(v) Termination benefits The £80 million of termination benefits recognised during 2013 relate to costs borne by the Company as part of the Group’s transformation programme, which is referred to in note 7 of the Group consolidated financial statements.
C – Tax (i) Tax (credited) /charged to the income statement The total tax credit comprises: £m
(iv) Tax reconciliation The tax on the Company’s profit before tax differs from the theoretical amount that would arise using the tax rate of the home country of the Company as follows: £m
The UK corporation tax rate reduced to 23% from 1 April 2013. Legislation was substantively enacted in July 2013 to reduce the main rate of UK corporation tax to 21% from 1 April 2014, with a further reduction to 20% from 1 April 2015. The 20% rate has been used in the calculation of the Company’s deferred tax as at 31 December 2013.
(vi) Current tax assets Current tax assets recoverable in more than one year are £93 million (2012: £50 million).
Balance at 1 January 2012 735 4,414 86 3,116 Arising in the year: Profit for the year — — — 616 Fair value gains on investments in subsidiaries and joint ventures — 2,126 — — Impairment losses on assets previously revalued through other comprehensive income now taken to the income statement — 254 — — Dividends and appropriations — — — (847) Reserves credit for equity compensation plans — — 42 — Shares issued in lieu of dividends — — — 127 Trust shares distributed in the year — — — (44) Issue of share capital under equity compensation scheme — — (68) 74 Aggregate tax effect — — — 18
Balance at 31 December 2012 735 6,794 60 3,060 Arising in the year: Profit for the year — — — 602 Fair value gains on investments in subsidiaries and joint ventures — 2,108 — — Actuarial loss on pension provision — — — (2) Impairment losses on assets previously revalued through other comprehensive income now taken to the income statement — — — — Dividends and appropriations — — — (538) Reserves credit for equity compensation plans — — 37 — Shares issued in lieu of dividends — — — — Trust shares distributed in the year — — — (33) Issue of share capital under equity compensation scheme — — (43) 47 Aggregate tax effect — — — 22
Tax of £22 million (2012: £18 million) is deductible in respect of coupon payments of £92 million (2012: £73 million) on the direct capital instruments and fixed rate tier 1 notes.
Within 1 year 556 314 870 603 307 910 1 to 5 years 200 1,204 1,404 200 1,197 1,397 5 to 10 years 242 1,348 1,590 241 1,342 1,583 10 to 15 years — 1,341 1,341 527 1,192 1,719 Over 15 years 4,165 2,950 7,115 3,608 2,610 6,218
H – Risk management Risk management in the context of the Group is considered in the Group consolidated financial statements, note 58. The business of the Company is managing its investments in subsidiary and joint venture operations. Its risks are considered to be the same as those in the operations themselves and full details of the major risks and the Group’s approach to managing these are given in the Group consolidated financial statements, note 58. Such investments are held by the Company at fair value in accordance with accounting policy D. The fair values of the subsidiaries and joint venture are estimated using applicable valuation models, underpinned by the Company’s market capitalisation. This uses the Company’s closing share price at year end. Given that the key input into the valuation model is based on an observable current share price, and therefore sensitive to movements in that price, the valuation process is not sensitive to non-observable market assumptions. Financial assets, other than investments in subsidiaries and the joint venture, largely consist of amounts due from subsidiaries. As at the balance sheet date, these receivable amounts were neither past due nor impaired. Financial liabilities owed by the Company as at the balance sheet date are largely in respect of borrowings (details of which are provided in note F and the Group consolidated financial statements, note 50) and loans owed to subsidiaries. Loans owed to subsidiaries were within agreed credit terms as at the balance sheet date.
Interest rate risk Loans to and from subsidiaries are at either fixed or floating rates of interest, with the latter being exposed to fluctuations in these rates. The choice of rates is designed to match the characteristics of financial investments (which are also exposed to interest rate fluctuations) held in both the Company and the relevant subsidiary, to mitigate as far as possible each company’s net exposure. All the Company’s long term external borrowings are at fixed rates of interest and are therefore not exposed to changes in these rates. However, for short term commercial paper, the Company is affected by changes in these rates to the extent the redemption of these borrowings is funded by the issuance of new commercial paper or other borrowings. Further details of the Company’s borrowings are provided in note F and the Group consolidated financial statements, note 50. The effect of a 100 basis point increase/decrease in interest rates would be a decrease/increase in profit before tax of £109 million (2012: decrease/increase of £111 million). The net asset value of the Company’s financial resources is not materially affected by fluctuations in interest rates.
Currency risk The Company’s direct subsidiaries are exposed to foreign currency risk arising from fluctuations in exchange rates during the course of providing insurance and asset management services around the world. The exposure of the subsidiaries to currency risk is considered from a Group perspective in the Group consolidated financial statements, note 58. The Company faces exposure to foreign currency risk through some of its borrowings which are denominated in Euros. However, most of these borrowings have been on-lent to a subsidiary which holds investments in Euros, generating the net investment hedge described in the Group consolidated financial statements, note 59(a)(iii).
Within 1 year 42 1,240 1 to 5 years 832 446 Over 5 years 208 608
Within 1 year 9,975 218 10,193 794 336 1,130 1 to 5 years 563 34 597 11,333 506 11,839 Over 5 years — — — 1,820 83 1,903
The related parties’ payables are not secured and no guarantees were given in respect thereof. The payables will be settled in accordance with normal credit terms. Details of guarantees, indemnities and warranties given by the Company on behalf of related parties are given in note 53(f). The directors and key management of the Company are considered to be the same as for the Group. Information on both the Company and Group key management compensation can be found in note 61.
J – Subsequent event There are no subsequent events to report.
In this section Financial and operating performance 248 Selected consolidated financial data 262 Information on the Company 264 Analysis of investments 271 Contractual obligations 275 Risk and capital management 276 Corporate responsibility key performance indicators 280 Corporate responsibility assurance statement 282
On 2 October 2013 the Group completed the sale of its United States life and related internal asset management business (US Life) to Athene Holding. Profit on disposal was £808 million, mainly reflecting currency translation and investment valuation reserves recycled to the income statement on completion. See ‘IFRS Financial statements – note 4 – Subsidiaries’ for further details. The results of US Life are presented as discontinued operations for all periods presented.
The Group continued to undertake restructuring and transformation activity to align our business operations with our strategy, including the Group’s cost savings programme. Integration and restructuring costs of £366 million (2012: £468 million) mainly include transformation costs, and Solvency II implementation costs of £79 million (2012: £117 million).
Demographic trends Our results are affected by the demographic make-up of the countries in which we operate. The types of products that we sell reflect the needs of our customers. For example, in countries with a high proportion of older people, a larger proportion of our sales will reflect their needs for pre- and post-retirement planning. Our sales levels will also be impacted by our ability to help provide useful information to such policyholders on retirement planning and to offer products that are competitive and respond to such policyholders’ needs. In our long-term insurance and savings business we make assumptions about key non-economic factors, such as the mortality rate that we expect to be experienced by our policyholders. In countries where the life expectancy is growing, this will need to be reflected in our pricing models as lower mortality rates will increase profitability of life insurance products but will reduce the returns on annuity products.
We review our assumptions against our own experience and industry expectations.
Economic conditions Our results are affected by the economic conditions in our geographic markets and, consequently, by economic cycles in those markets. High levels of general economic activity typically result in high levels of demand for, and sales of, our products and services. Economic activity in turn is affected by government monetary and fiscal policy as well as by global trading conditions and external shocks such as terrorist activity, war and oil price movements. 2013 saw the global economy recovering although the eurozone lagged behind. The challenging conditions in the economies of major European markets meant that for much of the year consumer confidence remained low. Nevertheless Aviva has increased sales significantly in France and Poland and seen a smaller increase in our turnaround business in Italy. The economies where the Group has operations that were impacted in 2013 by estimated low or negative growth include: France (0.2%)1; Spain (-1.2%)1; and Italy (-1.8%)1. Economic growth in the UK was more encouraging at 1.7%1 and the Canadian economy remains healthy with estimated growth of 1.7%1 in 2013. The picture has been brighter still in some of our growth markets with Turkey, for example, growing at 3.8%1. Over the next 3 years the world economy is expected to grow c.4%1 annually (vs. 2.9%1 in 2008‐12 and 4.2%1 in 2000‐7). Emerging markets will continue to grow strongly, although lower than historically. The US is leading the developed market recovery while the eurozone is expected to continue to lag behind.
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 2013, the total long-term business investment return variance was £403 million positive (2012: £278 million negative). For continuing operations, life investment variances were £49 million negative (2012: £620 million negative). Negative variances in the UK resulting from increasing the allowance for credit defaults on commercial mortgages were partly offset by narrowing spreads on government and corporate bonds in Italy and Spain. For 2012, the adverse life investment variances of £620 million predominantly related to the UK. This was 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. The positive variance of £452 million (2012: £342 million positive) for discontinued operations relates to the US business 1 International Monetary Fund
Financial and operating performance continued sold in 2013, driven by the impact of favourable equity market performance on embedded derivatives.
General insurance and health underwriting cycle Our general insurance and health business is comprised of our property and casualty insurance and health insurance operations. In 2013, general insurance and health sales accounted for 43% of Group net written premiums (NWP) from continuing operations. Demand for general insurance is usually price-sensitive because of the limited degree of product differentiation inherent in the industry. As a result, the price of insuring property and casualty risks is subject to a cycle (called an underwriting cycle). In periods when the price of risk is high, the high profitability of selling insurance attracts new entrants and hence new capital into the market. Increased competition, however, drives prices down. Eventually the business becomes uneconomic and some industry players, suffering from losses, exit the market whilst others fail, resulting in lower capital invested within the market. Decreased competition leads to increasing prices, thereby repeating the cycle. Our various general insurance markets are not always at the same stage of the underwriting cycle. In the UK, the personal motor market has seen further rate reductions in 2013 reflecting intense competition and regulatory change. This follows a period of rate increases in previous periods in response to rising claims costs and frequencies. Challenging rating conditions also apply to other UK classes of business. We expect the underwriting cycle to continue in the future but to be less pronounced than in the past because of structural changes to the industry over the past decade. Capital markets are imposing financial discipline by being increasingly more demanding about performance from insurance companies before extending new capital. Such discipline, together with the increased concentration of competitors within the market, recent natural disasters and the adoption of more advanced pricing methods, is expected to make the underwriting cycle less pronounced in the future.
Natural and man-made disasters Our general insurance business results are affected by the amount of claims we need to pay out which, in turn, can be subject to significant volatility depending on many factors, including natural and man-made disasters. Natural disasters arise from adverse weather, earthquakes and other such natural phenomena. Man-made disasters include accidents and intentional events, such as acts of terrorism. These events are difficult to predict with a high degree of accuracy, although they generally occur infrequently at a material level. Our exposure to large disasters is somewhat reduced through our focus on personal lines business and small to medium sized commercial risks in the general insurance business. The Group cedes much of its worldwide catastrophe risk to third-party reinsurers but retains a pooled element for its own account gaining diversification benefit. See ‘IFRS Financial statements – note 58 – Risk management’. In 2013 our operations in Canada suffered from losses related to the Toronto and Alberta floods (see ‘Market performance – Canada’ below for further details) and our operations in France were impacted by hail storms.
Exchange rate fluctuations We publish our consolidated financial statements in pounds sterling. Due to our substantial non-UK operations, a significant portion of our operating earnings and net assets are denominated in currencies other than sterling, most notably the euro, Canadian dollar and the US dollar. As a consequence, our results are exposed to translation risk arising from fluctuations in the values of these currencies against sterling. Total foreign currency translation recognised in the income statement was a gain of £187 million (2012: £128 million gain). We generally do not hedge foreign currency revenues, as we retain local currency in each business to support business growth, to meet local and regulatory market requirements and to maintain sufficient assets in local currency to match local currency liabilities. Movements in exchange rates may affect the value of consolidated shareholders’ equity, which is expressed in sterling. Exchange differences taken to other comprehensive income arise on the translation of the net investment in foreign subsidiaries, associates and joint ventures. This aspect of foreign exchange risk is monitored centrally against limits that we have set to control the extent to which capital deployment and capital requirements are not aligned. We use currency borrowings and derivatives when necessary to keep currency exposures within these predetermined limits, and to hedge specific foreign exchange risks when appropriate; for example, in any acquisition or disposal activity.
During 2013, sterling weakened slightly against the euro and strengthened against the Canadian dollar and US dollar. This resulted in a foreign currency loss in other comprehensive income from continuing operations of £35 million (2012: £200 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.
Activity in 2013 On 8 January 2013, Aviva sold the remainder of its stake in Delta Lloyd at €12.65 per share resulting in gross cash proceeds of £353 million. On 8 March 2013 the Group completed the disposal of its Irish long-term business subsidiary, Ark Life to Allied Irish Bank (AIB), and the acquisition of the non-controlling interest in Aviva Life Holdings Ireland Limited from AIB for total cash consideration of £117 million. On 24 April 2013 the Group disposed of its entire holding in its Spanish long-term business subsidiary, Aseval to Bankia for cash consideration of £502 million. In April the Group also completed the disposal of Aviva Zao, its Russian long-term business subsidiary, for consideration of £30 million, as well as completing the sale of its Malaysian joint ventures for cash consideration of £153 million. In May 2013 the Group sold its Romania Pensions business to MetLife, Inc. for consideration of £5 million. On 2 October 2013 the Group completed the disposal of its US life and related internal fund management business to Athene Holding Ltd receiving consideration of £1.4 billion. In November 2013 the Group reached a conditional agreement to sell its holding in Eurovita Assicurazioni S.p.A. to JC Flowers, subject to regulatory approval. Eurovita has been classified as held for sale. Further details can be found in the section ‘IFRS Financial statements – note 4 – Subsidiaries’.
Activity in 2012 In March Aviva’s distribution arrangement with Allied Irish Bank (AIB) for long term business ceased and plans were put in place for the bancassurance partnership with AIB to be unwound. A strategic review commenced to determine the most effective distribution channels going forward. In July the Group sold 37.2 million shares in Delta Lloyd for £313 million (net of transaction costs), reducing our holding to 19.8% of Delta Lloyd’s ordinary share capital, representing 18.6% of shareholder voting rights. As the Group no longer had significant influence over Delta Lloyd, we ceased to account for that company as an associate from 5 July 2012. Subsequent to the 2012 year end we disposed of our entire remaining holding. In July, the Group sold its life businesses in the Czech Republic, Hungary and Romania to MetLife Inc., for £37 million. In December we sold our controlling 58.4% interest in AVIVA NDB Holdings Lanka to a subsidiary of AIA group for a consideration of £31 million. On 18 December we reached an agreement with Bankia S.A. to transfer our holding in Spanish subsidiary Aseval to Bankia for £494 million. Due to the announced sale, Aseval was classified as held for sale at the balance sheet date.
