Aviva plc St Helen’s, 1 Undershaft London EC3P 3DQ +44 (0)20 7283 2000 www.aviva.com
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Aviva provides around 43 million customers with insurance, savings and investment products. We are the UK’s largest insurer* and one of Europe’s leading providers of life and general insurance. We combine strong life insurance, general insurance and asset management businesses under one powerful brand. We are committed to serving our customers well in order to build a stronger, sustainable business, which makes a positive contribution to society, and for which our people are proud to work.
View our reports online 2011 Annual report and accounts You can find more detailed information regarding Aviva’s performance from our online annual report and accounts. Providing our reports online allows us to reduce the paper we print and distribute.
Watch the video online: www.aviva.com/2011ar *Based on aggregate FY10 UK life and pension sales (PVNBP) and general insurance gross written premiums.
Performance review 020 Key performance indicators 022 Financial and operating performance 036 Selected consolidated financial data 037 Information on the company 050 Organisational structure 052 Analysis of investments 060 Contractual obligations 061 Risk and capital management 069 Basis of preparation 070 Accounting basis of preparation
Corporate responsibility 072 Highlights, our strategy and governance 073 Trust and transparency 074 Attracting and retaining talent 076 Developing communities 077 Climate change and environment 078 Sustainable products and services 079 External benchmarking and recognition 079 Affiliations and engagements 080 Key indicators 082 Accounting for Sustainability 087 Independent assurance statement
322 Condensed consolidated income statement 323 Earnings per share 324 Condensed consolidated statement of comprehensive income 324 Condensed consolidated statement of changes in equity 325 Condensed consolidated statement of financial position 326 Reconciliation of shareholders’ equity on IFRS and MCEV bases 326 Reconciliation of IFRS total equity to MCEV net worth 327 Group MCEV analysis of earnings 359 Statement of directors’ responsibilities in respect of the MCEV basis 360 Independent auditor’s report to the directors of Aviva plc on the consolidated MCEV financial statements
Our customers and communities We are building a strong, sustainable business which makes a positive contribution to society.
Chairman’s statement Aviva is a 21st century company, ready to compete in a modern economic environment.
Jason Varner Jason went the extra mile to help a customer complete a life insurance claim when her father died. He went to her home on a Saturday morning to help her fill in the paperwork. In Jason’s team – and across Aviva – performance means giving of our best for every customer, so that they want to stay with and recommend Aviva. www.aviva.com/2011ar
Essential read 2011 highlights continued 2011 has been a year of good strategic progress… We have continued to focus on markets where we will grow and earn the highest returns. For example: …and strong operating performance, beating our targets…
p We sold a further 15% stake in Delta Lloyd, reducing our exposure to the Benelux countries, which raised around £0.4 billion. We also sold our roadside breakdown business RAC for £1 billion.
p We left six markets – Australia, the UAE, Hungary, Romania, the Czech Republic and Slovakia3.
p We grew our market share in profitable markets such as individual annuities in the UK.
p We delivered a good operating performance in both our life and general insurance businesses.
p We are focused on balance sheet strength, through careful management of our assets and risks.
p We are well-placed to build on last year’s success and have increased our operating targets for 2012.
Sherri Voutier In Canada, Sherri Voutier was assigned to help Dorothy, an Aviva customer who had returned home to find she had been robbed. Dorothy, recently divorced, was devastated by the break-in, which left her “scared to death”. When Dorothy called Aviva to register her claim, Sherri recognised the fear and distress that the robbery had caused and, for weeks after the robbery, Sherri supported Dorothy, providing the encouragement she needed to move forward. www.aviva.com/2011ar
p We strive to recognise all our customers and employees as individuals. It is by understanding customers’ individual needs and listening to them that our people can really help them.
Playing a responsible role in society p Our global Street to School programme has helped 400,000 children since it started in 2009.
In 2011 Aviva produced another strong operating performance. We have done this in a year which has been dominated by concerns over macro-economic conditions, particularly in the eurozone. Against a backdrop of market volatility, we have remained focused on our strategy and served our customers well. In this regard, 2011 was a year very much like many others. When I took up this role six years ago the financial sector was enjoying the heights of a bull market. Before too long, Northern Rock and Lehman Brothers had collapsed and the sector found itself languishing in the depths of a bear market. Some in the financial community went from believing that the good times would never end, until they did, to expecting the world to stop turning on its axis, until it did not. Whilst these six years certainly have been eventful, our business spans five centuries. When our first customer bought house insurance from our founder firm the Hand in Hand insurance company in 1697 he could not have known that we would still be writing business 12 generations later. He paid around two shillings to insure his property for seven years for £200. Millions more have followed. Throughout my business career I’ve believed that successful organisations are those which are ready for anything. It’s a belief to which Aviva readily subscribes. If businesses want to survive, they must be flexible and fast to respond to changing circumstances. They must be agile.
The solution is good management of our balance sheet and good leadership. Our chief executive Andrew Moss and his executive committee have continued to execute the Company’s strategy during the last twelve months despite challenging markets. Under his leadership the Company has sold RAC, agreed the sale of our businesses in Hungary, Romania and Czech Republic, reduced our shareholding in Delta Lloyd and renewed our focus on our core markets. Through these actions, we are financially stronger and better able to ride uncertain economic conditions.
Strength of the board In addition to appointing John McFarlane as a non-executive director in September 2011, we strengthened the board through a number of executive and non-executive appointments. Most recently, Glyn Barker joined the board in February 2012 as a non-executive director, bringing long-standing experience as a senior finance and audit professional. In October 2011 Gay Huey Evans joined the board as a non-executive director and subsequently became chair of the Corporate Responsibility Committee. Gay brings significant financial services and regulatory experience, having held key positions in financial and banking institutions and at the Financial Services Authority. Gay replaced Carole Piwnica who stepped down from the board in December, having been a non-executive director for over eight years. Trevor Matthews joined the board in December 2011 as chief executive, Aviva UK, replacing Mark Hodges who stepped down from the board in June. Trevor was formerly vice-chairman of Friends Life and has over thirty years of global executive experience in the financial services industry. All appointments were made on merit, having regard to the benefits of board diversity and to the targets set by the company of having a minimum of 25% female representation on the board by 2013.
Aviva is a 21st century company, ready to compete in a modern economic environment. But in terms of the service we offer, we are still a company that our first customer would recognise: one that is flexible and fast to respond, sustainable and equipped to endure the rigours of ever changing investment markets and international economies.
In North America, operating earnings increased in both our US and Canadian businesses. In Asia, our investment in our relatively young businesses is clearly paying off as we successfully grow profits and build an attractive franchise. Aviva Investors made good progress with net external sales at a record £5.6 billion on an underlying basis6. In 2011, consistent with our focus on investing our capital where we can grow and earn the highest returns, we sold a further 15% stake in Delta Lloyd, raising around £0.4 billion and reducing our presence in the Benelux markets. We also sold our roadside breakdown business RAC at 17 times earnings for £1 billion. In addition we sold Aviva Investors business in Australia, concluded our partnership in the UAE and, in January 2012, we agreed the sale of our operations in Hungary, Romania, the Czech Republic and our exit from Slovakia. Our progress in 2011 owes much to the actions we have taken over a number of years to transform Aviva. Since 2009 we have increased operating profits from £2.0 billion to £2.5 billion, doubled operating capital generation and reduced our cost base from £5.1 billion to £4.1 billion7. In addition, the pension deficit of £1.7 billion has now moved into a surplus. As a result Aviva is a leaner and stronger company today. You can read more about how we have transformed Aviva on pages 12 and 13.
…with the support of our distribution partners… We continue to work closely with our distribution partners around the world so that we can serve our customers effectively. Our diverse network of partners – including banks and brokers – is one of Aviva’s core strengths and an area in which we will continue to invest. We have created one of the largest and most successful bancassurance franchises in the insurance sector with 130 partners. In the UK alone last year we expanded our distribution network with new agreements with HSBC, Santander and Barclays.
“ We’ve done a huge amount to transform Aviva over the past few years. We’ve built a strong, sustainable and diverse business, well positioned for future growth. We are making good progress, and, of course, there is more to do.” Andrew Moss Group chief executive p Aviva Global Services, India.
GI & Health Life * Operating profit before tax. The Group’s accounting policy for operating profit (also referred to as Group adjusted operating profit) remains consistent with prior periods and is set out on page 168.
Improved profitability At the same time as growing volumes in general insurance we also improved profitability, particularly benefiting from the actions taken over a number of years on pricing and operating costs. These actions have contributed to our improved combined operating ratio of 96.8%. Our disciplined management of new business mix has driven an improvement in the group’s life insurance new business internal rate of return to 14.4%, ahead of our target of at least 12%. Operating profits increased in the UK and Europe, despite tough economic conditions. We are beating all of our operating targets and are well-placed for 2012.
Managing risk Managing risk is fundamental to what we do. As a long-term holder of assets which are carefully matched to our long-term commitments to policyholders, our balance sheet has in-built resilience. The Group’s pension deficit of £1.7 billion in 2009 has now moved into a surplus. Our reduced shareholding and deconsolidation of Delta Lloyd further de-risked our balance sheet. We manage our assets to reduce risks and to deliver a good return for our customers and our shareholders. We have an excellent track record of managing credit risk through what has been a challenging external environment in recent years.
Growing profits… Operating profit was £2.5 billion9, broadly in line with 2010 despite the reduced contribution from Delta Lloyd following its deconsolidation in May 2011. On a continuing basis, excluding Delta Lloyd, operating profit increased 6% to £2,155 million (FY 2010: £2,026 million). This was the result of successfully allocating capital to our most profitable markets, disciplined underwriting and management of expenses and the underlying strength and scale of our in-force portfolios.
…and significantly increased operating capital generation In 2011 Aviva increased operating capital generation by £0.4 billion to £2.1 billion, an excellent result especially in the context of challenging financial markets. Improved profitability in both life insurance and general insurance businesses meant that capital generation from the in-force life portfolio increased to £2.3 billion and the general insurance business contributed £0.6 billion overall. At the same time we reduced capital consumed in writing new life business by £0.3 billion, driven by both improved capital efficiency and our management of business volumes. Since 2009 we have more than doubled the amount of operating capital we generate. This has been achieved through cost management on our in-force portfolio and the active management of new business volumes, mix and profitability. We have also benefited from key management initiatives such as the reattribution of the inherited estate in the UK life business. The disciplined allocation of capital to areas where we can earn the greatest returns means that we increased our life new business IRR to 14.4% with each region delivering new business profitability levels above our target. In Europe we have significantly reduced sales of capital intensive with-profits products which led to an improvement in the life new business IRR to 14%. In the UK we have rapidly grown market share in individual annuities and delivered an IRR of over 25% in this product area.
New business income contributed £1,037 million, with strong annuity volumes and profit growth in the UK offsetting lower volumes in Europe and the US. New business income margin, as a percentage of annual premium equivalent sales, was stable at 29%. Investment return was another important driver of operating profits, up 6% at £2,760 million (FY 2010: £2,606 million), underlining our strong track record of effective management of credit risk. Within this total, credit spread income on our annuity portfolio increased by £125 million to £813 million, reflecting our ability to earn good margins in a low interest rate environment.
…and a good contribution from general insurance We have successfully grown our general insurance business and delivered high quality earnings as a result of actions we’ve taken in pricing, underwriting and costs. General insurance and health profits increased by 3% to £935 million. The Group delivered a strong underwriting result up by 10% to £224 million. The improved combined operating ratio (COR) of 96.8% (FY 2010: 97.1%) was a result of the significant improvements we have made in pricing and efficiency over the last few years. These results are driven by current year profitability with the current year COR at 96.4%, and are not dependent on prior year reserve releases giving us confidence in the sustainability of this performance. We have successfully increased rates in a number of markets. In the UK for example we delivered a particularly strong performance as we took action to increase rates in personal and commercial motor and net written premiums were 8% higher at £4,371 million. Our strength in underwriting also contributed significantly. In the UK, for example, our direct book has seen a decreasing trend in bodily injury claims frequency in the last three years whilst the market has seen an increasing trend.
The actions we took in 2011 to improve profitability, increase operating capital generation and focus on our balance sheet strength, have underpinned Aviva’s resilience.
We have a well managed and high quality asset portfolio Overall asset quality remains strong with modest impairments seen in 2011. In UK corporate bonds, for example, we had very limited default experience of less than 5 basis points and the £770 million UK mortgage provision remains in place. Our direct shareholder asset exposure (net of minorities) to debt securities of the governments of Greece, Portugal, Ireland, Italy and Spain (including local authorities and government agencies) at 31 December 2011 was £1.3 billion (FY 2010: £1.6 billion), 1% of total shareholder assets.
UK and Europe – the world’s largest life and pensions markets
UK – 14 million customers p 48% of group operating profits11 p Nine major centres in the UK
Europe – 18 million customers12 p 32% of group operating profits p France, Ireland, Italy, Lithuania,
Netherlands, Poland, Russia, Spain, Turkey p Delta Lloyd: Belgium, Luxembourg, Netherlands
North America – 4 million customers p 15% of group operating profits p Canada, United States
Asia Pacific – 7 million customers p 2% of group operating profits p China, Hong Kong, India, Indonesia,
Ireland, Italy, Luxembourg, Poland, Singapore, Spain, Taiwan, United Kingdom, United States
UK p Operating profit up 8% to £1,451 million p Life operating profits up 9% to £931 million13 with sales up 10% to £11,315 million and new business IRR of 15% p General insurance and health operating profit14 up 7%
The general insurance business, which is the UK market leader, generated good, profitable growth as a result of our expertise in underwriting and claims management, our risk selection and sophisticated pricing. We achieved particularly strong results in personal motor insurance with net written premiums (excluding RAC) up 32% at more than £1.1 billion. We have more than two million personal motor customers in the UK, as a result of the successful roll out of direct pricing to brokers and the launch of quotemehappy. com, which offers low-cost insurance to careful drivers and already contributes more than 10% of our total new personal motor customers.
Customer satisfaction levels and employee engagement have increased, with customer complaints down 20% in 2011. We’ve been changing the way we look after our customers by simplifying our processes and making them more customer-friendly. In our existing annuity business this has delivered a 26 point improvement in our Transactional Net Promoter Score™, achieved significant cost savings and helped reduce call volumes by around 20%. Our progress has been recognised by the industry. We were voted General Insurer of the Year (Insurance Times) and Health Insurer of the Year (Health Insurance Awards).
Aviva has a strong presence in France, Spain, Italy, Poland and Ireland, and growing businesses in Russia and Turkey. We are a top six life insurer in all our markets, which together account for 15% of the world’s insurance premiums. Consistent with our strategic aim to sharpen our geographic focus we ended our partnership in UAE and, in January 2012, we agreed the sale of our businesses in the Czech Republic, Hungary, Romania and our exit from Slovakia. In France our pricing and underwriting expertise enabled us to deliver a very strong general insurance result. Our life business is resilient and delivered robust profits. We continued to focus on value over volume reducing sales of capital intensive with-profit products. Sales through Credit du Nord grew 13%, a successful performance in a challenging market. Spain, despite difficult economic conditions, delivered record operating profits of £216 million. As part of our focus on delivering good value and service for customers we introduced a new unit-linked product, helping to support our strong life new business IRR at 23%. In Italy our key focus was value over volume, taking strong actions to reduce sales of capital intensive with-profit products, resulting in increased life operating profits and a smaller Italian balance sheet. Our general insurance business in Italy was significantly impacted by adverse development on prior year reserves in motor. We initiated management actions to start to return COR to Group target. In Poland we refocused our direct sales force ahead of pension legislation changes, equipping them with the skills and tools to offer customers a broader range of insurance products. This resulted in significant growth in unit-linked products, protection sales and general insurance.
11 The Group’s accounting policy for operating profit (also referred to as Group adjusted operating profit) remains consistent with prior periods and is set out on page 168. 12 Excluding Delta Lloyd.
13 Includes £11 million of fund management operating profit. 14 Excludes Aviva Re and agencies in run-off.
North America p Operating profit16 up 15% to £433 million p Life operating profits up 13% to £197 million with sales down 17% at £3,932 million and life new business IRR of 14%
p General insurance operating profit up 14% to £254 million with net written premiums up 6% at £2,083 million and COR of 95%
In North America we produced a third consecutive year of growth in operating profits as a result of our pricing, sophisticated underwriting and cost management. While the insurance market in North America is exceptionally competitive, we improved operating profits by 15% and generated £0.4 billion of operating capital. We increased profits in the US as a result of pricing discipline and the growth in profitability of our life and annuity in-force book. We’ve increased sales of life insurance products, which now account for more than a quarter of our total US sales. We’ve achieved this by offering attractive products which provide financial security for our customers, delivering excellent customer service and by maintaining deep relationships with our key distribution partners. In Canada, where we are the second-largest general insurer, we continued to improve our results by focusing on profitable business, reducing our costs to make Aviva significantly more competitive and using technology to enhance our underwriting capabilities. We believe we are one of the more sophisticated insurers in the market at assessing and selecting risks. We are confident that by maintaining strong pricing discipline, focusing on customer service, and building on strengths in underwriting, we will deliver further profitable growth.
Asia Pacific p Operating profit up 126% to £70 million p Life operating profits up 52% to £108 million with sales up 10% to £1,782 million and life new business IRR of 13%17
We more than doubled operating profit as we redesigned and promoted products to address consumers’ changing needs, reduced our costs and developed new ways to reach our customers, including internet sales and the introduction of Aviva Advisors in Singapore and Hong Kong.
We produced a strong performance in Singapore, where our bancassurance agreement with DBS Bank grew from strength to strength. This enabled us to reach more customers and contributed to a 56% increase in life and pension sales. In China, a combination of regulatory changes, coupled with the impact of high interest rates on short term deposits led to reduced sales across the industry. Throughout this period, we continued to focus on building our customer base in the high-net-worth market, restructured our agency force and emphasised the importance of long term savings and retirement planning to our customers. As a result our profitability increased. In India regulatory changes caused the industry to shift towards traditional endowment and protection products. We were early in identifying the trend and started to offer these products in 2010, resulting in significantly higher margins in 2011. The longer-term outlook for our business in Asia remains positive with the low penetration rates of insurance products in many markets, high GDP growth, a growing middle-class and rising wealth. We remain focused on increasing our franchise value through profitable, organic growth.
