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Where others see a policy

We see a person

Annual Report 2010

Where others see a policy

We see a person

In a world of "me first!" we're putting our stakeholders at the center of everything we do. We put people before policies. And where others see a policy, we see a person. You will see this attitude at AVIVA NDB every day, in the little things we do differently that bring people and personal concerns back into the insurance transaction. It is our way of reinforcing trust, improving services and most of all, increasing value. So whoever you are, our mission remains steadfast. We build our business around you.

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

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Financial Highlights

2010

Total revenue Profit before tax Gross written premium - GI Gross written premium - Life Net assets Life Fund Return on net assets Basic earnings per share Market capitalisation (LKR Mn.) (LKR Mn.) (LKR Mn.) (LKR Mn.) (LKR Mn.) (LKR Mn.) (%) (LKR) (LKR Mn.) 15,187 894 2,847 7,784 2,910 24,447 30.72 20.01 8,400

2009

9,655 958 2,504 4,632 2,579 18,048 37.12 24.35 5,340

2008

7,265 605 2,045 4,342 2,224 14,484 27.20 15.46 3,450

2007

5,875 546 1,867 3,788 2,025 12,306 26.97 17.57 4,523

2006

4,813 539 1,468 3,150 1,743 10,508 30.92 17.45 4,065

Total Revenue

Profit Before Tax

Gross Written Premium - GI

LKR 15,187 Mn

10 09 08 07 06 15,187 9,655 7,265 5,875 4,813

LKR 894 Mn

10 09 08 07 06 894 958 605 546 539

LKR 2,847 Mn

10 09 08 07 06 2,847 2,504 2,045 1,867 1,468

Gross Written Premium - Life

Net Assets

Life Fund

LKR 7,784 Mn

10 09 08 07 06 7,784 4,632 4,342 3,788 3,150

LKR 2,910 Mn

10 09 08 07 06 2,910 2,579 2,224 2,025 1,743

LKR 24,447 Mn

10 09 08 07 06 24,447 18,048 14,484 12,306 10,508

Return On Net Assets

Basic Earnings Per Share

Market Capitalisation

30.7%

10 09 08 07 06 30.72 37.12 27.20 26.97 30.92

LKR 20.01

10 09 08 07 06 20.01 24.35 15.46 17.57 17.45

LKR 8,400 Mn

10 09 08 07 06 8,400 5,340 3,450 4,523 4,065

A Combined Force

AVIVA NDB Insurance combines the global strength of Aviva, UK's biggest and the world's sixth largest insurance group with the financial power of NDB, one of the largest financial conglomerates in Sri Lanka. The combined expertise resulting from this unique partnership offers customers the confidence of world-class financial solutions while upholding Sri Lankan values, bringing the best of both worlds. Aviva is one of the world's oldest insurance companies with a history dating back over 300 years. Today it has over 46,000 employees serving over 53 million customers across Europe, North America and Asia Pacific, in 28 countries including the US, Canada, France, China, India, Hong Kong, Singapore, Malaysia, Indonesia and Sri Lanka. Aviva's principal business activities are long-term insurance & savings, fund management and General insurance. Worldwide, the group has total sales of £ 45.1 billion and £ 379 billion funds under management. NDB Group operates regionally in Maldives and Bangladesh and offers project finance, corporate banking, commercial banking, SME lending, retail banking, investment banking, stock broking, wealth management and insurance solutions under one roof. NDB Bank, the commercial banking arm of NDB Group is one of the highest capitalised Sri Lankan commercial banks. The AA (lka) rating by Fitch Ratings Lanka Ltd., further affirms the strong financial profile, asset quality and sound capital position of NDB Bank. The dynamism and innovative spirit that has resulted from the combined strengths of Aviva and NDB offer a wealth of advantages to customers and stakeholders in Sri Lanka. It manifests primarily in the way we do business, focusing on the needs of customers, through research insights, thoughtful customer engagement and solutions that keep pace with the emerging challenges of an ever changing world.

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AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

AVIVA NDB Insurance PLC Tax Payer Identification Number (TIN) 134001356 VAT Registration Number 134001356 7000 Registered Office/ Head Office No. 75, Kumaran Ratnam Road, Colombo 02 Telephone : 2310000 Fax : 2447620, 2310076 E-mail : [email protected] Web : www.avivandb.com

Overview 1 - 11

1 4 5 7 10 Financial Highlights Our brand promise Chairman's introduction to the Annual Report of 2010 Managing Director's review of operations Milestones 2010

Financial Information 82 - 130

82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 Financial Calendar 2010 Chief Executive Officer's and Chief Financial Officer's Responsibility Statement Directors' Statement of Responsibilities on Financial Reporting Independent Auditors' Report Balance Sheet Statement of Income Group Statement of Changes in Equity Company Statement of Changes in Equity Cash Flow Statement Insurance Revenue Accounts Industry Segment Data ­ Balance Sheet 2010 Industry Segment Data ­ Balance Sheet 2009 Industry Segment Data ­ Statement of Income 2010 Industry Segment Data ­ Statement of Income 2009 Industry Segment Data ­ Cash Flow Statement 2010 Industry Segment Data ­ Cash Flow Statement 2009 Long Term Insurance Balance Sheet ­ Supplemental Notes to the Supplemental Long Term Insurance Balance Sheet

Business Review 14 - 37

14 26 32 Management Discussion and Analysis Our People - Our driving force Sustainability Report

Governance 40 - 79

40 42 44 51 65 73 74 75 76 77 78 79 Director's Profiles Senior Management Team The Annual Report of the Board of Directors on the affairs of the Company Corporate Governance Enterprise Risk Management Audit and Compliance Committee Report Remuneration Committee Report Investment Committee Report Actuary's Report ­ Life insurance Actuary's Report ­ General insurance Statement of Solvency as at 31 December 2010 Statement of Approved Assets as at 31 December 2010

101 Accounting Policies 108 Notes to the Financial Statements

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

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Our Vision.

To be a world-class provider of financial solutions for protection and wealth creation.

Our Mission.

We will be the most sought after Insurer in Sri Lanka for security, return optimisation and excellence in service, achieving leadership in identified segments of the market.

Our Core Values.

Progressiveness

We encourage innovation and improvement and champion continuous learning. We aim to be the best when it comes to listening and responding to our customers.

Performance

We set ourselves clear goals - and the only way we'll achieve them is if everyone works towards them in an efficient way.

Integrity

Other Information 134 - 156

134 Quarterly Analysis 2010 135 Quarterly Analysis 2009 136 Decade at a Glance 140 Share Information 143 Group Value Added Statement 144 Distribution Network 145 Introduction to Insurance Accounting 147 Glossary 154 Notice of Meeting 155 Form of Proxy Corporate Information - Inner back cover

We aim to maintain the highest professional and ethical standards. We try to be open and honest, keeping commitments and taking personal responsibility for the things we say and do. We want to earn trust and respect through honesty and fairness.

Teamwork

Teamwork is our lifeblood. We're committed to a common vision and objectives, depending on one another, pulling together and sharing knowledge. We aim to create a sense of community and belonging in how we operate as a business. We take pride in our achievements.

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AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Our brand promise

Aviva maintains a distinctive and cohesive brand across the world wherever the group operates and as the Sri Lanka arm of the global group, AVIVA NDB takes pride in building the brand and taking the brand promise to greater heights. Aviva started out 300 years ago, selling protection against fire and highway robbery. Today, it is the sixth largest global insurer with a brand purpose, brand promise and a brand personality that cuts through cultures and countries. Aviva's single minded purpose is to bring prosperity and peace of mind to its customers, making the group's vision of `One Aviva, twice the value' a reality. It means across the world where Aviva operates, customers are assured of the same quality, financial strength and security, benefiting from innovation, becoming more powerful and wide-reaching in responding to the challenges of a global market. Aviva's brand personality is warm, personal, professional, truthful and committed to delivering one distinctive experience to our customers bringing to life the promise `No one recognises you like Aviva.' What this really means to customers is empathy and understanding of both people and their needs. Our customers appreciate our expertise and feel valued. We take extra care to recognise customers as individuals, each and every time we engage with them, serving their needs better, more powerfully. Our image is fresh, positive and happy, a vibrant expression of our warm personality. It is reiterated in the Aviva Sunbeam - a visual representation of sunshine which communicates life, vitality and living well.

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

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Chairman's introduction to the Annual Report of 2010

I am pleased to report that AVIVA NDB has had a year of

"I am delighted to say that the key milestones of the transformation have been achieved successfully and the benefits are beginning to show in our business results."

significant success, achieving not only good business results but also making strong progress towards the total transformation of the Company in order to maintain this growth going forward. As Sri Lanka begins to experience the dividends of peace, we embarked on a planned transformation of the Company in late 2009 with the twin objectives of delivering greater value to our customers and our distributors that built on our brand promise that "no one recognises you like Aviva". I am delighted to say that the key milestones of the transformation have been achieved successfully and the benefits are beginning to show in our business results. Looking back, the situation we found ourselves in 2010 was a positive one in which Sri Lanka consolidated the peaceful environment of the country and made plans for a future of economic prosperity and macro economic stability. Although Sri Lanka too experienced the impact of the global recession, it was offset by the positive environment created by the end of the conflict and key sectors of the economy showing very positive growth. The overall macro economic environment remained positive with GDP growth expected to be around

T R Ramachandran

Chairman

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AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Chairman's introduction to the Annual Report of 2010 (contd.)

8%, relatively low inflation, low interest rates and an excellent performance by the stock market. The transformation plans of the Company took cognizance of these developments and responded positively, extending our presence to the North and East of the country. The AVIVA NDB brand has been firmly and successfully established in the market place. As part of the overall strategy a completely new set of products specially designed for the needs of our customers such as pensions, savings and investments have recently been introduced, fulfilling our promise of providing "Prosperity and peace of mind" to our customers. Our distribution has undergone a complete change with the introduction of the Wealth Planner concept of a highly professional financial adviser force, supported by technology and world class training. Our results are a testimony to the unwavering spirit with which AVIVA NDB faced 2010. Consolidated Revenue grew by 57% and GWP by 49 % reflecting the growth path pursued by the Company. Profit after tax declined by 18% to LKR 600 Mn after one-off brand change costs from Eagle to AVIVA NDB of LKR 324 mn. I am delighted to announce the first and final dividend of LKR 9.00 per share for 2010, being proposed by the Board of Directors, subject to approval of the shareholders of the Company. T R Ramachandran Chairman 10 February 2011 I also thank our employees and the Wealth Planners for their utmost dedication and commitment in transforming the Company in 2010. My thanks to Bill Lisle who preceded me as Chairman of the Board in 2010 for his contribution and leadership and to Shah Rouf who took over as the Managing Director of the Company in March 2010 for guiding the Company through a successful transformation and business year.

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

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Managing Director's review of operations

"Sri Lanka is at a very significant juncture in her history and the outlook for the Sri Lankan economy remains positive with a stable political environment and expectation of robust growth. As such, we believe the future business prospects to be very positive and financially attractive. We have begun the next phase of Transformation."

Shah Rouf

Managing Director

"Transformation delivered" sums up AVIVA NDB Insurance in 2010. On 12 February 2010 the Company transformed to AVIVA NDB to reflect the global and local nature of the business enterprise and communicate the combined strength of Aviva the global insurance giant and NDB the highly respected local banking institution. The date also marked a significant event in the transformation of the direct agency sales force and bancassurance financial planning consultants to a team of professional Wealth Planners. The financial performance of the Company bears testimony to the fruits of these endeavours and it is with pride that I, on behalf of all my colleagues at AVIVA NDB place before you the results of the Company in my inaugural year as Managing Director of the Company. On 1 March 2010 I formally assumed responsibility at the helm of the organisation and was handed over the rein from my predecessor Deepal Sooriyaarachchi who ably steered the course of the Company since March 2005 building a strong stable business enterprise and setting in motion the transformational change that unfolded in 2010. These accomplishments were started before I arrived and I only blew a little wind in the sails. The culture, values and ethics of AVIVA NDB and its ability to transform and overcome challenges bears witness to the strength of senior management leadership at AVIVA NDB.

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AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Managing Director's review of operations (contd.)

The results reported by AVIVA NDB for FY2010 are quite exceptional and it surpasses significant milestones along the way. Your Company recorded LKR 10.6 Bn in consolidated gross written premia and LKR 15.2 Bn in group revenue, crossing the LKR 10 Bn and LKR 15 Bn industry benchmarks of scale and success. The magnitude of the achievements must be evaluated against the backdrop of "change" that touched every aspect and sphere within the organisation. Life business in particular recorded a very strong performance. Life gross written premia at LKR 7.8 Bn for 2010 is 68% higher than the business volume recorded during 2009. The regional office based direct sales force and bank partner network based bancassurance sales team contributed in great measure towards this achievement, with the former accounting for 72% of the volume and the latter 26%, whilst corporate group Life and group gratuity business made up the remainder 2%. The bancassurance channel warrants special mention contributing LKR 2.0 Bn in gross written premia during the year which is 4.5x its business volume of 2009. From a business management perspective, it is encouraging to note the business mix change in favour of investment-linked products. Gross written premia of investment-linked business for FY2010 was 5.0x the corresponding FY2009 figure and accounted for 52% of FY2010 Life business volume growing in significance from 9% contribution in 2008 and 17% contribution in 2009. We are confident that with the business performance being reported we are well on our way to achieving our stated goal of "#1 in Life new business in Sri Lanka". The Wealth Planner distribution model with its stratified performance-linked benefit structure was a key factor contributing to the Life business performance. With the timely transition to the Wealth Planner distribution model the Company was well poised to benefit from the general optimism that pervaded the economy during 2010. Political stability, strong macro economic fundamentals and investment in key infrastructure underpins the economic resurgence that was founded on the country completing its first post-conflict year. It is estimated that the economy grew by 8% during FY2010 driven by the performance of the services and industrial sectors. Low and stable interest rates, relatively low inflation, a stable currency and strong foreign exchange flows contributed to spur economic growth. The business and consumer confidence is evident in the expansion of private sector credit and the performance of consumer goods based sectors. These factors resulted in increased purchases by consumers including the Life insurance segment in the market. AVIVA NDB's General insurance business segment too accrued benefits resulting from the improved economic and business climate. General insurance business reports a satisfactory top line performance during FY2010 with gross written premia of LKR 2.8 Bn recording 14% increase over the corresponding figure of FY2009. The growth was achieved despite the stringent underwriting policy adopted by the management team, especially in the medical class of business. This strategy was employed to improve the quality of our portfolio and thus the underwriting result of the General insurance business. Inherent to the medical class of business is the significant claims experience and therefore, it tends to be market practice that this class is typically written on an accommodative basis to attract and retain other classes such as fire, property, liability, marine and motor from the corporate sector. During FY2010 your management took the bold decision to rightprice its medical book with the resultant loss of 15% of the projected FY2010 General insurance business top line comprising medical and other connected classes of business. The impact was partially offset by the growth in the Motor class of business which reports LKR 1.6 Bn in gross premia written, recording 53% growth over FY2009. Maintaining profitability in General insurance remains a challenge given the soft market rates prevalent across all classes of General insurance business. During FY2010 the General insurance segment reports a net underwriting loss of LKR 338 Mn primarily due to the adverse loss experience of Medical and Motor classes of business as well as adverse weather. The two flood events in May and November that affected the Western province adversely impacted the financial performance of General insurance business. The combined operating ratio at 117.5% as at end 2010 is significantly higher than 99.7% reported at end 2009 and is above the tolerable limit, and management action is targeted at improving this performance. We believe that the initiatives and actions set in motion from Q3-2010 will improve results during FY2011. Despite the underwriting loss, the General insurance business segment reports a noteworthy bottom-line profits of LKR 274 Mn for FY2010 supported by strong investment income flow. It is my pleasure to announce that your Company posts consolidated after-tax profit of LKR 600 Mn for FY2010 with LKR 328 Mn transfer of surplus from the Life business. The financial result is commendable considering that the Company increased its expenditure during the year to make significant investment to build the new brand and enhance visibility through targeted communication campaigns. Based on the financial performance for FY2010, the Directors recommend the distribution of LKR 9.00 per share as first and final dividend to shareholders subject to approval at the Annual

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

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General Meeting of the shareholders of the Company. In determining the dividend to be recommended for distribution to shareholders the Directors have considered the need to retain earnings to support further investment to expand and grow the business over the business plan period. I am sure that you will be pleased to learn that the Company continues to remain strong and stable in the midst of the current growth phase with Life business solvency ratio at 1.5x, General insurance business solvency ratio at 4.09x and net assets of LKR 2.9 Bn. Net assets have grown by 13% during the year and provide a strong platform to maintain and sustain the current growth momentum. Life business solvency margin is LKR 872 Mn as at 31 December 2010 and the Company maintained an excess of admissible assets over liabilities of LKR 1,309 Mn for Life business. General insurance available solvency margin at LKR 1,722 Mn is LKR 1,301 Mn in excess of the required regulatory solvency margin of LKR 421 Mn. The financial strength and stability has been a key feature of AVIVA NDB throughout its history and this tradition continues unchanged. These ratios and figures give us the confidence and stability to pursue our desired growth ambitions for your Company. Sri Lanka is at a very significant juncture in her history and the outlook for the Sri Lankan economy remains positive with a stable political environment and expectation of robust growth. As such, we believe the future business prospects to be very positive and financially attractive. We have begun the next phase of "Transformation". You may have already experienced the Company's communication on the new Life insurance product suite. It is our firm belief that the new product range is well attuned to the needs of customers in the new and unfolding social and economic reality in Sri Lanka and is the best solutions on offer to fulfill those customer needs. The flagship "Pensions" together with the "Savings" and "Investment" products are designed to fulfill specific requirements of the respective need they are designed to address. The supporting communication and training of the distribution teams, especially the Wealth Planners will ensure that 2011 lives up to the benchmarks and supersedes the high-watermark set in 2010. The challenge for 2011 remains with the transformation initiatives targeting General insurance profitability and the ability to maintain realistic pricing levels in the face of unsustainable price competition in the market. In this respect, I welcome the amendment to the insurance regulation that warrants a separation of the Life insurance and General

insurance businesses of composite insurers within the stipulated timeline of four years and the subsequent mandatory listing on the stock exchange within the next five years. This would compel all serious General insurance players to firm up their prices over the next three year period to maintain a track record of profits and establish a financially viable business operation as these deadlines draw near. This development would pave the way for sound market practices and improve the financial stability of the General insurance sector. It is an opportune moment to thank the Insurance Board of Sri Lanka for their transparent and concerned engagement and dialogue with the industry on this and other matters during 2010. As I review the business success of 2010, I acknowledge with gratitude the efforts of the Wealth Planners ­ the direct agency sales force and the bancassurance financial planning consultants who contributed in great measure towards the success of 2010. I wish to also place on record my sincere appreciation to all AVIVA NDB employees and our business partners ­ the insurance brokers and the bancassurance partners for their continued support. Above all, I would like to thank our customers for the confidence and trust they continue to place in us. In this year of unprecedented change and exceptional performance, I recognise the support extended and contribution made by my colleagues on the Executive Committee and the support and guidance provided by the Board of Directors.

Shah Rouf Managing Director 10 February 2011

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AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Milestones 2010

7 February

Eagle transforms into AVIVA NDB

Eagle Insurance transformed into AVIVA NDB Insurance creating a milestone in the history of insurance in Sri Lanka. The transformation revitalised the Company with the combined strengths of its major shareholders, Aviva and NDB coming strongly into focus. The farsighted strategy is designed to benefit customers with the worldwide expertise of Aviva and the financial power of NDB and its commitment to play a pivotal role in insurance. The transformation was launched to the employees in the morning and the Wealth Planners in the evening on the same day. Mass media advertising commenced immediately afterwards and the Company's corporate branding was changed overnight across the country. In addition the direct sales force was also transformed into Wealth Planners.

11 March

Wealth Planners equipped with laptops

In a forward thinking step, AVIVA NDB commenced empowering the first batch of Wealth Planners by equipping them with laptops. This will keep them abreast of rapidly advancing technology and enable the Wealth Planners to serve customers with greater speed and efficiency. AVIVA NDB Wealth Planners are trained to meet both Life and General insurance needs of customers.

13 April

Zero accidents from firecrackers

In 2010 too AVIVA NDB Insurance launched a campaign to capture the attention of families warning them of the dangers of lighting firecrackers carelessly during Avurudu festivities. The media campaign was highly successful in raising awareness among the public on preventing firecracker accidents. Urging everyone to light crackers with greater care, the message this year was developed with the objective of encouraging the public to be more safety conscious without dampening the festive spirit.

21 February

Free Life Cover for fathers of newborns

AVIVA NDB Free Life Cover offer netted entries from caring fathers who wanted protection for their newborns. Fathers of all the babies born between February 21 and March 21 in 2010 qualified to apply for the Rs. 200,000 free life cover offered by AVIVA NDB Insurance, in a unique corporate responsibility endeavour that benefited the entire nation. The free life cover for fathers of newborns, offered for the first time in Sri Lanka was valid up to the baby's first birthday.

21 May

Wins National HRM Silver Award

AVIVA NDB Insurance won the Silver Award at the prestigious National HRM Awards ceremony. Nearly 50 companies competed for the awards presented by the Association of Human Resources Professionals (AHRP) to recognise organisations that have the best HR practices. The panel of judges comprised Sri Lankan academics and professionals as well as international HR and business leaders.

2 March

Scholarship for insurance studies

In an endeavour to encourage students to pursue their higher studies in Insurance, AVIVA NDB Insurance launched a scholarship scheme for students who excel in insurance studies. A young girl with a dream to pursue a career in insurance was the first recipient of the AVIVA NDB Scholarship for Excellence in Insurance Studies - Saumya Jayarathna of the Wayamba University. The student with the most outstanding academic performance in the Department of Insurance and Valuation is selected by the University to be awarded the scholarship. The student selected receives a monthly allowance during the final year of study and a six-month career guidance training opportunity at AVIVA NDB Insurance.

22 May

Awards Night for outstanding Wealth Planners

AVIVA NDB rewarded the Company's most outstanding performers at a glittering Awards Night that brought together 800 Wealth Planners. Apart from the top 6 winners, there were 18 Gold Award recipients and 2 who received the Platinum Award. There were altogether 16 MDRT and 9 IQA winners. The highlight of the evening was the presentation of the Award for Excellence to the internationally renowned artist Senaka Senanayake.

24 June 8 March

Deepal bids farewell and Shah takes over as MD

Shah Rouf assumed duties as the new Managing Director of AVIVA NDB Insurance, taking over the reigns from Deepal Sooriyaarachchi. Shah was CEO of Aviva Romania as well as Chief Distribution Officer for Central and Eastern Europe for Aviva prior to his new appointment.

Poson Vandana Train

AVIVA NDB Insurance enhanced the Poson Safety Campaign and made arrangements to run a special free shuttle service between Anuradhapura and Mihintale. The "AVIVA NDB Poson Vandana" train was available for the safety and convenience of devotees from 24th to 26th June. Over a million pilgrims visit Mihintale during the Poson season. This was the 17th successive year that the Company has had the Poson safety awareness campaign reducing the number of deaths from drowning among pilgrims to

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

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zero. Most importantly, the Company facilitated the presence of around 550 professional lifesavers at almost all the tanks and reservoirs with the collaboration of the Sri Lanka Police, Navy and the Life Saving Association of Sri Lanka. This year the lifesavers succeeded in saving 12 people.

3 November

Wins 2 awards at Ten Best Corporate Citizens Awards

AVIVA NDB Insurance bagged two prestigious titles at the glittering event held to recognise the best corporate citizens of Sri Lanka. The Company was named as one of the Ten Best Corporate Citizens and also became the Winner in the `Under LKR 10 billion turnover category'. The coveted recognition was awarded for exemplary performance in CSR and sustainable business by the Ceylon Chamber of Commerce.

11 June

Celebrating Aviva Day

In Sri Lanka, `Aviva Day' was commemorated at a remote village school in Ihala Hewessa in the Kalutara district. The school has been adopted as a part of the worldwide Aviva group's global Corporate Responsibility strategy `Street to School.' AVIVA NDB has identified Ihala Hewessa School to assist underprivileged children and completed much-needed renovations and infrastructure development of the school building, repaired the roof and built separate toilets for girls and boys to mark `Aviva Day.' The Company also donated shoes to all children and provided computer facilities. Employees provide monthly scholarships to 27 needy children of the school. AVIVA NDB also held a series of eco-friendly workshops on vehicle maintenance to enhance fuel efficiency and reduce carbon emission as a customer service that demonstrated the Company's commitment to the environment while making the customers feel truly recognised. Employees at AVIVA NDB celebrated `Aviva Day' with a `global food fair' at the Head Office, serving delicacies from selected Aviva countries across the globe.

4 November

AVIVA NDB hands over Aviva School Village to the children

Marking a milestone in the Street to School agenda in Sri Lanka, AVIVA NDB completed the first phase development work of the Aviva School Village in Rathugala ­ Monaragala district. The Company completed the development of a tube well; providing drinking water to all villagers, a school play ground, and a shrine room. Employees of AVIVA NDB reached out to the children by donating 380 books, whilst the Company donated school supplies packs to all the children of the school and plants for the school. The Company also handed over a secondary education scholarship scheme and attendance recognition scheme to the school Principal. The handing over ceremony was attended by Deputy Minister Rehabilitation and Prison Reform, Chairman of Probation and Child Care Services, leader of the indigenous community of the village, school Principal, and representatives of AVIVA NDB.

27 September

Sri Lanka Presidential Book Project gets a boost from AVIVA NDB

Chief Executive of Aviva Asia Pacific, Simon Machell visited Sri Lanka and took the opportunity to call on Lalith Weeratunga, the Secretary to President Mahinda Rajapaksa and present a donation of LKR half a million, to the government's initiative to encourage the reading habits among children as a part of Aviva group's `Street to School' Corporate Responsibility programme.

8 November

Higher Education Scholarship Awards

AVIVA NDB presented Higher Education Scholarships to Year 5 students who qualified by topping the batch in each of the 25 districts in Sri Lanka in 2003. The students have successfully completed their Ordinary Level examination and are entitled to receive the scholarship benefits from the commencement of their Advanced Level course up to the completion of their degree, amounting to a total of Rs. 60,000 to Rs. 84,000. Those who do not enter university receive a lump sum as a life-starter. The Chief Guest at the presentation, Professor Sarath Wijesooriya, Professor of Sinhala at the University of Colombo delivered an inspiring speech to the young students and their parents.

21 October

NSA Awards recognise safe workplaces

The prestigious National Safety Awards recognise and reward the safest workplaces in the country and is one of the most anticipated events in the corporate calendar. This year, the occasion was graced by Hon. Gamini Lokuge, Minister of Labour Relations & Productivity Improvement as the Chief Guest. National Safety Awards was evolved by AVIVA NDB Insurance to encourage accident-free workplaces and enhance safety standards in the country. The award is presented in collaboration with two state organisations, the Department of Labour and the Employees Trust Fund Board.

19 November

Launch of Campaign & Activity Management System

The revolutionary new Campaign Management System that provides warm leads to Wealth Planners to motivate cross selling and upselling commenced, making the selling process more effective and easy while closely monitoring and managing their activities.

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AVIVA NDB Insurance PLC Annual Report and Accounts 2010

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

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"AVIVA NDB provides me with the ideal investment choice giving me the power to live my dreams"

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AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Management Discussion & Analysis Sri Lankan Economy

The Sri Lankan economy recorded an impressive growth rate of 8% in GDP terms as at the third quarter 2010 as depicted in figure 1. This growth was underpinned by the restoration of peace, improved business confidence, a strong macro economic environment as well as a gradual recovery of the global economy from its deepest recession since the great depression. The Central Bank relaxed its monetary policy stance further resulting in lower interest rates in all market segments supporting the recovery of the domestic economic activities. The fiscal position improved considerably, mainly reflecting the increase in government revenue supported by the domestic economic activity and recovery of international trade. The public investment programme continued and all major infrastructure development projects progressed rapidly. The external sector made a remarkable turnaround, with both exports and imports recovering over 2010. Worker remittances remained strong with an inflow of USD 3,762 Mn over the eleven months in 2010, YoY growth of 23.9%, which assisted in partly off-setting the widening trade deficit. The widening trade deficit does not pose a significant threat at present due to the increased capital flows and private remittances. The end to the prolonged internal conflict, enhanced investor confidence and the improved macroe conomic environment provide the country with a great opportunity for sustainable growth and development. easing and low interest rate environment the Central bank expects the GDP to grow by 8.0% - 9.0% in 2011.

Figure 2

GDP - Quarterly Growth

8.5%

2010 Q2

7.0%

6.3%

6.2%

4.3%

2008 Q1

2008 Q2

2008 Q3

2008 Q4

2009 Q1

1.6%

2009 Q2

2.1%

2009 Q3

4.2%

2009 Q4

6.2%

2010 Q1

7.1%

2010 Q3

Figure 3

GDP - Annual Growth

7.7%

6.8%

6.0%

06

07

08

09

3.5%

10

(Q1-Q3)

Figure 1

Economic Highlights 2006 GDP Growth (%) 7.7 2007 6.8 19.96 -6.66 108.72 18.7 2008 6.0 19.08 -40.85 112.94 14.4 2009 2.6 9.32 125.25 114.39 4.8 2010 7.8 7.55 96.01 110.89 7.0

Inflation

Inflation remains modest in 2010 as shown in figure 4 with the point to point inflation at 6.9% in December 2010. The core inflation which excludes food and energy stood at 6.3%. Inflation moderation has continued to support the low interest regime in the country. The moderate inflation was attributed to better agricultural supplies and relatively stable global commodity prices.

Figure 4

(9 mths) (9 mths) 364-day Treasury bill (%) 12.98 Equity Return (%) Exchange Rate (USD) Inflation (%) 41.63 107.71 13.5

GDP Growth

Sri Lanka's Gross Domestic Product for the third quarter 2010 recorded a growth of 8.0% with contribution from all major sectors of the economy, compared to a growth rate of 4.2% a year ago as reflected in figure 2. The boom in agriculture and fisheries from the recently liberated Northern and Eastern regions has enabled a growth of 6.2% in agricultural sector in the 3Q 2010. The manufacturing sector posted an 8.8% growth, which was complemented by the robust growth posted by the service sector which grew by 8.0%. Backed by these numbers, the Central Bank recently revised its FY2010 growth forecast to 7.5% - 8.0% reinforcing confidence in the sustainability of the economic expansion as depicted in figure 3. With the Government's ambitious infrastructure drive, fiscal

Inflation

30% 25% 20% 15% 10% 5% 0 Jan-08 Jul-08 Jan-09 Jul-09 Point to Point Change Jan-10 Jul-10 Annual Average Change

7.8%

However, it must be noted that income support, subsidies and compensation to flood victims and farmers in particular will have to be paid out in 2011 on account of the devastation

8.0% Years

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

15

caused by floods and loss of the Maha paddy harvest. The cost of providing income support, credit for cultivation, reconstruction and repair of the irrigation network, roads, bridges and dwellings would be significantly high. It is unlikely that such costs have been budgeted and will widen the fiscal deficit that in turn would generate additional inflationary pressures.

Investor Confidence

The general optimism in the country and economy coupled with positive investor sentiment of the post conflict era resulted in the All Share Price Index of 6,635.87 recording a 96.0% growth for FY2010 as reflected in figures 6 and 7. The more liquid Milanka Price Index (MPI) closed the year at 7,061.46 recording a growth of 83.44% for the year. The Sri Lankan equity market was the best performing equity market in the world in 2010.Market Capitalisation stood at LKR. 2,210,425 Mn. Equity Investments continued to provide upside returns in 2010, on the back drop of better macroeconomic fundamentals, lower interest rates backed by robust corporate earnings. The long-term outlook for equity investments remains very positive.

Figure 6

Interest rates

The Central Bank continued to relax its key monetary policy stance in a bid to increase economic growth, thereby reducing the market interest rates substantially. The benchmark 364 day Treasury bill rate hovered around 7.55% from 9.32% in 2009. The longer term bond yields also have responded to the decline in yields. It is the general view that interest rates will be maintained at low levels with little or no volatility over the short term horizon to lay the foundation for sustained economic growth. It is encouraging to note that private sector credit has witnessed a sharp increase in recent months with YoY growth at 22.8% as at November 2010 supporting the view that future growth prospects will remain strong supported by these investments. The movement in interest rates is shown in figure 5.

Colombo Stock Exchange - All Share Price Index

8,250 7,250 6,250 5,250 4,250 3,250 2,250 1,250 Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Years

Figure 5

Interest Rate 364-day T-bill

22% 20% 18%

Figure 7

Daily Average Turnover of the CSE

14% (LKR Mn) 12% 10% 8% 6% Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 2.66

1.81

2.52

2.58

4.36

4.51

16%

1.63

1.49

Years Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10

External Reserves

The country's external reserve position has been at an all time high value of $ 6.6Bn, which is sufficient to finance 6.0 months equivalent imports, and this lends strength to a stable currency at LKR 111.1. The USD Worker remittances continued to lend support to balance of payments growing by 23.9% YoY as at November 2010. Sri Lanka's rupee has appreciated by 2.9% in 2010. Government continued to liberalise the foreign exchange regime, particularly in areas such as education and tourism. Sri Lanka's sovereign bond of $ 1Bn was oversubscribed by 6.3 times, clearly depicting the foreign investor confidence in post war Sri Lanka.

Challenges and opportunities

Industry Review The overview

The insurance industry picked up in the latter half of 2010 and is likely to record double digit growth based on estimated figures. Overall the industry has shown clear signs of recovery from a stagnant position noted in 2009 due to the macro socio economic factors improving in 2010 due to a more conducive economic environment and political stability.

1.49

1.57

1.64

1.96

16

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Management Discussion & Analysis (contd.)

Figure 8

General Composite Number of insurers 12 Only 5

Life Only 2 Total 19

The insurance regulator continues to actively strengthen and broaden its oversight of the industry as evidenced by the inclusion of the National Insurance Trust Fund (NITF) under its purview in addition to ensuring that insurers maintain sufficient capital.

Figure 9

Industry GWP (LKR Mn) 2006 Life General Mix Life (%) General (%) 39.7 60.3 40.0 60.0 40.6 59.4 41.5 58.5 17,104 25,931 2007 20,729 31,156 2008 23,613 34,553 2009 23,767 33,485

The Life insurance industry

The Life insurance sector is highly concentrated as 7 insurers are estimated to have made up approximately 97% of total market share in 2009, of which the top 5 insurers made up approximately 89% of total market share for the same period. This is evident even in the market share statistics published by the regulator for 2009 as depicted in figure 10. The Life industry was valued at LKR 23.8 as at end 2009 as indicated in the IBSL report of 2009 and depicted in figure 9. Market conditions indicate that a similar composition would prevail for Life insurance in 2010 based on available market information.

Figure 10

The insurance sector in total consists of 19 insurance companies, of which 12 are composite insurers, with 5 offering only General insurance and 2 offering only Life insurance products as depicted in figure 8 . The General insurance sector accounted for approximately 58.5% of total Gross Written Premium in 2009 (LKR 33.5Bn as indicated in the IBSL report for 2009), outlined in figure 9. This trend may reverse somewhat in 2010 with Life insurance likely to account for a larger share of the total GWP reported by the industry based on available market information. The growth momentum in the Life insurance sector is driven by growth in new business and improvements noted in the retention of existing policies with collections pertaining to renewal premiums showing signs of improvement when compared with high lapse rates that prevailed in 2009. The motor insurance sector is most likely to be the key driver of the growth momentum in General insurance in 2010 in continuance with the same trends reported in 2009, where the motor class accounted for 53% of GWP. The reduction in motor vehicle import duties and leasing becoming an increasingly popular financing option have acted as stimulants in driving the growth in the motor class in 2010. The amendment to the Insurance regulation which warrants a segregation of the Life insurance and General insurance businesses of composite insurers within the stipulated time line of four years and mandatory listing on the stock exchange within the next five years will result in the players in industry reviewing their existing business models and pricing strategies especially in the area of General insurance to ensure that these operations meet with the additional capital requirements and financial viability required for such listing in line with prevailing listing rules. This would be one of the key challenges the industry will face in the next three years in preparation for the segregation of composite insurers.

Industry - Life GWP 2009 Market Share

Others 11% Janashakthi 6% 20%

SLIC

20% AVIVA NDB 11% UAL CIC 32%

Challenges and opportunities

The weak economic conditions in 2009 left policyholders with less disposable income to continue with their premium payments, resulting in the industry reporting high lapse rates. With macro economic conditions improving steadily throughout 2010 together with the reduction of interest rates the pressure on the purse of the average Sri Lankan consumer eased to some extent and a downward slope was noted for surrenders and partial withdrawals during the last quarter of the year. The improvements noted in the maintenance of scalability by managing lapses and improving persistency would continue to be the key challenges the Life industry would have to overcome 2011, though somewhat reduced by the dilution of the threat posed from indirect competition from commercial banks due to the lowering of interest rates. Growth in new business picked up over the year on the back drop of the country recording positive economic growth as evidenced by the GDP growth of 8% and the strong performance of the equity markets with the ASPI recording a growth of 96% for the year. Based on the GWP reported by

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

17

the industry for the year 2010 and based on available market information, it is expected that the Life insurance industry would record a growth over 2009 in 2010. This positive trend is expected to continue and gather momentum in 2011 with the envisaged improvement in economic conditions and forecasted growth of 8% for GDP. Unit-linked or investment-linked Life insurance products are in their nascent stage in Sri Lanka with only two to three players including AVIVA NDB insurance entering this market space. The unparalleled growth in the equity market in 2010 stimulated a greater interest in unit linked products due to potential equity returns associated with these products. There is a customer need for similar investment based products as evidenced by the growth in these products over the year. During the latter part of 2010, the industry saw the entry of a range of new retirement benefit products and products that cater to education, to meet the unmet and partially met needs of consumers. The changes in demographic trends as signified by the aging population and the focus on education were the key drivers behind the introduction of these products. The focus on retirement benefits in the budget proposals put forward by the Government and policy makers of the country in November 2010 further augmented the need for retirement products and pension funds in the country. Changing the mindset of customers by creating the necessary awareness on the nature of insurance products as offering long term benefits and protection and underlining the importance of continuity with regard to premium payments over the duration of the policy term would remain an industry challenge. The customers' mindset is often to think of these products as traditional savings and investment products together with a retail mindset towards investment linked insurance products linked to market indices. Creating this awareness would minimise the opportunities to mis-sell and misunderstand the features of insurance products and somewhat curtail the lapse rates from increasing further. The industry would have to invest more than it has done in the past in creating awareness surrounding the need to have retirement plans. This is something new to the Sri Lankan population which has a culture firmly entrenched with the benevolent support of the extended family in times of adversity and retirement of aged parents. Such strategic investments would have to be made with a view to securing new market space in the area of retirement and pension benefits as Companies in the industry move towards the launch of this product category and away from more traditional life insurance products.

In this light, with the demographic trend moving towards an aging population, a more educated, financial savvy younger generation and the focus of the policy makers of the country on the need for pension products would all create new opportunities for the industry, though there would be direct competition from the state sector in respect of capturing the vast majority of the potential customer base. Flooding and adverse weather conditions experienced in quick succession in February 2011 and previously in 2010 were of a more serious nature than in the immediate past history and appear to pose a significant threat to the industry especially from the farming community who have lost their source of income from the destruction of the Maha harvest and also their capacity to cultivate the next harvest due to destruction of the seed paddy in their fields. This could have an adverse impact on renewal premiums leading to lapsation of policies in the Life space and also impact the generation of new business from the potentially fast growing agrarian sector.

The General insurance industry

The General insurance sector of Sri Lanka too, like the Life insurance sector is mainly concentrated amongst 5 major insurers which made up an estimated 83% of total General insurance market in 2009. This is depicted in figure 11. The General insurance sector was estimated to be valued at LKR 33.5 Bn at end 2009 as given in figure 12.

Figure 11 Figure 12

Industry - General GWP 2009 Market Share

Industry GWP General Insurance

34,553 08

SLIC

15%

(LKR Mn)

13% 7% AVIVA NDB UAL 10% 28% CIC

05

22,410

06

25,931

Janashakthi

22%

07

33,156

09

The industry has shown an estimated annual average growth of approximately 13.8% over the last 5 years up to 2009 with much of the thrust driven by the motor insurance sector. The motor insurance industry grew by an annual average of 16.2% over the last 5 years to 2009, owing much of its growth to 3rd party motor insurance being mandatory in Sri Lanka. It is likely that General insurance would report growth in 2010 due to the reduction in import duty on motor vehicles and growth trends reported by the Leasing industry, and due to leasing becoming a popular source of financing.

33,485

Others

18

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Management Discussion & Analysis (contd.)

Challenges and opportunities

The competitive rivalry in the sector is increasing with new entrants into a market which already consists of a large number of existing players. Increased competition has driven down motor and medical premiums resulting in the industry continuing to report underwriting losses and to the detriment of the industry as a whole. The high cost of replacement parts and increased frequency of claims and health insurance benefits being leveraged upon as being part of corporate benefits offered to staff, have caused further strain to underwriting results and pressure on margins. Industry growth has been curtailed during the period under review due to a reduction in the number of new and reconditioned vehicle registrations together with consumers deferring their investment decisions in motor vehicles in the first half of 2010, however this was reversed in the second half of the year with the lowering of import duties on motor cars and due to the reduction of VAT on hybrid and electronic cars along with the lowering of import duties on the importation of vehicle spare parts as announced in the budget proposals put forward by the Government in November 2010. With the impending regulatory changes that are to be enacted from 2013 it is likely that the number of players in the General Insurance segment will reduce through the consolidation that will take place within the industry. Companies would continue to be challenged by the soft market rates prevalent across all classes of business in General insurance arising from price competition that will continue to lead to underwriting losses. The General insurance sector may continue to evidence higher loss ratios from flood claims and damage to property plant and equipment as evidenced in 2010, in the event the adverse weather conditions continue to prevail in 2011 and become a common occurrence as part of the climatic change that is taking place globally. However, with every risk there prevails opportunity and adverse weather conditions may lead to communities living in areas susceptible to bad weather conditions seeking protection in insurance, and could result in new opportunities as well. plans with a noteworthy increase in GWP of LKR 3.5 Bn over the prior year as outlined in figures 13 and 14.

Figure 13 Figure 14

Total GWP Growth

49%

Total GWP

(LKR Mn)

13% 14% 06 07 08

13% 09 10

06

4,618

22%

07

5,655

08

6,387

09

7,136 10

The Life business reported a growth of 68% (LKR 3.1 Bn over prior year) with GWP reported at LKR 7.78 Bn and General insurance reported a figure of LKR 2.8 Bn for GWP being a growth of 14% LKR 343 Mn over the prior year as outlined in figure 15.

Figure 15

GWP (Rs. Mn) Life General Total Mix Life (%) General (%)

2006 3,150 1,468 4,618 68 32

2007 3,788 1,867 5,655 67 33

2008 4,342 2,045 6,387 68 32

2009 4,632 2,504 7,136 65 35

2010 7,784 2,847 10,631 73 27

Investment linked products accounted for 52% of GWP reported for Life, with the motor class accounting for 56% of GWP reported under General insurance as depicted in figures 16 and 17.

Figure 16 Figure 17

Life GWP - 2010

Product Category Mix

Corporate 2%

General GWP - 2010

Class-wise mix

Terrorism 1% Conventional 46

Accident 20%

Business Review

Consolidated review of the operations of the Company

During the year the Company recorded a growth of 49% for GWP from superlative efforts and momentum of the Wealth Planners, Bancassurance partners and strategic partnerships resulting in a reported GWP of LKR 10.6 Bn out performing

Unitlinked 52% Motor 56% Fire 18% Marine 5%

Investment Linked products and the motor class dominated in the Life and General insurance space. Investment linked

10,631

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

19

products boosted GWP by LKR 2 Bn with growth in new business from conventional and investment linked products being 1.3 times over the corresponding period in 2009 and accounted for 32% of total GWP for Life. The highlight of the year has been the significant growth trajectory in acquisition of new business in Life which has resulted in the Company becoming one of the fastest growing Life Insurers in the country. LKR 6.4 Bn was transferred to the Long term insurance fund during the year with the Long term insurance fund standing at LKR 24.4 Bn as at 31 December 2010 from LKR 18.0 Bn as 31 December 2009 and depicted in figure 18 which underlines the above assertion. The surplus transfer from the Life business was reported at LKR 328 Mn for 2010. The General insurance business reported a GWP of LKR 2.8 Bn as outlined in figure 19, being an increase of 14% over the prior year and reported an underwriting loss of LKR 338 Mn which was mitigated by the investment income from the General insurance business to result in post tax profit of LKR 274 Mn Group and Company delivered post tax profits of LKR 600Mn and 602 Mn respectively for the year. The proposed dividend of LKR 9 per share translates into a dividend payout of 45% to shareholders and a dividend of 15.32% to the life policyholders after investing significantly in the brand and other growth initiatives toward long sustainability of the business. It is further noted that the business was placed on a sound financial footing with prudent reserving for all likely eventualities based on global actuarial standards and best practice and having also met the required solvency requirements defined by the regulator.

Figure 18

In reviewing the performance achieved by the Company in 2010 it is also of significance to review the strategic initiatives that were crafted in early 2010 that resulted in a strong performance on multiple dimensions including but not limited to market leadership from significant growth in new business in Life, greater market reach, strong brand equity and prosperity and peace of mind that were delivered to all stakeholders of the Company.

Strategic initiatives

The Company embarked and focused on five key strategic priorities towards achieving the following over arching objectives in delivering the business plan for the year 2010. Executing the successful brand migration to increase brand equity, realignment of the organisation structure to respond to changes in the external environment and fast changing customer needs, transformation of a common distribution force selling both Life and General Insurance products, development of a world class product suite for Life insurance and a new service offering for General insurance and effective communication that cascaded through all levels of the organisation through focused change management were the key strategic initiatives put in place in 2010. The rebranding initiative commenced with the former Eagle Insurance PLC being transformed into AVIVA NDB Insurance PLC in February of 2010. The rebranding exercise resulted in the creation of a strong brand that leveraged on the global expertise, tried and tested processes and practices of AVIVA which combined with the financial strength of NDB Group one of the largest financial conglomerates in Sri Lanka. The rebranding exercise continued into the year and resulted in a total brand awareness of 75% by year end and was one of the two pillars that supported the strong performance delivered by the Company in 2010. The other pillar is the dedication and commitment of the team at AVIVA NDB. The corporate rebranding transcended to include the agency force who were transformed as Wealth Planners who are equipped to sell both Life and General Insurance. Along with the brand migration the corporate structure was realigned to meet with changing market conditions, customer expectations and growth opportunities in the external environment. The realigned structure focused on major verticals of distribution channels and processes from that of a structure that was functionally driven and segregated by line of business. The front line distribution teams were supported by operational and shared service units in addition to a new vertical which was

Life Fund Value (LKR) Growth (%)

Figure 19

2006 10,508 16

2007 12,306 14

2008 14,485 17

2009 18,048 18

2010 24,447 35

General GWP

(LKR Mn)

06

1,468

07

1,867

08

2,045

09

2,504

10

2,847

20

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Management Discussion & Analysis (contd.)

carved out to support customer management and marketing initiatives of the Company and supported the distribution teams with actionable market intelligence. The Company invested in technology, systems and processes with a view to connecting the distribution sales force with customers and the Company on an online real time basis, facilitating the speedy transfer of information and financial advice across the country to benefit the entire customer base of the Company and to increase customer reach and satisfaction. The Company also embarked on developing a new product suite for Life insurance that was cutting edge and took into consideration the life styles, unmet and partially met needs of existing and prospective customers and changing demographic trends in the country. It also focused on initiatives on improving service quality and the claims experience for its motor segment of the General insurance customer base which was termed as `New Motor', a proposition with a view to focusing on bottom line profitability from increasing market dominance which was a strategic shift in the General insurance business vertical. It is noteworthy to mention that the strategies crafted at the beginning of the year have translated into delivering a commendable performance both in operational and financial terms and was put together by pooling together the experience and technical expertise of the management and staff with no additional costs being incurred on external consultancy and stands out as one of the best examples of great teamwork. markets through the enabling factor of technology facilitated via internet access and broad band technology. These initiatives provided the Wealth Planners with the edge over their competition in a market that was rapidly changing on the back drop of political stability and freedom from the strife of civil war and economic hardships.

