Aviva PLC

Annual Report • Mar 7, 2013

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RNS Number : 4532Z Aviva PLC 07 March 2013  Part 4 of 5 Page 77 New business In this section Page B1 Life and pensions sales 78 B2 Investment sales 80 B3 Geographical analysis of life, pensions and investment sales 80 B4 Product analysis of life and pensions sales 81 B5 Trend analysis of PVNBP - cumulative 81 B6 Trend analysis of PVNBP - discrete 82 B7 Geographical analysis of regular and single premiums - life and pensions sales 83 B8 Geographical analysis of regular and single premiums - investment sales 83 B9 Life and pensions new business - net of tax and non-controlling interests 84 Page 78 B1 - Life and pensions sales Present value of new business premiums1 Value of new business New business margin Gross of tax and non-controlling interest 2012 £m 2011 £m 2012 £m 2011 £m 2012 % 2011 % United Kingdom 10,410 11,254 420 380 4.0% 3.4% Ireland 632 917 (8) (4) (1.3)% (0.4)% United Kingdom & Ireland 11,042 12,171 412 376 3.7% 3.1% France 3,638 4,047 119 142 3.3% 3.5% Spain 1,295 1,926 56 86 4.3% 4.5% Italy 1,971 2,993 29 75 1.5% 2.5% Other 159 262 - 5 - 1.9% Developed markets 18,105 21,399 616 684 3.4% 3.2% Poland 373 487 35 45 9.4% 9.2% Asia 1,765 1,782 63 71 3.6% 4.0% Other 403 320 32 20 7.9% 6.3% Higher growth markets 2,541 2,589 130 136 5.1% 5.3% Total life and pensions - continuing operations 20,646 23,988 746 820 3.6% 3.4% Total life and pensions - discontinued operations2 4,039 5,017 (280) (130) (6.9)% (2.6)% Total life and pensions 24,685 29,005 466 690 1.9% 2.4% 1 Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business. 2 Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011. Total Life and pensions sales are £24,685 million (FY11: £29,005 million). Excluding discontinued business, total life and pensions sales decreased 14% to £20,646 million (FY11: £23,988 million). The new business margin for continuing business increased to 3.6% (FY11: 3.4%), principally driven by the improvement in the UK. Value of new business was £746 million (FY11: £820 million) a reduction of 9%, with the impact of the 14% reduction in volume only partially offset by the improvement in new business margin. New business internal rates of return (IRR) are included in the Capital Management section, note C2ii. Developed Markets United Kingdom & Ireland In the United Kingdom, overall new business margin improved to 4.0% (FY11: 3.4%) and IRR improved to 18% (FY11: 15%) due to pricing actions on our core products and the withdrawal of products not meeting our hurdle rates, including large scale bulk purchase annuities, unit linked guarantee bond and building society partnerships. Total life and pension sales in the United Kingdom were down 7% to £10,410 million (FY11: £11,254 million). However, excluding bulk purchase annuities sales increased slightly to £10,223 million (FY11: £10,179 million). Protection sales were up 20% to £1,228 million (FY11: £1,025 million), benefiting from a full year's sales from our distribution deal with Santander. In 2012 we also secured an exclusive five-year distribution agreement for the sale of protection products with Tesco Bank, with sales starting in the fourth quarter of 2012. Total sales of Annuities were down 16% to £3,211 million (FY11: £3,832 million) following our decision to withdraw from the large scale bulk purchase annuity market. However, sales of Individual Annuities were up 10% to £3,024 million despite price increases to manage capital usage and we remain the market leader 1 Sales of Equity Release were up 37% to £434 million (FY11: £317 million) as we deployed risk based pricing expertise, developed in the annuities market, to this product. Pensions sales were down 2% to £5,158 million (FY11: £5,279 million). Within this, Group Personal Pensions sales were up 9% to £3,231 million (FY11: £2,961 million) as we benefited from high levels of activity in the run up to Retail Distribution Review (RDR) and Auto-Enrolment. Individual Pensions (including SIPP) were down 4% to £1,803 million (FY11: £1,876 million) as we maintained a disciplined approach to pricing. SIPP sales on our Platform grew strongly, up 123% to £408 million (FY11: £183 million). Corporate Pension sales were £124 million (FY11: £442 million). Sales of Bonds were down 53% to £379 million, impacted by changes in distribution channels in advance of RDR. Ireland sales were down 31% to £632 million (FY11: £917 million) due to the closure to new business of our joint venture with Allied Irish Bank ("AIB") from April 2012. Our non AIB business sales were £530 million (FY11: £485 million), driven by the success of our fixed rate deposit funds and the re-launch of protection business in the second half of 2012. 1. According to Association of British Insurers (ABI) as at 30 September 2012 Page 79 B1 - Life and pensions sales continued France Total life and pensions sales decreased 10% to £3,638 million (FY11: £4,047 million), a reduction of 4% on a local currency basis, with sales in the AFER product declining and sales through the Bancassurance channel remaining broadly flat. This is compared with a 10% fall in the French market2, as the tough economic environment and uncertainty around local tax regimes continue to impact consumer confidence. IRR is 11% (FY11: 11%) and new business margin is 3.3% (FY11: 3.5%) Spain Life and pensions sales in Spain decreased by 33% (28% on a local currency basis) to £1,295 million (FY11: £1,926 million). A substantial part of this reduction has been the result of management action focusing on the efficient use of capital. The business has directed attention on retaining profitable protection business, whilst developing capital efficient products, including unit linked savings. However, the economic position and the consolidation of the financial sector have meant that mortgage and loan related risk new business is also down on 2011. Despite this, the IRR remains strong at 21% (FY11: 23%) and new business margin is broadly stable at 4.3% (FY11: 4.5%). Italy Total life and pensions sales fell 34% to £1,971 million (FY11: £2,993 million), a decrease of 30% on a local currency basis. The weak demand for mortgages has led to a 40% deterioration in protection product sales and the reduced consumer appetite for investment products has resulted in 34% lower savings volumes. In addition, we have taken actions to improve profitability and reduce the level of capital intensive products by shifting the business mix away from with-profit to unit-linked products. However, while the change in business mix has helped to maintain IRR at 12% (FY11: 12%) new business margin has reduced to 1.5% (FY11: 2.5%). Higher growth markets Poland In Poland, life and pension sales decreased by 23% to £373 million (FY11: £487 million) a decrease of 17% on a local currency basis, due to a lower appetite for unit-linked products together with a change in regulation to prevent proactive marketing of pension plans. Margin was slightly up at 9.4% (FY11: 9.2%) and IRR was 20% (FY11: 24%). Asia Singapore continued its strong double-digit growth for the third consecutive year increasing to £688 million (FY11: £538 million) driven by a positive bancassurance performance through our partnership with Development Bank of Singapore. In China, the economic downturn coupled with high commodity prices led to a weakening of consumer purchasing power. Attractive bank interest rates further reduced demand for traditional longer term saving products and life and pension sales decreased by 22% to £286 million (FY11: £366 million). In India, long term savings sales decreased by 14% to £81 million (FY11: £94 million), a reduction of 2% on a local currency basis, as regulatory changes continue to disrupt the industry, including new bancassurance regulations and regulatory changes impacting the structure of traditional products. We are one of the first insurers to launch an online insurance sales portal. In Hong Kong, life and pension sales decreased by 21% to £122 million (FY11: £154 million) in a difficult market for unit-linked products. Life and pensions sales in the rest of Asia were £588 million (FY11: £630 million). The overall IRR for our Asia markets was 11% (FY11: 13%) and new business margin was 3.6% (FY11: 4.0%). Other Higher growth markets In Other higher growth markets, life and pension sales increased by 26% to £403 million (FY11: £320 million), mainly in Turkey where life and pension sales increased by 35% to £312 million (FY11: £231 million) as we continue to strengthen bancassurance and direct sales force distribution channels. Discontinued Operations - United States Discontinued operations include life and pensions sales in the United States of £4,039 million (FY11: £3,932 million). Life sales, which account for over 36% of total sales, were £1,441 million (FY11: £1,093 million). Sales of our annuity products declined by 8% to £2,598 million (FY11: £2,839 million) as a result of pricing actions we have taken throughout the year in response to the low interest rate environment. The life new business IRR was 17% (FY11: 14%), however, new business margin was negative at 6.9% driven particularly by the current low interest rates in the United States. 2. As published by the Fédération Française des Sociétés d'Assurance as at December 2012 Page 80 B2 - Investment sales Investment Sales1 2012 £m 2011 £m United Kingdom & Ireland 1,730 1,689 Aviva Investors 2,727 1,598 Higher growth markets 129 186 Total investment sales - continuing operations 4,586 3,473 Total investment sales - discontinued operations2 - 170 Total investment sales 4,586 3,643 1 Investment sales are calculated as new single premiums plus the annualised value of new regular premiums. 2 Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011. Total investment sales from continuing operations of £4,586 million were 32% higher than last year (FY11: £3,473 million). UK & Ireland investment sales (Collective Investments) increased 2% to £1,730 million (FY11: £1,689 million) in difficult trading conditions, supported by growth in sales through our wrap platform, up 151% to £221 million. Aviva Investors investment sales were £2,727 million (FY11: £1,598 million). The opening of our distribution offices in Europe contributed to most of this growth together with an increase in higher yield bond sales reflecting new mandates in Taiwan. Investment sales in Higher growth markets were 31% lower at £129 million (FY11: £186 million) reflecting lower consumer confidence in the face of volatile investment markets and challenging economic conditions . B3 - Geographical analysis of life, pension and investment sales % Growth Present value of new business premiums1 2012 £m 2011 £m Sterling Local currency2 Life and pensions business United Kingdom 10,410 11,254 (7)% (7)% Ireland 632 917 (31)% (26)% United Kingdom & Ireland 11,042 12,171 (9)% (9)% France 3,638 4,047 (10)% (4)% Spain 1,295 1,926 (33)% (28)% Italy 1,971 2,993 (34)% (30)% Other 159 262 (39)% (34)% Developed markets 18,105 21,399 (15)% (13)% Poland 373 487 (23)% (17)% China 286 366 (22)% (25)% Hong Kong 122 154 (21)% (22)% India 81 94 (14)% (2)% Singapore 688 538 28% 25% South Korea 435 481 (10)% (9)% Other 556 469 19% 25% Higher growth markets 2,541 2,589 (2)% - Total life and pensions - continuing operations 20,646 23,988 (14)% (11)% Total life and pensions - discontinued operations3 4,039 5,017 (19)% (19)% Total life and pensions 24,685 29,005 (15)% (13)% Investment sales4 United Kingdom & Ireland 1,730 1,689 2% 2% Aviva Investors 2,727 1,598 71% 80% Higher growth markets 129 186 (31)% (32)% Total investment sales - continuing operations 4,586 3,473 32% 35% Total investment sales - discontinued operations3 - 170 (100)% (100)% Total investment sales 4,586 3,643 26% 29% Total long-term savings sales - continuing operations 25,232 27,461 (8)% (5)% Total long-term savings sales - discontinued operations 4,039 5,187 (22)% (21)% Total long-term savings sales 29,271 32,648 (10)% (8)% 1. Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business. 2. Growth rates are calculated based on constant rates of exchange. 3. Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011. 4. Investment sales are calculated as new single premiums plus the annualised value of new regular premiums. Page 81 B4 - Product analysis of life and pensions sales % Growth Present value of new business premiums1 2012 £m 2011 £m Sterling Local currency2 Life and pensions business Pensions 5,158 5,279 (2)% (2)% Annuities 3,211 3,832 (16)% (16)% Bonds 379 801 (53)% (53)% Protection 1,228 1,025 20% 20% Equity release 434 317 37% 37% United Kingdom 10,410 11,254 (7)% (7)% Ireland 632 917 (31)% (26)% United Kingdom & Ireland 11,042 12,171 (9)% (9)% Savings 3,462 3,886 (11)% (5)% Protection 176 161 9% 17% France 3,638 4,047 (10)% (4)% Pensions 392 532 (26)% (21)% Savings 2,623 4,064 (35)% (31)% Annuities 39 54 (28)% (22)% Protection 371 531 (30)% (25)% Italy, Spain and Other 3,425 5,181 (34)% (29)% Developed markets 18,105 21,399 (15)% (13)% Higher growth markets 2,541 2,589 (2)% - Total life and pensions sales - continuing operations 20,646 23,988 (14)% (11)% Total life and pensions sales - discontinued operations3 4,039 5,017 (19)% (19)% Total life and pensions sales 24,685 29,005 (15)% (13)% 1. Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business. 2. Growth rates are calculated based on constant rates of exchange. 3. Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011. B5 - Trend analysis of PVNBP - cumulative 1Q11 YTD £m 2Q11 YTD £m 3Q11 YTD £m 4Q11 YTD £m 1Q12 YTD £m 2Q12 YTD £m 3Q12 YTD £m 4Q12 YTD £m % Growth on 4Q11 YTD Life and pensions business - Present value of new business premiums1 Pensions 1,105 2,708 3,963 5,279 1,251 2,762 3,963 5,158 (2)% Annuities 785 1,610 2,434 3,832 662 1,555 2,459 3,211 (16)% Bonds 271 466 638 801 128 253 322 379 (53)% Protection 250 490 749 1,025 300 608 920 1,228 20% Equity release 83 160 234 317 89 209 338 434 37% United Kingdom 2,494 5,434 8,018 11,254 2,430 5,387 8,002 10,410 (7)% Ireland 280 553 757 917 199 342 469 632 (31)% United Kingdom & Ireland 2,774 5,987 8,775 12,171 2,629 5,729 8,471 11,042 (9)% France 1,271 2,345 3,224 4,047 1,092 1,944 2,671 3,638 (10)% Spain 524 1,015 1,425 1,926 402 705 934 1,295 (33)% Italy 874 1,778 2,517 2,993 673 1,259 1,603 1,971 (34)% Other 79 155 228 262 50 98 146 159 (39)% Developed markets 5,522 11,280 16,169 21,399 4,846 9,735 13,825 18,105 (15)% Poland 149 305 403 487 107 201 274 373 (23)% Asia 426 902 1,343 1,782 442 913 1,367 1,765 (1)% Other 91 172 237 320 87 181 277 403 26% Higher growth markets 666 1,379 1,983 2,589 636 1,295 1,918 2,541 (2)% Total life and pensions 6,188 12,659 18,152 23,988 5,482 11,030 15,743 20,646 (14)% Investment sales2 869 1,830 2,682 3,473 949 1,934 3,400 4,586 32% Total long-term saving sales - continuing operations 7,057 14,489 20,834 27,461 6,431 12,964 19,143 25,232 (8)% Total long-term saving sales - discontinued operations3 1,707 2,913 4,051 5,187 1,034 2,073 3,071 4,039 (22)% Total long-term saving sales 8,764 17,402 24,885 32,648 7,465 15,037 22,214 29,271 (10)% 1. Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business. 2. Investment sales are calculated as new single premiums plus the annualised value of new regular premiums. 3. Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011. Page 82 B6 - Trend analysis of PVNBP - discrete 1Q11 £m 2Q11 £m 3Q11 £m 4Q11 £m 1Q12 £m 2Q12 £m 3Q12 £m 4Q12 £m % Growth on 3Q12 Sterling Life and pensions business - Present value of new business premiums1 Pensions 1,105 1,603 1,255 1,316 1,251 1,511 1,201 1,195 - Annuities 785 825 824 1,398 662 893 904 752 (17)% Bonds 271 195 172 163 128 125 69 57 (17)% Protection 250 240 259 276 300 308 312 308 (1)% Equity release 83 77 74 83 89 120 129 96 (26)% United Kingdom 2,494 2,940 2,584 3,236 2,430 2,957 2,615 2,408 (8)% Ireland 280 273 204 160 199 143 127 163 28% United Kingdom & Ireland 2,774 3,213 2,788 3,396 2,629 3,100 2,742 2,571 (6)% France 1,271 1,074 879 823 1,092 852 727 967 33% Spain 524 491 410 501 402 303 229 361 58% Italy 874 904 739 476 673 586 344 368 7% Other 79 76 73 34 50 48 48 13 (73)% Developed markets 5,522 5,758 4,889 5,230 4,846 4,889 4,090 4,280 5% Poland 149 156 98 84 107 94 73 99 36% Asia 426 476 441 439 442 471 454 398 (12)% Other 91 81 65 83 87 94 96 126 31% Higher growth markets 666 713 604 606 636 659 623 623 - Total life and pensions 6,188 6,471 5,493 5,836 5,482 5,548 4,713 4,903 4% Investment sales2 869 961 852 791 949 985 1,466 1,186 (19)% Total long-term saving sales - continuing operations 7,057 7,432 6,345 6,627 6,431 6,533 6,179 6,089 (1)% Total long-term saving sales - discontinued operations3 1,707 1,206 1,138 1,136 1,034 1,039 998 968 (3)% Total long-term saving sales 8,764 8,638 7,483 7,763 7,465 7,572 7,177 7,057 (2)% 1. Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business. 2. Investment sales are calculated as new single premiums plus the annualised value of new regular premiums. 3. Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011. Page 83 B7 - Geographical analysis of regular and single premiums - life and pensions sales Regular premiums Single premiums 2012 £m Local currency growth WACF Present value £m 2011 £m Local currency growth WACF Present value £m 2012 £m 2011 £m Local currency growth Pensions 595 (2)% 4.3 2,565 608 40% 4.5 2,750 2,593 2,529 3% Annuities - - - - - - - - 3,211 3,832 (16)% Bonds - - - - - - - 1 379 800 (53)% Protection 176 11% 7.0 1,228 158 10% 6.5 1,025 - - - Equity release - - - - - - - - 434 317 37% United Kingdom 771 1% 4.9 3,793 766 32% 4.9 3,776 6,617 7,478 (12)% Ireland 33 (34)% 3.8 127 53 (20)% 3.9 205 505 712 (24)% United Kingdom & Ireland 804 (1)% 4.9 3,920 819 27% 4.9 3,981 7,122 8,190 (13)% France 74 (3)% 7.9 584 81 (11)% 6.7 540 3,054 3,507 (7)% Spain 67 (22)% 5.6 375 92 (17)% 5.4 501 920 1,425 (31)% Italy 54 - 5.9 317 58 14% 5.4 316 1,654 2,677 (34)% Other 7 (59)% 8.9 62 19 (31)% 8.8 168 97 94 7% Developed markets 1,006 (4)% 5.2 5,258 1,069 16% 5.2 5,506 12,847 15,893 (16)% Poland 36 (22)% 7.3 261 50 - 7.3 367 112 120 2% Asia 282 (4)% 5.3 1,482 295 21% 4.9 1,444 283 338 (17)% Other 79 22% 3.7 290 68 23% 3.6 246 113 74 61% Higher growth markets 397 (2)% 5.1 2,033 413 19% 5.0 2,057 508 532 (3)% Total life and pension sales - continuing operations 1,403 (4)% 5.2 7,291 1,482 17% 5.1 7,563 13,355 16,425 (16)% Total life and pension sales - discontinued operations1 130 (27)% 11.1 1,440 182 (32)% 9.6 1,751 2,599 3,266 (20)% Total life and pension sales 1,533 (6)% 5.7 8,731 1,664 8% 5.6 9,314 15,954 19,691 (17)% 1. Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011. B8 - Geographical analysis of regular and single premiums - investment sales Regular Single PVNBP Investment sales 2012 £m 2011 £m Local currency growth 2012 £m 2011 £m Local currency growth Local currency growth United Kingdom & Ireland 9 6 50% 1,721 1,683 2% 2% Aviva Investors 5 6 (17)% 2,722 1,592 81% 80% Higher growth markets - - - 129 186 (32)% (32)% Total investment sales - continuing operations 14 12 17% 4,572 3,461 35% 35% Total investment sales - discontinued operations1 - - - - 8 (100)% (100)% Total investment sales 14 12 17% 4,572 3,469 35% 29% 1. Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011. Page 84 B9 - Life and pensions new business - net of tax and non-controlling interests Present value of new business premiums Value of new business New business margin Net of tax and non-controlling interest 2012 £m 2011 £m 2012 £m 2011 £m 2012 % 2011 % United Kingdom 10,410 11,254 319 281 3.1% 2.5% Ireland 474 688 (6) (3) (1.3)% (0.4)% United Kingdom & Ireland 10,884 11,942 313 278 2.9% 2.3% France 2,996 3,376 67 79 2.2% 2.3% Spain 719 1,054 15 28 2.1% 2.7% Italy 841 1,336 8 23 1.0% 1.7% Other 158 262 - 4 - 1.5% Developed markets 15,598 17,970 403 412 2.6% 2.3% Poland 339 440 26 34 7.7% 7.7% Asia 1,748 1,756 50 55 2.9% 3.1% Other 403 320 26 16 6.5% 5.0% Higher growth markets 2,490 2,516 102 105 4.1% 4.2% Total life and pensions - continuing operations 18,088 20,486 505 517 2.8% 2.5% Total life and pensions - discontinued operations1 4,039 4,531 (182) (85) (4.5)% (1.9)% Total life and pensions 22,127 25,017 323 432 1.5% 1.7% 1. Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011. Page 85 Capital management In this section Page C1 Capital management 86 C1i Capital management objectives and approach 86 C1ii Economic capital 87 C2 Capital performance 89 C2 i - Capital generation and utilisation 89 C2 ii - Capital required to write new business, internal rate of return and payback period 89 C2 iii - Analysis of IFRS basis return on equity 91 C2 iv - Analysis of MCEV basis return on equity 92 C3 Group capital structure 93 C4 Sources of liquidity 95 C5 EEV equivalent embedded value 96 C6 Regulatory capital 97 C7 IFRS sensitivity analysis 99 Page 86 Capital management C1 - Capital management C1i - Capital Management objectives and approach The primary objective of capital management is to optimise the balance between return and risk, whilst maintaining economic and regulatory capital in accordance with risk appetite. Aviva's capital and risk management objectives are closely interlinked, and support the dividend policy and earnings per share growth, whilst also recognising the critical importance of protecting policyholder and other stakeholder interests. Overall capital risk appetite, which is reviewed and approved by the Aviva board, is set and managed with reference to the requirements of a range of different stakeholders including shareholders, policyholders, regulators and rating agencies. Risk appetite is expressed in relation to a number of key capital and risk measures, and includes an economic capital risk appetite of holding sufficient capital resources to enable the Group to meet its liabilities in extreme adverse scenarios, on an ongoing basis, calibrated at a level consistent with a AA range credit rating. In managing capital we seek to: n maintain sufficient, but not excessive, financial strength in accordance with risk appetite, to support new business growth and satisfy the requirements of our regulators and other stakeholders giving both our customers and shareholders assurance of our financial strength; n optimise our overall debt to equity structure to enhance our returns to shareholders, subject to our capital risk appetite and balancing the requirements of the range of stakeholders; n retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit facilities and access to a range of capital markets; n allocate capital rigorously across the Group, to drive value adding growth through optimising risk and return; and n declare dividends with reference to factors including growth in cash flows and earnings In line with these objectives, the capital generated and invested by the Group's businesses is a key management focus. Operating capital generation, which measures net capital generated after taking into account capital invested in new business (before the impact of non-operating items) is a core regulatory capital based management performance metric used across the Group. This is embedded in the Group business planning process and other primary internal performance and management information processes. Capital is measured and managed on a number of different bases. These are discussed further in the following sections. Regulatory capital Individual regulated subsidiaries measure and report solvency based on applicable local regulations, including in the UK the regulations established by the Financial Services Authority (FSA). These measures are also consolidated under the European Insurance Groups Directive (IGD) to calculate regulatory capital adequacy at an aggregate Group level, where we have a regulatory obligation to have a positive position at all times. This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in the UK and Ireland with-profit life funds. The minimum solvency requirement for our European businesses is based on the Solvency 1 Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked life reserves respectively and for our general insurance portfolio of business is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our major non-European businesses (the US and Canada) a risk charge on assets and liabilities approach is used. Rating agency capital Credit ratings are an important indicator of financial strength and support access to debt markets as well as providing assurance to business partners and policyholders over our ability to service contractual obligations. In recognition of this, we have solicited relationships with a number of rating agencies. The agencies generally assign ratings based on an assessment of a range of financial factors (e.g. capital strength, gearing, liquidity and fixed charge cover ratios) and non financial factors (e.g. strategy, competitive position, and risk management). Certain rating agencies have proprietary capital models which they use to assess available capital resources against capital requirements as a component in their overall criteria for assigning ratings. Managing our capital and liquidity position in accordance with our target rating levels is a core consideration in all material capital management and capital allocation decisions. The Group's overall financial strength is reflected in our credit ratings. The Group's rating from Standard and Poors is A+ ("strong") with a Stable outlook; Aa3 ("excellent") with a Negative outlook from Moody's; and A ("excellent") with a Stable outlook from AMBest. Page 87 C1 - Capital management continued C1 ii Economic capital We use a risk-based capital model to assess economic capital requirements and to aid in risk and capital management across the Group. The model is based on a framework for identifying the risks to which business units, and the group as a whole, are exposed. Where appropriate, businesses also supplement these with additional risk models and stressed scenarios specific to their own risk profile. When aggregating capital requirements at business unit and group level, we allow for diversification benefits between risks and between businesses, with restrictions to allow for non-fungibility of capital where appropriate. This means that the aggregate capital requirement is less than the sum of capital required to cover all of the individual risks. The capital requirement reflects the cost of mitigating the risk of insolvency to a 99.5% confidence level over a one year time horizon (equivalent to events occurring in 1 out of 200 years) against financial and non-financial tests. The financial modelling techniques employed in economic capital enhance our practice of risk and capital management. They enable understanding of the impact of the interaction of different risks allowing us to direct risk management activities appropriately. These same techniques are employed to enhance product pricing and capital allocation processes. Unlike more traditional regulatory capital measures, economic capital also recognises the value of longer-term profits emerging from in-force and new business, allowing for consideration of longer-term value emergence as well as shorter-term net worth volatility in our risk and capital management processes. We continue to develop our economic capital modelling capability for all our businesses as part of our development programme to increase the focus on economic capital management and meeting the emerging requirements of the Solvency II framework and external agencies. Capital Management The estimated economic capital surplus represents the excess of Available Economic Capital over Required Economic Capital. Available Economic Capital is based on MCEV1 net assets, adjusted for items to convert to an economic basis. Required Economic Capital is based on Aviva's own internal assessment and capital management policies. The term 'economic capital' does not imply capital as required by regulators or other third parties. Summary analysis of Estimated Economic Capital Position 2012 £bn 2011 £bn Available economic capital 16.6 15.7 Standalone required economic capital (18.1) (18.9) Diversification benefit 6.8 6.8 Diversified required economic capital (11.3) (12.1) Estimated economic capital position at 31 December 2012 5.3 3.6 Cover Ratio 147% 130% Proforma impacts 1.8 n/a Estimated proforma economic capital position at 31 December 2012 7.1 n/a Proforma cover ratio 172% n/a Analysis of Change 2012 £bn Economic capital position at 31 December 2011 3.6 MCEV operating earnings 0.9 Economic variances 0.7 Other non-operating items (0.6) Dividend and appropriations, net of shares issued in lieu of dividends (0.7) Net impact of fixed rate note issuance/call 0.2 Other 0.4 Change in available economic capital 0.9 Impact of trading operations and other 0.4 Impact of credit hedging 0.2 Capital requirement benefits from Delta Lloyd partial sell-down 0.2 Change in diversified required economic capital 0.8 Estimated economic capital position at 31 December 2012 5.3 Proforma impacts 1.8 Estimated proforma Economic capital position at 31 December 2012 7.1 1 MCEV: market consistent embedded value. In preparing the MCEV information, the directors have done so in accordance with the MCEV principles with the exception of stating held for sale operations at their expected fair value, as represented by expected sales proceeds, less costs to sell. For more information on MCEV reporting please refer to Supplement 2 MCEV Financial Statements. Page 88 C1 - Capital management continued Summary analysis of Diversified Required Economic Capital Proforma 2012 £bn 2011 £bn Credit risk 1 2.3 3.5 Equity risk 2 1.7 2.2 Interest rate risk 3 0.1 0.2 Other market risk 4 1.5 1.5 Life insurance risk 5 1.0 1.1 General insurance risk 6 0.9 0.7 Other risk 7 2.4 2.9 Total (FY12 proforma basis) 9.9 12.1 Total (FY12 base results) 11.3 12.1 1 Capital held in respect of credit risk recognises the Group's shareholder exposure to changes in the market value of assets and defaults. Assets captured within this category include corporate bonds and non-domestic sovereign. A range of specific stresses are applied reflecting the difference in assumed risk relative to the investment grade and duration. The reduction in the year primarily reflects the disposal of the US but also includes the benefit of hedging instruments purchased in the year. 2 Capital held in respect of equity risk recognises the Group's shareholder exposure to changes in the market value of assets. The reduction in equity risk during the year primarily reflects the impact of the sell-down in Delta Lloyd. 3 Capital held in respect of interest rate risk recognises the Group's shareholder exposure to changes in the market value of assets. A range of specific stresses are applied reflecting the difference in assumed risk relative to investment grade and duration. 4Capital held in respect of other market risk recognises the Group's shareholder exposure to changes in the market value of commercial mortgages and property, but also captures risk in association with inflation and foreign exchange. 5Capital held in respect of life insurance risk recognises the Group's shareholder exposure to life insurance specific risks, such as longevity and lapse. 6Capital held in respect of general insurance risk recognises the Group's shareholder exposure to general insurance specific risks, such as claims volatility and catastrophe. 7 Capital held in respect of other risk recognises the Group's shareholder exposure to specific risks unique to particular business units. The reduction in the year primarily reflects the disposal of the US. Solvency II Following regulatory delays in finalising the Omnibus II Directive, which underpins Solvency II, it became clear that Solvency II would not come into effect on 1 January 2014. Currently the earliest expected effective date is 2 years later, on 1 January 2016. Aviva has been early adopting a number of Solvency II requirements into the ICA, which is the current economic regulatory basis in the UK. Aviva is well placed for review by the FSA on an "ICA plus" basis ("ICA plus" represents how the FSA is addressing the regulatory uncertainty left in the wake of continuing Solvency II implementation delays). Aviva continues to enhance and develop its economic capital infrastructure for full Solvency II compliance by the effective date and actively participate in developments through the key European industry working groups, and engaging with the FSA and HM Treasury to inform the on-going negotiations in Brussels. Page 89 C2 - Capital performance C2 i - Capital generation and utilisation The active management of the generation and utilisation of capital is a primary Group focus, with the balancing of new business investment and shareholder distribution with operating capital generation a key financial priority. Operating capital generation for the full-year 2012 was £2.0 billion. Life businesses generated £2.1 billion of capital (FY11: £2.3 billion), with a further £0.6 billion (FY11: £0.6 billion) generated by the general insurance and fund management businesses and other operations. Capital invested in new business was £0.7 billion (FY11: £0.8 billion), and continues to benefit from management actions to improve capital efficiency. The £0.7 billion of capital investment is primarily in life new business with the impact of capital investment in non-life business broadly neutral over the period. 2012 £bn 2011 £bn Operating capital generation: Life in-force profits1 2.1 2.3 General insurance, fund management and other operations profits 0.6 0.6 Operating capital generated before investment in new business 2.7 2.9 Capital invested in new business (0.7) (0.8) Operating capital generated after investment in new business 2.0 2.1 1 The Life in-force profits in 2012 exclude the negative impact of a true up relating to a prior estimate of required capital, which is included in the MCEV Free Surplus Emergence, as this does not impact the actual capital generated in 2012. Operating capital generation comprises the following components: - Operating Free surplus emergence, including release of required capital, for the life in-force business (net of tax and non-controlling interests); - Operating profits for the general insurance and non-life businesses (net of tax and non-controlling interests); - Capital invested in new business. For life business this is the impact of initial and required capital on free surplus. For general insurance business this reflects the movement in required capital, which has been assumed to equal the regulatory minimum multiplied by the local management target level. Where appropriate movements in capital requirements exclude the impact of foreign exchange and other movements deemed to be non-operating in nature. - Post deconsolidation on 6 May 2011, all Delta Lloyd capital generation, including life business, has been included within general insurance, fund management and other operations profits on an IFRS basis. The amount of operating capital remitted to Group is dependent upon a number of factors including non-operating items and local regulatory requirements. As well as financing new business investment, the operating capital generated is used to finance corporate costs, service the Group's debt capital and to finance shareholder dividend distributions. After taking these items into account the net operating capital generation after financing is £0.5 billion. 2012 £bn 2011 £bn Operating capital generated after investment in new business 2.0 2.1 Interest, corporate and other costs (0.8) (0.6) External dividends and appropriations, net of shares issued in lieu of dividends (0.7) (0.5) Net operating capital generation after financing 0.5 1.0 C2 ii - Capital required to write new business, internal rate of return and payback period As set out in C2i, the Group generates a significant amount of capital each year. This capital generation supports both shareholder distribution and reinvestment in new business. The new business written requires up front capital investment, due to high set-up costs and capital requirements. The internal rate of return (IRR) is a measure of the shareholder return expected on this capital investment. It is equivalent to the discount rate at which the present value of the post-tax cash flows expected to be earned over the life time of the business written, including allowance for the time value of options and guarantees, is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is the initial capital required to pay acquisition costs and set up statutory reserves in excess of premiums received ('initial capital'), plus required capital at the same level as for the calculation of the value of new business. The payback period shows how quickly shareholders can expect the total capital to be repaid. The payback period has been calculated based on undiscounted cash flows and allows for the initial and required capital. The projected investment returns in both the IRR and payback period calculations assume that equities, properties and bonds earn a return in excess of risk-free consistent with the long-term rate of return assumed in operating earnings. Page 90 C2 - Capital performance continued C2 ii - Capital required to write new business, internal rate of return and payback period continued The internal rates of return on new business written during the period are set out below. Gross of non-controlling interests 2012 Internal rate of return % Initial capital £m Required capital £m Total invested capital £m New business impact on free surplus Payback period years United Kingdom 18% 112 164 276 6 6 Ireland 2% 31 10 41 31 25 United Kingdom & Ireland 16% 143 174 317 37 8 France 11% 33 113 146 125 8 Spain 21% 21 42 63 35 4 Italy 12% 20 69 89 41 6 Other 8% 12 1 13 15 10 Developed markets 15% 229 399 628 253 8 Poland 20% 20 8 28 25 4 Asia 11% 60 29 89 82 11 Other 28% 17 15 32 29 3 Higher growth markets 16% 97 52 149 136 8 Total - excluding United States 14.9% 326 451 777 389 8 Total - United States 17% 24 292 316 319 4 Total 15.5% 350 743 1,093 708 7 Gross of non-controlling interests 2011 Internal rate of return % Initial capital £m Required capital £m Total invested capital £m New business impact on free surplus Payback period years United Kingdom 15% 155 187 342 89 7 Ireland 6% 27 22 49 38 12 United Kingdom & Ireland 14% 182 209 391 127 8 France 11% 45 127 172 153 8 Spain 23% 25 70 95 50 4 Italy 12% 24 117 141 66 6 Other 9% 25 1 26 25 8 Developed markets 14% 301 524 825 421 7 Poland 24% 25 9 34 30 4 Asia 13% 56 31 87 80 12 Other 22% 15 12 27 27 4 Higher growth markets 17% 96 52 148 137 9 Total - excluding Delta Lloyd and United States 14.5% 397 576 973 558 7 Total - Delta Lloyd1 and United States 14% 53 328 381 376 6 Total 14.3% 450 904 1,354 934 7 1 Comparative periods include the results of Delta Lloyd up to 6 May 2011. In Ireland, the closure of Ark Life to new business in the first half of 2012 has adversely impacted IRR and payback period as current expenses are spread over a smaller volume of business. Total invested capital is gross of non-controlling interests and valued on a point of sale basis. This differs from the new business impact on the free surplus which is stated net of non-controlling interests, valued on a year-end basis and benefits from the writing of new business in the UK Life RIEESA. The reconciliation is as follows: 2012 £m 2011 £m Total capital invested 1,093 1,354 Non-controlling interests1 (112) (180) Benefit of RIEESA on new business funding in UK (220) (190) Timing differences (point of sale versus year end basis) 2 (53) (50) New business impact on free surplus 708 934 1 Non controlling interests primarily in Italy and Spain 2 Timing differences across all markets Page 91 C2 - Capital performance continued C2 iii - Analysis of IFRS basis return on equity Operating return1 2012 Before Tax £m After tax £m Opening shareholders' funds including non- controlling interests £m Return on equity % Life assurance 1,831 1,542 11,237 13.7% General insurance and health2 858 633 5,875 10.8% Fund management 51 36 184 19.6% Other business (193) (135) (1,102) 12.3% Corporate3 (466) (538) 508 n/a Return on total capital employed (excluding Delta Lloyd and United States) 2,081 1,538 16,702 9.2% Delta Lloyd 112 84 776 10.8% United States 251 173 3,140 5.5% Return on total capital employed (including Delta Lloyd and United States) 2,444 1,795 20,618 8.7% Subordinated debt (294) (222) (4,550) 4.9% External debt (23) (17) (705) 2.4% Return on total equity 2,127 1,556 15,363 10.1% Less: Non-controlling interests (184) (1,530) 12.0% Direct capital instruments and fixed rate tier 1 notes (55) (990) 5.6% Preference capital (17) (200) 8.5% Return on equity shareholders' funds 1,300 12,643 10.3% 1 The operating return is based upon Group adjusted operating profit, which is stated before impairment of goodwill, amortisation of intangibles, exceptional items and investment variances. 