Other information 362 Glossary 366 Shareholder services 2011 highlights 2011 demonstrated the quality of our people and strength of our business in a year dominated by uncertainty in Europe.
Without our customers, there is no Aviva p Over the last year we have won more than 50 awards in 10 countries for our customer service, innovation and performance.
And we have remained focused on balance sheet strength The strength of our balance sheet is a clear priority and we have taken steps to ensure our capital position remains resilient. Over the last few years we have de-risked the business and strengthened our capital position which enabled us to withstand the extreme volatility in the European sovereign debt market in the second half of 2011. Our estimated IGD solvency surplus at 29 February 2012 was £3.3 billion (31 December 2011: £2.2 billion) as a result of market improvements and actions we have taken since the beginning of 2012. Aviva has an excellent track record of managing our assets and market exposures. We suffered minimal defaults on our financial investments in 2011. Whilst our balance sheet has been impacted by unrealised losses, we hold the vast majority of our assets for the longer term and the equity hedging we have in place means our capital is largely protected against adverse market movements. We continue to engage constructively with regulators and policy-makers and take the necessary steps to ensure that we are well prepared for the introduction of Solvency II.
Our customers are central to our success… We serve 43 million customers and we know that for Aviva to be a sustainable and successful business we must continue to provide good value and excellent service. As governments face increasing budget pressure, there will be an increasing demand for insurers, like Aviva, to fill the long-term savings gap. But customers will only choose Aviva, stay with us and recommend us if we look after them well.
Andrew Moss Group chief executive £33 billion in claims and benefits paid out to customers 60,000 hours employee volunteering hours children we have helped through our Street to School programme
As the UK’s leading insurer, having our life and general insurance businesses under one powerful brand, combined with our scale and broad product offering and distribution, gives us a strong competitive advantage. Our life insurance business goes from strength to strength, with operating profits11 at a record level. Our broad product range and unrivalled distribution network helped to drive up our overall share of the UK life and pensions market to 12%15 with gains in our core markets of workplace savings, ‘at retirement’ (annuities and equity release) and protection. As we continue to serve customers and price our products well, customers are choosing to stay with us. For example we have achieved further increases in the already high proportion of people continuing to invest with us when their Aviva pension policies mature.
p General insurance and health operating profit up 26% to £137 million with net written premiums up 5% at £2,059 million and COR of 101%
We are combining the Irish business with the UK to improve competitiveness and efficiency and management actions have begun to capitalise on our UK capability and scale. In Russia and Turkey our life and pension sales growth continues as we begin to take advantage of the market potential. In the short-term we expect that volume and mix in our mature markets of France, Italy and Spain, will be impacted by subdued consumer demand as a result of the macro- economic environment. In the longer term our combination of life and general insurance, strong market franchises and our underwriting and pricing expertise will enable us to benefit from the significant opportunity in Europe.
Return on equity shareholders’ funds Return on IFRS equity shareholders’ funds decreased to 12.0% (2010: 14.8%) as a result of growth in the capital base from £10.4 billion at the start of 2010 to £12.8 billion at the start of 2011, driven by profits in the period and actuarial gains on staff pension schemes.
Employee engagement and leadership Key performance indicators relating to our employees’ views on Aviva are based on questions in our annual global ‘Employee Promise’ survey. We report and set targets in line with global financial services (GFS) benchmark norms and monitor our internal performance by using our historical data to assess annual progress.
Basis of earnings by line of business Our earnings originate from three main lines of business: our long-term insurance and savings business, which includes a range of life insurance and savings products; fund management, which manages funds on behalf of our long-term insurance and general insurance businesses, external institutions, pension funds and retail clients; and general insurance and health, which focuses on personal and commercial lines. These lines of business are present in our various operating segments to a greater or lesser extent. In the UK, we have major long-term insurance and savings businesses and general insurance businesses; in Europe we have long-term insurance and savings businesses in all countries in which we operate, large general insurance businesses in France, Ireland and Italy, and smaller general insurance operations in several other countries; in North America we have a large longterm insurance and savings business in the US and a major general insurance business in Canada; in Asia Pacific we predominantly have long-term insurance and savings businesses. Our fund management businesses operate across all our four regions.
 Better reflection of the relative economic value of regular premium contracts compared to single premium contracts: sales recognise the economic value of all expected contractual cash flows for regular premium contracts in the year of inception, whereas IFRS net written premiums only recognise premiums received in the year.
 Deposits taken on non-participating investment contracts and equity release contracts: Under IFRS, non-participating investment contracts are recognised on the statement of financial position by recording the cash received as a deposit and an associated liability and are not recorded as premiums received in the income statement. Only the margin earned is recognised in the income statement.
Profit before tax 635 1,939 2,012 Tax attributable to policyholders’ returns 178 (394) (217)
Year ended 31 December 2011 On a PVNBP basis, sales in our UK long-term insurance and savings business increased by £1,158 million, or 10%, to £13,004 million (2010: £11,846 million). Protection sales grew by 9%, including a 7% increase in core protection products. Pension sales increased by 31% supported by a 65% increase in group personal pensions. Annuities increased by 21% supported by a 23% growth in bulk purchase annuities and a 20% increase in the sale of individual annuities. Bonds decreased 53% reflecting our continued stance on writing profitable business, the changing distributor landscape pre- Retail Distribution Review (RDR), and relative attractiveness of bonds following tax treatment changes. Investment sales increased by 9%, reflecting growth in managed funds and good performance from global property. Equity release sales decreased 27% following an exceptional performance in 2010 when the market was less competitive. Net written premiums in our UK long-term insurance and savings business increased by £396 million, or 7%, to £5,865 million (2010: £5,469 million). The increase is primarily due to higher sales of group personal pensions and individual annuities, offset by lower sales of single premium bonds. Adjusted operating profit increased by £70 million, or 8%, to £920 million (2010: £850 million). The non-profit result increased by £151 million, or 21%, to £854 million (2010: £703 million) driven by continued strong performance in annuities, increased annual management charges and inclusion of the full results of RBS Life, following its purchase by Aviva at the end of 2010. Included in the result are one-off benefits of £93 million relating to the Part VII transfers of the former RBS JV entities, and £30 million relating to the release of tax provisions associated with the reattribution of the inherited estate. The with-profit result, which includes the shareholders’ share of regular and terminal bonus payments, was £66 million (2010: £147 million) with the variance from 2010 mainly driven by the absence of the final special distribution (2010: £84 million). Profit before tax decreased by £383 million, or 49%, to £401 million for 2011 (2010: £784 million) reflecting an adverse impact from market movements in 2011.