Strategic priorities for the General insurance business

One of the key initiatives of the General Insurance business was to have a `single point of sale' quotation platform for the GI distribution team with multiple price offers and discount or load options that were made available to the customer for the motor class. Again the Company relied on IT enabling technology and infrastructure as the back bone for this initiative. Stemming from the above, the unmet needs of the GI motor customer base were assessed and compared with service offerings of competitors resulting in the evolution of the `New Motor' concept which was crafted to improve the claims service experience of the customer. Repair garages and spare part dealer networks were assessed for pricing and service quality and service providers of choice were selected by way of empanelled garages and empanelled spare part dealer networks to whom customers would be referred in the event of a claim. A `Fast Track' was introduced for settlement of `small' claims to improve the customer experience by cutting down on time taken on administering and processing of such claims. The claim settlement process was speeded up through the use of digital and broad band technology and assessor networks equipped with digital cameras and internet connectivity to transfer images of vehicle damage back to a central team of underwriters and claims settlers for processing of the claims. This led to an `improved claims experience' for the customer and eventual customer satisfaction. Pricing initiatives for both the motor and medical classes further underpinned the strategic shift in General insurance which was a focused on improving bottom line profitability as opposed to market leadership.

Review of the Life insurance business

Strategic priorities for the Life Business

As opposed to increasing the `feet on the street' the Company invested in addressing the training and development needs of the transformed Wealth Planners and linking of incentives and benefits to address the critical success factors of acquisition of new business, productivity and persistency as part of the over arching plan that was put into place and resulted in the outperformance of the business plan for GWP and a positive margin of 4%. The Wealth Planners were retrained in selling techniques, with product knowledge being reinforced to support wealth management as part of the service offering to the existing and potential Life customer base. The Wealth Planners were provided with faster access to information pertaining to customers, products and equity

Financial Review

Group Overview

Group revenue of LKR 15.18 Bn reported for the full year 2010 recorded a growth of 57%, compared to LKR 9.6 Bn in 2009, crossing the LKR 10 billion mark for the top line performance in 2010. This has been the highest achieved for top line

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

21

performance in the history of the Company as depicted in figures 20 and 21. The commendable growth in revenue was driven by the growth in gross written premia of both the Life and General insurance business by 69% and investment and other income of 41%.

Figure 20 Figure 21

Total Revenue

Total Revenue Growth

57% 15,187

(LKR Mn)

9,655

Net claims for the year amounting LKR 4.1 Bn recorded an increase of 55% over the reported figure of LKR 2.7 Bn for the year 2009, mainly contributed to by the increase in surrenders, partial withdrawals and gratuity payments in Life and the increase in motor, medical and weather related claims in General insurance business. Net claims as a percentage of GWP for 2010 was reported at 38.6%, increase of 1.3 percentage points from 37.2% in 2009. However, surrenders and partial withdrawals depicted a downward sloping curve in the last quarter of the year with the resurgence of positive economic growth and lowering of interest rates in the banking sector that previously posed a threat by way of indirect competition due to the high interest rate that prevailed in 2009. The total commission expenses recorded an increase of 65% compared to 2009 with the ratio to GWP being 7.4%. The comparative ratio was 6.7% for 2009. The Group's management expenses including the brand migration cost increased by 44% to LKR 2.7 Bn. Management expenses excluding the investment in brand migration reported an increase of 25% over the corresponding period in 2009. This increase is driven largely by acquisition costs that have increased in tandem with the outperformance in top line reported for 2010 in addition to the investment in brand change, cost incurred on organisation redesign and increases in staff related costs. Total management expenses including brand cost as a percentage of GWP for 2010 was reported at 25.7%, compared to 26.6% in 2009. The Group reported profit before taxation of LKR 894 Mn after charging the cost of the investment in the brand amounting to LKR 324 Mn being a reduction of 7% over the previous year. The Group recorded a post tax profit of LKR 600 Mn as outlined in figure 22 for the year with the Company reporting a profit after tax of LKR 602 Mn for the financial year ending 31 December 2010. The Life business contributed a surplus of LKR 328 backed entirely by admissible assets after having

Figure 22

7,265

4,813

5,875

22% 13%

24%

33%

06

07

08

09

10

06

07

08

09

10

The cumulative Gross written premium from the Life and General insurance business recorded a growth of 49% over the prior year, and was largely driven by the growth in the Life business which reported an impressive growth of 68% over the prior year with the General insurance business reporting a growth of 14% in a very competitive market environment comprising of 19 players for the same comparative period. The impressive growth achieved for top line is reflective of the successful brand migration which resulted in a synergy between the global expertise of Aviva and the strength of NDB bank, coupled with the re branding and transformation of the agency force as Wealth Planners which in turn resulted in a step change and shift in the strategic direction of the Company. The strategic shift against the back drop of a conducive economic environment led to the impressive growth in top line performance and consolidation of the Company's market dominance as one of the fastest growing Life Insurers in the Sri Lankan market in 2010. The continued momentum and efforts of the Wealth Planners, and focused aggression of the Bancassurance partners combined with strategic partnerships entered into by the Company delivered a growth in GWP of LKR 3.5 Bn for revenue over the corresponding period in 2009. Strong equity market performance with the ASPI growing by 96% in 2010 resulted in 42% increase in investment income over prior year, resulting in the Company reporting equity gains of LKR 2.2 Bn for the financial year ending 31 December 2010. The investment portfolios continued to return attractive yields from high interest rates locked into the portfolios in 2008.

Group Results Revenue (LKR Mn) Growth (%) Management Expenditure (LKR Mn) Growth (%) Net profit after tax Growth (%)

2006 4,813 13

2007 5,875 22

2008 7,265 24

2009 9,655 33

2010 15,187 57

1,167 22 523 2

1,410 15 527 1

1,565 21 464 -12

1,912 11 731 58

2,729 42 600 -18

22

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Management Discussion & Analysis (contd.)

adequately met the required solvency margin of 1.5 times which was provided for in excess of the regulatory requirement for solvency and supported by prudent reserving. The General insurance business reported a post tax profit of LKR 274 Mn after charging the cost of the investment of LKR 324 Mn in the brand change. The Company reported a market consistent embedded value of LKR 6,720 Mn for the full year 2010 being a growth of LKR 1,512 over 2009. A first and final dividend of LKR 9 per share totaling to LKR 270 Mn is proposed and in line with the dividend paid in 2009. The Group Earnings per share was reported at LKR 20.01. In a year of significant change the Company has done well to leverage on the combined strength of Aviva's global expertise and financial strength of NDB Bank in consolidating its own financial capabilities and market dominance to lay a strong foundation for the growth initiatives planned for the period 2011-2013, having created long term sustainability and value for all its stakeholders, in line with Aviva's commitment to bring prosperity and peace of mind to its customers. Investment income of the life business of LKR 4,383 Mn reported an increase of 37%, mainly due to the strong equity market performance against the back drop of a more conducive macro economic climate and socio economic conditions and further augmented by political stability with the return of peace to war torn Sri Lanka. The Company has maintained operational profitability irrespective of the increase in net claims and benefits by 42% during the year. Higher policy surrenders, partial withdrawals and gratuity payments have contributed to the increase in claims and benefits. The Life business recorded a net surplus of LKR 328 Mn, the marginal increase of 2% compared to LKR 320 Mn recorded in 2009 depicted in figure 23 despite the strain caused by reserving for new business generated during the year. There has been an increase in reserves in tandem with new business growth and underlined by prudence that the Company is long associated with in determining the surplus.

Figure 23

Life Surplus (LKR Mn) Value Growth (%)

2006 435 50

2007 400 16

2008 280 -8

2009 320 -30

2010 328 2

Life Insurance

The Life insurance business witnessed a strong growth trajectory for top line performance during the year 2010 with GWP being reported at LKR 7.8 Mn growing by an exponential 68% compared to the previous year. The growth in new business in 2010 was 1.3 times that of growth for new business reported in 2009 in GWP terms. The growth was predominantly driven by the significant growth in the investment-linked business driven by the strong performance of equity markets with the ASPI recording a growth of 96% for the year 2010. The GWP of the investment linked business for 2010 increased by 4 times over 2009, adding LKR 2 Bn to total GWP of the Life top line and accounted for 52% of GWP dominating the product mix between investment linked and universal life products offered by the Company. Policy holders investing in the Investment linked funds displayed a high degree of financial acumen and astuteness in switching between funds to take gain in line with market performance. On channel performance the direct sales force contributed 76% to GWP and was ably supported by the Bancassurance channel which contributed 26% to GWP or LKR 2 Bn in value over 2010. It is noteworthy to mention that the Life business reported a strong performance for new business margin of 4% in 2010.

A dividend of 15.32% was declared to the Life policy holders in 2010 by the Chief Actuary of the Company which has seen the dividend declaration to policy holders increase from 14.10% declared in 2009. Only realised equity gains have been considered in determining the attributable dividend payable to Life policy holders based on prudence and in line with the actuarial standards and best practice.

General Insurance

General insurance business has recorded a 60% growth in terms of total revenue which was reported at LKR 3 Bn for the year 2010. The growth in net earned premium and investment income of 61% and 57% respectively were the key contributors to revenue. GWP grew by 14% compared to the previous year and was reported at LKR 2.83 Bn with the motor class dominating above other classes of business and recorded a growth of LKR 53% over the previous year and accounted for 56% of GWP. The business channeled through the brokers, strategic partnerships and regional offices in the provinces outside the Western province contributed significantly to GWP and improved the Combined Operating Ratio (COR) for the General insurance business and the overall loss ratio of the motor class.

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

23

Net claims were reported at LKR 1.6 Bn an increase from LKR 716 Mn reported for the corresponding period in 2009. The overall net loss ratio was contained to 79% for the full year 2010 despite high prices prevailing for most part of 2010 and impacted further by flood related claims. The increase in the net loss ratio from 71% in 2009 to 79% in 2010 had an adverse impact on the COR which increased to 117.5% from 99.7% reported in 2009 outlined in figure 24. The loss ratios reported by the medical, motor and fire classes increased over the previous year and were the key drivers of the increase in the overall net loss ratio.

Figure : 24

Our Stakeholder Promise

AVIVA NDB takes pride in maintaining an excellent track record in corporate governance and the Company has continued to focus on long term sustainability by maintaining robust governance frameworks, stringent regulatory and statutory compliance as reflected by the recognition the Company received in 2010 by winning various awards for Corporate Governance, HR best practices and financial reporting. The Governance frameworks in operation are elaborated on pages 51 to 64 in this Annual Report and which contribute to a sustainable competitive advantage. The Company continues to focus a high degree of reliance on the Financial Reporting and Control Framework (FRCF) drawn up in line with the Soxs 302 and s404, and which ensures that the embedded processes and manual compensating controls are effective, tested periodically and mitigate against the risk of material mis-statement of the financial reporting of the Company.

Combined Operating Ratio (COR) Claims Ratio (%) Expense Ratio (%) Combined Operating Ratio (COR) (%)

2009 71.0 28.7 99.7

2010 79.1 38.4 117.5

LKR 34 Mn was added during the year to the brought forward IBNR provision that had a closing balance of LKR 165 Mn as at 31 December 2010. The Company has been prudent in adequately reserving for claims incurred but not reported at the close of the financial year. The growth in top line was achieved despite the stringent underwriting policy adopted by the management, especially in the medical class of business, where the top line from this class recorded a reduction of 31% compared to 2009 from repricing initiatives carried out in December 2010. The repricing was necessitated due to this class being written on an accommodative basis and the key driver of the underwriting loss of LKR 338 Mn reported by the Company in 2010.The repricing initiatives of the medical portfolio resulted in a loss of 15% of the top line for General insurance from medical and connected classes of business. The impact was partially mitigated by the positive growth of 53% in the motor class over the corresponding period in 2009 with a reported GWP of LKR 1.6 Bn. Investment income rose by 57% over the corresponding period and was reported at LKR 938 Mn. Investment income contained equity gains of LKR 539 Mn. Operating expenses were contained to LKR 1 Bn in 2010 an increase of LKR 544 Mn over the corresponding period in 2009, with the investment in brand migration cost of LKR 324 Mn being the key driver of the increase. Net profit after tax reported at LKR 274 Mn, a reduction of 41% from the reported amount of LKR 467 Mn in 2009. The decrease was mainly due to the increase in net claims and the spend on brand migration.

Policyholders

AVIVA NDB has maintained a prudent investment strategy for its investments in line with providing prosperity and peace of mind to its policyholders. The prudence adopted by the Company has ensured that its investments are made in liquid financial instruments and equity investments in blue chip companies with the associated risk being commensurate with the risk appetite of its policyholders and its shareholders. Investment funds in equity provided excellent returns in 2010 with the equity markets recording exceptional performance in the light of the ASPI recording an increase of 96%. The Company continued to develop detailed investment policies and investment mandates by which its investment funds are managed. The investment management of the funds are done by NDB Aviva Wealth Management Limited. Detailed processes were put in place to ensure that the oversight of the outsourced investment management of the funds was effective and that investments were carried out as stipulated in the investment mandate. The Company was able to thereby declare 15.32% to its Life policyholders as policyholder dividend for 2010.

Agency Force

One of the key milestones during the year was the rebranding of the insurance agents as " Wealth Planners" and equipping them to canvass both Life insurance and General insurance to provide a one-stop solution in building and preserving the wealth of the customers. Wealth Planners were

24

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Management Discussion & Analysis (contd.)

provided detailed training on providing both Life and General insurance solutions to customer needs. A special community among the Wealth Planner force was created as "i ­ Wealth Planners" who were equipped with technological tools and supporting devices. These Wealth Planners were trained to use personal laptops for their business functions and were also educated on using the specially designed web portal for the better management of their information needs. In addition, a new system was introduced to the national distribution to effectively monitor the key steps in the sales process via personal computers and also to use the customer lead information productively. Highest ever MDRT winners of the industry in one year (59) were produced by the Company in 2010, including 2 Court of the Table winners and 1 Top of the Table winner. In addition 21 Wealth Planners were awarded the International Quality Award. The solvency margin of the Life business is 1.5 times the required margin as shown in figures 27 and 28. An insurer is required to maintain a solvency margin of at least 5% of its Long Term insurance liability which was LKR 872 Mn as at end December 2010, whereas the Company maintained a solvency margin of 7.5%. The Company's statement of solvency and statement of approved assets for Life insurance business is given in pages 78 and 79 of this Annual Report.

Figure 27 Figure 28

Life Solvency Margin

Life Solvency Ratio

872

(LKR Mn)

756

(Times)

1.21

501

572

663

108

114

209

389

436

The Regulators

In choosing assets for investment, AVIVA NDB has ensured that the determinations issued by the regulator relating to the admissibility of assets and the Solvency Margin Rules are complied with in full. As AVIVA NDB has invested a high proportion of its assets in government securities and other admissible assets, the Company was able to maintain solvency levels which are much higher than the minimum levels required by the regulator. The Company's statements of solvency are certified annually by the Company's Chief Actuary and independent external auditors. General insurance achieved a solvency margin of 4.09 times the required solvency margin of LKR 421 Mn. This is shown in figures 25 and 26. Admissible assets of the General insurance business amounted to LKR 3,957 Mn as at end 2010. The solvency position of the General insurance business is given in the statement of solvency and statement of approved assets for General insurance business on pages 78 and 79 of this Annual Report.

06

07 08 09 Minimum Requirement Excess over minimum

10

06

07

1.20

08

1.32

09

1.51

10

Shareholders

AVIVA NDB has continued to provide a high return on investment to its shareholders. The Company has declared a dividend of LKR 9 per share for the financial year 2010 resulting in a payout ratio of 45% having reinvested sufficient earnings in the business to support the various growth initiatives planned for the period 2011 ­ 2013.

Employees

The Company provided gainful employment to 780 full time employees over the year. Based on HR best practice a metric to manage talent titled `Talking Talent' was rolled out by Aviva across all business units in 2010. Talking Talent is based on a series of continuous, positive conversations that employees have with their managers, in which talent is described in terms of an individual's learning agility and performance over time. It encourages paying attention to one's own performance and the ability to learn from honest and constructive feedback. In addition, there have been numerous external and internal training programmes, out bound training camps that have been conducted to up skill the work force in order that they keep abreast with changes taking place in the external environment and the advancement of technology.

Figure 25

Figure 26

General Insurance Solvency Ratio

General Insurance Solvency Margin

5.34

(LKR Mn)

4.06

(Times)

3.26

4.09

619

605

525

1,257

4.68

1,301

143

198

240

342

421

CSR Initiatives

The Company's focus was on uplifting the infrastructure of schools in underprivileged areas. In line with the Aviva Groups

06

07

08

09

10

06

07 08 09 Minimum Requirement Excess over minimum

10

1.50

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

25

Charity initiative `Street to School', the Company's Street to School project was launched in 2010. This programme is driven by our greatest asset, our people. Street to School is about recognising the unrecognised and helping children and young adults who have fallen out of education or are denied access to education to rebuild their lives maximising their natural potential. A school in Ihala Hewessa, adopted as the Aviva Green Village was renovated which included providing educational equipments including computer facilities, school books and other such requirements, building toilets for the children, repairing the school's roof and such other improvement of facilities. Employees volunteered to sponsor scholarships and donated books and a computer was donated to the village library. Many initiatives were also completed in providing a better school infrastructure to a primary school for children of the Veddha Community in Rathugala adopted as Aviva School Village. Among the contributions made were the tube well constructed providing drinking water and a play ground at this school for the Veddha community in Rathugala, located 300 miles from Colombo under `Aviva Street to School' programme. The Company continued in its endeavor to conduct environmentally friendly business practices of recycling printer cartridges and paper and conserving electricity. In addition regional workshops were held for selected customers on how best to maintain motor vehicles to help reduce environmental pollution, enhance fuel efficiency and reduce carbon emission. The CSR initiatives of the Company are further expanded on pages 32 to 37 of this Annual Report.

prospects for the country as a whole as Sri Lanka advances towards fast becoming an emerging market in the South Asian region. AVIVA NDB Insurance PLC will further take part in the economic rejuvenation and growth initiatives of the country by launching a suite of world class products and financial services to the Sri Lankan consumer commencing the first quarter of 2011. The launch of a new suite of products designed to best serve the insurance needs of Sri Lankan society. The products are a bold step in the local market, aiming to specifically identify and service some the most important needs of Sri Lankan people. The flagship product is a pensions vehicle, and has been identified as a necessity in view of the changing age profile of Sri Lanka, with more and more of the population entering middle and old age and fewer young people to bear the associated cost burden. The products, covering savings, child education, protection and investment needs in addition to pensions, are cutting edge in design, offering life style funds as an insurance first to better serve policyholders' investment and risk management requirements. We would invest in creating the required awareness as it is crucial that society be educated as to the core needs that these products service, and the long term nature of the associated commitment required, in order that prosperity and peace of mind be created and sustained for Sri Lankan society, and in line with one of the over arching strategies of the country which addresses the need for retirement options and pension benefits, bringing prosperity and peace of mind to the lives of all Sri Lankans as Aviva does the world over.

Transformation continued with `The Diamond standard'

Having successfully completed and delivered the first wave of transformation which commenced with re branding of Eagle Insurance PLC which transformed into AVIVA NDB Insurance PLC earlier on in the year together with the transformation of the agency force who were rebranded as Wealth Planners and who have successfully gone on to deliver unparalleled results during the year, the Company is now working towards a multi faceted diamond standard in 2011. The Company will focus on transforming the General insurance business with a focus on delivering a profitable bottom line as a composite insurer, and maintaining and growing a leading position in Life with the most productive direct sales force in the market as it aspires to be Aviva's first market leading business in Asia. The Company will continue to draw from the Global expertise of Aviva from tried and tested processes and practices and rely on the strength of NDB Bank - a world class Sri Lankan in leveraging the economic prosperity and forecasted growth

26

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Our People

Our driving force

The core of our business is our people. The Company's success over the past 22 years is attributed to our driving force ­ our people. 2010 marked a key milestone in the Company with the brand name changing to AVIVA NDB. The decisive factor behind the success of the brand change was our driving force ­ our people. Having `lived' the new brand for over an year, it is evident that our people embraced the new name and made the brand change an opportunity to change for the better. On 7th February, when the new brand was launched to our people, the underlying theme was that we have a glorious, hoary past, steeped in values and strong culture which will have its resonance even tomorrow; we will not forget our history, but we are now AVIVA NDB - we are better than ever.

Our HR Vision is to make our people the competitive advantage and core of the business that drives our Company towards being No. 01. Our HR purpose is to `Excite our people to exceptional performance', which will help us meet the Company Vision and Purpose.

The core of our HR policies, guidelines and practices has stemmed from our parent Company ­ Aviva Plc UK, but are localised to suit the Sri Lankan context. Our guidelines are not exhaustive but enabling in nature, as we believe that too prescriptive guidelines make leaders `operators'. Instead, our guidelines allow leaders to use their discretion, according to the different situations they are faced with. The HR policy is designed to make visible any risks we should manage proactively to support talent acquisition, learning and development, talent management, reward & recognition and talent engagement leading to the achievement of business objectives. The many accolades received during the year for our HR practices and framework is an endorsement of not only having the right policies but having them implemented to the best advantage of our people and our Company. Winning the Silver Award in the HRM Awards 2010 at the National HRM Awards presented by the Association of Human Resource Professionals and winning two prestigious titles at the 2010 Ten Best Corporate Citizens awards organised by the Ceylon Chamber of Commerce (where one of the evaluation criteria was Employee Relations) are ample examples.

Talent Resourcing

A healthy business needs regular injections of fresh ideas, perspectives and experiences from the outside world. Whilst there will be times when we need to look externally for particular kinds of talent, we aim to grow our talent from within, and hence, strive to maintain a build:buy mix of 70:30. The core values permeate our organisation and have embodied the unique culture of AVIVA NDB. Hence, when acquiring talent, it is important to us that there is cultural fit, in addition to the knowledge, skills, and attitude required for the role.

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

27

We provide people opportunities by re-deployments and promotions, enabling lateral and vertical moves within the organisation. During the year we facilitated 28 re-deployments providing our people the opportunity to be in the `right role' that match their skills, capabilities, competencies and aspirations.

The Company has an internal training faculty consisting of 55 skilled trainers on technical and non-technical areas. Internal academy programmes targeted at specific potential employee groups can be considered as a key contributor to the long standing learning culture of the Company. The education loan policy of the Company supports

Learning & Development (L&D)

We truly believe that human capital is the most important investment a business can make. Our L&D practices have enabled our people to have Protean careers. The learning opportunities have enabled our people to gain multiple skill sets and move from operating in a silo to the wider organisation. We strive to maintain a 70:20:10 mix in our L&D agenda. The essence of this is that effective development is achieved through learning from experiences (70%), from others (20%) and from instruction (10%). It is important to us to construct a development plan which encompasses all three elements of this 70:20:10 model.

employees to acquire international qualifications in insurance, actuarial science, finance, marketing, human resources, IT and management. This unique scheme provides financial assistance to the employee at no immediate burden of repayment since the Company pays the course fees, correspondence fees, etc upfront and not as a re-imbursement upon receiving the results. During the year 56 people made use of the education loan facility. As a key benefit of being a member of a global company, our people had the opportunity of taking part in several developmental programmes, extended by the Group during the year, in locations such as the United Kingdom, Netherlands, Singapore and India. We were also represented in the `Accelerated Leadership Programme', a middle management development programme tailor made for the Asian manager by Aviva Life Insurance Company Private

Learning from Instruction

Training Programmes Courses Reading Job expansion

Limited India, in collaboration with the Indian Institute of Management (IIM), Ahmadabad. In addition to the Aviva programmes, our people gained exposures varied from technical fields such as actuarial, finance, risk management and bancassurance to specific

Delegation

Learning from Networks Others

Coaching

10%

New role

management skill and knowledge developmental programmes in countries such as United Kingdom, Germany, Hong Kong, India, and Singapore. During 2009/2010, one of our members completed the MSc in Actuarial Management at the Cass Business School, University of London. At present, another member of our team is following the Postgraduate Diploma in Actuarial Science in London, UK. We are proud to be the only company that has a fully qualified, full-time employed Actuary as Chief / Appointed Actuary and Head of Actuarial Division. We are known in the industry for our abundant learning and development opportunities. The launch of Aviva Academy, powered by the learning tools of the Aviva group, was a significant milestone in our learning and development agenda.

20%

Exposure

Mentoring

70%

Secondments Sponsorship Community Projects Projects

Job rotations

Assignments

Learning from Experiences

Selecting the right development options in crucial

We are committed to a policy of supporting all our people to perform their jobs effectively. The responsibility of providing employees with L&D opportunities rests on the collective shoulders of the line management and HR.

The `Accelerated Leadership Development Programme' that commenced in 2009 continued in 2010, focusing on enhancing technical and general management skills and personal development for 30 selected junior management staff. The programme equipped the participants with both

28

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Our People

Our driving force

soft and hard skills needed to perform in their roles, coupled with management knowledge enhancement, which would help them as they progress to higher roles in the Company. As a global company, we believe in `pay for performance' We continued the Life and GI Technical Academies in which our people were provided with in-depth technical knowledge in Life insurance and General insurance. In addition to the in-house programmes, 175 of our people participated in local external training programmes and we also extended 50 foreign training programmes, which were selected to provide them with exposure in to areas that they would need to further their careers. linking one's individual performance with the Company's achievements. The remuneration policy of the Company is approved every year by the remuneration committee of the Company represented by three members of the Board of Directors which includes two independent non-executive directors. The committee invites or seeks opinions from professional advisers or others with relevant experience to assist in its duties to determine the remuneration policy of the Company. The committee reviews external market salary surveys to determine the market compatibility of the remuneration policy of the Company. promote long-term thinking, we have and are in the process of re-aligning our reward structure.

Talent Management

We have adopted Aviva's talent management approach, branded `Talking Talent'. This is a framework that binds employees across the Aviva group. Talking Talent is based on a series of continuous, positive conversations that employees have with their managers, in which talent is described in terms of an individual's learning agility and performance over time. It encourages paying attention to one's own performance and the ability to learn from honest and constructive feedback.

Annual

Managing Director's Special Award, Living our Values Award

Bi-annual

One Aviva Asia Pacific Award

Short-term

Splendour Recognition

Our endeavour is for our people to feel that they are recognised for their different talents, they are valued for their contribution, feel fulfilled in their work and that they have the opportunity to be in a role that plays to their strengths. Through this process we aspire to ensure that the organisation is supplied with the right talent, at the right time, to the right role. During the year, 100 of our people in the management grades went through the `Talking Talent' process where they had an opportunity to have open, honest, positive conversations with their managers on their career aspirations. We have in place a recognition framework that engages our people and reinforces actions and behaviours that we most want to see at our Company. Recognising and rewarding excellence is an integral part of the AVIVA NDB culture. Outstanding individual performance during the year is recognised at the annual Company Conference with the `Managing Director's Special Award', which is the most prestigious award an employee can be awarded. We encourage people to continuously `live' our values and recognise those who are champions of values with the `Living our Values' award. 6 employees were recognised with the Managing Director's Awards and 52 with the Living our Values awards in 2010, for performance during the year 2009.

On-the-spot / peer to peer appreciations

Rainbow Cards, e-sthuthi, MD's Thank You Cards

Reward & Recognition

At AVIVA NDB, we believe that both individual and business performance should be recognised when determining pay decisions. Salary reviews, variable pay, and non-financial reward decisions are driven by talent discussions. In designing our reward strategy, we do not focus solely on monetary rewards which breed short-termism. In order to

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

29

`Splendour Recognition' scheme recognises significant contributions by people working in project teams. The total number of employees recognised through this scheme was 63, for the work they completed in 2009. Managers are encouraged to recognise and reward superlative performance instantly. `Rainbow Cards' is a unique recognition scheme launched based on the premise that each person is different and hence the way to recognise our people should not be a `one size fits all' model. Each Divisional head and Regional Manager is equipped with packs of cards, titled `Rainbow Cards' that has different cards with different rewards, to recognise their people instantaneously. 104 people were recognised with Rainbow cards during the year. E-sthuthi is our e-card system that is hosted on the intranet that our people have access to send paper-less e-greetings. `Managing Director's Thank You Cards' was a new recognition scheme that was launched in 2010, where the Managing Director (MD) recognises people for exceptional contributions, with a personalised, branded `Thank You' card, handwritten by the MD. 31 people were recognised during the year. AVIVA NDB's existing comprehensive recognition model is in line with the Asia Pacific recognition model of the Aviva group. It has been further strengthened with the introduction of the `One Aviva Asia Pacific Award' that enables our people to compete shoulder to shoulder with their colleagues across national boundaries to win superior individual and team awards, biannually. This Regional Recognition Scheme endeavours to recognise actions, ideas and behaviours which accelerates Aviva's journey towards the achievement of its Vision.

Our people also conduct Career Guidance Workshops at local universities sharing the wealth of knowledge they possess. In 2010, we conducted a career guidance workshop at the University of Wayamba, focusing on imparting knowledge of insurance and improving certain identified soft skills among first year students. Five interactive sessions, ranging from Practical Aspects of General Insurance, Practical Aspects of Life Insurance, Risk Management, Career Development, and Business Etiquette were conducted by members of our management team. More than 150 students participated in the programme. Encouraging the younger generations to choose insurance as a career, we launched the `AVIVA NDB Scholarship for Excellence in Insurance Studies' during the year. The scholarship is offered to the student with the most outstanding academic performance in the Department of Insurance and Valuation in the Wayamba University. The selected student receives a monthly allowance of Rs. 3000/during the final year of study and a six-month career guidance training opportunity at AVIVA NDB Insurance on completion of the degree programme. The first recipient of the scholarship has completed her training period at the Company.

Street to School

In 2010, we launched `Street to School', a programme that is HR led and driven by our people. Street to School is about recognising the unrecognised and helping children and young adults who have fallen out of education or are denied access to education to rebuild their lives maximising their natural potential. This is a global programme rolled out in the Aviva world, and demonstrating our commitment to this cause, the Board of Directors of the Company have committed the use of a minimum of 50% of our shareholder donation fund to further this initiative. Our activities in `Street to School' involve two main projects; `Aviva Green Village' in Ihala Hewessa and `Aviva School Village' in Rathugala. The work in Aviva Green Village commenced in 2009 and to date our people are sponsoring 27 children in the Aviva Green Village school. Aviva School Village is located in a rural, remote village called `Rathugala', about 300 miles away from Colombo. The village is occupied by an indigenous community. These are the descendents of early settlers of the country, living in extreme poverty where education to the children is the last of the

Talent Engagement

A main component of our talent engagement agenda is our people driven Corporate Responsibility programme. With more Generation Y employees in the workforce, we have integrated sustainability in to our people agenda. By practice and not mere preaching, our people are increasingly becoming a part of the solution to identified causes. We have `Lend a Hand' ­ Employee Volunteer Leave to encourage our people to volunteer to give back to the community and society at large by engaging in activities that are identified by the Company. All employees are entitled to 2 paid leave days per annum to volunteer for a charity of their choice from the Company `Lend a Hand' charities list.

30

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Our People

Our driving force

priority list of the parents. Thus, almost all the children drop out from school at primary itself to either join their parents in farming or hunting or get involved in pastimes like alcoholism and drug addiction which ultimately waste away their lives. In early 2010, AVIVA NDB signed a Letter of Understanding with the Commissioner of Probation and Child Care Services for the development of the Aviva School Village in Rathugala. In the first phase, the Company completed the development of a tube well; providing drinking water not only to the school children, but to the villagers as well, school play ground, and a shrine room. Employees of AVIVA NDB reached out to the children by donating more than 380 books, whilst the Company donated school supplies packs to all the children of the school and plants for the school. The Company also handed over the secondary education scholarship scheme and attendance recognition scheme to the School principal. Through our HR practices we ensure that a positive `experience' is created for our people. In a competitive labour market where a war for talent exists and the difference between Company A and B is blurring, the experience and the pride we create for our people is our unique differentiator. It is all about our people liking the `experience' and being proud of being a part of AVIVA NDB. In creating such an experience, the well placed employee engagement agenda plays a pivotal role. For us, `employee engagement' is not an illusory concept. The engagement of employees with the Company is measured using four factors ­ advocacy, pride, satisfaction, and commitment. According to the 2010 Aviva Global Employee Promise Survey, conducted by the renowned international research agency, Kenexa, AVIVA NDB's employee engagement level is higher than the Sri Lanka norm. The Company Sports Club, a voluntary staff committee, appointed each year, takes responsibility in organising staff recreational events matching the demographical mix of the Company. The activities of the Sports Club promote diversity in the workplace and foster interaction and fellowship among our people. The funds are annually made available for this purpose in the Company plan budgets. For 2010 Rs. 8.9 million were made available and amongst the activities that were organised, the Company picnic for employees and their families, Sports Carnival, Paduru Party and Day of blessings were highlights. We strongly believe in our people's ability to shape the future of our Company. It was a milestone in our people agenda, when the HR practices of the Company were recognised at the National HRM Awards held in May 2010, where we emerged a Silver award winner. It is noteworthy that this was the first time the Company participated in the competition, after becoming a member of the Aviva group. The `monthly surprises from HR' comprise of exciting, fun activities that all our people look forward to. We want our people to `want' to work at the Company. It is the psychological contract between the employee and the organisation that matters to us. In achieving this, we create an environment that is engaging, energising, challenging, and rewarding. The high engagement level of the Company is something that the Company works on continuously to sustain in the organisation. The HR function, with the involvement of the line management, ensures that the responsibility of `engaging' employees with the Company rests upon their collective shoulders.

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

31

Key new initiatives of 2010

Shah's blog

With the objective of keeping all employees informed of the business direction and progress, we launched a platform on the intranet, branded ­ Shah's Blog. Shah Rouf, our Managing Director posts a weekly blog that all employees can access and also post their comments, views on. To take us through a leadership journey by sharing with us the essence of Aviva's 'Living Leadership' model, Peter Hope Director Leadership & Talent of Aviva Asia Pacific region was in Sri Lanka during the year, where he facilitated a residential workshop involving 75 of our senior management.

Tea for Ten

We consider it vital that our people have the opportunity to express their views regularly. `Tea for Ten' is a bi-weekly forum that is led by the Managing Director in which ten people are invited to meet with him and share their views on the business, issues they face, things that are working and those that are not. Everyone gets an opportunity to express their views and suggestions since it is a small group and it also serves as a meeting opportunity with the Managing Director. This was an initiative started in the beginning of 2010 and is well received by those who have participated to date.

Living our Values Award

As the brand name transformed, we transformed our recognition schemes as well. During the year, some of our former recognition schemes were re-launched as `Living our Values' recognition scheme. This recognition scheme aims to recognise individuals/teams who have demonstrated `living' the company Values in their daily work life.

`Talk to us'

Research shows that in many organisations, HR teams have a conversation with employees on two occasions - before they are hired and when they leave! At AVIVA NDB, we have a culture of open communication. To further strengthen this and to create more avenues for our people to `talk to us', every first and third Friday of the month, from 1:00pm - 5:00pm, the HR team is dedicated to engage in conversation with people.

360-degree feedback for the top team

To ensure that our leaders receive top-down, bottom-up, and lateral feedback to strengthen their development journey as a leader of AVIVA NDB, we conducted a 360-degree feedback programme for the top team during the year. The feedback will be followed by a comprehensive, tailor made development plan and we intend to roll this out to the next level of leaders in to the future.

`Total Rewards'

We designed and published a booklet titled 'Total Rewards' to provide our people with an overview of the Total Rewards available to them at AVIVA NDB. The booklet detailed the Company's approach to reward management including how the different elements that make the Total Reward are set, managed, and evaluated.

Living Leadership

Just as everyone at AVIVA NDB has talent, we believe that every one of us has the capacity for leadership. Leadership is about making a difference, whether we are leading our organisation, others, or ourselves - and we each have the power to perform individual acts of leadership every day.

32

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Sustainability Report

Stakeholder Group Key initiatives AVIVA NDB's response

· · · Won two top awards at the 10 Best Corporate Citizens Awards 2010, conducted by the Ceylon Chamber of Commerce. Ranked among the Ten Best Corporate Citizens in the country Named 'Winner' in the 'Less than LKR 10 Billion Turnover Category'.

Awards won for CSR

Community

CSR Value Driver Model

· ·

Mechanisms are in place to identify CR endeavours that have relevance to the nation and business focus is not a prerequisite. Continuity is guaranteed via trust funds. Conducted National Safety Awards, evolved and sponsored by the Company since 1994 to recognise and reward the safest workplaces. It was held in collaboration with the Dept. of Labour and Employees Trust Fund Board. Cracker safety communications during Avurudu festivities resulted in zero accidents. Poson Safety Campaign for pilgrims ensured zero accidents with lifeguards saving 12 lives. The Company facilitated a free shuttle train service between Anuradhapura and Mihintale for pilgrims. Higher Education Scholarships are awarded to Year 5 students who top the batch in each district since 1994. Students get the scholarship from A/L to degree. A trust fund set up in 1994 when the scheme commenced has now increased more than five-fold. A. S. Mani Trust set up to advance education in actuarial science recognises an actuarial student selected by the Sri Lanka Insurance Institute every year.

Inculcating safety

· · · · ·

Encouraging excellence

· · · ·

· · · · ·

An award of excellence is presented to an eminent person at the Company Sales Convention. In 2010 the award was presented to Senaka Senanayake who has earned international recognition as a world renowned artist. Children's Benefit Trust provides gratuitous payments to children for outstanding achievement. Development Oration Trust recognises and rewards an orator selected by the Sri Lanka Insurance Institute. Scholarship for Excellence in Insurance Studies is awarded to the student with the most outstanding academic performance in the Department of Insurance and Valuation at the Wayamba University.

·

The student receives a monthly allowance during the final year and a 6-month career guidance training at the Company on completion of the degree.

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

33

Stakeholder Group

Key initiatives Facilitating a progressive mindset

AVIVA NDB's response · · Positive thinking is encouraged through motivational workshops for small and medium entrepreneurs, parents and students. Workshops were held in Ambalangoda, Hikkaduwa and Embilipitiya. Donations and contributions were made to various charitable organisations. Completed a tube well providing drinking water and a playground at the school for the Veddha community in Rathugala, located 300 miles from Colombo under `Aviva Street to School' programme. · · Employees donated over 380 books. Renovated the school at Ihala Hevessa, adopted as the Aviva Green Village. Renovations included building toilets for the children and repairing the school's roof. · Employees volunteered to sponsor scholarships and donated books. A computer was donated to the village library. First and only insurer in the country to offer a free life cover to fathers of newborns. · The life cover of Rs. 200,000 was valid up to the baby's first birthday. A Company policy statement is in place on the environment Regional workshops were held for selected customers on how best to maintain motor vehicles to help reduce environmental pollution, enhance fuel efficiency and reduce carbon emission. · Workshops were conducted by a prominent motor engine specialist. 36,730 kg of paper recycled in 2010. 260 printer cartridges recycled in 2010. All windows are tinted for energy conservation. Central air conditions are switched off at 5 p.m. Energy saving bulbs are used in all AVIVA NDB offices. LCD monitors are used for energy conservation. Inter-building 3-wheeler shuttle service minimises fuel consumption. Sending reminders to customers to pay premium by SMS. `Think before you print' campaign, rationalised paper usage and double sided printing to reduce paper consumption. · · · · Call conferencing to reduce air travel. Replacing point of sale material with digital presentations to customers save paper usage. Eco-friendly disposal of electronic items. Regular maintenance and service of the Company's fleet to reduce emission.

Community (contd.)

Philanthropic initiatives Infrastructure development

· ·

Inspiring human values

·

Environment

Environment policy Eco-friendly workshops

· ·

Recycling waste Energy saving measures

· · · · · · ·

Reducing resource usage

· ·

34

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Sustainability Report

Stakeholder Group Key initiatives AVIVA NDB's response · · · · Return on Investment of 62.9% for 2010. Quarterly Financial Statements dispatched to CSE for dissemination to public on a timely basis. Audited Annual Accounts are dispatched to the shareholders within 3 months of the end of each financial year. Rs. 1000 invested at the inception of the Company stood at Rs. 107,671.88 as at December 2010. Part sponsored the Insurance Congress held by the Sri Lanka Insurance Institute. · Resource persons are provided to the Sri Lanka Insurance Institute for knowledge transfer. Our customer strategy comprises 4 elements: need-based product solutions, process improvements and re-engineering, customer relationship management and customer engagement initiatives. · · Customer engagement activities · Relationship Net Promoter Score target set by the Aviva group was achieved at the annual relationship benchmark survey. We were No. 2 in the industry in achieving Customer Loyalty. Customer communication through `Life' magazine, `Uplift' and `MyHealth' newsletters and customer engagement activities such as Customer Days with special movie screenings and drama staging. New products introduced in 2010 · · · DriveSmart ­ innovatively moving away from vehicle-based premium pricing. ChildHealthCare ­ offering surgery abroad. InvestmentPlan ­ Unit-linked investment choice with Life insurance enables customers to take advantage of the booming equity market.

Investors

Industry

·

Customers

Measuring customer satisfaction

·

Employees

HR Vision

· ·

To make people the competitive advantage and core of the business that drives the Company towards being No. 1. To `excite our people to exceptional performance'. Comprehensive HR policy that covers the entire employment life cycle. The Company Standing Instructions contain guidelines and procedures of the Company and is accessible by all employees via the intranet.

HR Purpose HR Policy

·

· Employee Engagement ·

A main component of our talent engagement agenda is our people driven Corporate Responsibility (CR) programme ­ `Street to School'. Employees sponsor 27 children in the `Aviva Green Village' school in Ihala Hewessa.

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

35

Stakeholder Group

Key initiatives

AVIVA NDB's response · · Employees donated more than 380 books to the `Aviva School Village' in Rathugala. All employees are entitled to 2 paid leave days per annum to volunteer for a charity of their choice from the `Lend a Hand' charities list. · Employees conducted a career guidance workshop at the University of Wayamba. More than 150 students participated in the programme. · The monthly surprises from HR continued. Highlights of the year were the apple and orange day, cup cakes for all, i-care day, and Christmas Hampers. · The Sports Club organised staff recreational events matching the demographical mix of the Company; picnic for employees and their families, Sports Carnival, and Paduru Party were the most attended events.

Employees (contd.)

Recognition Schemes

· ·

The Company has in place annual, bi-annual, short-term, and onthe-spot/peer to peer recognition schemes. Managing Director's Thank You cards was a new recognition scheme launched during the year. Employees register for programmes as per their individual development needs via the training calendar. Internal training faculty includes skilled trainers on technical and non-technical areas; amounts to 55. Education loan policy supports employees to acquire international qualifications in selected fields of study. 56 people made use of this facility.

Learning & Development (L&D)

· · ·

·

Membership subscriptions that allow the use of title of a qualification and also professional subscriptions related to work are sponsored.

· ·

Life and GI Technical Academies continued. Training information: No. of programmes Internal External Foreign 19 52 50

Internal Communications

· ·

Published `Total Rewards' a booklet to create awareness on the total rewards available to employees. Aviva global Employee Promise Survey rolled out with 100% participation.

36

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Sustainability Report

Stakeholder Group Key initiatives AVIVA NDB's response · · · Internal pulse survey conducted to gather feedback from employees on HR monthly surprises. A new initiative of the year was ­ `Shah's blog'; the MD posts a weekly message that people can read and post their comments on. `Tea for Ten' was another new initiative in which employees were invited by the MD for an informal chat, to express their views on matters concerning the business. · To further strengthen the culture of open communication, initiated `Talk to us' ­ a dedicated time for any employee to discuss any work related matter with the HR team. Employee benefits and welfare · · · · · · · Social issues · · · · · Group Life insurance cover for employees. Medical insurance cover with indoor and outdoor benefits including spouse and children. 15% of the employee's salary is contributed towards the Employee Provident Fund. Office wear and shoe allowance for employees. In addition to annual, sick, casual leave, the Company provides Paternity leave to new fathers and Volunteer leave for CR activities. Lunch is available at an economical rate at the AVIVA NDB canteen. Company maintained gymnasium within the precincts of the Head Office. All AVIVA NDB employees are above 18 years of age. All employees of the Company are precluded from accepting gifts except those for promotional purposes. All employees participated in a bribery and corruption online training and assessment module conducted by the Aviva group. The sexual harassment policy is a part of the Company's Standing Instructions. The Company facilitated an awareness programme on HIV and AIDS conducted by the Lanka Business Coalition on HIV and AIDS. Our procuring process is transparent and selection is based on the right value fit. Empanelled garages ensure quality · · A high service standard is assured for motor policy customers at empanelled garages Sales agents have been transformed into Wealth Planners to provide a one-stop solution in building and preserving wealth of the customers. Wealth Planners were extensively trained on providing both life & general insurance solutions to customers.

Employees (contd.)

Suppliers

Building rapport

·

Intermediaries

Transforming into Wealth Planners

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

37

Stakeholder Group

Key initiatives Better performance through new rewards & recognition

AVIVA NDB's response · All Wealth Planners and Wealth Planners' Managers were given different performance category targets to stretch themselves. Achievers were ranked according to a new hierarchical scheme using the following category names. Premier Wealth Planners Privileged Wealth Planners Senior Wealth Planners Wealth Planners Associate Wealth Planners The Wealth Planners who achieved the above category status at the end of the year graduated in the earned category. A special quarterly and annual benefit scheme was used to reward the Wealth Planners.

Intermediaries (contd.)

Insurance Powered by technology

·

A special community among the Wealth Planner force was created as "i ­ Wealth Planners" who were equipped with technological tools and supporting devices. These Wealth Planners were educated on using the specially designed `i-Wealth Planner' web portal for better management of their information needs. In addition, a new system was introduced to the national distribution to effectively monitor the key steps in the sales process via laptops, and also to use the customer lead information productively.

Economy

· · ·

Direct Employment was provided to 780 persons adding on average Rs. 1.2 Mn. to each employee in 2010. Income generation opportunity was provided to 3,098 persons through Life and General Insurance business. Payments were made to local suppliers and services.

38

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

"I can save for my child's future and ensure that her aspirations are fulfilled, while being assured of her protection with a range of insurance benefits."

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

39

40

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Director's Profiles

T R Ramachandran · Shah Rouf · Deepal Sooriyaarachchi David Hope · Nishit Majmudar · Russell De Mel Indrajit Wickramasinghe · Sarath Wikramanayake · Lal de Mel

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

41

T R Ramachandran - Chairman

Appointed to the Board on 04 November 2010. He is the Chief Executive Officer and Managing Director of Aviva Life Insurance Company India Limited, a joint venture between Dabur Group and Aviva. He is also a member of the Aviva Asia Pacific Executive Committee. Prior to joining Aviva in 2008, he was with Citibank India for 19 years where he held different roles in credit cards, assets, commercial and retail banking. In his last role, he was Head of Retail Banking with Citibank India where he was responsible for the entire retail bank, including wealth management, branch banking, investments and insurance, consumer assets and the NRI business in India. He holds an MBA degree from Bharathidasan Institute of Management, Tamil Nadu, India and is an alumnus of the CSEP Management Program from Columbia Business School, New York.

a Bachelor of Commerce from Bombay University and is an accredited member of the Institute of Investment Management and Research (UK). He is also a Fellow of the Institute of Actuaries in London and India.

Russell De Mel - Non-Executive Director

Appointed to the Board on 23 April 2010. He is the Chief Executive Officer of NDB Bank. He has served the Bank for almost 30 years, largely in the field of Corporate Banking. Prior to his current posting, he functioned as the Vice President of the Bank's Corporate Banking Group. He also served as the Vice President of NDB Bank's Group Risk Management department. He is a Director of several NDB Group Companies. His experience ranges from Project Financing, Infrastructure Financing, Merchant Banking, Corporate Planning and Management Information etc. He is a Fellow of the Chartered Institute of Management Accountants, UK.