2 The general insurance & health return on capital employed reduces when compared to 2011 due to the reallocation of goodwill from other business to general insurance and health upon the sale of RAC in 2011. 3 The 'Corporate' loss before tax of £466 million comprises costs of £136 million, net finance charge on the main UK pension scheme of £35 million and interest on internal lending arrangements of £319 million offset by investment return of £24 million. The corporate ROCE has been reported as 'n/a' as the opening capital is impacted by movements in the pension scheme, thereby making the percentage incomparable with the prior year. Operating return1 2011 Before Tax £m After tax £m Opening shareholders' funds including non- controlling interests £m Return on equity % Life assurance 1,926 1,512 11,356 13.3% General insurance and health 903 657 4,747 13.8% Fund management 62 49 192 25.5% Other business (207) (148) (119) 124.4% Corporate2 (436) (391) (232) n/a Return on total capital employed (excluding Delta Lloyd and United States) 2,248 1,679 15,944 10.5% Delta Lloyd 352 288 5,089 5.7% United States 231 88 2,758 3.2% Return on total capital employed (including Delta Lloyd and United States) 2,831 2,055 23,791 8.6% Subordinated debt (302) (222) (4,572) 4.9% External debt (26) (19) (1,494) 1.3% Return on total equity 2,503 1,814 17,725 10.2% Less: Non-controlling interests (223) (3,741) 6.0% Direct capital instruments and fixed rate tier 1 notes (43) (990) 4.3% Preference capital (17) (200) 8.5% Return on equity shareholders' funds 1,531 12,794 12.0% 1 The operating return is based upon Group adjusted operating profit, which is stated before impairment of goodwill, amortisation of intangibles, exceptional items and investment variances. 2 The 'Corporate' loss before tax of £436 million comprises costs of £138million, net finance charge on the main UK pension scheme of £46 million and interest on internal lending arrangements of £284 million offset by investment return of £32 million. The corporate ROCE has been reported as 'n/a' as the opening capital is impacted by movements in the pension scheme, thereby making the percentage incomparable with the prior year. Page 92 C2 - Capital performance continued C2 iv - Analysis of MCEV basis return on equity Operating return1 2012 Before Tax £m After tax £m Opening shareholders' funds including non- controlling interests £m Return on equity % Life assurance 2,206 1,630 14,148 11.5% General insurance and health 858 633 5,875 10.8% Fund management 24 17 184 9.2% Other business (186) (130) (1,102) 11.8% Corporate2 (466) (538) 508 n/a Return on total capital employed (excluding Delta Lloyd and United States) 2,436 1,612 19,613 8.2% Delta Lloyd 112 84 776 10.8% United States (378) (244) 361 (67.6)% Return on total capital employed (including Delta Lloyd and United States) 2,170 1,452 20,750 7.0% Subordinated debt (294) (222) (4,550) 4.9% External debt (23) (17) (705) 2.4% Return on total equity 1,853 1,213 15,495 7.8% Less: Non-controlling interests (336) (1,476) 22.8% Direct capital instruments and fixed rate tier 1 notes (55) (990) 5.6% Preference capital (17) (200) 8.5% Return on equity shareholders' funds 805 12,829 6.3% 1 The operating return is based upon Group adjusted operating profit, which is stated before impairment of goodwill, amortisation of intangibles, exceptional items and investment variance. 2 The 'Corporate' loss before tax of £466 million comprises costs of £136 million, net finance charge on the main UK pension scheme of £35 million and interest on internal lending arrangements of £319 million offset by investment return of £24 million. The corporate ROCE has been reported as 'n/a' as the opening capital is impacted by movements in the pension scheme, thereby making the percentage incomparable with the prior year. Operating return1 2011 Before Tax £m After tax £m Opening shareholders' funds including non- controlling interests £m Return on equity % Life assurance 2,888 2,062 16,673 12.4% General insurance and health 903 657 4,747 13.8% Fund management 28 18 192 9.4% Other business (204) (144) (119) 121.0% Corporate2 (436) (391) (232) n/a Return on total capital employed (excluding Delta Lloyd and United States) 3,179 2,202 21,261 10.4% Delta Lloyd 444 331 3,892 8.5% United States 242 158 1,118 14.1% Return on total capital employed (including Delta Lloyd and United States) 3,865 2,691 26,271 10.2% Subordinated debt (302) (222) (4,572) 4.9% External debt (26) (19) (1,494) 1.3% Return on total equity 3,537 2,450 20,205 12.1% Less: Non-controlling interests (253) (3,977) 6.4% Direct capital instruments and fixed rate tier 1 notes (43) (990) 4.3% Preference capital (17) (200) 8.5% Return on equity shareholders' funds 2,137 15,038 14.2% 1 The operating return is based upon Group adjusted operating profit, which is stated before impairment of goodwill, amortisation of intangibles, exceptional items and investment variance. 2 The 'Corporate' loss before tax of £436million comprises costs of £138million, net finance charge on the main UK pension scheme of £46 million and interest on internal lending arrangements of £284 million offset by investment return of £32 million. The corporate ROCE has been reported as 'n/a' as the opening capital is impacted by movements in the pension scheme, thereby making the percentage incomparable with the prior year. Page 93 C3 - Group capital structure The table below shows how our capital, on an MCEV basis, is deployed by products and services segments and how that capital is funded. 2012 £m 2011 £m Long-term savings 16,337 14,148 General insurance and health 6,089 5,875 Fund management 225 184 Other business (1,059) (1,102) Corporate1 (588) 508 Delta Lloyd - 776 United States 365 361 Total capital employed 21,369 20,750 Financed by Equity shareholders' funds 12,434 12,829 Non-controlling interests 2,214 1,476 Direct capital instruments and fixed rate tier 1 notes 1,382 990 Preference shares 200 200 Subordinated debt 4,337 4,550 External debt 802 705 Total capital employed 21,369 20,750 1 "Corporate" includes centrally held tangible net assets, the staff pension scheme surplus and also reflects internal lending arrangements. These internal lending arrangements, which net out on consolidation, arise in relation to the following: - Aviva Insurance Limited (AI) acts as both a UK general insurer and as the primary holding company for our foreign subsidiaries. Internal capital management mechanisms in place allocate a portion of the total capital of the company to the UK general insurance operations, giving rise to notional lending between the general insurance and holding company activities. These mechanisms also allow for some of the assets of the general insurance business to be made available for use across the Group. - Certain subsidiaries, subject to continuing to satisfy stand alone capital and liquidity requirements, loan funds to corporate and holding entities. These loans satisfy arm's-length criteria and all interest payments are made when due. - Subsequent to the year end, the Group has taken action to improve its access to dividends from the Group's insurance and asset management businesses by undertaking a corporate restructure. This will see the Group's interest in the majority of its overseas businesses move to Aviva Group Holdings Limited from Aviva Insurance Limited. Total capital employed is financed by a combination of equity shareholders' funds, preference capital, subordinated debt and borrowings. At FY12 we had £21.4 billion (FY11: £20.8 billion) of total capital employed in our trading operations measured on an MCEV basis. In May 2012 we issued US$650 million of Fixed Rate Tier 1 Notes. The Notes are perpetual and may be called from November 2017. The Notes qualify as Innovative Tier 1 capital under current regulatory rules and are expected to be treated as Fixed Rate Tier 1 capital under Solvency II transitional rules. The transaction had a positive impact on Group IGD solvency and Economic Capital measures. In June 2012 US$300 million of Lower Tier 2 floating rate notes were redeemed at first call. Financial leverage, the ratio of external senior and subordinated debt to MCEV capital and reserves, was 35.1% (FY11: 36.7%). Fixed charge cover, which measures the extent to which external interest costs, including subordinated debt interest and preference dividends, are covered by MCEV operating profit was 5.1 times (FY11: 8.9 times). The impact of the agreement to sell Aviva USA has meant that financial leverage under IFRS is higher at 52.6% (FY11: 37.1%). At FY12 the market value of our external debt, subordinated debt, preference shares (including both Aviva plc preference shares of £200 million and General Accident plc preference shares, within non-controlling interest, of £250 million), and direct capital instruments and fixed rate tier 1 notes was £7,260 million (FY11: £5,782 million), with a weighted average cost, post tax, of 4.4% (FY11: 6.6%). The Group Weighted Average Cost of Capital (WACC) is 6.3% (FY11: 7.1%) and has been calculated by reference to the cost of equity and the cost of debt at the relevant date. The cost of equity at FY12 was 7.5% (FY11: 7.4%) based on a risk free rate of 1.9% (FY11: 2.0%), an equity risk premium of 4.0% (FY11: 4.0%) and a market beta of 1.4 (FY11: 1.3). Page 94 C3 - Group capital structure continued Shareholders' funds, including non-controlling interests 2012 2011 Closing shareholders' funds Closing shareholders' funds IFRS net assets £m Internally generated AVIF £m Total Equity £m IFRS net assets £m Internally generated AVIF £m Total Equity £m Life assurance United Kingdom 4,905 1,595 6,500 4,794 1,421 6,215 Ireland 735 361 1,096 684 365 1,049 United Kingdom & Ireland 5,640 1,956 7,596 5,478 1,786 7,264 France 2,120 1,329 3,449 1,825 1,091 2,916 Spain 1,113 340 1,453 1,160 384 1,544 Italy 1,276 (317) 959 1,266 (1,405) (139) Other 54 13 67 238 (140) 98 Developed markets 10,203 3,321 13,524 9,967 1,716 11,683 Poland 336 1,442 1,778 263 1,063 1,326 Asia 784 28 812 865 58 923 Other 144 79 223 142 74 216 Higher Growth markets 1,264 1,549 2,813 1,270 1,195 2,465 11,467 4,870 16,337 11,237 2,911 14,148 General Insurance and health United Kingdom 3,546 - 3,546 3,394 - 3,394 Ireland 355 - 355 408 - 408 United Kingdom & Ireland 3,901 - 3,901 3,802 - 3,802 France 562 - 562 480 - 480 Canada 1,039 - 1,039 1,034 - 1,034 Other 489 - 489 468 - 468 Developed markets 5,991 - 5,991 5,784 - 5,784 Higher Growth markets 98 - 98 91 - 91 6,089 - 6,089 5,875 - 5,875 Fund Management 225 - 225 184 - 184 Other business (1,059) - (1,059) (1,102) - (1,102) Corporate (588) - (588) 508 - 508 Total capital employed (excluding Delta Lloyd and United States) 16,134 4,870 21,004 16,702 2,911 19,613 Delta Lloyd - - - 776 - 776 United States 365 - 365 3,140 (2,779) 361 Total capital employed 16,499 4,870 21,369 20,618 132 20,750 Subordinated debt (4,337) - (4,337) (4,550) - (4,550) External debt (802) - (802) (705) - (705) Total equity 11,360 4,870 16,230 15,363 132 15,495 Less: Non-controlling interests (2,214) (1,476) Direct capital instruments and fixed rate tier 1 notes (1,382) (990) Preference capital (200) (200) Equity shareholders' funds 12,434 12,829 Less: Goodwill and Intangibles1 (2,247) (3,479) Equity shareholders' funds excluding goodwill and intangibles 10,187 9,350 1 Goodwill and intangibles comprise £1,609 million (FY 2011: £2,640 million) of goodwill in subsidiaries, £921 million (FY 2011: £1,062 million) of intangibles in subsidiaries, £119 million (FY 2011: £131 million) of goodwill and intangibles in joint ventures and £nil (FY 2011: £115 million) of goodwill in associates, net of associated deferred tax liabilities of £(188)million (FY 2011: £(241) million) and the non controlling interests share of intangibles of £(214)million (FY 2011: £(228) million). The goodwill figure of £1,609 million includes a £94 million adjustment to impair goodwill which has been reflected in the additional value of in-force long-term business in the MCEV balance sheet. Page 95 C4 - Sources of Liquidity In managing the Group's liquidity requirements, there are a number of external and internal sources of cash and liquid resources, including: n external debt issuance; n funds generated by the sale of businesses; n liquidity generated by operating subsidiaries, associates and joint ventures; n internal debt; and n central assets of cash and securities. The Group uses these sources of liquidity to fund internal investment, debt repayments and payment of dividends to shareholders. For Aviva plc the principal source of liquidity is dividends and liquid resources provided by its subsidiaries, associates and joint ventures. The level of dividends remitted is based on two primary factors: the financial performance of operating subsidiaries, associates and joint ventures, and the local solvency and capital requirements of individual entities. The table below shows liquid resources provided to Group Centre from operating companies, subsidiaries, associates and joint ventures in 2012: 2012 Amounts received £m UK life insurance 150 UK general insurance 150 Canada 136 France 217 Spain 68 Poland 70 Other operations 153 944 Subsequent to the year end, the Group has 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. Under UK company law, dividends can only be paid if a company has distributable reserves sufficient to cover the dividend. At 31 December 2012, Aviva plc itself had distributable reserves of £3,037 million, which would have covered three years of historic dividend payments to our shareholders. In UK Life, our largest operating subsidiary, distributable reserves, which could be paid to Aviva plc via its intermediate holding company, are created mainly by the statutory long-term business profit transfer to shareholders. While the UK insurance regulatory laws applicable to UK Life and our other UK subsidiaries impose no statutory restrictions on an insurer's ability to declare a dividend, the rules require maintenance of each insurance company's solvency margin, which might impact their ability to pay dividends to the parent company. Our other life and general insurance, and fund management subsidiaries' ability to pay dividends and make loans to the parent company is similarly restricted by local corporate or insurance laws and regulations. In all jurisdictions, when paying dividends, the relevant subsidiary must take into account its capital position and must set the level of dividend to maintain sufficient capital to meet minimum solvency requirements and any additional target capital expected by local regulators. These minimum solvency requirements, which are consolidated under the European Insurance Group Directive, are discussed later in this section under the heading 'Regulatory capital position'. We do not believe that the legal and regulatory restrictions constitute a material limitation on the ability of our businesses to meet their obligations or to pay dividends to the parent company, Aviva plc. The Group has received and expects to receive proceeds on completion of the disposals as disclosed in - Note A3 - Subsidiaries. Aviva plc has established two main programmes for the issuance of external debt by Aviva plc. For short-term senior debt issuance we have a £2 billion commercial paper programme which allows debt to be issued in a range of currencies. At 31 December 2012, the outstanding debt issued under this programme was £603 million (FY11: £506 million excludes commercial paper issued by Delta Lloyd). For longer term debt we have established a Euro Medium Term Note (EMTN) programme. This programme has documentation readily available to allow quick issuance of long-term debt with a variety of terms and conditions. Debt issued under this programme may be senior debt or regulatory qualifying debt and may have a fixed or floating interest rate. At FY12, the outstanding debt issued under this programme was £2,076 million (FY11: £1,894 million). Page 96 C5 - EEV equivalent embedded value The embedded value of Aviva shown below is based on the projected future profits allowing for expected investment returns in excess of risk-free, and discounts those profits at a risk-discount rate. This result is deemed more comparable to other UK insurers who publish European Embedded Value (EEV) than market consistent embedded value. The expected release of future profits and required capital is shown in five-year groups. Projected cash flows are those used for Implied Discount Rate (IDR) calculations for in-force business. Held for sale operations have been stated at expected fair value, as represented by the expected sale proceeds, less cost to sell. The discount rate applied is 6.25% (FY11: 7.05%), based on a risk-free rate of 2.1%, a risk margin of 3.75% and an allowance for the time value of options and guarantees of 0.4%. The new business margin on continuing operations (net of tax and non-controlling interests) for business written during the period to 31 December 2012 is 2.9% (MCEV: 2.8%). Segmental analysis of life and related business EEV equivalent embedded value Net worth VIF on traditional embedded value Embedded value 2012 £bn 2011 £bn 2012 £bn 2011 £bn 2012 £bn 2011 £bn United Kingdom & Ireland 4.2 4.3 3.5 3.6 7.7 7.9 Developed markets excluding United Kingdom & Ireland 3.2 2.7 1.5 1.5 4.7 4.2 Developed markets 7.4 7.0 5.0 5.1 12.4 12.1 Higher Growth markets 0.8 0.7 1.5 1.3 2.3 2.0 Total covered business excluding United States 8.2 7.7 6.5 6.4 14.7 14.1 United States 1.1 2.7 Total Covered business 15.8 16.8 Non-covered business (0.9) 1.7 Total Group EV 14.9 18.5 Less preference share capital, direct capital instruments and fixed rate tier 1 notes (1.6) (1.2) Equity attributable to ordinary shareholders on an EV basis 13.3 17.3 Maturity profile of undiscounted EEV equivalent embedded value cash flows Total in-force business To show the profile of the free surplus emergence implicit in the traditional embedded value calculation for in-force business, the cash flows have been split into five year tranches depending on the date when the profit is expected to emerge. Release of future profits and required capital Total net 2012 £bn Free surplus 0-51 6-10 11-15 16-20 20+ of non- controlling interest United Kingdom & Ireland 1.3 2.5 2.3 2.5 2.1 4.5 13.9 Developed markets excluding United Kingdom & Ireland 0.1 2.6 1.6 1.2 1.0 2.7 9.1 Developed markets 1.4 5.1 3.9 3.7 3.1 7.2 23.0 Higher Growth markets 0.4 1.0 0.8 0.5 0.4 1.2 3.9 Total excluding United States 1.8 6.1 4.7 4.2 3.5 8.4 26.9 United States 0.3 0.8 - - - - 0.8 Total 2.1 6.9 4.7 4.2 3.5 8.4 27.7 1 For held for sale operations, cash flow emergence is reported in the 0-5 column. Release of future profits and required capital Total net 2011 £bn Free surplus 0-5 6-10 11-15 16-20 20+ of non- controlling interest United Kingdom & Ireland 1.0 3.0 3.1 2.6 2.0 4.5 15.2 Developed markets excluding United Kingdom & Ireland 0.0 2.3 1.7 1.3 1.1 3.2 9.6 Developed markets 1.0 5.3 4.8 3.9 3.1 7.7 24.8 Higher Growth markets 0.3 1.0 0.6 0.4 0.4 1.1 3.5 Total excluding United States 1.3 6.3 5.4 4.3 3.5 8.8 28.3 United States 0.0 1.7 0.9 0.7 0.6 0.8 4.7 Total 1.3 8.0 6.3 5.0 4.1 9.6 33.0 Page 97 C6 - Regulatory capital Individual regulated subsidiaries measure and report solvency based on applicable local regulations, including in the UK the regulations established by the Financial