instigated since then are sufficiently robust. Measures to improve controls have been implemented. The committee challenged management to improve the quality of the overall control environment across the Group. Significant work has been carried out by management to close issues raised by Internal Audit and the Group’s risk policies and business standards have been mapped against the Committee of Sponsoring Organizations of the Treadway Commission’s Enterprise Risk Management Framework (COSO framework) to provide a baseline position to assess where further development is required. An Integrated Assurance Framework (IAF) is also being rolled out across the Group as a mechanism for bringing together all the information on the operation of the control environment from management, Internal Audit and the Risk function; to provide a holistic view of the status and quality of controls and identify common themes and expedite action to remediate deficiencies. The committee reported to the Board regarding the effectiveness of the Group’s overall risk management and internal control systems including the risk management system in relation to the financial reporting process. The committee worked closely with the Risk Committee in its overall review of the Company’s systems of risk management and internal controls. The system of internal controls extends to the Group’s business units, each of which has an audit committee that provides an oversight role for its business. Membership of these business unit audit committees is largely comprised of nonexecutive directors of subsidiary companies. The committee’s terms of reference require it to establish and monitor procedures for dealing with complaints from employees in relation to accounting issues. The committee reviews the procedures annually and received regular updates from the CAO on any significant complaints received. A description of the Company’s systems of internal control and the Group’s risk management framework is included on pages 70 to 72.
Investigate and report on cases of suspected financial crime and employee fraud
Undertake advisory projects for management provided that they do not threaten the function’s actual or perceived independence from management
External auditor PwC was appointed as the Group’s auditor in 2012 following a formal tender process. The external audit contract will be put out to tender at least once every ten years. During the year, the committee performed its annual review of the independence, effectiveness and objectivity of the external auditor, assessing the audit firm, audit partner and audit teams. The process was conducted by means of a questionnaire, completed Group-wide by members of senior management and members of the Group’s finance community and the committee. The questionnaire sought opinions on the importance of certain criteria and the performance of the external auditor against those criteria. Based on this review, the committee concluded that the audit service of PwC was fit for purpose. The Company has an external auditor business standard in place which is aimed at safeguarding and supporting the independence and objectivity of the external auditor. The standard is in full compliance with all UK, US and International Federation of Accountants (IFAC) rules and takes into account the Auditing Practices Board Ethical Standards for Auditors. The standard regulates the appointment of former audit employees to senior finance positions in the Group and sets out the approach to be taken by the Group when using the nonaudit services of the principal external auditor. It distinguishes between (i) those services where an independent view is required and services that should be performed by the external auditor (such as statutory and non-statutory audit and assurance work); (ii) prohibited services where the independence of the external auditor could be threatened and must not be used; and (iii) other non-audit services where the external auditor may be used. Non-audit services where the external auditor may be used include: non-recurring internal controls (such as the work commissioned in relation to Aviva Investors) and risk management reviews (excluding outsourcing of internal audit work), advice on financial reporting and regulatory matters, due diligence on acquisitions and disposals, project assurance and advice, tax compliance services, and employee tax services. During the year the committee received quarterly reports of compliance against the standard. The Group paid £16.6 million to PwC for audit and auditrelated assurance services in 2013, relating to the statutory audit of the Group and Company financial statements, the audit of Group subsidiaries, additional fees relating to the prior year audit of Group subsidiaries and audit-related assurance services (2012: £15.8 million). The fees for other services, which are in compliance with applicable UK, US and International Federation of Accountants independence rules, included Market Consistent Embedded Value supplementary reporting, advice on accounting, risk and regulatory matters, reporting on internal controls, reporting on the Group’s Individual Capital Assessment and Economic Capital and work in relation to preparing the business for Solvency II implementation, were £7.6 million (2012: £16.0 million), giving a total fee to PwC of £24.2 million (2012: £31.8 million). In addition the Group paid PwC £0.2 million (2012: £0.2 million) in relation to the audit of Group occupational pension schemes. The Group paid £1.1 million to PwC in relation to other nonaudit services in respect of continuing operations. This included £0.2 million relating to a regulatory advice engagement and £0.9 million for a number of other, individually smaller services. In line with the external auditor business standard, the committee satisfied itself that for these engagements, robust controls (including appropriate levels of review) were in place to ensure that PwC’s objectivity and independence was safeguarded, and concluded that it was in the interests of the Company to purchase these services from PwC due to their specific expertise. Further details are provided in note 13.
The key responsibilities of the committee are to: Review the Group’s future risk strategy and its risk appetite, particularly in relation to capital and liquidity and to make recommendations on risk appetite to the Board
Review the governance, methodology and assumptions used in the Group’s models for determining its economic and regulatory capital requirements
Ensure that a due diligence appraisal of strategic or significant transactions due to be proposed to the Board is undertaken before the Board takes a decision whether to proceed
Review the effectiveness of operational controls Work with the Remuneration Committee to ensure that risk is considered in setting the overall remuneration policy for the Group
Michael Hawker (Chairman) 7 100% Glyn Barker 7 100% Michael Mire2 2 100% Bob Stein3 4 100% Russell Walls4 4 100%
Directors’ and Corporate governance report continued geopolitical uncertainty, which have the potential to depress economic growth and cause financial market volatility such as the potential for adverse consequences from the removal of quantitative easing, a slowdown in the US recovery, renewed challenges in emerging markets and political impasse in the eurozone. During the year the Group was designated a GSII, which brings the Group within scope of the policy requirements issued by the International Association of Insurance Supervisors, including the development by July 2014 of a Systemic Risk Management Plan, the development of recovery and resolution plans and additional loss absorbency capital requirements from January 2019, if the Group remains a GSII. It is now proposed that Solvency II will be implemented on 1 January 2016, following political agreement between the Trilogue parties in relation to long term guarantee product and investment measures. Until the “Level 2” Delegated Acts are finalised there remains uncertainty over the final capital impact on the Group.
Capital and liquidity management Following the approval of a revised capital management framework in 2012, the committee has closely monitored the Group’s economic capital and liquidity positions against risk appetite and targets for the Group and for material subsidiaries. The Group’s liquidity position and ICA surplus has increased throughout the year following implementation of a programme of strategic, economic and operational actions approved by the committee and the Board to strengthen and provide greater resilience to the Group’s capital and liquidity position.
Economic Capital Infrastructure Programme The implementation of the Solvency II Directive (SII) has been delayed by the European Union until 2016. The Group continues to work towards compliance based on currently available guidance from the European Insurance and Occupational Pensions Authority and is moving to an enhanced economic capital model ahead of SII implementation as it is strategically important for Aviva to have a view of its businesses on an economic capital basis to inform our business decisions.
Regulatory oversight The committee monitored the impact of the Financial Services Authority’s split into the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) in the UK as well as the relationship with regulators across the Group and discussed the specific management actions identified to address or mitigate issues which arose during the year. As discussed above, the Company has been designated as a GSII which will have a number of implications for the Group if it is still classified as a GSII in 2017. The committee is monitoring management’s
Directors’ and Corporate governance report continued development of the Group’s Systemic Risk Management Plan and the plans to meet the potential capital requirements.
Asset portfolio review Throughout the year the committee has carried out a review of the Group’s asset and investment portfolio to gain a more detailed understanding of the Group’s asset portfolio and how the investment decision process worked in the context of the RMF, asset allocation framework and relevant risk policies.