During 2012 the Group entered into negotiations to dispose of Aviva Zao, its Russian long-term business subsidiary, and the requirements for that business to be classified as held for sale were met. In December 2012 the Group announced the disposal of its US life and related internal fund management business to Athene Holding Ltd for £1.0 billion, including the shareholder loan. As a result of this announcement the results of the business for 2012 and comparative periods were classified as a discontinued operation and it was held for sale at the balance sheet date. Further details can be found in the section ‘IFRS Financial statements – note 4 – Subsidiaries’.
UK with-profits business With-profits products are designed to pay policyholders smoother investment returns through a combination of regular bonuses and final bonuses. Shareholders’ profit emerges from this business in direct proportion to policyholder bonuses, as shareholders receive up to one-ninth of the value of each year’s bonus declaration to policyholders. Accordingly, the smoothing inherent in the bonus declarations provides for relatively stable annual shareholders’ profit from this business. The most significant factors that influence the determination of bonus rates are the return on the investments of the with-profits funds and expectations about future investment returns. Actual and expected investment returns are affected by, among other factors, the mix of investments supporting the with-profits fund, which in turn is influenced by the extent of the inherited estate within the with-profits fund. The annual excess of premiums and investment return over operating expenses, benefit provisions and claims payments within our with-profits funds that are not distributed as bonuses and related shareholders’ profit is transferred from the income statement to the unallocated divisible surplus. Conversely, if a shortfall arises one year, for example because of insufficient
Financial and operating performance continued investment return, a transfer out of the unallocated divisible surplus finances bonus declarations and related shareholders’ profit. The unallocated divisible surplus consists of future (as yet undetermined) policyholder benefits, associated shareholders’ profit and the orphan estate. The orphan estate serves as working capital for our with-profits funds. It affords the withprofits funds a degree of freedom to invest a substantial portion of the funds’ assets in investments yielding higher returns than might otherwise be obtainable without being constrained by the need to demonstrate solvency.
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. 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. 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.
General insurance and health business Operating earnings within our general insurance and health business arise when premiums and investment return earned on assets supporting insurance liabilities and shareholder capital exceed claims costs, costs of acquiring new business and administration costs.
Financial highlights The following analysis is based on our consolidated financial statements and should be read in conjunction with those statements. In order to fully explain the performance of our business, we discuss and analyse the results of our business in terms of certain financial measures which are based on ‘nonGAAP measures’ and which we use for internal monitoring purposes. We review these in addition to GAAP measures, such as profit before and after tax. The remainder of the financial performance section focuses on the activity of the Group’s continuing operations. Details of the performance of the United States business which has been classified as discontinued and was sold on 2 October 2013, can be found in the market performance section.
Long-term insurance and savings new business sales Sales of the long-term insurance and savings business consist of: Insurance and participating investment business – This includes traditional life insurance, annuity business and with-profits business. – There is an element of insurance risk borne by the Group therefore, under IFRS, these are reported within net written premiums.
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.
– For new business reporting in the UK, companies continue to report non-participating investment business within their ‘covered business’ sales, in line with the historic treatment under UK GAAP.
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 the relative economic value of regular premium contracts compared to single premium contracts: Sales recognise the economic value of all expected contractual cash flows for regular premium contracts in the year of inception, whereas IFRS net written premiums only recognise premiums received in the year.
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.
Retail sales of mutual fund type products (investment sales) (4,875) (4,586) (3,473)
Analysed as: Long-term insurance and savings net written premiums 11,769 12,279 15,545 General insurance and health net
Share of long-term new business sales from joint ventures and associates Total long-term new business sales include our share of sales from joint ventures and associates. Under IFRS reporting, premiums from these sales are excluded from our consolidated accounts, with only our share of profits or losses from such businesses being brought into the income statement separately.
Annualisation impact of regular premium long-term business As noted above, the calculation of PVNBP includes annualised regular premiums. The impact of this annualisation is removed in order to reconcile the non-GAAP new business sales to IFRS premiums and will vary depending on the volume of regular premium sales during the year.
United Kingdom & Ireland Life 12,424 13,300 14,333 United Kingdom & Ireland General Insurance 4,200 4,490 4,842 France 5,614 4,640 5,063 Poland 555 438 552 Italy, Spain and Other 4,430 4,182 5,938 Canada 2,250 2,176 2,083 Asia 1,896 2,014 2,076 Aviva Investors 2,741 2,819 1,659 Other group activities 33 67 77
Sales (from continuing operations) Year ended 31 December 2013 Total sales from continuing operations were stable at £34,143 million (2012: £34,126 million) for the reasons set out in the market performance section below.
Year ended 31 December 2012 Total sales from continuing operations were 7% lower at £34,126 million (2011: £36,623 million) for the reasons set out in the market performance section below.
United Kingdom & Ireland Life 1,124 903 970 United Kingdom & Ireland GI 465 480 524 France 448 422 471 Poland 184 167 167 Italy, Spain and Other 314 365 292 Canada 246 277 256 Asia 87 53 70 Aviva Investors (26) 42 53 Other Group activities (793) (783) (774)
Share of Delta Lloyd’s adjusted operating profit (before tax) as an associate — 112 157
Non-operating items before tax (excluding Delta Lloyd as an associate) (405) (986) (1,253)
Share of Delta Lloyd's non-operating items (before tax) as an associate — (523) 10
Profit/(loss) before tax attributable to shareholders’ profits 2,819 (2,521) 184 1 Following the adoption of IAS 19 ‘Employee benefits’ the Group has retrospectively applied the changes to the comparative periods in these financial statements. This has led to an increase in profit before tax of £150 million for 2012, and £97 million in 2011. For further detail of the impact of the restatement please see note 1 to the IFRS financial statements.
Year ended 31 December 2012 Adjusted operating profit before tax decreased by £148 million or 7% to £2,038 million (2011: £2,186 million) for the reasons set out in the market performance section below.
Year ended 31 December 2012 The negative investment return variances and economic assumption changes of £620 million (2011: £897 million negative) mainly related to the UK, where the allowance for credit defaults on UK commercial mortgages increased to reflect uncertainty in the macroeconomic environment and the cost of de-risking activity. Elsewhere, positive variances in Spain and France were offset by a negative variance in Italy. Short term fluctuations on non-long term business of £7 million positive (2011: £266 million negative) reflected favourable market movements. The impairment of goodwill, associates and joint ventures was £60 million in 2012 (2011: £392 million). This included an impairment of £147 million in respect of the Group’s Indian associate, an impairment of £76 million in relation to goodwill on the Spanish business, an impairment of £33 million in relation to the Italian business and a small write down of £9 million in respect of the Group’s Korean joint venture. These impairments were partly offset by a reversal of the impairment recognised in 2011 in respect of our associate investment in Delta Lloyd of £205 million. Loss on disposal of subsidiaries and associates was £164 million (2011: £565 million profit). This includes a loss of £129 million relating to the disposal of our associate stake in Delta Lloyd. Integration and restructuring costs were £461 million (2011: £261 million). This included costs relating to restructuring and transformation activity that was taken to align our business operations with our strategy, including the Group’s Simplify programme (£165 million), £130 million in Ireland which includes expenses associated with the merging of the UK and Irish business, £24 million for restructuring in Aviva Investors, £25 million in respect of restructuring activities and £117 million relating to preparing the businesses for the implementation of Solvency II.
Premiums written net of reinsurance 20,489 21,173 24,707 Net change in provision for
Net earned premiums 20,623 21,157 24,471 Fee and commission income 1,279 1,273 1,465 Net investment income 12,509 21,135 4,373 Share of profit/(loss) of joint ventures and associates 120 (255) (123) Profit/(loss) on the disposal and re-measurement of subsidiaries and associates 115 (164) 565
Profit before tax attributable to shareholders' profits 1,281 175 648 1 Following the adoption of IAS 19 'Employee benefits' the Group has retrospectively applied the changes to the comparative periods in these financial statements. This has led to an increase in profit before tax of £150m for 2012, and £97m in 2011. For further detail of the impact of the restatement please see note 1 to the IFRS financial statements.
Following the adoption of IFRS 10 'Consolidated financial statements' the Group has retrospectively applied the change to the 2012 comparatives in these financial statements. There is no impact on the result for 2012 as a result of this restatement. For further details of the impact of the restatement please see note 1 to the IFRS financial statements.
Net investment income (from continuing operations) Year ended 31 December 2013 Net investment income from continuing operations was £12,509 million (2012: £21,135 million). Compared to the prior year, unrealised gains were lower in 2013 primarily as a result of
Financial and operating performance continued lower fixed income security market values partly offsetting growth in equity markets.
Year ended 31 December 2012 Net investment income for the year increased by £16,762 million to £21,135 million (2011: £4,373 million) reflecting positive market performance and narrowing credit spreads on assets as market sentiment improved in the Eurozone. This led to significant increases in net unrealised gains on investments.
Expenses (from continuing operations) Year ended 31 December 2013 Claims and benefits paid net of reinsurance in 2013 decreased by £1,508 million, or 6%, to £22,093 million (2012: £23,601 million) mainly reflecting lower claims payments in our life businesses. Change in insurance liabilities in 2013 was a credit of £2,493 million (2012: £430 million charge), resulting from changes in economic and non-economic assumptions. The change in investment contract provisions was a charge of £7,050 million (2012: £4,450 million charge) as a result of improved investment market conditions causing an increase in contract liabilities. The change in unallocated divisible surplus (“UDS”) was a credit of £280 million (2012: £6,316 million charge). Fee and commission expense, other expenses and finance costs decreased by £1,149 million to £6,804 million (2012: £7,953 million) mainly as a result of the Group’s cost savings programme. See ‘IFRS Financial Statements – note 7 – Details of expenses’ for further details.
Profit/(loss) before tax attributable to shareholders’ profits (from continuing operations) Year ended 31 December 2013 Profit before tax attributable to shareholders was £1,281 million (2012: £175 million). The increase mainly reflects lower expenses.
Year ended 31 December 2012 Profit before tax attributable to shareholders was £175 million restated (2011: £648 million). The decrease was primarily due to the increased tax charge attributable to policyholders’ returns.
United Kingdom and Ireland UK & Ireland life The table below presents sales, net written premiums, adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from our UK and Ireland longterm businesses for the three years ended 31 December 2013, 2012 and 2011.
Life and pensions sales 9,848 11,042 12,171 Investment sales 2,040 1,730 1,689
Year ended 31 December 2013 On a PVNBP basis, sales in the UK long-term insurance and savings business decreased by £1,031 million, or 10%, to £9,379 million (2012: £10,410 million). Volumes in the UK reduced significantly during the year, reflecting our focus on improving value and capital efficiency. Pension sales were up 6% to £5,476 million (2012: £5,158 million). Within this, sales of group pensions increased to £3,809 million (2012: £3,231 million) whilst sales of individual pensions were £1,667 million (2012: £1,803 million) with growth in our platform (self-invested personal pension) business more than offset by lower sales of other individual pensions products.
Sales of annuities were down 28% to £2,327 million (2012: £3,211 million), and protection sales were down 19% to £992 million (2012: £1,228 million), reflecting our focus on improving value and capital efficiency. Bond sales were down 52% to £183 million (2012: £379 million). Equity release sales were 8% lower at £401 million (2012: £434 million) due to increased competition in this market segment. Investment sales increased 18% to £2,040 million (2012: £1,730 million), with higher sales on our Wrap platform. In Ireland, sales fell 26% to £469 million (2012: £632 million). Ark Life, which was sold in April 2013, closed to new business a year earlier in April 2012. Excluding Ark Life sales of £102 million in 2012, the fall in 2013 was mainly due to our focus on sales of more profitable products. IFRS net written premiums were down 25% to £4,228 million (2012: £5,623 million) for the reasons set out above. Life business adjusted operating profit before tax increased by 7% to £952 million (2012: £892 million). Within this, UK adjusted operating profit increased by 5% to £930 million (2012: £887 million), mainly reflecting cost reductions and pricing discipline. Ireland adjusted operating profit was up to £22 million (2012: £5 million) as we continue to make progress in turning the business around. Adjusted operating profit from other operations of £131 million (2012: £14 million loss) includes a £145 million one-off gain from plan amendments to the Ireland pension scheme. IFRS profit before tax has increased to £717 million (2012: £107 million). This includes adjusted operating profits of £1,124 million (2012: £903 million), which have increased for the reasons set out above. It also includes negative investment variances of £414 million, which arose mainly due to an increase in the allowance for credit defaults on commercial mortgages; lower integration and restructuring costs of £59 million (2012: £71 million); and an £87 million profit arising on the sale of Ark Life.
Adjusted operating profit before tax decreased by £67 million, or 7%, to £903 million (2011: £970 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 £27 million, or 20%, to £107 million for 2012 (2011: £134 million).
Sales/IFRS net written premiums United Kingdom 3,823 4,062 4,371 Ireland 377 428 471
Adjusted operating profit before tax United Kingdom 431 459 478 Ireland 40 29 44
Year end 31 December 2013 UK & Ireland general insurance and health NWP decreased by 6% to £4,200 million (2012: £4,490 million). Within this, UK general insurance sales fell 6% to £3,823 million (2012: £4,062 million): personal lines NWP was down 5% to £2,276 million (2012: £2,397 million) reflecting underwriting discipline in a soft market, and commercial lines NWP was down 7% to £1,547 million (2012: £1,665 million) reflecting management actions to focus on profitability. Ireland general insurance and health NWP was £377 million (2012: £428 million). Adjusted operating profit before tax from general insurance and health business was down 3% to £471 million (2012: £488 million). An improvement in the underwriting result to £123 million (2012: £42 million), which benefited from benign weather, favourable large loss experience and lower expenses, was more than offset by lower longer-term investment returns due mainly to the revised terms of an internal loan (the impact of this is neutral at an overall Group level). IFRS profit before tax has increased to £387 million (2012: £248 million). This includes adjusted operating profits of £465 million (2012: £480 million), which have decreased for the reasons set out above. The increase in IFRS profit before tax is mainly due to lower integration and restructuring costs of £24 million (2012: £170 million). The impact of negative short-term fluctuations in investments was £74 million (2012: £17 million positive) and in 2013 this arose mainly due to an increase in risk free rates reducing fixed income security market values. This has been partly offset by a favourable impact from an increase in the swap rate used to discount latent claims.
Financial and operating performance continued has been offset by management actions to reduce exposure in unprofitable business segments. Adjusted general insurance and health operating profit in 2012 decreased by £34 million, or 7%, to £488 million (2011: £522 million). Our UK general insurance operation has seen a decrease of £19 million, or 4%, to £459 million (2011: £478 million). Excluding the RAC contribution of £75 million in 2011, this represented a like for like increase of 14% with the 2012 result benefiting from a favourable movement on prior year claims and an increase in long term investment return. 2012 was the second wettest year on record and whilst UKGI had more flood claims, weather-related claims were broadly in line with long-term average compared to the favourable experience in 2011. In Ireland, general insurance adjusted operating profit has decreased by £15 million, or 34%, to £29 million (2011: £44 million) mainly reflecting the difficult environment with intense competition and the adverse effect of the economy on premium volumes. Profit before tax decreased by £595 million, or 71%, to £248 million (2011: £843 million). 2011 benefited from the profit on disposal of RAC of £532 million. This combined with an increase in restructuring costs accounts for the majority of the year on year decrease.
