TIDMAV.
RNS Number : 7812A
Aviva PLC
25 March 2013
25 March 2013
AVIVA PLC
2012 ANNUAL REPORT ON FORM 20-F AND
2012 ANNUAL REPORT AND ACCOUNTS
Following the release by Aviva plc (the "Company") on 7 March
2013 of the Company's 2012 Preliminary Results Announcement for the
year ended 31 December 2012, the Company announces that it has
today issued the documents listed below:
-- 2012 Annual Report on Form 20-F, which has been filed with
the United States Securities and Exchange Commission
-- 2012 Annual Report and Accounts
The documents are available to view on the Company's website at
www.aviva.com/reports and copies have been submitted to the
National Storage Mechanism and will shortly be available for
inspection at www.hemscott.com/nsm.do
The Company's 2012 Annual Review, Notice of Annual General
Meeting 2013 and ancillary documents, together with hard copies of
the 2012 Annual Report and Accounts, will be made available to
shareholders on 2 April 2013.
Printed copies of the 2012 Annual Report and Accounts and 2012
Annual Review can be requested free of charge by shareholders from
2 April 2013 by contacting the Company's Registrar, Computershare
Investor Services PLC, on 0871 495 0105 or at
AvivaSHARES@computershare.co.uk, or by writing to the Group Company
Secretary, Aviva plc, St Helen's, 1 Undershaft, London EC3P
3DQ.
Enquiries:
Kirsty Cooper, Group General Counsel and Company Secretary
Telephone - 020 7662 6646
Liz Nicholls, Assistant Company Secretary
Telephone - 020 7662 8358
Information required under Disclosure & Transparency Rule
6.3.5(2)(b)
In accordance with Disclosure and Transparency Rule 6.3.5(2)(b),
additional information is set out in the appendices to this
announcement. These set out in full unedited text the directors'
responsibility statement, events after the reporting period,
principal risks and uncertainties and details of related party
transactions extracted from the Annual Report and Accounts 2012.
Page references in the text refer to page numbers in the 2012
Annual Report and Accounts.
Directors' responsibility statement
Each of the directors listed on pages 80 to 82 confirm that, to
the best of their knowledge:
-- The Group financial statements, which have been prepared in
accordance with IFRS as adopted by the EU, give a true and fair
view of the assets, liabilities, financial position and
profit/(loss) of the Group; and
-- The Directors' Report and the Management Report include a
fair review of the development and performance of the business and
the position of the Group, together with a description of the
principal risks and uncertainties that it faces.
Events after the reporting period
On 8 January 2013 the Company announced its intention to sell
the Group's remaining stake in Delta Lloyd N.V., a Dutch listed
insurance company. The sale took place by way of an accelerated
book build offering and the Group's entire remaining holding of
34,288,795 ordinary shares in Delta Lloyd N.V. was sold at a price
of EUR12.65 per share. The sale completed on 14 January 2013.
On 17 January 2013 the Company announced it had agreed to sell
the Group's stake in its Malaysian joint ventures, CIMB Aviva
Assurance Berhad and CIMB Aviva Takaful Berhad, to Sun Life
Assurance Company of Canada for GBP152 million payable in
cash. The deal is subject to regulatory approval and is expected
to complete during the first half of 2013.
On 27 February 2013 the Company announced it had agreed to sell
Aviva Russia to Blagosostoyanie, a non-state pension fund in
Russia, for a consideration of EUR35 million payable in cash. The
sale is subject to approval by the Federal Antimonopoly Service of
the Russian Federation and it is expected that the sale will
complete during the first half of 2013.
Principal risks and uncertainties
In accordance with the requirements of the FSA Handbook (DTR
4.1.8) we provide a description of the principal risks and
uncertainties facing the Group here and in note 56. 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'.
Risk environment
Financial market conditions during 2012 were volatile although
positive overall, benefiting from the expansionary monetary
policies followed by central banks across a number of economies in
the second half of the year. However, the continued political and
economic uncertainty relating to the Eurozone combined with the
high levels of debt in many western economies continues to act as a
brake on economic growth and raises the likelihood of a low growth,
low interest rate environment persisting for some time.
Reflecting the wider financial and economic conditions, both UK
and international regulatory authorities have implemented, or are
in the process of considering, enhanced regulatory requirements
intended to prevent future crises arising or assure the stability
of institutions under their supervision. A good example of this in
the UK is the Prudential Regulatory Authority's (PRA) proposed
focus on ensuring that firms have adequate resolution arrangements
in place.
Further regulatory uncertainty arose from the ongoing
discussions regarding the technical standards for, and the
implementation date of, Solvency II. Aviva continues to actively
participate in the development of Solvency II through key European
industry working groups.
Risk profile
The types of risk to which the Group is exposed have not changed
significantly over the year and remain credit, market, insurance,
asset management, liquidity, operational and reputational risks as
described in note 56 of the IFRS financial statements.
Reflecting Aviva's objective of building financial strength and
reducing capital volatility, the Group has taken steps to amend its
risk profile. These include a net sell down of approximately EUR3.6
billion (gross of minority interests) Italian government bonds,
a reduction in credit exposure to European financial
institutions and a move towards a more general reduction in credit
risk predominantly achieved through the sale of the Group's US
subsidiary (which remains subject to regulatory approval).
Restrictions on non-domestic investment in sovereign and corporate
debt from Greece, Ireland, Italy, Portugal and Spain remain in
place and balance sheet volatility was further reduced through the
sell down of Delta Lloyd in July 2012. As described in note 56, a
number of foreign exchange rate, credit and equity hedges are also
in place. The reduction in credit and equity exposure noted above
also reflects a broader move towards a more balanced risk
profile.
Subsequent to the year end, the Group has also taken action to
improve its access to dividends from the Group's insurance and
asset management businesses by undertaking a corporate
restructuring whereby Aviva Group Holdings (AGH) has purchased from
Aviva Insurance Limited (AIL) its interest in the majority of its
overseas businesses. This purchase has been funded by intercompany
loans. It is planned to pay down the intercompany loan balances
over time, in addition to meeting the Groups normal operating
expenses, taxes, interest on our external debt, dividends and
repayment of maturing debt.
Going forward, the Groups focus is on fewer businesses as is
reflected in the sale of Aviva's Czech Republic, Hungarian and
Romanian life businesses, the sale of Aviva's interest in our Sri
Lankan joint venture, our remaining stake in Delta Lloyd and the
agreed sale of the US business, the Romanian pensions business,
Aviva Russia, and our stake in the Malaysian joint venture CIMB.
The process of exiting these non-core businesses will reduce the
amount of the Group's capital employed in less economically
profitable areas, decrease balance sheet volatility and required
capital, and will allow capital to be re-employed in businesses
that enhance the Group's return on risk based capital. Execution
risk is inherent in the completion of all strategic transactions,
with a corresponding potential impact on capital requirements and
liquidity.
As a result of the sale of businesses (in particular the US),
the Group's future earnings have been reduced and the tangible net
asset value of the Group has fallen (leading to an increase in the
leverage ratio to close to 50%). We have plans in place to improve
earnings through managing the deployment of capital to maximise
return and expense reduction (though clearly execution risk
remains). These additional earnings, combined with higher retained
profits, should enable us to reduce our external leverage ratio to
40% in the medium term and reduce internal leverage.
56 - Risk management
This note sets out the major risks our businesses and its
shareholders face and describes the Group's approach to managing
these. It also gives sensitivity analyses around the major economic
and non-economic assumptions that can cause volatility in the
Group's earnings and capital position.
(a) Risk management framework
The risk management framework (RMF) in Aviva forms an integral
part of the management and Board processes and decision-making
framework across the Group. The key elements of our risk management
framework comprise risk appetite; risk governance, including risk
policies and business standards, risk oversight committees and
roles and responsibilities; and the processes we use to identify,
measure, manage, monitor and report (IMMMR) risks, including the
use of our risk models and stress and scenario testing.
For the purposes of risk identification and measurement, and
aligned to Aviva's risk policies, risks are usually grouped by risk
type: credit, market, liquidity, life insurance, general insurance,
asset management and operational risk. Risks falling within these
types may affect a number of metrics including those relating to
balance sheet strength, liquidity and profit. They may also affect
the performance of the products we deliver to our customers and the
service to our customers and distributors, which can be categorised
as risks to our brand and reputation.