Personnel and remuneration policy During the year, the committee approved the CRCO’s objectives for 2013 and reviewed his performance against 2012 objectives. The committee also assessed senior management’s performance against the agreed common risk objective and considered the appropriateness of the risk metrics when setting senior management remuneration policy.
Internal controls Working with the Audit Committee, the committee monitored the adequacy of the RMF. Throughout the year, the Group’s Internal Audit function continued to provide the committee with independent and objective reports on the appropriateness, effectiveness and sustainability of the Company’s system of internal controls. Key control issues reported by Internal Audit to management and to the committee members were monitored on a quarterly basis until the related risk exposures had been properly mitigated. More detail on the management of risk is contained in note 58.
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. In addition to undertaking its agreed annual programme of activities, the committee agreed that its priorities for 2014 should be to maintain the Group’s capital and liquidity position consistent with an AA rating; grow the Group’s economic capital surplus; monitor economic trends and emerging risks; monitor compliance with increased regulation; improve asset diversity and asset performance oversight and discussion; and implement Solvency II.
Governance Committee report This Report provides details of the role of the Governance Committee (formerly known as the Corporate Responsibility Committee) and the work it has undertaken during the year.
The Governance Committee has evolved from the Corporate Responsibility Committee during the year and revised terms of reference were adopted in December 2013 to reflect its expanded remit. 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.
Shareholder (Governance) A review was initiated to strengthen the Group’s subsidiary board framework. The aim of the review was to ensure the implementation of best practice corporate governance throughout the Group, being mindful of local laws, regulation and customs. As part of the process, consideration was given to whether the Company’s subsidiary boards were appropriately resourced in terms of skills and capabilities and were balanced in terms of diversity. The committee also received copies of the board effectiveness reviews undertaken by its subsidiaries and the actions implemented as a result of these reviews. In order to develop stronger ties between the subsidiary boards and the Board, a programme of visits by committee members to subsidiary board meetings was initiated. In addition, and as part of the extension of its remit, the committee is now responsible for overseeing the approval and appointment of non-executive directors to material company subsidiary boards. The committee received a regular summary of the Group’s legal issues and litigation which had the potential to impact the reputation of the Group. Updates on corporate governance developments were also provided and, where appropriate, actions were considered and implemented. To ensure independence, the Board entrusted the task of overseeing the 2013 Board and committee effectiveness review to the committee. Independent Board Evaluation was selected as the external facilitator based on a shortlist of third party candidates prepared by the Group Company Secretary. Independent Board Evaluation have no other connection with the Company. Further details of the evaluation is on pages 69 and 70.
Regulatory and Government The committee reviewed regulatory developments and conduct issues which had the potential to have a material impact on the Group and the management responses and actions in response to these. It also reviewed the relationships with the regulatory authorities in the UK and in other jurisdictions where the Group has a significant presence.
Customer Following the extension of its remit, the committee now has oversight of the Group’s treatment of its customers and the impact of it products on its customer base. The committee received reports from the Group’s UK Life and General Insurance businesses concerning customer and product issues and initiated a programme of work to develop a greater insight into product governance. The committee also received a report which considered whether Group businesses had adequately identified customer risks in their business plans and the suitability of those plans to monitor those risks. The committee reviewed and contributed to the development of the Customer Thesis and received a regular report on the Group’s key customer metrics relating to customer retention, complaints, conduct and values.
People The committee contributed to the development of the People Thesis and to the work in relation to the Culture and Values Programme which led to a new set of values being implemented by management. Updates were provided to the committee on compliance with the Business Ethics Code. The committee also supported efforts to improve the percentage of women in senior management positions and across the general UK employee population and received a summary of the 2013 Employee Promise Survey results.
Share capital and control The issued ordinary share capital of the Company was increased by 967,361 ordinary shares during the year which were allotted under the Group’s employee share and incentive plans. At 31 December 2013 the issued ordinary share capital totalled 2,946,939,622 shares of 25 pence each and the issued preference share capital totalled 200,000,000 shares of £1 each. Accordingly, the issued and paid-up ordinary share capital constituted 79% of the Company’s total issued share capital and the issued preference share capital constituted 21% of the Company’s total issued share capital at 31 December 2013. All the Company’s shares in issue are fully paid up and the ordinary and preference shares have a Premium and Standard listing respectively on the London Stock Exchange. The Company is listed on the New York Stock Exchange (NYSE) in the form of American Depositary Shares, referenced to ordinary shares, under a depositary agreement with Citibank. Details of the Company’s share capital and shares under option at 31 December 2013 and shares issued during the year are given in notes 31 to 34. The rights and obligations attaching to the Company’s ordinary shares and preference shares, together with the powers of the Company’s directors, are set out in the Company’s articles of association, copies of which can be obtained from Companies House and the Company’s website at www.aviva.com/investor-relations/corporate-governance/articles -association, or by writing to the Group Company Secretary. The powers of the Company’s directors are subject to relevant legislation and, in certain circumstances (including in relation to the issue or buying back by the Company of its shares), are subject to authority being given to the directors by shareholders in general meeting. At the 2014 AGM, shareholders will be asked to renew the directors’ authority to allot new securities. Details are contained in the 2014 Notice of Annual General Meeting (Notice of AGM). With the exception of restrictions on the transfer of ordinary shares under the Company’s employee share incentive plans, whilst the shares are subject to the rules of the plans, there are no restrictions on the transfer rights attaching to the Company’s ordinary shares or the transfer of securities in the Company. Where, under an employee share incentive plan operated by the Company, participants are the beneficial owners of shares but not the registered owners, the voting rights are normally exercised at the discretion of the participants. No person holds securities in the Company carrying special rights with regard to control of the Company. The Company is not aware of any agreements between holders of securities that may result in restrictions in the transfer of securities or voting rights. There are a number of agreements that take effect, alter or terminate upon a change of control of the Company, such as commercial contracts and joint venture agreements. None are considered to be significant in terms of their potential impact on the business of the Group as a whole. All of the Company’s employee share incentive plans contain provisions relating to a change of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions and pro rata reduction as may be applicable under the rules of the employee share incentive plans.
Authority to purchase own shares At the Company’s 2013 AGM, shareholders renewed the Company’s authorities to make market purchases of up to 294 million ordinary shares, up to 100 million 8¾% preference shares and up to 100 million 83/8% preference shares. These authorities were not used during the year or up to the date of this Report. At the 2014 AGM, shareholders will be asked to renew these authorities for another year and the resolution will once again propose a maximum aggregate number of ordinary shares which the Company can purchase of less than 10% of the issued ordinary share capital. Details are contained in the Notice of AGM. The Company held no treasury shares during the year or up to the date of this Report.
Major shareholdings The table below shows the holdings of major shareholders in the Company’s issued ordinary share capital in accordance with the Disclosure and Transparency Rules as at 31 December 2013 and 4 March 2014.
BlackRock, Inc1 Above 5% Indirect Above 5% Indirect Legal & General Group plc2 3.06% Direct 3.06% Direct AXA S.A.1 3.86% Direct & indirect 3.86% Direct & indirect The Capital Group
Companies Inc 3.06% Indirect 3.06% Indirect 1 Holding includes holdings of subsidiaries. 2 Interest held by Legal & General Assurance (Pensions Management) Ltd.
