Our purpose is all about what we do for our customers and ensuring we build a strong business on which they can depend.
As we continue to make progress resolving our balance sheet issues, our focus will shift to improving performance. In this area progress has already been made, particularly in improving expense and capital efficiency.
Group centre liquidity currently stands at £1.6 billion following the receipts from the disposals of Aviva USA, Delta Lloyd and Aseval amongst others.
Making sure that customers stay with us for the long term is important to the future success of our business
Older and healthier § Baby boomers and higher life expectancy have created a large 50+ generation. Personal wealth is highly concentrated within this group
Cash flow and growth Our aim is to be a diversified insurer with sustainable and progressive cash flows underpinned by good potential for growth.
Customers want to feel in control of their purchases and to feel confident that what they buy meets their needs. This means we must demonstrate we understand them as individuals, and deliver products and solutions that are personalised to them.
§ Enable customers to choose how they want to deal with us
Of senior managers are women £6.2m Invested in our communities plus 41,223 volunteering hours in 2013
Profitability in our general insurance business decreased slightly to 97.3% (2012: 97.0%) principally due to the impact of the Alberta and Toronto floods in Canada, which more than offset the positive effect of favourable weather in the UK & Ireland and improved underwriting discipline in Europe.
We remain committed to having a diverse Board in terms of gender as well as diversity of experience, skills and knowledge, background and nationality. There were 11 members on the Board in 2013, of whom nine were male and two were female.
There were 27,718 employees at Aviva as at 31 December 2013 of whom 13,538 were male and 14,180 were female.
In addition, we have invested in growing our direct business. We are currently the largest direct provider of funeral protection and the second largest direct general insurer.
Health market reforms currently underway will take effect in 2016 and change the market structure. Our strategy is focused on individuals and sole traders outside the scope of the reforms.
In 2013, we extended our bancassurance relationship with Santander increasing our network from 500 to 900 branches. We have also improved our digital and online presence.
Changes to pensions legislation effective January 2013 have helped to improve VNB. The introduction of a 25% government matching contribution has encouraged customers to set up or recommence personal contributions. The benefit of these additional contributions has been only partially offset by a legislated reduction in fund and allocation charges.
In 2014 we are looking to pilot the sale of pension and protection products through the retail branches of other Sabanci Group companies including Carrefour SA and EnerjiSA.
Spain and Italy: turnaround businesses Our strategy and full year performance Our strategic focus for Spain and Italy is to deliver sustainable cash remittances to Group. In 2013 we made progress in addressing market challenges and turning the businesses around, but there is still more to do.
We are entering into 2014 with good momentum underpinned by our pricing, underwriting and predictive analytics sophistication.
To maintain our competitive advantage in underwriting we continue to enhance our talent programme to ensure we have the best people in place at all levels of the organisation.
Aviva is well-positioned to take advantage of the heightened competitive environment and further drive improvement in earnings and cash flow.
4 Swiss Re Sigma No 3/2013, Swiss Re Asian Insurance Outlook March 2013. 5 Life Insurance Association, Singapore, 2009-2012. 6 World Development Indicators, The World Bank.
Top risks ranked by economic capital at risk Ranked according to the amount of economic capital at risk in a 1-in-200 year loss event over a one year time horizon; the three most significant types of risk affecting our current in-force business and investments are credit, longevity and equity.
§ Regulatory change: our businesses face considerable regulatory change as a result of Solvency II, our designation by the Financial Stability Board as a Global Systemically Important Insurer (G-SII) and developments in conduct regulation, which will affect how much capital we hold, how we operate and how we sell and distribute our products.
Our values will be reinforced throughout the organisation, not only through demonstration by our leaders, but also by their integration into key internal processes, such as performance management. The desired culture will be further enabled through the development of our internal communication channels, to provide employees with effective ways to enter into dialogue about the things that are most important to them.
Aviva plc – Global greenhouse gas emissions data from 1 January 2013 to 31 December 2013
Going further with our critical illness cover Over the last five years, we have paid out more than £2.2 million in critical illness claims to customers who didn’t realise they could claim under their policies. We identified the claims when customers contacted us to make changes to existing policies or to apply for a new insurance plan.
All air travel Rail travel Grey fleet** Outsourced data centres, electricity
Over 20 years, we have developed a deep understanding of the conflicts, barriers and challenges to good governance. We believe such experience and insight are crucial in identifying and addressing risks and opportunities within our clients’ portfolios. We have a strong commitment to international standards and principles of good governance, such as the UK Stewardship Code and International Corporate Governance Network Principles. Our corporate governance and corporate responsibility voting policy outlines our approach and expectation of companies. Where we withhold support for a company, we engage with them to help them address our concerns.
In December 2013, we held a round table in Singapore in partnership with the UN Office of the High Commissioner for Human Rights (OHCHR) and the Consortium for Street Children.
The report made a number of key recommendations for practitioners and stakeholders involved in supporting young people under similar circumstances.
He is currently a Non-Executive Director of Macquarie Group Ltd, Macquarie Bank Ltd (banking) and Washington H Soul Pattinson and Company Ltd (investment).
With respect to medical research, Michael is Chairman of The George Institute for Global Health (research institution).
He started his career at N M Rothschild (financial advisers) in 1970 as an analyst and then a foreign exchange dealer and spent three years seconded to the Central Policy Review Staff (now the Number 10 Policy Unit) to work on major initiatives including industrial policy and social security reform.
Bob brings significant accounting and financial services experience to the Board.
