Under the Code, shareholder approval is also necessary for certain equity-compensation plans and ‘significant changes’ thereto, subject to certain exceptions. The Code does not provide a detailed definition or explanation of what are considered to be ‘significant changes’, in contrast to the detailed definition of ‘material revisions’ provided by the NYSE.
 state that the Company and the Group have complied with applicable IFRS, subject to any material departures disclosed and explained in the financial statements.
Directors’ responsibility statement pursuant to Disclosure and Transparency Rule 4.1.12 Each of the directors listed on pages 90 to 91 confirms that, to the best of their knowledge: (a) the Group and Company financial statements in this report, which have been prepared in accordance with IFRS as adopted by the EU, International Financial Reporting Interpretations Committee’s interpretation and those parts of the Companies Act 2006 applicable to companies reporting under IFRS, give a true and fair view of the assets, liabilities, financial position and results of the Company and of the Group taken as a whole; and
Andrew Moss Pat Regan Group chief executive Chief financial officer 7 March 2012
Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Essential Read on pages 2 to 18, which includes the section on Aviva worldwide on pages 16 to 17. The Performance review is set out on pages 20 to 70 and includes the Risk and capital management on pages 61 to 68. In addition, the financial statements sections include notes on the Group’s borrowings (note 48), its contingent liabilities and other risk factors (note 51); its capital structure and position (note 54); management of its risks including market, credit and liquidity risk (note 56), and derivative financial instruments (note 57). The Group has considerable financial resources together with a diversified business model, with a spread of businesses and geographical reach. As a consequence, the directors believe that the Group is well placed to manage its business risks successfully. After making enquiries, the directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
 approving a report on the Committee’s activities for inclusion in the Company’s Annual Report and Accounts.
John McFarlane 1 September 2011 To date Andrew Moss* 12 July 2007 To date Russell Walls 23 January 2007 To date * The Nomination Committee notes that the UK Corporate Governance Code does not preclude the group chief executive from membership of the Committee. The Committee believes that the input of the group chief executive is essential and invaluable to the discussions of the Committee and that this is best obtained through his membership of the Committee. Any concerns about his membership are allayed by the predominance of independent non-executive directors on the Committee.
The Committee met on six occasions in 2011, of which three were scheduled Committee meetings and three were additional Committee meetings called at short notice. The members’ attendance record is set out above. The group company secretary acts as the secretary to the Committee. Members of the Committee take no part in any discussions concerning their own circumstances. The chairman of the Committee reports to meetings of the Board on the Committee’s work and the Board receives a copy of the agenda and the minutes of each meeting of the Committee.
The Committee continued its review of the Company succession plans for appointments to the Board, to ensure that an appropriate balance of skills and experience was maintained and that there was progressive refreshing of the Board. The Company chairman is due to retire in 2012 and two non-executive directors are due to retire in 2013 in line with the Code on the basis of their completion of nine years of service. The Committee recommended the appointment of two new independent nonexecutive directors to strengthen the Board in advance of their retirement and to aid future succession planning. John McFarlane was appointed to succeed Lord Sharman as the Company’s chairman following his retirement. The Committee prepared a comprehensive candidate search brief including an assessment of the time commitment expected. The search for a suitable candidate began within the Group before an external search agency, The Zygos Partnership, was retained. Several interviews were conducted with the chairman, senior independent non-executive director, Committee members and the group chief executive and, additionally, executive and non-executive directors met with the preferred candidate, before the Committee recommended Mr McFarlane’s appointment to the Board. The senior independent director chaired the Committee and the Board when it was dealing with the appointment of the successor to the chairmanship of the Company. Gay Huey Evans was appointed to succeed Carole Piwnica, following her retirement from the Board and as the chairman of the Corporate Responsibility Committee. A candidate search was conducted internally prior to the appointment of an external agency, JCA Group, and the Committee undertook a thorough review before recommending Ms Huey Evans’ appointment to the Board. In February 2012, following a thorough candidate search by an external agency, JCA Group, Glyn Barker was appointed as an independent non-executive director. The Committee strongly believes that diversity throughout the Group and at Board and senior management level is a key driver of success and brings a broader, more rounded perspective to decision-making and risk management, making the Board more effective. During the year, candidate searches were conducted and Board appointments were made on merit, against the criteria identified by the Committee having regard to the benefits of diversity on the Board, including gender.
• Board composition and succession planning 67 • Independence and Conflicts of interest 8 • Others (including corporate governance) 25
The Board wholly supported Lord Davies’ report, “Women on Boards”, and its recommendations and the Group has embedded gender KPIs throughout the talent management process. Currently three female directors make up 20% of the Board and it is intended that the Company will maintain a minimum of 25% female representation on the Board by 2013. At the date of this report, 20% of senior executives in the Company are female. It is the Company’s intention to increase this number as it is recognised that a higher number of women in senior management will create a stronger talent pipeline and is better for business.
Committee performance and effectiveness The Board undertook an annual review of the Committee’s performance and effectiveness and the results of the review will be incorporated into the Committee’s processes and activities for 2012.
 assessing the independence and objectivity of the external auditor and approving and monitoring the application of the external auditor policy/business standard.
The full terms of reference for the Committee can be found on the Company’s website, www.aviva.com/terms-of-reference, and are also available from the group company secretary.
Committee membership and attendance The following independent non-executive directors served on the Committee during the year: Period
Russell Walls (Chairman) 1 July 2004 To date Mary Francis 1 January 2007 To date Richard Karl Goeltz 1 July 2004 To date Euleen Goh 1 January 2009 To date Michael Hawker 1 September 2011 To date
The Committee met on 11 occasions in 2011, of which eight were scheduled Committee meetings and three were additional Committee meetings called at short notice. The members’ attendance record is set out above. In addition, the Committee held separate meetings with members of senior management and the external auditors to discuss issues relevant to the Committee and for the purpose of training. The group company secretary acts as the secretary to the Committee. The group chief executive, chief financial officer, chief audit officer, chief risk officer and the external auditor normally attend, by invitation, all meetings of the Committee. Other members of senior management are also invited to attend as appropriate to present reports. At the beginning of each scheduled Committee meeting, a private session is held by Committee members to discuss issues to be raised with management in the meeting. For part of that session, the Committee meets privately with senior management and separately with the chief audit officer to raise relevant issues. The Committee members also meet privately with the chief audit officer and the external auditor after the majority of meetings to follow up on particular issues. The chairman of the Committee reports to the subsequent meeting of the Board on the Committee’s work and the Board receives a copy of the agenda and the minutes of each meeting of the Committee. In performing its duties, the Committee has access to the services of the chief audit officer, the group company secretary and external professional advisers. Keith Nicholson, a former partner at KPMG LLP, acted as an external adviser to the Committee during the year.
Committee activities during 2011 The work of the Committee follows an agreed annual work plan and principally falls under three main areas: financial statements and accounting policies; internal control; and the oversight of internal and external audit. The chart below shows how the Committee allocated its time during 2011.
Financial statements and accounting policies In conjunction with members of management and the internal and external auditors, the Committee reviewed the Company’s financial announcements, including the Annual Report and Accounts to shareholders and associated documentation, the half-year results and the interim management statements. The Committee placed particular emphasis on their fair presentation and the reasonableness of the judgemental factors and
• Financial reporting 22 • External audit, auditor engagement and policy 23 • Internal audit and controls 18 • Financial reporting control framework and financial reporting developments 22 • Others (including governance, tax, treasury and dividends) 15
Internal audit The Committee reviewed, approved and monitored the annual Internal Audit plan and the effectiveness of the Internal Audit function. The level of resources, budget and functional plan for Internal Audit and the remuneration of the chief audit officer were also reviewed and approved by the Committee.
Independence The Committee reviewed a formal letter provided by the external auditor confirming its independence and objectivity within the context of applicable regulatory requirements and professional standards. In line with the APB Ethical Standards for Auditors, the Committee considered and agreed the rotation of the external audit partner within Ernst & Young LLP in 2012. However, given the subsequent decision to appoint PricewaterhouseCoopers LLP as the Group’s external auditor commencing with the 2012 financial year, the rotation of the Ernst & Young LLP audit partner will not occur. In line with the Company’s adoption of the revised risk management framework, the existing external auditor policy was superseded by the external auditor business standard, which became effective on 1 January 2012. The principles of the standard are the same as those of the external auditor policy and are aimed at safeguarding and supporting the independence and objectivity of the external auditor. The standard is in full compliance with all UK, US and International Federation of Accountants (IFAC) rules. The external auditor business standard also regulates the appointment of former audit employees to senior finance positions in the Group and sets out the approach to be taken
Audit Committee report continued by the Group when using the non-audit services of the principal external auditor. It distinguishes between those services where an independent view is required and that should be performed by the external auditor (such as statutory and non-statutory audit and assurance work), prohibited services where the independence of the external auditor could be threatened and it must not be used, and other non-audit services where the external auditor may be used. Non-audit services where the external auditor may be used include: non-recurring internal controls and risk management reviews (i.e. excluding outsourcing of internal audit work), advice on financial reporting and regulatory matters, due diligence on acquisitions and disposals, project assurance and advice, tax compliance services and employee tax services. The Committee received a quarterly report of compliance against the external auditor policy which applied during 2011 and will receive a quarterly report against the external auditor business standard in the future.
Audit Committee Report This Audit Committee Report was reviewed and approved by the Board on 7 March 2012.
This report provides details of the role of the Risk Committee and the work it has undertaken during the year.
Michael Hawker (Chairman from 1 September 2011) 1 January 2010 To date Mary Francis (Chairman from 1 January 2007 to 31 August 2011 and Committee member thereafter) 14 January 2006 To date Leslie Van de Walle 24 September 2009 To date Russell Walls 14 January 2006 To date
1 Michael Hawker was unable to attend the Committee meeting held on 23 March 2011 due to prior commitments. 2 Mary Francis was unable to attend the Committee meeting held on 12 October 2011 due to prior commitments and this meeting being called at short notice.
The Committee met on 11 occasions in 2011, of which nine were scheduled Committee meetings and two were additional Committee meetings called at short notice. The members’ attendance record is set out above. In addition the Committee held separate meetings with members of senior management and the external auditor to discuss issues relevant to the Committee and for the purposes of induction and training. The group company secretary acts as the secretary to the Committee. The group chief executive, chief risk officer, chief financial officer and the chief audit officer normally attended, by invitation, all meetings of the Committee. Other members of senior management were also invited to attend as appropriate to present reports. It was the Committee’s practice at each meeting to meet separately with the chief executive officer, without any members of management being present. Committee members also met privately with the chief risk officer after the majority of meetings to follow up on particular issues raised at the meetings. The chairman of the Committee reported to subsequent meetings of the Board on the Committee’s work and the Board received a copy of the agenda and the minutes of each meeting of the Committee. The chairman of the Committee sits on the Audit and Remuneration Committees to ensure that risk considerations are fully reflected in the decisions of those Committees. In performing its duties, the Committee had access to the services of the chief risk officer, chief audit officer, the group company secretary and external professional advisers. Keith Nicholson, a former partner at KPMG LLP, acted as an external adviser to the Committee during the year.
Risk appetite monitoring As the macro-economic climate deteriorated in the latter half of the year, the Committee received regular detailed reports on key risk exposures, the drivers of risk in the Group and emerging and potential risks, including the risk of a sustained low interest rate environment. The Committee gave particular focus to the monitoring of the Group’s capital and liquidity positions against risk appetite, the results of stress and scenario testing and the drivers of financial and insurance risks. The Committee critically assessed and challenged the appropriateness of the Group’s risk appetite, rigorously monitored the Group’s exposure against appetite particularly in relation to European sovereign debt holdings, counterparty and credit exposure, and assessed the actions taken to mitigate any risks that had become out of appetite. Working with the Audit Committee, the Committee also monitored the adequacy of the Group control framework.
Group risk management During the year, the Committee approved the new suite of policies and underlying standards which underpin the revised risk management framework and which would be effective from January 2012. The Committee continued to receive regular reports on compliance with the existing Group policies. The Committee also received regular reports on the development and roll-out of the Better Business Decisions programme, which was designed to equip senior management with the skills needed to embed enhanced risk-based decision making in the core business functions across the Group.
Internal controls The Group’s internal audit function continued to provide the Committee with independent and objective reports on the appropriateness, effectiveness and sustainability of the Company’s system of internal controls. Key control issues reported by Internal Audit to management and to the Committee members were monitored on a quarterly basis until the related risk exposures had been properly mitigated. More detail on the management of risk is contained in the Risk and capital management section of the Performance Review on pages 61 to 68.
Committee role and responsibilities The purpose of the Committee is to set guidance and direction and to oversee the policies and progress of the Group’s corporate responsibility (CR) activities. The key responsibilities of the Committee are:  assisting the Board in the development of the Group’s strategy on CR related issues including social, environmental and ethical matters;  reviewing the Group’s CR and environment policies to ensure they continue to meet the Group’s CR strategy and objectives;  reviewing and monitoring the Group’s CR risks and working with the Risk Committee to ensure that the Group’s CR risks are properly considered; and
 reviewing and approving the CR Report in the Company’s Annual Report and Accounts and providing for an appropriate form of assurance.
Carole Piwnica (Chairman from 25 March 2009 until 1 December 2011) 14 January 2006 1 December 2011 Lord Sharman 14 January 2006 To date Scott Wheway 5 December 2007 To date
* Appointed chairman of the Committee on 1 December 2011. ** Retired as chairman of the Committee on 1 December 2011. Ω This shows the percentage of meetings which the Committee member attended during the year while a member of the Committee. 1 Colin Sharman and Andrew Moss were unable to attend the Committee meeting held on 16 February 2011 due to prior commitments and this meeting being called at short notice.
Assurance During 2011, independent assurance on the Group’s CR and related activities and reporting was provided to the Committee by Ernst & Young. Members of the Committee were interviewed as part of the external assurance process and the subsequent management report, including Aviva’s action plan, was reviewed by the Committee to assist in the strengthening and future direction of the programme. Internal Audit reported to the Committee on any matters from the reviews in the Internal Audit Plan which were of relevance to the Committee and will provide support for the Committee going forward, with the sustainable objectives incorporated into the 2012 Internal Audit Plan.
 As outlined in the Chairman’s Statement, while the outlook for the wider economy has been pessimistic, particularly in the Eurozone, Aviva has performed strongly, and management and employees have remained focused on executing our strategy, and on delivering our goals, despite market volatility.
 Aviva has performed well against the Group’s Key Performance Indicators (KPIs) and the financial and non-financial targets set in respect of the 2011 Annual Bonus Plan were mostly exceeded during the year. The combination of financial outcomes, along with performance against targets relating to employees, customers and personal objectives mean the group chief executive received a bonus of 80.27% of his maximum opportunity for 2011 (2010: 74.3%).
 In line with emerging practice, we are disclosing 2012 salary increases and LTIP awards for the first time. These are presented alongside the historical information for the previous year, in table 7.
 Andrea Moneta resigned from the Board of Aviva plc (the Board) on 19 January 2011 and left the Company on 28 February 2011. Details of his leaving arrangements are disclosed in this report.
1. 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 2011. In addition to meeting statutory requirements, particularly the regulations on directors’ remuneration reports pursuant to the Companies Act 2006, the Committee has complied 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 the Companies Act 2006. During 2011, executive remuneration has been under intense scrutiny. The Committee has been conscious of the external environment and has given due consideration to market sentiment and potential future regulation. At the time of writing this report, proposed additional regulation by the Department for Business, Innovation and Skills (BIS) has not been issued, but the Committee believes that the approach taken over the last few years by Aviva will leave it well positioned against the likely final outcome of such regulation.
– Competitive long-term incentive plans: New revised standard long-term incentive awards have been granted to ensure our packages remain competitive within the relevant market place, and represent value for the shareholder. As disclosed in last year’s report, One Aviva, twice the value bonus plan (OATTV Plan) awards were not made and EDs received awards under the standard Long Term Incentive Plan (LTIP) only.
 Share ownership requirements: The share ownership requirement of the group chief executive increased from 175% to 200% of basic salary. In addition, members of the Executive Committee (EC) who are not EDs saw the introduction of a new share ownership requirement of 50% of basic salary; 50% of the EDs’, including the group chief executive, executive share plan releases and 25% of the EC members’ executive share plan releases will be required to be held, net of withholding taxes, until such time as their share ownership requirement is met.