Directors The directors as at the date of this Report are shown together with their biographical details in the Strategic report. During the year and up to the date of this Report, the following Board appointments, resignations and retirements occurred: Mark Wilson – appointed Group CEO on 1 January 2013 Sir Adrian Montague – appointed 14 January 2013 Bob Stein – appointed 28 January 2013 Trevor Matthews – resigned with effect from 8 May 2013 Richard Goeltz – retired 8 May 2013 Russell Walls – retired 8 May 2013 Michael Mire – appointed 12 September 2013 Patricia Cross – appointed 1 December 2013 Patrick Regan – tendered his resignation on 22 January 2014 and will leave the Board and the Group before the AGM. Under the Company’s articles of association, the Board can appoint additional directors or appoint a director to fill a casual vacancy. The new director must retire at the first annual general meeting following their appointment and can only continue as a director if they are elected by shareholders at the AGM.
Directors’ interests and indemnity arrangements At no time during the year did any director hold a material interest in any contract of significance with the Company or any of its subsidiary undertakings other than an indemnity provision between each director and the Company and employment contracts between each executive director and a Group company. The Company has purchased and maintained throughout the year, directors’ and officers’ liability insurance in respect of itself and its directors. The directors also have the benefit of the indemnity provision contained in the Company’s articles of association. The Company has executed deeds of indemnity for the benefit of each director of the Company, and each person who was a director of the Company during the year, in respect of liabilities that may attach to them in their capacity as directors of the Company or of associated companies. These indemnities were granted at different times according to the law in place at the time and where relevant are qualifying third-party indemnity provisions as defined by section 234 of the Companies Act 2006. These indemnities were in force throughout the year and are currently in force. Details of directors’ remuneration, service contracts, employment contracts and interests in the shares of the Company are set out in the Directors’ Remuneration Report. There is no arrangement or understanding with any shareholder, customer, supplier, or any other external party, to appoint a director or a member of the Group Executive.
Financial instruments Group companies use financial instruments to manage certain types of risks, including those relating to credit, foreign currency exchange, cash flow, liquidity, interest rates, and equity and property prices. Details of the objectives and management of these instruments are contained in the Risk and Capital Management section, the Shareholder Information section and an indication of the exposure of the Group companies to such risks is contained in note 58.
Annual General Meeting The 2014 AGM of the Company will be held on Wednesday, 30 April 2014 at the Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE at 11am. The Notice of AGM convening the meeting describes the business to be conducted thereat.
Directors’ responsibilities The directors are responsible for preparing the Annual report and accounts, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group and parent company financial statements in accordance with IFRS as adopted by the European Union (EU) and issued by the IASB. Under company law the directors must not approve the financial statements unless they
Directors’ and Corporate governance report continued are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and the Company for that period. In preparing these financial statements, the directors are required to: Select suitable accounting policies and then apply them consistently
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s and the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The directors are responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. They are also responsible for the maintenance and integrity of the Company’s website. The directors consider that the Annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s and the Group’s performance, business model and strategy. Each of the directors listed in the Strategic Report confirms that, to the best of their knowledge: The Group financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit/(loss) of the Group
Mark Wilson Patrick Regan Group Chief Executive Officer Chief Financial Officer
New York Stock Exchange listing requirements The Company’s ordinary shares are admitted to the NYSE and are traded as American Depositary Shares. As a foreign company listed on the NYSE, the Company is required to comply with the NYSE corporate governance rules to the extent that these rules apply to foreign private issuers. As a foreign private issuer, the Company is therefore required to comply with NYSE Rule 303A.11 by making a disclosure of the differences between the Company’s corporate governance practices and NYSE corporate governance rules applicable to US companies listed on NYSE. The Company complies with the UK Corporate Governance Code (Code) and other relevant best practice principles and guidelines. The main differences between UK and US requirements are summarised below together with Aviva’s approach to compliance: NYSE Listing Rules UK Corporate Governance Code Aviva approach
Independence criteria for directors Independent directors must form the majority of the board of directors. A director cannot qualify as independent unless the Board affirmatively determines that the director has no material relationship with the company. NYSE rules prescribe a list of specific factors and tests that US – listed companies must use for determining independence.
The Company is required to have a remuneration committee and under the Companies Act 2006 is required to obtain shareholder approval of the remuneration policy for executive directors.
The Company must have an audit committee and at least one member must have recent and relevant financial experience.
The Company has a Remuneration Committee which covers all NYSE and Code requirements and recommends the remuneration policy for executive directors to the Board and shareholders for approval.
Code of business conduct and ethics Companies are required to adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.
Not required under the Code. The Company has adopted a Business Ethics Code to which all employees are bound and a Code of Ethics for senior management, which complies with the Sarbanes-Oxley Act of 2002.
Focus on core businesses – Through the measurement of a number of key financial, operational and longer-term return measures, overall remuneration is closely aligned to the achievement of the Group’s strategic objectives
Our reward approach in practice The application of our policies and practices in the 2014 reward round has resulted in the following outcomes for the Group Chief Executive Officer (Group CEO), Mark Wilson: Basic pay – basic salary of £980,000 will remain unchanged.
In approving these outcomes the Committee also considered Aviva’s performance against the “underpin” measures put in place for the 2012 and 2013 performance years.
Continuing the shareholder dialogue We have met our major institutional shareholders and the main proxy agencies regularly in the course of 2013. We believe this regular contact is proving beneficial for both parties in increasing mutual understanding, addressing and resolving issues of concern and helping informed decision making. We remain committed to continuing that dialogue.
Remuneration reward review Our remuneration policy report reflects our reward framework as we will apply it for senior executive remuneration in 2014. We regularly undertake strategic reviews of our executive remuneration to ensure our reward frameworks, policies and practices remain fit for purpose, aligned with the wider talent market and compliant with relevant regulation. We have made no major changes this year, but we will carry out such a review 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. Subject to the outcomes of that consultation, we will aim to put proposals to shareholders at our 2015 Annual General Meeting (AGM) for approval. Usual practice would be that our remuneration policy is put to a vote every three years. Finally, the Remuneration Committee would ask shareholders to consider and approve the policy report and annual remuneration report set out in the following pages.
Directors’ remuneration policy This section sets out Aviva’s remuneration policy for directors, in accordance with the requirements of the Companies Act 2006 (as amended) and the Large & Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended). We have already implemented within our remuneration structures the policy approach set out in this section. We intend to apply this policy formally from the date of Aviva’s 2014 AGM, subject to shareholders approving this policy report at that meeting. Table 1 below provides an overview of our remuneration policy for executive directors (EDs). For an overview of the remuneration policy for non-executive directors (NEDs) see table 3 below.
Element Purpose and link to strategy Operation and recovery provisions (if applicable) Maximum opportunity Performance measures
Currently, performance targets over three years are: 50% vest based on targets for absolute ROE performance 50% vest based on relative Total Shareholder Return (TSR) against a comparator group
Pension To give a market competitive level of provision for postretirement income.
Benefits 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.