Year ended 31 December 2011 Long-term insurance and savings sales decreased £2,650 million, or 18%, to £12,237 million (2010: £14,887 million) and was primarily driven by management actions to reduce sales of capital intensive participating business in France and Italy.
In France, our focus on value over volume has resulted in a decrease of £871 million, or 18%, in life and pension sales to £4,047 million (2010: £4,918 million). Sales in AFER decreased £1,007 million, or 38%, to £1,639 million (2010: £2,646 million) offset by strong sales through Credit du Nord which increased by 13% to £1,407 million. In Italy, management actions to emphasise capital efficient products and move the product mix led to a 42% drop in participating business sales, driving sales down £1,463 million, or 33%, to £2,993 million (2010: £4,456 million). In Spain, sales decreased by £158 million, or 8%, to £1,926 million (2010: £2,084 million). Our general insurance and health sales increased £106 million, or 5%, to £2,059 million (2010: £1,953 million). The increase in general insurance of £71 million, or 4%, to £1,728 (2010: £1,657 million) was driven by successful pricing actions in personal motor as we focused on value generation. The increase in health net written premiums of £35 million, or 12%, to £331 million (2010: £296 million) reflects continued growth in Ireland offset by a small decline in France as customers reduced protection cover in a difficult economic environment. Aviva Europe net written premiums decreased £1,777 million, or 14%, to £11,264 million (2010: £13,041 million) primarily driven by the deliberate management actions to reduce sales of participating business leading to a 27% decline in this sector of the business. Total adjusted operating profit increased £39 million, or 4%, to £937 million (2010: £898 million). Our adjusted operating profit for long-term insurance and savings business in 2011 was £898 million (2010: £893 million), demonstrating the resilient performance from our markets of France, Spain and Italy where we have strength and scale. Ireland’s adjusted operating profit in 2010 included a release of reserves following a review of assumptions of £75 million. General insurance and health adjusted operating profit increased by £28 million, or 26%, to £137 million (2010: £109 million) with growth in general insurance profit in France offset by a reduction in Italy and an overall reduction in health insurance profits. We also released surplus reserves margins of around £45 million to align with the Group’s reserving policy but the benefit of this was fully offset by some reserve strengthening in Italy in respect of prior year. Aviva Europe’s loss before tax attributable to shareholders’ profits was £8 million in 2011. The loss primarily reflects investment losses in France, Ireland, Italy and Spain. This also includes impairment of our goodwill and intangibles in Ireland following AIB’s decision not to review the distribution agreement in respect of long-term business. In Italy, the UDS balance was £1,449 million negative as at 31 December 2011 (2010: £420 million negative). The method for estimation of the recoverable negative UDS balance was changed in 2011 to a real-world embedded value method. Further details on this including the impact of this change are set out in section ‘Financial statements IFRS – Note 44 – Unallocated divisible surplus’.
Year ended 31 December 2010 Aviva Europe sales in 2010 were £16,840 million, marginally increased on the prior year (2009: £16,258 million) primarily due to increased sales in Italy and Other Europe more than offsetting lower sales levels in Poland and Spain. Aviva Europe long-term insurance and savings sales were £512 million higher than the prior year at £14,887 million (2009: £14,375 million) despite the challenging economic environment. Sales through our bancassurance channel increased 9% to £8,040 million (2009: £7,353 million) primarily as a result of strong sales in Italy. Retail sales decreased 11% to £5,497 million (2009: £6,170 million). Nearly 60% of the decline in sales was from Poland as a result of significant pension legislation changes. General insurance and health sales increased 4% to £1,953 million (2009: £1,883 million). We saw growth in all our general insurance and health markets except in Ireland. In Ireland, health insurance sales grew 19%, but general insurance sales declined as the market continued to be challenging. Net written premiums in long-term insurance and savings business were £13,041 million, an increase of £586 million, or 5% (2009: £12,455 million), driven by sales of our profit sharing single premium products in Italy. Total adjusted operating profit increased to £898 million (2009: £797 million). Adjusted operating profit for long-term insurance and savings business in 2010 increased by £132 million to £893 million (2009: £761 million) reflecting increased profits from existing business in France, Italy and Spain offset by increased new business strain in Italy. The 2010 result includes £75 million from release of reserves for protection business following the adoption of realistic reserving in 2010. Aviva Europe’s adjusted operating profit of our general insurance and health businesses was £109 million in 2010, a decrease of £23 million, or 17%, over £132 million in 2009, primarily due to lower longer-term investment returns as a result of lower interest rate yields. Europe’s profit before tax attributable to shareholders’ profit was £608 million in 2010, a decrease of £323 million from 2009.
History and development of Aviva General Aviva provides around 43 million customers with long-term insurance and savings, general and health insurance, and fund management products and services. Over the last few years we have simplified and streamlined Aviva, changing it from a federation of insurance businesses into a unified operation united under a single brand. We are committed to serving our customers well in order to build a strong, sustainable business which makes a positive contribution to society and which our people are proud to work for. We are a public limited company incorporated under the laws of England and Wales. Our main activities are the provision of long-term insurance and savings, fund management and general insurance products and services.
 Protection – an insurance contract that protects the policyholder or his or her dependants against financial loss on death or ill-health. Our product ranges include term assurance, mortgage life insurance, flexible whole life and critical illness cover.
Aviva Investors Business overview and strategy Aviva Investors was established in 2008 when the Aviva Group combined all of its major fund management components into a single global fund management business. We have £263 billion in assets under management as at 31 December 2011 and offer a broad range of expert investment skills and experience around the world, most notably in the UK, Europe, the US, Asia Pacific and the Middle East. Our largest clients are the long-term insurance and savings, and general insurance businesses of Aviva, to whom we provide bespoke asset management services across a broad spectrum of asset classes. We provide external clients with bespoke segregated solutions or offer access to a variety of fund ranges. Our principal target clients for the larger segregated solutions tend to be large pension funds and financial institutions such as insurance companies and banks. Our strategy is to rapidly grow our share of higher-margin, external business, offering client-focused solutions and products to our customers across our international network.
 Alternatives – we offer a range of alternative investment products including private equity fund of funds and single hedge funds.
Poland Aviva Powszechne Towarzystwo Emerytalne Aviva BZ WBK S.A. (90.0%) Aviva Towarzystwo Ubezpieczen na Zycie SA (90.0%) Aviva Towarzystwo Ubezpieczen Ogolnych SA (90.0%)
Insurance and investment contracts Long-term business — Insurance contracts – non-linked1 9,692 19,254 18,367 117,906 165,219 — Investment contracts – non-linked2 59,690 — — — 59,690 — Linked business2 65,994 — — — 65,994
In 2011, in support of these objectives, the Group continued its work to enhance the risk management framework across the Group and to promote a strong risk management culture supported by a robust governance structure.