Before joining the FRC, he was a member of the leadership team at the Financial Services Authority (regulatory predecessor to the PRA and FCA), serving as Chief Operating Officer.
David joined Aviva in November 2002 and is Chief Executive Officer, Aviva Europe with accountability for the Group’s businesses in Italy, Lithuania, Poland, Spain and Turkey. He is also Chairman of Aviva France SA.
He has over 30 years of insurance experience with roles in actuarial, operations, sales & marketing and general management at Manulife, Hong Leong, British American Life & General and Malaysian American Insurance. This experience gives him a deep business understanding and extensive knowledge of the Asian market and culture which is critical to our success in the region.
Actual targets for ROE and the appropriate TSR comparator group are agreed by the committee annually and disclosed in the annual remuneration section of the full DRR.
Total emoluments of Executive Directors 2,011 1,419 292 119 1,103 — 450 490 584 405 4,440 2,433
International Tbk to set up a joint venture life insurance company in Indonesia
Induction, training and development The Board and the Chairman believe strongly in the development of all of its employees and directors and it is a requirement of each director’s appointment that they commit to continuing their development. During the year, directors attended a number of internal training sessions, including sessions on economic capital, the Own Risk Solvency Assessment and stress and scenario testing. Training sessions have been built into the Board’s and committees’ work plans for 2014. The Chairman ensures that all new directors receive a comprehensive induction programme tailored to their particular needs and which consists of several separate training sessions over a number of months. These include presentations from key members of senior management, visits to the Group’s main operating businesses and functions, and meetings with the external auditor and one of the Company’s corporate brokers. Further or follow-up meetings are arranged where a director requires a deeper understanding on a particular issue. All new directors also receive induction materials, which include the current strategic and operational plan, recent Board and committee minutes and meeting packs, organisation structure charts, role profiles, a history of the Group, and relevant policies, procedures and governance material.
Material existing or emerging risks within the business have been identified and assessed and the business operates in a manner which conforms to the minimum requirements outlined in Group risk policies and business standards
Communication with shareholders The Company places considerable importance on communication with shareholders and engages with them on a wide range of issues. The directors have an ongoing dialogue and a programme of meetings with institutional investors, fund managers and analysts which are managed by the Company’s investor relations function. At these meetings a wide range of issues are discussed including strategy, financial performance, management, remuneration and governance, within the constraints of information already made public, to understand any issues of concern to investors. Shareholders views are regularly shared with the Board through the Group CEO and CFO’s reports and the Company’s corporate brokers also periodically brief the Board on investor views. During the year, the Chairman and the Senior Independent Director met with the Company’s major institutional investors. In addition, the Senior Independent Director was available to meet with major investors to discuss any areas of concern that could not be resolved through normal channels of investor communication. In 2013 the Board, through the then Remuneration Committee chairman, consulted with institutional investors on executive remuneration, particularly on the proposed remuneration policy being put to shareholders for approval at the 2014 Annual General Meeting (AGM). The AGM also provides a valuable opportunity for the Board to communicate with private shareholders. All serving directors attended the 2013 AGM except Bob Stein, who had a prior commitment on the date that arose before he joined the Board. There is a dedicated email address which shareholders can use to ask questions on the business of the AGM at aviva.shareholders@aviva.com. The dedicated email address is included in the shareholder information section of the Notice of AGM. A presentation on the Group’s performance is given at the AGM and is made available on the Company’s website after the meeting at www.aviva.com/agm. Whenever possible, all directors attend the AGM and shareholders are invited to ask questions related to the business of the meeting at the AGM and have an opportunity to meet with the directors following the conclusion of the meeting.
Monitor succession plans for the appointment of nonexecutive directors, the Group CEO and other executive directors to the Board
Audit Committee report Committee role and responsibilities The purpose of the committee is to assist the Board in discharging its responsibilities for monitoring the integrity of the Group’s financial statements, assessing the effectiveness of the Group’s system of internal controls and monitoring the effectiveness, performance, independence and objectivity of the internal and external auditors. Whilst the Board as a whole has a duty to act in the best interests of the Company, the committee has a particular role, acting independently of management, to ensure that the interests of shareholders are properly protected in relation to financial reporting and the effectiveness of the Group’s systems of financial internal controls. The key responsibilities of the committee are to: Review the significant issues and judgements of management, and the methodology and assumptions used in relation to the Group’s financial statements, and formal announcements on the Group’s financial performance, including the reserving position relating to the Group’s life assurance and general insurance operations
Committee activities during 2013 The work of the committee followed an agreed annual work plan and principally fell under four main areas: financial statements and accounting policies, internal controls, oversight of the internal audit function and oversight of external audit. The committee’s work in each of these areas is described below. The following chart shows how the committee allocated its time during 2013.
During the year the committee focused on the following areas: Risk appetite monitoring The committee received regular detailed reports on key risk exposures, emerging and potential risks, and the drivers of risk throughout the Group. It assessed and challenged the appropriateness of the Group’s overall risk appetite. The committee monitored the Group’s exposure against these appetites, particularly in relation to liquidity appetite and Individual Capital Adequacy (ICA) surplus and how the Group’s business plan improves the Group’s capital position over time.
Methodology and assumptions In early 2013, the committee considered and approved the methodology and assumptions used to calculate the economic capital for the 2013 ICA submission. In late 2013 the committee considered and approved the methodology and assumptions for the 2014 ICA submission.
Committee membership and attendance The committee comprises independent NEDs only. The table below shows the committee members during the year and their attendance at committee meetings.