To promote a consistent and rigorous approach to risk management
across all businesses we have a set of risk policies and business
standards which set out the risk strategy, appetite, framework and
minimum requirements for the Group's worldwide operations. On a
semi-annual basis the business chief executive officers and chief
risk officers sign-off compliance with these policies and
standards, providing assurance to the relevant oversight committees
that there is a consistent framework for managing our
business and the associated risks.
A regular top-town key risk identification and assessment
process is carried out by the risk function. This includes the
consideration of emerging risks and is supported by deeper thematic
reviews. This process is replicated at the business unit level. The
risk assessment processes are used to generate risk reports which
are shared with the relevant risk committees.
Risk models are an important tool in our measurement of risks
and are used to support the monitoring and reporting of the risk
profile and in the consideration of the risk management actions
available. We carry out a range of stress (where one risk factor,
such as equity returns, is assumed to vary) and scenario (where
combinations of risk factors are assumed to vary) tests to evaluate
their impact on the business and the management actions available
to respond to the conditions envisaged.
Roles and responsibilities for risk management in Aviva are
based around the 'three lines of defence model' where ownership for
risk is taken at all levels in the Group. Line management in the
business is accountable for risk management, including the
implementation of the risk management framework and embedding of
the risk culture. The risk function is accountable for quantitative
and qualitative oversight and challenge of the IMMMR process and
for developing the risk management framework. Internal Audit
provides an independent assessment of the risk framework and
internal control processes.
Board oversight of risk and risk management across the Group is
maintained on a regular basis through its Risk Committee. The Board
has overall responsibility for determining risk appetite, which is
an expression of the risk the business is willing to take. Risk
appetites are set relative to capital, liquidity and franchise
value at Group and in the business units. Economic capital risk
appetites are also set for each risk type. The Group's position
against risk appetite is monitored and reported to the Board on a
regular basis. The oversight of risk and risk management at the
Group level is supported by the Asset Liability Committee (ALCO),
which focuses on business and financial risks, and the Operational
Risk Reputation Committee (ORRC) which focuses on operational and
reputational risks. Similar committee structures with equivalent
terms of reference exist in the business units.
56 - Risk management continued
Further information on the types and management of specific risk
types is given in sections (b) - (j) below.
The risk management framework of a small number of our joint
ventures and strategic equity holdings differs from the Aviva
framework outlined in this note. We work with these entities to
understand how risks are managed and to align them, where possible,
with Aviva's framework.
(b) Credit risk
Credit risk is the risk of financial loss as a result of the
default or failure of third parties to meet their payment
obligations to Aviva, or variations in market values as a result of
changes in expectations related to these risks. Credit risk is an
area where we can provide the returns required to satisfy
policyholder liabilities and to generate returns for our
shareholders. In general we prefer to take credit risk over equity
and property risks, due to the better expected risk adjusted
return, our credit risk analysis capability and the structural
investment advantages conferred to insurers with long-dated,
relatively illiquid liabilities.
Our approach to managing credit risk recognises that there is a
risk of adverse financial impact resulting from fluctuations in
credit quality of third parties including default, rating
transition and credit spread movements. Our credit risks arise
principally through exposures to debt security investments,
structured asset investments, bank deposits, derivative
counterparties, mortgage lending and reinsurance
counterparties.
The Group manages its credit risk at business unit and Group
level. All business units are required to implement credit risk
management processes (including limits frameworks), operate
specific risk management committees, and ensure detailed reporting
and monitoring of their exposures against pre-established risk
criteria. At Group level, we manage and monitor all exposures
across our business units on a consolidated basis, and operate a
Group limit framework that must be adhered to by all.
A detailed breakdown of the Group's current credit exposure by
credit quality is shown below.
(i) Financial exposures by credit ratings
Financial assets are graded according to current external credit
ratings issued. AAA is the highest possible rating. Investment
grade financial assets are classified within the range of AAA to
BBB ratings. Financial assets which fall outside this range are
classified as sub-investment grade. The following table provides
information regarding the aggregated credit risk exposure of the
Group for financial assets with external credit ratings, excluding
assets 'held for sale'. 'Not rated' assets capture assets not rated
by external ratings agencies.
As at AAA AA A BBB Speculative Not Carrying Less Carrying
31 December grade rated value assets value
2012 including classified GBPm
held as
for held
sale for
sale
-------------- ------ ------ ------ ------ ------------ ------- ----------- ------------ ---------
Debt
securities 24.4% 16.9% 23.8% 25.4% 4.2% 5.3% 161,623 (33,617) 128,006
-------------- ------ ------ ------ ------ ------------ ------- ----------- ------------ ---------
Reinsurance
assets 0.4% 63.4% 30.1% 0.7% 0.1% 5.3% 7,567 (883) 6,684
-------------- ------ ------ ------ ------ ------------ ------- ----------- ------------ ---------
Other
investments 0.1% 0.2% 2.3% 2.0% 1.5% 93.9% 30,093 (1,550) 28,543
-------------- ------ ------ ------ ------ ------------ ------- ----------- ------------ ---------
Loans 5.8% 8.2% 1.2% 0.1% 0.7% 84.0% 27,934 (3,397) 24,537
-------------- ------ ------ ------ ------ ------------ ------- ----------- ------------ ---------
Total 227,217 (39,447) 187,770
-------------- ------ ------ ------ ------ ------------ ------- ----------- ------------ ---------
As at AAA AA A BBB Speculative Not Carrying Less Carrying
31 December grade rated value assets value
2011 including classified GBPm
held as
for held
sale for
sale
-------------- ------ ------ ------ ------ ------------ ------- ----------- ------------ ---------
Debt
securities 32.3% 13.2% 29.9% 16.3% 2.8% 5.4% 153,345 (93) 153,252
-------------- ------ ------ ------ ------ ------------ ------- ----------- ------------ ---------
Reinsurance
assets 0.0% 70.1% 23.2% 0.0% 0.4% 6.3% 7,113 (1) 7,112
-------------- ------ ------ ------ ------ ------------ ------- ----------- ------------ ---------
Other
investments 0.2% 0.8% 1.4% 2.3% 0.4% 94.9% 30,377 217 30,160
-------------- ------ ------ ------ ------ ------------ ------- ----------- ------------ ---------
Loans 0.9% 1.3% 1.2% 0.2% 0.8% 95.6% 28,116 - 28,116
-------------- ------ ------ ------ ------ ------------ ------- ----------- ------------ ---------
Total 218,951 (311) 218,640
-------------- ------ ------ ------ ------ ------------ ------- ----------- ------------ ---------
The carrying amount of assets included in the statement of
financial position represents the maximum credit exposure.
The impact of collateral held on the net credit exposure is
shown below.
2012 Restated 2011
---------------------------------------------------------- -------------------------------------
At 31 December Carrying Collateral Net credit Carrying Collateral Net credit
2012 value in held exposure value in held exposure
the GBPm GBPm the GBPm GBPm
statement statement
of of
financial financial
position position
GBPm GBPm
------------------- ----------- ----------- ----------- ----------- ----------- -----------
Debt securities 161,623 (33) 161,590 153,345 (31) 153,314
------------------- ----------- ----------- ----------- ----------- ----------- -----------
Reinsurance
assets 7,567 (21) 7,546 7,113 (443) 6,670
------------------- ----------- ----------- ----------- ----------- ----------- -----------
Other investments 30,093 (1,224) 28,869 30,377 (465) 29,912
------------------- ----------- ----------- ----------- ----------- ----------- -----------
Loans 27,934 (26,893) 1,041 28,116 (26,957) 1,159
------------------- ----------- ----------- ----------- ----------- ----------- -----------
Total 227,217 (28,171) 199,046 218,951 (27,896) 191,055
------------------- ----------- ----------- ----------- ----------- ----------- -----------
Less: Assets
classified
as held
for sale (39,447) 3,958 (35,489) (311) - (311)
------------------- ----------- ----------- ----------- ----------- ----------- -----------
Total (excluding
held for
sale) 187,770 (24,213) 163,557 218,640 (27,896) 190,744
------------------- ----------- ----------- ----------- ----------- ----------- -----------
Following a review of the collateral reported, the total net
credit exposure (excluding assets classified as held for sale) at
31 December 2011 has decreased by GBP1,045 million.
Additional information in respect to collateral is provided in
notes 23(c) and notes 25(d)(i).
To the extent that collateral held is greater than the amount
receivable that it is securing, the table above shows only an
amount equal to the latter. In the event of default, any
over-collateralised security would be returned to the relevant
counterparty.