We achieved record net funded external sales up 137% on an underlying basis18 with in addition £1 billion of committed but unfunded sales. We did this by focusing our sales effort on a range of core investment solutions and strategies in key institutional markets. Independent internal and external client service rankings also improved. We continued to invest in our global infrastructure to support future business growth and meet the increasing expectations of regulators and clients. Combined with market movements and the impact of clients’ lower risk appetite, this led to slightly lower operating profits of £91 million. In the fourth quarter we reviewed our business to ensure we are well-placed to prosper despite challenging market conditions. We propose to streamline our business, concentrating on our core strengths in fixed income, real estate and multi asset solutions, and focusing sales and marketing activity on institutional markets. We plan to scale back distribution to retail investors, although in the UK in particular we will continue to offer investment products and solutions to retail investors through Aviva and our network of banks, insurers and brokers.
Aviva worldwide continued 16 The Group’s accounting policy for operating profit (also referred to as Group adjusted operating profit) remains consistent with prior periods and is set out on page 168. 17 Excluding Taiwan, regional IRR is 14%. 18 Underlying sales exclude an exceptional impact of -£0.5 billion arising from the sale of Aviva Investors’ equity manufacturing business which completed on 1/10/2011.
,5 1, 2, 2, 2, 1, 2, 2, 2, 2, 2,
Earnings per share Our IFRS earnings per share for 2011 was 5.8 pence (2010: 50.4 pence). The decrease was driven by adverse investment return variances and economic assumption changes on long-term business partially offset by profit on sale of the RAC. Our IFRS earnings per share from continuing operations for 2011 was 17.0 pence (2010: 37.6 pence).
Earnings per share Pence Total earnings per share (pence)Earnings per share from continuing operations (pence)
 We aim to achieve steady sustainable growth in our operating profit. In seeking to achieve this growth, we continue to adopt strict financial management discipline underpinned by strong corporate governance.
Adjusted operating profit before tax £m 1, 2, 1, 2, 2,
 While our focus is on capital efficiency and profit rather than volumes, sales remain an important indicator. Worldwide sales from continuing operations comprise the PVNBP of long-term savings new business sales and net written premiums from the general insurance and health businesses.
Operating capital generation Our focus on capital allocation and management has enabled us to achieve £2.1 billion of operating capital generation in 2011, up from £1.7 billion in 2010. Profits from existing life business remain strong, generating £2.3 billion of capital (2010: £2.1 billion), with a further £0.6 billion (2010: £0.6 billion) generated by the general insurance, fund management and non-insurance businesses. Capital invested in new business has reduced to £0.8 billion (2010: £1.0 billion) and includes investment in life new business of £0.9 billion, a reduction of £0.3 billion compared with 2010.
 Operating capital generation is the operating movement in our free capital in the year.
 Employee engagement represents the degree to which people believe Aviva is a great place to work and are contributing to help meet our collective goals and ambitions.
 Our aim is to improve both measures over time and meet or exceed a global financial services benchmark.
Customer advocacy The 2011 Relationship Net Promoter Score®1 survey showed an improvement on 2010.2 We maintained the proportion of businesses operating in the upper quartile (relative to local competition benchmarks), and reduced the proportion of business operating below the market average as they moved into a market average position. We are pleased with the progress made however we are committed to improving the performance of our markets which are below the market average.
% at market average% below market average % exceeding market average 1 Net Promoter, NPS, and Net Promoter Score are trademarks of Satmetrix Systems, Inc., Bain & Company, and Fred Reichheld. 2 2011 RNPS survey.
Exchange rate fluctuations We publish our consolidated financial statements in pounds sterling. Due to our substantial non-UK operations, a significant portion of our operating earnings and net assets are denominated in currencies other than sterling, most notably the euro and the US dollar. As a consequence, our results are exposed to translation risk arising from fluctuations in the values of these currencies against sterling. Total foreign currency movements during 2011 resulted in a loss recognised in the income statement of £35 million, compared to a £34 million gain in 2010. We generally do not hedge foreign currency revenues, as we prefer to retain revenue locally in each business to support business growth, to meet local and regulatory market requirements and to maintain sufficient assets in local currency to match local currency liabilities. Movements in exchange rates may affect the value of consolidated shareholders’ equity, which is expressed in sterling. Exchange differences taken to other comprehensive income arise on the translation of the net investment in foreign subsidiaries, associates and joint ventures. This aspect of foreign exchange risk is monitored centrally against limits that we have set to control the extent to which capital deployment and capital requirements are not aligned. We use currency borrowings and derivatives when necessary to keep currency exposures within these predetermined limits, and to hedge specific foreign exchange risks when appropriate; for example, in any acquisition or disposal activity. During 2011, sterling strengthened in value against the euro, but marginally weakened against the dollar, resulting in a foreign currency loss in other comprehensive income from continuing operations of £254 million (2010: £55 million gain). The impact of these fluctuations is limited to a significant degree, however, by the fact that revenues, expenses, assets and liabilities within our non-UK operations are generally denominated in local currencies.
Activity in 2010 On 17 February 2010, we sold our 35% holding in Sogessur SA to that company’s main shareholder for a consideration of £35 million, realising a profit on disposal of £24 million. On 24 February 2010, we acquired 100% of River Road Asset Management, a US equity manager, to support the expansion of Aviva Investors’ third-party institutional asset management business. The total consideration was estimated as £83 million (US$128 million). On 31 December 2010, the Group entered into transactions with RBS Group plc (RBSG) and agreed that, with effect from 31 December 2010, the Group would take ownership of the back book of RBS Life in exchange for RBSG taking 100% ownership of RBS Collective. Separately, a new distribution agreement was signed between our UK Life business and RBSG, with the new structure providing more flexibility in our long-term business operations.
Activity in 2009 On 1 October 2009, we completed the sale of our Australian life and pension business and wealth management platform to National Australia Bank for A$902 million (£443 million). The sale supported Aviva’s strategy of focusing on the key growth markets in Asia where leading positions can be achieved.
On 3 November 2009, we completed the Initial Public Offering (IPO) of approximately 42% of Delta Lloyd N.V. raising €1.1 billion (£1 billion). The IPO enabled Aviva to monetise part of its holding in Delta Lloyd, giving Aviva greater financial flexibility, including the option to explore balance sheet restructuring and further growth opportunities. Continuing with the Group’s strategy to exit non-core operations, we disposed of the British School of Motoring Limited for a consideration of £4 million.
Long-term insurance and savings business For most of our life insurance businesses, such as those in the UK and France, operating earnings are generated principally from our in-force books of business. Our in-force books consist of business written in prior years and on which we continue to generate profits for shareholders. Nevertheless new business written in these markets, with the exception of our UK with-profits business which is discussed below, has a significant direct effect on our operating earnings. Under IFRS, certain costs incurred in acquiring new business must be expensed thereby typically giving rise to a loss in the period of acquisition, though the degree of this effect will depend on the pricing structure of product offerings. In markets where we have experienced strong growth in recent years, such as Spain, Italy, the US and Asia, current year sales have a more significant effect on current year operating earnings.
The annual excess of premiums and investment return over operating expenses, benefit provisions and claims payments within our with-profits funds that are not distributed as bonuses and related shareholders’ profit is transferred from the income statement to the unallocated divisible surplus. Conversely, if a shortfall arises one year, for example because of insufficient investment return, a transfer out of the unallocated divisible surplus finances bonus declarations and related shareholders’ profit. The unallocated divisible surplus consists of future (as yet undetermined) policyholder benefits, associated shareholders’ profit and the orphan estate. The orphan estate serves as working capital for our with-profits funds. It affords the with-profits fund a degree of freedom to invest a substantial portion of the funds’ assets in investments yielding higher returns than might otherwise be obtainable without being constrained by the need to absorb the cash-flow strain of writing large volumes of new business and the need to demonstrate solvency.
Other participating business Outside of the UK, most of our long-term operations write participating business. This is predominantly savings or pensions business, where the policyholders receive guaranteed minimum investment returns, and additional earnings are shared between policyholders and shareholders in accordance with local regulatory and policy conditions. This may also be referred to as “with-profits” business.
Other long-term insurance and savings business Non-profit business falls mainly into two categories: investment type business and risk cover and annuity business. Investment type business, which accounts for most of our non-profit business, includes predominantly unit-linked life and pensions business where the risk of investing policy assets is borne entirely by the policyholder. In addition, investment type business includes life and pensions business where the risk of investing policy assets is typically shared between policyholders and shareholders, subject to a minimum rate of investment return guaranteed to policyholders. Operating earnings arise from unit-linked business when fees charged to policyholders based on the value of the policy assets exceed costs of acquiring new business and administration costs. In respect of remaining investment type business, investment return generated from policy assets has an effect on operating earnings though this is often nonproportional. Finally, in respect of all investment type business, shareholders bear the risk of investing shareholder capital in support of these operations. Risk cover business includes term assurance, or term life insurance business. Annuity business includes immediate annuities purchased for individuals or on a bulk purchase basis for groups of people. The risk of investing policy assets in this business is borne entirely by the shareholders. Operating earnings arise when premiums, and investment return earned on assets supporting insurance liabilities and shareholder capital, exceed claims and benefit costs, costs of acquiring new business and administration costs.
Other business Other business includes our operations other than insurance and fund management. This primarily consisted of the RAC roadside recovery operation in the UK up to its sale on 30 September 2011.
Non-GAAP measures Sales The total sales of the Group consist of long-term insurance and savings new business sales and general insurance and health net written premiums. We classify our long-term insurance and savings new business sales into the following categories: Long-term insurance and savings new business sales Sales of the long-term insurance and savings business consist of: Covered business or life, pensions and savings products:  Insurance and participating investment business
– This includes traditional life insurance, annuity business and with-profits business
 Non-participating investment business – This includes unit-linked business and pensions business – The amounts received for this business are treated as deposits under IFRS and an investment management fee is earned on the funds deposited
Non-covered business or investment sales:  These include retail sales of mutual fund type products such as unit trusts and OEICs. – There is no insurance risk borne by the Group therefore under IFRS, these are treated as deposits and investment management fee income is earned on the funds deposited. These have never been treated as ‘covered business’ for long-term insurance and savings reporting so we show these separately as investment sales.
For long-term insurance and savings new business, we define sales as the sum of the present value of new business premiums (PVNBP) of life, pension and savings products and investment sales. PVNBP is equal to total single premium sales received in the year plus the discounted value of annual premiums expected to be received over the terms of newly incepted contracts and is calculated as at the date of sale. We adjust annual premiums to reflect the expected stream of business coming from this new business over future years. In the view of management, this performance measure better recognises the relative economic value of regular premium contracts compared to single premium contracts. PVNBP is a European insurance industry standard measure of new business. For our long-term insurance and savings business, we believe that sales is an important measure of underlying performance and a better measure for new business than IFRS net written premiums. We consider the use of sales over IFRS net written premiums provides:  Consistent treatment of long-term insurance and investment contracts: IFRS net written premiums do not include deposits received on non-participating investment contracts. Longterm insurance contracts and participating investment contracts also contain a deposit component, which are included in IFRS net written premiums, in addition to an insurance risk component. Therefore, to appropriately assess the revenue generated on a consistent basis between types of contracts, we evaluate the present value of new business sales of long-term insurance and investment products on the basis of total premiums and deposits collected, including sales of mutual fund type products such as unit trusts and OEICs.
Less: Effect of capitalisation factor on regular premium long-term business (7,020) (6,378) (6,883) Share of long-term new business sales from joint ventures and associates (604) (1,446) (1,277) Annualisation impact of regular premium long-term business (611) (431) (454) Deposits taken on non-participating investment contracts and equity release contracts (4,577) (3,803) (3,481) Retail sales of mutual fund type products
Add: IFRS gross written premiums from existing long-term business 5,142 4,410 5,185 Less: long-term insurance and savings business premiums ceded to reinsurers (1,085) (983) (1,685)
 Effect of capitalisation factor on regular premium long-term business: PVNBP is derived from the single and regular premiums of the products sold during the financial period and is expressed at the point of sale. The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts. The discounted value of regular premiums is calculated using the market consistent embedded value methodology proposed by the CFO Forum Principles. The discounted value reflects the expected income streams over the life of the contract, adjusted for expected levels of persistency, discounted back to present value. The discounted value can also be expressed as annualised regular premiums multiplied by a weighted average capitalisation factor (WACF). The WACF varies over time depending on the mix of new products sold, the average outstanding term of the new contracts and the projection assumptions.
 Share of long-term new business sales from joint ventures and associates: Total long-term new business sales include our share of sales from joint ventures and associates. Under IFRS reporting, premiums from these sales are excluded from our consolidated accounts, with only our share of profits or losses from such businesses being brought into the income statement separately.
 Annualisation impact of regular premium long-term business: As noted above, the calculation of PVNBP includes annualised regular premiums. The impact of this annualisation is removed in order to reconcile the non-GAAP new business sales to IFRS premiums and will vary depending on the volume of regular premium sales during the year.
 Retail sales of mutual fund type products (investment sales): Investment sales included in the total sales number represent the cash inflows received from customers to invest in mutual fund type products such as unit trusts and OEICs. We earn fees on the investment and management of these funds which are recorded separately in the IFRS income statement as ’fees and commissions received’ and are not included in statutory premiums.
Adjusted operating profit 2,312 2,026 1,652 Add back adjusting items: Investment return variances and economic assumption changes on long-term insurance business (796) (219) 273
(before tax) as an associate 10 — — Share of Delta Lloyd’s tax expense, as an associate (34) — —
Profit before tax attributable to shareholders’ profits – continuing operations 813 1,545 1,795
(Loss)/profit before tax attributable to shareholders’ profits – discontinued operations (726) 895 10
The table below presents our consolidated income statement from continuing operations under IFRS for the three years ended 31 December 2011, 2010 and 2009.
Premiums written net of reinsurance 28,327 30,071 27,773 Net change in provision for unearned premiums (236) (73) 553
Change in insurance liabilities, net of reinsurance (3,730) (6,608) (4,234) Change in investment contract provisions 1,224 (8,693) (10,946) Change in unallocated divisible surplus 2,721 362 (1,479) Fee and commission expense (4,554) (5,433) (3,953)
Sales (from continuing operations) Year ended 31 December 2011 Sales in 2011 decreased £1,534 million, or 4%, to £40,555 million (2010: £42,089 million). Sales in the UK increased for both long-term insurance and savings, by £1,158 million, or 10%, to £13,004 million (2010: £11,846 million) and general insurance and health increased by £373 million, or 8%, to £4,912 million (2010: £4,539 million). Sales in Europe for long-term business and savings, decreased by £2,650 million, or 18%, to £12,237 million (2010: £14,887 million) and was primarily driven by management actions to reduce sales of capital intensive participating business in France and Italy. Sales in Europe for general insurance and health increased by £106 million, or 5%, to £2,059 million (2010: £1,953 million) primarily driven by successful pricing actions in personal motor and growth in health sales in Ireland. North America long-term insurance and savings sales decreased by £796 million, or 17%, to £3,932 million (2010: £4,728 million), and general insurance sales increased by £125 million, or 6%, to £2,083 million (2010: £1,958 million). Sales in Asia Pacific increased £150 million, or 7%, to £2,328 million (2010: £2,178 million) due to higher life and pension sales from bancassurance channels.
Year ended 31 December 2010 Sales in 2010 were £42,089 million, an increase of £2,513 million, or 6%, from £39,576 million in 2009. Sales in the UK increased for both long-term insurance and savings (19% increase on 2009) and general insurance and health (6% increase on 2009). Europe sales were slightly higher at £16,840 million (2009: £16,258 million) with lower sales in Poland and Spain and offsetting growth in Italy and Other Europe. North America long-term insurance and savings sales increased by 4%, or £183 million, and general insurance sales increased by 9%, or £158 million. Sales in Asia Pacific decreased by £534 million, or 20%, with the impact of the sale of the Australian life business in 2009 more than offsetting growth in other Asian markets.
Income (from continuing operations) Year ended 31 December 2011 Net written premiums in 2011 decreased by £1,744 million, or 6%, to £28,327 million (2010: £30,071 million). General and health insurance increased by £640 million, or 8%, to £9,162 million (2010: £8,522 million), with growth primarily in the UK, Europe and North America. Long-term insurance and savings decreased by £2,384 million, or 11%, to £19,165 million (2010: £21,549 million), driven by lower sales in Europe and North America.
Year ended 31 December 2010 Net written premiums in 2010 were £30,071 million, an increase of £2,298 million, or 8%, from £27,773 million in 2009. All regions reported increases on 2009 levels. General and health insurance increased by 6% on 2009, and life insurance and savings increased by 9%, fuelled by strong annuity sales in the UK. Europe reported a £586 million increase in net written premiums over 2009, while North America and Asia showed increases in net written premiums of 4% (£267 million) and 27% (£124 million) respectively.
Net investment income (from continuing operations) Year ended 31 December 2011 Net investment income for the year decreased by £12,758 million, or 68%, to £5,991 million (2010: £18,749 million). Investment returns were impacted by continued market volatility in 2011 resulting in higher unrealised losses on investments (2010: unrealised gains).
Year ended 31 December 2010 Net investment income for the year was £18,749 million, a decrease of £3,161 million (2009: £21,910 million). Investment returns were generally lower than in 2009, with lower unrealised gains on investments in 2010 and improved fair value adjustments on investment properties.
Other income (from continuing operations) Year ended 31 December 2011 Other income (which consists of fee and commission income, share of profit/(loss) after tax of joint ventures and associates, and profit on disposal of subsidiaries and associates) increased by £167 million, or 10%, to £1,921 million in 2011 (2010: £1,754 million). The increase was primarily due to the profit on disposal of RAC of £532 million, which was partly offset by a loss from Aviva’s share of joint ventures and associates of £123 million (2010: £141 million profit).
overnance Shareholder inform ation Financial statem ents IFRS Financial statem ents M CEV
Year ended 31 December 2010 Claims and benefits paid net of reinsurance in 2010 were £24,918 million, an increase of £936 million over 2009 (2009: £23,982 million) reflecting the overall growth of the portfolio and surrender values. This included a marginal decrease in claims payments to general insurance and health policyholders. Changes in insurance liabilities in 2010 were a charge of £6,608 million, an increase of £2,374 million on the prior year (2009: £4,234 million charge). This was primarily due to changes in economic and non-economic assumptions. The change in investment contract provision of £8,693 million charge (2009: £10,946 million charge) was a result of improved investment markets across our regions resulting in increases in our contract liabilities. The change in UDS of £362 million credit (2009: £1,479 million charge) reflected rising government bond yields in Italy, Spain and Ireland in the fourth quarter of 2010. Fee and commission expense, other expenses and finance costs of £8,705 million decreased by £100 million from £8,805 million in 2009. Increased fee and commission expenses were offset by lower other expenses, impairment charges and finance costs: See ‘Financial statements IFRS – Note 6 – Details of expenses’.