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 2013, 2012 and 2011.
Adjusted operating profit before tax Long-term insurance and savings business 385 335 323 General insurance and health 84 95 144 Other operations (21) (8) 4
Year ended 31 December 2012 Total sales in France were down £423 million, or 8%, to £4,640 million (2011: £5,063 million) mainly due to a reduction in longterm insurance and savings sales. Total life and pensions sales decreased 10% to £3,638 million (2011: £4,047 million), a reduction of 4% on a local currency basis, with sales in the AFER product declining and sales through the Bancassurance channel remaining broadly flat. France’s net written premium was £4,702 million, down £531 million, or 10% (2011: £5,233 million) driven by the decrease in AFER sales and relatively flat sales in general insurance. Adjusted operating profit for long-term insurance and savings business in 2012 was £335 million (2011: £323 million), an increase of £12 million or 4%. General insurance and health adjusted operating profit decreased by £49 million, or 34%, to £95 million (2011: £144 million) due in part to the one-off release in 2011 of surplus reserve margins of £45 million. There was also adverse claims experience from the February 2012 freeze, partly offset by a decrease in personal motor bodily injury claims. Restructuring costs in France were down £19 million, or 63%, to £11 million (2011: £30 million). 2011 included higher costs from the previous European restructuring programme. Profit before tax attributable to shareholders’ profits was £482 million, an increase of £215 million, or 81% (2011: £267 million).
Poland 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 Poland for the three years ended 31 December 2013, 2012 and 2011.
Adjusted operating profit before tax Long-term insurance and savings business 164 153 167 General insurance and health 9 9 (5) Other operations 11 5 5
Year ended 31 December 2013 Life and pensions sales on a PVNBP basis were up 30% to £486 million (2012: £373 million), mainly due to increased sales of unit-linked products and pensions following changes in pensions legislation. General insurance net written premiums were £69 million (2012: £65 million). Total net written premiums increased 10% to £475 million (2012: £433 million) due mainly to higher life and pensions sales. Adjusted operating profit has increased by 10% to £184 million (2012: £167 million). Life profits increased by 7% to £164 million (2012: £153 million) due to lower expenses and higher assets under management. General insurance profits were stable at £9 million (2012: £9 million). Profit before tax attributable to shareholders was £178 million, an increase of 1% (2012: £176 million).
Year ended 31 December 2012 Total long-term insurance and savings in Poland were down by £114 million, or 23%, to £373 million (2011: £487 million) as a result of lower appetite for unit-linked products and regulatory changes relating to pensions.
Sales Long-term insurance and savings business Spain 1,224 1,295 1,926 Italy 2,235 1,971 2,993 Other 544 470 511 Total long-term insurance and savings business 4,003 3,736 5,430
Adjusted operating profit before tax Long-term insurance and savings business Spain 150 215 216 Italy 142 159 140 Other 10 7 4 302 381 360
General insurance and health – Italy & other 19 (6) (47) Other operations (7) (10) (21)
Year ended 31 December 2013 Total long-term insurance and savings sales increased by £267 million, or 7%, to £4,003 million (2012: £3,736 million). In Italy, life sales increased by £264 million, or 13%, to £2,235 million (2012: £1,971 million) driven by higher sales of unit-linked and with-profits products. In Spain, life sales decreased by £71 million, or 5%, to £1,224 million (2012: £1,295 million) mainly reflecting the disposal of Aseval in April 2013. Other life sales, which mainly includes sales in our Turkey Life joint venture, increased £74 million, or 16%, to £544 million (2012: £470 million). General insurance sales decreased by £19 million, or 4%, to £427 million (2012: £446 million) driven by lower sales in Turkey. Premiums in Italy were stable. Net written premiums for the segment increased £157 million, or 5%, to £3,193 million (2012: £3,036 million) for the reasons described above. Total adjusted operating profit decreased £51 million, or 14%, to £314 million (2012: £365 million). This was mainly due to lower life profits in Spain (mainly reflecting the Aseval disposal) and Italy, partly offset by higher general insurance profits. Profit before tax attributable to shareholders’ profits was £509 million (2012: £273 million). This includes adjusted operating profits, positive life investment variances of £267 million (2012: £nil) arising from narrowing spreads on government and corporate bonds and a goodwill impairment charge of £48 million (2012: £108 million charge).
Adjusted operating profit before tax General insurance 246 277 256 Other operations — — —
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
Asia The table below presents the sales, net written premiums, adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS for the three years ended 31 December 2013, 2012 and 2011.
Sales Long-term insurance and savings business Singapore 818 688 538 Other Asia 826 1,077 1,244
General insurance and health Singapore 81 88 76 Other Asia 19 32 32
Aviva Investors The table below presents the investment sales, adjusted operating profit, profit before tax attributable to shareholders’ profits under IFRS and assets under management of Aviva Investors for the three years ended 31 December 2013, 2012 and 2011. As set out in ‘IFRS Financial Statements – note 4 – Subsidiaries’, the internal asset management operations of Aviva Investors North America were sold with the US life business and have been classified within discontinued operations.
Sales1 2,741 2,819 1,659 Adjusted operating profit before tax Fund management 68 39 50 Long-term insurance and savings business –
Pooled Pensions operating profit1 2 3 3 Other operations – client compensation costs (96) — —
Year ended 31 December 2013 Fund management operating profits were £68 million (2012: £39 million) driven by higher revenues, reflecting positive market movements and performance fees, and lower costs. Assets under management were up £4.2 billion to £240.5 billion, driven by capital appreciation which more than offset negative net flows. Loss before tax was £89 million (2012: £2 million profit), mainly due to the reasons set out below. In 2013 we found evidence of improper allocation of trades in fixed income securities in Aviva Investors. This occurred between 2006 – 2012. These breaches of our dealing policy involved late allocation of trades which favoured external hedge funds to the detriment of certain Aviva UK Life funds. The relevant regulatory authorities were notified at an early stage and have been kept fully apprised of the issue. A thorough review of internal control processes relating to the dealing policy has been carried out by management and reviewed by PwC. Measures to improve controls have been implemented. There is a total adverse impact on Group adjusted operating profit from this activity of £132 million. This reflects the compensation of £126 million expected to be claimed in respect of these breaches and other associated costs of £6 million. Of this total, £96 million reflects compensation expected to be claimed from, and other associated costs within, Aviva Investors. Compensation of £36 million relating to this matter is expected to be claimed from a group holding company. These amounts are shown in operating profit in ‘Other operations’.
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
Financial and operating performance continued £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. Assets under management increased by £11 billion, or 5%, to £236 billion (2011: £225 billion). This was due to capital appreciation more than offsetting negative net flows.
1 Restated for the adoption of IAS19. See note 1 for further details.
Year ended 31 December 2013 Net written premiums from our reinsurance business were £46 million (2012: £77 million). Adjusted operating loss from general insurance was £51 million (2012: £22 million profit). The decrease was mainly due to a £67 million impact from the floods in Canada in our reinsurance business. Corporate centre costs were £150 million (2012: £136 million). Group debt costs and other interest decreased to £502 million (2012: £537 million), mainly due to lower internal debt costs following the revision of terms to an internal loan (the impact of this is neutral at an overall Group level). Losses from other operations were £90 million (2012: £132 million), which includes £36 million of compensation expected to be claimed from a group holding company (see Aviva Investors above). Loss before tax attributable to shareholders’ profits was £1,080 million (2012: £1,420 million). The improvement in 2013 was mainly due to the disposal of the Delta Lloyd Associate.
Discontinued operations United States The table below presents IFRS net written premiums, adjusted operating profit and profit/(loss) before tax attributable to shareholders for the three years ended 31 December 2013, 2012 and 2011. On 2 October 2013 the Group completed the sale of its United States life and related internal asset management businesses (US Life) to Athene Holding. See ‘IFRS Financial Statements – note 4 – Subsidiaries’ for further details. The results of US Life are presented as discontinued operations for all periods presented.
Year ended 31 December 2013 The results for 2013 are for the 9 month period to 2 October 2013. 2012 represents a full year’s results. Net written premiums were £1,489 million (2012: £3,589 million). Adjusted operating profit before tax was £290 million (2012: £239 million), driven mainly by higher life profits of £272 million (2012: £200 million). Profit before tax of £1,538 million (2012: £2,696 million loss) reflects the adjusted operating profits above. It also includes positive investment variances of £452 million (2012: £342 million), which were driven mainly by the impact of favourable equity market performance on embedded derivatives, and profits on disposal of £808 million (2012: £2,359 million loss) mainly reflecting currency translation and investment valuation reserves recycled to the income statement on completion. Further details are set out in note 4 to the financial statements.
Delta Lloyd On 6 May 2011, the Group sold 25 million shares in Delta Lloyd, reducing our holding at that date to 42.7% of Delta Lloyd’s ordinary share capital, representing 40% of shareholder voting rights. As the Group no longer commanded a majority of shareholder voting rights, it no longer controlled Delta Lloyd. Accordingly, from 6 May 2011, the Group ceased to consolidate the results and net assets of Delta Lloyd and its results up to that date were shown as discontinued operations.
Income Gross written premiums 22,035 22,744 26,255 27,192 25,690 Premiums ceded to reinsurers (1,546) (1,571) (1,548) (1,606) (2,294)
Premiums written net of reinsurance 20,489 21,173 24,707 25,586 23,396 Net change in provision for unearned premiums 134 (16) (236) (72) 552
Net earned premiums 20,623 21,157 24,471 25,514 23,948 Fee and commission income 1,279 1,273 1,465 1,451 1,552 Net investment income 12,509 21,135 4,373 16,746 19,902 Share of profit/(loss) after tax of joint ventures and associates 120 (255) (123) 141 (463) Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 115 (164) 565 163 122
Profit/(loss) after tax from continuing operations 848 (86) 489 1,086 1,288 Profit/(loss) after tax from discontinued operations 1,273 (2,848) (357) 841 103
Continuing operations – Basic (pence per share) 22.0p (11.2)p 13.6p 38.9p 38.1p Continuing operations – Diluted (pence per share) 21.8p (11.2)p 13.4p 38.2p 37.8p
Number of shares in issue at 31 December 2,947 2,946 2,906 2,820 2,767 Weighted average number of shares in issue for the year 2,940 2,910 2,845 2,784 2,705
History and development of Aviva General Aviva, a public limited company incorporated under the laws of England and Wales, provides customers with long-term insurance and savings, general and health insurance, and fund management products and services. Our purpose is to free people from fear of uncertainty, allowing them to get on with their lives.
Business overview Our aims and strategy Our long-term strategic framework is based on four theses – investment, distribution, customer and people.
Customer thesis Our aim is to meet our customers’ needs better than our competitors, so that we become the insurer of choice in our chosen markets.
People thesis Our aim is to support our people to achieve their potential, so they can best serve our customers.
We will allocate resource to three areas of focus: – Digital – our aim is to increase our share of the direct digital channel and develop more effective use of data and new technology.
Market position In the UK we have a market share of 8% based on annual premium equivalent (APE)2 according to the Association of British Insurers (ABI) data as at 30 September 2013. We also have life insurance businesses in Ireland, France, Italy, Spain, Poland, Turkey and Asia. Further details of our position in each market are set out in the market sections below.
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.
Investment sales – comprise retail sales of mutual fund type products such as unit trusts, individual savings accounts (ISAs) and open ended investment companies (OEICs).
Other – includes equity release. Some of our insurance and investment contracts contain a discretionary participation feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts.
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, France, Singapore and Indonesia. In the year ended 31 December 2013, 50% of our total general insurance and health new business from continuing operations was written in the UK.
Corporate and specialty risks – products for large clients or where the risk is specialised.
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.
Further details of the distribution channels specific to each market are included in the following market analysis.
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 thirdparty investors. The main fund management operations are in the UK, North America, Europe and Asia Pacific. All sales of retail fund management products are included in our long-term insurance and savings business sales. In October 2013 we completed the sale of the internal asset management operations of Aviva Investors North America, as part of the sale of our United States life business.
Market position Aviva Investors was ranked 40th globally by assets under management, according to the Towers Watson World 500 largest asset managers study 2012 ranking of asset managers by assets under management. Total worldwide funds managed by Aviva Investors at 31 December 2013 was £241 billion. The substantial majority of this relates to Aviva’s insurance and savings operations.
Products In the UK, we provide a comprehensive product range focused on both the consumer and corporate market. The pensions and `at retirement’ products we offer include personal pensions, equity release, annuities, income drawdown and with-profits products. Our annuity offerings include immediate life, enhanced, fixed-term annuities and with-profits pension annuities. We provide a number of traditional life insurance products, including level-term, decreasing-term (with or without critical illness), guaranteed whole life insurance, and guaranteed lifelong protection plans. Our savings and investment products include ISAs, investment bonds, funds, base rate trackers, investments with guarantees and with-profits products. In Ireland, our long-term insurance and savings business offers a wide range of protection, bonds, savings, pension and annuity products. Our protection products include life insurance, mortgage protection, specified illness and guaranteed and whole life cover products. The pension range covers retirement and investment products including government personal retirement savings accounts (PRSA) schemes.
UK & Ireland general insurance Business overview and strategy The UK and Irish businesses are managed under a single management structure and work is progressing to leverage the scale and expertise that we believe exists in the UK to benefit the Irish business. We are a leading general insurer in both the UK and Ireland with market shares of 10.5%4 and 15.3%5 respectively. We employ around 9,000 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 business6. We believe our key strengths include underwriting and pricing sophistication, claims and cost management and excellent customer service. Our aim is to deliver cash and profitable growth by focussing on the fundamentals of the insurance business to maximise underwriting returns and we have a portfolio strategy to deliver greater stability of earnings.
4 Datamonitor analysis of market share based on 2012 GWP. 5 Irish Insurance Federation, 2012. 6 2012 FSA returns based on GWP data – covers personal motor, homeowner, commercial motor and commercial property.
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 FFSA8. We believe that customer confidence in financial markets has been affected 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 7 Swiss Re Sigma Study (World insurance 2012). 8 Fédération Française des Sociétésd'Assurance (FFSA).
Information on the Company continued 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 market. We believe that during the last couple of years, the market has entered a phase of price increases that currently makes up the majority of its marginal growth.
Market 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 Poland to continue to grow as its economy matures. In December 2013, the Polish parliament passed a new Pension Act following the government review of the Pillar II Pensions System. The Act will give the state-run pension system a prominent role in managing the country’s pension funds and will have important implications for the private pension providers.
Products Our life business in Poland provides a broad range of unitlinked, annuities, bonds and savings products and health insurance. For institutions we offer group life insurance and employee pension programmes, which are both unit-linked products. We offer a standard product as part of our privately managed Pillar II pensions business. We offer general insurance products to both commercial entities and to individuals. 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.