56 - Risk management continued
(ii) Financial exposures to peripheral European countries
Included in our debt securities and other financial assets, are
exposures to peripheral European countries. Gross of
non-controlling interests, our direct shareholder assets exposure
to the governments (and local authorities and agencies) of Greece,
Ireland, Portugal, Italy and Spain has reduced since 2011 and is
detailed in 25 (e). We continue to monitor closely the situation in
the eurozone and have had additional restrictions on further
investment in place since late 2009 as well as taking actions to
reduce exposure to higher risk assets.
(iii) Other investments
Other investments (including assets of operations classified as
held for sale) include unit trusts and other investment vehicles;
derivative financial instruments, representing positions to
mitigate the impact of adverse market movements; and other assets
includes deposits with credit institutions and minority holdings in
property management undertakings.
The credit quality of the underlying debt securities within
investment vehicles is managed by the safeguards built into the
investment mandates for these funds which determine the funds' risk
profiles. At the Group level, we also monitor the asset quality of
unit trusts and other investment vehicles against Group set
limits.
A proportion of the assets underlying these investments are
represented by equities and so credit ratings are not generally
applicable. Equity exposures are managed against agreed benchmarks
that are set with reference to overall appetite for market
risk.
(iv) Loans
The Group loan portfolio principally comprises:
-- Policy loans which are generally collateralised by a lien or
charge over the underlying policy;
-- Loans and advances to banks which primarily relate to loans
of cash collateral received in stock lending transactions. These
loans are fully collateralised by other securities; and
-- Mortgage loans collateralised by property assets.
We use loan to value; interest and debt service cover; and
diversity and quality of the tenant base metrics to internally
monitor our exposures to mortgage loans. We use credit quality,
based on dynamic market measures, and collateralisation rules to
manage our stock lending activities. Policy loans are loans and
advances made to policyholders, and are collateralised by the
underlying policies.
(v) Credit concentration risk
The long-term and general insurance businesses are generally not
individually exposed to significant concentrations of credit risk
due to the regulations applicable in most markets and the Group
credit policy and limits framework, which limit investments in
individual assets and asset classes. Credit concentrations are
monitored as part of the regular credit monitoring process and are
reported to Group ALCO. With the exception of government bonds the
largest aggregated counterparty exposure within shareholder assets
is approximately 1.5% of the total shareholder assets (gross of
'held for sale').
(vi) Reinsurance credit exposures
The Group is exposed to concentrations of risk with individual
reinsurers due to the nature of the reinsurance market and the
restricted range of reinsurers that have acceptable credit ratings.
The Group operates a policy to manage its reinsurance counterparty
exposures, by limiting the reinsurers that may be used and applying
strict limits to each reinsurer. Reinsurance exposures are
aggregated with other exposures to ensure that the overall risk is
within appetite. The Group risk function has an active monitoring
role with escalation to the Chief Financial Officer (CFO), Group
ALCO and the Board Risk Committee as appropriate.
The Group's largest reinsurance counterparty is Swiss
Reinsurance Company Ltd (including subsidiaries). At 31 December
2012, the reinsurance asset recoverable, including debtor balances,
from Swiss Reinsurance Company Ltd was GBP1,717 million.
(vii) Securities finance
The Group has significant securities financing operations within
the UK and smaller operations in some other businesses. The risks
within this activity are mitigated by over-collateralisation and
minimum counterparty credit quality requirements which are designed
to minimise residual risk. The Group operates strict standards
around counterparty quality, collateral management, margin calls
and controls.
(viii) Derivative credit exposures
The Group is exposed to counterparty credit risk through
derivative trades. This risk is mitigated through collateralising
almost all trades (the exception being certain foreign exchange
trades where it has historically been the market norm not to
collateralise). Residual exposures are captured within the Group's
credit management framework.
(ix) Unit-linked business
In unit-linked business the policyholder bears the direct market
risk and credit risk on investment assets in the unit funds and the
shareholders' exposure to credit risk is limited to the extent of
the income arising from asset management charges based on the value
of assets in the fund.
56 - Risk management continued
(x) Impairment of financial assets
In assessing whether financial assets are impaired, due
consideration is given to the factors outlined in accounting policy
(S). The following table provides information regarding the
carrying value of financial assets that have been impaired and the
ageing of financial assets that are past due but not impaired. The
table excludes assets 'held for sale'.
Financial assets that are past due
but not impaired
----------------- ---------------------------------------------------- ---------------------
At 31 Neither 0-3 3-6 6 months- Greater Financial Carrying
December past months months 1 year than assets value
2012 due nor GBPm GBPm GBPm 1 year that GBPm
impaired GBPm have
GBPm been
impaired
GBPm
----------------- ---------- -------- -------- ---------- -------- ---------- ---------
Debt securities 128,006 - - - - - 128,006
----------------- ---------- -------- -------- ---------- -------- ---------- ---------
Reinsurance
assets 6,684 - - - - - 6,684
----------------- ---------- -------- -------- ---------- -------- ---------- ---------
Other
investments 28,535 - - - - 8 28,543
----------------- ---------- -------- -------- ---------- -------- ---------- ---------
Loans 23,770 85 - - - 682 24,537
----------------- ---------- -------- -------- ---------- -------- ---------- ---------
Receivables
and other
financial
assets 7,518 46 13 14 26 - 7,617
----------------- ---------- -------- -------- ---------- -------- ---------- ---------
Financial assets that are past due
but not impaired
----------------- ---------------------------------------------------- ---------------------
At 31 Neither 0-3 3-6 6 months- Greater Financial Carrying
December past months months 1 year than assets value
2011 due nor GBPm GBPm GBPm 1 year that GBPm
impaired GBPm have
GBPm been
impaired
GBPm
----------------- ---------- -------- -------- ---------- -------- ---------- ---------
Debt securities 152,988 - - - - 264 153,252
----------------- ---------- -------- -------- ---------- -------- ---------- ---------
Reinsurance
assets 7,112 - - - - - 7,112
----------------- ---------- -------- -------- ---------- -------- ---------- ---------
Other
investments 30,152 - - - - 8 30,160
----------------- ---------- -------- -------- ---------- -------- ---------- ---------
Loans 27,582 6 - - - 528 28,116
----------------- ---------- -------- -------- ---------- -------- ---------- ---------
Receivables
and other
financial
assets 7,650 134 148 2 3 - 7,937
----------------- ---------- -------- -------- ---------- -------- ---------- ---------
Where assets have been classed as 'past due and impaired', an
analysis is made of the risk of default and a decision is made
whether to seek to mitigate the risk. There were no material
financial assets that would have been past due or impaired had the
terms not been renegotiated.
(c) Market risk
Market risk is the risk of adverse financial impact resulting,
directly or indirectly from fluctuations in interest rates, foreign
currency exchange rates, equity and property prices. Market risk
arises in business units due to fluctuations in both the value of
liabilities and the value of investments held. At Group level, it
also arises in relation to the overall portfolio of international
businesses and in the value of investment assets owned directly by
the shareholders. We actively seek some market risks as part of our
investment and product strategy however have limited appetite for
interest rate risk as we do not believe it is adequately
rewarded.
The management of market risk is undertaken at business unit and
at Group level. Businesses manage market risks locally using the
Group market risk framework and within local regulatory
constraints. Group Risk is responsible for monitoring and managing
market risk at Group level and has an established criteria for
matching assets and liabilities to limit the impact of mismatches
due to market movements.
In addition, where the Group's long-term savings businesses have
written insurance and investment products where the majority of
investment risks are borne by its policyholders, these risks are
managed in line with local regulations and marketing literature, in
order to satisfy the policyholders' risk and reward objectives. The
Group writes unit-linked business in a number of its operations.
The shareholders' exposure to market risk on this business is
limited to the extent that income arising from asset management
charges is based on the value of assets in the fund.
The most material types of market risk that the Group is exposed
to are described below.
(i) Equity price risk
The Group is subject to equity price risk arising from changes
in the market values of its equity securities portfolio.
We continue to limit our direct equity exposure in line with our
risk preferences. The reduction of the shareholding in Delta Lloyd
has decreased the Group's equity price risk and, in particular, has
led to a fall in equity exposures. Our equity hedging programme
during 2012 has further reduced our equity exposures. At a business
unit level, investment limits and local asset admissibility
regulations require that business units hold diversified portfolios
of assets thereby reducing exposure to individual equities. The
Group does not have material holdings of unquoted equity
securities.