The committee met on six occasions in 2013. The Group Company Secretary or her nominee acts as the secretary to the committee. The Chairman of the Board attended all meetings of the committee and the Group Corporate Responsibility Director, the Group HR Director, the Chief Marketing and Communications Officer and other members of senior management also attended meetings by invitation. The chairman of the committee reported to 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 Company has an Audit Committee and at least one member meets both the NYSE and Code requirements on financial experience. The Audit Committee does not review risk management as this is covered by the Risk and Governance Committees.
Paying for performance We believe there is a clear link between the performance of the Group, the value we add for shareholders and the remuneration of our most senior executives. Our remuneration policy and practice reflects performance against the Group’s main strategic priorities, which are: Improve financial performance – Total remuneration is heavily weighted towards pay dependent on outcomes against the key performance indicators (KPIs) of our business, notably cash flow, profit and return on equity (ROE)
Appointment of new CFO The Board announced on 28 February 2014 the appointment of Tom Stoddard as CFO. He will join Aviva on 5 May 2014. Details of his remuneration arrangements were included in the announcement of his appointment and are set out in this report.
Current basic salaries are disclosed on pages 95 and 96. There is no maximum increase within the policy. However, basic salary increases take account of the average basic salary increase awarded to UK employees. Different levels of increase may be agreed in certain circumstances at the committee’s discretion, such as: An increase in job scope and responsibility
Annual bonus To incentivise EDs to achieve the annual business plan. Deferral provides alignment with shareholder interests and aids retention of key personnel.
Notes 1 Fixed pay consists of basic salary, pension as described in table 1, and estimated value of benefits provided under the remuneration policy, excluding any one offs. This therefore excludes the relocation assistance for Mark Wilson, in connection with his relocation to the UK. Actual figures may vary in future years. 2 LTIP calculations are based on awards with a face value of 300% of basic salary for Mark Wilson and 225% of basic salary for Tom Stoddard.
Annual bonus Table 9 below sets out the Group’s performance against its 2013 KPIs. It also shows how these outcomes have translated into bonus payments. Details of the actual targets have not been disclosed as they are deemed to be commercially sensitive.
Table 10: Individual strategic 2013 performance Weighting (% of total bonus opportunity)
Face value has been calculated using the average of the middle-market closing price of an Aviva ordinary share on the three consecutive business days immediately preceding the date of grant, on 4 April 2013. Accordingly 983,277 and 541,806 shares were awarded to the Group CEO and CFO respectively based on a share price of 299 pence. Following his resignation from the Company Patrick Regan’s 2013 LTIP award will lapse. The LTIP vests subject to the achievement of two equally weighted performance measures, absolute ROE and relative TSR performance, which have been chosen to reflect shareholders’ long-term interests. Details of the performance measures and targets are set out below.
10 The performance target attached to the third tranche of the RRSA was met and this tranche vested on 7 March 2013 being the first dealing day following the normal vesting date where no dealing restrictions were in place. 11 The shares comprised in these vested awards include shares issued in lieu of dividends accrued during the deferral period. 12 These shares were awarded as phantom units which will be cash settled on vesting and no shares were transferred or allotted. 13 Subsequently pro-rated on 8 July 2013 following Trevor Matthews leaving the Company on 6 June 2013. 70,840 phantom units lapsed for the award granted in 2011 and 252,069 shares for the award granted in 2012. 14 Subsequently released, together with 600 shares in lieu of dividends on 8 July 2013 following Trevor Matthews leaving the Company on 6 June 2013. 15 The CSA was granted to Trevor Matthews following his recruitment in 2011. As disclosed in the 2011 DRR, this award was not subject to performance conditions and would have vested in tranches subject to Trevor Matthews remaining in employment with the Company but was subsequently released, together with 26,551 shares in lieu of dividends on 8 July 2013 following Trevor Matthews leaving the Company on 6 June 2013.
Dilution Awards granted under the Aviva all employee share plans are met by the funding of two employee trusts administered by external trustees that acquire 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. However, the funding policy is kept under review by the committee and the Board. Details of the shares currently held in the employee trusts are set out in note 33. During 2013, loans totalling £31.9 million were made to the external trustees to ensure sufficient shares were available to meet the Company’s on-going 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 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 1.45% and 0.82% respectively on 31 December 2013.
Consideration by the directors of matters relating to directors’ remuneration The committee is responsible for reviewing and making recommendations to the Board regarding the remuneration policy of the Group (the remuneration policy) and for reviewing compliance with the remuneration policy. At the 2014 AGM the remuneration policy will be presented to shareholders for approval and thereafter will be subject to a shareholder vote at least every three years, in accordance with the Companies Act 2006. Any change to the approved remuneration policy will only become effective if approved by the shareholders at a general meeting. The committee is further responsible for monitoring the level and structure of remuneration for the senior management of the Group.
Committee performance and effectiveness The committee undertook an annual review of its performance and effectiveness which concluded that overall the committee was effective in carrying out its duties. In addition to undertaking an annual programme of activities in 2013, the committee identified a number of areas for increased focus in 2014. These included undertaking a Strategic Reward Review to re-assess the reward structure of the Group.
