Towards a stronger Aviva Aviva plc Annual report and accounts 2012
Aviva is a life, general and health insurance business and provides asset management services. We are the largest insurer in the UK* and we have strong businesses in selected international markets.
2012 was a year of change for Aviva. In this annual report you can read more about how we’re taking steps to create a stronger Aviva.
Performance review Financial and operating performance 26 Selected consolidated financial data 40 Information on the company 41 Organisational structure 48 Analysis of investments 50 Contractual obligations 55 Risk and capital management 56 Basis of preparation 60
Our corporate responsibility strategy 62 Trust and transparency 64 Attracting and retaining talent 66 Community and Development 67 Climate change and environment 68 Key indicators 70 Accounting for Sustainability 72 Indices and benchmarks 75 Independent Assurance Report 76
Governance Chairman’s governance letter 78 Board of directors 80 Group Executive 83 Directors’ report 85 Corporate governance report 89 Nomination Committee report 95 Audit Committee report 97 Risk Committee report 100 Corporate Responsibility Committee report 103 Directors’ remuneration report 104
Shareholder information Company address 122 Share capital 122 Related party disclosures 124 Dividend data 124 Guarantees securitised assets and off-balance sheet arrangements 125 Liquidity and capital resources 125 Regulation 129 Risks relating to our business 135
Chairman’s statement 04 Group chief executive officer’s statement 06 Chief financial officer’s statement 10 Measuring our performance in 2012 14 Our business model 18 Market context 19 Market focus 20
Our plan to change Aviva In July 2012, we announced a plan designed to strengthen our capital position and transform Aviva: Focus, Strengthen, Perform. Page 02
Actions to focus the business, strengthen the balance sheet and improve performance have been the right ones Page 06
In the middle of 2012, we launched a radical repositioning of the Group, setting out an ambitious programme Page 04
In early 2012, we reviewed all of our businesses in the light of legitimate concerns about our performance. We concluded that we must: build up capital and financial strength improve the profitability of underperforming parts of our business reduce costs and eliminate bureaucracy become a less complex organisation
Taking all this into account, in July 2012, we produced a plan designed to transform Aviva: Focus, Strengthen, Perform
So far, we have exited a number of businesses, improved Aviva’s capital position and there are plans to improve the operating performance of our underperforming businesses.
Build financial strength We resolved to improve our economic capital levels so that they are in line with our industry peers. We plan to do this by making disposals and reducing the amount of capital we allocate to businesses producing lower returns. Our goals were to: Maintain an economic capital coverage ratio of between 160% and 175%
Reduce annual expenses by £400 million by the start of 2014 Change our culture to remove bureaucracy and ensure our people perform to their full potential
It is management’s view, endorsed by the Board, and with firm regulatory support, that we prioritise the reduction of internal and external debt over dividend preservation.
As it turned out, we have had a very active period, but achieved a great deal in a short time. Boosting capital was our main initial priority and I am pleased we were able to increase the economic capital surplus substantially by £3.5 billion from the end 2011 (130% coverage) to a pro-forma level of £7.1 billion (172% coverage), within our stated target range.
We have since exited seven of the most material “red” cells on time and at respectable prices, better and faster than was generally expected of us and action is being taken on the balance. Specifically, we announced the disposal of the US business, our stake in Delta Lloyd, and a number of smaller interests around the world, the settlement of our dispute with Bankia in Spain, a significant reduction in our exposure to Italy and Spain, and the exit of large bulk purchase annuities in the UK. We also targeted improvement by the end of 2013 in 27 “amber” cells, through revenue increase, cost reduction, loss mitigation, or capital reduction. Seven of these have been brought to “green” status. As we stand, we now have nine red cells, 20 amber cells and 22 green cells. We also reshaped our top management team, particularly with the appointment of a strong and decisive CEO, and made progress in the renewal of the Board.
Zero bonuses for Executive Directors While we appreciate the considerable progress that has been made on a number of fronts, we do not believe the overall situation of the Group warrants bonuses for executive directors for 2012 or pay rises for 2013.
“My intention is that Aviva will have a robust balance sheet with strong and predictable cash flows, diversified earnings and capital, and lower leverage.
Investment thesis: “cashflow and growth” Aviva is a company with a rich legacy, some strong businesses, an outstanding brand, a large customer base and very talented people.
I joined Aviva because I believe there is significant potential to be unlocked. Aviva is a turnaround story. In my first few months at Aviva I have had the opportunity to visit a number of our businesses and to speak to many customers. What strikes me is the dedication and professionalism of those colleagues who look after customers’ needs every day. Our customer service in many parts of the business is a genuine differentiator. However, in recent years Aviva has not lived up to its potential and has disappointed shareholders. In 2012 our Chairman, John McFarlane, highlighted these issues and set out a clear plan. The actions in 2012 to focus the business, strengthen the balance sheet, and improve performance have been the right ones and progress has been made. Aviva has delivered a large part of the disposal programme. In line with the plan laid out in July last year, in 2012 we narrowed the focus of our business through the announced sales of our most significant non-core businesses, including the sales of Delta Lloyd, USA, Sri Lanka, Malaysia and lastly Russia. In addition we have agreed to transfer Aseval to Bankia for £500 million. As a result our capital position has improved markedly, with the economic capital surplus strengthening from £3.6 billion to £7.1 billion, giving a coverage ratio now of 172% on a proforma basis, well within our target range of 160%–175%.
This plan has successfully addressed the immediate capital and focus issues. We now need to take Aviva to the next phase of its turnaround.
Investment thesis: “cashflow and growth” It is clear to me that Aviva has not articulated why investors should buy or hold Aviva shares – what investors should expect of us.
Cashflow Three core businesses Aviva has scale positions in the three core business lines of life and savings, general insurance and fund management – all under a strong brand. We have businesses in attractive, established markets which generate strong cash flows and which offer cross-sell potential. Aviva is world class in many core areas of insurance. For example, our underwriting, analytics and claims expertise, especially in Canada and UK general insurance, are impressive. And we have clear strengths in distribution including direct, through intermediaries, and through bancassurance where we have over 100 agreements.
Focus on cashflow We will manage the established markets for cash and ensure that the subsidiaries remit progressive cash dividends to the Group. Product development will be driven by a clear focus on sustainable cash flows. For example, in the UK we have managed the volume and pricing of our annuity business so that cash flows are brought forward and capital strain is lowered. It is also about our scale: we have approximately 34 million customers, annual life and general insurance gross written premiums of around £23 billion and over £300 billion total funds under management.
Significant diversification benefits Diversity, spreading the risk from one to many, is a central tenet of insurance. Aviva’s diversity across our three core businesses and across selected markets gives earnings stability and capital benefits. For example, product line and geographic diversification brings a significant reduction in our economic capital requirements.
Growth Insurance expertise and scale drives cashflow growth in our established markets Our established markets not only provide good cash flows but also offer potential for growth. Managing our substantial back books and focusing on improving persistency levels will increase the value from our existing customer base.
Grow the value of life new business and improve general insurance COR
Upside from operational improvement We have previously highlighted to the market there are elements of the Group which have underperformed for some time, where cash flows have not been optimised and where our expenses are too high. The turnaround of these amber cell businesses gives opportunity to create value for shareholders.
Balance sheet Aviva’s corporate structure was overly complex and far from optimal. Our internal leverage through the interdivisional balance was too high and created an unsatisfactory long-term exposure for the UK general insurance business. This internal leverage, together with external leverage, must be addressed. Pat Regan explains the change to our corporate structure in more detail in his CFO statement. In summary, we have replaced the interdivisional balance between Group and UK general insurance with a formal loan and we plan to reduce this by £600 million in total over the next three years. We have kept the FSA informed of our thinking in relation to these issues and they are supportive of the actions we are taking. With respect to our external leverage, we have a medium term target ratio of below 40%.
Our priorities in 2013 Cashflow § Focus businesses on cash flows to Group § Deliver in excess of £400 million cost saves § Improve operating performance § Grow the value of life new business and improve general insurance COR
Outlook To move forward, Aviva has had to make some difficult choices. The decisions we have made are realistic, provide clarity and address the uncertainty that has surrounded our stock. It is now up to Aviva to deliver the performance.
Key statistics in 2012 34m Customers worldwide £29bn Paid out in claims and benefits due in 2012
In January 2012, agreed the sale of Czech, Hungarian and Romanian life businesses
The agreed sale of the US has been a main contributor to a loss after tax of £3.1 billion. Operating performance is broadly in line with the previous year, but with higher restructuring costs as we transform the Company. Operating profit on an underlying basis1 was down 4% in 2012 primarily due to adverse foreign exchange movements. We have seen improvements in profitability of new business, cash flows to Group and good levels of operating capital generation. The economic capital position has significantly improved but, as a result of the disposals we have made, leverage has increased. We have also taken action to simplify the Group’s corporate structure, formalising the inter-divisional balance into a loan of which we will pay down £600 million over the next three years.
Financial strength The number one priority in 2012 was to improve Aviva’s capital position. During the year we have taken a number of management actions and this, combined with market movements, means that our IGD and economic capital solvency surpluses have improved significantly. We have simplified our portfolio of businesses and as a result Aviva will operate in 18 countries, from 30 three years ago. These changes, including the announced sales of Aviva USA and Delta Lloyd and the settlement of our agreement to transfer Aseval to Bankia in Spain, will result in a positive movement in our economic capital. On a proforma basis the estimated economic capital surplus improved to £7.1 billion with a coverage ratio of 172% as at 31 December 2012 (2011: £3.6 billion; 130% coverage).
In addition, we have now made the calculation more prudent to now include the pension deficit funding on a 10 year basis (previously five year basis). The IGD solvency surplus has improved to £3.8 billion as at 31 December 2012 (2011: £2.2 billion). At the end of February 2013, our estimated pro forma economic capital coverage ratio was 175%. We also took a number of steps to reduce the volatility of our capital position. In July we reduced our holding in Delta Lloyd from 41% to just under 20% and in January 2013 we sold our remaining stake. Over the course of the year we also reduced our exposure to Italian sovereign debt with a gross sell down of €6.5 billion2 this year from our shareholder and participating funds. After taking into account market movements and new business, the value of our net direct shareholder and participating fund holdings (net of NCI) in Italian sovereign debt is now £4.9 billion (2011: £6.4 billion) of which net direct shareholder exposure is £0.4 billion. Of the £4.9 billion Italian sovereign debt 74% is held in Italy. Aviva’s external debt and preference shares stood at £6.9 billion at the end of 2012. As a result of the reduction in net asset value from the disposals the external debt leverage ratio increased to 50%3. It is our intention to reduce this to below 40% over the medium term.
2 Gross of non-controlling interests (NCI), purchases and redemptions 3 External debt and preference shares divided by total tangible capital employed
The largest driver of the overall loss is the agreed sale of our US business. At HY12 we recognised an impairment of goodwill and intangibles of £0.9 billion related to that business, and at the full year we recognised a further impairment of £2.4 billion. This was partially offset by positive investment variances of £0.3 billion. On a continuing basis loss after tax was £202 million. Drivers of this loss after tax are operating profits offset by integration and restructuring costs of £461 million, primarily reflecting the execution of the transformation plan; adverse investment variances of £634 million; net adverse post tax non-operating items in Delta Lloyd of £304 million (principally relating to movements in the Delta Lloyd Group curve), and loss on disposals of £164 million and other goodwill and intangible impairments of £188 million. Operating profit per share (EPS) on a continuing basis was 39.2 pence (2011: 47.5 pence). Total EPS was negative 113.1 pence (2011: 5.8 pence) reflecting the loss on the sale of the US business.
Operating performance Operating profit on an underlying basis is £1.8 billion (2011: £1.9 billion), a 4% reduction compared with 2011. This was driven primarily by adverse foreign exchange movements of £65 million. Operating profit on a constant currency basis, excluding Delta Lloyd and RAC, was stable reflecting slightly lower operating profits from our life business partly offset by a small increase in profits from our general insurance and health businesses. Operating profit on an underlying basis after restructuring costs was £1.3 billion (2011: £1.6 billion). This includes restructuring costs of £461 million relating to our underlying businesses (2011: £261 million) mainly driven by the transformation of the business, the integration of Ireland into the UK business and preparations for Solvency II. The IFRS return on equity was 10.3% (2011: 12.0%). This was driven by the overall reduction in operating profit for the period.
Life new business internal rate of return excluding Delta Lloyd and United States
In our other businesses, income in Singapore increased to £65 million (2011: £52 million) driven by growth in both new business volumes and profitability. In Poland, operating profit reduced to £153 million (2011: £167 million) although on a local currency basis the overall result remained stable. In our remaining businesses, continued difficult economic conditions resulted in lower operating profits. The life new business IRR in our continuing operations was 14.9% (2011: 14.5%), with an increase in the UK offsetting reductions in some European markets, in particular Spain and Poland. The value of new business reduced to £746 million as a result of an increase in the UK offset by reductions in Europe.
Key statistics in 2012 £1,888m Adjusted operating profit before tax on a continuing basis £1,427m Adjusted operating profit before tax on a continuing basis after integration and restructuring costs
Fund management In a challenging investment environment Aviva Investors’ operating profit on a continuing basis (which excludes the contribution from Aviva Investors in the USA) was £42 million (2011: £53 million) with lower performance fees partially offset by cost savings from the strategic review. Investment performance was ahead of target on both benchmark and peer group measures. We maintained or improved client satisfaction, meeting or exceeding our targets on all client surveys in 2012. Net sales fell year-on-year as a result of the refocus of our product offering.
Capital generation and cash flows At full year 2012 Aviva generated £2.0 billion of operating capital (2011: £2.1 billion) ahead of the target we set at the start of the year. Operating capital generation from the in-force life portfolio was £2.0 billion (2011: £2.3 billion) while general insurance contributed £0.6 billion (2011: £0.6 billion). Operating capital generation levels were driven by strong performances in UK Life and Italy which offset the impact of reductions from the sale of Delta Lloyd and our US life and annuities business. Aviva increased the amount of cash remittances from the businesses to Group to £0.9 billion in 2012 (2011: £0.8 billion). France resumed dividend payments to Group and management actions in UK Life led to a significant increase in cash remitted to Group. The table shows operating capital generation and dividends paid to Group by business units. We continue to take a number of actions on capital efficiency and our corporate structures to increase cash remittances going forward.
Changes to Aviva’s capital structure We are taking action to reduce the complexity of the balance sheet and reduce internal leverage. Prior to 2013 in the Group’s corporate structure, AIL (Aviva Insurance Limited) was both the underwriting company for the UK General Insurance business and the holding company for the majority of the Group’s overseas subsidiaries. Prior to 2013 an inter-divisional loan balance of around £5 billion was in place between the UK General Insurance business and the Group and this was used over a number of years to purchase overseas subsidiaries and for other general corporate purposes. This structure was complex from a corporate governance point of view; created the potential for dividend traps and made demonstrating that Aviva has appropriate resolution arrangements in place (a key requirement of the PRA/FSA) more difficult. A more straightforward structure has now been put in place with two separate legal entities — Aviva Group Holdings Ltd (as holding company) and Aviva Insurance Limited (as the general insurance underwriting company). As a result of this change the inter-divisional balance between the Group and UK General Insurance will be formalised into an interest bearing loan of around £5.8 billion between AGH and AIL. We have decided to reduce the size of this loan balance and will pay down £600 million in total over the next three years. As a result of this change, which the FSA are supportive of, our corporate structure will be more transparent, the Group will have direct ownership of overseas subsidiaries and the exposure of our UK general insurance business to these will be reduced over time.
Adjusted operating profit on a continuing basis § Operating profit on a continuing basis of £1,888 million was down 10% in 2012 (down 6% excluding RAC which we sold in 2011), mainly due to adverse foreign exchange movements. Operating profit on a constant currency basis, excluding Delta Lloyd and RAC, was stable reflecting slightly lower operating profits from our life business partly offset by a small increase in profits from our general insurance and health businesses.
After integration and restructuring costs £m 1, 1, 2, 1, 1, 1,
Adjusted operating profit on a continuing basis Before integration and restructuring costs £m
Life internal rate of return (IRR) § We use IRR as a profitability measure of our life new business. We aim to achieve an internal rate of return in each of our life businesses of at least 13%.
§ Our disciplined management of new business mix and focus on profit over volume have driven an improvement in our IRR to 14.9% (2011: 14.5%), (excluding US and Delta Lloyd), with an increase in the UK offsetting reductions in some European markets, in particular Spain and Poland.
§ In 2012, the overall result was a loss after tax of £3,050 million (2011: £60 million profit).
§ For continuing operations, the loss after tax was £202 million.
Net operating capital generation § Operating capital generation measures the amount of surplus capital generated by our business and it supports our dividend to shareholders and our investment in new business.
§ During 2012, Aviva generated £2.0 billion of net operating capital (2011: £2.1 billion) ahead of the target set at the start of the year.
§ These levels include increases in UK Life and Italy, which offset the impact of reductions from the sale of Delta Lloyd, and a lower result from our US life and annuities business.
2 The economic surplus represents an estimated unaudited position. The capital requirement is based on Aviva’s own internal assessment and capital management policies. The term “economic capital” does not imply capital as required by regulators or other third parties. Pensions scheme risk is allowed for through ten years of stressed contributions.