Table 1: Strategic Reward Review’s key changes to each element of remuneration for the EDs, as implemented in 2011
Remuneration element 2010 From 2011 (as advised in the 2010 Directors’ Remuneration Report)
LTIP Group chief executive: 175% standard award EDs: 150% standard award Performance measures: 50% total return MCEV Return on Capital Employed (ROCE), 50% relative Total Shareholder Return (TSR) 30% vests for threshold performance
Group chief executive: 275% standard award EDs: 225% standard award Performance measures: 50% Operating IFRS ROCE, 50% Relative TSR (IFRS ROCE is considered a more stable balance sheet measure) 20% vests for threshold performance
Group and the remuneration of EDs and members of senior management;  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 and have regard to pay and conditions elsewhere within the Group;
 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 Chairman of the Company;  recommend to the Board the establishment of any employee share plans and exercise all the Board’s powers in relation to the operation of all share incentive plans, including the granting of awards, the setting and testing of performance conditions (where appropriate), and any discretion on behalf of the Board regarding any material amendments to the plans’ rules not requiring the approval of shareholders; and
4. Committee membership Table 2 below shows the directors who served as members of the Committee during the year, all of whom are independent NEDs, and individuals who attended Committee meetings: Table 2: Members and attendees of the Committee during 2011 Member Position Comments
Attended by invitation as the Committee’s independent adviser until August 2011. AHNBS is part of AON, which provided insurance broking services to the Company in 2011
Attended by invitation as the Committee’s independent adviser from August 2011. FIT Remuneration Consultants provided no other services to the Group in 2011 *Both AHNBS and FIT Remuneration Consultants are members of the Remuneration Consultants Group (the professional body established under the Walker review) and adhere to its code of conduct.
No person was present during any discussion relating to their own remuneration. In addition to the members and attendees listed in Table 2 above, the chief risk officer provided advice on the management of risk within the remuneration framework and Deloitte LLP advised the Committee on the calculation of TSR in respect of the LTIP vesting. Deloitte LLP were not appointed by the Committee and they provided consultancy services to the Group in 2011. The chairman of the Committee reports to meetings of the Board on the Committee’s work and the Board receives a copy of the agenda and the minutes of each meeting of the Committee. The Committee undertook an annual review of its performance and effectiveness. The review concluded that overall the Committee was effective in carrying out its duties.
Directors’ remuneration report continued 5. Committee attendance and activities during 2011 The Committee is required by its terms of reference to meet at least three times per year. In 2011, the Committee met ten times and the number of meetings attended by each Committee member is shown in Table 3: Table 3: Committee attendance
Table 4: Matters discussed by the Committee during its 2011 meetings Meeting Standing agenda items Other agenda items 17 January  None  Approval of the departure terms for Andrea Moneta 18 January  None  Discussion of Igal Mayer’s appointment terms as an ED
19 January  None  Approval of Igal Mayer’s appointment terms as an ED
 Agreement that bonus awards for senior management would take account of risk objectives
 Consideration and approval of bonus awards for the 2010 financial year and approval of share awards under the Annual Bonus Plan (ABP) for EDs and EC members
 A review and approval of LTIP grants to the EDs and EC members and approval of the performance conditions for the 2011 LTIP grants
 A performance test of subsisting LTIP and OATTV Plan grants  A review of dilution limits  A review and approval of recommendations on contributions into the Aviva Capital Accumulation Plan (ACAP)  Approval of the 2010 Directors’ Remuneration Report  Approval of the award of Free Shares to UK employees under the Aviva All Employee Share Ownership Plan (AESOP) and awards to Irish employees under the Aviva Group Employee Share Ownership Scheme
• Strategic reward review 6 • Remuneration terms for new EDs and EC members 10 • FSA’s remuneration code 4 • EDs’, EC members’ and senior management’s salaries and bonuses 20 • EDs’ and EC members’ objectives and Group targets including risk objectives 30 • Pensions and long-term savings 5 • Share plan awards and performance conditions 5 • Discussions regarding Group Risk input into compensation arrangements 5 • Other matters 15
May  None  Discussion and approval of the proposed remuneration package and joining arrangements for Trevor Matthews
 Discussion of the remuneration benchmarking and proposed 2012 salary increase for the group chief executive
Retention Share Award Plan  Approval of the appointment of FIT Remuneration
Consultants to provide remuneration services to the Committee in place of AHNBS
 Approval of the proposed 2012 financial, employee and customer targets for the operation of the ABP
 A review of the proposed approach to the 2011 Directors’ Remuneration Report
 Approval of the finalised remuneration package and joining arrangements for Trevor Matthews
 Approval of a revised list of Code Staff for two Aviva UK subsidiaries with regard to the FSA’s Remuneration Code 6. FSA’s Remuneration Code: Aviva Investors The FSA’s Remuneration Code does not apply to Aviva’s businesses with the exception of Aviva Investors and two small subsidiaries within the UK business. These businesses are in full compliance with the FSA’s Remuneration Code’s requirements and the Company expects the Solvency II Directive and other European-based legislation to further define requirements in this area in the near future. Specifically, Aviva Investors’ policy on remuneration takes into account its status as a Tier 4 organisation as defined in the FSA’s Remuneration Code 2010, and as such is fully compliant with this code. Aviva Investors’ reward principles and arrangements are designed to accurately and appropriately incentivise and reward employees for achieving stated business goals in a manner that is consistent with the Company’s approach to sound and effective risk management. Effective risk management is central to how the Company and Aviva Investors perform and the risk profile of each business is also taken into account in compensation decisions. The approach to performance and reward is designed to drive sustainable performance, ensuring that remuneration policies support the business strategy and long-term interests of the Company.
8. Alignment of Group strategy with executive remuneration The Committee considers alignment between Group strategy and the remuneration of its senior executives, including EDs, to be critical. It believes that senior executives should be appropriately rewarded (on a market competitive basis) for the delivery of stretching goals but should receive reduced rewards when the business performs poorly. The pay and employment conditions of employees of the Company and the Group were also taken into account when determining directors’ remuneration for the financial year, in addition to the Group Reward policies and framework. To achieve this alignment Aviva’s remuneration package is leveraged, with a suitable percentage of pay ‘at risk’ against the achievement of stretching goals, which is aligned with the Company’s risk profile and employee behaviour. Furthermore, two-thirds of any bonus for EDs and EC members and any LTIP grants are delivered in the form of Aviva shares. The requirements to defer bonus and participation in the LTIP closely tie the long-term value of executive remuneration to the Company’s share price performance. Senior executives thus have high exposure to the same benefits and drawbacks of share price movement as all shareholders. The belief that senior executives should be shareholders is reinforced through formal guidelines requiring EDs to build up and maintain a significant holding of shares in the Company.
Section 2 outlines the key changes in respect of executive remuneration that were implemented in 2011, following the Strategic Reward Review. The Committee’s considerations shown below relate to reward decisions made in 2011.  The Group’s strategic priorities and targets are set out elsewhere in the 2011 Annual Report and Accounts. Those priorities are reflected closely in the remuneration package of executives.  The Committee also considers how, given changing economic circumstances, the Group’s priorities, and consequently the targets underpinning its bonus structures, need to change from year to year. Financial targets sit alongside targets on customer advocacy and employee engagement that the Committee believes are critical to long-term organisational health. The personal objectives of the EDs and EC members are reviewed annually by the Committee to ensure they adequately reflect the strategic aims of the Group, good governance and best practice.
 Annual bonus plan: 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 is satisfied that the targets provide appropriate incentives, are sufficiently challenging, are aligned to shareholders’ interests and are within the Group’s risk appetite.
 LTIP: The LTIP encourages a longer-term management focus on ROCE and relative TSR. These metrics measure how the Company is performing in both absolute and relative terms.
9. Constituent elements of reward as a percentage of total remuneration Table 5 below shows how the Group’s remuneration policy translates in practice into the group chief executive’s remuneration package. The table outlines the contribution each element makes to overall compensation at both ‘Target’ and ‘Stretch’ levels of performance for the group chief executive. For the remainder of EDs, 43% (42% for Igal Mayer) of total remuneration is paid in cash for on ‘Target’ performance and 32% (30% for Igal Mayer) for ‘Stretch’ performance (excluding ACAP which EDs participate in to varied degrees; see Table 7). For all the EDs, more than half of total remuneration is performance-related.
(137.5% of basic salary).  2011 ‘Stretch’ performance means a stretch ABP outcome (150% of basic salary) and 100% vesting of the LTIP
The breakdown does not include any share price growth, the dividend equivalents payable on the ABP deferred shares and 2011 LTIP award, or other benefits (e.g. cash car allowance, value of private medical insurance (PMI) and all employee share ownership plans).
 Basic salary  ABP  LTIP  Long-term savings  Aviva Staff Pension Scheme (ASPS)  Benefits  All employee schemes
 Monthly in cash  Reviewed annually in February, with changes taking effect from 1 April.
LTIP The LTIP is intended to motivate the achievement of the Company’s longer-term objectives, to aid the retention of key personnel and to align executive interests to those of shareholders. In 2011 the group chief executive was eligible to receive an annual award of shares equal to 275% of basic salary. Other EDs were eligible to receive an annual award of shares equal to 225% and, in the case of Igal Mayer, 250% of basic salary (this reflects the fact that Mr Mayer was previously on US conditions of employment, under which he would have been eligible for a higher standard award, reflective of market practice). The Company operates a phantom scheme in the US for its US-based employees. The levels of award reflect US market practice. For awards made prior to 2011, no additional shares are awarded for the dividends paid during the three-year performance period on those shares that vest. From 2011 onwards, dividend equivalent awards will be paid in line with current market practice. The plan rules give the Committee the authority to cancel unvested awards in the event of misconduct by the participant or a member of their team, or in the event of a materially adverse misstatement of the Company’s financial statements.
Long-term savings The Aviva Capital Accumulation Plan (ACAP) is a long-term savings vehicle which aids retention while recognising the need for flexibility in long-term wealth planning. 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 7. No ED who participates in the ACAP is currently accruing benefits in the ASPS. A resignation or departure for breach of contract results in forfeiture of contribution for the relevant year.
 Discretionary payments into a trust where they are held for a minimum of five years.
Conditional Share Award to Trevor Matthews The Committee approved the granting of a one-off conditional share award to Trevor Matthews with a grant value of £2.02 million as part of the recruitment offer made to him. Mr Matthews became entitled to the grant of the award on the date of the commencement of his employment, 2 December 2011. The conditional share award was made on an exceptional basis, pursuant to rule 9.4.2(2) of the Listing Rules, to compensate for the loss of long-term incentives at his previous employer having taken due account of the conditions attached to those forfeited awards. The award was necessary to secure Mr Matthews’ recruitment and is subject to clawback provisions. Additional shares will be awarded at vesting in lieu of the dividends paid on the vested shares between the award date and vesting date.
11. Overview of the effect of the remuneration policy on EDs’ remuneration during 2011 and 2012 The effect of the remuneration policy in 2011 on EDs is set out in Table 7 below. It should be emphasised that the figures shown for the LTIP grant represent the face value of those awards on the date of grant. The LTIP grant would only be fully realised if very stretching performance conditions were to be met. Details on pension benefits are set out later in this report. Alongside the historical information, for the first time, the table also shows the forward looking salary increases and LTIP awards for 2012, where applicable.
Mr Moss received a 3.8% increase from £925,000 to £960,000, effective 1 April 2011 He will receive a further 4.8% increase from £960,000 to £1,006,000 effective 1 April 2012. These increases reflect his performance, experience and contribution since his appointment. Mr Moss’s average annual salary increase since April 2008 is 2.1%
£1,155,888 (120.4% of basic salary) (£385,296 delivered in cash and £770,592 deferred into shares for three years)
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 2011 A similar contribution is anticipated for 2012
Mr Moss continues to receive 2% of basic salary as a non-pensionable cash supplement provided in consideration of his surrendering his Unapproved Unfunded Retirement Benefit (UURB) promise at the point when accrual in the ASPS ceased **Percentages do not necessarily add up due to rounding.
Based on an annual salary of CAD 1,001,500 Mr Mayer will receive a salary increase of 2% from CAD 1,001,500 to CAD 1,021,530 effective April 2012
Bonus is a function of the degree of achievement of 2011 targets as follows: Financial 37.14% (maximum 50%) Employee 8.70% (maximum 10%) Customer 3.10% (maximum 10%) Personal 17.67% (maximum 30%)
The face value of the 2011 grant represented 250% of Mr Mayer’s basic salary on 28 February 2011. Mr Mayer will receive an LTIP grant for 2012 with a face value of CAD 2,503,750, representing the standard award of 250% of his basic salary as at 29 February 2012
Other benefits £21,044 cash car allowance during the period from joining the Board £201,879 accommodation***
Based on a £5,000 per month accommodation allowance, grossed up for tax purposes. 2012 rental costs were largely paid in advance in 2011 Aviva also met rental costs for his apartment in the US for the short period from his appointment as an ED until he moved out Based on a maximum £40,000 per annum family travel allowance, grossed up for tax purposes Flights between Toronto and London Paid against an allowance of up to £100,000 for costs incurred in connection with relocation * Igal Mayer joined the Board on 19 January 2011 and the information shown is for the period served as an ED in 2011 (with the exception of ABP, where the full year award is shown). Figures shown above have been converted from Canadian dollars to pounds sterling at the average exchange rate for 2011 of CAD 1.5837 : £1.00.
Toronto and London. Aviva meets the cost of rental accommodation in London of up to £5,000 per month, plus utility costs in line with standard policy. Mr Mayer also receives assistance in preparing his tax returns. Aviva meets the cost of any taxes due on these benefits. He is also entitled to be reimbursed up to a maximum of £100,000 for costs incurred in connection with relocation from the US. A sum of £35,699 has been paid against this allowance.
£45,000 (75% of one month’s basic salary) (£15,000 delivered in cash and £30,000 deferred into shares for three years)
The face value of the 2011 grant represented 225% of Mr Matthews’ basic salary on 2 December 2011 (using the share price upon which other 2011 LTIP awards were based) and was granted in the form of Phantom Units which will be cash settled on vesting Mr Matthews will receive an LTIP grant for 2012 with a face value of £1,620,000, representing the standard award of 225% of his basic salary as at 29 February 2012
Other benefits £1,309 cash car allowance during the year £470,000 cash payment in first month of employment and a conditional share award, face value of £2,020,000 £35,280 professional fees
Andrea Moneta, chief executive officer, Aviva Europe, Middle East and Africa* Element Amount Commentary**
Based on an annual salary of €780,000. Mr Moneta did not receive an increase to his basic salary in 2011
ABP £nil Mr Moneta received no bonus in connection with 2011 performance
Other benefits £932 cash car allowance during the period until leaving the Board £346,741 compensation for loss of earnings, options and performance shares from previous employer paid in March 2011 £4,854 housing allowance £867 schooling allowance £43,342 for loss of employment £35,000 legal fees
Basic salary £260,718 during the period until leaving the Board Mr Hodges received a 5.8% increase from £600,000 to £635,000, effective 1 April 2011
The Trustee of the Plan accepted Aviva’s recommendation and made an award into the Plan equivalent to 50% of Mr Hodges’ basic salary as at 1 April 2011. This award was forfeited upon Mr Hodges’ resignation
* Mark Hodges resigned from the Board on 2 June 2011 and the information shown is for the period served as an ED in 2011. **Percentages do not necessarily add up due to rounding.
Business measures (70%) Volume – total long-term savings 3.1 3.1 0.0
To align with the business priorities for 2012, the financial measures at Group level for 2012 are total capital generation, operating profit, internal rate of return, economic gain and total sales (the latter two of which are not set a stretch target in line with relevant risk considerations).
Table 9: 2011 LTIP ROCE targets ROCE targets over the three-year performance period Percentage of shares in award that vest based on achievement of ROCE targets
The Committee has determined the performance targets for the 2012 LTIP awards. The ROCE targets, originally calibrated at the end of 2010, have been recalibrated to reflect the impact of a significant improvement in the Aviva Staff Pension Scheme deficit, and the disposal and partial sell-down of RAC and Delta Lloyd respectively. These events, which occurred after the ROCE metric for the 2011 LTIP awards was calibrated, have significantly impacted on Aviva’s ability to deliver on the original ROCE targets. The impact of these events is that an additional £360 million post tax adjusted operating profit would be required from the underlying businesses to deliver the same level of ROCE as applied to previous LTIP awards. The Committee therefore agreed to apply a minimum vesting threshold of 30% and a maximum vesting threshold of 37.5% to the 2012 LTIP awards (over three years). The Committee considers that the revised metric would be just as stretching as would have been the case had the events and the recalibration not occurred. No adjustment has been made to the the ROCE target which applies to the 2011 LTIP awards.
TSR targets Relative TSR determines the vesting of the other 50% of any LTIP award. The comparator group for the assessment of relative TSR performance at the time of the 2011 grant comprised Aegon, Ageas, Allianz, Axa, Generali, ING, Legal and General, Lloyds Banking Group, Prudential, Resolution Limited, Royal Bank of Scotland, Royal and Sun Alliance, Standard Life and Zurich. These companies were chosen on the basis of product and geographic match to Aviva.
Table 11: Projections of vesting of subsisting LTIP awards LTIP award 31 December 2011 vesting projection (% of award)
Table 12: Potential value of 2011 LTIP awards (rounded to nearest £50) LTIP Andrew Moss Patrick Regan Trevor Matthews Igal Mayer*
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.
