IFRS operating profit before tax attributable to shareholders £2,297m 2007: £2,216m
This year our annual report and accounts has been printed by Beacon Press using pureprint environmental print technology. We choose Beacon Press because they have the important environmental certification by SGS for the FSC standards.
288 Independent auditor’s report 289 Summarised consolidated income statement 290 Consolidated statement of recognised income and expenses 290 Reconciliation of movements in shareholders’ equity 291 Summarised consolidated balance sheet 292 Reconciliation of shareholders’ equity 293 Group MCEV analysis of earnings 294 Segmentation of summarised consolidated balance sheet 295 Notes to the MCEV financial statementsFi na nc ia l s ta te m en ts M
* Based on gross worldwide premiums at 31 December 2007. ** Typically includes motor, household, creditor, health, commercial motor, commercial property and commercial liability insurance. † From continuing operations, including share of associates’ premiums. ‡ From continuing operations, long-term savings results are included on an MCEV basis before adjusting items for 2008 and 2007. Prior years are presented on an EEV basis. ≠ On an MCEV basis for 2008, 2007 and 2006. Prior years are presented on an EEV basis. # Return based on opening equity shareholders’ funds presented on an MCEV basis for 2008 and 2007. Prior years on an EEV basis.
Aviva are committed to caring for the environment and looking for sustainable ways to minimise our impact on it.
Dividend Our dividend policy remains unchanged. As a guide we use dividend cover in the 1.5 to 2.0 times range, based on IFRS operating earnings after tax and I am pleased to announce that our recommended final ordinary dividend for 2008 is 19.91 pence per share, bringing the total dividend for the year to 33.00 pence, in line with last year (2007: 33.00 pence).
When times are tough people want to protect what they have. They look for reassurance from brands they can trust – and our long experience of managing risk gives Aviva the strength and stability they need.
Today we’re the fifth-largest insurance group in the world. We have over 50 million customers, 54,000 employees, global sales of £51.4 billion and £381 billion of funds under management.
Financial results We have reported our results for the first time on a market consistent embedded value (MCEV) basis. MCEV is an improvement in many ways on European embedded value (EEV) reporting, which we have previously used, and Aviva is one of the first to adopt this basis in the UK. It leads to a more conservative view of our business which is appropriate in the current economic environment.
Meanwhile our underlying business has shown great resilience. Pre-tax operating profit on an MCEV basis was £3,358 million (2007 restated: £3,065 million) with strong results in both our long-term savings and general insurance business lines. Return on equity shareholders’ funds on an MCEV basis was 11.0% (2007: 10.4%) and the net asset value of the group at 31 December was 486 pence
Purpose Prosperity and peace of mind l 58 l 36 l 64l 50l 42
In the Asia Pacific markets we saw life and pensions business growing on the back of our Chinese joint venture and our new ventures in South Korea and Taiwan. Some European markets suffered in 2008 but we performed well in central and eastern Europe. With over 65% of sales coming from outside the UK, we’ve also benefited from currency movements such as the appreciation of the euro.
In September we launched Aviva Investors, pooling our asset management skills into a single company. With £236 billion currently under management, working in 15 countries around the world, we fully expect to see Aviva Investors become a powerhouse in global investment.
Whether it’s financial risk as a result of changes in the values of our investments and insurance liability or credit risk from our investment in bonds and other securities, we are monitoring and managing our risk continuously.
There are many examples of our prudent approach to risk. Expectations of credit default increased dramatically in 2008 and within our UK annuity company we have made provisions at a level which assumes credit default will be worse than at any time in modern business history, worse even than the 1930’s. We have experienced some credit default losses during the year, but these have been acceptable within the overall scale of our business.
When I talk to customers, I am always struck how good it is when we are delivering first class service. Our challenge is to do this consistently, day in, day out and this is what we aim to deliver through our new brand promise.
We want this to be a great organisation to work for, and I believe that our people show all the signs of being proud to belong to the global family that is Aviva. As a result of our cost cutting exercise, there were some redundancies in 2008; a difficult decision, but necessary to ensure the future development of the business.
As a company, we take our obligations to the world around us seriously. We’re a leader in the field of corporate responsibility and many of our people play an active part in the communities in which we operate. In 2008 we continued to be recognised by a wide range of external benchmarks for the work we do across a range of activities.
The global economy 2008 was one of the most turbulent years in economic history as a wide range of assets posted record or near record falls. What began in 2007 as a crisis in US sub-prime mortgages spread first through the global banking system and then the broader economy as credit markets froze and equity markets fell.
Governments introduced a series of measures aimed at restarting lending and supporting economies. By year-end a large part of the global banking system was effectively under government control. In a further step, huge stimulus packages were launched to limit the damage, as economies slipped into recession. However, by the end of the year most of the world’s equity markets had fallen by between 30% and 50%.
We recognise that our customers have their own busy schedules and need to be informed of the progress of their claims in an intelligent and proactive way.
We aim to make it easier for them by contacting them first and take the steps to keep them up to date so they don’t need to chase us.
In the current economic climate customers need as much help and support from their providers as possible.
By listening to, and recognising our customers we are able to develop and tailor our products to suit their requirements and provide help right now, when they need it the most.
There is no doubt that there is a disconnect between our current share price and the underlying value of the business. This is true of many sectors, and while investors remain nervous it is likely to persist. But customers continue to buy insurance, invest and save, with trusted brands like Aviva. As a result our operating performance has improved in 2008. You can read full details of our operating performance on pages 22 to 27.
Managing our risk At Aviva, sound risk management is a key component of our business. We had already made sensible investment decisions before the credit crunch took hold. While we had some default losses in the second half of the year on our exposure to AIG, Lehman, Bradford and Bingley, Freddie Mac, Fannie Mae and Washington Mutual, these were within our limits of acceptable risk. Since then we’ve taken further steps to provide against default risk.
In September 2007 we sold £3.4 billion of equities when the FTSE Index was standing at 6,400. Since then we’ve introduced safeguards to protect ourselves from further significant falls on the equity markets. We continuously assess our overall exposure and define the risks that we’re prepared to accept across the group.
Valuing our customers We are building a culture that puts customers at the heart of our business. By really understanding what they need we can give them the best possible service and experience of Aviva and earn their long-term loyalty to the brand.
By really getting to know our customers we are able to offer them the service and products that they want. In this way we can provide the best possible experience and earn their long-term loyalty.
To stay ahead in growth markets, we must be inventive. Bancassurance, which offers people the convenience of buying insurance at local bank branches, is one of the foundations of our business in western Europe. We’re now successfully introducing the concept of bancassurance to customers across eastern Europe and the Far East. Today we have more than 90 bancassurance partnerships around the world, generating nearly one quarter of Aviva's long-term savings sales.
This mix of activities is one of the key drivers of our success. We see life insurance, general insurance and asset management as complementary parts of a business that can balance cash flow, returns and long-term value for our shareholders, while bringing prosperity and peace of mind to our customers.
MCEV aims to improve transparency and comparability in embedded value reporting across Europe.
Building a more efficient organisation “One Aviva, twice the value”also means a leaner, more efficient organisation. One of the benefits of being a truly global organisation is that we can simplify systems, share services and IT, and streamline the running of all our businesses.
Phase two of the transformation, announced in June 2008, is the creation of nine modern customer facing centres of insurance expertise to deliver consistent first-class service. This, and associated initiatives, will deliver an extra £150 million in savings a year by the end of 2010. A further £50 million cost savings will come from our European businesses.
Worldwide general insurance combined operating ratio improved to 98% (2007: 100%)
Voted “General Insurer of the Year” in the UK at the Insurance Times Awards for the sixth year running
RAC was voted by JD Power as the best Roadside Assistance provider in the UK for the third year running
Won “Life Company of the Year” at the AFA Plan for Life awards in Australia
Maintained our number one ranking in both fixed indexed annuities and fixed indexed life insurance markets in the US Life business
Early adoption of market consistent embedded value (MCEV) methodology for our long-term savings business
l 22 – 27 More on our group performance l 36 – 69 More on our regional performance
We’re here to bring “prosperity and peace of mind” to our customers – prosperity with our life, savings and asset management business, peace of mind through the security general insurance cover brings.
£3,358m MCEV operating profit before tax Turbulent financial markets have had an impact on our profit before tax but operating profit, over which we have more direct control, is 10% up on 2007.
50m Number of customers Despite the tough economic climate in 2008 our overall customer base has grown. In Asia Pacific we launched joint ventures in South Korea and Taiwan and we expanded our distribution network in China. We’ve also seen an increase in customers in central and eastern Europe where our businesses have performed well.
486p Net asset value per share NAV is one of the key ratios analysts use for measuring the value of a company and contrasts with our share price which closed at 390p on 31 December.
Despite the difficult economic conditions we are confident that our strategy places us in good shape for the future, with opportunities in many of our markets.
Our strategy Although the outlook is challenging, our strategic objectives remain clear and relevant. Some of these objectives have already been met. North America is a great example where we have already reached our target a year ahead of schedule. In these areas we’ll be setting new and challenging targets for the year to come.
We are confident that by adhering to our strategy and our vision to create “one Aviva, twice the value”, we have the greatest opportunity for success in the present climate.
What we do In the UK we are a leading provider of life, pensions, investment, general insurance and health products to more than 20 million customers. We also provide roadside assistance through the RAC. Products are distributed via a number of channels including IFAs, brokers, corporate partners and direct to customers via the internet. Currently trading as Norwich Union, we are rebranding to Aviva during 2009.
Belgium Italy Romania Czech Republic Ireland Russia France Lithuania Slovakia Germany Netherlands Spain Hungary Poland Turkey
What we do We operate in 15 countries across Europe and are the second largest insurer in the region, providing life, general and health insurance products to more than 20 million customers. Customers are served through a diverse set of distribution channels, including banks, brokers, agents, direct sales force, telephone and the internet. Our ability to operate across distribution channels allows us to meet different customer preferences and respond to market developments.
Australia India South Korea China Malaysia Sri Lanka Hong Kong Singapore Taiwan
What we do We have been present in Asia Pacific for over 100 years and today operate in nine markets across this region. We are particularly focused on providing long-term savings products through a multi-channel distribution strategy with particular strength in bancassurance and wrap administration. We also sell general insurance products in Sri Lanka and Malaysia and are an established provider of health insurance in Singapore.
Contribution to Total sales group sales MCEV operating profit IFRS operating profit
Why now? Our start point was to ensure we had a real understanding of what our customers want from us across the globe so that we could build the brand around meeting their needs. Throughout 2008 we never stopped listening to our customers. They told us (in fact 3/4 of customers) that it was the products and service they recieved that matters most. To that end we created our brand promise of ‘no one recognises you like Aviva’ as across the globe customers expressed a strong need to be recognised for who they are, their situation and their needs.
Why we’re changing Aviva – already an established and respected brand Customers in 21 markets across the world already know us as Aviva. We’re market leaders in everything from bancassurance in Europe and Asia, to Fixed Indexed Annuities in the USA. And in 2008, our fund management operations around the world came together to form one single, global business, Aviva Investors. We have also traded as Aviva plc since 2001.
More impact with customers The creation of a single brand globally will mean we will be able to improve the effectiveness of our marketing spend across our businesses. This means achieving greater impact for less spend and be better placed to more effectively compete with other strong global brands, such as Axa and Aegon.
RAC and Delta Lloyd Two major brands will remain unchanged: RAC in the UK is a leader in a specialist market with very high levels of trust and recognition among its members that are specific to its roadside recovery heritage. In the Benelux countries, Delta Lloyd’s governance means that it operates more independently than our other businesses and so will not take part in the change.
What the change will mean… …to our customers This also makes good economic sense: we will be able to remove duplication across a wide range of activities and remove costs from the business, to the benefit of our shareholders and investors. We plan to recoup the cost of the name change in two years and then to deliver significant benefits.
…to our employees We make the same promise to our employees as we do to our customers. We respect and value our colleagues and recognise the contribution they make towards meeting the needs of our customers.
We also consulted the councils on the impact of the credit crunch and onset of recession which informed our final communications plans. We will continue to work with customer councils to help inform future product and service developments – and of course we share the learnings from the councils with colleagues across our markets too.
Our purpose is to deliver prosperity and peace of mind to our customers. We will do this by realising our vision: “one Aviva, twice the value”.
Proactively managed our balance sheet, including reducing and hedging equity exposure
Moved to market consistent embedded value (MCEV) to enhance decision making on value and profitability 2008 progress Achieved £340 million annualised cost savings in UK GI, UK Life and Europe
Increased our cost saving target from £350 million to £500 million
Increased use of shared services, both regionally (expanded Singapore hub, UK cost savings) and functionally (group-wide approach to functions such as procurement and HR)
Expanded significantly in our existing markets, particularly the US, China and Poland
We are fully committed to maintaining the composite nature of the group. We firmly believe in the benefits of life insurance, general insurance and asset management as complementary parts of an overall business model that balances cash flow, returns and long-term value creation, and delivers prosperity and peace of mind to customers.
