A strategy to deliver our vision The Aviva triangle has been developed to explain the purpose, vision, strategy and regional performance of the group. Our strategic priorities are: Manage composite portfolio
Aviva’s capital management philosophy is focused on capital efficiency and effective risk management to support our dividend policy and earnings per share growth. Rigorous capital allocation is one of our primary strategic priorities and is ultimately governed by the Group Executive Committee.
Customers more now than ever want peace of mind in these uncertain times. They have genuine concerns and will need help and support.
Built an experienced executive team, bringing together talent from our businesses worldwide
2008 progress Commenced migration to a single Aviva brand and created a global marketing function (see page 16)
Reinforced the FSA’s Treating Customers Fairly principles in every aspect of our business
Impairment of goodwill (66) (10) Amortisation and impairment of intangibles (117) (103) Profit on the disposal of subsidiaries and associates 7 49
Total capital employed is financed by a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. In addition to our external funding sources, we have certain internal borrowing arrangements in place which allow some of the assets that support technical liabilities to be invested in a pool of central assets for use across the group. These internal debt balances allow for the capital allocated to business operations to exceed the externally sourced capital resources of the group. Although intra-group in nature, they are included as part of the capital base for the purpose of capital management. These arrangements arise in relation to the following: Certain subsidiaries, subject to continuing to satisfy standalone capital and liquidity requirements, loan funds to corporate and holding entities, these loans satisfy arm’s-length criteria and all interest payments are made when due.
UK Life Other funds business 2008 2007 £bn £bn £bn £bn
The equity backing ratios, including property, supporting with-profit asset shares are 57% in CGNU Life, CULAC and NUL&P. With-profit new business is mainly written through CGNU Life.
For internal management purposes, our economic capital model is calibrated to our target capital adequacy rating. Financial modelling techniques enhance our practice of active risk and capital management, ensuring sufficient capital is available to protect against unforeseen events and adverse scenarios. Our aim continues to be the optimal usage of capital through appropriate allocation to our businesses. We continue to develop our economic capital modelling capability for all our businesses as part of our development programme to increase the focus on economic capital management.
Several of our long-term savings businesses sell products where the majority of the market risk is borne by the policyholder. Any market risk attributable to policyholders is managed to satisfy the policyholders’ objectives for risk and reward.
For some categories of our long-term business, we reduce interest rate risk through the close matching of assets and liabilities.
At group level, we maintain a prudent level of liquidity which meets the expectations of the FSA and the wider investment community. We maintain a buffer of liquid assets to cover unforeseen circumstances, including providing temporary funds to any of our business units that may experience temporary liquidity shortfalls. The group maintains significant committed borrowing facilities from a range of banks.
Product Design and Pricing risk Poorly designed or inadequately priced products can lead to both financial loss and reputational damage for Aviva. Guidelines have been developed to support the businesses through the complete cycle of the product development process, financial analysis and pricing.
Worsening claims ratios Another material risk is the financial impact of worsening claims ratios. The business units manage this risk through underwriting disciplines, control of claims management and exploring different solutions to the way we measure and price the risks we underwrite. For example, our UK business has developed digital flood mapping to understand better the risk to household insurance from flood damage.
Strategic risks We are exposed to a number of strategic risks. Our strategy needs to support our vision, purpose and objectives and be responsive to both the external and internal environment, for example changes in the competitive landscape, regulatory changes, merger and acquisition opportunities and emerging trends (such as climate change, pandemic and improving longevity).
We actively engage with external bodies to share the benefit of our expertise in supporting responses to emerging risks as well as challenging developments that could be damaging to our business and the industry as a whole.
Following our successful rebranding in September we are focusing on investment performance and client solutions and service. Under the leadership of chief executive Alain Dromer, we plan to take advantage of scale and build on our legacy strengths to develop a presence in new and rapidly growing markets.