Equity risk is also managed using a variety of derivative
instruments, including futures and options. Businesses actively
model the performance of equities through the use of risk models,
in particular to understand the impact of equity performance on
guarantees, options and bonus rates. At 31 December 2012 the
Group's shareholder funds held GBP3 billion notional of equity
hedges, with up to 12 months to maturity with an average strike of
88% of the prevailing market levels on 31 December 2012.
Sensitivity to changes in equity prices is given in section '(j)
risk and capital management' below.
(ii) Property price risk
The Group is subject to property price risk directly due to
holdings of investment properties in a variety of locations
worldwide and indirectly through investments in mortgages and
mortgage backed securities. Investment in property is managed at
business unit level, and is subject to local regulations on asset
admissibility, liquidity requirements and the expectations of
policyholders.
As at 31 December 2012, no material derivative contracts had
been entered into to mitigate the effects of changes in property
prices.
Sensitivity to changes in property prices is given in section
'(j) risk and capital management' below.
56 - Risk management continued
(iii) Interest rate risk
Interest rate risk arises primarily from the Group's investments
in long-term debt and fixed income securities and their movement
relative to the value placed on the insurance liabilities. A number
of policyholder product features have an influence on the Group's
interest rate risk. The major features include guaranteed surrender
values, guaranteed annuity options, and minimum surrender and
maturity values. Details of material guarantees and options are
given in note 41.
Exposure to interest rate risk is monitored through several
measures that include duration, economic capital modelling,
sensitivity testing and stress and scenario testing. The impact of
exposure to sustained low interest rates is considered within our
scenario testing.
The Group typically manages interest rate risk by investing in
fixed interest securities which closely match the interest rate
sensitivity of the liabilities where this is available. Interest
rate risk is also managed in some business units using a variety of
derivative instruments, including futures, options, swaps, caps and
floors.
Sensitivity to changes in interest rates is given in section
'(j) risk and capital management' below. Further information on
borrowings is included in note 48.
(iv) Inflation risk
Inflation risk arises primarily from the Group's exposure to
general insurance claims inflation, to inflation linked benefits
within the defined benefit staff pension schemes and within the UK
annuity portfolio and to expense inflation. Increases in long-term
inflation expectations are closely linked to long-term interest
rates and so are frequently considered with interest rate risk.
Exposure to inflation risk is monitored through economic capital
modelling, sensitivity testing and stress and scenario testing. The
Group typically manages inflation risk through its investment
strategy and, in particular, by investing in inflation linked
securities and through a variety of derivative instruments,
including inflation linked swaps.
(v) Currency risk
The Group has minimal exposure to currency risk from financial
instruments held by business units in currencies other than their
functional currencies, as nearly all such holdings are backing
either by unit-linked or with-profit contract liabilities or
hedging.
The Group operates internationally and as a result is exposed to
foreign currency exchange risk arising from fluctuations in
exchange rates of various currencies. Approximately half of the
Group's premium income arises in currencies other than sterling and
the Group's net assets are denominated in a variety of currencies,
of which the largest are euro, sterling and US dollars. The Group
does not hedge foreign currency revenues as these are substantially
retained locally to support the growth of the Group's business and
meet local regulatory and market requirements.
Businesses aim to maintain sufficient assets in local currency
to meet local currency liabilities, however movements may impact
the value of the Group's consolidated shareholders' equity which is
expressed in sterling. This aspect of foreign exchange risk is
monitored and managed centrally, against pre-determined limits.
These exposures are managed by aligning the deployment of
regulatory capital by currency with the Group's regulatory capital
requirements by currency. Currency borrowings and derivatives are
used to manage exposures within the limits that have been set.
At 31 December 2012 and 2011, the Group's total equity
deployment by currency including assets 'held for sale' was:
Sterling Euro US$ Other Total
GBPm GBPm GBPm GBPm GBPm
-------------- --------- ------ ------ ------ -------
Capital
31 December
2012 4,445 4,648 (51) 2,318 11,360
-------------- --------- ------ ------ ------ -------
Capital
31 December
2011 3,427 6,442 3,237 2,257 15,363
-------------- --------- ------ ------ ------ -------
A 10% change in sterling to euro/US$ foreign exchange rates
would have had the following impact on total equity.
10% 10% 10% 10%
increase decrease increase in decrease
in sterling/ in sterling/ sterling/ in sterling/
euro rate euro rate US$ rate US$ rate
GBPm GBPm GBPm GBPm
----------------- -------------- -------------- ------------- --------------
Net assets
at 31 December
2012 (386) 411 34 (5)
----------------- -------------- -------------- ------------- --------------
Net assets
at 31 December
2011 (524) 632 (323) 323
----------------- -------------- -------------- ------------- --------------
A 10% change in sterling to euro/US$ foreign exchange rates
would have had the following impact on profit before tax, excluding
'discontinued operations'.
10% 10% 10% 10%
increase decrease increase in decrease
in sterling/ in sterling/ sterling/ in sterling/
euro rate euro rate US$ rate US$ rate
GBPm GBPm GBPm GBPm
------------------ -------------- -------------- ------------- --------------
Impact on
profit before
tax 31 December
2012 (32) 32 1 (1)
------------------ -------------- -------------- ------------- --------------
Impact on
profit before
tax 31 December
2011 (84) 11 (4) 17
------------------ -------------- -------------- ------------- --------------
The balance sheet changes arise from retranslation of business
unit statements of financial position from their functional
currencies into sterling, with above movements being taken through
the currency translation reserve. These balance sheet movements in
exchange rates therefore have no impact on profit. Net asset and
profit before tax figures are stated after taking account of the
effect of currency hedging activities.
56 - Risk management continued
(vi) Derivatives risk
Derivatives are used by a number of the businesses. Activity is
overseen by the Group risk function, who monitors exposure levels
and approves large or complex transactions. Derivatives are
primarily used for efficient investment management, risk hedging
purposes, or to structure specific retail savings products.
The Group applies strict requirements to the administration and
valuation processes it uses, and has a control framework that is
consistent with market and industry practice for the activity that
is undertaken.
(vii) Correlation risk
The Group recognises that lapse behaviour and potential
increases in consumer expectations are sensitive to and
interdependent with market movements and interest rates. These
interdependencies are taken into consideration in the internal
economic capital model and in scenario analysis.
(d) Liquidity risk
Liquidity risk is the risk of not being able to make payments as
they become due because there are insufficient assets in cash form.
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. The Group seeks to ensure that it maintains
sufficient financial resources to meet its obligations as they fall
due through the application of a Group liquidity risk policy and
business standard. At Group and business unit level, there is a
liquidity risk appetite which requires that sufficient liquid
resources be maintained to cover net outflows in a stress scenario.
The Company's main sources of liquidity are liquid assets held
within the Company and Aviva Group Holdings Limited (AGH), and
dividends received from the Group's insurance and asset management
businesses. Sources of liquidity in normal markets also includes a
variety of short and long-term instruments including commercial
papers and medium and long-term debt. For 2012 and prior years, the
Company's main sources of liquidity also included intercompany
loans from Aviva Insurance Limited and Aviva International
Insurance Limited, subject to regulatory constraints. In addition
to the existing liquid resources and expected inflows, the Group
and Company maintain significant undrawn committed borrowing
facilities (GBP2.1 billion) from a range of leading
international banks to further mitigate this risk.
Maturity analyses
The following tables show the maturities of our insurance and
investment contract liabilities, and of the financial and
reinsurance assets to meet them. A maturity analysis of the
contractual amounts payable for borrowings and derivatives is given
in notes 48 and 57, respectively. Contractual obligations under
operating leases and capital commitments are given in note 52.
(i) Analysis of maturity of insurance and investment contract
liabilities
For non-linked insurance business, the following table shows the
gross liability at 31 December 2012 and 2011 analysed by remaining
duration. The total liability is split by remaining duration in
proportion to the cash-flows expected to arise during that period,
as permitted under IFRS 4, Insurance Contracts.
Almost all linked business and non-linked investment contracts
may be surrendered or transferred on demand. For such contracts,
the earliest contractual maturity date is therefore the current
statement of financial position date, for a surrender amount
approximately equal to the current statement of financial position
liability. We expect surrenders, transfers and maturities to occur
over many years, and the tables reflect the expected cash flows for
these contracts. However, contractually, the total liability for
linked business and non-linked investment contracts would be shown
in the 'within 1 year' column below, and previously the total
liability for linked business was shown in the 'within 1 year'
column. Changes in durations between 2011 and 2012 reflect
evolution of the portfolio, and changes to the models for
projecting cash-flows.