Shah Rouf - Managing Director

Appointed to the Board on 22 January 2010. Serving as Managing Director of the Company effective March 2010. He counts over 18 years experience with Aviva, having held senior management positions in both Life and General insurance in the UK, Middle East, India and continental Europe. Prior to his appointment to the Board of Directors of the Company, he was the CEO of Aviva Romania and Chief Distribution Officer Central and Eastern Europe for Aviva. He concluded his academic studies at the London School of Economics and has a BA (Hons) and an M.Sc. degree in Economics. He is an Associate of the Chartered Insurance Institute, UK.

Indrajit Wickramasinghe - Non-Executive Director

Appointed to the Board on 19 September 2008. He holds a Masters Degree in Business Administration from the University of Sri Jayawardenepura, a Postgraduate Diploma from the Chartered Institute of Marketing, UK and is a Chartered Marketer and Fellow of the Chartered Institute of Marketing, UK. He is currently the Chief Operating Officer of NDB Bank. Before joining NDB Bank 10 years ago, he held the position of Head of Marketing at Reckitt & Colman of Ceylon Ltd. He is also a Non Executive Director of NDB Stock Brokers Pvt. Ltd., and Capital Development & Investment Company PLC. He counts over 21 years of experience in the Fast-Moving Consumer Goods and Financial Service Sectors.

Deepal Sooriyaarachchi - Executive Director

Appointed to the Board on 17 May 2005. He functioned as the Managing Director until end February 2010 and continues as an Executive Director from March 2010. He counts over 24 years of business experience. He is a Director of Sampath Bank and Panasian Power PLC. Presently he works as a Management Developer. He is a Fellow of the Chartered Institute of Marketing, UK, Chartered Marketer and has a Masters in Business Administration from the University of Sri Jayawardenepura.

Sarath Wikramanayake - Non-Executive Director

Appointed to the Board on 3 July 2003. He is a Chartered Accountant. He has worked with the Bank of Butterfield, a Bermuda-based international bank for 19 years, where he reached the position of Executive Vice-President. Since returning to Sri Lanka, he has been the Chief Executive Officer of Union Assurance Limited and the President of the Insurance Association of Sri Lanka in 2002. He is currently engaged in providing consultancy services to the Financial Services and ICT Industries. In addition to his role as a Director of AVIVA NDB Insurance PLC, he is also a Director of several other companies including National Development Bank PLC, PC House PLC and NDB Aviva Wealth Management Ltd.

David Hope - Non-Executive Director

Appointed to the Board on 07 September 2009. He has been with the Aviva group in various senior HR roles, since 1996. In 2009 he was appointed to his current position of Regional HR Director, Asia Pacific. Prior to taking up this position he was Group HR Strategy Director responsible for HR Strategy, Reward, CSR and Diversity and Corporate Office HR. He started his career in the British Diplomatic Service, training as an Arabist and serving in British Embassies in Baghdad and Khartoum. His previous experience in HR was with Wessex Water and Hay Management Consultants. He is a graduate of Oxford University, he holds a Masters in Business Administration with Distinction from Bath University.

Lal de Mel - Non-Executive Director

Appointed to the Board on 28 July 2003. He was the Managing Director of CIC Paints from 1995 to 2001. He was also the Chairman of the Insurance Corporation Limited and a Director of Bank of Ceylon in 2001. He is currently the Chairman of NDB Investment Bank Ltd, Development Holdings (Pvt) Ltd and N Chandraratne Decorators (Pvt) Ltd and is a Director of several other institutions. He has a Bachelor of Science degree from the University of Ceylon and is a Member of the Chartered Institute of Marketing, UK, with postgraduate diplomas in Marketing and Management. He is a past President of the Sri Lanka Institute of Marketing, the Federation of Chambers of Commerce & Industry and the Ceylon National Chamber of Industries.

Nishit Majmudar - Non-Executive Director

Appointed to the Board on 08 July 2010. He has a solid actuarial background and has over 25 years of experience in finance and executive management. He has held a variety of senior roles across the Asia Pacific region with Prudential, the Monetary Authority of Singapore and Watson Wyatt. He holds

42

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Senior Management Team

Shah Rouf - Managing Director

Appointed to the Board of AVIVA NDB Insurance PLC on 22 January 2010. Serving as Managing Director of the Company effective March 2010. He counts over 17 years of experience with Aviva, having held senior management positions in both Life and General insurance in the UK, Middle East, India and continental Europe. Prior to his appointment to the Board of Directors of the Company, he was the CEO of Aviva Romania and Chief Distribution Officer Central and Eastern Europe for Aviva. He concluded his academic studies at the London School of Economics and has a BA (Hons) and an M.Sc. degree in Economics. He is an Associate of the Chartered Insurance Institute, UK.

experience in the fields of human resources, corporate law, litigation, compliance, company secretarial practice and business operations.

Gehan Rajapakse - GM Bancassurance & Partnerships

He heads the Bancassurance and Partnerships businesses of the Company for Life and General insurance distribution. He holds a Masters degree in Business Administration from the University of Sri Jayawardenepura, a Bachelor of Arts degree in Economics with Honours from the University of Colombo and is an Associate Member of the Chartered Institute of Management Accountants, UK. He counts over 18 years ofexperience in management and asset management. He also functions as the Chairman of the Investment Committee of the Company.

Upul Wijesinghe- Director Distribution - Direct Sales

He heads the Direct Sales Distribution Division of the Company for Life and General insurance businesses as Director Distribution - Direct Sales. He holds a Bachelor of Science degree with Honours from the University of Colombo and is an Associate of the Chartered Insurance Institute, UK. He is an Alumni of the International Center for Management Development, Switzerland. He was the President, Sri Lanka Insurance Institute in 2002 and 2003. He counts over 21 years of experience in insurance.

Leilamani Pereira - GM Finance

She heads the Finance division of the Company as General Manager Finance. She is a Fellow of the Chartered Institute of Management Accountants, UK and has a Masters in Business Administration from the University of Western Sydney. She counts over 10 years of senior management experience in the areas of financial reporting, corporate finance, taxation and process re-engineering in the banking, transportation and logistics, apparel and telecom sectors.

Chandana Jayasooriya - Director - Information Technology

He heads the IT Division of the Company. He holds a Masters degree in Information Technology (MSc-IT) from the Keele University - UK and is an Associate (AIB) of the Bankers Institute of Sri Lanka. He is a passed finalist as a Certified Information Security Manager (CISM) from the Information Systems Audit and Control Association (ISACA) - USA and a Project Management Professional (PMP) from the Project Management Institute (PMI) - USA. He is a member of the Computer Society of Sri Lanka (CSSL) and the British Computer Society (BCS). He counts over 26 years of experience in Information Technology in the Banking and Insurance sector.

Kelum Senanayake - GM Operations

He heads the insurance and logistics operations functions of the Company responsible for Life and General Operations and Logistics management. He has a Diploma in Business Management from World View Institute. He holds a Masters Degree in Business Administration from the University of Western Sydney. He joined the Company in 2009 and counts over 28 years experience in life and general insurance within the industry.

Amal Perera - GM Marketing & Customer Management

He heads the Marketing and Customer Management function as General Manager. He holds a Masters in Business Administration from the University of Sri Jayawardenepura. He is a Chartered Marketer and a member of The Chartered Institute of Marketing U.K. He is a Board member of the CIM Sri Lanka Region and holds the position of Secretary. He counts over 14 years of management experience in Marketing, Strategy Development and Corporate Planning.

Chathuri Munaweera - GM Human Resources & Legal

She functions as General Manager Human Resources and Legal and is the Company Secretary. She holds a Bachelor of Laws of the University of Colombo and is an Attorney-at-Law. She also holds a Post Graduate Certificate in Human Resource Management from the University of Sri Jayawardenepura. She represents Sri Lanka in the HR Directors team of Asia Pacific Region, Aviva plc. She counts over 14 years management

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

43

Shah Rouf · Upul Wijesinghe · Chandana Jayasooriya Chathuri Munaweera · Gehan Rajapakse · Leilamani Pereira Kelum Senanayake · Amal Perera

44

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

The Annual Report of the Board of Directors on the affairs of the Company

The Board of Directors of AVIVA NDB Insurance PLC ("the Company") have pleasure in presenting their Annual Report on the affairs of the Company in respect of the financial year ended 31 December 2010. The information provided herein is in pursuance of the requirements of the Companies Act No. 7 of 2007 and the Listing Rules of the Colombo Stock Exchange. In the preparation of this Report, reference has also been made to other recommended best practice reporting guidelines. The audited financial statements of the Company and the audited consolidated group financial statements for the said year and the Report of the Auditors thereon are set out on pages 85 to 130.

Significant events during 2010

2010 became a significant milestone of the Company as "Eagle Insurance PLC" was transformed into "AVIVA NDB Insurance PLC", reiterating Aviva group's global vision of becoming "One Aviva, twice the value" by the creation of a single brand globally through the combined strengths of Aviva group and the NDB group. In pursuance of the transformation, the Company's name change was effected in compliance with applicable regulatory and statutory requirements. The Registrar General of Companies, Sri Lanka issued the certificate of incorporation confirming the name change of the Company effective 12 February 2010.

Review of Performance and Future Developments Vision, Mission and Corporate Conduct

A Statement of the Corporate Vision and also a Statement of the Corporate Mission, are given on page 3. The Company's business activities have been and are carried out within the framework of the objectives of such Statements and in pursuance of the continued nurturing of business and work practices of the highest ethical standards. An overview of the Company's and of the group's financial and operational performance for the year ended 31 December 2010 and of future developments is contained in the Managing Director's Review with a detailed review being provided in the Management Discussion and Analysis segment, as reported on pages 14 to 25 respectively. These reports, together with the audited financial statements, reflect the state of affairs of the Company and of the group as at 31 December 2010.

Principal Activities of the Company and of its Subsidiary

The principal activity of the Company during the financial year under review, continued to be insurance. Rainbow Trust Management Limited, which remains a fully owned subsidiary of the Company, continued to provide trust and ancillary services during the year under review. To the best of the knowledge of the Board, neither the Company nor its afore mentioned subsidiary engaged in any activities, which contravened relevant local laws and regulations.

The Group Structure

AVIVA NDB Finance Lanka (Private) Limited, which has a direct shareholding of 87.3% in the Company, is its immediate holding Company. Aviva International Holdings Ltd, which is the ultimate holding Company, has an indirect shareholding of 51.0% in the Company. National Development Bank PLC (NDB) has a direct shareholding of 5.0% in the Company and an indirect shareholding of 36.1%. A graphical presentation of the shareholding structure of the Company and of the group is set out below.

National Development Bank PLC

99.7%

Aviva International Holdings Limited

Capital Development and Investment Company PLC 41.6% AVIVA NDB Finance Lanka (Private) Limited 87.3% 5% AVIVA NDB Insurance PLC 100% Rainbow Trust Management Limited

58.4%

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

45

Stated Capital & Reserves

The Company's Stated Capital as at 31 December 2010, was LKR 300 Mn represented by 30 Mn Ordinary Shares. There was no change in the Stated Capital during the year under review. The total capital and reserves for the group stood at LKR 2,909.6 Mn as at 31 December 2010 (LKR 2,579.5 Mn as at 31 December 2009), details of which are provided in notes 22 to 24 to the financial statements.

Appropriations Dividend paid for previous year Interim dividend paid Unappropriated profit carried forward

(270,000) 2,280,729

(210,000) (165,000) 1,950,561

There have been no reserve movements during the year, other than the movement in retained earnings.

Revenue

The Revenue of LKR 15.2 Bn comprises income generated from Life and General insurance business, and Trust services.

Shareholdings

The Company had 2189 registered shareholders, as at 31 December 2010. The distribution of shareholding, the Public holding percentage and details of the 20 largest shareholders, are given on page 140 of this report.

Dividends

The Directors have recommended a first and final dividend of LKR 9.00 per share for the year 2010 for approval by the Shareholders. The Directors have confirmed that the Company satisfies the solvency test requirement under section 56 of the Companies Act No. 07 of 2007 for the first and final dividend proposed. The Dividend will be paid partly out of dividends received and partly out of taxable profits of the Company. The dividend to be paid out of the profits will be subject to withholding tax.

Share information

Information relating to share valuation and share performance is given on page 142.

Financial Statements contained in the Annual Report

The financial statements of the Company and of the group, have been prepared in conformity with the requirements of the Sri Lanka Accounting Standards (SLAS), the Companies Act No. 7 of 2007 and, to the extent applicable, by the Regulation of the Insurance Industry Act No. 43 of 2000. The financial statements also conform to the formats and disclosures prescribed in the "Statement of Recommended Practice for Insurance Contracts" issued by the Institute of Chartered Accountants of Sri Lanka, which has been made a mandatory compliance requirement by the Insurance Board of Sri Lanka with effect from 01 January 2007. The financial statements, duly signed by the Directors are published on pages 86 to 130 and the Auditors Report thereon is provided on page 85.

Accounting Policies

The details of the accounting policies adopted by the Company in the preparation of the financial statements are disclosed on pages 101 to 107 of the Report. Accounting Policies are consistent with those in the previous years.

Life Surplus and Policyholders' Dividends

The Board of Directors received and adopted the Report of the Company's Chief Actuary for Life, Mr. Frank Munro which recommended the dividends that are payable to Policyholders and of the transfer of the surplus thereof to the Income statement. This is set out on page 76 of the Report.

Financial Results

The group recorded a consolidated net profit of LKR 600.2 Mn for the financial year ended 31 December 2010. A synopsis of the Company's consolidated performance is presented below. 2010 LKR'000 Group profit Net profit for the year Unappropriated profit brought forward Funds available for appropriation 600,168 1,950,561 2,550,729 2009 LKR'000 730,525 1,595,036 2,325,561

Property, Plant and Equipment

As at the Balance Sheet date, the net book value of Property, Plant and Equipment of the group amounted to LKR 240.6 Mn. During the financial year the capital expenditure on Property, Plant and Equipment for the Company and the group amounted to LKR 106.3 Mn. Details of the Company's Property, Plant and Equipment and the movement in their values during the year are given in note 5 to the financial statements on page 113.

Market value of the Company's Property, Plant and Equipment

The market values of the Company's Property, Plant and Equipment are not materially different to the book values as given in the notes to the financial statements on page 113.

46

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

The Annual Report of the Board of Directors on the affairs of the Company (contd.)

The Company owns 13.40 perches of freehold land at 76, Kew Road, Colombo 2 and 12.09 perches of freehold land at No. 80, Kew Road, Colombo 2. These properties were subject to a valuation during the year 2007 and the revaluation surplus of LKR 39.9 Mn has been included in the accounts in that year. As per the report of the valuer there is an increase in the market value of LKR 7 Mn as at 31 December 2010. However this increase has not been accounted for based on prudence as the Company's policy is to revalue properties every five years. The purpose of obtaining a letter confirming the value at the end of every financial year is to ensure that there is no decline in value that needs to be accounted for. Details of the extent, locations, valuations of the Company's land holdings are given in note no. 5 to the financial statements on page 113 of this Report. and a Revaluation Reserve which is a capital reserve. Movements in these reserves are given in the group Statement of Changes in Equity set out on page 88 of the Report.

Provision for Taxation

Provisions for Taxation for the Company and its subsidiary have been computed at the rates given in note 32 to the financial statements and are set out on page 125

Transforming into AVIVA NDB Insurance

The transformation into the new and dynamic "AVIVA NDB" brand has been successful and has been readily accepted by all stakeholders. This brand change is in line with Aviva's global vision of becoming "One Aviva, twice the value" to deliver a distinctive, cohesive experience that makes customers feel recognised. The one-off brand change spend amounted to LKR 324 Mn.

Investments

Investments of the Company and of the group amounted to LKR 26.6 Bn. A detailed description of the Investments held as at the Balance Sheet date is given in note 1 and 2 to the financial statements on page 108 and 112 respectively.

People Development Strategy

During the year, the Company continued investing in the human capital. The learning opportunities provided to employees have enabled them to gain multiple skill sets and move from operating in a silo to the wider organisation. There were 28 career re-deployments made during the year. The internal learning academy ­ Aviva Academy ­ programmes continued during the year. The "Aviva Accelerated Leadership Development Programme" that aimed at developing junior managers to take up leadership roles in future, concluded during the year. Another key initiative of 2010 was the launch of composite training, in line with the transformation agenda, in which selected employees in regional offices were trained on Motor insurance. 47 employees have been cross-trained during the year. The Company continued the Life and GI Technical Academies in which employees were provided with in-depth technical knowledge in Life and General insurance. In addition to the in-house programmes, 175 of our people participated in local external training programmes and we extended 50 foreign training programmes, selected to provide employees with exposure into areas that they would need to further their careers. As at Balance Sheet date the Company provided direct employment to 780 and income generation opportunity to 2,820 individuals.

Donations

The Board of Directors having due consideration to the best interests of the Company, resolved that a total sum of LKR 2.29 Mn was utilised as charitable donations for the year 2010, (which amount is within 1% of the average Profits after Tax for the preceding three years). The said amount does not include contributions which the Company had made during the year on account of Corporate Responsibility (CR) initiatives. No donations or any other form of payments or facilities have been made to political parties or for politically oriented purposes.

Provisions

The Board of Directors have taken all reasonable steps to ensure adequate provisioning for unearned premiums, unexpired risks and claims, including claims incurred but not reported. The Board of Directors have also arranged for a Consultant Actuary to value the General insurance claims and premium liabilities and for the Chief Actuary to value the Life Fund valuations. (Please refer page 107 for the policies adopted for provisioning and the basis thereof). As at the date of the Report, Board of Directors are not aware of any circumstances, which would render inadequate the amounts provided for in the financial statements.

Outstanding Litigation

In the opinion of the Board of Directors and the Company's lawyers, pending litigation against the Company will not have a material impact on the reported financial results or future operations of the Company.

Reserves

The total reserves of the group as at 31 December 2010, amounted to LKR 2.6 Bn consisting of the Resilience Reserve, and Retained Earnings, both of which are revenue reserves,

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

47

Events after the Balance Sheet date

The Directors have recommended a first and final dividend of LKR 9.00 per share for the year 2010 for approval by the Shareholders. There have been no events subsequent to the Balance Sheet date that would have any material effect on the Company or the group, which would require adjustment or disclosure in the financial statements.

Statutory Payments

The Board of Directors confirm that to the best of their knowledge and belief, statutory payments to all relevant regulatory and statutory authorities, have been paid by the Company. A Statement of Compliance by the Board of Directors in relation to Statutory Payments is included in the Directors' Statement of Responsibilities on Financial Reporting on page 84.

Interests Register

The particulars of entries made in the Interests Register during the financial year under review, in pursuance of the provisions of the Companies Act No. 7 of 2007, are given below: a) Directors' Interests in transactions with the Company Directors' interests in contracts of the Company, both direct and indirect, during the year under review are included in note 35 in the related party disclosures to the financial statements, set out on page 128 These interests have been duly declared at the Board meetings.

Corporate Governance and Internal Controls

The Board of Directors of the Company, acknowledge the responsibility of conducting the business activities of the Company in conformity with accepted good governance practices. Having reviewed the effectiveness of the internal control systems, the Board of Directors are of the considered view that the Company has taken necessary precautions to safeguard the interests of its stakeholders. Please refer page 51 for the Report on Corporate Governance and page 73 for the Audit and Compliance Committee Report.

Directors of the Company who were also Directors and or Employees of related entities as at 31st December 2010:

Company Rainbow Trust Management Ltd.

Name of Director T R Ramachandran S Rouf D Sooriyaarachchi D S P Wikramanayake T R Ramachandran R De Mel

Position Chairman Director Director Director Director Director

Relationship Fully owned subsidiary of AVIVA NDB Insurance PLC

AVIVA NDB Finance Lanka (Private) Limited (ANFL)

ANFL is the immediate holding Company of AVIVA NDB Insurance PLC

National Development Bank PLC (NDB)

R De Mel I Wickramasinghe D S P Wikramanayake

Director/ Chief Executive Officer NDB has an indirect Chief Operating Officer shareholding of 36.1% and a Director direct shareholding of 5% in AVIVA NDB Insurance PLC Director Director CDIC has an indirect shareholding in AVIVA NDB Insurance PLC ANFL, which is the holding Company of AVIVA NDB Insurance PLC, has a shareholding of 83.85% in NAWM. NAWM is engaged as the outsourced fund management service provider to AVIVA NDB Insurance PLC

Capital Development and Investment Company PLC (CDIC)

R De Mel I Wickramasinghe

NDB AVIVA Wealth Management Limited (NAWM)

D S P Wikramanayake D Sooriyaarachchi T R Ramachandran

Director Director Director

48

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

The Annual Report of the Board of Directors on the affairs of the Company (contd.)

b) i. Directors' dealings with Shares of the Company Disclosures in respect of shares held during the year ending 31 December 2010: The Directors have, in pursuance of section 200 of the Companies Act No.07 of 2007, made appropriate disclosures at Board Meetings regarding their interests in the Company's shares, including acquisitions or disposals of such shares. Details of the Directors' individual shareholdings in the Company as at 31 December 2009 and 31 December 2010, are given below: Name of Director Number of Number of shares as at shares as at 31st December 31st December 2009 2010 ** 900 ** 900 e) Executive Directors' Emoluments Non-Executive Directors' fees d) iii. Disclosures in respect of shares of the Company which have been disposed of during the year: None of the Directors of the Company have disposed of their shares in the Company during the year under review. c) Use of Company Information by the Directors This information is recorded in the Interests Register in pursuance of the provisions of section 197 of the Companies Act No.7 of 2007. Subject matter of information Date of Authorisation authorisation granted at a by the Board Board meeting/ by circular resolution None None

None

T R Ramachandran (Chairman) * appointed on 4th November 2010 Shah Rouf (Managing Director) * appointed on 22nd January 2010 Deepal Sooriyaarachchi David Hope Nishit Majmudar * appointed on 8th July 2010 Russell De Mel * appointed on 23rd April 2010 Indrajit Wickramasinghe Sarath Wikramanayake Lal de Mel Craig Timothy Brackenrig * Resigned on 22nd January 2010 Eran Wickramaratne * Resigned on 26th March 2010 Nihal Senanayake Welikala * Resigned on 26th March 2010 Harvey Chamberlain * Resigned on 14th June 2010 William Lisle * Resigned on 4th November 2010

Details of the remuneration and other benefits paid to the Directors The remuneration of the Executive Directors is duly determined by the Company's Remuneration Committee, on the basis of the Terms of Reference applicable in that regard. Effort is made thereby to secure a balance between the suitability of the remuneration so determined and of its fairness in relation to the Company's interests. The Company's Non-Executive Directors are not paid any remuneration. Directors Fees are paid on attendance at corporate meetings of one Non-Executive Director. Details of the Directors' fees and emoluments paid during the financial year 2010, which have been duly approved by the Board of Directors, are stated below. Consolidated Fees 2010 2009 LKR'000 LKR'000 97,537 120 14,018 120

**(a) Class of shares - Ordinary Shares. (b) These shares were acquired prior to 1st January 2009. ii. Disclosures in respect of shares of the Company which have been acquired during the year: None of the Directors of the Company have acquired shares of the Company during the year under review.

Loans to the Directors No loans have been granted to any Director of the Company or of any related entity, during the year under review. The Company has not provided any guarantee or any other form of security in connection with a loan made by any person to a Director of the Company or of any related entity.

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

49

f)

Insurance and Indemnity coverage provided to Directors and/or Officers of the Company and of its subsidiary : The Company has, in pursuance of Article 52 of the Articles of Association, effected during the financial year under review for its past and present Directors and Officers and for its Subsidiary, a "Director and Officer Liability" Insurance Policy (D&O). Pursuant to the approval of the Board of Directors being obtained thereto, the above Policy has been renewed for a further period, effective 22 December 2010. The terms and conditions of the said D & O policy is disclosed in the Policy document bearing number 06-HODOL-1194337, the salient details of which are set out below: Limit of Liability The premium Coverage Period of Insurance LKR 115,000,000.00 LKR 1,601,423.76 (Inclusive of taxes) Worldwide including USA and Canada from 22nd December 2010 to 30th November 2011

In accordance with Article 30 of the Articles of Association of the Company, Messrs Indrajit Wickramasinghe and David Hope retire by rotation at the Annual General Meeting and being eligible, are recommended by the Board for re-election.

Directors' Meetings

Set out below are the number of Directors' meetings (including meetings of the sub committees of the Board), which have been held during the financial year under review and the number of such meetings that has been attended by each Director of the Company during the said period, correlated to the period during which each such Director actually held office within the said year under review:

Name of Director Directors' Meetings Audit & Committee Meetings Investment Remuneration Meetings Meetings

Compliance Committee Committee

Directors during the Year/Changes

Name of Director Date of Date of Date of ReAppointment Resignation/ appointment Date of ceasing to be a Director

T R Ramachandran Shah Rouf Deepal Sooriyaarachchi David Hope Nishit Majmudar Russell De Mel Indrajit Wickramasinghe

A 1 4 3 3 2 3 4

B 1 4 4 4 2 3 4

A 3 2 -

B 4 2 -

A 3 -

B 3 -

A 2 -

B 2 -

* T R Ramachandran 4-Nov-10 Shah Rouf 22-Jan-10 Deepal Sooriyaarachchi 17-May-05 1-Feb-06 1-Feb-06 David Hope 7-Sep-09 Nishit Majmudar 8-Jul-10 Russell De Mel 23-Apr-10 Indrajit Wickramasinghe 19-Sep-08 Sarath Wikramanayake 3-Jul-03 1-Feb-06 14-Feb-06 Lal de Mel 28-Jul-03 Craig Timothy Brackenrig 9-Nov-07 22-Jan-10 Eran Wickramaratne 18-Jul-08 26-Mar-10 Nihal Senanayake Welikala (alternate) 18-Jul-08 26-Mar-10 Harvey Chamberlain 11-Mar-09 14-Jun-10 William Lisle 15-Jul-09 4-Nov-10 · T R Ramachandran was appointed to the Board as Chairman / Director effective 04-Nov-10 subsequent to the resignation of William Lisle as Chairman / Director. · Shah Rouf was appointed to the Board on 22 January 2010 and was appointed as Managing Director effective 01 March 2010.

Sarath Wikramanayake 4 4 4 4 7 7 2 2 Lal de Mel 4 4 - Eran Wickramaratne 1 1 - Harvey Chamberlain 2 2 2 2 4 4 - William Lisle 3 3 1 2 * Gehan Rajapakse - 7 7 - A = Number of meetings attended B = Number of meetings held during the time the Director held office during the period * Not a Director on the main Board Going Concern The Board of Directors have, consequent to due inquiry and having taken into account the financial position and future prospects of the Company, a reasonable expectation that the Company has adequate resources to continue to be in operational existence for the foreseeable future. For this reason, the Company continues to adopt the going concern basis in the preparation of its financial statements. Environmental Protection The Company has used its best endeavours to comply with the relevant environmental laws and regulations applicable in the country. The Company has not, to the best of the knowledge of the Board of Directors, engaged in any activity which is or which would be harmful or hazardous to the environment.

50

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

The Annual Report of the Board of Directors on the affairs of the Company (contd.)

Equitable Treatment to Stakeholders The Board have constantly endeavored to ensure that corporate operations are conducted in a manner which will secure equitable treatment to all Stakeholders of the Company. Appointment of Auditors The present Auditors Messrs Ernst & Young, Chartered Accountants, who were re-appointed at the last Annual General Meeting to hold office during the year under review, have confirmed their willingness to continue in office. Accordingly, a resolution to re-appoint them as Auditors and authorising the Board of Directors to fix their remuneration, will be proposed at the Annual General Meeting. Auditor's Remuneration The remuneration paid to Messrs Ernst & Young for both Audit and Non Audit services rendered for the year under review are stated below. Group 2010 LKR '000 Audit Non-Audit MCEV model review Other Services 5,144 2,181 600 2009 LKR '000 4,505 275 By order of the Board of Directors of AVIVA NDB Insurance PLC Annual Report The Board of Directors have approved the audited financial statements of the Company and of the group together with the reviews and other reports which form part of the Annual Report on 10th February 2011. The specified number of copies of the Report will be submitted to the Colombo Stock Exchange, the Insurance Board of Sri Lanka, the Sri Lanka Accounting and Auditing Standards Monitoring Board and the Registrar General of Companies, within applicable time frames. In terms of applicable provisions of the Listing Rules of the Colombo Stock Exchange, the Board of Directors has duly resolved to issue the Annual Reports of the Company in CD-ROMs to the Shareholders, subject to the Company being in compliance with such requirements stipulated in the said Rules. Annual General Meeting The Annual General Meeting will be held on Thursday, 31st March 2011 at 10.00 a.m. at "Kings Court", Cinnamon Lakeside, Colombo, No. 115, Sir Chittampalam A Gardiner Mawatha, Colombo 2. The Notice of the Annual General Meeting, setting out the business which will be transacted thereat appears on page 154.

Messrs Ernst & Young, does not have any relationship with the Company or with its subsidiary, other than that of Auditors of the Company.

T R Ramachandran Chairman Colombo 10th February 2011

Shah Rouf Managing Director

(Ms) Chathuri Munaweera Company Secretary

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

51

Corporate Governance

Good governance ensures that constituencies (stakeholders) with a relevant interest in a Company's business are fully taken into account. In addition, good governance makes a significant contribution to the prevention of malpractice and fraud within an organisation. A Company must develop transparent and sustainable relationships pivotal to its success. These will depend on the nature of the company's business and include those with employees, customers, shareholders, regulators, investors, suppliers, credit providers, local communities and the government. It is the management's responsibility to develop policies which address these requirements ; in doing so they must have regard to the overriding objective of preserving and enhancing the shareholders' investment over time and protecting the best interests of the other stakeholders. The Board's task is to approve the said policies as appropriate and to monitor the performance of the management in implementing them. These policies represent an integral part of the Corporate Governance framework of a company. It then becomes the responsibility of the Board to have in place such measures and procedures through which the Corporate Governance framework of the Company is well maintained and preserved. AVIVA NDB Insurance PLC (AVIVA NDB), has continuously endeavored to abide by accepted policies and best practices in Corporate Governance; and to conduct corporate operations within a structure of legal and ethical standards, professionalism, transparency and accountability. Thus for instance, AVIVA NDB, as a listed entity, has consistently sought to adhere to the following laws and regulations, which constitute part of the statutory and regulatory framework governing its affairs: 1. 2. 3. 4. 5. The provisions of the Companies Act No. 7 of 2007 The provisions of the Regulation of Insurance Industry Act No. 43 of 2000 (as amended) The Listing Rules of the Colombo Stock Exchange Inland Revenue Act No. 10 of 2006 (as amended) and other various statutes governing taxation Various laws which govern industrial relations such as the EPF Act, ETF Act, Shop and Office Employees Act and Payment of Gratuity Act The Articles of Association

6.

Additionally, AVIVA NDB's corporate governance structure is based on the "Code of Best Practice on Corporate Governance" issued by the Institute of Chartered Accountants of Sri Lanka (ICASL), the Exposure Draft on Best Practice on Corporate Governance issued jointly by the ICASL and the Securities and Exchange Commission of Sri Lanka (SEC) and the principles of Corporate Governance laid down by the Organisation for Economic Corporation and Development. In order to achieve an exemplary standard in its governance activities, AVIVA NDB has established an effective framework of checks and balances. Furthermore, the Board of Directors, whose responsibilities are appropriately delegated to management, are accountable for the overall management of the Company.

Corporate Governance Structure

Audit & Compliance Committee Board of Directors Remuneration Committee Investment Committee Managing Director

Direct Sales Distribution (Life & General)

Life Operations

General Operations

IT

Bancassurance & Partnerships (Life & General)

HR, Legal & Regulatory Compliance

Finance & Actuarial Services

Campaign Management & Marketing

Enterprise Risk Management

Internal Audit

52

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Corporate Governance (contd.)

AVIVA NDB has maintained excellent Corporate Governance Standards throughout its history and during the year under review as well. The Corporate Governance Review which sets out the mandatory good governance requirements are clearly marked for purposes of monitoring compliance. However, AVIVA NDB's compliance report in this regard is well beyond the mandatory disclosure requirements. Other best practices adopted by AVIVA NDB are enumerated and the level of compliance, in relation to each is explained below.

Board of Directors

Corporate Governance requirements with respect to the composition of the Board of Directors are stipulated in the Listing Rules of the CSE. Such requirements and the Company's level of compliance are detailed below.

Corporate Governance Principle

Level of Compliance

Rule 7.10.1 (a) Two or such number equivalent to one third of the total number of Directors, whichever is higher should be NonExecutive Directors Rule 7.10.1 (b) Total number of Directors to be calculated based on the number as at the conclusion of the immediately preceding AGM Rule 7.10.1 (c) Any changes which occur to the above stated ratio shall be rectified within ninety days from the date of the change. Rule 7.10.2 (a) Two or one third of the Non-Executive Directors appointed to the Board of Directors, whichever is higher shall be "independent"

Among the nine members of the Board of Directors seven are Non-Executive. There are two Executive Directors including the Managing Director serving on the Board. Each Director's status as Executive or Non-Executive is specified under "Director's Profile" on page 40 of this Annual Report. At the conclusion of the AGM held on 23rd March 2010 being the immediately preceding AGM of the Company, the total number of the members of the Board of Directors was nine, hence the minimum requirement for Non-Executive Directors was three whereas the Company has seven Non-Executive Directors on the Board.

During the financial year under review, no change occurred to this ratio.

There are three independent Non-Executive Directors as per the criteria for defining "Independence" stipulated under Rule 7.10.4 of the Listing Rules. Out of the seven Non-Executive Directors, three Directors can be classified as Independent Non-Executive Directors. Details of independent, Non-Executive Directors are given in page 53. In terms of the provisions of the Listing Rules of CSE, the written clarification provided by the CSE on the said Listing Rules and the declarations filed by the individual Directors, Mr Lal De Mel, Mr David Hope and Mr Nishit Majmudar can be classified as independent NonExecutive Directors on the Board of the Company. Mr David Hope and Mr Nishit Majmudar are employees of a Company within the Aviva group but the Board is of the view that this is not a disqualification to be classified as independent Non-Executive Directors on the Board of AVIVA NDB Insurance PLC within the criteria defined for "independence" in terms of the said Listing Rules and the said written clarifications. The Board has obtained signed and dated declarations from each Non-Executive Director on their independence or non-independence against the said criteria upon their appointment to the Board and also on an annual basis in terms of declaration specified in Appendix 7A of the CSE Rules.

Rule 7.10.2 (b) The Board shall require each NonExecutive Director to submit a signed and dated declaration annually of his/her independence or nonindependence against the specified criteria in the specified format stipulated in the CSE Rules.

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

53

Corporate Governance Principle

Level of Compliance

Rule 7.10.3 (a) The Board shall make a determination annually as to the independence or non-independence of each NonExecutive Director based on such declaration and other information available to the Board and shall set out in the Annual Report the names of Directors determined to be 'independent'

The Board of Directors determined the independence or non-independence of each Non-Executive Director and the names of such independent Non-Executive Directors served on the Board during the financial year under review are given below with their tenure as a member of the Board, irrespective of whether they ceased to be Directors as at 31 December 2010. In terms of the provisions of the Listing Rules of CSE, the written clarification provided by the CSE on the said Listing Rules and the declarations filed by the individual Directors, Mr Lal De Mel, Mr David Hope and Mr Nishit Majmudar can be classified as independent Non-Executive Directors on the Board of the Company. Mr David Hope and Mr Nishit Majmudar are employees of a Company within the Aviva group but the Board is of the view that this is not a disqualification to be classified as independent Non-Executive Directors on the Board of AVIVA NDB Insurance PLC within the criteria defined for independence in terms of the said Listing Rules and the said written clarifications. Name of the Director Tenure Mr. Sarath Wikramanayake From 03.07.2003 Mr. David Hope From September 2009 to date Mr. Harvey Chamberlain From 11.03.2009 to 14.06.2010 Mr. Lal de Mel From 28.07.03 to date Mr. Nishit Majmudar From 08.07.2010 to date (Mr. Sarath Wikramanayake ceased to be an independent Non-Executive Director since June 2010, due to his appointment at NDB Bank board.)

Rule 7.10.3 (b) In the event a Director does not qualify as 'independent' against any of the criteria set out in rule 7.10.4 of CSE rules but if the Board, taking into account all the circumstances, is of the opinion that the Director is nevertheless 'independent', the Board shall specify the criteria not met and the basis for its determination in the Annual Report Rule 7.10.3 (c) A brief resume of each Director which includes information on the nature of his/her expertise in relevant functional areas is to be published in the Annual Report Rule 7.10.3 (d) Upon appointment of a new Director to its Board, the entity shall forthwith provide to the CSE a brief resume of such Director which includes details relating to Rule 7.10.3 (a), (b) and (c) above

No such determination has been made by the Board during the year under review.

A brief resume of each Director is specified under "Director's Profile" on page 40 of the Annual Report.

The Company had 04 new appointments to the Board during the year under review and has provided a brief resume of such appointed Directors to CSE as specified.

54

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Corporate Governance (contd.)

In addition to the mandatory requirements specified above, the Company maintains a high level of Corporate Governance practices recognised and the level of compliance against such accepted principles are analysed below.

Availability of a formal schedule of matters for Board discussion

Board meetings were conducted based on a formal agenda which covers the main functions and responsibilities of the Board.

Board Accountabilities

The Board is accountable to the stakeholders that the business is conducted in an appropriate manner and the financial and non-financial targets of the Company are achieved. The Board Terms of Reference stipulates the specific duties of the Board and following are some key matters which comes under Board review and approval, Company strategy and business plan Financial reporting and controls Financial performance Shareholder dividends Policyholder dividends and surplus transfers from the Life fund Changes to the Company's capital structure Company's risk profile and risk map Regulatory compliance Constitution and performance of the Board Committees

Approval and review of the Company plan

The Board reviewed and approved the Company's 3 year strategic and business plans providing strategic direction and goals to the management.

Obtaining of independent professional advice

The Board members are permitted to obtain independent professional advice from third parties which includes the Company's external lawyers and auditors, at the expense of the Company, as deemed necessary.

Company Secretary

The Company Secretary possesses the required qualifications and expertise and advises the Board on matters concerning the Companies Act and other relevant rules, regulations and regulatory guidelines. All governance activities are coordinated by the Company Secretary on behalf of the Board and is accountable to the Board through the Chairman.

Board Appointments

Formal procedure for all Board appointments is maintained as per the Articles of Association of the Company. The Company believes that professional qualifications, business experience and personal qualities of the members of the Board is of high importance hence those factors are taken in to consideration when the decisions are made for new appointments.

Independent judgement

Executive responsibilities of the Company were shared with two Directors including the Managing Director who is directly responsible for day-to-day business operations of the Company. Non-Executive Directors do not have any business interest that could materially interfere with the exercise of their independent judgement. A register of interests is maintained by the Company Secretary which records any interest disclosed by a Director.

Re-election of members

The Articles of Association of the Company requires that 1/3rd of the Directors retire and are eligible to be re-elected by the shareholders at the Annual General Meeting. The Directors to so retire in a year shall be those who have served the longest in office since their last election. However, as between persons who were appointed Directors on the same day, those to retire shall unless they otherwise agree among themselves, be determined by lot.

Dedication of adequate time and effort for the matters of the Board

The Board members dedicate adequate time for the affairs of the Company by attending Board Meetings, Board Committee meetings and making decisions via circular resolutions. Additional meetings and discussions are held with the management whenever deemed necessary.

Board Meetings

At least 1 Board meeting was held each quarter and additional meetings were convened when necessary, and decisions were also approved through circular resolutions when deemed appropriate. During the year 2010, the Board has maintained an excellent record of attendance to the meetings and the attendance of the Directors at the Board meetings during the year is detailed under the Directors' report.

Training for new Directors

The Company does not provide formal training to Directors. The Board members are however constantly updated with relevant information pertaining to the Company, its business and regulatory and market environment.

Provision of timely and quality information

The Directors receive a comprehensive report of all Board papers and any other additional information requested by the

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

55

members of the Board, well in advance to the Board meetings. The Chairman ensures that all Directors are briefed on issues arising at Board Meetings. Board members are constantly apprised of the industry trends, market dynamics and information pertaining to same.

Executive capacity in 2010. Their remuneration is structured to link with performance and is subject to final approval of the Remuneration Committee and the Board of Directors. Compensation commitments on early termination The Remuneration Committee is empowered through the remuneration policy to determine the terms and conditions, financial package and retirement plan of the Executive Directors and such decisions are reviewed and approved by the Board of Directors. Remuneration Committee Report Remuneration Committee is appointed by the Board and functions within the agreed terms of reference. The Remuneration Committee report is given on page 74 of this Annual Report.

Financial Acumen

There were minimum of two members on the Board at any given time during the financial year under review who possessed finance qualifications and all the Directors have extensive exposure to financial and insurance businesses globally.

Directors' Responsibilities on the Financial Statements

The Directors take responsibility for preparation of the financial statements in accordance with the Sri Lanka Accounting Standards. They are also responsible for maintaining proper accounting records which are intended to disclose, with reasonable accuracy, the financial position of the Company. Some of their specific responsibilities with regard to financial statements include; · Selection of suitable accounting policies and bases, applying them consistently and making disclosure in the financial statements. Present information in a relevant, reliable and comparable manner State that the Company has complied with the applicable Sri Lanka Accounting Standards, subject to any material deviations disclosed and explained in the financial statements. After making adequate inquiries, make a declaration that the Company has adequate resources to continue as a going concern.

Chairman and Managing Director

Division of responsibilities The roles and responsibilities of the Chairman and the Managing Director are segregated and clearly defined in the Board Terms of Reference guaranteeing a balance of power and division of duties in strategic and operational decisions of the Company. The Managing Director's priority is the management of the Company in accordance with the mandate defined by the Board and is accountable for the achievement of the financial and non-financial objectives as stipulated in the Company plan. Chairman's function in the Board The Chairman is responsible for the leadership of the Board, managing of Board Meetings and the business undertaken thereat. The Chairman, together with the Company Secretary is responsible in ensuring all relevant issues are on the Board agenda and Directors receive appropriate information and documentation in a timely manner, thus facilitating the Directors to contribute at the deliberations. Appraisal of Managing Director Performance of the Managing Director is assessed by the Board. The Managing Director's financial and non-financial objectives are set at the beginning of each year by the Board in consultation with the Managing Director. Managing Director's performance is evaluated at the end of the year by the Chairman and the ratings obtained are submitted to the Remuneration Committee which in turn recommends the compensation, perquisites and allowances of the Managing Director to the Board. The Board after consideration of the recommendation takes the final decision.

· ·

·

Board Performance

The Company does not have a formal procedure for the evaluation of Board performance except for the Executive Directors.

Directors' Remuneration

Remuneration Procedure The Remuneration Committee is responsible for defining the remuneration policy of the Company. Details of the Remuneration Committee is given on page 64 of the Annual Report. Level and make up of remuneration To ensure smooth transition of leadership in the position of the Managing Director, two Directors served the Board in

56

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Corporate Governance (contd.)

Board Committees

Listing Rules of the Colombo Stock Exchange stipulate the requirement of Board Committees in order to ensure the good governance of listed companies. Given below is the detailed analysis of the level of compliance in terms of mandatory requirements of the listing rules as well as other accepted corporate governance principles.

1.

Remuneration Committee

Corporate Governance Principle (Listing Rules of CSE) Level of Compliance

Rule 7.10.5 (a) The Remuneration Committee shall comprise of a minimum of 2 independent Non-Executive Directors (in instances where an entity has only 2 Directors on its Board) or of Non-Executive Directors a majority of whom shall be independent, which ever shall be higher Rule 7.10.5 (a) Whether separate Remuneration Committee is formed or whether the Remuneration Committee of listed parent is used Rule 7.10.5 (b) The Remuneration Committee shall recommend the remuneration payable to the Executive Directors and CEO, to the Board of the Company which will make the final determination upon consideration of such recommendations. Rule 7.10.5 (a) One Non-Executive Director shall be appointed as the Chairman of the Remuneration Committee by the Board. Rule 7.10.5 (c) The Annual Report should set out the names of the Directors comprising the Remuneration Committee, contain a statement of the remuneration policy and set out the aggregate remuneration paid to Executive and Non-Executive Directors

Remuneration committee consists of three Non-Executive directors including two independent Non-Executive directors

The Company has formed a separate Remuneration Committee.

The Remuneration Committee recommends to the Board on the remuneration payable to the Managing Director based on the ratings obtained at the annual performance appraisal, and the Board after consideration of such recommendations makes the final decision.

The Chairman of the Remuneration Committee is a Non-Executive Director.

Names of the Directors of the Remuneration Committee is given on page 64 of the Annual Report. A statement of the remuneration policy is given under the Remuneration Committee report on page 74 and disclosure of remuneration paid to Directors is given on page 48 of the Annual Report.

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

57

2.

Audit and Compliance Committee

Corporate Governance Principle (Listing Rules of CSE) Level of Compliance

Rule 7.10.6 (a) The Audit Committee shall comprise of a minimum of 2 independent Non-Executive Directors (in instances where an entity has only 2 Directors on its Board) or of NonExecutive Directors a majority of whom shall be independent, which ever shall be higher Rule 7.10.6 (a) & 7.10.6 (c) Specify whether a separate Audit Committee is formed or whether the listed parent's Audit Committee is used Rule 7.10.6 (c) The names of the Directors (or persons in the parent company's committee in case of a group company) comprising the Audit Committee should be disclosed in the Annual Report Rule 7.10.6 (b) Confirm that the functions of the Audit Committee are in accordance with the rules Rule 7.10.6 (a) One Non-Executive Director shall be appointed as Chairman of the Committee by the Board of Directors Rule 7.10.6 (a) & 7.10.6 (c) the Chairman or one member of the Audit Committee should be a Member of a recognised professional accounting body Rule 7.10.6 (a) & 7.10.6 (c) Unless otherwise determined by the Audit Committee, the Chief Executive Officer and Chief Financial Officer attend the Audit Committee meetings Rule 7.10.6 (c) The Committee shall make a determination of the independence of the auditors and shall disclose the basis for such determination in the Annual Report

Audit & Compliance Committee consists of three Non-Executive Directors including two independent Non-Executive Directors.

The Company has formed a separate Audit and Compliance Committee.

Names of the members of the Audit and Compliance Committee and other information pertaining to the Committee is given on page 64 of the Annual Report.

This confirmation is mentioned in the Audit and Compliance Committee Report on page 64 of the Annual Report.

The Chairman of the Audit and Compliance Committee is an independent NonExecutive Director.

Mr. Sarath P Wikramanayake is a member of the Audit and Compliance Committee and he is a member of Institute of Chartered Accountants of Sri Lanka.

The Managing Director (CEO) and the Chief Financial Officer attended the Audit and Compliance Committee meetings held during the year under review.

The Committee determined that the external auditors of the Company are independent on the basis of the declaration made by them to the effect that they are not aware of any relationship with or interest in the Company or any of its subsidiaries that, in their professional judgement, might reasonably be thought to have a bearing on their independence within the meaning of the Code of Conduct and Ethics of the Institute of Chartered Accountants of Sri Lanka, applicable on the date of their declaration.

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Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Corporate Governance (contd.)

3. Investment Committee

on decisions, changes in policies and other changes which have an impact on the financial statements. Although it is not a mandatory regulatory requirement to have in place an Investment Committee, the Company has in place an Investment Committee appointed by the Board, as it is the Company's belief that the investment function of an insurance company is of extreme importance to have a direct overview by the Board via one of its sub committees. The investment function is directly responsible for ensuring that the Company maintains its solvency margins as required by the regulators in order to fulfill its obligations towards the policy holders and the creditors while ensuring a sufficient return for the shareholders. Scope and functions of the Investment Committee is detailed on page 64.