We aspire to increase operating profits by four times and to double our contribution to the group as we continue to integrate and grow the business around the globe. We are able to leverage the strong awareness of Aviva through our Aviva Investors sub-brand and will contribute to the group vision of “prosperity and peace of mind” while developing a distinctive high performance culture and global reputation as a leading institutional asset management business.
Total operating profit was £116 million (2007: £151 million). Of this, fund management operating profit totalled £114 million (2007: £147 million), principally derived from our UK, French and North American businesses. The pooled pension business, reported in the UK long-term savings segment, contributed a further £2 million (2007: £4 million).
Aviva Investors has a growth plan in place designed to reflect the current environment that is focused on enhancing the delivery of investment performance and third party and cross border sales.
Our strategy to maintain market leadership is to focus on insurance excellence through: being outstanding in the core general insurance skills of underwriting, pricing and claims handling that will allow us to create the conditions for profitable growth; reshaping our book of business to maximise our access to customers whilst delivering a sustainable distribution ratio; delivering the promise of scale by addressing legacy issues; providing products and services that meet the varying needs of our customers; supporting independent brokers and working with our partners to present a natural synergy for the benefit of our customers; and inspiring a genuine passion for our business in our people.
Mergers and Acquisitions – Acquisition of VIVAS Health in Ireland completes Hibernians product range – New joint venture arrangements in Poland provides additional distribution coverage – Increased holding of our profitable Spanish venture in Cajamurcia Vida
Long-term savings £1,638m Fund management £6m General insurance £397m Other operations £(116)m £1,925m
We provide life and pensions products in each of our European markets, where we are recognised for the quality of our products and customer service. In addition we provide general insurance products with operations in France, Italy, Poland and Turkey as well as in Ireland, where we are the market leader.
Expanded distribution, marketing programmes and new product launches contributed to sales of both our annuity and life products. 63% growth in annuity sales was a significant accomplishment given the challenging economic environment. Sales of life products, which mainly include indexed universal life and term assurance products, were slightly down on the prior year as growth was offset by the impact of our tactical decision to exit certain markets in late 2007 to focus on selling higher margin products.
Christmas wasn’t forgotten at Aviva Australia. Despite the fund freeze across much of the mortgage sector, we made sure tens of thousands of self-funded retirees received their pension as usual.
New start markets (South Korea, Malaysia, Sri Lanka and Taiwan) We have recently started joint ventures with bank partners in markets at various stages of development. In 2008 we commenced our operations in Taiwan and established market entry in South Korea, both through joint ventures with leading local banks. These are both advanced markets with insurance penetration similar to the UK.
In Australia, life and pension sales decreased 19% to £369 million (2007 restated: £454 million). In addition to the impact of a difficult economic climate, sales in 2007 were very strong following a one-off group pension transfer and favourable changes to superannuation legislation.
What action have we taken? – Published five year, industry-leading research into consumer attitudes to saving – Continued to reduce our own emissions through innovative initiatives and encouraging other companies as well – Funded off-setting projects to maintain our carbon neutral status and introduced three new initiatives in our Sustainable and Responsible Investment (SRI) portfolio – Strengthened our community investment activities to tackle global issues in financial literacy, education and life trauma – Launched “Summits” for 1,700 senior managers, designed to align, equip and mobilise the group to deliver the “one Aviva, twice the value” vision – Extended our “Talking Talent” programme to identify, manage and develop talent across the company
Our CR advisory group, reporting to the executive committee, is a forum for dialogue between our regions and our CR specialists at group level. It gathers and analyses perspectives from all around Aviva, helping to ensure that CR strategies are fully informed by insights from the broad spectrum of our business.
We are continuing to embed this approach as a priority in 2009 with a focus on training and continued measurement.
Our senior managers view our carbon target to be so significant that it is included in each regional chief executive’s personal objectives. To help improve the quality of our data we introduced an online CR data collection and reporting tool.