Aviva has not historically awarded additional cash or shares for the dividends that were paid during the three-year performance period on those shares that vest. As outlined earlier in this report, the awards that will vest from the 2011 LTIP grants onwards will attract dividend equivalents, which is aligned to current market practice. OATTV Plan awards were granted in 2008, 2009 and 2010 see Table 1 for more details. Based on the performance conditions attached to these awards, as described in the Directors’ Remuneration Report for the year of grant, the 2008 awards resulted in none of the shares vesting, hence 100% of these awards lapsed, and none of the shares from 2009 awards will vest. The same outcome is currently forecast for the 2010 awards.
Directors’ remuneration report continued 13. Share awards Table 15 below sets out the current position of those share-based awards made to the EDs who served during 2011 under current remuneration arrangements. This section (Share awards) and those sections headed ‘Share options’, ‘Directors’ remuneration in 2011’ and ‘EDs’ pension arrangements’ along with their associated footnotes have been subject to audit.
Table 15: LTIP, ABP, OATTV Plan, CFO Recruitment Share Awards Plan and Conditional Share Award
Aviva Annual Bonus Plan 20086 55,108 24,2907 79,398 — — 617.50 432.80 Mar-11
One Aviva, twice the value bonus plan 20083 93,567 — — 93,567 — 598.00 Mar-11
Patrick Regan Aviva Long Term Incentive Plan 20102 233,160 — — — 233,160 387.70 Mar-13
Aviva Annual Bonus Plan 2011 — 102,741 — — 102,741 435.60 Mar-14
Aviva Annual Bonus Plan 20095 85,982 25,8437 111,825 — — 245.00 324.00 Dec-11
Conditional Share Award 2011 — 653,721 — — 653,721 320.80 Mar-12,13,14
Table 15: LTIP, ABP, OATTV Plan, CFO Recruitment Share Awards Plan and Conditional Share Award (continued)
Mark Hodges14 Aviva Long Term Incentive Plan 20083 97,450 — 70,456 26,994 — 617.50 432.80 Mar-11
Aviva Annual Bonus Plan 20086 32,855 14,4827 47,337 — — 617.50 432.80 Mar-11
Aviva Annual Bonus Plan 2009 159,375 — — — 159,375 245.00 Mar-12
Notes 1 The actual price used to calculate the ABP and LTIP awards is based on a three-day average closing middle market price of an ordinary share of the Company. These were in 2008: 608p; 2009: 256p; 2010: 386p and 2011: 434p. The threeday average closing middle market price of an ordinary share of the Company used to grant the 2008 OATTV Plan awards was 617p; in 2009 was 256p; and in 2010 was 386p. The five day average closing middle market price of an ordinary share of the Company used to grant the Replacement Restricted Share Award (RRSA) in 2010 was 380.22p. The three-day average closing middle market price of an ordinary share of the Company used to grant the Bonus Replacement Deferred Share Award (BRDSA) in 2010 was 386p. The three-day average closing middle market price of an ordinary share of the Company used to grant the Conditional Share Award in 2011 was 309p.
5 Igal Mayer’s 2009 Aviva Annual Bonus Plan award vested in December 2011 due to Mr Mayer being subject to Canadian taxes. This is in accordance with the rules of this plan. 6 The shares comprising these awards are restricted shares which are beneficially owned by the ED and held in trust on their behalf under the terms of a restricted share award agreement. As outlined in the 2010 Directors’ Remuneration Report, income tax and National Insurance Contributions liabilities were paid on these awards on 30 March 2010. 7 These figures relate to shares issued in lieu of dividends accrued during the deferral period. 8 The awards under the CFO Recruitment Share Awards Plan were granted to Patrick Regan following his recruitment in 2010. As disclosed in the 2010 Directors’ Remuneration Report, the RRSA will vest in tranches subject to Mr Regan meeting his personal performance targets, the OATTV is subject to the same performance conditions as the OATTV Plan awards granted to other EDs in 2010 and the BRDSA is not subject to performance conditions. 9 The performance target attached to the first tranche of the RRSA was met and this tranche vested on 14 March 2011 being the first dealing day following the normal vesting date where no dealing restrictions were in place. 10 The information shown in this column for Igal Mayer is on joining the Board on 19 January 2011. 11 Trevor Matthews joined the Board on 2 December 2011 and held no share awards on appointment. 12 These shares were awarded as phantom units which will be cash settled on vesting and no shares will be transferred or allotted. 13 The information shown in this column for Mark Hodges is as at his resignation from the Board on 2 June 2011 and for Andrea Moneta is as at his resignation from the Board on 19 January 2011. 14 25% of Mark Hodges’ 2009 ABP award, 50% of Mr Hodges’ 2010 ABP award and 100% of Mr Hodges’ LTIP awards, OATTV awards and 2011 ABP award subsequently lapsed on his leaving the Company on 9 September 2011.
Andrew Moss Savings-related options 2005 3,279 — — 3,279 — 491.0 December 2010 –
May 2019 Mark Hodges Savings-related options 2007 1,705 — — 1,705 — 563.0 December 2010 –
Table 17: EDs’ key terms and conditions of employment Provision Policy
Termination payment Pay in lieu of notice up to a maximum of 12 months’ basic salary. This may be increased by a discretionary redundancy payment (where appropriate) but any such further termination payment is capped at 12 months’ basic salary. Any amount is subject to phased payment and mitigation requirements.
Remuneration and benefits As described in this report the operation of the ABP and LTIP is at the Company’s discretion and, in the case of the long-term savings plans, at the trustees’ discretion.
Date current contract commenced: 1 January 2007 22 February 2010 19 January 2011 2 December 2011 26 June 2008* 28 September 2009**
Directors’ remuneration report continued 16. Share ownership requirements An internal shareholding requirement was introduced in 2005 that the group chief executive and any ED 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. As outlined in section 2, following the 2011 AGM, the shareholding requirement was increased to 200% for the group chief executive. In addition, the EDs including the group chief executive are required to retain 50% of the net share releases from the deferred annual bonuses and LTIPs until the shareholding requirements have been reached, which will not have a target date. Unvested share awards including shares held in connection to compulsory bonus deferrals are not taken into account in applying this test. Table 18 shows the position at 30 December 2011, based on that day’s closing middle market price of an ordinary share of the Company of 300.8 pence.
18. All employee share plans EDs are eligible to participate in a number of HMRC-approved all employee share plans on the same basis as other eligible employees. These plans include a free share element of the Aviva All Employee Share Ownership Plan (AESOP). Under this element of the 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. Free shares were awarded in 2011. 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 currently no matching element to this investment by the Company. Shares awarded to, or investments made by, EDs through the AESOP are included in Table 24 of this report. The Aviva Savings Related Share Option Scheme and Aviva Savings Related Share Option Scheme 2007 allow eligible employees to acquire options over the Company’s shares at a discount of up to 20% of their market value at the date of grant. In order to exercise these options, participants must have saved through a three, five or seven-year HMRC-approved savings contract, subject to a maximum savings limit of £250 per month. Details of options granted to EDs under these schemes can be found in Table 16 above.
Period Following the introduction of the UK Corporate Governance Code, all NEDs are subject to annual re-election by shareholders at each AGM.
Termination By the director or the Company at their discretion without compensation upon giving one month’s written notice for NEDs and three months’ written notice for the chairman designate.
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 of the Company) in respect of membership and, where appropriate, chairmanship of Board committees. Fees are reviewed annually and are set by the Board to attract individuals with the required range of skills and experience. In determining the level of fees paid to the NEDs the Board receives recommendations from the EDs, who consider the NEDs’ duties and responsibilities, together with the time commitment required in preparing for and attending meetings, and the amounts paid by competitors and similar-sized companies. Following a review in February 2011 of the chairman of the Company’s fee against market benchmarks for the 25 FTSE companies either side of Aviva’s market capitalisation and in light of the freeze in his fee level since 2008, it was agreed to increase the chairman of the Company’s fee from £495,000 per annum to £550,000 per annum. This increase was effective from 1 April 2011. There were no other fee increases for NEDs during 2011. The chairman of the Company and NEDs do not participate in any incentive or performance plans or pension arrangements and they also do not receive an expense allowance. The Company’s articles of association provide that the total aggregate remuneration paid to the chairman of the Company 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 AGM. The Company proposes to increase this limit to £2 million as part of the amendments to the Company’s articles of association, which are subject to approval by shareholders at the Company’s 2012 AGM. The amount paid in 2011 was £1.4 million. EDs are remunerated under their employment contracts and receive no additional fee for serving as directors.
NEDs’ fees which were payable from 1 April 2011 are set out in Table 20 below.
21. Directors’ remuneration in 2011 Table 21 below sets out the remuneration paid or payable to the directors in respect of the year to 31 December 2011.
Notes 1 Bonuses show the value at the date of award inclusive of the two-thirds of bonus which Aviva requires its EDs to defer into Aviva shares for three years. 2 All the EDs received life assurance benefits during the year that relate to the cost incurred by the Company of insuring the directors’ life benefits which, had the director died during the year, could not have been wholly paid by the pension scheme and would therefore have been met by the Company had the insurance not been in place. The disclosure also includes the cost of private medical insurance and, where appropriate, accompanied travel, accommodation, relocation, security and car benefits. All the numbers disclosed include the tax charged on the benefits, where applicable. No directors received an expense allowance during the year.
3 Figures shown for Igal Mayer have been converted from Canadian dollars to pounds sterling at the average exchange rate for 2011 of CAD 1.5837 : £1.00. As previously stated, Mr Mayer is entitled to first class return flights between Toronto and London and a travel allowance of up to £40,000 per annum for his spouse and dependent children for travel to and from Toronto and London. Aviva meets the cost of rental accommodation in London of up to £5,000 per month plus utility costs in line with standard policy, and met the rental costs for his apartment in the US for the short period from his appointment as an ED until he moved out. Mr Mayer also receives assistance in preparing his tax returns. Aviva meets the cost of any taxes due on these benefits. These figures are included in the table above.
4 Under the terms of his letter of appointment, Igal Mayer is entitled to be reimbursed up to a maximum of £100,000, for costs incurred in connection with relocation from the US. A sum of £35,699 has been paid against this allowance, and is included in the figures above.
Employee contributions during the year2 — — — — Defined contribution employer contributions during the year — — — 71.9
Transfer value of accrued pension at 31 December 20104 365.1 1,091.7 6,518.5 — Transfer value of accrued pension at 31 December 20114 529.5 1,802.9 8,652.2 — Change in transfer value during the period less employee contributions3, 7 164.4 711.2 2,133.7 — Transfer value of net increase (decrease) in accrued pension less employee contributions6 — 0 1,686.0 —
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) and employee contributions into the defined contribution scheme 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. 4 The transfer values have been calculated in line with the relevant legislation and using actuarial assumptions agreed by the trustee. 5 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. 6 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. 7 The basis used to calculate transfer values for UK scheme members of the defined benefit section changed during 2011 and this contributes to the increase in transfer values over the year. 8 Igal Mayer is a member of the Aviva Canada Pension Plan, and the figures shown for him have been converted from Canadian dollars to pounds sterling at the average exchange rate for 2011 of CAD 1.5837 : £1.00. 9 In addition to his contributions quoted in the table above, Patrick Regan has a sum of £100,612 in lieu of pension contributions that exceed the £50,000 annual allowance held on account. This balance, together with any further amounts accrued for the first quarter of 2012, will be applied for Mr Regan’s benefit in March/April 2012. 10 Trevor Matthews did not receive any pension contributions for 2011. Contributions will begin to accrue from 1 January 2012.
Table 24: Directors’ interests in Aviva Shares15 Shares1 ABP2 LTIP3 OATTV Plan4 Options5 1 January 31 December 1 January 31 December 31 December
Mary Francis 4,700 4,700 — — — — — — — — Richard Karl Goeltz 7,500 17,500 — — — — — — — — Euleen Goh — — — — — — — — — — Michael Hawker 5,000 5,000 — — — — — — — — Gay Huey Evans6 — — — — — — — — — — Trevor Matthews7 — — — 653,72110 — 373,27111 — — — —
John McFarlane9 — 10,000 — — — — — — — —
Lord Sharman 35,654 36,962 — — — — — — — — Leslie Van de Walle 17,485 16,659 — — — — — — — — Russell Walls 4,000 8,000 — — — — — — — — Scott Wheway 13,579 13,579 — — — — — — — —
3 Awards granted under the LTIP which vest only if the performance conditions are achieved. 4 OATTV Plan awards were 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 and the Aviva Executive Share Option Plan 2005 as detailed in section 14. 6 Gay Huey Evans was appointed as a director on 20 October 2011. On appointment, she held no shares, awards or options. 7 Trevor Matthews was appointed as a director on 2 December 2011. On appointment, he held no shares, awards or options. 8 Igal Mayer was appointed as a director on 19 January 2011 and the information shown in the columns labelled 1 January 2011 is as at his appointment as a director. 9 John McFarlane was appointed as a director on 1 September 2011. On appointment, he held no shares, awards or options. 10 These shares represent the Conditional Share Award. 11 These shares were awarded as phantom units which will be cash settled on vesting and no shares will be transferred or allotted. 12 433,296 of these shares were awarded as phantom units which will be cash settled on vesting and no shares will be transferred or allotted. 13 These shares include the restricted shares from RRSA and BRDSA awarded under the rules of the CFO Recruitment Share Awards Plan. 14 These shares represent the OATTV awarded under the rules of the CFO Recruitment Share Awards Plan. 15 The interests of connected persons to the directors are included in the directors’ interests above.
Directors’ remuneration report continued 25. Former directors Andrea Moneta Andrea Moneta resigned from the Board on 19 January 2011 and left the Company by mutual consent on 28 February 2011. His earnings as an ED during 2011 are set out in table 7. As disclosed in the 2010 Directors’ Remuneration Report, Mr Moneta received a payment of €400,000 in March 2011, which was a contractual entitlement as payment for loss of earnings, options and performance shares from a previous employer. He also received a payment of €50,000 as compensation for loss of employment. In accordance with his minimum contractual entitlement, he also received basic salary in lieu of his notice period for 12 months from his termination date, but no additional pay or benefits. He received no bonus in connection with 2011 performance. As outlined in table 7, a payment of £35,000 was made to Mr Moneta’s solicitor in respect of advising on Mr Moneta’s departure. Deferred shares earned during his period of employment were released to him on the first dealing day following his departure date. LTIP and OATTV Plan awards will vest on a pro rata basis on their normal vesting date and in accordance with the performance condition outcomes.
26. Developments in 2012 Glyn Barker was appointed to the Board as a NED on 27 February 2012 and will receive the standard Board membership fee.
27. Directors’ Remuneration Report This Directors’ Remuneration Report was reviewed and approved by the Board on 7 March 2012.
Company address The Company’s registered office is St Helens, 1 Undershaft, London EC3P 3DQ. The Company’s telephone number is +44 (0)20 7283 2000.
Share class 2011 million million million 2010 million million 8.375% Cumulative irredeemable preference shares, nominal value £1 100 100 100 — — — 8.75% Cumulative irredeemable preference shares, nominal value £1 100 100 100 — — — New preference shares, nominal value £1 — — — — — — New preference shares, nominal value €1 — — — — — —
The Companies Act 2006 abolished the requirement for a company to have an authorised share capital and the articles of association adopted by the Company on 28 April 2010 reflect this. Directors are still limited as to the number of shares they can at any time allot, as the allotment authority continues to be required under the Act, save in respect of employee share schemes. Ordinary shares in issue in the Company rank pari passu. All the ordinary shares in issue carry the same right to receive all dividends and other distributions declared, made or paid by the Company. The Company is not permitted under English law to hold its own ordinary shares. While the Company is presently authorised to repurchase up to 282 million ordinary shares, any shares that are repurchased must be cancelled. Details of the Company’s dividends, including the paying agents, are set out below under ‘Articles of Association’.
Share options and awards The Company maintains a number of active stock option and share award schemes. Details of these schemes are set out in ‘Financial statements IFRS – Note 30 – Equity compensation plans’.
Share Investment Plan The Company’s UK resident employees of participating companies can buy ordinary shares in the Company by making monthly contributions from their gross salary. Contributions can be a minimum of £5 and up to a maximum of £125 per month (or, if less, 10% of gross salary). Contributions are held in a trust by an independent trustee and shares are allocated within 30 days of the employee’s monthly contribution date. Employees can withdraw their shares from the trust at any time on payment of income tax and National Insurance Contributions (NIC). However, after five years shares can be withdrawn from the trust free of income tax and NIC.
