The Group paid £15.0 million to Ernst & Young for audit services in 2009, relating to the statutory audit of the Group and Company financial statements and the audit of Group subsidiaries and associates pursuant to legislation (2008: £12.1 million). The fees for other services, which included advice on accounting and regulatory matters, reporting on internal controls, corporate governance matters, and due diligence work, were £19.0 million, giving a total fee to Ernst & Young of £34.0 million (2008: £25.0 million). Further details are provided in note 12 to the consolidated financial statements. In addition, the Group engaged the organisation Corporate Citizenship in relation to certain assurance work, including verification of its Corporate Responsibility Report.
In line with the Combined Code requirement, the Board undertook a review of the effectiveness of all its committees during the year, including the Audit Committee. In addition, the Committee also carried out a self-evaluation of its effectiveness.
The following independent non-executive directors served on the Committee during the year: Period
External background In the challenging economic and market environment the Board and the Committee continued to focus on financial risk and capital management. The Committee also spent an increasing amount of time on the emerging requirements of the European Union’s Solvency II Directive, and the recommendations of the Walker Report in the UK. Although the recommendations of the Walker Report are not yet binding on the Group, the Group is already compliant with the majority of the recommendations relating to risk. In particular, the Board has had a separate risk and regulatory committee since 2006. The Committee chairman regularly reports to the Board on the Committee’s activities, and sits on the Audit and Remuneration Committees to ensure that risk considerations are fully reflected in their decisions.
— Solvency II: with increasing emphasis on economic capital, the Committee monitored the likely impact of Solvency II on the Group’s economic capital requirements and businesses. The Committee is responsible for the oversight of the Group’s Solvency II programme.
— Risk monitoring: the Committee received regular reports on key risks and the actions and controls introduced to mitigate any risks that were out of appetite. Necessary focus was placed on financial and insurance risks including those relating to capital, credit, and equity risk. The Committee continued its practice of inviting business unit and regional teams, led by their Chief Executive, to present on how risk is managed in their businesses. During the year, presentations were received from North America region, Europe region, Asia Pacific region and UK General Insurance.
— Group risk policies: The Committee approved significant changes to certain Group risk policies and received regular reports on compliance with Group policies.
— Fraud and financial crime: the Committee maintained regular oversight of compliance with controls against financial malpractice including fraud, and of the arrangements for employees to report in confidence any concerns about lack of probity (whistleblowing).
During the year the Committee held two joint meetings with the Audit Committee and one with the members of the business unit audit committees in the Asia Pacific region.
In line with the Combined Code requirement, the Board undertook a review of the effectiveness of all its committees during the year, including the Risk and Regulatory Committee.
This report provides details of the role of the Corporate Responsibility Committee and the work it has undertaken during the year.
During the year, the Committee reviewed and approved the content and scope of the Company’s 2009 CR Report, monitored the management of the CR risks affecting the Group and helped establish a process by which regions could report performance and progress to the Committee. In November 2009 the Company announced its intention to put its CR Report to an advisory vote of shareholders at the 2010 AGM as a means of obtaining feedback on the report and the Company’s performance in this area. The report is set out on pages 67 to 78 and further details of the resolution are set out in the Notice of Annual General Meeting.
Performance reviewAviva plc Corporate responsibilityDirectors’ remuneration report Annual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
Highlights — The Remuneration Committee (the Committee) approved the Executive Directors’ (EDs) request to freeze their basic salaries for 2009 and to take a 10% reduction on the personal element of their annual bonus. In 2010, the EDs requested that their basic salaries should not be subject to annual review and the Committee has endorsed this proposal.
— The Committee entered the 2010 reward period conscious of the challenging economic background and widespread comment on over generous executive remuneration. The Committee believes Aviva’s 2009 business results are strong and that Aviva’s remuneration practices already closely link pay to performance and also align with current governance guidelines. The Committee has, however, continued to ensure prudent and proportionate reward outcomes.
Introduction This report sets out the details of the remuneration policy for the Company’s directors, describes its implementation and discloses the amounts paid in 2009. In addition to meeting statutory requirements, particularly the Companies Act 2006, Schedules 5 and 8, the Committee has aimed to comply with best practice guidelines, including guidance issued by the Association of British Insurers and the National Association of Pension Funds, in producing this report. Relevant sections of this report have been audited in accordance with corporate governance best practice and legislation.
This report covers the following: — The Committee’s objectives, membership and main activities in 2009; — A review of Aviva’s remuneration policy and practice; — Commentary on the alignment between remuneration, risk and Aviva’s business strategy and objectives; — Details of the terms of EDs’ service contracts; — Aviva’s share ownership policy with respect to EDs; — Aviva’s policy on external board appointments; — Aviva’s UK all employee share plans and share incentive plans; — Aviva’s position against dilution limits; — Remuneration of the Non Executive Directors (NEDs), and; — Tables summarising the 2009 position on: – Directors’ remuneration – EDs’ pension arrangements – Share incentive plans – Directors’ interests in shares
The Committee’s objectives The Committee is a committee of the Board. Its terms of reference are available from the Group Company Secretary and can be found on the Company’s website www.aviva.com/terms-of-reference. The Committee’s key objectives are to: — Establish a competitive remuneration package to attract, retain and motivate high quality leaders; — Promote the achievement of both the Company’s annual plans and its strategic objectives by providing a remuneration package that contains appropriately motivating targets that are within the Group’s risk appetite; and — Align senior executives’ remuneration with the interests of shareholders and other stakeholders, including customers and employees.
The Committee’s main responsibilities are to: — Recommend to the Board the Group’s remuneration policy for the EDs and members of senior management, covering basic salary, bonus, long-term incentives, retirement provisions, long-term wealth creation and other benefits; — Strike an appropriate balance between (i) the fixed and variable components and (ii) the cash, equity and equity related components of the total remuneration package; — Ensure the remuneration package is congruent with, and provides the incentives to realise, short and long term goals; — Review and determine the terms of employment and remuneration of the individual EDs, including any specific recruitment or severance terms; — Assess and, within the broad policy from time to time approved by the Board, determine the remuneration terms of the
— Select, appoint and determine terms of reference for independent remuneration consultants to advise the Committee on remuneration policy and levels of remuneration.
Committee membership Table 1 below shows the independent NEDs who served on the Committee during the year: Table 1: Members of the Committee during 2009 Member From To
The Committee was advised in 2009 by the Group Human Resources Strategy Director, David Hope, and the Group Reward Director, Martyn Fisher, on market practice and the alignment of reward arrangements to business strategy and by the Chief Accounting Officer, David Rogers, on matters relating to the performance measures and targets for the Group’s share incentive plans. Group Audit also provide assurance to the Committee over non-financial bonus targets.
Committee activities during 2009 The Committee is required by its terms of reference to meet at least three times per year and has a standing calendar of items within its remit. In addition to these standing items, the Committee discusses matters relating to the operation of the remuneration policy and emerging market practices. In 2009, the Committee met eight times and discussed, amongst others, the issues set out in Table 2 below: Table 2: Matters discussed by the Committee during its 2009 meetings Meeting Standing agenda items Other agenda items
— A review of dilution limits — A review and approval of recommendations on contributions into the Aviva Capital Accumulation Plan (ACAP)
— Approval of an invitation to UK and Irish employees to participate in — LTIP and OATTV Plan performance testing for the the Savings Related Share Option Schemes (SAYE) Australian participants following the decision to sell the business — EDs’ shareholding requirements — Update on governance and regulatory developments — Consideration of the impact of the Finance Act 2009 on remuneration
October — None — Approval of Mark Hodges’ remuneration following the expansion of his responsibilities
— Review remuneration changes for relevant members of the Executive Committee following new appointments and changes to responsibilities
December — Approval of the proposed 2010 financial, employee and customer targets for the operation of the ABP
The Committee remains conscious of the shareholders’ loss of value in light of the recession. This has also impacted the EDs through the significantly lower value of the deferred ABP shares and LTIP grants in 2007, both of which will vest in 2010.
ii) Changes to UK taxation The changes in the personal tax regime effective in April 2010 will create a significantly different tax position for a number of senior employees. The Company has therefore made available the choice to receive deferred annual bonus awards as restricted stock, thus allowing the payment of income tax on grant prior to the changes coming into effect in April 2010. Any potential cost to the Company is judged to be minimal. In addition, the 2010 LTIP grant will be underpinned by an approved share option grant. This will have no additional cost to the Company. These changes were discussed with Her Majesty’s Revenue and Customs (HMRC) before being implemented.
iii) Strategic Reward Review The Company is required every five years to seek shareholder approval for the operation of its share-based incentive plans. The Committee has, in the past, carried out a comprehensive review of senior executive remuneration to coincide with this. This has allowed the Company to put to shareholders’ proposals that reflect a thorough review of the Company’s remuneration package taking into account changing market and regulatory practice and the requirement to ensure that the package remains competitive. It was agreed in 2008 that the review would be delayed by 12 months from 2009 to 2010. This will enable Aviva to reflect on the new regulatory and governance requirements that emerge from the global financial crisis. Following an in-depth review during 2010, new proposals will be put to shareholders in 2011.
The Group’s strategic priorities and targets are set out elsewhere in this report. Those priorities are reflected closely in the remuneration package: — Basic Salary: Internal and external equity in basic salary positioning is an important contributor to a motivational remuneration package. A range of market data is used to inform decision making taking into account the Company’s policy with regard to the FTSE 30 and FTSE 50.
— ABP: Bonus structures are effective only if they drive, through the targets, the maintenance of the Company on a sound financial footing and sustained profitable growth. In addition, the targets must not provide an incentive to promote behaviours which could be detrimental to the Company’s long-term interests. Management must justify the targets it recommends. The Committee assures itself that the targets provide appropriate incentives, are sufficiently challenging, are aligned to shareholders’ interests and are within the Group’s risk appetite.
The Committee also considers how, given changing economic circumstances, the Group’s priorities, and consequently the targets underpinning its bonus structures, need to change. Given the challenging current environment the Committee has agreed that financial targets for 2010 should focus more on profitable growth and long-term value creation. Financial targets sit alongside targets on customer advocacy and employee engagement introduced in 2005 that the Committee believes are critical to long-term organisational health. The personal objectives of Executive Committee members are reviewed by the Committee to ensure they adequately reflect the strategic aims of the Group, good governance and best practice.
— LTIP: The LTIP encourages a longer-term management focus on Return on Capital Employed (ROCE) and relative TSR. These metrics measure how the Company is performing in both absolute and relative terms.
The Committee considers all these elements, plus pension and other benefits, as a whole. It looks to ensure that an appropriate balance is maintained between them so that the need for both short-term success and long-term sustainable growth is recognised. The Committee also ensures that the non-financial business measures and individual objectives reflect adequately the Company’s environmental, social and governance responsibilities.
Tables 3a and 3b: Breakdown of remuneration for the Group Chief Executive
— “Stretch” performance means a stretch ABP outcome (150% of basic salary), 100% vesting of the LTIP (175% of basic salary) and a 2:1 match from the OATTV Plan (200% of basic salary).
Remuneration policy in practice for EDs Table 4, below, summarises Aviva’s remuneration policy as it is applied in practice to EDs.
Basic salary Benchmarked as for total remuneration but with positioning and progression taking account — Monthly in cash of individual and business performance and the levels of increase provided for the broader UK — Reviewed annually in February, with changes employee population (basic salaries of the UK staff increased by 3% on average in 2009). taking effect from 1 April. The Committee takes seriously institutional investors’ concerns on the upward ratchet of basic salaries and is rigorous in its review of market position and salary.
70% of the bonus opportunity, and personal objectives which make up 30%.
75% of basic salary is payable for “on target” performance and up to 150% for “stretch”
OATTV Plan The OATTV Plan aligns senior executives with the Group Chief Executive clear strategic aim of doubling EPS by the end of 2012.
For the 2009 awards, the vesting of these matched shares is dependent on the achievement of 49.2 pence per share and then compounded annual growth targets as follows: — Less than 12.5% growth pa Nil — 12.5% growth pa 0.1 for 1 — 41.5% growth pa 2 for 1
Matching is on a straight-line basis for performance from 12.5% to 41.5%. No additional shares are awarded for the dividends paid during the three-year performance period on those shares that vest.
The Company operates a phantom scheme in the United States (US) for its US-based employees. Levels of awards reflect US market practice.
— Annual awards in shares that vest, subject to ROCE and relative TSR performance conditions being met at the end of a three-year performance period.
Long-term savings The Aviva Capital Accumulation Plan (ACAP) is a long-term savings vehicle which aids — Discretionary payments into a trust where they retention whilst recognising a need for flexibility in long-term wealth planning. are held for a minimum of five years. Company contributions are discretionary and vary year on year, but would not normally exceed 50% of basic salary. Contributions for the EDs are shown in the table on page 113. No ED who participates in the ACAP is currently accruing benefits in the ASPS. A resignation or departure for breach of contract generally results in forfeiture of contribution for the relevant year.
Other Benefits Other benefits are provided on a market competitive basis. — Cash car allowance
ABP £1,029,294 (111.3% of basic Bonus is a function of the degree of achievement of 2009 targets as salary) follows: (£343,098 delivered in cash Financial 38.9% (maximum 50%) and £686,196 deferred into Employee 5.0 % (maximum 10%) shares for three years) Customer 6.9 % (maximum 10%)
OATTV Plan £501,443 The face value of 100% of the two-thirds deferred element of 2008 annual bonus.
ACAP £462,500 The Trustee of the Plan accepted Aviva’s recommendation and made an award into the plan equivalent to 50% of Mr Moss’ basic salary as at 1 April.
Basic Salary £600,000 during the year. Mr Scott requested not to receive an increase to his basic salary in 2009.
OATTV Plan £243,945 The face value of 75% of the two-thirds deferred element of 2008 annual bonus.
OATTV Plan £266,039 The face value of 75% of the two-thirds deferred element of 2008 annual bonus.
Andrea Moneta, CEO, Aviva Europe, Middle East and Africa Element Amount Commentary**
ABP €848,660 (108.8% of basic Mr Moneta’s bonus is a function of the degree of achievement of 2009 salary) targets as follows: (€282,887 delivered in cash and Financial 41.7% (maximum 50%) €565,773 deferred into shares Employee 0.0 % (maximum 10%) for three years) Customer 8.8 % (maximum 10%)
OATTV Plan €408,000 The face value of 75% of the two-thirds deferred element of 2008 annual bonus.
Other Benefits €16,653 cash car allowance during the year €82,201 exchange rate adjustment €1,066,700 compensation for loss of earnings, options and performance shares from previous employer €100,000 housing allowance per annum for three years €40,000 schooling allowance PMI
Annual car allowance of £13,300 (€14,936) from 1 January 2009 to 28 September 2009, and €21,500 per annum from 29 September 2009 to 31 December 2009.
A further €800,000 compensation is payable for loss of earnings, options and performance shares from a previous employer, half payable in 2010 and half payable in 2011.
€100,000 annual housing allowance up to July 2011, grossed up for tax purposes.***
*** These exceptional other benefits were provided to replicate pre-existing obligations and are time-limited.
ABP – target setting The financial targets which underpinned the ABP (accounting for 50% of annual bonus) in 2009 were derived from Aviva’s return, growth and capital efficiency/capital generation goals. Three of the financial targets (operating profit, volume and new business contribution) were “stretched” (as set out in Table 6) due to their importance in achieving these aspirations.
Table 6: Group performance in 2009 against its KPIs Weighting (% of total bonus opportunity)
Business measures (70%) Volume – Total long-term savings 5.0 5.0 5.0
The Committee is sensitive to the current environment in relation to executive pay, and particularly relating to the payment of bonuses in circumstances where financial targets have not been met and share prices have fallen. However, the combination of financial and non-financial measures is central to the structure of the ABP. The Committee wants to ensure a balanced focus on both short-term financial performance and on the objective non-financial measures that are leading indicators of future financial success. This balance is, in the Committee’s view, reflective of good practice in incentive design and is consistent with the FSA’s guidance on creating incentive schemes that have a focus on long-term sustainable performance.
To align with the business priorities for 2010, the financial measures at Group level for 2010 are operating profit, volume, new business margin, the Combined Operating Ratio (COR) of our general insurance businesses and cost savings.
OATTV Plan The OATTV Plan aligns senior executives with the Group Chief Executive’s clear strategic aim of doubling EPS by the end of 2012. The plan matches 100% of the deferred ABP shares for the Group Chief Executive (75% for other EDs). For the grant made in 2009 the vesting of these matched shares is dependent on the average annual growth in EPS during the three year performance period, thus: — Less than 12.5% growth pa Nil — 12.5% growth pa 0.1 for 1 — 41.5% growth pa 2 for 1
Matching is on a straight-line basis for performance between 12.5% and 41.5%. The maximum match of two shares for each deferred share is paid for delivering a doubling of EPS by the end of 2010. The threshold matching of 0.1 of a share for each share deferred is equivalent to doubling EPS by 2014. The Committee reviews the performance conditions of this plan annually.
ROCE targets ROCE targets are set annually within the context of the Company’s three-year business plan and are set on a Market Consistent Embedded Value basis. Vesting depends upon performance over the three-year period against a target return. The Company’s external auditor provides a formal opinion on the ROCE vesting calculation. The 2009 LTIP award ROCE targets are set out in Table 7 below: Table 7: 2009 LTIP ROCE Targets ROCE over the three-year performance period Percentage of shares in award that vests based on achievement of ROCE targets
Between 31.5% and 37.5% Pro rata between 15% and 50% on a straight line basis
Details of subsisting LTIP awards are provided on page 110 and Table 9 below shows the vesting projections (non-audited) of those awards as at 31 December 2009.
Table 9: Projections of vesting of subsisting LTIP awards LTIP Award 31 December 2009 vesting projection (% of award)
Details of the assumptions used in valuing the LTIP for accounting purposes can be found on page 202 of this report. The vesting assumption made in respect of the 2010 award for accounting purposes is 50%.
Table 10: Potential value of 2009 LTIP awards (rounded to nearest £50) LTIP Andrew Moss Philip Scott Mark Hodges Andrea Moneta*
No share price growth is assumed; — Expected value, based on the vesting assumption made for accounting purposes, assumes TSR and ROCE elements vest at a combined rate of 50% of the total award. Share price growth of 5% per annum is assumed over the three-year performance period; — Maximum vesting assumes both TSR and ROCE elements vest in full, producing a 100% vesting. Share price growth of 10% per annum is assumed over the three-year performance period.
Andrea Moneta joined Aviva in July 2008 and does not have an LTIP award vesting in 2010. At the end of the performance period for the 2006 LTIP grant, which vested in 2009, the Company was ranked eighth out of the 15 companies in the TSR comparator group (15% vesting) and ROCE was 36.0% (41.3% vesting). The total vesting was therefore 56.3%. The 43.7% of the award which did not vest lapsed.