The capture and storage of carbon (or sequestration) is an important area of research in climate change mitigation. We are providing five-year funding for an investigation led by Earthwatch, the international environment charity, into the sequestration potential of mangrove swamps in Kenya. The project will also inform an economic model for avoiding deforestation and ensure the sustainability of these natural flood defences. The research supports our commitment to provide carbon finance in Africa where we believe there is an urgent need. It will demonstrate exactly how much carbon can be stored in mangroves over time, and will lead to the development of carbon credit verification.
We have introduced self selection options, which enable policyholders to receive and save policy documentation online, thus reducing paper usage, printing and postage cost.
Appointed to the Board in May 2004. Currently non-executive director of Signet Jewelers Ltd (retail) and chairman of its audit committee, non-executive director of Delphic Diagnostics Limited (medical) and treasurer and trustee of The British Red Cross. Former group finance director of BAA plc (transport), Wellcome plc (pharmaceuticals) and Coats Viyella plc (textiles). Former senior independent non-executive director of Stagecoach Group plc (transport) and Hilton Group plc (leisure) and a former non-executive director of the Mersey Docks and Harbour Company (transport).
Committees of senior executives responsible for reviewing the Group’s financial risks (Asset and Liability Management Committee) and non-financial, ie strategic and operational risks (Group Operational Risk Committee).
Management monitors the completeness of the Group’s risk profile on a regular basis. Each quarter, businesses report risk profiles and the adequacy of the mitigating action programmes, where risks are outside of the Group’s risk appetite. These assessments are based on financial, reputational and operational criteria. This enables the Group risk function to assess the overall risk exposure and to develop a Group-wide risk profile that is refreshed quarterly. Material items in the Group risk report are reported to the committee of the Group’s senior executives (Executive Committee), the Risk and Regulatory Committee and in respect of social, environmental and ethical risks, the Board’s Corporate Social Responsibility Committee. The Executive Committee considers whether the residual risks are within the Group’s risk appetite, and the adequacy of the mitigating actions. In addition the Executive Committee receives a fortnightly Group-wide risk update report.
The Board is equally interested in the concerns of private shareholders and, on its behalf the Group Company Secretary oversees communication with these investors. It is the practice of the Company to issue a postage paid reply form with its Annual General Meeting documentation to enable shareholders to put relevant questions to the directors. This is considered to be particularly helpful for those shareholders who are unable to attend the meeting. Written responses are provided through a brochure containing answers to the most frequently asked questions which is also placed on the Company’s website. All material information reported to the regulatory news services is simultaneously published on the Company’s website affording all shareholders full access to Company announcements.
Directors’ responsibility statement pursuant to the Disclosure and Transparency Rule 4
Russell Walls (Chairman) 1 July 2004 To date Mary Francis 1 January 2007 To date Richard Karl Goeltz 1 July 2004 To date Euleen Goh 1 January 2009 To date Carole Piwnica 24 September 2003 31 December 2008
Regulation and compliance The Committee works with management to ensure that the Group has a constructive relationship with its lead regulator, the FSA, and with the local regulators who oversee its businesses worldwide. During the year the Committee received regular reports on ongoing compliance issues and regulatory and other public policy initiatives. In particular, the Committee monitored the actions being taken by management in relation to the Risk Mitigation Programme agreed with the FSA; encouraged measures to strengthen oversight of the Group’s compliance functions outside the UK; and received presentations on the Group’s Treating Customers Fairly Programme in the UK and global customer centricity initiative.
Committee activities during 2008 The Committee is required by its Terms of Reference to meet at least three times per year and has a standing calendar of items within its remit. In addition to these standing items, the Committee discusses matters relating to the operation of the remuneration policy and emerging market practices. In 2008 the Committee met nine times and discussed, amongst others, the issues set out in Table 2 below: Table 2: Matters discussed by the Committee during its 2008 meetings
Annual Bonus Plan (ABP) – target setting The financial targets which underpinned the ABP (accounting for 50% of annual bonus) in 2008 were derived from Aviva’s return, growth and capital efficiency/capital generation goals. Three of the financial targets (operating profit, volume and new business contribution) were “stretched” (as set out in Table 6) due to their importance in achieving these aspirations.