In this section Independent auditors’ report 106 Accounting policies 110 Consolidated income statement 124 Consolidated statement of comprehensive income 125 Reconciliation of Group operating profit to profit/(loss) for the year 126 Consolidated statement of changes in equity 128 Consolidated statement of financial position 129 Consolidated statement of cash flows 130
(AVIF) and intangible assets 159 19 Interests in, and loans to, joint ventures 160 20 Interests in, and loans to, associates 161 21 Property and equipment 163 22 Investment property 164 23 Fair value methodology 164 25 Securitised mortgages and related assets 170 26 Interest in structured entities 171 27 Financial investments 173 29 Deferred acquisition costs, other assets, prepayments and accrued income 177 30 Assets held to cover linked liabilities 178 31 Ordinary share capital 179 32 Group’s share plans 179 33 Shares held by employee trusts 182 34 Preference share capital 182 35 Direct capital instruments and fixed rate tier 1 notes 183 36 Merger reserve 183 37 Other reserves 184 38 Retained earnings 184 39 Non-controlling interests 185 40 Contract liabilities and associated reinsurance 185 41 Insurance liabilities 186 42 Liability for investment contracts 196 43 Financial guarantees and options 197 44 Reinsurance assets 199 45 Effect of changes in assumptions and estimates during the year 201 46 Unallocated divisible surplus 201 47 Tax assets and liabilities 202 49 Pension obligations 203 51 Payables and other financial liabilities 211 52 Other liabilities 212 53 Contingent liabilities and other risk factors 212 55 Group capital structure 213 56 Statement of cash flows 215 57 Capital statement 217 58 Risk management 219 59 Derivative financial instruments and hedging 231 60 Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements 233 61 Related party transactions 235 62 Organisational structure 236 Financial statements of the Company 238 Income statement 238 Statement of comprehensive income 238 Statement of changes in equity 239 Statement of financial position 240 Statement of cash flows 241 Notes to the Company’s financial statements 242
What an audit of financial statements involves We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). 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 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.
Areas of particular audit focus In preparing the financial statements, the directors made a number of subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We primarily focused our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. In our audit, we tested and examined information, using sampling and other auditing techniques, to the extent we considered necessary to provide a reasonable basis for us to draw conclusions. We obtained audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. We considered the following areas to be those that required particular focus in the current year. This is not a complete list of all risks or areas of focus identified by our audit. For the Consolidated financial statements we discussed these areas of focus with the Audit Committee. Their report on those matters that they considered to be significant issues in relation to the financial statements is set out on pages 75 and 76.
iii) IFRS 12, Disclosure of Interests in Other Entities IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, and structured entities. The adoption of IFRS 12 has resulted in significant additional disclosures in respect of these interests. The standard has been applied retrospectively, with disclosure for the comparative period (except for disclosure on interests in unconsolidated structured entities) in line with the transitional provision of the standard. There is no impact on the Group’s profit or loss for the current or prior period or on the equity reported. The additional disclosures are included in notes 4, 19, 20, 26, 39 and 62.
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.
Accounting policies continued 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 and investment contract liabilities. This includes balances in respect of investment contracts which are legally reinsurance contracts but do not meet the definition of a reinsurance contract under IFRS. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying contract liabilities, outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract. Reinsurance of non-participating investment contracts and reinsurance contracts that principally transfer financial risk are accounted for directly through the statement of financial position. 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. These deposit assets or liabilities are shown within reinsurance assets in the consolidated statement of financial position. 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.
(R) Impairment of non-financial assets Property and equipment and other non-financial assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. Non-financial assets except goodwill which have suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
Accounting policy W below covers collateral, both received and pledged, in respect of these derivatives.
Current and deferred tax relating to items recognised in other comprehensive income and directly in equity are similarly recognised in other comprehensive income and directly in equity respectively. Deferred tax related to fair value re-measurement of available for sale investments, pensions and other postretirement obligations and other amounts charged or credited directly to other comprehensive income is recognised in the statement of financial position as a deferred tax asset or liability. Current tax on interest paid on direct capital instruments and fixed rate tier 1 notes is credited directly in equity. In addition to paying tax on shareholders’ profits, the Group’s life businesses in the UK, Ireland and Singapore pay tax on policyholders’ investment returns (‘policyholder tax’) on certain products at policyholder tax rates. Policyholder tax is accounted for as an income tax and is included in the total tax expense. The Group has decided to show separately the amounts of policyholder tax to provide a more meaningful measure of the tax the Group pays on its profits. In the pro forma reconciliations, operating profit has been calculated after charging policyholder tax.
The accounting policies (identified alphabetically) on pages 110 to 123 and notes (identified numerically) on pages 131 to 237 are an integral part of the financial statements.
Other comprehensive income, net of tax from continuing operations (617) (944) Other comprehensive income, net of tax from discontinued operations1 4b(vii) (319) 68
(d) Impact of changes in accounting policies on the consolidated statement of cash flows
(iv) Russia On 8 April 2013 the Group disposed of its subsidiary in Russia, Closed Joint Stock Insurance Company Aviva (Zao) (“Aviva Russia”), to Blagosostoyanie, a non-state pension fund in Russia, for consideration of £30 million, after transaction costs. Net assets disposed of were £29 million, comprising gross assets of £155 million and gross liabilities of £126 million resulting in a profit on disposal of £1 million.
Notes to the consolidated financial statements continued 5 – Segmental information The Group’s results can be segmented, either by activity or by geography. Our primary reporting format is on market reporting lines, with supplementary information being given by business activity. This note provides segmental information on the consolidated income statement and consolidated statement of financial position. The Group has determined its operating segments along market reporting lines. These reflect the management structure whereby a member of the Executive Management team is accountable to the Group CEO for the operating segment for which they are responsible. Following announcements in the first quarter of 2013 relating to modifications to its management structure, the Group’s operating segments were changed to align them with the revised organisational reporting structure. These segments are set out below. Results for prior periods have been restated to facilitate comparison.