Launched in September 2008, Aviva Investors is a clear example of the “one Aviva, twice the value” strategy in action. Integrating our global asset management businesses under one umbrella, Aviva Investors is now a leading asset manager, operating in 15 countries with £236 billion of funds under management. We plan to grow Aviva Investors and significantly increase its contribution to group profits.
We sell our products in 28 countries in ways that our customers choose to buy them. We will get closer to our customers through better understanding of their needs and by providing products and services that customers want. We will continue looking for the right distribution in the right markets. Our move to a global brand is key to achieving our goals.
Capital management will continue to be a key focus. Capital is treated as a scarce resource, and is allocated to provide the highest sustainable returns for shareholders. We continuously seek improvements in capital structure and efficiency.
In 2009, we will continue to drive the group strategy, while adapting our short-term tactics in response to current recessionary conditions. In particular we are focused on capital, profitability and productivity over volume growth and we have strengthened our commitment to understanding and responding to the needs of our customers and partners during these turbulent times.
% missed benchmark or target % at or above benchmark or target
Increase penetration in existing markets and enter new, high potential growth markets
Further develop effective global core business processes and infrastructure 2009 priorities Manage GI for value and cash flow and exercise price discipline and leadership
Monitor and manage market and operational risks in a volatile environment
Allocate capital to the highest risk-adjusted return opportunities by country, business line and product 2009 priorities Rebrand to Aviva in the UK by the end of 2009 and in Ireland and Poland by the end of 2010
Increase customer retention and overall marketing effectiveness group-wide 2009 priorities Execute our shared services strategy, including: – Globally consistent operating models for corporate functions eg IT, HR, Finance, Risk and Marketing
In 2008, the group’s strategy was underpinned by focusing on a number of key financial performance measures. The key measures that are used to assess performance at a group level are set out below: To demonstrate our commitment to our vision of “one Aviva, twice the value”, we announced our ambition in February 2008 to double IFRS earnings per share by 2012. This ambition is based on total IFRS return, including investment volatility and non-operating items over the weighted average number of shares.
Our board has recommended a final dividend of 19.91 pence per share (2007: 21.10 pence) bringing the total dividend for the year to 33.00 pence. The total dividend has been maintained in line with 2007. Dividend cover is 1.9 times (2007: 1.6 times) within our target range.
In 2008 we delivered strong MCEV operating profit at £3,358 million, up 10% against 2007 and IFRS operating profit of £2,297 million, up 4% against the prior year. These results reflect higher life and general insurance results offset by lower fund management returns.
Our global employee climate survey continues to provide measures of employee engagement and leadership. Employee engagement represents the degree to which people believe in Aviva being a great place to work and are contributing to help meet our collective goals and ambitions.
The survey results are used each year to determine and implement actions with the aim of achieving continuous improvement. The climate survey measures employees’ perceptions of leadership, verifying alignment with our strategic direction and immediate business plans. Our aim is to improve both measures over time and meet or exceed a global financial services benchmark.
Aviva is committed to implementing a consistent measure of customer advocacy across the group, Net Promoter Score® (NPS). Overall, 17 businesses carried out an overall NPS survey in 2008. For those that also benchmarked, eight businesses were at or exceeded the market average, with two placed in the upper quartile, and four scored below the market average. For those businesses that unable to conduct a benchmark survey, four businesses' scores met or exceeded their targets and one missed.
Our UK Life, UK GI and Canadian business are transitioning across to NPS in 2009. In the UK, the life business met its broker satisfaction target, UK GI achieved its direct customer satisfaction target (at 94%) and our RAC business continued to receive very high levels of customer satisfaction (98%).
Total new business sales, including investment sales, increased by 1% in 2008 to £40,278 million (2007: £39,705 million) with growth in life and pension sales being offset by a fall in the sales of investment products. As a global group with 67% of our long-term savings sales coming from outside the UK we have benefited from currency movements in the year, mainly the appreciation of the euro and US dollar. However, while we have already met the target to double sales in North America a year earlier than planned, in the current economic climate top-line sales growth targets are not our priority. In 2009 we aim to maintain a strong franchise in each of our markets, but with an increased emphasis on capital efficiency. We will aim to perform in line with the market, but will prioritise profitability and efficient use of capital.
What’s happened? – We are in one of the most turbulent periods for financial markets since records began – No one can accurately forecast when the current situation will start to improve – As a result the market is demanding more transparency in our results and the disclosures we make, reassurance in the quality of our assets and continued focus on cost management
Risk – We improved our risk management framework – Further developed a robust process for gathering and reviewing information on the quality of our assets – We took action to reduce the risks on our balance sheet
– We have produced our results on an MCEV basis. This is an important step forward in increasing the transparency of our business
Risk – We have taken out additional hedging against our equity exposure – We have included detailed asset quality analysis, for our analyst presentation responding to the demand for more information and transparency in our disclosures – We have made provision for potential default experience on our balance sheet
What’s next? – Continue the proactive management of our capital base to ensure that we have a strong foundation for future years and that capital is allocated where it can generate the best returns – Ensure that we remain at the front of industry changes through continued involvement in development of Solvency II and IFRS Phase II – Explore a possible US listing which will give us a platform to broaden our investor base in North America
As announced in February 2009 the Group has adopted a market consistent embedded value methodology (MCEV) for supplementary life reporting.This replaces the European Embedded Value basis (EEV) we have previously used. We have restated the 2007 balance sheet and results accordingly. There is no change to the underlying fundamentals or economics of our business as a result of adopting MCEV; it merely provides a further perspective on the business, particularly for internal capital allocation purposes. Full details of our methodology can be found in the Financial Statements MCEV section in this report.
Corporate centre Corporate centre costs for the year improved to £141 million (2007: £157 million) due to lower central spend and staff incentive costs. Within this total, project spend was £34 million (2007: £26 million), driven by the corporate centre’s share of the ongoing implementation of the global finance strategy. This project has allowed us to deliver new reporting requirements under MCEV and will enable us to meet future requirements under Solvency II. It will also deliver compliance with Sarbanes-Oxley (which would support a potential US listing). Further expenditure to deliver this project is also included in each region’s operating profit.
Adjusted for the following: Investment return variances and economic assumption changes on long-term business (1,631) 15
Short-term fluctuation in return on investments backing non-long-term business (819) (184)
Economic assumption changes on general insurance and health business (94) 2
Reconciliation of group operating profit to profit before tax – MCEV basis
(Loss)/profit before tax We have reported a loss before tax on an IFRS basis in 2008 of £1,300 million (2007 restated: £1,832 million profit). This loss mainly reflects the impact that the financial markets have had during the year with adverse investment variances and economic assumption changes amounting to £2,544 million (2007 restated: £167 million adverse). During the year equity markets fell by between 30% to 50%, bond yields fell by 80 basis points in the UK and 110 basis points in the Eurozone and credit spreads widened, reflecting the increased risk of corporate debt. In addition to market value movements, this line also reflects that we have further increased credit allowance by £550 million for credit defaults on £16 billion of assets in the UK annuity business. Adverse economic assumption changes on general insurance and health business of £94 million relate to the discounted latent claims provisions
Impairment of goodwill of £66 million (2007: £10 million) is mainly driven by impairments in the Netherlands and on an Italian associate.
Amortisation and impairment of intangibles of £117 million (2007: £103 million) reflected amortisation of acquired additional value of in force business. The increase since last year mainly relates to the new acquisition in Spain of Cajamurcia.
We have reported exceptional items of £551 million (2007: £nil) in the year. These include £142 million for the transfer of the lifetime wrap platform the write down in preparation for the sale of the British School of Motoring in the UK and the closure of the structured settlement business in the US. The costs also include £304 million after reinsurance for the discounted cost of strengthening our latent claims provisions, mainly in the UK, and £126 million for the settlement agreed by our Netherlands life business for its unit-linked policyholders, following an industry-wide challenge on the level of fees. The remaining balance relates to brand migration costs of £37 million offset by £58 million benefit from settlement of a disputed Australian tax liability and the consequent release of a provision for interest charges.
Tax The taxation credit was £415 million (2007 restated: £334 million charge) on an IFRS basis and includes a charge of £487 million (2007 restated: £604 million) on operating profit, equivalent to an effective rate of 21.2% (2007 restated: 27.3%). On an MCEV basis the effective rate of tax on operating profit was 25.0% (2007 restated: 30.1%).
Worldwide sales* 51,415 50,274 Life and pensions value of new business before tax and minority interests 780 897
Life and pensions value of new business net of tax and minority interests 409 504
Net written premiums from our general insurance and health business were £11,137 million (2007: £10,569 million). Good growth in Europe, particularly in the Netherlands, was partly offset by reduced premiums in our UK general insurance business, reflecting both the tough market conditions and our focus on profit rather than volumes.
Details of our sales performance can be found in the regional sections of this report.
During the year we revised our estimation of latent claims to reflect increasing market trends observed in mesothelioma claims The Institute of Actuaries’ Asbestos working party report in 2008 contributed to our view that there has been a real worsening of expected ultimate claims experience for mesothelioma, even though current claims are only running at about £25 million a year. Therefore we have made a one-off provision after discounting for £304 million. As this relates to business no longer written by the group, this has been treated as an exceptional item and is therefore not included in the calculation of COR.
Earnings per share Our IFRS earnings per share for 2008 was a loss of 36.8 pence (2007 restated: 48.9 pence). This reflects an increase in operating earnings offset by the investment variances and exceptional items discussed above. We remain committed to our target to double earnings per share as set at 2007 by 2012.
Dividend The Board has recommended a final dividend of 19.91 pence per share (2007: 21.10 pence), payable on 15 May 2009 to shareholders on the register at 27 March 2009. This equates to a total dividend for the year of 33.00 pence (2007: 33.00 pence). Our IFRS operating profits cover this dividend 1.9 times (2007 restated: 1.6 times) in line with our dividend cover target of 1.5 – 2.0 times.
Following a review by the Board of the operation of the current dividend reinvestment plan (DRIP) the company intends to propose a resolution at the forthcoming AGM to reintroduce a Scrip dividend scheme. Subject to shareholder approval, the Scrip Scheme will commence with the 2008 final dividend. The DRIP has been withdrawn.
Additional value of in-force long-term business – – 2,669 7,758 Interests in and loans to joint ventures and associates 2,983 3,782 2,983 3,782
Liabilities Gross liability for insurance and investment contracts 282,409 251,083 282,409 251,083
Equity attributable to our ordinary shareholders on an IFRS basis reduced by 15% to £11,052 million (2007 restated: £12,946 million) reflecting the impact of falling investment values partly offset by increased operating profit and the increase in the net assets of our non-UK businesses due to the strengthening of the euro and the dollar against sterling. On an MCEV basis, the equity attributable to ordinary shareholders was £12,912 million (2007 restated: £19,998 million), giving a net asset value per share of 486 pence (2007 restated: 763 pence).
Net cash from operating activities 7,526 627 8,153 4,143 Net cash from investing activities (164) (231) (395) (635) Net cash flow from financing activities (878) (1,259) (2,137) (1,184) Net increase in cash and cash equivalents 6,484 (863) 5,621 2,324 Cash and cash equivalents at 1 January 11,132 4,432 15,564 12,635 Effect of exchange rates 2,525 359 2,884 605 Cash and cash equivalents at 31 December 20,141 3,928 24,069 15,564
Of the cash and cash requirements shown above £493 million has been classified as held for sale (2007: £96 million)
Capital allocation Capital allocation is undertaken based on a rigorous analysis of a range of financial, strategic, risk and capital factors to ensure that capital is allocated efficiently to value adding business opportunities. A clear management decision making framework, incorporating ongoing operational and strategic performance review, periodic longer term strategic and financial planning and robust due diligence over capital allocation is in place, governed by the Group Executive Committee and Group Asset Committee. These processes incorporate various capital profitability metrics, including an assessment of return on capital employed and internal rates of return in relation to hurdle rates to ensure capital is allocated efficiently and that excess business unit capital is repatriated where appropriate.
Different measures of capital In recognition of the requirements of different stakeholders, we measure capital on a number of different bases, all of which are taken into account when managing and allocating capital across the group. These include measures which comply with the regulatory regimes within which we operate and those which the directors consider appropriate for the management of the business. The primary measures are: (i) Accounting bases We report our results on both an IFRS and a Market Consistent Embedded Value (MCEV) basis. The directors consider that the MCEV principles provide a more meaningful measure of the longterm underlying value of the capital employed in our life and related businesses. This basis allows for the impact of uncertainty in the future investment returns more explicitly and is consistent with the way the life business is priced and managed. Accordingly, in addition to IFRS, we analyse and measure the net asset value and total capital employed for the group on this basis. This is the basis on which group return on equity is measured.
(ii) Regulatory bases Individual regulated subsidiaries measure and report solvency based on applicable local regulations, including in the UK the regulations established by the Financial Services Authority (FSA). These measures are also consolidated under the European Insurance Groups Directive (IGD) to calculate regulatory capital adequacy at an aggregate group level. We have fully complied with these regulatory requirements during the year.
(iv) Economic bases We also measure capital using an economic capital model that takes into account a more realistic set of financial and non-financial assumptions. This model continues to be developed and is increasingly relevant in the internal management and external assessment of our capital resources. The economic capital model is used to assess capital strength in accordance with the Individual Capital Assessment (ICA) requirements established by the FSA. Further developments are planned to meet the emerging requirements of the Solvency II framework.