Details of the assumptions used in valuing the LTIP for accounting purposes can be found on page 206 of this report. The vesting assumption made in respect of the 2009 award for accounting purposes is 50%.
Aviva does not award additional shares for the dividends that were paid during the three year performance period on those shares that vest.
Notes 1.The actual price used to calculate the ABP and LTIP awards is based on a three-day average price. These were in 2005: 642p; 2006: 820p; 2007: 769p; 2008: 608p. The three-day average price used to grant the 2008 One Aviva twice the value award was 617p.
2.The performance period for all awards begins at the commencement of the financial year in which the award is granted.
Time commitment – Between 25 and 50 days per annum depending upon Board and committee requirements and corporate activity.
The Company’s Articles of Association provide that the total aggregate remuneration paid to the Chairman and NEDs will be determined by the Board within the limits set by shareholders. The current aggregate limit of £1.5 million was approved by shareholders at the Company’s 2005 Annual General Meeting. The amount paid in 2008 was £1.23 million. EDs are remunerated under their service contracts and receive no additional fee for serving as directors.
Committee Membership – Audit £10,000 – Remuneration £10,000 – Nomination £5,000 – Risk and Regulatory £5,000 – Corporate Social Responsibility £5,000
7. Mark Hodges was appointed as a director on 26 June 2008. On this date he held 79,873 shares, 125,876 bonus plan awards, 198,549 long term incentive awards, 41,838 OATTV awards and 1,705 options.
Opinion In our opinion: The financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s and the Parent Company's affairs as at 31 December 2008 and of the Group’s loss and the Parent Company’s profit for the year then ended; The financial statements and the part of the Directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985, as regards the Group financial statements, Article 4 of the IAS Regulation; and
Further details on the fair value hierarchy used in assessing the values of our financial investments are given in note 24(b) to these financial statements.
Merger accounting and the merger reserve Prior to 1 January 2004, certain significant business combinations were accounted for using the “pooling of interests method” (or merger accounting), which treats the merged groups as if they had been combined throughout the current and comparative accounting periods. Merger accounting principles for these combinations gave rise to a merger reserve in the consolidated balance sheet, being the difference between the nominal value of new shares issued by the Parent Company for the acquisition of the shares of the subsidiary and the subsidiary’s own share capital and share premium account. These transactions have not been restated, as permitted by the IFRS 1 transitional arrangements.
As noted in policy A above, insurance contracts and participating investment contracts in general continue to be measured and accounted for under existing accounting practices at the later of the date of transition to IFRS or the date of the acquisition of the entity. Accounting for insurance contracts is determined in accordance with the Statement of Recommended Practice issued by the Association of British Insurers in December 2005, as amended in December 2006. However, in certain businesses, the accounting policies or accounting estimates have been changed, as permitted by IFRS 4 and IAS 8 respectively, to remeasure designated insurance liabilities to reflect current market interest rates and changes to regulatory capital requirements. When accounting policies or accounting estimates have been changed and adjustments to the measurement basis have occurred then the financial statements of that year will have disclosed the impacts accordingly.
(V) Collateral The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions, as well as certain derivative contracts and loans in order to reduce the credit risk of these transactions. Collateral is also pledged as security for bank letters of credit. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty.
Accounting policies continued made at the beginning of the period, are recognised immediately in equity through the Statement of recognised income and expense.
(20,054) Net investment (expense)/income J (16,043) 9,689 (1,410) Share of loss after tax of joint ventures and associates (1,128) (304)
16,424 Balance at 1 January restated 15,931 13,745 (637) Total recognised (expense) and income for the year (618) 2,419
(67) Changes in minority interest in existing subsidiaries 36b (65) – (30) Shares acquired by employee trusts 30 (29) (10) 40 Reserves credit for equity compensation plans 34 39 50
Cash and cash equivalents in long-term business operations of £20,141 million (2007: £11,132 million) are primarily held for the benefit of policyholders and so are generally not available for use by the Group.