— Set business standards — Monitor performance — Oversee risk & capital management — Provide challenge — Recommend risk management activity
 The relatively illiquid nature of insurance liabilities is a potential source of additional investment return by allowing us to invest in higher yielding, but less liquid, assets such as commercial mortgages
Operational Risk of direct or indirect loss resulting from inadequate or failed internal processes, or from people and systems, or from external events, including changes in the legislative or regulatory environment
Management also use a variety of other performance indicators (OPIs) in both running and assessing the performance of individual business segments and units, rather than the Group as a whole. OPIs include measures such as new business margin, combined operating ratio and underwriting profit. In addition to reporting on our financial performance, it is important that as a forward-thinking company we are aware of our wider responsibilities and report on the non-financial aspects of our performance. We consider that our employees and customers are fundamental to the success of our business; as such, they form the basis for our non-financial measures, and include:  employee engagement and leadership; and  customer advocacy.
 Delivering our new Business Ethics Code to 89% of employees up from 32% in 2010.
We are committed to building trust with our customers, providing excellent levels of service and communication. We have developed a set of internal principles to inspire employees to bring recognition to life when interacting with customers. Our customers can choose to buy our products through intermediaries, our corporate partners or from Aviva direct. All employees are required to sign our business ethics code annually. Each instance of financial crime is recorded and investigated independently and controls are put in place to protect our customers’ data. By regularly researching the opinions and behaviours of our customers, through our Consumer Attitudes to Savings research for example, we are able to deliver products and services that are designed to provide prosperity and peace of mind to our customers.
Since 2006, when we were a founder member of the ClimateWise Principles, we have been a part of the management committee and continue to report each year against these industry-wide principles. We are also very active in the ClimateWise collaborations on research into health and climate change, sustainable claims management and integrating climate change considerations into fixed income investments. We have also played our part in the creation of the UN Principles for Sustainable Insurance which are due to be launched at the Rio+20 Summit in June 2012. The principles require insurers to understand, address, integrate, further develop and disclose material environmental, social and governance issues that impact the company and our customers. Following our call at the London launch of the Carbon Disclosure Project in 2010 to do more than simply disclose carbon data we have jointly developed and invested in Carbon Action. This will encourage companies to demonstrate their mitigation activities with an initial focus on carbon intensive sectors. We firmly believe that engaging our employees to raise awareness and address environmental impacts is an essential part of delivering our environmental strategy. 76% (2010: 71%) of our employees agree that we make business choices that support the environment which include measures such as our recycling initiatives, providing alternatives to business travel and energy reduction techniques. We ran a number of initiatives around the Group in 2011 to further engage employees, including ClimateWeek, WWF Earth hour and the 10:10 campaign in Europe.
Suppliers: We have increased the amount of suppliers signing the code of conduct, however, we have found that some suppliers are reluctant to sign a code as it is not a legal document. Therefore, we are implementing a code of behaviour alongside minimum contractual clauses for new contracts from Q2 2011, to address some of this issue. This data does not include European claims data. These KPIs have been revised in 2011 in light of our changing processes.
Waste Direct company impacts Hazardous and non-hazardous waste Total disposal cost for hazardous and non-hazardous waste in the UK was £681,000 (2010: £596,000), which includes UK landfill tax. On a worldwide basis the cost of offsetting the associated carbon emissions will be approximately £2,047.
Indirect impacts We have taken the opportunity to partner with the Consortium for Street Children (CSC) to aid our ability to play our part in national and international advocacy activity as we know that legislative, policy and service delivery improvements will make the biggest difference to the most children. In light of this we are also sponsoring pioneering research activity such as ‘The State of the World’s Street Children’ and a study regarding Street Children to be delivered by the High Commissioner for Human rights to the UN Human Rights Council in March 2012. We believe this type of collaboration is essential to achieve the recognition and realisation of street child rights, help deliver the Millennium Development Goals and increase the wellbeing of all in our global communities.
5. Reviewed the collation and aggregation of selected environmental and community investment performance data at Aviva businesses in the UK, France, Sri Lanka and Group.
 Nothing has come to our attention that causes us to believe that Aviva management has not applied its processes for determining material issues to be included in the CR Report.
Our independence As auditors to Aviva plc, Ernst & Young are required to comply with the independence requirements set out in the Auditing Practices Board’s (APB) Ethical Standards for Auditors. Ernst & Young’s independence policies apply to the firm, partners and professional staff. These policies prohibit any financial interests in our clients that would or might be seen to impair independence. Each year, partners and staff are required to confirm their compliance with the firm’s policies.
4. Patrick Regan Chief financial officer (Age 45) Appointed to the Board in February 2010 as chief financial officer. Previously group chief financial officer and group chief operating officer at Willis Group Holdings Limited (insurance broking), group financial controller for RSA Insurance Group plc (insurance) and finance and claims director, UK general insurance for AXA Insurance (insurance). He also held a number of senior management positions at GE Capital (financial services) and specialised in corporate finance and investigations at Grant Thornton (professional services). Member of the supervisory board of Delta Lloyd N.V.
Board of directors continued 7. Glyn Barker Independent non-executive director (Age 58) Appointed to the Board in February 2012. Currently a non-executive director of The Berkeley Group Holdings plc (construction) and a trustee of the English National Opera. Formerly vice-chairman UK of PricewaterhouseCoopers LLP and responsible for leading the executive team for the Europe, Middle East, Africa and India region. Formerly also UK head of assurance and a member of the UK management board of PricewaterhouseCoopers LLP.
12. Gay Huey Evans Independent non-executive director (Age 57) Appointed to the Board in October 2011. Currently a non-executive director of The London Stock Exchange Group plc (financial services) and Clariden Leu (Europe) Limited (financial services). Member of the management board and of the panel of finance experts of the Panel of Recognised International Market Experts in Finance (PRIME Finance), a trustee of Wellbeing of Women (UK) (charity) and The Wigmore Hall Trust (charity). Formerly vice-chairman of the board and non-executive chairman, Europe of the International Swaps and Derivatives Association, Inc. (ISDA) (financial trade association), vice-chairman, Investment Banking & Investment Management at Barclays Capital (banking) and held senior management positions at Citi Alternative Investments (EMEA) (banking), the Financial Services Authority (UK regulator) and Bankers Trust Company (banking). Chairman of the Corporate Responsibility Committee.