Relations with Stakeholders Shareholders Annual General Meeting (AGM)

Constructive use of AGM The Board of Directors encourages its shareholders to attend and actively participate at the AGM. The Chairman of the Board of Directors invites the external auditors and lawyers to be present at the AGM to answer any queries raised by shareholders. Separate resolutions for each substantially separate issue The Company proposes separate resolutions on each significant issue. Availability of Board Sub Committees to answer The Chairman of the Board of Directors arranges the Chairmen and/or members of the Board Sub-Committees to be available at the AGM to answer queries raised by shareholders. Circulation of Notice and other related documents to Shareholders The Company circulates the Notice of AGM, summary of the procedures governing voting at the AGM and the Annual Report together with any other relevant and required documents to the shareholders 15 working days prior to the AGM as per the requirements of the Companies Act and Articles of Association of the Company. Shareholders approved the Company name change via circular resolution in terms of the provisions of the Companies Act and the Articles of Association. Investors The Annual Report of the Company contains information and disclosures well exceeding the minimum disclosures required by the applicable regulations and rules. All the necessary material information which needs immediate disclosure as per the Listing Rules of the CSE has been adequately disclosed upon such information being approved by the Board of Directors. Press releases were also used to inform the public on developments and updates about the Company enabling both the existing and potential investors to make timely and fair assessment of the Company performance.

Analysis of level of compliance against other corporate governance principles.

Performance Governance The Company has implemented a framework for monitoring business performance across all levels in an effective and focused manner. This includes a well developed comprehensive structure of planning of a 3 year rolling plan approved by the Board of Directors. Based on the plan the key performance indicators (KPI) are established for each business unit with defined targets. The levels of achievement of the KPIs are reviewed on a quarterly basis by the Board and on a weekly/monthly basis by the senior management team. Aviva, as a part of the group performance governance system, has in place a comprehensive framework for regular monitoring of all its business units including AVIVA NDB Insurance in all key financial and non-financial areas. Capital adequacy, solvency and liquidity are some key areas of focus and performance is reviewed and followed up by a dedicated team from Aviva's Asia Pacific Regional Office. This Annual Report including the financial statements provides comprehensive details of the Company's performance during the year under review. External Auditors M/s. Ernst & Young Chartered Accountants functions as the external auditor of the Company. The audit and non-audit engagements are assigned and carried out under clear and separate scopes as contained in the respective engagement letters. Payments to the external auditors is reviewed and approved by the Audit and Compliance Committee and such payments made for the year under review is disclosed on page 125 of the Annual Report. Apart from this, the external auditors do not have any other relationship with or interest in the Company or its subsidiary. The Company, from time to time obtains the services and opinion of the external auditors

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Policyholders In addition to the Customer Feedback Management mentioned below, the Company is driven by customer oriented policies where any customer can directly communicate even with the Managing Director. The call centre is equipped with state of the art technology to assist any customer in any query on a 24/7 basis. Net Promoter Score (NPS) survey, which is a structured and formal customer feedback process, is carried out and results are reviewed by the management and form the basis for developing strategies to bridge the identified gaps and align the business. Net Promotor Score is an important KPI in determining the bonuses of the Senior Management of the Company. The Company has used the user friendly technology to communicate with its customers. A system to provide updates to its Life insurance policyholders with respect to their premium payments via Short Messaging Service (SMS) was successfully driven during the year. This resulted in ensuring that our valued policyholders obtaining the expected benefits from their Life insurance policies and also improving the persistency ratio of the Company which is understood to be above the industry average levels. Employees Annual Company Conference was successfully held and the Aviva Global Employee Promise survey has also been carried out. "Egoz", the Company intranet is used effectively to communicate with employees and Managing Director himself, carried out a series of discussions with the management to acquire first hand information and suggestions on improvements of service standards from employees who has direct relationship with customers on a day-to-day basis. This enabled the involving of staff in preparation of company strategies. Further information on employee engagement is discussed on page 26 to 31. Regulators Company maintains high standard of relationship with the regulators which goes beyond the standard statutory reporting. Company continued its practice in assisting the regulators in developing new regulatory standards which are in line with global developments. Company played its role as a member of the Insurance Association of Sri Lanka in providing feedback to new regulatory changes, mainly on the amendments to the Regulation of Insurance Industry Act No. 43 of 2000.

Market intermediaries The Company deals with Insurance Brokers as market intermediaries and maintained high fairness standards. Company always strives to encourage the market intermediaries to maintain similar levels of service standards as of the Company. Adequate knowledge sharing on new products has been carried out to ensure that accurate information is passed down to the end customer. Community Relationship with Community was mainly based on Company's CR activities and more details are disclosed under Corporate Responsibility in this Corporate Governance Review and also in the Sustainability Report on Page 32. All the advertisements published by the Company went through legal, compliance, product management sign offs to ensure accuracy and prevent any miscommunications. Major Transactions and material information The Company did not carry out any Major Transactions as defined in the Companies Act No. 7 of 2007, during the period under review. To ensure proper dissemination of material information, the Company in terms of CSE requirements pertaining to immediate disclosures informs CSE through the Company Secretary as soon as the same are approved by the Board of Directors.

Accountability and Audit Financial Reporting

Statutory and regulatory reporting The Annual Report and Interim Financial Statements, which are principle tools of communication with shareholders consist of the Company's financial position and the operating results with comprehensive details in excess of the statutory and regulatory requirements are published and circulated to shareholders within the required time period. The statutory accounts comply with the requirements of the Sri Lanka Accounting Standards and the requirements of the CSE and the Companies Act. In the year 2007 the Company initiated Financial Reporting Control Framework (FRCF), with the objective of eliminating material financial mis-statements which was conducted using a global system. During the year 2010, the Company covered 64 processes under the FRCF project identifying the risks/key controls in each process together with availability and adequacy of mitigating controls.

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Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Corporate Governance (contd.)

Other Reporting Copy of the Annual Report for the year 2009 has been uploaded to the Company's website for the benefit of the stakeholders. Media releases were published in leading newspapers providing financial results and other important developments of the Company. In terms of the Listing Rules of the CSE, soft copies of the financial statements were also provided to the CSE in order to publish them in the CSE website for the benefit of investors. A negative assurance audit was carried out by external auditors on the financial statements for the half year ending 30th June 2010. The negative assurance report was filed with the regulators and disseminated to the public with the half yearly financial statements. Inclusion of Directors' Report in the Annual Report This is given as Annual Report of the Board of Directors on page 44. Inclusion of a statement by Directors on their responsibility for preparation and presentation of financial statements This statement is included under Directors' Statement of Responsibility on page 84. Code of Ethics Inclusion of Management Discussion and Analysis report in the Annual Report This report is given on page 14 of this Annual Report Declaration by the Board that the business is a going concern This declaration is made under the Director's Report in page 49. Calling of a Board meeting / EGM if the net assets of the Company are less than half of its stated Capital and duty of Directors on Insolvency This is a very remote risk to the Company The Company requires all employees to maintain highest standards of integrity and honesty in performing duties. Ethics is one of the key considerations of the Company. A Code of Ethics and Professional Conduct has been adopted and made available for access for any employee by way of Standing Instructions via the intranet and sign offs from employees are obtained. Some of the requirements in the code are as follows: · · · · · Fairness, honesty and loyalty towards supporting all actions Awareness and adherence to the relevant laws Iindividual and collective contribution to the well-being of all stakeholders Avoiding conduct that is likely to reflect adversely on the Company's image Openness and public disclosure · · · · Other measures In addition to the above, there are various other measures which are taken by the Company to ensure effective internal control. Some of them are: · Structured processes in place for loss reporting, control exception reporting and compliance breach reporting. Implementation of Aviva policies as applicable to local requirements in order to mitigate risks as detailed in the Report on Enterprise Risk Management on page 65. All major IT systems implemented in the Company are subject to a Post Implementation Review. A bi-annual Corporate Governance self certification process is in place to test how well the corporate governance structure is embedded in the Company at all levels. A comprehensive Business Continuity Plan is in place and is tested for reliability. Internal audits are carried out according to an annual risk based Audit plan which is approved by the Audit and Compliance Committee.

Internal Control Maintaining a sound system of internal controls

Internal Audit Internal Audit function of the Company plays an active role in ensuring that effective system of internal controls operates within the Company. The Internal Audit function is reporting to the Audit and Compliance Committee thereby ensuring independence. Aviva has a globally benchmarked standards for planning, conducting and reporting of internal audits and provide necessary technical input to the Company's internal audits.

In addition to the above, a separate Code of Ethics and Standards of Conduct is available for the members of the sales force and they are required to make a pledge to uphold this code of ethics and standards of conduct.

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Corporate Responsibility CR is one of the important aspects of the culture of AVIVA NDB and is built upon the key elements of recognising the unrecognised, inculcating safety, rewarding excellence and inspiring human values. The Company ensures that the initiatives selected are in line with its overall CR strategy and are funded adequately to ensure their continuity over a period of time. The initiatives are selected in a formal evaluation by the Senior Management and endorsed by the Board. The Company in its new CR scope under the Aviva Group charity umbrella of "street to school", embraced activities that enable underprivileged children and young persons to have a better education and thereby an opportunity for a fulfilled self sufficient adulthood.

implemented to comply with the amendments to the rules which encapsulated the mandatory and immediate disclosure requirements with regard to related party transactions. Inland Revenue Act and related regulations and directives, guidelines issued by the Department of Inland Revenue Required taxes have been paid and PAYE taxes were deducted from employee benefits and paid to the Department of Inland Revenue. Regulation of Insurance Industry Act No. 43 of 2000 as amended and related regulations and directives, rules and guidelines issued by the Insurance Board of Sri Lanka Following certifications, returns and reports were submitted to the IBSL during the year in compliance with the statutory requirements : · · · · · · · Annual Return Quarterly Returns Quarterly Compliance Certification Monthly Compliance Certifications on advertising Actuarial abstracts for the year 2009 Reinsurance treaties Management letters certified by Auditors

Compliance Regulatory Compliance

Overall framework The Compliance function is entrusted with the GM - Legal who is an Attorney-at-law and the function is delegated to two separate teams led by Attorneys-at-Law. One team specifically overlook the compliance aspects of the sales function of the Company and also ensures the compliance with Anti Money Laundering and prevention of terrorist financing as per the relevant statutory enactments and the requirements of Financial Intelligence Unit of the Central Bank of Sri Lanka. The other team ensures the compliance of all the other statutory and regulatory requirements. While the respective departmental heads and managers are responsible for compliance of each applicable requirement, the compliance teams ensure that the best compliance practices are adhered to and maintained. The compliance team monitors and adheres to a monthly compliance sign-off process on statutory payment submissions, mandatory reporting requirements and adherence to other regulations as applicable and the sign-offs are randomly re-checked on "show me evidence" basis. Companies Act No. 7 of 2007 Relevant requirements under the Companies Act as a public quoted company, including adequate notices and disclosures are duly complied throughout the year. Listing Rules of the Colombo Stock Exchange Listing Rules of the Colombo Stock Exchange successfully complied throughout the year. New processes were

Insurance Agents who procure business for the Company are required to fulfill licensing requirements and the Company ensured that none of its tied up Agents canvass business for the Company without the license. Continuous update of data relating to recruitments and terminations of insurance agents has been complied with. National Insurance Trust Fund Act The Act established the National Insurance Trust Fund Board (NITF) which took over the administration of the Fund to meet the claims on Strike, Riot and Civil Commotion and Terrorism (SRCC & T) and the insurance companies were requested to remit the premiums collected towards the respective SRCC & T cover to the NITF and the Company has duly complied with the requirement. In terms of General insurance business, insurance companies were requested to cede 20% of each risk they reinsure with foreign reinsurance companies to NITF and the Company is now ceding the required portion of the risks that are being reinsured with foreign reinsurance companies.

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Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Corporate Governance (contd.)

Various laws related to industrial relations Laws relating to industrial relations pertaining to statutory payments such as, ETF, EPF and gratuity are paid accordingly. Resource requirements for compliance function Adequate resources are provided for the compliance function including personnel with appropriate knowledge and experience and IT infrastructure is also adequately provided. Training and knowledge enhancing of the officers involved in compliance function is adequately provided including foreign exposure. Customer feedback management Company maintains a separate team for Sales Compliance which is assigned to ensure that the sales force is compliant with the statutory requirements and ethical standards maintained by the Company. The Sales Compliance team follows an effective process on resolving customer complaints and providing them with appropriate solutions. This team is connected to all offices island wide through an IT based system. This enables speedy communication relating to complaints and investigations. Misselling and misappropriation of premiums by Agents is an industry wide customer complaint. The Company has taken strict measures against its tied up Agents who were proven guilty. In relation to the General insurance customers, ad hoc Protection of Policyholder interests The Company, in order to continue with its customer oriented and transparent operations has taken following steps with the aim of protection of policyholder interests. Insurance for Directors and Officers · The Company in alliance with the Wayamba University of Sri Lanka introduced an exclusive Financial Management Certificate course for the sales force of AVIVA NDB with the intention of giving competitive advantage as well as best quality services to the customers in the year 2009. A group of members of the sales force successfully completed this course during the year 2010. · Maintaining a panel of reinsurers with exemplary financial performance throughout the history and best terms arrived at with each renewal with the intention of providing the best possible cover at the minimum price to the customers. · Maintaining of solvency margin well in excess of the required margin in terms of the General and Long Term Insurance business and the details of solvency margins are given on page 78. · Maintenance of a separate fund in order to compensate the policyholders who were victims of misconduct of intermediaries. · Adoption of Code of Ethics and Standards of Conduct for Employees as well as the Sales Force. AVIVA NDB Insurance maintained a comprehensive IT Security Policy among various other policies which is available in the intranet. This is to be adhered by all the persons who use IT infrastructure and related services. Identifying the need of keeping the policies up to date, Company reviewed the IT security policy and made the revisions as necessary during the year under review. Information and Communication Technology The system software used for long term insurance operations is escrowed with a reputed escrow agent in UK after identifying the dependency on the system. Escrowing the source code of this system software ensures the continuance of usage of this software even at a time of a failure of the vendor. The changes and upgrades of the software is also captured in this arrangement as the vendor is required to deposit the source code with the escrow agent in regular intervals. As per the provisions of the Companies Act and upon the authorisation of the Board of Directors, the Company has effected Directors and Officers liability insurance cover to the members of the Board of AVIVA NDB and its subsidiary and the details are given under the Annual Report of Board of Directors on page 49. measures are taken where officers, executives, managers or top management get involved in dispute resolution depending on the circumstances of each matter.

Self Governance Initiatives

Capital Structure The stated capital of the Company as at 31 December 2010 is LKR 300 Mn which is in compliance with the rules of the IBSL.

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Information Security The Company believes that information is of paramount importance to its operation and need to take prudent measures in terms of information security. During the year a company wide awareness campaign was carried out followed by assessment and certifications for all employees with regard to information security. Non-Disclosure Agreements were used to protect information from being disclosed to third parties without due authorisation whenever there is a business relationship between the Company and a third party.

Enterprise Risk Management Enterprise Risk Management is a group wide concern and while each line Manager has a duty in identifying the risks in their respective areas AVIVA NDB Insurance has a dedicated team in this area. More information on the Company's enterprise risk management is covered under a separate report on "Enterprise Risk Management" on page 65. Concern for Environment and Energy conservation Company maintains several practices targeting environmental conservation and some of them are: · Change of default setting for printers to be duplex where both sides of paper being printed in order to minimise the use of papers. · · Discouraging employees to work after 5.00 pm thereby saving electricity. Waste management initiatives where plastic, paper and carbonic waste are discarded separately enabling recycling.

Financial Crime Prevention Financial Crime has been a major topic in the financial sector in the recent past and the Company foreseeing the risk has implemented Financial Crimes prevention policy in the year 2007. This policy mainly addresses three financial crimes, namely, Money Laundering, Financial Frauds and Bribery and Corruption. Whistle blowing policy of the Company took a new dimension with the introduction of "Right Call" which is a trilingual telephone service where any person can report a financial crime. This is a group wide initiative and the service is provided by an independent firm which guarantees utmost confidentiality.

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Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Information on Board Committees

Audit and Compliance Committee

Chairman Nishit Majmudar (Independent Non-Executive Director) David Hope (Independent Non-Executive Director) Sarath Wikramanayake (Non-Executive Director)

Remuneration Committee

David Hope (Independent Non-Executive Director) T R Ramachandran (Non-Executive Director) Mr. Lal De Mel (Independent Non-Executive Director) Chathuri Munaweera Available Managing Director GM- Human Resources

Investment Committee

Gehan Rajapakse (General Manager ­ Bancassurance & Partnerships) Nishit Majmudar (Independent Non-Executive Director) Sarath Wikramanayake (Non-Executive Director) Gavin D'Rosairo Available Managing Director GM ­ Finance Chief Actuary Independent Consultant Actuary Quarterly Available Available - To set policy guidelines for the management of investment portfolios. - To monitor investment performance and recommend appropriate investment strategies. - To ensure that portfolios are managed to achieve their investment objectives whilst adhering to the regulatory requirements. - To review the Company's Investment Policy and place the same before the Board for its approval thereof. - To implement the investment policy as approved by the Board. - To apprise the Board periodically on the committee's activities. - To liaise with the Insurance Regulator in connection with regulations pertaining to investments and to provide information to define the framework for the management of insurance portfolios.

Members

Secretary Agenda Invitees

Frequency of Meetings Professional Available Advice Terms of Available Reference Objectives - To review and make recommendations to the Board with regard to the approval of the Annual Report and Accounts of the Company, including of the interim financial statements. - To review and report to the Board on the effectiveness of the systems of internal controls and risk management. - To review the quality of internal and external audits and to secure the timely implementation of audit recommendations. - To ensure that the internal audit function is adequately resourced and has an appropriate standing and to also ensure co-ordination between the internal and external auditors. - To determine the fees to be paid to the external auditors' and to make recommendations to the Board with regard to their appointment and also with regard to their ceasing to hold office. - To review reports from the external auditor on significant issues arising from the audit of the Company's financial statements and on the Company's internal control environment, as well as to review regular updates on related matters. - To review the effectiveness of the corporate compliance framework with financial services and other relevant legislation. - To review the scope of each annual audit and its cost effectiveness with the external auditors and the Management. - To perform an independent supervisory role in securing corporate compliance with the Regulation of the Insurance Industry Act and related regulations as well as with other applicable statutes and regulations.

Thusara Ranasinghe Available Managing Director GM ­ Finance Chief Actuary Internal Auditor External Auditors Quarterly

Quarterly Available Available - To review and approve the remuneration policy applicable to employees of the Company. - To recommend to the Board the remuneration to be paid to Directors, including the MD, their perquisites and allowances. - To review and to approve the grant of employees' stock options (if and when applicable) subject to the approval of the Board.

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Enterprise Risk Management

Importance of Risk Management

Risk is the uncertainty which impacts the achievement of business objectives including failure to exploit opportunities. Risk is inherent to any business entity and is further enhanced by the environment in which the business operates. Enterprise Risk Management (ERM) is the process of identifying, analysing, reporting risks and planning and altering activities of an entity in order to minimise the negative effects of risk on an entity's capital and earnings while exploiting the benefits of risk. Enterprise Risk Management process expands to include not just risks associated with accidental losses, but also financial, strategic, operational, and other risks. Risk management is moving away from being a stand-alone process to a corporate wide process, inbuilt in every aspect of business operation and has become a critical success factor for growth and survival of entities. Some failures of global financial giants can be accredited to the lack of focus on ensuring the existence of the Enterprise Risk Management function which is considered the cornerstone in managing the risks of an entity. Aviva adopts its universal framework for risk management in all the business units across the globe, known as the "101" framework. The framework provides guidance to design the roles and responsibilities of risk management, reporting framework, improve and monitor the effectiveness of risk management. AVIVA NDB Risk Management framework which is in-line with Aviva group's Risk management & Internal Control Policy, defines the minimum standards for risk management. Our risk management revolves around setting risk appetite; mapping the residual risks against appetite and working towards moving the residual risks within tolerance. It is an ongoing process where standards and benchmarks are reviewed continuously so that the quality of risk management itself improves at each cycle. The amount of risk that AVIVA NDB is prepared to accept or tolerate is the "risk appetite" which is an expression of the level of risk: · To which AVIVA NDB is prepared to expose resources in order to achieve objectives; and The maximum loss AVIVA NDB is prepared to accept as a result of not achieving objectives.

·

Risk management framework of AVIVA NDB

AVIVA NDB has continuously placed much emphasis on the Management of risks since its early days and the risk management of AVIVA NDB has benefited immensely from Aviva's knowledge and experience as a giant in the global industry, and by adopting Aviva's risk management framework at AVIVA NDB.

By providing insight on the diverse universe of risks to which the Company is exposed, managers are able to control these risks to ensure they remain within risk appetite or tolerance while balancing these with potential returns to achieve the Company's strategic objectives. The Risk Management Framework (figure 1) supports this by enabling AVIVA NDB to:

Risk Analysis (Identification & Assessment)

Figure 1 ­ Aviva Risk Management Framework

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Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Enterprise Risk Management (contd.)

· Produce a comprehensive and accurate view of the risk profile at an appropriate level of materiality, to assist the decision-making process ("Risk Management Methodology"); Provide management information on material risks which lie outside of risk appetite and those which are volatile and therefore require close management and monitoring ("Insight"); and Provide assurance to stakeholders that risks are being appropriately managed ("Oversight"). continuous basis; and at process level each process owner along with the ERM unit participates in the risk identification and risk managing process in greater detail by conducting one to one discussions and through workshops. This two way approach paves the way to a comprehensive mechanism to gain insight and synchronise the knowledge and know-how of both Aviva and AVIVA NDB for an effective ERM practice. Expert judgement, outcomes of analysis and market and economy surveillance provide input to the risk identification process. The Company has categorised risks into "Level 1" risks, which broadly groups risks with common features together, and further "Level 2" risks which is a more detailed categorisation for the ease of identification. The risks that the company faces at present are classified into six "Level 1" risks and 35 "Level 2 "risks. The diagram below depicts the broad classification of risks identified for AVIVA NDB based on Aviva's Risk Model.

·

·

Risk Management Methodology

Risk identification

Risk identification at AVIVA NDB is an interactive process which uses both top-down and bottom-up approaches. This two way method uses a drill-down mechanism which allows the entity to gain insight on organisation wide risks on a

Strategic Level One

Operational

Financial

Level Two

Figure 2 ­ Aviva Risk Model

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Risk profiling and recording

Risk profiling and recording for the Company is carried out on a regular basis covering all risks as identified by the ERM Unit. The risk profiling provides the users a summarised but comprehensive understanding of the present risk situation of the Company, at the same time enables comparison of the same across periods. AVIVA NDB uses the Risk Navigator, Bubble Map and the Risk Rating Matrix as the tools of risk profiling. The Risk Navigator, also known as the Risk Register is the universal risk document which records the details of the identified risks such as risk identification number, description, inherent risk rating, residual risk rating, existing and proposed mitigating controls and control effectiveness. The Risk Register is used as the source document in carrying out risk assessments, risk reviews and compiling risk reports. The Bubble Map incorporates and depicts the rating of each level two risk based on the two dimensions of probability and impact. The Bubble Map provides an overview to the readers on visualising the key risks and their rating for the entity in a single diagram. The Risk Rating Matrix is a 4x4 matrix which is used for analysing and assessing risks to determine the inherent and residual risk rating based on the pre-defined limits for assessing the probability and impact of the identified risks. Once the inherent risks are compared with the existing controls, the risk profile is generated with the residual risk rating. Each residual risk is mapped with the agreed risk tolerance limits and is reported based on the colour coding of Red, Amber and Green known as "RAG" rating status to determine the key risks which are outside tolerance limits, reaching tolerance limits and risk within tolerance limits respectively in order to prioritise the action plans.

Who manages risk?

The ultimate responsibility of management of risks lies with the Board of Directors which delegates the responsibility to the Board Sub-Committees. At Business Unit level, the primary responsibility in managing risks lies with local policy owners. The Risk Management Committee is the main committee which overlooks the risk management function. The Board ensures sufficient resources, authority and support is provided to the Risk Management Unit and committees for effective risk management. The Risk Management Committee constitutes the members of the Management Committee and the Risk Management Unit, with the Internal Audit by invitation. The Committee meets every quarter, and takes key risk management decisions. The meeting discussion is based on the quarterly risk report and the meeting provides a platform for the members to discuss and analyse the risks, decide on actions pertaining to identified risks and to follow up on previously agreed actions. The management of risks at AVIVA NDB passes through our "three lines of defence" which are the Line Management, the Risk Management Unit and the Internal Audit function. First defence line, the line management of each business area holds the prime responsibility for the effective risk management in their operations by identifying and making response plans for each risk that the Company is exposed through their line of operations. The Enterprise Risk Management Unit - the second line of defence is responsible for inculcating the risk management methodology across the line management and provides assistance for a robust risk management capability across the lines. The third line of defence is the Internal Audit function which provides assurance on the effectiveness of the control environment.

ERM function

The Enterprise Risk Management team drives the risk management discipline and has been able to obtain the active participation of employees across the business in the risk identification and risk mitigation process. The prime duties of ERM are, · · · · · · Increase awareness and participation of risk owners in the process of risk management. Ensuring a strong "second line of defence" to absorb the flaws that surpass the first line of defence Identifying, measuring and reporting of the significant risks in collaboration of local risk owners Defining and monitoring the risk appetite for the risk categories that strengthen the reporting process Strengthening the learning process from risk incidents and improving the processes from lessons learnt Provision of risk based opinion in the process of new product development

Risk reporting and review

The senior management undertakes a review on key risks faced by the Company along with response plans on a regular basis at Business Unit level. The business process and policy owners have also been made an integral part of the risk review along with the ERM team. This has been the essence of a successful risk management environment at AVIVA NDB. The risk reporting of the Company is twofold, which constitutes the reporting of risks to the group and regional Risk Management functions as well as making sure the first line of defence at the Business Unit level are well aware of the present risk situation of the Company. The reporting aims to make sure that the controls and practices that the framework intends the Company to comply with are adhered to, and to make all the stakeholders aware of emerging risks, up or downgrading of any risks and actions in place to mitigate emerging risks.

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Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Enterprise Risk Management (contd.)

The bi-annual Managing Director's sign off on Governance to the Aviva group further strengthens the level of involvement by the ERM team within the business. The sign-off provides assurance that all key inherent risks within the business have been identified and assessed, that the business operates in a manner which conforms to the minimum standards outlined in the Risk Management Policies, that action plans are in place to rectify ineffective controls and bring associated out-of-tolerance residual risks within tolerance and that the business has a governance structure that is appropriate to oversee its risk management activities. In addition the certification assures that the business operates a delegated authority structure that is appropriate to oversee its activities. Prior to the Managing Director's bi-annual sign-off to the group, each policy owner signs-off confirming that a review of material risks and internal control measures pertaining to their respective areas of responsibility have been carried out, including reporting the occurrence of any key control exceptions. death and sickness claims exceeding, in either number or amount that assumed in the product pricing basis, and current embedded value basis. This risk is successfully mitigated by prudent assumptions made during the product development stage and by employing efficient underwriting practices. Catastrophe risk arising with multiple death claims is mitigated by purchasing adequate reinsurance cover. Persistency risk is where policyholders terminate their policies in greater numbers and or earlier than expected. Persistency has become one of the main areas receiving top management attention at AVIVA NDB. Persistency is a common concern for the Sri Lankan Insurance industry resulting in losses from unrecovered expenses and loss of future profits. Triggers for the poor persistency are, diminishing disposable income levels of the policy-holders, attitude towards the concept of insurance and possible poor selling practices and customer servicing. Proper follow-up on policies, superior customer services and informative selling processes minimises lapses of policies and thus improves persistency. The Company has ensured that appropriate reinsurance is in place for the risks underwritten. The counterparty credit risk from reinsurers is mitigated by selecting reinsures recommended by Aviva. The Management continually reviews the products in light of emerging experiences, and as a result is able to utilise opportunities to review charges or remove poor products from sale. The Expense Risk is mitigated by adequate management of acquisition and maintenance expenses, ensuring actual expenses are equal to or less than the charges taken from premiums received. This is achieved by prudent product pricing and focussed expense management. The Concentration Risk arises, when similar risks across a wide range of products, which individually taken are not material, but in aggregate create a material risk. This is managed by regular review and monitoring of aggregation risk across the business via Management Information. Strong pre-launch product approval process is in place where experts from all the areas look into the features of new products and carry out a rigorous analysis on the product, which minimises the risks that the new product will not achieve its volume targets.

What are the key risks faced by the Company?

Risks faced by AVIVA NDB are categorised into three high level risks - financial, strategic and operational. Financial risks comprise of insurance, market, credit, liquidity and capital management. Strategic risks include areas such as customer, products and markets as well as any risks to our business model arising from changes in our market and risks arising from mergers and acquisitions. Operational risks arise from inadequately controlled internal processes or systems, human error or non-compliance as well as from external events. Operational risks include business protection, reputation and regulatory risks, such as compliance.

Financial Risks

Insurance Risk

Insurance risk is one of the prime risks that the Company has to manage and the efficiency of management of which has a close relationship with the returns and the stability of the Company. Aviva sub divides Insurance risk into Life insurance, Life insurance Product Development, Unit Pricing, General insurance Underwriting, General insurance Reinsurance and General insurance Claims for the ease of management, each having been assigned a local policy owner responsible for that particular risk.

Life insurance Risk

Life insurance risk arises through its exposure to mortality and morbidity insurance and exposure to worse than anticipated operating experience on factors such as persistency levels, and management and administration expenses.

Market Risk

Market risk is the financial impact on the Company that arises due to the changes in the market variables such as interest rates, equity prices, property values, and foreign currency exchange rates. Due to the nature of our business, we see ourselves highly exposed to the market risk. Among them, interest rates and equity prices are the prime sources of market risk that our Company faces.

What we do at AVIVA NDB to mitigate Life insurance Risk.

Mortality and morbidity risk are the risks that the incidence of

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69

The asset liability mismatch which arises due to the short term nature of maturity of our investment assets in fixed income securities, when compared to the liabilities which are of longer maturities is one of the main triggers of market risk for our Company. As the local insurance industry is moving away from conventional insurance products to Investment linked products where return on investment is one of the key points of attraction for policyholders, it has become more important that we manage market risks and maximise the returns we earn on our investments.

Asset allocation limits of investment at AVIVA NDB as of 31st December were as follows.

General Insurance

5.4% 1.5% 3.3% 5.1% 8.2% 1.3%

Life Policyholders

5.3% 1.3%

What we do at AVIVA NDB to mitigate Market Risk.

The primary objective of market risk management is to optimise net of tax and net of expense returns to shareholders and policyholders within Aviva group requirements, whilst maintaining adequate liquidity to meet policyholder obligations and business requirements and also ensuring compliance with all applicable regulatory requirements. It is recognised that risk arising from changes in interest rates, equity prices, credit spreads and defaults, and foreign exchange rates is inevitable from the business that AVIVA NDB Insurance undertakes, and that a certain level of market risk is desirable to deliver benefits to both policyholders and shareholders by achieving the AVIVA NDB financial objectives. The risk tolerance limit, which is the amount of market risk that the Company is willing to take is reviewed on a periodic basis and is reported to all the stakeholders who are involved in the process of managing the market risk. The investment function of the Company is carried out by an outsourced investment manager. The Investment Committee, which is a Board Sub-Committee, overlooks the investment function as well as the monitoring of market risk. The investment policy document which sets out the overall investment strategy and the investment mandate which governs the investment function clearly define the limits for market risk parameters that the investment manager has to comply with. The Company keeps a sharp eye on the movement of market variables and the indicators of market risk such as VaR, Gap analysis, stress scenarios are reported on a periodic basis, which enable us to foresee a stress situation and take corrective action. The asset/liability management designs the optimum asset allocation, in order to maximise returns while being within risk tolerance limits set out by the governing policy. The designing of new products at AVIVA NDB places much importance on risk management, the newly launched Life insurance products of the Company gives policyholders the opportunity to decide the investment strategy of their own funds, within set parameters, and thereby balance their risks and rewards to better fit their own profile.

84.6%

83.9%

Government Securities

Corporate Bonds

Unit Trust

Equity

Money Market

General insurance Risk

General insurance risk may arise from fluctuations in the timing, frequency, severity of claims and claim settlements relative to expectations, unexpected claims arising from a single source, inadequate reinsurance protection or other risk transfer techniques. And also from risks arising from the type of products we offer, the inaccurate pricing of risks when underwritten, terms and benefits of those products and the impact of variations from assumptions on profit.

What we do at AVIVA NDB to mitigate the General insurance Risk

The Company ensures that all new business and renewals are written in accordance with AVIVA NDB policy and Aviva group guidelines. Independent underwriting business reviews are performed by consultants who are experts in the industry. This provides assurance that underwriting integrity is maintained throughout the various operating units across AVIVA NDB. Underwriters understand the types of risks that are within AVIVA NDB philosophy, those that are outside it and those that need to be treated with caution. The `Underwriting Academy' is the formal training programme where AVIVA NDB underwriters are trained on the technicalities of General Insurance underwriting. This ensures the Company possesses a team of underwriters who are technically competent to assess insurance risk. The Company ensures that products and policy wordings are within the Risk Appetite and/or are signed off by the appropriate person/s. Regular reviews and checks are conducted to ensure understanding and practice of regulatory requirements. Decision making processes and governance mechanisms are in place to ensure price integrity is maintained. Appropriate claims estimating and claims handling and authorisation processes are in place to ensure accurate reserves and pricing. Employees involved in claims management posses a high degree of functional skill and experience. Recoveries relating to claims payments are accurately recorded and pursued.

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Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Enterprise Risk Management (contd.)

AVIVA NDB manages the risk exposure by obtaining sufficient reinsurance cover. Maximum retention levels are determined and possible gaps in cover between policies issued versus reinsurance obtained is managed effectively. to compound on other risks such as legal and reputational, and the proper management of liquidity risk is vital.

Credit Risk

Credit risk is the possible financial loss to the Company due to a counter party defaulting or failing to meet their obligations. AVIVA NDB is exposed to credit risk by its investments, reinsurance assets and loans. The group Credit Policy governs the management of credit risk and provides guidelines for developing local parameters and limits for management of credit risk.

How we manage Liquidity Risk at AVIVA NDB

Due to the nature of our business and the mix of maturities of assets and liabilities, we are in a better position with regard to liquidity risk than many other financial institutions. Our assets are generally of short term maturities compared to our liabilities which mature over longer periods. However the uncertain nature of our liabilities makes it possible to incur losses due to having to sell assets at lower prices than intended to meet urgent cash needs. Proper planning and forecasting is one of the prime methods of managing liquidity risk and enables us to be prepared for a shock situation. The forecasts look into normal day as well as stress scenarios to provide a complete picture of the risk that we face. We also maintain limits of assets in higher liquid forms than others, balancing the risk and return of investing for shorter periods. The magnitude of liquidity risk is monitored through various tools and reported frequently, whilst tolerance which is the amount of liquid risk that we intend to take is reviewed periodically. The asset liability management function analyses and monitors the changes in maturity structure of our Balance Sheet to assess the impact on the liquidity risk as well as market risk.

What we do at AVIVA NDB to mitigate Credit Risk

In line with the Aviva Credit policy, the Company has set itself control limits in order to mitigate both the probability of defaults by a counterparty as well as exposure at default should such an incident take place. The measurements are estimated using expert judgement as well as statistical analysis, which again are revised to match the prevailing economic conditions. The investment manager is required to comply with single counterparty limits as well as single issue limits in all investment activity. Further, credit ratings of fixed income securities that the Company invests in are maintained at levels that correspond with the credit risk tolerance level of the Company. At the end of the period under review, the Company held 92% of its investment in Fixed Income Securities in Government Securities which are considered of zero credit risk, and 8% in Debt securities rated above BBB. Reinsurance counterparty risk is managed by choosing only those with sufficient financial strength to stand a shock situation, picked from the Aviva group approved counterparty list. The reinsurance exposures and concentrations are analysed centrally at group level, giving a global representation of the exposure.

Investment in Fixed Income Assets

0.0% 2.5% 5.5% 0.0% 0.0%

Strategic Risks

Customer Risk

At AVIVA NDB we recognise the customers are the most important stakeholders of the Company. The Customer Risk arises due to the failure to give the customer the recognition that the Company intends to, and due to failure to attract and retain customers for longer periods. The ultimate intention of management of customer risk of AVIVA NDB is to make sure procedures and controls are in place for fair treatment to customers, customer recognition, product design to suit customer groups, passing of clear information about products to customers, superior service and effective customer relationships.

What we do at AVIVA NDB to manage Customer Risk

92.0% Government Securities AAA Rated AA Rated A Rated BBB Rated Below BBB Rated or Not Rated

In order to mitigate customer risk, fair treatment of customers is made central to our corporate strategy, culture and values, and we act with integrity in our dealings with customers. Products and services that we design, market or sell (including AVIVA NDB products sold via intermediaries or third parties) are appropriately designed to truly meet the needs of targeted consumer groups. Charges are perceived as being fair and our products are considered as providing value for money relative to the benefits they offer.

Liquidity Risk

Liquidity risk is the unavailability cash or lack of access to assets that can be converted to cash in a short period of time, to meet financial obligations. Liquidity risk has a better tendency

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Consumers are provided with clear, fair and balanced information and are kept appropriately informed before, during and after the point of sale. Commission payments and other incentives lead to products being targeted to customers for whom they are likely to be suitable and, where customers receive advice, the advice is suitable. By providing continuous training to the sales force, the Company ensures that customer service is well above the industry standard and above what customers have been led to expect or should reasonably be able to expect. The Company has ensured that customers do not face unreasonable postsale barriers to change products, switch provider, submit a claim or make a complaint. At AVIVA NDB, customers' complaints are properly investigated and are handled fairly, the root causes of complaints are investigated and remedied, and customer feedback is used to design improvements to the customer experience. Our employees are trained to understand their responsibilities towards customers and remuneration and rewards policy encourages people to treat customers fairly and to win customer advocacy. Measures and controls are in place to allow senior management to monitor the above risks and track customerrelated performance.

Where insurance products are sold through business partnerships, we ensure that the partners possess sufficient financial strength and also that they have business ethics and culture that complements AVIVA NDB's practices. The partnership contracts are reviewed and renewed in order to maintain high quality distribution channel for our customers.

Strategy & Planning Risk

Strategic risk is common to any organisation regardless of the business it is in. The possibility of AVIVA NDB making inappropriate or adverse strategic choices that do not complement the overall business objectives, being unable to successfully implement selected strategies or related plans and decisions, lacking responsiveness to industry changes, failing to exploit opportunities, failing to select the optimum balance of risk and return through the alignment of business strategy and risk appetite on an enterprise-wide basis is considered as strategic risk.

What we do at AVIVA NDB to mitigate Strategic Risk.

Strategic planning at AVIVA NDB is a two way process where the top down thrust led by the Aviva group is well synchronised with the bottom up drive propelled by the functions of the Company. Strategy supports AVIVA NDB's objectives and responds appropriately to external and internal opportunities and challenges. At AVIVA NDB, we ensure that strategy is translated into successful operational plans, external risks and trends are recognised that may have an impact on our ability to deliver on the strategy. We ensure that all the stakeholders are directed towards the common objectives of the Company and our strategy is clearly communicated to the businesses and stakeholders. Plans are properly maintained to provide sufficient direction for accomplishing business objectives. We keep a keen eye on the developments at the market place that our strategies are in line with market trends and the economy. We also ensure sufficient information passes to the senior management in a timely manner so that the actual performance against agreed plans and objectives are monitored and corrective action is taken to ensure satisfactory business results.

Distribution Risk

The distribution risk arises due to the distribution model being untenable and distribution channels failing to support the strategic opportunities in the market place, failure to broaden and strengthen our direct distribution capabilities in line with strategy or meet service standards, failure to execute distribution strategy, including establishing inappropriate commission structures are the key risks in distribution.

What we do at AVIVA NDB to mitigate Distribution Risk.

The Company has ensured effective distribution channels and appropriate use of channels for products facilitating good business performance. AVIVA NDB distribution network reaches customers through 54 branches and we take every step to make sure our business practices do not fall short of business and customer expectations. The Company has an agency sales force strength of some 2600 financial advisers. All new agents are given adequate training and guidance to obtain IBSL licence in order to sell insurance products. Through extensive training AVIVA NDB is endorsing good agent sales practices and accountability for compliant practices. A separate Sales Compliance Unit headed by an Attorney-at-Law reiterates the Company's commitment for excellent sales practices.

Operational Risks

Business Protection Risk

Business protection risk is the failure to continue the business, operations, standards of operation and deliver the intended customer experience due to external or internal events that alter the usual flow of operations. The management of business protection is subdivided into information security, physical security, incident and business continuity management, and business protection skills and resources.

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AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Enterprise Risk Management (contd.)

What we do at AVIVA NDB to mitigate Business Protection Risk

Business protection at AVIVA NDB is a team based process with specialists from Information Technology, Physical Security, Health & Safety, Human Resources, Logistics and Enterprise Risk Management contributing. The Company takes steps to ensure the confidentiality, integrity, availability and safety of AVIVA NDB information and the protection of IT assets used to store, process and transmit such information. AVIVA NDB staff, premises and assets (including information and supporting technology / infrastructure) are protected against internal or external threats, either deliberate or accidental. We make sure that alternatives are available for all the resources should the business operation be disturbed due to an internal or external event. Health and safety of our employees always presides and employee safety and health is not compromised or put at risk. The strength of the business protection framework is reviewed and updated constantly through simulation exercises, staff training and awareness programmes. allowing callers to report concerns in their own language anonymously and in confidence. During the year under review we launched the interest register and the hospitality register, enabling more transparent work relationships. At AVIVA NDB we believe awareness and prevention of fraud is better than detection of them, thus we make sure every employee has sufficient knowledge of identifying and reporting of financial crime and also that they have the correct set of values and attitudes towards fraud and corruption. The controls of procedures as well as content of awareness programmes are reviewed and upgraded by policy owners and relevant heads frequently.

Regulatory Risk

The risk of a negative impact to business activities, earnings or capital, regulatory relationships or reputation as a result of failure or inability to comply fully with regulations, law, or codes applicable specifically to the Insurance industry is defined as regulatory risk.

Financial Crime Risk

The risk of failure to detect, prevent and report financial crime in respect of fraud, malpractice, corruption, money laundering and any other illegal behaviour comes under financial crime risk at AVIVA NDB Insurance. Unacceptable levels of fraud, malpractice, corruption and / or any illegal activity commissioned by an external party / parties, failing to meet requirements of regulation and legislation regarding financial crime management is considered as financial crime risk at AVIVA NDB.

What we do at AVIVA NDB to mitigate Regulatory Risk

We have been able to effectively manage the risk of changing regulations via monitoring, assessing and managing the impact of changing financial services regulation or regulatory standards. Regulatory compliance coupled with self regulation is ensured in all activities of the Company thus AVIVA NDB is not exposed to regulatory action or censure due to a breach of regulation. The Company maintains positive relationships with the financial services regulators, including meeting the requirements of action plans prescribed by the regulators. The Company, along with other leading insurance companies, is taking an active role in lobbying with the regulator for industry issues/risks which adversely impact the industry.

What we do at AVIVA NDB to mitigate Financial Crime Risk

The Financial Crime Risk Policy governs the management of financial crime, which governs internal and external fraud, money laundering, market abuse and legal and regulatory requirements regarding financial crime. Keeping in line with both group policy as well as local regulatory requirement, we have set out a vigilant procedure and control system to detect and prevent money laundering. Controls infrastructure is well established with adequate monitoring to prevent and deter any act of fraud, malpractice, corruption and / or any other illegal activity that may be undertaken by both internal and external parties. This includes policyholder fraud which is managed as part of business operations. In 2009 we launched our whistle blowing hotline, "Right Call" to report any issues relating to the Company including any illegal behaviour, malpractice, corruption or fraud. This Aviva group led initiative is driven by an independent company operating in the United States. The services are available in Singhalese, Tamil and in English 24 hours a day, 7 days a week

Going forward

Risk management of AVIVA NDB is an evolving process, improving and expanding its scope and strength to meet the increasing challenges of our environment. We will keep moving forward to be better able to increase value for shareholders, to provide safer and more attractive solutions for our customers and provide a better and even more secure workplace for our employees. Our emphasis continues to be directed towards creating greater awareness on risk management and methodology at AVIVA NDB. Commitment from senior management as well as the operational level and all staff, has ensured that employees are well aware of the strategic importance of creating a risk management culture across the Company.

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73

Audit and Compliance Committee Report

This report provides details of the role of the Audit and Compliance Committee of AVIVA NDB Insurance PLC and the responsibilities entrusted during the year under consideration. The purpose of the Committee is to assist the Board in discharging its responsibilities for the integrity of the Company's financial statements, to assess the effectiveness of the control environment and ensuring the objectivity and independence of external and internal auditors. The Committee consists of two independent and one Nonindependent Non-Executive Directors. The Chairman of the Committee Mr. Harvey Chamberlain resigned from the Board of Directors of the Company on 14 June 2010. Mr. Nishit Majmudar was appointed as the Chairman of the Committee upon resignation of Mr. Chamberlain. The membership of the Committee is as follows. Mr. Nishit Majmudar (Independent / Non-Executive Director) Chairman Mr. David Hope (Independent / Non-Executive Director) - Member Mr. Sarath Wikramanayake (Non-Independent / Non-Executive Director) - Member Mr. Sarath Wikramanayake is a member of the Institute of Chartered Accountants of Sri Lanka. The Board is satisfied that these Directors possess the required financial knowledge and skill to perform their duties on the Audit and Compliance Committee. The Committee held four formal meetings during the year under review and the Managing Director and the General Manager Finance/CFO attended these meetings as invitees. The Internal attended all four meetings, so did the External Auditors on invitation. Other members of the senior management attended as invitees when required. Apart from the formal meetings there were numerous communications between the Chairman, ACC Members and Members of the Executive Committee. The Committee recommends the quarterly financial statements, annual accounts and connected documents to the Board. It focuses on a fair presentation and disclosure, reasonability of estimates and judgmental factors and appropriateness of significant accounting policies adopted in preparation of financial statements. The Committee also reviews the annual plan of the Company's internal audit function and the Company's enterprise level risk profile. The Board receives a copy of the minutes of each meeting of the Committee. The External Auditors were given adequate access by the Committee to ensure independence and objectivity. The Audit Plan, Audit results and communications and the Management Letter issued by the External Auditors were received by the Committee. Reports on all internal audit assurances carried out during the period were tabled and reviewed by the Committee. Progress on implementation of internal audit recommendations were regularly analysed by the Committee to ensure operating of effective internal control and enhancement of the overall control environment. The effectiveness of the business Risk Management process for identifying and managing risk faced by the Company was appraised by the Committee. Quarterly Risk Assessment reports were tabled and reviewed by the Committee to ensure that the Company's Risk Profile remains current and relevant. The Committee routinely monitored the effectiveness of key controls and implementation status of future mitigation actions to manage identified risks. The Quarterly Compliance and other assurance reports pertaining to Control Exceptions, Fraud & Malpractice and Anti-Money Laundering and other significant matters were tabled and reviewed by the Committee. The Committee further appraised the action in place to control any issues identified in these reports.

Appointment of the External Auditors

The Committee has recommended to the Board that Messrs. Ernst & Young, Chartered Accountants be re-appointed as Statutory Auditors of the Company for the financial year ending 31st December 2011, subject to approval by the shareholders at the forthcoming Annual General Meeting. The Committee is satisfied that the internal controls and procedures in place for assessing and managing risks are adequately designed and operate effectively and is of the view that they provide reasonable assurance that the Company's assets are safeguarded and that the financial statements of the Company are reliable. In addition, the Committee reviews the Quarterly Regulatory Compliance Reports submitted and observes that the Company's compliance framework provides reasonable assurance that all relevant laws, rules, regulations, code of ethics and standard of conduct have been followed. The Audit & Compliance Committee has conducted its affairs in compliance with the applicable requirements specified in the Listing Rules of the Colombo Stock Exchange.