Table 11: Vesting history of LTIP awards Percentage of award vesting
Year of grant Performance period ROCE TSR Total 2002 January 2002 to December 2004 23.3 23.0 46.3 2003 January 2003 to December 2005 30.0 34.9 64.9 2004 January 2004 to December 2006 30.0 34.9 64.9 2005 January 2005 to December 2007 50.0 0.0 50.0 2006 January 2006 to December 2008 41.3 15.0 56.3
One Aviva Twice the Value Bonus Plan — 2008 93,567 — — — 93,567 598.0 Mar-11 — 2009 — 195,876 — — 195,876 245.0 Mar-12
Philip Scott Aviva Long Term Incentive Plan — 2006 95,121 — 53,553 41,568 0 814.0 202.5 Mar-09 — 2007 107,282 — — — 107,282 778.5 Mar-10 — 2008 140,625 — — — 140,625 617.5 Mar-11 — 2009 — 351,562 — — 351,562 245.0 Mar-12
Aviva Annual Bonus Plan — 2006 47,138 10,9078 58,045 — 0 814.0 202.5 Mar-09 — 2007 58,647 — — — 58,647 778.5 Mar-10 — 2008 70,312 — — — 70,312 617.5 Mar-11 — 2009 — 127,054 — — 127,054 245.0 Mar-12
Mark Hodges Aviva Long Term Incentive Plan — 2006 44,207 — 24,888 19,319 0 814.0 202.5 Mar-09 — 2007 56,892 — — — 56,892 778.5 Mar-10 — 2008 97,450 — — — 97,450 617.5 Mar-11 — 2009 — 304,687 — — 304,687 245.0 Mar-12
Aviva Long Term Incentive Plan — 2009 — 249,023 — — 249,023 245.0 Mar-12
Aviva Annual Bonus Plan — 2009 — 159,375 — — 159,375 245.0 Mar-12
One Aviva Twice the Value Bonus Plan — 2009 — 119,531 — — 119,531 245.0 Mar-12
Notes 1. The actual price used to calculate the ABP and LTIP awards is based on a three day average price. These were in 2006: 820p; 2007: 769p; 2008: 608p; 2009: 256p. The three day average price used to grant the 2008 OATTV Plan awards was 617p and in 2009 was 256p 2. The performance period for all awards begins at the commencement of the financial year in which the award is granted. 3. The performance conditions for awards granted and vested during 2009 are explained elsewhere in this report. 4. The monetary value of awards will be calculated by multiplying the relevant number of shares by the market price at the date of vesting. 5. The award date for the awards which vested in 2009 was 30 March 2006. 6. The awards granted to Andrea Moneta were awarded before he was appointed to the board, and were held at the date of his appointment. 7. The awards that vested in 2009 were released with the net amount being settled in shares and the balance settled in cash and used to pay the resulting tax liability. 8. These figures relate to shares issued in lieu of dividends accrued during the deferral period. 9. The aggregate net value of share awards granted to the directors in the period was £5.256 million (2008: £4.319 million). The net value has been calculated by reference to the market price at the date of grant.
Table 14: EDs’ key terms and conditions of employment Provision Policy
Sickness In line with senior management terms, ie 100% basic salary for 52 weeks, and 75% thereafter.
Contract dates Director Date current contract commenced Andrew Moss 1 January 2007 Philip Scott 15 November 2006 Mark Hodges 26 June 2008 Andrea Moneta 29 September 2009
Share ownership requirements An internal shareholding requirement was introduced in 2005 that the Group Chief Executive and any EDs should build, over a five-year period, a shareholding in the Company equivalent to 175% of basic salary and 150% of basic salary respectively and no specific value per share was designated for the calculation. Shares held in compulsory bonus deferrals and performance shares held in unvested LTIPs are not taken into account in applying this test.
As at 31 December 2009, based on that day’s closing share price of 397.9p, Mr Moss’ shareholding of 239,848 shares represented 103% of his basic salary of £925,000 (his holding of 176,067 shares at 1 January 2009 represented 76% of his basic salary of £925,000 using the 31 December 2009 share price). As it currently stands, largely due to the volatile market conditions in the current economic climate, Mr Moss will not meet the internal shareholding requirement target of 1.5 x his salary by April 2010, although he is on target to meet the 1.75 x his salary by July 2012. Mr Scott’s shareholding of 512,652 shares represented 340% of his basic salary of £600,000 (his holding of 400,973 shares at 1 January 2009 represented 266%). Mr Hodges’ shareholding of 139,028 shares represented 106% of his basic salary of £520,000 (his holding of 100,086 shares at 1 January 2009 represented 77%). Mr Moneta’s shareholding of 394 shares represented 0% of his basic salary of €780,000 (£694,587 based on average exchange rate for 2009 of €1.12297: £1.00).
The only ED who held an external NED appointment during 2009 was Philip Scott who was appointed to the Board of Diageo plc on 17 October 2007 and, following the announcement of his intended retirement from the Company, to the Board of Royal Bank of Scotland Group plc on 1 November 2009. As a NED of Diageo plc, Mr Scott received fees totalling £101,250 in 2009. As a NED of Royal Bank of Scotland Group plc, Mr Scott received fees totalling £25,000 in 2009.
These plans include a free share element of the Aviva All Employee Share Ownership Plan (AESOP). Under this plan, eligible employees can receive up to a maximum of £3,000 per annum in shares based upon the profits of the Company’s UK businesses. The shares are free of tax subject to a retention period. In addition, the partnership element of the AESOP, which the Company also operates, allows participants to invest up to £125 per month out of their gross salary in the Company’s shares. There is no matching to this investment by the Company.
Dilution Awards granted under the Aviva employee shares plans are met by the funding of an employee trust administered by an external trustee that acquires shares in the market. The current practice is that new issue shares will generally only be issued where it is not practicable to use the trust and the funding policy is kept under review by the Committee and the Board. Details of the shares currently held in the employee trust are set out in note 30 to the accounts.
During 2009 loans totalling of £53.6 million were made to RBC Trustees (CI) Limited to ensure sufficient shares were available to meet its ongoing liabilities.
Time commitment Between 25 and 50 days per annum depending upon Board and committee requirements and corporate activity.
Date of last appointment on letter of appointment 1 October 2008 3 May 2007 1 January 2009 30 May 2009 14 January 2008 6 May 2009 3 May 2007 5 December 2007
Appointment end date on letter of appointment AGM 2012 AGM 2010 AGM 2011 AGM 2012 AGM 2011 AGM 2010 AGM 2010 AGM 2010
It is the Company’s policy to set the fees paid to its Chairman and NEDs taking account of the median market payments in international companies of similar size and complexity. NEDs receive a basic annual fee in respect of their Board duties. A further fee is paid to NEDs (other than the Chairman) in respect of membership and, where appropriate, chairmanship of Board committees.
The Chairman and NEDs do not participate in any incentive or performance plans or pension arrangements. The Company’s Articles of Association provide that the total aggregate remuneration paid to the Chairman and NEDs will be determined by the Board within the limits set by shareholders. The current aggregate limit of £1.5 million was approved by shareholders at the Company’s 2005 Annual General Meeting. The amount paid in 2009 was £1.165 million. EDs are remunerated under their service contracts and receive no additional fee for serving as directors.
Committee Chairman – Audit £35,000 (inclusive of committee membership fee) – Corporate Responsibility £10,000 (inclusive of committee membership fee) – Remuneration £20,000 (inclusive of committee membership fee) – Risk and Regulatory £20,000 (inclusive of committee membership fee)
Directors’ remuneration in 2009 Table 17 below sets out the remuneration paid or payable to the directors in respect of the year to 31 December 2009. This section (Directors’ remuneration in 2009) and those sections headed “EDs’ pension arrangements” and “Share incentive plans” along with their associated footnotes have been subject to audit.
Table 17: Directors’ Remuneration in 2009 Basic salary/fees Bonuses1 ACAP Benefits2 Total
Non-executive directors Nikesh Arora 44 69 — — — — — — 44 69 Wim Dik 24 95 — — — — — — 24 95 Mary Francis 103 99 — — — — — — 103 99 Richard Goeltz 98 94 — — — — — — 98 94 Euleen Goh 78 — — — — — — — 78 — Carole Piwnica 83 87 — — — — — — 83 87 Leslie Van de Walle 45 — — — — — — — 45 — Russell Walls 108 107 — — — — — — 108 107 Scott Wheway 88 77 — — — — — — 88 77
4. For the purposes of the disclosure required by Schedule 5 to the Companies Act 2006, the total aggregate emoluments of the directors in respect of 2009 was £6.7 million (2008: £5.2 million). 5. No compensation payment for loss of office was made to any director, or former director, during the year. 6. Annual bonuses are one-third paid in cash and two-thirds deferred into shares for three years.
Following a review in March 2009 of Aviva’s fees against market benchmarks the following changes in NEDs’ emoluments were made with effect from 1 April 2009: — The fee for chairing the Risk and Regulatory Committee (inclusive of membership fee) was increased from £17,500 pa to £20,000 pa (an increase of 14.3%) — A new fee of £10,000 (inclusive of membership fee) was introduced for chairing the Corporate Responsibility Committee — Other fees remained unchanged
Accrued annual pension at 31 December 2008 21 395 81 — Accrued annual pension at 31 December 2009 22 400 85 — Gross increase in accrued pension over the year 1 5 4 — Increase (decrease) in accrued pension net of inflation over the year — (15) — —
Transfer value of accrued pension at 31 December 2008 231 6,300 660 — Transfer value of accrued pension at 31 December 2009 350 7,544 1,062 — Change in transfer value during the period less employee contributions 119 1,236 402 — Transfer value of net increase (decrease) in accrued pension less employee contributions 17 (279) 50 —
Notes 1. Accrued pensions shown are the amounts that would be paid annually on retirement based on service to the end of the year. 2. Benefits deriving from Additional Voluntary Contributions (AVCs) paid by directors are excluded from the amounts above. 3. The change in transfer value allows for fluctuations in the transfer value due to factors beyond the control of the Company and directors, such as changes in stock market conditions. The transfer values have been calculated in line with the relevant legislation and using actuarial assumptions agreed by the Trustee. These assumptions were revised during the year resulting in higher transfer values.
4. Mr Scott opted out of the ASPS on 30 June 2009. For the first three months of 2009 Mr Scott made regular member contributions of 5% of salary. Mr Scott then switched to making salary sacrifice contributions at the same rate for the final three months of his Scheme membership. Salary sacrifice contributions are excluded for the figures above.
5. Mr Moneta opted out of the Scheme on 30 June 2009. Contributions shown are for the period to this date. 6. No former Directors received any increase in retirement benefits in excess of the amount to which they were entitled, on the later of the date when the benefits first became payable, or 31 March 1997. 7. The transfer value of net increase (decrease) in accrued pension shows the value of the increase (decrease) in accrued pension net of inflation, over the year net of contributions.
Directors’ interests in Aviva shares The interests held by each person who was a director at the end of the financial year in the ordinary shares of 25 pence each in the Company are shown in Table 21 below. All the disclosed interests are beneficial. The table also summarises the interests in shares held through the Company’s various share incentive plans. Details of the options and long-term incentive awards are shown below.
Andrew Moss Carole Piwnica Philip Scott Lord Sharman Leslie Van de Walle Russell Walls Scott Wheway
The transfer of the shares to the director at the end of the period is not subject to the attainment of performance conditions but a proportion of the shares can be forfeited if the executive leaves service before the end of the period.
3. Awards granted under the LTIP which vest only if the performance conditions are achieved. 4. OATTV Plan awards are granted as a match to the bonus plan awards under the ABP and vest only if the performance conditions are achieved. 5. “Options” are options over shares granted under the SAYE. 6. The interests of connected persons to the Directors are included in the Directors’ interests above. 7. Andrea Moneta was appointed as a director on 29 September 2009. On this date he held 394 shares, 159,375 bonus plan awards, 249,023 long term incentive awards, 119,531 OATTV Plan awards and 0 options.
Michael Hawker Michael Hawker joined the Board of Aviva as a NED on 1 January 2010. He will be paid a fee of £63,000 per year as a member of the Board and an additional £5,000 per year as a member of the Risk and Regulatory Committee.
In this section 118 Major shareholders and related party disclosures 119 Dividend Data 119 Controls and procedures 120 Audit committee financial expert 120 Code of ethics 120 Regulation
Based on notifications received up to 31 December 2009, no shareholder held a beneficial interest of 5% or more in Aviva ordinary shares at 31 December 2009 or at any point in the preceding three financial years.
Inc, resulting in BlackRock holding 140,757,642 shares, or 5.09%, of voting rights of which 2,081,107 shares, or 0.08%, are held in CFDs.
To the best of our knowledge, except as set forth in the table above, no other shareholder held more than 3% of our outstanding ordinary shares as of 3 March 2010.
% of total issued shares/ As at 27 February 2008 Total number of shares held % of voting rights
Barclays plc – Non-beneficial interest 153,862,359 5.99% Axa S.A. and its Group companies – Held beneficially 29,277,260 1.14% – Non-beneficial interest 232,943,181 9.08% Legal & General Group plc – Held beneficially 93,312,175 3.65%
% of total issued shares/ As at 1 March 2006 Total number of shares held % of voting rights
Related party transactions For more information relating to related party transactions, including more information about the transactions described below, please see “Financial Statements IFRS – Note 53 – Related party transactions”.
However, the Company has transactions and outstanding balances with certain unit trusts, Open Ended Investments Companies, collateralised debt obligations and similar entities which are not consolidated and where a Group company acts as manager. These entities are regarded as related parties for the purposes of International Accounting Standard (“IAS”) 24. The balances are included in the Group’s statement of financial position at fair value or amortised cost in accordance with their IAS 39 classifications. The transactions are included in the income statement and include amounts paid on issue of shares or units, amounts received on cancellation of shares or units and paid in respect of the periodic charge and administration fee.
Directors and key management The total compensation to those employees classified as key management, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the executive and non-executive directors is as follows: Salary and other short-term benefits 39 38 40 Post-employment benefits 5 3 4 Equity compensation plans 16 9 14 Termination benefits 1 3 2
Various directors and key management of Aviva may from time to time purchase insurance, asset management or annuity products, or be granted mortgages marketed by Aviva Group companies in the ordinary course of business on substantially the same terms, including interest rates and security requirements, as those prevailing at the time for comparable transactions with other persons.
Other related parties The Group received income from other related parties from transactions made in the normal course of business. Loans to other related parties are made on normal arm’s length commercial terms.
Income Receivable Income Receivable Income Receivable earned at year earned at year earned at year in year end in year end in year end £m £m £m £m £m £m
Barclays plc 109,751,163 4.57% Legal & General Group plc 81,072,340 3.38%
Performance reviewAviva plc Additional information for Shareholders continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
The other related parties’ receivables are not secured and no guarantees were received in respect thereof. The receivables will be settled in accordance with normal credit terms. Details of guarantees, indemnities and warranties provided on behalf of related parties are given in ‘Financial Statements IFRS – Note 45(h) – Contingent liabilities and other risk factors – Other’.
Loans to joint ventures We make loans to our property management joint ventures to fund property developments which we undertake with our joint venture partners. Movements in these loans may be found in ‘Financial Statements IFRS – Note 18 – Interests in, and loans to, joint ventures’. Total loans at 31 December 2009 and at the end of each of the last three financial years are shown in the table below: Loans to joint ventures 327 297 167
These constitute loans to joint ventures to fund shopping, business or distribution centres or properties in Europe, as well as a film studio development in the UK. The largest of these is part of a facility granted in November 2005 and had a balance of £255 million as of 31 December 2009 and bears an interest rate of 8%.
Dividend Data Our dividend policy is to sustain a target dividend cover of between one and a half and two times our IFRS adjusted operating profit after tax before amortisation of goodwill and adjusting items. 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, we are dependent upon dividends and interest from our subsidiaries to pay cash dividends. Many of our subsidiaries are subject to insurance regulations that restrict the amount of dividends that they can pay to us. Historically, we have 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 of Directors, while payment of any final dividend requires the approval of our shareholders at a general meeting. Ordinary preference shares are irredeemable and dividends on ordinary preference shares are made at the discretion of our Board of Directors.
An interim dividend is generally paid in November of each year. A final dividend is proposed by our Board of Directors after the end of the relevant year and generally paid in May. The following table shows certain information regarding the dividends that we paid on ordinary shares for the periods indicated in pounds sterling and converted into US dollars at the noon buying rate in effect on each payment date.
Controls and procedures Disclosure controls and procedures Management has evaluated, with the participation of Aviva’s Group Chief Executive and Group Chief Financial Officer, the effectiveness of the disclosure controls and procedures as at 31 December 2009. There are inherent limitations to the effectiveness of any system of disclosure controls and
Audit committee financial expert The Board has determined that Russell Walls, Richard Goeltz and Euleen Goh all qualify as audit committee financial experts within the meaning of Item 16A of Form 20-F, and that Russell Walls, Richard Goeltz and Euleen Goh are all independent as defined by the New York Stock Exchange Corporate Governance Standards.
United Kingdom The Financial Services Authority In the UK, the Financial Services Authority (the FSA) is the single regulator for all authorised persons with respect to regulated activities in the financial services sector. In this regard, the FSA is authorised to make rules and issue guidance in relation to a wide sphere of activity encompassing the governance of the conduct of business by, and the prudential supervision of persons which the FSA has authorised to conduct such business (“Authorised Persons” or “Authorised Firms”).
Under the Financial Services and Markets Act 2000 (“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 which is granted permission by the FSA to carry on regulated activities becomes an Authorised Person for the purposes of FSMA. “Regulated activities” are prescribed in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 and include banking, insurance and investment business, stakeholder pension schemes, insurance mediation and certain mortgage mediation and lending activities.
The FSA’s regulation of the group A number of the Group’s UK subsidiaries are directly authorised and regulated by the FSA. The regulated subsidiaries include our insurance companies (eg the UK Life and UK General Insurance companies), asset managers (Aviva Investors) and intermediaries (UK Healthcare and RAC Motoring Services). Aviva plc, although not directly authorised by the FSA, does itself come within the scope of regulation by virtue of being the ultimate insurance holding company in the Group. In line with requirements under the Insurance Groups Directive, Group solvency returns are required to be prepared at Aviva plc level.
The FSA regulates from a legal entity perspective, even though we tend to operate within Regions by Business Unit.
Performance reviewAviva plc Additional information for Shareholders continued Corporate responsibilityAnnual Report and Accounts 2009 Governance
In order to determine whether a person or a group of persons is a “controller” for the purposes of FSMA, the holdings (shares or voting rights of the person and his ‘associate’), if any, are aggregated.
— maintaining confidence in the financial system — promoting public understanding of the financial system — securing the appropriate degree of protection for consumers — reducing the extent to which it is possible for a business to be used for a purpose connected with financial crime
Given our size, and the extent of our share of the UK retail market, a major issue within our business which causes concern for the FSA could have a very significant impact on these objectives. The FSA therefore aspires to have a ‘close and continuous’ relationship with us. In practice, this means that a wide range of Group, Regional and UK Business Unit senior managers have regular scheduled ‘close and continuous’ meetings with the FSA, and other meetings and discussions on specific issues take place as the need occurs. This adds up to weekly or even daily FSA interaction at both UK Business Unit and Group level, although contact at a Regional level would be less frequent.