Year ended 31 December 2010 Profit before tax attributable to shareholders in 2010 was £1,545 million against a profit of £1,795 million in 2009. The decrease was primarily due to the drop in net investment income, which was partially offset by an increase in premiums and a decrease in expenses.
Adjusted operating profit (from continuing operations) Year ended 31 December 2011 Adjusted operating profit (including Delta Lloyd as an associate) increased by £286 million, or 14%, to £2,312 million (2010: £2,026 million) for the reasons set out above.
Regional performance United Kingdom Our operations in the UK consist of our long-term insurance and savings business, which provides products such as bonds and savings, pensions, protection, annuities, equity release and investment products, including both with-profits and non-profit business, and our general insurance and health business, which provides a range of general and health insurance products focused on personal and business customers, such as household, motor and liability insurance. The table below presents adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from our operations in the UK for the three years ended 31 December 2011, 2010 and 2009.
Adjusted operating profit Long-term insurance and savings business UK Life 917 847 672 Aviva Investors 3 3 —
General insurance and health UK GI 508 476 424 Aviva Re and agencies in run-off 32 91 96
Long-term and savings business The table below presents sales, net written premiums, adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from our UK long-term business for the three years ended 31 December 2011, 2010 and 2009.
Year end 31 December 2011 UK general insurance and health net written premiums (NWP) increased by £373 million, or 8%, to £4,912 million (2010: £4,539 million). Performance is driven by our UK general insurance operation where NWP increased by £325 million, or 8%, to £4,371 million (2010: £4,046 million). In personal motor, NWP (excluding RAC) rose by £272 million, or 32%, to £1,126 million (2010: £854 million) reflecting rating action, strong growth in direct sales and the roll out of direct pricing to brokers. Adjusted operating profit in 2011 decreased by £27 million, or 5%, to £552 million (2010: £579 million) and includes a reduction of £59 million within our group captive reinsurer to £32 million (2010: £91 million). Our UK general insurance operation has seen an increase of £32 million, or 7%, to £508 million (2010: £476 million). Excluding RAC, adjusted operating profit has grown by £42 million, or 11%, to £433 million (2010: £391 million), with the 2011 result benefiting from favourable weather and a further improvement in underlying profitability. These factors have been offset in part by small strengthening in prior year claims reserves (excluding adverse 2010 freeze development) of £37 million (2010: £87 million release). This primarily reflects adverse experience on 2010 commercial motor business (for some vans, taxis and scheme accounts) and on one historic professional indemnity account. We have already taken rating action and selective exits with respect to these poor performing business lines. Profit before tax increased by £368 million, or 81%, to £825 million (2010: £457 million). The increase is driven by the profit on disposal of RAC of £532 million.
Aviva North America’s profit before tax attributable to shareholders’ profits was £309 million, a 27% increase (2009: £244 million). The increase was mainly as a result of improved operating results that more than offset short- term investment variances in both our life and general insurance businesses.
Asia Pacific Aviva Asia Pacific currently operates in ten countries across the region through both joint ventures and wholly-owned operations. We have businesses in markets at various stages of development, with established businesses in Singapore and Hong Kong, high potential businesses in India and China and developing businesses in South Korea, Malaysia, Sri Lanka, Indonesia and Vietnam. Our joint venture in Taiwan is classified as held for sale – see section ‘Financial statements IFRS – Note 3 – Subsidiaries’ The table below presents the sales, net written premiums, adjusted operating profit and profit/(loss) before tax attributable to shareholders’ profits under IFRS of Aviva Asia Pacific for the three years ended 31 December 2011, 2010 and 2009.
Net written premiums 583 579 455 Adjusted operating profit Asia Pacific long-term insurance and savings
Profit before tax attributable to shareholders’ profits – Australia — — 45
1 Excludes the contribution from the Australian life business sold on 1 October 2009
Year ended 31 December 2010 Aviva Investors’ adjusted operating profit in 2010 was £100 million, a decrease of £15 million from 2009. The reduction in operating profit was as a result of higher than expected redemptions and ongoing investment in the business which was starting to bear fruit as we saw an increase in higher-margin external assets. During 2010, we re-oriented our business towards more durable, higher-margin funds, which resulted in an increased average fee rate on gross external sales, excluding liquidity funds. Profit before tax attributable to shareholders was £61 million, a decrease of £30 million, or 33%, on 2009 (2009: £91 million). Amortisation expenses were higher than 2009, the acquisition of River Road Asset Management resulting in an intangible asset, and restructuring costs were higher than 2009 reflecting the phasing of our business transformation programme. Aviva Investors’ funds under management were £260 billion, an increase of £10 billion, or 4%, on 2009. The increase was a result of capital appreciation and the inclusion of River Road within the 2010 figures, partially offset by the impact of sterling’s appreciation against the euro.
Sales Long-term insurance and savings business 1,255 3,793 4,329 General insurance and health 557 1,177 1,163
From the start of 2011 to the partial disposal on 6 May 2011, the AAA collateralised bond spread narrowed by about 80 bps as a result of changes in the underlying bond index. This movement was the main driver of the adverse life investment variance of £820 million and the loss before tax of £726 million seen in the first four months of 2011.
Aviva plc Annual Report and Accounts 2011 Selected consolidated financial data
Selected consolidated financial data The following table sets forth our selected consolidated financial data for the periods indicated. This data is derived from our consolidated financial statements prepared in accordance with IFRS as issued by the IASB. The selected consolidated financial data for the five years ended 31 December 2011 has been derived from, and should be read in conjunction with, our audited consolidated financial statements and the related notes in these financial statements. The Group's shareholding in Delta Lloyd was reduced to 42.7% following the sale of shares on 6 May 2011. The results of Delta Lloyd up to the transaction date, as well as those of the preceding years, have therefore been classified as discontinued operations.
Premiums written net of reinsurance 28,327 30,071 27,773 28,482 24,900 Net change in provision for unearned premiums (236) (73) 553 295 (28)
Number of shares in issue at 31 December 2,906 2,820 2,767 2,658 2,622 Weighted average number of shares in issue for the year 2,845 2,784 2,705 2,643 2,588
Aviva plc Annual Report and Accounts 2011 Information on the company
 Annuities – a type of policy that pays out regular amounts of benefit, either immediately and for the remainder of a person’s lifetime, or deferred to commence from a future date. Immediate annuities may be purchased for an individual and his or her dependants or on a bulk purchase basis for groups of people. Deferred annuities are asset accumulation contracts, which may be used to provide benefits in retirement, and may be guaranteed, unit-linked or index-linked.
General insurance and health insurance General insurance and health insurance together accounted for 23% of our total worldwide sales for the year ended 31 December 2011. In the year ended 31 December 2011, we reported general and health insurance net written premiums of £9.2 billion.
Brands and products The sale of RAC in September 2011 means that our general insurance business now operates under a single brand across the world. Our general insurance business concentrates on:  Personal lines – motor, household, travel and creditor;  Commercial lines – fleet, liability and commercial property insurance;  Health insurance – private health insurance, income protection and personal accident insurance, as well as a range of corporate healthcare products; and
 Corporate and speciality risks – products for large clients or where the risk is specialist.
Distribution Customers can buy our products through a range of distribution channels, including:  Direct – In many of our markets, customers can buy our products over the telephone or via the internet. This method of distribution is most commonly available for simple, lowcost products which do not require advice.
 Direct sales force – In some of our European and Asia Pacific markets we operate direct sales forces that only sell Aviva’s products and the sales forces receive commission on the products they sell.
 Corporate partnerships, bancassurance and joint ventures – Aviva is a corporate partner for many organisations, including banks and other financial institutions, who wish to offer their customers insurance products. We have various distribution agreements with bancassurance partners and joint ventures across the markets in which we operate. Depending on our line of business in that market, the agreements offer long-term insurance products, general insurance and health products, asset management services or a combination thereof. In return for offering our products to their customers, the bank or joint venture partners receive a commission as a percentage of sales and in some cases achieve extra commission if agreed target levels of sales are met. Certain agreements have a profit sharing element based on predetermined percentage. In some cases, if the agreed targets are not met, certain terms of the contract can be renegotiated. Under the joint venture agreements, the costs of running the venture are often split between the partners.
Further details of the distribution channels specific to each market are included in the following regional analysis.
Brands and products Our business invests in most significant asset classes on behalf of institutional, pension fund and retail clients.
Operating segments Each operating segment has a member of our executive management team who is responsible for it and who is accountable to the group chief executive for the operating performance of their segment. The full membership of our executive management team is set out on page 92. This structure for our operating segments is intended to ensure the Group’s ability to take advantage of market opportunities, improve speed of response, eliminate duplication of effort, and encourage the sharing of best practice in the interests of our customers and shareholders, while providing local knowledge.
Aviva United Kingdom Business overview and strategy Our aim is to provide prosperity and peace of mind to our 14 million customers, who trust us with their long-term savings, general insurance and healthcare needs. We have a broad distribution network and our products can be bought direct, through intermediaries, or via our partnerships with leading UK banks and other institutions. We employ more than 17,500 people and operate from a number of locations throughout the UK, including York, Norwich, Perth, Glasgow, Eastleigh, London and Sheffield. Our combination of life, general insurance and health is exceptional, we believe, exceptional in its scale and breadth in the UK market. We aim to excel in each of these markets and create significant additional value for stakeholders by operating our businesses together. We have a strong brand, and awareness levels reached their highest levels yet in 2011.4
The underlying fundamentals for our business remain compelling. Research by Aviva and Deloitte6 shows there is potentially a total annual pensions gap of around £317 billion in the UK. This gap represents the difference between what individuals in the UK save today and what they need to save to maintain a comfortable standard of living in retirement. In addition, there is an estimated total protection gap of £2.4 trillion in the UK according to analysis by Swiss Re.7 It shows the overall gap between the protection cover individuals in the UK have and what they need to meet their requirements.
5 25% market share in the individual annuities market based on ABI returns and 36% market share in equity release based on Safe Home Income Plans (SHIP) returns 6 Europe’s Pension Gap, Aviva and Deloitte, 2010 7 Term and Health Watch, Swiss re, June 2010
Our savings and investment products include ISAs, investment bonds, funds, base rate trackers, investments with guarantees and with-profits products. Our products are predominantly non-profit with some withprofit business. Non-profit business means that shareholders retain 100% of the distributed profit. The with-profits products share the profits or losses of the with-profits fund between shareholders and policyholders. This is achieved through a system of bonuses. Aviva aims to smooth the return of the policyholder’s plan through declaring regular bonuses. As bonuses are added to the plan, valuable guarantees build up. These guarantees are unique to withprofits investments. At the close of the plan the investor receives a terminal bonus based on the performance of the fund.
Distribution We have a multi-distribution strategy, which means we sell our products through intermediaries, corporate partners, in the workplace, and directly to customers. We are a leading provider in the intermediary market with a 13.4% share.8 In 2011, we extended our distribution agreements with Santander and Barclays. We are also the provider of choice to the Royal Bank of Scotland and other leading organisations including the Post Office. We remain committed to building on our existing relationships and distribution partnerships as well as growing our workplace and direct channels.
United Kingdom Aviva General Insurance Business overview and strategy Aviva is a leading general insurer in the UK.9 We focus on personal and commercial insurance. We hold top three positions in all our major classes of business, including personal motor, homeowner, commercial motor and commercial property. We are also the leading insurer in the SME marketplace.10 We believe our key strengths include underwriting excellence, and product and distribution leadership. We aim to build on our market-leading position while focusing on the fundamentals of the insurance business to maximise returns through the insurance cycle. We seek to provide excellent customer service, maintain disciplined underwriting and pricing and control the impact of claims inflation. We are growing our capability in corporate and speciality risks (CSR), and building on our core underwriting and pricing strengths to win in these markets. We were named General Insurer of the Year at the 2011 Insurance Times awards in December 2011 based on our financial performance, service performance and broker reviews. We were identified in the 2011 Brand Finance rankings in September 2011 as the strongest general insurance company in the UK, based on brand strength and customer service.
Market and competition The UK is the third-largest insurance market in the world according to the ABI based on data for 2010. In 2010, the top four companies had an approximate 35% share of the general insurance market, based on Datamonitor figures for gross written premiums. We consider our main competitors to be Direct Line Group, RSA, AXA, Zurich, Lloyds Banking Group, Allianz and The Admiral Group. The principal competitive factors for our general insurance business in the UK are:  range and quality of our products;  access to distribution;  pricing and underwriting discipline;  risk management; 8 ABI Stats Q3 2011 9 Based on GWP from FY11 published results 10 Datamonitor, 2010
Distribution We have a multi-distribution strategy. Our personal products are sold directly to customers over the phone and through our websites www.aviva.co.uk and www.quotemehappy.com, via brokers and through more than 100 corporate partnerships. We are a member of RAC’s panel of insurers. Our quotemehappy insurance products are also available through price comparison websites. For commercial insurance, we focus on broker distribution and believe that independent brokers remain the best source of the advice required by business customers. As part of our strategy to grow in CSR, we have a bespoke trading floor, in the City of London, providing brokers with direct access to our underwriting specialists.
Europe Regional overview and strategy We have a major presence in the five markets of France, Ireland, Italy, Poland and Spain, which between them represent over 90% of our Europe new business premiums.11 We are also focused on increasing our presence in the growing markets of Russia and Turkey. Through our multi-distribution bancassurance franchise and established retail networks, we offer a range of life, pensions, and general and health insurance, providing the diversity and competitive strength that we believe only a composite insurance 11 As calculated on both a long-term savings PVNBP basis and a general insurance net written premium basis
Aviva Europe We are geographically focused on the markets of France, Ireland, Italy, Poland, Spain, Russia and Turkey. We operate a composite model, selling life and pensions products, general insurance products in all locations, except Russia and Spain, where we only sell life products. This model enables us to exploit our existing relationships and networks in order to develop higher margin customer-targeted products, to improve our product mix by increasing sales of protection and unit-linked products and to expand our general insurance distribution. Our strategy is focused on building on our:  geographic focus in the five markets of France, Ireland, Italy,
12 Based on regulatory data from the FFSA (Fédération Française des Sociétés d’Assurances), IIF (Irish Insurance
Market The life insurance market is driven by individual savings. The market is dominated by bancassurance, which has accounted for around 60% of the life insurance market over the past decade according to the FFSA. We believe that the long-term insurance and savings market in France has longer-term growth potential due to the ageing population and the growing need for private pensions. We also believe that the current volatility in the financial markets has affected customer confidence in purchasing riskbearing products, although we believe that over a longer period multi-funds policies and unit-linked funds are the best insurance vehicles for performance. We believe our customers want to be reassured and protected financially, and need to safeguard their wealth and make provisions for long-term care. The general insurance market in France is mature and highly competitive. For several years, price competition was high as insurers fought to gain market share, particularly in the personal lines market. We believe that price competition has, however, reached its limits as the market faced increased claims frequency and a higher average claims cost. In our opinion, the market has now entered a phase of price increases that currently makes up the majority of its marginal growth.
Products Aviva France provides a wide range of insurance solutions: life and long-term savings, general insurance and asset management through Aviva Investors France. The products sold through our life channel are long-term savings, pensions and regular premium products and a broad range of protection products. We are the manufacturer and main distributor of the AFER product which we believe is a leading savings product benefiting from high customer confidence, a strong reputation and strong financial performance. Aviva France holds a majority stake in Union Financière de France (UFF) which we believe has gained a reputation for expertise in managing, selecting and distributing mutual funds and sourcing tax optimisation products. In the general insurance market, our product range includes household, motor, health, legal protection products and also a broad range of insurance products for farms, craftsmen, tradesmen and small to medium-sized entities and specific products for building firms and motor fleets.
Distribution Aviva France has developed a multi-distribution model combining retail, direct and bancassurance networks through owned distribution channels, independent networks and partnerships. Our retail networks sell through 896 tied agents, a direct sales force made up of more than 280 advisers and over 700 UFF consultants and more than 1,000 active brokers in the life, health and construction markets. Direct distribution is sold through Eurofil for personal general insurance, Aviva Direct for health and protection and Epargne Actuelle for the AFER product. Eurofil is the second-largest direct general insurer and Aviva Direct is the leading provider of direct protection in France and the third-largest insurer of funeral expense plans in France by number of policies according to the FFSA as at 31 December 2011. We also operate in the bancassurance market through our partnership with Crédit du Nord, a subsidiary of Société Générale, selling life, savings, protection and general insurance products. This partnership gives Aviva access to over 1.9 million customers, as at December 2011. We also have several partnerships with car manufacturers, including Volvo, Ford, Mazda, Mercedes Benz and GM through whom we sell motor insurance.
Spain Business overview and strategy Aviva Spain is the country’s fifth-largest long-term insurer by gross written premiums with a market share of 6% in the third quarter of 2011 according to Investigación Cooperativa entre Entidades Aseguradoras y Fondos de Pensiones (ICEA). Aviva Spain sells long-term insurance and savings, and health and accident insurance in Spain through a bancassurance network based on joint ventures with six banks (Bancaja, Caja España, Caixa Galicia, Unicaja, Caja Granada and Cajamurcia) and through Aviva Vida y Pensiones, the wholly owned Aviva branded long-term insurance company. Our strategy in Spain is to further develop our bancassurance and retail operations and attract new partners when the opportunities arise. The close of 2011 saw the signing of a new exclusive distribution agreement with Spanish Mutual Insurance Company Pelayo to expand its national life and pensions distribution capability. We also intend to develop general insurance offerings through our existing partnerships. Overall, we will continue to be customer-focused, to react quickly to market trends and to maximise the sales of our core products, such as pensions and savings.