Nishit Majmudar Chairman, Audit and Compliance Committee, 10 February 2011

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AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Remuneration Committee Report

The Remuneration Committee is appointed by the Board of Directors from and amongst the Directors of the Company and comprises of three Non-Executive Directors, two of whom are classified as independent Directors in terms of the requirements of the Corporate Governance provisions stipulated in the Listing Rules of Colombo Stock Exchange. As at 31 December 2010, the Remuneration Committee comprised of the following Directors. 1. David Hope (Independent/ Non-Executive Director) Chairman of the Committee T R Ramachandran (Non-Executive Director) Committee Member Lal De Mel (Independent/ Non-Executive Director) Committee Member In determining the Remuneration Policy of the Company for each year, the Committee considers inter alia external as well as internal remuneration factors such as the economic conditions, resultant remuneration implications, results of the market salary surveys, internal remuneration principles and determiners to ensure that the Remuneration Policy of the Company is market competitive and recognises and addresses the short and long term needs of the organisation in relation to performance, talent retention and reward. The Remuneration Committee meets not less than two times a year. The decisions of the Committee are approved and or ratified as appropriate by the Board of Directors. The minutes of the Remuneration Committee are circulated and affirmed by the Board. In 2010, the Committee held two meetings in order to dispatch its businesses.

2.

3.

The Remuneration Committee is empowered to invite the Managing Director and the General Manager - Human Resources to its meetings to offer support in its discussions and considerations. The Committee is also vested with the authority to seek external independent professional advice on matters within the purview of the Committee and to invite professional advisers with relevant experience to assist in its duties and to attend meetings. Neither the Managing Director nor any other Directors are involved in Remuneration Committee meetings when determinations are made in relation to the remunerations of the respective Directors. The overall duties of the Remuneration Committee are: 1. to review and to approve the Remuneration Policy of the Company; to recommend to the Board of Directors, the remuneration to be paid to the Executive and NonExecutive Directors, their perquisites and allowances; to review and to approve the grant of employees' stock options (if and when such schemes are applicable) subject to the necessary approvals including the approval of the Board of Directors.

David Hope Chairman, Remuneration Committee 10 February 2011

2.

3.

The Remuneration Policy of the Company seeks to set out a compensation framework which allows the Company to reward superior performance and high potential, within the Company's capacity to pay. In setting its guidelines, the Remuneration Policy endeavours to be in line with the local statutory obligations and market conditions of pay as well as the best practices of the Aviva group where such practices can be localised and applied.

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Investment Committee Report

The Investment Committee of AVIVA NDB Insurance PLC is appointed by the Board of Directors of the Company and comprises 3 members of whom 2 are non-executive Directors. The functions of the Investment Committee are defined in the Board of Directors' Terms of Reference for the Investment Committee. · Ensure that the portfolios are managed to achieve their investment objectives whilst adhering to the regulatory requirements Review the Company's investment policy and place same before the Board of Directors for its approval Implement the investment policy as approved by the Board of Directors Apprise the Board of Directors periodically on the Committee's activities Liaise with the Insurance Regulator in connection with regulations pertaining to investments and provide information to define the framework for the management of insurance portfolios

· · · ·

Scope and Objectives

The Investment Committee performs a key oversight function as regards the investment operations of the Company and provides guidance to the investment managers on the investment objectives of the portfolios maintained by the business and the broad investment strategy to be adopted. The objectives of the Investment Committee include: · Set policy guidelines for the management of investment portfolios · Monitor investment performance and recommend appropriate investment strategies

The Committee has the authority to seek external professional advice on matters within the purview of the Committee and is also authorised to invite professional advisers or others with relevant experience to assist it in its duties and to attend meetings.

Members

The following members served on the Investment Committee during the year.

Member G S Rajapakse (Chairman from 31 January 2009) D S P Wikramanayake N P Majmudar (From 8 July 2010) H F Chamberlain (From 11 March 2009 to 14 June 2010) D G D'Rosairo (Secretary) From 31 January 2009 02 February 2006 8 July 2010 11 March 2009 12 May 2009 Period To To date To date To date 14 June 2010 To date

Meetings and Attendance

As defined in the Board of Director's Terms of Reference, the Investment Committee is required to meet at least 4 times during a calendar year. During 2010, the Investment Committee convened on 7 occasions with the Managing Director, the General Manager Finance and Senior Management representation from the areas of Actuarial, Risk and Investments including representatives from the outsourced investment management service provider attending the meeting on invitation by the Committee. Provided below is the members' attendance at the meetings during FY2010.

Member 26 Jan 10 G S Rajapakse (Chairman from 31 January 2009) ¸ D S P Wikramanayake ¸ N P Majmudar (From 8 July 2010) H F Chamberlain (From 11 March 2009 to 14 June 2010) ¸ 9 Feb 10 26 Mar 10 4 May 10 10 Aug 10 Attendance 9 Nov 10 16 Dec 10

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Reporting

The Investment Committee reports on its deliberations, activities, matters reviewed, recommendations made and decisions reached at every meeting of the Board of Directors of the Company.

Gehan Rajapakse Chairman, Investment Committee 10 February 2011

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AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Actuary's Report ­ Life Insurance

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Actuary's Report ­ General Insurance

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AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010. Pages 26 - 31 more on our people. Pages 32 - 37 more on Social Responsibility.

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Statement of Solvency as at 31.12.2010

The statement of Solvency for General Insurance and Long Term insurance has been prepared in accordance with the Solvency Margin (General insurance) Rules - 2004 and Solvency Margin (Long Term insurance) Rules - 2002 respectively and is in line with the formats stipulated by Insurance Board of Sri Lanka.

Long Term Insurance Business:*

Item

2010 (Rs.million)

2009 (Rs.million) 16,948 15,127 675 1,145 5% 756 1.51

1 2

3 4 5 6

Value of Admissible Assets Amount of Liabilities: 2.1 Policy Liabilities 2.2 Other Liabilities Value of Admissible Assets less Amount of Liabilities Factor Required Solvency Margin Solvency Ratio (Line 03 divided by line 05)

19,664 17,445 910 1,309 5% 872 1.50

* Includes conventional,non-unit account and guaranteed unit fund

General Insurance Business:

Item 2010 (Rs.million) 2009 (Rs.million)

1 2 3 4 5

Value of Admissible Assets Amount of Total Liabilities Available Solvency Margin (Line 01 minus Line 02) Required Solvency Margin Solvency Ratio [Line 03 divided by Line 04]

3,957 2,235 1,722 421 4.09

3,678 2,079 1,599 342 4.68

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Statement of Approved Assets as at 31.12.2010

Determined as per section 25 (1) of regulation of Insurance Industry Act No. 43 of 2000 and the Determination made by the Insurance Board of Sri Lanka in terms of the said Act.

Long Term Insurance Business:*

Item

2010 (Rs.million)

2009 (Rs.million)

1 2 3 4 5

Approved Assets maintained in Long Term Insurance Business Long Term Insurance Fund Excess in Approved Assets over Long Term Insurance Fund Excess in Approved Assets as a % of Long Term Insurance Fund Ratio Required

19,664 19,538 126 100.6% 100.0%

16,948 16,805 143 100.9% 100.0%

* includes conventional,non-unit account and guaranteed unit fund.

General Insurance Business:

Item 2010 (Rs.million) 2009 (Rs.million)

1 2 3 4 5

Approved Assets maintained in General Insurance Business Technical Reserve Excess in Approved Assets over Technical Reserve Approved Assets as a % Technical Reserve Ratio Required

3,383 1,652 1,730 204.7% 100.0%

2,831 1,489 1,342 190.1% 100.0%

Note: The Statement of Solvency and Approved Assets have been certified by the external auditors of the company

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AVIVA NDB Insurance PLC Annual Report and Accounts 2010

"Now with AVIVA NDB Pensions we can look forward to a comfortable retirement with my monthly pension. All I had to do was decide when to retire, how much I will need as a monthly pension and for how long I will need that pension for."

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

81

82

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Financial Calendar 2010

Interim Results for 2010 First Quarter Second Quarter Third Quarter Fourth Quarter Audited Financial Statements 2009 2010 Dividends 2009 ­ Interim Dividend 2009 ­ Final Dividend 2010 ­ First and Final Dividend Annual General Meetings 2009, 24th AGM 2010, 25th AGM * Approved by the Board of Directors ** Approved by the Shareholders *** Subject to approval by the Shareholders 04th May 2010 10th August 2010 09th November 2010 10th February 2011

09th February 2010 10th February 2011

23rd June 2009 * 23rd March 2010 ** 31st March 2011***

23rd March 2010 31st March 2011

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

83

Chief Executive Officer's and Chief Financial Officer's Responsibility Statement

The financial statements are prepared in compliance with the Sri Lanka Accounting Standards issued by the Institute of Chartered Accountants of Sri Lanka and the requirements of the Companies Act, No 7 of 2007 and Regulation of Insurance Industry Act No 43 of 2000. There are no departures from the prescribed Accounting Standards in their adoption. The Accounting Policies used in the preparation of the financial statements are appropriate and are consistently applied. The Board of Directors and the management of the Company accept responsibility for the integrity and objectivity of these financial statements. The estimates and judgments relating to financial statements were made on a prudent and reasonable basis, in order that the financial statements reflect in a true and fair manner, the form and substance of transactions, and reasonably present the Company's state of affairs. To ensure this, the Company has taken proper and sufficient care in installing a system of internal controls and accounting records, for safeguarding assets, and for preventing and detecting frauds as well as other irregularities, which is reviewed, evaluated and updated on an ongoing basis. Our internal auditors have conducted periodic audits to provide reasonable assurance that the established policies and procedures of the Company were consistently followed. However, there are inherent limitations that should be recognised in weighing the assurances provided by any system of internal controls and accounting. The financial statements were audited by M/s Ernst & Young Chartered Accountants, the external auditors. The Audit and Compliance Committee of the Company meets periodically with the internal auditors and the independent auditors to review the manner in which these auditors are performing their responsibilities, and to discuss auditing, internal control and financial reporting issues. To ensure complete independence, the independent auditors and the internal auditors have full and free access to the members of the Audit and Compliance Committee to discuss any matter of substance. It is also declared and confirmed that the Company has ensured compliance by the Auditor on the Guidelines for the Audit of Listed Companies where mandatory compliance is required. It is further confirmed that all the other guidelines have been compiled with.

Shah Rouf Chief Executive Officer

Leilamani Pereira Chief Financial Officer 10 February 2011

84

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Directors' Statement of Responsibilities on Financial Reporting

The following statement sets out the responsibilities of the Directors in relation to the financial statements of the Company and of its subsidiary. These differ from the responsibilities of the external Auditors, which are set out in their Report on page 85 of this Annual Report. The Companies Act No. 07 of 2007 ("the Act") requires the Directors to prepare financial statements of the Company and of its subsidiaries for each financial year comprising of : · an Income Statement, which presents a true and fair view of the income and expenditure of the Company and of its subsidiaries for the financial year under review; a Balance Sheet, which represents a true and fair view of the state of affairs of the Company and of its subsidiaries as at the end of the financial year under review, and which comply with the requirements of the Act. guided by other recommended best practices. The Directors further confirm that all financial and non ­financial requirements stipulated under the Companies Act No. 7 of 2007 pertaining to Directors' duties and responsibilities have been complied with wherever applicable. The Directors agree to the Long Term and Unit-linked insurance business provisions for the Company on the recommendation of the Chief Actuary following his annual investigation of the Life insurance business. The actuarial valuation takes into account all liabilities including contingent liabilities and is based on assumptions recommended by the Chief Actuary. The Directors have also taken reasonable steps to establish and maintain appropriate systems of internal controls to safeguard the assets of the Company, prevent and detect frauds and other irregularities. They have also ensured that proper records are maintained and that the information generated is reliable. The Directors are responsible for providing the Auditors with every opportunity to undertake whatever inspections they consider appropriate to enable them to form their opinion on the financial statements. The Directors to the best of their knowledge and belief, are satisfied that all statutory payments in relation to all relevant regulatory and statutory authorities which were due and payable by the Company and its subsidiary as at the Balance Sheet date, have been paid or where relevant provided for. The Directors are of the view that they have discharged their responsibilities as set out in this statement.

·

In preparing these financial statements the Directors are required to: · Select appropriate accounting policies and bases and apply them consistently, subject to any material departures being disclosed and explained; Make judgements and estimates that are reasonable and prudent; Ensure that applicable accounting standards have been followed.

·

·

The Directors adopt the going concern basis in preparing the financial statements. The Directors, having reviewed the business plans for Long Term and General insurance businesses for the period 2011-2013, are of the considered view that the Company and its subsidiary have adequate resources to continue in operation. The Directors are required by the Act to ensure that the Companies within the group maintain accounting records which adequately disclose with reasonable accuracy the financial position of the Company and of its subsidiary. The financial statements of the group are prepared in conformity with the requirements of the Sri Lanka Accounting Standards (SLAS), the Companies Act No. 7 of 2007, the Regulation of Insurance Industry Act No. 43 of 2000 and the Listing Rules of the Colombo Stock Exchange. In addition, the Company is in conformity with the formats and disclosures prescribed in the Statement of Recommended Practice for Insurance Contracts issued by the Institute of Chartered Accountants of Sri Lanka, which has been made mandatory by the Insurance Board of Sri Lanka with effect from 01 January 2007. The Company is also

By Order of the Board

(Ms) Chathuri Munaweera Company Secretary 10th February 2011

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

85

Independent Auditors' Report

TO THE SHAREHOLDERS OF AVIVA NDB INSURANCE PLC. Report on the Financial Statements We have audited the accompanying financial statements of AVIVA NDB Insurance PLC ("Company"), the consolidated financial statements of the Company and its subsidiary which comprise the balance sheets as at December 31, 2010, and the income statements, statements of changes in equity and cash flow statements for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Sri Lanka Accounting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Scope of Audit and Basis of Opinion Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Sri Lanka Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit. We therefore believe that our audit provides a reasonable basis for our opinion.

Opinion In our opinion, so far as appears from our examination, the Company maintained proper accounting records for the year ended December 31, 2010 and the financial statements give a true and fair view of the Company's state of affairs as at December 31, 2010 and its profit and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards. In our opinion, the consolidated financial statements give a true and fair view of the state of affairs as at December 31, 2010 and the profit and cash flows for the year then ended, in accordance with Sri Lanka Accounting Standards, of the Company and its subsidiary dealt with thereby, so far as concerns the shareholders of the Company. Report on Other Legal and Regulatory Requirements In our Opinion 1. These financial statements also comply with the requirements of Section 151 (2) and Sections 153 (2) to 153 (7) of the Companies Act No. 07 of 2007. The accounting records of AVIVA NDB Insurance PLC have also been maintained by the management in the manner required by the rules made by the Insurance Board of Sri Lanka established under the Regulation of Insurance Industry Act No 43 of 2000 so as to clearly indicate the true and fair view of the financial position of the insurer.

2.

Colombo 10th February 2011

86

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Balance Sheet

Group As at 31st December Note (Page No.) Assets Investments Investments - Unit linked Intangible assets Investment in subsidiary Property, plant and equipment Other fund assets Policy loans and other loans Deferred tax asset Reinsurance receivable Amounts due from related entities Trade receivables Other assets Cash and cash equivalents Cash and cash equivalents - Unit linked Total Assets Liabilities and Shareholders' Equity Liabilities Insurance provision - Long Term Conventional Insurance provision - Long Term Unit linked Provision for Life fund solvency Insurance provision - General Other funds Reinsurance creditors Income tax liability Other liabilities Other liabilities - Unit linked Total Liabilities Shareholders' Equity Stated capital Capital reserves Revenue reserves Total Shareholders' Equity Liabilities and Shareholders' Equity 2010 LKR '000 2009 LKR '000 2010 LKR '000 Company 2009 LKR '000

1 2 3 4 5 6 7 8 9 10 11 12

(108) (111) (113) (113) (113) (115) (115) (116) (116) (117) (117) (117)

21,381,466 5,191,335 63,856 240,562 200,041 1,726,490 96,353 698,061 888 574,069 1,088,843 416,995 467 31,679,426

17,760,977 1,346,150 86,173 237,772 190,769 1,634,964 128,158 502,704 847,034 1,132,239 544,022 30,214 24,441,176

21,378,723 5,191,335 63,856 1,000 240,562 200,041 1,726,490 96,353 698,061 1,406 574,032 1,088,793 415,843 467 31,676,962

17,757,035 1,346,150 86,173 1,000 237,772 190,769 1,634,964 128,157 502,704 1,863 846,970 1,132,147 540,566 30,214 24,436,484

13 13 14 15 16 17 18 19 20

(117) (117) (118) (118) (119) (120) (120) (120) (121)

19,316,675 5,130,753 175,000 2,201,087 200,041 204,900 53,839 1,426,437 61,049 28,769,781

16,686,639 1,361,066 175,000 1,865,820 190,769 290,298 236,573 1,040,236 15,298 21,861,699

19,316,675 5,130,753 175,000 2,201,087 200,041 204,900 53,839 1,426,141 61,049 28,769,485

16,686,639 1,361,066 175,000 1,865,820 190,769 290,298 236,238 1,039,869 15,298 21,860,997

22 23 24

(122) (122) (122)

300,000 39,916 2,569,729 2,909,645 31,679,426

300,000 39,916 2,239,561 2,579,477 24,441,176

300,000 39,916 2,567,561 2,907,477 31,676,962

300,000 39,916 2,235,571 2,575,487 24,436,484

The accounting policies and notes as set out on pages 101 to130 form an integral part of the financial statements. I certify that the financial statements have been prepared in compliance with the requirements of the Companies Act No.7 of 2007.

Leilamani Pereira Chief Financial Officer The Board of Directors is responsible for the preparation and presentation of the financial statements. Signed for and on behalf of the Board by,

T R Ramachandran Chairman Colombo 10th February 2011

Shah Rouf Managing Director

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

87

Statement of Income

Group For the year ended 31st December Note (Page No.) 2010 LKR '000 2009 LKR '000 Company 2010 2009 LKR '000 LKR '000

Revenue Gross written premium Reinsurance premium Net written premium Net change in reserves for unearned premium Net earned premium Benefits, losses and expenses Net claims and benefits Commission (net of reinsurance commission) Franchise fee Deferred acquisition cost Increase in Long Term insurance fund Other revenue Asset management fees and related income Investment income Other income Expenses Operating and administrative expenses

25 26

(122) (123)

15,186,924 10,630,728 (977,966) 9,652,762 (58,853) 9,593,909

9,654,799 7,136,118 (1,014,659) 6,121,459 (436,755) 5,684,704

15,185,557 10,630,728 (977,966) 9,652,762 (58,853) 9,593,909

9,702,796 7,136,118 (1,014,659) 6,121,459 (436,755) 5,684,704

27

(123)

(4,123,548) (835,356) (249,358) 43,801 (6,399,723)

(2,661,492) (521,390) (74,155) 41,916 (3,563,284)

(4,123,548) (835,356) (249,358) 43,801 (6,399,723)

(2,661,492) (521,390) (74,155) 41,916 (3,563,284)

28 29

(124) (124)

138 5,315,779 277,098

7,321 3,742,974 219,800

5,315,444 276,204

3,803,059 215,033

30

(124)

(2,728,981)

(1,918,854)

(2,725,775)

(1,917,671)

Profit before taxation Tax expenses Net profit for the year

31 32

(125) (125)

893,759 (293,591) 600,168

957,540 (227,015) 730,525

895,598 (293,608) 601,990

1,006,720 (219,900) 786,820

Basic earnings per share Dividend per share Final dividend paid for previous year (LKR) Interim dividend paid (LKR)

33

(127)

LKR 20.01

LKR 24.35

LKR 20.07

LKR 26.23

34 34

(127) (127)

9.00 9.00

7.00 5.50 12.50

9.00 9.00

7.00 5.50 12.50

The accounting policies and notes as set out on pages 101 to 130 form an integral part of the financial statements.

Colombo 10th February 2011

88

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Group Statement of Changes in Equity

For the year ended 31st December 2010 Capital Reserve Note (Page No) Stated capital LKR '000 Revaluation reserve LKR '000 Revenue Reserves Resilience reserve LKR '000 Retained earnings LKR '000 Total equity LKR '000

Balance as at 31st December 2008 Final dividend paid for 2008 Net profit for the year Interim dividend paid Balance as at 31st December 2009 Final dividend paid for 2009 Net profit for the year Balance as at 31st December 2010 34 (127) 34 (127) 34 (127)

300,000 300,000 300,000

39,916 39,916 39,916

289,000 289,000 289,000

1,595,036 (210,000) 730,525 (165,000) 1,950,561 (270,000) 600,168 2,280,729

2,223,952 (210,000) 730,525 (165,000) 2,579,477 (270,000) 600,168 2,909,645

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

89

Company Statement of Changes in Equity

For the year ended 31st December 2010 Capital Reserve Note (Page No) Stated capital LKR '000 Revaluation reserve LKR '000 Revenue Reserves Resilience reserve LKR '000 Retained earnings LKR '000 Total equity LKR '000

Balance as at 31st December 2008 Final dividend paid for 2008 Net profit for the year Interim dividend paid Balance as at 31st December 2009 Final dividend paid for 2009 Net profit for the year Balance as at 31st December 2010 34 (127) 34 (127) 34 (127)

300,000 300,000 300,000

39,916 39,916 39,916

289,000 289,000 289,000

1,534,751 (210,000) 786,820 (165,000) 1,946,571 (270,000) 601,990 2,278,561

2,163,667 (210,000) 786,820 (165,000) 2,575,487 (270,000) 601,990 2,907,477

90

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Cash Flow Statement

Group For the year ended 31st December 2010 LKR '000 2009 LKR '000 2010 LKR '000 Company 2009 LKR '000

Cash flows from operating activities Premiums / fees received from customers Reinsurance premium (net of commission) paid Claims and benefits paid Reinsurance receipts in respect of claims and benefits Cash paid to and on behalf of employees Interest received from policy loans and cash & cash equivalents Other operating cash payments Cash flow from operating activities (Note a) Taxes paid Policy loans granted Policy loan repayments Net cash flow from operating activities Cash flows from investing activities Purchase of liquid investments Purchase of other investments Sale of liquid investments Sale of other investments Proceeds from sale of subsidiary Investment expenses Interest received from investments Dividend received Purchase of intangible assets Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Net cash used in investing activities Cash flows from financing activities Final dividend paid for the previous year Interim dividend paid Net cash used in financing activities Increase in cash and cash equivalents (Note b) Note a : Profit before tax Amortisation of intangible assets Depreciation (Gain)/loss on disposal of fixed assets Investment expenses Interest income Dividend Income Net realised and unrealised gains Realised gain from sale of subsidiary Provision for doubtful debts Operating cashflow before working capital changes (Increase)/decrease in debtors and other assets Increase/(decrease) in creditors Increase / (decrease) in net claims provision Increase/(decrease) in Long Term insurance funds Increase/(decrease) in net unearned premium (Increase)/decrease in net deferred acquisition cost Cash flow from operating activities Note b : Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the end of the year Cash and cash equivalents at the beginning of the year

11,304,541 (874,231) (4,184,604) 257,061 (922,044) 225,766 (2,850,278) 2,956,211 (26,409) (714,074) 606,581 2,822,309

7,117,122 (800,289) (2,882,897) 248,673 (675,848) 206,698 (1,852,587) 1,360,872 (34,552) (740,608) 564,568 1,150,280

11,303,648 (874,231) (4,184,604) 257,061 (920,708) 225,598 (2,847,031) 2,959,733 (26,166) (714,074) 606,581 2,826,074

7,098,258 (800,289) (2,882,897) 248,673 (669,313) 200,220 (1,878,614) 1,316,038 (17,991) (740,608) 564,568 1,122,007

(5,915,239) (12,704,977) 2,236,243 11,908,575 (56,924) 1,843,971 98,828 (23,914) (106,284) 10,638 (2,709,083)

(3,528,874) (6,491,243) 2,277,301 5,241,477 147,770 (62,671) 1,786,164 71,610 (22,962) (63,447) 1,553 (643,322)

(5,916,438) (12,704,977) 2,236,243 11,908,575 (56,924) 1,843,709 98,828 (23,914) (106,284) 10,638 (2,710,544)

(3,501,801) (6,491,243) 2,277,301 5,241,477 147,770 (62,671) 1,786,164 71,610 (22,962) (63,447) 976 (616,826)

(270,000) (270,000) (156,774)

(210,000) (165,000) (375,000) 131,958

(270,000) (270,000) (154,470)

(210,000) (165,000) (375,000) 130,181

893,759 46,231 99,214 (6,358) 100,793 (2,932,890) (101,699) (2,281,190) (14,625) (4,196,765) 326,190 217,930 194,081 6,399,723 58,853 (43,801) 2,956,211

957,540 40,934 97,798 (953) 70,431 (2,673,671) (70,985) (969,449) (28,869) 52,427 (2,524,797) (254,477) 154,044 28,040 3,563,284 436,754 (41,976) 1,360,872

895,598 46,231 99,214 (6,358) 100,793 (2,932,555) (101,699) (2,281,190) (14,625) (4,194,591) 326,121 219,347 194,081 6,399,723 58,853 (43,801) 2,959,733

1,006,720 40,934 97,624 (951) 70,431 (2,664,768) (70,985) (969,536) (97,770) 52,427 (2,535,874) (280,035) 145,845 28,040 3,563,284 436,754 (41,976) 1,316,038

417,462 574,236 (156,774)

574,236 442,278 131,958

416,310 570,780 (154,470)

570,780 440,599 130,181

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

91

Insurance Revenue Accounts

For the year ended 31st December 2010 LKR '000 2009 LKR '000

General insurance Gross written premium

2,846,803

2,503,628

Net earned premium Net claims incurred Acquisition expenses net of reinsurance commission Operating and administrative expenses excluding non technical expenses Other technical income Net underwriting result Investment income and other income excluding other technical income Non technical expenses Profit before taxation

2,045,897 (1,619,182) (101,012) (680,498) 16,948 (337,847) 970,653 (335,270) 297,536

1,271,952 (902,653) 13,423 (463,208) 923 (79,563) 620,329 (9,230) 531,536

Key ratios - General insurance Net loss ratio Net expense ratio Net combined ratio Combined operating ratio ( COR)

79.1% 37.4% 116.5% 117.5%

71.0% 35.3% 106.3% 99.7%

Long Term insurance business Gross written premium

7,783,925

4,632,490

Net written premium (net of reinsurance premium) Investment income and other income Net claims and benefits Commission (net of reinsurance commission) and franchise fees Operating and administrative expenses Increase in Long Term insurance fund Income tax expenses Surplus transfer to shareholders' fund

7,548,012 4,604,047 (2,504,366) (939,902) (1,710,006) (6,399,723) (270,269) 327,793

4,412,752 3,396,840 (1,758,839) (567,052) (1,445,233) (3,563,284) (155,184) 320,000

92

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Industry Segment Data ­ Balance Sheet 2010

As at 31st December General Insurance LKR '000 Long Term Insurance LKR '000 Services LKR '000 Eliminations LKR '000 Group LKR '000

Assets Investments Investments - Unit linked Intangible assets Investments in subsidiaries Property, plant and equipment Other fund assets Policy loans and other loans Deferred tax asset Reinsurance receivable Amounts due from related entities Trade receivables Other assets Cash and cash equivalents Cash and cash equivalents - Unit linked Total Assets

3,671,330 63,856 1,000 240,562 200,041 261,866 68,358 606,843 901 574,032 289,770 89,929 6,068,488

17,707,393 5,191,335 1,464,624 27,995 91,218 505 799,023 325,914 467 25,608,474

2,743 37 50 1,152 3,982

(1,000) (518) (1,518)

21,381,466 5,191,335 63,856 240,562 200,041 1,726,490 96,353 698,061 888 574,069 1,088,843 416,995 467 31,679,426

Liabilities and Shareholders' Equity Liabilities Insurance provision - Long Term Conventional Insurance provision - Long Term Unit linked Provision for Life fund solvency Insurance provision - General Other funds Reinsurance creditors Income tax liability Other liabilities Other liabilities Unit linked Total Liabilities

175,000 2,201,087 200,041 129,247 2,384 453,252 3,161,011

19,316,675 5,130,753 75,653 51,455 972,889 61,049 25,608,474

814 814

(518) (518)

19,316,675 5,130,753 175,000 2,201,087 200,041 204,900 53,839 1,426,437 61,049 28,769,781

Shareholders' Equity Stated capital Capital reserves Revenue reserves Total Shareholders' Equity

300,000 39,916 2,567,561 2,907,477

-

1,000 2,168 3,168

(1,000) (1,000)

300,000 39,916 2,569,729 2,909,645

Liabilities and Shareholders' Equity

6,068,488

25,608,474

3,982

(1,518)

31,679,426

Capital expenditure

130,198

-

-

-

130,198

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

93

Industry Segment Data ­ Balance Sheet 2009

As at 31st December General Insurance LKR '000 Long Term Insurance LKR '000 Services LKR '000 Eliminations LKR '000 Group LKR '000

Assets Investments Investments - Unit linked Intangible assets Investments in subsidiaries Property, plant and equipment Other fund assets Policy loans and other loans Deferred tax asset Reinsurance receivable Amounts due from subsidiaries Trade receivables Other assets Cash and cash equivalents Cash and cash equivalents - Unit linked Total Assets

2,870,523 86,173 1,000 237,772 190,769 241,218 65,036 411,761 415 846,970 345,849 164,862 5,462,348

14,886,512 1,346,150 1,393,746 63,121 90,943 1,448 786,298 375,704 30,214 18,974,136

3,942 1 64 92 3,456 7,555

(1,000) (1,863) (2,863)

17,760,977 1,346,150 86,173 237,772 190,769 1,634,964 128,158 502,704 847,034 1,132,239 544,022 30,214 24,441,176

Liabilities and Shareholders' Equity Liabilities Insurance provision - Long Term Conventional Insurance provision - Long Term Unit linked Provision for Life fund solvency Insurance provision - General Other funds Amounts due to subsidiaries Reinsurance creditors Income tax liability Other liabilities Other liabilities Unit linked Total Liabilities

175,000 1,865,820 190,769 235,781 64,975 354,516 2,886,861

16,686,639 1,361,066 54,517 171,263 685,353 15,298 18,974,136

1,863 335 367 2,565

(1,863) (1,863)

16,686,639 1,361,066 175,000 1,865,820 190,769 290,298 236,573 1,040,236 15,298 21,861,699

Shareholders' Equity Stated capital Capital reserves Revenue reserves Total Shareholders' Equity

300,000 39,916 2,235,571 2,575,487

-

1,000 3,990 4,990

(1,000) (1,000)

300,000 39,916 2,239,561 2,579,477

Liabilities and Shareholders' Equity

5,462,348

18,974,136

7,555

(2,863)

24,441,176

Capital expenditure

86,407

-

-

-

86,407

94

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Industry Segment Data ­ Statement of Income 2010

For the year ended 31st December General Insurance LKR '000 3,033,498 Long Term Asset Insurance Management LKR '000 LKR '000 12,152,059 Services LKR '000 1,367 Eliminations LKR '000 Group LKR '000 15,186,924

Revenue

Gross written premium Reinsurance premium Net written premium Increase in net unearned premium Net earned premium

2,846,803 (742,053) 2,104,750 (58,853) 2,045,897

7,783,925 (235,913) 7,548,012 7,548,012

-

-

-

10,630,728 (977,966) 9,652,762 (58,853) 9,593,909

Benefits, losses and expenses Net claims and benefits (1,619,182) Commission (net of reinsurance commission) (76,856) Franchise fee (67,956) Deferred commission 43,801 Increase in Long Term insurance fund Other revenue Asset management fees and related income Investment income Other income Expenses Operating and administrative expenses Profit before taxation / Transfer to shareholders' fund Income tax expenses Net profit for the year / Transfer to shareholders' fund -

(2,504,366) (758,500) (181,402) (6,399,723)

-

-

-

(4,123,548) (835,356) (249,358) 43,801 (6,399,723)

931,964 55,637

4,383,480 220,567

-

138 335 894

-

138 5,315,779 277,098

(1,015,769)

(1,710,006)

-

(3,206)

-

(2,728,981)

297,536 (23,339)

598,062 (270,269)

-

(1,839) 17

-

893,759 (293,591)

274,197

327,793

-

(1,822)

-

600,168

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

95

Industry Segment Data ­ Statement of Income 2009

For the year ended 31st December General Insurance LKR '000 1,893,204 Long Term Asset Insurance Management LKR '000 LKR '000 7,809,592 33,062 Services LKR '000 5,144 Eliminations LKR '000 (86,203) Group LKR '000 9,654,799

Revenue

Gross written premium Reinsurance premium Net written premium Increase in net unearned premium Net earned premium Benefits, losses and expenses Net claims and benefits Commission (net of reinsurance commission) Franchise fee Deferred commission Increase in Long Term insurance fund Other revenue Asset management fees and related income Investment income Other income Expenses Operating and administrative expenses Profit before taxation / Transfer to shareholders' fund Income tax expenses Net profit for the year / Transfer to shareholders' fund

2,503,628 (794,921) 1,708,707 (436,755) 1,271,952

4,632,490 (219,738) 4,412,752 4,412,752

-

-

-

7,136,118 (1,014,659) 6,121,459 (436,755) 5,684,704

(902,653) 2,373 (30,866) 41,916 -

(1,758,839) (523,763) (43,289) (3,563,284)

-

-

-

(2,661,492) (521,390) (74,155) 41,916 (3,563,284)

594,448 26,804

3,208,611 188,229

24,303 8,364 395

320 452 4,372

(17,302) (68,901) -

7,321 3,742,974 219,800

(472,438)

(1,445,233)

(14,887)

(3,598)

17,302

(1,918,854)

531,536 (64,716)

475,184 (155,184)

18,175 (6,523)

1,546 (592)

(68,901) -

957,540 (227,015)

466,820

320,000

11,652

954

(68,901)

730,525

96

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Industry Segment Data ­ Cash Flow Statement 2010

For the year ended 31st December General Insurance LKR '000 3,480,884 (694,441) (1,666,137) 195,238 (249,599) 327,795 24,715 (1,133,696) 284,759 (26,166) 258,593 Long Term Insurance LKR '000 7,822,764 (179,790) (2,518,467) 61,823 (671,109) (327,795) 200,883 (1,713,335) 2,674,974 (714,074) 606,581 2,567,481 Services Eliminations LKR '000 LKR '000 893 (1,336) 168 (3,247) (3,522) (243) (3,765) Group LKR '000 11,304,541 (874,231) (4,184,604) 257,061 (922,044) 225,766 (2,850,278) 2,956,211 (26,409) (714,074) 606,581 2,822,309

Cash flows from operating activities Premiums / fees received from customers Reinsurance premiums (net of commission) paid Claims and benefits paid Reinsurance receipts in respect of claims and benefits Cash paid to and on behalf of employees Cash received from/(to) Long Term funds Interest received from policy loans and cash & cash equivalents Other operating cash payments Cash flow from operating activities Income tax / ESC paid Policy loans granted Policy loan repayments (Note a)

Net cash flow from operating activities Cash flows from investing activities Purchase of liquid investments Purchase of other investments Sale of liquid investments Sale of other investments Investment expenses Interest received from investments Dividend received Purchase of intangible assets Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Net cash used in investing activities Cash flows from financing activities Final dividend paid for the previous year Net cash used in financing activities Increase/(decrease) in cash and cash equivalents (Note b) Note a : Profit before tax Amortisation of intangible assets Depreciation (Gain)/ loss on disposal of fixed assets Investment expenses Interest income Dividend Income Net realised and unrealised gains Provision for doubtful debts Operating cashflow before working capital changes (Increase)/decrease in debtors and other assets Increase/(decrease) in creditors Increase / (decrease) in net claims provision Increase/(decrease) in Long Term insurance funds Increase/(decrease) in net unearned premium (Increase)/decrease in net deferred acquisition cost Cash flow from operating activities Note b : Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the end of the year Cash and cash equivalents at the beginning of the year

(1,047,473) (2,089,735) 1,324,883 1,580,636 (9,012) 268,251 28,484 (23,914) (106,284) 10,638 (63,526)

(4,868,965) (10,615,242) 911,360 10,327,939 (47,912) 1,575,458 70,344 (2,647,018)

1,199 262 1,461

- (5,915,239) - (12,704,977) - 2,236,243 - 11,908,575 (56,924) - 1,843,971 98,828 (23,914) (106,284) 10,638 (2,709,083)

(270,000) (270,000) (74,933)

(79,537)

(2,304)

-

(270,000) (270,000) (156,774)

297,536 46,231 99,214 (6,358) 11,409 (364,801) (28,519) (538,645) (1,252) (485,185) 312,370 (33,556) 148,283 327,795 58,853 (43,801) 284,759

598,062 89,384 (2,567,754) (73,180) (1,742,545) (13,373) (3,709,406) 13,751 252,903 45,798 6,071,928 2,674,974

(1,839) (335) (2,174) 69 (1,417) (3,522)

-

893,759 46,231 99,214 (6,358) 100,793 (2,932,890) (101,699) (2,281,190) (14,625) (4,196,765) 326,190 217,930 194,081 6,399,723 58,853 (43,801) 2,956,211

-

89,929 164,862 (74,933)

326,381 405,918 (79,537)

1,152 3,456 (2,304)

-

417,462 574,236 (156,774)

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

97

Industry Segment Data ­ Cash Flow Statement 2009

For the year ended 31st December General Insurance LKR '000 Long Term Insurance LKR '000 4,552,403 (208,745) (1,815,677) 52,511 (471,729) (320,000) 180,323 (1,263,869) 705,217 (740,608) 564,568 529,177 Asset Management LKR '000 25,997 (5,061) 5,756 (5,830) 20,862 (4,254) 16,608 Services Eliminations LKR '000 LKR '000 4,461 (1,474) 722 (990) 2,719 2,719 (11,594) 32,847 21,253 (12,307) 8,946 Group LKR '000 7,117,122 (800,289) (2,882,897) 248,673 (675,848) 206,698 (1,852,587) 1,360,872 (34,552) (740,608) 564,568 1,150,280

Cash flows from operating activities Premiums / fees received from customers 2,545,855 Reinsurance premiums (net of commission) paid (591,544) Claims and benefits paid (1,067,220) Reinsurance receipts in respect of claims and benefits 196,162 Cash paid to and on behalf of employees (197,584) Cash received from Long Term funds 320,000 Interest received from policy loans and cash & cash equivalents 19,897 Other operating cash payments (614,745) Cash flow from operating activities (Note a) Income tax / ESC paid Policy loans granted Policy loan repayments Net cash flow from operating activities Cash flows from investing activities Purchase of liquid investments Purchase of other investments Sale of liquid investments Sale of other investments Investment expenses Interest received from investments Dividend received Sale of subsidiary Purchase of intangible assets Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Net cash used in investing activities Cash flows from financing activities Final dividend paid for the previous year Interim Dividend paid Net cash used in financing activities Increase/(decrease) in cash and cash equivalents (Note b) Note a : Profit before tax Amortisation of intangible assets Depreciation Gain loss on disposal of fixed assets Investment expenses Interest income Dividend Income Net realised and unrealised gains Realised gain from sale of subsidiary Provision for doubtful debts Operating cashflow before working capital changes (Increase)/decrease in debtors and other assets Increase/(decrease) in creditors Increase/(decrease) in net claims provision Increase/(decrease) in Long Term insurance funds Increase/(decrease) in net unearned premium (Increase)/decrease in net deferred acquisition cost Cash flow from operating activities Note b : Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the end of the year Cash and cash equivalents at the beginning of the year 610,821 (17,991) 592,830

(1,214,079) (2,456,888) 1,115,647 2,030,694 (7,840) 308,495 20,403 147,770 (22,962) (63,447) 976 (141,231)

(2,287,722) (4,034,355) 1,161,654 3,210,783 (54,831) 1,477,669 51,207 (475,595)

(15,990) 2 (15,988)

(469) (469)

(10,614) 575 (10,039)

(3,528,874) (6,491,243) 2,277,301 5,241,477 (62,671) 1,786,164 71,610 147,770 (22,962) (63,447) 1,553 (643,322)

(210,000) (165,000) (375,000) 76,599 531,536 40,934 97,624 (951) 10,056 (364,095) (20,370) (121,116) (97,770) (1,950) 73,898 (118,292) (91,157) 31,594 320,000 436,754 (41,976) 610,821

53,582 475,184 60,375 (2,309,576) (50,615) (848,420) 54,377 (2,618,675) (161,743) 245,905 (3,554) 3,243,284 705,217

620 18,175 144 (2) 87 18,404 2,577 (119) 20,862

2,250 1,546 30 1,576 15 1,128 2,719

(1,093) (68,901) 68,901 22,966 (1,713) 21,253

(210,000) (165,000) (375,000) 131,958 957,540 40,934 97,798 (953) 70,431 (2,673,671) (70,985) (969,449) (28,869) 52,427 (2,524,797) (254,477) 154,044 28,040 3,563,284 436,754 (41,976) 1,360,872

164,862 88,263 76,599

405,918 352,336 53,582

1,093 473 620

3,456 1,206 2,250

(1,093) (1,093)

574,236 442,278 131,958

98

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Long Term Insurance Balance Sheet - Supplemental

As at 31st December Assets Investments Government securities Corporate debt Quoted shares Unit trusts Bank deposits 2010 LKR '000 2009 LKR '000

(Note a) (Notes b & c) (Note d)

14,988,502 1,360,000 1,107,004 226,887 25,000

17,707,393

12,498,742 1,360,000 858,672 144,098 25,000

14,886,512

Investments - Unit linked Government securities Corporate Debt - unit Linked Repurchase agreements Quoted shares

1,511,048 365,653 3,314,634

5,191,335

557,239 18,039 100,622 670,250

1,346,150

Policy loans Other loans Deferred tax asset Reinsurance receivable Amounts due from subsidiaries Other assets Cash and cash equivalents Cash and cash equivalents - Unit linked Total assets

1,416,623 48,001 27,995 91,218 505 799,023 325,914 467 326,381 25,608,474 375,704 30,214

1,309,130 84,616 63,121 90,943 1,448 786,298 405,918 18,974,136

Liabilities Insurance provision - Long Term Conventional Insurance provision - Long Term Unit linked Income tax liability Policyholders' advance payments Reinsurance creditors Agency commission payable Franchise fee payable Other liabilities Other liabilities Unit linked Total liabilities

19,316,675 5,130,753 51,455 179,771 75,653 126,505 16,366 650,247 61,049 25,608,474

16,686,639 1,361,066 171,263 153,303 54,517 108,946 5,914 417,190 15,298 18,974,136

The above Long Term Insurance Balance Sheet is to be read in conjunction with the Balance Sheet on page 86, accounting policies and notes to the financial statements on pages 99 to 130 .

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

99

Notes to the Supplemental Long Term Insurance Balance Sheet

(a) Government Securities Long Term 2010 LKR '000 Treasury bonds Treasury bills Repurchase agreements (b) Quoted Shares Long Term 2010 Number of shares Banks, Finance & Insurance Central Finance Company PLC Commercial Bank of Ceylon PLC DFCC Bank Hatton National Bank PLC Lanka Orix Leasing Company PLC Nations Trust Bank PLC Sampath Bank PLC Seylan Bank PLC Singer Finance (Lanka) PLC Union Assurance PLC (Reclassified from strategic equity to dealing equity in 2010) Cost Market value LKR '000 45,066 29,069 66,903 9,968 40,763 9,037 30,000 228,938 Number of shares 2009 Cost Market value LKR '000 15,462 43,863 17,067 46,989 21,293 25,878 12,878,037 1,247,189 863,276 14,988,502 2009 LKR '000 11,199,688 1,155,029 144,025 12,498,742

173,399 145,200 167,300 78,000 149,918 92,400 2,000,000 1,875,000

22,612 17,312 29,413 9,986 17,856 9,254 30,000 73,243

48,700 231,466 102,200 276,000 579,398 126,700 -

12,158 33,553 15,608 29,513 20,228 17,095 -

209,676 Chemical & Pharmaceutical Chemical Industries (Colombo) PLC Construction & Engineering Colombo Dockyard PLC Diversified Holdings Aitken Spence & Company PLC Hayleys PLC John Keells Holdings PLC Food & Beverages Ceylon Tobacco Co PLC Distilleries Co. of Sri Lanka PLC Nestle Lanka PLC Renuka Agri Food PLC The Lion Brewery Ceylon PLC Hotels & Travels Aitken Spence Hotel Holdings PLC Asian Hotels & Properties PLC The Fortress Resorts PLC Manufacturing ACL Cables PLC Ceylon Grain Elevators PLC Chevron Lubricants Lanka PLC Piramal Glass Co PLC Royal Ceramics Lanka PLC Tokyo Cement Co. (Lanka) PLC 116,100 7,586 7,586 95,640 8,572 8,572 375,000 46,500 273,160 18,455 6,794 43,677 68,926 152,900 235,100 69,800 125,800 15,529 26,798 22,633 18,793 83,753 544,950 126,000 10,764 17,718 28,482 178,600 220,000 207,300 2,050,000 78,000 170,000 11,716 13,498 17,499 5,075 12,023 8,843 68,654

459,744 16,335 16,335 26,301 26,301 63,713 16,042 81,511 161,266 54,280 41,824 46,277 23,286 165,667 57,601 24,444 82,045 15,199 16,434 33,064 15,990 23,782 9,350 113,819 182,600 340,000 6,900,400 270,000 157,000 25,000 1,096,400 260,000 292,900 85,800 728,300 45,900 170,500 431,160 254,740 320,000

128,155 16,995 16,995 17,141 17,141 18,473 23,142 60,488 102,103 21,429 25,727 27,821 1,639 76,616 14,476 2,278 13,873 30,627 9,426 16,533 17,069 12,570 55,598

170,552 20,160 20,160 62,348 62,348 60,818 29,283 73,944 164,045 48,100 30,828 35,607 1,639 116,174 42,272 2,363 13,431 58,066 14,015 48,195 15,181 17,955 95,346

100

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Notes to the Supplemental Long Term Insurance Balance Sheet (contd.)