(iii) Treatment of shares held by employee trusts As explained in note 30, employee share trusts have purchased the Company’s shares in the market to satisfy awards under various share plans. At 31 December 2007, these trusts held shares with a cost of £10 million which, on materiality grounds, were included within other financial assets rather than being shown as a deduction from total shareholders’ equity in the consolidated balance sheet. In view of the Company’s current policy of purchasing shares in the market rather than issuing new shares, which will lead to larger balances on this account, we have restated the 2007 figures accordingly.
(ii) UBI Vita On 18 June 2008, the Group acquired 50% plus one share in UBI Assicurazioni Vita SpA (UBI Vita), an Italian life insurance company, from Unione di Banche Italiane Scpa (UBI Banca), for a consideration of £52 million. UBI Vita distributes life insurance products through a bancassurance agreement with Banca Popolare di Ancona and other channels.
Other Other goodwill has arisen on smaller acquisitions and increases in shareholdings in existing subsidiaries, as well as fair value adjustments to acquisitions made in 2007. None of these is considered material for separate disclosure.
(ii) Assets and liabilities of operations classified as held for sale The assets and liabilities of operations classified as held for sale as at 31 December 2008 relate to our Dutch health insurance business and certain UK non-core operations, and were as follows: £m
Change in unallocated divisible surplus 2,151 – 2,331 – – – – 4,482
Change in insurance liabilities, net of reinsurance (729) 417 (949) (1,920) (327) – – (3,508)
# United Kingdom General Insurance includes the Group Reinsurance business, agency run off business and the non-insurance business for the RAC.
Capital expenditure (excluding business combinations) 36 93 72 70 4 5 – 280
In the table above, the £304 million relating to strengthening of latent claims provisions is included in change in insurance liabilities, with the remaining £247 million being included in other expenses.
Interest on banking customer deposits 250 166 Interest on reinsurance deposits 11 37 Interest on collateral received 321 190 Other similar charges 147 202
Net investment income (note 4b(i)) 522 1,115 Internal charges included under other headings (73) 18
(e) The table below compares the actual return on investments attributable to the non-long-term business, after deducting investment management expenses and charges, with the aggregate longer term return over a five year period. This table will be built up over time to give comparative figures over a similar five-year period.
This note shows the total remuneration payable by the Group to our principal auditors, Ernst & Young.
This note analyses the tax charge for the year and explains the factors that affect it.
As explained in accounting policy N, the carrying amount of goodwill and intangible assets with indefinite useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. The tests led to impairment of goodwill of £68 million in 2008 (2007: £10 million).
In several business units, Group companies and other parties jointly control certain entities. This note analyses these interests and describes the principal joint ventures in which we are involved.
On 4 April 2008, the Group acquired 40.65% of LIG Life Insurance Co. Ltd (LIG Life), a South Korean life insurance company, for £34 million. This company was renamed Woori Aviva Life Insurance Co. Ltd and distributes life insurance products through multiple distribution channels, focusing on the Busan metropolitan area in the southeastern region of the country. Further shareholdings of 5.51% and 0.63% were acquired on 7 April and 29 May 2008 respectively for a total of £4 million. The contractual arrangements with the other major shareholder have led us to account for this investment as an interest in a joint venture.