The Company issued shares pursuant to special resolutions passed on 10 May 2006, increasing the authorised share capital from £1.45 billion and €700 million to £1.95 billion and €700 million by the creation of 500 million new preference shares of £1 each, and allowing the directors, subject to certain conditions, to issue equity securities up to the aggregate nominal value of £150 million. This authority expired at the conclusion of the AGM in 2007. A further ordinary resolution was passed on 26 April 2007 allowing the directors, subject to certain conditions, to allot equity securities up to the aggregate nominal value of £108 million. This authority expired at the conclusion of the AGM in 2008. An ordinary resolution was passed on 1 May 2008 allowing the directors, subject to certain conditions, to issue equity securities up to the aggregate nominal value of £94 million. This authority expired at the conclusion of the AGM in 2009. Ordinary resolutions were passed on 29 April 2009, increasing the authorised share capital from £1.95 billion and €700 million to £2.5 billion and €700 million by the creation of 2.2 billion ordinary shares of 25 pence each, and allowing the directors, subject to certain conditions, to issue equity securities up to the aggregate nominal value of £221 million and up to £443 million in connection with an offer by way of a rights issue. This authority expired at the conclusion of the AGM on 28 April 2010. The Companies Act 2006 abolished the requirement for a company to have an authorised share capital and the articles of association adopted by the Company on 28 April 2010 reflect this. Directors are still limited as to the number of shares they can at any time allot, as the allotment authority continues to be required in the Act save in respect of employee share schemes. There were no changes to the voting rights of any class of shares during 2009, 2010 or 2011, other than issuances in connection with our various employee option schemes and under the Company’s scrip dividend scheme. The Company did not issue shares for consideration other than cash during 2009, 2010 or 2011. In addition, at the Company’s general meetings in 2009, 2010 and 2011, shareholders authorised the limited dis-application of Section 561 of the Companies Act 2006 to permit the Company to issue new equity securities for cash without applying shareholders’ statutory pre-emptive rights.
Other related parties The Group received income from and paid expenses to 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.
In addition to the amounts disclosed for associates in the table above, at 31 December 2011 amounts payable at year-end were £49 million, and expenses incurred during the period were £3 million. Transactions with joint ventures relate to the property management undertakings, the most material of which are listed in note 18(b). Our interest in these joint ventures comprises a mix of equity and loans, together with the provision of administration services and financial management to many of them. Our UK life insurance companies earn interest on loans advanced to these entities and our fund management companies also charge fees to these joint ventures for administration services and for arranging external finance. Our UK fund management companies manage most of the assets held by the Group’s main UK staff pension scheme, for which they charge fees based on the level of funds under management. The main UK scheme holds investments in Group-managed funds and insurance policies with other Group companies, as explained in note 47(e)(iii). The 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 51 – contingent liabilities and other risk factors’.
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 2011 and at the end of each of the last three financial years are shown in the table below: £m 2010 £m £m
For the 2007 final dividend and previous final and interim dividends, shareholders on record were provided with the opportunity to elect to receive dividends in the form of newly issued ordinary shares through the Aviva Scrip Dividend Scheme. For the 2008 interim dividend, the Aviva Scrip Dividend Scheme was replaced by a dividend reinvestment plan (DRIP). For those shareholders participating in the DRIP, the Company paid a cash dividend, which was then used to buy existing shares on the open market. For the 2008 final dividend, Aviva withdrew the DRIP and reintroduced the Aviva Scrip Dividend Scheme. An interim dividend is generally paid in November of each year. A final dividend is proposed by the Company’s Board 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.
Management of capital resources We seek to maintain an efficient capital structure using a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. This structure is consistent with our risk profile and the regulatory and market requirements of our business. In managing our capital, we seek to:  match the profile of our assets and liabilities, taking into account the risks inherent in each business;  maintain financial strength to support new business growth while still satisfying the requirements of policyholders, regulators and rating agencies;  retain financial flexibility by maintaining strong liquidity, access to a range of capital markets and significant unutilised committed credit lines;  allocate capital efficiently to support growth and repatriate excess capital where appropriate; and
In the UK, we have raised non-recourse funding secured against books of mortgages. This funding has been raised through the use of special-purpose entities. The beneficial interest in the books of mortgages has been passed to these special-purpose entities. These entities, which are owned by independent trustees, have funded this transfer through the issue of loan notes. The value of the secured assets and the corresponding non-recourse funding was £1,306 million (31 December 2010: £1,288 million). We continue to receive fees from these special purpose entities in respect of loan administration services. These special purpose entities have been consolidated as we retain the residual interest in them. The transactions and reasons for consolidation are discussed further within ‘Financial statements IFRS – Note 24 – Securitised mortgages and related assets’.
Application of funds We use funds to pay dividends to our shareholders, to service our debt and to pay our central Group cash flows. In 2011, total cash paid by the Company as ordinary and preference dividends and coupon payments on direct capital instruments amounted to £507 million, compared to £548 million in 2010. In 2011, our total interest costs on central borrowings were £325 million. This compared to £324 million of interest paid on central borrowings in 2010. Total corporate centre expenses in 2011 were £138 million compared to £144 million in 2010. An additional application of our funds is the acquisition of businesses. In 2011, cash paid for the acquisition of subsidiaries, joint ventures and associates net of cash acquired amounted to £114 million, compared to cash received of £542 million in 2010. Principal acquisitions in 2011 and cash consideration paid are disclosed in ‘Financial statements IFRS – Note 3 – Subsidiaries’.
Capital injections We make capital injections into our businesses where necessary to ensure that they meet their local solvency requirements and also to support development of their operations. Capital is provided either by equity or, where a local holding company is in place, may be via loans with the holding company subsequently injecting equity capital in the regulated operating company. Each capital injection is subject to central review and approval by the Board of the relevant holding company and needs to meet our required internal rates of return. To the extent capital injections are provided or funded by regulated entities, then we have to consider the impact on regulatory capital of the capital injection. Otherwise our ability to make capital injections into our businesses is not materially limited by applicable legal and regulatory restrictions. Total capital injections into the business units were £296 million and £333 million in 2011 and 2010 respectively.
Year ended 31 December 2010 Net cash from operating activities Total net cash from operating activities decreased by £878 million to £1,807 million in 2010 (2009: £2,685 million). The decrease is due to lower investment income and higher claims in the longterm business segment.
Net cash used in investing activities Net cash from investing activities decreased by £781 million to £349 million utilised (2009: £432 million utilised). The increase is a result of a £930 million reclassification within the statement of cash flows described further in note 2(b). The underlying increase is a result of cash and cash equivalents acquired as part of the RBS Life acquisition described further in note 3(a).
Net cash out flow on financing activities Net cash used in financing activities was £782 million higher at £1,353 million (2009: £571 million). The increase is a result of a £930 million reclassification within the statement of cash flows described further in note 2(b). The underlying decrease of £133 million reflects higher interest payments partially offset by a lower net drawdown of borrowings.
Regulatory capital position Individual regulated subsidiaries measure and report solvency based on applicable local regulations, including in the UK the regulations established by the FSA. These measures are also consolidated under the European Insurance Groups Directive (IGD) to calculate regulatory capital adequacy at an aggregate Group level, where we have a regulatory obligation to have a positive position at all times. This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in the UK and Ireland with-profit life funds. The minimum solvency requirement for our European businesses is based on the Solvency 1 Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked life reserves respectively and for our general insurance portfolio of business is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our major non-European businesses (the US, and Canada) a risk charge on assets and liabilities approach is used.
The EU Insurance Groups Directive (IGD) regulatory capital solvency surplus has decreased by £1.6 billion since 31 December 2011 to £2.2 billion. The key movements over the period are set out in the following table: £bn
IGD solvency surplus at 31 December 2010 3.8 Operating profits net of other income and expenses 1.0 Dividends net of scrip (0.5) Market movements including foreign exchange (1.9) Pension scheme funding (0.3) Impact of Delta Lloyd sell down 0.1 Impact of RAC sale 0.2 Restructuring of UK regulated general insurance entities 0.2 Increase in Capital Resource Requirement (0.3) Other regulatory adjustments (0.1)
Capital commitments Contractual commitments for acquisitions or capital expenditures of investment property, property and equipment and intangible assets, which have not been recognised in our consolidated financial statements, are as follows: £m 2010 £m £m
Audit Committee financial experts The Board has determined that Russell Walls, Richard Goeltz, Michael Hawker 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, Michael Hawker and Euleen Goh are all independent as defined by the Securities and Exchange Commission rules and the New York Stock Exchange Corporate Governance Standards.
Insurance Groups Directive (IGD) The IGD requires member states to introduce the following measures to strengthen supervision of insurance companies which are part of a group:  An adjustment margin to the solvency calculation in relation to participating interests 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 margin test referred to above, to be applied at the level of the parent undertaking.
The FSA’s regulation of the Group A number of the Group’s UK subsidiaries are directly authorised and regulated by the FSA, including our insurance companies (e.g. the UK Life and UK General Insurance companies), asset managers (Aviva Investors) and intermediaries (UK Healthcare). Aviva plc, although not directly authorised by the FSA, does itself come within the scope of some regulation as the ultimate insurance holding company in the Group. As Aviva is a UK-based group, the FSA has the responsibility of acting as lead regulatory (i.e. the cross-sector supervisory co-ordinator) for the Group within the EU.
Capital and solvency rules for insurers The FSA rules require that a UK insurer (including those within the Group) must hold capital resources equal to at least the Minimum Capital Requirement (MCR). Insurers with with-profits liabilities of more than £500 million (which is the case with Aviva’s withprofits fund) must hold capital equal to the higher of MCR and the Enhanced Capital Requirement (ECR). The ECR is intended to provide a more risk responsive and ‘realistic’ measure of a withprofits insurer’s capital requirements, whereas the MCR is broadly equivalent to the previous required minimum margin, and satisfies the minimum EU standards.
Determination of the ECR involves the comparison of two separate measurements of the Authorised Firm’s financial resources requirements, which the 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
Intervention and enforcement The FSA has extensive powers to investigate and intervene in the affairs of Authorised Firms and is obliged to monitor compliance with the requirements imposed by, and to enforce the provisions of, FSMA related to secondary legislation and the rules made thereunder. 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 permissions to protect the interests of consumers or potential consumers 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 consumers have suffered loss. In addition to applying 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.
The Financial Services Compensation Scheme (FSCS) The FSCS is intended to compensate individuals and small businesses for claims against an Authorised Firm where the Authorised Firm is unable or unlikely to be able to meet those claims (generally, when it is insolvent or has gone out of business). Under a new funding system that started on 1 April 2008, for the purposes of funding FSCS compensation costs, the FSCS levy is split into five broad classes:  Deposits;  Long-term insurance and pensions;  General insurance;  Investments; and  Home finance.
With the exception of the deposits class, each broad class is divided into two sub-classes based on provider/intermediation activities. Each of the ‘sub-classes’ is made up of firms which are
Shareholder information continued providers or intermediaries and engage in similar styles of business with similar types of customer. The sub-classes are based on the activities a firm undertakes (and are aligned to their FSA permissions). A firm could be allocated to one or more sub-classes according to the activities that it undertakes. In the event of a failure of a market participant, the Authorised Firms in the Group could be required to make contributions to compensate investors. It should be noted that such contributions are not restricted to failures in the sub-classes to which a particular firm belongs, as there is the potential for cross-subsidy between sub-classes to be required.
United States We write life and annuity business in the United States through Aviva USA, a wholly owned subsidiary formed by the merger of Aviva Life Insurance Company of America with AmerUS which it acquired in July 2006. Aviva USA is domiciled in Iowa and licensed to conduct business in all 50 states. In New York it operates a wholly owned subsidiary, Aviva Life Insurance Company of New York. The US insurance industry is regulated primarily on a state- by-state basis. Individual states have authority to pass statutes, adopt regulation or issue directives to regulate insurance activities within their jurisdiction.
Intellectual property Our primary brands (the Aviva name and logo) are registered trade marks in the UK and are registered or pending in all other countries where Aviva has operations. Aviva has 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.
Ongoing difficult conditions in the global financial markets and the economy generally may adversely affect our business and results of operations, and these conditions may continue. Our results of operations are materially affected by uncertainty in the worldwide financial markets and macro-economic conditions generally. A wide variety of factors, including concerns over slowing growth, high sovereign debt within, and to a lesser degree outside, the eurozone, the stability and solvency of financial institutions, longer-term low interest rates in developed markets, inflationary threats as well as geopolitical issues in the Middle East and North Africa, have contributed to increased volatility in the financial markets and diminished expectations for the global economy going forward. Global fixed income markets continue to experience both volatility and limited market liquidity, which have affected a broad range of asset classes and sectors. Factors relating to general economic conditions, such as consumer spending, business investment, government spending, the volatility and strength of both debt and equity markets, and inflation, all affect the profitability of our business. In a sustained economic phase of low growth and high public debt, characterised by higher unemployment, lower household income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our financial and insurance products could be adversely affected. In addition, we may experience an elevated incidence of claims or surrenders of policies. Any potential material adverse affect will also be dependent upon customer behaviour and confidence.
Losses due to defaults by counterparties, including potential sovereign debt defaults or restructurings, could adversely affect the value of our investments and reduce our profitability and shareholders’ equity. We choose to take and manage credit risk through our investment assets partly to increase returns to policy holders whose policies the assets back, and partly to optimise the return for shareholders.
Market risks relating to Aviva’s business Changes in interest rates may cause policyholders to surrender their contracts, reduce the value of our investment portfolio and impact our asset and liability matching, which could adversely affect our results of operation and financial condition. Our exposure to interest rate risk relates primarily to the market price and cash flow variability of assets and liabilities associated with changes in interest rates. Some of our products, principally traditional participating products, universal life insurance and annuities, including fixed and equity indexed annuities, expose us to the risk that changes in interest rates will reduce our ‘spread’, or the difference between the amounts that we are required to pay under the contracts and the rate of return we are able to earn on investments intended to support obligations under the contracts. Our spread is a key component of our net income. As interest rates decrease or remain at low levels, we may be forced to reinvest proceeds from investments that have matured or have been prepaid or sold at lower yields, reducing our investment return. Moreover, borrowers may prepay or redeem the fixed-income securities, commercial mortgages and mortgage-backed securities in our investment portfolio with greater frequency in order to borrow at lower market rates, which increases this risk. Lowering interest crediting rates can help offset decreases in investment margins on some products. However, our ability to lower these rates could be limited by competition or contractually guaranteed minimum rates and may not match the timing or magnitude of changes in asset yields. As a result, our spread could decrease or potentially become negative. Our expectation for future spreads is an important component in the amortisation of policy acquisition costs and significantly lower spreads may cause us to accelerate amortisation, thereby reducing net income in the affected reporting period. In addition, during periods of declining interest rates, the guarantees within existing life insurance and annuity products may be more attractive to consumers, resulting in increased premium payments on products with flexible premium features, and a higher percentage of insurance policies remaining in force from year to year, during a period when our new investments carry lower returns. Accordingly, during periods of declining interest rates, our profitability may suffer as the result of a decrease in the spread between interest rates credited to policyholders and returns on our investment portfolio. Increases in market interest rates could also negatively affect our profitability. Surrenders of life insurance policies and fixed annuity contracts may increase as policyholders seek higher returns and higher guaranteed minimum returns. Obtaining cash to satisfy these surrenders may require us to liquidate fixed maturity investments at a time when market prices for those assets are depressed which may result in realised investment losses. Regardless of whether we realise an investment loss, these cash payments would result in a decrease in total invested assets, and may decrease our net income. Premature withdrawals may also cause us to accelerate amortisation of policy acquisition costs, which would also reduce our net income. Our mitigation efforts with respect to interest rate risk are primarily focused on maintaining an investment portfolio with diversified maturities that has a weighted average duration approximately equal to the duration of our estimated liability cash flow profile. However, it may not be possible to hold assets that will provide cash flows to exactly match those relating to policyholder liabilities, in particular in jurisdictions with less developed bond markets and in certain markets where regulated surrender value or maturity values are set with reference to the interest rate environment prevailing at the time of policy issue. This is due to the duration and uncertainty of the liability cash flows and the lack of sufficient assets of suitable duration. This results in a residual asset/liability mismatch risk that can be managed but not eliminated. In addition, our estimate of the liability cash flow profile may be inaccurate for other reasons, such as varying mortality or general insurance claims, and we may be forced to liquidate investments prior to maturity at a loss in order to cover the liability. Such a loss could have a material adverse affect on our results of operations and financial condition. See ‘Financial statements IFRS – Note 56 – Risk management’.
Fluctuations in currency exchange rates may adversely affect our results of operations and financial condition. We operate internationally and are exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. For the year ended 31 December 2011, over half of our premium income arises in currencies other than sterling, and our net assets are denominated in a variety of currencies, of which the largest are the euro, sterling and US dollar. In managing our foreign currency exposures, we do not hedge revenues as these are substantially retained locally to support the growth of the business and meet local regulatory and market requirements. Nevertheless, the effect of exchange rate fluctuations on local operating results could lead to significant fluctuations in our consolidated financial statements upon translation of the results into sterling. Although we take certain actions to address this risk, foreign currency exchange rate fluctuation could materially adversely affect our reported results due to unhedged positions or the failure of hedges to effectively offset the impact of the foreign currency exchange rate fluctuation. Any adverse foreign currency exchange fluctuation may also have a material adverse effect on our regulatory capital surplus based on the EU Insurance Groups Directive. For a discussion of the impact of changes in foreign exchange rates on our results of operations, see ‘Financial statements IFRS – Note 56 – Risk management’.