Operating profit/(loss) before tax attributable to shareholders 903 480 422 167 365 277 53 42 (671) 2,038 239 2,277 1 Total reported income, excluding inter-segment revenue, includes £18,582 million from the United Kingdom (Aviva plc’s country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts were written.
Notes to the consolidated financial statements continued 5 – Segmental information continued (a) (iv) Segmental statement of financial position as at 31 December 2012 – (Restated)1
Premiums written net of reinsurance 12,279 8,894 — — 21,173 Net change in provision for unearned premiums — (16) — — (16)
The expected return on equities and properties is calculated by reference to the opening 10-year swap rate in the relevant currency plus an appropriate risk margin. These are the same assumptions as are used under MCEV principles to calculate the longer-term investment return for the Group’s long-term business. For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average prospective yields for the actual assets held less an adjustment for credit risks; this includes an adjustment for credit risk on all Eurozone sovereign debt. Where such securities are classified as available for sale (AFS), the expected investment return comprises the expected interest or dividend payments and amortisation of the premium or discount at purchase.
(b) The longer-term investment return and short-term fluctuation for continuing operations are as follows: Non-long-term business – Continuing operations 2013 £m
(g) The economic assumption changes mainly arise from movements in the rate used to discount latent claims. As explained in accounting policy L, provisions for latent claims are discounted, using rates based on the relevant swap curve, in the relevant currency at the reporting date, having regard to the duration of the expected settlement of the claims. The discount rate is set at the start of the accounting period, with any change in rates between the start and end of the accounting period being reflected below operating profit as an economic assumption change. The range of discount rates used is disclosed in note 41c.
Staff costs from continuing operations 1,671 1,966 Staff costs from discontinued operations 109 145
(ii) The tax charge attributable to policyholders’ returns included above is £nil (2012: £nil).
Net of tax, noncontrolling interests, preference dividends and DCI1 £m Per share p Before tax £m
Diluted earnings/(loss) per share from continuing operations1 648 2,979 21.8 (326) 2,954 (11.2)
Carrying amount at 31 December 1,476 1,520 1 Disposals include the disposal of the US business in 2013. Goodwill relating to US Life was fully impaired in 2012. Following the completion of the disposal, the gross amounts are removed from the above table in 2013 with no impact on the statement of financial position.
Carrying amount of intangibles with indefinite useful lives (detailed in note 18) Total
At 1 January — 256 9 265 115 1,003 — 1,118 Share of results before tax — 10 — 10 — (296) — (296) Share of tax — (1) — (1) — (2) — (2)
Share of (loss)/profit after tax (29) 9 — (20) (147) (93) — (240) Impact of the adoption of IFRS 101 — — — — — 42 9 51 Additions 29 14 — 43 32 — — 32 Loans repaid — — (4) (4) — — — — Reduction in Group interest — (8) — (8) — (601) — (601) Share of losses taken to other comprehensive income — — — — — (7) — (7) Dividends received — (10) — (10) — (43) — (43) Foreign exchange rate movements — 1 — 1 — (45) — (45)
Financial Assets Loans (note 24) 23,811 23,879 24,311 24,537 Financial Investments (note 27)
Fixed maturity securities 124,385 124,385 128,160 128,160 Equity securities 37,326 37,326 33,065 33,065 Other investments (including derivatives) 31,250 31,250 27,518 27,518
Recurring fair value measurements Investment Property (note 22) — — 9,451 9,451 — 9,451 Loans (note 24) — 3,115 15,362 18,477 5,402 23,879 Financial investments measured at fair value (note 27)
Non-recurring fair value measurements1 Properties occupied by group companies (note 21) — — 257 257 Properties occupied by group companies classified as held for sale — — — —
Investments classified as Level 2 Please see note 23(a) for a description of typical Level 2 inputs. Fixed income assets, in line with market practice, are generally valued using an independent pricing service. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis. Pricing services, where available, are used to obtain the third-party broker quotes. Where pricing services providers are used, a single valuation is obtained and applied. When prices are not available from pricing services, quotes are sourced from brokers. Other level 2 investments, including Unit Trusts, are valued using net assets values which are deemed to be observable market inputs.
9,962 473 2,489 12,924 (501) 1 Restated for the impact of the adoption of IFRS 10. Refer to note 1 for further details. 2 This table was prepared in accordance with IFRS 7.
Of the above total, £114,391 million (2012: £129,448 million) is due to be recovered in more than one year after the statement of financial position date. Other debt securities of £7,070 million (2012: £8,826 million) primarily include residential and commercial mortgage-backed securities, as well as other structured credit securities.