The FSA also periodically conducts a formal ARROW review of Aviva (which stands for Advanced Risk-Responsive Operating framework), to assess the level of risk that the Group poses to each of the FSA objectives. The last full risk assessment was conducted in 2009 and the next full risk assessment is due to start in the first half of 2011. The resulting risk mitigation programme (RMP) itemises those areas of potential risk or weakness where the FSA particularly wishes us to focus attention. The risk assessment and RMP are updated on an on-going basis between each ARROW review.
The FSA’s enforcement powers, which may be exercised against both Authorised Firms and Approved Persons, include public censure, imposition of unlimited fines and, in serious cases, the variation or revocation of permission to carry on regulated activities or of an Approved Person’s status. The FSA may also vary or revoke an Authorised Firm’s permission to protect the interests of consumers or potential consumers, or if the Authorised Firm has not engaged in regulated activity for 12 months, or if it is failing to meet the threshold conditions for authorisation. The FSA has further powers to obtain injunctions against Authorised Persons and to impose or seek restitution orders where persons have suffered loss.
In addition to its ability to apply sanctions for market abuse, the FSA has the power to prosecute criminal offences arising under FSMA and insider dealing under Part V of the Criminal Justice Act 1993 and breaches of money laundering regulations. The FSA’s stated policy is to pursue criminal prosecution in all appropriate cases.
Restrictions on business Under the FSA’s Handbook, an insurance company is restricted from carrying on any commercial business other than insurance business and activities directly arising from that business. Therefore, the FSA authorised insurance companies in the Group are bound by this restriction.
Determination of the ECR involves the comparison of two separate measurements of the Authorised Firm’s financial resources requirements, which the FSA 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
The regulatory peak implements the Solvency I Directives, the latter forming part of the European Commission’s efforts to achieve a single European market for financial services. The LTICR is made up of several components, but in general is equal to approximately 4% of the mathematical reserves, although the formula varies according to the type of business written.
All insurers must also assess for themselves the amount of capital needed to back their business (Individual Capital Assessments). If the FSA views the result of this assessment as insufficient, the FSA may draw up its own Individual Capital Guidance for the firm, which can be imposed as a requirement on the scope of the Authorised Firm’s permission.
The extent to which long-term fund assets may be used for purposes other than long-term business is restricted by the rules in the FSA Handbook. Only the “established surplus” – the excess of assets over liabilities in the long-term fund, as determined by actuarial investigation – may be transferred so as to be available for other purposes. Restrictions also apply to the payment of dividends by the insurance company, as described below. The rules in the FSA Handbook for insurers require the maintenance of sufficient assets in the separate long-term insurance fund to cover the actuarially determined value of the insurance liabilities.
Distribution of profits and with-profits business For UK authorised life insurer carrying on with-profits business, the FSA’s rules require that once an allocation of surplus in a with-profits fund has been made to policyholders, no transfer of assets representing any part of a subsequent surplus can be made, to shareholders or otherwise, unless either the “relevant minimum” (as defined in the FSA Handbook) of the surplus has been allocated to policyholders or a statutory notification procedure has been followed. Calculation of the relevant minimum is based on the percentage of the relevant surplus previously allocated to eligible policyholders.
Reporting requirements Under the FSA Handbook, insurance companies must file with the FSA their audited annual accounts and statements of financial position and life insurers’ annual reports from the actuary performing the actuarial function. There is also a requirement to report the annual solvency position of the insurance company’s ultimate parent.
The European Union (EU) In addition to its UK businesses Aviva is also currently active in 14 of the 27 EU member states through wholly owned
Shareholder information Financial statements IFRS Financial statements MCEV Other information subsidiary and joint venture companies. These companies are subject to the laws and regulation of the EU member state in which they are based. However, as progress continues towards the creation of a single market in financial services, EU legislation will continue to have a significant influence on the legislative environment both 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. Directives set the minimum standards for the appropriate national legislatures to meet, but leave it up to the legislatures to decide just how they should be implemented. National governments are generally free to include restrictions in their laws beyond those required by a directive but may not pass laws that do not meet the minimum standard. Directives are written at a fairly high level of detail and consequently implemented in more detail at national level according to the local legal system. Still higher levels of detail may be imposed through the rules and regulations of national regulators. In the case of financial services businesses these rules can be extensive.
EU financial services regulation is based on the principle of ‘home country control’ under which the home country regulator is responsible for monitoring compliance with all applicable regulation. For life and non-life insurance business the home country control principle was implemented through the Third Life and Non-Life Directives during the mid 1990’s. This regime places the responsibility for such issues as solvency, actuarial reserves and investment of assets as well as certain governance issues on the home country regulator. Consequently most companies that have been licensed to conduct insurance business in one member state may conduct business or apply to ‘passport’ into all other member states 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.
Insurance group directive (IGD) The EU has promulgated the Insurance Groups Directive (“IGD”), which requires member states to introduce the following measures to strengthen supervision of insurance companies which are part of a group: — An adjustment to the solo supervision solvency calculation in relation to participating interest in other insurance undertakings in order to eliminate ‘double-gearing’ (the use of the same regulatory capital in more than one entity of a group).
— An additional parent undertaking solvency margin calculation analogous to the adjusted solo solvency 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 intra­ group transactions.
Since 31 December 2006 the group capital resources requirement (the parent undertaking solvency calculation mentioned above) has been a ‘hard’ test (ie it constitutes a requirement to maintain the group capital resources, rather than simply to make the calculation) under the FSA Handbook.
— For certain products and services, giving a cooling-off period, which for general insurance is 14 days, in which a consumer may, without penalty, cancel such a contract.
— 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.
Financial Services Action Plan (FSAP) Further measures towards the creation of a single market in financial services were incorporated into the Financial Services Action Plan (FSAP) adopted in 2000. The FSAP included specific legislative action aimed at extending (i) the single wholesale market (ii) creating an open and secure retail market and (iii) introducing state of the art prudential rules and supervision.
Investment business With the introduction of the Investment Services Directive (ISD) the same home country control and passporting regime applied to fund management activities. In November 2007 the ISD was superseded by the Markets in Financial Instruments Directive (MiFID). MiFID builds on the home country control principle but extends the range of ‘core’ investments services and activities that may be passported from one member state to another and increased clarity of responsibilities between home and host country jurisdictions. MiFID also introduces greater harmonisation governing the organisation and conduct of business of investment firms.
Future EU developments The integration of retail financial services and the increased awareness of consumers to financial issues remain high on the EU agenda. This is tending to drive a number of initiatives including the Single Market review which will encompass reviews of the working of the retail financial services markets, adequacy of consumer protection and contractual rights provisions as well as more specific proposals on investment products and mortgages.
The European Commission has adopted draft legislation that will create a European Systemic Risk Board (ESRB) and set up a European System of Financial Supervision (ESFS). The ESFS will be composed of national supervisors and three new European Supervisory Authorities (ESAs) for banking, insurance and securities. The ESAs will have powers to develop technical standards and guidelines and direct national supervisors to take action or refrain from action in cases where national supervisors cannot reach agreement between them and where the Commission has decided that an emergency situation exists. The Commission is now looking to the Council and Parliament for rapid adoption so that the new structures can begin functioning in 2010.
Consequently, life insurance companies are subject to regulation both in the state in which they are domiciled as well as in each of the individual states in which they operate. State regulation can vary in detail 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 conduct of selling agents as well as the approval of products and associated product forms and literature.
NAIC has a commitment to modernising the state based system of insurance regulation and is pushing forward an action plan aimed at achieving consistency of approach between states on a number of issues including consumer protection, licensing, solvency and changes in insurance company control. The American Council of Life Insurers (ACLI) is proposing an optional federal charter (OFC) under which life insurers could choose to be federally regulated instead of state regulated. It is envisaged that the OFC would operate within the NAIC modernisation plan.
In addition to the OFC there have been legislative proposals for federal reform in the US. The legislation that is currently pending would impose stricter prudential standards on systemically significant financial companies, higher risk financial activities and introduce new mechanisms for resolving failures of significant financial companies. The legislative proposals require additional stress testing and reporting on a regular basis. In addition, a federal insurance office (FIO) will be established with a remit to monitor the insurance industry, co-ordinate federal efforts and develop federal policy on international insurance matters. While the FIO will have no regulatory authority over the business of insurance it will be required to conduct a study of how to improve and modernise insurance regulation and report to Congress no later than one year after the proposed legislations comes into force.
Risk-based capital The NAIC has developed risk-based capital standards for life insurance companies as well as a model act for state legislatures to enact. The model act requires that life insurance companies report on a formula-based, risk-based capital standard that they calculate by applying factors to various asset, premium and reserve items. The formula takes into account the risk characteristics of a company, including asset risk, insurance risk, interest rate risk and business risk. The NAIC designed the formula as an early warning tool to identify potentially inadequately capitalised companies for purposes of initiating regulatory action. The model act imposes broad confidentiality requirements on those engaged in the insurance business (including insurers, agents, brokers and others) and on state insurance departments as to the use and publication of riskbased capital data.
Any state adopting the model act gives the state insurance commissioner explicit regulatory authority to require various actions by, or take various actions against, insurance companies whose adjusted capital does not meet minimum risk-based capital standards. The Iowa Insurance Commissioner takes into account the NAIC’s risk-based capital standards to determine adequate compliance with Iowa insurance law.
Effective 31 December 2005, the NAIC implemented new requirements, referred to as C-3 Phase II, for calculating risk based capital in connection with variable annuity products with death and living benefit guarantees. These changes did not have a material effect on our US operations, and at 31 December 2008, the Company’s total adjusted capital under the NAIC’s definition substantially exceeded Iowa standards.
Insurance business in Canada is regulated federally by the Office of the Superintendent of Financial Institutions (OSFI) with the focus very much on prudential supervision, ie capital adequacy, solvency etc. OSFI derives its powers from the federal Insurance Companies Act (Canada) which governs the structure and operation of federally incorporated insurance companies.
There are also 10 individual provincial regulators each regulating predominantly conduct of business issues such as policy terms and conditions, pricing and underwriting of companies they have licensed to write business in the province.
There are wholly owned businesses in Singapore and Hong Kong. Aviva operates in China, India, Malaysia, Sri Lanka, Taiwan and Korea which, depending on the nature and extent of the control we are able to exert, are either accounted for as subsidiaries, joint ventures or associates.
We have an active programme of review of marks and watching for infringements. There are no material infringements in the UK known to us as at the date of this report, either by the Group or third parties.
In this section 128 Independent auditor’s report 130 Accounting policies 143 Consolidated financial statements: 143 Consolidated income statement 144 Pro forma reconciliation of group operating profit to profit before tax 146 Consolidated statement of comprehensive income 147 Consolidated statement of changes in equity 149 Consolidated statement of financial position 150 Consolidated statement of cash flows 151 Notes to the consolidated financial statements: 151 1 Exchange rates 151 2 Presentation changes 152 3 Subsidiaries 155 4 Segmental information 163 5 Details of income 164 6 Details of expenses 166 7 Finance costs 167 8 Long-term business economic volatility 168 9 Longer term investment return and economic assumption changes for non-long-term business 169 10 Employee information 170 11 Directors 171 12 Auditors’ remuneration 172 13 Tax 173 14 Earnings per share 176 15 Dividends and appropriations 176 16 Goodwill 180 17 Acquired value of in-force business (AVIF) and intangible assets 181 18 Interests in, and loans to, joint ventures 184 19 Interests in, and loans to, associates 186 20 Property and equipment 187 21 Investment property 188 22 Loans 190 23 Securitised mortgages and related assets 191 24 Financial investments 197 25 Receivables and other financial assets 197 26 Deferred acquisition costs and other assets 199 27 Assets held to cover linked liabilities 199 28 Ordinary share capital 200 29 Equity compensation plans 203 30 Shares held by employee trusts 203 31 Preference share capital 204 32 Direct capital instrument 204 33 Merger reserve 205 34 Other reserves 206 35 Retained earnings 206 36 Minority interests 207 37 Contract liabilities and associated reinsurance 208 38 Insurance liabilities 218 39 Liability for investment contracts 220 40 Financial guarantees and options 223 41 Reinsurance assets 224 42 Effect of changes in assumptions and estimates during the year 225 43 Unallocated divisible surplus 225 44 Special bonus and reattribution of the inherited estate 227 45 Tax assets and liabilities 228 46 Provisions 229 47 Pension obligations 238 48 Borrowings 244 49 Payables and other financial liabilities 244 50 Other liabilities 245 51 Contingent liabilities and other risk factors 247 52 Commitments 248 53 Statement of cash flows 249 54 Group capital structure 250 55 Capital statement 253 56 Risk management 270 57 Derivative financial instruments 273 58 Assets under management 273 59 Related party transactions 275 Financial statements of the company
Aviva plc Independent auditor’s report to theAnnual Report and Accounts 2009 shareholders of Aviva plc
We have audited the Group and Parent Company financial statements (the “financial statements”) of Aviva plc for the year ended 31 December 2009 which comprise the Accounting Policies, the Consolidated and Parent Company Income Statements, the Pro Forma Reconciliation of Group Operating Profit to Profit before Tax, the Consolidated and Parent Company Statements of Comprehensive Income, the Consolidated and Parent Company Statements of Changes in Equity, the Consolidated and Parent Company Statements of Financial Position, the Consolidated and Parent Company Statements of Cash Flows, and the related notes 1 to 59 and A to I. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 to the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 92, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Opinion on financial statements In our opinion: — the financial statements give a true and fair view of the state of the Group’s and of the Parent company’s affairs as at 31 December 2009 and of the Group’s and the Parent company’s profit for the year then ended — the financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; and — the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006 In our opinion: — the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies
Act 2006; — the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and — the information given in the Corporate Governance Statement, set out on page 90 with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements.
Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: — adequate accounting records have not been kept by the Parent company, or returns adequate for our audit have not been received from branches not visited by us; or — the Parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or — certain disclosures of directors’ remuneration specified by law are not made; or — we have not received all the information and explanations we require for our audit; or — a Corporate Governance Statement has not been prepared by the Company.
Under the Listing Rules we are required to review: — the directors’ statement, set out on page 92, in relation to going concern; and — the part of the Corporate Governance Statement relating to the company’s compliance with the nine provisions of the
James W Dean (Senior statutory auditor) for and on behalf of Ernst & Young LLP Statutory Auditor London
Aviva plc (the “Company”), a public limited company incorporated and domiciled in the United Kingdom (UK), together with its subsidiaries (collectively, the “Group” or “Aviva”) transacts life assurance and long-term savings business, fund management, and most classes of general insurance and health business through its subsidiaries, associates and branches in the UK, Ireland, continental Europe, United States (US), Canada, Asia, Australia and other countries throughout the world.
(A) Basis of presentation Since 2005, all European Union listed companies have been required to prepare consolidated financial statements using International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and endorsed by the European Union (EU). The date of transition to IFRS was 1 January 2004. In addition to fulfilling their legal obligation to comply with IFRS as adopted by the European Union, the Group and Company have also complied with IFRS as issued by the International Accounting Standards Board and applicable at 31 December 2009.
In 2009, the IASB issued IFRS 9, Financial Instruments – Classification and Measurement, the first part of a replacement standard for IAS 39, Financial Instruments: Recognition and Measurement. This is applicable prospectively for accounting periods commencing 1 January 2013 or later, and is therefore not applicable for the current accounting period. It has not yet been endorsed by the EU but, on adoption, will require us to review the classification of certain investments while allowing us to retain the fair value measurement option as we deem necessary.
During 2008 and 2009, the IASB also issued amendments to IFRS 1, First Time Adoption of IFRS, IAS 32, Financial Instruments: Presentation, IAS 39 and the results of its annual improvements project. Further amendments to IFRS 1, IFRS 2, Share-Based Payment, IAS 24, Related Party Disclosures, and the results of its second annual improvements project have been issued but have not yet been endorsed by the EU. These are applicable prospectively for accounting periods commencing 1 July 2009 or later, and are therefore not applicable for the current accounting period. On adoption, they will not have any material impact on the Group’s financial reporting.
IFRIC interpretation 17, Distributions of Non-cash Assets to Owners, and interpretation 19, Extinguishing Financial Liabilities with Equity Instruments, as well as an amendment to interpretation 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, were issued during 2008 and 2009 but the latter two have not yet been endorsed by the EU. These are applicable prospectively for accounting periods commencing 1 July 2009 or later, and are therefore not applicable for the current accounting period. On adoption, they will not have any impact on our financial reporting.
In accordance with IFRS 4, Insurance Contracts, the Group has applied existing accounting practices for insurance and participating investment contracts, modified as appropriate to comply with the IFRS framework and applicable standards. Further details are given in policy F below.
The separate financial statements of the Company are on pages 275 to 282.
Use of estimates All estimates are based on management’s knowledge of current facts and circumstances, assumptions based on that knowledge and their predictions of future events and actions. Actual results may differ from those estimates, possibly significantly.
The table below sets out those items we consider particularly susceptible to changes in estimates and assumptions, and the relevant accounting policy.
(D) Consolidation principles Subsidiaries Subsidiaries are those entities (including special purpose entities) in which the Group, directly or indirectly, has power to exercise control over financial and operating policies in order to gain economic benefits. Subsidiaries are consolidated from the date on which effective control is transferred to the Group and are excluded from consolidation from the date the Group no longer has effective control. All inter-company transactions, balances and unrealised surpluses and deficits on transactions between Group companies have been eliminated.
Investment vehicles In several countries, the Group has invested in a number of specialised investment vehicles such as Open-ended Investment Companies (OEICs) and unit trusts. These invest mainly in equities, bonds, cash and cash equivalents, and properties, and distribute most of their income. The Group’s percentage ownership in these vehicles can fluctuate from day-to-day according to the Group’s and third-party participation in them. Where Group companies are deemed to control such vehicles, with control determined based on an analysis of the guidance in IAS 27 and SIC 12, they are consolidated, with the interests of parties other than Aviva being classified as liabilities. These appear as “Net asset value attributable to unitholders” in the consolidated statement of financial position. Where the Group does not control such vehicles, and these investments are held by its insurance or investment funds, they do not meet the definition of associates (see below) and are, instead, carried at fair value through profit and loss within financial investments in the consolidated statement of financial position, in accordance with IAS 39, Financial Instruments: Recognition and Measurement.
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 (PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), 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 the shareholdings in the GPs and the terms of each partnership agreement. Where the Group exerts control over a PLP, it has been treated as a subsidiary and its results, assets and liabilities have been consolidated. Where the partnership is managed by a contractual agreement such that no party exerts control, 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. Where the
Associates and joint ventures Associates are entities over which the Group has significant influence, but which it does not control. Generally, it is presumed that the Group has significant influence if it has between 20% and 50% of voting rights. Joint ventures are entities whereby the Group and other parties undertake an economic activity which is subject to joint control arising from a contractual agreement. In a number of these, the Group’s share of the underlying assets and liabilities may be greater than 50% but the terms of the relevant agreements make it clear that control is not exercised. Such jointly-controlled entities are referred to as joint ventures in these financial statements.