Market We believe Spain’s savings banks, ‘the cajas’, will continue to be under pressure given the current financial sector restructuring process and the number of mergers taking place. Any opportunities arising from this will be considered by Aviva on their merits. In relation to distribution agreements with bancassurance partners, Aviva is protected financially within our contracts with the cajas should a merger result in the insurance services of the newly merged company being awarded to the insurer of the other party involved. The top positions in the long-term insurance market are dominated by bank-owned or bank-insurer joint ventures, with the overall bancassurance channel accounting for more than 73% of gross written premiums at the end of 2010 in the Spanish life insurance market according to ICEA in the publication Canales de Distribución – Estadística 2010. Customers in Spain are accustomed to receiving advice through banking channels, and we use our relationship with the cajas to capitalise on this.
Products We offer a wide range of bonds, savings and protection products. Investment products include both unit-linked and traditional plans, where profit sharing is regularly used to increase the policy return. Our traditional plans include savings schemes and income products. Pension savings products have valuable tax advantages. We offer a flexible range of individual and group plans with alternative investment choices. We also offer protection products, covering both mortgages and credit loans typically providing cover for the family in the event of death or disability.
Aviva Vida y Pensiones distributes our products through professional intermediaries (financial advisers, agents and brokers) and a direct sales force, supported by a branch office network and call centres; 2012 will see the start of distribution through Pelayo´s network of 200 branches and around 1,000 exclusive agents. We believe the strength of our distribution relationships has enabled us to maintain our position as the second-largest provider of protection products in the market according to the ICEA at 30 September 2011.
Ireland Business overview and strategy Ireland is one of Aviva's 12 priority markets and the company is fully committed to ensuring that its Irish customers continue to receive excellent service and products at competitive prices. However, the economic environment in Ireland is challenging and there is a pressing need to ensure the Irish cost base is at a market-leading level to secure the long-term success of the business. Following a detailed structural review, Aviva has proposed to make its Irish business part of a new UK and Ireland region, aligning many of the activities and services provided for customers. The Irish business would benefit from Aviva UK’s investment in technology, underwriting capability and significant purchasing power, enabling Aviva Ireland to offer more competitive pricing and to introduce new products and services. Aviva’s distribution arrangement with Allied Irish Bank (AIB) for long-term business will cease in 2012 and the bancassurance partnership with AIB is being unwound. A strategic review is underway to determine the most effective distribution channels going forward. Aviva Ireland had a 15% share of the Irish long-term insurance and savings market in 2010 based on new business APE (excluding investment only business) according to the Irish Insurance Federation (IIF),14 and is the fourth-largest life and pension provider in Ireland. Our general insurance business is the largest in Ireland, with a market share of 16% in 2010 according to the IIF. Aviva has a 14% market share of the lives insured according to the Health Insurance Authority (HIA)15 at the end of 2010 making it the third-largest health insurer in Ireland. Aviva Ireland has over one million customers across its general insurance, life and pensions, asset management (which is managed by Aviva Investors) and health insurance businesses.
Market The economic environment in Ireland remains challenging. During the past three years, there has been a constant and unprecedented decline in the Irish life insurance market. The market contracted by 29% in 2008, a further 28% in 2009 and 6% in 2010 (based on the IIF Factfile). The life insurance market in Ireland is largely consolidated with approximately 81% of the market share held by the top four providers, including Aviva, according to a report by IFF based on 2010 new business APE. Some 50% of the life and pensions market is now controlled by companies which are, or will be, under government control following the state control of Irish Life & Pensions (2010 market share of 27.9%). The government also has a minority shareholding in New Ireland through Bank of Ireland (2010 market share of 20.5% based on IIF Factfile).
14 Irish Insurance Federation: 15 Health Insurance Authority: We believe that customers have moved away from traditional life products in Ireland because of volatility in the stock markets and a slowdown in the housing market in the last three years. The general insurance operating environment remains difficult as competition is intense and the economic downturn is adversely impacting business volumes. The market contracted by 7.6% in 2008, a further 6.3% in 2009 and 2.6% in 2010.16 The market has been slow to harden with a market combined operating ratio (COR) of 108.9% in 2009. We expect rates to remain soft. There have been significant changes in GI distribution with competitors seeking to grow market share. RSA acquired the 123.ie brand in September 2010 and continues to develop it through marketing spend. Liberty entered the market in 2011 through a joint venture. Aggressive competition continues in the private motor market. The home insurance market is showing signs of softening. Rate increases have been put through on less profitable commercial business by Aviva and Liberty in an attempt to drive profitability. However, these actions are being used by some competitors to target business to increase market share.
Products Our long-term insurance and savings business offers a comprehensive range of protection, bonds and savings and pension products. Our protection products include life insurance, mortgage protection, specified illness and guaranteed whole life cover products. The pension range covers retirement and investment products including government promoted personal retirement savings account (PRSA) schemes. Our general insurance business provides a wide range of products, including property, motor, travel, farm and business insurance. Our health insurance business provides a range of plans in both the personal and company plan sector.
19 Bank Zachodni WBK: bankomatow/wyszukiwarkaplacowek -i-bankomatow.html 20 Insurance Union of Turkey:
Distribution In Turkey, we operate through a multi-channel distribution framework consisting of bancassurance, direct sales force, corporate sales, agencies, telemarketing and brokers.
Products and distribution In Russia, we sell a range of products, including credit life and standalone personal accident products which are distributed via the bancassurance channel. We sell group life contracts (including accident, disability and death cover) which are distributed via a dedicated corporate channel and through brokers. We also sell personal accident products which are distributed via a worksite marketing channel, and voluntary (Pillar III) corporate pension plans. Aviva Russia has 21 distribution agreements with banks, operating in 63 out of 83 Russian regions.
Delta Lloyd – associate The Group’s share of the profits of its retained interest in Delta Lloyd as an associate are shown within the Delta Lloyd segment within continuing operations. Please see page 49 for more information on Delta Lloyd.
Products Aviva USA’s broad product portfolio offers flexible solutions to a wide variety of customer needs. We offer both protection and savings products, with traditional fixed as well as indexed accumulation options that pay interest based on the movement of a market index. Depending on such movement, indexed policies can deliver higher returns than traditional fixed products, especially when interest rates are low. Indexed products also serve to protect the customer’s investment and provide a guaranteed income even when the market is down. Aviva USA also offers a wide array of optional extras or ‘riders’ that can be added to policies to meet customised individual needs. An example would be our ‘Wellness for Life’ rider, which allows life insurance customers to reduce the cost of their policies if they maintain certain medical criteria. Through an exclusive relationship with Mayo Clinic Health Solutions, a best in class healthcare provider, participants are provided with a range of practical and accessible health information and wellness services to help them lead a healthier lifestyle. In the savings market, Aviva USA’s fixed annuity portfolio offers tax-advantaged savings opportunities and protection against the risk of outliving one’s assets. We provide, for example, a guaranteed lifetime withdrawal benefit, a feature that allows customers to make guaranteed minimum withdrawals from their annuity for the entirety of their lives. We also operate within the managed account guaranteed investment contract (GIC) market with a product that leverages the investment management capabilities of both our life insurance business and those of Aviva Investors North America. Aviva also issues funding agreements in the institutional market.
Distribution Aviva USA uses a multi-channel distribution strategy to bring its products to market by focusing on more than 50 key distribution partners. Our distribution channels include career marketing organisations, independent marketing organisations, brokerage general agents and personal producing agents. We work with them to promote and sell our annuity and life insurance products nationwide. Our network covers all 50 states with over 33,000 active agents largely contracted through key distribution partners.
Canada Business overview and strategy Aviva Canada is the country’s second-largest general insurer.26 Through its distribution partners it provides a range of personal and commercial lines insurance products to nearly 3 million policyholders. It has an 8.2% market share and a top-five position in all major provinces.26 The company employs 3,600 people and operates from a head office in Toronto, with offices located throughout Canada.
25 3rd Quarter 2011 report of US Individual Annuities sales, Life Insurance and Market Research Association. 26 MSA Research Inc., 2010 online database.
We believe that we are well placed for continued growth and that our success is underpinned by our two strategic priorities of building strong broker relationships and maintaining sophisticated pricing and underwriting. The transformation of our personal lines business over the last few years has ensured the business is highly competitive. We expect that continued refinement to our models will allow us to leverage this position to positively react to market opportunities. We are using the lessons learned from personal lines to enhance and grow our commercial lines business. We will also continue to address increasing customer demand for choice, simplicity and self-service by working with our broker partners on processes and technology solutions to help them compete with other channels.
Market As the eighth-largest in the world, Canada’s general insurance market is established and stable.27 The four largest provinces generate around 89% of total premiums with Ontario, the largest, representing 48% of total Canadian premiums.28 The Canadian general insurance industry is highly fragmented with many small players and no dominant consumer brand. Steady consolidation has resulted in the top five companies representing 40% of the market and the top two companies, Intact Financial and Aviva, controlling 24% of the market.28 The rest of the industry includes several national carriers as well as smaller, provincially based or niche companies. While direct and affinity channels are gradually increasing in market share, the traditional broker channel accounts for over 65% of distribution.29 In addition to the growth of direct and affinity channels, insurance carriers are increasingly supporting and controlling distribution through investment in brokers.
Asia Pacific Regional overview and strategy Aviva’s Asia Pacific business operates in ten countries across the region through associates, joint ventures and wholly owned operations. We have a balanced portfolio, comprising businesses in key strategic markets such as China and India, which have large populations and relatively high economic growth. Singapore is our largest business in the developing markets in South East Asia, and we are growing strongly in the more mature South Korean market. We serve our customers through a multi-channel distribution strategy, with particular strength in bancassurance. Aviva Asia Pacific is focused on creating franchise value through organic growth. Increasing the value of our new business remains 27 World Insurance in 2010. New Swiss Re sigma study “World insurance in 2010” 28 MSA Research Inc., 2010 online database 29 Axco Insurance Report for Canada
Information on the company continued our first priority. We are achieving this through scale benefits and by focusing our product mix on higher margin products.
Market and competition We believe that the fundamentals of the Asian markets are attractive and that strong domestic demand and intra-regional trade are likely to sustain the region’s growth. We expect Asia to be the fastest growing region for life insurance globally over the next decade with strong double-digit growth. We expect the Asian insurance market to continue to outpace the West owing to currently low penetration rates of insurance products in many markets, high GDP growth, the presence of a growing middle class and rising wealth. Changing customer attitudes also open up new opportunities such as retirement, wealth management and protection. The demand for products with guarantees is increasing due to current market volatility. Local companies are our main competitors in most markets. We have several strengths that we believe give us a competitive advantage, which include:  multi-channel distribution, with particular strength and expertise in bancassurance;  balanced portfolio of fast-growing and high-margin markets; and  sharp focus in promoting higher margin products and improving persistency.
Products Our Asian businesses offer a range of protection, bonds and savings and pension products, including universal life, participating and non-participating endowments, unit-linked single and regular premium life insurance, other savings and pensions products and a range of accident and health insurance products. Due to the internationalisation and appreciation of China’s currency the Renminbi (RMB), we launched RMB insurance savings products in Hong Kong and Singapore, thereby tapping into the growing demand for RMB insurance products in this market.
34 Life statistics from Life Insurance Association Malaysia, Family Takaful statistics from Insurance Services Malaysia 35 36 Asian Development outlook 2011 update, December 2011.
Aviva Singapore has a multi-channel distribution strategy building on a core bancassurance relationship with DBS Bank, expanding the network of IFAs and Aviva Advisors and online general insurance platform. In China and South Korea, we distribute the majority of our products through bancassurance and IFAs. In Hong Kong, India and Malaysia, bancassurance is the main distribution channel. We are investing in other channels such as direct marketing to diversify our sources of revenue.
Business review In the final quarter of 2011, we undertook a detailed review of our business to ensure that Aviva Investors remains well-placed to compete in what we expect will be a period of continuing economic instability, subdued growth, increased regulatory scrutiny and reduced risk-appetite among investors. The conclusion of the review was that the business strategy is sound but that greater focus in core areas of strength would improve profitability and enable us to continue to make important investments in the development of our global infrastructure. As a result, we propose to streamline our business, concentrating fund management activity in fixed income, real estate and multi asset solutions, where we see growth potential and already have a strong competitive position. We remain committed to the active management of local equities in the UK, continental Europe, the US and Singapore, but we have seen a reduced appetite for riskier assets such as equities, notably in Europe, and we propose to respond to this, and eliminate duplication, by reducing the scope of active equity management in London. A majority of business already comes from institutional clients, so we are proposing to focus sales and marketing activity on key institutional markets. We will, however, continue to support Aviva networks distributing to retail investors globally. In the UK in particular, we will continue to offer high-quality investment products and solutions to retail investors through our network of banks, insurers (including Aviva), and brokers.
Where a client is looking for a solution, outcome focused product or is working within a specific risk budget our multi-manager, asset allocation and multi-asset fund teams draw on the wider capabilities within Aviva Investors or externally to create the required outcome. Our global platform has enabled us to generate significant sales across borders with successes in 2011 including a substantial mandate from a Middle East client into River Road Asset Management, our US equity investment manager. Similarly, our Real Estate Multi Manager platform offers global exposure to real estate markets that we believe few competitors can match.
Products Our product range covers a broad range of asset classes. In Europe, we have a range of SICAVs (open-ended collective investment schemes), which are domiciled in France, Luxembourg and Poland. These funds have different share classes depending on the size and type of investor. Our traditional distribution model for these funds focuses on wholesale distributors, asset allocators and small to mid-size institutional investors but following our business review we propose to focus our pooled fund range and segregated capabilities on institutional clients’ needs. In the UK, we supply products to the retail and wholesale markets, principally distributing equity and bond funds in our UK domiciled OEIC range, and a market-leading range of open ended real estate funds. These are promoted to investors via IFAs, fund platforms, fund supermarkets and discretionary asset managers and we remain fully committed to this business. In addition, we have a range of pooled pension funds which are aimed at the smaller pension fund market. These funds are normally defined benefit schemes and tend to be advised by investment consultants. We manage hedge funds in the UK and the US. These funds are generally registered offshore and are primarily sold to the hedge funds industry, although we also promote single strategy funds to institutional clients, family offices and wealth managers. The asset classes include fixed interest, multi-asset and convertibles. We also have an expanding range of specialist property funds. These funds are targeted at specialist real estate buyers and large institutions (mostly pension funds and local authorities), and provide real estate solutions to a wide range of risk appetites, ranging from secure income generating funds to highly leveraged growth funds. We have six money market funds, domiciled in Dublin and Paris, addressing the sterling and euro money market segments. These funds are sold by a specialist sales team based in London and Paris and target corporate treasury functions.
Business overview and strategy Delta Lloyd operates in the life insurance and pensions, general insurance, fund management and selected banking markets in the Netherlands and Belgium. The group employs approximately 5,400 permanent staff as at 31 December 2011. In September 2011 Delta Lloyd announced the sale of its German business to Nomura Holdings Inc. The sale was in line with Delta Lloyd's stated strategy of focusing on its core markets. It follows Delta Lloyd's decision, announced in March 2010, to place its German business into run-off and to stop writing new policies. The German business is not reported as held for sale as at 31 December 2011 by Delta Lloyd. This is due to the year-end valuation of the German business which under year-end market conditions did not support a probable sale.
Aviva plc*Aviva plc* Organisational structure The following chart shows, in simplified form, the organisational structure of the Group as at 31 December 2011. Aviva plc is the holding company of the Group.
Subsidiaries The principal subsidiaries of the Company are listed below by country of incorporation. All are wholly owned, directly or indirectly, and transact insurance or reinsurance business, fund management activities or services in connection therewith, unless otherwise stated.
Spain Aseguradora Valenciana SA, de Seguros y Reaseguros (Aseval) (50.0%) Aviva Vida y Pensiones, SA de seguros y reaseguros Caja Espana Vida, Compania de Seguros y Reaseguros (50.0%) Caja Murcia Vida y Pensiones, de Seguros y Reaseguros SA (50.0%) Caja Granada Vida, de Seguros y Reaseguros, SA (25.0%) CxG Aviva Corporación CaixaGalicia de Seguros y Reaseguros, S.A. (50.0%) Unicorp Vida, Compania de Seguros y Reaseguros (50.0%)
United Kingdom The Group has interests in several property limited partnerships. Further details are provided in note 18 to the financial statements.
Analysis of investments We invest our policyholders’ funds and our own funds in order to generate a return for both policyholders and shareholders. The financial strength of our Group and both our current and future operating results and financial performance are, therefore, in part dependent on the quality and performance of our investment portfolios in our UK, continental European, North America and Asia Pacific operations. For additional information on our financial investments, see ‘Financial statements IFRS – Note 25 – Financial investments’. For a quantitative analysis of funds under management by Aviva and third-party fund managers, see ‘Financial statements IFRS – Note 58 – Assets under management’.
Property partnerships As part of their investment strategy, the UK and certain European policyholder funds have invested in a number of property limited partnerships (PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The nature of our involvement in property partnerships is set out in the second and third paragraphs of the investment vehicles section of ‘Financial statements IFRS – Accounting policies – (C) Consolidation principles’. Property partnerships are accounted for as subsidiaries, joint ventures or financial investments depending on our participation and the terms of each partnership agreement. For each property partnership accounted for as a subsidiary, joint venture or financial investment, we are exposed to falls in the value of the underlying properties which are reflected as unrealised gains/losses on investment properties, our share of joint venture results and unrealised gains/losses on financial investments, respectively. However, the majority of these are in policyholder funds (rather than shareholder funds) so such losses are offset by changes in the amounts due to policyholders or unitholders, or in the unallocated divisible surplus (UDS).
Aviva plc Annual Report and Accounts 2011 in government bonds and 33% of total debt security holdings were in corporate bonds with a credit rating of A or above, as of 31 December 2011. ‘Wrapped credit’ is credit exposure that has been insured with monoline insurers to achieve a better credit rating. The monoline insurers suffered further downgrades during 2010 and 2011 and this is reflected in the analysis that follows. The exposure is diversified across several monolines and the underlying bonds are diversified across many different counterparties. In general, we are a long-term holder of this debt, although we continue to review our holdings with reference to the underlying quality and prospects. The majority of the residential mortgage-backed securities (RMBS) are US investments and over 71% of this exposure is backed by the US government-sponsored entities (GSEs) Fannie Mae and Freddie Mac. Under the conservatorship arrangements with the US government implemented in September 2008, these securities have an implicit guarantee, although they are not expressly backed by the full faith and credit of the US government. The majority of the remaining US RMBS are backed by fixed-rate loans that originated in 2005 or before. At 31 December 2011 our exposure to collaterised debt obligations (CDO) and collaterised loan obligations (CLO) was limited to £51 million (2010: £332 million). Investments in structured assets (excluding agency RMBS that are backed by GSEs) were £6.2 billion, representing approximately 4% of total debt securities. At 31 December 2011, the proportion of our shareholder debt securities that are investment grade remained relatively stable at 87% (2010: 88%). The remaining 13% of shareholder debt securities that do not have an external rating of BBB or higher can be split as follows:  4% are debt securities that are rated as below investment grade;  5% are US private placements which are not rated by the major ratings agencies, but are rated an average equivalent of Aby the Securities Valuation Office of the National Association of Insurance Commissioners (NAIC), a US national regulatory agency; and
 4% are not rated by the major rating agencies or the NAIC.