Services Authority (FSA). These measures are also consolidated under the European Insurance Groups Directive (IGD) to calculate regulatory capital adequacy at an aggregate Group level, where Aviva has a regulatory obligation to have a positive position at all times. This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in the UK and Ireland with-profit life funds. The minimum solvency requirement for our European businesses is based on the Solvency 1 Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked life reserves respectively and for our general insurance portfolio of business is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our major non-European businesses (the US and Canada) a risk charge on assets and liabilities approach is used. Based on individual guidance from the FSA we recognise surpluses of £0.4 billion as at 31 December 2012 (FY 2011: £0.2 billion) in the non-profit funds of our UK Life and pensions businesses which is available for transfer to shareholders. Regulatory capital - Group: European Insurance Groups Directive (IGD) UK life funds £bn Other business £bn Total 2012 £bn Total 2011 £bn Insurance Groups Directive (IGD) capital resources 5.2 9.2 14.4 14.1 Less: capital resource requirement (5.2) (5.4) (10.6) (11.9) Insurance Group Directive (IGD) excess solvency - 3.8 3.8 2.2 Cover over EU minimum (calculated excluding UK life funds) 1.7 times 1.3 times The EU Insurance Groups Directive (IGD) regulatory capital solvency surplus has increased by £1.6 billion since 31 December 2011 to £3.8 billion. The key movements over the period are set out in the following table: £bn IGD solvency surplus at 31 December 2011 2.2 Operating profits net of other income and expenses 0.9 Dividend and appropriations, net of shares issued in lieu of dividends (0.7) Market movements including foreign exchange1 1.3 Pension scheme funding (0.2) Movement in hybrid debt 0.2 UK reinsurance transactions 0.1 Increase in Capital Resources Requirement (0.1) Other regulatory adjustments 0.1 Estimated IGD solvency surplus at 31 December 2012 3.8 1 Market movements include the impact of equity, credit spread, interest rate and foreign exchange movements net of the effect of hedging instruments. On a proforma basis the estimated IGD solvency surplus at 31 December 2012 is £3.9 billion. The proforma 31 December 2012 position includes the impact of the announced disposals of the Aviva US Life and annuities business and related asset management operations, Malaysia and Aseval held for sale in the Group IFRS balance sheet. Page 98 C6 - Regulatory capital continued Reconciliation of Group IGD capital resources to FRS 27 capital The reconciliation below provides analysis of differences between our capital resources and the amounts included in the capital statement made in accordance with FRS 27 and disclosed within our consolidated accounts. The Group Capital Adequacy report is prepared in accordance with the FSA valuation rules and brings in capital in respect of the UK Life valued in accordance with FSA regulatory rules excluding surpluses in with-profit funds. The FRS 27 disclosure brings in the realistic value of UK Life capital resources. As the two bases differ greatly, the reconciliation below is presented by removing the restricted regulatory assets and then replacing them with the unrestricted realistic assets. 2012 £bn Total capital and reserves (IFRS basis) 11.4 Plus: Other qualifying capital 4.4 Plus: UK unallocated divisible surplus 2.0 Less: Goodwill, acquired AVIF and intangible assets 1 (3.4) Less: Adjustments onto a regulatory basis - Group Capital Resources on regulatory basis 14.4 The Group Capital Resources can be analysed as follows: Core Tier 1 Capital 10.9 Innovative Tier 1 Capital 1.4 Total Tier 1 Capital 12.3 Upper Tier 2 Capital 1.7 Lower Tier 2 Capital 3.1 Group Capital Resources Deductions (2.7) Group Capital Resources on regulatory basis (Tier 1 and Tier 2 Capital) 14.4 Less: UK life restricted regulatory assets (6.1) Add: UK life unrestricted realistic assets 5.7 Add: Overseas UDS 2 and Shareholders' share of accrued bonus 5.0 Total FRS 27 capital 19.0 1 Goodwill and other intangibles includes goodwill of £132million in joint ventures and associates and amounts classified as held for sale. 2 Unallocated divisible surplus for overseas life operations is included gross of minority interest and amounts disclosed include balances classified as held for sale. 2012 includes a negative balance of £2 million in Italy. Regulatory capital - UK Life with-profits funds The available capital of the with-profit funds is represented by the realistic inherited estate. The estate represents the assets of the long-term with-profit funds less the realistic liabilities for non-profit policies within the funds, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs, guarantees and promises. Realistic balance sheet information is shown below for the three main UK with-profit funds: New With-Profit Sub Fund (NWPSF), Old With-Profit Sub Fund (OWPSF) and With-Profit Sub-Fund (WPSF). These realistic liabilities have been included within the long-term business provision and the liability for insurance and investment contracts on the Group's IFRS balance sheet at 31 December 2012 and 31 December 2011. 2012 2011 Estimated realistic assets £bn Estimated realistic liabilities 1 £bn Estimated realistic inherited estate 2 £bn Capital support arrangement3 £bn Estimated risk capital margin £bn Estimated excess available capital £bn Estimated excess available capital £bn NWPSF 17.3 (17.3) - 0.7 (0.4) 0.3 0.7 OWPSF 2.9 (2.6) 0.3 - (0.1) 0.2 0.2 WPSF4 18.3 (16.5) 1.8 - (0.5) 1.3 1.0 Aggregate 38.5 (36.4) 2.1 0.7 (1.0) 1.8 1.9 1 These realistic liabilities include the shareholders' share of future bonuses of £0.3 billion (FY 2011: £0.3 billion). Realistic liabilities adjusted to eliminate the shareholders' share of future bonuses are £36.0 billion (FY 2011: £38.8 billion). These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £1.8 billion, £0.3 billion and £3.5 billion for NWPSF, OWPSF and WPSF respectively (FY 2011: £1.9 billion, £0.3 billion and £3.1 billion). 2 Estimated realistic inherited estate at 31 December 2011 was £nil, £0.3 billion and £1.6 billion for NWPSF, OWPSF and WPSF respectively. 3 The support arrangement represents the reattributed estate (RIEESA) of £0.7 billion at 31 December 2012 (FY 2011: £1.1 billion). 4 The WPSF fund includes the Provident Mutual (PM) fund which has realistic assets and realistic liabilities of £1.7 billion and therefore does not contribute to the realistic inherited estate. Investment mix The aggregate investment mix of the assets in the three main with-profit funds was: 2012 % 2011 % Equity 23% 22% Property 16% 17% Fixed interest 51% 54% Other 10% 7% The equity backing ratios, including property, supporting with-profit asset shares are 71% in NWPSF and OWPSF, and 64% in WPSF. Page 99 C7 - IFRS Sensitivity analysis The Group uses a number of sensitivity test-based risk management tools to understand the volatility of earnings, the volatility of its capital requirements, and to manage its capital more efficiently. Primarily, MCEV, ICA, and scenario analysis are used. Sensitivities to economic and operating experience are regularly produced on all of the Group's financial performance measurements to inform the Group's decision making and planning processes, and as part of the framework for identifying and quantifying the risks that each of its business units, and the Group as a whole are exposed to. For long-term business in particular, sensitivities of MCEV 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. More information on MCEV sensitivities can be found in the presentation of results on an MCEV basis in the supplementary section of this report. 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 the MCEV methodology. 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. Sensitivity test results Illustrative results of sensitivity testing for long-term business, general insurance and health and fund management business and other operations 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. Sensitivity factor Description of sensitivity factor applied Interest rate and investment return The impact of a change in market 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 (life insurance only) The impact of an increase in mortality/morbidity rates for assurance contracts by 5%. Annuitant mortality (life insurance only) The impact of a reduction in mortality rates for annuity contracts by 5%. Gross loss ratios (non-life insurance only) The impact of an increase in gross loss ratios for general insurance and health business by 5%. Long-term businesses 2012 Impact on profit before tax £m Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Expenses +10% Assurance mortality +5% Annuitant mortality -5% 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 Impact on shareholders' equity before tax £m Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Expenses +10% Assurance mortality +5% Annuitant mortality -5% 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) Page 100 C7 - IFRS Sensitivity analysis continued Long-term businesses continued 2011 Impact on profit before tax £m Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Expenses +10% Assurance mortality +5% Annuitant mortality -5% 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 Impact on shareholders' equity before tax £m Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Expenses +10% Assurance mortality +5% Annuitant mortality -5% 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) Changes in sensitivities between 2012 and 2011 reflect movements in market interest rates, porfolio growth, changes to asset mix and the relative durations of assets and liabilities and asset liability managment 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 beneficial impact on non-participatng business, due to the increase in market value of fixed interest securities and the relative durations of assets and liabilities; smilarly a rise in interest rates has a negative impact. The mortality sensitivities also relate primarily to the UK. In the Unites 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 £nil. As a result, were eceonomic movements to occur, the correseponding 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. Page 101 C7 - IFRS Sensitivity analysis continued General insurance and health businesses 2012 Impact on profit before tax £m Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Expenses +10% Gross loss ratios +5% 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 Impact on shareholders' equity before tax £m Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Expenses +10% Gross loss ratios +5% 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) 2011 Impact on profit before tax £m Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Expenses +10% Gross loss ratios +5% 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 Impact on shareholders' equity before tax £m Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Expenses +10% Gross loss ratios +5% 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 other operations businesses 1 2012 Impact on profit before tax £m Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Total excluding Delta Lloyd (5) - 30 (90) 10 2012 Impact on shareholders' equity before tax £m Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Total excluding Delta Lloyd (5) - 30 (90) 10 2011 Impact on profit before tax £m Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Total excluding Delta Lloyd (10) 10 - (40) 75 2011 Impact on shareholders' equity before tax £m Interest rates +1% Interest rates -1% Credit spreads +0.5% Equity/ property +10% Equity/ property -10% Total excluding Delta Lloyd (10) 10 - (40) 75 1 The Fund management and other operations are not shown excluding the United States as their sensitivities are immaterial to the group. Page 102 C7 - IFRS Sensitivity analysis continued Delta Lloyd The full-year 2012 sensitivities contained in the above tables exclude any contribution from Delta Lloyd following deconsolidation of this business. Limitations of sensitivity analysis The previous 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 shareholders' 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. Page 103 Analysis of assets In this section Page D1 Total assets 104 D2 Total assets - Valuation bases/fair value hierarchy 105 D3 Analysis of asset quality 107 D3.1 Goodwill, acquired value of in-force business and intangible assets 107 D3.2 Investment property 108 D3.3 Loans 109 D3.4 Financial investments 113 D4 Pension fund assets 127 D5 Available funds 128 D6 Guarantees 128 Page 104 D1 - Total assets As an insurance business, Aviva Group holds a variety of assets to match the characteristics and duration of its insurance liabilities. Appropriate and effective asset liability matching (on an economic basis) is the principal way in which Aviva manages its investments. In addition, to support this, Aviva also uses a variety of hedging and other risk management strategies to diversify away residual mis-match risk that is outside of the Group's risk appetite. 31 December 2012 Policyholder assets £m Participating fund assets £m Shareholder assets £m Total assets analysed £m Less assets of operations classified as held for sale £m Statement of financial position total £m Goodwill and acquired value of in-force business and intangible assets - - 3,278 3,278 (674) 2,604 Interests in joint ventures and associates 116 1,239 479 1,834 (126) 1,708 Property and equipment 25 183 185 393 (2) 391 Investment property 4,172 6,079 582 10,833 (18) 10,815 Loans 605 5,562 21,767 27,934 (3,397) 24,537 Financial investments Debt securities 16,472 83,497 61,654 161,623 (33,617) 128,006 Equity securities 22,500 9,854 1,423 33,777 (1,248) 32,529 Other investments 23,704 4,258 2,131 30,093 (1,550) 28,543 Reinsurance assets 1,576 542 5,449 7,567 (883) 6,684 Deferred tax assets - - 220 220 (32) 188 Current tax assets - - 68 68 (1) 67 Receivables and other financial assets 354 2,686 4,990 8,030 (413) 7,617 Deferred acquisition costs and other assets - 498 4,856 5,354 (1,555) 3,799 Prepayments and accrued income 141 1,242 1,721 3,104 (403) 2,701 Cash and cash equivalents 4,305 10,466 9,043 23,814 (917) 22,897 Additional impairment to write down the disposal group to fair value less costs to sell - - (2,233) (2,233) 2,233 - Assets of operations classified as held for sale - - - - 42,603 42,603 Total 73,970 126,106 115,613 315,689 - 315,689 Total % 23.4% 39.9% 36.7% 100.0% 0.0% 100.0% FY11 as reported 70,367 124,631 117,378 312,376 - 312,376 FY11 Total % 22.5% 39.9% 37.6% 100.0% 0.0% 100.0% As at 31 December 2012, 36.7% of Aviva's total asset base was shareholder assets, 39.9% participating assets where Aviva shareholders have partial exposure, and 23.4% policyholder assets where Aviva shareholders have no exposure. Of the total assets (excluding assets held for sale), investment property, loans and financial investments comprised £224.4 billion, compared to £255.8 billion at 31 December 2011. Page 105 D2 - Total assets - Valuation bases/fair value hierarchy Total assets - 2012 Fair value £m Amortised cost £m Equity accounted/ tax assets1 £m Total £m Goodwill and acquired value of in-force business and intangible assets - 3,278 - 3,278 Interests in joint ventures and associates - - 1,834 1,834 Property and equipment 244 149 - 393 Investment property 10,833 - - 10,833 Loans 18,973 8,961 - 27,934 Financial investments Debt securities 161,623 - - 161,623 Equity securities 33,777 - - 33,777 Other investments 30,093 - - 30,093 Reinsurance assets - 7,567 - 7,567 Deferred tax assets - - 220 220 Current tax assets - - 68 68 Receivables and other financial assets - 8,030 - 8,030 Deferred acquisition costs and other assets - 5,354 - 5,354 Prepayments and accrued income - 3,104 - 3,104 Cash and cash equivalents 23,814 - - 23,814 Additional impairment to write down the disposal group to fair value less costs to sell - (2,233) - (2,233) Total 279,357 34,210 2,122 315,689 Total % 88.5% 10.8% 0.7% 100.0% Assets of operations classified as held for sale 37,957 4,518 128 42,603 Total (excluding assets held for sale) 241,400 29,692 1,994 273,086 Total % (excluding assets held for sale) 88.4% 10.9% 0.7% 100.0% FY11 Total 269,812 39,356 3,208 312,376 FY11 Total % 86.4% 12.6% 1.0% 100.0% 1 Within the Group's statement of financial position, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with equity accounted within the analysis of the Group's assets. Total assets - Policyholder assets 2012 Fair value £m Amortised cost £m Equity accounted/ tax assets1 £m Total £m Goodwill and acquired value of in-force business and intangible assets - - - - Interests in joint ventures and associates - - 116 116 Property and equipment - 25 - 25 Investment property 4,172 - - 4,172 Loans - 605 - 605 Financial investments Debt securities 16,472 - - 16,472 Equity securities 22,500 - - 22,500 Other investments 23,704 - - 23,704 Reinsurance assets - 1,576 - 1,576 Deferred tax assets - - - - Current tax assets - - - - Receivables and other financial assets - 354 - 354 Deferred acquisition costs and other assets - - - - Prepayments and accrued income - 141 - 141 Cash and cash equivalents 4,305 - - 4,305 Total 71,153 2,701 116 73,970 Total % 96.2% 3.7% 0.1% 100.0% Assets of operations classified as held for sale 3,021 27 - 3,048 Total (excluding assets held for sale) 68,132 2,674 116 70,922 Total % (excluding assets held for sale) 96.1% 3.8% 0.1% 100.0% FY11 Total 67,310 2,804 253 70,367 FY11 Total % 95.6% 4.0% 0.4% 100.0% 1 Within the Group's statement of financial position, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with equity accounted within the analysis of the Group's assets. Page 106 D2 - Total assets - Valuation bases/fair value hierarchy continued Total assets - Participating fund assets 2012 Fair value £m Amortised cost £m Equity accounted/ tax assets1 £m Total £m Goodwill and acquired value of in-force business and intangible assets - - - - Interests in joint ventures and associates - - 1,239 1,239 Property and equipment 132 51 - 183 Investment property 6,079 - - 6,079 Loans 978 4,584 - 5,562 Financial investments Debt securities 83,497 - - 83,497 Equity securities 9,854 - - 9,854 Other investments 4,258 - - 4,258 Reinsurance assets - 542 - 542 Deferred tax assets - - - - Current tax assets - - - - Receivables and other financial assets - 2,686 - 2,686 Deferred acquisition costs and other assets - 498 - 498 Prepayments and accrued income - 1,242 - 1,242 Cash and cash equivalents 10,466 - - 10,466 Total 115,264 9,603 1,239 126,106 Total % 91.4% 7.6% 1.0% 100.0% Assets of operations classified as held for sale 2,788 333 - 3,121 Total (excluding assets held for sale) 112,476 9,270 1,239 122,985 Total % (excluding assets held for sale) 91.5% 7.5% 1.0% 100.0% FY11 Total 113,287 9,884 1,460 124,631 FY11 Total % 90.9% 7.9% 1.2% 100.0% 1 Within the Group's statement of financial position, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with equity accounted within the analysis of the Group's assets. Total assets - Shareholders assets 2012 Fair value £m Amortised cost £m Equity accounted/ tax assets1 £m Total £m Goodwill and acquired value of in-force business and intangible assets - 3,278 - 3,278 Interests in joint ventures and associates - - 479 479 Property and equipment 112 73 - 185 Investment property 582 - - 582 Loans 17,995 3,772 - 21,767 Financial investments Debt securities 61,654 - - 61,654 Equity securities 1,423 - - 1,423 Other investments 2,131 - - 2,131 Reinsurance assets - 5,449 - 5,449 Deferred tax assets - - 220 220 Current tax assets - - 68 68 Receivables and other financial assets - 4,990 - 4,990 Deferred acquisition costs and other assets - 4,856 - 4,856 Prepayments and accrued income - 1,721 - 1,721 Cash and cash equivalents 9,043 - - 9,043 Additional impairment to write down the disposal group to fair value less costs to sell - (2,233) - (2,233) Total 92,940 21,906 767 115,613 Total % 80.4% 18.9% 0.7% 100.0% Assets of operations classified as held for sale 32,148 4,158 128 36,434 Total (excluding assets held for sale) 60,792 17,748 639 79,179 Total % (excluding assets held for sale) 76.8% 22.4% 0.8% 100.0% FY11 Total 89,215 26,668 1,495 117,378 FY11 Total % 76.0% 22.7% 1.3% 100.0% 1 Within the Group's statement of financial position, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with equity accounted within the analysis of the Group's assets. Page 107 D2 - Total assets - Valuation bases/fair value hierarchy continued Financial instruments (including derivatives and loans) The Group classifies its investments as either financial assets at fair value through profit or loss (FV) or financial assets available for sale (AFS). The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. The FV category has two subcategories - those that meet the definition as being held for trading and those the Group chooses to designate as FV (referred to in this section as 'other than trading'). In general, the FV category is used as, in most cases, our investment or risk management strategy is to manage our financial investments on a fair value basis. All securities in the FV category are classified as other than trading, except for non-hedge derivatives and a small amount of debt and equity securities, bought with the intention to resell in the short term, which are classified as trading. The AFS category is used where the relevant long-term business liability (including shareholders' funds) is passively managed. Loans are carried at amortised cost, except for certain mortgage loans, where we have taken advantage of the fair value option under IAS 39 to present the mortgages, associated borrowings, other liabilities and derivative financial instruments at fair value, since they are managed together on a fair value basis. We believe this presentation provides more relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for these four items. Fair value hierarchy To provide further information on the valuation techniques we use to measure assets carried at fair value, 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 IFRS7 Financial Instruments: Disclosures. n Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets. n Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly. If the asset has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset. n Inputs to Level 3 fair values are unobservable inputs for the asset. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date (or market information for the inputs to any valuation models). As such, unobservable inputs reflect the assumptions the business unit considers that market participants would use in pricing the asset. Examples are certain private equity investments and private placements. Fair values sourced from internal models are Level 2 only if substantially all the inputs are market observable. Otherwise fair values sourced from internal models are classified as Level 3. Fair value hierarchy Total assets 2012 Level 1 £m Level 2 £m Level 3 £m Sub-total fair value £m Amortised cost £m Less: Assets of operations classified as held for sale £m Statement of financial position total £m Investment property - 10,833 - 10,833 - (18) 10,815 Loans - 18,973 - 18,973 8,961 (3,397) 24,537 Debt securities 107,953 43,588 10,082 161,623 - (33,617) 128,006 Equity securities 33,074 230 473 33,777 - (1,248) 32,529 Other investments (including derivatives) 21,704 5,510 2,879 30,093 - (1,550) 28,543 Assets of operations classified as held for sale - - - - - 39,830 39,830 Total 162,731 79,134 13,434 255,299 8,961 - 264,260 Total % 61.6% 29.9% 5.1% 96.6% 3.4% 100.0% Assets of operations classified as held for sale 2,993 32,979 516 36,488 3,342 - 39,830 Total (excluding assets held for sale) 159,738 46,155 12,918 218,811 5,619 - 224,430 Total % (excluding assets held for sale) 71.2% 20.6% 5.8% 97.6% 2.4% 100.0% FY11 Total 156,641 78,520 11,368 246,529 9,630 (347) 255,812 FY11 Total % 61.1% 30.7% 4.4% 96.2% 3.8% 100.0% At 31 December 2012, the proportion of total financial investments, loans and investment properties classified as Level 1 in the fair value hierarchy has remained stable at 61.6% (FY11: 61.1%). Level 2 and Level 3 financial investments, loans and investment properties have also remained relatively stable at 29.9% (FY11: 30.7%) and 5.1% (FY11: 4.4%), respectively. Excluding assets classified as held for sale, the proportion of Level 1 assets at 31 December 2012 increases to 71.2% with Level 2 assets reducing to 20.6% reflecting the impact of the higher proportion of Level 2 debt securities within the US business (see D3.4.1). D3 - Analysis of asset quality D3.1 - Goodwill, Acquired value of in-force business and intangible assets The Group's goodwill, acquired value of in-force business and the majority of other intangible assets have arisen from the Group's business combinations. These business combinations include several bancassurance arrangements, which have resulted in £512 million of the total £1,703 million of goodwill and £691 million of the total £1,575 million of AVIF and other intangible assets. These balances primarily represent the value of bancassurance distribution agreements acquired in these business combinations and are before the deduction of goodwill and other intangibles held for sale. The Group's total goodwill and intangible balances at FY12 noted above are after impairments recognised during the year. Page 108 D3 - Analysis of asset quality continued D3.2 - Investment property 2012 2011 Fair value hierarchy Fair value hierarchy Investment property - Total Level 1 £m Level 2 £m Level 3 £m Total £m Level 1 £m Level 2 £m Level 3 £m Total £m Lease to third parties under operating leases - 10,822 - 10,822 - 11,552 - 11,552 Vacant investment property/held for capital appreciation - 11 - 11 - 86 - 86 Total - 10,833 - 10,833 - 11,638 - 11,638 Total % - 100.0% - 100.0% - 100.0% - 100.0% Assets of operations classified as held for sale - 18 - 18 - - - - Total (excluding assets held for sale) - 10,815 - 10,815 - 11,638 - 11,638 Total % (excluding assets held for sale) - 100.0% - 100.0% - 100.0% - 100.0% 2012 2011 Fair value hierarchy Fair value hierarchy Investment property - Policyholder assets Level 1 £m Level 2 £m Level 3 £m Total £m Level 1 £m Level 2 £m Level 3 £m Total £m Lease to third parties under operating leases - 4,172 - 4,172 - 4,164 - 4,164 Vacant investment property/held for capital appreciation - - - - - 4 - 4 Total - 4,172 - 4,172 - 4,168 - 4,168 Total % - 100.0% - 100.0% - 100.0% - 100.0% Assets of operations classified as held for sale - 12 - 12 - - - - Total (excluding assets held for sale) - 4,160 - 4,160 - 4,168 - 4,168 Total % (excluding assets held for sale) - 100.0% - 100.0% - 100.0% - 100.0% 2012 2011 Fair value hierarchy Fair value hierarchy Investment property - Participating fund assets Level 1 £m Level 2 £m Level 3 £m Total £m Level 1 £m Level 2 £m Level 3 £m Total £m Lease to third parties under operating leases - 6,078 - 6,078 - 6,312 - 6,312 Vacant investment property/held for capital appreciation - 1 - 1 - 72 - 72 Total - 6,079 - 6,079 - 6,384 - 6,384 Total % - 100.0% - 100.0% - 100.0% - 100.0% Assets of operations classified as held for sale - - - - - - - - Total (excluding assets held for sale) - 6,079 - 6,079 - 6,384 - 6,384 Total % (excluding assets held for sale) - 100.0% - 100.0% - 100.0% - 100.0% 2012 2011 Fair value hierarchy Fair value hierarchy Investment property - Shareholder assets Level 1 £m Level 2 £m Level 3 £m Total £m Level 1 £m Level 2 £m Level 3 £m Total £m Lease to third parties under operating leases - 572 - 572 - 1,076 - 1,076 Vacant investment property/held for capital appreciation - 10 - 10 - 10 - 10 Total - 582 - 582 - 1,086 - 1,086 Total % - 100.0% - 100.0% - 100.0% - 100.0% Assets of operations classified as held for sale - 6 - 6 - - - - Total (excluding assets held for sale) - 576 - 576 - 1,086 - 1,086 Total % (excluding assets held for sale) - 100.0% - 100.0% - 100.0% - 100.0% 95% (FY11: 91%) of total investment properties by value are held in unit-linked or participating funds. Shareholder exposure to investment properties is principally through investments in Property Limited Partnerships (PLPs). Depending on the Group's interest in these PLPs, its investments are classified as either interests in joint ventures, unit trusts or consolidated as a subsidiary, in which case the underlying investment properties held by the PLP are included on the balance sheet. The decrease in shareholder exposure to investment properties is mainly a result of disposals and declines in property values at 31 December 2012 compared to 31 December 2011, partly offset by new acquisitions. Investment properties are stated at their market values as assessed by qualified external independent valuers or by local qualified staff of the Group in overseas operations, all with recent relevant experience. Values are calculated using a discounted cash flow approach and are based on current rental income plus anticipated uplifts at the next rent review, lease expiry or break option taking into consideration lease incentives, assuming no future growth in the estimated rental value of the property. This uplift and the discount rate are derived from rates implied by recent market transactions on similar properties. The basis of valuation therefore naturally falls to be classified as Level 2. Valuations are typically undertaken on a quarterly (and in some cases monthly) basis. 99.9%(FY11: 99.3%) of total investment properties by value are leased to third parties under operating leases, with the remainder either being vacant or held for capital appreciation. Page 109 D3 - Analysis of asset quality continued D3.3 - Loans The Group loan portfolio is principally made up of: n Policy loans which are generally collateralised by a lien or charge over the underlying policy; n 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; n Mortgage loans collateralised by property assets; and n Other loans, which include loans to brokers and intermediaries. Loans with fixed maturities, including policy loans, mortgage loans (at amortised cost) and loans and advances to banks, are recognised when cash is advanced to borrowers. These loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method. For certain mortgage loans, the Group has taken advantage of the fair value option under IAS 39 to present the mortgages, associated borrowings, other liabilities and derivative financial instruments at fair value, since they are managed together on a fair value basis. Due to the illiquid nature of these assets, where fair value accounting is applied, it is done so on a Level 2 basis. Loans - Total 2012 United Kingdom & Ireland £m France £m United States £m Canada £m Italy, Spain and Other £m Higher growth markets £m Total £m Policy loans 28 839 402 - 12 30 1,311 Loans and advances to banks 4,250 - - - - - 4,250 Mortgage loans 19,187 1 2,994 - - - 22,182 Other loans 95 8 1 83 2 2 191 Total 23,560 848 3,397 83 14 32 27,934 Total % 84.3% 3.0% 12.2% 0.3% 0.1% 0.1% 100.0% Assets of operations classified as held for sale - - 3,397 - - - 3,397 Total (excluding assets held for sale) 23,560 848 - 83 14 32 24,537 Total % (excluding assets held for sale) 96.0% 3.5% 0.0% 0.3% 0.1% 0.1% 100.0% FY11 Total 23,964 949 3,067 80 16 40 28,116 FY11 Total % 85.2% 3.4% 10.9% 0.3% 0.1% 0.1% 100.0% Loans - Policyholders assets 2012 United Kingdom & Ireland £m France £m United States £m Canada £m Italy, Spain and Other £m Higher growth markets £m Total £m Policy loans - - - - - - - Loans and advances to banks 604 - - - - - 604 Mortgage loans - - - - - - - Other loans - - - - - 1 1 Total 604 - - - - 1 605 Total % 99.8% 0.0% 0.0% 0.0% 0.0% 0.2% 100.0% Assets of operations classified as held for sale - - - - - - - Total (excluding assets held for sale) 604 - - - - 1 605 Total % (excluding assets held for sale) 99.8% 0.0% 0.0% 0.0% 0.0% 0.2% 100.0% FY11 Total 917 - - - - - 917 FY11 Total % 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100.0% Loans - Participating fund assets 2012 United Kingdom & Ireland £m France £m United States £m Canada £m Italy, Spain and Other £m Higher growth markets £m Total £m Policy loans 20 839 181 - - - 1,040 Loans and advances to banks 3,402 - - - - - 3,402 Mortgage loans 976 1 135 - - - 1,112 Other loans - 8 - - - - 8 Total 4,398 848 316 - - - 5,562 Total % 79.1% 15.2% 5.7% 0.0% 0.0% 0.0% 100.0% Assets of operations classified as held for sale - - 316 - - - 316 Total (excluding assets held for sale) 4,398 848 - - - - 5,246 Total % (excluding assets held for sale) 83.8% 16.2% 0.0% 0.0% 0.0% 0.0% 100.0% FY11 Total 5,197 948 325 - - 1 6,471 FY11 Total % 80.3% 14.7% 5.0% 0.0% 0.0% 0.0% 100.0% Page 110 D3 - Analysis of asset quality continued D3.3 - Loans continued Loans - Shareholder assets 2012 United Kingdom & Ireland £m France £m United States £m Canada £m Italy, Spain and Other £m Higher growth markets £m Total £m Policy loans 8 - 221 - 12 30 271 Loans and advances to banks 244 - - - - - 244 Mortgage loans 18,211 - 2,859 - - - 21,070 Other loans 95 - 1 83 2 1 182 Total 18,558 - 3,081 83 14 31 21,767 Total % 85.2% 0.0% 14.2% 0.4% 0.1% 0.1% 100.0% Assets of operations classified as held for sale - - 3,081 - - - 3,081 Total (excluding assets held for sale) 18,558 - - 83 14 31 18,686 Total % (excluding assets held for sale) 99.3% 0.0% 0.0% 0.4% 0.1% 0.2% 100.0% FY11 Total 17,849 1 2,743 80 16 39 20,728 FY11 Total % 86.1% 0.0% 13.2% 0.4% 0.1% 0.2% 100.0% The value of the Group's loan portfolio (including Policyholder, Participating Fund and Shareholder assets), at 31 December 2012 stood at £27.9 billion (FY11: £28.1 billion), a decrease of £0.2 billion. Excluding assets held for sale, the Group's loan portfolio amounts to £24.5 billion. The total shareholder exposure to loans increased to £21.8 billion (FY11: £20.7 billion), and represented 78% of the total loan portfolio, with the remaining 22% split between participating funds (£5.6 billion) and policyholder assets (£0.6 billion). Of the Group's total loan portfolio (including Policyholder, Participating Fund and Shareholder assets), 79% (FY11: 76%) is invested in mortgage loans. Mortgage loans - Shareholder assets 2012 United Kingdom & Ireland £m United States £m Total £m Non-securitised mortgage loans - Residential (Equity release) 3,172 - 3,172 - Commercial 8,720 2,859 11,579 - Healthcare 4,101 - 4,101 15,993 2,859 18,852 Securitised mortgage loans 2,218 - 2,218 Total 18,211 2,859 21,070 Assets of operations classified as held for sale - 2,859 2,859 Total (excluding assets held for sale) 18,211 - 18,211 FY11 Total 17,668 2,507 20,175 The Group's mortgage loan portfolio spans several business units, primarily in the UK and USA, and across various sectors, including residential loans, commercial loans and government supported healthcare loans. Aviva's shareholder exposure to mortgage loans accounts for 96.8% of total shareholder asset loans. This section focuses on explaining the shareholder risk within these exposures. United Kingdom & Ireland (Non-securitised mortgage loans) Residential The UK non-securitised residential mortgage portfolio has a total current value of £3.2 billion (FY11: £2.7 billion). The increase from the prior year is primarily due to £570 million of new loans and accrued interest and £52 million of fair value gains, partly offset by £107 million of redemptions. These mortgages are all in the form of equity release, whereby homeowners mortgage their property to release cash equity. Due to the low relative levels of equity released in each property, they predominantly have a Loan to Value ("LTV") of below 70%, and the average LTV across the portfolio is approximately 29.6% (FY11: 27.5%). Healthcare Primary Healthcare & PFI businesses loans included within shareholder assets are £4.1 billion (FY11: £3.7 billion)and are secured against General Practitioner premises, other primary health related premises or other emergency services related premises. For all such loans, government support is provided through either direct funding or reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially over the term of the loan. Although the loan principal is not Government guaranteed, the nature of these businesses and premises provides considerable comfort of an ongoing business model and low risk of default. On a market value basis, we estimate the average LTV of these mortgages to be 96%, although as explained above, we do not consider this to be a key risk indicator. Income support from the Government bodies and the social need for these premises provide sustained income stability. Aviva therefore considers these loans to be low risk and uncorrelated with the strength of the UK or global economy. Page 111 D3 - Analysis of asset quality continued D3.3 - Loans continued Commercial Gross exposure by loan to value and arrears Shareholder assets 2012 >120% £m 115-120% £m 110-115% £m 105-110% £m 100-105% £m 95-100% £m 90-95% £m 80-90% £m 70-80% £m <70% £m Total £m Not in arrears 341 704 939 843 754 1,233 439 1,290 414 1,317 8,274 0 - 3 months - 1 36 - 51 9 21 - 3 - 121 3 - 6 months - - - - - 55 2 - - - 57 6 - 12 months - - - - - 47 2 - - - 49 > 12 months - - - - - 204 15 - - - 219 Total 341 705 975 843 805 1,548 479 1,290 417 1,317 8,720 Of the total £8.7 billion of UK non-securitised commercial mortgage loan in the shareholder fund, £8.4 billion are held by our UK Life business, of which £7.7 billion back annuity liabilities, and are stated on a fair value basis. The loan exposures for our UK Life business are calculated on a discounted cash flow basis, and include a risk adjustment through the use of Credit Risk Adjusted Value ("CRAV") methods. Aviva UK General Insurance hold the remaining £0.3 billion of loans which are stated on an amortised cost basis and are subject to impairment review, using a fair value methodology calibrated to the UK Life approach, adjusted for specific portfolio characteristics. For the commercial mortgages held by the UK Life and UK General Insurance business, loan service collection ratios, a key indicator of mortgage portfolio performance, remained high during the period. Loan Interest Cover ("LIC"), which is defined as the annual net rental income (including rental deposits and less ground rent) divided by the annual loan interest service, increased to 1.40x (FY11: 1.32x) due to new business being completed with strong cover. Mortgage LTVs decreased during the year from 102% to 95% largely due to new business completing with low LTVs (property values have fallen c3.2% between 2011 and 2012). All loans in arrears have been assessed for impairment. Of the £446 million (FY11: £418 million)value of loans in arrears included within our shareholder assets, the interest and capital amount in arrears is only £2.4 million. The valuation allowance (including supplementary allowances) made in the UK Life for corporate bonds and mortgages, including healthcare mortgages, held by Aviva Annuity UK Limited and carried at fair value equates to 56 bps and 89 bps respectively at 31 December 2012 (FY11: 60 bps and 69 bps respectively). The total valuation allowance held by Aviva Annuity UK Limited in respect of corporate bonds and mortgages, including healthcare mortgages, was £1.8 billion (FY11: £1.6 billion)over the remaining term of the UK Life corporate bond and mortgage portfolio. The increase is driven by an increase in the commercial mortgage allowances to reflect up-to-date market information and growth in the corporate bond portfolio. In addition, we hold £118 million (FY11: £84 million) of impairment provisions in our UK General Insurance mortgage portfolio, which is carried at amortised cost. The UK portfolio remains well diversified in terms of property type, location and tenants as well as the spread of loans written over time. The risks in commercial mortgages are addressed through several layers of protection with the mortgage risk profile being primarily driven by the ability of the underlying tenant rental income to cover loan interest and amortisation. Should any single tenant default on their rental payment, rental from