Long-term savings 19,250 22,397 General insurance and health 5,516 5,594 Fund management 340 355 Other business (326) 831
At 31 December 2008 we had £24.8 billion (31 December 2007: £29.1 billion) of total capital employed in our trading operations, measured on an MCEV basis. Net asset value per ordinary share, based on equity shareholders’ funds, has decreased to 486 pence per share (31 December 2007: 763 pence per share).
On 13 May 2008 we issued £0.8 billion equivalent of Lower Tier 2 hybrid in a dual-tranche transaction (£400 million and €500 million). £0.6 billion of the proceeds was used to repay short-term commercial paper borrowings. On 8 August 2008 we issued a further £0.2 billion of Lower Tier 2 hybrid. These transactions had a positive impact on group IGD solvency and economic capital measures.
Financial leverage, the ratio of external senior and subordinated debt to MCEV capital and reserves, was 34.7% (31 December 2007: 19.2%). Fixed charge cover, which measures the extent to which external interest costs, including subordinated debt interest and preference dividends, are covered by MCEV operating profit was 9.2 times (31 December 2007: 9.2 times).
Our excess solvency of £2.0 billion reflects a net decrease of £0.9 billion since 31 December 2007 reflecting the prevailing challenging market and general insurance trading conditions offset by various capital initiatives undertaken during the year including the issue of hybrid debt. Following individual guidance from the FSA we now recognise surpluses in the non-profit funds of our UK life and pensions business which is available for transfer to shareholders of £0.4 billion, the benefit of which is offset by reserve strengthening elsewhere in the group.
Regulatory basis – Long-term businesses For our non-participating worldwide life assurance businesses, capital requirements, expressed as a percentage of the EU minimum, are set for internal management and embedded value reporting purposes as the higher of: Target levels set by reference to internal risk assessment and internal objectives, taking account of the level of operational, demographic, market and currency risk.
These levels of required capital are used in the calculation of embedded value to evaluate the cost of locked in capital. At 31 December 2008 the aggregate regulatory requirements based on the EU minimum test amounted to £6.0 billion (31 December 2007: £4.6 billion). At this date, the actual net worth held in our long-term business was £9.5 billion (31 December 2007: £9.4 billion) which represents 157% (31 December 2007: 205%) of these minimum requirements.
Estimated Estimated Estimated realistic Estimated realistic realistic inherited risk capital Estimated Estimated assets liabilities*,** estate† margin‡ excess excess £bn £bn £bn £bn £bn £bn * These realistic liabilities include the shareholders’ share of future bonuses of £0.8 billion (31 December 2007: £1.2 billion). Realistic liabilities adjusted to eliminate the shareholders’ share of future bonuses are £43.2 billion (31 December 2007: £48.8 billion).
**These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision net of charges included within realistic liabilities is £1.4 billion, £1.5 billion and £4.1 billion for CGNU Life, CULAC and NUL&P respectively (31 December 2007: £0.7 billion, £0.8 billion and £3.0 billion for CGNU Life, CULAC and NUL&P respectively).
Investment mix The aggregate investment mix of the assets in the three main with-profit funds at 31 December 2008 was: Fixed interest 56% 37%
Proposed reattribution of inherited estate In July 2008 following extensive discussions with the Policyholder Advocate, Norwich Union announced a £1 billion offer to one million eligible policy holders in return for giving up the right to the £2.1 billion inherited estate of CGNU Life Assurance Ltd and Commercial Union Life Assurance Company Ltd. Since then, investment market performance has caused the value of the estate to reduce to £1.4 billion meaning that the offer made in July no longer meets our criteria of being fair to both policyholders and shareholders. As a consequence, we are working closely with the Policyholder Advocate to see how we can restructure our offer and expect to be in a position to provide an update to policyholders in the next few months. These developments do not affect the entitlement to receive a £2.1 billion special distribution that we announced in early 2008.
It is possible that the first stage of the Solvency II project will reach conclusion by June 2009 if the EU Parliament, Council and Commission are able to reach agreement on the “Level 1 Framework Directive”. If this happens, it is envisaged that full implementation of Solvency II requirements could be imposed on EU insurers in the first quarter of 2013.
Rating agency bases Agency ratings are important in supporting access to debt capital markets and in providing assurance to business partners and policyholders over the financial strength of the group and our ability to service contractual obligations. In recognition of this, we have solicited rating relationships with a number of rating agencies.
Rating agencies generally assign ratings based on an assessment of a range of financial (eg capital strength, gearing and fixed charge cover ratios) and non- financial (eg competitive position and quality of management) factors. Managing our capital and liquidity position in accordance with our target rating levels is a core consideration in all material capital management and capital allocation decisions.
Economic bases We use a risk-based capital model to assess economic capital requirements and to aid in risk and capital management across the group. This model is also used to support our Individual Capital Assessments (ICA) which are reported to the FSA for all UK regulated insurance businesses. The model is based on a framework for identifying the risks to which business units, and the group as a whole, are exposed. A mixture of scenario based approaches and stochastic models are used to capture market risk, credit risk, insurance risk and operational risk. Scenarios are specified centrally to provide consistency across businesses and to achieve a minimum standard. Where appropriate, businesses also supplement these with additional risk models specific to their own risk profile. When aggregating capital requirements at business unit and group level, we allow for diversification benefits between risks and between businesses, with restrictions to allow for non-fungibility of capital when appropriate. This means that the aggregate capital requirement is less than the sum of capital required to cover all of the individual risks.
The FSA uses the results of our ICA process when setting target levels of capital for the UK regulated insurance businesses. In line with FSA requirements, the ICA estimates the capital required to mitigate the risk of insolvency to a 99.5% confidence level over a one year time horizon (equivalent to events occurring in 1 out of 200 years) against financial and non-financial tests.
As a global company, we face a large and diverse number of risks. Each of these risks has the potential to harm our financial performance or hinder the achievement of our strategic objectives. If we don’t manage risk effectively we could miss potential opportunities to further develop and expand our business.
Naturally, it’s impossible to analyse every single risk we encounter, so instead we set limits to manage our material risks to ensure we stay within our risk appetite (the amount of risk we are willing to accept). To work out how “material” a risk is to our business we assess its size and scale based on how likely it is that it will occur and what potential impact it would have on our business and our stakeholders if it were to occur. Most importantly, when risks are outside of appetite we agree what actions need to be taken to manage the risks (or groups of risks).
Our Risk Management Framework provides the means for us to identify, assess, measure, manage and monitor all of these different types of risk to provide us with a single picture of the threats, uncertainties and opportunities we face. We’re then able to make appropriate decisions to limit and control the impact that all of these risks may have on our strategic objectives.
What risk management activity happens at Aviva? To ensure that risks are effectively identified and assessed and that appropriate controls and responses are in place, our risk management activity needs to operate through clearly defined and agreed structures and processes.
As well as working with the regions, the central risk team is also responsible for managing group risk governance and oversight.
Our Risk Management Framework At group centre, we monitor risks on a regular basis through our Risk Management Framework. The framework includes all our risk management processes, systems and tools and helps set standards for identifying, managing and reporting risks and establishing minimum standards for our control environment.
– Set risk policies – Monitor performance – Oversee risk management – Provide challenge – Recommend risk activity
– Oversee risk management – Monitor regional risk profile – Operate in line with policy – Report to Group
Policies and procedures We have 35 policies that deal with the management of all our risks. These policies define our risk appetite and set 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.
The Financial Services Authority (FSA) requires Aviva to assess its economic capital requirements to ensure that it adequately reflects business and control risks. In turn this analysis supports our strategic planning and decision-making processes.
Market risk Aviva is exposed to market risk from owning a portfolio of international insurance businesses. A decline in markets or an increase in market volatility may also adversely affect sales of our investment products and our fund management business. We recognise that market risk is part of the businesses that we run, and that a certain level of market risk is acceptable in order to deliver benefits to both policyholders and shareholders.
We manage market risk by applying our market risk policy to all of the assets under the group’s control. This includes policyholder assets (those assets supporting the technical liabilities) and shareholder assets (the surplus assets held that are not required to meet policyholder benefits and to cover regulatory margins). In practice assets can move between these categories.
Interest rate risk Changes in the level of interest rates affect both the products we sell and the value of our investments. For example, long-term debt and fixed income securities are both exposed to fluctuations in interest rates. We are also exposed to movements in interest rates on business carrying investment return and surrender value guarantees.
For short-term business such as general insurance, we require a close matching of assets and liabilities by duration to minimise this risk. If we can’t entirely remove interest rate exposure through matching, then we may use a variety of derivative instruments in order to hedge against unfavourable market movements.
Property price risk We also invest in property assets in different global locations. These assets are also subject to fluctuations in their value. Property investment is managed locally by our business units, recognising any local regulatory restrictions in respect of asset admissibility or liquidity and with reference to the business units’ risk appetite.
A 10% decrease in property values would decrease shareholders’ funds by £300 million pre-tax on an IFRS basis and embedded value would decrease by £355 million, net of tax on an MCEV basis. Sensitivities to property values are shown in note 55 and in the section on MCEV reporting.
We manage the exposure to individual counterparties, by measuring exposure against centrally set limits. These limits take account of credit ratings issued by rating agencies such as Standard & Poor’s.
We manage the level of risk we’re prepared to take via analysis that helps us define the optimal balance between the risk we take and the returns we can earn on the underlying assets, monitoring the types of investment available to us to achieve our aims. We also actively monitor and consider the risk of a fall in the value of fixed interest securities from changes in the perceived credit worthiness of the issuer.
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. Speculative activity is prohibited, unless prior approval has been obtained from the Derivatives Approval Committee.
Longevity risk We have a significant exposure to annuity business and our most significant life insurance risk is therefore associated with longevity. We monitor longevity statistics and compare these with emerging industry trends. We use the results of this analysis to decide both the reserving and pricing of annuities.
Mortality and morbidity risk Our business units manage mortality and morbidity risk arising on insurance products through the setting of limits and the use of reinsurance to transfer excessive risk exposures. Sensitivity tests show that mortality risk is relatively low. A 5% worsening in assurance mortality experience reduces shareholder funds by £30 million on an IFRS basis and decreases embedded value by £265 million on an MCEV basis, net of tax.
Persistency risk Persistency (or lapse) risk affects all of our life insurance businesses and is managed at a business unit level through frequent monitoring of experience. Where possible, the potential financial impact of lapses is reduced by the product design. Guidelines have been developed on persistency management, sharing best practice in the setting of lapse assumptions, product design requirements, experience monitoring, and required management actions.
Expense risk Expenses are managed and monitored at a business unit level, as part of general day-to-day business management. Expense management is a key part of a business’ ability to meet financial targets. Expense risk arises not only from any failure to control the overall level of expenses but also from any deviation of actual experience from the assumptions made in pricing our insurance policies. Expense assumptions are regularly monitored to ensure they remain appropriate.
Catastrophe risk Our largest general insurance risk is claims incurred from catastrophic events, such as flooding and windstorm. We manage this risk through central monitoring of risk aggregations and, where we do not wish to retain the risk within the group, by purchasing catastrophe cover from third-party reinsurers.
As catastrophe events become more remote, the amount of risk we retain increases, so that our total potential loss from our most concentrated exposure (northern European wind storm) is approximately £400 million for a one in ten year event, compared to approximately £850 million for a one in a hundred year event.
Our businesses are primarily responsible for identifying and managing operational risks in line with minimum standards of control set out in our policies. Each operational risk is assessed against financial, operational and reputation criteria.
Business management teams must be satisfied that all material risks falling outside our risk appetite are being mitigated, monitored and reported to an appropriate level. Any risks with a high potential impact level are monitored centrally on a regular basis.
Supplier risk Within Aviva, we have robust guidelines on how supplier risk should be assessed, mitigated and monitored through our Purchasing and Outsourcing policies. These policies are promoted and endorsed by Aviva's senior management and our local Procurement and Risk teams have the responsibility to ensure these are fully implemented. Performance against these guidelines is then assessed at both regional and group level on an ongoing quarterly basis. Risk is measured against four areas: financial impact, internal service disruption, customer impact and risk to the Aviva brand.
We have a wide array of investment capabilities to draw on. As a unified provider we can now tap into virtually every type of investment opportunity all over the world, giving our clients access to more products than ever before. Our expertise and global and local knowledge, meanwhile, help us select the right solutions to match each client’s needs.
What’s happened? Global financial markets in turmoil – Global banking crisis, frozen credit markets and falling equity markets – Commercial and residential property prices fell sharply – Commodity prices at record lows
Stimulus packages provided by governments – Government made huge sums of money available to banks in an attempt to restart credit markets – Interest rate cuts and tax incentives to stimulate spending – Other incentives provided to industries to shore up businesses
Economies around the world slipping into recession – US and UK moved into official recession in fourth quarter of 2008
Risk management – The risk management culture across the group continues to give significant competitive advantages as we grow our external business around the globe
Policymakers coordinated a series of measures aimed at restarting lending and supporting economies and by year-end a large part of the global banking system was effectively under government control. In a further step, huge stimulus packages were announced by governments around the world, designed to limit the damage as their economies slipped into recession. However, by the end of December most of the world’s equity markets had fallen by around 40% for the year.