(E) Foreign currency translation Income statements and cash flows of foreign entities are translated into the Group’s presentation currency at average exchange rates for the year while their statements of financial position are translated at the year end exchange rates. Exchange differences arising from the translation of the net investment in foreign subsidiaries, associates and joint ventures, and of borrowings and other currency instruments designated as hedges of such investments, are recognised in other comprehensive income and taken to the currency translation reserve within equity. On disposal of a foreign entity, such exchange differences are transferred out of this reserve and are recognised in the income statement as part of the gain or loss on sale. The cumulative translation differences were deemed to be zero at the transition date to IFRS.
Translation differences on debt securities and other monetary financial assets measured at fair value and designated as held at fair value through profit or loss (FV) (see policy S) are included in foreign exchange gains and losses in the income statement. For monetary financial assets designated as AFS, translation differences are calculated as if they were carried at amortised cost and so are recognised in the income statement, whilst foreign exchange differences arising from fair value gains and losses are recognised in other comprehensive income and included in the investment valuation reserve within equity. Translation differences on nonmonetary items, such as equities which are designated as FV, are reported as part of the fair value gain or loss, whereas such differences on AFS equities are included in the investment valuation reserve.
Memorandum of Understanding with the ASB, under which we voluntarily agreed to adopt in full the standard from 2005 in the Group’s IFRS financial statements. FRS 27 adds to the requirements of IFRS but does not vary them in any way. The additional requirements of FRS 27 are detailed in policy K below and in note 55.
A gain or loss on a financial investment is only realised on disposal or transfer, and is the difference between the proceeds received, net of transaction costs, and its original cost or amortised cost as appropriate.
Provisions for latent claims are discounted, using rates based on the relevant swap curve, in the relevant currency at the reporting date, having regard to the expected settlement dates of the claims. The discount rate is set at the start of the accounting period with any change in rates between the start and end of the accounting period being reflected below operating profit as an economic assumption change. The range of discount rates used is described in note 38(c). Outstanding claims provisions are valued net of an allowance for expected future recoveries. Recoveries include non-insurance assets that have been acquired by exercising rights to salvage and subrogation under the terms of insurance contracts.
Other assessments and levies The Group is subject to various periodic insurance-related assessments or guarantee fund levies. Related provisions are established where there is a present obligation (legal or constructive) as a result of a past event. Such amounts are not included in insurance liabilities but are included under “Provisions” in the statement of financial position.
Intangible assets Intangibles consist primarily of brands, certain of which have been assessed as having indefinite useful lives, and contractual relationships such as access to distribution networks and customer lists. The economic lives of the latter are determined by considering relevant factors such as usage of the asset, typical product life cycles, potential obsolescence, maintenance costs, the stability of the industry, competitive position, and the period of control over the assets. These intangibles are amortised over their useful lives, which range from five to 30 years, using the straight-line method.
Depreciation is calculated on the straight-line method to write-down the cost of other assets to their residual values over their estimated useful lives as follows: — Land No depreciation — Properties under construction No depreciation — Owner-occupied properties, and related mechanical and electrical equipment 25 years — Motor vehicles Three-years, or lease term if longer — Computer equipment Three to five years — Other assets Three to five years
(S) Financial investments The Group classifies its investments as either financial assets at fair value through profit or loss (FV) or financial assets available for sale (AFS). The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. The FV category has two subcategories – those that meet the definition as being held for trading and those the Group chooses to designate as FV (referred to in this accounting policy as “other than trading”).
For both debt and equity AFS securities identified as being impaired, the cumulative unrealised net loss previously recognised within the investment valuation reserve is transferred to realised losses for the year with a corresponding movement through other comprehensive income. Any subsequent increase in fair value of these impaired securities is recognised in other comprehensive income and recorded in the investment valuation reserve, unless this increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement. In such an event, the reversal of the impairment loss is recognised as a gain in the income statement.
(T) Derivative financial instruments and hedging Derivative financial instruments include foreign exchange contracts, interest rate futures, currency and interest rate swaps, currency and interest rate options (both written and purchased) and other financial instruments that derive their value mainly from underlying interest rates, foreign exchange rates, commodity values or equity instruments. All derivatives are initially recognised in the statement of financial position at their fair value, which usually represents their cost. They are subsequently remeasured at their fair value, with the method of recognising movements in this value depending on whether they are designated as hedging instruments and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. Premiums paid for derivatives are recorded as an asset on the statement of financial position at the date of purchase, representing their fair value at that date.
Interest rate and currency swaps Interest rate swaps are contractual agreements between two parties to exchange periodic payments in the same currency, each of which is computed on a different interest rate basis, on a specified notional amount. Most interest rate swaps involve the net exchange of payments calculated as the difference between the fixed and floating rate interest payments. Currency swaps, in their simplest form, are contractual agreements that involve the exchange of both periodic and final amounts in two different currencies. Both types of swap contracts may include the net exchange of principal. Exposure to gain or loss on these contracts will increase or decrease over their respective lives as a function of maturity dates, interest and foreign exchange rates, and the timing of payments.
(V) Collateral The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions, as well as certain derivative contracts and loans, in order to reduce the credit risk of these transactions. Collateral is also pledged as security for bank letters of credit. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty.
Other assets include vehicles which are subject to repurchase agreements and inventories of vehicle parts. The former are carried at the lower of their agreed repurchase price or net realisable value, whilst the latter are carried at the lower of cost and net realisable value, where cost is arrived at on the weighted average cost formula or “first in first out” (FIFO) basis. Provision is made against inventories which are obsolete or surplus to requirements.
(X) Statement of cash flows Cash and cash equivalents Cash and cash equivalents consist of cash at banks and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are those with less than three months’ maturity from the date of acquisition, or which are redeemable on demand with only an insignificant change in their fair values.
(Z) Provisions and contingent liabilities Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more probable than not that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.
Pension obligations The Group operates a large number of pension schemes around the world, whose members receive benefits on either a defined benefit basis (generally related to a member’s final salary and length of service) or a defined contribution basis (generally related to the amount invested, investment return and annuity rates), the assets of which are generally held in separate trustee-administered funds. The pension plans are generally funded by payments from employees and the relevant Group companies.
For defined benefit plans, the pension costs are assessed using the projected unit credit method. Under this method, the cost of providing pensions is charged to the income statement so as to spread the regular cost over the service lives of employees. The pension obligation is measured as the present value of the estimated future cash outflows, using a discount rate based on market yields for high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability. The resulting pension scheme surplus or deficit appears as an asset or liability in the consolidated statement of financial position.
Costs charged to the income statement comprise the current service cost (the increase in pension obligation resulting from employees’ service in the current period, together with the schemes’ administration expenses), past service cost (resulting from changes to benefits with respect to previous years’ service), and gains or losses on curtailment (when the employer materially reduces the number of employees covered by the scheme) or on settlements (when a scheme’s obligations are transferred outside
(AC) Borrowings Borrowings are recognised initially at their issue proceeds less transaction costs incurred. Subsequently, most borrowings are stated at amortised cost, and any difference between net proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest rate method. All borrowing costs are expensed as they are incurred except where they are directly attributable to the acquisition or construction of property and equipment as described in policy O above.
(AD) Share capital and treasury shares Equity instruments An equity instrument is a contract that evidences a residual interest in the assets of an entity after deducting all its liabilities. Accordingly, a financial instrument is treated as equity if: (i) there is no contractual obligation to deliver cash or other financial assets or to exchange financial assets or liabilities on terms that may be unfavourable; and (ii) the instrument is a non-derivative that contains no contractual obligation to deliver a variable number of shares or is a derivative that will be settled only by the Group exchanging a fixed amount of cash or other assets for a fixed number of the Group’s own equity instruments.
Performance reviewAviva plc Corporate responsibilityConsolidated financial statementsAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
(12,710) Change in investment contract provisions (11,185) 10,629 (1,758) Change in unallocated divisible surplus (1,547) 4,482 (4,995) Fee and commission expense (4,396) (4,411) (6,098) Other expenses (5,366) (5,416) (1,518) Finance costs 7 (1,336) (1,547)
2,298 Profit/(loss) before tax 2,022 (2,368) (247) Tax attributable to policyholders’ returns 13 (217) 1,068 2,051 (1,300) (804) Tax (expense)/credit AB & 13 (707) 1,483 247 Less: tax attributable to policyholders’ returns 13 217 (1,068)
Profit/(loss) before tax attributable to shareholders’ profits 1,805 1,494 Profit/(loss) for the year 1,315 (885)
Earnings per share AF & 14 43.0c Basic (pence per share) 37.8p (36.8)p 42.6c Diluted (pence per share) 37.5p (36.8)p
Pro forma reconciliation of Group operating profit to profit before tax For the year ended 31 December 2009
Operating profit before tax attributable to shareholders’ profits 2,144 Long-term business 1,887 1,694 1,091 General insurance and health 960 1,198
(242) Other operations and regional costs (214) (198) (123) Corporate centre (108) (141) (723) Group debt costs and other interest (636) (379)
2,298 IFRS operating profit before adjusting items and tax attributable to shareholders’ profits Adjusted for the following: (86) Investment return variances and economic assumption changes on long-term business 8 (75) (1,631) 108 Short-term fluctuation in return on investments on non-long-term business 9a 95 (819)
65 Economic assumption changes on general insurance and health business 9a 57 (94) (70) Impairment of goodwill and other amounts expensed 16 (62) (66)
(325) Integration and restructuring costs 6 (286) (326) 51 Exceptional items 6 45 (551)
Pro forma reconciliation of Group operating profit to profit before tax continued Operating profit can be further analysed into the following segments: General Fund Long-term insurance manage- Other business and health ment operations Total Year ended 31 December 2009 £m £m £m £m £m
UK 672 535 (14) (28) 1,165 Aviva Europe 761 132 3 (99) 797 Delta Lloyd 277 143 28 (49) 399 North America 85 144 — (16) 213 Asia Pacific 92 6 1 (22) 77 Aviva Investors — — 115 — 115
UK 751 656 (18) (12) 1,377 Aviva Europe 685 220 4 (78) 831 Delta Lloyd 196 177 10 (73) 310 North America 16 145 — (12) 149 Asia Pacific 46 — 13 (23) 36 Aviva Investors — — 114 — 114
Aviva plc Consolidated financial statements continued Annual Report and Accounts 2009
Other comprehensive income Investments classified as available for sale 1,149 Fair value gains/(losses) 34 1,011 (2,344) (352) Fair value gains transferred to profit on disposals 34 (310) (126)
548 Impairment losses on assets previously revalued through other comprehensive income now taken to the income statement * 34 482 830
(1,295) Actuarial losses on pension schemes 47e(iv) (1,140) (929) 27 Actuarial losses on pension schemes transferred to unallocated divisible surplus 47c(i) 24 78
Consolidated statement of changes in equity For the year ended 31 December 2009
Total comprehensive income for the year — — — — — (1,110) (26) 1,030 332 — 14 240 — 92 332
Transfers to minority interests following Delta Lloyd IPO — — — — — (351) (26) (156) — — 3 (530) — 1,460 930
Minority share of dividends declared in the year — — — — — — — — — — — — — (109) (109)
The accounting policies (identified alphabetically) on pages 130 to 142 and notes (identified numerically) on pages 151 to 274 are an integral part of these financial statements.
Total comprehensive income for the year — — — — — 3,253 (36) (1,530) (1,040) — (1,751) (1,104) — 501 (603)
Minority interests in acquired subsidiaries — — — — — — — — — — — — — 43 43
Shares distributed by employee trusts — — — — 6 — — — — — (6) — — — —
Reserves credit for equity compensation plans — — — — — — — — — 39 — 39 — — 39
Shares issued under equity compensation plans — — — — — — — — — (15) 15 — — — —
Consolidated statement of financial position As at 31 December 2009 €m Note £m £m £m
Financial investments R,S & 24 182,398 Debt securities 160,510 150,398 121,511 49,253 Equity securities 43,343 43,351 58,829 39,575 Other investments 34,826 36,511 36,500 248 Deferred tax assets AB & 45b 218 2,642 590 408 Current tax assets 45a 359 622 376 10,945 Receivables and other financial assets 25 9,632 9,816 8,619 6,388 Deferred acquisition costs and other assets W & 26 5,621 6,147 4,487 4,095 Prepayments and accrued income 26d 3,604 3,762 2,986 28,609 Cash and cash equivalents X & 53d 25,176 23,643 15,659 60 Assets of operations classified as held for sale AG & 3d 53 1,550 1,128
(77) Shares held by employee trusts 30 (68) (33) (10) 2,078 Other reserves 34 1,829 2,141 1,469 3,892 Retained earnings 35 3,425 3,902 6,434 11,995 Equity attributable to shareholders of Aviva plc 10,556 11,379 13,242 1,125 Direct capital instrument 32 990 990 990 4,023 Minority interests 36 3,540 2,204 1,795
Liabilities 194,423 Gross insurance liabilities K & 38 171,092 174,850 152,839 125,017 Gross liabilities for investment contracts L & 39 110,015 107,559 98,244 4,393 Unallocated divisible surplus K & 43 3,866 2,325 6,785 11,243 Net asset value attributable to unitholders D 9,894 6,918 6,409 4,523 Provisions Z, AA & 46 3,980 2,984 1,937 1,180 Deferred tax liabilities AB & 45b 1,038 3,063 2,565 218 Current tax liabilities 45a 192 642 1,225 17,045 Borrowings AC & 48 15,000 15,201 12,657 23,343 Payables and other financial liabilities R & 49 20,542 20,840 18,060 4,152 Other liabilities 50 3,653 4,386 3,636 38 Liabilities of operations classified as held for sale AG & 3c 33 1,221 942
Approved by the Board on 3 March 2010. Patrick Regan Chief Financial Officer
Cash flows from investing activities Acquisitions of subsidiaries, joint ventures and associates, net of cash acquired 53b (596) (336) Disposals of subsidiaries, joint ventures and associates, net of cash transferred 53c 1,131 353 Purchase of minority interest in subsidiary — (65) New loans to joint ventures and associates (145) (182) Repayment of loans to joint ventures and associates 99 52 Net repayment loans to joint ventures and associates 18a & 19a (46) (130) Purchases of property and equipment 20 (149) (216) Proceeds on sale of property and equipment 188 59 Purchases of intangible assets 17 (30) (60)
Cash flows from financing activities Proceeds from issue of ordinary shares, net of transaction costs 1 20 Treasury shares purchased for employee trusts (53) (29) New borrowings drawn down, net expenses 4,260 5,515 Repayment of borrowings (3,853) (5,217) Net drawdown of borrowings 48e 407 298 Interest paid on borrowings (1,199) (1,537) Preference dividends paid (17) (17) Ordinary dividends paid (476) (732) Coupon payments on direct capital instrument (61) (56) Finance lease payments — (14) Capital contributions from minority shareholders 6 36 Dividends paid to minority interests of subsidiaries (109) (106)
Net increase in cash and cash equivalents 1,682 5,563 Cash and cash equivalents at 1 January 23,531 15,134 Effect of exchange rate changes on cash and cash equivalents (962) 2,834
Notes to the consolidatedAnnual Report and Accounts 2009 financial statements Financial statements IFRS Financial statements MCEV Other information 1 – Exchange rates The Group’s principal overseas operations during the year were located within the Eurozone and the United States. The results and cash flows of these operations have been translated into sterling at an average rate for the year of €1 = £0.88 (2008: €1 = £0.80) and £1 = US$1.57 (2008: £1= US$1.85). Assets and liabilities have been translated at the year end rate of €1 = £0.88 (2008: €1 = £0.97, 2007: €1 = £0.73) and £1 = US$1.61 (2008: £1= US$1.44, 2007: £1 = US$1.99).
Total foreign currency movements during 2009 resulted in a gain recognised in the income statement of £154 million (2008: £327 million loss).
2 – Presentation changes (a) Changes to presentation (i) The Group has adopted IAS 1 (Revised), Presentation of Financial Statements, as of 1 January 2009. The principal impact of this has been in the following areas: (a) The titles of some of the prime statements have changed, so that the consolidated statement of recognised gains and losses is now called the consolidated statement of comprehensive income; the reconciliation of movements in consolidated shareholders’ equity is now called the consolidated statement of changes in equity; the consolidated balance sheet is renamed the consolidated statement of financial position; and the consolidated cash flow statement is renamed the consolidated statement of cash flows. (b) The standard requires the income tax effect of each component of comprehensive income to be disclosed. This information is given in note 13. (c) Changes in the year in each element of equity must now be shown on the face of the consolidated statement of changes in equity, rather than in the notes. (d) The standard requires entities to present a comparative consolidated statement of financial position as at the beginning of the earliest comparative period when the entity has applied an accounting policy retrospectively, makes a retrospective restatement or reclassifies items in the financial statements. As we have restated certain prior year figures, explained in section (b) below, we have presented three consolidated statements of financial position and supporting notes in these financial statements.
(ii) The Group has also adopted Amendments to IFRS 7, Improving Disclosures about Financial Instruments, as of 1 January 2009. The principal impact of these amendments is to require the following additional disclosures: (a) An analysis of financial assets and liabilities carried at fair value using a fair value hierarchy that reflects the significance of inputs used in making the fair value measurements.
Comparative information for the disclosures required by the IFRS 7 amendments is not needed in the first year of application.
(a) Acquisitions (i) Material acquisitions There were no material acquisitions in the year ended 31 December 2009.
(ii) Other goodwill arising As disclosed in the 2008 financial statements, on 30 June 2008 the Group acquired Swiss Life Belgium (SLB). At 30 June 2009, the fair values of the assets and liabilities were updated from their provisional values to reflect decreases in the value of acquired in-force business and deferred acquisition costs, and increases in insurance and investment contract liabilities. This has given rise to an increase in goodwill of €72 million (£64 million) to €132 million (£117 million).
(iii) Non-adjusting subsequent event Acquisition of River Road Asset Management On 5 January 2010, the Group announced that it had agreed to acquire 100% of River Road Asset Management, a US equity manager, to support the expansion of Aviva Investors’ third party institutional asset management business. Completion took place on 24 February 2010 for an estimated total consideration of £79 million (US$122 million), of which £37 million (US$57 million) was paid in cash on completion. The balance comprises contingent consideration.
The contingent consideration arrangement requires the Group to pay amounts over the next five years, based on a multiple of the earnings during that period, up to a maximum total purchase price of £70 million (US$108 million). The potential undiscounted amount of all future payments that the Group could be required to make under the contingent consideration arrangement is between £26 million (US$41 million) and £53 million (US$82 million).