At 31 December Total On demand 1-5 years 5-15 years Over 15
2012 GBPm or within GBPm GBPm years
1 year GBPm
GBPm
----------------- -------- ----------- ---------- ----------- --------
Long-term
business
----------------- -------- ----------- ---------- ----------- --------
Insurance
contracts
- non-linked 117,602 8,303 31,894 44,455 32,950
----------------- -------- ----------- ---------- ----------- --------
Investment
contracts
- non-linked 59,788 2,491 12,390 16,679 28,228
----------------- -------- ----------- ---------- ----------- --------
Linked business 69,690 5,667 18,203 21,590 24,230
----------------- -------- ----------- ---------- ----------- --------
General
insurance
and health 15,006 6,166 5,763 2,456 621
----------------- -------- ----------- ---------- ----------- --------
Total contract
liabilities 262,086 22,627 68,250 85,180 86,029
----------------- -------- ----------- ---------- ----------- --------
At 31 December Total On demand 1-5 years 5-15 years Over 15
2011 GBPm or within GBPm GBPm years
1 year GBPm
GBPm
----------------- -------- ----------- ---------- ----------- --------
Long-term
business
----------------- -------- ----------- ---------- ----------- --------
Insurance
contracts
- non-linked
(restated)(1) 117,442 9,693 35,403 45,829 26,517
----------------- -------- ----------- ---------- ----------- --------
Investment
contracts
- non-linked
(restated)(1) 62,412 6,240 20,208 26,252 9,712
----------------- -------- ----------- ---------- ----------- --------
Linked business
(restated)(2) 65,994 7,297 20,614 24,324 13,759
----------------- -------- ----------- ---------- ----------- --------
General
insurance
and health 15,241 5,645 5,967 2,913 716
----------------- -------- ----------- ---------- ----------- --------
Total contract
liabilities 261,089 28,875 82,192 99,318 50,704
----------------- -------- ----------- ---------- ----------- --------
(1) Following a review of the classification of contracts issued
by the Group's Italian long-term business, certain portfolios have
been reclassified from participating insurance to participating
investment contracts for all years presented. There is no impact on
the result for any year presented as a result of this
classification.
(2) Linked business maturity profile has been restated to
reflect an expected rather than contractual basis. Contractually,
the total liability for linked business would be shown in the
'within 1 year column'.
56 - Risk management continued
(ii) Analysis of maturity of financial assets
The following table provides an analysis, by maturity date of
the principal, of the carrying value of financial assets which are
available to fund the repayment of liabilities as they crystallise.
This table excludes assets held for sale.
At 31 December Total On demand 1-5 years Over No fixed
2012 GBPm or within GBPm 5 years term
1 year GBPm (perpetual)
GBPm GBPm
------------------- -------- ----------- ---------- --------- -------------
Debt securities 128,006 16,796 36,009 75,198 3
------------------- -------- ----------- ---------- --------- -------------
Equity securities 32,529 - - - 32,529
------------------- -------- ----------- ---------- --------- -------------
Other investments 28,543 12,638 866 12,508 2,531
------------------- -------- ----------- ---------- --------- -------------
Loans 24,537 5,358 1,780 17,329 70
------------------- -------- ----------- ---------- --------- -------------
Cash and
cash equivalents 22,897 22,897 - - -
------------------- -------- ----------- ---------- --------- -------------
236,512 57,689 38,655 105,035 35,133
------------------- -------- ----------- ---------- --------- -------------
At 31 December Total On demand 1-5 years Over No fixed
2011 GBPm or within GBPm 5 years term
1 year GBPm (perpetual)
GBPm GBPm
------------------- -------- ----------- ---------- --------- -------------
Debt securities 153,252 18,698 39,079 95,460 15
------------------- -------- ----------- ---------- --------- -------------
Equity securities 32,646 - - - 32,646
------------------- -------- ----------- ---------- --------- -------------
Other investments 30,160 21,007 1,192 1,016 6,945
------------------- -------- ----------- ---------- --------- -------------
Loans 28,116 6,490 2,800 18,825 1
------------------- -------- ----------- ---------- --------- -------------
Cash and
cash equivalents 23,043 23,043 - - -
------------------- -------- ----------- ---------- --------- -------------
267,217 69,238 43,071 115,301 39,607
------------------- -------- ----------- ---------- --------- -------------
The assets above are analysed in accordance with the earliest
possible redemption date of the instrument at the initiation of the
Group. Where an instrument is transferable back to the issuer on
demand, such as most unit trusts or similar types of investment
vehicle, it is included in the 'On demand or within 1 year' column.
Debt securities with no fixed contractual maturity date are
generally callable at the option of the issuer at the date the
coupon rate is reset under the contractual terms of the instrument.
The terms for resetting the coupon are such that we expect the
securities to be redeemed at this date, as it would be uneconomic
for the issuer not to do so, and for liquidity management purposes
we manage these securities on this basis. The first repricing and
call date is normally ten years or more after the date of issuance.
Most of the Group's investments in equity securities and fixed
maturity securities are market traded and therefore, if required,
can be liquidated for cash at short notice.
(e) Life insurance risk
Life insurance risk in the Group arises through its exposure to
mortality and morbidity risks and exposure to worse than
anticipated operating experience on factors such as persistency
levels and management and administration expenses. The Group
chooses to take measured amounts of life insurance risk provided
that the relevant business has the appropriate core skills to
assess and price the risk and adequate returns are available.
The underlying risk profile of our life insurance risks,
primarily persistency, longevity, mortality and expense risk, has
remained stable during 2012, although the current low levels of
interest rates have increased our sensitivity to longevity shocks.
Persistency risk remains significant and continues to have a
volatile outlook with underlying performance linked to some degree
to economic conditions. However, businesses across the Group have
continued to make progress with a range of customer retention
activities. The Group has continued to write strong volumes of life
protection business, and to utilise reinsurance to reduce exposure
to potential losses. More generally, life insurance risks are
believed to benefit from a significant diversification against
other risks in the portfolio. Life insurance risks are modelled
within the internal economic capital model and subject to
sensitivity and stress and scenario testing. The assumption and
management of life insurance risks is governed by the group-wide
business standards covering underwriting, pricing, product design
and management, in-force management, claims handling, and
reinsurance. The individual life insurance risks are managed as
follows:
-- Mortality and morbidity risks are mitigated by use of
reinsurance. The Group allows businesses to select reinsurers, from
those approved by the Group, based on local factors, but retains
oversight of the overall exposures and monitor that the aggregation
of risk ceded is within credit risk appetite.
-- Longevity risk and internal experience analysis are monitored
against the latest external industry data and emerging trends.
Whilst individual businesses are responsible for reserving and
pricing for annuity business, the Group monitors the exposure to
this risk and any associated capital implications. The Group has
used reinsurance solutions to reduce the risks from longevity and
continually monitors and evaluates emerging market solutions to
mitigate this risk further.
-- Persistency risk is managed at a business unit level through
frequent monitoring of company experience, and 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 has developed guidelines on persistency
management.
-- Expense risk is primarily managed by the business units
through the assessment of business unit profitability and frequent
monitoring of expense levels.
Embedded derivatives
The Group has exposure to a variety of embedded derivatives in
its long-term savings business due to product features offering
varying degrees of guaranteed benefits at maturity or on early
surrender, along with options to convert their benefits into
different products on pre-agreed terms. The extent of the impact of
these embedded derivatives differs considerably between business
units and exposes Aviva to changes in policyholder behaviour in the
exercise of options as well as market risk.
56 - Risk management continued
Examples of each type of embedded derivative affecting the Group
are:
-- Options: call, put, surrender and maturity options,
guaranteed annuity options, options to cease premium payment,
options for withdrawals free of market value adjustment, annuity
options, and guaranteed insurability options.
-- Guarantees: embedded floor (guaranteed return), maturity
guarantee, guaranteed death benefit, and guaranteed minimum rate of
annuity payment.
-- Other: indexed interest or principal payments, maturity value, loyalty bonus.
The impact of these is reflected in the economic capital model
and MCEV reporting and managed as part of the asset liability
framework.
(f) General insurance risk
Types of risk
General insurance risk in the Group arises from:
-- Fluctuations in the timing, frequency and severity of claims
and claim settlements relative to expectations;
-- Unexpected claims arising from a single source or cause;
-- Inaccurate pricing of risks or inappropriate underwriting of risks when underwritten; and
-- Inadequate reinsurance protection or other risk transfer techniques.