Economic capital surplus2 § This is an internal measure we use to calculate the financial strength of our business. A ratio of over 100% represents a surplus of available economic capital over our required economic capital.
§ On 5 July 2012, we announced a new target economic capital range of 160-175% of required capital.
§ On a pro forma basis, the estimated economic capital surplus improved to £7.1 billion as at 31 December 2012 (2011: £3.6 billion), with a coverage of 172% (2011: 130%). This positive movement is a result of improved market conditions and a range of management actions, including changes to our portfolio, such as the agreed sale of Aviva USA and transfer of Aseval to Bankia.
§ We are making continued progress and are committed to improving the performance across all our businesses.
§ Given the extensive transformation and recent management changes at Aviva, it is not surprising that our independently assured ratings for senior leaders dropped to 61%. This is a significant concern which we are addressing through our cultures and values programme.
88% of our employees signed to say they had received, understood and accepted our Business Ethics code in 2012. We aim for 100%. The Corporate Responsibility Committee recognises that this is not good enough and we will focus on achieving our target in 2013.
In 2012 we offset all of the CO2 (or equivalent) emissions after minimising our environmental impact where possible. This means we are carbon neutral. We carefully source all of our carbon offset projects to ensure they also benefit community development. During 2012, we reduced emissions on a like for like basis by 12% compared to the previous year. 24% of the energy we use comes from renewable sources such as wave, wind and sun.
22% of our top 400 senior managers are women. Ensuring diversity throughout our business brings a more rounded perspective to our decision-making, risk management and leadership communications. We recognise that diversity takes many forms and we aspire to balanced leadership.
We believe a sustainable business is one that plays an active role in society. In 2012, our employees dedicated more than 56,000 hours to volunteering. There was also a 3% increase in the number of employees contributing through payroll giving.
§ In addition we have businesses in selected international markets including France, Canada, Poland and Singapore
§ Customers pay insurance premiums which we use to pay claims; our scale enables us to pool the risks of many customers
We help protect customers from the financial impact of unforeseen events and help them save for a more secure future
Managing risk and investments is fundamental to what we do and how we generate returns
Our products are sold through: Direct – sales people and online
1 Based on aggregate 2011 UK life and pensions sales (PVNBP) and general insurance gross written premiums. 2 In continuing operations, as at 31 December 2012.
Source: Non-life premiums average annual growth (2006 – 2011) provided by Swiss Re; growth rates based on local currency.
Customers across all our markets need to save more for a comfortable retirement Growing pressure on Europe’s pension systems caused by ageing populations is a widely acknowledged problem, with the ratio of retirees to workers set to increase. The Pension Gap report, produced by Aviva and Deloitte, shows the difference between the pension provision that people will need for an adequate standard of living in retirement and the pension amount they can currently expect to receive.
§ UK operating profit £887m (2011: £917m) § UK long-term sales, including investment sales, £12,140m (2011: £12,943m)
There in times of difficulty When Tracy Harrison-Green’s husband Andrew died suddenly aged just 43 an Aviva life insurance policy was a great help during a very difficult time. A £10 a month decreasing term policy that the couple took out when they married in 2003 automatically paid off their entire mortgage. Tracy, from York, says that buying the policy was the best financial decision she ever made. It meant that during a period of great personal tragedy, she didn’t need to worry about finding the money to secure the roof over her head.
§ UK general insurance operating profit of £448m (2011: £433m excluding RAC)
Aviva is the leading general insurer in the UK. Although sales were lower, total like for like operating profit increased slightly, demonstrating our focus on disciplined underwriting to maintain profitability ahead of volumes. We delivered a UK general insurance COR of 98% despite the fact that 2012 was the second wettest year on record. Our operating performance remains our number one priority, with an increasing focus on broker management, pricing analytics, cost control and capital allocation. These results highlight the strength of our diversified portfolio and our risk selection, which has delivered good profitability in UK personal lines with combined operating ratios of 97% and 93% in motor and homeowner respectively. We have seen further modest growth in the UK motor market where we now have nearly 2.5 million customers. This represents an increase of more than 250,000 customers since the start of 2012 driven by the success of our Quotemehappy and multicar offerings. We are further developing our profitable homeowner business, assisted by a new partnership deal with insurance broker Gallagher Heath.
An Olympic effort When summer storms caused floods in the UK, Aviva was there to help. On two days of particularly bad weather in June we helped over 2,500 customers. Two weeks later, after more floods, we contacted customers who had previously claimed to see if they had suffered further damage and needed assistance. We helped the City of Newcastle Gymnastics Academy when they were completely devastated by floods, and lost almost every piece of Olympic training kit. Within 24 hours, our loss adjusters were on the scene and arranged a speedy interim payment. We also provided free cover at a temporary location to ensure the 800+ gymnasts could maintain their fitness levels.
In UK commercial, the market remains challenging for brokers and customers, due to the ongoing economic conditions. We are focusing on improving our processes to ensure we provide commercial customers with insurance cover at an acceptable price and our shareholders with a good return on their capital. We are focused on further improving our customer service. We have strengthened our underwriting disciplines and invested in pricing, risk selection and customer and broker facing systems. In 2012 customer advocacy scores improved as we achieved an 18 point improvement in our Relationship Net Promoter Score® and we reduced the number of complaints received by almost 30%. Brokers also recognised our excellent customer service by voting us Insurance Times General Insurer of the Year, for the second year running. We continue to develop innovative insurance solutions such as ‘Aviva Drive’, a smartphone app which helps us to tailor insurance prices to customers’ driving styles. We also launched ‘Fast Track’, an online trading platform which provides brokers with the facility to ‘quote and buy’ online in under five minutes. During the year, we further restructured our Irish general insurance business to improve profitability. Additional actions to make further improvements continue in 2013.
Aviva Italy is the sixth-largest business in the Aviva Group. In 2012 operating profit increased despite a fall in GDP and market volatility. We have taken positive steps to maintain profitability putting in place various initiatives in our life and GI businesses which have improved our performance. Life profitability improved due to our focus on products that are less capital intensive and the result has been a favourable change in our product mix. General insurance profitability improved through pricing actions and disciplined claims management. General insurance sales were 8% lower than the previous year on a local currency basis.
“Despite difficult economic conditions in continental Europe, the strength of our life insurance back book has allowed us to deliver a steady set of results.
Helping customers when disaster strikes When two earthquakes struck the northern Italian region of Emilia Romagna in May forcing more than 45,000 people to leave their homes we were there to help. To make sure that all our customers were properly insured in difficult circumstances we extended the deadline for late payments on general insurance policies from 15 to 45 days and awarded late payment interest on life policies.
Poland § Life operating profit £153m (2011: £167m) § Life new business IRR 20% (2011: 24%) § Long-term savings sales £373m (2011: £487m)
Aviva is Canada’s second-largest general insurer. The business delivered a good financial result with a strong increase in profit. This performance was due to pricing sophistication, underwriting discipline, improved retention and strong underlying growth in new business. We also maintained a profitable mix of personal and commercial lines business. We use predictive analytics to enhance our underwriting capabilities and further research and development is underway to enhance our pricing for weather-related perils.
We continued to improve our distribution and our bancassurance agreement with Santander provides us with a strong source of revenue so that we now have a 10% share of the individual life insurance market.
§ Operating profit £42m (2011: £53m) § Net funded external sales £1.7bn with a further £0.2bn of committed but unfunded sales (2011: £3.6bn)
China In China, bank interest rates remain high making our savings products less attractive. We have therefore shifted our focus towards the sale of protection products.
India In India, despite regulatory changes creating uncertainty in the market, we extended our distribution agreement with Indusind Bank, India’s leading private sector bank. We also launched an online sales portal for protection business. Online customers now account for 14% of new customers acquired and 4% of new business premium in India.
“I am very much looking forward to working with our teams and partners to realise the potential of Aviva in Asia.
“We have delivered a solid set of results in a challenging and competitive environment, with the business ahead of target on all key financial metrics.
Making retirement planning simple We know that many customers worry that planning for retirement might be complicated, so in 2012 Aviva’s Singapore business launched a retirement plan specifically designed to be as simple as possible – it’s called ‘My Retirement’. All of the documentation is written in straightforward language and the product itself provides a capital guarantee, with guaranteed returns. It is designed to be simple, safe and sure.
 The Group undertook restructuring and transformation activity to align our business operations with our strategy, including the Group’s Simplify programme. Integration and restructuring costs of £468 million (2011: £268 million) include Simplify costs of £165 million, Ireland transformation costs (including the merger of the UK and Ireland businesses) of £130 million, £24 million in relation to the transformation of Aviva Investors, £30 million in respect of other restructuring activities and £119 million relating to the cost of preparing the businesses for the implementation of Solvency II.
Capital and credit market conditions An important part of our business involves investing client, policyholder and shareholder funds across a wide range of financial investments, including equities, fixed income securities and properties. Our results are sensitive to volatility in the market value of these investments, either directly because we bear some or all of the investment risk, or indirectly because we earn management fees for investments managed on behalf of policyholders. Investment market conditions also affect the demand for a substantial portion of our life insurance products. In general, rising equity price levels have a positive effect on the demand for equity-linked products, such as unit trusts and unitlinked life insurance products, and conversely have a negative effect on the demand for products offering fixed or guaranteed minimum rates of return. Declining equity price levels tend to have the opposite effects. During 2012, the challenging conditions continued to impact the Group’s performance. The total long-term business investment return variance was negative £278 million (2011: £1,616 million negative). For continuing operations, negative long-term business investment variances of £620 million (2011: £897 million negative) mainly relates to the UK. This is mainly due to increasing the allowance for credit defaults on UK commercial mortgages to reflect uncertainty in the macro-economic environment, and the cost of de-risking activity. Elsewhere, positive variances in Spain and France were offset by a negative variance in Italy. For 2011, the adverse life investment variances of £897 million related largely to the impact of lower risk-free interest rates, wider credit spreads and increased market volatility in the UK and Europe.
With-profits business We write products through our with-profits funds mainly in our UK & Ireland operating segment, with a small fund in Singapore. These funds enable policyholders to participate in a large pool of diverse investments, therefore reducing their exposure to individual securities or asset classes. The investment pool is managed by us with returns to with-profits policyholders paid through bonuses which are added to the value of their policy. In order to provide an element of stability in the returns to policyholders, bonuses are designed to reduce policyholders’ exposure to the volatility of investment returns over time and to provide an equitable share of surplus earned, depending on the investment and operating performance of the fund. Shareholders also have a participating interest in the with-profits funds and any declared bonuses. Generally, policyholder and shareholder participation in with-profits funds in the UK is split 90:10. Shareholders’ profits arising on with-profits business under IFRS depend on the total bonuses declared to policyholders on an annual basis. The level of bonuses declared to policyholders is influenced by the actual returns on investments and our expectation of future rates of return. Whilst bonuses can never be negative, a predicted sustained fall in equity markets could lead to a reduction in regular and final bonus rates, thereby reducing both policyholder returns and shareholders’ profit under IFRS. In 2011, low investment returns and the difficult economic outlook led to reductions in regular and final bonus rates. Better investment performance in 2012 meant that we have been able to increase the majority of final bonus rates.
During 2012, sterling strengthened in value against the euro and marginally strengthened against the dollar, resulting in a foreign currency loss in other comprehensive income from continuing operations of £200 million (2011: £284 million loss). 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.
As noted above, on 27 February we announced the sale of our Russian Life business.
Basis of earnings by line of business Our earnings originate from three main lines of business: our long-term insurance and savings business, which includes a range of life insurance and savings products; general insurance and health, which focuses on personal and commercial lines; and fund management, which manages funds on behalf of our long-term insurance and general insurance businesses, external institutions, pension funds and retail clients. These lines of business are present in our various operating segments to a greater or lesser extent. In the UK, we have major long-term insurance and savings businesses and general insurance businesses; in Europe we have long-term insurance and savings businesses in all countries in which we operate, large general insurance businesses in France, Ireland and Italy, and smaller general insurance operations in several other countries; in Canada we have a leading general insurance operation; in Asia we predominantly have long-term insurance and savings businesses. Our fund management businesses operate across Europe, Asia, North America and the UK.
Other long-term insurance and savings business Non-profit business falls 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, including Group Centre expenses. In 2011 this also included the RAC roadside recovery operation in the UK up to its sale on 30 September 2011.
Long-term insurance and savings new business sales Sales of the long-term insurance and savings business consist of:  Insurance and participating investment 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. – 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.
 Better reflection of current management actions in the year: IFRS net written premiums include premiums on regular premium contracts which incepted in prior years, and therefore reflect the actions of management in prior years.
The table below presents our consolidated sales for the three years ended 31 December 2012, 2011 and 2010 for our continuing operations, as well as the reconciliation of sales to net written premiums in IFRS.
 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.
 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.
Adjusting items: Investment return variances and economic assumption changes on long-term business (620) (897) (229) Short-term fluctuation in return on investments on non-long-term business 7 (266) (199) Economic assumption changes on general insurance and health business (21) (90) (61) Impairment of goodwill, associates and joint ventures and other amounts expensed (60) (392) (23) Amortisation and impairment of intangibles (128) (116) (139) (Loss)/profit on the disposal and remeasurement of subsidiaries and associates (164) 565 163 Exceptional items — (57) 276 Share of Delta Lloyd’s non-operating items (before tax) as an associate (523) 10 — Share of Delta Lloyd’s tax expense, as an associate 107 (34) —
Profit before tax attributable to shareholders’ profits – continuing operations 25 551 1,396
Year ended 31 December 2011 The investment return variances and economic assumption changes on long-term insurance business in 2011 produced a £897 million charge (2010: £229 million charge). The short-term fluctuations and economic assumption changes on the non-life business produced a £266 million charge (2010: £199 million charge). This was due to unfavourable market movements in a number of our markets. The impairment of goodwill, associates and joint ventures was £392 million in 2011 (2010: £23 million). An impairment of £217 million was recognised in respect of the associate, Delta Lloyd. The fair value was calculated based on the market price of the ordinary shares of Delta Lloyd NV quoted on the NYSE Euronext Amsterdam as at 31 December 2011. Following the announcement of the termination of Aviva Ireland’s bancassurance distribution contract, management reviewed the recoverability of the goodwill associated with this business and an impairment loss of £120 million was recognised, reducing the carrying value of goodwill relating to this business to nil. The UK long-term business had an impairment of £29 million. In Italy, an impairment of £11 million was recognised in respect of Aviva Assicurazioni Vita Spa, as a result of a reduction in management’s estimates for the future profitability of the business due to current economic circumstances. There was an impairment charge of £15 million recognised in respect of goodwill within interests in joint ventures relating to South Korea. Amortisation of intangibles decreased by £23 million, or 17%, to £116 million (2010: £139 million). Profit on disposal of subsidiaries and associates was £565 million (2010: £163 million). The profit comprised principally of a £532 million profit in relation to the sale of RAC, as described in note 3 to the IFRS financial statements. Integration and restructuring costs for 2011 were £261 million (2010: £216 million). This includes costs associated with preparing the businesses for Solvency II implementation of £96 million, a £30 million charge in the UK relating to the reattribution of the inherited estate and expenditure relating to the Quantum Leap project (the Group’s previous European restructuring program) in Europe of £51 million. Expenditure relating to other restructuring exercises across the Group amounted to £84 million.
Exceptional items in 2011 were £57 million unfavourable (2010: £276 million favourable) relating to a £22 million provision for compensation scheme costs for the leveraged property fund in Ireland, and a £35 million expense for the discounted cost of strengthening latent claims provisions in the UK written a significant number of years ago. In 2010, exceptional items mainly related to a £286 million benefit from the closure of the final salary section of the UK staff pension scheme.
Consolidated results of operations The table below presents our consolidated sales from continuing operations for the three years ended 31 December 2012, 2011 and 2010.
Italy, Spain and Other 3,849 5,665 7,484 Higher growth markets 2,944 3,039 2,959
(Loss)/profit on the disposal and remeasurement of subsidiaries and associates (164) 565 163
Profit before tax 246 373 1,790 Tax attributable to policyholders’ returns (221) 178 (394)
Year ended 31 December 2012 On a PVNBP basis, sales in the UK long-term insurance and savings business decreased by £844 million, or 7%, to £10,410 million (2011: £11,254 million). Protection sales were up 20% to £1,228 million (2011: £1,025 million), benefiting from a full year’s sales from the distribution deal with Santander. Sales of annuities were down 16% to £3,211 million (2011: £3,832 million) following the decision to withdraw from the large scale bulk purchase annuity market. However, sales of individual annuities were up 10% to £3,024 million despite price increases to manage capital usage. Sales of Equity Release were up 37% to £434 million (2011: £317 million) as Aviva deployed risk based pricing expertise, developed in the annuities market, to this product. Pensions sales were down 2% to £5,158 million (2011: £5,279 million). Within this, Group Personal Pensions sales were up 9% to £3,231 million (2011: £2,961 million) as benefits were seen from increased levels of activity in the run up to Retail Distribution Review (“RDR”) and Auto-Enrolment. Individual Pensions (including SIPP (self invested pension plan) were down 4% to £1,803 million (2011: £1,876 million) as a disciplined approach to pricing was maintained. Sales of Bonds were down 53% to £379 million (2011: £801 million), impacted by changes in distribution channels in advance of RDR.