Benefits are provided on a market related basis. The Company reserves the right to deliver benefits to EDs depending on their individual circumstances, which may include a cash car allowance, life insurance and private medical insurance. In the case of non-UK executives, the committee may consider additional allowances in line with standard relevant market practice. EDs employed under UK contracts are eligible to participate in any HMRC approved all employee share plans operated by the Company on the same basis as other eligible employees.
To assist with mobility across the Group to ensure the appropriate talent is available to execute strategy locally.
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.
Dependent on location and family size, benefits are market related and time bound. They are not compensation for performing the role but to defray costs of a relocation or residence outside the home country. The committee would pay no more than it judged reasonably necessary, in the light of all applicable circumstances.
Notes to the table: Performance measures For the annual bonus, performance measures are chosen to align to the Group’s KPIs and include financial, employee and customer measures. Achievement against personal objectives is also taken into account. LTIP performance measures are chosen to provide an indication of both absolute and relative return generated for shareholders. In terms of target setting, a number of reference points are taken into account each year including, but not limited to, the Group’s business plan and external market expectations of the Company. Maximum payouts require exceptional performance that significantly exceeds performance targets or expected performance, under both the annual bonus and LTIP.
Discretions In addition to the discretions referred to in the DRR, the discretions the committee has in relation to the operation of the Annual Bonus Plan (ABP) and LTIP include, but are not limited to, who participates, the timing and size of awards, setting additional conditions (and the discretion to change or waive those conditions), whether dividend equivalents will be awarded, the determination of vesting and adjustment in certain circumstances such as rights issues. In addition, in relation to the LTIP, in accordance with its terms, the committee has discretion to waive or change a performance condition if anything happens which causes the committee reasonably to consider it appropriate to do so. Any use of the discretions will be disclosed, where relevant, in the Annual report and accounts and, where appropriate, be subject to consultation with Aviva’s major shareholders. In the event of a change in control, unless a new award is granted in exchange for an existing award, or if there is a significant corporate event like a demerger, awards under the LTIP would normally vest to the extent that the performance conditions have been satisfied as at the date of the change in control, and unless the committee decides otherwise, would be pro-rated to reflect the time between the start of the performance period and the change in control. Awards under the ABP would normally vest on the date of the change in control and may vest if there is a significant corporate event. The use of discretion in Aviva’s HMRC all employee share plans is set out in the rules and exercised in accordance with HMRC rules.
Consistency of executive remuneration policy across the Group The remuneration policy for our EDs is designed as part of the remuneration philosophy and principles that underpin remuneration for the wider Group. Remuneration arrangements for employees below the EDs take account of the seniority and nature of the role, individual performance and local market practice. The components and levels of remuneration for different employees may therefore differ from the policy for EDs. Any such elements are reviewed against market practice and approved in line with internal guidelines and frameworks. The committee reserves the right to make any remuneration payments and payments for loss of office (including exercising any discretions available to it in connection with such payments) notwithstanding that they are not in line with the policy set out above where the terms of the payment were agreed (i) before the policy came into effect or (ii) at a time when the relevant individual was not a director of the Company and, in the opinion of the committee, the payment was not in consideration for the individual becoming a director of the Company. For these purposes “payments” includes the committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are “agreed” at the time the award is granted.
As stated Tom Stoddard will join Aviva on 5 May 2014 as CFO and the CFO data in the table below is based on his remuneration on joining.
Termination payment Pay in lieu of notice up to a maximum of 12 months’ basic salary. Any payment is subject to phasing and mitigation requirements. An ED would be expected to mitigate the loss of office by seeking alternative employment. Any payments in lieu of notice would be reduced, potentially to zero, by any salary received from such employment. In the case of Mark Wilson, if his employment were to be terminated by the Company, other than for cause, within three years of his appointment then he would be entitled to be reimbursed against evidenced expenditure for reasonable and appropriate costs incurred in relocating outside the UK up to a maximum of £100,000, inclusive of any tax liability.
Car allowance A cash car allowance is received, as varied from time to time.
Other benefits Other benefits include private medical insurance and participation in the Company’s staff pension scheme. As disclosed in 2012, were the current Group CEO to incur additional reasonable relocation expenses above the £200,000 limit set out in the annual remuneration report section, then the committee would consider reimbursement of those expenses up to an agreed further limit.
Policy on payment for loss of office There are no pre-determined ED special provisions for compensation for loss of office. The committee has the ability to exercise its discretion on the final amount actually paid but any compensation would be based on what would be paid by way of basic salary, pension entitlement and other contractual benefits during the notice period depending on whether notice is worked or a payment made in lieu of notice. Where notice of termination of a contract is given, payments to the ED would continue for the period worked during the notice period. Alternatively, the contract may be terminated and phased monthly payments made in lieu of notice for, or for the balance of, the 12 months’ notice period. During this period, EDs would be expected to mitigate their loss by seeking alternative employment. Payments in lieu of notice would be reduced by the salary received from any alternative employment, potentially to zero. The Company would typically make a contribution towards an EDs legal fees in connection with advice on the terms of their departure. There is no automatic entitlement to an annual bonus for the year in which loss of office occurs. The committee may determine that an ED may receive a pro rata bonus in respect of the period of employment during the year loss of office occurs based on an assessment of performance. Where an ED leaves the Company by reason of death, disability or ill health, or any other reason determined by the committee, there may be a payment of a pro rata bonus for the relevant year at the discretion of the committee. The treatment of leavers under our ABP and LTIP is determined by the rules of the relevant plans. Good leaver status under these plans would be granted in the event of, for example, the death of an ED, or their departure on ill health grounds. Good leaver status for other leaving reasons is at the discretion of the committee, taking into account the circumstances of the individual’s departure, but would typically include planned retirement. In circumstances where good leaver status has been granted, awards may still be subject to a reduction prior to vesting in the event that inappropriate conduct of the ED whilst an employee is subsequently discovered post departure. In the case of the long-term incentive plans, where the committee determines EDs to be good leavers, vesting is normally based on the extent to which performance conditions have been met at the end of the relevant performance period, and the proportion of the award that vests is pro-rated for the time from the date of grant to final date of service (unless the committee decides otherwise).
Its ongoing dialogue with shareholders. It seeks shareholder views and takes them into account when any significant changes are being proposed to remuneration arrangements and when formulating and implementing remuneration policy. It has consulted broadly on the contents of this policy report.
Non-executive directors Table 3 below, sets out details of our remuneration policy for NEDs.
To attract individuals with the required range of skills and experience to serve as a Chairman and as a NED.
NEDs receive a basic annual fee in respect of their Board duties. Further fees are paid for membership and, where appropriate, chairmanship of Board committees. The Chairman receives a fixed annual fee. Fees are reviewed annually taking into account market data and trends and the scope of specific Board duties. The Chairman and NEDs do not participate in any incentive or performance plans or pension arrangements and do not receive an expense allowance. NEDs are reimbursed for expenses, and any tax arising on those expenses is settled directly by Aviva. To the extent that these are deemed taxable benefits, they will be included in the annual remuneration report, as required.
The NEDs, including the Chairman of the Company, have letters of appointment which set out their duties and responsibilities. The key terms of the appointments are set out in table 4 below.
Committee membership and attendance The committee comprises independent NEDs only. Table 5 below shows the committee members during the year and their attendance at committee meetings.