A review of the business has resulted in the rationalisation of our business partnerships, with a number of loss making partnerships closed. In November 2013, Aviva announced a conditional agreement to sell its entire 39% stake in Eurovita Assicurazioni S.p.A (Eurovita) to JC Flowers. The sale is subject to approval by IVASS, the Italian insurance regulator.
Market The Italian life market is dominated by the top 10 providers which represented around 84% of the total market share in 20129. The life insurance industry in Italy reported a decline in volumes as of 31 December 2012, with gross written premiums down by 4.1% compared to the same period in 2011. The general insurance segment decreased by 1.5% in the same period9.
Distribution Our products are distributed through bancassurance partnerships with UniCredit Group, Banco Popolare Group and Unione di Banche Italiane (UBI). These partnerships give us access to more than 3,600 branches. In addition, we also have approximately 4,000 sales advisers, and 600 insurance (multimandate ) agents and brokers as of 30 June 2013.
Spain Business overview and strategy Aviva Spain is the country’s sixth largest long-term insurer by gross written premiums with a market share of 4% in the third quarter of 201310. Aviva Spain sells protection, long-term savings and pensions, health and accident insurance through a bancassurance network based on joint ventures with five banks. We also sell through Aviva Vida y Pensiones, the wholly-owned Aviva branded long-term insurance company and through our Spanish mutual insurance company Pelayo. In April 2013, Aviva completed the transfer of its entire holding in Aseval11 to Bankia S.A. Our strategy is to maintain the franchise value in Spain with no further investment until market conditions improve, and to develop further our retail operations with new distribution agreements. The ongoing focus in on less capital intensive products.
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 effect 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 72% of gross written premiums at the end of 201210 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.
Distribution Through bancassurance partnerships we have established subsidiaries to distribute our products with each of the banks as set out below: Unicorp Vida – in conjunction with Unicaja since 2001 CxG – in conjunction with Caixa Galicia since 2001 Caja España Vida – in conjunction with Caja España since 2001 Caja Granada Vida – in conjunction with Caja Granada since 2002 Cajamurcia Vida – in conjunction with Cajamurcia 10 Investigación Co-operativa entre Entidades Asegurados y Fordos de Pensionies (ICEA). 11 Aseval: “Aseguradora Valenciana, Sociedad Anónima de Seguros y Reaseguros”.
Other The Italy, Spain and Other segment also includes our businesses in Turkey where we sell life and savings products including unit linked pensions through our life joint venture. Our Turkish general insurance operation sells personal motor, household, commercial property, small and medium size enterprises, personal accident, marine and travel insurance, and is classified as held for sale.
Market Canada is the eighth largest13 non-life market in the world and is established and stable. The four largest provinces generate around 88% of total premiums with Ontario, the largest, representing 47% of total Canadian premiums12. The Canadian general insurance industry is highly fragmented with many small players and no dominant consumer brand. Steady consolidation has resulted in the top five companies representing 40% of the market and the top two companies, Intact Financial and Aviva, controlling close to 23% of the market12.The rest of the industry includes several national carriers as well as smaller, provincially based or niche companies. Whilst direct and affinity channels are gradually increasing in market share, the traditional broker channel accounts for 65% of distribution14. In addition to the growth of direct and affinity channels, insurance carriers are increasingly supporting and controlling distribution through investment in brokers.
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
Distribution We operate in Canada through a distribution network focused on approximately 1,600 independent group and retail brokers who distribute our core personal and commercial line products. In addition, we work closely with both independent and wholly owned specialty brokers to distribute specialty personal line products.
Market Aviva USA was a provider of fixed indexed life insurance and fixed indexed annuities in the USA. According to Wink’s Sales & Market Report, as of 30 September 2013, Aviva USA was ranked ninth in the market for the sale of fixed indexed life products with a 4% market share, and fifth for the sale of fixed indexed annuities with a 6% market share.
Products Aviva USA offered 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. Aviva USA also offered a range of optional extras or ’riders’ added to policies to meet customised individual needs. In the savings market, Aviva USA’s fixed annuity portfolio offered tax-advantaged savings opportunities and protection against the risk of outliving one’s assets. Some of these products included a guaranteed lifetime withdrawal benefit that allows customers to make guaranteed minimum withdrawals from their annuity for the entirety of their lives.
Distribution Aviva USA used a multi-channel distribution strategy, which included career marketing organisations, independent marketing organisations, brokerage general agents and personal producing agents. Its network covered all 50 states with agents largely contracted through key distribution partners.
Delta Lloyd Delta Lloyd is a financial services provider in the Netherlands and Belgium. The Group ceased to control Delta Lloyd on 6 May 2011 and its results for 2011 up to that date are presented as discontinued operations. For the period from 7 May 2011 to 5 July 2012, the Group had an associate interest in Delta Lloyd. From 6 July 2012, following a further selldown, the Groups stake was treated as a financial investment. The Groups share of Delta Lloyd’s results as an associate and its interest in Delta Lloyd as a financial investment are both included in the comparative periods presented in these financial statements in “other group activities” within continuing operations. In January 2013, the Group sold its remaining stake in Delta Lloyd.
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, Canada and Asia. For additional information on our financial investments, see ‘IFRS Financial statements – note 27 – Financial investments’.
Investment strategy Our investment portfolio supports a range of businesses operating in a number of geographical locations. Our aim is to match the investments held to support a line of business to the nature of the underlying liabilities, whilst at the same time considering local regulatory requirements, the level of risk inherent within different investments, and the desire to generate superior investment returns, where compatible with this stated strategy and risk appetite.
Long-term insurance and savings business As stated above, we aim to optimise investment returns whilst ensuring that sufficient assets are held to meet future liabilities and regulatory requirements. As different types of life insurance business vary in their cash flows and in the expectations placed upon them by policyholders, we need to hold different types of investments to meet these different cash flows and expectations. The UK with-profits business is comprised largely of long-term contracts with some guaranteed payments. We are therefore able to invest a significant proportion of the funds supporting this business in equities and real estate. This is because the longterm nature of these contracts allows us to take advantage of the long-term growth potential within these classes of assets, whilst the level of guaranteed payments is managed to mitigate the level of risk that we bear in relation to the volatility of these classes of assets. Non-UK participating business, annuities and non-participating contracts in all countries, have a high level of guaranteed future payments. We endeavour to match the investments held against these types of business to future cash flows. We therefore have a policy of generally holding fixed income securities and mortgage loans with appropriate maturity dates. With unit-linked business, the primary objective is to maximise investment returns, subject to following an investment policy consistent with the representations that we have made to our unit-linked product policyholders.
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 ‘IFRS Financial Statements – Accounting policies – (D) Consolidation principles’. Property partnerships are accounted for depending on our participation and the terms of each partnership agreement. For each property partnership accounted for as a subsidiary, joint venture, associate 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 or associate 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.
Analysis of investments We distinguish between policyholder, participating fund and shareholder investments, which are terms used to reflect the differing exposure to investment gains and losses. Policyholder assets are connected to our unit-linked business, where the policyholder bears the investment risk on the assets in the unit-linked funds. Our exposure to loss on policyholder assets is limited to the extent that income arising from asset management charges is based on the value of assets in the funds. Participating fund assets relate to some of our insurance and investment contracts which contain a discretionary participation feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. Our exposure to investment losses on participating funds is generally limited to our participation in the fund. Shareholder assets are other assets held within our businesses that are not backing unit-linked liabilities or participating funds. Investments held at 31 December 2013 and 31 December 2012 are listed below: Policyholder assets £m
Corporate Public utilities — 59 1,567 2,320 79 200 4,225 Convertibles and bonds with warrants — — — 300 — 8 308 Other corporate bonds 2,972 5,374 9,399 8,676 1,119 2,748 30,288 2012 Restated1 % 26.3% 20.5% 19.3% 26.3% 4.6% 3.0% 100.0% 1 The 2012 figures have been restated following the adoption of IFRS 10 ‘Consolidated Financial Statements’ – see ‘IFRS Financial Statements – note 1’ for details.
Government UK Government — 4,362 45 — — 200 4,607 Non-UK Government 4,287 3,441 871 1,583 18 2 10,202
Corporate Public utilities 6 36 2,310 976 — 215 3,543 Convertibles and bonds with warrants — — — 3 — 77 80 Other corporate bonds 982 1,335 5,129 3,348 291 2,219 13,304 2012 Restated1 % 19.9% 14.4% 28.8% 25.0% 3.1% 8.8% 100.0% 1 The 2012 figures have been restated following the adoption of IFRS 10 ‘Consolidated Financial Statements’ – see ‘IFRS Financial Statements – note 1’ for details.
We grade debt securities according to external credit ratings issued at the balance sheet date. The credit rating used for each individual security is the median rating of the available ratings from the major credit rating agencies. If a credit rating is available from only one of these rating agencies then this rating is used. If an individual security has not been given a credit rating by any of the major rating agencies, the security is classified as ‘non-rated’. For the table above we have expressed our rating using a rating scale whereby investment grade debt securities are classified within the range of AAA (extremely strong) to BBB (good) ratings, with AAA being the highest possible rating. Debt securities which fall outside this range are classified as less than BBB. This rating scale is analogous with that used by major rating agencies. At 31 December 2013, the proportion of our shareholder debt securities that are investment grade increased to 90.2% (2012: 88.1%). The remaining 9.8% of shareholder debt securities that do not have an external rating of BBB or higher can be split as follows: 1.4% are debt securities that are rated as below investment grade; and 8.4% are not rated by the major rating agencies.
Of the securities not rated by an external agency 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.
Exposures to peripheral European countries Included in our debt securities and other financial assets are exposures to peripheral European countries. All of these assets are valued on a mark to market basis under IAS 39, and therefore our statement of financial position and income statement already reflect any reduction in value between the date of purchase and the balance sheet date. The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds. Net of non-controlling interests, our direct shareholder and participating fund asset exposure to the government (and local authorities and agencies) of Italy is £4.9 billion (2012: £4.9 billion). Gross of non-controlling interests, 96% of our shareholder asset exposure to Italy arises from investment exposure of our Italian business.
Direct sovereign exposures to Greece, Ireland, Portugal, Italy and Spain (net of non-controlling interests, excluding policyholder assets)
Total Greece, Ireland, Portugal, Italy and Spain 6.0 6.1 0.9 0.9 6.9 7.0
Direct sovereign exposures to Greece, Ireland, Portugal, Italy and Spain (gross of non-controlling interests, excluding policyholder assets)
At 31 December 2013, shareholder investment in equity securities amounted to £1,000 million. The investments include a strategic holding in Italian banks of £258 million (£132 million net of non-controlling interests). Of our £8,007 million exposure to equity investments in banks, trusts and insurance companies, £457 million relates to shareholder investments, which includes our strategic holding as mentioned above.
Unit trusts and other investment vehicles 25,824 2,411 371 28,606 Derivative financial instruments 25 686 347 1,058 Deposits and credit institutions 401 40 160 601 Minority holdings in property management undertakings — 679 117 796 Other 313 64 13 390 2012 Restated1 % 80.0% 12.5% 7.5% 100.0% 1 The 2012 figures have been restated following the adoption of IFRS 10 ‘Consolidated Financial Statements’ – see ‘IFRS Financial Statements – note 1’ for details.
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; Canada: Scarborough, Ontario; and Europe: Paris, France; Dublin, Ireland; Madrid, Spain; Warsaw, Poland; and Milan, Italy.
Insurance and investment contracts Long-term business – Insurance contracts – non-linked1 7,997 15,330 12,211 80,325 115,863 – Investment contracts – non-linked2 60,039 — — — 60,039 – Linked business2 73,458 — — — 73,458 General Insurance3 6,177 3,796 1,848 3,087 14,908 147,671 19,126 14,059 83,412 264,268 Other contractual obligations4 Borrowings 1,509 1,298 1,095 12,783 16,685 Operating lease obligations 111 192 165 575 1,043 Capital commitments 19 8 — — 27 Payables and other financial liabilities5 8,674 259 140 927 10,000 Net assets attributable to unit holders 10,362 — — — 10,362
Total contractual obligations above 302,385 Effect of discounting contractual cash flows for insurance contracts (37,655) Contractual undiscounted interest payments6 (8,395) Difference between carrying value of borrowings and undiscounted cash flows of principal (471) Contractual cash flows under operating leases and capital commitments (1,070) Difference between derivative liabilities contractual cash flows and carrying value (806) Liabilities of operations classified as held for sale 3,023 Unallocated divisible surplus7 6,713 Provisions8 984 Current and deferred tax liabilities 679 Other liabilities 2,472
4 The Group has no material finance leases for property and equipment. 5 Includes obligations for repayment of collateral received under stock lending arrangements and derivative transactions amounting to £3,958 million. 6 When subordinated debt is undated or loan notes perpetual, the interest payments have not been included beyond 15 years. Annual interest payments for these borrowings are £73 million. Contractual undiscounted interest payments are calculated using fixed interest rates or prevailing market floating rates as applicable. 7 The unallocated divisible surplus represents the excess of assets over liabilities, including policyholder ‘asset share’ liabilities in the UK, which reflect the amount payable under the realistic Peak 2 reporting regime of the PRA.
Risk management objectives As a global insurance group, risk management is at the heart of what we do and is the source of value creation as well as a vital form of control. It is an integral part of maintaining financial stability for our customers, shareholders and other stakeholders. Our sustainability and financial strength are underpinned by an effective risk management process which helps us identify major risks to which we may be exposed, establish appropriate controls and take mitigating actions for the benefit of our customers and investors. The Group’s risk strategy is to invest its available capital to optimise the balance between return and risk whilst maintaining an appropriate level of economic (i.e. riskbased ) capital and regulatory capital in accordance with our risk appetite. Consequently, our risk management objectives are to: Embed rigorous risk management throughout the business, based on setting clear risk appetites and staying within these; Allocate capital where it will make the highest returns on a risk-adjusted basis; and
Meet the expectations of our customers, investors and regulators that we will maintain sufficient capital surpluses to meet our liabilities even if a number of extreme risks materialise.
Aviva’s risk management framework has been designed and implemented to support these objectives. The key elements of our risk management framework comprise our risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles & responsibilities; and the processes we use to identify, measure, manage, monitor and report (IMMMR) risks, including the use of our risk models and stress and scenario testing. These elements are expanded in the IFRS Financial statements – note 58.
The nature of the business means that prices in certain circumstances can be increased to maintain overall profitability. This is subject to the competitive environment in each market. To the extent that there are further falls in interest rates the investment yield would be expected to decrease further in future periods. Further information on the Group’s sensitivity to a reduction in interest rates is included in the sensitivity analysis in note 58 of the IFRS Financial Statements. This analysis shows an initial benefit to profit before tax and shareholders’ equity from a 1% decrease in interest rates due to the increase in market value of the backing fixed income securities. However, in subsequent years the reduction in portfolio yield would result in lower net investment income.