Of the securities not rated by an external agency or NAIC, most are allocated an internal rating using a methodology largely consistent with that adopted by an external ratings agency, and are considered to be of investment grade credit quality; these include £2.4 billion of private placements and other corporate bonds held in our UK Life business which have been internally rated as investment grade.
Convertibles and bonds with warrants 6 — 57 342 26 4 435
Structured RMBS1 non-agency ALT A2 5 4 — 21 130 — 160
CDO (including CLO)5 — — — — 51 — 51 1 RMBS – Residential Mortgage Backed Security. 2 ALT A – Alternative A – paper. 3 CMBS – Commercial Mortgage Backed Security. 4 ABS – Asset Backed Security. 5 CDO – Collateralised Debt Obligation, CLO – Collateralised Loan Obligation. 6 ABCP – Asset Backed Commercial Paper.
Government UK government 4,659 — — — — — 4,659 UK local authorities 1 — — — — — 1
Convertibles and bonds with warrants — — — 1 — 4 5
Structured RMBS non-agency ALT A — — — — — — — RMBS non-agency prime 1 — 3 — — — 4 RMBS agency — — — — — — —
CDO (including CLO) — — — — — — — ABCP — — — — — — —
Government UK government 10,876 — — — — 11 10,887 UK local authorities — — — — — — —
Structured RMBS non-agency ALT A 5 4 — 21 125 — 155 RMBS non-agency prime 144 22 — — 44 — 210 RMBS agency 1,337 — — — — — 1,337
Rating with insurance guarantee Rating without insurance guarantee 2011 Fair value £m
Banks, trusts and insurance companies 3,386 2,281 598 6,265 Industrial miscellaneous and all other 14,455 7,116 287 21,858 Non-redeemable preferred shares 33 23 371 427
Property Our global headquarters are located in St Helen’s, 1 Undershaft, London, England. We also have the following regional headquarters:  UK – UK Life: York, England;  UK – UK General Insurance: Norwich, England;  Europe – London, England;  North America – Chicago, Illinois, USA;  Asia Pacific – Singapore; and  Aviva Investors – London, England.
In addition to the above, our regions have major offices in the following locations:  North America: Scarborough, Ontario, Canada and West Des Moines, Iowa, USA; and  Europe: Paris, France; Dublin, Ireland; Madrid, Spain; Warsaw, Poland; and Milan, Italy.
Contractual obligations Contractual obligations with specified payment dates at 31 December 2011 included the following: Less than one year £m
Total liabilities per statement of financial position 297,013 1 Amounts shown in respect of long-term insurance contracts represent estimated undiscounted cash flows for the Group’s life assurance contracts. In determining the projected payments, account has been taken of the contract features, in particular that the amount and timing of the contractual payments reflect either surrender, death or contract maturity. In addition, the undiscounted amounts shown include the expected payments based on assumed future investment returns on assets backing insurance and investment contract liabilities. The projected cash flows exclude the unallocated surplus of with-profits funds (see below).
2 All linked contracts and almost all non-linked investment contracts may be surrendered or transferred on demand. For such contracts the earliest contractual maturity is therefore at the current statement of financial position date, for a surrender amount approximately equal to the current statement of financial position liability. Although we expect surrenders, transfers and maturities to occur over many years, the total liability for non-linked investment contracts is shown in the ‘Less than one year’ column above.
 Meet the expectations of our customers, investors and regulators that we will maintain sufficient capital surpluses to meet our liabilities even if a number of extreme risks materialise.
Risk management framework Aviva’s risk management framework forms an integral part of the management and Board processes and decision-making framework across the Group. The key elements of our risk management framework are described below: Risk appetite Risk appetite is an expression of the level of risk we are willing and able to accept in pursuit of our strategic objectives and thus provides the context for our risk and capital management. The following appetite statements, which are reviewed and approved by the Board, demonstrate a key focus on balance sheet strength and protection of the franchise value. They supplement risk appetite statements relating to the regulatory solvency position.  Economic capital: the Aviva Board requires that the Group has sufficient capital to remain able to meet its liabilities in extreme adverse scenarios, on an ongoing basis, calibrated consistently with the Group’s strategic target of maintaining a credit rating in the AA range.
 Franchise value: we recognise that our long-term sustainability depends upon the protection of our franchise and our relationship with customers. As such, we will not accept risks that materially impair the reputation of the Group and we will require that customers are always treated with integrity.
Risk management responsibilities Roles and responsibilities for risk management in Aviva are based around the ‘three lines of defence’ model where ownership for risk is taken at all levels in the Group. Line management in the business is accountable for risk-taking, implementing the risk management framework and embedding a risk culture (1st line of defence). The risk function is accountable for quantitative and qualitative oversight and challenge of the identification, measurement, management, monitoring and reporting of key risks and for developing the risk management framework (2nd line of defence). Internal audit provides an independent assessment of the risk framework and internal control processes (3rd line of defence).
Risk governance and oversight As described in the corporate governance report on page 97, the Aviva plc Board is responsible for setting the Group’s risk appetite and monitoring the establishment and operation of prudent and effective controls in order to assess and manage risks associated with the Group’s operations. The Risk Committee (RC) assists the Board in its oversight of risk and risk management across the Group. The GEC assists the Group CEO with regard to strategic, monitoring and controls aspects of day-to-day management including monitoring the development and implementation of group strategies, plans and policies, the monitoring of performance, the assessment and control of risk and the maintenance and ongoing development of a robust framework and environment. The GEC has established the Asset Liability Committee (ALCO) and the Operational Risk Committee (ORC) to assist it with the execution of its duties. The ALCO provides a key focus on business and financial risks and the ORC provides a key focus on operational risks. The group-level committees are in turn supported by similar governance structures in the regions. These relationships are summarised in the diagram below.
— Set strategic objectives — Monitor performance — Set risk appetite — Set and uphold values — Set risk policies
— Oversee risk management — Monitor risk and capital profile — Monitor business performance — Operate in line with policy — Report to Group
Risk environment The first half of 2011 was characterised by relatively benign investment market conditions. However, the third quarter saw a sharp worsening in the global economic outlook and substantial deterioration in equity and credit markets in the US, the UK and Europe. While equity markets recovered to some degree in the fourth quarter, the ongoing stressed conditions in the eurozone led to further widening in sovereign bond spreads for a number of countries and weighed heavily on corporate bond prices. The continued political and economic uncertainty relating to the eurozone combined with the high levels of debt in many western economies act as a brake on economic growth and lead to the potential for a low growth, low interest rate environment to persist for some time.
Credit Risk of financial loss as a result of the default or failure of third parties to meet their payment obligations, or variations in market values as a result of changes in expectation related to these risks
 In general we prefer to take credit risk over equity and property risks, due to the better expected risk adjusted return, our credit risk analysis capability and the structural investment advantages conferred to insurers with longdated, relatively illiquid liabilities
Liquidity Risk of not being able to make payments as they become due because there are insufficient assets in cash form
 We take measured amounts of life insurance risk provided that the relevant business has the appropriate core skills to assess and price the risk and adequate returns are available
General insurance Risk of adverse movements in claims, underwriting, catastrophe experience and reserving
 We take general insurance risk in measured amounts for explicit reward, in line with our core skills in underwriting and pricing
 We have a preference for those risks that we understand well, that are intrinsically well managed and where there is a spread of risks in the same category
For further details refer to ‘Risks relating to our business’ on page 155 and ‘Financial statements IFRS – Note 56 – Risk management’.
 Counterparty default: includes a delay in repayments or interest payments, restructuring of borrower repayments/ interest schedule, bankruptcy
 Credit risk hedging  Investment restrictions on sovereign and corporate exposure to some eurozone countries  Specific asset de-risking
 Active asset management and hedging in business units  Increased size of Group-level equity hedging programme  Pension fund de-risking  Asset and liability duration matching limits impact of interest rate changes and actions taken to manage guarantee risk, through product design
 Cash inflows: from premiums, investment income, capital injections, dividends and loans
 Cash outflows: for claims and redemptions, debt service requirements, tax payments, dividends to group and expenses
 Maintaining committed borrowing facilities (£2.1 billion) from banks  Asset liability matching methodology develops optimal asset portfolio maturity structures in our businesses to ensure cash flows are sufficient to meet liabilities
 Use of reinsurance to help reduce the financial impact of a catastrophe and manage earnings volatility
 Extensive use of data, financial models and analysis to improve pricing and risk selection
 Underwriting and claims management disciplines  Digital mapping to better manage property flood risk  Focus on personal lines, small and medium-sized enterprises  Inflation hedging
 Failure of key processes and controls resulting in misselling, fraud or losses requiring customer compensation
 Media speculation and negative publicity, adverse market and customer perception
 Products or services recommended by us not performing as expected
 Velocity of near-instantaneous global transmissions of failure and use of social networking sites
 Building our brand prominence and regularly monitoring brand metrics  Targeting the delivery of exceptional experience to our customers and treating customers fairly in line with the FSA principles  Monitoring metrics including customer advocacy, retention and complaints
Capital management Capital management objectives The primary objective of capital management is to optimise the balance between return and risk, while maintaining economic and regulatory capital in accordance with risk appetite. Aviva’s capital and risk management objectives are closely interlinked, and support the dividend policy and earnings per share growth, while also recognising the critical importance of protecting policyholder and other stakeholder interests. Overall capital risk appetite, which is reviewed and approved by the Aviva Board, is set and managed with reference to the requirements of a range of different stakeholders including shareholders, policyholders, regulators and rating agencies. Risk appetite is expressed in relation to a number of key capital and risk measures, and includes an economic capital risk appetite of holding sufficient capital resources to enable the Group to meet its liabilities in extreme adverse scenarios, on an ongoing basis, calibrated consistently with the Group’s strategic target of maintaining credit ratings in the AA range. In managing capital we seek to:  maintain sufficient, but not excessive, financial strength in accordance with risk appetite, to support new business growth and satisfy the requirements of our regulators and other stakeholders giving both our customers and shareholders assurance of our financial strength;  optimise our overall debt to equity structure to enhance our returns to shareholders, subject to our capital risk appetite and balancing the requirements of the range of stakeholders;  retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit facilities and access to a range of capital markets;  allocate capital rigorously across the Group, to drive value adding growth through optimising risk and return; and
Accounting basis: Capital employed by segment and financing of capital The table below shows how our capital, on an MCEV basis, is deployed by segment and how that capital is funded.
Long-term savings 15,211 18,533 General insurance and health 5,875 4,747 Fund management 218 215 Other business (1,102) (119)
Delta Lloyd 776 3,892 Total capital employed 20,750 26,271 Financed by: Equity shareholders’ funds 12,829 15,038 Non-controlling interests 1,476 3,977 Direct capital instruments 990 990 Preference shares 200 200 Subordinated debt 4,550 4,572 External debt 705 1,494 Total capital employed 20,750 26,271 1 “Corporate” includes centrally held tangible net assets, the staff pension scheme surplus and also reflects internal lending arrangements. These internal lending arrangements, which net out on consolidation, arise in relation to the following: – Aviva Insurance Limited (AI) acts as both a UK general insurer and as the primary holding company for our foreign subsidiaries. Internal capital management mechanisms in place allocate a portion of the total capital of the company to the UK general insurance operations, giving rise to notional lending between the general insurance and holding company activities. These mechanisms also allow for some of the assets of the general insurance business to be made available for use across the Group.
Total capital employed is financed by a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. At 31 December 2011 we had £20.8 billion (2010: £26.3 billion) of total capital employed in our trading operations, measured on an MCEV basis. The reduction is primarily driven by the deconsolidation of Delta Lloyd and the impact of financial markets. In May 2011 we issued £450 million of Lower Tier 2 hybrid capital securities maturing in 2041 which may be called from 2021. In November 2011 we issued a further $400 million of Lower Tier 2 hybrid capital securities maturing in 2041 which may be called from 2016. These instruments are expected to comply for Tier 2 treatment under Solvency 2. The transactions had a positive impact on Group IGD solvency and Economic Capital measures. Also in November 2011 €800 million of Lower Tier 2 hybrid capital securities were redeemed at first call. Financial leverage, the ratio of external senior and subordinated debt to MCEV capital and reserves, was 36.7% (2010: 31.9%). Fixed charge cover, which measures the extent to which external interest costs, including subordinated debt interest and preference dividends, are covered by MCEV operating profit, and was 8.9 times (2010: 9.4 times).
Regulatory capital – overview Individual regulated subsidiaries measure and report solvency based on applicable local regulations, including in the UK the regulations established by the Financial Services Authority (FSA). These measures are also consolidated under the European Insurance Groups Directive (IGD) to calculate regulatory capital adequacy at an aggregate group level, where we have a regulatory obligation to have a positive position at all times. This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in the UK and Ireland with-profit life funds. The minimum solvency requirement for our European
Risk and capital management continued businesses is based on the Solvency 1 Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked life reserves respectively and for our general insurance portfolio of business is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our major non-European businesses (the US and Canada) a risk charge on assets and liabilities approach is used.
Estimated excess £bn 1 These realistic liabilities include the shareholders’ share of future bonuses of £0.3 billion (31 December 2010: £0.7 billion). Realistic liabilities adjusted to eliminate the shareholders’ share of future bonuses are £38.8 billion (31 December 2010: £41.5 billion). These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £1.9 billion, £0.3 billion and £3.1 billion for NWPSF, OWPSF and WPSF respectively (31 December 2010: £1.9 billion, £0.3 billion and £3.1 billion).
3 The support arrangement represents the reattributed estate (RIEESA) of £1.1 billion at 31 December 2011 (31 December 2010: £1.2 billion).
The equity backing ratios, including property, supporting withprofit asset shares are 71% in NWPSF and OWPSF, and 74% in WPSF.
Solvency II The development of Solvency II continues in 2012 with a view to complete discussions about legislation. The key priority is concluding the discussions on the Omnibus II directive to provide clarity about the implementation date as well as the role of transitionals in the level 2. Once this is concluded we expect the European Commission to complete the development of the Level 2 implementing measures that will establish the technical requirements governing the practical application of Solvency II. Aviva continues to actively participate in these developments through the key European industry working groups and by engaging with the FSA and HM Treasury to inform the ongoing negotiations in Brussels.
Capital generation and utilisation The active management of the generation and utilisation of capital is a primary Group focus, with the balancing of new business investment and shareholder distribution with operating capital generation a key financial priority. The full-year 2011 result of £2.1 billion reinforces our confidence in the capital generation of the Group. Profits from existing life business remain strong, generating £2.3 billion of capital (2010: £2.1 billion), with a further £0.6 billion (2010: £0.6 billion) generated by the general insurance, fund management and non-insurance businesses. Capital invested in new business has reduced to £0.8 billion (2010: £1.0 billion). Investment in life new business was £0.9 billion, a reduction of £0.3 billion compared with full-year 2010. This is mainly a result of actions taken to manage the consumption of capital on writing new life products, in particular managing volumes, product mix and pricing. This reduction is partly offset by a smaller release of capital from non-life business investment of £0.1 billion (2010: £0.2 billion release).
Operating capital generation after investment in new business 2.1 1.7 1 The life in-force profits in full year 2010 excludes the negative impact of the Delta Lloyd longevity assumption change of £0.2 billion which is included in the MCEV analysis of free surplus generated.
Operating capital generation comprises the following components: – Operating free surplus emergence, including release of required capital, for the life in-force business (net of tax and non-controlling interests); – Operating profits for the general insurance and non-life businesses (net of tax and non-controlling interests).; – Capital invested in new business. For life business this is the impact of initial and required capital on free surplus.
Standards basis);  proposed ordinary dividend per share and dividend cover;  adjusted operating profit before tax;  worldwide sales;  operating capital generation; and  return on equity shareholders’ funds.
Forward-looking statements This business review contains ‘forward-looking statements’ about:  our future plans;  our current goals; and  our expectations of our future financial condition, performance and results.
Accounting basis of preparation International Financial Reporting Standards (IFRS) Our consolidated financial statements are prepared under IFRS, using standards issued by the International Accounting Standards Board (IASB) and endorsed by the EU. In addition to fulfilling this legal obligation, the Group has also complied with IFRS as issued by the IASB and applicable at 31 December 2011. The financial data contained in the report and accounts has been prepared using the Group’s accounting policies set out on pages 168 to 182. Where applicable, the financial statements have also been prepared in accordance with the Statement of Recommended Practice (SORP) on accounting for insurance business issued by the Association of British Insurers (ABI), the most recent version of which was issued in December 2005 and amended in December 2006.
Critical accounting policies The major areas of judgement on policy application are considered to be whether Group entities should be consolidated (set out in policy D), product classification (set out in policy F) and the classification of financial investments (set out in policy S). The loss of control of Delta Lloyd in May 2011, and its classification as a discontinued operation in the current and preceding years, is discussed in notes 2 and 3(b) to the financial statements.
Future accounting developments We continue to take an active role in the development of new accounting standards, via industry forums and working parties, and reviewing and providing comment on proposals from the IASB. Phase II of the IASB’s project on insurance contracts continues to be the most significant area of development for us, and we continue actively to engage in the debate. We fully support the timely development of a global standard for insurance accounting that reflects the economics of our business, and are working directly and through the CFO Forum of leading European insurers to achieve this. While this standard is still under development, we will continue to focus on embedded value as the best measure of value for our long-term business. We continue to monitor other major IASB projects, including financial instruments, revenue recognition and leasing.