Aviva has a preference for general insurance risk in measured
amounts for explicit reward, in line with our core skills in
underwriting and pricing. The majority of the general insurance
business underwritten by the Group continues to be short tail in
nature such as motor, household and commercial property insurances.
The Group's underwriting strategy and appetite is communicated via
specific policy statements, related business standards and
guidelines. General insurance risk is managed primarily at business
unit level with oversight at the Group level. Claims reserving is
undertaken by local actuaries in the various general insurance
businesses and is also subject to periodic external reviews.
Reserving processes are further detailed in note 39 'insurance
liabilities'.
The vast majority of the Group's general insurance business is
managed and priced in the same country as the domicile of the
customer.
Management of general insurance risks
Significant insurance risks will be reported under the risk
management framework. Additionally, the economic capital model is
used to assess the risks that each general insurance business unit,
and the Group as a whole, is exposed to, quantifying their impact
and calculating appropriate capital requirements.
Business units have developed mechanisms that identify, quantify
and manage accumulated exposures to contain them within the limits
of the appetite of the Group. The business units are assisted by a
Business Capability team who provide technical input for major
decisions which fall outside individual delegated limits or
escalations outside group risk preferences, group risk
accumulation, concentration and profitability limits.
Reinsurance strategy
Significant reinsurance purchases are reviewed annually at both
business unit and Group level to verify that the levels of
protection being bought reflect any developments in exposure and
the risk appetite of the Group. The basis of these purchases is
underpinned by analysis of economic capital, economic gain,
earnings volatility, liquidity, retained risk exposure profile and
the Group's franchise value.
Detailed actuarial analysis is used to calculate the Group's
extreme risk profile and then design cost and capital efficient
reinsurance programmes to mitigate these risks to within agreed
appetites. For businesses writing general insurance we analyse the
natural catastrophe exposure using external probabilistic
catastrophe models widely used by the rest of the (re)insurance
industry.
The Group cedes much of its worldwide catastrophe risk to
third-party reinsurers but retains a pooled element for its own
account gaining diversification benefit. The total Group potential
loss from its most concentrated catastrophe exposure zone (Northern
Europe) is approximately GBP260 million, for a one in ten year
annual loss scenario, compared to approximately GBP460 million when
measured on a one in a hundred year annual loss scenario.
In our 2011 Annual Report & Accounts we reported our
participation in a share of Hiscox's US property catastrophe
portfolio. This arrangement expired on the 31 December 2012 and
remaining exposure will run off during 2013.
(g) Asset management risk
Asset Management risk arises through exposure to negative
investment performance, fund liquidity, and factors that influence
franchise value such as product development appropriateness and
capability, and client retention. The Group's exposure to asset
management risk is informed through regular assessment of the
investment management capabilities and proven track record of the
investment funds.
Aviva is directly exposed to the risks associated with operating
an asset management business through its ownership of Aviva
Investors. The underlying risk profile of our asset management risk
is derived from investment performance, specialist investment
professionals and leadership, product development capabilities,
fund liquidity, margin, client retention, regulatory developments,
fiduciary and contractual responsibilities. Investment performance
has remained strong over 2012 despite some positions being impacted
by the volatility of global markets.
56 - Risk management continued
Action has been taken during the year to improve the operational
infrastructure and enhance the quality of the customer experience
including; progressing towards the implementation of the Blackrock
Aladdin platform to support our investment process; review of our
Business Development capability; and a continued drive to work
closely with clients.
(h) Operational risk
Operational risk is the risk of direct or indirect loss, arising
from inadequate or failed internal processes, people and systems,
or external events including changes in the regulatory environment.
We have limited appetite for operational risk and aim to reduce
these risks as far as is commercially sensible.
Our business units are primarily responsible for identifying and
managing operational risks within their businesses, within the
group-wide operational risk framework including the risk and
control self-assessment process. Businesses must be satisfied that
all material risks falling outside our risk tolerances are being
mitigated, monitored and reported to an appropriate level. Any
risks with a high potential impact are monitored centrally on a
regular basis. Businesses use key indicator data to help monitor
the status of the risk and control environment. They also identify
and capture loss events, taking appropriate action to address
actual control breakdowns and promote internal learning.
(i) Brand and reputation risk
We are exposed to the risk that litigation, employee misconduct,
operational failures, the outcome of regulatory investigations,
media speculation and negative publicity, disclosure of
confidential client information, inadequate services, whether or
not founded, could impact our brands or reputation. Any of our
brands or our reputation could also be affected if products or
services recommended by us (or any of our intermediaries) do not
perform as expected (whether or not the expectations are founded)
or the customer's expectations for the product change. We seek to
reduce this risk to as low a level as commercially sensible.
The FSA regularly considers whether we are meeting the
requirement to treat our customers fairly and we make use of
various metrics to assess our own performance, including customer
advocacy, retention and complaints. Failure to meet these
requirements could also impact our brands or reputation.
If we do not manage the perception of our brands and reputation
successfully, it could cause existing customers or agents to
withdraw from our business and potential customers or agents to
choose not to do business with us.
(j) Risk and capital management
(i) Sensitivity test analysis
The Group uses a number of sensitivity tests to understand the
volatility of earnings, the volatility of its capital requirements,
and to manage its capital more efficiently. Sensitivities to
economic and operating experience are regularly produced on the
Group's key financial performance metrics to inform the Group's
decision making and planning processes, and as part of the
framework for identifying and quantifying the risks to which each
of its business units, and the Group as a whole, are exposed.
For long-term business in particular, sensitivities of market
consistent performance indicators to changes in both economic and
non-economic experience are continually used to manage the business
and to inform the decision making process.
(ii) Life insurance and investment contracts
The nature of long-term business is such that a number of
assumptions are made in compiling these financial statements.
Assumptions are made about investment returns, expenses, mortality
rates and persistency in connection with the in-force policies for
each business unit. Assumptions are best estimates based on
historic and expected experience of the business. A number of the
key assumptions for the Group's central scenario are disclosed
elsewhere in these statements for both IFRS reporting and reporting
under MCEV methodology.
(iii) General insurance and health business
General insurance and health claim liabilities are estimated by
using standard actuarial claims projection techniques. These
methods extrapolate the claims development for each accident year
based on the observed development of earlier years. In most cases,
no explicit assumptions are made as projections are based on
assumptions implicit in the historic claims.
(iv) Sensitivity test results
Illustrative results of sensitivity testing for long-term
business, general insurance and health business and the fund
management and non-insurance business are set out below. For each
sensitivity test the impact of a reasonably possible change in a
single factor is shown, with other assumptions left unchanged.
56 - Risk management continued
Sensitivity factor Description of sensitivity factor
applied
------------------------------------ ------------------------------------------
Interest rate and investment The impact of a change in market
return interest rates by a 1% increase
or decrease. The test allows
consistently for similar changes
to investment returns and movements
in the market value of backing
fixed interest securities.
------------------------------------ ------------------------------------------
Credit spreads The impact of a 0.5% increase
in credit spreads over risk-free
interest rates on corporate
bonds and other non-sovereign
credit assets. The test allows
for any consequential impact
on liability valuations
------------------------------------ ------------------------------------------
Equity/property market values The impact of a change in equity/property
market values by +/- 10%.
------------------------------------ ------------------------------------------
Expenses The impact of an increase in
maintenance expenses by 10%.
------------------------------------ ------------------------------------------
Assurance mortality/morbidity The impact of an increase in
(life insurance only) mortality/morbidity rates for
assurance contracts by 5%.
------------------------------------ ------------------------------------------
Annuitant mortality (life insurance The impact of a reduction in
only) mortality rates for annuity
contracts by 5%.
------------------------------------ ------------------------------------------
Gross loss ratios (non-life The impact of an increase in
insurance only) gross loss ratios for general
insurance and
health business by 5%.