Ireland sales were down 31% to £632 million (2011: £917 million) due to the closure to new business of the joint venture with Allied Irish Bank (“AIB”) from April 2012. Non AIB business sales were £530 million (2011: £485 million), with the increase driven by sales of fixed rate deposit funds and the re-launch of protection business in the second half of 2012.
Net written premiums in our UK & Ireland long-term insurance and savings businesses decreased by £1,200 million, or 18%, to £5,623 million (2011: £6,823 million). The decrease is primarily due the reduction in BPA (bulk purchase annuities) premiums. Adjusted operating profit before tax decreased by £67 million, or 7%, to £910 million (2011: £977 million). This mainly reflects lower profits in Ireland where the Life operations result fell to £5 million from £47 million in 2011, as the closure to new business of our joint venture with AIB became effective. The UK Life business saw profits fall by £30 million or 3% to £887 million, mainly due to a lower level of one-off items in 2012 (2011 included one-off benefits of £93 million relating to the Part VII transfers of the former RBS JV entities and £30 million relating to the release of tax provisions associated with the reattribution of the inherited estate). Profit before tax decreased by £53 million, or 35%, to £98 million for 2012 (2011: £151 million).
Year ended 31 December 2011 On a PVNBP basis, sales in our UK and Ireland long-term insurance and savings business were £11,254 million, an increase of £1,217 million, or 12% (2010: £10,037 million). In the UK, protection sales grew by 9%, including a 7% increase in core protection products. Pension sales increased by 39% and annuities increased by 21% supported by a 23% growth in bulk purchase annuities and a 20% increase in the sale of individual annuities. Bonds decreased 52% reflecting our continued stance on writing profitable business, the changing distributor landscape pre RDR, and relative attractiveness of bonds following tax treatment changes. Equity release sales decreased 27% following an exceptional performance in 2010 when the market was less competitive. Investment sales increased by 9%, reflecting growth in managed funds and good performance from global property. In Ireland, sales fell 2% to £917 million (2010: £938 million). Net written premiums in our UK and Ireland long-term insurance and savings business were £6,823 million, an increase of £536 million, or 9% (2010: £6,287 million). The increase was primarily due to higher sales in the UK of group personal pensions and individual annuities, offset by lower sales of single premium bonds. Adjusted operating profit was £977 million, a decrease of £4 million (2010: £981 million). An increase in the UK was offset by a decrease in Ireland. In the UK, the non-profit result was driven by strong performance in annuities, increased annual management charges and inclusion of the full results of RBS Life, following its purchase by Aviva at the end of 2010. Included in the result are one-off benefits of £93 million relating to the Part VII transfers of the former RBS JV entities, and £30 million relating to the release of tax provisions associated with the reattribution of the inherited estate. The with-profit result, which includes the shareholders’ share of regular and terminal bonus payments, decreased from 2010 mainly driven by the absence of the final special distribution (2010: £84 million). In Ireland, the 2010 result included a release of reserves following a review of assumptions of £75 million. Profit before tax was £151 million, a decrease of £684 million, or 82% (2010: £835 million) reflecting an adverse impact from market movements in 2011 and impairment of goodwill in Ireland.
Adjusted general insurance and health operating profit in 2011 was £552 million, an increase of £44 million, or 9% (2010: £508 million). Our UK general insurance operation increased £51 million, or 11%, to £508 million (2010: £457 million). Excluding RAC, adjusted operating profit grew by £61 million, or 16%, to £433 million (2010: £372 million), with the 2011 result benefiting from favourable weather and a further improvement in underlying profitability. These factors were 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 reflected adverse experience on 2010 commercial motor business (for some vans, taxis and scheme accounts) and on one historic professional indemnity account. We took rating action and selective exits with respect to these poor performing business lines. Profit before tax was £806 million, an increase of £458 million, or 132% (2010: £348 million). The increase was driven by the profit on disposal of RAC in the UK of £532 million.
France The table below presents sales, net written premiums, adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from our operations in France for the three years ended 31 December 2012, 2011 and 2010.
Sales Long-term insurance and savings business 3,638 4,047 4,918 General insurance and health 1,002 1,016 968
Adjusted operating profit before tax General insurance 276 254 222 Non-insurance — — 7
Adjusted operating profit before tax after integration and restructuring costs 265 248 209
Year ended 31 December 2012 General insurance sales in Canada increased by £93 million, or 4%, to £2,176 million (2011: £2,083 million), due to a combination of improved retention levels and rate increases across both personal and commercial lines. Adjusted operating profit improved by £22 million, or 9%, to £276 million (2011: £254 million) mainly due to favourable underwriting results partially offset by lower long-term investment return. Restructuring costs have increased £5 million, or 83%, to £11 million (2011: £6 million) due to an increase in Solvency II costs and some Simplify transformation program costs. Profit before tax attributable to shareholders’ profits decreased by £53 million, or 18%, to £244 million (2011: £297 million).
Year ended 31 December 2011 General insurance sales in Canada increased by £125 million, or 6%, to £2,083 million (2010: £1,958 million), reflecting growth in both Personal and Commercial Lines. Adjusted operating profit from general insurance improved by £32 million, or 14%, to £254 million (2010: £222 million) driven by growth in underwriting profit. Profit before tax attributable to shareholders’ profits increased by £74 million, or 33%, to £297 million (2010: £223 million).
General insurance and health Asia (5) (8) (6) Poland (including Lithuania) 9 (5) (10)
Adjusted operating profit before tax after integration and restructuring costs 193 220 157
Year ended 31 December 2012 Total sales for the segment were £2,944 million, a decrease of £95 million or 3% (2011: £3,039 million). Long-term insurance and savings sales in Asia decreased by £17 million, or 1%, to £1,765 million (2011: £1,782 million) with higher sales in Singapore more than offset by lower sales in other markets. Long term sales in Poland decreased by £114 million, or 23%, to £373 million (2011: £487 million) as a result of lower appetite for unitlinked products and regulatory changes relating to pensions. Sales in other markets increased by £83 million or, 26%, to £403 million (2011: £320 million) driven by Turkey which saw a 35%
sales increase as a result of expansion of the bancassurance and direct sales channels. Overall net written premiums in the general insurance and health business increased to £274 million (2011: £264 million). In Asia, net written premiums in the general insurance and health business rose to £120 million (2011: £108 million) due to growth in Singapore. Adjusted operating profit decreased by £27 million, or 12%, to £202 million (2011: £229 million). The change mainly reflects the non recurrence of a Hong Kong reserving change which benefited the results by £25 million in 2011. Profit before tax attributable to shareholders increased by £39 million, or 22%, to £217 million (2011: £178 million).
Year ended 31 December 2012 Aviva Investors’ adjusted operating profit for fund management from continuing operations decreased by £11 million, or 22%, to £39 million (2011: £50 million). The reduction in profits was as a result of lower performance fees, partially offset by lower operating expenditure driven by cost savings. Profit before tax attributable to shareholders from continuing operations decreased by £34 million, or 94%, to £2 million (2011: £36 million), mainly due to the reduction in adjusted operating profit and a one-off profit in 2011 arising on the disposal of Aviva Investors Australia. Aviva Investors’ funds under management (including discontinued operations), increased by £11 billion, or 4%, to £274 billion (2011: £263 billion). This is due to capital appreciation more than offsetting negative net flows. Further details are given in ‘Financial Statements IFRS – note 58 – Assets under management’.
Year ended 31 December 2012 Corporate centre costs decreased by £2 million, to £136 million (2011: £138 million). This was driven by a reduction in central spend and share award costs, partly offset by higher project costs, including the impact of meeting greater financial and regulatory requirements. Group debt and other interest costs increased by £11 million, or 2% to £659 million (2011: £648 million). This increase principally relates to higher interest costs on internal lending arrangements driven by changes in internal loan balances throughout the year. Group debt costs and other interest includes a net pension charge of £35 million (2011: £46 million). This represents the difference between the expected return on pension scheme assets and the interest charge on pension scheme liabilities. Other Group operations costs have remained flat at £204 million (2011: £204 million). This includes balances described as non-insurance in the market sections above, and £48 million relating to the running costs of the Aviva Europe and North America regional offices, which have subsequently both closed. It also includes Group banking and finance charges of £26 million and marketing spend of £22 million.
Adjusted operating profit before tax (from continuing operations) Year ended 31 December 2012 Adjusted operating profit before tax decreased by £201 million, or 10%, to £1,888 million (2011: £2,089 million) for the reasons set out above.
Adjusted operating profit before tax Long-term insurance and savings business 200 197 174
Year ended 31 December 2011 Delta Lloyd’s adjusted operating profit for the period to 6 May 2011, when it was deconsolidated, was £191 million. The Group’s share of the profits of its retained interest in Delta Lloyd as an associate for the remainder of 2011 was £133 million. From the start of 2011 to the partial disposal on 6 May 2011, the AAA collateralised bond spread narrowed by about 80 basis points (“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 2012 Selected consolidated financial data
Premiums written net of reinsurance 21,173 24,707 25,586 23,396 23,815 Net change in provision for unearned premiums (16) (236) (72) 552 296
Expenses Claims and benefits paid, net of recoveries from reinsurers (23,601) (24,380) (22,240) (21,080) (23,425) Change in insurance liabilities, net of reinsurance (430) (2,284) (2,837) (1,119) 7,219 Change in investment contract provisions (4,450) 1,478 (9,212) (11,096) 10,880 Change in unallocated divisible surplus (6,316) 2,721 362 (1,479) 4,452
Profit/(loss) before tax attributable to shareholders’ profits 25 551 1,396 1,652 (631) Tax attributable to shareholders’ profits (227) (134) (345) (440) 294
(Loss)/profit after tax from continuing operations (202) 417 1,051 1,212 (337) (Loss)/profit after tax from discontinued operations (2,848) (357) 841 103 (548)
(Loss)/profit per share attributable to equity shareholders: Continuing operations – Basic (pence per share) (15.2)p 11.1p 37.6p 35.3p (15.7)p Continuing operations – Diluted (pence per share) (15.2)p 10.9p 37.0p 35.0p (15.8)p
Number of shares in issue at 31 December 2,946 2,906 2,820 2,767 2,658 Weighted average number of shares in issue for the year 2,910 2,845 2,784 2,705 2,643
Aviva plc Annual report and accounts 2012 Information on the company
Business overview Our aims and strategy In July 2012, we announced our new strategic plan which has three main objectives:  Narrow focus
We aim to focus on fewer business segments where we believe we can produce attractive returns with a high probability of success.
 Build financial strength We will achieve target economic capital levels in line with our industry peers, reduce capital volatility and bring leverage down to a conservative level. We announced new target economic capital levels of 160-175%.
 Improve financial performance We aim to deliver a higher level of revenue growth, lower losses and claims and higher return on capital, notwithstanding the subdued economic environment in developed markets. During 2012 we announced a new expense reduction target of £400 million.
Due to the size of the UK & Ireland segment, it has been split into separate Life and General Insurance segments, which undertake long-term insurance and savings business and general insurance, respectively. Aviva Investors, our fund management business, operates across most markets providing fund management services to third-party investors and to our long-term insurance businesses and general insurance operations. Our business operates across three main market sectors – life insurance and savings; general and health insurance; and fund management.
Brands and products We have operated under the Aviva brand globally since 2010. Our long-term insurance and savings businesses offer a broad range of life insurance and savings products. Our products are split into the following categories:  Pensions – is a means of providing income in retirement for an individual and possibly his or her dependants. Our pension products include personal and group pensions, stakeholder pensions and income drawdown.
 Annuities – is 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.
 Bonds and savings – are accumulation products with single or regular premiums and unit-linked or guaranteed investment returns. Our product ranges include single premium investment bonds, regular premium savings plans, mortgage endowment products and funding agreements.
1 APE is a recognised sales measure in the UK and is the total of new annual premiums plus 10% of single premiums.
General insurance and health insurance General insurance and health insurance accounted for 26% of our total worldwide sales for the year ended 31 December 2012. In the year ended 31 December 2012, we reported general and health insurance net written premiums of £8.9 billion.
Market position We are a leading general insurer in the United Kingdom and Canada and also have general insurance operations in France, Italy, Ireland, Poland and Turkey. We sell health products in the UK, Ireland, Singapore and Indonesia. In the year ended 31 December 2012, 52% of our total general insurance and health new business from continuing operations was written in the UK.
Brands and products Our general insurance business operates under the Aviva brand globally and concentrates on the following products:  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 specialty risks – products for large clients or where the risk is specialised.
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, low cost products which do not require advice.
 Direct sales force – In some of our European and Asian markets we operate direct sales forces that only sell Aviva’s products and the sales forces receive commission on the products they sell.
 Intermediaries – We offer a range of long-term insurance, savings, retirement, general insurance and health insurance products which can be bought through an intermediary, such as an independent financial adviser or an insurance broker. Intermediaries receive a commission on sales of Aviva’s products.
Fund management Aviva Investors, our fund management business, provides fund management services to Aviva’s long-term insurance and savings, and general insurance operations as well as to third-party investors. The main fund management operations are in the UK, North America, Europe, Asia Pacific and the Middle East. All sales of retail fund management products are included in our longterm insurance and savings business sales.
In December 2012 it was announced that the internal asset management operations of Aviva Investors North America would be sold alongside the United States life business.
Market and competition The UK industry has entered a period of significant regulatory change, with the Retail Distribution Review (RDR) and AutoEnrolment, transforming the way that long-term savings products are bought and sold. We have been selling a full suite of RDR compliant products since September 2012 and during 2012 processed our first schemes under Auto-Enrolment. We also hold leading positions in the protection and annuities marketplaces which are largely unaffected by the RDR. The UK long-term savings market is highly competitive and we consider our main competitors to be Standard Life, Prudential, Legal & General, and Lloyds Banking Group.
UK & Ireland general insurance Business overview and strategy In 2012, Aviva continued to combine its UK and Irish general insurance businesses, allowing Ireland to leverage the scale and expertise that exists in the UK. We are a leading general insurer in both the UK and Ireland with market shares of 10.5%3 and 15.1%4 respectively, and have approximately 9 million customers. We employ around 11,000 people and operate from a number of locations throughout the UK and Ireland, including Norwich, Perth, Glasgow, London, Dublin and Galway. We focus on personal and commercial insurance. In the UK we hold top three positions in all our major classes of business3. In Ireland we are a leader in general insurance4 and health insurance. We believe our key strengths include underwriting excellence, claims and cost management and excellent customer service. We focus on the fundamentals of the insurance business to maximise returns through the insurance cycle and provide stability of earnings.
2 ABI Stats Q3 2012 3 Source: Datamonitor analysis of market share based on 2011 GWP 4 Source: Irish Insurance Federation, 2011 5 New Swiss Re Sigma Study (World insurance 2011)
Following significant premium rate increases in recent years in response to rising claims costs and frequencies, the UK personal motor market has seen rate reductions in 2012 reflecting intense competition and regulatory change. Challenging conditions also apply to other UK classes of business, with rating increases typically limited to low single digits. In Ireland, the market remains challenging reflecting the economic downturn, increased competition and market contraction of 3% in 2010 and a further 5% in 2011. In the UK our main competitors are Direct Line Group, RSA, The Admiral Group, AXA, Zurich, Lloyds Banking Group, Allianz and Ageas. In Ireland, our competitors include RSA, AXA, Zurich and Liberty.
Products We provide a wide range of general insurance products both in the UK and Ireland. In the UK we have a business mix of approximately 60% personal lines and 40% commercial lines. Our UK personal products include motor, home and travel insurance. Our UK commercial products include motor, property and liability insurance for small and medium size enterprises (“SMEs”) and the larger UK Corporate and Speciality Risks market. In Ireland our products include property, motor, travel, farm and business insurance and our health insurance business provides products for both the personal and company sector.
France Business overview and strategy France is the fourth largest insurance market in the world5. Aviva France operates through two main companies: Aviva Vie and Antarius (JV structure with Crédit Du Nord). Aviva France, one of the top ten insurance businesses in France, is ranked seventh in life insurance (excluding bancassurance) and tenth in general insurance as measured by gross written premiums, according to L’Argus de l’Assurance, as at 31 December 2011. Our health business has a 1.8% share of the market based on 2011 premium income6. Aviva France’s strategy is to continue to diversify and grow our business profitability.
Market The life insurance market is driven by individual savings and 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 current volatility in the financial markets has affected customer confidence but that over a longer period, multi-funds policies and unit-linked funds are the best insurance vehicles for performance. We believe 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. The general insurance market in France is mature and highly competitive. For several years, price competition was high as insurers sought market share, particularly in the personal lines 6 Source: Fédération française des sociétés d'assurance (FFSA)
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, primarily for individuals, and with a focus on the unit-linked market. We have a longstanding relationship with the Association Française d’Epargne et de Retraite (AFER) which is the largest retirement savings association in France with 735,000 members as at 31 December 2011, to manufacture and distribute the AFER savings product. In the general insurance market our product range includes household, motor, health and legal protection products and also a range of insurance products for farms, craftsmen, tradesmen and small to medium sized entities and specific products for building firms and motor fleets.
Canada Business overview and strategy Aviva Canada is the country’s second largest general insurer7 Through its distribution partners it provides a range of personal and commercial lines insurance products to nearly three million policyholders. It has an 8.4% market share and a top five position in all major provinces.7 Aviva Canada employs approximately 3,800 people and operates from a head office in Toronto, with other offices located throughout Canada. 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. We believe 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 will continue to address increasing customer demand for choice, simplicity and self-service by working with our broker partners on processes and technology solutions in order to help them compete with other channels.