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 3 – Subsidiaries continued (i) Dutch health insurance business On 1 January 2009, the Group’s Dutch subsidiary, Delta Lloyd, sold its health insurance business to OWM CZ Groep Zorgverkeraar UA (CZ), a mutual health insurer, for £246 million, realising a profit of £31 million, calculated as shown below. Under the terms of the agreement, CZ purchased the Delta Lloyd health insurance business and took on its underwriting risk and policy administration. Delta Lloyd continues to market and distribute health insurance products from CZ to its existing customers and continues to provide asset management for the transferred business. Delta Lloyd also has exclusive rights to market life, general insurance and income protection products to CZ’s customers.
Assets Investments and property and equipment 396 Receivables and other financial assets 359 Prepayments and accrued income 158 Cash and cash equivalents 483
(ii) Australian life and pensions business On 1 October 2009, the Group sold its Australian life and pensions business and wealth management platform to National Australia Bank for cash of A$902 million (£443 million). The total sale proceeds were fixed by reference to the net assets of the businesses at 31 December 2008, adjusted to reflect the results in the period from 1 January 2009 to completion. The profit on disposal of these wholly-owned subsidiaries was £122 million, calculated as follows: £m
Assets Goodwill and intangible assets 1 Investments and property and equipment 2,530 Receivables and other financial assets 60 Deferred acquisition costs and other assets 20 Tax assets 26 Cash and cash equivalents 175
Liabilities Gross insurance liabilities and liabilities for investment contracts (2,083) Payables and financial liabilities (59) Other liabilities (249) Tax liabilities and other provisions (45)
Profit on disposal before tax 122 * The Group hedged its exposure to A$900 million of the sale proceeds through the purchase of foreign currency forward contracts.
(iii) UK non-core operations On 11 February 2009, the Group sold The British School of Motoring Limited and its subsidiaries to Arques Consulting GmbH for a consideration of £4 million. The resultant loss on disposal of £9 million was provided for in the 2008 financial statements.
(iv) Non-adjusting subsequent event On 17 February 2010, the Group sold its 35% holding in Sogessur SA to that company’s main shareholder, Société Générale, for a consideration of £35 million, realising a profit on disposal of £24 million.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 3 – Subsidiaries continued (c) Listing of minority shareholding in Delta Lloyd On 3 November 2009, Aviva plc and Delta Lloyd completed the Initial Public Offering (“IPO”) of Delta Lloyd, which commenced trading on Euronext Amsterdam on that date. The IPO consisted of a public offering to institutional and retail investors of Delta Lloyd’s ordinary shares, including the over-allotment option (also referred to as a “greenshoe”) taken up on 24 November 2009. The Group has remained the majority shareholder after the IPO, retaining 58% of the ordinary share capital in Delta Lloyd. The transaction has been treated as an equity transaction with minorities, resulting in the following transfers between reserves: Transfers (from)/to £m
(d) Operations and assets classified as held for sale Assets held for sale as at 31 December 2009 comprise: Property and equipment held for sale (see (i) below) — 102 — Assets of operations classified as held for sale (see (ii) below) 53 1,448 1,128
(ii) Assets and liabilities of operations classified as held for sale The assets and liabilities of operations classified as held for sale as at 31 December 2009 relate to RAC France and an Australian associate, and are as follows: Goodwill and intangible assets — 14 — Investments and property and equipment 32 396 316 Receivables and other financial assets 20 386 554 Deferred acquisition costs and other assets — 1 — Prepayments and accrued income 1 158 145 Tax assets — — 17 Cash and cash equivalents — 493 96
Aviva Europe Activities reported in the Aviva Europe operating segment exclude operations in the UK and include those in Russia and Turkey. Principal activities are long-term business in France, Ireland, Italy, Poland and Spain, and general insurance in France, Ireland and Italy.
North America Our activities in North America principally comprise our long-term business operations in the US and general insurance business operation in Canada.
Asia Pacific Our activities in Asia Pacific principally comprise our long-term business operations in Australia (prior to its sale on 1 October 2009), China, India, Singapore, Hong Kong, Sri Lanka, Taiwan, Malaysia, and South Korea.
Life GI# Europe Lloyd America Asia Pacific Investors activities Total £m £m £m £m £m £m £m £m £m
Net earned premiums 4,777 4,519 12,439 4,347 6,141 450 — — 32,673 Fee and commission income 261 272 558 226 55 121 296 — 1,789 5,038 4,791 12,997 4,573 6,196 571 296 — 34,462 Net investment income 8,199 553 10,184 3,172 2,242 586 157 (121) 24,972 Inter-segment revenue — — — — — — 202 — 202 Share of loss of joint ventures and associates (416) — (36) (41) — (11) — — (504) Profit on the disposal of subsidiaries and associates — — — 31 — 122 — — 153
Change in investment contract provisions (4,008) — (6,451) (239) (128) (148) (211) — (11,185) Change in unallocated divisible surplus 872 — (2,280) (68) — (71) — — (1,547) Amortisation of deferred acquisition costs and acquired value of in-force business (46) — (47) (3) (149) (4) — — (249) Depreciation and other amortisation expense (45) (72) (60) (35) (77) (6) (5) — (300) Other operating expenses (1,804) (1,893) (2,107) (1,248) (653) (246) (348) (306) (8,605) Impairment losses** — (42) (17) (445) (104) — — — (608) Inter-segment expenses (119) (6) (15) — (60) (1) — (1) (202) Finance costs (254) (19) (13) (672) (18) — — (360) (1,336)
**Impairment losses, and reversal of such losses, recognised directly in other comprehensive income were £482 million and £nil respectively. # United Kingdom General Insurance includes the Group Reinsurance business, agency run off business and the non-insurance business for the RAC.
Gross written premiums 8,108 5,496 9,550 5,979 6,486 587 — — 36,206 Premiums ceded to reinsurers (612) (498) (350) (92) (214) (75) — — (1,841) Internal reinsurance revenue — 26 (17) (4) (4) (1) — — —
Net written premiums 7,496 5,024 9,183 5,883 6,268 511 — — 34,365 Net change in provision for unearned premiums 6 344 (3) (18) (50) (2) — —– 277
Claims and benefits paid, net of recoveries from reinsurers (8,620) (3,944) (9,280) (4,131) (2,912) (464) — (2) (29,353)
Change in investment contract provisions 7,240 — 2,643 122 (126) 401 349 — 10,629 Change in unallocated divisible surplus 2,151 — 2,301 30 — — — — 4,482 Amortisation of deferred acquisition costs and acquired value of in-force business — — (39) (5) (285) (4) — — (333) Depreciation and other amortisation expense (70) (108) (43) (77) (51) (5) (5) — (359) Other operating expenses (1,787) (2,599) (1,444) (1,526) (633) (296) (362) 552 (8,095) Impairment losses** — (26) (17) (797) (200) — — — (1,040) Inter-segment expenses (137) (2) (18) — (42) (3) — (1) (203) Finance costs (541) (10) (20) (683) (17) — — (276) (1,547)
(Loss)/profit before tax (1,180) (391) 199 (200) (338) (56) 72 (474) (2,368) Tax attributable to policyholders’ returns 1,031 — 49 — — (12) — — 1,068
(Loss)/profit before tax attributable to shareholders (149) (391) 248 (200) (338) (68) 72 (474) (1,300)
**Impairment losses, and reversal of such losses, recognised directly in other comprehensive income were £830 million and £nil respectively. # United Kingdom General Insurance includes the Group Reinsurance business, agency run off business and the non-insurance business for the RAC.
Capital expenditure (excluding business combinations) 38 23 40 24 65 3 4 — 197
Life GI Europe Lloyd America Asia Pacific Investors activities Total £m £m £m £m £m £m £m £m £m
Goodwill 52 1,208 1,078 279 903 55 3 — 3,578 Acquired value of in-force business and intangible assets 65 265 1,355 115 2,196 28 14 — 4,038 Interests in, and loans to, joint ventures and associates 2,080 — 414 190 2 296 — 1 2,983 Property and equipment 123 173 153 366 106 32 10 1 964 Investment property 8,872 148 1,632 2,288 7 21 655 803 14,426 Loans 20,156 833 1,142 17,919 2,130 56 1 — 42,237 Financial investments 69,060 2,501 92,331 33,393 24,621 3,865 1,454 3,035 230,260 Deferred acquisition costs 1,221 994 855 225 2,626 40 3 1 5,965 Other assets 13,925 4,956 17,255 6,391 5,538 630 661 755 50,111
Liability for investment contracts 35,109 — 61,890 3,216 3,403 1,643 2,298 — 107,559 Unallocated divisible surplus 2,727 — (548) 143 — 3 — — 2,325 Net asset value attributable to unitholders 986 — 2,713 591 — 175 — 2,453 6,918 External borrowings 2,716 11 184 6,786 163 — — 5,341 15,201 Other liabilities, including inter-segment liabilities 8,164 (972) 4,707 13,801 4,041 190 324 2,881 33,136
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 4 – Segmental information continued (v) Segmental statement of financial position as at 31 December 2007
Capital expenditure (excluding business combinations) 30 140 56 50 10 5 6 2 299
Other Other includes the RAC non-insurance operations, our banking businesses, service companies, head office expenses, such as Group treasury and finance functions, and certain financing costs and taxes not allocated to business segments.
Net change in provision for unearned premiums — 559 — — 559
Net earned premiums 22,921 9,752 — — 32,673 Fee and commission income 703 131 548 407 1,789 23,624 9,883 548 407 34,462 Net investment income 23,126 1,272 6 568 24,972 Inter-segment revenue — — 189 — 189 Share of (loss)/profit of joint ventures and associates (449) 2 (16) (41) (504) Profit on the disposal of subsidiaries and associates (4) — — 157 153
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 4 – Segmental information continued (ii) Segmental income statement – products and services for the year ended 31 December 2008
(Loss)/profit before tax attributable to shareholders (243) (106) 81 (1,032) (1,300) Adjusted for non-operating items 1,937 1,304 42 314 3,597
Operating profit/(loss) before tax attributable to shareholders’ profits 1,694 1,198 123 (718) 2,297 * Gross written premiums includes inward reinsurance premiums assumed from other companies amounting to £255 million, of which £89 million relates to property and liability insurance, £131 million to long-term business and the remainder to health business. **General insurance and health business segment includes gross written premiums of £1,924 million and premiums ceded to other companies of £35 million relating to health business.
(iii) Segmental statement of financial position – products and services as at 31 December 2009
Gross insurance liabilities 155,693 19,157 — — 174,850 Gross liabilities for investment contracts 107,559 — — — 107,559 Unallocated divisible surplus 2,325 — — — 2,325 Net asset value attributable to unit holders 4,449 16 — 2,453 6,918 Borrowings 4,368 — — 10,833 15,201 Other liabilities, including inter-segment liabilities 16,953 379 392 15,412 33,136
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 5 – Details of income This note gives further detail on the items appearing in the first section of the consolidated income statement.
Gross written premiums (note 4a & 4b) Long-term: Insurance contracts 16,692 19,388 Participating investment contracts 8,030 4,884
From financial instruments designated as trading and other than trading 7,258 7,302 From AFS investments and financial instruments at amortised cost 2,150 2,012 9,408 9,314 Dividend income 1,753 2,444 Other income from investments designated as trading
Realised gains and losses on AFS investments Gains recognised previously as unrealised in equity (see policy S and note 34) 310 126
116 (2,197) Realised gains on loans 24 7 Foreign exchange gains and losses on investments other than trading 238 (395) Other investment expenses (174) (95)
Insurance contracts 16,973 16,986 Participating investment contracts 4,264 5,085 Non-participating investment contracts 67 115
Claims and benefits paid to policyholders on general insurance and health business 7,444 8,696 28,748 30,882 Less: Claim recoveries from reinsurers
Change in investment contract provisions Investment income allocated to investment contracts 5,136 (6,957) Other changes in provisions
Participating investment contracts (note 39) 5,764 (3,088) Non-participating investment contracts (5,425) (591)
Impairments Net impairment on loans 53 50 Net impairment on financial investments 538 973 Net impairment on receivables and other financial assets 2 17 Net impairment on non-financial assets (1) —
School of Motoring in the UK and the structured settlement business in the United States; — A £304 million expense after reinsurance for the discounted cost of strengthening latent claims provisions, mainly in the UK
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 7 – Finance costs This note analyses the interest costs on our borrowings (which are described in note 48) and similar charges.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 8 – Long-term business economic volatility The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business. This note explains the methodology behind this.
The limited economic variance in 2009 reflects the recovery in investment markets, with positive variances on fixed interest assets in Europe and the United States driven by the narrowing of credit spreads towards the end of the year, offset by losses from equity derivatives in the Netherlands. Investment variances include the reversal of £160 million of losses incurred in 2008 relating to assets backing participating business in Spain. Additional credit default provisions for corporate bonds and commercial mortgages were maintained at £550 million in the UK and increased by £97 million in Europe. This compares to a significantly negative impact in 2008 driven by the global financial crisis.
For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average prospective yields for the actual assets held. Where such securities are classified as available for sale, such as in the United States, the expected investment return comprises the expected interest or dividend payments and amortisation of the premium or discount at purchase.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 9 – Longer-term investment return and economic assumption changes for non-long-term business continued The principal assumptions underlying the calculation of the longer-term investment return are: Longer-term rates of Longer-term rates of return Equities return Properties
United Kingdom 7.0 9.2 5.5 7.7 France 7.3 8.3 5.8 6.8 Ireland 7.3 8.3 5.8 6.8 Netherlands 7.3 8.3 5.8 6.8 Canada 6.1 7.7 4.6 6.2
10 – Employee information This note shows where our staff are employed throughout the world and analyses the total staff costs. The note excludes staff employed by our joint ventures or associates.
United Kingdom operations* Aviva Europe Delta Lloyd North America Asia Pacific Aviva Investors Corporate centre
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 10 – Employee information continued (b) Staff costs Total staff costs were: Wages and salaries 1,860 2,107 Social security costs 272 258 Post-retirement obligations
Profit sharing and incentive plans 135 172 Equity compensation plans (note 29d) 56 39 Termination benefits 76 57
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 12 – Auditors’ remuneration This note shows the total remuneration payable by the Group to our auditors.
All other fees: Services relating to corporate finance transactions — 1.2 — 1.8 3.0 Services relating to information technology — — — — — Other supplementary services — 7.9 — 2.9 10.8
Fees payable to Ernst & Young LLP and its associates for other services to Group companies: Audit of Group subsidiaries pursuant to legislation 10.0 — — — 10.0 Additional fees related to the prior year audit of Group subsidiaries pursuant to legislation 0.5 — — — 0.5 Other services pursuant to legislation 2.4 — — — 2.4 Audit of Group pension scheme — 0.1 — — 0.1 Supplementary reporting — 3.5 — — 3.5 Tax services — — 0.2 — 0.2
All other fees: Services relating to corporate finance transactions — 0.1 — 0.4 0.5 Services relating to information technology — — — 0.1 0.1 Other supplementary services — 4.7 — 1.5 6.2
Fees payable for the audit of the Group’s subsidiaries pursuant to legislation include fees for the statutory audit of the subsidiaries, both inside and outside the UK, and for the work performed by Ernst & Young LLP in respect of the subsidiaries for the purpose of the consolidated financial statements of the Group.
Other services pursuant to legislation comprise services in relation to statutory and regulatory filings. These include audit services for the audit of FSA returns in the UK and review of interim financial information under the Listing Rules of the UK Listing Authority.
Fees for Other supplementary services include £5.7 million (2008: £3.5 million) for assurance services in connection with the Group’s Financial Reporting Control Framework; £1.2 million (2008: £1.2 million) for examination of the Group’s Individual Capital Assessment (ICA); and £3.9 million (2008: £1.5 million) for other services which includes work undertaken on the listing on the New York Stock Exchange and the reattribution of the inherited estate in the UK.
Deferred tax In respect of pensions and other post-retirement obligations (45) (15) In respect of unrealised gains/(losses) on investments 241 (203)
(c) Tax credited to equity Tax credited directly to equity in the year amounted to £17 million (2008: £16 million), and is wholly in respect of coupon payments on a direct capital instrument.
Tax calculated at standard UK corporation tax rate of 28% (2008: 28.5%) 566 (675) Different basis of tax – policyholders 82 (767) Adjustment to tax charge in respect of prior years (113) (283) Non-assessable income (105) (94) Non-taxable profit on sale of subsidiaries and associates (44) (2) Disallowable expenses 279 95 Different local basis of tax on overseas profits 50 (61) Movement in deferred tax not recognised (15) 292 Other 7 12
(a) Basic earnings per share (i) The profit/(loss) attributable to ordinary shareholders is: Operating Adjusting profit items Total £m £m £m
Coupon payments in respect of direct capital instruments (DCI) (net of tax) (44) — (44)
Profit/(loss) for the year 1,810 (2,695) (885) Amount attributable to minority interests (91) 61 (30) Cumulative preference dividends for the year (17) — (17) Coupon payments in respect of direct capital instruments (DCI) (net of tax) (40) — (40)
Operating profit attributable to ordinary shareholders 2,022 1,221 45.1 Non-operating items: Investment return variances and economic assumption changes on long-term business (note 8) (75) (120) (4.4) Short-term fluctuation in return on investments backing non-long-term business (note 9b) 95 158 5.8 Economic assumption changes on general insurance and health business (note 9b) 57 41 1.5 Impairment of goodwill and other amounts expensed (note 16a) (62) (62) (2.3) Amortisation and net impairment of intangibles (note 17) (144) (38) (1.4) Profit on the disposal of subsidiaries and associates (note 3b) 153 153 5.7 Integration and restructuring costs and exceptional items (note 6) (241) (329) (12.2)
Profit attributable to ordinary shareholders Dilutive effect of share awards and options
Operating profit attributable to ordinary shareholders Dilutive effect of share awards and options
Ordinary dividends declared and charged to equity in the year Final 2008 – 19.91 pence per share, paid on 15 May 2009 527 — (Final 2007 – 21.10 pence per share, paid on 16 May 2008) — 554 Interim 2009 – 9.00 pence per share, paid on 17 November 2009 248 — (Interim 2008 – 13.09 pence per share, paid on 17 November 2008) — 348 775 902 Preference dividends declared and charged to equity in the year 17 17 Coupon payments on direct capital instrument 61 56
As explained in (b)(i) below, an amount of £30 million related to the recognition of a deferred tax asset previously recognised in goodwill has been expensed in the year. Together with impairment charges of £32 million recognised in respect of goodwill within interests in associates (note 19), the total goodwill write down for the year is £62 million.