Disclosure of information to the auditor The directors in office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor, Ernst & Young LLP, is unaware and each director has taken all steps that ought to have been taken as a director to be aware of any relevant audit information and to establish that Ernst & Young LLP are aware of that information. The above statement is made in accordance with Section 418 of the Companies Act 2006. The Audit Committee reviews the appointment and the terms of engagement of the auditor, the auditor’s effectiveness, independence and relationship with the Group, including the level of audit and non-audit fees paid. Further details on the work of the auditor and the Audit Committee are set out in the Audit Committee Report on pages 108 to 110.
Annual General Meeting The 2012 AGM of the Company will be held on Thursday, 3 May 2012 at the Barbican Centre, Silk Street, London EC2Y 8DS at 11am. The Notice of AGM convening the meeting will describe the business to be conducted thereat and will include details of proposed amendments to the Company’s articles of association.
• Chairman 1 • Executive directors 4 • Non-executive directors 10
Mary Francis CBE Mrs Francis has a long and distinguished career and broad experience as a non-executive director. With her background in government affairs and the financial services industry, coupled with long-standing senior and governance positions across a range of industries, she has the financial knowledge and business acumen to provide rigorous challenge in the discussions of the Board.
Throughout the year the chairman of each Committee provided the Board with a summary of the key issues considered at the meetings of the Committees and the agendas and minutes of the meetings were circulated to the Board. The Committees operate within defined terms of reference which are available on the Company’s website, www.aviva.com/investor-relations/corporategovernance /terms-of-reference/, or from the group company secretary upon request. Board Committees are authorised to engage the services of external advisers as they deem necessary in the furtherance of their duties at the Company’s expense. Reports of the Committee chairmen are set out on pages 106 to 136.
Control environment The Group operates a ‘three lines of defence’ model. Primary responsibility for the application of the risk management framework – risk identification, measurement, management, monitoring and reporting – lies with business management (the first line of defence). Management is therefore responsible for implementing and monitoring the operation of the system of internal control and for providing assurance to the Group Executive Committee (GEC), the Audit Committee, the Risk Committee and the Board. Support for and challenge of the completeness and accuracy of risk assessment, risk reporting and adequacy of mitigation plans are performed by the specialist risk function (the second line of defence). The design of the risk management framework is also primarily the responsibility of the second line of defence. The risk function operates globally with teams in all major regions and business units. Independent and objective assessment on the robustness of the risk management framework and the appropriateness and effectiveness of internal control is provided by the Internal Audit (the third line of defence) to the Audit and Risk Committees, regional and business unit audit committees, the Board and the GEC.
Risk governance and oversight The Board is responsible for setting the Group’s risk appetite and monitoring the establishment and operation of prudent and
Shareholder approval of equity-compensation plans Under the NYSE listing standards, shareholders must be given the opportunity to vote on all equity-compensation plans and ‘material revisions’ to those plans, with limited exceptions.
Committee activities during 2011 The chart below shows how the Committee allocated its time during 2011.
Gay Huey Evans (Chairman from 1 December 2011) 20 October 2011 To date Euleen Goh Andrew Moss
Highlights  At the Company’s 2011 Annual General Meeting (AGM), our shareholders endorsed the 2010 Directors’ Remuneration Report, which proposed changes to the Group’s executive remuneration structures and plans. These were outlined in detail in the 2010 Directors’ Remuneration Report and are summarised below in Section 2.
Details of the assumptions used in valuing the LTIP for accounting purposes can be found in note 30(e) to the Annual Report and Accounts. The vesting assumption made in respect of the 2011 award for accounting purposes is 50%.
2009–2011 LTIP and OATTV Plan: Performance outcome for group chief executive The 2009 Directors’ Remuneration Report disclosed the face value of the LTIP and OATTV Plan awards granted to all EDs at that time. The face value of the LTIP and OATTV Plan awards granted to the group chief executive were £1,618,750 and £501,443 respectively. The total actual value of the awards that will vest is £1,553,388, based on the performance condition outcome and assuming a share price of 300.8p (which was the closing middle market price of an ordinary share of the Company on 30 December 2011).
Andrew Moss Aviva Long Term Incentive Plan 20083 253,289 — 183,127 70,162 — 617.50 432.80 Mar-11
19. Dilution Awards granted under the Aviva employee share plans are met by the funding of an employee trust administered by an external trustee that acquires shares in the market. The current practice is that new issue shares will generally only be issued where it is not practicable to use the trust and the funding policy is kept under review by the Committee and the Board. Details of the shares currently held in the employee trust are set out in note 31 to the Annual Report and Accounts. During 2011, loans totalling £27.7 million were made to RBC Trustees (CI) Limited to ensure sufficient shares were available to meet its ongoing liabilities. The Company monitors the number of shares issued under the Aviva employee share plans and their impact on dilution limits. The Company’s usage of shares compared to the relevant dilution limits set by the Association of British Insurers (ABI) in respect of all share plans (10% in any rolling ten-year period) and executive share plans (5% in any rolling ten-year period) was 4.22% and 2.23% respectively on 31 December 2011.
Directors’ remuneration report continued 20. Non-executive directors The NEDs, including the chairman of the Company, have letters of appointment which set out their duties and responsibilities. The key terms of the appointments are set out in Table 19 below.
Mark Hodges Mark Hodges resigned from the Board on 2 June 2011 and left the Company on 9 September 2011. His salary payments ceased on 9 September 2011. In accordance with the ABP rules, 75% of the unvested deferred shares awarded in March 2009, and 50% of unvested deferred shares awarded in March 2010 will vest and be released at the end of the relevant three-year deferral period. The remainder of these shares, plus 100% of the deferred shares awarded in March 2011, lapsed on the date Mr Hodges tendered his resignation. Mr Hodges received no bonus in connection with 2011 performance. All unvested LTIP and OATTV Plan awards lapsed, with no shares being released from these awards.
Management of debt Aviva plc is the principal financing vehicle in our centralised funding strategy. Our senior debt obligations are supported by guarantees from our principal UK non-life trading subsidiaries. We also manage our external debt in line with rating agency limits applicable for entities with a rating in the AA range. We aim to maintain a balance of fixed and floating rate debt, and manage the maturity of our borrowings and our undrawn committed facilities to avoid bunching of maturities. We aim to maintain access to a range of funding sources, including the banking market, the commercial paper market and the long-term debt capital markets. We issue debt in a variety of currencies, predominantly sterling, euros and US dollars, based on investor demand at the time of issuance and management of the Group’s foreign exchange translation exposures in the statement of financial position. In May 2011, we issued £450 million of subordinated debt callable in 2021. In November 2011, we issued a further $400 million of subordinated debt callable in 2016. We used €800 million euro equivalent to repay a €800 million subordinated debt instrument callable in November 2011.