Market fluctuations may cause the value of options and guarantees embedded in some of our life insurance products to exceed the value of the assets backing their reserves, which could adversely affect our results of operations or financial condition. As a normal part of their operating activities, various Group companies have given guarantees and options, including interest rate and investment return guarantees, in respect of certain longterm insurance and fund management products. In providing these guarantees and options, our capital position is sensitive to fluctuations in financial variables, including foreign currency exchange rates, interest rates, property values 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. Periods of significant and sustained downturns in equity markets, increased equity volatility or reduced interest rates could result in an increase in the valuation of the future policy benefit or policyholder account balance liabilities associated with such products, resulting in a reduction to net income. We use reinsurance in combination with derivative instruments to mitigate some of the liability exposure and the volatility of net income associated with these liabilities, and while we believe that these and other actions mitigate the risks related to these benefits, we remain liable for the guaranteed benefits in the event that reinsurers or derivative counterparties are unable or unwilling to pay. We are also subject to the risk that the cost of hedging these guaranteed minimum benefits increases, resulting in a reduction to net income. In addition, we are subject to the risk that unanticipated policyholder behaviour or mortality, combined with adverse market events, produces economic losses beyond the scope of the risk management techniques employed. These, individually or collectively, may have a material adverse effect on our results of operations, financial condition or liquidity.
The determination of the amount of allowances and impairments taken on our investments is highly subjective. If our business does not perform well, we may be required to recognise an impairment of our goodwill or intangibles with indefinite and finite useful lives, which could adversely affect our results of operations or financial condition. The determination of the amount of allowances and impairments vary by investment type and is based upon our periodic evaluation and assessment of known risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available and additional impairments may need to be taken or allowances provided for in the future. If the carrying value of an investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. There can be no assurance that management has accurately assessed the level of impairments taken and allowances reflected in our financial statements. Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. We test goodwill and
Liquidity risks relating to Aviva’s business Adverse capital and credit market conditions may affect our ability to meet liquidity needs and to access capital which could adversely affect our results of operations or financial condition. At a Group level, we need some of our invested assets to be liquid to pay our operating expenses, taxes, interest on our debt, dividends on our capital stock and repay maturing debt. At an operational level we also need liquidity to meet insurance claims. Without sufficient liquidity, we could be forced to curtail our operations and our business would suffer. The principal sources of our liquidity are insurance premiums, annuity considerations, deposit funds and cash flow from our investment portfolio and assets, consisting mainly of cash or assets that are readily convertible into cash. Sources of liquidity in normal markets also include a variety of short and long-term instruments, including repurchase agreements, commercial paper, medium and longterm debt, junior subordinated debt, securities, capital securities and stockholders’ equity. We hold certain investments that may lack liquidity such as privately placed fixed-maturity securities, and unlisted equities, as the inputs used for their valuation are not directly observable in the market. These asset classes represented approximately 4.3% of the total assets held at fair value as of 31 December 2011. As has been the case across the industry, even some of our higher-quality assets have been more illiquid as a result of the recent challenging market conditions. The reported value of our relatively illiquid types of investments, our investments in the asset classes described in the paragraph above and, at times, our higher-quality, generally liquid asset classes, do not necessarily reflect the lowest current market price for the asset. If we were forced to sell certain of our assets in the current market, there can be no assurance that we will be able to sell them for the prices at which we have recorded them and we may be forced to sell them at significantly lower prices. We may need to seek additional financing in the event internal resources are not sufficient to meet our needs. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit and the overall availability of credit to the financial services industry. Disruptions and uncertainty or volatility in the capital and credit markets may exert downward pressure on availability of liquidity and credit capacity for certain issuers and may limit our access to capital required to operate and grow our business. Such market conditions may limit our ability to replace, in a timely manner, maturing debt, satisfy statutory capital requirements and generate fee income and market-related revenue to meet liquidity needs. As such, we may be forced to delay raising capital, issue shorter-term securities than we prefer, or bear an unattractive cost of capital which could decrease our profitability and reduce our financial flexibility. Our results of operations, financial condition and cash flows could be materially adversely affected.
If our business does not perform well or if actual experience versus estimates used in valuing and amortising deferred acquisition costs (DAC) and acquired value of in-force business (AVIF) vary significantly, we may be required to accelerate the amortisation and/or impair the DAC and AVIF which could adversely affect our results of operations or financial condition. We incur significant costs in connection with acquiring new and renewal business. Those costs that vary with and are driven by the production of new and renewal business are deferred and referred to as DAC. The recovery of DAC is dependent upon the future profitability of the related business. The amount of future profit or margin is dependent principally on investment returns in excess of the amounts credited to policyholders, mortality, morbidity, persistency and expenses to administer the business. Of these factors, investment margins and general insurance underwriting profit are most likely to impact the rate of amortisation of such costs. The aforementioned factors enter into management’s estimates of gross profits or margins, which generally are used to amortise such costs. If the estimates of gross profits or margins were overstated, then the amortisation of such costs would be accelerated in the period the actual amount is known and would result in a charge to income. Significant or sustained equity market declines could result in an acceleration of amortisation of the DAC related to UK unit-linked business, resulting in a charge to income. Such adjustments could have a material adverse effect on our results of operations or financial condition. AVIF reflects the estimated present value of future profits that will emerge over the remaining life of certain in-force contracts in a life insurance company, acquired either directly or through the purchase of a subsidiary, and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the insurance and investment contracts in-force at the acquisition date. AVIF is based on actuarially determined projections. Actual experience may vary from the projections. Revisions to estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in impairment and a charge to income. Where AVIF is amortised, an acceleration of the amortisation of AVIF would occur if the estimates of gross profits or margins were overstated in the period in which the actual experience is known and would result in a charge to net income. Such adjustments could have an adverse effect on our results of operations or financial condition.
The failure to attract or retain the necessary personnel could have a material adverse effect on our results and/or financial condition. As a global financial services organisation with a decentralised management structure, we rely to a considerable extent on the quality of local management in the regions and countries in which we operate. The success of our operations is dependent, among other things, on our ability to attract and retain highly qualified professional employees. Competition for such key employees is intense. Our ability to attract and retain key employees is dependent on a number of factors, including prevailing market conditions and compensation packages offered by companies competing for the same talent.
There are inherent funding risks associated with our participation in defined benefit staff pension schemes. We operate both defined benefit and defined contribution staff pension schemes. The defined benefit section of the UK staff pension scheme was closed to new members from 1 April 2011, with entry into the defined contribution sections being offered to the staff members affected. Closure of the defined benefit scheme will remove the volatility associated with adding future accrual for active members. There are inherent funding risks associated with the defined benefit schemes. Events could result in a material reduction in the funding position of such schemes and, in some cases, may result in a deficit between the pension scheme’s assets and liabilities. The factors that affect the scheme’s position include: poor investment performance of pension fund investments; greater life expectancy than assumed; adverse changes in interest rates or inflation; and other events occurring that increase the costs of past service benefits over the amounts predicted in the actuarial assumptions. In the short term, the funding position is inherently volatile due to movements in the market value of assets. Where a funding deficit or surplus arises, the position will be discussed with the scheme trustees to agree appropriate actions. This may include a plan to fund the deficit over a period of years. Any surplus or deficit in the defined benefit pension scheme will affect our shareholders’ equity, although the IFRS position may diverge from the scheme funding position.
Our process for valuing investments may include methodologies, estimations and assumptions which require judgement and could result in changes to investment valuations. We value our AFS and FV securities using designated methodologies, estimation and assumptions. These securities, which are reported at fair value on the consolidated statement of financial position, represent the majority of our total cash and invested assets. We have categorised the measurement basis for assets carried at fair value into a ‘fair value hierarchy’ in accordance with the valuation inputs and consistent with IFRS 7 Financial Instruments: Disclosures. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1); the middle priority to fair values other than quoted prices based on observable market information (Level 2); and the lowest priority to unobservable inputs that reflect the assumptions that we consider market participants would normally use (Level 3). The majority of our financial assets are valued based on quoted market information (Level 1) or observable market data (Level 2). At 31 December 2011, 4.3% of total financial investments, loans and investment properties at fair value were classified as Level 3, amounting to £11,369 million. Where estimates were used for inputs to Level 3 fair values, these were based on a combination of independent third-party evidence and internally developed models, intended to be calibrated to market observable data where possible. An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. See ‘IFRS critical accounting policies – Investments’. Any change to investment valuations may affect our results of operations and reported financial condition.
Brand and reputation risks relating to Aviva’s business We are rated by several rating agencies, and a decline in any of these ratings could affect our standing among customers, broker-dealers, agents, wholesalers and other distributors of our products and services and cause our sales and earnings to decrease. A rating downgrade, or the perceived potential for such a downgrade, of Aviva plc or any of our rated insurance subsidiaries may, among other things, materially increase the number of policy surrenders and withdrawals by policyholders of cash values
Holders of our ADSs will have limited recourse if we or the depositary fail to meet our respective obligations under the Deposit Agreement. The Deposit Agreement expressly limits our obligations and liability and those of the depositary. Neither we nor the depositary will be liable if either of us:  are prevented from or delayed in performing any obligation by circumstances beyond our/their control;  exercise or fail to exercise discretion under the Deposit
In addition, the depositary has the obligation to participate in any action, suit or other proceeding with respect to our ADSs which may involve it in expense or liability only if it is indemnified.
The holders of our ADSs in the US may not be able to participate in offerings of rights, warrants or similar securities to holders of our ordinary shares on the same terms and conditions as holders of our ordinary shares. In the event that we offer rights, warrants or similar securities to the holders of our ordinary shares or distribute dividends payable, in whole or in part, in securities, the Deposit Agreement provides that the depositary (after consultation with us) shall have discretion as to the procedure to be followed in making such rights or other securities available to ADR holders including disposing of such rights or other securities and distributing the net proceeds in US dollars to ADR holders. Given the significant number of our ADR holders in the US, we generally would be required to register with the SEC any public offering of rights, warrants or other securities made to our ADR holders unless an exemption from the registration requirements of the US securities laws is available. Registering such an offering with the SEC can be a lengthy process which may be inconsistent with the timetable for a global capital raising operation. Consequently, we have in the past elected and may in the future elect not to make such an offer in the US, including to our ADR holders in the US, and rather only conduct such an offering in an ‘offshore’ transaction in accordance with ‘Regulation S’ under the US Securities Act of 1933, as amended. Therefore, there can be no assurance that our ADR holders will be able to participate in such an offering in the same manner as our ordinary shareholders.
The ADS and ordinary share price of Aviva has been, and may continue to be, volatile. The share price of our ADS and ordinary shares has been volatile in the past and the share price and trading volume of our ADSs may continue to be subject to significant fluctuations due, in part, to changes in our actual or forecast operating results and the inability to fulfil the profit expectations of securities analysts, as well as to the high volatility in the securities markets generally and more particularly in shares of financial institutions. Other factors, besides our financial results, that may impact out share price include, but are not limited to:  market expectations of the performance and capital adequacy of financial institutions in general;  investor perceptions of the success and impact of our strategies;  a downgrade or review of our credit ratings;  potential litigation or regulatory action involving Aviva or sectors we have exposure to through our insurance and fund management activities;  announcements concerning financial problems or any investigations into the accounting practices of other financial institutions; and
Judgments of US courts may not be enforceable against us. Judgments of US courts, including those predicated on the civil liability provisions of the Federal securities laws of the US, may not be enforceable in courts in the United Kingdom. As a result, our shareholders who obtain a judgment against us in the US may not be able to require us to pay the amount of the judgment.
Limitations on Enforceability of Civil Liabilities under US Federal Securities Laws. We are an English company. Any experts working on our behalf are likely to be residents of the United Kingdom and not the United States. In addition, most of our officers and directors are residents of the United Kingdom and not the United States. It may be difficult or impossible to serve legal process on persons located outside the United States and to force them to appear in a US court. It may also be difficult or impossible to enforce a judgment of a US court against persons outside the United States, or to enforce a judgment of a foreign court against such persons in the United States. We believe that there may be doubt as to the enforceability against persons in the United Kingdom, whether in original actions or in actions for the enforcement of judgments of US courts, of civil liabilities predicated solely upon the laws of the United States, including its federal securities laws. Individual shareholders of an English company (including US persons) have the right under English law to bring lawsuits on behalf of the company in which they are a shareholder, and on their own behalf against the company, in certain limited circumstances. English law does not permit class action lawsuits by shareholders, except in limited circumstances.
Pro forma reconciliation of Group operating profit to profit before tax 184
Notes to the consolidated financial statements 5 Details of income 203 6 Details of expenses 204 8 Long-term business economic volatility 207 9 Longer-term investment return and economic assumption changes for non-long-term business 208 14 Earnings per share 214 15 Dividends and appropriations 218 17 Acquired value of in-force business (AVIF) and intangible assets 222 18 Interests in, and loans to, joint ventures 223 19 Interests in, and loans to, associates 227 20 Property and equipment 229 22 Fair value methodology 230
Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Aviva plc Annual Report on pages 1 to 164 to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
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 2011 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
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.
Corporate Governance Code specified for our review; and  certain elements of the report to shareholders by the Board on Directors’ remuneration.
Critical accounting policies The major areas of judgement on policy application are considered to be whether Group entities should be consolidated (set out in policy D), product classification (set out in policy F) and the classification of financial investments (set out in policy S). The loss of control of Delta Lloyd in May 2011, and its classification as a discontinued operation in the current and preceding years, is discussed in notes 2 and 3(b).
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. From 1 January 2004, the date of first time adoption of IFRS, the Group was required to use the purchase method of accounting to account for the acquisition of subsidiaries. Under this method, the cost of an acquisition was measured as the fair value of assets given up, shares issued or liabilities undertaken at the date of acquisition, plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired was recorded as goodwill (see policy N below). Any surplus of the acquirer’s interest in the subsidiary’s net assets over the cost of acquisition was credited to the income statement. For business combinations for which the acquisition date is on or after 1 January 2010, the Group is required to use the acquisition method of accounting. Under this method, the cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any non-controlling interest in the acquiree. For each business combination, the Group has the option to measure the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. The excess of the consideration transferred over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. Acquisition-related costs incurred are expensed as incurred. Transactions that do not result in a loss of control are treated as equity transactions with non-controlling interests.
(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. Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transactions. Gains and losses resulting from the settlement of such transactions, and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement.
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, while 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 non-monetary 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.
(G) Premiums earned Premiums on long-term insurance contracts and participating investment contracts are recognised as income when receivable, except for investment-linked premiums which are accounted for when the corresponding liabilities are recognised. For single premium business, this is the date from which the policy is effective. For regular premium contracts, receivables are recognised at the date when payments are due. Premiums are shown before deduction of commission and before any sales-based taxes or duties. Where policies lapse due to non-receipt of premiums, then all the related premium income accrued but not received from the date they are deemed to have lapsed is offset against premiums. General insurance and health premiums written reflect business incepted during the year, and exclude any sales-based taxes or duties. Unearned premiums are those proportions of the premiums written in a year that relate to periods of risk after the statement of financial position date. Unearned premiums are calculated on either a daily or monthly pro rata basis. Premiums collected by intermediaries, but not yet received, are assessed based on estimates from underwriting or past experience, and are included in premiums written. Deposits collected under investment contracts without a discretionary participating feature (non-participating contracts) are not accounted for through the income statement, except for the fee income (covered in policy H) and the investment income attributable to those contracts, but are accounted for directly through the statement of financial position as an adjustment to the investment contract liability.
(H) Other investment contract fee revenue Investment contract policyholders are charged fees for policy administration, investment management, surrenders or other contract services. The fees may be for fixed amounts or vary with the amounts being managed, and will generally be charged as an adjustment to the policyholder’s balance. The fees are recognised as revenue in the period in which they are collected unless they relate to services to be provided in future periods, in which case they are deferred and recognised as the service is provided. Initiation and other ‘front-end’ fees (fees that are assessed against the policyholder balance as consideration for origination of the contract) are charged on some non-participating investment and investment fund management contracts. Where the investment contract is recorded at amortised cost, these fees are deferred and recognised over the expected term of the policy by an adjustment to the effective yield. Where the investment contract is measured at fair value, the front-end fees that relate to the provision of investment management services are deferred and recognised as the services are provided.
(I) Other fee and commission income Other fee and commission income consists primarily of fund management fees, income from the RAC’s non-insurance activities, distribution fees from mutual funds, commissions on reinsurance ceded, commission revenue from the sale of mutual fund shares and transfer agent fees for shareholder record keeping. Reinsurance commissions receivable are deferred in the same way as acquisition costs, as described in policy W. All other fee and commission income is recognised as the services are provided.