(b) During 2013, a total of 967,361 ordinary shares of 25 pence each were allotted and issued by the Company as follows: Number of shares
The Group has one subsidiary whose non-controlling interest (NCI) is material on the basis of their share of profit/(loss), as follows: Proportion of ownership interests held by NCI
Notes to the consolidated financial statements continued 41 – Insurance liabilities continued (ii) Gross figures Before the effect of reinsurance, the loss development table is: Accident year
Notes to the consolidated financial statements continued 44 – Reinsurance assets continued (c) Movements The following movements have occurred in the reinsurance asset during the year: (i) In respect of long-term business provisions
Carrying amount at 1 January 1,254 1,369 Impact of changes in assumptions (45) 22 Reinsurers’ share of claim losses and expenses Incurred in current year 312 286 Incurred in prior years (32) 13 Exceptional strengthening of general insurance latent claims provisions — — Reinsurers’ share of incurred claim losses and expenses 280 299 Less: Reinsurance recoveries received on claims Incurred in current year (169) (138) Incurred in prior years (140) (150) Reinsurance recoveries received in the year (309) (288) Unwind of discounting 10 13 Other movements — —
Net deferred tax liability (312) (1,007) Less: Amounts classified as held for sale (7) 648
Net liability at 31 December (312) (1,007) 1 Disposals include the disposal of the US business in 2013 £689 million
Surplus included in other assets (note 29) 606 — — 606 1,257 — — 1,257 Deficit included in provisions (note 48) (57) (209) (101) (367) (111) (371) (169) (651)
This note gives full IAS 19, Employee Benefits, disclosures for the above schemes. The smaller ones, while still measured under IAS 19, are included as one total within Provisions (see note 48). Similarly, while the charges to the income statement for the main schemes are shown in section (b)(i) below, the total charges for all pension schemes are disclosed in section (d) below. The assets of the UK, Irish and Canadian schemes are held in separate trustee-administered funds to meet long-term pension liabilities to past and present employees. In all schemes, the appointment of trustees of the funds is determined by their trust documentation, and they are required to act in the best interests of the schemes’ beneficiaries. The long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes. A full actuarial valuation of each of the defined benefit schemes is carried out at least every three years for the benefit of scheme trustees and members. Actuarial reports have been submitted for each scheme within this period, using appropriate methods for the respective countries on local funding bases.
Equities 409 671 1,080 484 604 1,088 Property — 1,087 1,087 — 926 926 Cash 540 — 540 571 — 571 Derivatives 88 192 280 15 372 387 Other1 — 243 243 — 240 240
Within one year 558 81 639 725 64 789 1 to 5 years 659 330 989 951 259 1,210 5 to 10 years 437 396 833 399 364 763 10 to 15 years 707 306 1,013 611 284 895 Over 15 years 766 125 891 940 291 1,231
Non-recourse Loans to property partnerships (see (a) below) 804 989 Loans to Irish investment funds (see (b) below) 7 20 UK Life reassurance (see (c) below) 208 257 Other non-recourse loans (d) 288 336 1,410 1,853 1 Restated for the adoption of IFRS10. See note 1 for further details.
(d) Regulatory compliance The Group’s insurance and investment business is subject to local regulation in each of the countries in which it operates. A number of the Group’s UK subsidiaries are “dual regulated” (directly authorised by both the PRA (for prudential regulation) and the FCA (for conduct regulation)) whilst others are solo regulated (regulated solely by the FCA for both prudential and conduct regulation). Between them, the PRA and FCA have broad powers including the authority to grant, vary the terms of, or cancel a regulated firm’s authorisation; to investigate marketing and sales practices; and to require the maintenance of adequate financial resources. The Group’s regulators outside the UK typically have similar powers, but in some cases they also operate a system of ‘prior product approval’. The Group’s regulated businesses have compliance resources to respond to regulatory enquiries in a constructive way, and take corrective action when warranted. However, all regulated financial services companies face the risk that their regulator could find that they have failed to comply with applicable regulations or have not undertaken corrective action as required. The impact of any such finding (whether in the UK or overseas) could have a negative impact on the Group’s reported results or on its relations with current and potential customers. Regulatory action against a member of the Group could result in adverse publicity for, or negative perceptions regarding, the Group, or could have a material adverse effect on the business of the Group, its results of operations and/or financial condition and divert management’s attention from the day-to-day management of the business.
Operating cash flows reflect the movement in both policyholder and shareholder controlled cash and cash equivalent balances. Around two thirds of the Group’s balances relate to unit-linked or participating policyholder funds. As such, the asset mix and the level of cash held by these funds are determined from a policyholder perspective and can move significantly from one year to another. Shareholder cash at 31 December 2013 is at £8.3 billion (2012: £9.0 billion). Purchases and sales of operating assets, including financial investments, are included within operating cash flows as the purchases are funded from cash flows associated with the origination of insurance and investment contracts, net of payments of related benefits and claims. During the year, the net operating cash inflow reflects a number of factors, including the level of premium income and the timing of receipts of premiums and the payment of creditors, claims and surrenders. It also includes changes in the size and value of consolidated cash investment funds and changes in the Group participation in these funds.
Cash at bank and in hand 12,314 12,898 Cash equivalents 13,036 11,121 24,857 23,453 1 Restated for the adoption of IFRS10. See note 1 for further details.
Insurance participating (45) — (60) (10) (20) (30) (5) (40) Insurance non-participating (145) 140 (415) (5) 10 (80) (60) (450) Investment participating (10) 5 (5) 5 (5) (10) — — Investment non-participating (20) 20 (5) 5 (5) (15) — — Assets backing life shareholders' funds (35) 55 (25) 40 (45) — — —
Notes to the consolidated financial statements continued 58 – Risk management continued General insurance and health business sensitivities as at 31 December 2013 2013 Impact on profit before tax (£m)
Equity/Index contracts OTC Options 12 1 — 2,765 650 (10) Exchange traded Futures 3,186 117 (13) 5,468 45 (123) Options 5,015 256 (91) 11,880 228 (139)
Financial liabilities Derivatives 5,328 (3,577) 1,751 (13) (193) 1,545 Total 5,328 (3,577) 1,751 (13) (193) 1,545 1 Restated for the adoption of IFRS10. See note 1 for further details.