Highlights 72 Our strategy 72 Governance 72 Trust and transparency 73 Attracting and retaining talent 74 Developing communities 76 Climate change and environment 77 Sustainable products and services 78 External benchmarking and recognition 79 Affiliations and engagements 79 Key indicators 80 Accounting for Sustainability 82 Independent assurance statement 87
Highlights from 2011 include:  Increasing community investment by 9% to £12.4 million and helped 400,000 children to date through our Street to School campaign.
We have developed a robust CR programme over the past 11 years. Although we acknowledge that we have differing levels of CR maturity within our markets we are working to develop our capability globally. Our KPI section lists some areas where we are outperforming our targets and leading the CR agenda. In other areas we have a way to go to meet our ambitions. In all areas we are committed to continuous improvement. Whilst still within the upper quartile for financial services, the number of women in senior management has fallen by 2% over the past two years. Having implemented a ‘balanced leadership’ programme in 2010, we recognise that we need to continue progressing our talent pipeline to reverse this trend. After long-term year on year reductions of carbon dioxide we are now facing tougher challenges to reduce carbon. We are looking to innovative solutions to address this. We will continue to build trust and pride in our organisation by our employees with a strong community programme, valued development opportunities and transparent communications. We believe a key part of a long-term, successful business is to have sustainable products. We have committed to develop more sustainable products and services going forward.
‘Mandatory carbon reporting’.  UK Department for Business Innovation and Skills –
Stewardship – Enhancing Corporate Reporting and Audit.  Response to Lord Davies’ review on ‘Women on Boards’.
In addition to these consultations we have engaged with MPs on the Street to School programme with our UK partner Railway Children to raise awareness of children at risk on our streets in the UK. The IPSOS Mori MPs study carried out independently each year suggests Aviva scores favourably against its peers when MPs are asked whether they considered that the company acts with integrity and takes its social responsibilities seriously.
Financial crime Our financial crime standard reinforces our zero-tolerance approach and ensures that risks relating to fraud, money laundering, market abuse and bribery and corruption are adequately managed. This year we have updated our anti-bribery procedures to incorporate the requirements of the UK Bribery Act. An enhanced training module accompanied the roll-out of the new procedures to all staff. Going forward, this training requirement has been devolved to regional management, to provide at a local level. We are continuing to improve our identification and recording of financial crime on a consistent basis, across the group. We encourage our employees to raise any concerns they might have through ‘Right Call’ – an Aviva-wide malpractice reporting service. This enables all employees to report any suspicions or concerns in a confidential manner for independent investigation. During 2011, 69 incidents were recorded across the group. All cases were referred for independent investigation with 54 reaching conclusion and 15 cases currently remaining under investigation.
Understanding our customers We continued to work to understand perceptions and needs in our markets and once again conducted our wide-ranging survey on Consumer Attitudes to Saving, using the results to inform ongoing product and service developments across the group.
Our chief executive, Andrew Moss, gave the Henley Lecture in 2011 and spoke about the need to create greater understanding of the insurance industry, including saving for retirement. Andrew also chaired our Future Prosperity Panel, a team of nine leading thinkers who gathered to consider the challenges and solutions for savings in people’s future prosperity. The outcomes are published in our Future Prosperity report in collaboration with the Economist Intelligence Unit. Please see www.aviva.com/research-and-discussion/future-prosperity-panel.
Referral fees and reform of the personal injury system We have been calling for a complete ban on referral fees and a reform of the personal injury system for the last six years in the UK. Our own policy is that we do not sell customer data and we are very pleased that referral fees will be banned. We are now focusing on helping to get a fairer deal for our customers by calling for a deduction in personal accident legal fees and costs.
Aviva Europe restructure In October 2011 we announced a proposal to combine Aviva Ireland with Aviva UK to form a new UK and Ireland Region. We also announced that the European regional operations would be restructured to strengthen the business and create a leaner cost base. It is expected to take up to two years for the full implementation of these changes which started in March 2012. We are engaging with our employees on the impact of the proposals and we remain committed to a full and open consultation process with them and their representatives. We hope to achieve any proposed job reductions through voluntary means where possible and will support employees through this transformation.
Fair pay Since 2005 Aviva has been a London Living Wage employer. During the year we have communicated with Fairpensions, the Living Wage organisation, to discuss our involvement in the wider UK national living wage. Consultation with our employee forum and UK executive committee has led to a change to our minimum pay grades which align with the UK living wage for our direct employees. This change will be effective from April 2012.
Corporate responsibility continued annual employee engagement survey (2010: 80%). Employee engagement globally has improved by 5% to 68%. Improvements are particularly strong on satisfaction at 69% (2010: 62%) and commitment at 58% (2010:51%). Moving forward, our strategy is to help Aviva achieve its strategic priorities and vision by:  Building the capability of our regions and functions to achieve their chosen strategies.  Developing a culture of performance, where we play to win, take personal responsibility and recognise our people as individuals.
Developing leadership capability In 2010 we introduced a globally consistent definition of leadership called ‘Living Leadership’. During 2011 we have focused on moving this from concept to reality by listening to our employees in ‘fishbowl’ settings at our summits, embedding it in how we deliver our business strategy and how we lead practically in our work every day. We want everyone in Aviva to be a leader, regardless of their position. This year, we have aligned leadership development to a globally consistent definition of ‘Living Leadership, the act of making a difference’ and developed a new leadership capability framework. We have continued to build alignment to a global organisation through our improved on-boarding experience for senior leaders. In support of our goal of embedding risk management more strongly in Aviva’s culture, our top 350 leaders attended the ‘Better Business Decisions’ programme in 2011. It was designed to create a common understanding of the vital role that every employee – regardless of role or function – must play in understanding and managing risk. In Asia Pacific we wrapped leadership development around the strategy work we are doing, an approach that will become global during 2012. Our Frontline Manager Programme has been revised to meet the needs of our global audience and ensures a consistent experience for those transitioning roles to lead people for the first time. Leadership development needs to be continually refreshed to ensure leaders are equipped to deal with the emerging trends and business needs. We have done this for 2012 by including assessment and development at points of leadership transition and coaching to meet emerging business challenges.
 out of 58 questions of the core survey only two declined from the past year 2010 – by 1% point each.
Corporate responsibility continued employees an array of options to suit individual needs, including discounted dental and healthcare.
Diversity, equality and human rights Being respectful of each other’s differing backgrounds, cultures, needs and views is key to our delivery of the employee promise. Our Diversity and Inclusion practices remain aligned with the United Nations Universal Declaration of Human Rights and the International Labour Organisation’s core labour standards. In addition, our new global risk standard for corporate responsibility includes a set of minimum requirements for all Aviva businesses with regard to diversity, equality and human rights. This reinforces our commitment to fairness and consistency across all our businesses and ensures we are measuring our effectiveness on an annual basis. In 2010, our Employee Promise survey results showed that our commitment to valuing diversity in our organisation could be improved. We made some notable improvements in 2011:  76% of employees believe we have a climate in which diverse perspectives are valued (2010: 66%).  83% of employees believe that Aviva provides an environment free from bullying and hostilities (2010: 77%).  78% indicated that Aviva has an environment where people from diverse backgrounds can succeed (2010: 73%).
We are taking special interest in the gender balance of the organisation in order to create a more gender-balanced leadership. Our total female population is 50.4%, whereas the number of senior women in the workplace is 20%. We currently have three female non executive directors, making up 21% of our board with a target of maintaining a minimum of 25% by 2015 as a commitment to the Lord Davies review.
We have followed through with many of the commitments we made last year, including:  Developing a more diverse talent pipeline and measuring our gender mix.  Establishing a mentoring programme to help develop executive directors’ awareness of diversity issues.  Raising awareness of gender diversity through articles on our intranet and external sponsorships.
Developing communities We believe a sustainable business is one which plays an active role in society. As well as providing employment to 36,600 people, we provide prosperity and peace of mind to our 43 million customers. To deepen our impact on society we invest the talent of our people as well as financial resources in a range of community programmes. Our approach is based on building partnerships across three main areas strategic to our business: education, life trauma and financial literacy. We are actively contributing to the Millennium Development Goals and we demonstrate our commitment to being at the leading edge of addressing environmental, social and governance issues through our UN Global Compact LEAD membership.
Community projects We commit at least 50% of our community development budget to Street to School. Our approach to benefiting our people, community and brand is also found in the following examples:  Our ongoing partnership with Oxfam 365 helps to equip
 ‘Paying for It’, launched by Aviva in 2007, continued to take economic citizenship teaching into schools throughout the UK using trained Aviva volunteers and now with 3,500 teachers using our resources.
 Our grassroots athletics and rugby programmes reach out to tens of thousands of children every year to help them develop a healthy and active lifestyle.
 In Canada, the Aviva Community Fund gives members of the public the opportunity to turn great ideas into action to benefit their local communities. This innovative use of social media encouraged two million members of the community to vote on their preferred project.
We are clear that our major programmes should align to our strategy but we also understand that our employees have issues close to their own heart that they would like to see their company support. We encourage employees to take up their volunteering allowance and offer matched funding to support this. One employee found that being involved in a school volunteering programme was a key highlight of the year. Not only did it feel personally satisfying to be involved, it benefited the school children enormously. Typically a one-day taster of volunteering has led to an appetite for further volunteering throughout 2012.
* We also offset 105% of our remaining emissions by investing in sustainable projects such as renewable energy generation and small-scale run-of-river hydro electricity systems.
CO2 performance data is calculated on a like-for-like basis taking into account new acquisitions and divestments in 2011.
The role of insurers in climate change The insurance industry has a fundamental part to play in society’s responses to climate change. As a major insurer Aviva has firsthand understanding of the impact of extreme weather events on our customers. On their behalf, we are committed to help mitigate the threat of climate change and support everyone in society to adapt to changes caused by man-made emissions already in the atmosphere. Our industry can also draw on its knowledge of historical weather data to identify patterns of change, applying our understanding of risk to map future temperature scenarios and determine likely impacts. Our Accounting for Sustainability statement on page 82 explains our progress against these areas. We believe that climate change must be tackled now. As extreme weather events become more frequent and more severe, they become more challenging to insure. It is in everyone’s interest that insurance remains affordable and available so that people affected by severe weather events can recover quickly from unavoidable impacts. Aviva is currently working with the ABI and the Government to address the issues around the ending of the flooding Statement of Principles in 2013. However, this has to be part of a bigger conversation in which everyone understands their responsibility in flood risk management. This includes insurers ensuring that premiums accurately and fairly reflect the risk, local authorities and Government continuing to invest in defences and indeed the homeowner – who can consider what measures they can take to reduce the damage if the worst does happen.
Leadership and participation We have joined forces with other leading organisations to provide a collective industry voice and specialist sector-specific influence to support the climate change agenda:  The 2o Challenge Communiqué – a call from businesses around the world for governments to speed up international climate change negotiations and take action at a national level.
 Open letters from UKSIF on the green investment bank.  2011 Global Investor Statement on Climate Change – a joint statement by 285 leading investors on the need for policy to stimulate private sector investment in climate change solutions, job creation and long-term sustainability of the global economy.
 Business in the Community (BITC) International Campaign – we are a member of the environment workstream that aims to support businesses to take action on climate change and other environmental issues on a global scale.
Sustainable products and services Well-designed, well-delivered and socially inclusive products and services underpin our promise to provide prosperity and peace of mind to our 43 million customers, many of whom have long-term relationships with us. More than just a ‘product’, insurance has a tangible value for society and individuals. It’s a sharing of risk at a local and global level that helps people to live their lives, businesses to do business and modern society to function.
External benchmarking and recognition Our achievements in 2011 were recognised by our inclusion in some of the world’s leading external benchmarks:  Dow Jones Europe and World Sustainability Indexes;  SAM Sustainability Yearbook;  FTSE4GOOD Index Series;  FTSE KLD Europe, Asia Pacific and Global Sustainability indexes (excluding the US Index);  ECPI Ethical Index Euro and Ethical Index Global;  Ethibel Excellence and Pioneer Indexes;  Carbon Clear – ranked 3rd in FTSE100;  Newsweek Green Companies – ranked 28th out of 100 companies;  Gold status in Business in the Community’s (BITC)
Affiliations and engagements We work closely with leading organisations to share good practice, identify emerging issues and improve our performance. Here are just a few of the organisations we collaborated with in 2011:  CBI Climate Change Board;  Carbon Disclosure Project;  HRH Prince of Wales Accounting for Sustainability;  ClimateWise;  UNEP Finance Initiative;  UN Global Compact LEAD and represented on UN Principles for Responsible Investment, UN Principles for Sustainable Insurance and Caring for Climate working groups;  CRO Forum;  Consortium for Street Children;  UN Women Empowerment Principles;  ORC Global Diversity Forum; and  Institute of Business Ethics.
% of employees who rate us favourably on customer index New KPI 67% 69% 73% Meet/exceed GFS benchmark (2011: 75%)
Climate change and environment % of remaining CO2 emissions offset annually 100% 100% 100% 100%
Water consumption (m³) – absolute 843,750 751,750 690,369 509,657 Reduce water use by 4%
% of employees who feel that Aviva makes business choices that support the environment
% of employees who feel that Aviva is committed to attracting, developing and keeping a diverse workforce
New KPI 67% 69% 75% Improve past performance (no GFS benchmark)
% of employees who feel we have created an environment where people with diverse backgrounds can succeed
% of employees who rate us favourably on engagement index New KPI 64% 63% 68% Meet/exceed GFS benchmark (2011: 73%)
% of investment in Aviva ‘Street to School’ New KPI New KPI 52% 54% 50% of cash donations
Business ethics: While our target remains at 100% it is inevitable that not all employees will be able to sign the code each year due to maternity leave, sick leave etc. This year our percentage is below the requirement in Europe due to a delay in roll out of the revised code.
The Bribery and Corruption training was halted in 2010 while the training package was revised to take into account the requirements of the UK Bribery Act 2010.
Customers: Using NPS methodology we calculate the performance of businesses relative to their local market. Our ‘Customer advocacy’ section on page 85 outlines this further.
Relative CO2 data – The relative comparison uses the 2011 basis for reporting (as above), adjusted for structural changes and businesses that did not report in 2010
People: While we have improved in most of these KPIs against our own performance, our targets are external benchmarks which we are working towards. *The data for this index has been restated to allow accurate comparisons across the following four questions: 1 Aviva group's leadership has communicated a vision of the future that motivates me. 2 I understand the goals of our Aviva vision. 3 The senior leadership team of my business unit provides a clear sense of direction. 4 I trust the senior leadership team in my part of the business.
8%  Meet/exceed GFS benchmark 6%  Improve past performance (no GFS benchmark)
Greenhouse gas emissions Direct company impacts Cash flow performance The most material direct environmental impact that Aviva creates are greenhouse gas emissions. We emit greenhouse gases through our company operations generated from energy used in our buildings, fugitive emissions, air travel, car business miles and rail travel. For the first time this year associated emissions from our use of water and disposal of waste to landfill, and where collected, emissions from car rental for business journeys are included in our footprint. However, our operational emissions are smaller than those of our supply chain, the insurance claims fulfilment process and the emissions of the investment funds we manage. The scope of Aviva’s emissions includes all operations where we have day-to-day control; including joint ventures and associates. In 2011, we have included new markets in our reporting boundary: Indonesia, AI Singapore and AI Luxembourg. Some 165,115 tonnes of carbon dioxide (tCO2) or equivalent were emitted by Aviva into the atmosphere in 2011. Carbon offsets for the voluntary carbon market will be purchased in 2012 to cover our footprint plus an additional 5% extra to allow for any inconsistencies in reporting. The cost of offsetting will be funded by the areas of the business that have created the emissions on a ‘polluter pays’ basis.
Carbon offsetting (173,371) (133,049) Total net emissions (8,256) (6,336) * Data according the Defra guidelines i.e. UK electricity rated as grid average but renewable recognised in other countries. Gross and absolute emission in 2011 were the same. Going forward we will report on absolute emissions only
Corporate responsibility continued extensively employed the use of no-cost and low-cost behaviour changes and technologies which have a return on investment (ROI) comparable to other core business investment decisions. In order to assist our business further in carbon reduction activities we have created a Sustainability Fund which will be seeded at a group level. Aviva businesses can apply for the funding to install energy saving technologies. These may have a longer ROI to support our long-term carbon reduction target, and combat the impact of rising energy costs and potentially bolster our energy security over the next decade. The financial savings made will pay off the ‘loan’ with the businesses keeping further savings. Energy saving will help to reduce the cost of purchasing carbon offsets. We will report on development in this area next year. Our group annual carbon reduction target still stands at 5%. Our long-term target to 2020 has been rebaselined following the sale of the RAC business. This is now set at 20% reduction using a baseline year of 2010. The UK businesses are financially impacted in 2012 by the cost of the Carbon Reduction Commitment Energy Efficiency Scheme (CRCEES). Aviva’s operational carbon boundaries differ from those reported for the CRCEES as that also includes energy emissions from our portfolio of properties included in funds which we manage and have responsibility for. Aviva’s position in the CRCEES Performance League table was 899 out of a total of 2103 participating organisations. The total CO2 emissions in respect of CRCEES for the 2010/2011 financial year were 100,344 tCO2. We estimate the cost of our 2011/2012 emissions to be £1.29 million. Both the operational and CRCEES carbon footprints have reduced and will be reduced further due to the sale of the RAC business at the end of September 2011. The graph below shows the cost breakdown of one kilowatt hour of UK energy for Aviva. The cost of the actual energy and supply equates to 73%, government levies and taxes which are paid account for 25% of the overall cost. These are revenue raising and are not ringfenced by the Government for environmental improvements. The only aspect of the costs which benefit the environment is the carbon offsetting element (2%).
The cost of carbon varies depending on the source of the emissions and the geography of where the emissions are created. These also change over time. We are conscious of the potential impacts that climate change has on our business. Climate change is a major trend that drives changes in our risk profile. We build the financial risk that climate change poses into our levels of capital reserves and risk management processes. The risk section provides further information on this on page 61.
There are many ways our work in this area is informed. One of these is our continuing involvement in ClimateWise, the insurance sector collaboration forum on climate change. Our involvement in the workstream looking at sustainable claims management continues, along with work on calls for the consideration of low-carbon solutions inclusion in fixed income investment vehicles.