The use of inaccurate assumptions in pricing and reserving for insurance business may have an adverse effect on our business profitability. The Group’s life insurance companies are required to make a number of assumptions in relation to the business written, including the mortality and morbidity rates of our customers, the development of interest rates, persistency rates (the rates at which customers terminate existing policies prior to their maturity dates) and future levels of expenses. These assumptions may turn out to be incorrect. When establishing their liabilities, our life insurance companies allow for changes in the assumptions made, monitor their experience against the actuarial assumptions used and assess the information gathered to refine their long-term assumptions, together with taking actual claims experience into account. However, it is not possible to determine precisely the total amounts that will ultimately be paid under the policies written by the business as amounts may vary from estimates. Changes in assumptions may also lead to changes in the level of capital required to be maintained, meaning that we may need to increase the amount of our reserves. This could have a material adverse impact on the Group’s value, the results of our operations and financial condition. Additionally, our management of the general insurance business requires the general insurance companies to make a number of assumptions in relation to the business written. These assumptions include the costs of writing the business and settling claims, and the frequency and severity of claims. The assumptions may turn out to be incorrect, thereby adversely impacting our profit. Additionally, man-made disasters, including accidents and intentional events, are difficult to predict with a high degree of accuracy. These would also have an adverse impact on our profit due to higher than expected claims. Furthermore, outstanding claims provisions for the general insurance business are based on the best-estimate ultimate cost of all claims incurred but not settled at a given date, whether reported or not, together with related claims handling costs. Any provisions for re-opened claims are also included. A range of methods, including stochastic projections, may be used to determine these provisions. Underlying these methods are a number of explicit or implicit assumptions relating to the expected settlement amount and settlement pattern of claims. If the assumptions underlying the reserving basis were to prove incorrect, we might have to increase the amount of the general insurance provisions, which would adversely impact our financial condition or results of operations.
Operational risks relating to Aviva’s business All of our businesses are subject to operational risks, including the risk of direct or indirect loss resulting from inadequate or failed internal and external processes, systems and human error or from external events. Our business is dependent on processing a large number of complex transactions across numerous and diverse products. Furthermore, the long-term nature of the majority of our business means that accurate records have to be maintained for significant periods. We also outsource several operations, including certain servicing and IT functions and are therefore partially reliant upon the operational processing performance of our outsourcing partners. Our systems and processes on which we are dependent to serve our customers are designed to appropriately identify and address the operational risks associated with our activities. However, they may nonetheless fail due to IT malfunctions, human error, intentional disruption or hacking of IT systems by third parties, business interruptions, non-performance by third parties or other external events. This could disrupt business operations resulting in material reputational damage and the loss of customers, and have a consequent material adverse effect on our results of operations and financial condition. Although we have taken steps to upgrade systems and processes to reduce these operational risks, we cannot anticipate the details or timing of all possible operational and systems failures which may adversely impact our business.
Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 105, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Act 2006;  the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and  the information given in the Corporate Governance Statement, set out on pages 101 to 103, with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements.
(B) Operating profit The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management, short-term realised and unrealised investment gains and losses are treated as non-operating items. The Group focuses instead on an operating profit measure (also referred to as adjusted operating profit) that incorporates an expected return on investments supporting its long-term and non-long-term businesses. Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. Variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit. For non-long-term business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer-term return and shortterm fluctuations from that level. Further details of this analysis and the assumptions used are given in notes 8 and 9. Operating profit also excludes: amortisation and impairment of goodwill and intangibles; the profit or loss on disposal of subsidiaries, joint ventures and associates; integration and restructuring costs; and exceptional items. Details of all of these are provided in the relevant notes.
(S) Financial investments The Group classifies its investments as either financial assets at fair value through profit or loss (FV) or financial assets available for sale (AFS). The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. The FV category has two subcategories – those that meet the definition as being held for trading and those the Group chooses to designate as FV (referred to in this accounting policy as ‘other than trading’). In general, the FV category is used as, in most cases, the Group’s investment or risk management strategy is to manage its financial investments on a fair value basis. Debt securities and equity securities, which the Group buys with the intention to resell in the short term, are classified as trading, as are non-hedge derivatives (see policy T below). All other securities in the FV category are classified as other than trading. The AFS category is used where the relevant long-term business liability (including shareholders’ funds) is passively managed, as well as in certain fund management and non-insurance operations. Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values. Debt securities are initially recorded at their fair value, which is taken to be amortised cost, with amortisation credited or charged to the income statement. Investments classified as trading, other than trading and AFS, are subsequently carried at fair value. Changes in the fair value of trading and other than trading investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS are recognised in other comprehensive income and recorded in a separate investment valuation reserve within equity. Investments carried at fair value are measured using a fair value hierarchy, described in note 22, with values based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. When securities classified as AFS are sold or impaired, the accumulated fair value adjustments are transferred out of the investment valuation reserve to the income statement with a corresponding movement through other comprehensive income. Financial guarantees are recognised initially at their fair value and are subsequently amortised over the duration of the contract. A liability is recognised for amounts payable under the guarantee if it is more likely than not that the guarantee will be called upon.
(AB) Income taxes The current tax expense is based on the taxable profits for the year, after any adjustments in respect of prior years. Tax, including tax relief for losses if applicable, is allocated over profits before taxation and amounts charged or credited to components of other comprehensive income and equity, as appropriate. Provision is made for deferred tax liabilities, or credit taken for deferred tax assets, using the liability method, on all material temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. The principal temporary differences arise from depreciation of property and equipment, revaluation of certain financial assets and liabilities including derivative contracts, provisions for pensions and other post-retirement benefits and tax losses carried forward; and, in relation to acquisitions, on the difference between the fair values of the net assets acquired and their tax base. The rates enacted or substantively enacted at the statement of financial position date are used to determine the deferred tax.
(AF) Earnings per share Basic earnings per share is calculated by dividing net income available to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding the weighted average number of ordinary shares purchased by the Group and held as Treasury shares. Earnings per share has also been calculated on the operating profit before impairment of goodwill and other adjusting items, after tax, attributable to ordinary shareholders, as the directors believe this figure provides a better indication of operating performance. Details are given in note 14. For the diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares, such as convertible debt and share options granted to employees. Potential or contingent share issuances are treated as dilutive when their conversion to shares would decrease net earnings per share.