Equity securities Ordinary shares Public utilities – 6,165 – 6,165 Banks, trusts and insurance companies – 10,195 66 10,261 Industrial miscellaneous and all other 46 38,672 3,712 42,430
Investment property – 14,426 – 14,426 – – 14,426 Loans – 21,468 – 21,468 20,769 – 42,237 Fixed maturity securities 107,943 40,798 1,850 150,591 – (336) 150,255 Equity securities 36,608 5,871 932 43,411 – (60) 43,351 Other investments (including
Fixed maturity securities 156,097 7,634 (13,140) 150,591 Equity securities 54,518 2,685 (13,792) 43,411 Other investments Unit trusts and specialised investment vehicles 28,700 1,994 (1,705) 28,989 Derivative financial instruments 1,792 1,761 (643) 2,910 Deposits with credit institutions 551 – – 551 Minority holdings in property management undertakings 758 279 (68) 969 Other long-term investments 2,883 209 (402) 2,690 Other short-term investments 8 – (1) 7
Notes to the consolidated financial statements continued 27 – Assets held to cover linked liabilities
Balance at 1 January 2007 (331) 194 979 78 73 993 Arising in the year: Fair value gains – 23 149 – – 172 Fair value gains transferred to profit on disposals – – (391) – – (391) Transfer to profit on disposal of subsidiary
Shares issued under equity compensation plans (note 35) – – – – (15) (15)
Notes to the consolidated financial statements continued 35 – Retained earnings
Less: Obligations to staff pension schemes transferred to provisions (note 45a) (1,402) – (1,402) (1,025) – (1,025)
– “with-profit” funds of CGNU Life Assurance (CGNU Life), Commercial Union Life Assurance (CULAC) and the with-profit and Provident Mutual funds of Norwich Union Life & Pensions (NUL&P), where the with-profit policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance; – “non-profit” funds of Norwich Union Annuity and NUL&P, where shareholders are entitled to 100% of the distributed profits. Shareholder profits on unitised with-profit business written by Norwich Union Life & Pensions and on stakeholder unitised with-profit business are derived from management fees and policy charges, and emerge in the non-profit funds.
For unit-linked and some unitised with-profit business, the provisions are valued by adding a prospective non-unit reserve to the bid value of units. The prospective non-unit reserve is calculated by projecting the future non-unit cash flows on the assumption that future premiums cease, unless it is more onerous to assume that they continue. Where appropriate, allowance for persistency is based on actual experience.
38 – Insurance liabilities continued Valuation discount rates Mortality tables used
Netherlands Permanent health and injury 3.82% 3.87% 7 years 8 years Reinsured London Market business 3.56% 5.00% 8 years 8 years Latent claims 1.17% to 15 years
Claims previously discounted (187) (4) (4) (4) (2) (3) (4) (7) (12) (227) New discounted claims (474) – – – – – – – – (474)
Present value recognised in the balance sheet 1,691 261 347 601 686 1,049 1,472 2,018 4,469 12,594
Changes in UPR recognised as (income)/expense (388) 24 Gross portfolio transfers and acquisitions (11) 87 Foreign exchange rate movements 408 191
Return of premium guarantee Until 2005, Hibernian Life wrote two tranches of linked bonds with a return of premium guarantee, or a price floor guarantee, after five or six years. The provision for these over and above unit and sterling reserves, at the end of 2008 is £18 million (2007: £0.1 million).
Actuarial (losses)/gains recognised in the statement of recognised income and expense (929) 648
The principal asset risks to which the scheme is exposed are: Equity market risk – the effect of equity market falls on the value of plan assets.
Our borrowings are either core structural borrowings, such as subordinated debt, debenture loans and most commercial paper, or operational borrowings, such as bank loans and financing for securitised mortgage loan notes. This note shows the carrying values and contractual maturity amounts of each type, and explains their main features and movements during the year.
(iv) Bank loans Bank loans comprise: Non-recourse Loans to property partnerships (see (a) below) 978 485 Loans to Irish investment funds (see (b) below) 60 74
(a) As explained in accounting policy D, the UK long-term business policyholder funds have invested in a number of property limited partnerships (PLPs). The PLPs have raised external debt, secured on their respective property portfolios, and the lenders are only entitled to obtain payment of both interest and principal to the extent there are sufficient resources in the respective PLPs. The lenders have no recourse whatsoever to the policyholder or shareholders’ funds of any companies in the Aviva Group. Loans of £978 million (2007: £485 million) included in the table relate to those PLPs which have been consolidated as subsidiaries.
(c) During the year, a UK long term business has entered into a financial reassurance agreement with Swiss Re under which up front payments are received from Swiss Re in return for 90% of future surplus arising. The loan will be repaid as profits emerge on the business.