United Kingdom 64 70 34 40 Europe 35 43 9 15 North America 14 27 (3) 3 Asia Pacific 1 7 1 6 Total Aviva Investors 114 147 41 64 Other fund management 9 32 1 26 Total Aviva FM results 123 179 42 90
Note: Full year 2007 has been restated to reflect the new Aviva Investors’ management structure. The fund management portion of the US business has been separately identified with a £24 million transfer from the life business result.
Operational performance Against this economic backdrop, the launch of Aviva Investors in September was well received by clients, industry analysts and the media. The risk management culture and the full support of the group continue to be significant competitive advantages as we grow our external business around the globe.
In 2008, falling asset prices and a global flight to more liquid and transparent investments impacted our business in both negative and positive ways. In line with the broader market we saw significant outflows of cash from the open-ended funds in our UK real estate business. However, we also experienced record monthon -month net inflows into our sterling and euro liquidity funds. As part of an effort to promote transparency and to protect clients’ liquidity in extremely volatile markets we moved two of our constant net asset value liquidity funds to a variable net asset value policy in November. This decision was considered to be in the best interest of investors as a variable net asset value provides a more accurate reflection of the underlying value of the funds on a daily basis.
Investment performance We have aligned the organisation to long-term investment trends, supporting our focus on investment performance. This includes the separation of our investment offerings into components which enables us to customise and package investment solutions across a range of client segments and needs.
Trustee Tutor is our award-winning education programme. We use it to give trustees the knowledge to challenge and gain the most from their fund managers and consultants. Through various learning and development media, it caters for different knowledge levels and learning styles.
Cross-border sales and third-party sales We created a scalable infrastructure in 2008. This included using our Luxembourg SICAV platform to launch the Aviva Investors Australian Resources Fund, Aviva Investors Global High Yield Bond Fund, Global Equity Income Fund and the Aviva Investors Renewable Energy Fund. This platform is expected to generate further transferable benefits from our partnerships with both internal and external clients and to drive cross-border sales.
As a result of these actions, our commitment to excellence and performance during the year, we were recognised by our industry through winning several prestigious awards including: Fixed income hedge fund of the year, G7 Fund, Eurohedge Awards
Best Australian equity large-cap share fund, Portfolio Partners Elite Opportunities Trust, Australian Financial Review Smart Investor Blue Ribbon Awards
Financial performance Total funds under management at 31 December 2008 were £236 billion (2007: £235 billion). In common with the asset management industry in general, market factors had an adverse impact on the value of our funds under management. However the fall in equity and property capital values and outflows from some open-ended property funds was more than offset by exchange gains as sterling declined against other major currencies towards the end of the year, increasing the value of our non-sterling investments.
While the decline during the year in funds under management in local currency terms had an adverse impact on management fee income, this was offset by strong results from the UK stock lending business and performance fees recognised. During the year we continued to invest in developing a scalable, cost efficient operating platform, ensuring that cost growth is controlled and focused on adding value for our clients. However, as a result of the decline in underlying management fee income, the cost income ratio increased
For markets we expect short term interest rates to stay very low and bond yields to be similarly low. Equity valuations now appear cheap globally, providing good return prospects over the very long term, with other assets such as corporate bonds are cheaper still. In the short run however equities will struggle to make progress until closer to the trough in global economic activity. This could allow some recovery in asset prices later in the year, but the risks remain to the downside.
After the car was recovered, we made sure it was returned free of charge without any claims settlement to repay. In fact, we even arranged delivery back to an understandably delighted customer: “Finally getting the ‘Old Girl’ back was a dream come true – hopefully she'll be back on the road soon.”
Our life and general insurance businesses are based in York and Norwich respectively, with operations spread across the UK. We also have overseas operations in India and Sri Lanka
What’s happened? Economic downturn – Global economic crisis, a dramatic slowdown in the housing market and the onset of a recession – Savings ratio at its lowest level since the 1940s as disposable incomes decline and cost of living increase – Significant decline in consumers confidence as value of investments fall
Operational excellence – Outsourced administration of 1 million policies to Swiss Re – Achieved four stars in the Financial Adviser Service awards – Launched financial adviser academy in advance of Retail Distribution Review recommendations – 1,037 employees graduated from the Service Academy – Helped 7,500 of our customers to unlock more value from their homes in these tough times
Profile and strategy As Norwich Union we are one of the leading providers of life, pensions and investment products in the UK with a total market share of 11% and a top three position in our key markets of savings, protection, pensions and annuities. Our ambition is to offer products and services that provide financial security and peace of mind for our existing 7 million customers, while attracting new customers and delivering profitable growth for our shareholders.
Our main operations are based in York though we have a significant presence in Norwich, Eastleigh, Bristol and Sheffield. We also have outsourcing relationships with a number of partners including Swiss Re in the UK, WNS in India, Scottish Friendly and International Financial Data Services (IFDS).
Our ambition is to create value for our customers and protect what is important to them. We also aim to improve financial literacy and engage with our customers to provide support and advice whenever it is needed. In 2008, we received over £8 billion in premiums from our customers, settled 6,500 death claims equating to £319 million, paid over £1 billion in annuities, £500 million to pension customers, helped in excess of 14,500 customers make a claim and received 2 million calls from our customers, supported by the commitment of more than 8,500 staff.
To enhance our approach of offering straightforward, easy to access products and services tailored to individual customer needs, we will continue with our current strategy of: simplifying the business through addressing the legacy system issues built up through past mergers and acquisitions; transforming our business model; realising synergies and operational efficiencies across the UK; and generating capital for the group.
* On an MCEV basis for 2008 and 2007. Prior years presented on an EEV basis.
Long-term savings IFRS MCEV Value New operating operating of new business profit profit PVNBP business margin £m £m £m £m %
The marketplace The UK long-term savings market declined by 7% in 2008 after five consecutive years of growth. In 2008 we have seen an unprecedented series of events affect our market including the global economic crisis, a dramatic slowdown in the housing market and regulatory impacts such as capital gains tax changes and the ongoing reviews into the payment protection insurance market and advice-remuneration models.
In 2008, we saw falls in all the major investments markets including a 31% decline in the FTSE 100 index, a 20% decline in commercial property values and a sharp fall in the value of corporate bonds. These conditions have resulted in industry wide reductions to with-profits bonus levels, the introduction of market value reductions for early withdrawals and, in relation to some specialised forms of investment, deferral of settlement of withdrawals.
For the third successive year we improved our rating in the Financial Adviser Service Awards and our four-star rating reflects our highest position since 2000 demonstrating that financial advisers are acknowledging the improvements we are making to our customer service. In advance of the publication of the Retail Distribution Review recommendations, which will change the way advice is given to customers buying retail investment products , we have launched our Financial Adviser Academy which is currently supporting over 2,000 advisers in achieving their CII Diploma in Financial Planning.
A UK customer contacted our tele-advice team to discuss a new mortgage protection policy. She was concerned about the potential cost of her premiums as she had been treated for breast cancer. However, our adviser, Jason, noticed that she still had some existing policies, including critical illness cover – but she had assumed she couldn’t claim because her treatment was successful. So Jason took responsibility for investigating the situation and engaged with the claims team on the customer’s behalf. The result? We paid her almost £100,000. And that virtually paid off the mortgage she had originally wanted to cover!
Visit Norwich Union at * The savings ratio is the proportion of household income which is saved as a percentage of total disposable household income.
We recognise that it will be a real challenge for advisory businesses to transform their business models and are fully committed to supporting advisers through these changes.
In July 2008 following extensive discussions with the Policyholder Advocate, Norwich Union announced a £1 billion offer to one million eligible policy holders in return for giving up the right to the £2.1 billion inherited estate of CGNU Life Assurance Ltd and Commercial Union Life Assurance Company Ltd. Since then, investment market performance has caused the value of the estate to reduce to £1.4 billion meaning that the offer made in July no longer meets our criteria of being fair to both policyholders and shareholders. As a consequence, we are working closely with the Policyholder Advocate to see how we can restructure our offer and expect to be in a position to provide an update to policyholders in the next few months. These developments do not affect the entitlement to receive a £2.1 billion special distribution that we announced in early 2008.
Sales of collective investments were lower by 46% in 2008 at £1,485 million (2007: £2,751 million), as a result of the down-turn in the property, equity and fixed income markets.
The adverse expense experience variance has halved in 2008 to approximately £40 million, leaving us on track to achieve our commitment of a zero cost overrun in 2009 as we deliver the full benefit of the £100 million annualised cost savings announced in
The non-profit result was £462 million (2007: £545 million). The prior year result included a £167 million one-off benefit from the implementation of the reserving changes introduced by PS06/14. Underlying earnings were up £84 million reflecting the cumulative benefits of the efficiency programme (£65 million) and lower new business strain.
Outlook The outlook for 2009 is very uncertain as the impact of the global financial crises continues to affect customers' ability to save and plan effectively. We expect the trends experienced in 2008 to continue throughout 2009. In the current environment we will maintain our focus on rigorous capital discipline and on driving higher returns through operational efficiency, product innovation and targeted commission changes. We are optimistic that we can continue to deliver profitable growth in these turbulent times.
We are confident that through our strong brand, extensive product range and distribution reach we will emerge from these economic conditions in a strong position. We also expect that our strategy of simplifying and transforming our business, coupled with the resilience of our compelling business model will provide us with the opportunity to capitalise on our leading position in the market place and create further shareholder value.
The marketplace The UK general insurance market continues to be characterised by over-capacity, high competition and falling prices. However, after a lengthy period of these soft market conditions in commercial lines, we are seeing tentative signs of hardening although rate increases remain below the level of claims inflation. There are also early signs that personal lines rates are also starting to harden.
The UK market remains one of the most dynamic in the world both in terms of products and distribution. In 2008 the proportion of customers buying insurance on-line has continued to increase and this is now a major distribution channel. In particular, internet price comparison sites have again grown their market share as customers seek price transparency, with sales for personal motor insurance via these sites increasing from 16% to 52% over the last three years.
Two developments have been increasing insurance companies’ costs in recent years: An increase in the unregulated practice of “claims farming” – This is a major emerging issue for the industry and involves claims being referred to third party companies who generate referral fees which inflate claims settlement costs and drive up the overall cost of insurance for customers without delivering commensurate value.
Agency run-off (21) – – – Norwich Union Healthcare 14 – 389 406 £m
During the year we have continued to implement initiatives to improve the efficiency of our organisation. In addition to our ongoing activity to minimise claims inflation, work is well advanced on the second phase of the programme announced in June 2008 to improve service and enable growth. This phase is delivering the promise of scale by addressing legacy issues built up through past mergers and acquisitions and is being undertaken with the customer in mind so that we can deliver a much better service once the phase has been completed. It involves the redesign of the operations function, simplifying our processes and products, delivering improvements in customer services and completing the consolidation of our business from 27 sites into nine modern insurance “centres of excellence”. Excellent progress has already been made with over 50 systems decommissioned and 14 properties (where NUI or RAC was the main occupier) vacated by the end of 2008.
The focus we place on profit has led to a number of key decisions being made to reshape our book of business. Within personal lines: We have a clear strategy to distinguish between our direct offerings. – NU Direct (soon to be Aviva UK Direct Insurance) has been respositioned away from the aggregators to provide direct customers with our best price service. Initiatives implemented in 2008 to support this include the ‘Happy’s back’ advertising campaign and providing price transparency by including competitors’ prices alongside our website quotes.
We are committed to supporting independent brokers and have established broker networks as well as working on delivering our trading platform directly into the offices of 3,000 independent brokers
We are focusing our partner business on where there is both a genuine “moment of truth” and the right return. – A “moment of truth” occurs when there is a clear point in the buying process where purchasing insurance has a logical position at front of mind for the customer.
* Read more about the Competition Commission remedies for the payment protection insurance market on their website at: www.competition-commission.org.uk
A colleague had just started working in our claims department, when a customer called. He’d left his chip pan on, fallen asleep, and was upset that he and his wife would have died if their dog hadn’t raised the alarm. He was also confused about his cover – his wife usually dealt with insurance, but now suffered from Alzheimer’s. Unfortunately, the customer only possessed contents insurance with us – so most fire damage wasn’t covered. That’s when our new colleague decided to track down the buildings insurance policy for him. And make sure they helped this distressed customer. She even came into work early to do so. That’s a fantastic show of customer care. Not to mention the quality of our recruits.
As discussed on page 16, Norwich Union will be rebranding to Aviva in 2009. However, we will be retaining the iconic RAC brand which continues to command an exceptional level of loyalty and we are developing strategies and propositions (eg the re-launch of RAC Insurance as a panel offering) to build upon the position of trust engendered by this brand.
General Insurance Total general insurance operating profit was £642 million (2007: £421 million). This includes a contribution from Aviva Re, the group's captive reinsurer, of £97 million (2007: £53 million), which benefited from a one-off commutation of £30 million in the year. Losses of £21 million (2007: £nil) relate to agency business in run-off. The following commentary relates only to NUI.