United Kingdom Long-term business (see (i) below) 31 52 71 — — — 31 52 71 General insurance, RAC and health (see (ii) below) 1,208 1,208 1,276 201 201 221 1,409 1,409 1,497
Europe France (long-term business) (see (iii) below) — — — 55 60 45 55 60 45 Ireland
Key assumptions used for the calculation were: — Budgeted operating profit represents the operating profit in the business plans, approved by management, and as such reflects the best estimate of future profits based on both historical experience and expected growth rates for the relevant UK industry sectors
— Growth rates represent the rates used to extrapolate future cash flows beyond the business plan period and have been based upon latest information available regarding future and past growth rates, including external sources of data such as ABI Annual Market Statistics.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 16 – Goodwill continued Europe Long-term business The recoverable amount of long-term business cash generating units in the Europe region, has been determined based on a value in use calculation. The first step of the test was to compare the carrying value of each cash generating unit, including goodwill, to the Market Consistent Embedded Value (MCEV) of that cash generating unit. If the MCEV is less than the carrying value of a cash generating unit the present value of profits from expected new business for that cash generating unit is considered. If the value of profits from expected new business for a cash generating unit is expected to grow beyond the period of the initial plan, this growth rate is set with regard to past experience in each market and market expectations of future growth in each country.
(iii) France (long-term business) The recoverable amount of the indefinite life intangible asset has been assessed as part of the recoverable amount of the French long-term business cash generating unit. The MCEV of the French long-term business was significantly greater than its carrying value, including indefinite life intangible assets.
(iv) Ireland (long-term business) The MCEV of the Irish long-term business is greater than its carrying value so the recoverable value will be significantly in excess of its carrying value, including goodwill.
(v) Ireland (general insurance and health) The recoverable amount of the Irish general insurance and health business exceeds the carrying value of the cash generating unit including goodwill.
(vi) Italy (long-term business) This calculation is an actuarially-determined appraisal value and is based on the embedded value of the business together with the present value of expected profits from future new business.
Key assumptions (in addition to MCEV principles) used for the calculation were: — New business contribution represents the present value of projected future distributable profits generated from business written in a period. This is initially based on the most recent three year business plans approved by management; — Growth rate represents the rate used to extrapolate new business contributions beyond the business plan period, and is based on management’s estimate of future growth of 2.0%; and — Risk adjusted discount rate of 10.2% represents the rate used to discount expected profits from future new business. The discount rate includes a risk-free rate and a risk margin to make prudent allowance for the risk that experience in future years for new business may differ from that assumed.
Key assumptions used for the calculation were: — Budgeted operating profit for an initial three year period represents the operating profit in the most recent business plans, approved by management and as such reflects the best estimate of future profits based on both historical experience and expected growth rates for the Italian economy; — Growth rate of 3.0% represents the rate used to extrapolate future cash flows beyond the business plan period; and — A risk adjusted discount rate of 10.2%.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 16 – Goodwill continued (viii) Delta Lloyd (long-term, general insurance, health and fund management) The recoverable amount of the Delta Lloyd life and general insurance and health cash generating units has been determined on the basis of a value in use calculation. This calculation is an appraisal value and is based on the discounted expected future cash flows from the operations over their expected useful life. Expected cash flows for future periods have been obtained from the plan figures for a three to five year period, depending on the management plan period of the unit. Expected cash flows for later periods have been extrapolated, taking into account the growth rate.
Key assumptions used for the calculation were: — Expected cash flows for future periods have been obtained from the plan figures for a three to five year period; — For the year following the end of the management plan period cash flows are extrapolated at a growth rate of nil to 2.6%
depending on the particular circumstances of each unit; and — Risk-adjusted discount rate of 10.1% to 10.6% depending on management’s assessment of the specific risks of each unit, represents the rate used to discount expected profits from future new business.
Key assumptions used for the calculation were: — Embedded value represents the shareholder interest in the life business and is based on projected cash flows of the business including expected investment returns. — Risk adjusted discount rate of 8.0% is used to calculate the embedded value; — New business contribution represents the present value of projected future distributable profits generated from business written in a period. This is initially based on the most recent three year business plans approved by management; — Growth rate represents the rate used to extrapolate new business contributions beyond the business plan period, and is based on management’s estimate of future growth of 5.0% for life and annuity business, which is set with regard to past experience in these markets; and
— Risk adjusted discount rate of 10.0% represents the rate used to discount expected profits from future new business. The discount rate includes an additional margin to make prudent allowance for the risk that experience in future years for new business may differ from that assumed.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 17 – Acquired value of in-force business (AVIF) and intangible assets This note shows the movements in cost and amortisation of the in-force business and intangible assets acquired when we have purchased subsidiaries.
AVIF on AVIF on assets indefinite insurance investment with finite useful contracts* contracts** useful lives lives (a) Total £m £m £m £m £m
Gross amount At 1 January 2008 2,273 110 1,005 709 4,097 Additions 4 — 60 — 64 Acquisition of subsidiaries 59 — 24 — 83 Disposals (4) (5) (79) — (88) Movement in shadow adjustment 327 — — — 327 Transfers (4) 67 (63) — — Transfers to goodwill and other assets — — — (31) (31) Foreign exchange rate movements 869 44 277 149 1,339
Accumulated amortisation At 1 January 2008 (498) (18) (242) — (758) Amortisation for the year (333) (13) (100) — (446) Disposals — — 39 — 39 Transfers (1) (43) 44 — — Foreign exchange rate movements (230) (18) (85) — (333)
Transfers from property and equipment (note 20) — — (3) — (3)
Accumulated impairment At 1 January 2008 (77) — (8) (57) (142) Impairment losses charged to exceptional item — — (32) (20) (52) Other impairment losses charged to expenses (2) — (13) — (15) Foreign exchange rate movements (17) — (2) (18) (37)
At 31 December 2009 1,394 99 1,111 256 2,860 * On insurance and participating investment contracts. **On non-participating investment contracts.
(b) The negative figure of £20 million for AVIF on insurance contracts arises from the updating of fair values for Swiss Life Belgium, described in note 3(a)(ii).
(c) During the year, the Group reviewed the terms of its bancassurance agreement with Banco Popolare, signed in December 2008, which was initially for 10 years with five-year automatic renewal periods. This agreement is expected to be renewed indefinitely. Although this agreement had originally been classified as an intangible asset with indefinite useful life, it is now considered more appropriate to reclassify it as having a finite useful life where the residual value is high, as a consequence of the terms of the put option, and amortisation immaterial and this is consistent with other similar contracts. This has resulted in a reallocation in the year of £431 million from intangible assets with indefinite useful lives to those with finite useful lives.
(d) Other intangible assets with finite useful lives consist primarily of the value of bancassurance and other distribution agreements.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 18 – Interests in, and loans to, joint ventures In several business units, Group companies and other parties jointly control certain entities. This note analyses these interests and describes the principal joint ventures in which we are involved.
Share of results after tax — (1,032) — (1,032) Amortisation and impairment of goodwill and intangibles1 (6) — — (6)
Share of loss after tax (6) (1,032) — (1,038) Acquisitions and additions 25 150 182 357 Disposals and reduction in Group interests — (131) — (131) Fair value losses taken to other comprehensive income — (12) — (12) Loans repaid — — (52) (52) Foreign exchange rate movements 7 30 — 37
Share of results after tax — (402) — (402) Amortisation of intangibles1 (7) — — (7)
Share of loss after tax (7) (402) — (409) Acquisitions and additions — 415 145 560 Disposals and reduction in Group interests — (59) — (59) Fair value gains taken to other comprehensive income — 8 — 8 Loans repaid — — (99) (99) Foreign exchange rate movements (14) (7) (16) (37)
At 31 December 2009 202 1,172 327 1,701 1. Comprises of amortisation of AVIF on insurance contract of £3 million (2008: £6 million) and other intangibles of £4 million (2008: £nil).
(ii) The balances at 31 December comprised: Goodwill and Equity intangibles interests Loans Total 2009 £m £m £m £m
Goodwill and Equity intangibles interests Loans Total 2008 £m £m £m £m
Property management undertakings — 1,080 297 1,377 Long-term business undertakings 198 158 — 356 General insurance undertakings — 4 — 4
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 18 – Interests in, and loans to, joint ventures continued (b) Property management undertakings The principal joint ventures are as follows: Company GP proportion held PLP proportion held
(c) Long-term business undertakings The principal joint ventures are as follows: Country of incorporation and
All investments in the above companies are unlisted and are held by subsidiaries except for the shares in Aviva-COFCO Life Insurance Co. Limited, which are held by the Company. The Group’s share of net assets of that company is £55 million (2008: £57 million) and have a fair value of £72 million (2008: £61 million).
(d) Impairment testing CIMB Aviva Assurance Berhad and CIMB Aviva Takaful Berhad The Group’s investments in CIMB Aviva Assurance Berhad and CIMB Aviva Takaful Berhad have been tested for impairment by comparing their carrying values (which include goodwill which arose on their acquisition) with their recoverable amounts. The recoverable amounts for both the investments have been determined based on value in use calculations. This calculation is an actuarially-determined appraisal value and is based on the embedded value of the business together with the present value of expected profits from future new business. The recoverable amounts exceed the carrying values of both the investments.
Key assumptions used for the calculation were: — Cash flow projections based on
Consistent Embedded Value (MCEV) principles. The embedded value is the total of the net worth of the life business and the value of the in-force business. The underlying methodology and assumptions have been reviewed by a firm of actuarial consultants.
At 31 December 2009 385 893 3 1,281 1. Includes impairment of £1 million in other intangibles (2008: £4 million).
Aviva Life Insurance Company India Limited Insurance Ordinary shares of RS1 each 26.0% India Banca Network Investimenti SpA Product distribution Ordinary shares of €1 each 49.92% Italy Cyrte Fund I CV Investment fund Partnership share 22.31% Netherlands Cyrte Fund II BV Investment fund Ordinary shares of €1 each 10.48% Netherlands Cyrte Fund III CV Investment fund Partnership share 13.93% Netherlands RBSG Collective Investments Limited Investment Ordinary shares of £1 each 49.99% Great Britain RBS Life Investments Limited Insurance Ordinary shares of £1 each 49.99% Great Britain
The Group’s Dutch subsidiary owns 30.8% of the shares, and depositary receipts for shares, in Van Lanschot NV, a financial services company in the Netherlands. The Group is not able to appoint management representation on the board of this company and is therefore unable to exert significant influence over its affairs. Accordingly, this investment is treated as a financial investment rather than as an associate.
The recoverable amounts exceed the carrying values of both the investments.
As a result of the testing, an impairment of £26 million has been recognised. This reflects adverse developments in the business environment in which this associate operates.
At 31 December 2008 61 573 14 876 605 2,129 Additions 62 11 — 40 36 149 Transfer to investment properties (note 21) (16) (47) — — — (63) Disposals (7) (49) (2) (82) (196) (336) Transfers to intangibles (note 17) — — — (23) — (23) Fair value losses (see below) — (33) — — — (33) Foreign exchange rate movements (6) (35) (2) (14) (18) (75)
If owner-occupied properties were stated on a historical cost basis, the carrying amount would be £328 million (2008: £414 million).
Carrying value At 1 January 2008 12,603 2,788 15,391 Additions 1,744 2 1,746 Capitalised expenditure on existing properties 92 8 100 Acquisitions of subsidiaries 81 — 81 Fair value losses (2,441) (696) (3,137) Disposals (852) (297) (1,149) Transfers (2) 2 — Foreign exchange rate movements 1,276 118 1,394
At 31 December 2008 12,501 1,925 14,426 Additions 319 49 368 Capitalised expenditure on existing properties 64 9 73 Fair value losses (917) (167) (1,084) Disposals (785) (143) (928) Transfers from property and equipment (note 20) 28 35 63 Foreign exchange rate movements (453) (35) (488)
Policy loans 214 1,655 1,869 265 1,861 2,126 215 1,316 1,531 Loans to banks — 5,339 5,339 — 6,415 6,415 — 7,576 7,576 Securitised mortgage loans (see note 23)
Of the above loans, £33,241 million (2008: £30,673 million, 2007: £25,666 million) is expected to be recovered more than one year after the statement of financial position date.
The change in fair value of these loans during the year, attributable to a change in credit risk, was a gain of £338 million (2008: £644 million loss). The cumulative change attributable to changes in credit risk to 31 December 2009 was a loss of £315 million (2008: £854 million loss).
Loans at amortised cost The fair value of these loans at 31 December 2009 was £19,786 million (2008: £20,218 million, 2007: £17,588 million).
This collateral generally takes the form of liens or charges over properties and, in the case of policy loans, the underlying policy, for the majority of the loan balances above. In all other situations, the collateral must be in a readily realisable form, such as listed securities, and is held in segregated accounts. Transfer of title for the collateral received always occurs in such cases, although no market risk or benefit is taken. In the event of a default, the Group is able to sell or repledge the collateral.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 23 – Securitised mortgages and related assets The Group has loans receivable, secured by mortgages, which have then been securitised through non-recourse borrowings, in our UK Life and Dutch businesses. This note gives details of the relevant transactions.
(a) Description of arrangements (i) United Kingdom In a long-term business subsidiary Aviva Equity Release UK Limited (AER), the beneficial interest in certain portfolios of lifetime mortgages has been transferred to five special purpose securitisation companies (the ERF companies), in return for initial consideration and, at later dates, deferred consideration. The deferred consideration represents receipts accrued within the ERF companies after meeting all their obligations to the note holders, loan providers and other third parties in the priority of payments. The purchases of the mortgages were funded by the issue of fixed and floating rate notes by the ERF companies.
All the shares in the ERF companies are held by independent companies, whose shares are held on trust. Although AER does not own, directly or indirectly, any of the share capital of the ERF companies or their parent companies, it retains control of the majority of the residual or ownership risks and rewards related to the assets of the securitisation companies, and they have therefore been treated as subsidiaries in the consolidated financial statements. AER has no right to repurchase the benefit of any of the securitised mortgage loans, other than in certain circumstances where AER is in breach of warranty or loans are substituted in order to effect a further advance.
Delta Lloyd companies have purchased notes in the securitisation companies, which have been eliminated on consolidation through offset against the borrowings of the securitisation companies in the consolidated statement of financial position.
Loan notes held by third parties are as follows: Total loan notes issued, as above Less: Loan notes held by Group companies
Loan notes held by third parties (note 48c) 1,444 5,885 1,590 6,195 1,674 5,620
Fixed maturity securities Debt securities UK government — 21,423 — 21,423 — 18,854 — 18,854 — 18,767 — 18,767 UK local authorities — 16 — 16 — 17 — 17 — 81 — 81 Non-UK government 11 45,655 1,810 47,476 9 40,029 756 40,794 35 28,278 936 29,249 Corporate bonds
(note 57d) 2,078 — — 2,078 2,910 — — 2,910 1,609 — — 1,609 Deposits with credit institutions 88 881 — 969 115 831 — 946 114 733 — 847 Minority holdings in property management undertakings — 667 — 667 — 969 — 969 — 977 — 977 Other investments – long-term — 1,187 4 1,191 — 2,686 4 2,690 — 1,640 17 1,657 Other investments – short-term — — — — — 3 4 7 — 4 — 4 2,166 32,560 123 34,849 3,025 33,339 147 36,511 1,727 34,575 198 36,500 Total financial investments Less assets classified as held for sale Fixed maturity securities — — — — — (336) — (336) — (80) — (80) Equity securities — — — — — (60) — (60) — (236) — (236) Other investments (23) — — (23) — — — —
Other debt securities of £11,906 million (2008: £11,636 million, 2007: £5,348 million) primarily include residential and commercial mortgage backed securities, as well as other structured credit securities.
Modelled with significant observable market inputs – (‘Level 2’) Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly. If the asset has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset. Level 2 inputs include the following: — Quoted prices for similar (ie not identical) assets in active markets. — Quoted prices for identical or similar assets in markets that are not active, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. — Inputs other than quoted prices that are observable for the asset (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment spreads, loss severities, credit risks, and default rates). — Inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (market­
Where we use broker quotes and no information as to the observability of inputs is provided by the broker, we generally validate the price quoted by the broker by using internal models with observable inputs. When the price obtained from the broker and internal model are similar, we look to the inputs used in our internal model to understand the observability of the inputs used by the broker. In circumstances where internal models are not used to validate broker prices, and the observability of inputs used by brokers is unavailable, the investment is classified as Level 3. Broker quotes are usually non-binding.
Modelled with significant unobservable market inputs – (‘Level 3’) Inputs to Level 3 fair values are unobservable inputs for the asset. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date (or market information for the inputs to any valuation models). As such, unobservable inputs reflect the assumptions the business unit considers that market participants would use in pricing the asset. Examples are certain private equity investments and private placements.
— Notes issued by loan partnerships held by our UK Life business amounting to £1.0 billion, for which there is no active market. These are valued using counterparty quotes, corroborated against the prices of selected similar securities. In 2009 there was insufficient market observable transactions in the selected securities to provide a reliable proxy price to corroborate the counterparty price.
— Private equity investment funds held by our UK Life business amounting to £0.8 billion. In valuing our interest in these funds, we rely on investment valuation reports received from the fund manager, making adjustments for items such as subsequent draw downs and distributions between the date of the report and valuation date and the fund manager’s carried interest.
— Other Level 3 investments amount to £1.6 billion and relate to a diverse range of different types of securities held by a number of businesses throughout the Group.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 24 – Financial investments continued (ii) An analysis of investments according to fair value hierarchy is given below: Fair value hierarchy
Less: Assets of Statement operations of financial Sub-total Amortised classified as position
Level 1 Level 2 Level 3 fair value cost held for sale Total £m £m £m £m £m £m £m
Loans — 18,540 — 18,540 17,653 — 36,193 Fixed maturity securities 101,621 18,710 1,260 121,591 — (80)121,511 Equity securities 54,124 4,309 632 59,065 — (236) 58,829 Other investments (including derivatives) 27,286 8,895 319 36,500 — — 36,500
Fixed Other maturity Equity investsecurities securities ments Total £m £m £m £m
The Group assesses the fair value hierarchy of its financial investments biannually at 30 June and 31 December. Transfers between fair value hierarchy levels are deemed to have occurred at the assessment date.
Transfers into and out of Level 3 arose for the following reasons: — Changes in the market observability of valuation inputs. — Changes in the market observability of inputs used to validate valuations. — Significant differences between third party prices used for valuations and validation prices either sourced from third parties or internal models. The transfers into Level 3 principally relate to certain debt securities held by our businesses in the UK, Italy and France and private equity investment funds in the UK. These investments were previously classified as Level 2. The single largest transfer was of £6.8 billion structured bond type products, whose valuation methodology is described earlier in this section.
(c) Cost, unrealised gains and fair value The following is a summary of the cost/amortised cost, gross unrealised gains and losses and fair value of financial investments: Cost/ amortised Unrealised Unrealised Impairment cost gains losses losses Fair value £m £m £m £m £m
Unit trusts and specialised investment vehicles 30,230 784 (484) (15) 30,515 Derivative financial instruments 1,518 896 (337) — 2,077 Deposits with credit institutions 969 — — — 969 Minority holdings in property management undertakings 635 69 (26) (11) 667 Other long-term investments 729 191 (297) (2) 621
Fixed maturity securities 122,172 1,970 (2,542) (9)121,591 Equity securities 50,635 9,052 (367) (255) 59,065 Other investments
Total impairments of financial investments recognised in the income statement in the year, disclosed in note 6, were £538 million (2008: £973 million). This comprised impairments of financial investments classified as available-for-sale of £482 million (2008: £830 million) disclosed in the table below, and impairments of financial investments classified as fair value through profit or loss of £56 million (2008: £143 million).