The committee met ten times during 2013 of which eight were scheduled committee meetings and two were additional committee meetings called to deal with urgent matters and/or called at short notice. The Group Chairman generally attended all meetings of the committee. The Group Company Secretary acted as 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 persons listed in table 6 assisted the committee in considering executive remuneration and attended meetings by invitation during the year. No person was present during any discussion relating to their own remuneration.
Committee activities during 2013 Whilst not mutually exclusive the categories shown on the pie chart below were areas of focus for the committee during the year. The chart also shows how the committee dedicated its time to these activities.
Implementation of remuneration policy in 2014 The implementation of the policy will be consistent with that outlined in the policy report and we are not proposing any significant changes compared with the policy that applied in 2013.
Basic salaries The basic salary for the Group CEO will remain unchanged at £980,000 per annum.
LTIP LTIP grants in 2014 will be in line with the levels set out in the policy report. The LTIP will vest subject to the degree of achievement of two equally weighted performance measures, absolute ROE and relative TSR performance, which have been chosen to reflect shareholders’ long term interests. No grant will be made to Patrick Regan, who tendered his resignation as CFO on 22 January 2014 and will leave the Board and the Group before the AGM.
Approach to non-executive directors’ fees for 2014 NED fees were last reviewed in March 2014 and limited changes were made as set out below. Table 7 below sets out our approach to NEDs fees for 2014: Table 7: Non-executive directors’ fees Role Fee from 1 April 2014 Fee from 1 April 2013
Committee Chairman (inclusive of committee membership fee) – Audit £45,000 £45,000 – Governance £35,000 £20,000 – Remuneration £35,000 £35,000 – Risk £45,000 £45,000
Committee membership – Audit £15,000 £15,000 – Governance £12,500 £10,000 – Nomination £7,500 £7,500 – Remuneration £12,500 £12,500 – Risk £15,000 £15,000 Notes 1 Inclusive of Board membership fee and any committee membership fees.
Appointment of Chief Financial Officer Aviva announced the appointment of Tom Stoddard as CFO on 28 February 2014. Mr Stoddard is currently expected to join the Company on 5 May 2014. Details of his remuneration were announced at the time, and are as follows: Basic salary – £675,000 per annum next subject to review in 2015 Annual bonus – 75% of basic salary for plan performance and up to 150% of basic salary for stretch performance. Two thirds of any bonus awarded is currently required to be deferred into Aviva shares for three years LTIP – Eligible for an LTIP grant with a face value of up to 350% of basic salary. The LTIP is subject to performance conditions and vests after three years to the extent that those conditions have been met. His 2014 grant will be at 225% of basic salary Buyout – On a strict “like for like” basis he will be eligible to receive a buyout up to a maximum level of £1 million gross to replace deferred compensation he has forfeited on resignation from his previous employer Relocation expenses – He may claim reasonable relocation expenses up to a maximum of £200,000 (inclusive of any benefit in kind liability that may arise) in respect of relocation from the US to the UK Benefits – A cash car allowance and PMI cover for himself and his family
Notes 1 Mark Wilson joined the Board with effect from 1 December 2012, and became Group CEO on 1 January 2013. He received no emoluments in respect of 2012. 2 Patrick Regan tendered his resignation as CFO on 22 January 2014 and will leave the Board and the Group before the AGM, and so received no bonus award for 2013. His LTIP awards granted in 2011, 2012 and 2013 will lapse. 3 Trevor Matthews left Aviva on 6 June 2013 and so 2013 figures represent the period up to that date. 4 Bonus payable in respect of the financial year including any deferred element at face value at date of award. 5 Value of the LTIP for 2013 relates to the 2011 award, which had a three year performance period ending on 31 December 2013. 34.48% of the award will vest in March 2014. An assumed Aviva ordinary share price of 431.9 pence has been used to determine the value of the award based on the average share price over the final quarter of the 2013 financial year. 6 The LTIP value for Patrick Regan for 2012 has been updated to reflect the actual value at vesting of the award. The figure previously disclosed was £607,302. 7 Pension contributions consist of employer contributions into the defined contribution section of the Aviva Staff Pension Scheme, excluding salary exchange contributions made by the employees, plus payments in lieu of pension above the lifetime or annual allowance caps.
The main driver of the Group CEO’s bonus is the performance of the Group against key financial targets, with further consideration given to targets relating to employee engagement and customer satisfaction. Additionally, the individual performance of the CEO is taken into account. In considering the Group CEO’s 2013 bonus the committee took full account of the Group outcomes and noted in particular the performance against financial targets. The performance on net capital returns, IFRS profit before tax, the MCEV value of new business and total expenses were pleasing, with demanding targets having been achieved. The combined operating ratio performance reflected some significant weather related events, notably two large flood events in our Canadian business. Against a background of significant change and restructuring, the business required reductions in job numbers in 2013. We are striving to minimise large scale restructuring going forward, but in 2013 these changes impacted our employees and our targeted engagement scores were missed. We have set targets for 2014 which we believe will require significant efforts to achieve. This element of the bonus did not produce any payment in 2013. Aviva remains committed to providing a great service to our customers and it is disappointing that the progress we wanted to make in 2013 on this measure was not achieved in full. Again, we have set 2014 targets that continue to challenge the business to make progress in this area. Mark Wilson’s personal performance was rated highly by the Board who particularly recognised the increase in the value of new business, the major improvement in the capital and liquidity base, the substantive progress on building a first-class management team and the restructuring of the cost base. Based on the outcomes against the KPIs, and an assessment of Mr Wilson’s individual strategic performance, the Committee approved a bonus of 75% of the maximum, equivalent to 112.5% of basic salary with a total value of £1,102,500. This is set out in the annual bonus column of table 8.
Mark Wilson (30%) 15 30 27.46 Patrick Regan (30%)1 15 30 0 Note 1 Patrick Regan tendered his resignation as CFO on 22 January 2014 and will leave the Board and the Group before the AGM. He will therefore receive no bonus in respect of 2013 performance.
LTIP award vesting in respect of 2013 The LTIP value shown in the single total figure for remuneration is for the award expected to vest in March 2014. The only current or former ED who will receive a vesting amount from this award is Trevor Matthews. The performance conditions for this award are set out in table 11 below.
Relative Total Shareholder Return (TSR) performance 50% Median Upper quintile and above Below median 0%
Single total figure of remuneration for 2013 – non-executive directors (audited information) Table 12 below sets out the total remuneration earned by each NED who served during 2013.
Current non-executive directors Glyn Barker 122 76 — 1 122 77 Patricia Cross 8 — 1 — 9 — Michael Hawker 137 137 1 — 138 137 Gay Huey Evans 105 96 1 — 106 96 Michael Mire 29 — 1 — 30 — Sir Adrian Montague 113 — 2 — 115 — Bob Stein 89 — 1 — 90 — Scott Wheway 118 112 1 — 119 112
The total amount paid to NEDs in 2013 was £1,471,000 which is within the limits set in the Company’s articles of association, which have previously been approved by shareholders.
Share awards made during the financial year (audited information) LTIP awards are made in shares which vest conditionally upon performance targets being met. The number of conditional shares granted is based on a percentage of basic salary. The following table sets out details of LTIP awards of conditional shares made during the year.