Products The general insurance products that we provide through our Canadian companies are:  Personal, home and motor insurance;  Small and medium-size enterprise commercial insurance, including motor, property, liability, boiler and machinery, and surety; and
Italy, Spain and Other Italy Business overview and strategy Aviva Italy is the country’s sixth largest life insurer, with a market share of 4.44% based on 2011 premiums (excluding Eurovita)11 and is the 12th largest general insurance company with a market share of 1.54%12. We have approximately 2.5 million customers across both the Life and General Insurance businesses. Aviva Italy has set up a transformation plan to navigate through the current challenging economic environment and consolidate its business structure. Aviva Italy aims to reinforce its business partnerships with three of the five largest Italian banks and with 500 agents.
 The insurance regulator went through a restructure and as of 1 January 2013 is reporting to the Bank of Italy. It is now called IVASS (Istituto per la Vigilanza sulle Assicurazioni).
Products Our long-term insurance and savings business offers a wide range of products covering protection, bonds and savings and pensions. We are focussed on less capital intensive products. We have reduced product guarantees and launched three new life products all with improved economic returns and reduced capital consumption. We have increased our share of unit-linked business and reduced our with-profit sales, to manage down our exposure to this sector. We have been focusing to further develop our offering in protection where we are one of the market leaders. Our general insurance business in Italy mainly provides motor and home insurance products to individuals, as well as small commercial risk insurance, including marine insurance, to businesses. In 2013 we will further develop our partnership with Banco Popolare distributing motor insurance through their branches.
Market The Spanish market is significantly affected by the current economic climate and the financial sector continues to be under pressure as a result of the ongoing restructuring process and mergers taking place. Any opportunities arising from these will be considered by Aviva on their merits. In relation to distribution agreements with bancassurance partners, Aviva is protected financially within our contracts with Spain’s savings banks (“the cajas”) from any detrimental affect arising from these mergers. The top positions in the long-term life insurance market are dominated by bank-owned or bank-insurer joint ventures, with the overall bancassurance channel accounting for more than 74% of gross written premiums at the end of 201116 in the Spanish life insurance market. Customers in Spain are accustomed to receiving advice through banking channels, and we continue to use our relationship with our partners to capitalise on this whilst developing our retail agents and broker distribution network.
Aviva Vida y Pensiones distributes our products through professional intermediaries (financial advisers, agents and brokers), supported by a branch office network and call centres. In 2012 we saw the start of distribution through Pelayo´s network of 200 branches and approximately 1,000 exclusive agents. Our distribution relationships have enabled us to maintain our position as the largest provider of individual protection products in the market17.
Market We believe the fundamentals of the Asian markets are strong. The Asian Development Bank predicts GDP growth for emerging markets in Asia of 7.2% in 2012.22 Despite inflationary pressures, we believe Asia’s strong domestic demand and intra-regional trade is likely to sustain this growth momentum, with China and India driving the overall trend. We expect Asia to be the fastest growing region for life insurance globally, with the potential for 15-20% average market growth per annum over the next decade. We believe that South East Asia in particular offers one of the highest insurance margins in the world. By strengthening our multi-channel distribution capability as well as managing our product portfolio for margin and profit, we believe we are well-positioned to continue delivering strong growth in franchise value. Outside of Asia, the Polish market for protection products has seen significant growth since 1999, although penetration rates remain relatively low according to KNF statistics. We expect the insurance market in Turkey to continue to grow as its economy matures.
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. Outside of Asia, our life business in Poland provides a broad range of unit-linked, annuities and bonds and savings products and health insurance. For institutions we offer group life insurance and employee pension programmes, which are both unit-linked products. Our pension business offers a standard product for all customers as part of the privately managed second pillar pensions market. We offer general insurance products to both commercial entities and individuals in Poland. For institutions we offer selected commercial lines risks. For individuals we offer home, accident and travel insurance, which are primarily sold by tied agents, as well as motor insurance, which is sold primarily through our direct operation. In Russia, we sell a wide range of products including personal and group life as well as personal accident policies. In Turkey, we sell life and savings products including unit-linked pensions, supplemented by protection insurance and other savings products. Our Turkish general insurance operations sell personal motor, household, commercial property, small and medium size enterprises, personal accident, marine and travel insurance.
20 21 KNF: www.knf.gov.pl/Images/A_Informacje_IIkw_2011k_tcm75-27692.xls 22 Asian Development outlook 2011 update, December 2011.
Discontinued operations United States Business overview and strategy On 21 December 2012, the Group announced that it had agreed to sell its United States life operations, consisting of our United States life and annuities business (Aviva USA) and the related asset management operations of Aviva Investors North America, to Athene Holding Ltd. Completion of the sale is expected in 2013. As the disposal will result in the loss of a major geographical area of operations, previously presented as “United States” in the segmental reporting note, the results of Aviva USA for all periods presented in the income statement have been classified as a discontinued operation. Aviva USA has been classified as held for sale in the statement of financial position as at 31 December 2012.
Products Aviva USA offers 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 range of optional extras or `riders’ that can be added to policies to meet customised individual needs. 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. Some of these products include a guaranteed lifetime withdrawal benefit that allows customers to make guaranteed minimum withdrawals from their annuity for the entirety of their lives.
Organisational structure The following chart shows, in simplified form, the organisational structure of the Group as at 31 December 2012. Aviva plc is the holding company of the Group.
* Incorporated in England and Wales ** Incorporated in People’s Republic of China.
Aviva plc has a 50% interest in the joint venture *** Incorporated in Scotland **** Includes certain investment management businesses † Incorporated in the United States
Ireland Aviva Insurance Europe SE Aviva Health Group Ireland Limited (70.0%) Aviva Life & Pensions Ireland Limited (75.0%)
Associates and joint ventures The Group has ongoing interests in the following operations that are classified as associates or joint ventures. Further details of those operations that were most significant in 2012 are set out in notes 18 and 19 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 the 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 the UK, Europe, North America and Asia. 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 – (D) 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 UDS.
Investments held at 31 December 2012 and 31 December 2011 are listed below: Policyholder assets £m
Debt securities Participating fund asset and shareholder debt securities analysed by credit rating and sector Participating fund asset and shareholder debt securities analysed by credit rating and product type as at 31 December 2012 are set out in the table below. Government and corporate debt securities are further analysed by type of issuer.
Convertibles and bonds with warrants — — 21 284 4 19 328
Convertibles and bonds with warrants 6 — 19 112 2 — 139
Securities Valuation Office of the National Association of Insurance Commissioners (“NAIC”), a US national regulatory agency; and,
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 rating agency, and are considered to be of investment grade credit quality; these include £2.4 billion of debt securities held in our UK Life business, predominantly made up of private placements and other corporate bonds, which have been internally rated as investment grade.
Not available without insurance guarantee — 0.0% 15 2.7% — 0.0% 13 1.9%
Banks, trusts and insurance companies 3,904 2,395 959 7,258 Industrial, miscellaneous and all other 15,935 6,340 123 22,398 Non-redeemable preference shares 90 24 323 437
Property Our global headquarters are located in St. Helen’s, 1 Undershaft, London, England, EC3P 3DQ. In addition, we have major offices in the following locations:  UK: UK Life, York; UK General Insurance, Norwich; Aviva Investors, London;  Asia: Singapore;  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 2012 included the following: Less than one year £m
Total liabilities per statement of financial position 304,329 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 divisible 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 linked non-linked investment contracts is shown in the less than one year column above.
Principal risks and uncertainties In accordance with the requirements of the FSA Handbook (DTR 4.1.8) we provide a description of the principal risks and uncertainties facing the Group here and in note 56. Our disclosures covering ‘risks relating to our business’ in line with reporting requirements of the Securities Exchange Commission (SEC) provide more detail and can be found in the shareholder information section ‘Risks relating to our business’.
 declare dividends with reference to factors including growth in cash flows and earnings.
In line with these objectives, the capital generated and invested by the Group’s businesses is a key management focus. Operating capital generation, which measures net capital generated after taking into account capital invested in new business (before the impact of non-operating items) is a core regulatory capital based management performance metric used across the Group. This is embedded in the Group’s business planning process and other primary internal performance and management information processes. Capital is measured and managed on a number of different bases. These are discussed further in the following sections.
– Certain subsidiaries, subject to continuing to satisfy stand-alone capital and liquidity requirements, loan funds to corporate and holding entities. These loans satisfy arm’s length criteria and all interest payments are made when due.
Estimated IGD solvency surplus at 31 December 2012 3.8 1 Market movements include the impact of equity, credit spread, interest rate and foreign exchange movements net of the effect of hedging instruments.
Investment mix The aggregate investment mix of the assets in the three main with-profits funds at 31 December 2012 was: %
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. Operating capital generation for the full-year 2012 was £2.0 billion. Life business generated £2.1 billion of capital (2011: £2.3 billion), with a further £0.6 billion (2011: £0.6 billion) generated by the general insurance and fund management businesses and other operations. Capital invested in new business was £0.7 billion (2011: £0.8 billion), and continues to benefit from management actions to improve capital efficiency. The £0.7 billion of capital investment is primarily in life new business with the impact of capital investment in non-life business broadly neutral over the period.
As well as financing new business investment, the operating capital generated is used to finance corporate costs, service the Group’s debt capital and to finance shareholder dividend distributions. After taking these items into account the net operating capital generated after financing is £0.5 billion.
Accounting basis of preparation In addition to presenting our results and financial position on an International Financial Reporting Standards basis, we also use non-GAAP measures based on Market Consistent Embedded Value principles27. Further details of non-GAAP measures are given in the section Performance Review – Financial and Operating Performance. Details of the accounting basis of preparation including critical accounting policies and estimates are set out in Financial Statements – Accounting Policies.
Longer-term investment return The long-term nature of most of our operations means that shortterm realised and unrealised gains and losses are shown as an adjustment to operating profit. We focus instead on operating profit incorporating a longer-term investment return (“LTIR)”. The rates of return that we use for equity and property in our LTIR methodology are aligned with the rates that we use under MCEV27 principles. For fixed interest securities, we include the amortisation of premiums or discounts arising on purchase, thereby producing an LTIR that is equivalent to the gross redemption yield.
 Maintained employee engagement at 68%, increased employee pride by 3% to 75%.
 Reduced our carbon footprint by 12% on a relative basis.
 controlling our environmental and climate impacts and influencing the actions of others
During 2012 we have considered our material issues and our strategy through the lens of our key stakeholder groups. We understand that;  To be the most recommended insurer – customers tell us our values are key. We must demonstrate responsibility and integrity, sharing our social purpose and the information they need to enable them to make the right choices
 To be an investment of choice – investors tell us that companies with transparent and well managed environmental, social and governance (ESG) issues deliver higher performance
Opportunities during 2013 As the transformation of Aviva continues we will focus on the contribution corporate responsibility can make to building the company's financial strength and resilience, reducing risk and volatility, and improving earnings performance. Aviva’s focus on core business and high performance has been helpful in setting our 2013 corporate responsibility strategy. Whilst our material issues remain unchanged we have refreshed our priorities to make sure all our activity is aligned to the business strategy. This means ensuring robust risk management and compliance, protecting the progress and leadership we have delivered and focusing investment on programmes that create maximum measurable shared value for our stakeholders. It also means paying attention to how we can deliver these outcomes in the most efficient and effective way in our capital constrained markets. These developments have strengthened our commitment to the embedding of sustainability across the business as core to the way we do business. As we shape our business for long-term success we are also conscious of the value our expertise can bring within the wider debate. We remain committed to taking a lead role where appropriate and to learn from and collaborate with others as we seek a secure and sustainable future for all. We aspire to upper-quartile performance for financial services in our employee promise survey, notably in those areas that relate to leadership and engagement. This year, following significant organisational change, we did not meet our target. We recognise the need to focus our attention on this in 2013 and remain committed to our aspirations.
We continue to engage with policy makers on major issues facing society such as the ageing society and corporate sustainability in Westminster and Brussels. 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 and have attended several meetings with Education Ministers to support their public policy outreach. In February we colaunched research in the House of Commons on the effectiveness of Railway Children’s REACH model.
Trust and transparency Building and maintaining trust in Aviva by our customers, our business partners, suppliers, shareholders and employees, is of prime importance within a sector that sees some of the lowest levels of trust in society. We know trust is partly determined by the social purpose that the organisation demonstrates through the communication of its brand and the way it runs its business. People want a relationship with an organisation that they trust will do what they say they will. That’s why providing peace of mind and the much needed support during the most difficult and challenging times in our customers lives is important to us.
 25% have not considered or do not know how much monthly income they will need to get by/survive in retirement
We also take time to listen to our own customers through our Net Promoter Score® (NPS) survey, our leading, group-wide measure of customer advocacy, measured and benchmarked twice a year. This survey drives annual action planning, ensuring we act on what we learn, as well as being a constituent of our executive directors’ annual remuneration. We followed up our 2011 Mind the Gap report with research that shows consumers appear to be in denial over retirement planning with UK and US the most likely to not know how much or have not considered how much income they will need in retirement. We also found that India, China and Singapore have the highest proportion of consumers wanting to continue working beyond retirement whilst France, UK and Italy have the lowest proportion wanting to work beyond retirement age. We understand the implications for our business and industry and continue to engage with governments and consumer societies to improve uptake of savings. Indeed in Spain, The Experts’ Forum of the Aviva Savings and Pensions Institute has recommended that the Government introduce reforms in taxation on long-term savings and pensions products to encourage people to save for their retirement. Further, our call to action for governments following our research is to:  Engage people by providing annual statements to all citizens showing a forecast of pension retirement income from all sources, all in one place
Fair pay We reported last year that we were to pay all of our employees in the UK a living wage nationally from April 2012. We have now implemented this change to incorporate the annual Living Wage increases. We have also become an advisory council member of the Living Wage Foundation and were pleased to support the Foundation in the delivery of Living Wage week this year. We continue to work with our suppliers to encourage their national Living Wage status.
Essential learning All employees within the UK business are required to complete nine modules of essential learning on annual basis. This training covers the essential elements of working for Aviva and includes health and safety, financial crime, wellbeing and business ethics modules. This programme not only delivers training in a consistent way to all employees, it allows for system reminders and management information. We are gradually rolling out this essential learning package to other markets, with Aviva Investors and Aviva France coming online in 2013.
Employee promise Within the context of a challenging year, we have maintained an employee engagement of 68% globally, and seen improvements in our employees’ sense of pride in working at Aviva, 75% (2011: 72%) our employees’ propensity to recommend our products and services, 72% (2011: 70%) and their ability to manage an appropriate work life balance, 76% (2011: 67%). Moving forward, our focus will be on enabling Aviva to achieve its strategic priorities and vision by:  Developing a high performance culture, driven by living our organisational values and taking action when behaviours are not aligned
Developing a high performance culture In 2012, we recognised that sustainable performance and competitive differentiation would be achieved by building a values based culture. Creating an inspiring vision and strategy that enables individuals to bring their full selves to work, through the alignment of their personal and organisational values is a critical leadership role. We started our journey with an all employee cultural values assessment. Through this we now understand our employee’s personal values and beliefs, which we can look to harness in order to build greater organisational commitment. A high performance culture relies on strong leadership and the alignment of organisational structures, systems and processes. In light of this, we have aligned our performance management, reward and leadership development programmes to our desired values. As we move forward, the journey will be led from the top of the organisation, with senior leadership engagement critical to the delivery of a high performance ethic and organisational success.
Diversity and inclusion In addition to delivering a range of initiatives in 2012, we also refreshed our approach to inclusion. There are three themes to our approach:  Careers: we want to be the employer of choice for our people such that they choose to invest their working lives with us
This allows flexibility around local business related priorities while creating a model for aligning agendas to a common framework. Being respectful of each other’s differing backgrounds, cultures, needs and views is key. 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 global Corporate Responsibility standard includes a set of minimum requirements for all Aviva businesses with regard to diversity, equality, and human rights. Our Employee Promise Survey is one way that we confirm that our commitment to diversity and inclusion is reflected in the way we work. In 2012, 76% of employees reported that Aviva had an environment where people from diverse backgrounds can succeed. We continue to take a special interest in gender diversity, because it is an area that is relevant in all our global markets and the business case for gender balance in leadership is indisputable. Globally, women are a majority of Aviva’s population at 54%. The percentage of women in senior management has improved to 22% (2011: 20%), the gender balance on our Group Executive stands at 25% and 24% of the board were women during 2012.We remain committed to achieving 25% female board composition by the end of 2015. Our employee network groups make an important contribution to the organisation and in the community. Most notable of these are the Women’s Network and Aviva Pride. We improved our ranking to 32nd (2011: 98th) on the Stonewall Workplace Equality Index. This result reflects our continuing efforts to develop an inclusive environment for all of our people.