Transactions with joint ventures in the UK relate to the property management undertakings, the principal ones of which are listed in note 19(a)(iii). Our interest in these joint ventures comprises a mix of equity and loans, together with the provision of administration services and financial management to many of them. Our UK life insurance companies earn interest on loans advanced to these entities, movements in which may be found in note 19(a)(i). 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 Groupmanaged funds and insurance policies with other Group companies, as explained in note 49(b)(ii). 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 note 53(f).
UK & Ireland General Insurance and Ireland Life and Health Subsidiaries
United Kingdom The Group has interests in several property limited partnerships. Further details are provided in notes 19, 20 and 26 to the financial statements.
Current tax For this year (84) (46) Prior year adjustments (7) (6) Total current tax (91) (52) Deferred tax Origination and reversal of temporary differences (49) (180) Changes in tax rates or tax laws 24 — Total deferred tax (25) (180)
(iii) Tax credited to equity Tax credited to equity comprises £22 million (2012: £18 million) in respect of coupon payments on the direct capital instruments and fixed rate tier 1 notes.
Tax calculated at standard UK corporation tax rate of 23.25% (2012: 24.5%) 113 94 Adjustment to tax credit in respect of prior years (7) (6) Non-assessable dividends (337) (388) Disallowable expenses 13 76 Non-taxable loss on settlement of intra-group loan 17 — Movement in deferred tax not recognised — (118) Change in future local statutory tax rate 32 4 Losses surrendered intra-group for nil value 53 106
Expenses Claims and benefits paid, net of recoveries from reinsurers (22,093) (23,601) (24,380) Change in insurance liabilities, net of reinsurance 2,493 (430) (2,284) Change in investment contract provisions (7,050) (4,450) 1,478 Change in unallocated divisible surplus 280 (6,316) 2,721 Fee and commission expense (3,975) (4,457) (4,326) Other expenses (2,220) (2,843) (2,779) Finance costs (609) (653) (711)
Pensions 5,476 5,158 5,279 Annuities 2,327 3,211 3,832 Bonds 183 379 801 Protection 992 1,228 1,025 Equity release 401 434 317
Year end 31 December 2012 UK and Ireland general insurance and health NWP decreased by £352 million, or 7%, to £4,490 million (2011: £4,842 million), mainly as a result of the disposal of RAC. Excluding RAC, NWP decreased by £48 million, or 1%, to £4,062 million (2011: £4,110 million). The UK has seen growth in personal motor, corporate and speciality risks and personal speciality lines. This
Profit before tax attributable to shareholders' profits 104 245 299 1 Restated for the adoption of IAS19. See note 1 for further details.
Investment thesis Our aim is to be a diversified insurer with sustainable and progressive cash flows underpinned by good potential for growth. The thesis sets out why investors should choose us, enabling investors to make an informed decision about our business.
– Automation – we aim to reduce manual interventions in processes, reducing overheads and improving efficiency to benefit our customers.
Life insurance and savings business Long-term insurance and savings business from continuing operations accounted for approximately 74% of our total business based on worldwide total sales from continuing operations for the year ended 31 December 2013. We reported total long-term insurance and savings new business sales from continuing operations of £20.5 billion and investment sales of £4.9 billion for the year ended 31 December 2013. Our focus is to remain financially strong so that we can pay claims and deliver on the promises we have made to our customers, shareholders and business partners.
Annuities – is a type of policy that pays out regular amounts of benefit, either immediately and for the remainder of a person’s lifetime, or deferred to commence from a future date. Immediate annuities may be purchased for an individual and his or her dependants or on a bulk purchase basis for groups of people. Deferred annuities are asset accumulation contracts, which may be used to provide benefits in retirement, and may be guaranteed, unit-linked or index-linked.
Distribution Customers can buy our products through a range of distribution channels, including: Direct – In many of our markets, customers can buy our products over the telephone or via the internet. This method of distribution is most commonly available for simple, low cost products which do not require advice.
Information on the Company continued be Standard Life, Prudential, Legal & General, Lloyds Banking Group, Friends Life, Zurich, Canada Life and Just Retirement. In Ireland, the economic environment remains challenging although we believe the life insurance market has returned to growth in 2013. The life insurance market in Ireland is relatively concentrated and there has been further consolidation in the sector during 2013. We consider our main competitors to be Bank of Ireland Life, Irish Life, Canada Life (now merged with Irish Life) and Friends First.
France Business overview and strategy France is the third8 largest insurance market in Europe. Aviva France has a significant presence in the French Life insurance market in which it operates through two main companies: Aviva Vie and Antarius (JV structure with Crédit Du Nord). Aviva France is ranked tenth in general insurance as measured by gross written premiums, according to L’Argus de l’Assurance, as at 31 December 2012. Aviva France’s strategy is to deliver sustainable dividends to Group by increasing profitability in our life business and targeted growth in profitable general insurance segments.
Poland Business overview and strategy At 30 September 2013, our Polish life operation is the fourth largest life insurer in Poland, with a market share of 7% based on gross written premium, according to the Polish Financial Supervision Authority (KNF). Our general insurance business is the eighth largest with a market share of 2.0% on the same basis. Our focus in Poland is to grow the value of new business.