(b) Quoted Shares (contd.) Long Term Number of shares 2010 Cost Market value LKR '000 Number of shares 2009 Cost Market value LKR '000

Plantations Balangoda Plantations PLC Horana Plantations PLC Kelani Valley Plantations PLC

300,000 109,600

9,642 8,198 17,840

10,920 17,525 28,445

432,000 171,000

17,050 12,869 29,919

10,368 9,063 19,431

Power and Energy Lanka IOC PLC Laugfs Gas PLC

36,900

849 849

956 956

358,100 -

10,589 10,589

6,177 6,177

Telecommunications Dialog Telekom PLC Sri Lanka Telecom PLC

1,764,730 -

43,118 43,118

20,824 20,824

2,764,730 1,019,900

67,551 36,667 104,218

20,044 46,915 66,959

Trading Brown & Company PLC

103,000

16,079 16,079 553,535

25,431 25,431 1,100,833

-

571,961

779,258

(c)

Strategic Investment - Quoted Shares Long Term Number of shares Union Assurance PLC* Serendib Land PLC 25,714 2010 Market value 15,428 15,428 Quoted shares - total Cost LKR '000 6,171 6,171 1,107,004 Number of shares 1,875,000 25,714 2009 Market value 170,156 12,857 183,013 Cost LKR '000 73,243 6,171 79,414 858,672

*The equity holding of Union Assurance PLC, which was considered a strategic investment upto 2009, has been re-classified as dealing equity in 2010, and is reported at market value as at the Balance Sheet date. (d) Unit Trusts Long Term 2010 Cost Units Eagle Gilt Edged Fund Eagle Growth Fund Eagle Income Fund Unit trusts 3,736,930 2,000,000 3,626,559 LKR '000 37,668 20,000 36,622 Market value LKR '000 37,855 151,860 37,172 226,887 2009 Cost Units 3,392,959 2,000,000 3,304,484 LKR '000 20,000 20,000 33,317 Market value LKR '000 34,710 75,220 34,168 144,098

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

101

Accounting Policies

The principal accounting policies adopted in the preparation of the financial statements are set out below: 1. GENERAL AVIVA NDB Insurance PLC is a public limited liability company incorporated and domiciled in Sri Lanka and listed on the Colombo Stock Exchange. In the report of the Directors and in the financial statements "the Company" refers to AVIVA NDB Insurance PLC as the holding company and "the Group" refers to AVIVA NDB Insurance PLC and it's subsidiary whose accounts have been consolidated therein. The Company is engaged in Life Assurance, and General insurance business. The corporate information of the Company is given on the inner back cover. The registered office and principal place of business of the Company is located at No.75, Kumaran Ratnam Road, Colombo 2. The Company's parent entity is AVIVA NDB Finance Lanka (Private) Ltd. The Company's ultimate parent entity and controlling party is Aviva International Holdings Ltd., which is incorporated in the United Kingdom. Date of Authorisation for issue The consolidated financial statements of the Group for the year ended 31 December 2010 were authorised for issue by the Directors on 10th February 2011. The notes to the financial statements on pages 108 to 130 form an integral part of the financial statements. The principal accounting policies adopted in the preparation of these financial statements are set out below. 2. 2.1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Statement of Compliance The Company and Group financial statements have been prepared in accordance with Sri Lanka Accounting Standards (SLAS), and the requirements of the Companies Act No. 7 of 2007 and the Regulation of Insurance Industry Act No. 43 of 2000 and the Listing Rules of the Colombo Stock Exchange. The formats and disclosures are in accordance with the Statement of Recommended Practice for Insurance Contracts (SORP), adopted by the Institute of Chartered Accountants of Sri Lanka (ICASL). Basis of preparation The Company and Group financial statements have been prepared under the historical cost convention unless stated otherwise. The Company Balance Sheet represents the assets, liabilities and equity of shareholders. The Group Balance Sheet includes the assets and liabilities of the Company and its' subsidiary. The Long Term insurance Balance Sheet represents the assets and liabilities of Life Policyholders. a) The company and group presents its balance sheet broadly in order of liquidity. The Company Statement of Income reflects the underwriting results of General insurance business, surplus from Long Term insurance business and the, investment and other income of General insurance and Life shareholders. The Group statement of income includes the income of the Company business and income from Trust Services. The Group income statement for 2009 includes transactions of the Asset Management business upto the point of its disposal on 11th June 2009. 2.3. Functional and presentation currency The financial statements are presented in Sri Lankan Rupees, which is the functional and presentation currency of the Company and Group, rounded to the nearest thousand. Significant accounting judgments, estimates and assumptions The preparation of the financial statements of the Company require the management to make judgments, estimates and assumptions, which may affect the amounts of income, expenditure, assets , liabilities and the contingent liabilities disclosed, at the reporting date. In the process of applying the Group's accounting policies the key assumptions made relating to the future and the sources of estimation at the reporting date together with the related judgments that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Valuation of Insurance Provision -Life insurance Contract Liabilities - Long Term & Unit linked The liability for Life insurance contracts is based on the current assumptions based on the best estimate at the time, increased with a margin for risk and adverse deviation. The main assumptions used relate to mortality, morbidity, longevity, investment returns, expenses, lapse and surrender rates and discount rates. The Group bases mortality and morbidity on standard industry Euroland mortality tables which reflect historical experiences, adjusted when appropriate to reflect the Group's unique risk exposure, product characteristics, target markets and own claims severity and frequency experiences. For those contracts that insure risk related to longevity, prudent allowance is made for expected future mortality changes. Estimates are also made as to future investment income arising from assets backing life insurance contracts. These estimates are based on current market returns.

2.4.

2.2.

102

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Accounting Policies (contd.)

Assumptions on future expenses are based on planned expense levels, adjusted for expected expense inflation if appropriate. Lapse and surrender rates are based on Group's historical experience of lapses and surrenders. Discount rates are based on current market rates. Unitised investment contract fair values are determined by reference to the values of the assets backing the liabilities, which are based on the value of the unit-linked fund. b) Valuation of Insurance Provision-General Insurance Reserve for outstanding claims including IBNR General insurance business contracts, estimates have to be made for the expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost of claims Incurred But Not Reported at the reporting date (IBNR). It can take a significant period of time before the ultimate claims cost can be established, and the cost so established could be different to the amount that has been considered on the reporting date. The ultimate cost of outstanding claims is estimated by the consultant actuaries using a range of standard actuarial claims projection techniques, such as Incurred Claims Development, Paid Claim Development and Incurred Bornheutter- Furguson methods. The main assumption underlying these techniques is that a company's past claims development experience can be used to project future claims development and the related claims costs. As such, these methods extrapolate the development of paid and incurred losses, based on the observed development of earlier years and expected loss ratios. No explicit assumptions are made regarding future rates of claims inflation. Instead, the assumptions used are those implicit in the historical claims development data on which the projections are based. Also technical reserves were not discounted, but have instead allowed for implicit prudential margin to be built up in respect of investment income. Unexpired Risk Reserve The calculation of premium liability requires a comparison between the company's held unearned premium reserve less DAC provision with actuarial estimate of the unexpired risk for the total general insurance business. The resulting premium liability is the higher of these two. In estimating the unexpired risk liability, assumptions are made on the expected ultimate loss ratio for each class of business and management expenses incurred whilst these policies remain exposed for claims. c) Retirement Benefits The liability for retirement gratuity is recognised based on the actuarial valuation carried out as at 31st December 2010, using the Projected Unit Credit method. The provision is made by way of two insurance policies d) purchased from AVIVA NDB Insurance which covers all employees attached to the Company. The actuarial valuations involve making assumptions about discount rates, future salary increases and incidence of withdrawals. Due to the complexity of the valuation, the underlying assumptions and its long term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. Details of the key assumptions used in the estimates are contained in Note 21 on page 121. Deferred tax asset / liability Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the tax losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with the future tax planning strategy. Deferred tax assets and liabilities are computed based on the reduced income tax rate of 28% announced in the recent budget proposals and the movement in the deferred tax assets and liabilities due to change in applicable rate have been charged to the income statement in the current year. Changes in Accounting Policies The accounting policies are consistent with those used in the previous year and have been consistently applied by the Group. Comparative Information Previous years figures have been re-classified wherever necessary, to conform to the current year's presentation. Basis of Consolidation The consolidated financial statements comprise of the financial statements of AVIVA NDB Insurance PLC and its wholly owned subsidiary Rainbow Trust Management Limited. The investment in NDB AVIVA Wealth Management Company was divested on 11th June 2009. Hence the results up to that point have been included in the consolidated income statements for 2009. All companies in the Group have a common financial year, which ends on 31st December. 2.8. Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date control effectively commences until the date the control effectively ceases.

2.5.

2.6.

2.7.

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

103

The financial statements of the subsidiary are prepared for the same reporting year as the Company, using consistent accounting policies. The results for the year of the fully owned subsidiary are included in the consolidated statement of income. The assets and liabilities of the subsidiary as at the balance sheet date are included in the consolidated Balance Sheet. 2.9.1. Transactions eliminated on consolidation Intra-group balances and transactions and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. 2.10. Segmental Reporting A segment is a distinguishable component of the Group engaged in providing services subject to risks and rewards that are different to those of other segments. The primary format is based on the core businesses of General Insurance, Long Term insurance,and Trust services. The Group's activities are located mainly in Sri Lanka. Consequently, the economic environment in which the Group operates is not subject to risks and returns that are significantly different on a geographical basis. Hence, disclosure by geographical region is not provided. Expenses directly identified to a particular segment are charged accordingly. Expenses that cannot be directly identified to a particular segment are allocated on bases decided by the management and applied consistently throughout the year. 2.11. Foreign Currency Transactions Transactions in foreign currencies are translated to Sri Lankan rupees at the functional currency rate of exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange prevailing at the balance sheet date. All exchange differences are taken to the statement of income. 3. 3.1. ASSETS AND THEIR BASES OF VALUATION Intangible assets Purchased computer software licenses are assessed as finite life intangible assets and are carried at cost less accumulated amortisation and any accumulated impairment in value. Computer software costs are amortised over its estimated useful life of 5 years and assessed for impairment if there is an indication that the asset may be impaired. The amortisation expense is recognised in the Statement of Income.

3.2.

Property, Plant and Equipment Property, Plant and Equipment is stated at cost or fair value less accumulated depreciation and any accumulated impairment in value. Impairment reviews take place when events or changes in circumstances indicate that the carrying value may not be recoverable. Items of Property, Plant and Equipment are derecognised upon replacement, disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognising of the asset is included in the income statement in the year the asset is derecognised.

3.2.1. Cost All items of Property, Plant and Equipment are initially recorded at cost. Such costs include the cost of replacing part of the property, plant and equipment if recognition criteria are met. Where items of Property, Plant and Equipment are subsequently revalued, the entire class of such assets is revalued at fair value. 3.2.2. Revaluation The Group has adopted a policy of revaluing the assets held at valuation every five years. When an asset is revalued, any increase in the carrying amount is credited directly to a Revaluation Reserve, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in the income statement, in which case the increase is recognised in the income statement. Any revaluation deficit that offsets a previous surplus in the same asset is directly offset against the surplus in the revaluation reserve and any excess recognised as an expense. On disposal, any revaluation reserve relating to the asset sold is transferred to retained earnings. Revaluation is performed on freehold land and buildings by professionally qualified valuers. 3.3. Depreciation Provision for depreciation is calculated by using a straightline method on the cost or valuation of all Property, Plant and Equipment, other than freehold land, in order to write off such amounts over the estimated useful economic life of such assets. The estimated useful lives of assets are as follows: No. of Years Plant and machinery 5 Main frames / mini computers 5 Personal computers and other computer equipment 3 - 5 Equipment and furniture 5 Motor vehicles 4 Full depreciation is provided in the month of purchase and no depreciation is provided in the month of disposal.

104

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Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Accounting Policies (contd.)

The assets' residual values, useful lives and method of depreciation are reviewed and adjusted if appropriate at each financial year end. 3.4. Operating Leases Leases, where the lessor effectively retains substantially all of the risks and benefits of ownership over the term of the lease, are classified as operating leases. Lease payments are recognised as an expense in the income statement on a straight-line basis over the term of the lease. 3.5. Investments 3.5.1 Investment in Subsidiaries In the Company's financial statements, investments in subsidiaries are treated as a long term investment and stated at cost. Provision for impairment is made when in the opinion of the Directors there has been a decline other than temporary in the carrying amount of the investment. 3.5.2 Shareholder Fund and Long Term Insurance Fund Investments. 3.5.2.1. Initial recognition The Group's fund investments include Government securities, debt instruments, equity shares and unit trusts. Fund investments are initially recognised at cost, being the consideration paid to acquire the investment and any directly attributable transaction costs. 3.5.2.2. Subsequent Measurement Subsequent measurement of each class of investment is as follows. 3.5.2.3. Government Securities Investments in Government securities such as treasury bills, treasury bonds and repurchase agreements are stated at cost and interest accrued up to year end is shown under other receivables. 3.5.2.4. Quoted Shares and Unit Trusts Quoted shares and unit trusts are stated at market value on the Balance Sheet except for strategic investments which are stated at cost. Gains or losses due to changes in market value are recognised in the statement of income. Provision is made for any permanent diminution in value of strategic investments. 3.5.2.5. Debt Instruments Debt instruments are held on a long term basis and are stated at cost and interest accrued up to year end, which is shown under other receivables. Provision for diminution in value is made when there has been a decline, other than temporary in the value of the investments. 3.5.2.6. Unit-linked Investments Unit linked investments are stated at market value with gains or losses due to changes in market value recognised in the Income Statement. 3.5.2.7. Other Fund Investments Other fund investments include monies that are held for the benefit of persons associated with the company, namely the Agents Superannuation Fund, Scholarship Fund and the Claims Fund. Other fund investments are stated at market value. Movements in the market values of the investments held under these funds are charged / credited to the respective funds. 3.6. Reinsurance Receivable The Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance companies. Recoverable amounts are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contract. Reinsurance is recorded gross in the consolidated balance sheet unless a right to offset exists. If a reinsurance asset is impaired, the Group reduces the carrying amount accordingly and recognises a loss in the statement of income. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after the initial recognition of the reinsurance asset, that the company may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amount that the company will receive from the reinsurer. Reinsurance assets are de-recognised when the contractual rights are extinguished or expire or the contract is transferred to another party. 3.7. Trade and Other Receivables Trade and other receivables are stated at their estimated realisable value. Collectability of premiums and other debtors is reviewed on an ongoing basis. Debts which are uncollectible are written off, while adequate provision is made for any long outstanding receivables. Other Assets and Receivables Other assets and receivables are stated at their net realisable value. Loans Loans with fixed maturities including policy loans, staff loans and agents loans are recognised when cash is advanced to borrowers. Loans are carried at the unpaid principal capital balances with interest accrued up year end.

3.8.

3.9.

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3.10. Impairment of assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the group makes an estimate of the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash generating unit's fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognised in the income statement, except that, impairment losses in respect of property, plant and equipment are recognised against the revaluation reserve to the extent that it reverses a previous revaluation surplus. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. Previously recognised impairment losses are reversed only if there has been an increase in the recoverable amount of the asset. Such increase is recognised to the extent of the carrying amount had no impairment losses been recognised previously. 3.11. Cash and Cash Equivalents For the purpose of the Cash Flow Statement cash and cash equivalents comprise cash in hand, deposits held at call with banks and other demand deposits net of book overdraft. In the Balance sheet book overdrafts are included under liabilities. 4. LIABILITIES AND PROVISIONS All known liabilities have been accounted for in preparing the financial statements. Interest Bearing Borrowings Interest bearing borrowings are recognised at cost. Provision for Taxation The provision for income tax is based on the elements of income and expenditure as reported in the Financial Statements and computed in accordance with the provisions of the relevant tax legislations. Income tax relating to items recognised directly in equity is recognised in equity and not in the income statement. 4.3. Deferred Taxation Deferred tax is provided using the Liability Method on temporary differences at the balance sheet date between

the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilised. The carrying amount of deferred tax assets is reviewed at each Balance Sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each Balance Sheet date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the year when the asset is realised or liability is settled, based on the tax rates and tax laws that have been enacted or substantively enacted as at the Balance Sheet date. Income tax relating to items recognised directly in equity is recognised in equity. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. 4.4. Trade and other payables Trade and other payables are stated at cost. Provisions (excluding insurance contracts) Provisions are made for all obligations existing as at the Balance Sheet date when it is probable that such an obligation will result in an outflow of resources and a reliable estimate can be made of the quantum of the outflow. All contingent liabilities are disclosed as a note to the financial statements unless the outflow of resources is remote. Contingent assets are disclosed, where the inflow of economic benefit is probable. 4.6. Retirement Benefits 4.6.1. Defined Benefit Plans The Projected Unit Credit method (PUC) is used for the actuarial valuation of the gratuity liability. Under the PUC method, projected accrued benefits are calculated in

4.5.

4.1.

4.2.

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Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Accounting Policies (contd.)

respect of each benefit that will accrue for all active members covered under the insurance policy as at end of the year. The projected accrued benefit is based on the accrual formula as per policy and the period of service as at end of the year, subject to members' final compensation projected to the age at which the employee is assumed to leave active service. This liability is fully funded through insurance policies obtained from the Company. The policy liability is the actuarial present value of the projected accrued benefits as at 31st December. However under the Payment of Gratuity Act, No. 12 of 1983, the liability to an employee arises only on completion of five years of continued service. 4.6.2. Defined Contribution Plans The Company and employees contribute to the Provident Fund in terms of the Employees' Provident Fund Act, No. 15 of 1958 as amended. Contributions in respect of permanent employees are made to a private fund approved by the Commissioner of Labour. Contributions in respect of contractual employees are remitted to the Central Bank of Sri Lanka. The Company also contributes to the Employees Trust Fund in terms of the Employees Trust Fund Act, No. 46 of 1980 as amended. Obligations for contributions to provident and trust funds covering all employees are recognised as an expense in the Statement of Income as incurred. 4.7. Dividends Interim dividends and final dividends paid are recognised in equity in the period in which they are paid. GENERAL INSURANCE BUSINESS Gross Written Premium Premium is generally recognised as written upon inception of the policy. Upon inception of the contract, premiums are recorded as written and are earned primarily on a pro-rata basis over the term of the related policy coverage. However for those contracts for which the period of risk differs significantly from the contract period, premiums are earned over the period of risk in proportion to the amount of insurance protection provided. Reinsurance Premium Reinsurance premium expense is accounted for in the same accounting period as the gross written premium to which it relates or in accordance with the pattern of reinsurance services received. Unearned Premium Unearned premium is the portion of gross written premium and reinsurance premium written in the current year in respect of risk related to subsequent periods. Unearned premium is calculated on the 24th basis in accordance with the Rules made by the Insurance Board of Sri Lanka under the Regulation of Insurance Industry Act, No. 43 of 2000. 5.4. Unexpired Risks Provision is made where appropriate for the estimated amount required over and above unearned premium to meet future claims and related expenses on the business in force as at 31st December. Deferred Acquisition Expenses Deferred acquisition expenses represent commission and franchise fees which vary with and are directly related to the production of business. Commission expenses are deferred and charged over the period in which the related premiums are earned, on 24ths basis. Claims Claims incurred include provisions for the estimated cost of claims and related handling expenses in respect of incidents up to 31st December. Claims outstanding are assessed by reviewing the individual claim files and estimating changes in the ultimate cost of settling claims. The provision in respect of claims Incurred But Not Reported (IBNR) is actuarially valued to ensure a more realistic estimation of the future liability based on past experience and trends. Actuarial valuations are performed on an annual basis. Whilst the Directors consider that the provision for claims related reinsurance recoveries are fairly stated on the basis of information currently available, the ultimate liability will vary as a result of subsequent information and events. This may result in adjustments to the amounts provided. Such adjustments are reflected in the financial statements for that period. The methods used, and the estimates made, are reviewed regularly. 6. 6.1. LONG TERM INSURANCE Gross Written Premium Premium is accounted as and when cash is received and in the same period as the policy liabilities are created. For single premium contracts, premiums are recorded as income when received with any excess profit deferred and recognised as income in a constant relationship to the insurance in force, for annuities and the amount of expected benefit payments. Reinsurance Premium Reinsurance premium expense is accrued on active policies on a monthly basis. Benefits, Losses and Expenses Expenses relate to the acquisition and maintenance of Long Term insurance business. Claims by death or maturity are

5.5.

5.6.

5. 5.1.

5.2.

6.2.

5.3.

6.3.

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

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charged against revenue on notification of death or on expiry of the term. Claims payable includes direct cost of settlement. Interim payments and surrenders are accounted for at the time of settlement. 6.4. Actuarial Valuation for Long term Insurance Provision The Directors determine the Long term and unit-linked insurance business provisions for the Company on the recommendation of the Chief Actuary, following his annual investigation of the Life insurance business. The actuarial valuation takes into account all liabilities including contingent liabilities and is based on assumptions recommended by the Reporting Actuary.

9. 9.1.

INVESTMENT INCOME Interest Income and dividend income Interest income is recognised in the financial statements on an accrual basis. Interest income from Government Securities is grossed up for withholding tax deducted at source. Dividend income is accrued on declaration. Withholding tax grossed up in excess of the tax charge for the year is written off to the Income Statement in the same year. This can be written back at any point where the tax charge is greater than the withholding tax paid for the year.

9.2.

6.4.1. Life insurance Contract Liabilities Life insurance liabilities are recognised when the contracts are entered into and premiums are charged. These liabilities are calculated via the net premium method for protection products, the unit fund plus sterling reserve method for Unit-linked products and a modified gross premium method for conventional products. For the net premium method the liability is calculated as the discounted value of the future benefits that are directly related to the contract, less the discounted value of the theoretical premiums that would be required to meet those future benefits based on the valuation assumptions.

Realised / unrealised gains Total net capital gains / (losses) arising on realisation and movements in market value of investments on an aggregate portfolio basis are credited / (charged) to the Statement of Income. OTHER INCOME Other income is recognised on an accrual basis. EXPENDITURE RECOGNITION Expenses are recognised in the income statement on the basis of a direct association between the cost incurred and the earning of specific items of income. All expenditure incurred in the running of the business and in maintaining the property, plant and equipment in a state of efficiency has been charged to the income statement. EFFECT OF SRI LANKA ACCOUNTING STANDARDS (SLAS) ISSUED BUT NOT YET EFFECTIVE The following standards have been issued by the Institute of Chartered Accountants of Sri Lanka. · Sri Lanka Accounting Standard 44 - Financial Instruments; Presentation (SLAS 44) · Sri Lanka Accounting Standard 45 - Financial Instruments; Recognition and Measurement (SLAS 45) · Sri Lanka Accounting Standard 39 - Share Based Payments (SLAS 39) The effective date of SLAS 44, 45 and 39 was changed during the year to be effective for financial periods beginning on or after 01 January 2012. These three standards have been amended and forms a part of the new set of financial reporting standards to be adopted as mentioned below. Following the convergence of Sri Lanka Accounting Standards with the International Financial Reporting Standards, the Council of the Institute of Chartered Accountants of Sri Lanka has adopted a new set of financial reporting standards that would apply for financial periods beginning on or after 01 January 2012. The application of these financial reporting standards is substantially different to the prevailing standards.

10.

11.

12. For the sterling reserve method all contract-related cash flows are projected using best estimate assumptions (but with valuation claim rates) and additional liabilities are set up in the event that contracts are not self-financing. For the modified gross premium method the investment account is the starting point and in addition to that a liability may be held on account of future cash flows shortfalls. This second component is calculated exactly as per the sterling reserve above. 7. 7.1. ASSET MANAGEMENT Asset Management Fees Asset management fees consist of portfolio management fees in respect of corporate and individual clients and fund management fees arising from unit trust funds. Asset management fees are based on a contractual fee arrangement applied to assets under management and recognised as earned when the service has been provided. Performance fee is accounted for on a cash basis. TRUST MANAGEMENT SERVICES Trust Management Fee and Service Charges Trust management fees and service charges are recognised on an accrual basis.

8. 8.1.

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Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Notes to the Financial Statements

1 Investments Group 2010 LKR '000 Government securities Bank deposits Corporate debt Quoted shares Unit trusts (Note 1.1) (Note 1.2) (Note 1.3 & 1.4) (Note 1.5) 18,041,833 25,000 1,459,556 1,581,238 273,839 21,381,466 2009 LKR '000 14,902,105 25,000 1,456,964 1,140,823 236,085 17,760,977 2010 LKR '000 18,039,090 25,000 1,459,556 1,581,238 273,839 21,378,723 Company 2009 LKR '000 14,898,163 25,000 1,456,964 1,140,823 236,085 17,757,035

Group 1.1 Government securities 2010 LKR '000 14,754,168 1,877,925 1,409,740 18,041,833 1.2 Corporate debts - Group / Company 1.2.1 Quoted Debentures 2010 Cost 2009 LKR '000 12,619,680 1,619,536 662,889 14,902,105 2010 LKR '000 14,754,168 1,877,925 1,406,997 18,039,090

Company 2009 LKR '000 12,619,680 1,619,536 658,947 14,898,163

Treasury bonds Treasury bills Repurchase agreements

No. of debentures

Date of maturity

Market Coupon value Rate LKR '000 LKR '000 %

300,000 100,000 100,000 425,000 500,000 300,000 100,000 100,000 458,744 542,219 14.00 13.75 10.92 21.00 16.75

No. of debentures

2009 Cost Market Coupon value Rate LKR '000 LKR '000 %

300,000 100,000 100,000 425,000 500,000 300,000 100,000 100,000 458,744 542,219 14.00 13.75 20.41 21.00 16.75

Development Finance Corporation of Ceylon Development Finance Corporation of Ceylon Development Finance Corporation of Ceylon Nations Trust Bank PLC Hatton National Bank PLC

300,000 100,000 100,000 4,250,000 5,000,000

26/09/2016 26/09/2011 26/09/2011 19/08/2013 31/07/2022

300,000 100,000 100,000 4,250,000 5,000,000

1,425,000 1,500,963

1,425,000 1,500,963

1.2.2 Commercial Paper Repurchase Agreements

Nations Trust Bank PLC

- 01/07/2011

34,556 34,556

34,556 34,556

8.25

-

31,964 31,964

31,964 31,964

8.25

Total

1,459,556

1,456,964

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

109

1.3

Quoted Shares Group No. of shares Market value LKR '000 LKR '000 2010 Cost No. of shares 2009 Cost Market value LKR '000 No. of shares 2010 Cost Company Market value LKR '000 LKR '000 No. of shares 2009 Cost Market value LKR '000

Banks, Finance & Insurance Central Finance Company PLC Commercial Bank of Ceylon PLC DFCC Bank Hatton National Bank PLC Lanka Orix Leasing Company PLC National Development Bank PLC Nations Trust Bank PLC Sampath Bank PLC Seylan Bank PLC Singer Finance (Lanka) PLC Union Assurance PLC (Reclassified from strategic equity to dealing equity in 2010)

173,399 145,200 167,300 78,000 9,000 149,918 92,400 2,000,000 5,625,000

22,612 17,312 29,413 9,986 1,854 17,856 9,254 30,000 219,729

45,066 29,069 66,903 9,968 3,146 40,763 9,037 30,000 686,813

56,200 270,686 120,800 309,900 9,000 675,398 144,700 -

13,697 39,102 18,470 33,846 1,854 23,271 19,654 -

17,844 51,295 173,399 20,174 145,200 52,760 167,300 78,000 1,854 9,000 24,821 29,555 149,918 92,400 - 2,000,000 - 5,625,000

22,612 17,312 29,413 9,986 1,854 17,856 9,254 30,000 219,729

45,066 29,069 66,903 9,968 3,146 40,763 9,037 30,000 686,813

56,200 270,686 120,800 309,900 9,000 675,398 144,700 -

13,697 39,102 18,470 33,846 1,854 23,271 19,654 -

17,844 51,295 20,174 52,760 1,854 24,821 29,555 -

358,016 Chemicals and Pharmaceuticals Chemical Industries (Colombo) PLC

920,765

149,894

198,303

358,016

920,765

149,894 198,303

116,100

7,586 7,586

16,335 16,335

357,300

19,047 19,047

22,510 22,510

116,100

7,586 7,586

16,335 16,335

357,300

19,047 19,047

22,510 22,510

Construction and Engineering Colombo Dockyard PLC

95,640

8,572 8,572

26,301 26,301

287,615

20,341 20,341

70,394 70,394

95,640

8,572 8,572

26,301 26,301

287,615

20,341 20,341

70,394 70,394

Diversified Holdings Aitken Spence & Company PLC Hayleys PLC John Keells Holdings PLC.

375,000 46,500 273,160

18,455 6,794 43,677 68,926

63,713 16,043 81,511 161,267

53,000 198,600 501,579

21,936 26,814 69,775 118,525

70,225 34,110 86,021 190,356

375,000 46,500 273,160

18,455 6,794 43,677 68,926

63,713 16,043 81,511 161,267

53,000 198,600 501,579

21,936 26,814 69,775

70,225 34,110 86,021

118,525 190,356

Food and Beverages Ceylon Tobacco Co PLC Distilleries Co. of Sri Lanka PLC Nestle Lanka PLC Renuka Agri Food PLC The Lion Brewery Ceylon PLC

152,900 235,100 69,800 125,800

15,529 26,798 22,633 18,793 83,753

54,280 41,824 46,277 23,286 165,667

300,100 338,300 99,200 884,900 -

24,698 29,799 32,323 1,991 88,811

55,519 35,606 41,168 1,991 134,284

152,900 235,100 69,800 125,800

15,529 26,798 22,633 18,793 83,753

54,280 41,824 46,277 23,286 165,667

300,100 338,300 99,200 884,900 -

24,698 29,799 32,323 1,991 -

55,519 35,606 41,168 1,991 -

88,811 134,284

Hotels and Travels Aitken Spence Hotel Holdings PLC Asian Hotels & Properties PLC The Fortress Resorts PLC

544,950 126,000 -

10,764 17,718 28,482

57,601 180,700 24,444 25,000 - 1,281,400 82,045

17,326 2,278 16,223 35,827

48,653 2,363 15,697 66,713

544,950 126,000 -

10,764 17,718 28,482

57,601 180,700 24,444 25,000 - 1,281,400 82,045

17,326 2,278 16,223 35,827

48,653 2,363 15,697 66,713

Manufacturing ACL Cables PLC Ceylon Grain Elevators PLC Chevron Lubricants Lanka PLC Piramal Glass Ceylon PLC Royal Ceramics Lanka PLC Tokyo Cement Co. (Lanka) PLC

178,600 220,000 207,300 2,050,000 78,000 170,000

11,716 13,499 17,499 5,075 12,023 8,843 68,655

15,198 215,400 16,434 33,064 389,700 15,990 8,100,400 23,782 313,500 9,350 113,818

11,279 19,290 19,961 14,589 65,119

16,532 178,600 - 220,000 55,240 207,300 17,821 2,050,000 20,848 78,000 - 170,000 110,441

11,716 13,499 17,499 5,075 12,023 8,843 68,655

15,198 215,400 16,434 33,064 389,700 15,990 8,100,400 23,782 313,500 9,350 113,818

11,279 19,290 19,961 14,589 -

16,532 55,240 17,821 20,848 -

65,119 110,441

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Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Notes to the Financial Statements (contd.)

1.3 Quoted Shares (contd.) Group No. of shares Market value LKR '000 LKR '000 2010 Cost No. of shares Market value LKR '000 LKR '000 2009 Cost No. of shares 2010 Cost Company Market value LKR '000 LKR '000 No. of shares Market value LKR '000 LKR '000 2009 Cost

Plantations Balangoda Plantations PLC Horana Plantations PLC Kelani Valley Plantations PLC

300,000 109,600

9,642 8,198 17,840

10,920 17,525 28,445

508,500 198,500

19,895 14,877 34,772

12,204 10,520 22,724

300,000 109,600

9,642 8,198 17,840

10,920 17,525 28,445

508,500 198,500

19,895 14,877 34,772

12,204 10,520 22,724

Power and Energy Lanka IOC PLC Laugfs Gas PLC

36,900

849 849

956 956

449,100 -

12,985 12,985

7,747 7,747

36,900

849 849

956 956

449,100 -

12,985 12,985

7,747 7,747

Telecommunications Dialog Telekom PLC Sri Lanka Telecom PLC

1,764,730 -

43,118 43,118

20,824 3,134,530 - 1,206,800 20,824

74,510 43,519 118,029

22,725 1,764,730 55,513 78,238

43,118 43,118

20,824 3,134,530 - 1,206,800 20,824

74,510 43,519 118,029

22,725 55,513 78,238

Trading Brown & Company PLC

103,000

16,079 16,079

25,431 25,431

-

663,350

901,710

103,000

16,079 16,079

25,431 25,431

-

-

-

701,876 1,561,854

701,876 1,561,854

663,350 901,710

1.4

Strategic Investments - Quoted Shares Group 2010 2009 No. of Market Cost No. of Market Cost shares value shares value LKR '000 LKR '000 LKR '000 LKR '000 Union Assurance PLC* Serendib Land PLC 80,768 48,461 48,461 - 5,625,000 19,384 80,768 19,384 510,469 40,384 219,729 19,384 Company 2010 2009 No. of Market Cost No. of Market Cost shares value shares value LKR '000 LKR '000 LKR '000 LKR '000 80,768 48,461 48,461 - 5,625,000 19,384 80,768 19,384 510,469 219,729 40,384 19,384 550,853 239,113

550,853 239,113

Quoted shares - total

1,581,238

1,140,823

1,581,238

1,140,823

*The equity holding of Union Assurance PLC, which was considered a strategic investment upto 2009, has been re-classified as dealing equity in 2010, and is reported at market value as at the Balance Sheet date.

1.5 Unit Trusts

Group Market value Units LKR '000 LKR '000 2010 Cost Market value Units LKR '000 LKR '000 2009 Cost 2010 Cost Company Market value Units LKR '000 LKR '000 Market value Units LKR '000 LKR '000 2009 Cost

Eagle Gilt Edged Fund Eagle Growth Fund Eagle Income Fund Pyramid Unit Trust Unit trusts

4,858,009 2,000,000 7,099,263 -

48,968 49,212 4,410,847 20,000 151,860 3,052,500 72,114 72,767 6,468,777 - 500,000 273,839

30,251 45,123 4,858,009 48,968 49,212 4,410,847 30,251 45,123 29,083 114,805 2,000,000 20,000 151,860 3,052,500 29,083 114,805 65,645 66,887 7,099,263 72,114 72,767 6,468,777 65,645 66,887 3,839 9,270 - 500,000 3,839 9,270 236,085 273,839 236,085

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111

2

Investments - Unit Linked Group 2010 LKR '000 Government securities Corporate debt Quoted shares (Note 2.1 ) (Note 2.2 ) 1,876,701 3,314,634 5,191,335 2009 LKR '000 657,861 18,039 670,250 1,346,150 2010 LKR '000 1,876,701 3,314,634 5,191,335 Company 2009 LKR '000 657,861 18,039 670,250 1,346,150

Group 2.1 Government securities 2010 LKR '000 1,511,048 365,653 1,876,701

2.2 Quoted Shares - Unit-Linked Group No. of shares Market value LKR '000 LKR '000 2010 Cost No. of shares Market value LKR '000 LKR '000 2009 Cost No. of shares 2010 Cost Company Market value LKR '000 LKR '000

Company 2010 LKR '000 1,511,048 365,653 1,876,701 2009 LKR '000 557,239 100,622 657,861

2009 LKR '000 557,239 100,622 657,861

Treasury bills Repurchase agreements

No. of shares

Market value LKR '000 LKR '000

2009 Cost

Banks, Finance & Insurance Commercial Bank of Ceylon PLC 754,478 DFCC Bank 762,200 Hatton National Bank PLC 688,200 Lanka Orix Leasing Company PLC 523,400 Nations Trust Bank PLC Sampath Bank PLC 637,796 Seylan Bank PLC 878,500 Singer Finance (Lanka) PLC 3,000,000

139,368 101,778 180,043 65,990 122,489 80,012 45,000

196,089 152,592 275,211 66,891 173,417 85,917 45,000

262,432 226,700 249,800 387,400 107,600 -

38,362 33,912 33,147 12,553 14,187 -

49,731 754,478 37,859 762,200 42,528 688,200 - 523,400 14,237 21,977 637,796 - 878,500 - 3,000,000

139,368 101,778 180,043 65,990 122,489 80,012 45,000

196,089 152,592 275,211 66,891 173,417 85,917 45,000

262,432 226,700 249,800 387,400 107,600 -

38,362 33,912 33,147 12,553 14,187 -

49,731 37,859 42,528 14,237 21,977 -

734,680 995,117 Beverages Food & Tobacco Ceylon Tobacco Co PLC Distilleries Co. of Sri Lanka PLC Nestle Lanka PLC Renuka Agri Food PLC The Lion Brewery Ceylon PLC

132,161 166,332

734,680 995,117

132,161 166,332

435,600 115,480 154,638 196,600 967,500 136,773 172,118 253,400 164,300 88,641 108,931 70,900 - 567,400 540,800 93,512 100,102 434,406 535,789

20,676 23,102 25,404 1,277 70,459

36,371 26,670 29,424 1,277 93,742

435,600 115,480 154,638 196,600 967,500 136,773 172,118 253,400 164,300 88,641 108,931 70,900 - 567,400 540,800 93,512 100,102 434,406 535,789

20,676 23,102 25,404 1,277 70,459

36,371 26,670 29,424 1,277 93,742

Chemicals & Pharmaceuticals Chemical Industries (Colombo) PLC 495,500

42,406 42,406

69,717 289,500 69,717

15,691 15,691

18,239 495,500 18,239

42,406 42,406

69,717 289,500 69,717

15,691 15,691

18,239 18,239

Construction and Engineering Colombo Dockyard PLC

408,495

96,731 112,336 172,465 96,731 112,336

14,741 14,741

42,211 408,495 42,211

96,731 112,336 172,465 96,731 112,336

14,741 14,741

42,211 42,211

112

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Notes to the Financial Statements (contd.)

2.2 Quoted Shares - Unit-linked (contd.) Group No. of shares Market value LKR '000 LKR '000 2010 Cost No. of shares Market value LKR '000 LKR '000 2009 Cost No. of shares 2010 Cost Company Market value LKR '000 LKR '000 No. of shares Market value LKR '000 LKR '000 2009 Cost

Diversified Holdings Aitken Spence & Company PLC Hayleys PLC John Keells Holdings PLC

1,427,100 209,000 1,084,662

162,089 53,201 235,998 451,288

242,464 72,105 323,663 638,232

37,500 158,000 422,188

22,766 21,274 55,777 99,817

49,688 1,427,100 27,137 209,000 72,405 1,084,662 149,230

162,089 53,201 235,998 451,288

242,464 72,105 323,663 638,232

37,500 158,000 422,188

22,766 21,274 55,777

49,688 27,137 72,405

99,817 149,230

Hotels & Travels Aitken Spence Hotel Holdings PLC 1,471,325 Asian Hotels & Properties PLC 524,500 Hotel Services (Ceylon) PLC 549,000 The Fortress Resorts PLC -

79,214 77,700 16,490 173,404

155,519 101,753 14,274 271,546

125,300 154,300 817,000

16,367 13,323 10,421 40,111

33,737 1,471,325 14,581 524,500 - 549,000 10,008 58,326

79,214 77,700 16,490 173,404

155,519 101,753 14,274 271,546

125,300 154,300 817,000

16,367 13,323 10,421 40,111

33,737 14,581 10,008 58,326

Manufacturing Ceylon Grain Elevators PLC Chevron Lubricants Lanka PLC Piramal Glass Co PLC Royal Ceramics Lanka PLC Tokyo Cement Co. (Lanka) PLC

828,500 734,100 7,304,300 323,700 1,180,900

44,368 95,817 23,227 57,674 64,324 285,410

61,889 119,303 339,600 56,974 5,885,100 98,696 150,000 64,950 401,812

19,532 12,494 9,266 41,292

- 828,500 48,138 734,100 12,947 7,304,300 9,975 323,700 - 1,180,900 71,060

44,368 95,817 23,227 57,674 64,324 285,410

61,889 119,303 339,600 56,974 5,885,100 98,696 150,000 64,950 401,812

19,532 12,494 9,266 41,292

48,138 12,947 9,975 71,060

Plantations Horana Plantations PLC Kelani Valley Plantations PLC

590,000 377,100

18,958 32,525 51,483

21,476 60,298 81,774

227,000

12,959 12,959

12,031 12,031

590,000 377,100

18,958 32,525 51,483

21,476 60,298 81,774

227,000

12,959 12,959

12,031 12,031

Power and Energy Lanka IOC PLC Laugfs Gas PLC

98,600

2,268 2,268

2,554 2,554

589,700 -

12,265 12,265

10,172 10,172

98,600

2,268 2,268

2,554 2,554

589,700 -

12,265 12,265

10,172 10,172

Telecommunications Dialog Telekom PLC Sri Lanka Telecom PLC

5,236,440 -

65,114 65,114

61,790 1,118,560 - 886,900 61,790

15,017 37,416 52,433

8,110 5,236,440 40,797 48,907

65,114 65,114

61,790 1,118,560 - 886,900 61,790

15,017 37,416 52,433

8,110 40,797 48,907

Trading Brown & Company PLC

583,100

103,377 103,377

143,967 143,967

-

491,929

670,250

583,100

103,377 103,377

143,967 143,967

-

-

-

Quoted shares

2,440,567 3,314,634

2,440,567 3,314,634

491,929 670,250

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

113

3

Intangible Assets Group / Company Cost as at 01.01.2010 LKR '000 Software Total 354,932 354,932 Additions during the year LKR '000 23,914 23,914 Disposals/write -offs during the year LKR '000 12,364 12,364 Cost as at 31.12.2010 LKR '000 366,482 366,482

Amortisation as at 01.01.2010 LKR '000 Software Total 268,759 268,759

Charge for the year LKR '000 46,231 46,231

Amortisation on disposal /write-offs LKR '000 12,364 12,364

Amortisation as at 31.12.2010 LKR '000 302,626 302,626

Net book value

86,173

63,856

Software with a cost of LKR 124,880,207 (2009 - LKR 137,244,319) has been fully amortised and continues to be in use by the Group / Company. All intangible assets have a finite useful life and are being amortised over a period of five years.

4 Investment in Subsidiary (unquoted) at cost % Holding 31.12.10 Investee Rainbow Trust Management Ltd. Total 100 100 100,000 100,000 100,000 100,000 31.12.09 Number of shares 31.12.10 31.12.09 Carrying value 31.12.10 LKR '000 1,000 1,000 31.12.09 LKR '000 1,000 1,000 Directors' valuation 31.12.10 LKR '000 1,000 1,000 31.12.09 LKR '000 1,000 1,000

5 Property, Plant and Equipment 5.1 Group Cost/valuation as at 01.01.2010 LKR '000 Freehold land Plant and machinery Main frames/mini computers Personal computers and other computer equipment Equipment and furniture Motor vehicles Total (Note 5.3) 57,000 28,530 69,493 307,658 205,159 133,204 801,044 Additions Disposals/write Cost / during the - offs during Valuation as at year the year 31.12.2010 LKR '000 LKR '000 LKR '000 66,350 21,539 18,395 106,284 64 69,493 52,117 17,556 15,792 155,022 57,000 28,466 321,891 209,142 135,807 752,306

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Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Notes to the Financial Statements (contd.)

5.1 Group (Contd.) Depreciation as at 01.01.2010 LKR '000 Plant and machinery Main frames/mini computers Personal computers and other computer equipment Equipment and furniture Motor vehicles Total 25,650 69,493 244,867 130,128 93,134 563,272 Charge for the year LKR '000 1,546 44,031 28,987 24,650 99,214 Depreciation on disposal / write-offs LKR '000 64 69,493 52,114 17,144 11,927 150,742 Depreciation as at 31.12.2010 LKR '000 27,132 236,784 141,971 105,857 511,744

Net book value

237,772

240,562

Group property, plant and equipment with a cost of LKR 319,519,849 (2009 - LKR 380,992,376) have been fully depreciated and continue to be in use by the Group. 5.2 Company Cost/valuation as at 01.01.2010 LKR '000 Freehold land Plant and machinery Main frames/mini computers Personal computers and other computer equipment Equipment and furniture Motor vehicles Total (Note 5.3) 57,000 28,530 69,493 307,001 204,597 133,204 799,825 Depreciation as at 01.01.2010 LKR '000 Plant and machinery Main frames/mini computers Personal computers and other computer equipment Equipment and furniture Motor vehicles Total 25,650 69,493 244,212 129,564 93,134 562,053 Additions during the year LKR '000 66,350 21,539 18,395 106,284 Charge for the year LKR '000 1,546 44,031 28,987 24,650 99,214 Disposals/write Cost / - offs during Valuation as at the year 31.12.2010 LKR '000 LKR '000 64 69,493 51,735 17,443 15,792 154,527 Depreciation on disposal /write - offs LKR '000 64 69,493 51,732 17,031 11,927 150,247 57,000 28,466 321,616 208,693 135,807 751,582 Depreciation as at 31.12.2010 LKR '000 27,132 236,511 141,520 105,857 511,020

Net book value

237,772

240,562

Company property, plant and equipment with a cost of LKR 318,793,326 (2009 - LKR 379,771,159) have been fully depreciated and continue to be in use by the Company.

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115

5.3 Freehold land Group 2010 Cost Revaluation surplus Net Book value Details of land stated at valuation are given below: Property Freehold land at No.80 Kew Road, Colombo 2 6 Other Fund Assets Group / Company 2010 Cost Number of units Government securities Cash at bank Unit Trusts Eagle Income Fund Eagle Growth Fund Eagle Gilt Edged Fund LKR '000 177,480 584 Market value LKR '000 185,411 584 2009 Cost Number of units LKR '000 169,534 1,728 Market value LKR '000 177,056 1,728 Method of valuation Open market value method Effective date of valuation 06.12.2007 Property valuer Mr. B.L. Ariyatillake - Chartered Valuer approved by IBSL 17,084 39,916 57,000 2009 17,084 39,916 57,000 2010 17,084 39,916 57,000 Company 2009 17,084 39,916 57,000

(Note 23.1)

913,944 24,882 275,343

9,519 936 2,835 191,354

9,368 1,889 2,789 200,041

977,204 50,000 -

7,602 500 179,364

10,104 1,881 190,769

7

Policy Loans and Other Loans Group 2010 LKR '000 Policy loans Other loans (Note 7.1) (Note 7.2) 1,416,623 309,867 1,726,490 2009 LKR '000 1,309,130 325,834 1,634,964 2010 LKR '000 1,416,623 309,867 1,726,490 Company 2009 LKR '000 1,309,130 325,834 1,634,964

7.1 Policy loans Group 2010 LKR '000 Balance as at 1st January Loans granted during the year Repayments during the year Balance as at 31st December 1,309,130 714,074 (606,581) 1,416,623 2009 LKR '000 1,133,090 740,608 (564,568) 1,309,130 2010 LKR '000 1,309,130 714,074 (606,581) 1,416,623 Company 2009 LKR '000 1,133,090 740,608 (564,568) 1,309,130

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Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Notes to the Financial Statements (contd.)

7.2 Other loans Group 2010 LKR '000 Staff loans Field staff loans 191,142 118,725 309,867 2009 LKR '000 206,745 119,089 325,834 2010 LKR '000 191,142 118,725 309,867 Company 2009 LKR '000 206,745 119,089 325,834

Balance as at 1st January Loans granted during the year Repayments during the year Loan balances written off during the year

398,967 280,367 (310,938) (22,620) 345,776 (35,909) 309,867

406,302 239,117 (246,452) 398,967 (73,133) 325,834

398,967 280,367 (310,938) (22,620) 345,776 (35,909) 309,867

406,302 239,117 (246,452) 398,967 (73,133) 325,834

Provision for bad and doubtful debts Balance as at 31st December

7.3 The Company has not granted any loans or advances to Directors during the year. 8 Deferred Tax Asset Deferred tax assets/liabilities have been recognised for all deductible / taxable temporary differences and carry forward of unused tax losses, to the extent that it is probable that taxable profit will be available against which the temporary differences and the unused tax losses can be utilised. Group Company 2010 2009 2010 2009 LKR '000 LKR '000 LKR '000 LKR '000 Closing balance of the deferred tax asset 96,353 128,158 96,353 128,157

The closing balance of the deferred tax asset relates to the following: Accelerated depreciation for tax purposes Losses available for offset against future taxable income

(6,981) 103,334 96,353

(25,467) 153,625 128,158

(6,981) 103,334 96,353

(25,468) 153,625 128,157

Deferred tax assets/liabilities have been computed taking into consideration the proposed tax rate of 28% effective from year of assessment 2011/2012, which was stated in the budget proposals in November 2010. However, this change in tax rate has not been enacted as at the Balance Sheet date. The deferred tax effect on undistributed reserves of subsidiaries has not been accounted for since the parent can control the timing of reversal of these temporary differences. 9 Amounts due from Related Entities Group Relationship 2010 LKR '000 888 888 2009 LKR '000 2010 LKR '000 888 518 1,406 Company 2009 LKR '000 1,863 1,863

AVIVA NDB Finance Lanka (Pvt) Limited Rainbow Trust Management Ltd.

Parent Subsidiary

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117

10

Other Assets Group 2010 LKR '000 Inventory Interest receivable ACT recoverable ESC recoverable WHT recoverable Other recoverables 14,689 697,908 66,397 11,767 148,612 149,470 1,088,843 2009 LKR '000 13,220 542,566 66,397 8,013 275,704 226,339 1,132,239 2010 LKR '000 14,689 697,908 66,397 11,767 148,562 149,470 1,088,793 Company 2009 LKR '000 13,220 542,566 66,397 8,013 275,632 226,319 1,132,147

11

Cash and cash equivalents Group 2010 LKR '000 Call deposits Current accounts Cash in hand 402,772 11,002 3,221 416,995 2009 LKR '000 501,753 39,274 2,995 544,022 2010 LKR '000 401,709 10,913 3,221 415,843 Company 2009 LKR '000 498,388 39,183 2,995 540,566

12

Cash and cash equivalents - Unit Linked Group 2010 LKR '000 Call accounts 467 467 2009 LKR '000 30,214 30,214 2010 LKR '000 467 467 Company 2009 LKR '000 30,214 30,214

13

Insurance Provision - Long Term Insurance provision - Long Term Conventional is relating to the long duration contract liabilities included in the Life Insurance Fund, primarily from traditional non - participating Life insurance products. Annually renewable contracts are only for group insurance products. The Non-Unit fund of the Linked long term business is also included under this provision. The insurance provision has been established in accordance with the "Solvency Margin (Long Term Insurance) Rules 2002" made by the IBSL, under section 105 read with section 26 of the Regulation of Insurance Industry Act No. 43 of 2000. The valuation of the Insurance Provision-Long Term insurance business as at 31.12.2010 was made by the Chief Actuary Mr. F Munro. According to the results of the valuation,the provision of LKR 17,170 million (2009 LKR 14,970 million) is adequate to cover the liabilities pertaining to the long term conventional insurance business inclusive of the liability in respect of policyholders dividends. The dividend includes life policyholders share of net income that is required to be allocated by the insurance contract or by insurance regulations. The Board of Directors decided to transfer LKR 328 million (2009 - LKR 320 million) from the Long Term insurance fund to the shareholders' fund. Subsequent to this transfer, the Long Term insurance fund stands at LKR 19,317 million (2009 - LKR 16,687 million). 2010 LKR Million Life fund net Assets- Conventional Non-Unit fund of linked long term business Insurance provision- Long Term (Pre-transfer) Transfer to Shareholders Insurance provision- Long Term Conventional (Post - transfer) 19,153 492 19,645 (328) 19,317 2009 LKR Million 16,923 84 17,007 (320) 16,687

The valuation of the Insurance Provision-Unit Linked non participating business, as at 31.12.2010 was made by the Chief Actuary, using a cash flow projection method. Unit fund liability as at 31.12 2010 was LKR 5,131 million (2009 - LKR 1,340 million) whereas the unit fund assets was LKR 5,131 million (2009 - LKR 1,361 million).