Return on equity targets ROE targets determine the vesting of 50% of the LTIP award and are set annually within the context of the Company’s three-year business plan. Vesting depends upon performance over the three-year period against a target return. The 2013 LTIP award ROE targets are set out in table 14 below.
Total shareholder return targets (audited information) Relative TSR determines the vesting of the other 50% of the LTIP award. Performance of the 2013 grant will be assessed against the following companies: Aegon, Allianz, Axa, CNP Assurances, Direct Line Group, Generali, Legal & General, MetLife, Old Mutual, Prudential, Resolution Limited, RSA, Standard Life and Zurich. TSR vesting operates as set out in table 15 below.
Payments to past directors (audited information) Russell Walls retired from the Board with effect from 8 May 2013. Mr Walls was appointed as Chairman and Non-Executive Director of Aviva Insurance Limited on 1 May 2013, a subsidiary company of Aviva plc and the emoluments he received in respect of this directorship for the 2013 financial year were £72,328. Richard Karl Goeltz retired from the Board with effect from 8 May 2013. Mr Goeltz was appointed as Chairman and NonExecutive Director of Aviva Life Holdings UK Limited on 14 May 2013, a subsidiary company of Aviva plc and the emoluments he received in respect of this directorship for the 2013 financial year were £71,250. On 13 February 2014, Mr Goeltz was also appointed as a non-executive director of Aviva Life & Pensions UK Limited, Aviva Annuity UK Limited and Aviva Life Services UK Limited, each of which are subsidiary companies of Aviva plc.
Payments for loss of office (audited information) Trevor Matthews resigned from the Board with effect from 8 May 2013 and left the Company on 6 June 2013. His notice period commenced on 7 February 2013. Mr Matthews was paid only awards that were contractually required and no discretions were applied. This constituted full and final settlement of Mr Matthews’ departure terms. Any new ED appointment would be in accordance with our remuneration policy set out above.
(9,528 shares, inclusive of shares awarded in lieu of dividends accrued, vesting at a share price of 358.9 pence) His 2011 and 2012 LTIP awards will vest at the end of the relevant performance period (March 2014 and March 2015 respectively). These will be pro-rated to reflect his service during the performance period and the extent to which the performance conditions have been achieved at the end of the period. 104,278 phantom shares (not inclusive of shares awarded in lieu of dividends accrued) will therefore vest in March 2014 and a maximum of 230,073 shares (not inclusive of shares awarded in lieu of dividends accrued) will therefore vest in March 2015 depending on performance conditions on the same basis as vesting for other directors
Mr Matthews received the final tranche of his recruitment award (the “conditional share award” disclosed in the 2011 DRR), which vested on his departure. The value realised was £877,360 (based on 244,458 shares, inclusive of shares awarded in lieu of dividends accrued, vesting at a share price of 358.9 pence)
Patrick Regan tendered his resignation as CFO on 22 January 2014 and will leave the Board and the Group before the AGM. Mr Regan will continue to receive basic salary and benefits up to his agreed departure date. There will be no payment in lieu of any balance of his notice period that may be outstanding on departure He received no bonus in respect of 2013 and will receive no bonus in respect of 2014. No LTIP award will be made for 2014 The deferred element of Mr Regan’s 2010 and 2011 bonuses will lapse on termination of his employment His 2011, 2012 and 2013 LTIP awards will also lapse on termination of his employment
Table 16: Aviva plc five-year TSR performance against the FTSE 100 return index and the median of the comparator group
Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13
Table 17: Historical CEO remuneration outcomes Group CEO 2009 2010 2011 2012 2013
Annual bonus payout (as a % of maximum opportunity) Mark Wilson Andrew Moss
LTIP vesting (as a % of maximum opportunity) Mark Wilson Andrew Moss
Notes 1 Mark Wilson joined the Board as an ED with effect from 1 December 2012, and became Group CEO on 1 January 2013. He received no emoluments in respect of 2012. 2 Andrew Moss resigned from the Board with effect from 8 May 2012 and left the Company on 31 May 2012.
Percentage change in remuneration of Group CEO The table below would ordinarily set out the increase in the basic salary, bonus and benefits of the Group CEO and that of the wider UK workforce. As the current Group CEO became CEO on 1 January 2013 but joined the Board with effect from 1 December 2012, no comparison is possible this year. The UK employee workforce was chosen as a suitable comparator group as EDs are based in the UK (albeit with a global role and responsibilities) and pay changes across the Group vary widely depending on local market conditions.
Adjusted operating profit before tax1 1,577 1,686 7% Dividends paid2 757 429 (43)% Share buybacks3 — — — Total staff costs4 1,966 1,671 (15)% Notes 1 Operating profit before tax attributable to shareholders’ profits for continuing operations after integration and restructuring costs. 2 The total cost of ordinary dividends paid to shareholders. 3 There were no share buybacks in 2012 or 2013. 4 Total staff costs from continuing operations includes wages and salaries, social security costs, post-retirement obligations, profit sharing and incentive plans, equity compensation plans and termination benefits. The average number of employees in continuing operations was 33,589 (2012) and 29,970 (2013).
External Board appointments The Company recognises that its EDs can benefit from serving in a personal capacity as a non-executive director of a non-Aviva Group company. At the same time, it is conscious of the corporate governance recommendations that EDs should take account of the time commitment required by a non-executive director position and ensure that any such role does not impact their ability to carry out fully their executive duties. The Company therefore has a policy of normally allowing EDs to serve as a non-executive director of one external company, subject to approval by the Board, and for the individual to retain any board fees. Currently, Patrick Regan holds one external non-executive director appointment. He was, until the disposal of the Group’s interests in Delta Lloyd N.V. in January 2013, a Company-nominated member on the supervisory board. He has continued to be a member of the supervisory board in a personal capacity since that date. He received €62,227 during 2013 in respect of this appointment.
Statement of directors’ shareholdings and share interests (audited information) Executive directors share ownership requirements The Company requires the Group CEO to build a shareholding in the Company equivalent to 200% of basic salary and each ED to build a shareholding in the Company equivalent to 150% of basic salary. The EDs are required to retain 50% of the net shares released from deferred annual bonuses and LTIPs until the shareholding requirement is met. Unvested share awards including shares held in connection with bonus deferrals are not taken into account in applying this test. Table 20 below shows the position of each ED against the shareholding requirement as at 31 December 2013, based on that day’s closing middle-market price of an ordinary share of the Company of 449.7 pence.
Table 20: Executive Directors – share ownership requirements Shares held Options held
Table 21: Non-executive directors’ shareholdings4 1 January 20132 31 December 20133
Table 22: LTIP, ABP, One Aviva twice the value bonus plan (OATTV), CFO Recruitment share awards plan and Conditional share award
Patrick Regan Aviva long term incentive plan5 20106,7 233,160 — 162,815 70,345 — 387.70 301.00 Mar-13 20116 311,059 — — — 311,059 435.60 — Mar-14 20126 425,223 — — — 425,223 331.50 — Mar-15 20136,7 — 541,806 — — 541,806 294.20 — Apr-16
Aviva annual bonus plan 2012 8,928 — — — 8,928 14 331.50 — Mar-15
Company at the date of grant. 2 The award date for the LTIP and Bonus Replacement Deferred Share Award (BRDSA) awards granted in 2010 which vested in 2013 was 30 March 2010, the award date for the Replacement Restricted Share Award (RRSA) award was 11 March 2010 and the award date for the award granted in 2011 which vested in 2013 was 2 December 2011. The awards which vested in 2013 were released with the net amount being settled in shares and the balance settled in cash and used to pay the resulting tax liability. The monetary value of awards was calculated by multiplying the relevant number of shares by the closing middle-market price of an ordinary share of the Company at the date of vesting.