------------------------------------ ------------------------------------------
Long-term business
Sensitivities as at 31 December 2012
2012 Interest Interest Credit Equity/ Equity/ Expenses Assurance Annuitant
Impact rates rates spreads property property +10% mortality mortality
on profit +1% -1% +0.5% +10% -10% +5% -5%
before
tax
GBPm
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Insurance
Participating (45) (15) (110) 60 (95) (25) (5) (50)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Insurance
non-participating (160) 130 (430) - - (75) (45) (470)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Investment
participating (55) 45 - 5 (10) (10) - -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Investment
non-participating (40) 35 (5) 10 (15) (20) - -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Assets
backing
life
shareholders'
funds 10 (15) (40) 45 (45) - - -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Total
excluding
Delta
Lloyd
and United
States (290) 180 (585) 120 (165) (130) (50) (520)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
United
States 880 (640) 495 - - - - -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Total
excluding
Delta
Lloyd 590 (460) (90) 120 (165) (130) (50) (520)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
2012 Interest Interest Credit Equity/ Equity/ Expenses Assurance Annuitant
Impact rates rates spreads property property +10% mortality mortality
on shareholders' +1% -1% +0.5% +10% -10% +5% -5%
equity
before
tax
GBPm
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Insurance
Participating (45) (15) (110) 60 (95) (25) (5) (50)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Insurance
non-participating (165) 125 (430) - - (75) (45) (470)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Investment
participating (55) 45 - 5 (10) (10) - -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Investment
non-participating (45) 40 - 10 (15) (20) - -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Assets
backing
life
shareholders'
funds (5) - (45) 50 (50) - - -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Total
excluding
Delta
Lloyd
and United
States (315) 195 (585) 125 (170) (130) (50) (520)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
United - - - - - - - -
States
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Total
excluding
Delta
Lloyd (315) 195 (585) 125 (170) (130) (50) (520)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Sensitivities as at 31 December 2011
2011 Interest Interest Credit Equity/ Equity/ Expenses Assurance Annuitant
Impact rates rates spreads property property +10% mortality mortality
on profit +1% -1% +0.5% +10% -10% +5% -5%
before
tax
GBPm
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Insurance
Participating (45) (155) (20) 5 (95) (45) (10) (50)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Insurance
non-participating (180) 130 (385) 30 (35) (65) (45) (470)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Investment
participating (35) 40 (30) 50 (75) (10) - -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Investment
non-participating (15) 20 (5) 15 (15) (20) - -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Assets
backing
life
shareholders'
funds 135 (15) (10) 10 (10) - - -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Total
excluding
Delta
Lloyd
and United
States (140) 20 (450) 110 (230) (140) (55) (520)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
United
States 45 (50) 10 50 (35) (10) (15) -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Total
excluding
Delta
Lloyd (95) (30) (440) 160 (265) (150) (70) (520)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
2011 Interest Interest Credit Equity/ Equity/ Expenses Assurance Annuitant
Impact rates rates spreads property property +10% mortality mortality
on shareholders' +1% -1% +0.5% +10% -10% +5% -5%
equity
before
tax
GBPm
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Insurance
Participating (45) (155) (25) 5 (95) (45) (10) (50)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Insurance
non-participating (180) 130 (385) 30 (35) (65) (45) (470)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Investment
participating (35) 40 (30) 50 (75) (10) - -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Investment
non-participating (15) 20 (5) 15 (15) (20) - -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Assets
backing
life
shareholders'
funds 125 - (15) 15 (15) - - -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Total
excluding
Delta
Lloyd
and United
States (150) 35 (460) 115 (235) (140) (55) (520)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
United
States (540) 455 (350) 50 (35) (10) (15) -
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
Total
excluding
Delta
Lloyd (690) 490 (810) 165 (270) (150) (70) (520)
-------------------- --------- --------- --------- ---------- ---------- --------- ----------- -----------
56 - Risk management continued
Changes in sensitivities between 2012 and 2011 reflect movements
in market interest rates, portfolio growth, changes to asset mix
and the relative durations of assets and liabilities and asset
liability management actions.
The sensitivities to economic movements (excluding the United
States) relate mainly to business in the UK. In general, a fall in
market interest rates has a beneficial impact on non-participating
business, due to the increase in market value of fixed interest
securities and the relative durations of assets and liabilities;
similarly a rise in interest rates has a negative impact. The
mortality sensitivities also relate primarily to the UK.
In the United States, most debt securities are classified as AFS
for which movements in unrealised gains or losses are taken
directly to shareholders' equity. This limited the overall
sensitivity of IFRS profit to interest rate and credit spread
movements. Following the classification of the business as held for
sale in 2012 it was remeasured to fair value less costs to sell. It
has been assumed that economic movements would not materially
impact the fair value less costs to sell and the impact on
shareholders' equity is therefore reported as GBPnil. As a result,
were economic movements to occur, the corresponding movements in
AFS assets which would be taken directly to shareholders' equity,
are reversed out through profit before tax in order to maintain the
remeasurement value of the US at fair value less costs to sell.
General insurance and health business
sensitivities as at 31 December 2012
2012 Interest Interest Credit Equity/ Equity/ Expenses Gross loss
Impact on profit rates rates spreads property property +10% ratios
before tax +1% -1% +0.5% +10% -10% +5%
GBPm
---------------------- --------- --------- --------- ---------- ---------- --------- -----------
Gross of reinsurance
excluding Delta
Lloyd (260) 235 (125) 45 (50) (120) (300)
---------------------- --------- --------- --------- ---------- ---------- --------- -----------
Net of reinsurance
excluding Delta
Lloyd (300) 285 (125) 45 (50) (120) (285)
---------------------- --------- --------- --------- ---------- ---------- --------- -----------
2012 Interest Interest Credit Equity/ Equity/ Expenses Gross loss
Impact on shareholders' rates rates spreads property property +10% ratios
equity before +1% -1% +0.5% +10% -10% +5%
tax
GBPm
-------------------------- --------- --------- --------- ---------- ---------- --------- -----------
Gross of reinsurance
excluding Delta
Lloyd (260) 235 (125) 50 (50) (25) (300)
-------------------------- --------- --------- --------- ---------- ---------- --------- -----------
Net of reinsurance
excluding Delta
Lloyd (300) 285 (125) 50 (50) (25) (285)
-------------------------- --------- --------- --------- ---------- ---------- --------- -----------
Sensitivities as at 31 December 2011
2011 Interest Interest Credit Equity/ Equity/ Expenses Gross loss
Impact on profit rates rates spreads property property +10% ratios
before tax +1% -1% +0.5% +10% -10% +5%
GBPm
---------------------- --------- --------- --------- ---------- ---------- --------- -----------
Gross of reinsurance
excluding Delta
Lloyd (205) 180 (125) 50 (55) (130) (300)
---------------------- --------- --------- --------- ---------- ---------- --------- -----------
Net of reinsurance
excluding Delta
Lloyd (275) 275 (125) 50 (55) (130) (290)
---------------------- --------- --------- --------- ---------- ---------- --------- -----------
2011 Interest Interest Credit Equity/ Equity/ Expenses Gross loss
Impact on shareholders' rates rates spreads property property +10% ratios
equity before +1% -1% +0.5% +10% -10% +5%
tax
GBPm
-------------------------- --------- --------- --------- ---------- ---------- --------- -----------
Gross of reinsurance
excluding Delta
Lloyd (205) 180 (125) 50 (55) (30) (300)
-------------------------- --------- --------- --------- ---------- ---------- --------- -----------
Net of reinsurance
excluding Delta
Lloyd (275) 275 (125) 50 (55) (30) (290)
-------------------------- --------- --------- --------- ---------- ---------- --------- -----------
For general insurance, the impact of the expense sensitivity on
profit also includes the increase in ongoing administration
expenses, in addition to the increase in the claims handling
expense provision.
Fund management and non-insurance business
sensitivities as at 31 December 2012
2012 Interest Interest Credit Equity/ Equity/
Impact on profit before tax rates rates spreads property property
GBPm +1% -1% +0.5% +10% -10%
--------------------------------- --------- --------- --------- ---------- ----------
Total excluding Delta Lloyd (5) - 30 (90) 10
--------------------------------- --------- --------- --------- ---------- ----------
2012 Interest Interest Credit Equity/ Equity/
Impact on shareholders' equity rates rates spreads property property
before tax +1% -1% +0.5% +10% -10%
GBPm
--------------------------------- --------- --------- --------- ---------- ----------
Total excluding Delta Lloyd (5) - 30 (90) 10
--------------------------------- --------- --------- --------- ---------- ----------
56 - Risk management continued
Sensitivities as at 31 December 2011
Interest Interest Credit Equity/ Equity/
2011 rates rates spreads property property
Impact on profit before tax +1% -1% +0.5% +10% -10%
GBPm
--------------------------------- --------- --------- --------- ---------- ----------
Total excluding Delta Lloyd (10) 10 - (40) 75
--------------------------------- --------- --------- --------- ---------- ----------
2011 Interest Interest Credit Equity/ Equity/
Impact on shareholders' equity rates rates spreads property property
before tax +1% -1% +0.5% +10% -10%
GBPm
--------------------------------- --------- --------- --------- ---------- ----------
Total excluding Delta Lloyd (10) 10 - (40) 75
--------------------------------- --------- --------- --------- ---------- ----------
Limitations of sensitivity analysis
The above tables demonstrate the effect of a change in a key
assumption while other assumptions remain unchanged. In reality,
there is a correlation between the assumptions and other factors.