Capital management Capital management objectives The primary objective of capital management is to optimise the balance between return and risk, whilst maintaining economic and regulatory capital in accordance with risk appetite. Aviva’s capital and risk management objectives are closely interlinked, and support the dividend policy and earnings per share growth, whilst also recognising the critical importance of protecting policyholder and other stakeholder interests. Overall capital risk appetite, which is reviewed and approved by the Aviva Board, is set and managed with reference to the requirements of a range of different stakeholders including shareholders, policyholders, regulators and rating agencies. Risk appetite is expressed in relation to a number of key capital and risk measures, and includes an economic capital risk appetite of holding sufficient capital resources to enable the Group to meet its liabilities in extreme adverse scenarios, on an ongoing basis, calibrated at a level consistent with a AA range credit rating.
The EU Insurance Groups Directive (IGD) regulatory capital solvency surplus has decreased by £0.2 billion since 31 December 2012 to £3.6 billion. The key movements over the period are set out in the following table: £bn
IGD solvency surplus at 31 December 2012 3.8 Operating profits net of other income and expenses 1.2 Dividends and appropriations (0.5) Market movements including foreign exchange1 (0.4) Pension scheme funding (0.1) Disposals 0.2 Poland pension legislative changes (0.3) Increase in capital resources requirement (0.1) Other regulatory adjustments (0.2)
Estimated excess available capital £bn 1 These realistic liabilities include the shareholders’ share of accrued bonuses of £0.1 billion (31 December 2012: £0.3 billion). Realistic liabilities adjusted to eliminate the shareholders’ share of accrued bonuses are £33.4 billion (31 December 2012: £36.0 billion). These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £1.4 billion, £0.2 billion and £2.5 billion for NWPSF, OWPSF and WPSF respectively (31 December 2012: £1.8 billion, £0.3 billion and £3.5 billion for NWPSF, OWPSF and WPSF respectively).
Solvency II Following the provisional agreement between the European Parliament, European Council and European Commission in November 2013 on the Omnibus II Directive, there is now a widespread expectation that Solvency II will come into effect on 1 January 2016, based on the European Commission’s Directive – also in November 2013 – that postpones the implementation to that date. Aviva continues to actively participate in the development of the Level 2 and Level 3 text that will establish the technical requirements governing the practical application of Solvency II through the key European industry working groups, and by engaging with the PRA and HM Treasury throughout. This includes consideration of the role of transitional arrangements once Solvency II comes into effect.
The Group’s overall financial strength is reflected in our credit ratings. The Group’s rating from Standard and Poor’s is A+ (strong) with a Stable outlook; A1 (good) with a Stable outlook from Moody’s; and A (excellent) with a Stable outlook from A.M. Best.
Financial flexibility The Group’s borrowings are comprised primarily of long dated hybrid instruments with maturities spread over many years, minimising refinancing risk. In addition to central liquid asset holdings of £1.3 billion, the majority of which was held within Aviva Group Holdings Limited at the 2013 year end, the Group also has access to unutilised committed credit facilities of £1.5 billion provided by a range of leading international banks.
Operating capital generation: Life in-force profits1 1.5 1.7 General insurance, fund management and non-insurance profits 0.6 0.5
Operating capital generation comprises the following components: – Operating Free surplus emergence, including release of required capital, for the life in-force business (net of tax and non-controlling interests); – Operating profits for the general insurance and non-life businesses (net of tax and non-controlling interests) from non-covered business only, where non-covered business is that which is outside the scope of life MCEV methodology; – Capital invested in new business. For life business this is the impact of initial and required capital on free surplus. For general insurance business this reflects the movement in required capital, which has been assumed to equal the regulatory minimum multiplied by the local management target level. Where appropriate movements in capital requirements exclude the impact of foreign exchange and other movements deemed to be nonoperating in nature.
– Post deconsolidation on 6 May 2011, all Delta Lloyd business (including its life, general insurance, fund management and non-insurance segments) has been included in OCG on an IFRS basis (net of taxation and non-controlling interests).
– Post classification as held for sale in Q4 2012, US Life was no longer managed on a MCEV basis so it has been included in OCG on an IFRS basis (net of taxation).
Trust and Transparency % of employees who read, understand and accept the Business
% of employees who rate us favourably on the customer index 69% 73% 75% 74% Maintain or improve past performance
Climate change and environment % of remaining CO2e emissions offset annually
% of employees who feel we have created an environment where people with diverse backgrounds can succeed 73% 78% 76% 75% Meet/exceed GFS benchmark
% of employees who rate us favourably on enablement index New KPI New KPI New KPI 64% Meet/exceed GFS benchmark (2013: 70%)
% of employees who rate us favourably on engagement index* 63% 68% 68% 56% Meet/exceed GFS benchmark (2013: 73%)
Suppliers % of "Managed Supply" spend where supplier accepted Code of
% of "Managed Supply" spend where supplier has successfully completed the CR element of the Supplier process
% of employees participating in volunteering 17% 20% 18% 27% Increase the % of employee participation in volunteering
Number of employee hours spent volunteering 57,250 60,390 56,357 41,223 Increase the number of employee volunteering hours
Relative CO2e data – The relative comparison uses the 2013 basis for reporting (as above), and the adjusted relative data for 2012 encompassing structural changes that occurred in 2012. Our 2010 baseline, which we use to understand our progress on a long term basis is 132,244 CO2e. Our long term reduction target remains at 20% reduction by 2020, from this restated baseline. We have restated waste for 2012 due to an error in our China waste figure and to include Solus for the first time. Water consumption – We have restated our water consumption for 2012 after an overstatement was found in the China data. 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.
Suppliers: The scope of "managed supply" included in the indicator has grown this year from UK only in 2012 to all Aviva businesses that are operating the shared service model (some of which adopted the model in the second half of 2013). The data is based on a total managed supply population year end 2013 of 269 suppliers.
Increase from previous year Hospitality register: this figure has remained static however, more Aviva businesses are now compliant with this
Decrease in community investment: The decrease in total community investment is due to the completion of our UK Athletics sponsorship, which represented over 33% of our total KPI in 2012. Additionally, this year’s reporting does not include the US business (sold in 2013) which contributed over 10% to this KPI in 2012.
Our conclusion Based on the procedures we have performed and the evidence we have obtained, nothing has come to our attention that causes us to believe that the Selected Information for the year ended 31 December 2013 has not been prepared, in all material respects, with the Reporting Criteria. This conclusion is to be read in the context of what we say below.
Our independence and quality control We applied the Institute of Chartered Accountants in England and Wales (ICAEW) Code of Ethics, which includes independence and other requirements founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. We apply International Standard on Quality Control (UK&I) and accordingly maintain a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. Our work was carried out by an independent team with experience in sustainability reporting and assurance.
Understanding reporting and measurement methodologies The Selected Information needs to be read and understood together with the Reporting Criteria. The absence of a significant body of established practice on which to draw to evaluate and measure non-financial information allows for different, but acceptable, measurement techniques. The nature, methods and precision used to determine non-financial information can result in materially different measurements, affecting comparability between entities and over time. The Reporting Criteria used for the reporting of the Selected Information are at 31 December 2013.
Aviva’s responsibilities The Directors of Aviva are responsible for: designing, implementing and maintaining internal controls over information relevant to the preparation of the Selected Information that is free from material misstatement, whether due to fraud or error; establishing objective Reporting Criteria for preparing the Selected Information; measuring Aviva’s performance based on the Reporting Criteria; and the content of the Annual Report and Accounts 2013.
In this section Company address 286 Share capital 286 Related party disclosures 288 Dividend data 288 Guarantees, securitised assets and off-balance sheet arrangements
Share capital The Company has four classes of shares: Ordinary shares of £0.25 each which constitute equity security and hold voting rights; Cumulative irredeemable preference shares of £1 each, which entitle holders to attend and vote at general meetings only when dividends on such shares are in arrears. Cumulative irredeemable preference shareholders may also attend general meetings and vote on particular proposals when such proposals relate to an alteration of the rights attaching to such shares, a reduction of capital (other than through a redemption or repurchase of shares) or a winding up of business. On a winding up, they carry a preferential right of return of capital ahead of the ordinary shares; Sterling new preference shares of £1 each, which have such rights and terms (including terms related to the redemption of shares, ranking and entitlement to dividend and capital) as the Board determines; and
Euro new preference shares of €1 each, which have such rights and terms (including terms related to the redemption of such shares, ranking and entitlement to dividend and capital) as the Board determines.
Issued share capital The Company had an aggregate issued and outstanding ordinary share capital of £736 million as of 31 December 2013. The following table sets out information about the issued and outstanding classes of equity as of 31 December 2013.
Ordinary shares, nominal value 25p 2,947 2,946 2,905 20 25 30 8.375% Cumulative irredeemable preference shares, nominal value £1 100 100 100 — — — 8.75% Cumulative irredeemable preference shares, nominal value £1 100 100 100 — — —
The Companies Act 2006 abolished the requirement for a company to have an authorised share capital and the Company’s current articles of association reflect this. Directors are still limited as to the number of shares they can allot, as the allotment authority continues to be required under the Act, save in respect of employee share schemes. Ordinary shares in issue in the Company rank pari passu. All the ordinary shares in issue carry the same right to receive all dividends and other distributions declared, made or paid by the Company. The Company is not permitted under English law to hold its own ordinary shares. Whilst the Company is presently authorised to repurchase up to 294 million ordinary shares, any shares that are repurchased must be cancelled. Details of the Company’s dividends are set out below under ‘Dividend data’. The Company’s preference shares rank, as to the payment of dividends and capital, as set out in note 34 of the IFRS Financial statements.
At 1 January 2011 2,820,148,642 Shares issued under the Group’s Employee and Executive Share Option Schemes1 1,574,706 Shares issued in lieu of dividends2 83,989,590
At 31 December 2012 2,945,972,261 Shares issued under the Group’s Employee and Executive Share Option Schemes1 967,361
At 31 December 2013 2,946,939,622 1 For more information on our various option schemes, see note 32 in the financial statements. 2 The issue of shares in lieu of cash dividends is considered a bonus issue under the terms of the Companies Act 2006 and the nominal value of the shares is charged to the share premium account.
There were no changes to the voting rights of any class of shares during 2011, 2012 and 2013, other than issuances in connection with our various employee option schemes and under the Company’s scrip dividend scheme. The Company did not issue shares for consideration other than cash during 2011, 2012 and 2013. In addition, at the Company’s general meetings in 2011, 2012 and 2013, shareholders authorised the limited dis-application of section 561 of the Companies Act 2006 to permit the Company to issue new equity securities for cash without applying shareholders’ statutory pre-emptive rights.
Subsidiaries Transactions between the Company and its subsidiaries are eliminated on consolidation.
Salary and other short-term benefits 5.3 4.7 6.7 Post-employment benefits 1.1 1.9 1.7 Equity compensation plans 3.3 4.8 5.9 Termination benefits 1.1 1.5 0.7 Other long term benefits 1.6 0.4 2.8
In addition to the amounts disclosed for associates and joint ventures above, at 31 December 2013 amounts payable at yearend were £nil (2012: £nil), and expenses incurred during the period were £3 million (2012: £5 million). Transactions with joint ventures in the UK relate to the property management undertakings, the principal ones of which are listed in note 19(a)(iii) of the IFRS Financial statements. Our interest in these joint ventures comprises a mix of equity and loans, together with the provision of administration services and financial management to many of them. Our UK life insurance companies earn interest on loans advanced to these entities, movements in which may be found in note 19(a)(i) of the IFRS Financial statements. Our fund management companies also charge fees to these joint ventures for administration services and for arranging external finance.
Loans to joint ventures 24 43 1 Comprises the impact of the adoption of IFRS 10 on the prior year comparative and the resulting consolidation and deconsolidation of entities based on the revised definition and criteria of control outlined in accounting policy (D). See note ‘IFRS Financial Statements – note 1’ for further details.
Dividend data The Company has a policy to pay a progressive dividend with reference to growth in cash flows and earnings. Under UK company law, we may only pay dividends if the company has ‘distributable profits’ available. ‘Distributable profits’ are accumulated, realised profits not previously distributed or capitalised, less accumulated, unrealised losses not previously written off based on IFRS. Even if distributable profits are available, we pay dividends only if the amount of our net assets is not less than the aggregate of our called-up share capital and undistributable reserves and the payment of the dividend does not reduce the amount of our net assets to less than that aggregate. As a holding company, the Company is dependent upon dividends and interest from our subsidiaries to pay cash dividends. Many of the Company’s subsidiaries are subject to insurance regulations that restrict the amount of dividends that they can pay to us. Historically, the Company has declared an interim and a final dividend for each year (with the final dividend being paid in the year following the year to which it relates). Subject to the restrictions set out above, the payment of interim dividends on ordinary shares is made at the discretion of our Board, whilst payment of any final dividend requires the approval of the Company’s shareholders at a general meeting. Preference shares are irredeemable and dividends on preference shares are made at the discretion of our Board. The Company pays cash dividends in pounds sterling, although the articles of association permit payment of dividends on ordinary shares in other currencies and in forms other than cash, such as ordinary shares. If dividends on ordinary shares held by the American Depositary Shares (ADS) depositary are paid in pounds sterling, the ADS depositary will convert the pounds sterling that it receives on behalf of the ADS holders into US dollars according to the prevailing market rate on the date that the ADS depositary actually receives the dividends. For the 2007 final dividend and previous final and interim dividends, shareholders on record were provided with the opportunity to elect to receive dividends in the form of newly issued ordinary shares through the Aviva Scrip Dividend Scheme. For the 2008 interim dividend, the Aviva Scrip Dividend Scheme was replaced by a dividend reinvestment plan (DRIP). For those shareholders participating in the DRIP, the Company paid a cash
Limited liability partnerships classified as joint ventures As part of their investment strategy, the UK and certain European long-term business policyholder funds have invested in a number of property limited partnerships (PLP), either directly or via property unit trusts (PUT), through a mix of capital and loans. The PLPs are managed by general partners (GP), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a Group subsidiary. Accounting for the PUTs and PLPs as subsidiaries, joint ventures or other financial investments depends on whether the Group is deemed to have control or joint control over the PUTs and PLPs’ shareholdings in the GPs and the terms of each partnership agreement are considered along with other factors that determine control. If a partnership is managed by an agreement such that there is joint control between the parties, notwithstanding that the Group’s partnership share in the PLP (including its indirect stake via the relevant PUT and GP) may be greater than 50%, such PUTs and PLPs have been classified as joint ventures. Of the PLPs accounted for as joint ventures at 31 December 2013, the Group’s economic interest exceeded 50% in respect of one partnership, The Mall Limited Partnership, in which the Group had a 50.52% economic interest. IFRS Financial statements – note 19 provides a list of the principal PLPs accounted for as joint ventures, as well as summarised information on the Group’s interests in its joint ventures in aggregate. In respect of these PLPs, there are no significant contingent liabilities to which we are exposed, nor do we have any significant contingent liabilities in relation to our interests in them. External debt raised by the PLPs is secured on their respective property portfolios, and the lenders are only entitled to obtain payment of both interest and principal to the extent there are sufficient resources in the respective PLPs. The lenders have no recourse whatsoever to the policyholder and shareholders’ funds of any companies in the Aviva Group. At 31 December 2013, we had £140 million capital commitments to these PLP joint ventures.