5 For the 2013 LTIP grant, the TSR comparator group consisted of the following companies: Aegon, Allianz, Axa, CNP Assurances, Direct Line Group, Generali, Legal & General, Met Life, Old Mutual, Prudential, Resolution Limited, RSA, Standard Life and Zurich. For the 2011 and 2012 LTIP grants the TSR comparator group consisted of the following companies: Aegon, Ageas, Allianz, Axa, Generali, ING, Legal & General, Lloyds Banking Group, Prudential, Resolution Limited, RSA, Royal Bank of Scotland Group, Standard Life and Zurich.
9 The shares comprising these awards were restricted shares which were beneficially owned by Patrick Regan and held in trust on his behalf under the terms of a restricted share award agreement. As outlined in the 2010 DRR, income tax and national insurance contributions liabilities were paid on the RRSA on 11 March 2010 and on the BRDSA on 30 March 2010.
Share options (audited information) Details of the EDs who were in office for any part of the 2013 financial year and hold or held options over ordinary shares of the Company pursuant to the Company’s share based incentive plans are set out in table 23 below. Savings-related share options refer to options granted under the HMRC approved Aviva 2007 SAYE Scheme. Options are normally exercisable during the six-month period following the end of the relevant (3, 5 or 7 year) savings contract. Executive share options (approved) refer to options granted under the HMRC approved schedule to the Aviva Executive Share Option Plan 2005. Options were exercisable on 30 March 2013 to the extent that the LTIP awards granted in 2010 had vested. No options were exercised and have now lapsed.
The closing middle-market price of an ordinary share of the Company on 31 December 2013 was 449.7 pence, and the closing middle-market price of an ordinary share of the Company during the year ranged from 294.1 pence to 449.7 pence. During the year, no share options were exercised by directors (2012: nil options exercised). EDs did not pay for the award of any share options and options are not subject to performance conditions (the savings related options being granted under an all-employee share scheme and the executive share options being linked to awards under the LTIP which are subject to performance conditions).
Within the remuneration policy, the key responsibilities of the committee are to: make recommendations to the Board regarding the Group’s remuneration policy in respect of the Board Chairman, EDs, members of the Group Executive and members of senior management, taking account of all legal and regulatory requirements and provisions of best practice work with the Risk Committee to ensure that risk and risk appetite are properly considered in setting the remuneration policy for the Group review and determine the remuneration of the Chairman of the Board and the terms of employment and remuneration of individual EDs and Group Executive members, including any specific recruitment or severance terms review and recommend to management the level and structure of senior management remuneration approve the Aviva Investors' reward strategy, including any changes to the strategy and note the total bonus pool; receive remuneration details of Aviva Investors' ’material’ employees; and approve any new share and incentive plans or any changes to existing share and incentive plans recommend to the Board the establishment of any employee share plans; exercise all the Board’s powers in relation to the operation of all share and incentive plans and the Group’s all employee share ownership plan select, appoint and determine terms of reference for independent remuneration consultants to advise the committee on remuneration policy and levels of remuneration have regard to remuneration trends across the Group when setting remuneration policy for EDs ensure that remuneration arrangements for all employees are commensurate with promoting ethical behaviour ensure the effectiveness of the process for assessing the senior management group for talent and succession planning purposes, ensuring appropriate reward for performance and a consistent approach to the development of talent throughout the Group, working with the Governance and Nomination committees as necessary annually approve the list of Code Staff and any severance packages for Code Staff under the relevant regulatory remuneration code and the remuneration for employees in control functions and those whose remuneration exceeds an agreed limit approve the Group remuneration business standard agree a policy for authorising expense claims for the CEO and Chairman.
Report on the financial statements Our opinion In our opinion the financial statements, defined below: give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2013 and of the Group’s and Parent Company’s profit and cash flows for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Consolidated financial statements, Article 4 of the IAS Regulation.
What we have audited The Consolidated financial statements and the Company financial statements (the “financial statements”), which are prepared by Aviva plc, comprise: the Consolidated and the Company statements of financial position as at 31 December 2013; the Consolidated and the Company income statements and statements of comprehensive income for the year then ended; the Reconciliation of Group operating profit to profit/(loss) for the year then ended; the Consolidated and the Company statements of changes in equity and statements of cash flows for the year then ended; and the Accounting policies and the notes to the financial statements, which include other explanatory information.
Overview of our audit approach Materiality We set certain thresholds for materiality. These helped us to determine the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we set materiality for the Consolidated financial statements as a whole at £81 million. Our view on overall materiality was communicated to the Audit Committee. In determining our materiality, we have considered financial metrics which we believe to be relevant, and concluded that Operating Profit before tax attributable to shareholders’ profits after integration and restructuring costs was the relevant benchmark because it reflects the underlying profit of the business. We agreed with the Audit Committee that we would report to them all uncorrected misstatements greater than £4 million, as well as differences below that amount that, in our view, warranted reporting on qualitative grounds.
Overview of the scope of our audit The Group is structured along market reporting lines being ‘United Kingdom & Ireland’ (Life and General Insurance), France, Poland, ‘Italy, Spain and Other’, Canada, Asia, Aviva Investors, ‘Other group activities’ and Discontinued operations. In establishing the overall approach to the group audit, we determined the type of work that needed to be performed at each of the market reporting lines by us, as the group engagement team, or component auditors within PwC UK and from other PwC network firms operating under our instructions. Where the work was performed by component auditors, we determined the level of involvement we needed as the group engagement team to have in the audit work at those reporting lines to be able to conclude whether sufficient audit evidence had been obtained as a basis for our opinion on the Consolidated financial statements as a whole. Certain components within the market reporting lines required an audit of their complete financial information, either due to their size or their risk characteristics. Specific audit procedures on certain balances and transactions were also performed in relation
Independent auditors report to the members of Aviva plc continued to other components to ensure we obtained appropriate coverage across all account balances and performed audit work to cover the areas of focus we identified and which are set out below. The work performed on the components, together with additional procedures performed at the Group level gave us the evidence we needed for our opinion on the Consolidated financial statements as a whole.
Area of focus How the scope of our audit addressed the area of focus
We tested the key methodologies and challenged the assumptions used by the directors in the valuation of the insurance contract liabilities consisting of the long-term and general insurance businesses. For the long-term business liabilities, those assumptions to which the liability is most sensitive are as follows: the United Kingdom business has substantial holdings in asset classes with significant credit risk, particularly corporate bonds and commercial mortgages which are used to back annuitant liabilities. We therefore focused on the allowance for credit default in setting the applicable liability discount rate; and the United Kingdom business annuitant mortality assumptions as these require a high degree of judgement due to the number of factors that result in uncertainty over future life expectancy.