other tenants backing the same loan often ensures the loan interest cover does not fall below 1.0x. Where there are multiple loans to a single borrower further protection may be achieved through cross-charging (or pooling) such that any single loan is also supported by rents received within other pool loans. Additionally, there may be support provided by the borrower of the loan itself and further loss mitigation from any general floating charge held over assets within the borrower companies. If the LIC cover falls below 1.0x and the borrower defaults then Aviva still retains the option of selling the security or restructuring the loans and benefiting from the protection of the collateral. A combination of these benefits and the high recovery levels afforded by property collateral (compared to corporate debt or other uncollateralised credit exposures) results in the economic exposure being significantly lower than the gross exposure reported above. Securitised mortgage loans Of the total securitised residential mortgages (£2.2 billion), approximately £260 million of securities are still held by Aviva shareholder funds. The remaining securities have been sold to third parties, and therefore present little credit risk to Aviva. Securitised residential mortgages held are predominantly issued through vehicles in the UK. Page 112 D3 - Analysis of asset quality continued D3.3 - Loans continued United States (Non-securitised mortgage loans) Commercial Gross exposure by loan to value and arrears Shareholder assets 2012 >120% £m 115-120% £m 110-115% £m 105-110% £m 100-105% £m 95-100% £m 90-95% £m 80-90% £m 70-80% £m <70% £m Total £m Neither past due nor impaired 14 - 2 1 14 23 19 131 516 2,137 2,857 0 - 3 months - - - - 2 - - - - - 2 3 - 6 months - - - - - - - - - - - 6 - 12 months - - - - - - - - - - - > 12 months - - - - - - - - - - - Total 14 - 2 1 16 23 19 131 516 2,137 2,859 Aviva USA currently holds £2.9 billion (FY11: £2.5 billion) of commercial mortgages included within shareholder assets. These mortgages continue to perform well, reflecting: n Low underwriting LTVs (shall not exceed 80% at the time of issuance), and consequently a portfolio with an average LTV of 61% (FY11: 64%); n A highly diversified portfolio, with strong volumes in many states with more stable economies and related real estate values; and n Strong LIC ratios, with 98% of the loans having an LIC above 1.0x, and 2.0% with LIC below 1.0x. As at 31 December 2012, the actual amount of interest payment in arrears was £0.03 million. Page 113 D3 - Analysis of asset quality continued D3.4 - Financial investments 2012 2011 Total assets Cost/ amortised cost £m Unrealised gains £m Impairment and unrealised losses £m Fair value £m Cost/ amortised cost £m Unrealised gains £m Impairment and unrealised losses £m Fair value £m Debt securities 147,220 16,433 (2,030) 161,623 147,537 12,395 (6,587) 153,345 Equity securities 30,898 5,043 (2,164) 33,777 33,055 3,637 (4,009) 32,683 Other investments 28,939 2,308 (1,154) 30,093 30,362 553 (538) 30,377 Total 207,057 23,784 (5,348) 225,493 210,954 16,585 (11,134) 216,405 Assets of operations classified as held for sale 32,834 3,762 (181) 36,415 403 4 (60) 347 Total (excluding assets held for sale) 174,223 20,022 (5,167) 189,078 210,551 16,581 (11,074) 216,058 Aviva holds large quantities of high quality bonds, primarily to match our liability to make guaranteed payments to policyholders. Some credit risk is taken, partly to increase returns to policyholders and partly to optimise the risk/return profile for shareholders. The risks are consistent with the products we offer and the related investment mandates, and are in line with our risk appetite. The Group also holds equities, the majority of which are held in participating funds and policyholder funds, where they form an integral part of the investment expectations of policyholders and follow well-defined investment mandates. Some equities are also held in shareholder funds. The vast majority of equity investments are valued at quoted market prices. D3.4.1 - Debt securities Fair value hierarchy Debt securities - Total 2012 Level 1 £m Level 2 £m Level 3 £m Total £m UK Government 18,208 158 - 18,366 Non-UK Government 39,385 5,234 1,757 46,376 Europe 35,950 1,115 1,756 38,821 North America 787 3,779 - 4,566 Asia Pacific & Other 2,648 340 1 2,989 Corporate bonds - Public utilities 5,789 3,299 52 9,140 Corporate convertible bonds 182 107 182 471 Other corporate bonds 39,383 29,028 7,980 76,391 Other 5,006 5,762 111 10,879 Total 107,953 43,588 10,082 161,623 Total % 66.8% 27.0% 6.2% 100.0% Assets of operations classified as held for sale 1,480 32,017 120 33,617 Total (excluding assets held for sale) 106,473 11,571 9,962 128,006 Total % (excluding assets held for sale) 83.2% 9.0% 7.8% 100.0% FY11 103,183 42,222 7,940 153,345 FY11 % 67.3% 27.5% 5.2% 100.0% Fair value hierarchy Debt securities - Policyholders assets 2012 Level 1 £m Level 2 £m Level 3 £m Total £m UK Government 4,180 - - 4,180 Non-UK Government 2,607 60 1 2,668 Europe 1,846 59 1 1,906 North America 149 - - 149 Asia Pacific & Other 612 1 - 613 Corporate bonds - Public utilities 284 - 1 285 Corporate convertible bonds 4 - - 4 Other corporate bonds 5,136 1,922 158 7,216 Other 1,829 285 5 2,119 Total 14,040 2,267 165 16,472 Total % 85.2% 13.8% 1.0% 100.0% Assets of operations classified as held for sale 190 1,148 - 1,338 Total (excluding assets held for sale) 13,850 1,119 165 15,134 Total % (excluding assets held for sale) 91.5% 7.4% 1.1% 100.0% FY11 12,492 2,717 86 15,295 FY11 % 81.6% 17.8% 0.6% 100.0% Page 114 D3 - Analysis of asset quality continued D3.4 - Financial investments continued D3.4.1 - Debt securities continued Fair value hierarchy Debt securities - Participating fund assets 2012 Level 1 £m Level 2 £m Level 3 £m Total £m UK Government 10,643 10 - 10,653 Non-UK Government 29,260 620 1,720 31,600 Europe 27,378 560 1,720 29,658 North America 199 36 - 235 Asia Pacific & Other 1,683 24 - 1,707 Corporate bonds - Public utilities 2,585 254 33 2,872 Corporate convertible bonds 177 25 126 328 Other corporate bonds 24,761 2,310 7,506 34,577 Other 1,494 1,868 105 3,467 Total 68,920 5,087 9,490 83,497 Total % 82.5% 6.1% 11.4% 100.0% Assets of operations classified as held for sale 633 2,082 - 2,715 Total (excluding assets held for sale) 68,287 3,005 9,490 80,782 Total % (excluding assets held for sale) 84.5% 3.7% 11.8% 100.0% FY11 67,653 4,504 7,293 79,450 FY11 % 85.2% 5.7% 9.1% 100.0% Fair value hierarchy Debt securities - Shareholder assets 2012 Level 1 £m Level 2 £m Level 3 £m Total £m UK Government 3,385 148 - 3,533 Non-UK Government 7,518 4,554 36 12,108 Europe 6,726 496 35 7,257 North America 439 3,743 - 4,182 Asia Pacific & Other 353 315 1 669 Corporate bonds - Public utilities 2,920 3,045 18 5,983 Corporate convertible bonds 1 82 56 139 Other corporate bonds 9,486 24,796 316 34,598 Other 1,683 3,609 1 5,293 Total 24,993 36,234 427 61,654 Total % 40.5% 58.8% 0.7% 100.0% Assets of operations classified as held for sale 657 28,787 120 29,564 Total (excluding assets held for sale) 24,336 7,447 307 32,090 Total % (excluding assets held for sale) 75.8% 23.2% 1.0% 100.0% FY11 23,038 35,001 561 58,600 FY11 % 39.3% 59.7% 1.0% 100.0% 0.7%(FY11: 1.0%) of shareholder exposure to debt securities and 1.0% excluding assets held for sale is fair valued using models with significant unobservable market parameters (classified as Fair Value Level 3). Where estimates are used, these are based on a combination of independent third party evidence and internally developed models, calibrated to market observable data where possible. 40.5% (FY11: 39.3%) of shareholder exposure to debt securities is based on quoted prices in an active market and are therefore classified as Fair Value Level 1. The majority of the debt instruments in Level 2 are held by our US and Canadian businesses. These debt instruments are valued by independent pricing firms in accordance with usual market practice in that region and consistent with other companies operating in the region are classified as Level 2 in the Fair Value hierarchy. Excluding our US and Canadian businesses, the proportion of shareholder debt securities classified as Level 1 in the Fair Value hierarchy would be 78.9% (FY11: 84.1%); while excluding assets held for sale (including our US business) 75.8% of shareholder debt securities are classified as Level 1. Page 115 D3 - Analysis of asset quality continued D3.4 - Financial investments continued D3.4.1 - Debt securities continued External ratings Debt securities - Total 2012 AAA £m AA £m A £m BBB £m Less than BBB £m Non-rated £m Total £m Government UK Government 18,025 88 32 - - 203 18,348 UK local authorities 13 - - - - 5 18 Non-UK Government 11,925 16,693 3,671 12,914 1,071 102 46,376 29,963 16,781 3,703 12,914 1,071 310 64,742 Corporate Public utilities 47 296 5,661 2,879 80 177 9,140 Convertibles and bonds with warrants 6 - 40 397 6 22 471 Other corporate bonds 5,503 8,839 27,179 23,876 3,357 7,637 76,391 5,556 9,135 32,880 27,152 3,443 7,836 86,002 Certificates of deposits - 388 517 87 1,054 4 2,050 Structured RMBS1 non-agency prime 169 23 4 - - - 196 RMBS1 agency 907 - - - - - 907 1,076 23 4 - - - 1,103 CMBS2 1,617 369 196 137 120 1 2,440 ABS3 595 198 277 53 95 10 1,228 CDO (including CLO)4 - - - - 1 5 6 ABCP5 58 27 - - - - 85 2,270 594 473 190 216 16 3,759 Wrapped credit 1 269 94 104 42 47 557 Other 648 193 860 639 917 153 3,410 Total 39,514 27,383 38,531 41,086 6,743 8,366 161,623 Total % 24.4% 16.9% 23.8% 25.4% 4.2% 5.3% 100.0% Assets of operations classified as held for sale 3,478 3,638 9,424 12,726 1,920 2,431 33,617 Total (excluding assets held for sale) 36,036 23,745 29,107 28,360 4,823 5,935 128,006 Total % (excluding assets held for sale) 28.2% 18.5% 22.7% 22.2% 3.8% 4.6% 100.0% FY11 49,759 20,167 45,819 24,988 4,252 8,360 153,345 FY11 % 32.3% 13.2% 29.9% 16.3% 2.8% 5.5% 100.0% 1 RMBS - Residential Mortgage Backed Security. 2 CMBS - Commercial Mortgage Backed Security. 3 ABS - Asset Backed Security. 4 CDO - Collateralised Debt Obligation, CLO - Collateralised Loan Obligation. 5 ABCP - Asset Backed Commercial Paper. Page 116 D3 - Analysis of asset quality continued D3.4 - Financial investments continued D3.4.1 - Debt securities continued External ratings Debt securities - Policyholders assets 2012 AAA £m AA £m A £m BBB £m Less than BBB £m Non-rated £m Total £m Government UK Government 4,177 3 - - - - 4,180 UK local authorities - - - - - - - Non-UK Government 564 306 786 772 198 42 2,668 4,741 309 786 772 198 42 6,848 Corporate Public utilities 2 18 152 91 15 7 285 Convertibles and bonds with warrants - - - 1 - 3 4 Other corporate bonds 273 741 3,027 2,568 224 383 7,216 275 759 3,179 2,660 239 393 7,505 Certificates of deposits - 239 417 54 275 1 986 Structured RMBS1 non-agency prime - - 2 - - - 2 RMBS1 agency - - - - - - - - - 2 - - - 2 CMBS2 6 1 - - - - 7 ABS3 6 4 39 - - - 49 CDO (including CLO)4 - - - - - - - ABCP5 - - - - - - - 12 5 39 - - - 56 Wrapped credit - 11 1 2 2 1 17 Other 201 60 267 198 284 48 1,058 Total 5,229 1,383 4,691 3,686 998 485 16,472 Total % 31.7% 8.4% 28.5% 22.4% 6.1% 2.9% 100.0% Assets of operations classified as held for sale 48 49 - 1,170 67 4 1,338 Total (excluding assets held for sale) 5,181 1,334 4,691 2,516 931 481 15,134 Total % (excluding assets held for sale) 34.2% 8.8% 31.0% 16.6% 6.2% 3.2% 100.0% FY11 6,208 1,132 3,912 3,101 371 571 15,295 FY11 % 40.6% 7.4% 25.6% 20.3% 2.4% 3.7% 100.0% Page 117 D3 - Analysis of asset quality continued D3.4 - Financial investments continued D3.4.1 - Debt securities continued External ratings Debt securities - Participating fund assets 2012 AAA £m AA £m A £m BBB £m Less than BBB £m Non-rated £m Total £m Government UK Government 10,610 4 28 - - 11 10,653 UK local authorities - - - - - - - Non-UK Government 6,779 11,830 1,677 10,471 833 10 31,600 17,389 11,834 1,705 10,471 833 21 42,253 Corporate Public utilities 18 93 1,712 1,012 20 17 2,872 Convertibles and bonds with warrants - - 21 284 4 19 328 Other corporate bonds 3,881 4,955 11,902 9,731 1,739 2,369 34,577 3,899 5,048 13,635 11,027 1,763 2,405 37,777 Certificates of deposits - 6 42 12 614 - 674 Structured RMBS1 non-agency prime 68 - 2 - - - 70 RMBS1 agency 20 - - - - - 20 88 - 2 - - - 90 CMBS2 152 28 10 25 1 1 217 ABS3 50 30 120 22 38 - 260 CDO (including CLO)4 - - - - - - - ABCP5 17 - - - - - 17 219 58 130 47 39 1 494 Wrapped credit - 57 12 22 2 - 93 Other 402 120 534 397 570 93 2,116 Total 21,997 17,123 16,060 21,976 3,821 2,520 83,497 Total % 26.3% 20.5% 19.2% 26.3% 4.6% 3.1% 100.0% Assets of operations classified as held for sale 95 198 666 1,156 534 66 2,715 Total (excluding assets held for sale) 21,902 16,925 15,394 20,820 3,287 2,454 80,782 Total % (excluding assets held for sale) 27.1% 21.0% 19.1% 25.8% 4.0% 3.0% 100.0% FY11 30,540 11,204 24,004 9,786 1,465 2,451 79,450 FY11 % 38.4% 14.1% 30.2% 12.3% 1.8% 3.2% 100.0% Page 118 D3 - Analysis of asset quality continued D3.4 - Financial investments continued D3.4.1 - Debt securities continued External ratings Debt securities - Shareholder assets 2012 AAA £m AA £m A £m BBB £m Less than BBB £m Non-rated £m Total £m Government UK Government 3,238 81 4 - - 192 3,515 UK local authorities 13 - - - - 5 18 Non-UK Government 4,582 4,557 1,208 1,671 40 50 12,108 7,833 4,638 1,212 1,671 40 247 15,641 Corporate Public utilities 27 185 3,797 1,776 45 153 5,983 Convertibles and bonds with warrants 6 - 19 112 2 - 139 Other corporate bonds 1,349 3,143 12,250 11,577 1,394 4,885 34,598 1,382 3,328 16,066 13,465 1,441 5,038 40,720 Certificates of deposits - 143 58 21 165 3 390 Structured RMBS1 non-agency prime 101 23 - - - - 124 RMBS1 agency 887 - - - - - 887 988 23 - - - - 1,011 CMBS2 1,459 340 186 112 119 - 2,216 ABS3 539 164 118 31 57 10 919 CDO (including CLO)4 - - - - 1 5 6 ABCP5 41 27 - - - - 68 2,039 531 304 143 177 15 3,209 Wrapped credit 1 201 81 80 38 46 447 Other 45 13 59 44 63 12 236 Total 12,288 8,877 17,780 15,424 1,924 5,361 61,654 Total % 19.9% 14.4% 28.8% 25.0% 3.1% 8.8% 100.0% Assets of operations classified as held for sale 3,335 3,391 8,758 10,400 1,319 2,361 29,564 Total (excluding assets held for sale) 8,953 5,486 9,022 5,024 605 3,000 32,090 Total % (excluding assets held for sale) 27.9% 17.1% 28.1% 15.7% 1.9% 9.3% 100.0% FY11 13,011 7,831 17,903 12,101 2,416 5,338 58,600 FY11 % 22.2% 13.4% 30.6% 20.7% 4.1% 9.0% 100.0% The overall quality of the book remains strong, despite the continuing downgrade activity by the major rating agencies during the year to 2012. 25% of shareholder exposure to debt securities is in government holdings (FY11: 23%). Our corporate debt securities portfolio represents 66% (FY11: 67%) of total shareholder debt securities. The majority of non-rated corporate bonds are held by our businesses in the US and UK. At 31 December 2012, the proportion of our shareholder debt securities that are investment grade increased to 88.1% (FY11: 86.9%). The remaining 11.9% of shareholder debt securities that do not have an external rating of BBB or higher can be split as follows: n 3.1% are debt securities that are rated as below investment grade; n 3.7% are US private placements which are not rated by the major rating agencies, but are rated as investment grade by the Securities Valuation Office of the National Association of Insurance Commissioners (NAIC), a US national regulatory agency; and, n 5.1% are not rated by the major rating agencies or the NAIC. Of the securities not rated by an external agency or NAIC most are allocated an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to be of investment grade credit quality; these include £2.4 billion of debt securities held in our UK Life business, predominantly made up of private placements and other corporate bonds, which have been internally rated as investment grade. The majority of the Residential Mortgage-Backed Securities (RMBS) are U.S. investments and over 87% of this exposure is backed by one of the U.S. Government Sponsored Entities (GSEs) including Fannie Mae and Freddie Mac which, under the conservatorship arrangements implemented in September 2008, have an implicit guarantee, although they are not expressly backed by the full faith and credit of the U.S. Government. The Group has extremely limited exposure to CDOs, CLOs and 'Sub-prime' debt securities. Asset backed securities (ABS) are held primarily by our US and UK businesses. 92.7% of the Group's shareholder holdings in ABS are investment grade. ABS that either have a rating below BBB or are not rated represent approximately 0.1% of shareholder exposure to debt securities. Page 119 D3 - Analysis of asset quality continued D3.4 - Financial investments continued D3.4.2 - Equity securities 2012 2011 Fair value hierarchy Fair value hierarchy Equity securitites - Total Level 1 £m Level 2 £m Level 3 £m Total £m Level 1 £m Level 2 £m Level 3 £m Total £m Public utilities 3,684 - - 3,684 4,132 - 1 4,133 Banks, trusts and insurance companies 6,771 72 415 7,258 5,763 99 403 6,265 Industrial miscellaneous and all other 22,182 158 58 22,398 21,605 174 79 21,858 Non-redeemable preferred shares 437 - - 437 56 371 - 427 Total 33,074 230 473 33,777 31,556 644 483 32,683 Total % 97.9% 0.7% 1.4% 100.0% 96.6% 2.0% 1.4% 100.0% Assets of operations classified as held for sale 1,068 180 - 1,248 37 - - 37 Total (excluding assets held for sale) 32,006 50 473 32,529 31,519 644 483 32,646 Total % (excluding assets held for sale) 98.4% 0.2% 1.4% 100.0% 96.5% 2.0% 1.5% 100.0% 2012 2011 Fair value hierarchy Fair value hierarchy Equity securities - Policyholder assets Level 1 £m Level 2 £m Level 3 £m Total £m Level 1 £m Level 2 £m Level 3 £m Total £m Public utilities 2,571 - - 2,571 2,728 - - 2,728 Banks, trusts and insurance companies 3,902 - 2 3,904 3,386 - - 3,386 Industrial miscellaneous and all other 15,797 137 1 15,935 14,282 166 7 14,455 Non-redeemable preferred shares 90 - - 90 33 - - 33 Total 22,360 137 3 22,500 20,429 166 7 20,602 Total % 99.4% 0.6% 0.0% 100.0% 99.2% 0.8% 0.0% 100.0% Assets of operations classified as held for sale 1,057 119 - 1,176 34 - - 34 Total (excluding assets held for sale) 21,303 18 3 21,324 20,395 166 7 20,568 Total % (excluding assets held for sale) 99.9% 0.1% 0.0% 100.0% 99.2% 0.8% 0.0% 100.0% 2012 2011 Fair value hierarchy Fair value hierarchy Equity securities - Participating fund assets Level 1 £m Level 2 £m Level 3 £m Total £m Level 1 £m Level 2 £m Level 3 £m Total £m Public utilities 1,095 - - 1,095 1,368 - - 1,368 Banks, trusts and insurance companies 2,309 - 86 2,395 2,211 - 70 2,281 Industrial miscellaneous and all other 6,274 21 45 6,340 7,048 6 62 7,116 Non-redeemable preferred shares 24 - - 24 23 - - 23 Total 9,702 21 131 9,854 10,650 6 132 10,788 Total % 98.5% 0.2% 1.3% 100.0% 98.7% 0.1% 1.2% 100.0% Assets of operations classified as held for sale - - - - 1 - - 1 Total (excluding assets held for sale) 9,702 21 131 9,854 10,649 6 132 10,787 Total % (excluding assets held for sale) 98.5% 0.2% 1.3% 100.0% 98.7% 0.1% 1.2% 100.0% 2012 2011 Fair value hierarchy Fair value hierarchy Equity securities - Shareholder assets Level 1 £m Level 2 £m Level 3 £m Total £m Level 1 £m Level 2 £m Level 3 £m Total £m Public utilities 18 - - 18 36 - 1 37 Banks, trusts and insurance companies 560 72 327 959 166 99 333 598 Industrial miscellaneous and all other 111 - 12 123 275 2 10 287 Non-redeemable preferred shares 323 - - 323 - 371 - 371 Total 1,012 72 339 1,423 477 472 344 1,293 Total % 71.1% 5.1% 23.8% 100.0% 36.9% 36.5% 26.6% 100.0% Assets of operations classified as held for sale 11 61 - 72 2 - - 2 Total (excluding assets held for sale) 1,001 11 339 1,351 475 472 344 1,291 Total % (excluding assets held for sale) 74.1% 0.8% 25.1% 100.0% 36.8% 36.6% 26.6% 100.0% 71.1% of our shareholder exposure to equity securities is based on quoted prices in an active market and as such is classified as Level 1 (FY11: 36.9%). The increase in 2012 reflects the classification of our holding in Delta Lloyd as a financial investment from 5 July 2012 and the transfer of non-redeemable preferred shares from Level 2 to 1 as quoted prices in active markets become