118

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Notes to the Financial Statements (contd.)

14 Provision for Life Fund Solvency The provision represents the amount of shareholder net assets allocated to support the solvency of the Life policy holders as permitted by the Insurance Board of Sri Lanka. This is in addition to the solvency margin of 6.5 % provided within the Life Policyholders Fund which is above the minimum requirement of 5%. The Provision for Life Fund Solvency has further strengthened the solvency position to 7.5%. Group 2010 LKR '000 Balance as at 1st January Transfer during the year Balance as at 31st December 15 Insurance Provision - General The General insurance provision shown in the Balance Sheet is as follows: Group / Company 2010 2009 LKR '000 LKR '000 Premium Unearned premium Gross Reinsurance Net Deferred acquisition expenses 1,428,425 (244,494) 1,183,931 (80,503) 1,103,428 Gross claims reserve Claims outstanding Claims incurred but not reported (IBNR) Unexpired risk reserve (URR) Gross claims reserve Insurance provision Reconciliation between insurance provision and technical reserve Insurance provision Reinsurance recoverable on claims outstanding Reinsurance recoverable on claims incurred but not reported (IBNR) Technical reserve 1,456,915 (331,837) 1,125,078 (36,702) 1,088,376 175,000 175,000 2009 LKR '000 175,000 175,000 2010 LKR '000 175,000 175,000 Company 2009 LKR '000 175,000 175,000

877,931 210,687 9,041 1,097,659 2,201,087

605,576 166,527 5,341 777,444 1,865,820

2,201,087 (503,386) (45,241) 1,652,460

1,865,820 (341,333) (35,362) 1,489,125

The computation of claims incurred but not reported (IBNR) reserve includes provisions for internal and external claim handling expenses and a prudential margin in line with internationally accepted benchmarks.Validation of technical reserves for 2010 was done by an independent firm of actuaries.

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119

16

Other Funds A brief description and the movement of each fund is given below.

16.1 Claims Fund - General Insurance This fund consists of amounts received by AVIVA NDB Insurance PLC from Zurich Group Reinsurance on portfolio transfer (on a clean-cut basis). These funds are invested in Government Securities to be utilised upon settlement of claims. Group / Company 2010 2009 LKR '000 LKR '000 Balance as at 1st January Capital withdrawals Income/ gains & losses 93,454 (16,023) 13,635 91,066 80,511 12,943 93,454

16.2 Scholarship Fund This fund is created to ensure continuity of the payments committed to Policyholders' children who have been awarded scholarships under the Company's Life policy scholarship schemes. The fund invests 100% in Eagle Mutual funds. Group / Company 2010 2009 LKR '000 LKR '000 Balance as at 1st January Capital withdrawals Capital deposits Income/ gains & losses 2,870 (2,925) 2,781 1,953 4,679 1,824 936 110 2,870

16.3 Agents Superannuation Fund This fund is created for the benefit of the Agency Force. The fund accumulates contributions from both the Company and Agents, based on a qualifying performance criteria which is a fixed percentage linked to their commissions. The Agents Superannuation Life fund invests 100% in Government securities and Agents Superannuation General fund invests 100% in Mutual funds. Group / Company 2010 2009 LKR '000 LKR '000 Balance as at 1st January Capital deposits Capital withdrawals Income/ gains & losses 94,445 30,294 (31,971) 11,528 104,296 Other Funds - Total 200,041 105,166 25,452 (49,565) 13,392 94,445 190,769

120

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Notes to the Financial Statements (contd.)

17 Reinsurance Creditors Group 2010 LKR '000 Balance as at 1st January Premium net of commission and recoveries on paid claims Receipts during the year Payments made during the year Balance as at 31st December 290,298 531,772 24,131 (641,301) 204,900 2009 LKR '000 286,383 612,755 72,816 (681,656) 290,298 2010 LKR '000 290,298 531,772 24,131 (641,301) 204,900 Company 2009 LKR '000 286,383 612,755 72,816 (681,656) 290,298

18

Income Tax Liabilities Group 2010 LKR '000 Balance as at 1st January Provision Payments Elimination due to disposal of subsidiary (Over) / under provisions and set off against ESC/ refunds Balance as at 31st December 236,573 48,959 (244) (231,449) 53,839 2009 LKR '000 125,565 241,893 (4,254) (12,306) (114,325) 236,573 2010 LKR '000 236,238 48,959 (231,358) 53,839 Company 2009 LKR '000 115,686 234,786 (114,234) 236,238

19

Other Liabilities Group 2010 LKR '000 Policyholders' advance payments Life claims payable Agency commission payable Franchise fee payable Government taxes and levies Provisions Other creditors 179,771 167,715 238,029 55,904 38,776 607,451 138,791 1,426,437 2009 LKR '000 153,303 119,718 191,930 21,648 100,034 371,414 82,189 1,040,236 2010 LKR '000 179,771 167,715 238,029 55,904 38,759 607,232 138,731 1,426,141 Company 2009 LKR '000 153,303 119,718 191,930 21,648 100,009 371,232 82,029 1,039,869

(Note 19.1)

19.1 Government taxes and levies Group 2010 LKR '000 VAT payable Stamp duty payable Withholding tax payable PAYE tax payable IBSL fees and cess payable NBT payable Other tax payable 17,571 508 2,575 7,242 9,329 1,551 38,776 2009 LKR '000 68,544 432 1,288 3,845 5,435 18,819 1,671 100,034 2010 LKR '000 17,554 508 2,575 7,242 9,329 1,551 38,759 Company 2009 LKR '000 68,519 432 1,288 3,845 5,435 18,819 1,671 100,009

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20

Other Liabilities - Unit linked Group 2010 LKR '000 Fund Management Fee payable Custodian fee payable Investment creditors 27,745 3,864 29,440 61,049 2009 LKR '000 10,929 2,902 1,467 15,298 2010 LKR '000 27,745 3,864 29,440 61,049 Company 2009 LKR '000 10,929 2,902 1,467 15,298

21 Retirement Benefits 21.1 Provision is made by way of two insurance policies purchased from AVIVA NDB Insurance PLC which cover all employees attached to the Company. The liability is recognised based on the actuarial valuation carried out as at 31st December 2010 using the Projected Unit Credit method. 2010 2009 LKR'000 LKR'000 Present Value of the Fund Assets Present Value of Fund Obligations Surplus Amount recognised as expense in current year LKR'000 Current service cost Interest Cost Expected return on plan assets Actuarial (gains)/losses to be recognised Past service cost Expense recognised in respect of gratuity fund Premium paid for Gratuity Life Cover Total Amount recognised as expense in current year Principal actuarial assumptions used Discount rate Salary increase Incidence of withdrawals 21.2 Contributions made to the Provident Fund during the year were as follows. Company LKR '000 Permanent employees Contractual employees Total 21.3 Contributions made to the Employers Trust Fund during the year were as follows. Contributions LKR '000 Permanent employees Contractual employees Total 10,303 16 10,319 51,515 64 51,579 Contributions Employees LKR '000 43,167 42 43,209 Total LKR '000 94,682 106 94,788 16,156 15,097 (17,457) 13,796 353 14,149 2010 % per annum 9.00 10.00 7.00 2009 % per annum 9.75 12.50 5.00 211,244 144,561 66,683 183,763 154,836 28,927

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Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Notes to the Financial Statements (contd.)

22 Stated Capital Company 2010 No. of shares Fully paid ordinary shares 23 Capital Reserves 30,000,000 LKR '000 300,000 No. of shares 30,000,000 2009 LKR '000 300,000

23.1 Revaluation Reserve Revaluation reserve consists of the net surplus on the revaluation of property, plant and equipment as described in note 5.3 on page xx. Group 2010 LKR '000 Balance as at 1st January Revaluation surplus arising during the year Balance as at 31st December 24 Revenue Reserves 39,916 39,916 2009 LKR '000 39,916 39,916 2010 LKR '000 39,916 39,916 Company 2009 LKR '000 39,916 39,916

24.1 Resilience Reserve A Resilience reserve of LKR65 million was established in 2004 with funds appropriated from profits in order to strengthen the capability of the Company to meet temporary variations in asset values of the Life business. This reserve has been further strengthened by appropriation from profits. Group Company 2010 2009 2010 2009 LKR '000 LKR '000 LKR '000 LKR '000 At beginning of the year Appropriation from profits At end of the year 24.2 Retained Earnings Group 2010 LKR '000 AVIVA NDB Insurance PLC Rainbow Trust Management Ltd. 2,278,561 2,168 2,280,729 2009 LKR '000 1,946,571 3,990 1,950,561 2010 LKR '000 2,278,561 2,278,561 Company 2009 LKR '000 1,946,571 1,946,571 289,000 289,000 289,000 289,000 289,000 289,000 289,000 289,000

Revenue Reserves 25 Revenue

2,569,729

2,239,561

2,567,561

2,235,571

Group 2010 LKR '000 Gross written premium Reinsurance Premium Net written premium Increase in net unearned premium Net earned premium Asset management fees and related income Investment income Other income Revenue 10,630,728 (977,966) 9,652,762 (58,853) 9,593,909 138 5,329,737 263,140 15,186,924 2009 LKR '000 7,136,118 (1,014,659) 6,121,459 (436,755) 5,684,704 7,321 3,751,277 211,497 9,654,799

Company 2010 2009 LKR '000 LKR '000 10,630,728 (977,966) 9,652,762 (58,853) 9,593,909 5,329,234 262,414 15,185,557 7,136,118 (1,014,659) 6,121,459 (436,755) 5,684,704 3,811,093 206,999 9,702,796

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123

26 Gross Written Premium 26.1. General insurance Group / Company 2010 2009 LKR '000 LKR '000 Accident Fire Marine Motor Terrorism 585,580 500,723 136,149 1,584,882 39,469 2,846,803 26.2. Long Term insurance Individual policies - Conventional Individual policies - Unit linked Corporate policies 735,633 550,214 125,403 1,033,605 58,773 2,503,628

3,613,494 4,038,668 131,763 7,783,925 10,630,728

3,459,966 803,896 368,628 4,632,490 7,136,118

27

Net Claims and Benefits Group / Company 2010 2009 LKR '000 LKR '000

27.1 General insurance Gross claims Accident Fire Marine Motor

(595,102) (392,409) (37,022) (961,819) (1,986,352) 367,171 (1,619,181)

(402,688) (101,721) (25,580) (560,652) (1,090,641) 187,988 (902,653)

Reinsurance recoveries General insurance net claims 27.2 Long Term insurance Net claims and benefits Gross claims - death, disability and hospitalisation Reinsurance recoveries Net claims Gratuity payments Surrenders Policy maturities Annuities Interim payments on anticipated endowment plans Long Term insurance net claims and benefits

(230,712) 62,288 (168,424) (190,278) (1,470,340) (606,786) (14,067) (54,472) (2,504,367)

(151,727) 58,394 (93,333) (126,226) (1,010,499) (445,421) (22,002) (61,358) (1,758,839)

(4,123,548)

(2,661,492)

124

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Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Notes to the Financial Statements (contd.)

28 Investment Income Group 2010 LKR '000 Interest income on government bonds & treasury bills* Interest income on repurchase agreements Interest income on corporate debt Dividend income - quoted shares and units Capital gain on sale of subsidiary Net realised capital gain / (loss) Net unrealised capital gain /(loss) 2,624,115 66,798 241,977 101,699 687,961 1,593,229 5,315,779 * Notional withholding tax included in interest income 29 Other Income Group 2010 LKR '000 Interest on policy loans Interest income on cash and cash equivalents Gain on disposal of property, plant and equipment Other technical income Other non technical income 197,886 13,958 6,358 19,132 39,764 277,098 2009 LKR '000 177,757 8,303 953 9,442 23,345 219,800 2010 LKR '000 197,886 13,790 6,358 18,406 39,764 276,204 Company 2009 LKR '000 177,757 8,034 951 4,946 23,345 215,033 269,091 2009 LKR '000 2,356,015 37,511 280,145 70,985 28,869 262,689 706,760 3,742,974 239,353 2010 LKR '000 2,624,115 66,463 241,977 101,699 687,961 1,593,229 5,315,444 269,058 Company 2009 LKR '000 2,347,765 36,858 280,145 70,985 97,770 262,689 706,847 3,803,049 238,462

30

Operating and Administrative Expenses Group 2010 LKR '000 Staff expenses Administration and establishment expenses Selling expenses Amortisation of intangible assets Depreciation Other expenses (Note 30.1) (964,917) (569,089) (910,920) (46,231) (99,214) (138,610) (2,728,981) 2009 LKR '000 (733,830) (560,391) (352,461) (40,934) (97,798) (133,440) (1,918,854) 2010 LKR '000 (963,353) (567,448) (910,919) (46,231) (99,214) (138,610) (2,725,775) Company 2009 LKR '000 (725,282) (550,951) (352,395) (40,934) (97,624) (150,485) (1,917,671)

(Note 30.2)

30.1 Staff Expenses Group 2010 LKR '000 Salaries and bonus Contribution to defined contribution plans Staff welfare Staff training Others (523,060) (61,898) (58,692) (32,196) (289,071) (964,917) 2009 LKR '000 (414,801) (52,106) (46,439) (34,785) (185,699) (733,830) 2010 LKR '000 (522,202) (61,811) (58,589) (32,116) (288,635) (963,353) Company 2009 LKR '000 (409,560) (52,106) (45,490) (34,498) (183,628) (725,282)

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30.2 Other Expenses Group 2010 LKR '000 (Increase) / decrease in provision for doubtful debts Other technical expenses Other non technical expenses 14,625 (52,265) (100,970) (138,610) 2009 LKR '000 (52,427) (18,073) (62,940) (133,440) 2010 LKR '000 14,625 (52,265) (100,970) (138,610) Company 2009 LKR '000 (52,427) (18,073) (79,985) (150,485)

31

Profit before taxation Profit before taxation for the year is stated after charging the following expenses: Group 2010 LKR '000 Auditors' remuneration Audit Non audit - MCEV Model review - Other services Directors' emoluments Directors' fees Premium paid for Directors and Officers Liability Policy Contribution to defined contribution plans- EPF and ETF Legal fees Amortisation of intangible assets Depreciation Capital gain on sale of subsidiary Donations Premium on gratuity insurance policies 2009 LKR '000 2010 LKR '000 Company 2009 LKR '000

5,144 2,181 600 97,537 120 1,601 61,898 4,913 46,231 99,214 2,291 14,149

4,505 275 14,018 120 1,694 52,106 2,101 40,934 97,798 28,869 3,094 8,450

4,996 2,181 600 97,537 120 1,601 61,811 4,897 46,231 99,214 2,268 14,045

4,341 275 14,018 120 1,694 52,106 2,101 40,934 97,624 97,770 3,092 8,402

32

Taxation Group 2010 LKR '000 2009 LKR '000 2010 LKR '000 Company 2009 LKR '000

32.1 Taxation is made up as follows : Current income tax Current tax charge (Over)/under provisions of previous years Notional tax for 2010, unutilised during the year Deferred income tax Income tax expense reported

48,959 (3,003) 215,830 31,805 293,591

241,893 158 56,069 (71,105) 227,015

48,959 (2,985) 215,830 31,804 293,608

234,786 158 56,069 (71,113) 219,900

Social responsibility levy has been charged at the rate of 1.5% (2009 - 1.5%) on the current income tax expense.

126

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Notes to the Financial Statements (contd.)

32.2 Numerical reconciliation between tax charge and the product of accounting profit multiplied by the applicable tax rate. Group 2010 LKR '000 Accounting profit Applicable tax rate Tax at applicable rate Add/(less) tax effect of the following items: Expenses not allowable for tax purposes Realised/unrealised gains and losses not subject to tax Brought forward tax losses set-off against taxable income Dividend income taxed at source Insurance related items not subject to tax - Long-term insurance* Tax losses during the year for which DTA has not been created Under provision of income tax in previous year Tax effect of un- utilised notional tax for the year Social Responsibility Levy Movement in deferred tax asset / liability Tax charge for the year 893,759 35% 312,816 2009 LKR '000 957,540 35% 335,139 2010 LKR '000 895,598 35% 313,459 Company 2009 LKR '000 1,006,720 35% 352,352

116,711 (795,308) (25,837) (35,595) 474,627 566 (3,002) 215,830 978 31,805 293,591

80,854 (347,011) (124,395) (24,845) 318,280 158 56,069 3,871 (71,105) 227,015

116,634 (795,308) (25,837) (35,595) 474,627 (2,984) 215,830 978 31,804 293,608

80,785 (371,156) (124,395) (24,845) 318,280 158 56,069 3,765 (71,113) 219,900

* Taxation on Long-term insurance business is computed on investment income less administrative and commission expenses, which is known as the I - E basis. 32.3 AVIVA NDB Insurance PLC is liable for income tax at 35% (2009 - 35%) on the taxable income. 32.4 Rainbow Trust Management Ltd. is liable for income tax at 35% (2009 - 35%). 32.5 The full benefit of capital allowances arising in terms of Section 25 of the Inland Revenue Act No. 10 of 2006 has been taken into account in determining tax charge / loss for the year. 32.6 The group has tax losses amounting to LKR 369 million ( 2009 - LKR 439 million) available indefinitely for offset against future taxable profits of the company, for which deferred tax asset has been created. 32.7 Notional tax credit for Withholding tax on Treasury Bills and Bonds The Inland Revenue Act No.10 of 2006 as amended by subsequent legislation provides that a company which derives interest income from secondary market transactions in Government securities (on or after 1st April 2002 would be entitled to a notional tax credit being one ninth of the net interest income) provided such interest income forms part of the statutory income of the Company. The notional tax credit available for set off against future tax liability of the Company is as follows. Financial Year 2003 2004 2005 2006 2007 2008 2009 2010 Notional tax LKR '000 123,980 68,027 74,741 100,114 122,511 171,156 238,462 269,058 1,168,049 Set-off against tax liability upto year of assessment 2009/2010 Balance available for set-off against future tax liability (309,762) 858,287

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33

Basic Earnings per Share Basic earnings per share is calculated by dividing the net profit after tax for the year by the weighted average number of ordinary shares in issue as at the year end. Group Company 2010 2009 2010 2009 Net profit for the year Number of ordinary shares Basic earnings per share (LKR '000) ('000) (LKR) 600,168 30,000 20.01 730,525 30,000 24.35 601,990 30,000 20.07 786,820 30,000 26.23

34 Dividend / Dividend per Share 34.1 Dividend Group 2010 LKR '000 Final dividend paid for previous year Interim dividend paid (270,000) (270,000) 2009 LKR '000 (210,000) (165,000) (375,000) 2010 LKR '000 (270,000) (270,000) Company 2009 LKR '000 (210,000) (165,000) (375,000)

34.2 Dividend per Share Group 2010 Number of ordinary shares Dividend per share Final dividend paid for previous year Interim dividend paid ('000) 30,000 2009 30,000 2010 30,000 Company 2009 30,000

(LKR) (LKR)

9.00 9.00

7.00 5.50 12.50

9.00 9.00

7.00 5.50 12.50

Dividend distributed out of taxable profits is subject to withholding tax at 10% to be deducted at source from the shareholders. To the extent that dividends received by the Company forms part of the dividend declared, this will not be subject to the 10% withholding tax deduction. Dividend per share is calculated by dividing total dividends by the number of ordinary shares in issue as at the year end.

128

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Notes to the Financial Statements (contd.)

35 Related Party Disclosures Details of significant related party disclosures are as follows:

35.1 Transactions with the parent and related entities

Name of the Company and relationship Nature of transaction NDB AVIVA Wealth Rainbow Trust National Development Aviva Asia Management Limited Management Ltd. Bank PLC Private limited* Related Company Subsidiary Significant Investor Group Company

Aviva -re** Group Company

Serendib Land Related Company

2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 LKR '000 LKR '000 LKR '000 LKR '000 LKR '000 LKR '000 LKR '000 LKR '000 LKR '000 LKR '000 LKR '000 LKR '000

Management Fees Paid Franchise Fee paid Investment Income Received Allocation of overheads Investments in government securities and fixed deposits Investment in shares Insurance premium Received Claims incurred Rent paid Brokerage paid Group recharges Re-insurance transactions (net)

(59,320) (44,556) 14,029

2,295

1,442

-

-

-

-

-

-

1,212 -

1,131 -

(73,613) (19,260) 60,998 88,732 -

-

-

1,349 (567) -

1,226 (108) -

-

-

191,949 711,361 73,488 58,105

-

-

9,204

36,223

11,520 -

10,800 -

(30,665) (26,284) -

-

-

(15,280) (13,054) -

* Aviva Group re-charges are on account of internal audit, training, insurance and global applications related services provided during the year. ** Aviva -re is a reinsurer for general insurance. *** The Company has advanced LKR 887,669 to AVIVA NDB Finance Lanka (Pvt) Limited, the Parent Company as at the Balance Sheet date. 35.1.1 Transactions with related entities NDB AVIVA Wealth Management Limited paid trust management fees of LKR 137,638 ( 2009 - LKR 135,104) to Rainbow Trust Management Ltd. 35.2 Transactions with Key Management Personnel of the Company or Parent and their close family members The key management personnel of the Company are the members of its Board of Directors and those of its Parent and Ultimate Parent. a) Key Management Personnel Compensation 2010 LKR '000 Directors remuneration Short-term employee benefits Retirement benefits Premiums paid for Directors and Officers Liability policy * Directors' fees 77,102 13,882 6,553 1,601 120 99,258 * b) The insurance policy covers past and present Directors and Officers of the Company and its subsidiaries. No loans have been granted to Key Management Personnel, during the year. 2009 LKR '000 13,767 251 1,694 120 15,832

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c)

Other Transactions Business transactions of Key Management Personnel 2010 LKR '000 Premium paid on insurance policies taken by Directors in their individual capacity Claims paid 538 538 2009 LKR '000 595 595

There have been no transactions with close family members of Key Management Personnel and Shareholders who have either control, significant influence or joint control over the Company. 35.3 Transactions with other related parties a) Transactions with entities that are controlled, jointly controlled or significantly influenced by Key Management Personnel or their close family members, or shareholders who have either control, significant influences or joint control over the entity. Transactions by Key Management Personnel with related companies. Company NDB AVIVA Wealth Management Limited Relationship Related Company Details of Financial Dealings Transactions to the value of LKR. 2,959,226 (2009 - LKR 1,113,865)

Transactions by Key Management Personnel with Other Companies (Directors of the Company who are also Directors of entities which have insurance policies from the Company at normal commercial terms) Company Sampath Bank PLC Details of Financial dealings General insurance business to the value of LKR 3,244,000 (2009 - LKR 10,240,000) and payment of claims LKR 3,659,000 ( 2009 - LKR 3,460,000) General insurance business to the value of LKR 4,634,000 (2009 - LKR 2,058,000) and payment of claims LKR 1,447,000 ( 2009 - LKR 87,000) General insurance business to the value of LKR 1,170,000 (2009 - LKR 1,036,000) and payment of claims LKR 1,397,000 ( 2009 - LKR 524,000) and Life insurance business to the value of LKR 123,678 ( 2009 - LKR 122,643) General insurance business to the value of LKR 11,000 ( 2009 - LKR 17,000) and no claims during the year ( 2009 - LKR 18,000) General insurance business to the value of LKR 2,384,000 ( 2009 - LKR 3,132,000) and no claim payments during the year ( 2009 - LKR 163,000). General insurance business to the value of LKR 46,000 (2009 - LKR 84,000) and payment of claims LKR 7,000 ( 2009 - LKR 211,000) General insurance business to the value of LKR 420,000 (2009 - LKR 500,000), and no claims during the year ( no claims during 2009) General insurance business to the value of LKR 78,000, no claims during the year.

Hemas Manufacturing (Pvt) Limited

NDB Investment Bank (Pvt) Limited

N Chandraratne Decorators (Pvt) Limited

Development Holdings (Pvt) Limited

Cisco Speciality Packaging (Pvt) Limited

Maldives Finance Leasing Company Limited

Lanka Communication Services (Pvt) Limited

130

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

35.4 Post employment benefit plans of the Company and its related parties. 2010 LKR '000 Contributions made by the Company to the provident fund in respect of Key Management Personnel compensation 590 Contributions made by the Company to the Trust Fund in respect of Key Management Personnel compensation

2009 LKR '000 1,179

118 708

236 1,415

36 Contingent Liabilities 36.1 Assessment in respect of Value Added Tax (VAT) The Company has been issued with an assessment by the Department of Inland Revenue on the 23rd of July 2005 under the Value Added Tax Act, in relation to the taxable period ending 31st December 2003 for LKR 43.3 million. The Company has filed an appeal in August 2005 on the basis that the underlying computation includes items which are exempt/ out of scope of the VAT Act. The appeal made by the Company is currently with the Board of Review of the Department of Inland Revenue. The hearing of the appeal by the Board of Review was held in the current year and the Company is awaiting the final decision. Based on the information available and expert advice, the directors are confident that the ultimate resolution of the above contingency is unlikely to have a material adverse effect on the financial position of the Company. Additionally the Company has received VAT assessments to the value of LKR 6.1 million from the Department of Inland Revenue, in relation to which appeals have been filed. 36.2 Pending Litigation In the opinion of the Directors and the Company's lawyers, pending litigation against the company will not have a material impact on the reported financial results or future operations of the Company. 37 Capital Commitments As at 31st December 2010, capital expenditure approved by the Board of Directors is as follows. 2010 LKR '000 Approved and contracted for Approved but not contracted for 58,657 58,657 2009 LKR '000 62,924 62,924

38

Events after the Balance Sheet Date The Board of Directors of the Company have recommended a declaration of a first and final dividend of LKR 9.00 per share for the financial year ended 31st December 2010, subject to approval by the shareholders. As required by section 56(2) of the Companies Act No. 07 of 2007, the Board of Directors have confirmed that the Company satisfies the solvency test in accordance with section 57 of the Companies Act No. 7 of 2007, and has obtained a certificate from the Auditors, prior to recommending the first and final dividend of LKR 9.00 per share for the year 2010 to be paid on 11th April 2011. In accordance with the Sri Lanka Accounting Standard 12 (revised 2005) - Events after the Balance sheet date, the first and final dividend recommended has not been recognised as a liability in the Financial Statements as at 31st December 2010.

39

Shareholders' Interest in Long Term Insurance Provision The value of future profits on existing Long Term insurance business constitutes an asset and has not been accounted for.

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AVIVA NDB Insurance PLC Annual Report and Accounts 2010

"I have a comprehensive motor insurance plan with a distinct difference. My premium will no longer be calculated by the value of my vehicle alone, because my competency behind the wheel is equally significant so that I pay a personalised premium just right for me"

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

133

134

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Quarterly Analysis 2010

Group Statement of Income 1st quarter Jan - Mar 10 LKR '000 Revenue Gross written premium Reinsurance premium Net written premium (Increase) / decrease in net unearned premium Net earned premium Benefits, losses and expenses Net claims and benefits Commission (net of reinsurance commission) Franchise fee Deferred commission Increase in Long Term insurance fund Other revenue Asset management fees and related income Investment income Other income Expenses Operating and administrative expenses Profit before taxation Income tax expenses Net profit for the period Company Statement of Income 1st quarter Jan - Mar 10 LKR '000 Revenue Gross written premium Reinsurance premium Net written premium (Increase)/decrease in net unearned premium Net earned premium Benefits, losses and expenses Net claims and benefits Commission (net of reinsurance commission) Franchise fee Deferred commission Increase in Long Term insurance fund Other revenue Investment income Other income Expenses Operating and administrative expenses Profit before taxation Income tax expenses Net profit for the period 2,730,427 2,080,269 (278,088) 1,802,181 (105,586) 1,696,595 2nd quarter Apr - Jun 10 LKR '000 3,195,051 2,150,048 (303,056) 1,846,992 30,476 1,877,468 3rd quarter Jul - Sep 10 LKR '000 4,935,231 2,984,502 (194,533) 2,789,969 28,687 2,818,656 4th quarter Oct - Dec 10 LKR '000 4,324,848 3,415,909 (202,289) 3,213,620 (12,430) 3,201,190 Total Jan - Dec 10 LKR '000 15,185,557 10,630,728 (977,966) 9,652,762 (58,853) 9,593,909 2,730,927 2,080,269 (278,088) 1,802,181 (105,586) 1,696,595 2nd quarter Apr - Jun 10 LKR '000 3,195,397 2,150,048 (303,056) 1,846,992 30,476 1,877,468 3rd quarter Jul - Sep 10 LKR '000 4,935,482 2,984,502 (194,533) 2,789,969 28,687 2,818,656 4th quarter Oct - Dec 10 LKR '000 4,325,118 3,415,909 (202,289) 3,213,620 (12,430) 3,201,190 Total Jan - Dec 10 LKR '000 15,186,924 10,630,728 (977,966) 9,652,762 (58,853) 9,593,909

(952,349) (167,518) (37,189) 8,741 (986,000) (437,720) 36 974,829 59,467 (614,432) (17,820) (62,632) (80,452)

(981,968) (138,869) (46,946) 2,868 (1,321,715) (609,162) 32 1,260,527 57,370 (658,849) 49,918 (96,855) (46,937)

(1,181,500) (272,511) (79,874) 16,768 (2,547,452) (1,245,913) 34 2,042,465 74,327 (676,183) 194,730 (80,619) 114,111

(1,007,731) (256,458) (85,349) 15,424 (1,544,556) 322,520 36 1,037,958 85,934 (779,517) 666,931 (53,485) 613,446

(4,123,548) (835,356) (249,358) 43,801 (6,399,723) (1,970,275) 138 5,315,779 277,098 (2,728,981) 893,759 (293,591) 600,168

(952,349) (167,518) (37,189) 8,741 (986,000) (437,720) 974,750 59,082 (613,717) (17,605) (62,632) (80,237)

(981,968) (138,869) (46,946) 2,868 (1,321,715) (609,162) 1,260,437 57,146 (658,127) 50,294 (96,855) (46,561)

(1,181,500) (272,511) (79,874) 16,768 (2,547,452) (1,245,913) 2,042,376 74,199 (675,500) 195,162 (80,637) 114,525

(1,007,731) (256,458) (85,349) 15,424 (1,544,556) 322,520 1,037,881 85,777 (778,431) 667,747 (53,484) 614,263

(4,123,548) (835,356) (249,358) 43,801 (6,399,723) (1,970,275) 5,315,444 276,204 (2,725,775) 895,598 (293,608) 601,990

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Quarterly Analysis 2009

Group Statement of Income 1st quarter Jan - Mar 09 LKR '000 Revenue Gross written premium Reinsurance premium Net written premium (Increase) / decrease in net unearned premium Net earned premium Benefits, losses and expenses Net claims and benefits Commission (net of reinsurance commission) Franchise Fee Deferred commission Increase in Long Term insurance fund Other revenue Asset management fees and related income Investment income Other income Expenses Operating and administrative expenses Profit before taxation Income tax expenses Net profit for the period Company Statement of Income 1st quarter Jan - Mar 09 LKR '000 Revenue Gross written premium Reinsurance premium Net written premium (Increase)/decrease in net unearned premium Net earned premium Benefits, losses and expenses Net claims and benefits Commission (net of reinsurance commission) Franchise fee Deferred commission Increase in Long Term insurance fund Other revenue Investment income Other income Expenses Operating and administrative expenses Profit before taxation Income tax expenses Net profit for the period 1,916,488 1,547,031 (290,602) 1,256,429 (47,741) 1,208,688 2nd quarter Apr - Jun 09 LKR '000 2,472,349 1,434,071 (225,757) 1,208,314 28,730 1,237,044 3rd quarter Jul - Sep 09 LKR '000 2,401,894 1,716,387 (222,169) 1,494,218 (82,774) 1,411,444 4th quarter Oct - Dec 09 LKR '000 2,912,065 2,438,629 (276,131) 2,162,498 (334,970) 1,827,528 Total Jan - Dec 09 LKR '000 9,702,796 7,136,118 (1,014,659) 6,121,459 (436,755) 5,684,704 1,926,509 1,547,031 (290,602) 1,256,429 (47,741) 1,208,688 2nd quarter Apr - Jun 09 LKR '000 2,412,115 1,434,071 (225,757) 1,208,314 28,730 1,237,044 3rd quarter Jul - Sep 09 LKR '000 2,403,362 1,716,387 (222,169) 1,494,218 (82,774) 1,411,444 4th quarter Oct - Dec 09 LKR '000 2,912,813 2,438,629 (276,131) 2,162,498 (334,970) 1,827,528 Total Jan - Dec 09 LKR '000 9,654,799 7,136,118 (1,014,659) 6,121,459 (436,755) 5,684,704

(636,686) (124,455) (5,175) 3,076 (633,255) (187,807) 4,247 656,625 56,949 (368,172) 161,842 (63,487) 98,355

(587,967) (133,206) (11,631) 8,115 (1,037,090) (524,735) 2,986 1,117,513 54,572 (432,951) 217,385 (68,465) 148,920

(694,782) (107,204) (25,998) 22,573 (1,019,043) (413,010) 33 941,425 50,460 (441,120) 137,788 (62,949) 74,839

(742,057) (156,525) (31,351) 8,152 (873,896) 31,851 55 1,027,411 57,819 (676,611) 440,525 (32,114) 408,411

(2,661,492) (521,390) (74,155) 41,916 (3,563,284) (1,093,701) 7,321 3,742,974 219,800 (1,918,854) 957,540 (227,015) 730,525

(636,686) (124,455) (5,175) 3,076 (633,255) (187,807) 651,598 56,202 (368,086) 151,907 (59,857) 92,050

(587,967) (133,206) (11,631) 8,115 (1,037,090) (524,735) 1,182,843 52,462 (433,882) 276,688 (65,090) 211,598

(694,782) (107,204) (25,998) 22,573 (1,019,043) (413,010) 941,306 49,144 (440,056) 137,384 (62,790) 74,594

(742,057) (156,525) (31,351) 8,152 (873,896) 31,851 1,027,312 57,225 (675,647) 440,741 (32,163) 408,578

(2,661,492) (521,390) (74,155) 41,916 (3,563,284) (1,093,701) 3,803,059 215,033 (1,917,671) 1,006,720 (219,900) 786,820

136

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Decade at a Glance

Statement of Income

(Values are to the nearest rupees thousand)

2010 General Insurance Gross written premium Net earned premium Investment income and other income Net claims Reinsurance commission net of acquisition expenses Operating and administrative expenses Special Tsunami relief expenses Finance costs Profit / (loss) before taxation Long Term Insurance Annual premium equivalent Gross written premium Net written premium Investment income and other income Net claims and benefits Commission (net of reinsurance commission) Increase in Long Term insurance fund Operating and administrative expenses Tax expense Surplus transfer to shareholders' fund Total business (Group) Gross written premium Revenue Net earned premium Benefits, losses and expenses Other revenue Operating and administrative expenses Special Tsunami relief expenses Finance costs Profit before taxation Income tax expenses Profit after taxation Minority interest Net profit for the year (2,728,980) (1,918,854) (1,564,900) (1,410,067) (1,167,303) (1,018,972) 893,759 (293,591) 600,168 600,168 957,540 (227,015) 730,525 730,525 604,821 (141,101) 463,720 463,720 546,116 (19,035) 527,081 527,081 538,963 (15,495) 523,468 523,468 527,970 (12,593) 515,377 515,377 (838,152) (89,000) (3,886) 263,209 (9,545) 253,664 253,664 (883,779) (23,446) 318,412 318,412 318,412 (785,185) (53,901) 269,636 (183) 269,453 269,453 (739,959) (35,523) 197,512 (206) 197,306 197,306 10,630,728 15,186,924 9,593,909 5,593,015 7,136,118 9,654,799 5,684,704 3,970,095 6,387,470 7,265,318 5,259,132 2,006,186 5,655,245 5,874,842 4,386,651 1,488,191 4,618,462 4,813,426 3,561,892 1,251,534 4,043,477 4,276,524 3,145,871 1,130,653 3,558,155 3,728,323 2,772,533 955,790 3,242,508 3,347,232 2,502,072 845,160 2,737,092 2,950,453 2,064,248 886,205 2,407,855 2,711,696 1,914,279 797,417 (1,710,006) (1,445,233) (1,157,021) (1,020,515) (270,269) 327,793 (155,184) 320,000 (150,675) 280,000 400,000 (833,680) 435,000 (705,584) 375,000 (550,081) 250,000 (547,203) 215,000 (524,054) 192,904 (503,123) 145,205 (939,902) (567,052) (558,772) (471,145) (375,530) (349,501) (321,321) (274,511) (226,570) (193,368) (6,399,723) (3,563,284) (2,178,018) (1,798,355) (1,269,864) (1,252,803) (1,372,545) (924,921) (1,035,241) (1,001,129) 4,604,047 3,396,840 1,633,746 1,222,411 999,717 920,132 (917,336) 690,128 (564,232) 689,580 (780,660) 716,614 (463,224) 654,091 (408,472) (2,504,366) (1,758,839) (1,435,078) (1,105,713) (1,058,236) 3,094,196 7,783,925 7,548,012 1,680,094 4,632,490 4,412,752 1,695,791 4,342,218 4,125,818 1,635,644 3,788,103 3,573,317 1,248,905 3,150,042 2,972,593 1,009,258 2,832,541 2,680,092 783,197 2,500,131 2,368,051 735,713 2,169,842 2,052,715 662,032 1,827,208 1,725,379 571,585 1,677,344 1,597,206 (1,015,769) 297,536 (472,438) 531,536 (402,238) 139,328 (376,987) 123,897 (323,431) 85,051 (304,952) 135,010 (277,692) (89,000) (3,886) (1,912) (324,763) (23,446) 88,887 (248,104) (53,901) 68,220 (219,713) (35,523) 43,156 (101,011) 13,423 14,347 38,223 27,299 42,301 36,833 120,253 72,432 15,821 2,846,803 2,045,897 987,601 (1,619,182) 2,503,628 1,271,952 621,252 (902,653) 2,045,252 1,133,314 331,981 (938,076) 1,867,142 813,334 230,996 (581,669) 1,468,420 589,299 222,713 (430,829) 1,210,936 465,779 184,125 (252,243) 1,058,024 404,482 240,162 (312,811) 1,072,666 449,357 129,242 (261,756) 909,884 338,869 148,052 (189,128) 730,511 317,073 117,052 (151,554) 2009 2008 2007 2006 2005 2004 2003 2002 2001

(11,564,185) (6,778,405) (5,095,597) (3,918,659) (3,107,160) (2,729,582) (2,534,076) (2,121,595) (1,841,731) (1,738,702)

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

137

Revenue

18,000 15,000 8,000 7,000 6,000

Life GWP & APE

(LKR Mn)

(LKR Mn)

12,000 9,000 6,000 3,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

5,000 4,000 3,000 2,000 1,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Net Earned Premium

Other Revenue

GWP

APE

Total GWP

12,000 10,000 8,000 15,000 12,000

(LKR Mn)

Life GWP, revenue & operating and administrative expenses

(LKR Mn)

9,000 6,000 3,000 0

6,000 4,000 2,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Life GWP

General GWP

Total GWP

Revenue

Life operating and administrative expenses

GWP

Expenses

15,000 12,000

General GWP, revenue and net earn premium

3,500 3,000 2,500

(LKR Mn)

9,000 6,000 3,000 0

(LKR Mn)

2,000 1,500 1,000 500 0

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Benefits, losses and expenses Finance costs

Operating and administrative expenses Income tax expenses

Revenue

Net earned premium

GWP

Net profit for the year

800 700 600 3,500 3,000 2,500

General GWP, revenue & operating and administrative expenses

(LKR Mn)

(LKR Mn)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

500 400 300 200

2,000 1,500 1,000 500 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Revenue

General operating and administrative expenses

GWP

138

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Decade at a Glance (contd.)

Balance Sheet

(Values are to the nearest rupees thousand)

2010 Group Assets Investments Investments - Unit linked Property, plant and equipment Other assets Total assets Equity and liabilities Stated capital Revaluation reserve Special reserve Fund Resilience reserve General reserve Retained earnings Total capital and reserves Liabilities Insurance provision - Long Term Insurance provision - Unit linked Provision for Life Fund solvency Insurance provision - General Other liabilities Total liabilities Total equity and liabilities Long Term - supplemental Assets Investments Investments - Unit linked Other assets Total assets Liabilities Insurance provision - Long Term Insurance provision - Unit linked Other liabilities Total liabilities Investor Information Return on net assets (%) Net assets per share (LKR) Market price per share - 31st December (LKR) Basic earnings per share (LKR) Price earnings ratio (times) Market capitalisation (LKR Mn) Dividend per share (LKR) Employee Information Revenue per employee (LKR Mn) Net profit per employee (LKR'000) Number of employees (nos.) 2010 30.72 96.99 280 20.01 14.00 8,400 9.00 2009 37.12 85.98 178.00 24.35 7.31 5,340 12.50 2008 27.20 74.13 115.00 15.46 7.44 3,450 3.00 2007 26.97 67.51 150.75 17.57 8.58 4,523 9.50 2006 30.92 58.11 135.50 17.45 7.77 4,065 8.25* 2005 35.98 48.91 85.00 17.18 4.95 2,550 4.17* 2004 24.44 35.90* 110.00 8.46* 13.01* 2,200 5.34* 2003 32.38 32.77* 120.00 10.61* 11.31* 2,400 7.83* 2002 34.58 ** 25.99*

**

2009

2008

2007

2006

2005

2004

2003

2002

2001

21,381,466 17,760,977 14,834,964 12,753,342 11,467,119 5,191,335 1,346,150 473,706 241,130 48,436 240,562 237,772 376,872 403,431 386,671 4,866,063 5,096,277 4,105,475 3,570,828 3,028,835

9,970,620 296,332 2,391,279

8,646,435 244,336 2,983,017

7,034,788 204,687 2,397,225

6,217,796 211,304 1,576,405 8,005,505

4,917,869 255,785 1,418,273 6,591,927

31,679,426 24,441,176 19,791,017 16,968,731 14,931,061 12,658,231 11,873,788 9,636,700

300,000 39,916 289,000 2,280,729 2,909,645

300,000 39,916 289,000 1,950,561 2,579,477

300,000 39,916 289,000 1,595,036 2,223,952

300,000 39,916 315,510 237,000 955,000 177,806 2,025,232

300,000 279,820 161,500 720,000 281,915 1,743,235

300,000 268,036 135,000 541,000 223,231 1,467,267

200,000 235,588 65,000 516,000 60,302 1,076,890

200,000 666,000 117,226 983,226

200,000 533,000 46,814 779,814

**

200,000 418,000 42,361 660,361

**

19,316,675 16,686,639 13,989,661 12,063,506 10,453,542 5,130,753 1,361,066 494,760 242,897 54,507 175,000 175,000 175,000 2,201,087 1,865,820 1,447,620 1,088,994 1,122,631 1,946,266 1,773,174 1,460,024 1,548,102 1,557,146

9,238,184 858,759 1,094,021

7,985,381 1,512,900 1,298,617

6,612,836 1,171,089 869,549

5,687,915 461,676 1,076,100 7,225,691 8,005,505

4,652,674 400,006 878,886

**

28,769,781 21,861,699 17,567,065 14,943,499 13,187,826 11,190,964 10,796,898 8,653,474 31,679,426 24,441,176 19,791,017 16,968,731 14,931,061 12,658,231 11,873,788 9,636,700

5,931,566 6,591,927

**

17,707,393 14,886,512 12,555,930 11,000,554 5,191,335 1,346,150 473,704 241,130 2,709,746 2,741,474 2,028,136 1,794,460

9,992,944 48,436 1,229,112

8,713,775 965,998 9,679,773

7,502,053 947,165 8,449,218

5,871,267 1,066,629 6,937,896

5,114,610 871,668 5,986,278

4,135,508 737,544 4,873,052

25,608,474 18,974,136 15,057,770 13,036,144 11,270,492

19,316,675 16,686,639 13,989,661 12,063,506 10,453,542 5,130,753 1,361,066 494,760 242,897 54,507 1,161,046 926,431 573,349 729,741 762,443 25,608,474 18,974,136 15,057,770 13,036,144 11,270,492

9,238,184 441,589 9,679,773

7,985,381 463,837 8,449,218

6,612,836 325,060 6,937,896

5,687,915 298,363 5,986,278

4,652,674 220,378 4,873,052

2001 29.91 22.01**

**

62.50 8.98* 6.96* 1,250 4.00*

**

43.00 6.58 6.54 860 3.00 *

**

19.47 769 780

12.28 929 786

10.02 640 725

9.21 826 638

9.06 986 531

9.57 1,153 447

8.30 565 449

7.68 730 436

6.88 628 429

6.61 481 410

* Adjusted for subsequent bonus issues. ** Adjusted as stipulated by SLAS 12 (revised - applicable w.e.G. 01/01/2006).

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

139

Total Liabilities

35,000 30,000 25,000

(LKR Mn)

20,000 15,000 10,000 5,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Stated capital Insurance Provision - Life Other Liabilities

Reserves Insurance Provision - GI

Total Assets

35,000 30,000 25,000

(LKR Mn)

20,000 15,000 10,000 5,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Government Securities Equity Property, plant and equipment

Corporate Debt Unit Trusts Other assets

Total capital and reserves

3,000 2,500 2,000

(LKR Mn)

1,500 1,000 500 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

140

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Share Information

Shareholdings

As at 31st December 2010 there were 2,189 registered shareholders.

Distribution of Ordinary Shares

Resident Shareholding No. of Shareholders 1,879 273 22 3 2 2,179 No. of Shares % No. of Shareholders 7 2 1 10 Non-Resident No. of Shares % No. of Shareholders 1,886 275 23 3 2 2,189 Total No. of Shares %

1 1001 10,001 -

1,000 10,000 100,000

514,444 704,183 670,612 411,300 27,682,162 29,982,701

1.71 2.35 2.24 1.37 92.27 99.94

1,999 5,200 10,100 17,299

0.01 0.02 0.03 0.06

516,443 709,383 680,712 411,300 27,682,162

1.72 2.37 2.27 1.37 92.27

100,001 - 1,000,000 Over 1,000,000 Total

30,000,000 100.00

The percentage of shares held by the public 12.72%.