Oxfam 365 Alliance. This emergency fund supports relief operations and helps Oxfam respond to humanitarian disasters where public funding may be limited. Thanks to this alliance, 6.5 million people facing 27 emergency situations across the globe were reached in 2011–12
 ‘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 sport programmes in the UK reach out to hundreds 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 and our brokers the opportunity to turn great ideas into action to benefit their local communities. This innovative use of social media encouraged over 2.8m votes to be cast for various community projects in 2012. A total of $1 million will be shared among projects such as a youth addiction and support program in Glace Bay, Nova Scotia; a secondary school science and nutrition program in Vancouver, BC; animal rescue programs in Spruce Grove, Alberta and Sprucedale, Ontario; and a new splash pad in Canora, Saskatchewan
Access to insurance To improve insurance access and service for vulnerable people in the UK, we have created an internal ‘dementia taskforce’. We also now include Alzheimer’s Society materials in our training programme. To help low-income households, we work with social landlords and broker partners to provide tenants with easily accessible and affordable home contents insurance. Less than half of low-income households in the UK have contents insurance while a third take out loans to replace items. This compounds the risk of indebtedness. We believe in providing micro-insurance products to extend the value of insurance and the peace of mind that it offers to low income families. In India we work with the micro-insurance company Bhartiya Samruddhi Finance to give us the technology to process product purchases within 24 hours. Delivery through their vast rural branch network helps us serve our financially excluded and rural customers better and faster and enables us to provide them world class services at low cost. In Singapore, we have been the official provider of term life and critical illness cover for the Singapore armed forces since 1983, extending to their role in UN Peacekeeping and humanitarian services. To date we have provided life and illness cover to over 125,000 servicemen and women.
Climate change and environment Protecting the environment to mitigate against and adapt to manmade climate change are key priorities for Aviva that we believe require action today, not tomorrow. Following the sale of our businesses in USA, Sri Lanka and Malaysia we have restated our 2010 baseline and restate it to our 2010 baseline of 132,244 tonnes CO2e. Our long term reduction target remains at 20% by 2020, from this restated baseline. Our relative annual target reduction is set at 5% to help us achieve the longer-term target. We also aim to increase our use of renewable electricity, this year we’ve increased the amount we purchase to 24% (2011: 7%).
Scope 1 – operational emissions from owned sources e.g. gas, vehicle fleet as part of product/service. Scope 2 – operational emission from non-owned sources e.g. electricity. Scope 3 – business activity emissions from non-owned sources – e.g. business travel.
As a major international real estate manager, we are conscious of the implications that a changing climate can have on our property investments. In the UK we are continuing our work in this area ensuring that our entire portfolio has energy performance certificates and will meet minimum performance regulation in 2018. The Real Estate area of Aviva Investors also works with the Aviva General Insurance’s Geographic Information System team so that they can understand the potential flood risk applicable to properties which they intend to add to the investment portfolio. Aviva France has signed a national partnership with the French Chambers of Commerce to promote an Environment Management System dedicated to small and medium businesses: EnVol. As one of the main partners, we offer a 5% discount on professional’s insurance policies when the customer obtains the EnVol certification. This rewards them for having assessed their environmental impact and defined a plan to reduce it.
Industry 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. We have joined the EU Corporate Leaders Group on Climate Change (EU CLG) which seeks to communicate the support of business for the European Union to move to a low carbon society, and to work in partnership with the institutions of the EU to make this a practical reality. Aviva Investors signed the EU CLG’s letter which calls for policy makers to introduce a clear carbon price framework in a stable and timely manner. We were a founder member of the ClimateWise Principles and continue to be represented on the management committee. During 2012 we were involved in ClimateWise collaborations on research into sustainable claims management and understanding the roles of different stakeholders in improving the resilience of cities to a changing climate in North America. Aviva has been represented on the CBI Energy and Climate Change Board since its creation in 2007. We continue to be represented at a senior level on this board. We firmly believe that engaging our employees to raise awareness and address environmental impacts is an essential part of delivering our environmental strategy. For the second year running 76% of our employees agree that we make business
Environmental Regulations Aviva is compliant with the UK Government’s Carbon Reduction Energy Efficiency scheme. In 2012, we purchased and surrendered 91,590 carbon allowances at a cost of nearly £1.1 million. Going forward we are preparing for the UK Government’s Mandatory Carbon Reporting which applies to companies listed on the London Stock Exchange. We will be reporting in line with this in next year’s Annual Report and Accounts.
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 2012:  Consortium for Street Children  CRO Forum  ClimateWise  UNEP Finance Initiative  CBI Energy and Climate Change Board  HRH Prince of Wales Accounting for Sustainability  Institute of Business Ethics  UN Global Compact LEAD  UN Human Rights Commissioner  UN Principles for Sustainable Insurance  UN Principles for Responsible Investment  UN Women Empowerment Principles  ORC Global Diversity Forum; and  Business in the Community
Trust and Transparency Business ethics % of employees signing of receipt, understanding and acceptance of our Business Ethics Code on an annual basis
% of employees completing the Bribery and Corruption training n/a 100% of employees 100% of employees
% of employees who rate us favourably on customer index 67% 69% 73% 75% Maintain or improve past performance Climate change and environment % of remaining CO2e emissions offset annually
% of employees who rate us favourably on leadership index 66% 64% 70% 61% Meet/exceed GFS benchmark (2012: 70%)
% of investment in Aviva ‘Street to School’ New KPI 52% 54% 58% 50% of cash donations % of employees who feel that Aviva does a good job of contributing to the communities in which we live and work
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 we have not met our target, and the achieved outcome is lower than we aim for at 88% due to a change in system use in the UK and significant structural changes to our business.
10%  Reduce water use by 4% 17%  Reduce waste generated by 4% (2)%  80% or above 0%  Meet/exceed GFS benchmark
GFS stands for the Global Financial Services benchmark. This is a tough external benchmark that we use as a stretch target. In the equivalent regional benchmarks we are consistently performing above the benchmark.
People: Our EPS results reflect the wider organisational change of our business. Our targets are external benchmarks which we are working towards.
Suppliers: Due to changes in the way that we manage our procurement, we are unable report a Group figure this year. It is our aspiration to report the Group figure going forward.
We have reported the following indicators for 2012:  Greenhouse gas emissions;  Waste;  Resource usage;  Customer advocacy; and  Community development.
Some of the monies in the Sustainability Fund, mentioned in last year’s report have now been employed in voltage optimisation technology in the UK. The return on investment is expected to be 47 months and the saving initially will be fed back into the fund to enable further investments to be made This fund was created to help 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 UK businesses were financially impacted in 2012 by the cost of the Carbon Reduction Commitment Energy Efficiency Scheme (CRCEES). The total CO2 emissions in respect of CRCEES for 2011/2012 financial year were 97,729 tCO2 e (2010/2011: 105,418 tCO2e) with a cost to the business of just under £1.1 million. 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 in 2011 was 899 out of a total of 2103 participating organisations. The graph below shows the cost of carbon per tonne for Aviva. These figures take into account the cost of CRC, the Climate Change Levy and the cost of purchasing carbon credits. 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. The only aspect of the costs which benefits the environment is the carbon offsetting element.
Electricity (UK) Rest of world CO2e and all business travelGas (UK)
,0 8, 6, 0kg p er e m pl oy ee
Indirect impacts Performance, strategy and targets Water consumption increased by 10% in 2012, this was mainly due to improved reporting around this resource. Without additional business units reporting, we have increased by 0.95%.
 Office paper: 4,000–5,000 sheets per employee per annum (Gartner research).
% in upper quartile % at or above market average % below market average
Indirect impacts After working alongside both NGO, Government and UN agencies we are increasingly committed to national and international leverage of best practice and advocacy activity. In 2012 we delivered a pioneering partnership with High Commissioner for Human Rights to sponsor a report welcomed by UN Human Rights Council. Also during 2012 we conducted a review of our Street to School goals analysing our impacts and consulting a wide range of internal and external stakeholders. Going forward, we will begin to shift our focus beyond just being a corporate champion of street children to being a cross sector catalyst for action for street children. We believe this type of collaboration is essential to achieve the recognition and realisation of street child rights, help deliver the Millennium Development Goals and increase the wellbeing of all in our global communities.
During 2012 Aviva has been included in some key responsible investment indices: Aviva has been included in the FTSE4Good since its inception in 2001. FTSE4Good rank as one of the top four global organisations in their ESG ratings.
STOXX ESG global leader Aviva is rated as a Global ESG leader and are rated us as one of the top ten companies in their index for our governance structure.
Additionally, Aviva are proud to have been recognised by the following: Stonewall We have improved our ranking to 32nd in the Stonewall Equality Index 2013, up from 98th in 2012.
Carbon disclosure project – We achieved a carbon disclosure score of 78%, with a rating of B – indicating the climate change strategy is integrated but not fully established across all initiatives.
We have also won awards specifically for our Street to School programme:  CRY Child rights award, India  Marketing society awards for excellence, Cause related marketing in the UK  Out of the box PR – India PR and Corporate Communications awards  Great wall of education, India – highly commended, TVE Corporate Sustainability Awards  Best foreign insurance company – Aviva Cofco won for its successful branding, for understanding its customer’s needs and for being a responsible organisation.
What we are assuring (“Selected Information”) The selected corporate responsibility (CR) data for the year ended 31 December 2012 marked with the symbol  presented in the Annual Report and Accounts 2012 on pg 70. The scope of our work was restricted to the Selected Information for the year ended 31 December 2012 and does not extend to information in respect of earlier periods or to any other information in the Annual Report and Accounts 2012.
Understanding reporting and measurement methodologies There are no globally recognised and established practices for evaluating and measuring the Selected Information. The range of different, but acceptable, techniques can result in materially different reporting outcomes that may affect comparability with other organisations. The Reporting Criteria used as the basis of Aviva’s reporting should therefore be read in conjunction with the Selected Information and associated statements reported on Aviva’s website.
Our responsibilities We are responsible for:  planning and performing the engagement to obtain limited assurance about whether the Selected Information is free from material misstatement, whether due to fraud or error;  forming an independent conclusion, based on the procedures we have performed and the evidence we have obtained; and
This report, including our conclusions, has been prepared solely for the Directors of Aviva as a body in accordance with the agreement between us, to assist the Directors in reporting Aviva’s corporate responsibility performance and activities. We permit this report to be disclosed in the Annual Report and Accounts for the year ended 31 December 2012, to enable the Directors to show they have addressed their governance responsibilities by obtaining an independent assurance report in connection with the Selected Information. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Directors as a body and Aviva for our work or this report except where terms are expressly agreed between us in writing.
3 Assurance, defined by the International Auditing and Assurance Standards Board (IAASB), gives the user confidence about the subject matter assessed against the reporting criteria. Reasonable assurance gives more confidence than limited assurance, as a limited assurance engagement is substantially less in scope in relation to both the assessment of risks of material misstatement and the procedures performed in response to the assessed risks.
Role of the Board The Board is responsible to shareholders for promoting the long term success of the Company, and in particular, for setting the Group’s strategic aims, monitoring management’s performance against these strategic aims, setting the Group’s risk appetite and ensuring the Group is adequately resourced and that effective controls are in place in the business. The Board sets the values, tone and culture of the Group. As a regulated Group, the Board also has a duty to protect the interests of policyholders.
Effectiveness of the Board The effectiveness of the Board is vital to the success of the Group and we undertake a rigorous evaluation each year in order to assess how well the Board, its Committees, the directors and myself are performing and how our effectiveness could be improved. Given the significant changes to the Board during the year I felt that an internal effectiveness review led by myself would be appropriate for 2012. The review was carried out using questionnaires followed by discussion at Board and Committee meetings and through meetings between myself and each director individually. The review focused on the effectiveness of the Board and each Committee, how efficiently time at meetings was used, and the appropriateness of the balance of skills, knowledge and experience represented by Board and Committee members. Overall, the directors concluded that the Board and its Committees operated effectively and agreed that the actions identified for focus and improvement in previous reviews had been addressed and implemented during the year. Areas identified for greater Board focus in 2013 included allocating a greater proportion of time to in-depth discussion of the markets in which the Group operates and their competitive position and re-focusing strategy discussions on long-term strategy, as well as continuing to monitor the Group’s capital and liquidity position. I also concluded that each director contributes effectively and demonstrates full commitment to his/her duties.
 Leslie Van de Walle resigned as a nonexecutive director in May 2012 to pursue other activities.
 We are actively searching for two additional female non-executive directors.
On behalf of the Board I would like to thank all the directors for their contribution to the Company during the year, and particularly those who have retired, or will retire, in 2013 for their dedicated service.
John McFarlane Chairman (Born June 1947) Appointed to the Board in September 2011 and became executive chairman in July 2012 and non-executive chairman following the appointment of Mark Wilson as Group CEO on 1 January 2013. Currently a non-executive director of Westfield Holdings Ltd (retail mall developer and operator) and Old Oak Holdings Ltd (financial holding company). Former chief executive officer of Australia and New Zealand Banking Group Ltd (banking), executive director of Standard Chartered plc (banking), head of Citicorp and Citibank UK and Ireland, and managing director of Citicorp Investment Bank Ltd (banking). Former director and council member of the London Stock Exchange (financial services) and former non-executive director of the Royal Bank of Scotland Group plc (banking), National Westminster Bank plc (banking), Capital Radio plc (media), The Securities Association (UK securities regulator), the Auditing Practices Board (auditing regulator) and the Business Council of Australia. Former chairman of the Australian Bankers Association and president of the International Monetary Conference. He is chairman of the Board and the Nomination Committee. He has substantial global listed company experience and an excellent track record spanning over 30 years in the UK and international financial services industry. As executive chairman, he was instrumental in driving forward the Company’s strategic plan to narrow the focus of the Group’s business portfolio, build financial strength and improve financial performance. He successfully managed the implementation of a culture and values change programme, cutting bureaucracy and delayering the organisation. He has extensive experience in banking, including investment, corporate and retail banking, and in general management, insurance, strategy, risk and cultural change. His wide-ranging board and executive experience provides him with the requisite skills for his chairmanship of the Company and the Board.
Mark Wilson Group chief executive officer (Born August 1966) Appointed to the Board as Group CEO designate in December 2012 and became Group CEO on 1 January 2013. Formerly chief executive officer and president of AIA Group (insurance), and former chief executive of AXA China and AXA South East Asia (insurance). He also previously held a number of senior management positions at National Mutual in New Zealand (insurance). He has over 25 years of operational and executive experience in the insurance industry across life assurance, general insurance and asset management, in both mature and growth markets. He has extensive experience of leading major international insurance companies and has an excellent track record as a focused and inspirational business leader. At AIA Group and AXA, he successfully developed and implemented short, medium and longterm strategies, delivered robust change programmes and developed and transformed business performance and cultures in challenging market conditions.
Trevor Matthews Executive director and chairman, Developed Markets (Born March 1952) Appointed to the Board in December 2011 as chief executive, Aviva UK. In April 2012, he became chairman of the UK & Ireland board and was appointed executive director and chairman, Developed Markets. Currently chairman of the Financial Skills Partnership and a commissioner for the UK Commission for Employment and Skills. Previously chief executive officer and vice chairman of Friends Life (life assurance) and chief executive officer of Friends Provident plc (life assurance). Former chief executive of Standard Life Assurance Company Ltd (life assurance), president and chief executive officer of Manulife Japan (life assurance) and executive vice president, Canadian operations and chairman, Manulife Bank, Toronto (financial services). He has also held senior management positions at National Australia Bank (banking) and Legal & General Assurance Holdings Australia Ltd (insurance). He has over 40 years of experience in the financial services industry with a track record of achievement in the insurance sector globally. He has brought to the Board an in-depth operational and functional knowledge of insurance, both in the UK and overseas. He will be stepping down from the Board prior to the 2013 AGM.
Glyn Barker Independent non-executive director (Born September 1953) Appointed to the Board in February 2012. Currently chairman of Irwin Mitchell (law firm), a non-executive director of Transocean Ltd (offshore drilling) and The Berkeley Group Holdings plc (construction) and a trustee of the English National
Opera. Formerly vice-chairman UK of PricewaterhouseCoopers LLP with responsibility for leading the executive team for the Europe, Middle East, Africa and India region and was previously UK managing partner, UK head of assurance and a member of the UK management board of PricewaterhouseCoopers LLP. He is a member of the Audit, Nomination and Risk Committees. He has extensive experience as a business leader and a trusted adviser to FTSE 100 companies and their boards on a wide variety of corporate and finance issues. He brings to the Board a deep understanding of accounting and regulatory issues together with in-depth transactional and financial services experience. He will become chairman of the Audit Committee on 8 May 2013.
Michael Hawker AM Independent non-executive director (Born October 1959) Appointed to the Board in January 2010. Currently a non-executive director of Macquarie Group Ltd (banking) and Macquarie Bank Ltd (banking), Washington H Soul Pattinson Pty Ltd (investment), International Rugby Development Ltd (rugby), and IRFB Services (Ireland) Ltd (rugby). He is chairman and non-executive director of the Australian Rugby Union and SANZAR Pty Limited (rugby union) and is a non-executive director/trustee of the George Institute for Global Health (UK). He is a member of the advisory council at General Enterprise Management Services International Ltd (private equity), and council member of the International Rugby Board. Formerly chief executive and managing director of Insurance Australia Group (insurance), group chief executive of business and consumer banking at Westpac Banking Corporation (banking) and chairman of the Insurance Council of Australia. Senior fellow of the Financial Services Institute of Australasia and a fellow of the Australian Institute of Company Directors. He is chairman of the Risk Committee and a member of the Audit, Nomination and Remuneration Committees. He will step down as a member of the Remuneration Committee on 8 May 2013. He has a wealth of knowledge and experience gained over a long career in the banking and insurance industries, in both executive and non-executive roles in Europe, Asia and Australia. He has been a highly effective chairman of the Risk Committee during a period of significant volatility in the external economic environment.