Net cash inflow 433 (135) 298 Foreign exchange rate movements 779 1,779 2,558 Borrowings acquired for non-cash consideration – (3) (3) Acquisitions – 81 81 Fair value movements – (404) (404) Amortisation of discounts and other non-cash items 2 – 2
Contractual obligations for future repairs and maintenance on investment properties are £1 million (2007: £nil).
(a) The reconciliation of profit/(loss) before tax to the net cash inflow from operating activities is: £m
Cash proceeds from disposal of subsidiaries, joint ventures and associates 396 295 Net cash and cash equivalents divested with subsidiaries (43) (12)
Effect of economic assumption changes (140) (120) (668) (928) (444) (1,372) 2 (1,370)
For the remaining life and general insurance operations, the total available capital amounting to £10.9 billion (2007: £12.3 billion) is significantly higher than the minimum requirements established by regulators and, in principle, the excess is available to shareholders. In practice, management will hold higher levels of capital within each business operation to provide appropriate cover for risk.
This note sets out the major risks our businesses face and describes our approach to managing these. It also gives sensitivity analyses around the major economic and non-economic assumptions that can cause volatility in our earnings and capital requirements. Further discussion of the impact of current market conditions is included in the Group Chief Executive’s review (page 2 ) and the Business Review (page 32 )
The Group recognises the critical importance of maintaining an efficient and effective risk management framework. To this end, the Group has an established governance framework, which has the following key elements: – Defined terms of reference for the Board, its committees, and the associated executive management committees; – A clear organisational structure with documented delegated authorities and responsibilities from the Board to Board committees, executive management committees and senior management; – A risk management function operating across Group centre, regions and business units, with clear responsibilities and objectives; – A Group policy framework that defines risk appetite and sets out risk management and control standards for the Group’s worldwide operations. The policies also set out the roles and responsibilities of businesses, regions, policy owners, and the risk oversight committees; and
As at 31 December 2008, no material derivative contracts had been entered into to mitigate the effects of changes in property prices.
Derivatives risk Derivatives are used by a number of the businesses, within policy guidelines agreed by the Board of directors, as set out in the Group policy on derivatives use. Activity is overseen by the Derivatives Approvals Committee, which monitors implementation of the policy, exposure levels and approves large or complex transactions proposed by businesses. Derivatives are primarily used for efficient investment management, risk hedging purposes or to structure specific retail savings products. Derivative transactions are covered by either cash or corresponding assets and liabilities. Speculative activity is prohibited, unless prior approval has been obtained from the Derivatives Approvals Committee. Over the counter derivative contracts are entered into only with approved counterparties and using ISDA documentation and credit support annexes (or equivalent) in accordance with the Group derivatives policy. Adherence to the collateral requirements as set out in the Group derivatives and Group credit policies thereby reduces the risk of credit loss.
Types of risk General insurance risk in the Group arises from: – Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations; – Unexpected claims arising from a single source; – Inaccurate pricing of risks or inappropriate underwriting of risks when underwritten; – Inadequate reinsurance protection or other risk transfer techniques; and
Key management compensation The total compensation to those employees classified as key management, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the executive and non-executive directors is as follows: £m
4,197 Operating profit before tax attributable to shareholders’ profits 3,358 3,065 Adjusted for the following: (15,526) Economic variances on long-term business (12,422) (19) (1,024) Short-term fluctuation in return of investments on non-long-term business (819) (184)
Assets 3,689 Goodwill 3,578 3,082 4,163 Acquired value of in-force business and intangible assets 4,038 3,197 2,751 Additional value of in-force long-term business 2,669 7,758 1,791 Interests in, and loans to, joint ventures 1,737 2,576 1,285 Interests in, and loans to, associates 1,246 1,206 994 Property and equipment 964 942 14,872 Investment property 14,426 15,391 43,543 Loans 42,237 36,193
Financial investments 154,902 Debt securities 150,255 121,312 44,692 Equity securities 43,351 58,829 37,233 Other investments 36,116 36,269 8,138 Reinsurance assets 7,894 8,054 2,724 Deferred tax assets 2,642 590 641 Current tax assets 622 376 10,119 Receivables and other financial assets 9,816 8,619 6,337 Deferred acquisition costs and other assets 6,147 4,487 3,878 Prepayments and accrued income 3,762 2,986 24,929 Cash and cash equivalents 24,181 16,089 1,598 Assets of operations classified as held for sale 1,550 1,128
Opening Group MCEV 16,506 1,594 18,100 528 2,122 18,628 Opening adjustments – – – – – –