We assessed the directors’ calculation of these liabilities by testing the underlying company data, the approach and assumptions used against recognised actuarial practices and by applying our industry knowledge and experience. For the general insurance liabilities we performed re-projections on selected classes of general insurance business in the United Kingdom and Canada. We also assessed the directors’ calculation of the general insurance liabilities by testing the underlying company data, the approach and assumptions used against recognised actuarial practices and by applying our industry knowledge and experience.
Valuation of goodwill Our audit of the directors’ goodwill impairment assessment focused in particular on Aviva Spain. This is because the continued volatility in the Spanish economy means that there is an increased potential for impairment in the goodwill relating to Aviva Spain. (Refer to note 17 to the Consolidated financial statements.)
Valuation of certain investments in the Consolidated and the Company financial statements We focussed on financial investments based on models at United Kingdom Life and General Insurance, France and Italy in the Consolidated financial statements because of the subjective nature of their valuation and we focussed on investments in subsidiaries in the Company financial statements because of the judgments involved in applying the applicable valuation models. (Refer to note 23 to the Consolidated financial statements and note A to the Company financial statements.)
For a sample of financial investments valued based on models, such as unquoted equity or debt securities, commercial mortgages and over the counter derivatives, we compared the assumptions used by the directors to external industry data, and in certain instances independently modelled certain valuations, to assess and challenge the appropriateness of the directors’ models and key assumptions used. For investments in subsidiaries, we assessed the directors’ process for identifying indicators of impairment. We also tested the directors’ determination of the value of these investments, including the methodology and assumptions adopted.
Risk of fraud in revenue recognition ISAs (UK & Ireland) presume there is a risk of fraud in revenue recognition because of the pressure management may feel to achieve the planned results. We focused on the timing and accuracy of the recognition of gross earned premium, fees receivable under investment contracts, reinsurance and acquisition costs associated with written premium, and their presentation in the Consolidated income statement. (Refer also to note 6 to the Consolidated financial statements.)
As the foundation of the evidence we obtained regarding the revenue recognised during the year, we evaluated the relevant IT systems and tested the internal controls over the completeness, accuracy and timing of revenue recognised in the financial statements. We also tested journal entries posted to revenue accounts to identify unusual or irregular items.
Risk of management override of internal controls ISAs (UK & Ireland) require that we consider this.
We assessed the overall control environment of the Group, including the arrangements for staff to “whistle-blow” inappropriate actions, and interviewed senior management and the Group’s internal audit function. We examined the significant accounting estimates and judgements relevant to the financial statements for evidence of bias by the directors that may represent a risk of material misstatement due to fraud. We also tested journal entries made to identify unusual or irregular items.
Other matters on which we are required to report by exception Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: we have not received all the information and explanations we require for our audit; or adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or the Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns.
Other information in the Annual Report Under ISAs (UK & Ireland), we are required to report to you if, in our opinion, information in the Annual Report is: materially inconsistent with the information in the audited financial statements; or apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group and Parent Company acquired in the course of performing our audit; or is otherwise misleading.
David Law (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 1. The maintenance and integrity of the Aviva plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. 2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
(A) Basis of preparation The consolidated financial statements and those of the Company have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to those reporting under IFRS. In addition to fulfilling their legal obligation to comply with IFRS as adopted by the EU, the Group and the Company have also complied with IFRS as issued by the IASB and applicable at 31 December 2013. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, investment property, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. In accordance with IFRS 4 Insurance Contracts, the Group has applied existing accounting practices for insurance and participating investment contracts, modified as appropriate to comply with the IFRS framework and applicable standards. Further details are given in accounting policy G. Items included in the financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (the functional currency). The consolidated financial statements are stated in pounds sterling, which is the Company’s functional and presentational currency. Unless otherwise noted, the amounts shown in these financial statements are in millions of pounds sterling (£m). The separate financial statements of the Company are on pages 238 to 246. See note 3 for presentation changes to the consolidated financial statements.
Separate Financial Statements that addressed the accounting for consolidated financial statements. It also supersedes SIC-12 Consolidation – Special Purpose Entities and establishes a single control model that applies to all entities. IFRS 10 sets out the requirements for the preparation and presentation of consolidated financial statements, requiring an entity to consolidate entities it controls. The standard changes the definition of control and the new criteria for control is outlined in accounting policy D. In line with the transitional provisions the requirements have been retrospectively applied at the beginning of the immediate preceding period. The application of IFRS 10 has resulted in the consolidation of investment vehicles that were not previously consolidated, and deconsolidation of investment vehicles that were previously consolidated. There is no impact on the profit or loss for the current or prior year or on equity reported. There is no material impact on the total assets or liabilities in the comparative period. The effect on amounts previously reported at 31 December 2012 is set out in note 1.
iv) IFRS 13, Fair Value Measurement IFRS 13 establishes a single standard for all fair value measurements. The standard does not change the scope of fair value measurement, but provides further guidance on how fair value should be determined. The changes have no significant impact on the Group’s application of fair value measurements and have no impact on the profit or loss for the current or prior period or on equity reported. IFRS 13 also requires enhanced disclosures about fair value measurement, some of which replace existing disclosure requirements in other standards, including IFRS 7 Financial Instruments: Disclosures and are set out in note 23. IFRS 13 has been adopted and applied prospectively in accordance with the standard.
vi) IAS 19, Employee Benefits (Revised) The amendment revises requirements for pensions and other post-retirement benefits, termination benefits and other employee benefits. The key changes include the revision of the calculation of the finance cost, enhanced disclosures surrounding the characteristics and risk profile of defined benefit plans, and a requirement to include all actuarial gains and losses immediately in other comprehensive income which is already in line with the Group’s current policy. The key impact of the revised standard on the Group’s consolidated financial statements
(viii) IAS 27, Separate Financial Statements (2011) and IAS 28, Investments in Associates and Joint Ventures (2011)
Standards, interpretations and amendments to published standards that are not yet effective and have been adopted early by the Group The following amendments to existing standards have been issued, are effective for accounting periods beginning on or after 1 January 2014 and have been adopted early by the Group: (i) Amendments to IAS 36, Impairment of Assets The amendments clarify disclosure requirements in respect of the recoverable amount of impaired non-financial assets if the amount is based on fair value less costs to sell. These amendments have been early adopted by the Group, with no significant impact on the Group’s consolidated financial statements. The amendments have been endorsed by the EU.
Standards, interpretations and amendments to published standards that are not yet effective and have not been adopted early by the Group The following new standards, amendments to existing standards and interpretations have been issued, are effective for accounting periods beginning on or after the following date and have not been adopted early by the Group: Effective for annual periods beginning on or after 1 January 2014 (i) Amendments to IAS 32, Financial Instruments – Presentation The amendments to IAS 32 clarify the requirements for offsetting financial assets and financial liabilities on the statement of financial position. The adoption of these amendments is not expected to have a significant impact on the Group’s profit for the year or equity. The amendments have been endorsed by the EU.
(ii) Amendments to IFRS 10, IFRS 12 and IAS 27 (2011) The amendments provide an exemption from consolidation of subsidiaries under IFRS 10 Consolidated Financial Statements for entities which meet the definition of an 'investment entity', such as certain investment funds. Instead, such entities would measure their investment in particular subsidiaries at fair value through profit or loss in accordance with IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement. There are no implications for the Group’s consolidated financial statements, because the Group does not meet the definition of an investment entity. The amendments have been endorsed by the EU.