Profit/(loss) before tax attributable to shareholders’ profits 813 (726) 1,545 895
Reserves credit for equity compensation plans — — — — — — — — — 41 — 41 — — 41
Equity attributable to shareholders of Aviva plc 12,843 12,994 Direct capital instruments 33 990 990 Non-controlling interests 37 1,530 3,741
Cash generated from continuing operations 53a 107 1,337 Tax paid (434) (412)
Treasury shares purchased for employee trusts (29) (14) New borrowings drawn down, net of expenses 3,646 2,885 Repayment of borrowings (3,602) (2,059) Net drawdown of borrowings 44 826 Interest paid on borrowings (708) (696) Preference dividends paid 15 (17) (17) Ordinary dividends paid (431) (472) Coupon payments on direct capital instruments 15 (58) (59) Capital contributions from non-controlling interests 37b 68 42 Dividends paid to non-controlling interests of subsidiaries (126) (157) Changes in controlling interest in subsidiary — 15
Aviva’s interest in the carrying value of Delta Lloyd’s IFRS net assets prior to disposal and fair value adjustments at the date of initial recognition of the associate were as follows: £m
Assets Goodwill 316 Acquired value of in-force business and intangible assets 59 Interests in, and loans to, joint ventures and associates 359 Property and equipment 242 Investment property 2,131 Loans 20,196 Financial investments 34,081 Deferred acquisition costs 195 Other assets 3,528
Inter-segment revenue — — — — — 219 — — 219 — 219 Share of profit of joint ventures and associates (41) — — — (2) 4 (84) — (123) 28 (95) Profit/(loss) on the disposal of subsidiaries and associates — 528 50 — — 23 (3) (33) 565 (32) 533
Claims and benefits paid, net of recoveries from reinsurers (9,000) (2,809) (10,917) (3,862) (346) — — — (26,934) (1,475) (28,409) Change in insurance liabilities, net of reinsurance (2,256) (12) 109 (1,615) 44 — — — (3,730) (909) (4,639) Change in investment contract provisions 856 — 591 (86) — (137) — — 1,224 (94) 1,130 Change in unallocated divisible surplus 351 — 2,404 — (34) — — — 2,721 (19) 2,702 Amortisation of acquired value of in- force business on insurance contracts (27) — (40) (199) (3) — — — (269) (1) (270) Depreciation and other amortisation expense (88) (33) (214) (74) (5) (17) — — (431) (9) (440)
Profit/(loss) before tax from continuing operations 765 609 80 (819) 635 Tax attributable to policyholder returns 178 — — — 178
Operating profit/(loss) before tax attributable to shareholders’ profits 2,318 1,050 201 (1,019) 2,550 * Gross written premiums includes inward reinsurance premiums assumed from other companies amounting to £255 million, of which £113 million relates to property and liability insurance and £142 million relates to long-term business. ** General insurance and health business segment includes gross written premiums of £942 million relating to health business. The remaining business relates to property and liability insurance.
Realised gains and losses on AFS investments Gains recognised previously as unrealised in equity (see policy S and note 35) 148 73
Claims and benefits paid Claims and benefits paid to policyholders on long-term business Insurance contracts 15,433 14,614 Participating investment contracts 6,343 4,981 Non-participating investment contracts 38 39 Claims and benefits paid to policyholders on general insurance and health business 6,264 6,381
Notes to the consolidated financial statements continued 10 – Employee information This note shows where our staff are employed throughout the world, excluding staff employed by our joint ventures and associates, and analyses the total staff costs.
Staff costs from continuing operations 2,155 1,798 Staff costs from discontinued operations 177 441
Profit for the year 1,497 (275) 1,222 Amount attributable to non-controlling interests (123) 6 (117) Cumulative preference dividends for the year (17) — (17) Coupon payments in respect of direct capital instruments (DCI) (net of tax) (42) — (42)
North America United States (long-term business) (see (ix) below) 800 795 — — 800 795 United States (fund management) 29 28 — — 29 28
 Risk-adjusted discount rate of 10% (2010: 10%) represents the rate used to discount expected profits from future new business. The discount rate includes an additional margin to make prudent allowance for the risk that experience in future years for new business may differ from that assumed.
*Comprises amortisation of AVIF on insurance contracts of £3 million (2010: £2 million) and other intangibles of £3 million (2010: £5 million).
Notes to the consolidated financial statements continued 18 – Interests in, and loans to, joint ventures continued (d) Impairment testing All interests in joint ventures have been tested for impairment but only the material items are detailed below.
The joint ventures have no significant contingent liabilities to which the Group is exposed. The Group has capital commitments to property management joint ventures of £258 million (2010: £45 million).
Depreciation and impairment At 1 January 2010 — (4) (7) (677) (306) (994) Charge for the year — — (1) (47) (29) (77)
Transfers to intangibles (note 17) — — — 57 — 57 Impairment losses charged to restructuring costs — — — — (3) (3) Foreign exchange rate movements — — 1 5 6 12
Examples of these are securities measured using discounted cash flow models based on market observable swap yields, and listed debt or equity securities in a market that is inactive. Valuations, whether sourced from internal models or third parties, incorporate credit risk by adjusting the spread above the yield curve for government treasury securities for the appropriate amount of credit risk for each issuer, based on observed market transactions. To the extent observed market spreads are either not used in valuing a security, or do not fully reflect liquidity risk, our valuation methodology, whether sourced from internal models or third parties, reflects a liquidity premium.
Notes to the consolidated financial statements continued 22 – Fair value methodology continued The transfers into and out of Level 3 in 2011 are spread across our businesses in the UK, Italy, the US and France and across a number of asset classes, with no single business or asset class predominating. There are a variety of reasons for these transfers, including change in market activity in valuation inputs, transparency of valuation inputs from third-party pricing sources and matching between internal model valuations and broker quotes. Of the £387 million net losses (2010: £247 million net gains) recognised in the income statement during the year, a £390 million loss (2010: £252 million gain) is recognised in net investment income and a £3 million gain (2010: £5 million loss) relates to impairments and is included in other expenses.
 Notes issued by loan partnerships held by our UK Life business amounting to £1.2 billion, for which there is no active market. These are valued using counterparty quotes, corroborated against the prices of selected similar securities. In 2011, there were insufficient market observable transactions in the selected securities to provide a reliable proxy price to corroborate the counterparty price. In addition, our UK Life business owns part of the residual equity interest in these loan partnerships valued at £0.2 billion according to net asset values, which are not considered market observable, resulting in a Level 3 classification.
Convertibles and bonds with warrants attached — 418 17 435 — 583 — 583
These are further analysed as follows: At fair value through profit or loss 212,714 15,626 (6,533) 221,807
Asia Pacific and other 420 1,573 577 2,570 * As a result of the partial disposal of Aviva’s stake in Delta Lloyd, from 6 May 2011 the Group has ceased to consolidate the results and net assets of the Delta Lloyd Group . Throughout the disclosure, therefore, Delta Lloyd has been excluded for the purposes of the 31 December 2010 to allow for a proper comparison, unless otherwise noted.