Products/suppliers/investors Increasingly we are considering environmental impacts associated with our products and services and the processes involved in their use and fulfilment. We have completed a carbon footprint exercise for the energy consumption of the UK properties we own through our Aviva Investors Real Estate portfolio. According to our CRCEES submission this amounted to 53,705 tCO2 in 2010/11. Through the Real Estate Sustainability Charter and Sustainability Forum we are working with site managers and tenants to reduce the properties’ environmental impacts. The Aviva Investors European Renewable Energy Fund achieved its first close in mid-2011 and expects to acquire and manage approximately €1bn of assets. The fund is currently open for further investment. In order to meet the needs of the rapidly expanding environmental goods and services sector, Aviva UK launched an expansion of policy endorsements covering low-carbon technologies and services in March 2011. In 2010 Aviva Canada created a set of endorsement bundles introduced to satisfy the insurance needs of domestic customers. Customers who utilise solar panels and wind turbines to generate electricity for their own consumption and/or supplying energy to the Grid as part of Provincial Incentive Programs can now be covered as part of their insurance policy. Building on that, a further product has been developed which means that in the event of a total or major loss at the insured's home, the customer will be able to replace damaged or destroyed property with more environmentally friendly and sustainable products. Aviva France has developed a number of products which encourage and reward our customers for their environmentally conscious behaviour. One of these products is our limited mileage motor policy which offers reduced premiums for driving less. Take up of the low mileage product makes up 25% of Aviva France’s portfolio and accounted for 28% of new sales in 2010.
Global 500 and FTSE350 (2010: 70); and  BREEAM1 minimum ranking ’Good‘ for new build and refurbishment.
Electricity (UK) Gas (UK) Business travel and all emissions for rest of world
Conservation investment In the UK, total capital expenditure for storage and recycling was £100,000 (2010: zero). This investment means that the percentage of waste diverted from landfill now stands at 91% and will be zero to landfill by the end of 2012.
Performance, strategy and targets Despite the quality of reporting in respect of waste improving in 2011, the overall volume of waste disposed of reduced by 2,393 tonnes for the UK. There are several reasons for this including structural changes such as less office closures, but also more efficient paper use (see Resource usage). The US head office employ the use of a solar compactor for general waste and a food waste desiccator, the product of which is used as a soil improver. These two machines have reduced the number of waste collections. Having already reached a recycling rate of 89% in 2010 Aviva UK sought to further improve the recycling rate in 2011. The focus of attention was food waste which was previously included in general waste. It is anticipated that the UK business will reach its zero to landfill target by the end of 2012, three years ahead of the target year.
Energy intensity The total cost of buildings related energy in 2011 was £18.3 million (2010: £17.7 million). The equivalent cost per square metre is £22. The cost of UK CRCEES regulation of £1.29 million is an additional cost.
Indirect impacts Products/suppliers/investors 2011 was the first full year of Aviva UK’s adherence to the Royal Mail’s Responsible Mailing programme for direct marketing mail. Nearly 8 million items of direct mail were delivered through this programme which ensures that the paper used is FSC accredited. Aviva US only uses FSC accredited paper in its operations. By the end of 2011 all UK General Insurance home, motor and broker commercial transactional policy packs, yearly statements and renewals were e-enabled, generating saving of nearly £2 million per annum on print and postage costs. Another 41% of Aviva UK policy documentation will be e-enabled in 2012 with total estimated savings of £8.6 million.
Aviva’s waste 000 tonnes Total waste (tonnes) Recycled (tonnes) Total waste per employee (kgs)
Our performance, strategy and targets The 2011 Relationship Net Promoter Score (RNPS) survey again showed an improvement on the previous year. We maintained the proportion of businesses operating in the upper quartile (relative to local competition benchmarks) and reduced the proportion of businesses operating below the market average as they moved into a market average position. We are pleased with the progress made however and we are committed to improving the performance of our markets which are below the market average. Across our regions:  In North America, we have maintained similar positions relative to the competition when compared with 2010.  In Asia, China, Korea and Singapore we have outperformed, when compared to the local market benchmark. There were also further strong improvements in the Indian business.
Building customer advocacy is one of the primary objectives for the business as a whole with our long-term target for all markets to be in the upper quartile relative to their local competition. Using a consistent methodology, each market is also set an annual target of either maintenance or improvement depending on their current performance.
In order to achieve these targets, we use Net Promoter as a discipline rather than just a number, which means continuously listening to and understanding what our customers want from us so that we can improve the experience we deliver to them. Following the RNPS survey, we undertake robust analysis to highlight key drivers which each market uses to develop annual action plans. The 2012 action plans show that markets are focusing on key areas of the customer experience, including how we engage with customers through ongoing communications after the initial sale, how we build products that are in the best interests of customers and ensuring that we are available to customers through the service channels they choose (such as digital and mobile).
Indirect impacts Customers place their trust in us to deliver on our promises. By acting responsibly we ensure that Aviva is here for the long term to provide prosperity and peace of mind. Our progress in this area has been recognised by being ranked as the most reputable financial services provider in the UK by the Reputation Institute in 2011.
Looking to the future It is also important to our business to understand how consumers’ lives are changing and therefore how we can adapt to these changes. In 2011 we explored some of the major trends currently manifesting in our key markets, such as the growing consideration consumers give to the impact of their purchasing decisions on the environment, increasing desire for emotional experiences rather than tangible goods, and recognition of the importance of the home in an increasingly unstable world. We are well positioned to help consumers through this uncertainty, enabling them to make better financial choices and protect what’s important to them. With this understanding of future consumer needs we can position our business to respond and therefore build our reputation as a company that listens to and understands what customers want.
Our performance, strategy and targets Our global community development (CD) strategy, focusing on financial literacy, education and life trauma, aligns to our corporate vision and channels financial support and the expertise of our employees into projects where we can see positive societal impacts. Our total investment was £1 million higher than in 2010. Three key factors contributed to this: significant investment in our ongoing global CD and causerelated marketing initiative Street to School which donated funds and used our marketing reach to raise awareness of the issue; improvement in the scope and accuracy of the way we record CD data according to LBG guidelines; and the increasing engagement of our people in CD activity. We delivered over 60,392 hours of volunteering in 2011 (2010: 57,250) and we had a significant 5% uplift in those believing our commitment to CR is genuine and 10% uplift in employees believing we act responsibly in our communities. This places us 14% above the Global Financial Services benchmark in this regard. Our flagship Street to School initiative to get young people off the streets and into education and training is delivering tangible benefits in engaging our people, impacting the lives of vulnerable young people and in creating the right brand associations for Aviva. Our clear focus on this programme, with at least 50% of CD activity happening in this sphere gives us the opportunity to make a deep and lasting difference. 23 Street to School programmes are in operation and we have developed a rigorous measurement framework together with our partners to allow us to govern and demonstrate the activity, its inputs and outputs. From this we know that we helped over 274,000 children through our programmes in 2011. We continue to use Street to School in our cause-related marketing, showing its potential to engage our stakeholders and also its power to engage social media communities. We will continue to extend the impact of Street to School in 2012 and will also be conducting a review to ensure we plan for the sustainability of these impacts.
What we did to form our conclusions Our assurance engagement has been planned and performed in accordance with ISAE30001 and to meet the requirements of a Type 2 assurance engagement as defined by AA1000AS (2008) . The AA1000AS (2008)2 assurance principles of Inclusivity, Materiality and Responsiveness have been used as criteria against which to evaluate the CR Report. To form our conclusions on the CR Report we undertook the steps outlined below: 1. Interviewed a selection of executives and senior managers at Aviva’s Group headquarters in London and selected Aviva businesses to understand the current status of corporate responsibility activities, and progress made during the reporting period.
6. Reviewed information or explanations about selected data, statements and assertions regarding Aviva’s corporate responsibility performance.
Level of assurance Our evidence-gathering procedures were designed to obtain a limited level of assurance (as set out in ISAE3000) on which to base our conclusions. The extent of evidence gathering procedures performed is less than that of a reasonable assurance engagement (such as a financial audit) and therefore a lower level of assurance is provided.
Reviews of Historical Financial Information (ISAE3000). 2 AA1000AS (2008) – A second edition of the AA1000 assurance standard from the Institute of Social and Ethical
Inclusivity Has Aviva been engaging with stakeholders across the business to further develop its approach to corporate responsibility?  We are not aware of any key stakeholder groups that have been excluded from dialogue.  We are not aware of any matters that would lead us to conclude that Aviva has not applied the inclusivity principle in developing its approach to corporate responsibility.
Materiality Has Aviva provided a balanced representation of material issues concerning its corporate responsibility performance?  We are not aware of any material aspects of Aviva’s corporate responsibility performance which have been excluded from the CR Report.
Performance information How plausible are the statements and claims within the CR Report?  We are not aware of any inconsistencies in the assertions made with regards to performance and achievement. How complete and accurate is the environmental and community investments data in the CR Report?  With the exception of the limitations identified in the
CR Report, we are not aware of any material reporting units that have been excluded from Group data.
Observations on particular aspects of our engagement Our observations and areas for improvement will be raised in a report to Aviva management. Selected observations are provided below. These observations do not affect our conclusions on the CR Report set out above.  Aviva continues to use the Credit 360 data collection tool as a means of standardising the environmental and community data collation process. There have been improvements in data collection, particularly in relation to the community data. Aviva should consider improving the guidance and training for the reporting of environmental performance data.
1. Lord Sharman of Redlynch OBE Chairman (Age 69) Appointed to the Board in January 2005 and became chairman in January 2006. Currently president of GamCare (charity). Former chairman of Aegis Group plc (media services) and KPMG International (auditors), deputy chairman of Group 4 Securicor plc (security services), member of the supervisory board of ABN AMRO Holding N.V. (banking) and an independent non-executive director of Young & Co’s Brewery plc (drinks), AEA Technology plc (commercial/technology), BG Group plc (oil and gas) and Reed Elsevier Group plc (publishing). Chairman of the Board and the Nomination Committee and a member of the Corporate Responsibility Committee.
5. Trevor Matthews Executive director (Age 59) Appointed to the Board in December 2011 as chief executive, Aviva UK. Previously chief executive officer and vice-chairman of Friends Life (insurance) and chief executive officer of Friends Provident plc (insurance). Former chief executive of Standard Life Assurance Company Limited, president and chief executive officer of Manulife Japan and executive vice-president, Canadian operations and chairman, Manulife Bank, Toronto. He has also held senior management positions at National Australia Bank and Legal & General Assurance Holdings Australia Limited.
9. Richard Karl Goeltz Senior independent non-executive director (Age 69) Appointed to the Board in May 2004. Currently a non-executive director of the Warnaco Group Inc. (clothing), the New Germany Fund (investment trust), the Central Europe and Russia Fund (investment trust) and the European Equity Fund (investment trust), a member of the Council and Court of Governors of The London School of Economics and Political Science and a trustee of the American Academy in Berlin. Former vice-chairman and chief financial officer of American Express Company (financial services) and director and chief financial officer of NatWest Group plc (banking). Former nonexecutive director of Delta Air Lines, Inc. (transport) and Federal Home Loan Mortgage Corporation (Freddie Mac) (financial services) and a former member of the Accounting Standards Board (UK). Member of the Audit and Nomination Committees.
10. Euleen Goh Independent non-executive director (Age 56) Appointed to the Board in January 2009. Currently a non-executive director of Singapore Airlines Limited (aviation), DBS Bank Limited (banking), DBS Group Holdings Limited (banking), Singapore Exchange Limited (financial services), CapitaLand Limited (real estate) and the Singapore Chinese Girls’ School. Chairman of the Singapore International Foundation. Former chairman of the Accounting Standards Council of Singapore and former chief executive officer of Standard Chartered Bank in Singapore (banking). Member of the Audit and Corporate Responsibility Committees.
13. Leslie Van de Walle Independent non-executive director (Age 55) Appointed to the Board in May 2009. Currently chairman of SIG plc (construction) and non-executive director of La Seda de Barcelona, SA (plastic packaging) and DCC plc (business support). Formerly chief executive officer of Rexam plc (packaging), executive vice-president of retail for oil products and head of oil products, Shell Europe, for Royal Dutch Shell plc and previously held a number of senior management positions with Cadbury Schweppes plc (consumer goods) and United Biscuits Ltd (consumer goods). Former nonexecutive director of Aegis Group plc (media services). Member of the Remuneration and Risk Committees.
Simon Machell Chief executive, Aviva Asia Pacific (Age 48) Joined the Group in 1994. Formerly chief executive of Norwich Union Insurance and managing director of RAC plc. Previously held positions with Ernst & Young LLP and Legal & General plc. Holds a BA Honours in Economics from the University of Durham and is a Fellow of the Institute of Chartered Accountants of England and Wales. He was chairman of the Motor Insurance Bureau (the UK fund that pays out to the victims of uninsured drivers) from 2001 to 2007.
Cathryn Riley Chief information officer (Age 49) Joined the Group in 1996. Formerly UK commercial director for Aviva UK and chief operating officer and chief information officer, Aviva Europe. Previously held senior management roles at Commercial Union, CGU plc and Norwich Union. Holds a Master of Arts in Manpower Studies from Polytechnic of Central London (now Westminster University) and is a graduate of the CEDEP general management programme at INSEAD and of the Institute of HR Management.
Robin Spencer Chief risk officer (Age 42) Joined the Group in 1995. Formerly chief executive officer of Aviva Canada, chief financial officer and executive vice-president of Aviva Canada and held various senior management positions in the finance function, including finance director for London & Edinburgh Insurance Company Limited. Previously spent five years with Procter & Gamble Limited. Holds a Master of Arts in Economics from Aberdeen University and is a chartered management accountant. Currently chairman of the European Chief Risk Officer Forum. Former chairman of Canada’s Property and Casualty Insurance Compensation Corporation.
The biographical details of the persons currently serving as directors appear on pages 90 to 91. The UK Corporate Governance Code (the Code) provides that all directors of FTSE 350 companies should be subject to annual re-election by shareholders and that directors should be subject to election by shareholders at the first annual general meeting after their appointment. The Company complied with this provision in 2011 and at the 2012 AGM, all directors of the Company will again offer themselves for election/re-election in compliance with this provision of the Code.
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. 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 Committee. 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.
Financial instruments Aviva 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 Shareholder Information section on pages 155 to 164 and an indication of the exposure of the Group companies to such risks is contained in note 56 to the consolidated financial statements.
Health and safety Aviva is committed to providing a safe and healthy working environment for all staff, contractors and anyone who is or may be affected by the business’ undertakings. The Group’s health and safety standard sets out the range of policies, procedures and systems required to manage risks and promote wellbeing. This includes appropriate staff consultation through nominated health and safety representatives. The group chief executive has overall accountability for health and safety across the organisation and regularly reviews health and safety performance.
Political donations At the 2011 AGM, shareholders passed a resolution, on a precautionary basis, to authorise the Company to make political donations and/or incur political expenditure (as such terms are defined in sections 362 to 379 of the Companies Act 2006), in each case in amounts not exceeding £100,000 in aggregate. As the authority granted will expire on 3 May 2012, renewal of this authority will be sought at this year’s AGM. Further details are available in the Notice of AGM. The definitions of political donations and political expenditure used in the Companies Act 2006 are broad in nature and this authority is sought to ensure that any activities undertaken throughout the Group’s businesses, which could otherwise be construed to fall within these provisions, can be undertaken without inadvertently infringing them. It is not the policy of the Company to make donations to EU political organisations or to incur other political expenditure. During the year, the Aviva USA Political Action Committee, which is funded solely by voluntary contributions from employees of Aviva USA Corporation (a subsidiary of the Company), made contributions to six candidate campaigns and industry political action committees. The total sum of the donations made was $11,250 and the donations were used to support candidates for nomination and/or election to public office.
Group employees The Group’s statement on its employees is set out in the Corporate Responsibility Report. In summary, the Group’s commitment to communication and dialogue with employees continues. The existence of a Group-wide intranet enables engagement and communication with employees throughout the Group on a single platform. It also helps management to share information, ideas and opportunities quickly across the entire business and to achieve a common awareness on the part of all employees of the financial and economic factors affecting the performance of the Company. A strong emphasis is placed on the provision of news and information through a range of media. Employees have opportunities to voice their opinions and ask questions through intranet sites, question-and-answer sessions with the group chief executive, via telephone conferencing, opinion surveys and the Group’s Employee Promise Survey which is open to all employees. Face-to-face briefings and team meetings are actively encouraged and are held in all business units across the Group. The Group’s businesses in the UK have established employee consultative forums and a European Consultative Forum convenes annually to discuss matters impacting the business across Europe. The Group ensures that involvement of employees in its performance is encouraged by allowing eligible employees to participate in the Group’s all employee share ownership plans.
Creditor payment policy and practice It is the Group’s policy to pay creditors when they fall due for payment. Terms of payment are agreed with suppliers when negotiating each transaction and the policy is to abide by those terms, provided that the suppliers also comply with all relevant terms and conditions. In respect of Group activities in the UK, the amounts due to trade creditors at 31 December 2011 represented 22.2 days of average daily purchases through the year (2010: 20.8 days).
Appointment of new auditor In order to ensure good corporate governance and that the services of the external auditor remained of the highest quality, the Audit Committee recommended that the provision of external audit services be put to tender in 2011. Following a transparent and competitive tender, including presentations from all candidate firms and discussions with management, the Audit Committee recommended to the Board of Directors that PricewaterhouseCoopers LLP be appointed to replace Ernst & Young LLP as the external auditor of the Aviva Group commencing with the 2012 financial year. This appointment is subject to shareholder approval and a resolution to that effect will be proposed at the Company’s 2012 AGM.
The UK Corporate Governance Code The UK Corporate Governance Code (the Code) issued by the Financial Reporting Council dated June 2010 is applicable to companies with a UK Premium Listing with financial years beginning on or after 29 June 2010. The Company opted for early adoption of some of the provisions of the Code in 2011. However, this is the first time the Company will report in full on compliance with the Code, in respect of the 2011 financial year. The Code sets out standards of good practice in the form of principles and provisions on how companies should be directed and controlled to follow good governance. The Financial Services Authority (FSA) requires companies with a UK Premium Listing to disclose how they have applied the main principles of the Code and whether they have complied with its provisions throughout the accounting period. Where the provisions have not been complied with, companies must provide an explanation for this. The Directors’ Report is therefore based on compliance with the Code. Details of how the Company has applied the Code principles and complied with its provisions are set out on pages 97 to 136. It is the Board’s view that the Company has been fully compliant throughout the accounting period with the relevant provisions of the Code. Further information on the Code can be found on the Financial Reporting Council’s website, www.frc.org.uk.