Operating profit in 2008 was £566 million (2007 restated: £368 million), which mainly reflected an improvement in weatherrelated claims for the year which were in line with normal expectations (2007: £475 million adverse). This benefit was partly offset by a reduction in the savings on prior year claims development to £285 million (2007 restated: £430 million, including £215 million of a non-recurring nature), together with a reduction in investment returns to £549 million (2007 restated: £613 million).
Looking forward, the market volatility and declining interest rates are likely to continue to influence profitability in the near future.
In line with group policy as set out in note 2(b) on page 146, we have moved to a more transparent reserving policy including the discounting of latent claims. We have also reviewed our latent claims reserves to ensure we are in line with externally benchmarked levels. Accordingly we have strengthened gross undiscounted provisions by £623 million in the year. The net discounted strengthening of £279 million in our latent claims reserves has been included as an exceptional item below operating profit.
Health Total health insurance operating profit increased to £14 million (2007: nil) resulting from pricing decisions throughout the year to improve margins, tighter expense controls and exiting unprofitable international markets.
Outlook Following several years of profitable growth, we anticipate that the challenging market conditions we have seen in 2007 and 2008 will continue into 2009, both in the UK general insurance market specifically and the wider economy generally. In particular we would expect: In a mature market such as UK general insurance, trends in gross domestic product to be reflected in premium levels leading to a contraction in volumes
In 2009 we will continue with the second phase of the programme to improve service and drive growth. As announced in October 2008 we expect this phase, together with additional actions being taken in other areas (most notably in the IT function), to deliver further cost savings of £150 million per annum by 2010. The actions taken to reduce distribution costs and impact of claims ratio improvements arising from rating and risk selection will result in a real improvement in current year profitability. All this gives us confidence in delivering a UKGI COR in 2009 in line with our worldwide target of 98% or better, without the benefit of historical levels of prior year support.
What’s happened? Aging populations approaching retirement age – Throughout western Europe the “baby boomer” generations approaching retirement age has increased demand for services that fund retirement and care
Economic and market turbulence across Europe – Slowing business volumes as consumers adjust spending – Bancassurance sales impacted as banks seek to increase liquidity and capital – Demand for trusted and secure asset classes as consumers reduce their risk appetite
Market harmonisation across the region – Converging regulations, cross-border bank and broker consolidation and an increasing global nature of financial markets.
What action have we taken? Focused on our products, distribution and our customers needs – We have responded to difficult economic conditions by adjusting products to meet our customer’s altered needs such as the launch of the “Safe Haven Fund” in Ireland – Cross border sales from Hungary to Slovakia have increased our geographical coverage – We have enacted initiatives that support our distributors and policyholders alike. Such as explaining to customers most affected by market volatility what is happening in the market and how it impacts them
Profile and strategy Aviva operates in fifteen countries across Europe, providing life, general and health insurance products to more than twenty million customers.
Fund management Investment sales IFRS operating profit MCEV operating profit £m £m £m £m £m £m **On an MCEV basis for 2008 and 2007. Prior years presented on an EEV basis.
The marketplace Europe is the largest market in the world generating more than 40% of global insurance premiums*and accounting for over 30% of global personal financial assets**. It has a relatively affluent population of more than 800 million people and encompasses both mature markets, such as France and Ireland, and some of the world’s largest emerging markets, such as Russia and Poland. Some of the insurance markets in central and eastern Europe have been among the fastest growing across the globe, a pattern that is likely to resume once global economic conditions improve.
Insurance market development varies considerably across the region from mature and highly-penetrated markets such as Ireland (£4,000+ premiums per capita† ) to emerging markets such as Russia and Turkey (below £500 per capita). Within this range some western markets, for example Spain and Italy, have low penetration levels compared with other western European countries and therefore have the potential to grow substantially over the next decade.
It’s an innovative response to younger drivers’ needs: 18 to 25-year-olds who haven’t previously held insurance and drive less than 9,000km per year. And it’s designed to promote responsible driving, too. The pricing system encourages drivers to use the road when accident risks are lowest. Also, we offer a 10% reduction for parents who hold car insurance with us and ensure their offspring drive their own vehicle (rather than more powerful parental cars). The pilot scheme will also test the re-adjusting of premiums to reflect policyholder behaviour.
Visit Aviva France at * Sigma (2008). **Aviva/Oliver Wyman research (2007). † Axco (2008), Comite European des Assurances (2008), Central Intelligence Agency (2008).
Over the next decade, Europe will be the region most likely impacted by the effects of an ageing population. Governments will struggle to fund state pensions and healthcare and will increasingly encourage self provision. For consumers this will result in an increased need to save but also in a reduction in risk appetite and a flight to trusted and secure financial services providers. In western Europe, the “baby boomer” generation’s approach to retirement will prompt a flow of investments in more secure asset classes followed by increased demand for services that fund retirement and care. Insurers like Aviva are well positioned to benefit from this market shift.
Customer We are committed to providing our customers with prosperity and peace of mind and putting them at the heart of everything we do.
Products and distribution Our European business is an excellent example of Aviva’s diversity. We meet customers’ long-term savings needs in 15 markets, with a broad range of products, through a range of distribution channels. In France and Poland the majority of our sales are through retail channels, while bancassurance channels dominate sales in Spain and Italy. Customers in Ireland are served evenly through both retail and bancassurance.
Corporate responsibility Corporate Responsibility (CR) is fundamental to our vision for Aviva Europe. Gaining admiration and trust, in particular through our interactions with customers, partners, our employees and our communities, are the natural outcomes of a consistent application of Aviva’s CR policies and principles. As an evolving region, the levels of awareness of CR and the speed of its implementation, naturally depend on the maturity of each business in each of our markets and its integration with the culture and values of the group.
Employees Operating as one business across 15 European markets offers our employees enhanced development opportunities and the chance to gain experience in different locations, as well as stimulating the sharing of best practice across the region. This helps us to improve the retention of talented staff and gives us a competitive advantage. For example, the development of new life policy administration systems in Romania and Czech Republic has been undertaken by a team drawn from a number of our markets across the region.
Our philosophy is to treat our employees as individuals, recognising the unique contribution they make to the success of our business. One of the mechanisms we use is an annual employee survey, and in 2008 we were pleased that three quarters of our people chose to participate. The results of the survey indicated that we continue to make progress in a number of the areas that matter most to our people. Importantly, it also enabled us to identify those areas where we need to make more progress and close the gap between Aviva in Europe and ISR top performing European companies and thereby become the most admired, trusted, sought-after and financially successful company in our industry and region.
Profile and strategy The Delta Lloyd (DL) group is one of the top-five leading financial services providers based in the Netherlands, with significant operations in Belgium and Germany. The DL group has over £70 billion of assets under management, 4.5 million customers and employs 6,500 staff.
DL Bank has introduced its own annuity products in response to the challenge from the banking sector, which is now allowed to offer unit-linked savings and pension products on the same terms as insurers. In Belgium the acquisition of Swiss Life Belgium from SNS REAAL on 30 June 2008 further strengthened its position in the Belgian life insurance market. DL has opted for a positioning of its asset management business as a niche player and aims to expand its activities in Belgium and Germany and to increase third party distribution.
The sale of the health business to OWM CZ Groep Zorgverkeraar UA (“CZ”) was completed on 1 January 2009 and as part of the alliance, DL has exclusive rights to market life, general insurance and income protection products to CZ’s 2.6 million customers. This agreement will enable DL to focus on its core life and general insurance businesses while providing access to products from a top-three health provider and continuity of service to customers.
Following market-wide challenge in respect of charges, DL has agreed a settlement with its unit-linked policyholders. It is the first insurer in the Dutch market to reach such an agreement which represents a considerable improvement for customers in comparison to the original Financial Services Ombudsman recommendation. The cost to DL is £126 million.
The acquisition of ABN AMRO by the Dutch state and subsequent confirmation of the continuation of DL’s long-term joint venture with ABN AMRO has enhanced DL’s bancassurance position and ensures that they can continue to provide products to customers through the full range of distribution channels. Both parties have agreed that the joint venture will be the exclusive insurance partner for both the existing and the future Dutch banking operations of ABN AMRO.
These cars are better for the environment as they produce lower carbon emissions and use alternative energy sources such as non-fossil fuels, like hydrogen, and solar power.
Financial performance The financial results of Aviva Europe, including Delta Lloyd, are described below.
Our Aviva Europe new business margin, excluding Delta Lloyd, was 4.3% (2007 restated: 3.9%) reflecting a focus on profitability. In Delta Lloyd the new business margin reduced to (1.8)% (2007 restated: 0.3%) due to the writing of large corporate pension schemes. Overall, the new business margin was 2.8% (2007 restated: 3.2%). This has been supported by increased process efficiency and strong cost management across the region. This will continue to be important in 2009 as new business markets continue to contract across much of the region. In 2009 we will optimise our sales volumes consistent with our focus on prudent capital management and seeking the greatest returns on capital.
IFRS operating profit increased to £881 million (2007 restated: £777 million). The strength of the euro has had a positive impact on these results and, on a local currency basis, IFRS operating profit decreased by 4%, driven by higher new business strain in Delta Lloyd. In Poland we saw increased cost efficiencies and higher returns from existing business and in Spain we benefitted from a new bancassurance joint venture with Cajamurcia. In Turkey we saw the continued successful development of our joint venture AvivaSA.
Demographic changes – With 78 million members of the US “baby boom” generation approaching retirement age, demand for household savings and insurance products remain high – Significant population increases, changing demographic profile and significant economic development in Western Canada drive organic growth opportunity
Insurance” brand campaign – Claims Service Guarantee in Aviva Canada promises great claim experience every step along the experience – “Wellness for Life” programme in the US
What’s next? Our medium-term targets are: – Optimise business mix, growth and margin – Generate capital for the group
Through Aviva Canada, we market a wide range of conventional personal and commercial lines insurance to more than three million customers using brokers and affinity groups. Aviva Canada is the largest general insurance operation in the Aviva group outside of the UK, with a 9% share of the Canadian market#. We have a top five position in all major provinces and are well placed for steady organic growth. Our success is founded on strong fundamentals; strong distribution relationships, underwriting excellence and a balanced portfolio of commercial and personal lines.
~ and, despite the uncertainty affecting the financial markets, people are still saving and buying insurance from brands they trust. In Aviva USA we are well positioned to respond to this customer need for safety, having savings and investment products with downside guarantees which are a very attractive offering for retiring customers.
Total sales 7,000 £m * On an MCEV basis for 2008 and 2007. Prior years presented on an EEV basis. **The World Bank, based on 2007 GDP. † Swiss Re Sigma Report, No.3/2008, “World Insurance in 2007: emerging markets leading the way”.
≈ AXCO Insurance Market Report, 2006. # “MSA Report, Property and Casualty, Canada, 2008” Published by Market-Security
She got back in touch with us and couldn’t express how much she appreciated the extra effort we’d shown her.
The Canadian general insurance industry is highly fragmented with many small players and no dominant consumer brand. Steady consolidation has resulted in the top five companies sharing 35% of the market with the top two companies, ING and Aviva, controlling 20%#. The rest of the industry consists of smaller, provincially based models or niche companies. Further consolidation is therefore anticipated.
The trend of insurers purchasing independent brokers through loans and minority equity investments continues. However, the need to preserve capital and the slowing availability of acquisition targets are driving aggressive organic growth activity among the industry’s leading insurers. Emerging distribution opportunities and trends in consumer buying habits are resulting in customers of personal lines progressively moving away from the well-established and dominant retail broker model. Direct and affinity marketing are the fast-growing new channels in personal lines, with commercial lines distribution expected to remain firmly broker based.
Stewart Hamilton in Scarborough was chatting to a BMO rep and, when he mentioned Aviva, was told he was hearing good things about us.
Asked what specifically, the rep told how a friend of his was very happy because we’d sent her a disposable camera to keep in her glove box. She ended up getting in an accident and there were disputes over what had happened, but the pictures she had taken at the time made her case clear. She was delighted about how forward thinking we were and has been raving about us ever since.
In general insurance, strong performance in commercial lines ensured sustained growth. In the highly competitive personal lines market, we implemented a major change programme that included: standardisation, streamlining and automation of personal lines underwriting centralisation of broker underwriting support; and introduction of more than 100 business development roles combined with culture change initiatives in underwriting and sales
2008 was focused on achieving our growth agenda. The immense change in our environment caused by the financial crisis in late 2008 requires us to be ever diligent on staying financially healthy and strong. We have adapted our strategic emphasis in 2009 to profitability, productivity and capital efficiency. To conserve capital, we will focus our attention on our existing core businesses in Canada and the US.
Over the long term, Aviva Canada is well placed to benefit from consumers’ interest in the purchase of leisure and life style products such as insurance for boats and antique cars, playing to Aviva’s strength and enabling us to maintain our dominant market share.
Long-term savings In the US, our long-term savings sales increased by 57% to £5,715 million (2007 restated: £3,646 million). This was the second consecutive year of record volumes despite significant challenges in the financial markets which have changed the competitive landscape and shaken consumer confidence. We retained our number one sales position in both the indexed annuity and the indexed life insurance markets and have already doubled sales within two years of the acquisition of the former AmerUs business, one year ahead of the stated target.