Liquidity and capital resources Treasury function The treasury function of our business is managed by our centralised treasury team, headed by the Group treasurer. The Group treasurer acts as owner of Group business standards for liquidity and foreign exchange risk management within the Group risk governance and oversight framework. Changes in policy require the agreement of the chief risk and capital officer. These policies are independently implemented and monitored by each of our businesses. Our central treasury team is split into distinct functions: a Group team, which develops our overall treasury strategy, and our treasury team at Aviva Investors, which manages and monitors our treasury and cash flow positions for our holding companies. Each business unit is responsible for monitoring its own cash and liquidity positions, as well as its ongoing funding requirements. It is our policy to make the majority of our financing arrangements at the parent company level, primarily through external borrowings and equity offerings. This enables us to achieve the efficiencies afforded by our collective size. A number of our business units also raise debt on their own behalf. Our principal objective in managing our liquidity and capital resources is to maximise the return on capital to shareholders, while enabling us to pay dividends, service our debt and our holding companies’ cash flows. In the context of a financial services company where our working capital is largely
Shareholder information continued representative of our liquidity, we believe that our working capital is sufficient for our present operational requirements. For additional information, see ‘IFRS Financial statements – note 58 – Risk management – liquidity risk’.
Management of debt Aviva plc is the principal financing vehicle in our centralised funding strategy. We aim to manage our external debt in line with rating agency limits applicable for entities with a rating in the AA range. We manage the maturity of our borrowings and our undrawn committed facilities to avoid bunching of maturities. We aim to maintain access to a range of funding sources, including the banking market, the commercial paper market and the long-term debt capital markets. We issue debt in a variety of currencies, predominantly sterling and euros, based on investor demand at the time of issuance and management of the Group’s foreign exchange translation exposures in the statement of financial position. In July 2013, we issued €650 million of Lower Tier 2 subordinated debt callable in 2023. In October 2013, we repaid a €650 million Lower Tier 2 subordinated debt instrument at its first call date. At 31 December 2013, our total external borrowings, including subordinated debt and securitised mortgage loans, amounted to £7.8 billion (2012: £8.3 billion). Of the total borrowings, £5.1 billion (2012: £5.1 billion) are considered to be core borrowings and are included within the Group’s capital employed. The balance of £2.7 billion (2012: £3.2 billion) represents operational debt issued by operating subsidiaries. We also have substantial committed credit facilities available for our use. At 31 December 2013, we had undrawn committed credit facilities expiring within one year of £0.4 billion (2012: £0.4 billion) and £1.1 billion in credit facilities expiring after more than one year (2012: £1.7 billion). Of these facilities, £750 million was allocated in 2013 (2012: £750 million) to support our commercial paper programme. Further information on the maturity profile, currency and interest rate structure of our borrowings is presented in ‘IFRS Financial statements – note 50 – Borrowings’. Commercial paper is issued for terms up to 12 months and is generally reissued at maturity. On 28 February 2014, the Company gave notice of its intention to redeem two subordinated debt instruments of £200 million and €50 million at their first call dates of 1 April and 30 April respectively. The table below presents our debt position for the periods indicated: £m
Core structural borrowings Subordinated debt 4,370 4,337 Debenture loans 199 199 Commercial paper 556 603
Operating borrowings Operational borrowings at amortised cost 1,410 1,853 Operational borrowings at fair value 1,313 1,332 7,848 8,324 Less: Amounts classified as held for sale (29) (145)
1 Comprises the impact of the adoption of IFRS 10 on the prior year comparative and the resulting consolidation and deconsolidation of entities based on the revised definition and criteria of control outlined in accounting Policy (D). See ‘IFRS Financial statements – note 1’ for further details.
In the UK, we have raised non-recourse funding secured against books of mortgages. This funding has been raised through the use of special-purpose entities. The beneficial interest in the books of mortgages has been passed to these special-purpose entities. These entities, which are owned by independent trustees, have funded this transfer through the issue of loan notes. The value of the secured assets and the corresponding nonrecourse funding was £1,313 million (2012: £1,332 million). We continue to receive fees from these special purpose entities in respect of loan administration services.
These special purpose entities have been consolidated as we retain the residual interest in them. The transactions and reasons for consolidation are discussed further within ‘IFRS Financial statements – note 25 – Securitised mortgages and related assets’.
Undrawn borrowings At 31 December 2013, we had £1.5 billion (2012: £2.1 billion) undrawn committed central borrowing facilities available to us, provided by a range of leading international banks, all of which have investment grade credit ratings. We have allocated £750 million to support the credit rating of Aviva’s commercial paper programme. Undrawn borrowings are analysed below: £m
Our committed central borrowing facilities have two financial covenants: Borrowings (excluding non-recourse indebtedness) may not exceed total shareholders’ funds. At 31 December 2013, borrowings were 56% of total shareholders funds.
Total shareholders’ funds to exceed 32% of non-life net written premiums for the previous 12 months. At 31 December 2013, total shareholders funds were 150% of non-life net written premiums.
One of our principal sources of liquidity is dividends from our subsidiaries. The level of dividends is based on two primary factors: the financial performance and the local solvency and capital requirements of our individual business units. The table below shows liquid resources provided to Group Centre from operating companies, subsidiaries, associates and joint ventures in 2013. Cash remittances include amounts received from Aviva Insurance Limited in January 2014 in respect of 2013 activity.
UK & Ireland life insurance 370 France 235 Poland 85 Spain 51 Italy 12 Other Europe 5 Canada 130 Asia 20 Other operations 14
UK & Ireland general insurance1 347 1 Includes amounts received in respect of 2013 activity.
During 2013, the Group took action to improve its access to dividends from the Group’s insurance and asset management businesses by undertaking a corporate restructuring whereby Aviva Group Holdings (“AGH”) purchased from Aviva Insurance Limited (“AIL”) its interest in the majority of its overseas businesses.
Application of funds We use funds to pay dividends to our shareholders, to service our debt and to pay our central Group cash flows. In 2013, total cash paid by the Company as ordinary and preference dividends and coupon payments on direct capital instruments and Fixed Rate Tier 1 notes amounted to £538 million, compared with £720 million in 2012. In 2013, our total interest costs on central borrowings were £328 million. This compared with £317 million of interest paid on central borrowings in 2012. Total corporate centre expenses in 2013 were £150 million compared with £136 million in 2012. An additional application of our funds is the acquisition of businesses. In 2013, cash paid for the acquisition of subsidiaries, joint ventures and associates from continuing operations net of cash acquired amounted to £nil million, compared with cash paid of £129 million in 2012.
Capital injections We make capital injections into our businesses where necessary to ensure that they meet their local solvency requirements and also to support development of their operations. Capital is provided either by equity or, where a local holding company is in place, may be via loans with the holding company
Net cash from investing activities Net cash used in investing activities increased by £1,210 million to £1,225 million outflow (2012: £15 million outflow). The movement is mainly a result of the disposal of the US Life business.
Year ended 31 December 20121 Net cash from operating activities Total net cash from operating activities increased by £2,841 million to a £2,499 million inflow in 2012 (2011: £342 million outflow). The increase was primarily due to an increase in flows from the net purchase/sale of operating assets.
Statements’ – see IFRS Financial statements – Note 1 for further details.
Contractual obligations for future repairs and maintenance on investment properties are £nil (2012: £nil). We have capital commitments to joint ventures of £140 million (2012: £41 million). These commitments are expected to be funded through operational cash flow without recourse to core structural borrowings.
The European Union In addition to its UK businesses, Aviva is active in other EU member states through wholly owned subsidiary and joint venture companies. These companies are subject to the laws and regulations of the EU member state in which they are based, but are also affected by higher level EU legislation, which will continue to have a significant influence on the legislative environment in the UK and other EU markets. The EU operates by promulgating directives that must be implemented into local national legislation within each EU member country. These directives set minimum standards for national legislatures to meet, with each legislature able to decide how they should be implemented. National governments may not pass laws which fail to meet the minimum standards set out in a directive, but are generally free to impose legal requirements which go beyond those required. Directives are written at a fairly high level, with more detail being provided at national level through legislation developed in accordance with the local legal system. Even greater detail may be imposed through the rules and regulations of national regulators and, for financial services businesses these rules can be extensive. The EU may also impose requirements directly on countries through regulation. EU financial services regulation is based on the principle of ‘home country control’, which makes the home country regulator responsible for monitoring compliance with all applicable regulation. Key directives of particular relevance to the financial services industry, and so to Aviva’s businesses in the EU include: Third Life and Non-Life Directives These directives implemented the home country control principle for life and non-life insurance business in the mid1990s and placed the responsibility for such issues as solvency, actuarial reserves, investment of assets, and certain governance issues on the home country regulator. Most companies licensed to conduct insurance business in one member state may rely on their home country regulation to ‘passport’ into all other member states to conduct business without having to be separately licensed in each. The general exception is selling activity which continues to be regulated by the state in which the sale takes place.
An additional parent undertaking solvency margin calculation analogous to the adjusted margin test referred to above, to be applied at the level of the parent undertaking.
The introduction of new solo supervision requirements, including rules as to internal control within the insurance undertaking regarding the production of information relevant to supplementary supervision, the exchange of information within the group and the supervision of intragroup transactions.
Further provisions aimed at ensuring co-operation between competent regulatory authorities of member states.
Insurance Mediation Directive This requires EU member states to establish a framework to: ensure that insurance and reinsurance intermediaries have been registered on the basis of a minimum set of professional and financial requirements; ensure that registered intermediaries will be able to operate in other member states by availing themselves of the freedom to provide services or by establishing a branch; and impose requirements on insurance intermediaries to provide specified minimum information to potential customers.
Systemic Risk In July 2013 the Financial Stability Board (FSB) designated nine insurance groups as Global Systemically Important Insurers (G-SIIs). As an international insurer, Aviva is one of the firms that has been designated as a G-SII. Alongside the FSB’s designation the International Association of Insurance Supervisors published policy measures that will apply to G-SIIs. The policy measures include enhanced supervision, recovery and resolution planning, the preparation of systemic risk management and liquidity risk management plans. The policy measures also include higher loss absorbency requirements (HLA). In the absence of a global capital framework for insurers, the International Association of Insurance Supervisors (“IAIS”) is developing a Basic Capital Requirement (BCR) to provide a comparable foundation for the application of HLA to G-SIIs. The development phase of the BCR is planned to conclude during 2014. The IAIS will then develop its approach to HLA which will be applicable to G-SIIs from 2019.
Future EU developments During 2013 the European Commission undertook a review of the European System of Financial Supervision (ESFS). The ESFS includes the three sector specific European Supervisory Authorities (ESAs) that have powers to make binding rules and drive supervisory consistency and convergence through a single rule book. It is anticipated that the Commission will publish its conclusions of its review during 2014. There are a number of European dossiers that are expected to progress during 2014, including Packaged Retail Investment
Products (PRIPs) that will introduce common product disclosure standards, the review of the Insurance Mediation Directive (IMD) and MiFID, and the Directive for Institutions of Occupations Retirement Provisions (IORP) that sets rules for occupational pension schemes. The European Market Infrastructure Regulation (EMIR) that introduces central clearing of standard Over the Counter (OTC) derivatives came into force in 2013. This is subject to transitional provisions and actions that the European Securities and Markets Authority (ESMA) must complete before central clearing can commence later this year.
Within their respective jurisdictions, the PRA and FCA have authority to make rules and issue guidance, taking into account relevant EU directives, impacting individuals and firms authorised to conduct regulated activities (“Authorised Persons” and “Authorised Firms”). Under the FSMA no person may carry on, or purport to carry on, a regulated activity by way of business in the UK unless he is an Authorised Person or an exempt person. A firm granted permission to carry on regulated activities becomes an Authorised Person for the purposes of FSMA. ‘Regulated activities’ are prescribed in the FSMA (Regulated Activities) Order 2001 and include banking, insurance and investment business, stakeholder pension schemes, insurance mediation and certain mortgage mediation and lending activities. Authorised Firms must at all times meet specified threshold conditions, including possession of adequate resources for the carrying on of their business, and being fit and proper to conduct that business, having regard to all the circumstances. Authorised Firms must also operate in accordance with the FCA’s Principles for Business if solo regulated and the PRA’s and FCA’s Principles for Business if dual regulated. The FCA has 11 high level principles for conducting financial services business in the UK, including maintenance of adequate systems and
Shareholder information continued controls, treating customers fairly, and communicating with customers in a manner that is clear, fair and not misleading. The PRA has 6 high level principles including maintenance of adequate systems and controls and financial prudence. The PRA and FCA regulatory regimes are based on the principle that firms should have effective systems and controls, including robust risk management, which are appropriate to the size, complexity and diversity of their business.
UK Regulation of the Aviva Group A number of the Group’s UK subsidiaries are “dual regulated” (directly authorised by both the PRA (for prudential regulation) and the FCA (for conduct regulation)) whilst others are solo regulated (regulated solely by the FCA for both prudential and conduct regulation). Aviva plc, although not directly authorised, does come within the scope of some regulation as the ultimate insurance holding company in the Group. The PRA and FCA have new powers under the FS Act in relation to unregulated parent undertakings (“qualifying parent undertakings”) that control and exert influence over regulated firms. The new powers include the ability to make directions imposing requirements on parent undertakings, take enforcement action where such directions are breached and gather information from parent undertakings. As Aviva is a UK-based group, the PRA has the responsibility of acting as lead regulator (i.e. the cross-sector supervisory co-ordinator) for the Group within the EU.
Conduct of business rules The FCA’s Conduct of Business (COB) and Insurance: Conduct of Business (ICOB) Rules apply to every Authorised Firm carrying on relevant regulated activities, and regulate the day-to-day conduct of business standards to be observed by all Authorised Persons in carrying out regulated activities. The COB and ICOB Rules are principle based, and the scope and range of obligations imposed on an Authorised Firm will vary according to the scope of its business and range of the Authorised Firm’s clients. Generally speaking, however, the obligations imposed on an Authorised Firm by the COB and ICOB Rules will include the need to classify its clients according to their level of sophistication, provide them with information about the Authorised Firm, meet certain standards of product disclosures (including fee and remuneration arrangements), ensure that promotional material which it produces is clear, fair and not misleading, assess suitability when advising on certain products, control the range and scope of advice given, manage conflicts of interest, report appropriately to its clients and provide certain protections in relation to client assets. The PRA’s COB rule book is limited to with-profits business and linked long-term insurance business as these classes of business are regulated by both the PRA and FCA. For with-profits business the FCA is concerned with ensuring fairness between policyholders and shareholders whilst the PRA has ultimate responsibility in respect of decisions which have material consequences for both affordability and fairness. For linked long-term business, the FCA is concerned with ensuring benefits are determined by reference to an approved index, whilst the PRA is concerned with linked assets being capable of being
Shareholder information continued realised in time to meet obligations to policyholders and the matching of linked assets with linked liabilities.