Sir Adrian Montague CBE Independent non-executive director (Born February 1948) Appointed to the Board in January 2013. Currently chairman of 3i Group plc (private equity) and Anglian Water Group Ltd (utilities), deputy-chairman and senior independent director of UK Green Investment Bank plc (investment bank) and a non-executive director of Skanska AB (construction). Formerly chairman of Friends Provident plc (life insurance), British Energy Group plc (utilities), Michael Page International plc (recruitment), and Cross London Rail Links Ltd (Crossrail), and was formerly deputy-chairman of Network Rail Ltd (railway network authority) and Partnerships UK plc (public private partnership). He was also previously chief executive of the Treasury Taskforce. He is a member of the Audit, Corporate Responsibility and Nomination Committees. He will become senior independent non-executive director on 8 May 2013. Sir Adrian brings his significant experience of the financial services industry and in government and regulatory circles to the Board.
Bob Stein Independent non-executive director (Born February 1949) Appointed to the Board in January 2013. Currently a non-executive director and vice-chair of the audit committee of Assurant, Inc (US specialty insurance) and is a trustee emeritus of the board of trustees of the Actuarial Foundation. He spent most of his working life at Ernst & Young in the US, where he held a number of managing partner roles in the actuarial, insurance and financial services practices in the US and globally, culminating in being managing partner, global actuarial practice. He is a member of the Nomination, Risk and Remuneration Committees. He brings significant accounting and financial services experience to the Board.
Scott Wheway Independent non-executive director (Born August 1966) Appointed to the Board in December 2007. Former chief executive officer of Best Buy Europe (retail services), director of The Boots Company plc (now known as The Boots Company Ltd) (pharmacy) and managing director and retail director of Boots the Chemist at Alliance Boots plc, and director of the British Retail Consortium. He formerly held a number of senior executive positions at Tesco plc (retail services), including chief executive of Tesco in Japan. He is chairman of the Remuneration Committee and a member of the Corporate Responsibility and Nomination Committees. He has a wealth of business experience in the retail sector and his understanding of customer priorities has been greatly beneficial in driving the customer agenda and excellence in customer service within the business. He has chaired the Remuneration Committee with vigour and has rebuilt the Group’s standing with its significant investors in relation to the Group’s remuneration policy. Following the issues raised at the 2012 annual general meeting, he led an extensive consultation exercise with the Company’s major shareholders and a significant review of the Group’s remuneration policies and practices.
Paul Boyle Chief audit officer (Born July 1959) Joined Aviva in November 2010 as chief audit officer and became a member of the Group Executive in August 2012. He was formerly the first chief executive of the Financial Reporting Council (FRC), the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance, from 2004 until 2009. Whilst in this role, he led the establishment of the International Forum of Independent Audit Regulators serving as its chairman or vicechairman from 2006 until 2009. Before joining the FRC, he was a member of the leadership team at the Financial Services Authority, serving as chief operating officer from 2000 until 2004. He has also held senior management roles in WH Smith Group plc and Cadbury Schweppes plc.
Carole Jones Acting group HR director (Born June 1960) Joined Aviva in 1990 and is acting group HR director with responsibility for managing human resources across the Group. She joined the Group Executive in July 2012. She has been with the Group for more than 20 years, initially as HR manager in the UK Life and General Insurance businesses. In 2006 she was appointed acting human resources director for the Group's Norwich Union Life business in the UK, and in 2008 she relocated to the US where she led the HR function for Aviva's North American region until she returned to the UK as director of HR strategy & organisational development in 2011. She was appointed acting group HR director in July 2012.
John Lister Group chief risk and capital officer (Born April 1958) Joined Aviva in 1986 and is the group chief risk and capital officer. He has overall responsibility for managing capital across Aviva, preparing the business for Solvency II and ensuring that an appropriate risk management framework is in place. He has more than 25 years’ experience working in the UK Life business. He is an actuary and spent the first nine years of his career in a variety of senior actuarial roles across the UK Life business before becoming its chief actuary in 2005. In 2009 he became finance director of Aviva UK Life, and in April 2012 he was appointed group chief capital officer. His role was expanded in July 2012 and he became group chief capital and risk officer, with responsibility for the Group’s risk and capital functions, and a member of the Group Executive reporting to Mark Wilson for risk matters and Patrick Regan for capital matters.
Amanda Mackenzie Chief marketing and communications officer (Born December 1963) Joined Aviva in March 2008 and is chief marketing and communications officer with responsibility for all Group marketing, communications and public affairs. She is also the executive sponsor for diversity and inclusion. She joined the Group Executive in 2008. She oversaw the rebrand of the Group and set up the global marketing and communications function. She has 25 years of marketing and advertising experience, including director roles at British Airways Airmiles, BT and British Gas. She is a non-executive director at Mothercare plc.
Cathryn Riley Chief operations officer (Born April 1962) Joined Aviva in 1996 and is chief operations officer with responsibility for IT, business change and shared services across the Group. She joined the Group Executive in May 2011. She joined Commercial Union in 1996 and subsequently held a number of senior roles in its successor companies, CGU and Norwich Union. She served as operations director and retail director at Norwich Union and spent seven years in various executive roles within Aviva's UK General Insurance business. She has also previously served as managing director Norwich Union Healthcare, business services director of Norwich Union Life, chief operating officer Aviva UK Life, chief operating officer and chief information officer of Aviva Europe and UK commercial director. She is currently a non-executive director of Equitable Life.
Robin Spencer Chief executive officer, Aviva UK & Ireland General Insurance (Born January 1970) Joined Aviva in 1995 and is chief executive officer, UK & Ireland General Insurance with responsibility for leading Aviva’s largest general insurance business. He joined the Group Executive in January 2010. He was previously group chief risk officer, chief financial officer and subsequently president and chief executive officer of Aviva Canada. Prior to that, he was global finance transformation director. He previously worked in Group Finance in London and held a number of senior finance roles with Norwich Union Insurance, including finance director for London & Edinburgh, a subsidiary of Aviva. Prior to joining Aviva, he spent five years with Procter & Gamble in the UK.
Maurice Tulloch President and chief executive officer, Aviva Canada (Born March 1969) Joined Aviva in 1992 and is president and chief executive officer of Aviva Canada with responsibility for the strategic direction and operation of Canada’s second largest property and casualty insurer, and the second largest general insurance operation in the Group. He joined the Group Executive in July 2012. He was previously executive vicepresident and chief operating officer, Aviva Ontario and specialty distribution and previously held several senior management positions in the Group. He is chair of the Insurance Bureau of Canada (IBC), chair of the Property & Casualty Insurance Compensation Corporation (PACICC) Board, chair of the Insurance Institute of Canada (IIC) Board and a member of the General Insurance Statistical Agency (GISA) Board. He is a member of IBC’s National Auto Insurance Committee, GISA’s Executive Committee and Statistical Plan Committee, Toronto Financial Services Alliance (TFSA) Leadership Council Committee, and the Financial Services Commission of Ontario (FSCO) CEO Advisory Committee.
Results The Group’s results for the year are shown in the consolidated income statement on page 160.
With the exception of restrictions on transfer of the ordinary shares under the Company’s employee share incentive plans whilst the shares are subject to the rules of the plans, there are no restrictions on the voting rights attaching to the Company’s ordinary shares or the transfer of securities in the Company. Where, under an employee share incentive plan operated by the Company, participants are the beneficial owners of shares but not the registered owners, the voting rights are normally exercised at the discretion of the participants. No person holds securities in the Company carrying special rights with regard to control of the Company. The Company is not aware of any agreements between holders of securities that may result in restrictions in the transfer of securities or voting rights. Unless expressly specified to the contrary in the articles of association, the articles of association may only be amended by special resolution of the Company’s shareholders in general meeting. There are a number of agreements that take effect, alter or terminate upon a change of control of the Company, such as commercial contracts and joint venture agreements. None are considered to be significant in terms of their potential impact on the business of the Group as a whole. All of the Company’s employee share incentive plans contain provisions relating to a change of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions and pro rata reduction as may be applicable under the rules of the employee share incentive plans. At the Annual General Meeting (AGM) in 2013, shareholders will be asked to renew the directors’ authority to allot new securities. Details are contained in the 2013 Notice of Annual General Meeting (Notice of AGM).
Authority to purchase own shares At the Company’s 2012 AGM, shareholders renewed the Company’s authorities to make market purchases of up to 290 million ordinary shares, up to 100 million 8¾% preference shares and up to 100 million 83/8% preference shares. These authorities were not used during the year or up to the date of this Report. At the 2013 AGM, shareholders will be asked to renew these authorities for another year and the resolution will once again propose a maximum aggregate number of ordinary shares which the Company can purchase of less than 10% of the issued ordinary share capital. Details are contained in the Notice of AGM. The Company held no treasury shares during the year or up to the date of this Report.
BlackRock, Inc1 5.15% Indirect 5.15% Indirect Legal & General Group plc2 3.98% Direct 3.98% Direct AXA S.A.1 3.86% Direct & indirect 3.86% Direct & indirect 1 Holding includes holdings of subsidiaries. 2 Interest held by Legal & General Assurance (Pensions Management) Ltd.
Directors The directors as at the date of this Report are shown together with their biographical details on pages 80 to 82. During the year and up to the date of this Report, the following Board appointments, resignations and retirements occurred: Glyn Barker – appointed 27 February 2012 Igal Mayer – resigned 19 April 2012 Leslie Van de Walle – resigned 2 May 2012 Andrew Moss – resigned 8 May 2012
Lord Sharman of Redlynch – retired 30 June 2012 Mary Francis – resigned 3 October 2012 Mark Wilson – appointed 1 December 2012 and became Group CEO on 1 January 2013 Euleen Goh – resigned 31 December 2012 Sir Adrian Montague – appointed 14 January 2013 Bob Stein – appointed 28 January 2013
Financial instruments Group companies use financial instruments to manage certain types of risks, including those relating to credit, foreign currency exchange, cash flow, liquidity, interest rates, and equity and property prices. Details of the objectives and management of these instruments are contained in the Risk and Capital Management section on pages 56 to 59, the Shareholder Information section on pages 121 to 144 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 CEO has overall accountability for health and safety across the organisation. Health and safety performance is regularly reviewed through the Corporate Responsibility Committee.
Charitable donations Aviva takes its corporate citizenship seriously and recognises the role it plays in the communities in which it operates and the role they play in its business. The Group’s flagship community development programme is ‘Street to School’. Further details of this and the Group’s other charitable, community and corporate responsibility initiatives are disclosed in the Corporate Responsibility Report on pages 61 to 76. During 2012, £5.7 million was donated in cash to UK- based charities by the Company and its subsidiaries. A total of £8.9 million was donated by the Group world-wide.
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. It also helps management to share information, ideas and opportunities quickly 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 CEO, 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 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 in the UK to participate in the Group’s employee share ownership plans.
Directors’ report continued 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 2012 represented 17.9 days of average daily purchases through the year (2011: 22.2 days).
Change of auditor Following a tender process in 2011, PwC was appointed as the Company’s external auditor commencing with the 2012 financial year and its appointment was approved by shareholders at the 2012 AGM. PwC is subject to annual re-election and resolutions on its appointment and seeking authorisation for the directors to set the auditor’s remuneration are included in the Notice of AGM.
Value of interests in land Any difference between market value and the value included in the balance sheet regarding the Group’s interests in land are disclosed in notes 20 and 21 and are incorporated into this Report by reference.
Events after the reporting period On 8 January 2013 the Company announced its intention to sell the Group’s remaining stake in Delta Lloyd N.V., a Dutch listed insurance company. The sale took place by way of an accelerated book build offering and the Group’s entire remaining holding of 34,288,795 ordinary shares in Delta Lloyd N.V. was sold at a price of €12.65 per share. The sale completed on 14 January 2013. On 17 January 2013 the Company announced it had agreed to sell the Group’s stake in its Malaysian joint ventures, CIMB Aviva Assurance Berhad and CIMB Aviva Takaful Berhad, to Sun Life Assurance Company of Canada for £152 million payable in cash. The deal is subject to regulatory approval and is expected to complete during the first half of 2013. On 27 February 2013 the Company announced it had agreed to sell Aviva Russia to Blagosostoyanie, a non-state pension fund in Russia, for a consideration of €35 million payable in cash. The sale is subject to approval by the Federal Antimonopoly Service of the Russian Federation and it is expected that the sale will complete during the first half of 2013.
Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Essential Read on pages 1 to 24, which includes the Market Focus section on pages 20 to 24. The Performance Review is set out on pages 25 to 60 and includes the Risk and Capital Management section on pages 56 to 59. In addition, the financial statements sections include notes on the Group’s borrowings (note 48); its contingent liabilities and other risk factors (note 51); its capital structure and position (note 53); management of its risks including market, credit and liquidity risk (note 56); and derivative financial instruments (note 57). The Group has considerable financial resources together with a diversified business model, with a spread of businesses and geographical reach. As a consequence, the directors believe that the Group is well placed to manage its business risks successfully. After making enquiries, the directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
Directors’ responsibilities The directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group and parent company financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the directors are required to:  Select suitable accounting policies and then apply them consistently;  Make judgements and accounting estimates that are reasonable and prudent;  State whether applicable IFRS as adopted by the European
Union have been followed, subject to any material departures disclosed and explained in the financial statements; and
 Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
 The Directors’ Report and the Management Report include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
Mark Wilson Patrick Regan Group chief executive officer Chief financial officer
Further details of how the Company has applied the Code principles and complied with its provisions are set out in this Report, the Reports of each Board Committee and the Directors’ Remuneration Report. Further information on the Code can be found on the Financial Reporting Council’s website at www.frc.org.uk.
The Board The Board is responsible to shareholders for promoting the long term success of the Company and, in particular, for setting the Group’s strategic aims, monitoring management’s performance against the strategic aims, setting the Group’s risk appetite, ensuring the Group is adequately resourced and ensuring that effective controls are in place in the business. The Board also sets the values and the culture of the Group and has a duty to protect the interests of policyholders. The specific duties of the Board are clearly set out in its terms of reference which address a wide range of corporate governance issues and lists those items that are specifically reserved for decision by the Board. Matters requiring Board approval include:  Group strategy and business plans;  Financial reporting and controls, capital structure and dividend policy;  Group risk appetite and framework;  Corporate governance;  Remuneration policy;  Significant transactions and expenditure; and  Other matters (e.g. appointment and removal of the group company secretary and chief risk and capital officer, Board and Committee succession planning and the constitution of Board Committees).
The directors As at the date of this Report the Board comprises the chairman, Group CEO, two further executive directors and eight independent non-executive directors. The following charts show the balance of the Board between executive and non-executive representation, length of tenure and the diversity of the Board in terms of gender and nationality.
The chairman and Group CEO Role profiles are in place for the chairman and Group CEO which clearly set out the duties of each role. The chairman’s priority is leadership of the Board and ensuring its effectiveness; the Group CEO’s priority is the management of the Group. The Board has delegated the day-to-day running of the Group to the Group CEO within certain limits, above which matters must be escalated to the Board for consideration and approval. As noted above, the roles of chairman and Group CEO were combined and undertaken by John McFarlane prior to the 2013 AGM until the end of the year. The Board agrees with the principle in the Code requiring these roles to be carried out by separate individuals. However, due to unforeseen circumstances during the year the Board unanimously agreed that it was in the best interests of the Company for the benefit of its shareholders to combine the roles for a short period until a new Group CEO could be recruited. From 1 January 2013 the roles are no longer combined.
Senior independent director Richard Goeltz has served as the senior independent director since January 2009 and as an independent non-executive director for nearly nine years. Sir Adrian Montague will take over this role on 8 May 2013 when Richard Goeltz retires from the Board. The role of the senior independent director is to provide a sounding board for the chairman, to serve as an intermediary for the other directors where necessary and to be available to shareholders should they have concerns that they have been unable to resolve through normal channels, or when such channels would be inappropriate. During the year, the non-executive directors, led by Richard Goeltz, have met twice without the chairman present and he led the review of the chairman’s performance during the year.
Board activities during 2012 The work of the Board follows an agreed annual work plan and principally falls under six main areas. The following chart shows how the Board allocated its time during 2012.
The Board monitored the performance of the Group and its compliance with the governance framework described below through regular:  Group CEO reports highlighting issues such as strategic planning and execution; updates on ongoing corporate transactions; financial forecasts and results; the Group’s vision and values; the external environment; personnel changes and market and competitor developments;  Chief financial officer reports on a range of issues including financial results and forecasts; capital; operational performance; strategic initiatives; pensions funding deficit; investor relations and rating agency updates; risk appetite; corporate transactions and progress against Solvency II;  Reports and recommendations from each Board Committee; and
As part of its annual work plan, the Board reviewed and approved all financial results announcements, the Annual Report and Accounts, the operational plan and dividend payments; considered succession plans for the Board and Group Executive; approved all changes to the composition of the Board and its Committees; reviewed the performance of the group chief executive; received regular updates on progress against strategy; considered personnel issues including the results of the annual employee promise survey; and reviewed public policy trends.