Long-term business operating profit on an MCEV basis was £201 million (2007 restated: £124 million), an increase of 62% driven by improved value of new business, higher expected return from widening credit spreads and less adverse operating assumption changes.
IFRS operating profit was £16 million (2007 restated: £79 million). Core margins are under pressure due to the low interest rate environment in the US, coupled with a volatile investment market. This has resulted in lower account values, higher lapse activity and a higher cost of options to support product guarantees.
Our decision to continue making the payments came just after several major mortgage funders announced they’d be suspending or limiting redemptions.
“Our customers have worked hard to fund their retirement and we’re committed to meeting their needs,” explains Frank Lombardo, Aviva group director operations.
“There have been lots of discussions about the issues facing retirees but when our customers are worried we need to act now to find solutions.”
What’s happened? Investors’ confidence has fallen – Local stock markets in the Asia Pacific region have been significantly affected by the global economic crisis and sales of investment and investment-linked products have been negatively affected
Prospect for continued growth across the region – Low insurance penetration, an aging population and high Gross Domestic Product (GDP) growth indicate prospect for continued growth across the region – Bancassurance is the fast-growing channel in the emerging markets of China and India
Developing and retaining talent – Launched a series of initiatives aimed at building our employee brand and developing our top leaders
What’s next? Our medium term targets are to: – Prioritise our portfolio – Develop the regional operating model – Invest in the markets with the best opportunities
Fund management Investment sales IFRS operating profit MCEV operating profit £m £m £m £m £m £m
Established markets (Australia, Singapore, Hong Kong) The Australian market has moved away from older style retail investment products and today over 90% of retail investments are being channelled through the wrap administration market. While current market volatility and declining investor confidence will clearly have an impact on growth in the short term, we believe that the strong fundamentals in the Australian market will enable double digit growth in both the protection and platform markets over the next decade.
Singapore and Hong Kong are relatively mature markets and are developing as offshore private wealth management hubs in Asia. As a result, demand for retirement planning and wealth management products is increasing.
High potential markets (India, China) India is a highly attractive market with its large population, a high gross domestic savings rate creating capital for investment, a large and growing middle class to support long-term growth and the government’s commitment to economic reform.
China is also a very attractive market due to its population size and stable, rapid GDP growth. The life insurance market grew by an average of 26% per annum between 2000 and 2007 and grew by 48% in 2008‡. We believe that the low insurance penetration and changing demographics (a growing affluent class, an ageing population and the acceleration of urbanisation) will continue to fuel growth in the medium term. We are now the second largest, in terms of total premium income, of the foreign insurance companies in this market with a presence in nine provinces and 39 city branches.
The life insurance industry in Sri Lanka grew by an average of 19% per annum between 2003 and 2007~. It has South Asia’s fastest ageing population and the low insurance penetration has the potential to drive continued growth in the future.
On 12 May, 2008 a devastating earthquake hit the Sichuan province of China. Tragically, tens of thousands of lives were lost in the disaster. And the challenge facing colleagues at our AvivaCOFCO Sichuan branch was enormous.
After an emergency meeting, a command centre was set up. Text messages were sent to all Sichuan customers, letting them know how to make a claim or get help. Within three days, the first claim payment of 120,000 yuan was made to a customer in Qingyi town, Mianyang city.
Aviva-COFCO colleagues later donated their bonuses to help those in the worst-affected areas, and colleagues are still working fast to settle claims.
As part of the shared service model we have created a regional propositions team to both anticipate changes in customer needs and to lead and coordinate the development of products and their roll out across the region. Additionally, Navigator, our Australian wrap administration platform, was successfully launched in Singapore in recent years, an example of how we are able to share expertise and provide support to developing businesses. We plan to build on this success by introducing Navigator in Hong Kong in 2009.
During 2008 we have expanded our customer reach in our local markets. In Australia, where we recently won “Life Company of the Year” at the AFA Plan for Life Awards, our strategy of taking strategic stakes in dealer groups has continued to generate additional business. We successfully acquired an interest in a further dealer group this year and now have five such strategic investments in place. In addition we have signed a bancassurance agreement with Wide Bay Australia. The sales of risk products through their branches will commence by the end of the first quarter of 2009.
In Malaysia, Taiwan and South Korea we are focusing on developing successful bancassurance partnerships with our JV partners, leveraging Aviva’s recognised bancassurance expertise.
We have focused on aligning our human resources with the strategic priorities of the business and have initiated programmes to develop our ability to harness adversity and strengthen our leadership.
Through sharing expertise across our Asia Pacific region, CIMB Aviva has created EasyLife, combining simple products with needs-based advice services to address the need for education. We’ll complement Easylife with a range of Easy Takaful plans in 2009.
General insurance and health Net written premiums in the general insurance and health businesses increased to £33 million (2007: £28 million). This mainly reflected the contribution from Malaysia which commenced operations in July 2007.
Sales of life and pensions products in Asia grew 18% to £1,351 million (2007 restated: £1,141 million). This was driven by 66% growth in China, following significant expansion of our distribution network, and first-time contributions from our new joint ventures in South Korea and Taiwan. This growth was partly offset by results from our other Asian operations. In India and Singapore regulatory changes had a negative impact on our sales while in Hong Kong our products are mainly investment related and were therefore greatly impacted by the market volatility.
On an IFRS basis, operating profit from the long-term businesses improved to £46 million (2007: £31 million) due to lower new business strain from reduced sales and changes in the business mix.
Case study:: 67,000 hours – employee volunteering takes off Our people are voting with their feet on the benefits of helping local communities. In just two years the number of paid employee volunteering hours has nearly doubled (34,000 hours in 2006). Employees can now take up to three paid days per year to support the causes they care deeply about. With individual and team-based opportunities, it’s a great way to engage with charities and bring new skills back to Aviva.
What’s happened? Economic uncertainty – The credit crunch has undermined consumer confidence in financial services. Building trust and improving the public’s understanding in money matters is a societal imperative
Environmental concern – Climate change remains one of the biggest risks to our planet. Global businesses are intensifying their efforts to reduce their own impacts and influencing partners and suppliers to take up the challenge
Employment market changing – Increasing competition to attract and retain talented employees is joined by the need to equip future leaders with the right skills to excel in tough market conditions
What have we achieved? – 72% of our employees say that Aviva is a great place to work (Global Survey) – Retained our membership of the FTSE4Good and Dow Jones Sustainability World indexes – Won “Building Public Trust” award for clear and transparent reporting of our executive remuneration policy – Ranked 9th out of all UK companies in the Good Companies Guide for our work to shape policy and promote consistency in climate change issues – Increased participation by our employees in our Corporate Responsibility (CR) activities
Matching the right people to the right roles and taking action where there are gaps
Employee Promise To become “one Aviva” and deliver “twice the value“we are reinforcing our external brand of recognising our customers as individuals. To ensure that this is how all our customers experience Aviva we have embarked on a global programme to create a culture where this lives and breathes internally so our employees are truly recognised as individuals and for their contribution to Aviva’s success.
Management and leadership programmes which create the environment for employees to be the best they can be, ie Leading People, Talking Talent & Talking Performance
A global climate survey to ensure we are listening to what is important to our employees and a new online “employee promise” poll
Governance and strategy The Aviva corporate responsibility (CR) programme encompasses our business ethics and values, our customers, our people and suppliers, our community relations and the environment. When conditions are adverse, as in the current economic downturn being experienced by businesses and customers globally, it’s more important than ever to maintain our reputation as an employer of choice and a responsible corporate citizen. This means responding appropriately to immediate events. It also means staying focused on important goals that will contribute towards long-term prosperity and peace of mind for our customers.
In everything we do, we aim to meet the highest standards of conduct and these principles are set out in our business ethics code. This year we implemented a revised code which reinforces the standards expected of all our employees and businesses. Every single employee at Aviva has a part to play in upholding our standards and our success comes from their commitment to translate principles into action, whatever their role or level of seniority. That’s why our people strategy is at the heart of our business and why we invest in comprehensive programmes to nurture talent, develop future leaders and enable people to fulfil their potential in line with our values of integrity, performance, progressiveness and teamwork.
Mobilising our leaders in adverse conditions Our Leadership Academy work focused on “Summit“ events designed to align, equip and mobilise Aviva’s leaders to deliver “one Aviva, twice the value”. 1,700 of our senior leaders participated in one of 16 major events around the world. This programme has been the biggest, most concentrated investment in our leadership capability. Each leader was equipped to measure and improve their ability to respond at their best in adverse conditions. Within the 1,700 leaders, 120 were identified as “climbing coaches“ – change agents who are equipped with the skills to embed the Summit knowledge across the business. There has been a demonstrable improvement in clarity, engagement and personal commitment to bring “one Aviva, twice the value” to life.
Leading people We believe that developing leadership capability is an investment in our future. This is confirmed by our employees who told us in our 2008 annual global climate survey that the way their immediate managers behave impacts on their own engagement and performance.
We rely on our employees to raise concerns about ethical behaviour and financial crime and have recently implemented “Right Call” – an Aviva-wide malpractice reporting service. This enables all employees to report any suspicions or concerns in a confidential manner for independent investigation.
Engaging with our stakeholders Dialogue with a wide range of internal and external stakeholders, using a variety of feedback mechanisms from surveys to one-to-one meetings, is an essential part of our business strategy. We also participate in industry-wide forums and work with professional institutions to develop our research and understanding in key subject areas.
Representation of female colleagues within the senior management group increased from 22% in 2007 to 28% in 2008. We have appointed the first female member to our executive committee this year, and we now have three women on the board. Amanda Mackenzie joined the executive committee in March 2008 as chief marketing officer. Rita Dhut and Siobhan Boylan from Aviva Investors were named in Financial News’ “100 Most Influential Women”.
Employee survey We carried out our global climate survey for the fourth consecutive year, providing our employees with a channel to express their feedback. Our overall participation rate increased to 74% (2007: 70%) with four business units achieving 100% participation.
Community As a responsible business, we are committed to helping address challenges facing people and society. Globally, Aviva invested £9.6 million in community and charitable programmes in 2008. Our community investment is focused on financial literacy, education and life trauma – subjects which are closely aligned with our business and where we can maximise our expertise and resources to make a difference. In addition to this core programme, we also respond to humanitarian crises, as and when they arise, through our partnership with Oxfam. How we invest takes different forms: from directly funding carefully selected initiatives in partnership with charitable organisations, to creating a workplace where employee volunteering and giving is enabled and supported.
Case study: The Eve Appeal and Aviva Women’s Network The London group of the Aviva Women’s Network hosted a range of events this year, including a unique tea party to raise funds for The Eve Appeal, a UK charity which seeks to cut the number of deaths from gynaecological cancer by 50%. While the event had a very serious purpose, it also gave women from different areas of the business the opportunity to meet and network.
Work on reducing our impact on the environment continued at pace this year. We again reduced our carbon emissions by more efficient use of energy and by implementing alternatives to business travel such as our high definition video-conferencing facility.
To help us manage our impact we set global targets in 2008 to achieve reductions by 5% in carbon emissions and 2% in water.
When we compare our global operations’ performance to 2007 on a like-for-like basis, our total emissions fell by 6.6%. Overall, we achieved a group-wide reduction in carbon emissions of 3.3%. This figure includes data from our operations in China for the first time. Our water consumption fell by 1.2%. We review these targets annually and provide new ones based on our performance to date. For 2009 we have set the following targets: Reduce CO2 emissions by 5%
Since we introduced our global climate survey four years ago, employee participation levels have risen and we’ve gathered valuable feedback on all areas of our business. In 2008, we saw an increase in positive attitudes in every area of the survey compared to 2007, including Aviva’s leadership,understanding of company values and levels of engagement . More employees said they felt more customer focused and empowered in the workplace. Awareness of Aviva’s diversity policies and practices was also higher than 2007 and more employees felt that their talents were being managed effectively by their managers.
We’ve also been concentrating on water this year as it is a major issue relating to climate change. Our customers are seriously affected when flooding occurs so it is important to us to help people be prepared. To this end we have pioneered a flood planning process to highlight to a whole community ways to deal with a flood and how damage can be limited.
Our Australian business offers a financial incentive to employees to purchase renewable energy or water saving devices for their home. They will match fund the government’s rebate of up to A$300, which makes these purchases more affordable.
Customers Satisfied customers are a key measure of success and our purpose, to provide prosperity and peace of mind, guides every interaction, from customer service to responsible selling and marketing. Product innovation, to meet people’s changing life needs, is an essential element in all our markets.
In France, we are increasingly integrating CR principles into our products, and offer lower home and car insurance premiums to customers who act more safely, and who make environmentally and socially responsible choices. There are also incentives for our French policyholders to stop smoking and so reduce the risks to their health.
As a global insurer, we take pride in understanding the specific needs of our customers, wherever they are in the world. In India, we have developed a range of financial products and services to help the underprivileged and combat poverty. The micro-insurance plan, Grameen Suraksha, reduces the burden on its rural policyholders (who now number more than 1.1 million) who pay premiums for just two years and then realise the term benefit for five or ten years. And India’s first comprehensive child care plan, Aviva Little Master, is designed to take care of the current and future needs of children should they be orphaned.