(J) Net investment income Investment income consists of dividends, interest and rents receivable for the year, movements in amortised cost on debt securities, realised gains and losses, and unrealised gains and losses on FV investments (as defined in policy S). Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest income is recognised as it accrues, taking into account the effective yield on the investment. It includes the interest rate differential on forward foreign exchange contracts. Rental income is recognised on an accruals basis. 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. Unrealised gains and losses, arising on investments which have not been derecognised as a result of disposal or transfer, represent the difference between the carrying value at the year end and the carrying value at the previous year end or purchase value during the year, less the reversal of previously recognised unrealised gains and losses in respect of disposals made during the year. Realised gains or losses on investment property represent the difference between the net disposal proceeds and the carrying amount of the property.
Contract liabilities Deposits collected under non-participating investment contracts are not accounted for through the income statement, except for the investment income attributable to those contracts, but are accounted for directly through the statement of financial position as an adjustment to the investment contract liability. The majority of the Group’s contracts classified as non-participating investment contracts are unit-linked contracts and are measured at fair value. Certain liabilities for non-linked non-participating contracts are measured at amortised cost. The fair value liability is determined in accordance with IAS 39, using a valuation technique to provide a reliable estimate of the amount for which the liability could be settled between knowledgeable willing parties in an arm’s length transaction. For unit-linked contracts, the fair value liability is equal to the current unit fund value, plus additional non-unit reserves if required based on a discounted cash flow analysis. For non-linked contracts, the fair value liability is based on a discounted cash flow analysis, with allowance for risk calibrated to match the market price for risk. Amortised cost is calculated as the fair value of consideration received at the date of initial recognition, less the net effect of payments such as transaction costs and front-end fees, plus or minus the cumulative amortisation (using the effective interest rate method) of any difference between that initial amount and the maturity value, and less any write-down for surrender payments. The effective interest rate is the one that equates the discounted cash payments to the initial amount. At each reporting date, the amortised cost liability is determined as the value of future best estimate cash flows discounted at the effective interest rate.
(M) Reinsurance The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Premiums on reinsurance assumed are recognised as revenue in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies, using assumptions consistent with those used to account for these policies. Where general insurance liabilities are discounted, any corresponding reinsurance assets are also discounted using consistent assumptions. Gains or losses on buying retroactive reinsurance are recognised in the income statement immediately at the date of purchase and are not amortised. Premiums ceded and claims reimbursed are presented on a gross basis in the consolidated income statement and statement of financial position as appropriate. Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract. Reinsurance contracts that principally transfer financial risk are accounted for directly through the statement of financial position and are not included in reinsurance assets or liabilities. A deposit asset or liability is recognised, based on the consideration paid or received less any explicitly identified premiums or fees to be retained by the reinsured. If a reinsurance asset is impaired, the Group reduces the carrying amount accordingly and recognises that impairment loss in the income statement. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.
(N) Goodwill, AVIF and intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired subsidiary, associate or joint venture at the date of acquisition. Goodwill on acquisitions prior to 1 January 2004 (the date of transition to IFRS) is carried at its book value (original cost less cumulative amortisation) on that date, less any impairment subsequently incurred. Goodwill arising before 1 January 1998 was eliminated against reserves and has not been reinstated. Goodwill arising on the Group’s investments in subsidiaries since that date is shown as a separate asset, while that on associates and joint ventures is included within the carrying value of those investments.
(O) Property and equipment Owner-occupied properties are carried at their revalued amounts, which are supported by market evidence, and movements are recognised in other comprehensive income and taken to a separate reserve within equity. When such properties are sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings. These properties are depreciated down to their estimated residual values over their useful lives. All other items classed as property and equipment within the statement of financial position are carried at historical cost less accumulated depreciation. Investment properties under construction are included within property and equipment until completion, and are stated at cost less any provision for impairment in their values until construction is completed or fair value becomes reliably measurable. 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
(P) Investment property Investment property is held for long-term rental yields and is not occupied by the Group. Completed investment property is stated at its fair value, which is supported by market evidence, as assessed by qualified external valuers or by local qualified staff of the Group in overseas operations. Changes in fair values are recorded in the income statement in net investment income. As described in policy O above, investment properties under construction are included within property and equipment, and are stated at cost less any provision for impairment in their values until construction is completed or fair value becomes reliably measurable.
AFS equity securities: An AFS equity security is considered impaired if there is objective evidence that the cost may not be recovered. In addition to qualitative impairment criteria, such evidence includes a significant or prolonged decline in fair value below cost. Unless there is evidence to the contrary, an equity security is considered impaired if the decline in fair value relative to cost has been either at least 20% for a continuous six-month period or more than 40% at the end of the reporting period, or being in an unrealised loss position for a continuous period of more than 12 months at the end of the reporting period. We also review our largest equity holdings for evidence of impairment, as well as individual equity holdings in industry sectors known to be in difficulty. Where there is objective evidence that impairment exists, the security is written down regardless of the size of the unrealised loss.
For 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.
Foreign exchange contracts Foreign exchange contracts, which include spot, forward and futures contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed price and settlement date. Foreign exchange option contracts are similar to interest rate option contracts, except that they are based on currencies, rather than interest rates. Exposure to gain or loss on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate.
Derivative instruments for hedging On the date a derivative contract is entered into, the Group designates certain derivatives as either: (i) a hedge of the fair value of a recognised asset or liability (fair value hedge); (ii) a hedge of a future cash flow attributable to a recognised asset or liability, a highly probable forecast transaction or a firm commitment (cash flow hedge); or (iii) a hedge of a net investment in a foreign operation (net investment hedge).
(W) Deferred acquisition costs and other assets The costs directly attributable to the acquisition of new business for insurance and participating investment contracts (excluding those written in the UK) are deferred to the extent that they are expected to be recoverable out of future margins in revenues on these contracts. For participating contracts written in the UK, acquisition costs are generally not deferred as the liability for these contracts is calculated in accordance with the FSA’s realistic capital regime and FRS 27. For non-participating investment and investment fund management contracts, incremental acquisition costs and sales enhancements that are directly attributable to securing an investment management service are also deferred. Where such business is reinsured, an appropriate proportion of the deferred acquisition costs is attributed to the reinsurer, and is treated as a separate liability. Long-term business deferred acquisition costs are amortised systematically over a period no longer than that in which they are expected to be recoverable out of these future margins. Deferrable acquisition costs for non-participating investment and investment fund management contracts are amortised over the period in which the service is provided. General insurance and health deferred acquisition costs are amortised over the period in which the related revenues are earned. The reinsurers’ share of deferred acquisition costs is amortised in the same manner as the underlying asset. Deferred acquisition costs are reviewed by category of business at the end of each reporting period and are written-off where they are no longer considered to be recoverable. 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, while 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.
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 the Group). In addition, the difference between the expected return on scheme assets, less investment expenses, and the interest cost of unwinding the discount on the scheme liabilities (to reflect the benefits being one period closer to being paid out) is credited to investment income. All actuarial gains and losses, being the difference between the actual and expected returns on scheme assets, changes in assumptions underlying the liability calculations and experience gains or losses on the assumptions made at the beginning of the period, are recognised immediately in other comprehensive income. For defined contribution plans, the Group pays contributions to publicly or privately administered pension plans. Once the contributions have been paid, the Group, as employer, has no further payment obligations. The Group’s contributions are charged to the income statement in the year to which they relate and are included in staff costs.
(AC) Borrowings Borrowings are classified as being for either core structural or operational purposes. They 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. Where loan notes have been issued in connection with certain securitised mortgage loans, the Group has taken advantage of the revised fair value option under IAS 39 to present the mortgages, associated liabilities and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch which would otherwise arise from using different measurement bases for these three items.
Treasury shares Where the Company or its subsidiaries purchase the Company’s share capital or obtain rights to purchase its share capital, the consideration paid (including any attributable transaction costs net of income taxes) is shown as a deduction from total shareholders’ equity. The Group’s only such holding comprises shares purchased by employee trusts to fund certain awards under the equity compensation plans described in policy AA above. Gains and losses on sales of own shares are charged or credited to the treasury share account in equity.
Consolidated income statement For the year ended 31 December 2011 £m £m
Share of loss/(profit) after tax of joint ventures and associates (123) 28 141 (10) Profit/(loss) on the disposal and re-measurement of subsidiaries and associates 3b 565 (32) 163 (4)
Attributable to: Equity shareholders of Aviva plc 225 1,463 Non-controlling interests 37b (165) 429
Earnings per share AF & 14 Basic (pence per share) 5.8p 50.4p Diluted (pence per share) 5.7p 49.6p
Continuing operations – Basic (pence per share) 17.0p 37.6p Continuing operations – Diluted (pence per share) 16.7p 37.0p
Operating profit before tax attributable to shareholders’ profits Long-term business 2,123 185 2,308 1,988 330 2,318
Other: Other operations and regional costs (207) (2) (209) (177) (43) (220)
Group debt costs and other interest (657) (4) (661) (644) (12) (656)
Short-term fluctuation in return on investments on non-long-term business 9a (266) (60) (326)
Amortisation and impairment of intangibles (171) (5) (176) (193) (23) (216) Profit/(loss) on the disposal of subsidiaries and associates 3b 565 (32) 533 163 (4) 159
Non-operating items before tax (excluding Delta Lloyd as an associate) (1,475) (917) (2,392) (481) 371 (110) Share of Delta Lloyd’s non-operating items (before tax) as an associate 10 — 10 — — —
Share of Delta Lloyd’s tax expense, as an associate (34) — (34) — — —
Profit/(loss) before tax attributable to shareholders’ profits 813 (726) 87 1,545 895 2,440
Corporate centre (138) Group debt costs and other interest (657) Share of operating profit (before tax) of Delta Lloyd as an associate 157
Profit for the year from continuing operations 584 1,222 (Loss)/profit for the year from discontinued operations (524) 670
Fair value gains/(losses) 2 (14) Share of other comprehensive income of joint ventures and associates (134) — Actuarial gains on pension schemes 47e(iv) 996 1,078 Other pension scheme movements (22) (18) Foreign exchange rate movements 35 & 37b (254) 55 Aggregate tax effect – shareholder tax 13b (261) (116)
Total comprehensive income for the year from continuing operations 1,198 2,717 Total comprehensive income for the year from discontinued operations (442) 606
Attributable to: Equity shareholders of Aviva plc 923 2,950 Non-controlling interests 37b (167) 373
The accounting policies (identified alphabetically) on pages 168 to 182 and notes (identified numerically) on pages 191 to 311 are an integral part of these financial statements.
Dividends and appropriations — — — — — — — — — — (813) (813) — — (813)
Non-controlling interests’ share of dividends declared in the year — — — — — — — — — — — — — (126) (126)
Reclassification to financial liabilities — — — — — — — — — — — — — (205) (205)
Consolidated statement of changes in equity continued For the year ended 31 December 2010
Dividends and appropriations — — — — — — — — — — (757) (757) — — (757)
Shares issued in lieu of dividends 13 — (13) — — — — — — — 209 209 — — 209
Capital contributions from non-controlling interests — — — — — — — — — — — — — 42 42
Dilution of shareholding in Delta Lloyd — — — — — (3) — (1) — — (4) (8) — 8 —
Non-controlling interests’ share of dividends declared in the year — — — — — — — — — — — — — (187) (187)
Deferred tax assets AB & 45b 238 288 Current tax assets 45a 140 198
Consolidated statement of cash flows For the year ended 31 December 2011
Net cash (used in)/from operating activities – continuing operations (327) 925 Net cash (used in)/from operating activities – discontinued operations (15) 882
Net cash from investing activities – continuing operations 590 431 Net cash used in investing activities – discontinued operations (512) (82)
Net cash used in financing activities – continuing operations (1,257) (532) Net cash used in financing activities – discontinued operations (516) (821)
Total foreign currency movements during 2011 resulted in a loss recognised in the income statement of £35 million (2010: £34 million gain).
2 – Presentation changes As described in note 3(b), the Group’s shareholding in Delta Lloyd N.V. (‘Delta Lloyd’) was reduced to 42.7%, representing 40% of shareholder voting rights, following the sale of shares on 6 May 2011. Our holding has since been diluted to 41.9% at 31 December 2011, representing 39.3% of shareholder voting rights, through Delta Lloyd’s issue of scrip dividends which we did not take up. As the Group no longer commands a majority of shareholder voting rights, it no longer controls Delta Lloyd. Accordingly, from 6 May 2011 the Group has ceased to consolidate the results and net assets of Delta Lloyd. The effect of this in the various movements reconciliation tables in these notes is described as ‘Deconsolidation of Delta Lloyd’. The transaction resulted in the loss of control of a major geographical area of operations, previously presented as ’Delta Lloyd’ in the segmental reporting note. The results of Delta Lloyd up to the transaction date, as well as those for preceding years, have therefore been classified as discontinued operations. The Group’s share of the profits of its retained interest in Delta Lloyd as an associate after the transaction date is reported in a separate segment as part of continuing operations.
Notes to the consolidated financial statements continued 3 – Subsidiaries This note provides details of the acquisitions and disposals of subsidiaries that the Group has made during the year, together with details of businesses held for sale at the year end. The principal Group subsidiaries are listed on pages 50 to 51.
(a) Acquisitions (i) Material acquisitions There were no material acquisitions in the year ended 31 December 2011.
(i) RAC Limited On 30 September 2011, the Group sold RAC Limited (‘RAC’) to The Carlyle Group for £977 million, realising a profit of £532 million. Aviva is continuing its commercial relationship with RAC, both as a key underwriter of motor insurance on RAC’s panel and as a partner, selling RAC breakdown cover to our customers. The Group has retained the RAC (2003) Pension Scheme which, at 31 December 2011, had an IAS 19 deficit of £51 million. The profit on disposal is calculated as follows: £m
Assets Goodwill 284 Intangible assets 229 Property and equipment 30 Receivables 85 Other assets 43
(ii) Aviva Investors Australia On 1 October 2011, the Group sold its Australian fund management business, Aviva Investors Australia Ltd, to nabInvest, National Australia Bank’s direct asset management business, for £35 million, which includes contingent consideration with a fair value of £3 million. Net assets disposed of were £11 million, comprising assets of £15 million and liabilities of £4 million, giving a profit of £20 million after transaction costs. Recycling currency translation reserves of £3 million to the income statement resulted in an overall profit on disposal of £23 million.
Notes to the consolidated financial statements continued 3 – Subsidiaries continued (iii) Delta Lloyd On 6 May 2011, the Group sold 25 million shares in Delta Lloyd N.V. (‘Delta Lloyd’) (the Group’s Dutch long-term insurance, general insurance and fund management operation), reducing our holding to 42.7% of Delta Lloyd’s ordinary share capital, representing 40% of shareholder voting rights. As the Group no longer commands a majority of shareholder voting rights, it no longer controls Delta Lloyd. Accordingly, from 6 May 2011 the Group has ceased to consolidate the results and net assets of Delta Lloyd. Cash consideration of £380 million was received for the sale of shares, and £8 million of costs were attributable to the disposal transaction. The Group retained significant influence over Delta Lloyd through its initial 42.7% shareholding (diluted since then to 41.9% at 31 December 2011 through Delta Lloyd’s issue of scrip dividends which we did not take up) and contractual right to appoint two members of Delta Lloyd’s supervisory board. Our continuing interest in Delta Lloyd has been classified as an associate and initially re-measured at fair value as at 6 May 2011, using the closing market value of the Delta Lloyd shares listed on Euronext on that day. As Delta Lloyd is no longer consolidated, equity reserves for accumulated currency translation differences and accumulated fair value differences on available for sale financial investments relating to that company have been recycled to the income statement. Equity reserves relating to Delta Lloyd’s owner-occupied property have been transferred directly to retained earnings. The transaction resulted in the loss of control of a major geographical area of operations, previously presented as ’Delta Lloyd’ in the segmental reporting note. The results of Delta Lloyd, up to the transaction date as well as those for the previous year have therefore been classified as discontinued operations. The Group’s share of the profits of its retained interest in Delta Lloyd as an associate after the transaction date is reported in a separate segment as part of continuing operations. The loss on the disposal of Delta Lloyd is calculated as follows: £m
Net cash proceeds from disposal 372 Fair value of continuing interest in associate at 6 May 2011 1,116 Currency translation and investment valuation equity reserves recycled to the income statement 600 Consolidated net assets of Delta Lloyd as at 6 May 2011, net of non-controlling interests (2,120)
Liabilities Insurance liabilities 32,481 Liabilities for investment contracts 3,355 Unallocated divisible surplus 144 Net asset value attributable to unitholders 631 External borrowings 6,499 Other liabilities 14,107
Net assets sold (14.9%) (577) Fair value adjustments on initial recognition of associate (427)
The fair value adjustments represent the difference between the net asset value of the Group’s residual interest in Delta Lloyd and its fair value at the transaction date, based on the market price of its listed shares on that date. This adjustment principally comprises the de-recognition of all previously recognised goodwill and an increase in insurance liabilities, partially offset by an increase in the value of loan investments, and adjustments to other assets and liabilities of the associate.