In addition, the Board undertook the following specific activities during the year:  Agreed a revised strategic plan to narrow the focus of the
Insurance business into the UK General Insurance business;  Reviewed the progress of the project to reorganise and flatten the Group’s legal entity structure; and  Considered and approved a new IT strategy.
Board effectiveness The effectiveness of the Board is vital to the success of the Group and the Company undertakes a rigorous evaluation each year in order to assess how well the Board, its Committees, the directors and the chairman are performing. The aim is to improve the effectiveness of the Board and its Committees and the Group’s overall performance. The evaluation process for 2012 was led by the chairman and supported by the group company secretary. For a number of years the Board effectiveness review had been facilitated by external consultants. However, given the number of changes to the composition of the Board during the year the chairman considered that it would be more appropriate to carry out the 2012 effectiveness review internally using questionnaires tailored to the Board and each Committee. The results were discussed by the Board and each of the Committees and actions agreed. The review focused on the effective operation of the Board and each Committee, the effective use of meeting time, the appropriateness of the balance of skills, knowledge and experience of the Committee members, and identified key areas of focus for the Board and each Committee for 2013. Overall, the directors concluded that the Board and its Committees operated effectively and agreed that the issues identified for action or improvement in previous reviews had been implemented or addressed during the year. Areas identified for greater Board focus in 2013 included allocating a greater proportion of time to in-depth discussions of the markets in which the Group operates and their competitive positions and re-focusing strategy discussions towards the Group’s long-term strategy, as well as continuing to monitor the Group’s capital and liquidity position. The focus of the Board Committees in 2013 are detailed in each Committee’s Report. The review of the performance of the chairman, led by the senior independent director, concluded that the chairman continued to lead the Board effectively and had been instrumental in the progress which the Company and the Group had made during the year to deliver the Group’s strategy. The chairman assessed the performance of the executive directors in their capacity as directors of the Company and also assessed the performance of the non-executive directors. To assess the executive directors in respect of their executive duties a separate process was carried out by the chairman measuring performance against each executive director’s role objectives. The chairman concluded that each director contributes effectively and demonstrates full commitment to his/her duties.
Induction, 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 continuing their development. During the year, directors attended a number of internal courses, including on Solvency II, the Internal Model approval process and how rating agencies rate insurance companies. Training sessions have also been built into the Board’s and Committees’ work plans for 2013. The Board has a comprehensive induction programme for new executive and non-executive directors which is tailored to their particular needs and which consists of several separate training sessions over a number of months. These include presentations from key members of senior management, visits to the Group’s main operating businesses and functions, and meetings with the external auditor and one of the Company’s corporate brokers. Further or follow-up meetings are arranged where a director requires a deeper understanding on a particular issue. All new directors also receive induction materials which includes the current strategic and operational plan, recent Board and Committee minutes and meeting packs, organisational structure charts, role profiles, a history of the Group, and relevant policies, procedures and governance material.
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 2012 is shown in the table below and the attendance at Committee meetings is shown in the Committee reports.
Risk Management Framework The Risk Management Framework (RMF) is designed to identify, measure, manage, monitor and report significant risks to the achievement of business objectives and is embedded throughout the Group. It is codified through risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements for the Group’s world-wide operations. Further details on procedures for the management of risks are given in note 56.
Internal controls Internal controls facilitate effective and efficient business operations, the development of robust and reliable internal reporting and compliance with laws and regulations. A Group Reporting Manual including International Financial Reporting Standards (IFRS) requirements and a Financial Reporting Control Framework (FRCF) are in place across the Group. FRCF relates to the preparation of reliable financial reporting and preparation of local and consolidated financial statements in accordance with IFRS and with the requirements of the SarbanesOxley Act of 2002. The FRCF process follows a risk-based approach, with management identification, assessment (documentation and testing), remediation (as required), reporting and certification over key financial reporting-related controls. The Board has delegated to the Group CEO the day-to-day management of the Company and approval of specific issues up to set financial limits including limits on revenue and capital expenditure, reinsurance spend and the settlement of claims. In turn the Group CEO has delegated some of his authority to his direct reports. There is a similar delegated authority framework in place throughout the Group.
Second line The Risk function is accountable for the quantitative and qualitative oversight and challenge of the identification, measurement, monitoring and reporting of significant risks and for developing the RMF. As the business responds to changing market conditions and customer needs, the Risk function regularly monitors the appropriateness of the Company’s risk policies and the RMF to ensure they remain up to date. This helps to provide assurance to the various risk oversight committees that there are appropriate controls in place for all core business activities, and that the processes for managing risk are understood and followed consistently across the Group. To assist with the execution of his duties the chief risk and capital officer has established the Operational Risk and Reputation Committee (ORRC) which oversees operational risks and reputation impacts arising from activities across the Group. It oversees the operational risk elements of the implementation and maintenance of the risk policies and business standards, the Group’s adherence to the Operational Risk Policy, and the adequacy and implementation of the RMF throughout the Group.
Further details on procedures for the management of risk operated by the Group are given in note 56.
Effectiveness of controls To support an assessment of the effectiveness of the Group’s governance, internal control and risk management systems, the chief executive officer of each business unit is required to certify that:  There are sound risk management and internal control systems that are effective and fit for purpose in place across the business; and
The chief risk officer of each business unit must certify that:  The Risk function has reviewed and challenged the process supporting the business unit chief executive officer’s certification, and is satisfied that it can provide reasonable assurance of the material accuracy and completeness of the business unit chief executive officer’s assessment; and
 No material gaps exist in the RMF, as it applies to the business unit.
Communication with shareholders The Company places considerable importance on communication with shareholders and engages with them on a wide range of issues. The Group has an ongoing programme of dialogue and meetings between the executive directors and institutional investors, fund managers and analysts managed by the Company’s Investor Relations function. At these meetings a wide range of relevant issues including strategy, performance, management, remuneration and governance are discussed within the constraints of information already made public, to understand any issues of concern to investors. During the year, the chairman and the chairman of the Remuneration Committee met with the Company’s major institutional investors. In addition, the senior independent director was available to meet with major investors to discuss any areas of concern that could not be resolved through normal channels of investor communication. In 2012 the Board, through the Remuneration Committee chairman, consulted with institutional investors on executive remuneration. The Company’s AGM provides a valuable opportunity for the Board to communicate with private shareholders. There is a dedicated email address and a query facility on the Company’s website which shareholders can use to ask questions on the business of the AGM. The details of these are highlighted in the shareholder information section of the Notice of AGM. A presentation on the Group’s performance is given at the AGM and made available on the website after the meeting at www.aviva.com/agm. 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. All the directors on the Board at the time of the 2012 AGM attended the meeting.
The majority of the Board comprises independent non-executive directors who are deemed independent under the Code.
Committees US companies are required to have a nominating/corporate governance committee. In addition to identifying individuals qualified to become Board members, this committee must develop and recommend to the Board a set of corporate governance principles.
The Company has a Nomination Committee. The Board as a whole is responsible for the corporate governance of the Group and oversees this through reports to the Board and its Committees.
Shareholder approval of equity-compensation plans Shareholders must be given the opportunity to vote on all equity-compensation plans and ‘material revisions’ to those plans, with limited exceptions. Detailed definitions of ‘material revisions’ are provided by NYSE.
This Report provides details of the role of the Nomination Committee and the work it has undertaken during the year.
Committee membership and attendance As at the date of this Report, the Committee comprises the chairman and all the Company’s independent non-executive directors. Prior to leaving the Group, Andrew Moss was also a member of the Committee. The table below shows the Committee members during the year and their attendance at Committee meetings: Membership and attendance
John McFarlane (Chairman)2 6 100% Lord Sharman3 1 50% Glyn Barker4 4 100% Mary Francis5 3 75% Richard Karl Goeltz 6 100% Euleen Goh4 4 100% Michael Hawker4 4 100% Gay Huey Evans4 4 100% Andrew Moss6 1 50% Russell Walls 6 100% Scott Wheway4 4 100%
Group chief executive officer search The Committee led the process for the recruitment of a new group chief executive following the departure of Andrew Moss in May 2012. The Committee approved the search brief and engaged Spencer Stuart to identify suitable candidates. The brief included finding candidates with strong insurance experience, a track record of running large global organisations, and the skills and leadership qualities to unite and motivate the Group’s employees and to embed a high-performance culture. A shortlist of candidates were interviewed by the chairman, the senior independent director and two non-executive directors. The preferred candidates met with all non-executive directors and the successful candidate met with the Financial Services Authority (FSA). The Remuneration Committee led on the development of an appropriate remuneration package for the role and approved the final package to be offered to the successful candidate. Both the Remuneration and Nomination Committees were mindful of shareholder views when considering the remuneration package for the role. Having considered all the skills, experience and personal attributes of the preferred candidates, the Committee recommended Mark Wilson be appointed to the role and to the Board. The Board appointed Mark Wilson as a director with effect from 1 December 2012 and as Group CEO from 1 January 2013. He has extensive experience in leading major international insurance companies across life insurance, general insurance and asset management. Spencer Stuart does not have any other connection with the Company.
Non-executive director search As part of the continual cycle to refresh the Board, the Committee led the process to recruit two new non-executive directors to succeed Richard Goeltz and Russell Walls who will both retire from the Board, having completed nine years of service, on 8 May 2013. The Committee engaged The Zygos Partnership to identify suitable candidates. The Committee prepared comprehensive candidate search briefs with an emphasis on finding a candidate who could become the next senior independent director and a candidate with strong life assurance experience. Shortlisted candidates were interviewed by the chairman, the senior independent director and two nonexecutive directors and, additionally, executive and non-executive directors met with the preferred candidates. Following FSA approval, the Board accepted the Committee’s recommendations and appointed Sir Adrian Montague and Bob Stein as nonexecutive directors on 14 and 28 January 2013 respectively. The Committee further recommended to the Board that Sir Adrian Montague be appointed as senior independent
Nomination Committee report continued director prior to the 2013 AGM to succeed Richard Goeltz. The Committee believes that Sir Adrian has the requisite skills and experience to be an effective senior independent director. The Committee has also recommended that Glyn Barker be appointed as chairman of the Audit Committee to succeed Russell Walls prior to the 2013 AGM. Glyn Barker was formerly vice-president, UK of PwC and has a deep understanding of accounting and regulatory issues together with in-depth transactional and assurance experience. In his role at PwC he did not carry out external audit work for the Company and the Committee is satisfied that his former connection to PwC does not compromise the external auditor’s independence. The Zygos Partnership has no other connection with the Company.
Committee role and responsibilities The purpose of the Committee is to assist the Board in discharging its responsibilities for monitoring the integrity of the Group’s financial statements, assessing the effectiveness of the Group’s system of internal controls and monitoring the effectiveness, independence and objectivity of the internal and external auditors. Whilst the Board as a whole has a duty to act in the best interests of the Company, the Committee has a particular role, acting independently of management, to ensure that the interests of shareholders are properly protected in relation to financial reporting and the effectiveness of the Group’s systems of financial internal controls. The key responsibilities of the Committee are to:  Review the significant issues and judgements of management, and the methodology and assumptions used in relation to the Group’s financial statements and formal announcements on the Group’s financial performance including the reserving position relating to the Group’s life assurance and general insurance operations;  Review the Group’s going concern assumptions;  Assess the effectiveness of the Group’s system of internal controls, including financial reporting, financial controls and the Internal Audit function;  Consider and review the performance of the chief audit officer, and agree with management his effectiveness and his remuneration;  Consider and make recommendations to the Board on the appointment, reappointment, dismissal or resignation and remuneration of the external auditor; and
1 This shows the percentage of meetings which the Committee member attended during the year whilst a member . of the Committee. A number of the Committee members were unable to attend meetings called at short notice.
Committee expertise The Committee members have significant financial experience and expertise. Russell Walls, a Fellow Chartered Certified Accountant, is former group finance director of BAA plc, Wellcome plc and Coats Viyella plc. Richard Goeltz is a former chief financial officer of American Express Company and NatWest Group plc and a former member of the Accounting Standards Board. Glyn Barker is a chartered accountant and has held a number of senior positions at PwC where, most recently, he was UK vice chairman. Michael Hawker, a Senior Fellow of the Financial Services Institute of Australasia, is a former chief executive officer and managing director of Insurance Australia Group. The Board is satisfied that each of the current Committee members has recent and relevant financial experience and also meets US requirements to be an audit committee financial expert. Glyn Barker will succeed Russell Walls as Committee chairman on 8 May 2013. As former vice-chairman of PwC, Glyn Barker has a recent connection with the Group’s current auditor. However, he did not perform any audit work and had no responsibility for the audit business of PwC. PwC has concluded that Glyn Barker was not in the chain of command for the audit engagement team in the two years prior to his retirement, and has confirmed that he does not have any significant ongoing financial connection with the firm with respect to his pension arrangements. As he retired from PwC before PwC was appointed as the Company’s auditor and as he complies with the rules of the US Securities and Exchange Commission and the Auditing Practices Board’s Ethical Standards on auditor independence the Committee is satisfied that PwC is independent of the Company.
Committee activities during 2012 The work of the Committee followed an agreed annual work plan and principally fell under four main areas: financial statements and accounting policies, internal controls, the oversight of the internal audit function and the oversight of external audit. The Committee’s work in each of these areas is described below. The group company secretary assisted the Committee chairman in planning the Committee’s work, and ensured that the Committee received information and papers in a timely manner. The chart on the next page shows how the Committee allocated its time during 2012.
Internal control During the year the Committee received quarterly updates on the effectiveness of the Group’s financial reporting control framework and discussed rectification of any deficiencies in controls. In that respect, the Committee focused on the work by management to improve the internal control framework in Aviva Investors, where a new controls assurance team had been established, and enhancing controls around end-user computing policies and practices and monitoring US IT change management. The Committee reported to the Board regarding the effectiveness of the Group’s overall risk management and internal control systems including the risk management system in relation to the financial reporting process. The Committee worked closely with the Risk Committee in its overall review of the Company’s systems of risk management and internal controls. The Committee encouraged continuous improvements in the effectiveness of internal controls where appropriate. The system of internal controls extends to the Group’s business units, each of which has an audit committee that provides an oversight role for its business. Membership of these business unit audit committees is very largely comprised of nonexecutive directors. The chief audit officer attended business unit audit committee meetings throughout the year and reported back on their effectiveness to the Committee. During 2012 the members of the Committee attended several business unit audit committee meetings, including those in the US, Italy, Canada and Aviva Investors. Revised terms of reference for business unit audit committees were discussed and implemented within the business units together with a new induction pack for business unit audit and risk committee members. The Committee’s terms of reference require it to establish and monitor procedures for dealing with complaints from employees in relation to accounting issues. The Committee reviews the procedures annually and received regular updates from the chief audit officer on any significant complaints received. A description of the Company’s systems of internal control is included in the Corporate Governance Report on pages 89 to 94.
 Undertake advisory projects for management provided that they do not threaten the function’s actual or perceived independence from management.
Audit Committee report continued environment at Aviva Investors. The chief audit officer increased management’s focus throughout the year on management’s progress on closing overdue audit issues where further improvement is still required. The Committee assessed the effectiveness of the Internal Audit function against criteria provided by the Institute of Chartered Accountants in England and Wales and by the Institute of Internal Auditors and concluded that the function was effective. An independent review is carried out every five years and the next independent review is due to be carried out in 2013.
External auditor PwC was appointed by the Board as the Company’s external auditor on 22 March 2012 for the 2012 reporting period and was re-appointed by shareholders at the 2012 AGM. The Committee led the tender and selection process through which PwC was appointed and has recommended to the Board that PwC be re-appointed by shareholders at the 2013 AGM. There are no contractual obligations that restrict the Committee’s choice of external auditor. Given the resignation of Ernst & Young LLP as external auditor in early 2012 and that PwC has only just completed its first full year audit, no external auditor effectiveness review was carried out in 2012. A review will be conducted in 2013. The Company has an external auditor business standard in place which is aimed at safeguarding and supporting the independence and objectivity of the external auditor. The standard is in full compliance with all UK, US and International Federation of Accountants (IFAC) rules and takes into account the Auditing Practices Board Ethical Standards for Auditors. As discussed above, the Committee believes that Glyn Barker’s connection with PwC does not compromise PwC’s independence. The standard regulates the appointment of former audit employees to senior finance positions in the Group and sets out the approach to be taken by the Group when using the non-audit services of the principal external auditor. It distinguishes between (i) those services where an independent view is required and those that should be performed by the external auditor (such as statutory and non-statutory audit and assurance work); (ii) prohibited services where the independence of the external auditor could be threatened and must not be used; and (iii) other non-audit services where the external auditor may be used. Nonaudit services where the external auditor may be used include: non-recurring internal controls and risk management reviews (excluding outsourcing of internal audit work), advice on financial reporting and regulatory matters, due diligence on acquisitions and disposals, project assurance and advice, tax compliance services, and employee tax services. During the year the Committee received quarterly reports of compliance against the standard. The Group paid £13.5 million to PwC for audit services in 2012, relating to the statutory audit of the Group and Company financial statements, the audit of Group subsidiaries, and auditrelated assurance services (2011: £17.3 million to Ernst & Young LLP). Prior to 2012, PwC was a significant provider of consulting services to the Group. The level of fees for non-audit services in 2012 below includes fees billed in the year relating to projects that commenced prior to PwC’s appointment as external auditor. All of these services are in compliance with applicable UK, US and International Federation of Accountants independence rules. We do not expect PwC’s non-audit fees to continue at this level in the future. The fees for other services, which included MCEV supplementary reporting, assurance on the Group’s 2012 Corporate Responsibility Report, advice on accounting, risk and regulatory matters, reporting on internal controls, reporting on the Group’s Individual Capital Assessment and Economic Capital, work in relation to preparing the business for Solvency II implementation, and work on capital transactions, were £18.3 million to PwC (2011: £11.2 million to Ernst & Young LLP), giving a total fee to PwC of £31.8 million (2011: £28.5 million to Ernst & Young LLP). In addition the Group paid £1 million to Ernst & Young LLP in 2012 in relation to the 2011 audit. The 2012 fees for other non-audit services for continuing operations of £7.7 million includes advice to our European businesses in relation to the risk management aspects of Solvency II (£1.9 million), £1.9 million relating to four regulatory advice engagements, £0.7 million relating to restructuring at Aviva Investors, £0.3 million for risk training, £0.3 million supporting an industry-wide competition review, £0.3 million for an additional claims reserves review and £2.3 million for other services. The 2012 fees for tax compliance services of £0.4 million includes fees for one engagement in Higher Growth markets of £0.3 million, and fees for corporate finance transactions of £0.3 million relates to an engagement for an Aviva Investors property fund. In line with the external auditor business standard, the Committee satisfied itself that for these engagements, robust controls (including appropriate levels of review) were in place to ensure that PwC’s objectivity and independence was safeguarded, and concluded that it was in the interests of the Company to purchase these services from PwC due to their specific expertise. Further details are provided in note 12.