Capital and solvency rules for insurers The PRA rules require that a UK insurer (including those within the Group) must hold capital resources equal to at least the Minimum Capital Requirement (MCR). Insurers with with-profits liabilities of more than £500 million (which is the case with Aviva’s with-profits fund) must hold capital equal to the higher of MCR and the Enhanced Capital Requirement (ECR). The ECR is intended to provide a more risk responsive and ‘realistic’ measure of a with-profits insurer’s capital requirements, whereas the MCR is broadly equivalent to the previous required minimum margin, and satisfies the minimum EU standards. Determination of the ECR involves the comparison of two separate measurements of the Authorised Firm’s financial resources requirements, which the PRA refers to as the ‘twin peaks’ approach. The two separate peaks are: the requirement comprised by the mathematical reserves plus the ‘long term insurance capital requirement’ (the LTICR), together known as the ‘regulatory peak’; and a calculation of the ‘realistic’ present value of the insurer’s expected future contractual liabilities together with projected ‘fair’ discretionary bonuses to policyholders, plus a risk capital margin, together known as the ‘realistic peak’.
Distribution of profits and with-profits business For UK authorised life insurers carrying on with-profits business, such as Aviva Life and Pensions UK Ltd (‘AVLAP’), the FCA’s rules require that where a firm decides to make a distribution of surplus from the with-profits fund it must distribute at least the required percentage (as defined in the FCA Handbook) of the total amount distributed to policyholders, with the balance of the total amount to be distributed being payable to the shareholders. In addition, at least once a year the AVLAP Board must consider whether a distribution is required to be made from the Old with-profits sub-fund (“Old WPSF”) inherited estate. Such a distribution will ordinarily be required if the level of the inherited estate of the Old WPSF exceeds the Required Distribution Threshold as described in the Reattribution Scheme of Transfer effective from 1 October 2009 (‘The Scheme’) on any such annual investigation from the third such investigation after 1 October 2009. An Annual investigation may also be carried out to determine if a Release to shareholders can be made from the RIEESA. Releases can only be made: if the Reattributed Inherited Estate exceeds the Permitted Release Threshold as defined in the Scheme; the AVLAP Board (based on appropriate actuarial advice including that of the With-Profits Actuary) are of the opinion that the Release will not give rise to a significant risk that the New with-profits sub-fund (including the RIEESA) would be unable to meet its obligations to policyholders and its capital requirements or the Old WPSF would be unable to meet its obligations to policyholders; and following the sixth annual investigation after 1 October 2009 or later investigation and provided that investigation and investigations made in the previous 2 years determined that the Reattributed Inherited Estate exceeded the Permitted Release Threshold.
United States During part of 2013 we wrote life and annuity business in the United States through Aviva USA Corporation (Aviva USA), which was a wholly owned subsidiary formed by the merger of Aviva Life Insurance Company of America with AmerUS which it acquired in July 2006. Aviva USA was domiciled in Iowa and was the holding company for Aviva Life and Annuity Company which was licensed to conduct business in all states except New York and Washington D.C. In New York it operated a wholly owned subsidiary, Aviva Life Insurance Company of New York. Aviva plc reached agreement, in December 2012, to sell Aviva USA and the sale was completed in October 2013. The US insurance industry is regulated primarily on a stateby -state basis. Individual states have authority to pass statutes, adopt regulation or issue directives to regulate insurance activities within their jurisdiction. Consequently, life insurance companies are subject to regulation both in their domicile state as well as in each state in which they operate. State regulation can vary from state to state. All have laws and regulations covering the financial aspects of the insurance business, including standards of solvency, reserves, reinsurance and capital adequacy. In addition, most states have specific regulation governing licensing and the conduct of selling agents as well as the approval of products and associated product forms and literature.
Asia We operate in Asia through a network of subsidiary companies either wholly owned or established as a joint venture with a local partner. Our business is predominantly long-term and savings business, with small general insurance and health operations. There are wholly owned businesses in Singapore and Hong Kong. During 2013 Aviva also operated businesses in China, India, Malaysia, Taiwan, Korea, Indonesia and Vietnam which, depending on the nature and extent of the control exerted by Aviva, were accounted for as subsidiaries, joint ventures or associates. The business in Malaysia was sold in April 2013. The Asia area is made up of a number of widely differing and independent markets. The markets tend to be at different stages in their development but each has its own regulatory structures and Aviva complies with the local regulation in each of the countries in which it operates. Industry regulation typically focuses on financial stability, i.e. minimum capital and the basis for calculating solvency, reserves and policyholder liability. In many of the markets regulators have the power to revoke operating licences, regulate shareholder structures and the participation in and the payment of dividends. Asia markets are moving quickly to modernise insurance regulation with an increasing focus on governance and conduct of business.
Risks relating to our business You should carefully review the following risk factors together with other information contained in this Annual Report before making an investment decision relating to our ordinary shares or ADSs. Our business, financial position, results of our operations and cash flow could be materially affected by any of these risks, the trading price of our ordinary shares or ADSs could decline due to any of these risks and investors may lose part or all of their investment.
As a global business, we are exposed to various local political, regulatory and economic conditions, business risks and challenges which may affect the demand for our products and services, the value of our investment portfolios and the credit quality of local counterparties. We offer our products and services in Europe (including the UK), North America and the Asia Pacific region through wholly owned and majority-owned subsidiaries, joint ventures, companies in which we hold non-controlling equity stakes, agents and independent contractors. Our international operations expose us to different local political, regulatory, business and financial risks and challenges which may affect the demand for the our products and services, the value of our investment portfolio, the required levels of capital and surplus, and the credit quality of local counterparties. These risks include, for example, political, social or economic instability in countries in which we operate, discriminatory regulation, credit risks of our counterparties, lack of local business experience in certain markets, risks associated with exposure to insurance industry insolvencies through policyholder guarantee funds or similar mechanisms set up in markets in which we are present and, in certain cases, risks associated with the potential incompatibility with foreign partners, especially in countries in which we are conducting business through entities which we do not control. Some of our international insurance operations are, and are likely to continue to be, in emerging markets where these risks are heightened. Our overall success as a global business depends, in part, upon our ability to succeed in different economic, social and political conditions.
Credit risks relating to Aviva’s business Market developments and government actions regarding the sovereign debt crisis in Europe, particularly in Greece, Ireland, Italy, Portugal and Spain, could have a material adverse effect on our results of operations, financial condition and liquidity. The continued uncertainty over the outcome of various European Union (“EU”) and international financial support programmes, and the possibility that other EU member states may experience similar financial pressures, could further disrupt global markets. In particular, this crisis has disrupted, and could further disrupt, equity and fixed income markets, and has resulted in volatile bond yields on the sovereign debt of EU members. The issues arising out of the current sovereign debt crisis may transcend Europe, cause investors to lose confidence in the safety and soundness of European financial institutions and the stability of European member economies, and likewise affect UK and US based financial institutions, the stability of the global financial markets and any economic recovery. We hold investments in both UK and non-UK securities. If an EU member state were to default on our obligations or to seek to leave the eurozone, or if the eurozone were broken up entirely, the impact on the financial and currency markets would be significant and could impact materially all financial institutions, including the Group. Recent political negotiations in the US over raising the US debt ceiling indicate that a risk of sovereign debt default and the potential adverse impact on global markets which could result from this, is not limited to the eurozone. Such events could adversely affect our business and results of operations, financial condition and liquidity.
The reported value of our relatively illiquid types of investments, our investments in the asset classes described in the paragraph above and, at times, our higher-quality, generally liquid asset classes, do not necessarily reflect the lowest current market price for the asset. If we were forced to sell certain of our assets in the current market, there can be no certainty that we would be able to sell them for the prices at which we have recorded them and we may be forced to sell them at significantly lower prices. We may need to seek additional financing in the event internal resources are not sufficient to meet our needs. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry and the market’s perception of our financial condition. Disruptions and uncertainty or volatility in the capital and credit markets may exert downward pressure on availability of liquidity and credit capacity for certain issuers and may limit our access to capital required to operate and grow our business. Such market conditions may limit our ability to replace, in a timely manner, maturing debt, satisfy statutory capital requirements and generate fee income and market-related revenue to meet liquidity needs. As such, we may be forced to delay raising capital, issue shorter-term securities than we prefer, or bear an unattractive cost of capital which could decrease profitability and reduce financial flexibility. Our results of operations, financial condition and cash flows could be materially adversely affected.
As a holding company, Aviva plc is dependent on our operating subsidiaries to cover operating expenses and dividend payments. As a holding company, Aviva plc has no substantial operations of our own. Our principal sources of funding are dividends from subsidiaries, shareholder-backed funds and any amounts that may be raised through the issuance of debt and commercial paper. Our insurance and fund management operations are generally conducted through direct and indirect subsidiaries. Certain subsidiaries have regulatory restrictions that may limit the payment of dividends, which in some circumstances could limit our ability to pay dividends to shareholders. The inability of our subsidiaries to pay dividends in an amount sufficient to enable us to meet our cash requirements at the holding company level could have a material adverse impact on our business.
A requirement to pay intercompany indebtedness early could have negative consequences for our business and results of operations. An intercompany loan was granted by Aviva Insurance Limited to Aviva Group Holdings Limited in February 2013 (the balance of which was £4.8 billion as at 31 December 2013). We have agreed with the Board of the UK General Insurance Company (AIL) an appropriate target for the long term level of the internal loan between the Group Holding Company (AGH) and AIL. That level has been set such that AIL places no reliance on the loan to meet its stressed insurance liabilities assessed on a 1:200 basis. Our prudential regulators, PRA, agree with this approach. The effect of this would be to reduce the internal loan balance from its level at the end of February 2014 of £4.1 billion to approximately £2.2 billion. We will complete this reduction by the end of 2015. A requirement to reduce the loan more rapidly or to a greater extent than planned could have negative consequences for our business and results of operations and, in particular, could impact on the ability of subsidiaries to remit dividends to the Issuer.
If our business does not perform well or if actual experience versus estimates used in valuing and amortising Deferred Acquisition Costs (“DAC”) and Acquired value of in-force business (“AVIF”) varies significantly, we may be required to accelerate the amortisation and/or impair the DAC and AVIF which could adversely affect our results of operations or financial condition. We incur significant costs in connection with acquiring new and renewal business. Those costs that vary with and are driven by the production of new and renewal business are deferred and referred to as DAC. The recovery of DAC is dependent upon the future profitability of the related business. The amount of future profit or margin is dependent principally on investment returns in excess of the amounts credited to policyholders, mortality, morbidity, persistency and expenses to administer the business. Of these factors, investment margins and general insurance underwriting profit are most likely to impact the rate of amortisation of such costs. The aforementioned factors enter into management’s estimates of gross profit or margins, which generally are used to amortise such costs. If the estimates of gross profit or margins were overstated, then the amortisation of such costs would be accelerated in the period the actual amount is known and would result in a charge to income. Significant or sustained equity market declines could result in an acceleration of amortisation of the DAC related to unit-linked business, resulting in a charge to income. Such adjustments could have a material adverse effect on the results of operations or financial condition. AVIF reflects the estimated present value of future profit that will emerge over the remaining life of certain in-force contracts in a life insurance company, acquired either directly or through the purchase of a subsidiary, and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the insurance and investment contracts in-force at the acquisition date. AVIF is based on actuarially determined projections. Actual experience may vary from the projections. Revisions to estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in impairment and a charge to income. Where AVIF is amortised, an acceleration of the amortisation of AVIF would occur if the estimates of gross profit or margins were overstated in the period in which the actual experience is known and would result in a charge to net income. Such adjustments could have an adverse effect on our results of operations or financial condition.
Operational risks relating to Aviva’s business All of our businesses are subject to operational risks, including the risk of direct or indirect loss resulting from inadequate or failed internal and external processes, systems and human error or from external events. Our business is dependent on processing a large number of complex transactions across numerous and diverse products. Furthermore, the long-term nature of the majority of our business means that accurate records have to be maintained for significant periods. Our systems and processes on which we are dependent to serve our customers are designed to identify appropriately and address the operational risks associated with our activities. However, they may nonetheless fail due to IT malfunctions, human error, intentional disruption or hacking of IT systems by third parties, business interruptions, non-performance by third parties or other external events. This could disrupt business operations resulting in material reputational damage and the loss of customers, and have a consequent material adverse effect on our results of operations and financial condition. Although we have taken steps to upgrade systems and processes to reduce these operational risks, we cannot anticipate the details or timing of all possible operational and systems failures which may adversely impact our business. Our businesses are exposed to risk from potential noncompliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of “rogue traders” or other employees. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not always be effective.
We operate in several markets through arrangements with third parties. These arrangements involve certain risks that we do not face with our subsidiaries. Our ability to exercise management control over our partnership operations, our joint ventures and our investment in them depends on the terms of the legal agreements. In particular, the relationships depend on the allocation of control among, and continued co-operation between, the participants. We may also face financial or other exposure in the event that any of our partners fail to meet their obligations under the agreement or encounter financial difficulty. For example, a significant proportion of our product distribution, such as bancassurance, is carried out through arrangements with third parties not controlled by us and is dependent upon the continuation of these relationships. A temporary or permanent disruption to these distribution arrangements could affect our financial condition. Some of these arrangements require our third-party partners to participate in and provide capital to our joint venture, associate and subsidiary undertakings. Our partners may change their strategic priorities or encounter financial difficulties preventing them from providing the necessary capital to promote future growth. In addition, we outsource certain customer service, technology and legacy policy administration functions to third parties and may do so increasingly in the future. If we do not effectively develop and implement our outsourcing strategy, third-party providers do not perform as anticipated or we experience technological or other problems with a transition to or between such providers, we may not realise the full extent of productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and a loss of business. Failings in our outsource partners may also affect our reputation. Our fund management operation depends on a number of key vendors for various fund administration, accounting, valuations, custody and transfer agent roles and other operational needs. The failure or inability to diversify sources for key services or the failure of any key vendors to fulfill their obligations could lead to operational issues for us and in certain products, which could result in financial losses for us and our clients.
There are inherent funding risks associated with our participation in defined benefit staff pension schemes. We operate both defined benefit and defined contribution staff pension schemes. The defined benefit section of the UK staff pension scheme was closed to new members from 1 April 2011, with entry into the defined contribution sections being offered to the staff members affected. Closure of the defined benefit scheme will remove the volatility associated with adding future accrual for active members. There are inherent funding risks associated with the defined benefit schemes. Events could result in a material reduction in the funding position of such schemes and, in some cases, may result in a deficit between the pension scheme’s assets and liabilities. The factors that affect the scheme’s position include: poor investment performance of pension fund investments; greater life expectancy than assumed; adverse changes in interest rates or inflation; and other events occurring that increase the costs of past service benefit over the amounts predicted in the actuarial assumptions. In the short term, the funding position is inherently volatile due to movements in the market value of assets. Where a funding deficit or surplus arises, the position will be discussed with the scheme trustees to agree appropriate actions. This may include a plan to fund the deficit over a period of years. Any surplus or deficit in the defined benefit pension scheme will affect shareholders’ equity, although the IFRS position may diverge from the scheme funding position. The UK pension schemes are subject to statutory requirements with regards to funding and other matters relating to the administration of the schemes. Compliance with these requirements is subject to regular review. A determination that we have failed to comply with applicable regulations could have an adverse impact on our results of operations or our relationship with current and potential contributors and employees, and result in adverse publicity.