Categories of Shareholdings

No. of Shareholders Individual Institutional Total 2,118 71 2,189 No. of Shares 1,651,838 28,348,162 30,000,000 %

5.51 94.49 100.00

Substantial Shareholdings

No. of Shares %

AVIVA NDB Finance Lanka (Private) Limited National Development Bank PLC

26,182,162 1,500,000

87.27 5.00

Value of LKR. 1,000 invested at AVIVA NDB IPO

120,000 100,000 80,000 60,000

32,147 18,297 61,547 107,672 54,122 12,570 11,177 9,350 2,800 6,800 1,000 IPO 1988 1989 1,000 900 1990 1991 1992 2,750 1993 1994 1995 8,655 1996 8,843 1997 1998 8,597 1999 10,297 2000 10,497 2001 2002 13,197 2003 2004 31,747 2005 36,497 2006 2007 2008 51,722 2009 74,372 2010

40,000 20,000 0

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

141

Major Shareholders

The 20 largest shareholders as at 31 December 2010 are given below: 31-Dec-10 No. of Shares 1 2 3 4 5 6 7 8 9 AVIVA NDB Finance Lanka (Private) Limited National Development Bank PLC Mr Senathirajah Union Investments Ltd Colonial Motors Ltd Jacey Trust Services (Private) Limited Merchant Bank of Sri Lanka Limited/ Union Investments Ltd Mr Dalpethado Mr Hathiramani 83,700 55,812 37,800 37,498 33,300 30,598 21,000 19,700 16,999 15,500 15,000 15,000 15,000 15,000 28,686,719 * No. of shares referred above are ordinary shares 0.28 0.19 0.13 0.12 0.11 0.10 0.07 0.07 0.06 0.05 0.05 0.05 0.05 0.05 95.62 83,700 28,712 37,248 37,498 20,598 16,999 15,000 15,000 15,000 28,568,967 0.28 0.10 0.12 0.12 0.07 0.06 0.05 0.05 0.05 95.22 26,182,162 1,500,000 300,000 111,300 90,750 90,600 % 87.27 5.00 1.00 0.37 0.30 0.30 No. of Shares 26,182,162 1,500,000 300,000 111,300 90,750 115,000 31-Dec-09 % 87.27 5.00 1.00 0.37 0.30 0.38

10 Mr Srikantha 11 Union Assurance PLC 12 Mr Perera 13 Mr Rodrigo/ Mrs V N Rodrigo 14 Waldock Mackenzie Ltd/ Mr K H Udeshi 15 Dr Ratnaweera 16 Mr Fernando 17 Mr Udeshi 18 Mrs Wickremesinghe 19 Mr Nawinne 20 The Ceylon Desiccated Coconut & Oil Co

142

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Share Information (contd.)

Share Valuation

The market value of the Company's ordinary shares as at 31 December 2010 was LKR 280.00 (31 December 2009 - LKR 178.00) No. of transactions 742 417,600 98,794,170 570,327 8,400 2,210,452 6,635.87 280.00 325.00 165.00 20.01 13.99 96.99 30.72 370 193,200 29,489,400 142,463 5,340 1,092,137 3,385.55 178.00 187.50 100.25 24.35 7.31 85.98 37.12

Share Performance

2010 2009

Record of Scrip Issues

Year of issue 1994 1995 1996 1997 2005 Type of issue Bonus Bonus Bonus Bonus Bonus Ratio 1: 5 1: 4 1: 4 1 : 15 1: 2

No. of shares traded Total value of shares traded (LKR.) CSE Turnover (LKR. Mn) AVIVA NDB market cap. (LKR. Mn) CSE market cap. (LKR. Mn) All Share Price Index - 31 December AVIVA NDB Share Price - 31 December (LKR.) AVIVA NDB Share Price - High (LKR.) AVIVA NDB Share Price - Low (LKR.) Earnings per share (LKR.) P/E Ratio (times) Net assets per share (LKR.) Return on net assets (%)

CSE Indices Vs AVIVA NDB Share Price

Indexed to 31 December 2009

220 200 180 160 140 120 100 80 60 40

Dec 09 Jan 10 AVIVA NDB Feb 10 Mar 10 ASPI Apr 10 Milanka May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

143

Group Value Added Statement

2010 LKR '000 Net earned premium Investment income and other income Net claims and benefits Cost of external services Value added 9,593,909 5,593,015 15,186,924 (4,123,548) (1,528,869) 9,534,507 % To employees To intermediaries To the Government as taxes, cess and levies To the providers of capital To the Life policyholders as Long Term reserves Retained within the business - as amortisation of intangible assets - as depreciation - in reserves 964,917 1,045,221 379,033 270,000 6,399,723 46,231 99,214 330,168 9,534,507 10 11 4 3 67 733,830 847,683 287,654 375,000 3,563,284 40,934 97,798 355,525 6,301,708 2009 LKR '000 5,684,704 3,970,095 9,654,799 (2,661,492) (691,599) 6,301,708 % 11 12 8 6 55 1 2 5 100

1 3 100

Distribution of value added - 2010

Distribution of value added - 2009

To employees To intermediaries To the Government as taxes To the providers of capital To Life policyholders Retained as amortisation of intangible assets Retained as depreciation Retained in reserves

11% 12% 8% 6% 55% 1% 2% 5%

To employees To intermediaries To the Government as taxes To the providers of capital To Life policyholders Retained as amortisation of intangible assets Retained as depreciation Retained in reserves

14% 19% 0% 8% 48% 0% 3% 8%

144

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Distribution Network

Head Office 75 Kumaran Ratnam Road Colombo 2 E-mail: [email protected] www.avivandb.com Tel : 231 0300 / 231 0000 Fax : 231 0076 AVIVA NDB 24 - Hour Hotline: 231 0310 Fax : 471 5892 General insurance Division UPTO Building 95 Sir Chittampalam A Gardiner Mw Colombo 2 Tel : 2310 400 Fax : 2310 011 AVIVA NDB Life Link No. 1 Kumaran Ratnam Road Colombo 2 Tel : 2 310 310 Fax : 4 715 892 City Office 101/1 Sir Chittampalam A Gardiner Mw Colombo 2 Tel : 231 0200 Fax : 231 0259 AVIVA NDB Regional Offices Distribution Network Ambalangoda 118A / 2 / 1 GMA Building Galle Road Ambalangoda Tel 091 225 8969 Fax 225 8994 Ambalantota 143 Main Street Ambalantota Tel 047 222 3359 Fax 047 222 5022 Ampara 149 Nidahas Mw Ampara Tel 063 222 3664 Fax 063 222 3663 Anuradhapura 213 / 5 Maithripala Senanayake Mw Anuradhapura Tel 025 222 0858 Fax 025 222 3102 Avissawella 68 /1 / 1 Yatiyantota Road Avissawella Tel 036 223 2597 Fax 036 223 3550 Badulla 72 Sagarika Bldg Lower Street Badulla Tel 055 222 2848 Fax 055 223 0772 Bandarawela 3 / 126 Main Street Bandarawela Tel/Fax 057 222 4869 Batticaloa 42 / 1 Trincomalee Road Batticaloa Tel 065 222 7975 Fax 065 222 7988 Chilaw 109 / 1 Colombo Road Chilaw Tel 032 222 3027 Fax 032 222 1217 Dambulla 734 / 1 Anuradhapura Road Dambulla Tel 066 228 3335 Embilipitiya 1st Floor Lakmini Supermarket Bldg 51 Main Street Embilipitiya Tel 047 226 1919 Tel/Fax 047 223 0416 Galle 16 1 / 1 Colombo Road Kaluwella Galle Tel 091 224 6733 Fax 091 223 2261 Gampaha 85 Bauddhaloka Mw Gampaha Tel 033 222 7393 / 222 1177 /223 4700 Fax 033 222 6840 Horana 135 Panadura Road Horana Tel/Fax 034 226 2359 Ja-Ela 59A Negombo Road Ja-Ela Tel/Fax 224 8222 / 224 8223 /224 8224 Jaffna 62 / 6 Stanley Road Jaffna Tel 021 222 1215 Fax 021 222 1216 Kalutara 183 1 / 1 Main Street Kalutara Tel 034 222 2820 Fax 034 222 9783 Kandy Commercial Bank Bldg 6th Floor 90-92 Kotugodella Veediya Kandy Tel 081 222 2321 / 220 0100 / 220 0101 / 222 2322 Fax 081 223 2668 Kegalle 447 / 8 Main Street Kegalle Tel 035 222 3141 Fax 035 223 1780 Kiribathgoda 412 / 2 Gaala Junction Kandy Road Kiribathgoda Tel/Fax 290 1660 /290 1664 / 2901666 Kotte 119 Pannipitiya Road Battaramulla Tel 287 5258 / 288 9809 -11 Fax 552 5394 Kuliyapitiya 149 / 7 Main Street Kuliyapitiya Tel/Fax 037 228 1867 Kurunegala 110 / 1 Noel Seneviratne Mw Colombo Road Kurunegala Tel/Fax 037 222 3540 /222 7707 / 222 9998 Maharagama 140 /1 High Level Road Maharagama Tel 283 7611 / 283 7612 Fax 283 7488 Matale 181 Nimali Bldg Trincomalee Street Matale Tel/Fax 066 223 2401-3 Matara No.24, E. H. Cooray Building, Anagarika Dharmapala Mawatha, Matara. Tel 041 222 2844 / 222 1051 / 222 0674 Fax 041 222 7344 Moneragala 308A Kachcheri Junction Wellawaya Road Moneragala Tel/Fax 055 227 6496 Moratuwa 529 /1 Galle Road Rawathawatte Moratuwa Tel/Fax 264 8020 / 264 8021 / 264 8022 Negombo 349 /17 Main Street Negombo Tel/Fax 031 222 2266 / 223 5115 Nuwara Eliya 1st Floor Siva Shopping Complex 48 Lawson Street Nuwara Eliya Tel/Fax 052 222 3478 Polonnaruwa 68/1 Batticaloa Road Polonnaruwa Tel/Fax 027 222 3108 Ratnapura 23A Bandaranayake Mw Ratnapura Tel/Fax 045 223 0946 / 222 4417 / 045 222 2601 Trincomalee 5A Main Street Trincomalee Tel/Fax 026 222 7949 / 026 222 6095/6 Vavuniya 66 Station Road Viravapuliyankulam Vavuniya Tel Mobile 024 222 5672 Tel/Fax 024 222 5673

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

145

Introduction to Insurance Accounting

Introduction to Insurance Accounting

Insurance Accounting is different from the accounting for a manufacturing or trading organisation, due to the uniqueness of the business and terminology associated with the transactions. As a result, understanding the accounts of an insurance company is a challenge from a layman's point of view. This brief note is to facilitate the reviewer in understanding our financials and is to be read with the additional information provided in the glossary. not received by the Company. A General insurance policy is issued for a period of one year or less. For example, a motor insurance policy is generally issued for a period of one year whereas; a marine insurance policy is issued for a lesser period to cover the duration of the voyage.

3.

Reinsurance Premium

Reinsurance is the process whereby part of the risk/s undertaken by the insurance company is transferred to another entity called the re-insurance company, for which the insurance company pays a premium known as the Reinsurance Premium.

Statement of Income

Industry Segment Data - Statement of Income 2010 For the year ended 31st December

Notes General Insurance LKR. '000 Long Term Insurance LKR. '000

4.

Net Written Premium

Gross written Premium net of reinsurance premium is known as the Net Written Premium and is the premium from risk retained within the business.

Revenue Gross written premium Reinsurance premium Net written premium Increase in net unearned premium Net earned premium Benefits, losses and expenses Net claims and benefits Commission (net of reinsurance commission) Franchise fee Deferred commission Increase in Long Term Insurance Fund

1 2 3 4 5 6

3,033,498 2,846,803 (742,053) 2,104,750 (58,853) 2,045,897

12,152,059 7,783,925 (235,913) 7,548,012 7,548,012

5.

Earned Premium / Unearned Premium

The premium received is distributed across the period covered by the policy, generally a period of twelve months, and amount applicable for the reporting period is taken as premium income. This portion of premium taken as income is known as the Earned Premium. The balance portion is maintained in a reserve and is known as the Unearned Premium Reserve.

6.

Net Earned Premium

The portion of premium which is applicable for the financial year and earned by the insurer.

7 9 10 11 12

(1,619,182) (76,856) (67,956) 43,801 325,704

(2,504,366)

7.

(758,500) (181,402) (6,399,723) (2,295,979)

Net Claims and Benefits

If the incident against which the insurance cover was obtained occurs, the insurance company indemnifies the insured with an agreed sum, which is known as a Claim. In addition to claims which are common to both businesses, claims for General insurance relate to property, accident and liability whilst claims for Life insurance include in addition to death, disability and hospitalisation claims, other benefits paid to Life policyholders such as gratuity, surrenders, policy maturities, disability benefits, annuities and interim payments.

Note: Only the insurance specific part of the segmental income statement is extracted.

1.

Revenue

Revenue consists of the net earned premium, investment income and other income.

8.

Reinsurance Recoveries

Part of the claim payment is reimbursed by the reinsurance company to the insurance company based on the proportion of risk/s transferred to the reinsurer. This is known as the Reinsurance Recoveries.

2.

Gross Written Premium

The main source of income of an insurance company consists of the premiums paid by customers for the risk/s which they transfer to the Company. This consists of premiums for Life insurance policies and General insurance policies. Life insurance income is accounted for when premiums are received whereas, General insurance income is accounted on commencement of the insurance cover, even if premiums are

9.

(i) Commission

Insurance business is predominantly transacted through intermediaries such as brokers and direct agents. When policies are sold by intermediaries, the insurance company pays a commission based on a specified percentage of the premium and this is a key expense item.

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AVIVA NDB Insurance PLC Annual Report and Accounts 2010

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Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Introduction to Insurance Accounting (contd.)

(ii) Reinsurance Commission

The agreed risk transfer to a reinsurer takes place at the same rate as the rate charged for the policy. In view of this, the reinsurer offers a discount to the insurer to cover expenses incurred in acquiring the business. In insurance accounting, this is known as the Reinsurance Commission, which is an income to the insurance company. The term "underwriting" refers to the process of an insurance company evaluating and accepting the risks which customers wish to transfer and determining a price for such risks. In General insurance, the profit or loss of the underwriting process is known as the `Underwriting Result' which is the net of earned premium, claims, acquisition and other expenses. The underwriting result can be derived from the Insurance Revenue Account.

10.

Franchise Fee

Fees payable to partnering banks on account of premiums generated from bancassurance business from clients of the respective banks.

Balance Sheet

As at 31st December

Notes 2010 LKR '000

11.

Deferred Commission / Deferred Acquisition Cost

As a General Insurance policy may extend beyond the financial year end, only the portion of commission applicable for the reporting period is taken as the commission charge. The balance portion is maintained in a reserve and is known as the Deferred Acquisition Expenses Reserve. Liabilities Insurance provision - Long Term Conventional Insurance provision - Long Term Unit-linked Provision for Life Fund Solvency Insurance provision - General

13 13 14 15

19,316,675 5,130,753 175,000 2,201,087

12.

Increase in Long Term Insurance Fund

For the purpose of meeting the policyholders' future liabilities the insurer is required to maintain a separate fund with sufficient assets to cover an actuarially determined provision which is known as the Long Term Insurance Provision. The amount added to the provision during the current year will appear in the statement of income as Increase in Long Term Insurance Fund. The terms Written Premium, Earned premium, Commission and Claims when stated as "Gross" refers to the absolute amount and "Net" refers to the amount left after deducting the reinsurance portion.

Note: Only the insurance specific part of the Balance Sheet is extracted.

13.

The Long Term Insurance Fund

In Long Term insurance business, due to the longer duration of the policy period, insurance companies are required to maintain a separate fund to meet future policy holders' obligations. This is known as the "Insurance Provision - Long Term Insurance". The size of the fund that needs to be maintained is determined by the actuarial valuation which is carried out annually. This process estimates the excess of the assets over the policyholder's liabilities of the fund after distribution of dividends to the policyholders as at the year end. The excess is generally known as the Life Surplus. The amount that is determined to be transferred to the shareholder from this Life surplus is recorded as "Transfer to Shareholders' Funds" in the financial statements. The Life fund of the Conventional Life business and that of Unit-linked Life business are reported separately in line with the reporting requirements.

The Underwriting Process / Underwriting Result

Insurance Revenue Account For the year ended 31st December

2010 LKR '000

General insurance Gross written premium Net earned premium Net claims incurred Acquisition expenses net of of reinsurance commission Operating and administrative expenses excluding non technical expenses Other technical income Net underwriting result (680,498) 16,948 (337,847) (101,012) 2,846,803 2,045,897 (1,619,182)

14.

Provision for Life Fund Solvency

This is a reserve created by an appropriation from profits to support the solvency position of the Long Term insurance business.

15.

Insurance Provisions ­ General insurance

The reserve that is maintained in respect of General insurance business consisting of unearned premium reserve, claims outstanding and deferred acquisition expenses is known as the "Insurance Provision ­ General Insurance".

Note: Only the insurance specific part of the Insurance Revenue account is extracted.

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Glossary

Accidental death benefit

An additional payment made under a Life insurance policy if death is caused by an accident. The extra amount is usually equal to the face value of the policy.

Balance Sheet

A statement showing the financial position of a business on a specific date by listing its assets (what it owns) and its liabilities (the claims on its assets, or what it owes).

Actuary

A person who provides solutions to insurance related problems using applied mathematics (in particular, probability) to provide solutions to insurance-related problems. Actuarial techniques are used to design new insurance products and to assess the profitability of new and existing business.

Bancassurance

An arrangement whereby banks sell insurance and investment products to their customers on behalf of other financial providers.

Benchmark

A market index or rate against which an investment fund compares its performance and mix of assets.

Agent

An individual who is an independent contractor authorised to carry out transactions on behalf of another, such as the sale of insurance policies. Insurance agents usually earn commission or a fee on the sale of a policy. In Sri Lanka they are tied to a particular insurance company and offer a limited selection of products.

Beneficiary

A person, organisation or estate that receives, or may become eligible to receive, benefits from a will, insurance policy, retirement plan or other contract.

Blue chip

A description applied to the biggest and most highly regarded companies quoted on the stock market. Shares in such companies are usually considered a reliable and profitable investment.

Amortisation

An accountancy term for the gradual reduction in value of an asset caused by the passage of time. If something is amortised, it is written off. If the cause is not solely related to time, the effect is described as depreciation.

Board of Directors

Decision-making body legally responsible for overseeing the management of a company. In a listed company the directors are elected by the shareholders. Executive directors are usually employees responsible for managing the day-to-day business of the company. Non-executive directors are independent outsiders (not on the company payroll) and normally carry out their duties on a part-time basis.

Annual Premium Equivalent (APE)

A method for calculating levels of life, pensions and investment new business levels, to smooth out the effect of large, one-off payments.

Annual report

A document issued once a year by a company to report its financial position. Annual reports normally include the company's accounts, a statement of assets, liabilities and recent earnings, a description of business operations, and a comment on the outlook for the future. Public companies quoted on the Colombo Stock Exchange are required to issue an annual report to all shareholders.

Bond

A bond is technically a certificate of debt issued by a government or company in return for a loan from an investor. Bonds are sometimes known as fixed interest securities, as they often have a fixed rate of interest and a predetermined repayment date. Examples include gilt-edged securities issued by the government of Sri Lanka, and corporate bonds issued by companies as investment products.

Annuity

Another word for "pension". An annuity is a regular payment from an insurance company designed to give the policyholder an income for life after retirement. It is paid for by a lump sum saved during the policyholders' working lifetime. Annuity rates are based on yields on gilt-edged securities at the time of purchase. On death, any remaining investments usually become the property of the annuity provider.

Broker

An individual or firm that acts as an intermediary between a buyer and seller, usually charging commission or a fee. Insurance brokers arrange cover on behalf of their clients and represent the interests of the policyholder.

Capital

Any form of wealth capable of being employed in the production of more wealth.

Asset

Anything of value owned by a business that can be set against its liabilities. Assets are usually divided into four types: fixed assets (typically land, buildings and machines); current assets (cash, stock, investments, work in progress and payments owing); liquid assets (cash or funds held in a form that can be quickly converted into cash); and intangible assets (goodwill, trademarks, patents, etc).

Capital structure

The manner in which a company finances itself, including issuing shares, long term borrowings and retained earnings.

Central bank

The major regulatory bank in a country, usually controlled by the government. Its role can include setting interest rates, note issue, supervision of commercial banks, management of exchange reserves and the national currency's value, as well as acting as the government banker.

Assurance

A term sometimes used instead of "insurance", generally in connection with Life business, since assurance implies the certainty of an event (such as death) and insurance only the probability.

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Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Glossary (contd.)

CEO

Abbreviation for Chief Executive Officer. The CEO is the head of a company and oversees strategic planning and operational activities. D. These are usually issued by a credit rating agency or credit bureau.

Critical illness cover

A Life insurance policy with the benefits payable on diagnosis of one of a number of specified medical conditions.

CFO

Abbreviation for Chief Financial Officer. The CFO is responsible for a company's accounting and financial activities, and usually reports to the Chief Executive Officer.

Debenture

A fixed interest security issued by a company or government agency, usually secured on its assets, with a long term redemption (repayment) date typically between 5 and 10 years ahead. If a company files for bankruptcy, debenture stockholders are first in line to be repaid before the other stockholders and shareholders.

Claim

Notification to an insurance company of a call by a policyholder to the benefits due under the terms of an insurance policy or scheme.

Claims expenses

Expenses incurred while investigating and settling an insurance claim, over and above the cost of the claim itself. Can include legal and other professional fees. Also known as loss adjustment expenses.

Dependent

A person who depends upon another for financial support. A minor (child) is normally a dependent at least until reaching the age of majority.

Depreciation

Reduction in the worth of an asset in a company's accounts to reflect its loss of value through age and use.

Claims incurred

The total of all claims sustained during an accounting period, whether paid or not. Also known as losses incurred.

Diversification

For an investor, a method of reducing exposure to risk by investing in a range of sectors and financial products. For an insurer, it involves off-setting or counter-balancing risks across business lines, geographies, etc.

Claims ratio

Claims incurred, adjusted for any reinsurance, expressed as a percentage of net premiums earned. Sometimes referred to as loss ratio.

Combined Operating Ratio (COR)

A financial measure of insurance underwriting profitability that expresses the total of claim costs, commission and expenses as a percentage of premiums. A COR below 100% indicates profitable underwriting. Companies with a COR over 100% can still be profitable if they earn sufficient investment income from the premiums paid by policyholders.

Dividend

An amount based on a company's profits paid out to shareholders for each share they hold based on the profits of a company. Usually paid as cash, but they can also take the form of non-cash benefits.

Earnings

Another word for profit. Broadly calculated as revenues minus costs, operating expenses and taxes, minority interests, extraordinary items and dividends on preference stock.

Commission

Payment made to an agent or other intermediary, normally in return for selling an insurance or investment policy.

Earnings Per Share (EPS)

Net profit attributable to shareholders holding ordinary shares divided by the number of shares issued - is a guide to how well a company is performing. Companies often use a weighted average of shares outstanding over the reporting term.

Compliance

The requirement to operate in accordance with statutory or regulatory guidelines.

Consumer price index

An indicator of inflation that measures the percentage change in the cost of a representative "basket" of products and services bought by the average household.

Economic value added

A financial performance measure used to evaluate a company's true profit and the creation of wealth for shareholders.

Contract

A legally binding document between two parties. In the case of insurance, a common name for a scheme or policy.

Endowment assurance

A policy combining Life assurance and investment under which the sum assured is paid at a pre-agreed date, or on the death of the policyholder if earlier.

Corporate Social Responsibility (CSR)

A company's approach to how they engage with issues such as environmental management, local communities, employees, human rights, health and safety at work, suppliers, customers and standards of business conduct.

Equity

Another word for "share". Shareholders' equity is the value of the shares they hold.

Exchange rate

The rate at which one currency may be converted into another. Often quoted as an indicator of the relative strength of a currency or the attractiveness of the market in which it is used.

Credit rating

A measure of the ability of an individual, organisation or country to repay debt. The highest rating is usually AAA, and the lowest

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Expense ratio

Expenses associated with running an insurance business, such as commission, professional fees and other administrative costs, expressed as a percentage of premiums. Also the annual operating costs of an investment fund, expressed as a percentage of assets.

IFRS

International Financial Reporting Standards. These are accounting regulations designed to ensure comparable balance sheet preparation and disclosure, and are the standards that all public listed companies in the European Union are required to use.

Extraordinary item

A non-recurring event that materially affects a company's finances in a reporting period.

In force

An insurance policy is "in force" from its start date until the date it is terminated.

Extraordinary items

Gains and losses in a company's accounts resulting from one-off or unusual events.

Index

An index is the weighted value of a group of securities used to measure the ups and downs of a market, market sector or asset class, and to provide a performance benchmark against which other investments in that category can be measured.

Fair market value

The price that a reasonable buyer would be willing to pay and a reasonable seller would be willing to accept for a product on the open market.

Inflation

An increase in the general level of prices over a period of time.

Final dividend

The dividend paid by a company to shareholders at the end of the financial year.

Institutional investor or shareholder

Large financial organisation, such as a bank, insurance company, pension fund or investment trust, that holds and trades substantial volumes of stocks and shares for its own benefit or on behalf of others.

Fiscal policy

A means by which a government can influence the national economy through changes in tax and public spending.

Insurance

A contract taken out with an insurer to protect against loss from a perceived risk. The person taking out the insurance is called the insured. Payments for the policy are called premiums.

Fixed interest

A guaranteed rate of interest paid over the term of an investment or loan. A fixed interest security is an investment such as a government bond that provides a set level of income and usually has a redemption value, paid at maturity.

Intangible assets

The theoretical value to a company of its non-physical assets, such as its brand name, patents, royalties, trademarks, copyright and goodwill.

Gilt-edged securities

Bonds or securities issued by the Sri Lankan government to raise funds, and are considered the safest form of Rupee lending.

Interest

The fee charged by a lender for the use of borrowed money, or the return earned on an investment, such as savings in a deposit account. It can also mean part or total ownership of an asset.

Gross

Before tax has been deducted. The opposite of net.

Gross domestic product (GDP)

The total value of all goods and services produced domestically by a country each year. Can be calculated as gross national product minus income from abroad. A key measure of national economic health.

Interest rate

Percentage rate at which money is added to savings or borrowings. The cost of borrowing or lending money.

Interim results

Figures issued during the financial year to indicate business performance since the last full-year accounts were published. Usually announced quarterly or half-yearly.

Gross premium income

Income from business written during the year, before any reinsurance is taken into account.

Intermediary

An individual or organisation who introduces business to an insurance company on behalf of a customer and represents them in dealings with the company. Types of intermediaries include financial advisers, agents, brokers, dealers and traders.

Gross written premia

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.

Investment

Buying and holding assets, such as shares, bonds, property and commodities, to earn income or to make capital gains.

Health insurance

Provides cover against loss from illness or bodily injury. The policy can cover expenses for medicine, visits to the doctor, hospital stays, other medical expenses and loss of earnings, depending on the conditions covered and the benefits and choices of treatment available on the policy.

Investment bank

A financial organisation involved in corporate finance, advice on mergers, takeovers and acquisitions, the launch of new stocks and shares and investment management.

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Glossary (contd.)

Investment income

Earnings or revenue (such as share dividends and interest payments) arising from the ownership of assets. national currency. Monetary policy enables a government to affect the amount of money spent by consumers and businesses.

Money market instrument

A short term debt obligation, such as a banker's certificate of deposit, commercial paper or government security, generally regarded as a low-risk, low-return investment for the holder.

Joint life

An insurance contract where two people are insured against death.

Liabilities

A company's debts and obligations, shown on the balance sheet as claims on its assets.

Money supply

Total amount of money in circulation in an economy. There are several ways this can be measured such as M0, M1, M2, M2b. Financial authorities use these measures to set targets for monetary growth. Net After tax has been deducted. The opposite of gross.

Liability insurance

Insurance designed to protect the policyholder in the event of a claim by a third party alleging that negligence or inappropriate action has resulted in bodily injury or damage to property. Can cover a range of personal, professional and commercial risks.

Net asset value

The value of a company calculated by subtracting its liabilities from its assets. The difference is the capital, that is, the funds that would be available to ordinary shareholders if the company were wound up.

Life insurance

Promises the payment of an agreed sum of money upon the death of the insured within a specified period of time. Also known as Life assurance.

Liquidity

Ease with which an asset can be bought or sold without significantly affecting its price. A liquid asset is one easily convertible into cash.

Net premiums earned

The proportion of net written premiums recognised for accounting purposes as income in a given period.

Net written premia

Total gross written premia for a given period, minus premiums paid over or "ceded" to reinsurers.

Listed

A company whose shares are traded on a stock exchange is said to be listed. It means the same as quoted.

Net profit

The amount left over after deducting tax, interest, depreciation, fees, minority interests and extraordinary charges from sales revenue. Also known as net earnings, or net income.

Long term savings

Collective term for Life insurance, pensions, savings, investments and related business.

Lump sum benefit

A benefit arising in the form of a single, once-and-for-all payment rather than a series of payments.

New business

Term used to describe the value of Long Term savings policies sold to new and existing customers. Includes premium increases on existing business.

Margin

Profit margin as a percentage of trading profit. Reflects the underlying profitability of the business, but not whether the company is making money for shareholders. It is calculated before interest charges and tax.

New business strain

The technical name given to an initial depletion of cash and/or erosion of shareholders' net assets at the moment an insurance contract is sold. This "strain" arises because, in addition to meeting costs associated with the sale of contracts, insurance companies must make actuarial provisions at the outset of a contract that are often significantly higher than the premiums received. To begin with, therefore, cash outflows exceed inflows, creating a strain.

Market

The place where transactions take place in a particular type of commodity, such as a stock exchange.

Market capitalisation

The value of a company calculated by multiplying the number of shares the company has in circulation by the market price of those shares.

Operating profit

The difference between total income/revenue and total running costs/operating expenses from continuing operations. Excludes non-operational items, such as one-off gains or losses from the sale of assets or acquisition costs. Also called earnings before interest and taxes (EBIT), or operating income.

Maturity

The date that an insurance policy or other financial contract finishes or "matures", and the proceeds, sometimes known as the maturity value, become payable.

Ordinary share

Where ownership of a company is divided into a number of equal parts or "shares", ordinary shareholders are entitled to a distribution of the profits (known as dividends) and have the right to vote at company meetings. If the company is wound up,

Monetary policy

Regulation of the money supply and interest rates by a central bank, with the aim of controlling inflation and stabilising the

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ordinary shareholders are entitled to any assets left after all other obligations have been met. These residual assets are known as the equity of the company, hence the term "equities" sometimes used to describe ordinary shares. Ordinary shares rank after debentures and preference shares.

Property and casualty insurance

Also known as Non-life or General insurance. Casualty insurance primarily covers losses arising from accidents that cause injury to other people or damage to the property of others. Property insurance covers loss or damage through fire, theft, floods, storms and other specified risks.

Per capita

Average per person. Per capita income represents the average earnings for each person in a population, and is often used to measure a country's standard of living.

Proxy

A method by which a shareholder may vote without attending a meeting by appointing someone else to vote on their behalf.

Policy document

A document that details the full product information and terms and conditions of an insurance policy, and the policy schedule(s) which provides the specific benefits/premiums/payment conditions covered. It provides evidence that a contract exists between the insured and insurer.

Public company

A company whose shares are available to members of the public.

Quoted

If a company has a quote (or is "quoted"), its shares can be traded on the stock exchange. It means the same as listed.

Portfolio

A collection of financial assets - investments in shares, fixed interest stocks, cash and property - held by an investor.

Rate of return

The change in value of an investment over a period of time, taking into account income from it and any change in its market value. Normally expressed as an equivalent annual percentage of the total amount invested. Also the yield from a fixed income security.

Premium

The monetary amount paid for an insurance policy. The payment a policyholder makes in return for insurance cover. Usually paid monthly, annually or as a single lump sum. Also, if the market price of a new share is higher than its issue price, it is said to be trading at a premium.

Recession

A period of general economic decline. Specifically, a decline in gross domestic product (GDP) for two or more consecutive quarters.

Price/earnings ratio (P/E ratio)

Share price divided by earnings per share over the latest 12-month period. The result offers investors a way of comparing companies' prospects. For example, a high P/E ratio might suggest a company has strong growth potential, and investors will pay more for a share if they think that the company's earnings will rise rapidly.

Regulatory body

An organisation with statutory powers to lay down a framework within which member companies must operate.

Reinsurance

A form of insurance bought by insurance companies to protect themselves from the risk of large losses. One insurer pays to place part of an insured risk or an entire book of business with one or more other insurance companies, known as the reinsurers.

Price sensitive information

Information about a business which, if made public, would be likely to have a significant effect on the company's share price. Listed companies must report such information to the stock exchange.

Return

For savings, the difference between the original sum invested and the final value of income or capital growth, given as a percentage. For shares, the overall investment performance based on the movement in the price of the shares (gain or loss) and the dividend income from the shares.

Principal

A term for the original investment, or the amount borrowed, or the part of the amount borrowed that remains unpaid (excluding interest).

Private company

A company which is not allowed to offer its shares to the general public.

Return on capital employed (ROCE)

Usually calculated as pre-tax profit divided by capital employed (total assets minus current liabilities), expressed as a percentage. Indicates how efficiently a company's management uses its assets to generate profits over a period of time.

Profit

Excess of income over expenses for a particular period. Figures may be given as gross profit, net profit before tax, net profit after tax, and earnings.

Rights issue

An invitation from a company to their existing shareholders to buy new shares, usually for less than the prevailing share price, to raise additional capital.

Profit and loss account

An account compiled at the end of the financial year showing that year's revenue and expense items, and indicating gross and net profit or loss.

Risk

The measurable probability of loss or less-than-expected returns from an investment, asset or business activity.

Profit before tax

All profits earned in a period, including investment gains.

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Glossary (contd.)

Risk based capital

Capital allocated by a company to cover risks arising from the nature of its business and the markets in which it operates, based on an assessment of those risks and the likelihood of adverse developments. For example, banks may be required to set aside capital to cover their exposure to the risk of customers defaulting on the repayment of loans.

Statutory basis

The valuation basis and approach used for reporting financial statements to local regulators.

Stock

Often used as an alternative word for share, especially in the US. However, it can refer specifically to fixed-interest investments, such as bonds and gilt-edged stocks, which represent a loan to the issuer, rather than shares, which signify part ownership of a company.

Run-off

The process of managing accounts and settling claims for an insurance business or investment fund that has stopped accepting new risks or has been closed to new business. It can also be a termination condition of a reinsurance contract that the reinsurer remains liable for losses after the contract ends until policies in force at the time have been "run-off", either for a specified period or until they have expired.

Stock exchange

A marketplace where stocks and shares and other financial instruments can be traded.

Subordinated debt, loan or security

A fixed interest issue or debt that ranks below other debt in order of priority for repayment if the issuer is liquidated. Holders are compensated for the added risk through higher rates of interest.

Scrip issue

A free issue of new shares to existing shareholders in proportion to their holdings. Can make shares more attractive to investors because there are more of them at a lower price. Also known as stock split or capitalisation issue.

Sum assured

The lump sum benefit payable under an insurance policy or contract in circumstances defined within the policy (usually it represents an amount payable on death or maturity).

Sector

Part of a market or industry whose components share similar characteristics. Stocks are often grouped into sectors.

Surrender

The act of cancelling or cashing in the proceeds of an insurance contract before it becomes payable or reaches its maturity date for a surrender value.

Securities

General term for financial instruments traded on a stock exchange, such as stocks and shares, and the notes, certificates and bearer warrants that signify ownership of them.

Surrender value

The amount of money payable on cancellation ("surrender") of a policy with an investment element, before the benefit becomes payable (normally on death or maturity). Surrender values will depend on premiums paid and time elapsed.

Securities and Exchange Commission of Sri Lanka (SEC)

Official Sri Lankan regulatory body responsible for investor protection and regulation of the securities industry and companies quoted on Colombo Stock Exchanges.

Tax year

The annual accounting period, also known as the fiscal year or the financial year.

Share

Common term for equity. Specifically, a certificate conferring ownership rights in a company. Ordinary shares (or common stock) provide voting rights at company meetings and entitle the holder to a proportional share of the profits.

Technical provisions

Amounts set aside on the basis of actuarial calculations to meet obligations to policyholders.

Shareholder

Someone who owns shares or stock in a company or mutual fund. Shareholders also have the right to declared dividends and the right to vote on company matters, including the Board of Directors.

Technical result

The insurance profit of Life, Pensions and General insurance business. Measures performance in the core businesses.

Term insurance

Also known as temporary insurance. A type of Life insurance where the benefit (sum assured) is paid only if death occurs during a specific period of time.

Shareholders funds

Shareholders' funds represent the assets that remain once all a company's liabilities have been accounted for. This also equates to the capital of the company, plus any profits that have been retained by the business.

Total return

Total return is the change in value of an investment over a given period, including income from dividends and interest, as well as any capital gains or losses, expressed as a percentage of the initial investment.

Stakeholder

Any individual or organisation with an interest in a company.

Statutory accounts

The accounts that every public limited company is required by law to produce and publish.

Total shareholder return

A measure of company performance based on the overall value to shareholders of their investment in a stock over a given period of

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time. Includes movement in the share price and dividends paid and reinvested, expressed as a percentage of the initial value of the investment or share price at the beginning of the period.

Treasury bill/Treasury bond

Loan or debt securities issued by a government to help pay for its financial needs. Investors receive a guaranteed return over a fixed period. In Sri Lanka, treasury bills (also known as T-bills) are shortterm securities issued for up to one year. They are sold at a discount, the difference between the purchase price and the face value representing the holder's profit at the end of the term. Treasury bonds (T-bonds) also pay a fixed rate of interest and are long term securities issued with a term of more than 1 year. Treasury bills and Treasury bonds are usually known as gilt-edged securities.

units in an investment fund, such as a unit trust. The assets in the fund can be a mix of stocks, shares, bonds, property or other securities. The value of the units and the return from them can fluctuate in line with the investment performance of the assets in the fund, and there is no guarantee on the amount of capital that will be returned.

Unrealised

A notional profit or loss that has not yet been achieved through a transaction. The profit or loss is "realised" when the investor sells the security or asset in question. Unrealised gains are usually not taxable.

Volatility

The variable amount by which a share price or market value rises and falls during a period of time. If it moves up and down rapidly or unpredictably, it has high volatility; if it is more stable or rarely changes, it has low volatility.

Trust

A legal arrangement where one or more people are appointed to look after property or investments on behalf of someone else (the beneficiary). The Trustees are legally responsible for how the assets are managed.

Warrant

A tradable security that gives the holder the right to buy a share or bond at a fixed price on a future date.

Trustee

Someone appointed to hold or administer assets for the benefit of other people.

Whole Life insurance

An insurance contract where the benefit is payable on death, whenever it occurs. Distinct from term insurance, which pays out only if death occurs within a specific period.

Underwriting

The process of selecting which risks an insurance company can cover, and deciding the premiums and terms of acceptance. On the stock exchange, an arrangement by which a company is guaranteed that an issue of shares will raise a given amount of money, because the underwriters promise to buy any of the issue not taken up by the public.

Withholding tax

Withholding tax is an amount withheld by the party making payment to another (payee) and paid to the taxation authorities.

Write down

To reduce the value of an asset or investment in a balance sheet to reflect its current market value. An accounting action sometimes used to reflect the effect of depreciation on the book value of an asset.

Underwriting profit

The difference between insurance premiums earned and claims and expenses paid over a given period. If premiums are the higher figure, there is an underwriting profit; if they are lower, there is an underwriting loss. Underwriting profit excludes investment income, so is a commonly used method of evaluating the performance of a General insurance company.

Write off

To cancel a debt, or to acknowledge the loss or worthlessness of an asset. Also to remove an asset or holding entirely from a balance sheet. The reduction in value, or loss, is said to be "written off".

Unearned premiums

Premiums received by an insurer relating to cover provided outside the current accounting period. Such premiums are not normally treated as income until they have been "earned" during the period to which they relate.

Yield

Rate of return on an investment in percentage terms, taking into account annual income and any change in capital value. Also the dividend payable on a share expressed as a percentage of the market price.

Unit trust

Fund of stocks and shares held by a manager for the benefit of investors. Individuals buy units in the fund, which then invests in a wide range of shares. This approach offers small investors the opportunity to pool their money with others and benefit from a greater spread of risk and investment opportunities. British equivalent of an American mutual fund.

Yield to maturity (YTM)

Yield to maturity is the rate of return expected if a bond or other dated investment is held for the full term of the contract, or until the maturity date.

YTD

Abbreviation for "year to date". Usually means the period starting 1st January of the current year and ending today.

Unitised

Investment policy under which contributions are used to buy units in a chosen investment fund.

Unit-linked

A type of long term savings plan where premiums are used to buy

154

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Notice of Meeting

NOTICE IS HEREBY GIVEN THAT the 25th Annual General Meeting of AVIVA NDB Insurance PLC will be held on Thursday, 31st March, 2011 at 10.00 a.m. at "Kings Court", Cinnamon Lakeside, Colombo, No. 115, Sir Chittampalam A Gardiner Mawatha, Colombo 02, for the following purposes:

Ordinary Business:

1. To receive and to consider the audited financial statements for the year ended 31st December, 2010 together with the Reports of the Auditors and Directors thereon. To declare a first and final dividend of LKR 9.00 (Rupees Nine only) per share as recommended by the Board of Directors. To re-elect Mr. Indrajit Wickramasinghe as a Director who retires by rotation in terms of Article 30 of the Articles of Association of the Company. To re-elect Mr. David Hope as a Director who retires by rotation in terms of Article 30 of the Articles of Association of the Company. To ratify the total donations of LKR 2.29 Mn which were made by the Company during the year ended 31st December 2010 which amount is within the aggregate thereof amounting to 1% of the average Profits after Tax for the preceding three years. To authorise the Directors, to make on behalf of the Company, in pursuance of the provisions of the Companies (Donations) Act No. 26 of 1951, donations during the year 2011 not exceeding 1% of the average Profits after Tax of the Company for the preceding three years. To re-appoint the retiring Auditors and to authorise the Directors to determine their remuneration.

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7.

BY ORDER OF THE BOARD

(Ms) Chathuri Munaweera Company Secretary Colombo 10th February 2011

NOTE: 1. A member entitled to attend and vote at the afore stated meeting is entitled to appoint a Proxy to attend and vote in his/her stead. 2. 3. 4. A Proxy need not be a member of the Company. A Form of Proxy accompanies this Notice. The completed Form of Proxy should be deposited at the registered office of the Company not later than 48 hours before the time appointed for the holding of the meeting.

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

155

Form of Proxy

I/We ................................................................................................................................................................ of ..................................................................................................................................... being a member/members of AVIVA NDB Insurance PLC do hereby appoint ......................................................................................................... of ............................................................................................................................... whom failing : Mr. T R Ramachandran Mr. S Rouf Mr. D Sooriyaarachchi Mr. R De Mel Mr. D S P Wikramanayake Mr. L de Mel Mr. I Wickramasinghe whom failing whom failing whom failing whom failing whom failing whom failing

as my/our Proxy to represent me/us and vote on my/our behalf at the TWENTY FIFTH ANNUAL GENERAL MEETING of the Company to be held on 31st March, 2011 at 10.00 a.m. at "Kings Court", Cinnamon Lakeside, Colombo, No. 115, Sir Chittampalam A Gardiner Mawatha, Colombo 02 and at any adjournment thereof, and at every poll which may be taken in consequence thereof: * Please delete the inappropriate words * In favour of Against * In favour of Against * In favour of Against * In favour of Against * In favour of Against * In favour of Against * In favour of Against the ordinary resolution numbered (1) set out in the Notice convening the aforesaid meeting.

the ordinary resolution numbered (2) set out in the Notice convening the aforesaid meeting.

the ordinary resolution numbered (3) set out in the Notice convening the aforesaid meeting.

the ordinary resolution numbered (4) set out in the Notice convening the aforesaid meeting.

the ordinary resolution numbered (5) set out in the Notice convening the aforesaid meeting.

the ordinary resolution numbered (6) set out in the Notice convening the aforesaid meeting.

the ordinary resolution numbered (7) set out in the Notice convening the aforesaid meeting.

Signed this ............................................. day of ................................... Two Thousand and Eleven.

.................................. Signature of Shareholder Notes: 1. If no words are struck out and / or there is in the view of the Proxyholder doubt (by reason of the way in which the instructions contained in the Proxy have been completed) as to the way in which the Proxyholder should vote, the Proxyholder shall vote as he/she thinks fit. 2. A Proxy need not be a member of the Company. 3. Instructions as to completion appear overleaf.

156

AVIVA NDB Insurance PLC Annual Report and Accounts 2010

Pages 10 - 11 more on the events of 2010 Pages 26 - 31 more on our people Pages 32 - 37 more on Social Responsibility

Overview 1 - 11 Business Review 14 - 37 Governance 40 - 79 Financial Information 82 - 130 Other Information 134 - 156

Form of Proxy (contd.)

INSTRUCTIONS AS TO COMPLETION

1. Kindly perfect the Form of Proxy by filling in legibly your full name and address signing in the space provided and filling in the date of signature. The persons mentioned on the reverse hereof, are Directors of the Company and they are willing to represent any Shareholder/s as Proxy, and vote as directed by the Shareholder. They will not, however be willing to speak or move or second any amendments to the resolutions or make any statement in regard thereto on behalf of any Shareholder. If another Proxy is preferred, delete the names printed, add the name of the Proxy preferred and initial the alteration. Kindly return the completed Form of Proxy to the Company by deleting one or other of the alternate words indicated by an asterisk in the body of the same. In the case of a corporate member the Form of Proxy should be executed under its common seal or by a duly authorised officer of the entity in accordance with its Articles of Association or Constitution. If the Form of Proxy is signed by an Attorney, the relative Power of Attorney should also accompany the completed Form of Proxy, if it has not already been registered with the Company. The completed Form of Proxy should be deposited at the registered office of the Company at No. 75, Kumaran Ratnam Road, Colombo 02 not later than 48 hours before the time appointed for the holding of the meeting.

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Corporate Information

Name of the Company AVIVA NDB Insurance PLC Company Registration No ­ PQ 18 Legal Form · Public Company with limited liability. · Incorporated in Sri Lanka on 12th December 1986 under the Companies Act No. 17 of 1982. · Re - registered under the Companies Act No. 07 of 2007. · A composite Insurance Company licensed by the Insurance Board of Sri Lanka. · The shares of the Company are listed on the Colombo Stock Exchange. Tax Payer Identification Number (TIN) 134001356 VAT Registration Number 134001356 - 7000 Directors T R Ramachandran ­ Chairman Shah Rouf ­ Managing Director Deepal Sooriyaarachchi David Hope Nishit Majmudar Russell De Mel Indrajit Wickramasinghe Sarath Wikramanayake Lal de Mel Accounting year 31st December Subsidiaries Consultant Actuary ­ Life Insurance Mr Frank Munro AVIVA NDB Insurance PLC No. 75, Kumaran Ratnam Road, Colombo 2 Sri Lanka Consultant Actuaries ­ General Insurance Towers Watson Risk Consulting Pte Ltd No. 135, Cecil Street # 09-01, Singapore 069536 Lawyers Julius & Creasy Attorneys-at-Law & Solicitors No. 41, Janadhipathi Mawatha Colombo 01 Reinsurance Panel - Life Insurance Munich Re-insurance Company Zurich Financial Services (Isle of Man) Re-insurance Company Ltd Reinsurance Panel ­ General Insurance Treaty Reinsurers Aviva Re National Insurance Trust Fund Munich Reinsurance Company

Facultative Reinsurers

Zurich Insurance Company Ltd Swiss Reinsurance Company Ltd Federal Insurance Company Lloyds Underwriters Bankers Standard Chartered Bank Bank of Ceylon Commercial Bank of Ceylon PLC Hatton National Bank PLC The Hongkong & Shanghai Banking Corporation Limited People's Bank Sampath Bank PLC National Development Bank PLC Citi Bank NA Nations Trust Bank National Savings Bank Deutsche Bank Custodian Banks The Hongkong & Shanghai Banking Corporation Limited Bank of Ceylon

Name of the Company

Rainbow Trust Management Limited

Holding

100%

Principal Activity

Trust Management

Registered Office/ Head Office No. 75, Kumaran Ratnam Road, Colombo 02 Telephone : 2310000 Fax : 2447620, 2310076 E-mail : [email protected] Web : www.avivandb.com Company Secretary Ms Chathuri Munaweera ­ LLB, Attorney­at-Law Company Registrars SSP Corporate Services (Private) Limited No. 101, Inner Flower Road, Colombo 03 Telephone: 2573894, 2576871 Auditors Ernst & Young Chartered Accountants No. 201, De Saram Place Colombo 10

Information

Aviva NDB

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