Assets Intangible assets 1 — Interests in, and loans to, joint ventures and associates 12 14 Property and equipment 1 — Financial investments 347 — Receivables and other financial assets 62 — Prepayments and accrued income 3 —
(d) Irish long-term business Our Irish long-term business is carried out through a subsidiary, Aviva Life Holdings Ireland Limited (‘ALHI’), which is 75% owned by Aviva and 25% owned by Allied Irish Bank (‘AIB’). ALHI holds two subsidiaries, one of which is Ark Life Assurance Company Limited (‘Ark’) which carries out bancassurance business via a distribution agreement with AIB. The original distribution agreement was renewable in 2011 but, on 15 December 2011, AIB notified us that they did not wish to renew it and the existing shareholders’ agreement governing ALHI was terminated. The termination of this agreement triggered the ability for both parties to exercise put and call options that will result in the unwind of the original structure such that the Ark business returns 100% to AIB and the Group will purchase the 25% minority stake in ALHI. The formal exercise of these options was approved on 17 January 2012 and, as a result, the Ark business became held for sale on that date. Any change in that company’s ownership is subject to regulatory approval in Ireland, so completion is not expected until later in 2012.
As a result of these events, we have tested the goodwill relating to ALHI’s life businesses, as well as the distribution agreement intangible asset, for impairment. This has resulted in charges of £120 million and £44 million respectively being made in the income statement.
Notes to the consolidated financial statements continued 4 – Segmental information The Group’s results can be segmented, either by activity or by geography. Our primary reporting format is on regional reporting lines, with supplementary information given by business activity. This note provides segmental information on the consolidated income statement and statement of financial position.
(a) Operating segments The Group has determined its operating segments along regional lines. These reflect the management structure whereby a member of the executive management team is accountable to the group chief executive for the operating segment for which he or she is responsible. The activities of each operating segment are described below: United Kingdom The United Kingdom comprises two operating segments – UK Life and UK General Insurance (UK GI). The principal activities of UK Life are life insurance, long-term health and accident insurance, savings, pensions and annuity business, while UK GI provides insurance cover to individuals and businesses, for risks associated mainly with motor vehicles, property and liability, such as employers’ liability and professional indemnity liability, and medical expenses. UK GI also includes the Group reinsurance result and the results of run-off agency business, and, for the period to its disposal on 30 September 2011, the RAC motor recovery business.
Aviva Europe Activities reported in the Aviva Europe operating segment exclude operations in the UK and Delta Lloyd but 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.
Aviva Investors Aviva Investors operates in most of the regions in which the Group operates, in particular the UK, France, the US and Canada and other international businesses, managing policyholders’ and shareholders’ invested funds, providing investment management services for institutional pension fund mandates and managing a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs.
Delta Lloyd and discontinued operations The activities of Delta Lloyd comprise long-term business operations in the Netherlands and Belgium, and general insurance, fund management and banking operations in the Netherlands. As described in note 3(b), on 6 May 2011 the Group ceased to hold a majority of the shareholder voting rights in Delta Lloyd and therefore the results of that company up to 6 May 2011 are presented as discontinued operations. After this date, the Group ceased to consolidate Delta Lloyd. The Group’s share of the profits of its retained interest in Delta Lloyd as an associate are shown in the Delta Lloyd segment within continuing operations.
Measurement basis The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are on normal commercial terms. The Group evaluates performance of operating segments on the basis of: (i) profit or loss from operations before tax attributable to shareholders: and (ii) profit or loss from operations before tax attributable to shareholders, adjusted for non-operating items outside the segment management’s control, including investment market performance and economic assumption changes.
Notes to the consolidated financial statements continued 4 – Segmental information continued (i) Segmental income statement for the year ended 31 December 2011
Net change in provision for unearned premiums (39) (82) (57) (46) (12) — — — (236) (56) (292)
Tax attributable to policyholders’ returns 196 — (10) — (8) — — — 178 — 178
Profit/(loss) before tax attributable to shareholders 401 825 (8) 507 34 71 (87) (930) 813 (726) 87
Claims and benefits paid, net of recoveries from reinsurers (8,144) (2,829) (9,413) (4,069) (463) — — (24,918) (4,234) (29,152) Change in insurance liabilities, net of reinsurance (2,923) 237 (687) (3,020) (215) — — (6,608) (569) (7,177) Change in investment contract provisions (3,300) — (5,034) (129) — (230) — (8,693) (48) (8,741) Change in unallocated divisible surplus (166) — 478 — 50 — — 362 (33) 329 Amortisation of acquired value of in-force business on insurance contracts — — (43) (115) (4) — — (162) (12) (174) Depreciation and other amortisation expense (71) (42) (54) (82) (5) (10) — (264) (37) (301)
Tax attributable to policyholders’ returns (384) — (3) — (7) — — (394) — (394)
Profit/(loss) before tax attributable to shareholders 784 457 608 309 39 61 (713) 1,545 895 2,440
Acquired value of in-force business and intangible assets 204 67 967 728 11 44 — — 2,021 Interests in, and loans to, joint ventures and associates 1,274 — 276 1 476 15 776 — 2,818
(iv) Segmental statement of financial position as at 31 December 2010
Acquired value of in-force business and intangible assets 277 241 1,072 58 1,102 16 40 — 2,806 Interests in, and loans to, joint ventures and associates 1,603 — 315 323 1 381 14 — 2,637
Net asset value attributable to unitholders 991 — 4,231 678 — — — 3,132 9,032
Other liabilities, including inter-segment liabilities 7,316 (1,823) 3,760 13,706 2,541 193 901 2,892 29,486
Other Includes the RAC non-insurance operations (up to the disposal date of 30 September 2011), service companies, head office expenses, such as Group treasury and finance functions, and certain financing costs and taxes not allocated to business segments.
Delta Lloyd In the products and services analysis, the results of Delta Lloyd up to 6 May 2011 are presented as discontinued operations. After this date, the Group’s share of the profits of its retained interest in Delta Lloyd as an associate are shown only within other activities within continuing operations.
Notes to the consolidated financial statements continued 4 – Segmental information continued (i) Segmental income statement – products and services for the year ended 31 December 2011
Gross written premiums* 20,250 9,750 — — 30,000 Premiums ceded to reinsurers (1,085) (588) — — (1,673)
Net written premiums 19,165 9,162 — — 28,327 Net change in provision for unearned premiums — (236) — — (236)
Profit/(loss) before tax attributable to shareholders from continuing operations 943 609 80 (819) 813 Adjusted for: Non-operating items from continuing operations (excluding Delta Lloyd as an associate) 1,180 326 19 (50) 1,475 Share of Delta Lloyd’s non-operating items (before tax), as an associate — — — (10) (10) Share of Delta Lloyd’s tax expense, as an associate — — — 34 34
Notes to the consolidated financial statements continued 4 – Segmental information continued (ii) Segmental income statement – products and services for the year ended 31 December 2010
Net written premiums 21,549 8,522 — — 30,071 Net change in provision for unearned premiums — (73) — — (73)
Operating profit/(loss) before tax attributable to shareholders’ profits from continuing operations 1,988 904 98 (964) 2,026 Operating profit/(loss) before tax attributable to shareholders’ profits from discontinued operations 330 146 103 (55) 524
(iii) Segmental statement of financial position – products and services as at 31 December 2011
Total equity and liabilities 312,376 * Aviva’s continuing associate interest in Delta Lloyd is included within ‘Other’.
Acquired value of in-force business and intangible assets 2,328 356 59 63 2,806 Interests in, and loans to, joint ventures and associates 2,630 6 — 1 2,637
Less: premiums ceded to reinsurers (notes 4a & 4b) (1,673) (1,734) Gross change in provision for unearned premiums (note 39e) (189) (43) Reinsurers’ share of change in provision for unearned premiums (note 42c(iii)) (47) (30) Net change in provision for unearned premiums (236) (73)
Fee and commission income Fee income from investment contract business 519 438 Fund management fee income 372 394 Other fee income 448 450 Reinsurance commissions receivable 71 110 Other commission income 54 56 Net change in deferred revenue 15 2
Notes to the consolidated financial statements continued 6 – Details of expenses This note gives further detail on the items appearing in the expenses section of the consolidated income statement.
Change in insurance liabilities Change in insurance liabilities 4,024 5,727 Change in reinsurance asset for insurance provisions (294) 881
Change in investment contract provisions Investment income allocated to investment contracts (303) 3,839 Other changes in provisions Participating investment contracts (note 40) (776) 4,845 Non-participating investment contracts (151) 2 Change in reinsurance asset for investment contract provisions 6 7
Fee and commission expense Acquisition costs Commission expenses for insurance and participating investment contracts 2,914 2,734 Change in deferred acquisition costs for insurance and participating investment contracts (293) (575) Deferrable costs for non-participating investment contracts 68 141 Other acquisition costs 1,192 1,137 Change in deferred acquisition costs for non-participating investment contracts 46 (29) Investment income attributable to unitholders 252 1,586 Reinsurance commissions and other fee and commission expense 375 439
Impairment of goodwill on subsidiaries (note 16a) 160 3 Amortisation of acquired value of in-force business on insurance contracts (note 17) 270 162 Amortisation of intangible assets (note 17) 165 179 Impairment of acquired value of in-force business (note 17) 7 — Impairment of intangible assets (note 17) 49 16 Integration and restructuring costs (see below) 268 225 Exceptional items (see below) — (286) Other expenses 761 837
Expenses from continuing operations 35,368 48,562 Expenses from discontinued operations 3,242 7,005
Exceptional items Exceptional items relating to continuing operations totalled £57 million net expense (2010: £276 million net credit) in the year.
Change in insurance liabilities, net of reinsurance (note 39) (57) (10) Other expenses (as above) — 286
Notes to the consolidated financial statements continued 7 – Finance costs This note analyses the interest costs on our borrowings (which are described in note 48) and similar charges. Finance costs comprise: Continuing operations 2011 £m £m
Notes to the consolidated financial statements continued 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, as described below.
Investment variances and economic assumptions – continuing operations (796) (219) Investment variances and economic assumptions – discontinued operations (820) 1,010
In 2010, investment variances of £791 million included £1,010 million relating to Delta Lloyd. Of this, around £800 million was due to differing movements in asset and liability yield curves with the remainder primarily related to gains on interest rate derivatives. Liabilities in Delta Lloyd are discounted using a yield curve based on a fully collateralised AAA bond portfolio. The discount rate increased in 2010 as an increase of around 80bps in credit spreads on collateralised bonds was only partly offset by lower risk-free yields. As a result, while lower interest rates increased the market value of assets, this was not offset by a corresponding movement in liabilities. The AAA collateralised bond spread movement in 2010 reflected the perceived risk regarding the curve’s components which include bonds issued by Spanish savings banks and a range of other European organisations. Over the period from the start of 2011 to the partial disposal of Delta Lloyd on 6 May 2011, the AAA collateralised bond spread narrowed by about 80bps as a result of changes in the underlying bond index. This movement was the main driver of the negative variance of £820 million for discontinued operations in 2011, largely reversing the positive variance reported in the prior year. For continuing operations, the negative investment variance of £796 million relates largely to the impact of lower risk-free interest rates, wider credit spreads and increased market volatility in the UK and Europe. In the UK these factors have increased the cost of guarantees in the New With-Profits sub-fund. In Europe the variance is driven by wider credit spreads on bonds in Ireland, Italy and Spain. Any future increases in credit spreads on corporate and government bonds would cause further negative investment variances. The overall allowances for credit defaults on UK corporate bonds and commercial mortgages remain at broadly consistent levels.
9 – Longer-term investment return and economic assumption changes for non-long-term business For non-long-term business, the total investment income, including realised and unrealised gains, is split between a calculated longerterm return, which is included in operating profit, and short-term fluctuations from this, which are disclosed outside operating profit but are included in profit before tax. This note gives details of the longer-term return calculation and the relevant assumptions, as well as the economic assumption changes on our general insurance and health business.
(a) The short-term fluctuations in investment return and economic assumption changes attributable to the non-long-term business result and reported outside operating profit were as follows: Non-long-term business £m £m
Short-term fluctuations in investment return (see (b) below) – continuing operations (266) (199) Economic assumption changes – continuing operations (see (g) below) (90) (61)
(b) The longer-term investment return and short-term fluctuation for continuing operations are as follows: Non-long-term business
Net investment income 602 497 Foreign exchange on unrealised gains/losses and other charges (99) 53
(c) The longer-term investment return is calculated separately for each principal non-long-term business unit. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of investment return. The longer-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated longer-term return for other investments is the actual income receivable for the year. Actual income and longer-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities. For other operations, the longer-term return mainly reflects assets backing nonlong -term business held in the France holding company.
Total assets supporting non-long-term business 18,528 19,965 *For 2011 represents assets in France holding company backing non-long-term business. For 2010 represents Delta Lloyd banking and mortgage activities which are no longer consolidated following the partial disposal of Delta Lloyd on 6 May 2011.
The principal assumptions underlying the calculation of the longer-term investment return are: Longer-term rates of return equities
The Group has applied the same economic assumptions for equities and properties as are used under MCEV principles to calculate the longer-term investment return for its non-long-term business in 2010 and 2011.
(b) Staff costs Total staff costs were: Continuing operations 2011 £m £m
Fees payable to E&Y LLP and its associates for services to Group companies classified as continuing operations 18.9 5.8 0.2 2.2 27.1
Fees payable to E&Y LLP and its associates for services to Group companies classified as discontinued operations — 0.3 — — 0.3 Additional fees related to prior year audit of Group companies classified as discontinued operations 1.1 — — — 1.1
13 – Tax This note analyses the tax (credit)/charge for the year and explains the factors that affect it.
(a) Tax (credited)/charged to the income statement (i) The total tax (credit)/charge comprises: Continuing operations 2011 £m £m
Current tax For this year 539 583 Prior year adjustments (16) (44)
Total tax charged to income statement from continuing operations 51 717 Total tax (credited)/charged to income statement from discontinued operations (202) 225
(ii) The Group, as a proxy for policyholders in the UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Irish and Singapore life insurance policyholder returns is included in the tax (credit)/charge. The tax credit attributable to policyholders’ returns included in the credit above is £178 million (2010: £394 million charge).
(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce the current tax expense and deferred tax expense by £25 million and £108 million (2010: £34 million and £88 million), respectively.
Long-term business technical provisions and other insurance items 939 42 Deferred acquisition costs 96 223 Unrealised (losses)/gains on investments (1,265) 175 Pensions and other post-retirement obligations 2 23 Unused losses and tax credits 105 24 Subsidiaries, associates and joint ventures 1 2 Intangibles and additional value of in-force long-term business (99) (111) Provisions and other temporary differences (251) (200)
Deferred tax (credited)/charged to income statement from continuing operations (472) 178 Deferred tax (credited)/charged to income statement from discontinued operations (41) 220
Notes to the consolidated financial statements continued 13 – Tax continued (b) Tax charged/(credited) to other comprehensive income (i) The total tax charge comprises: £m £m
Tax calculated at standard UK corporation tax rate of 28% 684 110 794 Reconciling items Different basis of tax – policyholders — 272 272 Adjustment to tax charge in respect of prior years (28) — (28) Non-assessable income (93) — (93) Non-taxable profit on sale of subsidiaries and associates (44) — (44) Disallowable expenses 142 — 142 Different local basis of tax on overseas profits 95 — 95 Change in future local statutory tax rates (26) — (26) Movement in deferred tax not recognised (156) — (156) Tax effect of profit from associates and joint ventures (4) — (4)
Notes to the consolidated financial statements continued 13 – Tax continued The tax (credit)/charge attributable to policyholders' returns is removed from the Group’s total (loss)/profit before tax in arriving at the Group’s profits before tax attributable to shareholders' profits. As the net of tax profits attributable to with-profit and unit-linked policyholders is zero, the Group’s pre-tax (loss)/profit attributable to policyholders is an amount equal and opposite to the tax (credit)/charge attributable to policyholders included in the total tax (credit)/charge. The difference between the policyholder tax (credit)/charge and the impact of this item in the tax reconciliation can be explained as follows: £m £m
Tax attributable to policyholder returns (178) 394 UK corporation tax at a rate of 26.5% (2010: 28%) in respect of the policyholder tax deduction 47 (110) Other life insurance regime impacts — (12) Different local basis of tax on overseas profits 2 —
A reduction in the UK corporation tax rate from 28% to 26% was substantively enacted in March 2011 and was effective from 1 April 2011. A further reduction from 26% to 25% was substantively enacted in July 2011 and will be effective from 1 April 2012. Accordingly, these rates have been applied in the measurement of the Group’s deferred tax assets and liabilities as at 31 December 2011. In addition, the Government announced its intention to further reduce the UK corporation tax rate to 24% from 1 April 2013 and to 23% from 1 April 2014. The aggregate impact of the proposed reductions from 25% to 23% would reduce the deferred tax assets and deferred tax liabilities by approximately £60 million. Considerable changes to the regime for taxing UK life insurance companies will be made with effect from 1 January 2013. Draft legislation on this was included in the draft 2012 Finance Bill published on 6 December 2011, and consultation on the changes and the draft legislation has continued since then. Based on the draft legislation published in December 2011 and the continued consultation, it is not expected that these changes will have a material impact on the deferred tax assets and liabilities shown in the consolidated statement of financial position.