The Board’s policy is to appoint and retain non-executive directors, who can apply their wider business knowledge and experiences to their understanding of the Aviva Group, and to review and refresh regularly the skills of the Board. In line with the Code, several non-executive directors, including the Company chairman, are due to retire in 2012 and 2013, after serving on the Board for up to nine years. During the year, the Nomination Committee continued to undertake succession planning for the Board to ensure that an appropriate balance of skills and experience is maintained. As part of the process for the appointment of new directors, the Nomination Committee, on behalf of the Board, considers the diversity of the Board, including gender. The diverse nationalities which currently make up the
Board ensure an international perspective, which is invaluable for the Group as a global business. In addition to the strengths of experience and diversity, the Board also complies with the requirements of the Code on the independence of directors. The aim is that the Board as a whole should have an appropriate balance of skills, experience, independence and knowledge to enable each director and the Board as a whole to discharge their duties and responsibilities effectively. During the year, following a thorough search by external recruitment consultants, The Zygos Partnership and JCA Group, the Nomination Committee recommended a number of appointments to the Board as part of its succession planning process. John McFarlane was appointed to the Board as an independent non-executive director and will take over the chairmanship of the Board following Lord Sharman’s retirement planned for the end of June 2012. Gay Huey Evans was appointed as an independent non-executive director and subsequently as chairman of the Corporate Responsibility Committee following the retirement of Carole Piwnica. In February 2012, Glyn Barker was appointed as an independent non-executive director. Each director must be able to devote sufficient time to the role in order to discharge his or her responsibilities effectively. On average, directors spend at least 44 days a year on Company business, with the chairmen of the Audit, Risk and Remuneration Committees spending substantially more. The Code requires that at least half the Board, excluding the chairman, should comprise independent non-executive directors as determined by the Board. The Nomination Committee performs an annual review of directors’ interests in which all potential or perceived conflicts, including time commitments, length of service and other issues relevant to their independence, are considered. Where a non-executive director has served on the Board for up to nine years, the Board, through the Nomination Committee, assesses whether such a director remains independent in character and judgement. The Nomination Committee report, including a description of its duties and its activities during the year in relation to succession planning, is set out on pages 106 to 107. It is the Board’s view that independent non-executive directors need to be able to present an objective, rigorous and constructive challenge to management, drawing on their wider experiences to question assumptions and viewpoints and where necessary defend a given position. The independent non-executive directors should also assist management in the development of the Company’s strategy. To be effective, an independent director needs to acquire a sound understanding of the industry and the Company so as to be able to evaluate properly the information provided. Having considered the matter carefully, the Board is of the opinion that all of the current non-executive directors are independent and free from any relationship or circumstances that could affect, or appear to affect, their independent judgement. Accordingly, over half of the Board members, excluding the chairman, are independent non-executive directors. All of the current directors that served during 2011 have been subject to a formal performance evaluation during 2011 and 2012. Nonexecutive directors who have served on the Board for more than six years were subject to a particularly rigorous review of their independence. As at the date of this report, there are four nonexecutive directors who have served on the Board for more than six years. More details about all the directors are set out in the Notice of AGM and their biographical details are set out on pages 90 to 91. Below is a summary of some of the skills and experience they possess and which they bring to the Board.
• UK 8 • Continental Europe 1 • US 2 • Other 4
Richard Karl Goeltz Mr Goeltz has over 40 years’ experience in corporate finance, including 20 years in the financial services industry. He has a broad range of both executive and non-executive business experience in major global corporations. His experience of audit and governance committees has been invaluable in providing effective oversight as a member of the Company’s Audit Committee. As the senior independent director he has provided strong support to the Board and Nomination Committee, particularly in relation to the chairman’s succession.
Michael Hawker AM Mr Hawker has a wealth of financial services knowledge gained over 28 years in the banking and insurance industry in both executive and non-executive roles in Europe, Asia and Australia. He also has significant experience of risk committees which has been invaluable in the review and implementation of the Group’s risk management framework.
Trevor Matthews Mr Matthews has over 30 years of executive experience in the financial services industry. He has an outstanding track record of achievement in the insurance sector globally and brings to the Board in-depth operational and strategic knowledge of life assurance and financial services operations.
Igal Mayer Mr Mayer has had a long and diverse career at Aviva with an excellent track record of improving business performance. Most recently, he has led the restructuring of Aviva’s European regional operations to strengthen the businesses and create a leaner cost base. He brings to the Board a truly international perspective and a detailed knowledge of the insurance industry.
Andrew Moss Mr Moss has extensive experience in the financial services industry and a track record of successfully leading businesses through challenging economic conditions. He has successfully led the Group since 2007, and through his clear strategic vision and strong leadership skills he has strengthened the Company’s position as one of the world’s leading insurers.
Lord Sharman of Redlynch OBE Lord Sharman has wide-ranging international experience in the financial services industry and a wealth of non-executive experience which includes numerous non-executive directorships and the chairmanship of various listed companies. He has an excellent track record of working with and leading diverse international businesses and has applied these skills to his chairmanship of the Company’s Board.
Russell Walls Mr Walls has a strong financial background and significant international business experience. With his financial acumen, thorough, common sense approach and experience on the audit committees of a number of listed companies, he has provided an invaluable contribution to the discussions of the Board and of the Audit Committee, most recently in relation to the external audit tender.
Scott Wheway Mr Wheway has a wealth of business experience in the retail sector and has been a champion of excellent customer service. He has provided key insights into the Company’s strategy of putting the customer at the heart of business. As the chairman of the Company’s Remuneration Committee, he led the strategic review of executive remuneration within the Group and consulted closely with major investors to ensure that the Group’s executive remuneration is aligned with stakeholder needs.
The chairman and group chief executive The respective roles of the chairman and group chief executive are set out in the Board’s terms of reference. The chairman’s priority is leadership of the Board and ensuring its effectiveness; the group chief executive’s priority is the management of the Company. The chairman’s commitment to the Company is two to three days per week and his main interests outside the Company are set out in his biographical details on page 90. During the year, the chairman of the Company, Lord Sharman of Redlynch, stepped down as a non-executive director of Reed Elsevier plc with effect from 20 April 2011 and as a non-executive director of BG Group plc with effect from 12 May 2011.
Training and development The Board believes strongly in the development of all of its employees and directors and it is a requirement of each director’s appointment that they commit to continue their development. The form that this development takes is subject to individual director’s requirements and the relevance of the training available. During the year, directors attended a number of internal and external courses including training on Solvency II for the Board and the Audit Committee and on IFRS Phase II for members of the Audit Committee. There was a joint training session for members of the Risk and Audit Committees on the global corporate structure and the Risk Committee members also attended training on economic capital methodology and stress testing. Training sessions have also been built into the Board’s and Committees’ work plans for 2012. The Board made visits to the Group’s businesses located in the UK during the year to gain a closer understanding of their operations. The Board has a comprehensive induction programme for new non-executive directors which is tailored to their particular needs and which consists of several separate sessions over a number of months. These include presentations from key members of senior management, visits to the Group’s main operating businesses, and meetings with the external auditor and one of the Company’s corporate brokers. Further or followup meetings are arranged where a director requires a deeper understanding on a particular issue.
Directors’ attendance The Company requires directors to attend all meetings of the Board and the Committees on which they serve and to devote sufficient time to the Company in order to perform their duties. The attendance of the directors at the Board meetings held in 2011 is shown in the table below and the attendance at Committee meetings is shown in the Committee reports.
Mary Francis 15 100% Richard Karl Goeltz 15 100% Euleen Goh 13 87%2
Trevor Matthews∞ 1 100% Igal Mayer** 14 100% Andrea Moneta¥ 0 n/a Andrew Moss 15 100% Carole Piwnica Ω 12 86%2
Risk management and internal control statement The Board has overall responsibility for:  determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives; and  maintaining the Group’s risk management and internal control systems and for reviewing their effectiveness.
To discharge this responsibility, the Board has established frameworks for risk management and internal control. The Group’s systems of risk management and internal control play a key role in the management of risks that may impact the fulfilment of its objectives. Internal control facilitates effective and efficient operations, the development of robust and reliable internal reporting and compliance with laws and regulations. These systems are designed to 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 systems are regularly reviewed and comply with the Turnbull Guidance (Internal Control: Revised Guidance for Directors) published by the Financial Reporting Council. The Audit Committee, working closely with the Risk Committee, on behalf of the Board, last reviewed the effectiveness of the systems of risk management and internal control in March 2012, covering all material controls, including financial, operational and compliance controls and the risk management framework and processes. The necessary actions have been or are being taken to remedy any significant failings and weaknesses identified from these reviews. The Board confirms that there is an ongoing process for identifying, measuring, managing, monitoring and reporting the significant risks faced by the Group, which has been in place for the year under review and up to the date of approval of the Annual Report and Accounts. The principal features of the systems of risk management and internal control and the methods by which the Board satisfies itself that these systems operate effectively are set out below.
Corporate governance report continued effective controls in order to assess and manage risks associated with the Group’s operations. The Risk Committee assists the Board in its oversight of risk and risk management across the Group. The Risk Committee reviews the Group’s risk appetite and future risk strategy and makes recommendations on risk appetite to the Board. It also reviews the risk profile against the risk appetite, reviews the principal risk policies, approves any material changes to these policies, and reviews the Group’s internal models and stress and scenario testing. The oversight of the design, completeness and effectiveness of the risk management framework relative to the Group’s activities is performed on behalf of the Board by the Risk Committee. This includes the oversight of the quality of the risk function and the effectiveness of risk reporting. The Risk Committee’s oversight covers all aspects of risk including market, credit, liquidity, general insurance, life insurance, operational, reputational and regulatory risks. 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 control and for monitoring the effectiveness, performance and objectivity of the internal and external auditors. These Committees receive reports on risk management and internal controls and consider where relevant whether appropriate actions have been undertaken as well as monitoring the completion of any Group-level actions. These Committees have clearly defined terms of reference and full reports for these Committees are set out on pages 108 to 112. The parts of the governance framework relating to the operational management of the Group’s businesses include limits on the authority delegated by the Board in respect of matters which are necessary for the effective day-to-day running and management of the business. The Board delegates day-to-day management, including risk management, to the group chief executive, who has delegated operational aspects of day-to-day management to executives within the Group through a delegated authority framework. The GEC assists the group chief executive with regard to strategic, monitoring and control aspects of day-to-day management including the development and implementation of group strategies, plans and policies, the monitoring of operational and financial performance, the assessment and control of finance, business and operational risks and the maintenance and ongoing development of a robust control framework and environment. In turn, the GEC has established the Asset Liability Committee (ALCO) and the Operational Risk Committee (ORC) to assist with the execution of its duties. The ALCO provides a key focus on business and financial risks and the ORC on operational risks. Together, the ORC and ALCO provide the GEC with a mechanism to oversee the implementation of Aviva’s risk strategy and risk policies, providing assurance that key risks significant to the achievement of the Group’s business objectives are adequately identified, measured, managed, monitored and reported. The Board Committees also monitor the Group’s risk profile relative to its risk appetite and provide a focal point for the escalation of significant risk exposures and ensure mitigating actions are being taken when risks are, or expected to move, out of appetite. The Board Committees are in turn supported by similar governance structures in the regions and markets. The group chief risk officer is a member of the GEC and has a reporting line to the group chief executive and to the Risk Committee with access to the Risk Committee chairman, assuring independence of the function. Similarly, the regional chief risk officers are members of the regional executive committees.
The Performance Management Monitoring Committee, led by the group chief executive, oversees regional performance and provides a forum for review and challenge on strategic, operational and financial performance, including capital and risk management.
Control activities The Group has a set of formal risk management and internal control policies that facilitate a consistent approach to the management of all the risks across all the businesses and locations in which the Group operates. These risk policies define the Group’s appetite for different risk types and set out risk management and control requirements for the Group’s worldwide operations. The risk policies also set out the roles and responsibilities of businesses, regions, risk policy owners and the risk oversight committees. As the business responds to changing market conditions and customer needs, we regularly monitor the appropriateness of our risk policies 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 our core business activities, and that the processes for managing risk are understood and followed consistently across our global businesses. In preparation for Solvency II, the Company reviewed the existing risk management policies and enhanced the risk management and internal control framework through the introduction of updated risk policies and business standards which took effect at the beginning of 2012. Businesses regularly review the risks identified against the tolerances specified in the risk policies, and where risks are outside of tolerance, action plans are required. Similarly, controls are regularly reviewed for effectiveness and remediation actions are implemented where necessary. The Audit Committee receives regular reports from management to assist with its review and assessment of the effectiveness of the system of internal control including financial reporting. A governance certification process is conducted throughout the Group in support of this review. The necessary actions have been or are being taken to remedy significant failings and weaknesses identified from these reviews. The chief executive and chief financial officer of each region have certified compliance with the Group’s governance, internal control and risk management requirements, supported by consideration of evidence from all three lines of defence. They have certified that all the key inherent risks within the business have been identified and assessed and that the business operates in a manner which conforms to the minimum standards outlined in Group risk policies as well as the business ethics code. The chief executives and chief financial officers in the regions have also confirmed that there is a governance structure that is appropriate to oversee risk management activities and that the business has complied with the terms of its delegated authority (cascaded by the Group) and has operated a delegated authority structure that is appropriate to oversee its activities. Any key risks not previously identified, control weaknesses or non-compliance with the Group policy framework or local delegation of authority, must be highlighted as part of this process. The chief risk officers of each region have also certified their responsibility for providing effective challenge and independent oversight of the business management of all risks and of the system of internal control. The chief risk officers have certified in each region that they have reviewed, and where appropriate, challenged the completeness, appropriateness and adequacy of risk assessments (irrespective of risk appetite), risk reporting and the adequacy of risk mitigation plans, including proactively advising senior management of emerging risk issues. They have
Corporate governance report continued also certified that they have monitored the implementation of, and compliance with, the risk policies and standards, providing challenge and escalating all material breaches of limits, appetite or policy to the appropriate forum as necessary. The chief risk officer reports regularly to the GEC and Risk Committee on the key risks and the Group’s position relative to its risk appetite. The Group risk function has reviewed any matters identified by regions in their certification and also assessed the risk and control issues that arose and were reported during the year by the three lines of defence.
Internal controls over financial reporting A Group Reporting Manual including International Financial Reporting Standards (IFRS) and Market Consistent Embedded Value (MCEV) requirements has been defined and rolled out across the Group. A Financial Reporting Control Framework (FRCF) is in place across the Group. FRCF relates to the preparation of reliable financial reporting and preparation of local and consolidated financial statements in accordance with IFRS and MCEV. FRCF also ensures compliance with the requirements of the Sarbanes-Oxley Act 2002. The FRCF process follows a risk-based approach, with management identification, assessment (documentation and testing), remediation as required, reporting and certification over key financial reporting-related controls. Management regularly undertakes quality assurance procedures over the application of the FRCF process and FRCF controls. The results of the FRCF process are signed off by business unit and regional chief executives and chief financial officers and at a Group level by the group chief executive and group chief financial officer. The Disclosure Committee, which has the role of overseeing the design and effectiveness of the Group’s disclosure controls, for both financial and non-financial information, evaluates the Group’s disclosure controls and reviews and endorses the Group’s key periodic external reports, including the consolidated financial statements. This Committee is chaired by the chief financial officer and reports to the Audit Committee. A Group Technical Committee, reporting to the Disclosure Committee is in place, which presides over significant technical matters and reviews technical decisions including key judgements, issues and application of assumptions.
Risk management A Risk Management Framework (RMF), designed to identify, measure, manage, monitor and report significant risks to the achievement of business objectives is in place and embedded throughout the Group. The RMF is codified through the risk policies and standards described above (under control activities) and includes a cascade of the Board-approved risk appetite by risk type and to business units. The RMF also sets risk limits for individual risks. The risk management process has been in place for the year under review and up to the date of approval of the Company’s Annual Report and Accounts. Further details on procedures for the management of risk operated by the Group are given in the section on risk management set out on pages 61 to 68.
Corporate governance report continued is simultaneously published on the Company’s website, allowing all shareholders full access to material Company announcements. The Company has taken full advantage of the provisions within the Companies Act 2006 allowing communications to be made electronically to shareholders where they have not requested hard copy documentation. As a result, the Company’s website has become the primary method of communication for the majority of its shareholders. Details of the information available for shareholders on the website can be found in the Shareholder Services section on page 367 and the Shareholder Services section of the website at www.aviva.com/shareholderservices. The Company’s AGM provides a valuable opportunity for the Board to communicate with private shareholders. At the meeting, the Company complies with the Code as it relates to voting, the separation of resolutions and the attendance of Board Committee chairmen. Whenever possible, all directors attend the AGM and shareholders are invited to ask questions related to the business of the meeting during the meeting and have an opportunity to meet with the directors following the conclusion of the meeting. In line with the Code, details of proxy voting by shareholders, including votes withheld, are made available on request and are placed on the Company’s website following the meeting. The Company’s Annual Report and Accounts, together with the Company’s half-year report, interim management statements, reports on Form 20F (for filing with the United States Securities and Exchange Commission) (SEC) and other public announcements, are designed to present a balanced and understandable view of the Group’s activities and prospects and are available on the Company’s website, www.aviva.com/investor-relations/results-and-reports. The chairman’s statement, the group chief executive’s review and the Performance Review provide an assessment of the Group’s affairs and they will be supported by a presentation to be made at the AGM, which can also be viewed by webcast on the Company’s website at www.aviva.com/agm after the meeting.
Aviva Investors Aviva Investors, the Group’s core asset management company, considers good governance to play an important role in protecting and enhancing shareholder value. In keeping with the Group’s values, Aviva Investors looks to act as a responsible investor, monitors the governance of the companies in which it invests and seeks to maintain an effective dialogue and engagement with companies on matters which may affect shareholder interests and the future performance of those companies. Aviva Investors applies and complies with the UK Stewardship Code maintained by the Financial Reporting Council and has published detailed Stewardship and Corporate Governance and Voting Policies as part of its investment strategy, which underpin its approach to engaging and voting at Company general meetings. These policies encompass social, environmental and ethical issues and are applied pragmatically after careful consideration of all relevant information. In addition, Aviva Investors makes detailed voting reports available to clients, and provides some summary reporting on its website, www.avivainvestors.com.