Portugal — — — — — — — — — — — —
The balance of deferred acquisition costs for long-term business decreased by £483 million in 2011, reflecting the impact of the shadow adjustment in the US. Amortisation increased by £153 million in 2011, mainly in the UK and the US, where DAC balances, and the amortisation thereof, are increasing, driven by the growing volumes of business and emergence of profits from the business. Where amortisation of the DAC balance depends on projected profits, changes to economic conditions may lead to a movement in the DAC balance and a corresponding impact on profit. It is estimated that the movement in the DAC balance would reduce profit by £145 million if market yields on fixed income investments were to increase by 1% and increase profit by £170 million if yields were to reduce by 1%.
(v) One Aviva, twice the value bonus plan awards These are conditional awards granted under the Aviva Annual Bonus Plan 2005 between 2008 and 2010, and are described in section (b) below and in the Directors’ Remuneration Report.
Notes to the consolidated financial statements continued 30 – Group’s share plans continued (b) Outstanding options and awards (i) Share options At 31 December 2011, options to subscribe for ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva Savings Related Share Option Scheme
(ii) Share awards At 31 December 2011, awards issued under the Company’s executive incentive plans over ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva Long Term Incentive Plan 2005 Number of shares Vesting period Number of shares Vesting period
Notes to the consolidated financial statements continued 36 – Retained earnings This note analyses the movements in the consolidated retained earnings during the year.
Mortality assumptions for non-profit business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below: Mortality tables used
The gross outstanding claims provision before discounting was £11,420 million (2010: £13,179 million). The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims. The discount rate that has been applied to latent claims reserves is based on the relevant swap curve in the relevant currency having regard to the expected settlement dates of the claims. The range of discount rates used depends on the duration of the claims and is given in the table above. The duration of the claims span over 35 years, with the average duration being between 7 and 16 years depending on the geographical region. Any change in discount rates between the start and the end of the accounting period is reflected below operating profit as an economic assumption change. During 2011, we have continued to experience a steady increase in the number of bodily injury claims settled by periodic payment orders (PPOs) or structured settlements, especially in the UK, which are reserved for on a discounted basis.
Notes to the consolidated financial statements continued 39 – Insurance liabilities continued (iii) Net of reinsurance After the effect of reinsurance, the loss development table is: In the loss development tables shown above, the cumulative claim payments and estimates of cumulative claims for each accident year are translated into sterling at the exchange rates that applied at the end of that accident year. The impact of using varying exchange rates is shown at the bottom of each table. Disposals are dealt with by treating all outstanding and IBNR claims of the disposed entity as ‘paid’ at the date of disposal. The loss development tables above include information on asbestos and environmental pollution claims provisions from business written before 2002. The undiscounted claim provisions for continuing operations, net of reinsurance, in respect of this business at 31 December 2011 were £929 million (2010: £896 million). The movement in the year reflects exceptional strengthening of provisions by £35 million in the UK (2010: £10 million in respect of several specific discontinued commercial liability risks written in Canada a significant number of years ago), other strengthening of £23 million (2010: £68 million), claim payments, reinsurance recoveries and foreign exchange rate movements.
Carrying amount at 1 January 69,482 66,559 Provisions in respect of new business 3,433 6,169 Expected change in existing business provisions (2,195) (2,400) Variance between actual and expected experience (2,708) 845 Impact of operating assumption changes (72) 36 Impact of economic assumption changes 631 240 Other movements 211 (65) Change in liability recognised as an expense (700) 4,825 Foreign exchange rate movements (1,284) (1,918) Deconsolidation of Delta Lloyd (2,523) — Other movements 10 16
The variance between actual and expected experience of £2.7 billion was primarily driven by unfavourable movements in investment markets in 2011, which had a direct or indirect impact on liability values. Equity markets fell and credit spreads on corporate bonds widened, reducing the value of assets supporting the participating investment liabilities. For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. Minor variances arise from differences between actual and expected experience for persistency, mortality and other demographic factors. The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of participating investment contract liabilities. The impact of economic assumption changes of £0.6 billion relates mainly to the impact of lower risk-free interest rates on UK with-profits business. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year shown in note 43, together with the impact of movements in related non-financial assets.
Carrying amount at 1 January 48,305 43,456 Provisions in respect of new business 3,863 4,096 Expected change in existing business provisions (2,558) (2,145) Variance between actual and expected experience (2,796) 1,276 Impact of operating assumption changes 1 20 Impact of economic assumption changes 7 3 Other movements (123) 53 Change in liability (1,606) 3,303 Effect of portfolio transfers, acquisitions and disposals — 1,903 Deconsolidation of Delta Lloyd (832) — Foreign exchange rate movements (206) (357) Other movements (2) —
(i) Guaranteed annuity options Similar options to those written in the with-profit fund have been written in relation to non-profit products. Provision for these guarantees does not materially differ from a provision based on a market-consistent stochastic model, and amounts to £35 million at 31 December 2011 (2010: £31 million).
Deficits in the main staff pension schemes (note 47e(vii)) 406 527 Other obligations to main staff pension schemes – insurance policies issued by Group companies* — 1,445
Fair value of scheme assets at the end of the year 11,791 9,971 8,754 7,936 8,814 Present value of scheme liabilities at the end of the year (10,527) (11,419) (11,812) (9,951) (10,017)
Surplus included in other assets (note 27) 524 — — — 524 Deficits included in provisions (note 46) (207) (164) (146) (1,455) (1,972)
Notes to the consolidated financial statements continued 54 – Group capital structure continued Total capital employed is financed by a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. At 31 December 2011, we had £20.8 billion (2010: £26.3 billion) of total capital employed in our trading operations, measured on an MCEV basis. The reduction is primarily driven by the deconsolidation of Delta Lloyd and the impact of financial markets. In May 2011 we issued £450 million of Lower Tier 2 hybrid capital securities maturing in 2041 which may be called from 2021. In November 2011 we issued a further US$400 million of Lower Tier 2 hybrid capital securities maturing in 2041 which may be called from 2016. These instruments are expected to comply for Tier 2 treatment under Solvency 2. The transactions had a positive impact on Group IGD solvency and Economic Capital measures. Also in November 2011 €800 million of Lower Tier 2 hybrid capital securities were redeemed at first call. Financial leverage, the ratio of external senior and subordinated debt to MCEV capital and reserves, was 36.7% (2010: 31.9%). Fixed charge cover, which measures the extent to which external interest costs, including subordinated debt interest and preference dividends, are covered by MCEV operating profit, was 8.9 times (2010: 9.4 times). At 31 December 2011, the market value of our external debt, subordinated debt, preference shares (including both Aviva plc preference shares of £200 million and General Accident plc preference shares, within non-controlling interests, of £250 million), and direct capital instrument was £5,782 million (2010: £7,279 million), with a weighted average cost, post tax, of 6.6% (2010: 4.5%). The Group Weighted Average Cost of Capital (WACC) is 7.1% (2010: 7.8%) and has been calculated by reference to the cost of equity and the cost of debt at the relevant date. The cost of equity at 31 December 2011 was 7.4% (2010: 9.9%) based on a risk free rate of 2.0% (2010: 3.4%), an equity risk premium of 4.0% (2010: 4.0%) and a market beta of 1.3 (2010: 1.6).