available. Excluding assets classified as held for sale, 74.1% of shareholder exposure is to equities that are Level 1. Shareholder investments include a strategic holding in Italian banks of £289 million (£148 million net of any non-controlling interest share in the Group companies that own the investments). Page 120 D3 - Analysis of asset quality continued D3.4 - Financial investments continued D3.4.3 - Other investments 2012 2011 Fair value hierarchy Fair value hierarchy Other investments - Total Level 1 £m Level 2 £m Level 3 £m Total £m Level 1 £m Level 2 £m Level 3 £m Total £m Unit trusts and other investment vehicles 20,341 3,712 2,703 26,756 20,690 3,774 2,796 27,260 Derivative financial instruments 340 1,203 47 1,590 343 1,139 16 1,498 Deposits with credit institutions 702 11 26 739 403 - 24 427 Minority holdings in property management undertakings - 584 - 584 - 617 - 617 Other 321 - 103 424 466 - 109 575 Total 21,704 5,510 2,879 30,093 21,902 5,530 2,945 30,377 Total % 72.1% 18.3% 9.6% 100.0% 72.1% 18.2% 9.7% 100.0% Assets of operations classified as held for sale 445 709 396 1,550 217 - - 217 Total (excluding assets held for sale) 21,259 4,801 2,483 28,543 21,685 5,530 2,945 30,160 Total % (excluding assets held for sale) 74.5% 16.8% 8.7% 100.0% 71.9% 18.3% 9.8% 100.0% 2012 2011 Fair value hierarchy Fair value hierarchy Other investments - Policyholder assets Level 1 £m Level 2 £m Level 3 £m Total £m Level 1 £m Level 2 £m Level 3 £m Total £m Unit trusts and other investment vehicles 19,344 3,423 56 22,823 19,299 3,188 59 22,546 Derivative financial instruments 34 7 - 41 16 31 2 49 Deposits with credit institutions 515 - - 515 158 - - 158 Minority holdings in property management undertakings - 14 - 14 - 22 - 22 Other 311 - - 311 458 - - 458 Total 20,204 3,444 56 23,704 19,931 3,241 61 23,233 Total % 85.3% 14.5% 0.2% 100.0% 85.8% 13.9% 0.3% 100.0% Assets of operations classified as held for sale 206 51 - 257 210 - - 210 Total (excluding assets held for sale) 19,998 3,393 56 23,447 19,721 3,241 61 23,023 Total % (excluding assets held for sale) 85.3% 14.5% 0.2% 100.0% 85.6% 14.1% 0.3% 100.0% 2012 2011 Fair value hierarchy Fair value hierarchy Other investments - Participating fund assets Level 1 £m Level 2 £m Level 3 £m Total £m Level 1 £m Level 2 £m Level 3 £m Total £m Unit trusts and other investment vehicles 673 267 2,231 3,171 1,250 486 2,284 4,020 Derivative financial instruments 132 300 - 432 74 288 - 362 Deposits with credit institutions 44 - - 44 61 - - 61 Minority holdings in property management undertakings - 555 - 555 - 579 - 579 Other - - 56 56 - - 56 56 Total 849 1,122 2,287 4,258 1,385 1,353 2,340 5,078 Total % 19.9% 26.4% 53.7% 100.0% 27.3% 26.6% 46.1% 100.0% Assets of operations classified as held for sale 70 - - 70 - - - - Total (excluding assets held for sale) 779 1,122 2,287 4,188 1,385 1,353 2,340 5,078 Total % (excluding assets held for sale) 18.6% 26.8% 54.6% 100.0% 27.3% 26.6% 46.1% 100.0% 2012 2011 Fair value hierarchy Fair value hierarchy Other investments - Shareholders assets Level 1 £m Level 2 £m Level 3 £m Total £m Level 1 £m Level 2 £m Level 3 £m Total £m Unit trusts and other investment vehicles 324 22 416 762 141 100 453 694 Derivative financial instruments 174 896 47 1,117 253 820 14 1,087 Deposits with credit institutions 143 11 26 180 184 - 24 208 Minority holdings in property management undertakings - 15 - 15 - 16 - 16 Other 10 - 47 57 8 - 53 61 Total 651 944 536 2,131 586 936 544 2,066 Total % 30.5% 44.3% 25.2% 100.0% 28.4% 45.3% 26.3% 100.0% Assets of operations classified as held for sale 169 658 396 1,223 7 - - 7 Total (excluding assets held for sale) 482 286 140 908 579 936 544 2,059 Total % (excluding assets held for sale) 53.1% 31.5% 15.4% 100.0% 28.1% 45.5% 26.4% 100.0% In total 74.8% (FY11: 73.7%) of shareholder other investments, are classified as Level 1 or 2 in the fair value hierarchy. The unit trusts and other investment vehicles invest in a variety of assets, which can include cash equivalents, debt, equity and property securities. Excluding assets classified as held for sale, 84.6% of shareholder exposure is to other investments that are Level 1 or 2. Page 121 D3 - Analysis of asset quality continued D3.4 - Financial investments continued D3.4.4 - Available for sale investments - Impairments and duration and amount of unrealised losses The total impairment expense for 2012 for AFS debt securities was £12 million (FY11: £19 million). This expense relates to our US business, of which £7 million relates to corporate bonds and £5 million relates to commercial mortgage backed securities that are not yet in default but showed continued deterioration in market value from the previous impairment value. We have not recognised an impairment charge in respect of unrealised losses on AFS debt securities and other investments as we believe the decline in fair value of these securities relative to their amortised cost to be temporary. At 31 December 2012, 98% of the AFS debt securities were held by our US business. In respect of debt securities in an unrealised loss position, we have the intent to hold these securities for a sufficient period to recover their value in full and the ability to hold them to maturity, as they are held to match long-term policyholder liabilities of the same or longer duration. In the US the decrease in unrealised losses experienced during 2012, reflects a decrease in the US government treasury yield curve, partially offset by widening credit spreads. In addition, a continued reversal of unrealised losses would be expected as bonds purchased at historically low credit spreads pre-financial crisis approach maturity. Where factors specific to an issuer have resulted in an unrealised loss we have considered whether the security is impaired and recognised an impairment charge where necessary. Total unrealised losses on AFS debt securities and other investments at 31 December 2012 were £74 million (FY11: £229 million) and £5 million (FY11: £10 million), respectively. The continuous period for which these AFS classified securities have been in an unrealised loss position is disclosed below: 0 - 6 months 7 - 12 months more than 12 months Total 2012 Fair value1 £m Gross unrealised £m Fair value1 £m Gross unrealised £m Fair value1 £m Gross unrealised £m Fair value1 £m Gross unrealised £m Less than 20% loss position: Debt securities 2,006 (14) 53 (3) 534 (11) 2,593 (28) Equity securities - - - - 2 - 2 - Other investments 8 - 8 - 20 (3) 36 (3) 2,014 (14) 61 (3) 556 (14) 2,631 (31) 20%-50% loss position: Debt securities - - - - 70 (34) 70 (34) Equity securities - - - - - - - - Other investments - - 2 (1) 2 (1) 4 (2) - - 2 (1) 72 (35) 74 (36) Greater than 50% loss position: Debt securities - - - - 7 (12) 7 (12) Equity securities - - - - - - - - Other investments - - - - - - - - - - - - 7 (12) 7 (12) Total Debt securities 2,006 (14) 53 (3) 611 (57) 2,670 (74) Equity securities - - - - 2 - 2 - Other investments 8 - 10 (1) 22 (4) 40 (5) 2,014 (14) 63 (4) 635 (61) 2,712 (79) Assets of operations classified as held for sale 2,014 (14) 63 (4) 231 (58) 2,308 (76) Total (excluding assets held for sale) - - - - 404 (3) 404 (3) 1 Only includes AFS classified securities that are in unrealised loss positions. Page 122 D3 - Analysis of asset quality continued D3.4 - Financial investments continued D3.4.4 - Available for sale investments - Impairments and duration and amount of unrealised losses continued 0 - 6 months 7 - 12 months more than 12 months Total 2011 Fair value1 £m Gross unrealised £m Fair value1 £m Gross unrealised £m Fair value1 £m Gross unrealised £m Fair value1 £m Gross unrealised £m Less than 20% loss position: Debt securities 1,781 (52) 353 (23) 540 (33) 2,674 (108) Equity securities - - - - 2 - 2 - Other investments 50 (2) 150 (8) 8 - 208 (10) 1,831 (54) 503 (31) 550 (33) 2,884 (118) 20%-50% loss position: Debt securities 14 (7) 15 (5) 168 (76) 197 (88) Equity securities - - - - - - - - Other investments - - - - - - - - 14 (7) 15 (5) 168 (76) 197 (88) Greater than 50% loss position: Debt securities 1 (2) 1 (2) 16 (29) 18 (33) Equity securities - - - - - - - - Other investments - - - - - - - - 1 (2) 1 (2) 16 (29) 18 (33) Total Debt securities 1,796 (61) 369 (30) 724 (138) 2,889 (229) Equity securities - - - - 2 - 2 - Other investments 50 (2) 150 (8) 8 - 208 (10) 1,846 (63) 519 (38) 734 (138) 3,099 (239) Assets of operations classified as held for sale - - - - - - - - Total (excluding assets held for sale) 1,846 (63) 519 (38) 734 (138) 3,099 (239) 1 Only includes AFS classified securities that are in unrealised loss positions. Page 123 D3 - Analysis of asset quality continued D3.4 - Financial investments continued D3.4.5 - Exposures to peripheral European countries Included in our debt securities and other financial assets are exposures to peripheral European countries. All of these assets are valued on a mark to market basis under IAS 39, and therefore our statement of financial position and income statement already reflect any reduction in value between the date of purchase and the balance sheet date. The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds. Net of non-controlling interests, our direct shareholder and participating fund asset exposure to the government (and local authorities and agencies) of Italy is £4.9 billion (FY11: £6.4 billion), a decrease of £1.5 billion. Gross of non-controlling interests, 82% of our shareholder asset exposure to Italy arises from investment exposure of our Italian business. Direct sovereign exposures to Greece, Ireland, Portugal, Italy and Spain (net of non-controlling interests, excluding policyholder assets) Participating Shareholder Total 31 December 2012 £bn 31 December 2011 £bn 31 December 2012 £bn 31 December 2011 £bn 31 December 2012 £bn 31 December 2011 £bn Greece - - - - - - Ireland 0.4 0.3 - 0.2 0.4 0.5 Portugal 0.3 0.2 - - 0.3 0.2 Italy 4.5 5.6 0.4 0.8 4.9 6.4 Spain 0.9 0.8 0.5 0.3 1.4 1.1 Total Greece, Ireland, Portugal, Italy and Spain 6.1 6.9 0.9 1.3 7.0 8.2 Direct sovereign exposures to Greece, Ireland, Portugal, Italy and Spain (gross of non-controlling interests, excluding policyholder assets) Participating Shareholder Total 31 December 2012 £bn 31 December 2011 £bn 31 December 2012 £bn 31 December 2011 £bn 31 December 2012 £bn 31 December 2011 £bn Greece - - - - - - Ireland 0.4 0.4 - 0.2 0.4 0.6 Portugal 0.3 0.2 - - 0.3 0.2 Italy 8.5 9.7 0.6 1.1 9.1 10.8 Spain 1.3 1.0 0.9 0.6 2.2 1.6 Total Greece, Ireland, Portugal, Italy and Spain 10.5 11.3 1.5 1.9 12.0 13.2 Page 124 D3 - Analysis of asset quality continued D3.4 - Financial investments continued D3.4.6 - Non UK Government Debt Securities (gross of non-controlling interests) The following is a summary of non UK government debt by issuer as at 31 December 2012 analysed by policyholder, participating and shareholder funds. Policyholder Participating Shareholder Total Non UK Government Debt Securities 2012 £m 2011 £m 2012 £m 2011 £m 2012 £m 2011 £m 2012 £m 2011 £m Austria 14 28 634 512 123 58 771 598 Belgium 45 30 1,342 1,029 172 176 1,559 1,235 France 189 215 9,072 7,529 1,944 1,634 11,205 9,378 Germany 217 239 2,389 1,751 957 792 3,563 2,782 Greece - - - 46 - 2 - 48 Ireland 34 33 363 378 26 216 423 627 Italy 263 273 8,517 9,670 617 1,056 9,397 10,999 Netherlands 65 63 1,193 1,284 228 136 1,486 1,483 Poland 672 509 1,012 720 445 329 2,129 1,558 Portugal - - 257 204 - 8 257 212 Spain 36 46 1,317 1,046 854 639 2,207 1,731 European Supranational debt 136 114 2,928 2,376 1,470 856 4,534 3,346 Other European countries 235 125 634 410 421 91 1,290 626 Europe 1,906 1,675 29,658 26,955 7,257 5,993 38,821 34,623 Canada 18 18 195 195 2,517 2,342 2,730 2,555 United States 131 129 40 66 1,665 1,631 1,836 1,826 North America 149 147 235 261 4,182 3,973 4,566 4,381 Singapore 7 8 453 309 276 211 736 528 Sri Lanka 2 21 2 2 - 139 4 162 Other 604 391 1,252 1,262 393 227 2,249 1,880 Asia Pacific and other 613 420 1,707 1,573 669 577 2,989 2,570 Total 2,668 2,242 31,600 28,789 12,108 10,543 46,376 41,574 Less: assets of operations classified as held for sale 197 34 556 9 2,274 19 3,027 62 Total (excluding assets held for sale) 2,471 2,208 31,044 28,780 9,834 10,524 43,349 41,512 At 31 December 2012, the Group's total government (non-UK) debt securities stood at £46.4 billion (FY11: £41.6 billion), an increase of £4.8 billion. The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds. Our direct shareholder asset exposure to government (non-UK) debt securities amounts to £12.1 billion (FY11: £10.5 billion). The primary exposures, relative to total shareholder (non-UK) government debt exposure, are to French (16%), German (8%), Spanish (7%) and Italian (5%) (non-UK) government debt securities. The participating funds exposure to (non-UK) government debt amounts to £31.6 billion (FY11: £28.8 billion), an increase of £2.8 billion. The primary exposures, relative to total (non-UK) government debt exposures included within our participating funds, are to the (non-UK) government debt securities of France (29%), Italy (27%), Germany (8%), Belgium (4%), Spain (4%), Netherlands (4%) and Poland (3%). Page 125 D3 - Analysis of asset quality continued D3.4 - Financial investments continued D3.4.7 - Exposure to worldwide bank debt securities Direct shareholder and participating fund assets exposures to worldwide bank debt securities (net of non-controlling interests, excluding policyholder assets) Shareholder assets Participating fund assets 2012 Total senior debt £bn Total subordinated debt £bn Total debt £bn Total senior debt £bn Total subordinated debt £bn Total debt £bn Austria - - - 0.3 - 0.3 France 0.1 - 0.1 3.5 0.8 4.3 Germany 0.1 0.1 0.2 0.5 0.5 1.0 Ireland - 0.1 0.1 - - - Italy 0.1 0.1 0.2 0.3 0.1 0.4 Netherlands 0.4 0.2 0.6 1.9 0.3 2.2 Portugal - - - 0.1 - 0.1 Spain 0.8 0.1 0.9 1.1 0.1 1.2 United Kingdom 0.8 0.5 1.3 1.0 1.2 2.2 United States 1.3 0.8 2.1 1.0 0.1 1.1 Other 0.6 0.4 1.0 2.0 0.8 2.8 Total 4.2 2.3 6.5 11.7 3.9 15.6 Less: assets of operations classified as held for sale 1.3 1.0 2.3 0.1 0.1 0.2 Total (excluding assets held for sale) 2.9 1.3 4.2 11.6 3.8 15.4 FY11 Total 3.7 2.2 5.9 10.6 3.6 14.2 Net of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £6.5 billion. The majority of our holding (65%) is in senior debt. The primary exposures are to US (32%) and UK (20%) banks. Net of non-controlling interests, our direct shareholder asset exposure to worldwide bank equity securities is £0.2 billion. Our holdings include strategic holdings in Italian banks of £148 million. Net of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £15.6 billion. The majority of the exposure (75%) is in senior debt. Participating funds are the most exposed to French (28%), UK (14%) and Dutch (14%) banks. Direct shareholder and participating fund assets exposures to worldwide bank debt securities (gross of non-controlling interests, excluding policyholder assets) Shareholder assets Participating fund assets 2012 Total senior debt £bn Total subordinated debt £bn Total debt £bn Total senior debt £bn Total subordinated debt £bn Total debt £bn Austria - - - 0.3 - 0.3 France 0.1 - 0.1 4.0 0.9 4.9 Germany 0.1 0.1 0.2 0.5 0.5 1.0 Ireland - 0.1 0.1 - - - Italy 0.2 0.1 0.3 0.5 0.2 0.7 Netherlands 0.4 0.2 0.6 2.0 0.3 2.3 Portugal - - - 0.1 - 0.1 Spain 1.2 0.1 1.3 1.5 0.2 1.7 United Kingdom 0.8 0.6 1.4 1.1 1.3 2.4 United States 1.4 0.8 2.2 1.1 0.1 1.2 Other 0.7 0.4 1.1 2.2 0.9 3.1 Total 4.9 2.4 7.3 13.3 4.4 17.7 Less: assets of operations classified as held for sale 1.4 1.1 2.5 0.2 0.1 0.3 Total (excluding assets held for sale) 3.5 1.3 4.8 13.1 4.3 17.4 FY11 Total 4.3 2.3 6.6 12.0 3.9 15.9 Gross of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £7.3 billion. The majority of our holding (67%) is in senior debt. The primary exposures are to US (30%) and UK (19%) banks. Gross of non-controlling interests, our direct shareholder asset exposure to worldwide bank equity securities is £0.4 billion. Our holdings include strategic holdings in Italian banks of £289 million. Gross of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £17.7 billion. The majority of the exposure (75%) is in senior debt. Participating funds are the most exposed to French (28%), UK (14%) and Dutch (13%) banks. Page 126 D3 - Analysis of asset quality continued D3.5 - Reinsurance assets The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract. 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. For the table below, reinsurance asset credit ratings are stated in accordance with information from leading rating agencies. Financial assets that are past due but not impaired Arrears 2012 Neither past due nor impaired £m 0-3 months £m 3-6 months £m 6 months - 1 year £m Greater than 1 year £m Financial assets that have been impaired £m Total £m Policyholders assets 1,576 - - - - - 1,576 Participating fund assets 542 - - - - - 542 Shareholder assets 5,449 - - - - - 5,449 Total 7,567 - - - - - 7,567 Total % 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100.0% Assets of operations classified as held for sale 883 - - - - - 883 Total (excluding assets held for sale) 6,684 - - - - - 6,684 Total % (excluding assets held for sale) 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100.0% FY 2011 7,112 - - - - - 7,112 FY 2011 % 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100.0% Ratings Ratings 2012 AAA £m AA £m A £m BBB £m Less than BBB £m Non-rated £m Total £m Policyholders assets - 266 1,101 - - 209 1,576 Participating fund assets - 141 401 - - - 542 Shareholder assets 28 4,388 779 56 5 193 5,449 Total 28 4,795 2,281 56 5 402 7,567 Total % 0.4% 63.4% 30.1% 0.7% 0.1% 5.3% 100.0% Assets of operations classified as held for sale - 744 99 20 5 15 883 Total (excluding assets held for sale) 28 4,051 2,182 36 - 387 6,684 Total % (excluding assets held for sale) 0.4% 60.7% 32.6% 0.5% 0.0% 5.8% 100.0% FY 2011 2 4,983 1,650 - 27 450 7,112 FY 2011 % 0.0% 70.1% 23.2% 0.0% 0.4% 6.3% 100.0% D3.6 - Receivables and other financial assets Financial assets that are past due but not impaired Arrears 2012 Neither past due nor impaired £m 0-3 months £m 3-6 months £m 6 months - 1 year £m Greater than 1 year £m Financial assets that have not been impaired £m Total £m Policyholders assets 346 8 - - - - 354 Participating fund assets 2,686 - - - - - 2,686 Shareholder assets 4,899 38 13 14 26 - 4,990 Total 7,931 46 13 14 26 - 8,030 Total % 98.7% 0.6% 0.2% 0.2% 0.3% 0.0% 100.0% Assets of operations classified as held for sale 413 - - - - - 413 Total (excluding assets held for sale) 7,518 46 13 14 26 - 7,617 Total % (excluding held for sale) 98.7% 0.6% 0.2% 0.2% 0.3% 0.0% 100.0% FY 2011 7,663 134 148 2 3 - 7,950 FY 2011 % 96.4% 1.7% 1.9% 0.0% 0.0% 0.0% 100.0% Page 127 D3 - Analysis of asset quality continued D3.6 - Receivables and other financial assets continued Credit terms vary from subsidiary to subsidiary, and from country to country, and are set locally within overall credit limits prescribed by the Group credit limit framework, and in line with the Group Credit Policy. The credit quality of receivables and other financial assets is managed at the local business unit level. Where assets classed as 'past due and impaired' exceed local credit limits, and are also deemed at sufficiently high risk of default, an analysis of the asset is performed and a decision is made whether to seek sufficient collateral from the counterparty or to write down the value of the asset as impaired. The Group reviews the carrying value of its receivables at each reporting period. If the carrying value of a receivable or other financial asset is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. D3.7 - Cash and cash equivalents Cash and cash equivalents consist of cash at banks and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with less than three months maturity from the date of acquisition, and include certificates of deposit with maturities of less than three months at date of issue. D4 - Pension fund assets In addition to the assets recognised directly on the Group's balance sheet outlined in the disclosures above, the Group is also exposed to the ''Plan assets'' that are