Committee performance and effectiveness The Committee undertook an annual review of its performance and effectiveness which concluded that overall the Committee was effective in carrying out its duties. The Committee agreed that its priorities for 2013 should include continuing to monitor Group liquidity jointly with the Risk Committee, ensuring that appropriate controls remain in place during the continued restructuring of the Group, closely monitoring reserving and actuarial assumptions changes, and considering compliance with the relevant new requirements of the UK Corporate Governance Code.
The key responsibilities of the Committee are to:  Review the Group’s risk appetite and future risk strategy, particularly in relation to economic (i.e. risk-based) capital, liquidity, reputation and operational risk, and make recommendations on risk appetite to the Board;  Review the Group’s risk profile against its risk appetite and strategy and review the drivers of changes, if any, in the Group’s risk profile;  Review the design, completeness and effectiveness of the risk management framework relative to the Group’s activities;  Assess the adequacy and quality of the risk management function and the effectiveness of risk reporting within the Group;  Review the methodology and assumptions used in the Group’s models for determining its economic and regulatory capital requirements; and
1 This shows the percentage of meetings which the Committee member attended during the year whilst a member of the Committee.
2 Glyn Barker joined the Committee on 2 May 2012. He was unable to attend the Committee meeting held on 4 December 2012 due to prior commitments and this meeting being called at short notice.
The Committee met on eleven occasions in 2012, of which nine were scheduled Committee meetings and two were additional Committee meetings called at short notice. Two of the meetings were held jointly with the Audit Committee to consider the business of Aviva France and the Group’s capital and liquidity position. The Committee followed a programme of attending meetings of business unit risk committees and, during the year, members of the Committee attended meetings in the US and
Canada. The group company secretary acted as the secretary to the Committee. In November, the Committee chairman hosted a two-day conference for the chairmen of the boards and risk committees of the Group’s principal subsidiaries. The agenda included discussions on Solvency II; revisions to the timing of implementation of Solvency II and the impact on the Group’s capital regime; the FSA’s perspective of the roles and responsibilities of the Board, the Committee and the business unit boards and risk committees under Solvency II; calculation of economic capital and the internal model; and an in-depth analysis of the Group’s key risk types. The chairman of the Company, Group CEO, chief risk and capital officer, chief financial officer and the chief audit officer normally attended all Committee meetings. Other members of senior management were also invited to attend as appropriate to present reports. It was the Committee’s practice to hold private sessions at the beginning of each meeting to discuss issues to be raised with management in the main meeting, and to meet with the Group CEO, chief finance officer and chief risk and capital officer without any other members of management being present. The Committee chairman reported to the subsequent meeting of the Board on the Committee’s work and the Board received a copy of the agenda and the minutes of each Committee meeting. Throughout the year, the Committee chairman sat on the Audit and Remuneration Committees to ensure that risk considerations were fully reflected in the decisions of those Committees. In performing its duties, the Committee had access to the services of the chief risk and capital officer, chief audit officer, the group company secretary and external professional advisers.
The chart below shows how the Committee allocated its time during 2012.
Capital and liquidity management Throughout the year, the Committee closely monitored the Group’s economic capital and liquidity positions against risk appetite and targets, and considered in detail the results of stress and scenario testing at Group and local market level. Given the volatility in market conditions during the year, the Committee challenged the appropriateness of the Group’s regulatory and economic capital surplus and liquidity targets and, after detailed consideration, recommended to the Board revised, strengthened targets. The Committee gave particular focus to considering and approving a programme of strategic, economic and operational actions to be undertaken to strengthen and provide greater resilience to the Group’s capital and liquidity positions, and monitored the results and effectiveness of the programme.
Fraud and financial crime The Committee reviewed compliance with controls against financial malpractice including fraud, and of the arrangements for employees to report in confidence any concerns about lack of probity (whistleblowing). It received updates on, and approved enhancements to, the financial crime prevention programme, which was designed to further embed and ensure enforcement of the Group’s anti-bribery and corruption policies and to provide on-going training for the Group’s businesses and employees.
Risk Committee Report This Risk Committee Report was reviewed and approved by the Board on 6 March 2013.
Gay Huey Evans (Chairman) 4 100% Euleen Goh2 4 100% Andrew Moss3 2 100% Lord Sharman4 2 100% Scott Wheway 4 100%
The Committee met on four occasions in 2012. The group company secretary or her nominee acts as the secretary to the Committee.The executive chairman attended all meetings of the Committee and the group CR director, the group HR director, the chief marketing and communications officer and other members of senior management also attended meetings by invitation. The chairman of the Committee reported to the subsequent meeting of the Board on the Committee’s work and the Board received a copy of the agenda and the minutes of each meeting of the Committee.
CR Strategy Performance and Risk Management During the year the Committee reviewed and approved the Group CR strategy and functional plan for 2012-2014 and monitored progress made by the Group’s businesses against each of the CR key performance indicators. Updates were given on CR programme activities such as the Street to School programme; business ethics; health, safety and wellbeing; and stakeholder recognition. The Committee also focused on ensuring a strengthening of CR performance across the Group through enhanced employee engagement, influencing key stakeholders and by further encouraging diversity and inclusion throughout the Group. The Committee continued to monitor risks relating to the Group’s CR activities together with associated risk mitigation initiatives.
We have met our major institutional shareholders and the main proxy agencies on many occasions over the last year. We have consulted them on these changes and will continue the open and honest discussions we have established.
Putting the changes into practice These changes have impacted our operational practices and our decisions in the 2013 reward round. Key agreed outcomes have been:  Base pay – the Committee has frozen executive directors’ base pay for 2013;  Annual bonus – the Committee has not awarded bonuses to executive directors for 2012. Our annual bonus plan is based on key financial, employee and customer performance indicators. Solely taking into account performance against these measures at Group level (assuming ‘onplan ’ personal performance), the bonus outcome for 2012 would have been 52% of maximum. However, we have taken account of the underpin metrics to ensure bonus outcomes that are better aligned with the creation of shareholder value. Following careful consideration of those metrics the Committee decided that executive directors would not receive a bonus for 2012;  Chairman fees – John McFarlane indicated he did not wish any increase in the fees paid to him when he undertook his executive role in the period from May 2012 to 31 December 2012; and
This Report sets out the details of the remuneration policy and practices for the Company’s directors, describes its implementation and discloses the amounts paid in respect of 2012. It also provides details of the role of the Remuneration Committee and the work it has undertaken during the year. In addition to meeting statutory requirements, particularly the regulations on directors’ remuneration reports pursuant to the Companies Act 2006 and Schedule 8 of the Large and Medium-sized Companies and Group (Accounts and Reports) Regulations 2008, the Committee has complied with best practice guidelines in producing this Report, including guidance issued by the Association of British Insurers and the National Association of Pension Funds. In this Report, the sections headed ‘Share awards’, ‘Share options’, ‘Directors’ remuneration in 2012’ and ‘EDs’ pension arrangements’ along with their associated footnotes have been audited in accordance with the Companies Act 2006.
Committee role and responsibilities The Remuneration Committee is responsible for reviewing and making recommendations to the Board regarding the remuneration policy of the Group and for reviewing compliance with the policy. The Committee is further responsible for monitoring the level and structure of remuneration for the senior management of the Group.
The key responsibilities of the Committee are to:  Make recommendations to the Board regarding the Group’s remuneration policy in respect of the Board chairman, executive directors (EDs), members of the Group Executive and members of senior management;  Work with the Risk Committee to ensure that risk and risk appetite are properly considered in setting the remuneration policy for the Group;  Review and determine the remuneration of the chairman of the Board and the terms of employment and remuneration of individual EDs and Group Executive members, including any specific recruitment or severance terms;  Review and recommend to management the level and structure of senior management remuneration;  Approve the Aviva Investors' reward strategy, including any changes to the strategy and agree the total bonus pool, receive remuneration details of Aviva Investors' ’material’ employees, and approve any new share and incentive plans or any changes to existing share and incentive plans;  Recommend to the Board the establishment of any employee share plans, exercise all the Board’s powers in relation to the operation of all share and incentive plans and the Group’s all employee share ownership plan; and
Committee membership and attendance The Committee comprises independent non-executive directors only. Table 1 below shows the Committee members during the year and their attendance at Committee meetings.
In addition to the attendees listed in the table above, Mark Wilson (Group CEO), Russell Walls (non-executive director), Glyn Barker (non-executive director), Patrick Regan (chief financial officer), Paul Boyle (chief audit officer), Rupert McNeill (HR director, centres of expertise) and Bob Orme (director of reward and performance) attended Committee meetings during the year, none of whom were present at meetings when their own remuneration was being discussed. FIT Remuneration Consultants (FIT) acted as independent advisors to the Committee until May 2012 (having been appointed as advisor to the Committee in August 2011). FIT is a member of the Remuneration Consultants Group and adheres to its Code of Conduct. It provided no other services to the Company during the year. During the year, the Committee received advice on executive remuneration matters from Deloitte LLP which is a member of the Remuneration Consultants Group and adheres to its Code of Conduct. Deloitte LLP was appointed as advisor to the Committee on 4 December 2012. In addition during the year, management received advice on remuneration matters and taxation from Deloitte LLP and on remuneration matters from Linklaters LLP.
(AESOP); awards to Irish employees under the Aviva Group Employee Share Ownership Scheme; and the invitation to UK employees to participate in the Aviva Savings Related Share Option Scheme and to Irish employees to participate in the Aviva Ireland Save As You Earn Scheme;  Initial consideration of targets for bonus awards for the 2013 financial year and of 2013 LTIP targets;  Review of the shareholding requirements of EDs and Group Executive members;  Review of share plan dilution limits;  Review of the standard employment terms within employment contracts of EDs and senior management; and  Review of senior management remuneration at Aviva Investors and of FSA Code Staff.
Non-routine remuneration matters:  Approval of the departure terms of EDs and members of the Group Executive who left the Group during 2012;  Consideration and approval of the remuneration arrangements for new members of the Group Executive following the restructuring of the Group and for other senior managers; and  Review and, as appropriate, approval of any exceptional remuneration proposals for senior managers outside the agreed Group remuneration policy.
Governance:  Approval of the 2011 Directors’ Remuneration Report;  Consideration of the structure of the 2012 Directors’ Remuneration Report;  Review of the Committee’s 2012 and 2013 work plan;  Annual approval of the Remuneration business standard;  Review and consideration of regulatory developments, including the consultation by the Department for Business, Innovation and Skills on revised remuneration reporting regulations; and  Consideration of, and agreement on, the appropriate overview of Aviva Investors’ remuneration matters.
Committee performance and effectiveness The Committee undertook an annual review of its performance and effectiveness which concluded that overall the Committee was effective in carrying out its duties. In addition to undertaking an annual programme of activities in 2013, the Committee identified a number of areas for increased focus in 2013.
Table 3: Remuneration policy for EDs Element Purpose and link to strategy Operation for 2013 Changes and associated rationale
Annual review, with changes taking effect from 1 April each year. This review is informed by:  Relevant pay data including market practice among the 25 FTSE listed companies either side of Aviva in terms of market capitalisation.
Taking into account both the Company’s performance and the prevailing economic climate, no increases are being made to EDs’ base salaries for 2013.
Benefits To provide employees with market competitive benefits at a level needed to recruit and retain individuals.
All EDs are eligible to participate in a defined contribution plan up to the annual limit. Any amounts above the annual or lifetime limits are paid in cash.
ABP To incentivise executives to achieve the annual business plan. Deferral provides alignment with shareholders and aids retention of key personnel.
LTIP To motivate executives to achieve the Company’s longer-term objectives, to align executive interests with those of shareholders and to aid the retention of key personnel.
The plan rules allow for awards to be made up to a maximum of 350% of base salary (and up to 450% of base salary for US employees in exceptional circumstances). In 2013, an award of 300% of base salary will be made to the Group CEO and 225% of base salary to Patrick Regan. No grant will be made to Trevor Matthews who will cease to be an ED prior to the 2013 AGM. Awards will vest subject to the achievement of the following performance targets over a three year performance period:  50% of awards vest based on absolute ROE1,3 performance; and  50% based on relative TSR2 against a comparator group.  Additional shares are awarded at vesting in lieu of dividends on any shares which vest. Unvested awards are subject to clawback in the event of misconduct or materially adverse misstatement of accounts.
Shareholding of 150% of base salary for EDs, and 200% for the Group CEO. EDs are required to retain 50% of the net shares released from executive share plans until the requirements are met.
Any buyout awards will not be more generous than the awards being forfeited and will be made on an equivalent basis, including phased delivery and the application of performance conditions where appropriate.
A revised buyout policy was approved by the Remuneration Committee in 2012.
3 ROE performance is the same metric described as ROCE performance in the 2011 Directors’ Remuneration Report. This is a change in nomenclature only; the definition of the metric has not changed from 2011 to 2012. The definition of ROE in respect of the 2013 has been refined and is described on page 112.
The Company does not directly consult with employees when formulating ED pay policy. However it does take into account information provided by the HR function and feedback from employee opinion surveys.
1. Scenarios for Patrick Regan and Trevor Matthews are the same as their base salaries are identical. Trevor Matthews will step down from the Board prior to the 2013 AGM. The above scenarios therefore applied to him for 2012, but will not apply for 2013.
Table 5: Group performance in 2012 against its KPIs Weighting (% of total bonus opportunity)*
The Committee has taken into account the ‘underpin’ measures, namely Economic Value Added, Economic Capital, absolute and relative TSR, as described below, to ensure that any bonus payments are more closely aligned to shareholders’ experience. Following careful consideration of these metrics by the Committee, it agreed that no ED would receive a bonus in respect of 2012.
LTIP The award made to Patrick Regan in 2010 was subject to performance conditions set out in table 6 below.
ROE over the three year performance period was 36.9% leading to 46.5% of the maximum 50% vesting. Relative TSR performance resulted in a ranking of 7 out of 15, leading to 23.33% of the maximum 50% vesting. Correspondingly 69.83% of the award is due to vest in March 2013.
Former directors Igal Mayer Igal Mayer resigned from the Board on 19 April 2012 and left the Company on 31 May 2012. He is receiving base salary for 12 months in lieu of notice (less gross base salary paid between 19 April 2012 and 31 May 2012), amounting to CAD $899,732.20. This is being paid in instalments and is subject to mitigation. He also received payment for ten days’ accrued but untaken holiday entitlement.
Legal fees of £25,000 were paid to Mr Mayer’s solicitor in respect of advising on his departure. He will also be eligible to claim for tax compliance services fees until April 2013, up to a maximum of £65,000.
Table 7: Result of the vote on Directors’ Remuneration Report at 2012 AGM For Against
Appointment of Group CEO Mark Wilson joined the Board on 1 December 2012 and took up the role of Group CEO on 1 January 2013. As announced at the time of his appointment, his remuneration details are as follows:  Base salary – £980,000 per annum, subject to review in 2014;  Annual bonus – 75% of base salary for plan performance and 150% of base salary for stretch performance;  LTIP – he is eligible for an LTIP grant of up to 350% of base salary subject to meeting specific performance conditions over a three year performance period. His 2013 grant will be at 300% of base salary;  Relocation expenses – he is eligible to claim reasonable and appropriate relocation expenses of up to £200,000 (inclusive of any benefit-in-kind liability which may arise) in respect of relocation from Hong Kong to the UK. If any additional reasonable expenses above this limit are incurred in the course of Mr Wilson’s relocation the Remuneration Committee has agreed to consider reimbursement of such additional expenses up to a further limit to be agreed; and
Base salaries As highlighted in the Remuneration Committee chairman’s letter, EDs’ base salaries will not be increased in 2013.