Systems errors or regulatory changes may affect the calculation of unit prices or deduction of charges for unitlinked products which may require us to compensate customers retrospectively. A significant proportion of our product sales are unit-linked contracts, where product benefit are linked to the prices of underlying unit funds. While comprehensive controls are in place, there is a risk of error in the calculation of the prices of these funds due to human error in data entry, IT-related issues or other causes. Additionally, it is possible that policy charges which are deducted from these contracts are taken incorrectly, or the methodology is subsequently challenged by policyholders or regulators and changed retrospectively. Any of these can give rise to compensation payments to customers. Controls are in place to mitigate these risks, but errors could give rise to future liabilities. Payments due to errors or compensation may negatively impact profit.
Execution risk is inherent in the completion of all strategic transactions. Such risks include uncertainty in relation to obtaining the required regulatory approvals on satisfactory terms for the change of control envisaged by such transactions. Such execution risk gives rise to a corresponding potential impact on capital requirements and liquidity.
Our acquisitions may divert management attention and other resources and involve risks of undisclosed liabilities and integration issues. In past years, we have completed a number of acquisitions around the world. We may make further acquisitions in the future. Growth by acquisition involves risks that could adversely affect our operating results, including the substantial amount of management time and other resources that may be diverted from operations to pursue and complete acquisitions, or risks of undisclosed liabilities or integration or separation issues.
We may not be able to protect our intellectual property and may be subject to infringement claims by a third party. Our primary brand in the UK (“Aviva”) is a registered trade mark in the UK and elsewhere. We own other registered or pending trade marks in the UK, including Community trade marks having effect in the entire EU. We rely on a combination of contractual rights, copyright and trademark laws to establish and protect our intellectual property. Although we use a broad range of measures to protect our intellectual property rights, third parties may infringe or misappropriate our intellectual property. The loss of intellectual property protection or the inability to secure or enforce the protection of our intellectual property assets could have a material adverse effect on our business and our ability to compete. Third parties may have, or may eventually be issued, patents or other protections that could be infringed by our products, methods, processes or services or could limit our ability to offer certain product features. In recent years, there has been increasing intellectual property litigation in the financial services industry challenging, among other things, product designs and business processes. If a third party were to successfully assert an intellectual property infringement claim against us, or if we were otherwise precluded from offering certain features or designs, or utilising certain processes, it could have a material adverse effect on our business, results of operations and financial condition.
Our businesses are conducted in highly competitive environments. There are many factors which affect our ability to sell our products, including fiscal incentives, price and yields offered, financial strength and ratings, range of product lines and product quality, brand strength and name recognition, fund management performance and historical bonus levels. In some of our markets, we face competitors that are larger, have greater financial resources or greater market share, offer a broader range of products, benefit from more advantageous tax treatments, or have higher bonus rates or claims-paying ratios. Further, heightened competition for talented and skilled employees with local experience, particularly in the emerging, high-growth markets, may limit our ability potential to grow businesses as quickly as planned. Our principal competitors in the life market include many of the major financial services businesses including, in particular, Axa, Allianz, CNP, Generali, Prudential, Legal & General and Standard Life. Our principal competitors in the general insurance market include Direct Line Insurance, Intact, RSA, Zurich, Axa and Allianz. Our principal competitors in the fund management market include BlackRock, State Street Global, Fidelity Investments, Schroders and Aberdeen, as well as the fund management divisions of our principal competitors in the life market. We also face competitors who specialise in many of the niche markets in which we operate. We believe that competition will intensify across all regions in response to consumer demand, technological advances, the impact of consolidation, regulatory actions and other factors. Our ability to generate an appropriate return depends significantly upon our capacity to anticipate and respond appropriately to these competitive pressures.
Regulatory and legislative risks relating to Aviva’s business Our regulated business is subject to extensive regulatory supervision both in the UK and internationally. We are subject to extensive laws and regulations that are administered and enforced by a number of different governmental authorities and non-governmental self-regulatory agencies, including the PRA and the FCA and other regulators. In light of wider financial and economic conditions, some of these authorities are considering, or may in the future consider, enhanced or new regulatory requirements intended to prevent future crises or otherwise assure the stability of institutions under their supervision. These authorities may also seek to exercise their supervisory or enforcement authority in new or more robust ways. All of these possibilities, if they occurred, could affect the way we conduct our business and manages our capital, and may require us to satisfy increased capital requirements. Insurance regulation in the UK is largely based on the requirements of EU directives. Inconsistent application of directives by regulators in different EU member states may place us at a competitive disadvantage to other European financial services groups. In addition, changes in the local regulatory regimes of designated territories could affect the calculation of our solvency position. Our insurance subsidiaries worldwide are subject to detailed and comprehensive government regulation in each of the jurisdictions in which they conduct business. Regulatory agencies have broad administrative power over many aspects of the insurance business, which may include premium rates, marketing and selling practices, advertising, licensing agents, policy forms, capital adequacy and permitted investments. Government regulators are concerned primarily with the protection of policyholders rather than our shareholders or creditors. The failure of any of our insurance subsidiaries to meet minimum capital and surplus requirements could subject it to further examination or corrective action imposed by insurance regulators, including limitations on its ability to write additional business, increased supervision by regulators or the implementation of resolution plans. Any corrective action imposed could have a material adverse effect on our business, results of operations and financial condition. A decline in minimum capital and surplus amounts may also limit the ability of an insurance subsidiary to make dividend payments or distributions to us and could be a factor in causing rating agencies to downgrade the insurer’s financial strength ratings, which could have a material adverse effect on our business, results of operations and financial condition. In the UK, our business is subject to regulation by both the PRA and the FCA, which have broad powers, including the authority to grant, vary the terms of, or cancel a regulated firm’s authorisation, to investigate marketing and sales practices, to make product intervention rules and to require the maintenance of adequate financial resources. The PRA and the FCA have the power to undertake a range of investigative, disciplinary or enforcement actions, including public censure, restitution, fines or sanctions and to require firms to pay compensation. The PRA and the FCA may make enquiries of the companies which they regulate regarding compliance with regulations governing the operation of business and, similar to the other UK regulated financial services companies, we face the risk that the PRA or the FCA could find that we have failed to comply with applicable regulations or have not undertaken corrective action as required. Issues and disputes may arise from time to time from the way in which the insurance industry or fund management industry has sold or administered an insurance policy or other product or in the way in which they have treated policyholders or customers, either individually or collectively.
Shareholder information continued designated as G-SIIs also includes a number of our competitors. The list will be updated annually from November 2014. For so long as it is designated as a G-SII, the Group is within the scope of policy requirements issued by the International Association of Insurance Supervisors (“IAIS”), including: enhanced supervision requiring the development by July 2014 of a Systemic Risk Management Plan; the development of recovery and resolution plans; and higher loss absorbency capital requirements, which will apply from January 2019 for those insurers still designated as G-SIIs in November 2017. Details of the loss absorbency capital requirements are still being developed by the IAIS leading to uncertainty over their impact. There is a risk that, if we continue to be designated as a G-SII, this could lead to a significant increase in capital required to support our business which may give rise to a need for us to delay deleveraging plans or to issue additional debt. Similarly we could be required to reduce or discontinue activities which contribute to systemic riskiness, restructure to facilitate resolvability and/or remove or reduce (or accelerate the planned reduction of) intercompany debts or guarantees within the Group. Such requirements could have negative consequences for our business and results of operations and, in particular, could impact on the ability of subsidiaries to remit dividends to the Issuer. The IAIS has no direct legal powers to impose standards on either regional or national supervisors of the Group but, in the UK, the PRA is taking steps to discuss G-SII requirements with UK firms to whom the designation has been applied. The IAIS is also developing a common framework for the supervision of internationally active insurance groups (“ComFrame”). The framework is designed to develop common principles for supervision and so may result in more extensive regulation, particularly at group level, in those jurisdictions which do not currently employ group-wide supervision. In addition, it is not clear how ComFrame will interact with existing regimes of group-wide supervision. On 9 October 2013, the IAIS announced a commitment to develop a risk-based global insurance standard (“ICS”) by 2016. The intention is that the ICS will ultimately form part of ComFrame. A revised draft ComFrame proposal is expected in March 2014 and ComFrame, including the final ICS, is expected to be adopted at the end of 2018 to apply from 2019.
We are involved in various legal proceedings, regulatory investigations and examinations and may be involved in more in the future. We have been named as defendants in lawsuits, including class actions and individual lawsuits. We have been subject to regulatory investigations or examinations in the various jurisdictions where we operate. These actions arise in various contexts, including in connection with our activities as an insurer, securities issuer, employer, investment adviser, investor and taxpayer. Certain of these lawsuits and investigations seek significant or unspecified amounts of damages, including punitive damages, and certain of the regulatory authorities involved in these proceedings have substantial powers over the conduct and operations of our business. Due to the nature of certain of these lawsuits and investigations, we cannot make an estimate of loss or predict with any certainty the potential impact of these lawsuits or investigations. In the course of conducting insurance business, we receive general insurance liability claims, and become involved in actual or threatened related litigation arising therefrom, including claims in respect of pollution and other environmental hazards. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents that they cover and the uncertainties associated with establishing liability and the availability of reinsurance, the ultimate cost cannot be determined with certainty.
We may face increased compliance costs as a result of recent legislation passed in the United States. In March 2010, the United States passed legislation that would require non-United States financial institutions to enter into agreements to provide information on United States account holders beginning in 2015. If this information is not provided in a form and with contents satisfactory to the United States tax authorities, a non-United States financial institution will have a 30% withholding tax applied to certain amounts derived from United States sources. Under the final United States Treasury regulations, no such withholding tax will be imposed on any payments made prior to 1 July 2014. On 1 September 2013, regulations were introduced in the United Kingdom (the ‘‘Regulations’’) to give effect to the intergovernmental agreement entered into between the United Kingdom and the United States to improve tax compliance, dated 12 September 2012 (the ‘‘UK-US IGA’’). Under the UK-US IGA, UK-based financial institutions should not be subject to a 30% withholding on US source income, unless they fail to meet the requirements set out in the UK-US IGA and the Regulations. A number of other jurisdictions have announced that they intend to introduce similar measures.
Product definitions Annuities A type of policy that pays out regular amounts of benefit, either immediately and for the remainder of a person’s lifetime, or deferred to commence from a future date. Immediate annuities may be purchased for an individual and his or her dependants or on a bulk purchase basis for groups of people. Deferred annuities are accumulation contracts, which may be used to provide benefits in retirement. Annuities may be guaranteed, unit-linked or index-linked.
Open ended investment company (OEIC) A collective investment fund structured as a limited company in which investors can buy and sell shares.
International financial reporting standards (IFRS) These are accounting regulations designed to ensure comparable statement of financial position preparation and disclosure, and are the standards that all publicly listed companies in the European Union are required to use.
Net written premiums Total gross written premiums for the given period, less premiums paid over or ‘ceded’ to reinsurers.
Value of new business (VNB) VNB is the present value of future profits from new business written at the point of sale. It is calculated on a market consistent basis using economic assumptions set at the start of each quarter and the same operating assumptions as those used to determine the embedded value at the end of the reporting period and is stated after the effect of any frictional costs. Unless otherwise stated, it is quoted net of tax and minority interests.
Individual 548,969 97.03 264,080,246 8.96 Banks and nominee companies 14,031 2.48 2,631,081,144 89.28 Pension fund managers and insurance companies 221 0.04 1,107,028 0.04 Other corporate bodies 2,573 0.45 50,671,204 1.72
1–1,000 510,676 90.26 141,776,379 4.81 1,001–5,000 48,894 8.64 93,490,932 3.17 5,001–10,000 3,524 0.62 24,602,884 0.84 10,001–250,000 2,166 0.38 89,126,377 3.02 250,001–500,000 144 0.03 52,216,902 1.77 500,001 and above 389 0.07 2,524,576,690 85.67 American Depositary Receipts (ADRs)+ 1 0.00 21,149,458 0.72
2014 financial calendar Annual General Meeting 30 April 2014 Announcement of first quarter Interim Management Statement 15 May 2014 Announcement of unaudited half-year results 7 August 2014 Announcement of third quarter Interim Management Statement 30 October 2014 2013 final dividend dates – ordinary shares Ex-dividend date 2 April 2014 Record date 4 April 2014 Last day for Dividend Reinvestment Plan election 24 April 2014 Dividend payment date* 16 May 2014 * Please note that the ADR local payment date will be approximately five business days after the proposed dividend date for ordinary shares.
Broad Sanctuary, Westminster, London SW1P 3EE on Wednesday, 30 April 2014 at 11am.
Shareholders can vote electronically at www.investorcentre.co.uk/eproxy, in person by attending the meeting, or by completing and returning the relevant voting card(s) by post.
The voting results for the 2014 AGM will be accessible on the Company’s website at www.aviva.com/agm shortly after the meeting.
AGM voting instructions Completed proxy instructions must be submitted to the
Friday, 25 April 2014 at 11am for members of the Aviva Share Account, participants in the Vested Share Account and the Aviva All Employee Share Ownership Plan.
Holders of ordinary and preference shares will receive any dividends payable in sterling and holders of ADRs will receive any dividends payable in US dollars.
The Company has decided to introduce a Dividend Reinvestment Plan. The plan provides the option for eligible shareholders to reinvest their cash dividend in additional ordinary shares in the Company. For further information please visit www.aviva.com/ecomms. Completed application forms should be sent to the Company’s Registrar, Computershare, by no later than 5pm on Thursday, 24 April 2014.
Overseas global dividend service The Global Payments Service provided by Computershare enables shareholders living overseas to elect to receive their dividends in a choice of over 65 international currencies. For further details and fees for this service please visit www.investorcentre.co.uk/faq and select the Dividends and Payments tab, followed by Global Payment Service.
Contact details Ordinary and preference shares – Computershare For any queries regarding your shareholding, or to advise of changes to your personal details, please contact our Registrar, Computershare: By telephone: 0871 495 0105 Lines are open from 8.30am to 5pm (UK time), Monday to Friday (excluding public holidays). Please call +44 117 378 8361 if calling from outside the UK.
Manage your holdings online You can view and manage your shareholding online by visiting www.aviva.com/ecomms. To log in you will require your 11 digit Shareholder Reference Number (SRN), which you will find on your proxy or voting card, latest dividend stationery, or any share certificate issued since 4 July 2011. Shareholders can also elect to receive electronic communications by registering their email address online, or by contacting Computershare directly. Making this election will save on printing and distribution costs and has environmental benefits.
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