Case study: Offsetting our carbon emissions As part of our climate change strategy, we retrospectively offset our outstanding carbon. In rural areas of East Africa we have joined forces with co2balance to replace the use of open fires for cooking with energy efficient stoves. As well as providing 70% more energy efficiency, there are social and economic benefits.
More efficient stoves means less wood is burnt, so helping to prevent deforestation. And as the stoves are built within the villages employment is created in local areas.
This year also saw the launch of three new SRI initiatives by Aviva Investors: The inclusion of the UN Principles for Responsible Investment (UN PRI) in our contracts. This enables clients to see the PRI assessment of our performance and hold us to account for delivery on our responsible investment commitments
Suppliers We understand the importance of responsible business practices within the supply chain and recognise the influence that our organisation can have. This year we have developed our position by chairing the Financial Services Purchasing Forum CSR sub-group which aims to promote a coordinated and standardised approach to managing CR issues in the supply chain. Ethical, social and environmental considerations are already part of our procurement processes: we give each new supplier in the UK a minimum 10% CR weighting when reviewing new tender submissions.
The Guardian/Observer Good Companies Guide – ranked 9th out of FTSE 350 companies
Affiliations and engagements We engage externally with leading organisations to share good practice, improve our performance and ensure the effectiveness of our CR strategies. Among much other collaboration in 2008, we contributed to and signed our support to the following: CBI Climate Change Board
ClimateWise – Aviva was one of the leading companies to be recognised in the Forum for the Future ClimateWise programme review
CO2 emissions Total cost of offsetting 105% of our global CO2 emissions – 128,931 tonnes in 2008 – was in the region of £750,000. We incur up to a 2% premium for zero emission/ renewable electricity compared to fossil fuels. Following the publication of the 2008 UK DEFRA carbon reporting guidelines, at the end of our current electricity contract we will no longer pay a premium for zero emission electricity in the UK.
Conservation investment Total capital expenditure for storage and recycling in the UK was minimal (2007: £200,000).
Water The operating cost of water usage was £944,000 in 2008 (2007: £938,000)
Environmental incidents During 2008 there were no environmental incidents as a result of our operations, resulting in fines of £nil (2007: £nil).
Total waste (tonnes) Recycled (tonnes) Total waste per employee (kgs) New businesses m m pe r e m pl oy ee800,000 14
Commentary on our performance, strategy and targets In 2008, our total CO2 emissions decreased with all businesses reporting consistently on their footprint and applying practices to reduce their emissions. They have achieved this by using technologies, changing behaviours, and by purchasing zero emission and renewable electricity. We anticipate our carbon footprint reducing to 108,000 tonnes in 2009 through our divestment of AutoWindscreens and AGS – 10,000 tonnes – and by reducing business travel. There will be an increase from our new data centre reaching full capacity but expect that this will reduce over time through a programme of virtualisation and consolidation of data.
This year the UK general insurance business worked with public bodies to create a best practice template in flood planning, involving local authorities, emergency services and utilities companies. The planning should help improve response times, raise awareness and reduce damage. See www.floodplanuk.org. This development complements the work completed earlier in the year. See www.floodsim.com
In 2008, the total volume of waste generated has increased globally by 2% and the proportion of waste recycled has decreased by 4% on 2007 data to 84%. Our waste figures will reduce by some 6,000 tonnes due to the divestment of AutoWindscreens.
The rebranding of our businesses in the UK, Ireland and Poland to Aviva in 2009 and 2010 will inevitably generate increased volumes of waste. This however, is being closely monitored to ensure this waste is kept to a minimum.
Our focus on water reduction increased in 2008; the Aviva’s businesses in the UK set a target of 10% reduction. Trials of flow straighteners for taps, reduced water consumption urinals, and water saving devices on toilets cisterns have been successful, resulting in a combined reduction to 5.5m3 per employee per year at the test locations. A group target of 4% has been set for 2009, through the sharing of these good practices around the world.
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This business review complies with the recommendations of the European Union (EU) Modernisation Directive, the Companies Act 2006 (Contents of Directors’ report: Business review) and is in line with current best practice. It is addressed to, and written for, the members of Aviva plc with the aim of providing a fair review of our business development, performance and position at the current time. In producing this review, we aim to present a view that is balanced and comprehensive and that is consistent with the size and complexity of our business. The review is written in the context of the risks and uncertainties facing our business. We anticipate that the format and content of the review will evolve over time, along with developments in our business and the external environment.
By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events that are beyond our control. For example, certain insurance risk disclosures are dependent on our choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that we have estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statement include, but are not limited to: Global economic business conditions
The timing and impact of acquisitions and business combinations in relevant industries
International Financial Reporting Standards (IFRS) Our consolidated financial statements are prepared under IFRS, using standards issued by the International Accounting Standards Board (IASB) and endorsed by the EU. In addition to fulfilling this legal obligation, the group has also complied with IFRS as issued by the IASB and applicable at 31 December 2008.
Following a review of our general insurance reserving policy, we have restated the 2007 comparative figures to discount our long-term latent claims provisions. We have also reviewed our policy on the consolidation of managed funds and, as a result, have made further restatements for the effect of third party participation. Details are given in note 2 to the financial statements.
The MCEV methodology adopted is in accordance with the MCEV Principles published by the CFO Forum in June 2008, with the exception of the use of an adjusted risk-free yield due to current market conditions for immediate annuities in the UK and Netherlands and for all US contracts. Under the MCEV methodology, the total profit recognised over the full lifetime of an insurance policy is the same as under the IFRS basis of reporting. However, the MCEV basis gives a fairer indication of the profitability of business on inception. Additionally, shareholders’ funds on an MCEV basis incorporate internally generated additional value of in-force business (AVIF), which is excluded for IFRS reporting. Our incentive schemes and internal management reporting are focused broadly evenly between IFRS and MCEV performance. These financial statements include supplementary information on MCEV reporting in the “Alternative method of reporting long-term business” section.
Longer term investment return The long-term nature of most of our operations means that shortterm realised and unrealised gains and losses are shown as an adjustment to operating profit. We focus instead on operating profit incorporating a longer term investment return (LTIR). Our rates of return that we use for equity and property in our LTIR methodology are aligned with the rates that we use under MCEV principles. For fixed interest securities, we include the amortisation of premiums or discounts arising on purchase, thereby producing an LTIR that is equivalent to the gross redemption yield.
Insurance and participating investment contract liabilities F & K Goodwill, AVIF and other intangible assets N Fair value of financial investments S Impairment of financial investments S Fair value of derivative financial instruments T Deferred acquisition costs and other assets W Provisions and contingent liabilities Z Pension obligations AA Deferred income taxes AB
Appointed to the Board in December 1999. Currently chairman of the supervisory board of Ziggo Holdings B.V. (telecommunications), a non-executive director of Unilever N.V. and Unilever plc (consumer), of LogicaCMG plc (computer services) and vice-chairman of Stage Entertainment B.V. (entertainment). Former Minister for Foreign Trade in the Netherlands. A former chairman of Nederlandse Unilever Bedrijven B.V. (consumer) and former chairman and chief executive officer of KPN Royal Dutch Telecom (telecommunications). A former chairman of the supervisory board of Holland Casino (gaming) and of Tele Atlas N.V. (information systems), a former member of the supervisory boards of TNT Post Group (mail services) and ABN AMRO N.V. (banking).
Appointed to the Board in May 2000 and became chief financial officer in July 2007. Joined Norwich Union in 1973 and held a number of senior positions before joining the Norwich Union board in 1993. Formerly, responsible for the group’s insurance businesses outside Europe and Aviva Investors, the group’s UK fund management operations. Currently a non-executive director of Diageo plc (drinks) and chairman of the European Insurance CFO Forum.
Chairman of the corporate social responsibility committee and member of the remuneration committee
Appointed to the Board in October 2005. Currently senior independent director of Centrica plc (utilities), a non-executive director of St Mowden Properties plc (property development) and a director of Almeida Theatre Company Limited. A senior adviser to Chatham House and Governor of the Pensions Policy Institute. Formerly Director General of the Association of British Insurers, nonexecutive director of the Bank of England, Alliance & Leicester plc (banking) and Fund Distribution Limited and a senior civil servant.
Chairman of the risk and regulatory committee and a member of the audit and remuneration committees
Appointed to the Board in May 2004. Currently a non-executive director of the Warnaco Group Inc (clothing) and the New Germany Fund (investment trust), the Central Europe and Russia Fund (investment trust), the European Equity Fund (investment trust) and a governor of The London School of Economics and Political Science. Former chief financial officer of American Express Company (financial services) and NatWest Group plc (banking). Former nonexecutive director of Delta Air Lines,Inc (transport) and Federal Home Loan Mortgage Corporation (Freddie Mac) (financial services) and a former member of the Accounting Standards Board (UK).
Appointed to the Board in January 2009. Currently a non-executive director of Singapore Airlines Limited (transport), MediaCorp Pte Ltd (broadcasting), DBS Bank Limited, DBS Group Holdings Ltd (banking) and the Singapore Exchange Limited. Former Chief Executive Officer of Standard Chartered Bank in Singapore (banking).
Joined the Group in September 2007. Formerly global head of group investment businesses at HSBC, senior executive vice president and head of asset management and insurance at Credit Commercial de France and director of capital markets at La Compagnie Financiére Edmond de Rothschild. Previously at the French Treasury in the Ministry of Finance and the French Institute for Statistics and Economic Studies. Educated at l’École Polytechnique, Paris and l’École Nationale de la Statistique l‘Administration Économique, Paris.
Joined the Group in 2006. Formerly chairman, president and chief executive officer of AmerUs Group and chief investment officer of AmerUs Capital. Previously with Providian Corporation, Federated Investors, Inc and Mellon Bank. Holds a Bachelor of Science degree in urban and regional planning from Indiana University of Pennsylvania and a master’s degree in public administration from the University of Pittsburgh. A graduate of Harvard Business School’s Advanced Management Program and a Chartered Financial Analyst.
Joined the Group in 1989. Formerly chief executive officer of Aviva Canada, chief financial officer and executive vice-president. Previously finance director for Norwich Union Insurance and managing director for CGU Insurance in London. Holds a BA Honours in Commerce and Economics from the University of Toronto, is a chartered accountant and has received an honorary Chartered Insurance Professional designation from the Insurance Institute of Canada.
Joined the Group in 2007. Formerly a partner with the global financial services group at McKinsey & Company, advising leading insurers and banks in Europe, USA, Asia and Australia. Holds an engineering degree and an MBA from the Indian Institute of Management.
Dividends The directors are recommending a final dividend of 19.91 pence per share (2007: 21.10 pence), which together with the interim dividend of 13.09 pence paid on 17 November 2008 (2007: 11.90 pence), produces a total dividend for the year of 33.00 pence per share (2007: 33.00 pence). The total cost of ordinary dividends paid in 2008, was £902 million (2007: £801 million). The final dividend for 2008 will be paid on 15 May 2009 to all holders of ordinary shares on the Register of Members at the close of business on 27 March 2009.
At the forthcoming Annual General Meeting, shareholders will be asked to consider an increase in the authorised share capital of the Company, to renew the directors’ authority to allot shares and to reintroduce the Scrip Dividend Plan. Details are contained in the Notice of Meeting.
The biographical details of the persons currently serving as directors appear on pages 84 and 85.
The Company’s articles of association require one-third of the directors to retire by rotation each year and also require each director to retire at intervals of not more than three years. At the forthcoming Annual General Meeting, Mary Francis, Richard Goeltz, Carole Pwinica and Russell Walls, all non-executive directors, will retire and, being eligible, will offer themselves for re-election. Euleen Goh and Mark Hodges will offer themselves for election by shareholders at this year’s Annual General Meeting being the first such meeting after their appointment. Euleen Goh is a non-executive director and was appointed to the Board on 1 January 2009. Mark Hodges is an executive director with a service contract with the Company, details of which can be found in the Directors’ remuneration report. Guillermo de la Dehesa retired from the Board on 31 December 2008 and Wim Dik will retire at this year’s Annual General Meeting in line with the Board’s plans to renew and refresh its composition.
Substantial shareholdings As at 27 February 2009 the Company had received the following notification in accordance with the provisions of the Disclosure and Transparency Rules of the Financial Services Authority; the holdings of Legal & General Group plc had fallen below 5% of the total voting rights attaching to the issued ordinary share capital of the Company.
Charitable donations The Company has continued to support community initiatives and charitable causes worldwide and the total Group commitment during the year was £9.6 million (2007: £6.8 million).
In 2008, the Group’s community investment in the United Kingdom totalled £5.6 million (2007: £4 million) of which £2.2 million (2007: £1.4 million) was given in the form of donations to charitable organisations. The Company continues its global partnership with the Oxfam 365 Alliance which ensures that Oxfam can maintain a state of constant preparedness, enabling them to respond immediately to emergencies wherever they occur in the world. The Company promotes a strong volunteering policy and employees are entitled to up to three days annually to support volunteering activities. The Company allocates a part of its budget to matching contributions to charitable causes raised by staff and for providing financial support to charities and communities where members of staff give a personal commitment in terms of their time.