Increase for the year charged to the income statement (93) (384) (5) (482)
In certain markets, the Group or the Group’s appointed stock lending managers obtain legal ownership of the collateral received and can re-pledge it as collateral elsewhere or sell outright in the absence of default. The carrying amounts of financial assets received and pledged in this manner at 31 December 2009 were £16,909 million and £703 million respectively (2008: £18,486 million and £322 million respectively, 2007: £23,779 million and £4 million respectively). The value of collateral that was actually sold or re-pledged in the absence of default was £nil (2008: £nil).
In addition to the above, the Group has received and pledged cash collateral under stock lending arrangement that has been recognised in the statement of financial position with a corresponding obligation or receivable for its return. These latter balances are shown separately in notes 49 and 25 respectively.
(ii) Stock repurchase arrangements Included within financial investments are £664 million (2008: £383 million, 2007: £358 million) of debt securities and other fixed income securities which have been sold under stock repurchase arrangements. The obligations arising under these arrangements are shown in note 49.
(iii) Other arrangements In carrying on its bulk purchase annuity business, the Group’s UK Life operation is required to place certain investments in trust on behalf of the policyholders. Amounts become payable from the trust funds to the trustees if the Group were to be in breach of its payment obligations in respect of policyholder benefits. At 31 December 2009, £703 million (2008: £474 million, 2007: £nil) of financial investments were restricted in this way.
Amounts owed by contract holders 2,435 2,303 2,554 Amounts owed by intermediaries 1,216 1,649 1,417 Deposits with ceding undertakings 1,670 1,747 1,163 Amounts due from reinsurers 680 802 701 Amounts due from brokers for investment sales 232 120 326 Amounts receivable for collateral pledged (notes 24(e) and 57(c)) 15 1 21 Reimbursements due from government health insurance 141 147 402 Corporate owned life insurance 146 162 112 Dividends receivable 76 183 152 Finance lease receivables 162 121 111 Other banking assets 273 237 50 Other financial assets 2,606 2,730 2,164
Expected to be recovered in less than one year 8,985 9,116 8,261
(a) Carrying amount The carrying amount comprises: Deferred acquisition costs in respect of: Insurance contracts – Long-term business 2,952 3,306 1,473 Insurance contracts – General insurance and health business 1,227 1,489 1,583 Participating investment contracts – Long-term business 85 87 112 Non-participating investment contracts – Long-term business 1,032 1,062 1,126 Retail fund management business 20 21 27
Total deferred acquisition costs 5,316 5,965 4,321 Surpluses in the staff pension schemes (note 47(e)(vii)) — — 27 Other assets 305 183 139
Total 5,621 6,148 4,487 Less: Amounts classified as held for sale — (1) —
Deferred acquisition costs on long-term business are generally recoverable in more than one year whereas such costs on general insurance and health business are generally recoverable within one year after the statement of financial position date.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 26 – Deferred acquisition costs and other assets continued (b) Movements in the year The movements in deferred acquisition costs during the year were: General Retail fund
Long-term business insurance and health business manage­ ment business Total £m £m £m £m
(c) Other assets Other assets include £1 million (2008: £1 million, 2007: £66 million) that is expected to be recovered more than one year after the statement of financial position date.
(d) Prepayments and accrued income Prepayments and accrued income of £3,604 million (2008: £3,762 million, 2007: £2,986 million), include £148 million (2008: £259 million, 2007: £111 million) that is expected to be recovered more than one year after the statement of financial position date.
(a) Details of the Company’s ordinary share capital are as follows: The authorised share capital of the Company at 31 December 2009 was: 5,200,000,000 (2008: 3,000,000,000) ordinary shares of 25 pence each 1,300 750
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.
(ii) Executive share options These are options granted on various dates from 1999 to 2004, under the Aviva Executive Share Option Scheme or predecessor schemes. Options granted between 1999 and 2000 were subject to the satisfaction of conditions relating to either the Company’s return on equity shareholders’ funds (ROE) or its relative total shareholder return (TSR) against a chosen comparator group. In respect of options granted from 2000 the performance condition has been a mixture of both ROE and TSR measures. In all cases, performance is measured over a three-year performance period and the options are normally exercisable between the third and tenth anniversary of their grant.
(iii) Deferred bonus plan options These are options granted in 2000 under the CGU Deferred Bonus Plan. Participants who deferred their annual cash bonus in exchange for an award of shares of equal value also received a matching award over an equal number of share options. The exercise of these options is not subject to the attainment of performance conditions. These options are exercisable up to the tenth anniversary of their grant.
(b) Outstanding options and awards (i) Share options At 31 December 2009, options to subscribe for ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva Savings Related
Aviva Executive Option price Number Normally Share Option Scheme p of shares exercisable
The following table summarises information about options outstanding at 31 December 2009: Weighted average Outstanding remaining Weighted average options contractual life exercise price Range of exercise prices Number Years p
The vesting of awards under the Aviva Long Term Incentive Plan 2005 is subject to the attainment of performance conditions as described in the Directors’ remuneration report. Shares which do not vest, lapse.
(iii) Shares to satisfy awards and options Prior to March 2003, it was the practice to satisfy awards and options granted under the executive incentive plans through shares purchased in the market and held by employee share trusts which were established for the purpose of satisfying awards under the various executive incentive plans and funded by the Company.
From March 2003 to July 2008, it was generally the Company’s practice to satisfy the awards granted after March 2003 by the issue of new shares at the time of vesting. However, since July 2008, it has been the Company’s practice to satisfy all awards and options using shares purchased in the market and held by employee trusts except where local regulations make it necessary to issue new shares. Further details are given in note 30.
(d) Expense charged to the income statement The total expense recognised for the year arising from equity compensation plans was as follows: Equity-settled expense (note 10b) Cash-settled expense
(e) Fair value of options and awards granted after 7 November 2002 The weighted average fair values of options and awards granted during the year, estimated by using the Black-Scholes option pricing model, were £1.78 and £1.94 (2008: £1.99 and £4.44) respectively.
(i) Share options The fair value of the options was estimated on the date of grant, based on the following weighted average assumptions: Weighted average assumption 2009 2008
1 options granted after 7 November 2002 were exercised during the year (2008: 1,112,282). 44,590
Share price 216.25p 608p Expected volatility* 60% 25% Expected volatility of comparator companies’ share price* 61% 26% Correlation between Aviva and competitors’ share price* 55% 65% Expected life 2.75 years 2.78 years Expected dividend yield 8.23% 4.5% Risk-free interest rate* 1.76% 3.9% * For awards with market-based performance conditions.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 30 – Shares held by employee trusts We satisfy awards and options granted under the executive incentive plans primarily through shares purchased in the market and held by employees share trusts. This note gives details of the shares held in these trusts.
Cost debited to shareholders’ funds At 1 January 8,635,582 33 1,521,064 10 Acquired in the year 14,000,000 54 8,500,000 29 Distributed in the year (4,656,350) (19) (1,385,482) (6)
The shares are owned by an employee share trust with an undertaking to satisfy awards of shares in the Company under the Group’s equity compensation plans. Details of the features of the plans can be found in the Directors’ remuneration report.
The preference share capital of the Company at 31 December 2009 was: Authorised 200,000,000 cumulative irredeemable preference shares of £1 each 200 200 1,000,000,000 Sterling preference shares of £1 each 1,000 1,000 700,000,000 Euro preference shares of €1 each 700 700
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 32 – Direct capital instrument This note gives details of the direct capital instrument issued in November 2004.
5.9021% £500 million direct capital instrument 500 500 500 4.7291% €700 million direct capital instrument 490 490 490
In addition, under certain circumstances defined in the terms and conditions of the issue, the Company may at its sole option: — substitute at any time not less than all of the DCIs for, or vary the terms of the DCIs so that they become, Qualifying Tier 1
The Company has the option to defer coupon payments on the DCIs on any relevant payment date. Deferred coupons shall be satisfied only in the following circumstances, all of which occur at the sole option of the Company: — Redemption; or — Substitution by, or variation so they become, alternative Qualifying Tier 1 Securities or Qualifying Upper Tier 2 Securities; or — Substitution by preference shares.
33 – Merger reserve This note analyses the movements in the merger reserve during the year.
Prior to 1 January 2004, certain significant business combinations were accounted for using the “pooling of interests method” (or merger accounting), which treats the merged groups as if they had been combined throughout the current and comparative accounting periods. Merger accounting principles for these combinations gave rise to a merger reserve in the consolidated statement of financial position, being the difference between the nominal value of new shares issued by the Parent Company for the acquisition of the shares of the subsidiary and the subsidiary’s own share capital and share premium account.
The balance on the reserve has arisen through the mergers of Commercial Union, General Accident and Norwich Union companies, forming Aviva plc in 2000, together with the acquisition of RAC plc in 2005.
translation properties valuation instruments tion reserve reserve (see accounting reserve (see accounting reserve (see accounting reserve (see accounting
Balance at 31 December 2008 3,685 157 (711) (1,103) 113 2,141 Arising in the year: Fair value losses — (26) 977 — — 951 Fair value gains transferred to profit on disposals — — (310) — — (310) Transfer to profit on disposal of subsidiary (note 3b) (96) — — — — (96) Fair value losses transferred to retained earnings on disposals (note 35) — (1) — — — (1) Share of fair value changes in joint ventures and associates taken to other comprehensive income (notes 18a & 19a) — — 122 — — 122 Impairment losses on assets previously revalued directly through equity now taken to income statement* — — 482 — — 482 Reserves credit for equity compensation plans (note 29d) — — — — 56 56 Shares issued under equity compensation plans (note 35) — — — — (60) (60) Transfer to minority interests following Delta Lloyd IPO (note 3c) (351) (26) (156) — — (533) Foreign exchange rate movements (1,014) — — 332 — (682) Aggregate tax effect – shareholders’ tax — — (241) — — (241)
Balance at 1 January as reported 3,902 6,338 Prior year adjustment (see note 2b(ii)) — 96 Balance as 1 January restated 3,902 6,434 Profit/(loss) for the year attributable to equity shareholders 1,085 (915) Actuarial (losses)/gains on pension schemes (note 47e(iv)) (1,140) (929) Actuarial losses/(gains) on pension schemes transferred to unallocated divisible surplus (note 43) 24 78 Dividends and appropriations (note 15) (853) (975) Shares issued in lieu of dividends 299 170 Shares issued under equity compensation plans (note 34) 60 15 Shares distributed by employee trusts (note 30) (18) (6) Fair value gains/(losses) realised from reserves (note 34) 1 (1) Transfer to minority interests following Delta Lloyd IPO (note 3c) 3 — Aggregate tax effect 62 31
The shares issued in lieu of dividends are in respect of the transfer to retained earnings from the ordinary dividend account, arising from the treatment of these shares explained in note 28(b).
36 – Minority interests This note gives details of the Group’s minority interests and shows the movements during the year.
(a) Minority interests at 31 December comprised: Equity shares in subsidiaries 2,098 695 660 Share of earnings 795 673 429 Share of other reserves 395 577 450 3,288 1,945 1,539 Preference shares in General Accident plc 250 250 250 Preference shares in other subsidiaries 2 9 6
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 37 – Contract liabilities and associated reinsurance The following notes explain how we calculate our liabilities to our policyholders for insurance and investment products we have sold to them. Notes 38 and 39 cover these liabilities and note 40 details the financial guarantees and options given for some of these products. Note 41 details the reinsurance recoverables on these liabilities whilst note 42 shows the effects of the assumptions we have changed during the year.
(277,690) 7,240 (270,450) (279,014) 7,476 (271,538) (247,224) 7,538 (239,686) Provision for unearned premiums (4,781) 332 (4,449) (5,493) 418 (5,075) (5,484) 511 (4,973) Provision arising from liability adequacy tests (7) — (7) (13) — (13) (24) — (24) Other technical provisions — — — — — — (3) 5 2
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 38 – Insurance liabilities This note analyses our insurance contract liabilities by type of product and describes how we calculate these liabilities and what assumptions we have used.
Provision for unearned premiums — 4,781 4,781 — 5,493 5,493 — 5,484 5,484 Provision arising from liability adequacy tests — 7 7 — 13 13 — 24 24 Other technical provisions — — — — — — — 3 3
Less: Obligations to staff pension schemes transferred to provisions (note 46a) (1,351) — (1,351) (1,402) — (1,402) (1,025) — (1,025) Amounts classified as held for sale — (20) (20) — (709) (709) — (627) (627)
– The RIEESA of UKLAP, which is a non-profit fund where shareholders are entitled to 100% of the distributed profits, but these cannot be distributed until the “lock-in” criteria set by the Reattribution Scheme have been met. RIEESA will be used to write non-profit business and also to provide capital support to NWPSF.
— In the Netherlands, the balance of profits, after providing appropriate returns for policyholders and after tax, accrues for the benefit of the shareholders. The bases for determining returns for policyholders are complex, but are consistent with methods and criteria followed generally in the Netherlands. In addition, a substantial number of policies provide benefits that are determined by investment performance, subject to certain guarantees, and shareholders’ profits are derived largely from management fees.
Equity returns 26.6% 34.6% Property returns 15.0% 15.0% Fixed interest yields 14.4% 15.9%
Mortality Mortality assumptions are set with regard to recent company experience and general industry trends.
The liability for future policy benefits for traditional life insurance is computed using the net level method, based on guaranteed interest and mortality rates as used in calculating cash surrender values. Reserve interest assumptions ranged from 2.00% to 7.50% in 2009 (2008: 2.00% to 7.50%). The weighted average interest rate for all traditional life policy reserves in 2009 was 4.47% (2008: 4.47%).
We only establish loss reserves for losses that have already occurred. We therefore do not establish catastrophe equalisation reserves that defer a share of income in respect of certain lines of business from years in which a catastrophe does not occur to future periods in which catastrophes may occur. When calculating reserves, we take into account estimated future recoveries from salvage and subrogation, and a separate asset is recorded for expected future recoveries from reinsurers after considering their collectability.
Outstanding Outstanding claim IBNR Total claim claim IBNR Total claim provisions provisions provisions provisions provisions provisions £m £m £m £m £m £m
Outstanding claim IBNR Total claim provisions provisions provisions £m £m £m
Netherlands Permanent health and injury Reinsured London Market business Latent claims to to to 8 to 15 9 to 15 9 to 15 years years years 35 years 35 years 35 years
The discount rate that has been applied to latent claims reserves is based on the relevant swap curve in the relevant currency having regard to the expected settlement dates of the claims. The range of discount rates used depends on the duration of the claims and is given in the table above. The duration of the claims span over 35 years, with the average duration being between 8 and 15 years depending on the geographical region. Any change in discount rates between the start and the end of the accounting period is reflected below operating profit as an economic assumption change.
(iii) Assumptions Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are generally set by skilled claims technicians, applying their experience and knowledge to the circumstances of individual claims. Taking into account all available information and correspondence regarding the circumstances of the claim, such as medical reports, investigations and inspections. Claims technicians set case estimates according to documented claims department policies and specialise in setting estimates for certain lines of business or types of claim. Claims above certain limits are referred to senior claims handlers for authorisation.
The assumptions used in most non-life actuarial projection techniques, including future rates of claims inflation or loss ratio assumptions, are implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in the future, for example, to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy conditions and claims handling procedures in order to arrive at a point estimate for the ultimate cost of claims that represents the likely outcome, from a range of possible outcomes, taking account of all the uncertainties involved. The range of possible outcomes does not, however, result in the quantification of a reserve range.
The best estimate of the liabilities reflects the latest available market information and studies. Many different scenarios can be derived by flexing these key assumptions and applying different combinations of the different assumptions. An upper and lower scenario can be derived by making reasonably likely changes to these assumptions, resulting in an estimate £195 million greater than the best estimate, or £155 million lower than the best estimate. These scenarios do not, however, constitute an upper or lower bound on these liabilities.
Changes in claims reserve recognised as an expense Effect of portfolio transfers, acquisitions and disposals Foreign exchange rate movements
Exceptional strengthening of claim provisions In 2009 an exceptional charge of £60 million was incurred for the strengthening of reserves in respect of several specific discontinued commercial liability risks written in Canada a significant number of years ago, which is included in change in insurance liabilities.
The Group aims to maintain strong reserves in respect of its general insurance and health business in order to protect against adverse future claims experience and development. As claims develop and the ultimate cost of claims become more certain, the absence of adverse claims experience will result in a release of reserves from earlier accident years, as shown in the loss development tables and movements table (c)(iv) above. However, in order to maintain overall reserve adequacy, the Group establishes strong reserves in respect of the current accident year (2009) where the development of claims is less mature and there is much greater uncertainty attaching to the ultimate cost of claims. Releases from prior accident year reserves are also due to an improvement in the estimated cost of claims. Key elements of the release from prior accident year general insurance and health net provisions during 2008 were: — £285 million from the UK, mainly due to an improved trend in bodily injury experience on both personal and commercial motor, favourable experience on commercial liability and a reduction in public liability average claim costs. — £312 million from Europe, mainly due to lower than expected IBNR and costs of settling motor and commercial liability claims.
— £111 million from Canada, mainly due to favourable motor bodily injury experience.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 38 – Insurance liabilities continued (ii) Gross figures Before the effect of reinsurance, the loss development table is: Accident year £m £m £m £m £m £m £m £m £m £m £m
Estimate of gross ultimate claims 6,600 6,044 5,813 6,003 6,603 7,130 8,430 9,322 7,364 Cumulative payments (6,350) (5,767) (5,527) (5,617) (6,001) (6,272) (7,191) (7,350) (3,780)
Present value 2,580 242 264 255 382 595 851 1,231 1,961 3,571 11,932 Cumulative effect of foreign exchange movements — 43 43 69 83 106 152 132 (41) — 587 Effect of acquisitions — 7 10 62 14 23 23 27 11 — 177
Present value 1,456 174 199 238 371 582 811 1,184 1,928 3,452 10,395 Cumulative effect of foreign exchange movements — 31 38 60 79 99 143 126 (42) — 534 Effect of acquisitions — 6 7 38 11 18 18 17 9 — 124
The loss development tables above include information on asbestos and environmental pollution claims provisions from business written before 2001. The undiscounted claim provisions, net of reinsurance, in respect of this business at 31 December 2009 were £968 million (2008: £1,019 million, 2007 £323 million). The movement in the year reflects exceptional strengthening of provisions by £60 million in respect of several specific discontinued commercial liability risks written in Canada a significant number of years ago (2008: £668 million due to the increased market trend in mesothelioma claim notifications), other releases of £62 million (2008: £16 million strengthening), foreign exchange rate movements and timing differences between claim payments and reinsurance recoveries.