3. Net assets for the total life businesses on an MCEV basis presented net of minority interests.
This methodology reflects the level of capital considered by the directors to be appropriate to manage the business. The same definition of required capital is used for both existing and new business.
The level of required capital across the business units expressed as a percentage of the EU minimum solvency margin (or equivalent) can be found on page 316.
Life and pensions (loss)/earnings before tax (9,950) 2,525 Tax on operating earnings (821) (754) Tax on other activities 3,779 48
This note gives more detail relating to the value of new business, the capital required to write new business, the rate of return achieved and how quickly the initial capital invested is paid back.
8. In the UK, other operating assumption changes include the impact of the with-profit special distribution. In Ireland, other assumption changes reflect a reduction in the assumed future tax charges. In Poland, other assumptions reflect a change in the pattern of future mortality charging structure.
United Kingdom – (12) (12) – (8) (8) Europe (28) (88) (116) (11) (34) (45) North America (14) 2 (12) (2) (2) (4) Asia Pacific (23) – (23) (13) – (13)
For service companies, expense inflation relates to the underlying expenses rather than the fees charged to the life company.
Equity implied volatilities The implied volatility is that determined by the Black-Scholes’ formula to reproduce the market price of the option. The following tables sets out the model equity implied volatilities.
France Aviva Participations SA and its principal subsidiaries: Antarius S.A. (50.0%) Aviva Assurances S.A. Aviva France SA Aviva Investors France S.A. Aviva Vie SA Eurofil S.A. Société d’Epargne Viagére SA (83.7%) Union Financière de France Banque (Banking) (74.4%)
Italy Aviva Italia Holding S.p.A and its principal subsidiaries: Aviva Assicurazioni S.p.A (50.0%) Aviva Italia S.p.A Aviva Life SpA (50.0%) Aviva Previdenza S.p.A (55.0%) Aviva Vita S.p.A (25.5%) Eurovita Assicurazioni S.p.A (40.5%) Aviva Assicurazioni Vita S.p.A (50.0%)
Spain Aseguradora Valenciana S.A., de Seguros y Reaseguros (Aseval) (50.0%) Aviva Vida y Pensiones, Sociedad Anonima de Seguros y Reaseguros Caja Espana Vida, Compania de Seguros y Reaseguros (50.0%) Caja Murcia Vida y Pensiones, de Seguros y Reaseguros S.A. (50.0%) Caja Granada Vida, de Seguros y Reaseguros, S.A. (25.0%) CxG Aviva Corporación CaixaGalicia de Seguros y Reaseguros, S.A. (50.0%) Unicorp Vida, Compania de Seguros y Reaseguros (50.0%)
ID fraud/unsolicited mail Share-related fraud and identity theft still affects many shareholders and we urge you to continue to be vigilant. If you receive any unsolicited mail offering advice, you should inform Equiniti immediately. More information on this can be found on our website at www.aviva.com/shareholderupdates
You can also cast your vote for the next AGM online, quickly and easily using the Sharevote service by visiting www.aviva.com/agm for a reliable and environmentally friendly way of voting.
# WH Ireland Limited is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority, registered in England No. 02002044.
Group financial calendar for 2009 Announcement of financial results for the year ended 31 December 2008 5 March Annual General Meeting 29 April Announcement of first quarter interim management statement 30 April Announcement of unaudited six months’ interim results 6 August Announcement of third quarter interim management statement 4 November