It should also be noted that these sensitivities are non-linear,
and larger or smaller impacts should not be interpolated or
extrapolated from these results.
The sensitivity analyses do not take into consideration that the
Group's assets and liabilities are actively managed. Additionally,
the financial position of the Group may vary at the time that any
actual market movement occurs. For example, the Group's financial
risk management strategy aims to manage the exposure to market
fluctuations.
As investment markets move past various trigger levels,
management actions could include selling investments, changing
investment portfolio allocation, adjusting bonuses credited to
policyholders, and taking other protective action.
A number of the business units use passive assumptions to
calculate their long-term business liabilities. Consequently, a
change in the underlying assumptions may not have any impact on the
liabilities, whereas assets held at market value in the statement
of financial position will be affected. In these circumstances, the
different measurement bases for liabilities and assets may lead to
volatility in shareholder equity. Similarly, for general insurance
liabilities, the interest rate sensitivities only affect profit and
equity where explicit assumptions are made regarding interest
(discount) rates or future inflation.
Other limitations in the above sensitivity analyses include the
use of hypothetical market movements to demonstrate potential risk
that only represent the Group's view of possible near-term market
changes that cannot be predicted with any certainty, and the
assumption that all interest rates move in an identical
fashion.
Related party disclosures
Related party transactions
For more information relating to related party transactions,
including more information about the transactions described below,
please see 'Financial Statements IFRS - Note 59 - Related party
transactions'.
Subsidiaries
Transactions between the Company and its subsidiaries are
eliminated on consolidation.
Key management compensation
The total compensation to those employees classified as key
management, being those having authority and responsibility for
planning, directing and controlling the activities of the Group,
including the executive and non-executive directors is as
follows:
2012 2011
GBPm GBPm
----------------------------------------- ------ ------
Salary and other short-term benefits(1) 4.7 6.7
Other long-term benefits 0.4 2.8
Post-employment benefits(1) 1.9 1.7
Equity compensation plans(1) 4.8 5.9
Termination benefits(1) 1.5 0.7
----------------------------------------- ------ ------
Total 13.3 17.8
----------------------------------------- ------ ------
Various directors and key management of Aviva may from time to
time purchase insurance, asset management or annuity products, from
Aviva Group companies in the ordinary course of business on
substantially the same terms, including interest rates and security
requirements, as those prevailing at the time for comparable
transactions with other persons.
Apart from the disclosed transactions discussed above and in the
'Governance' section of this report, no director had an interest in
shares, transactions or arrangements that requires disclosure under
applicable rules and regulations.
Other related parties
The Group received income from and paid expenses to other
related parties from transactions made in the normal course of
business. Loans to other related parties are made on normal arm's
length commercial terms.
Services provided to, and by related parties
2012 2011
-------- ----------- ----------- ----------- -------- ----------- ----------- -----------
Income Expenses Payable Receivable Income Expenses Payable Receivable
earned incurred at period at period earned incurred at period at period
in in period end end in in period end end
period GBPm GBPm GBPm period GBPm GBPm GBPm
GBPm GBPm
------------ -------- ----------- ----------- ----------- -------- ----------- ----------- -----------
Associates - (4) - - - (3) (49) -
Joint
ventures 23 (1) - 103 23 - - 125
Employee
pension
schemes 12 - - 6 13 - - 9
------------ -------- ----------- ----------- ----------- -------- ----------- ----------- -----------
35 (5) - 109 36 (3) (49) 134
------------ -------- ----------- ----------- ----------- -------- ----------- ----------- -----------
In addition to the amounts disclosed for associates and joint
ventures above, at 31 December 2012 amounts payable at yearend were
GBPnil, and expenses incurred during the period were GBP5
million.
Transactions with joint ventures in the UK relate to the
property management undertakings, the most material of which are
listed in note 18(b). Our interest in these joint ventures
comprises a mix of equity and loans, together with the provision of
administration services and financial management to many of them.
Our UK life insurance companies earn interest on loans advanced to
these entities, movements in which may be found in note 18(a).
Our fund management companies also charge fees to these joint
ventures for administration services and for arranging external
finance.
Our UK fund management companies manage most of the assets held
by the Group's main UK staff pension scheme, for which they charge
fees based on the level of funds under management. The main UK
scheme holds investments in Group managed funds and insurance
policies with other Group companies, as explained in note
47(e)(iii).
The related parties' receivables are not secured and no
guarantees were received in respect thereof. The receivables will
be settled in accordance with normal credit terms. Details of
guarantees, indemnities and warranties provided on behalf of
related parties are given in note 51(g).
Loans to joint ventures
We make loans to our property management joint ventures to fund
property developments which we undertake with our joint venture
partners. Movements in these loans may be found in 'Financial
Statements IFRS - Note 18 - Interests in, and loans to,
joint ventures'. Total loans at 31 December 2012 and at the end
of each of the last three financial years are shown in the table
below:
Loans to joint ventures 2012 2011 2010
GBPm GBPm GBPm
------------------------- ------ ------ ------
92 100 375
------------------------- ------ ------ ------
59 - Related party transactions
This note gives details of the transactions between Group
companies and related parties which comprise our joint ventures,
associates and staff pension schemes.
The Group undertakes transactions with related parties in the
normal course of business. Loans to related parties are made on
normal arm's-length commercial terms.
Services provided to, and by related parties
2012 2011
-------- ----------- ----------- ----------- -------- ----------- ----------- -----------
Income Expenses Payable Receivable Income Expenses Payable Receivable
earned incurred at period at period earned incurred at period at period
in in period end end in in period end end
period GBPm GBPm GBPm period GBPm GBPm GBPm
GBPm GBPm
------------ -------- ----------- ----------- ----------- -------- ----------- ----------- -----------
Associates - (4) - - - (3) (49) -
Joint
ventures 23 (1) - 103 23 - - 125
Employee
pension
schemes 12 - - 6 13 - - 9
------------ -------- ----------- ----------- ----------- -------- ----------- ----------- -----------
35 (5) - 109 36 (3) (49) 134
------------ -------- ----------- ----------- ----------- -------- ----------- ----------- -----------
Transactions with joint ventures in the UK relate to the
property management undertakings, the most material of which are
listed in note 18(b). Our interest in these joint ventures
comprises a mix of equity and loans, together with the provision of
administration services and financial management to many of them.
Our UK life insurance companies earn interest on loans advanced to
these entities, movements in which may be found in note 18(a).
Our fund management companies also charge fees to these joint
ventures for administration services and for arranging external
finance.
Our UK fund management companies manage most of the assets held
by the Group's main UK staff pension scheme, for which they charge
fees based on the level of funds under management. The main UK
scheme holds investments in Group-managed funds and insurance
policies with other Group companies, as explained in note
47(e)(iii).
The related parties' receivables are not secured and no
guarantees were received in respect thereof. The receivables will
be settled in accordance with normal credit terms. Details of
guarantees, indemnities and warranties provided on behalf of
related parties are given in note 51(g).
Key management compensation
The total compensation to those employees classified as key
management, being those having authority and responsibility for
planning, directing and controlling the activities of the Group,
including the executive and non-executive directors is as
follows:
2012 2011
GBPm GBPm
----------------------------------------- ------ ------
Salary and other short-term benefits(1) 4.7 6.7
Other long-term benefits 0.4 2.8
Post-employment benefits(1) 1.9 1.7
Equity compensation plans(1) 4.8 5.9
Termination benefits(1) 1.5 0.7
----------------------------------------- ------ ------
Total 13.3 17.8
----------------------------------------- ------ ------
(1) Following a review of the composition of key management in
the current year, comparative amounts have been restated from the
amounts previously reported. The total key management compensation
reported in 2011 was GBP65 million.
Information concerning individual directors' emoluments,
interests and transactions is given in the Directors' Remuneration
Report.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR BBGDXISDBGXU
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