Profit attributable to ordinary shareholders from continuing operations 1,315 (269) 1,046 Profit attributable to ordinary shareholders from discontinued operations 219 139 358
Operating profit attributable to ordinary shareholders 2,312 1,438 50.5 Non-operating items: Investment return variances and economic assumption changes on long-term business (note 8) (796) (476) (16.7) Short-term fluctuation in return on investments backing non-long-term business (note 9a) (266) (198) (7.0) Economic assumption changes on general insurance and health business (note 9a) (90) (67) (2.4) Impairment of goodwill, associates and joint ventures (note 16a, 19dii) (392) (359) (12.6) Amortisation and net impairment of intangibles (note 17) (171) (178) (6.3) Profit on the disposal of subsidiaries and associates (note 3b) 565 552 19.5 Integration and restructuring costs and exceptional items (note 6) (325) (244) (8.5) Share of Delta Lloyd’s non-operating items (before tax) as an associate 10 15 0.5 Share of Delta Lloyd’s tax expense as an associate (34) — —
Profit attributable to ordinary shareholders from continuing operations 813 483 17.0 Loss attributable to ordinary shareholders from discontinued operations (726) (318) (11.2)
Operating profit attributable to ordinary shareholders 2,026 1,315 47.2 Non-operating items: Investment return variances and economic assumption changes on long-term business (note 8) (219) (90) (3.2) Short-term fluctuation in return on investments backing non-long-term business (note 9a) (199) (157) (5.6) Economic assumption changes on general insurance and health business (note 9a) (61) (44) (1.6) Impairment of goodwill, associates and joint ventures (note 16a, 19dii) (23) (23) (0.9) Amortisation and net impairment of intangibles (note 17) (193) (115) (4.1) Profit on the disposal of subsidiaries and associates (note 3b) 163 163 5.9 Integration and restructuring costs and exceptional items (note 6) 51 (3) (0.1)
Profit attributable to ordinary shareholders from continuing operations 1,545 1,046 37.6 Profit attributable to ordinary shareholders from discontinued operations 895 358 12.8
(b) Diluted earnings per share (i) Diluted earnings per share are calculated as follows: Total £m
Profit attributable to ordinary shareholders 483 2,845 17.0 Dilutive effect of share awards and options — 50 (0.3)
Profit attributable to ordinary shareholders 1,046 2,784 37.6 Dilutive effect of share awards and options — 47 (0.6)
Operating profit attributable to ordinary shareholders 1,438 2,845 50.5 Dilutive effect of share awards and options — 50 (0.8)
Diluted operating profit per share from continuing operations 1,438 2,895 49.7
Operating profit attributable to ordinary shareholders 1,315 2,784 47.2 Dilutive effect of share awards and options — 47 (0.7)
Operating profit attributable to ordinary shareholders 219 2,784 7.9 Dilutive effect of share awards and options — 47 (0.2)
Deconsolidation of Delta Lloyd (542) — Foreign exchange rate movements (8) (17)
Notes to the consolidated financial statements continued 16 – Goodwill continued (b) Goodwill allocation and impairment testing A summary of the goodwill and intangibles with indefinite useful lives allocated to cash-generating units is presented below.
(ii) General insurance and health The recoverable amount of the UK General Insurance and health business exceeds the carrying value of the cash-generating unit including goodwill. The recoverable amount of the UK general insurance and health unit has been determined based on a value in use calculation. The calculation uses cash flow projections based on business plans approved by management covering a three-year period. Cash flows beyond that three-year period have been extrapolated using a steady 1.25% (2010: 2.5%) growth rate and a risk-adjusted discount rate of 8.2% (2010: 9.3%). This growth rate is set with regards to past experience and historical statistics of UK premium growth published by the Association of British Insurers. 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;  Some of the assumptions that underline the budgeted operating profit include market share, customer numbers, premium rate and fee income changes, claims inflation and commission rates; and
Following its disposal, the RAC business no longer forms part of this cash-generating unit.
(ii) General insurance, health and other The recoverable amount of general insurance, health and other non-life cash-generating units in Europe was determined based on a value in use calculation. Value in use is calculated for each cash-generating unit using a discounted cash flow projection based on business plans and growth assumptions approved by management for each cash-generating unit and discounted at a risk discount rate appropriate for each cash-generating unit. If the cash flows are 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 based on the fair value less costs to sell of the cashgenerating unit to which it relates. The fair value less costs to sell was determined based on the quoted market value of the share of interest in the subsidiary to which it relates. The fair value less costs to sell of the cash-generating unit was greater than its carrying value, including indefinite life intangible assets.
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 3% (2010: 3%); and  Risk-adjusted discount rate of 4.85% (2010: 6.5%) represents the rate used to discount expected profits from future new business. The discount rate is a combination of 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. The MCEV principles applied to project future cash flows include allowance for many of the risks associated with these cash flows, and therefore these risks are not also reflected in the discount rate applied to calculate a present value of future cash flows.
The recovery of goodwill in the Italy long-term business is dependent on future performance being in line with current plans. The future performance assumptions are inherently uncertain and dependant on local economic conditions.
Notes to the consolidated financial statements continued 16 – Goodwill continued (vii) Italy (non-life) The recoverable amount exceeds the carrying value of the cash-generating units including goodwill. 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; and
 Growth rate of 3% (2010: 3%) represents the rate used to extrapolate future cash flows beyond the business plan period; and  a risk-adjusted discount rate of 10.3% (2010: 10.8%).
As a result of this test, an impairment of £11 million has been recognised in respect of Aviva Assicurazioni Vita Spa. The impairment arose as a result of a reduction in management’s estimates for the future profitability of the business due to current economic circumstances. The recoverable amount of the Avipop Assicurazioni cash-generating unit exceeds its carrying value by £1.3million. An adjustment to the discount rate used to calculate the present value of expected future profits of 100 basis points would result in the recoverable amount being equal to the carrying value.
(viii) Spain (long-term business) The recoverable amount of the Spanish long-term business exceeds the carrying value of the cash-generating unit including goodwill. 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 profits generated from business written in a period.
In addition to estimating the recoverable value of the Spain cash-generating unit, management considered the terms of the contractual arrangements with bancassurance partners. Management further considered the range of outcomes from the ongoing re-organisation of the Caja market and insurance distribution arrangements mandated by the Spanish government, including ongoing arbitration with one of our bancassurance partners. Management concluded that, under a range of reasonably possible scenarios, the contractual terms support the recoverability of the carrying value of the cash-generating unit.
Notes to the consolidated financial statements continued 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.
Movement in shadow adjustment (80) — — — (80) Transfers from property and equipment (note 20) — — 88 — 88
Transfers from property and equipment (note 20) — — (57) — (57) Foreign exchange rate movements (7) 4 (3) — (6)
Impairment losses charged to expenses — — (21) — (21) Foreign exchange rate movements — — — 1 1
Impairment losses charged to expenses (note (d)) (7) — (50) — (57) Reversal of impairment losses — — 2 — 2
* On insurance and participating investment contracts. ** On non-participating investment contracts.
(a) Intangible assets with indefinite useful lives comprise the RAC brand (until disposal on 30 September 2011), and the value of the Union Financière de France Banque distribution channel, where the existing lives of the assets and their competitive position in, and the stability of, their respective markets support this classification. Impairment testing of these intangibles is covered in note 16(b).
(b) Acquisitions of intangible assets with finite lives relate to Canadian broker businesses. (c) Other intangible assets with finite useful lives consist primarily of the value of bancassurance and other distribution agreements. (d) Impairment losses on intangible assets with finite lives arise from the assessment of the recoverable amount of the Ireland longterm insurance business. The methods and assumptions used in this assessment are as discussed in Note 16(b)(iv). This assessment resulted in an impairment of £44 million. Other impairments have arisen in the French long-term insurance business. Impairment losses in respect of AVIF on insurance contracts have arisen in the US long-term business.
Share of results before tax — 180 — 180 Share of tax — (15) — (15)
Less: Amounts classified as held for sale — (14) — (14)
Share of results after tax — (17) — (17) Impairment of goodwill (15) — — (15) Amortisation of intangibles* (6) — — (6)
(b) Property management undertakings The principal joint ventures are as follows: Company GP proportion held PLP proportion held
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 £150 million (2010: £115 million) which have a fair value of £150 million (2010: £115 million).
(ii) 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: (i) the policy portfolio expected at the valuation date; and (ii) the future sales based on plans approved by management covering the subsequent three-year period. The cash flows from the existing policy portfolio are calculated using best estimate assumptions, which have been supported by experience investigations where available and prudent estimates typical for the market where experience investigations are not available;  The embedded value for existing business was derived using risk free rates;  The value in use was derived as the sum of embedded value of existing business and the new business contribution in each future year discounted using a risk adjusted discount rate of 13.9% (2010: 13.8%); and  New sales beyond the three-year period have been extrapolated using a growth rate of 10% (2010: 10%).
(iii) AvivaSA Emeklilik ve Hayat A.S. The Group’s investment in AvivaSA Emeklilik ve Hayat A.S. has been tested for impairment by comparing its carrying value (which includes goodwill which arose on its acquisition) with its recoverable amount. The recoverable amount has been determined based on a value in use calculation. 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 amount exceeds the carrying value of the cash-generating unit including goodwill. Key assumptions used for the calculation were:  Embedded value represents the shareholder interest in the life business and is calculated in accordance with the MCEV
principles. The embedded value is the total of the net worth of the life business and the value of the in-force business.  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 4% (2010: 3%).  Risk adjusted discount rate of 12.8% (2010: 14.6%) represents the rate used to discount expected profits from future new business. The discount rate reflects a risk margin to make prudent allowance for the risk that experience in future years for new business may differ from that assumed.
Share of results after tax — 12 — 12 Impairment of goodwill and intangibles* (22) — — (22) Amortisation of acquired value of in-force business (8) — — (8)
Share of results before tax — 196 — 196 Share of tax — (36) — (36)
Share of loss after tax — (57) — (57) Acquisitions (see (i) below) — 1,116 — 1,116 Additions (see (ii) below) 35 — — 35 Reduction in Group interests — (3) — (3) Share of losses taken to other comprehensive income — (143) — (143) Dividends received — (71) — (71) Deconsolidation of Delta Lloyd (see (i) below) — (359) — (359) Foreign exchange rate movements — (43) — (43)
(i) Change in status of Delta Lloyd As described in note 3(b), the Group’s shareholding in Delta Lloyd N.V. (‘Delta Lloyd’) was reduced to 42.7%, representing 40% of shareholder voting rights, following the sale of shares on 6 May 2011. This transaction was recognised as the deconsolidation of a subsidiary and the acquisition of an associate. The Group’s interest in Delta Lloyd has since been diluted to 41.91% through its offering of scrip dividends which we did not take up (shows as ‘reduction in Group interests’ above). Associates held by Delta Lloyd itself, previously recognised through its consolidation, were included in the deconsolidation and incorporated into the acquisition value of Delta Lloyd as an associate.
Aviva Life Insurance Company India Limited Insurance 26.00% India Delta Lloyd N.V. Financial Services 41.91% Netherlands
The Group controls 39.3% of the shareholder voting rights in Delta Lloyd. All investments in principal associates are held by subsidiaries. With the exception of Delta Lloyd, all are unlisted. Delta Lloyd is listed on NYSE Euronext Amsterdam and the quoted value of the Group’s investment in this company at 31 December 2011 was £776 million.
Notes to the consolidated financial statements continued 19 – Interests in, and loans to, associates continued (c) Additional information Summarised aggregate financial information on the Group’s interests in its associates is as follows: Delta Lloyd £m Other £m total £m total*
 The embedded value for existing business was derived using risk free rates;  The value in use was derived as the sum of the embedded value of existing business and the new business contribution in each future year discounted using a risk adjusted discount rate of 18.4% (2010: 17.3%); and
(ii) Delta Lloyd N.V. The recoverable amount of Delta Lloyd N.V. has been determined based on fair value less costs to sell. The fair value has been calculated based on the market price of ordinary shares of Delta Lloyd N.V. quoted on NYSE Euronext Amsterdam as at 31 December 2011. As a result of this test an impairment of £217 million has been recognised in respect of the associate, reducing its carrying amount to fair value.
Cost or valuation At 1 January 2010 94 420 10 797 427 1,748
Transfers from/(to) investment property (note 21) (1) 2 — — — 1 Transfers to intangibles (note 17) — — — (69) (19) (88)
Deconsolidation of Delta Lloyd — — — 54 108 162 Foreign exchange rate movements — — 1 3 (1) 3
Transfers (to)/from property and equipment (note 20) (2) 1 (1) Foreign exchange rate movements (75) (12) (87)
Transfers (to)/from property and equipment (note 20) 1 — 1 Deconsolidation of Delta Lloyd (2,015) (116) (2,131) Foreign exchange rate movements 64 — 64
Investment properties are stated at their market values as assessed by qualified external valuers. Values are calculated using a discounted cash flow approach and are based on current rental income plus anticipated uplifts at the next rent review, assuming no future growth in rental income. This uplift and the discount rate are derived from rates implied by recent market transactions on similar properties. The fair value of investment properties leased to third parties under operating leases at 31 December 2011 was £11,552 million (2010: £12,924 million). Future contractual aggregate minimum lease rentals receivable under the non-cancellable portion of these leases are given in note 52(b)(i).
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 or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the instrument. Level 2 inputs include the following:  Quoted prices for similar (i.e. not identical) assets and liabilities in active markets.  Quoted prices for identical or similar assets and liabilities 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 or liability (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 (marketcorroborated inputs).
Notes to the consolidated financial statements continued 22 – Fair value methodology continued 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 or liability. 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 or liability 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 or liability. Examples are certain private equity investments and private placements. The majority of the Group’s financial assets and certain financial liabilities are valued based on quoted market information or observable market data. A small percentage (4.8%) of total financial assets recorded at fair value are based on estimates and recorded as Level 3 investments. Where estimates are used, these are based on a combination of independent third-party evidence and internally developed models, calibrated to market observable data where possible. Third-party valuations using significant unobservable inputs validated against Level 2 internally modelled valuations are classified as Level 3, where there is a significant difference between the third-party price and the internally modelled value. Where the difference is insignificant, the instrument would be classified as Level 2.
(b) Fair value hierarchy analysis An analysis of financial assets and liabilities according to fair value hierarchy is given below: Fair value hierarchy
Financial investments and loans (notes 25 and 23) Loans — 18,486 — 18,486 9,630 — 28,116
Notes to the consolidated financial statements continued 22 – Fair value methodology continued
Financial investments and loans (notes 23 and 25) Loans — 21,028 — 21,028 22,046 — 43,074
Financial liabilities Non-participating investments contracts (note 40) 44,795 1,131 199 46,125 2,180 — 48,305
(c) Further information on Level 3 financial instruments (i) The tables below show movements in the Level 3 financial assets and liabilities measured at fair value.
Total funds Balance at 1 January 8,709 972 2,668 12,349 208 Total net (losses)/gains recognised in the income statement (466) (35) 114 (387) 5 Total net gains/(losses) recognised in other comprehensive income 33 — (10) 23 —
Total net losses recognised in the income statement in the year amounted to £387 million (2010: £247 million net gains). Included in this balance are £354 million net losses (2010: £280 million net gains) attributable to assets still held at the end of the year.
 Certain strategic interests in banking partners held by our Italian business amounting to £0.3 billion. Valuations are based on third-party independent appraisals, or where internally modelled, transactions in similar entities, discounted cash flow techniques and valuation multiples, using public and internal management information.
Notes to the consolidated financial statements continued 23 – Loans This note analyses the loans our Group companies have made, the majority of which are mortgage loans.
Securitised mortgage loans (see note 24) UK 2,154 — 2,154 1,912 — 1,912
Loans and advances to bank customers — — — — 2,023 2,023 Loans to brokers and other intermediaries — 96 96 — 100 100
Loans to banks include cash collateral received under stock lending arrangements (see note 25(d)). The obligation to repay this collateral is included in payables and other financial liabilities (note 49). Of the above loans, £21,626 million (2010: £35,581 million) is expected to be recovered more than one year after the statement of financial position date.