shown net of the present value of scheme liabilities within the IAS 19 net pension surplus. Pension surpluses are included within other assets and pension deficits are recognised within provisions in the Group's consolidated statement of financial position. Plan assets comprise: 2012 2011 United Kingdom £m Ireland £m Canada £m Total £m United Kingdom £m Ireland £m Canada £m Total £m Equities 909 87 92 1,088 735 46 76 857 Bonds 8,867 260 121 9,248 8,663 233 129 9,025 Property 914 12 - 926 657 13 - 670 Other 957 47 15 1,019 1,135 90 14 1,239 Total 11,647 406 228 12,281 11,190 382 219 11,791 Risk management and asset allocation strategy 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. To meet these objectives, each scheme's assets are invested in a diversified portfolio, consisting primarily of debt securities, equity securities and property. Main UK scheme Both the Group and the trustees regularly review the asset/liability management of the main UK scheme. It is fully understood that, whilst the current asset mix is designed to produce appropriate long-term returns, this introduces a material risk of volatility in the scheme's surplus or deficit of assets compared with its liabilities. The principal risks to which the scheme is exposed are interest rate, inflation and equity markets. These are actively mitigated, for example, by using inflation and interest rate swaps. Additionally, the exposure to equities has been reduced over time. There is also an exposure to currency risk where assets are not denominated in the same currency as the liabilities. The majority of this exposure has been removed by the use of hedging instruments. Other schemes The other schemes are considerably less material but their risks are managed in a similar way to those in the main UK scheme. Page 128 D5 - Available funds To ensure access to liquidity as and when needed, the Group maintains over £2 billion of undrawn committed central borrowing facilities with various highly rated banks, £0.75 billion of which is allocated to support the credit rating of Aviva plc's £2 billion commercial paper programme. The expiry profile of the undrawn committed central borrowing facilities is as follows: 2012 £m 2011 £m Expiring within one year 420 955 Expiring beyond one year 1,725 1,160 2,145 2,115 D6 - Guarantees As a normal part of their operating activities, various Group companies have given guarantees and options, including investment return guarantees, in respect of certain long-term insurance and fund management products. For the UK Life with-profit business, provisions in respect of these guarantees and options are calculated on a market consistent basis, in which stochastic models are used to evaluate the level of risk (and additional cost) under a number of economic scenarios, which allow for the impact of volatility in both interest rates and equity prices. For UK Life non-profit business, provisions do not materially differ from those determined on a market consistent basis. In all other businesses, provisions for guarantees and options are calculated on a local basis with sensitivity analysis undertaken where appropriate to assess the impact on provisioning levels of a movement in interest rates and equity levels (typically a 1% decrease in interest rates and 10% decline in equity markets). Page 129 Other information In this section Page Glossary 130 Shareholder services 132 ---------------------------- Page 130 Glossary Product definitions Annuities 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 accumulation contracts, which may be used to provide benefits in retirement, and may be guaranteed, unit-linked or index-linked. Bonds and savings These are accumulation products with single or regular premiums and unit-linked or guaranteed investment returns. Critical illness cover Pays out a lump sum if the insured person is diagnosed with a serious illness that meets the plan definition. Deferred annuities An annuity (or pension) due to be paid from a future date or when the policyholder reaches a specified age. A deferred annuity may be funded by a policyholder by payment of a series of regular contributions or by a capital sum. Group pensions A pension plan that covers a group of people, which is typically purchased by a company and offered to their employees. Guaranteed annuities A policy that pays out a fixed regular amount of benefit for a defined period. Income drawdown The policyholder can transfer money from any pension fund to an income drawdown plan from which they receive an income. The remainder of the pension fund continues to be invested, giving it the potential for growth. Investment sales Comprise retail sales of mutual fund-type products such as unit trusts, individual savings accounts (ISAs) and open ended investment companies (OEICs). ISAs Individual savings accounts - Tax-efficient plans for investing in stocks and shares, cash deposits or life insurance investment funds, subject to certain limits. Mortgage endowment An insurance contract combining savings and protection elements which is designed to repay the principal of a loan or mortgage. Mortgage life insurance A protection contract designed to pay off the outstanding amount of a mortgage or loan in the event of death of the insured. Open ended investment company (OEIC) An collective investment fund structured as a limited company in which investors can buy and sell shares. Pensions A means of providing income in retirement for an individual and possibly his/her dependants. Personal pensions A pension plan tailored to the individual policyholder, which includes the options to stop, start or change their payments. Protection An insurance contract that protects the policyholder or his/her dependants against financial loss on death or ill-health. Regular premium A series of payments are made by the policyholder, typically monthly or annually, for part of or all of the duration of the contract. SICAVs This is an open-ended investment fund, structured as a legally independent joint stock company, whose units are issued in the form of shares. Single premium A single lump sum is paid by the policyholder at commencement of the contract. Stakeholder pensions Low cost and flexible pension plans available in the UK, governed by specific regulations. Term assurance A simple form of life insurance, offering cover over a fixed number of years during which a lump sum will be paid out if the life insured dies. Unit trusts A form of open ended collective investment constituted under a trust deed, in which investors can buy and sell units. Unit-linked annuities A type of deferred annuity which is invested in units of investment funds, whose value depends directly on the market value of assets in those funds. Whole life A protection policy that remains in force for the insured's whole life. Traditional whole life contracts have fixed premium payments that typically cannot be missed without lapsing the policy. Flexible whole life contracts allow the policyholder to vary the premium and/or amount of life cover, within certain limits. With-profits A type of long-term savings and insurance product sold in the UK under with profits policies premiums are paid into a separate fund. Policyholders receive a return on their policies through bonuses, which "smooth" the investment return from the assets which premiums are invested in. Bonuses are declared on an annual and terminal basis. Shareholders have a participating interest in the with-profit funds and any declared bonuses. Generally, policyholder and shareholder participation in with-profit funds in the UK is split 90:10. Page 131 General terms Available for sale (AFS) Securities that have been acquired neither for short-term sale nor to be held to maturity. These are shown at fair value on the statement of financial position and changes in value are taken straight to equity instead of the income statement. Association of British Insurers (ABI) A major trade association for UK insurance companies, established in July 1985. Acquired value of in force (AVIF) The present value of future profits on a portfolio of long-term insurance and investment contracts, acquired either directly or through the purchase of a subsidiary. Bancassurance An arrangement whereby banks and building societies sell insurance and investment products to their customers on behalf of other financial providers. UK Corporate Governance Code The code sets out guidance in the form of principles and provisions on how companies should be directed and controlled to follow good governance practice. Deferred acquisition costs (DAC) The costs directly attributable to the acquisition of new business for insurance and investment contracts may be deferred to the extent that they are expected to be recoverable out of future margins in revenue on these contracts. Fair value The amount for which an asset can be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. FSA The UK's Financial Services Authority - Main regulatory body appointed by the government to oversee the financial services industry in the UK. Since December 2001 it has been the single statutory regulator responsible for savings, insurance and investment business. From 1 April 2013, the FSA will split into two new regulatory bodies: the Prudential Regulation Authority (PRA), which will be a subsidiary of the Bank of England, and the Financial Conduct Authority (FCA). Funds under management Represents all assets actively managed or administered by or on behalf of the Group including those funds managed by third parties. Funds under management by Aviva Represents all assets actively managed or administered by the fund management operations of the Group. General insurance Also known as non-life or property and casualty insurance. Property insurance covers loss or damage through fire, theft, flood, storms and other specified risks. Casualty insurance primarily covers losses arising from accidents that cause injury to other people or damage the property of others. Gross written premiums The total earnings or revenue generated by sales of insurance products, before any reinsurance is taken into account. Not all premiums written will necessarily be treated as income in the current financial year, because some of them could relate to insurance cover for a subsequent period. Independent Financial Advisers (IFAs) A person or organisation authorised to give advice on financial matters and to sell the products of all financial service providers. IFRS International Financial Reporting Standards. These are accounting regulations designed to ensure comparable statement of financial position preparation and disclosure, and are the standards that all publicly listed companies in the European Union are required to use. Operating profit From continuing operations based on expected investment returns, stated before tax attributable to shareholders' profits, and before non-operating items including impairment of goodwill, exceptional and other items. This is also referred to as adjusted operating profit. Inherited estate In the UK, the assets of the long-term with-profit funds less the realistic reserves for non-profit policies written within the with-profit funds, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs and guarantees. Long-term and savings business Collective term for life insurance, pensions, savings, investments and related business. Net written premiums Total gross written premiums for the given period, minus premiums paid over or 'ceded' to reinsurers. Net asset value per ordinary share Net asset value divided by the number of ordinary shares in issue. Net asset value is based on equity shareholders' funds. Present value of new business (PVNBP) Present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business under Market Consistent Embedded Value (MCEV) principles published by the CFO Forum. 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. Page 132 Shareholder services Shareholder profile as at 31 December 2012 By category of shareholder Number of shareholders % Number of shares % Individual 571,901 96.89 278,168,612 9.44 Banks and nominee companies 15,334 2.60 2,614,092,081 88.73 Pension fund managers and insurance companies 239 0.04 2,788,904 0.09 Other corporate bodies 2,771 0.47 50,922,664 1.73 Total 590,245 100 2,945,972,261 100 By size of shareholding Number of shareholders % Number of shares % 1-1,000 532,678 90.25 148,707,650 5.05 1,001-5,000 51,069 8.65 97,672,281 3.32 5,001-10,000 3,605 0.61 25,063,113 0.85 10,001-250,000 2,304 0.39 97,703,037 3.32 250,001-500,000 162 0.03 58,338,929 1.98 500,001 and above 426 0.07 2,498,907,051 84.82 American Depositary Receipts (ADRs) 1 0.00 19,580,200+ 0.66 Total 590,245 100 2,945,972,261 100 +The number of registered ordinary shares represented by ADRs. Please note that each Aviva ADR represents two (2) ordinary shares. * Percentages do not necessarily add up due to rounding. 2013 financial calendar Annual General Meeting 9 May 2013 Announcement of first quarter Interim Management Statement 16 May 2013 Announcement of unaudited half-year results 8 August 2013 Announcement of third quarter Interim Management Statement 7 November 2013 2012 final dividend dates - ordinary shares Ex-dividend date 20 March 2013 Record date 22 March 2013 Dividend payment date * 17 May 2013 * Please note that the ADR local payment date will be approximately five business days after the proposed dividend date for ordinary shares. Annual General Meeting (AGM) n The 2013 AGM will be held at The Barbican Centre, Silk Street, London EC2Y 8DS on Thursday, 9 May 2013 at 11am. n Details of each resolution to be considered at the meeting are provided in the Notice of AGM, which is available on the Company's website at www.aviva.com/agm. n Shareholders can vote electronically at www.investorcentre.co.uk/eproxy, in person by attending the meeting, or by completing and returning the relevant voting card(s) by post. n The voting results for the 2013 AGM will be accessible on the Company's website at www.aviva.com/agm shortly after the meeting. n If you are unable to attend the AGM but would like to ask the directors a question in connection with the business of the meeting, you can do so by sending a question to the group company secretary by email to aviva.shareholders@aviva.com. We will endeavour to provide you with a response as soon as possible. AGM voting instructions n Completed proxy instructions must be submitted to the Company's Registrar, Computershare Investor Services PLC (Computershare), as soon as possible, but in any event to arrive by no later than: n 11am on Tuesday, 7 May 2013 for ordinary shareholders; and n 11am on Friday, 3 May 2013 for members of the Aviva Share Account and participants in the Aviva All Employee Share Ownership Plan. Dividends n Dividends on ordinary shares are normally paid in May and November - please see the table above for the key dates in respect of the 2012 final dividend. n Dividends on preference shares are normally paid in March, June, September and December - please visit www.aviva.com/preferenceshares for the latest dividend payment dates. n Holders of ordinary and preference shares will receive any dividends payable in sterling and holders of ADRs will receive any dividends payable in US dollars. Direct credit of dividend payments n If you would like to have your cash dividends paid directly into your bank or building society account, please visit www.aviva.com/dividendmandate for more information or contact Computershare using the contact details overleaf. Overseas global dividend service n The Global Payments Service provided by Computershare enables shareholders living overseas to elect to receive their dividends in a choice of over 65 international currencies. For further details and fees for this service please visit www.investorcentre.co.uk/faq and select the Dividends and Payments tab, followed by Global Payment Service. Page 133 Manage your holdings online You can view and manage your shareholding online by visiting www.aviva.com/ecomms. To log in you will require your 11 digit Shareholder Reference Number (SRN), which you will find on your proxy or voting card, latest dividend stationery, or any share certificate issued since 4 July 2011. Shareholders can also elect to receive electronic communications by registering their email address online, or by contacting Computershare directly. Making this election will save on printing and distribution costs and has environmental benefits. Useful links for shareholders Online Shareholder Services Centre www.aviva.com/shareholderservices Dividend information for ordinary shares www.aviva.com/dividends Annual General Meeting information and Electronic Voting www.aviva.com/agm www.investorcentre.co.uk/eproxy Aviva share price www.aviva.com/shareprice ADR holders www.aviva.com/adr Aviva preference shareholders www.aviva.com/preferenceshares Aviva preference share price www.londonstockexchange.com Aviva Annual Review In response to shareholder feedback, we have reintroduced the Annual Review as an alternative to the full Annual Report and Accounts. The Annual Review provides a summary of Aviva's businesses and performance in an easier to read format, which many of our shareholders found useful in the past. You can find further information and view the Annual Review at www.aviva.com/reports. If you prefer to receive hard copy documents and would like to elect to receive a copy of the Annual Review instead of the full Annual Report and Accounts, please contact Computershare. Contact details Ordinary and preference shares - Computershare For any queries regarding your shareholding, or to advise of changes to your personal details, please contact our Registrar, Computershare: By telephone: 0871 495 0105 Lines are open from 8.30am to 5pm (UK time), Monday to Friday (excluding public holidays). Please call +44 117 378 8361 if calling from outside the UK. By email: avivaSHARES@computershare.co.uk In writing:Computershare Investor Services PLC The Pavilions, Bridgwater Road, Bristol BS99 6ZZ American Depositary Receipts (ADRs) - Citibank For any queries regarding Aviva ADRs, please contact Citibank Shareholder Services (Citibank): By telephone: 1 877 248 4237(1 877-CITI-ADR), or +1 781 575 4555 if you are calling from outside the US. (Lines are open from 8.30am to 6.00pm, Monday to Friday US Eastern Standard Time). By email: citibank@shareholders-online.com In writing:Citibank Shareholder Services, PO Box 43077, Providence, Rhode Island 02940-3077 USA Please visit www.citi.com/dr for further information about Aviva's ADR programme. Group Company Secretary Shareholders may contact the group company secretary as follows: By email: aviva.shareholders@aviva.com In writing: Kirstine Cooper, Group Company Secretary St Helen's, 1 Undershaft, London EC3P 3DQ By telephone: +44 (0)20 7283 2000 Form 20-F Aviva is a foreign private issuer in the United States of America and is subject to certain reporting requirements of the Securities Exchange Commission (SEC). Aviva files its Form 20-F with the SEC, copies of which can be found at www.aviva.com/reports. Be on your guard - beware of fraudsters! Shareholders are advised to be very wary of any unsolicited telephone calls or correspondence offering to buy shares at a discount or offering free financial advice or company reports. Boiler rooms use increasingly sophisticated means to approach investors and often leave their victims out of pocket. The Financial Services Authority (FSA) has found most share fraud victims are experienced investors who lose an average of £20,000. The FSA has provided tips on how to protect your savings which you can find at www.fsa.gov.uk/scams. n Remember: if it sounds too good to be true, it probably is! n Keep in mind that genuine companies are very unlikely to call you with an offer to buy or sell shares. n If the caller persists, hang up. For more information please visit the warning to shareholders page at: www.aviva.com/shareholderservices End of part 4 of 5 This information is provided by RNS The company news service from the London Stock Exchange END FR ZDLBBXXFEBBQ