Estimated excess available capital £bn Excess £bn * These realistic liabilities include the shareholders’ share of future bonuses of £0.3 billion (31 December 2010: £0.7 billion). Realistic liabilities adjusted to eliminate the shareholders’ share of future bonuses are £38.8 billion (31 December 2010: £41.5 billion). 1 These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £1.9 billion, £0.3 billion and £3.1billion for NWPSF, OWPSF and
 Persistency risk is managed at a business unit level through frequent monitoring of company experience, benchmarked against local market information. Generally, persistency risk arises from customers lapsing their policies earlier than has been assumed. Where possible the financial impact of lapses is reduced through appropriate product design. Businesses also implement specific initiatives to improve retention of policies which may otherwise lapse. The Group Insurance Committee has developed guidelines on persistency management.
Net of reinsurance excluding Delta Lloyd (275) 275 50 (55) (130) (290)
Profit for the year — — — — — — 500 500 — 500
Where applicable, the accounting policies of the Company are the same as those of the Group on pages 168 to 182. The notes identified alphabetically on pages 316 to 320 are an integral part of these separate financial statements. Where the same items appear in the Group financial statements, reference is made to the notes (identified numerically) on pages 191 to 311.
Arising in the year: Profit for the year — — — 500 Fair value gains on investments in subsidiaries and joint ventures — 408 — — Actuarial gains on pension provisions — — — 1 Dividends and appropriations — — — (757) Reserves credit for equity compensation plans — — 41 — Shares issued in lieu of dividends — — — 209 Trust shares distributed in the year — — — (50) Issue of share capital under equity compensation scheme — — (51) 51 Aggregate tax effect — — — 17
H – Related party transactions The Company receives dividend and interest income from subsidiaries and pays interest and fee expense to those subsidiaries in the normal course of business. These activities are reflected in the table below. Loans to and from subsidiaries are made on normal arm’s-length commercial terms. The maturity analysis of the related party loans is as follows: Loans owed by subsidiaries
E11 – Post-tax internal rate of return and payback period on life and pensions new business
Shares held by employee trusts (43) — (43) Retained earnings 5,954 — 5,954 Additional retained earnings on an MCEV basis — 486 486
Shares held by employee trusts (32) — (32) Retained earnings 5,411 — 5,411 Additional retained earnings on an MCEV basis — 2,420 2,420
Other movements in IFRS net equity — 525 525 536 1,061 1,061
Equity attributable to ordinary shareholders of Aviva plc on an MCEV basis 15,038
Aviva Europe MCEV operating earnings decreased 20% to £1,617 million (2010: £2,013 million) as operating variances and assumption changes were less favourable than in the prior period. Additionally, our lower new business volumes, as a result of our focus on value over volume, have led to a corresponding decline in the value of new business.
Experience variances were favourable at £41 million (2010: £147 million) following positive mortality and other experience across the region, partly offset by adverse expenses in France and Ireland and lapse experience in Ireland.
Assumption changes on existing business were favourable at £178 million (2010: £338 million) primarily reflecting positive impact of changes to mortality and lapse assumptions in France and changes to assumed expense levels and management actions in relation to product charges in Poland, offset by adverse impacts of lapse and expense changes in Ireland, Italy, Spain and Other Europe.
– project and other related expenses1 (6) (3) (1) — — (2) (4) (10) (12) (3) (31) (1) (32)
Value of new business after tax 15 (1) 27 4 32 77 1 — 78 432 510 Life MCEV operating (loss)/earnings after tax 25 (10) 28 37 49 129 3 94 226 2,193 2,419 Life MCEV (loss)/earnings after tax (16) (29) (928) 41 (8) (940) 3 (13) (950) (1,337) (2,287) Closing covered businesses’ embedded value 214 266 (244) 158 405 799 21 — 820 12,274 13,094
Demographic assumptions Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva’s recent operating experience with a view to giving a best estimate of future experience. We have anticipated future changes in experience where that is appropriate, e.g. we have allowed for improvements in future policyholder longevity. We have set the assumptions based on a best estimate of shareholder outcomes. In particular, where the policyholder behaviour varies with economic experience, we have set assumptions which are dynamic, i.e. vary depending on the economic assumptions. For example, surrender and option take-up rate assumptions that vary according to the investment scenario under consideration have been used in the calculation of the time value of options and guarantees, based on our assessment of likely policyholder behaviour in different investment scenarios. Additionally, where demographic experience is not driven by economic scenarios but is asymmetric on a standalone basis, the best estimate assumption considers the weighted-average expected experience, not simply the median or most likely outcome. Notwithstanding the notification on 15 December 2011 that the bancassurance distribution agreement with Allied Irish Bank was not being renewed, the Aviva Ireland demographic assumptions have been set assuming the business remains open to new business and does not incur diseconomies of scale or other operating impacts.
As reported on page 346 £m 10bp increase in adjustment to risk-free rates £m £m £m
Market values Credit spread 2011 Embedded value (net of tax and non-controlling interest)
Other matter We have reported separately on the statutory Group financial statements of Aviva plc for the year ended 31 December 2011. The information contained in the consolidated MCEV financial statements should be read in conjunction with the financial statements prepared on an IFRS basis.
Wrap investments An account in which a broker or fund manager executes investment decisions on behalf of a client in exchange for a single quarterly or annual fee, usually based on the total assets in the account rather than the number of transactions.
General terms cont. IFRS International Financial Reporting Standards. These are accounting regulations designed to ensure comparable statement of financial position preparation and disclosure, and are the standards that all publicly listed companies in the European Union are required to use.
Financial options and guarantees Features of the covered business conferring potentially valuable guarantees underlying, or options to change, the level or nature of policyholder benefits and exercisable at the discretion of the policyholder, whose potential value is impacted by the behaviour of financial variables.