(a) Carrying amount The liability for investment contracts at 31 December comprised: Long-term business Participating contracts 66,559 65,278 53,609 Non-participating contracts at fair value 41,289 39,509 43,608 Non-participating contracts at amortised cost 2,167 2,772 1,027
For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated distributable surplus. Guarantees on long-term investment products are discussed in note 40.
Financial statements IFRS Financial statements MCEV Other information 39 – Liability for investment contracts continued (c) Movements in the year The following movements have occurred in the year: (i) Participating investment contracts
The variance between actual and expected experience of £2.5 billion was primarily driven by favourable movements in investment markets in 2009, which had a direct or indirect impact on liability values. Equity markets recovered and the values of corporate bonds and commercial mortgages were increased by the narrowing of credit spreads. For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. Minor variances arise from differences between actual and expected experience for persistency, mortality and other demographic factors.
The variance between actual and expected experience of £2.5 billion was primarily driven by favourable movements in investment markets in 2009, which had a direct or indirect impact on liability values. Equity markets recovered and the value of corporate bonds and commercial mortgages were increased by the narrowing of credit spreads. For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. Minor variances arise from differences between actual and expected experience for persistency, mortality and other demographic factors.
The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of non­ participating investment contract liabilities. The £2.5 billion variance between actual and expected experience is not a change in assumptions. The impact of assumption changes on profit are included in the effect of changes in assumptions and estimates during the year shown in note 42, which combines participating and non-participating investment contracts together with the impact of movements in related non-financial assets.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 40 – Financial guarantees and options This note details the financial guarantees and options we have given for some of our insurance and investment products.
(iv) Guaranteed minimum pension The Group’s UK with-profit funds also have certain policies that contain a guaranteed minimum level of pensions as part of the condition of the original transfer from state benefits to the policy.
In addition, the with-profit fund companies have made promises to certain policyholders in relation to their with-profit mortgage endowments. Top-up payments will be made on these policies at maturity to meet the mortgage value up to a maximum of the 31 December 1999 illustrated shortfall. For UKLAP WP policyholders, these payments are subject to certain conditions.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 40 – Financial guarantees and options continued The most significant of these contracts is the AFER Eurofund which has total liabilities of £33 billion at 31 December 2009 (2008: £33 billion, 2007: £24 billion). The guaranteed bonus on this contract equals 75% of the average of the last two years’ declared bonus rates and was 3.67% for 2009 (2008: 3.66%, 2007: 3.64%) compared with an accounting income from the fund of 4.62% (2008: 4.85%,2007: 4.92%).
These GAOs are “in the money” at current interest rates but the exposure to interest rates under these contracts has been hedged through the use of reinsurance, using derivatives (swaptions). The swaptions effectively guarantee that an interest rate of 5% will be available at the vesting date of these benefits so there is reduced exposure to a further decrease in interest rates.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 40 – Financial guarantees and options continued ‘No MVR’ guarantees Certain unitised with-profit policies containing ‘no MVR’ guarantees, similar to those in the UK, have been sold in Ireland.
(v) United States Indexed and total return strategy products In the United States, the Group writes indexed life and deferred annuity products. These products guarantee the return of principal to the policyholder and credit interest based on certain indices, primarily the Standard & Poor’s 500 Composite Stock Price Index.
The derivatives held by the Group and the options embedded in the policy are both carried at fair value.
The US Treasury swap curve plus a risk adjustment of 1.87% (2008: 5.30%, 2007: 1.05%) for indexed life and 1.65% (2008: 5.30%, 2007: 1.05%) for indexed deferred annuities is used as the discount rate to calculate the fair value of the embedded options.
The Group has certain products that credit interest based on a total return strategy, whereby policyholders are allowed to allocate their premium payments to different asset classes within the general account. The Group guarantees a minimum return of premium plus approximately 3% interest over the term of the contracts. The linked general account assets are fixed maturity securities, and both the securities and the contract liabilities are carried at fair value. At 31 December 2009, the liabilities for total return strategy products were £1.2 billion (2008: £1.5 billion, 2007: £1.2 billion).
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 40 – Financial guarantees and options continued (d) Sensitivity In providing these guarantees and options, the Group’s capital position is sensitive to fluctuations in financial variables including foreign currency exchange rates, interest rates, real estate prices and equity prices. Interest rate guaranteed returns, such as those available on guaranteed annuity options (GAOs), are sensitive to interest rates falling below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was made.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 41 – Reinsurance assets continued (ii) In respect of general insurance and health outstanding claims provisions and IBNR
Carrying amount at 1 January 1,766 1,663 Impact of changes in assumptions (72) 21 Exceptional strengthening of latent claims provisions — 52 Reinsurers’ share of claim losses and expenses
Incurred in current year 255 228 Incurred in prior years 7 12
Reinsurers’ share of incurred claim losses and expenses 262 240 Less: Reinsurance recoveries received on claims
Reinsurance recoveries received in the year (340) (364) Unwind of discounting 22 24
The impact of interest rates for long-term business relates primarily to the US, driven by the reduction in credit spreads on corporate bonds; this had the effect of increasing liabilities for indexed business and hence a negative impact on profit. The overall impact on profit also depends on movements in the value of assets backing the liabilities, which is not included in this disclosure.
In Italy, the UDS balances were £92 million negative in total at 31 December 2009 (2008: France, Italy and Spain £924 million negative, 2007: Italy £116 million negative) because of an accounting mismatch between participating assets carried at market value and participating liabilities measured using local practice. In each case, the negative balance is considered to be recoverable from margins in the existing participating business liabilities.
(a) Special bonus declared by UK Life business On 5 February 2008, the Group’s UK long-term business operation, Norwich Union Life, announced a one-off, special bonus worth an estimated £2.3 billion, benefiting around 1.1 million with-profit policyholders in its CGNU Life and CULAC with-profit funds. The bonus is being used to enhance policy values by around 10% in total, in three instalments, with the qualifying dates being 1 January 2008, 1 January 2009 and 1 January 2010. In accordance with the way the funds are managed, the bonus distribution is being split on a 90/10 basis between policyholders and shareholders. £2,127 million was set aside for policyholders on 1 January 2008, and subject to market movements from that date, will be allocated over three years. Similarly, shareholders will receive £236 million, subject to market movements, over the three year period.
As explained in accounting policies F and K, the Group’s insurance and participating investment contract liabilities are measured in accordance with IFRS 4, Insurance Contracts, and FRS 27, Life Assurance. The latter requires liabilities for with-profit funds falling within the scope of the UK’s Financial Services Authority’s capital regime to be determined in accordance with this regime, adjusted to remove the shareholders’ share of future bonuses. This required us to recognise planned discretionary bonuses within policyholder liabilities at 31 December 2007, even if there was no constructive obligation at the time. As a result of the announcement made above, a transfer of £2,127 million was made in 2007 from the UDS in order to increase insurance liabilities by £1,728 million and participating investment contract liabilities by £399 million. Of the original £236 million due to shareholders, £69 million has been transferred from the UDS in 2009 (2008: £89 million).
Within UKLAP, two new with-profit sub-funds have been created. Policies of non-electing policyholders have been transferred to the Old With-Profit Sub-Fund (OWPSF). The inherited estate has not been reattributed and remains in the OWPSF.
Where policyholders elected to accept the reattribution their policies have been transferred to the New With-Profit Sub-Fund (NWPSF). The inherited estate, totalling £1,105 million at 1 October 2009, has been reattributed to a separate long-term fund called the Non-Profit Sub-Fund 1(NPSF1), in which 100% of the surplus is attributable to shareholders.
On the effective date of 1 October 2009, the unallocated divisible surplus of NWPSF was released as it has been allocated to shareholders. The release of this liability is included in the impact below. The reorganisation scheme has imposed certain restrictions around release of the assets allocated to shareholders as a result of this transaction, to ensure that sufficient protection for with-profit policyholder benefits is maintained.
Change in unallocated divisible surplus Release of unallocated divisible surplus (a) 881
Cash and cash equivalents (b) (450) Prepayments (c) (208) Total assets (658)
Gross insurance liabilities (b) 21 Unallocated divisible surplus (a) (881) Tax liabilities (d) 207
Notes: (a) The unallocated divisible surplus transferred to the NWPSF, in proportion to the electing policies, has been allocated to shareholders and released. The remaining UDS, transferred to the OWPSF
in proportion to the non-electing policies, has not been released and remains unallocated. (b)Policyholder incentive payments total £471 million. Payments totalling £450 million were paid in cash and the remaining payments of £21 million were added to the value of certain policies in the form of additional benefits. (c) During the development stage of the scheme eligible costs were capitalised as a prepayment. As the benefit of the scheme has now been realised, these costs have been charged to the
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 45 – Tax assets and liabilities This note analyses the tax assets and liabilities that appear in the statement of financial position, and explains the movements in these balances in the year.
(a) Current tax Current tax assets recoverable and liabilities payable in more than one year are £254 million and £49 million (2008: £230 million and £362 million).
The taxation of foreign profits and worldwide debt cap rules were enacted in the Finance Act 2009. Under the foreign profits rules, a dividend exemption was introduced which largely exempts dividends received on or after 1 July 2009 from UK corporation tax. The Group has applied this legislation in arriving at its UK tax results for 2009. The worldwide debt cap rules apply from 1 January 2010 and are not expected to apply to the Group due to an exemption for qualifying financial services groups.
Net deferred tax liability (820) (421) 1. As a result of Aviva's US sub-group filing a single consolidated tax return for the first time in 2009, deferred tax assets and liabilities in this jurisdiction are presented net for the year ended 31 December 2009. This has reduced both assets and liabilities by £1 billion compared with the previous year end.
(ii) The net deferred tax liability arises on the following items: £m £m
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 46 – Provisions This note details the non-insurance provisions that the Group holds, and shows the movements in these during the year.
Charge to income statement 346 239 585 Utilised during the year (248) (193) (441) Acquisition of subsidiaries — 39 39 Foreign exchange rate movements 20 65 85
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 47 – Pension obligations This note describes the Group’s pension arrangements for its employees and explains how our obligations to these schemes are calculated.
(i) Defined benefit section of the ASPS The Company works closely with the trustees who are required to consult it on the funding of the scheme and its investment strategy. Following each actuarial valuation, the Company and the trustees agree the level of contributions needed and funding levels are then monitored on an annual basis.
At 31 March 2009, the date of the last actuarial valuation, this section of the scheme had an excess of obligations over available assets, on a funding basis, which uses more prudent assumptions than are required for reporting under IAS 19, of £3.0 billion. At 31 December 2009, this figure is estimated to have fallen to £2.7 billion. The Company and the trustees are in advanced stages of finalising a long-term funding plan over which it will aim to eliminate the funding deficit. Under the current proposals, deficit funding payments in 2010 are expected to be £365 million.
The employing companies’ contributions to the defined benefit section of the ASPS throughout 2009 were 41% of employees’ pensionable salaries, together with the cost of redundancies during the year, and additional deficit funding payments totalling £52 million. As this section of the scheme is closed to new entrants and the contribution rate is determined using the projected unit credit method, it is expected that the percentage cost of providing future service benefits will continue to increase as the membership ages, leading to higher pension costs, and the number of members falls, leading to a higher charge per member. Pending finalisation of the funding plan above, the employers’ contribution rate for 2010 has been increased to 43% of pensionable salaries, with expected service funding contributions under the current proposals increasing to £130 million. Active members of this section of the ASPS contributed between 5% and 7.5% of their pensionable salaries, increasing to between 6% and 10% from 1 April 2010.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 47 – Pension obligations continued In 2006, the Group’s UK life business carried out an investigation into the allocation of costs in respect of funding the ASPS, to identify the deficit that arose in respect of accruals prior to the introduction of the current management services agreements (MSAs) and to propose a split between individual product companies based on an allocation of the deficit into pre- and post-MSA amounts. The results of this review were agreed by the relevant company boards and accepted by the UK regulator. Consequently, with effect from 1 January 2006, the Company’s UK with-profit product companies are liable for a share, currently 12%, of the additional payments for deficit funding referred to above up to a total of £130 million. This has resulted in movements between the unallocated divisible surplus (UDS) and retained earnings via the statement of comprehensive income of £24 million in 2009 (2008: £78 million) to reflect actuarial movements in the deficit during the year and therefore a change in the amount recoverable from the with-profit product companies.
(ii) Defined contribution (money purchase) section of the ASPS The trustees have responsibility for selecting a range of suitable funds in which the members can choose to invest and for monitoring the performance of the available investment funds. Members are responsible for reviewing the level of contributions they pay and the choice of investment fund to ensure these are appropriate to their attitude to risk and their retirement plans. The employers’ contribution rates for members of the defined contribution section up to 30 June 2009 were 8% of pensionable salaries, together with further contributions up to 4% where members contributed, and the cost of the death-in-service benefits. With effect from 1 July 2009, members of this section have contributed at least 1% of their pensionable salaries and, depending on the percentage chosen, the Company’s contribution has increased up to a maximum 14%. These contribution rates are unchanged for 2010.
Total defined benefit schemes (note 10b) 187 175 UK defined contribution schemes Overseas defined contribution schemes
The main actuarial assumptions used to calculate scheme liabilities under IAS 19 are: UK Netherlands
Inflation rate 2.5% 2.5% 2.5% 2.0% 2.0% 2.5% General salary increases 3.75% 3.75% 3.75% 3.5% 3.75% 4.25% Pension increases 1.25% 1.25% 1.25% 2.0% 2.0% 2.4% Deferred pension increases — — — 2.0% 2.0% 2.4% Discount rate 5.5% 6.75% 5.25% 5.5% 5.9% 5.6% Basis of discount rate AA-rated corporate bonds AA-rated corporate bonds
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 47 – Pension obligations continued The mortality tables, average life expectancy and pension duration used at 31 December 2009 for scheme members are as follows: Life expectancy/(pension duration) at NRA of a male
UK PA92U2010MC with a one year age rating deduction and including an allowance for future improvements 60
Canada UP1994 projected to 2015, using Scale AA 65 84.4 (19.4)
Ireland 94% PNA00 with allowance for future improvements 61 86.5 (25.5)
The discounted scheme liabilities have an average duration of 22 years in the UK schemes and between 12 and 18 years in the overseas schemes. The undiscounted benefits payable from the main UK defined benefit scheme are expected to be as shown in the chart below: Undiscounted benefit payments £m
The total pension expense for these schemes comprises: Recognised in the income statement
Experience gains arising on scheme liabilities 77 105 Changes in assumptions underlying the present value of the scheme liabilities (1,778) 859
The loss arising from changes in assumptions in 2009 reflects the impact of lower discount rates for liabilities across all schemes and higher pension and salary increase assumptions in the UK and Netherlands, together with the strengthening of mortality assumptions in Ireland.
The cumulative amount of actuarial gains and losses on the pension schemes recognised in other comprehensive income since 1 January 2004 (the date of transition to IFRS) is a loss of £2,230 million at 31 December 2009 (2008: loss of £1,090 million).
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 47 – Pension obligations continued (v) Experience gains and losses The following disclosures of experience gains and losses give a five year history. Scheme assets exclude insurance policies with Group companies and income on the assets underlying them.
Difference between the expected and actual return on scheme assets Amount of gains/(losses) 561 (1,893) (138) 251 798 Percentage of the scheme assets at the end of the year 6.4% 23.8% 1.6% 3.1% 10.9%
Experience gains/(losses) on scheme liabilities (excluding changes in assumptions) Amount of gains/(losses) 77 105 (80) 63 (86) Percentage of the present value of scheme liabilities 0.7% 1.1% 0.8% 0.6% 0.9%
In addition, the trustees have taken measures to partially mitigate inflation and interest rate risks, including entering into inflation and interest rate swaps to hedge approximately one third of the scheme’s exposure to these risks.
Deficits in the schemes included in provisions (note 46) (1,412) (14) (110) (171) (1,707)
Included in other assets (note 26) — — — 27 27
above. Where the investment and insurance policies are in segregated funds with specific asset allocations, they are included in the appropriate line in the table above, otherwise they appear in “Other”. The Dutch insurance policies of £1,351 million (2008: £1,402 million, 2007: £1,025 million) are considered non-transferable under the terms of IAS 19 and so have been treated as other obligations to staff pension schemes within provisions (see note 46).
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 47 – Pension obligations continued The total IAS 19 obligations and strict IAS 19 assets (ie excluding the non-transferable insurance policies) of the schemes give a net deficit of £3,058 million (2008: £2,015 million, 2007: £1,203 million), as shown in the following tables.
Deficits in the schemes included in provisions (note 46) (445) (1,417) (68) (85) (2,015)
The present value of unfunded post-retirement benefit obligations included in the totals in both sets of tables above is £118 million (2008: £104 million, 2007: £107 million).
Deficits in the schemes at 1 January 9,338 (9,951) (613) (1,402) (2,015) Employer contributions 294 — 294 (62) 232 Employee contributions 18 (18) — (8) (8) Benefits paid (392) 392 — 46 46 Current and past service cost (see (iv) above) — (156) (156) — (156) Gains/(losses) on curtailments and settlements (see (iv) above) (19) 68 49 — 49 Credit/(charge) to investment income (see (iv) above) 466 (591) (125) (58) (183) Other actuarial gains/(losses) (see (iv) above) 543 (1,701) (1,158) 18 (1,140) Buy-outs and other transfers (1) 1 — 2 2 Exchange rate movements on foreign plans (142) 144 2 113 115 10,105 (11,812) (1,707) (1,351) (3,058)Deficits in the schemes at 31 December
Deficits in the schemes at 1 January 9,839 (10,017) (178) (1,025) (1,203) Employer contributions 620 — 620 (70) 550 Employee contributions 24 (24) — (7) (7) Benefits paid (368) 368 — 39 39 Current and past service cost (see (iv) above) (5) (158) (163) — (163) Losses on curtailments (see (iv) above) — (3) (3) — (3) Credit/(charge) to investment income (see (iv) above) 706 (585) 121 (64) 57 Other actuarial gains/(losses) (see (iv) above) (1,951) 964 (987) 58 (929) Buy-outs and other transfers (1) 1 — 1 1 Exchange rate movements on foreign plans 474 (497) (23) (334) (357)
The change in the pension schemes’ net deficits during 2009 is mainly attributable to the unfavourable changes in assumptions underlying the present value of the schemes’ liabilities, partly offset by a rise in equity and property investment values.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 48 – Borrowings Our borrowings are either core structural borrowings, such as subordinated debt, debenture loans and most commercial paper, or operational borrowings, such as bank loans and financing for securitised mortgage loan notes. This note shows the carrying values and contractual maturity amounts of each type, and explains their main features and movements during the year.
(a) Analysis of total borrowings Total borrowings comprise: Core structural borrowings, at amortised cost 5,489 5,525 4,311 Operational borrowings, at amortised cost 4,404 4,233 3,347 Operational borrowings, at fair value 5,107 5,443 5,011 15,000 15,201 12,669 Less amounts classified as held for sale — — (12)