Investment property 3,564 5,648 239 9,451 — 9,451 Loans 471 5,535 17,873 23,879 — 23,879 Financial investments
Principal risks and uncertainties In accordance with the requirements of the FCA Handbook (DTR 4.1.8) we provide a description of the principal risks and uncertainties facing the Group here and in note 58. Our disclosures covering ‘risks relating to our business’ in line with reporting requirements of the Securities Exchange Commission (SEC) provide more detail and can be found in the shareholder information section ‘Risks relating to our business’.
Water consumption (m³) – absolute 690,369 509,657 529,960 459,634 Reduce water use by 4%
Increase in employee volunteering and decrease in volunteering hours: The increase in the % of employees volunteering a consequence of our focus on driving employee participation. The reduction in total volunteering hours is due to our increased focus on individual skills based volunteering, rather than team events, and also a significant reduction in overall headcount.
Selected Information The scope of our work was limited to assurance over the information marked with the symbol in Aviva’s Annual Report and Accounts 2013 (the “Selected Information” as found on pages 280 and 281). The Selected Information was assessed against the Reporting Criteria found at responsibility/reports/1. Our assurance does not extend to information in respect of earlier periods or to any other information included in Annual Report and Accounts 2013.
Liquidity and capital resources 289 Regulation 293 Risks relating to our business 299
The Matching Share Plan Under the all employee share ownership plan (AESOP), eligible employees can invest up to statutory limits, currently £125 per month out of their gross salary in the Company’s shares. A matching element was introduced in April 2013 through which the Company matches every purchased share with two matching shares for the first £40 of a participant’s monthly contribution. Matching shares are subject to forfeiture if purchased shares are withdrawn from the AESOP within three years of purchase, as long as the employee remains employed by the Company. From May 2013 participants were also eligible to receive dividend shares through the AESOP.
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).
The determination of the amount of allowances and impairments taken on our investments is highly subjective. Our process for valuing investments may include methodologies, estimations and assumptions which require judgement and could result in changes to investment valuations. 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 varies 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. We value our fair value securities using designated methodologies, estimations 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 13 ‘Fair Value Measurement’. 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 2013, 17% of total financial investments, loans and investment properties at fair value were classified as Level 3, amounting to £37,171 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 our valuation. Goodwill represents the excess of the amounts paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. We test goodwill and intangible assets with indefinite useful lives at least annually for impairment or when circumstances or events indicate there may be uncertainty over this value. We test intangibles with finite lives when circumstances or events indicate there may be uncertainty over this value. For impairment testing, goodwill and intangibles have been allocated to cash-generating unit by geographical reporting unit and business segment. The fair value of the reporting unit is impacted by the performance of the business. Goodwill, negative unallocated divisible surplus and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support our carrying value. Such write downs could have a material adverse effect on our results of operations or financial condition.
There has been an increased focus in the UK on the fair treatment of customers, in particular on the way in which the insurance industry or fund management industry sells and administers insurance policies or other products. This has included the implementation of the recommendations of the Retail Distribution Review (“RDR”) from 31 December 2012. The RDR banned product providers from paying commission to advisers on new sales and also required certain changes to the way advisers describe their services to customers. The new distribution landscape has altered the way in which retail investment products are sold to customers and presents challenges to our UK distribution and advisory activities in adapting to the new rules. Where larger groups or matters of public policy are concerned, the PRA and the FCA may intervene directly. There have been several industry-wide issues in recent years in which the PRA or the FCA (or previously the FSA) has intervened directly, including the sale of personal pensions, the sale of mortgage-related endowments and investments in split capital investment trusts and payment protection insurance. Outside of the UK, our businesses are regulated by local regulators that often have similar powers to the PRA and the FCA and could therefore have a similar negative impact on perceptions of our businesses or have a material adverse effect on our business. Furthermore, various jurisdictions in which we operate, including the UK, have created investor compensation schemes that require mandatory contributions from market participants in some instances in the event of a failure of another market participant. As a major participant in the majority of our chosen markets, circumstances could arise where we, along with other companies, may be required to make such contributions. A determination that we have failed to comply with applicable regulations could have a negative impact on our results of operations or on our relations with current and potential customers. Regulatory action against a member of the Group could result in adverse publicity for, or negative perceptions regarding, the Group, or could have a material adverse effect on our business, our results of operations and financial condition and divert management’s attention from the day-to-day management of the business. We will not always be able to predict the impact of future legislation or regulation or changes in the interpretation or operation of existing legislation or regulation on our business, results of operations and financial condition. Changes in government policy, legislation or regulatory interpretation applying to companies in the financial services and insurance industries in any of the markets in which we operate, which may be applied retrospectively, may adversely affect our product range, distribution channels, capital requirements, dividends payable by subsidiaries and, consequently, results and financing requirements. We may face increased compliance costs due to the need to set up additional compliance controls or the direct cost of such compliance because of changes to financial services legislation or regulation. The Solvency II Directive (“Solvency II”), an insurance industry regulation agreed by the European Parliament in 2009, will require European domiciled insurers to move to more riskbased capital requirements. The implementation date for Solvency II has been extended to January 2016. There continue to be material uncertainties around the impact of the more detailed technical requirements of Solvency II and around the approval of internal models and there is a risk that these could lead to a significant increase in the capital required to support our business. In July 2013 the Group was designated by the Financial Stability Board (“FSB”) as a global systemically important insurer (“G-SII”). The initial list of nine insurance groups that have been
Turnbull Guidance on Internal Control The Turnbull Guidance sets out best practice on internal controls for UK listed companies, and provides additional guidance in applying certain sections of the UK Corporate Governance Code.