In addition, the Group’s businesses are committed to supporting their local communities in line with the Company’s strategy which focuses on education, financial literacy and life trauma. For example, in the United Kingdom the business partners with schools to deliver education citizenship modules into schools (for 14 – 19 year olds) with a focus upon economics, as part of the “Paying For It” scheme. Since 2007, Aviva Canada has partnered with ThinkFirst Foundation of Canada. ThinkFirst seeks to prevent brain and spinal cord injuries through education by promoting healthy behaviour in children and youths.
Political donations At the Annual General Meeting held in 2008, shareholders passed a resolution, on a precautionary basis, to authorise the Company to make political donations and/or incur political expenditure (as such terms are defined in Sections 362 to 379 of the Companies Act 2006) in amounts not exceeding £100,000 in aggregate.
As the authority granted at the 2008 Annual General Meeting will expire on 29 April 2009 renewal of this authority is being sought at this year’s Annual General Meeting. Further details are available in the Notice of Meeting.
In summary, the Group’s commitment to communication and dialogue with employees continues. The introduction of a truly group-wide intranet has enabled, for the first time, engagement and communication with all employees throughout the Group on a single platform. It also helps management to share information, ideas and opportunities much faster across the entire business. A strong emphasis is placed on the provision of news and information through a range of media. Employees have opportunities to voice their opinions and ask questions through intranet sites, Q&A telecon sessions, opinion surveys and the Group’s climate survey which is open to all employees. Face-to-face briefings and team meetings are actively encouraged and are held in all business units across the Group. The Group’s businesses in the United Kingdom have established employee consultative forums and a European Consultative Forum convenes annually to discuss matters impacting the business across Europe.
Reappointment of the auditor and disclosure of information to the auditor In accordance with Section 489 of the Companies Act 2006, a resolution is to be proposed at the Annual General Meeting to reappoint Ernst & Young LLP as auditor of the Company. A resolution will also be proposed authorising the directors to determine the auditor’s remuneration. The Audit Committee reviews the appointment of the auditor, the auditor’s effectiveness and relationship with the Group, including the level of audit and nonaudit fees paid. Further details on the work of the auditor and the Audit Committee are set out below in the Audit Committee report.
The directors in office at the date of this report confirm that, so far as they are each aware, there is no relevant audit information of which Ernst & Young LLP are unaware and each director has taken all steps that ought to have been taken as a director to be aware of any relevant audit information and to establish that Ernst & Young are aware of that information.
Annual General Meeting The 2009 Annual General Meeting of the Company will be held on 29 April 2009 at The Barbican Centre, Silk Street, London EC2Y 8DS at 11am. A separate document accompanying the Annual Report and Accounts contains the Notice convening the Meeting and a description of the business to be conducted thereat.
Registered Office: St. Helen’s, 1 Undershaft, London EC3P 3DQ Registered in England No. 2468686
It is the Board’s view that the Company has been fully compliant throughout the accounting period with the provisions set down in Section 1 of the Combined Code, apart from a period of 29 days in 2008 when the majority of the members of the Nomination Committee were not independent non-executive directors. This report sets out details of how the Company has applied the principles and complied with the provisions of the Combined Code during 2008. Further information on the Combined Code can be found on the Financial Reporting Council’s website, www.frc.org.uk
The Board has adopted a procedure whereby directors may, in the performance of their duties, seek independent professional advice at the Company’s expense if considered appropriate. During the year the members of the Remuneration Committee sought independent advice from New Bridge Street Consultants on a review of senior executive remuneration.
The Directors The Board currently comprises the Chairman, seven independent non-executive directors, one non-independent non-executive director and three executive directors. Each non-executive director serves for a fixed term not exceeding three years that may be renewed by mutual agreement. Subject to the Board being satisfied with a director’s performance, independence and commitment, there is no specified limit regarding the number of terms a director may serve. Each director is required to be elected by shareholders at the Annual General Meeting following his/her appointment by the Board and to be re-elected at least once every three years. Any non-executive director who has served on the Board for nine years or more is required to submit himself/herself for re-election annually. The Board’s policy is to appoint and retain non-executive directors who can apply their wider knowledge and experiences to their understanding of the Aviva Group, and to review and refresh regularly the skills and experience the Board requires through a programme of rotational retirement. In addition to the strengths of experience, diversity and an international perspective, the Board also seeks to comply with the requirements of the Combined Code on the independence of directors. The process for appointing new directors is conducted by the Nomination Committee whose report, including a description of its duties, is set out on page 95.
Senior Independent Director Under the Combined Code the Board appoints one of the non-executive directors to act as Senior Independent Director. The main responsibility of the Senior Independent Director is to be available to shareholders should they have concerns that they have been unable to resolve through normal channels, or when such channels would be inappropriate. The Senior Independent Director is also responsible for leading the Board’s discussion on the Chairman’s performance and the appointment of a new chairman, when appropriate. Wim Dik served as the Senior Independent Director from 2004 to December 2008 and was succeeded in January 2009 by Richard Goeltz.
The performance of the Chairman is also included in the above process and takes into account the views of both the executive and non-executive directors. The Chairman’s evaluation is managed by the Senior Independent Director who provides feedback to the Chairman. As part of the Chairman’s evaluation the non-executive directors meet separately under the chairmanship of the Senior Independent Director.
Training and development The Board believes strongly in the development of all its employees and directors and it is a requirement of each director’s appointment that they commit to continue their development. The form that this development takes is subject to individual director’s requirements and the quality and relevance of the training available.
The Board has a comprehensive induction programme consisting of several separate sessions which take place over a number of months at times convenient for the director. The sessions include presentations from key members of senior management, visits to the Group’s main operating businesses, and meetings with the external auditor and one of the Company’s corporate brokers. Further or follow-up meetings are arranged where a director requires a deeper understanding on a particular item.
During 2008 the Chairman and the non-executive directors met in the absence of the executive directors and there was one meeting of the non-executive directors chaired by the Senior Independent Director at which the Chairman was not present in order to appraise the Chairman’s performance.
Throughout the year the chairman of each committee provided the Board with a summary of the key issues considered at the meetings of the committees and the minutes of the meetings were circulated to the Board. The committees operate within defined terms of reference which are available from the Group Company Secretary upon request. Board committees are authorised to engage the services of external advisers as they deem necessary in the furtherance of their duties at the Company’s expense.
Conflicts of interest In line with the Companies Act 2006, the articles of association were amended at the 2008 Annual General Meeting to allow the Board to authorise potential conflicts of interest that may arise and to impose such limits or conditions as it thinks fit. The decision to authorise a conflict of interest can only be made by non-conflicted directors (those who have no interest in the matter being considered) and in making such decision the directors must act in a way they consider in good faith will be most likely to promote the Company’s success. The Company has established a procedure whereby actual and potential conflicts of interest are regularly reviewed and for the appropriate authorisation to be sought prior to the appointment of any new director or if a new conflict arises. During 2008 this procedure operated effectively.
The systems are designed to: Safeguard assets; Maintain proper accounting records; Provide reliable financial information; Identify and manage business risks; Maintain compliance with appropriate legislation and regulation; and
Control environment The Group has an established risk management and governance framework, the key features of which include: Terms of reference for the Board and each of its committees; A clear organisational structure, with documented delegation of authority from the Board to executive management; A Group policy framework, which sets out risk management and control standards for the Group’s operations worldwide; Defined procedures for the approval of major transactions and capital allocation; and
The Group’s risk management and governance framework is consistent with the requirements of the Financial Services Authority’s risk-based framework for integrating the embedding risk and capital management (Prudential Sourcebook).
Risk identification, assessment and management There is in place an ongoing process for identifying, evaluating and managing the significant risks faced by the Group which has operated throughout 2008 and up to the date of signing this report. The Group’s risk management and governance framework is designed to support the identification, assessment, monitoring, management and control of risks that are significant to the achievement of the Group’s business objectives. The Group has a set of formal policies which govern the management and control of both financial and non-financial risks. The adoption of these policies throughout the Group enables a consistent approach to the management of risk at regional and business unit level. At Group level, policy owners maintain policy content and guidance material and are responsible for the definition of the management information requirements from the businesses to support the risk oversight committees in the discharge of their responsibilities. Policy owners are also responsible for the Group-wide aggregation and oversight of their specific risks. During 2008 the Group policy set has been embedded, the risk management framework has been reviewed and a new Chief Risk Officer appointed.
The Boards, audit committees and management of the operational businesses also consider local risk reports in a similar way. Regular reports are supplemented by escalation procedures for new or deteriorating risks. In addition, business units provide a certificate every six months to confirm compliance with the Group’s risk management framework and governance, and the terms of their delegated authority. Any risk or control issues not already reported through the regular risk management processes must be specifically highlighted.
The Risk and Regulatory Committee has the overall responsibility of monitoring the Group’s internal control and risk management systems on behalf of the Board. In addition, the Audit Committee performs an annual review of the effectiveness of the internal audit function and the framework for the Group’s internal financial controls and financial reporting. Throughout 2008, the Audit Committee and the Risk and Regulatory Committee received quarterly reports from the Chief Audit Officer on issues arising and updates on previously reported items. More detailed reports on the work of these committees during 2008 are set out on pages 96 and 98.
Internal audit The Group’s internal audit function advises management on the effectiveness of its internal control systems, the adequacy of these systems to manage business risk and to safeguard the Group’s assets and resources. Through the Chief Audit Officer, the internal audit function provides objective assurance on risk and control to both the Audit Committee and the Risk and Regulatory Committee. The effectiveness of the Group’s internal audit function is reviewed each year by the Audit Committee.
The Group has an ongoing programme of dialogue and meetings between the executive directors and institutional investors, fund managers and analysts. At these meetings a wide range of relevant issues including strategy, performance, management and governance are discussed within the constraints of information already made public.
The Company’s Investor Relations department is dedicated to facilitating communication with institutional investors. The directors consider it important to understand the views of shareholders and, in particular, any issues which concern them. The Board receives reports on matters that have been raised with management at the regular meetings held with the large investors. During the year the Chairman held a meeting with the major institutional investors and attended investor meetings with management. In addition, the Senior Independent Director is available to meet with major shareholders to discuss any areas of concern that cannot be resolved through normal channels of investor communication and arrangements can be made to meet with the Senior Independent Director through the Group Company Secretary. Similarly, arrangements can be made for major shareholders to meet with newly appointed directors. In addition, the Board consults with shareholders in connection with specific issues where it considers appropriate. For example, the chairman of the Remuneration Committee consulted with investors in 2008 regarding the introduction of the One Aviva, Twice the Value Bonus Plan which is outlined in the Remuneration Committee report on page 103.
The Company has taken full advantage of the provisions within the Companies Act 2006 allowing communications to be made electronically to shareholders where they have not requested hard copy documentation. As a result the Company’s website has become the primary method of communication for the majority of its shareholders. Details of the information available for shareholders on the website can be found on the Shareholder information pages 330 to 332.
The Company’s Annual General Meeting provides a valuable opportunity for the Board to communicate with private investors. At the meeting, the Company complies with the Combined Code as it relates to voting, the separation of resolutions and the attendance of committee chairmen. Whenever possible, all directors attend the Annual General Meeting and shareholders are invited to ask questions during the meeting and have an opportunity to meet with the directors following the conclusion of the formal part of the meeting. In line with the Combined Code, details of proxy voting by shareholders, including votes withheld, are made available on request and are placed on the Company’s website following the meeting.
Institutional investor Aviva Investors, the Group’s core asset management company, believes that good governance plays an important role in protecting and enhancing shareholder value. In keeping with the Group's values, Aviva Investors looks to act as a responsible investor, monitors the governance of the companies in which it invests and seeks to maintain an effective dialogue and engagement with companies on matters which may affect the future performance of those companies.
Aviva Investors maintains a detailed Corporate Governance and Voting Policy as part of its investment strategy, which underpins its approach to engaging and voting at company general meetings. The policy encompasses social, environmental and ethical issues and is applied pragmatically after careful consideration of all relevant information. In addition, Aviva Investors makes detailed voting reports available to clients, as well as providing some summary reporting on its website www.avivainvestors.com.
After making enquiries, the directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts.
Lord Sharman (Chairman) 25 January 2006 To date Nikesh Arora 29 July 2008 To date Guillermo de la Dehesa 21 June 2000 29 July 2008 Wim Dik 26 April 2004 29 July 2008 Richard Goeltz 29 July 2008 To date Andrew Moss 12 July 2007 To date Russell Walls 23 January 2007 To date
During the year the Board accepted the Committee’s recommendations that Mark Hodges and Euleen Goh join the Board. Mark Hodges was appointed as an executive director of the Board, increasing the number of executive directors to three. The appointment of Euleen Goh as a new non-executive director from 1 January 2009 also helps to maintain the balance of the Board in the context of the retirement of Wim Dik during 2009. In respect of Ms Goh’s appointment the Committee engaged a search agency to help it identify suitable candidates with the skills and capabilities required and to assist with the preparation of an interview list.
The Group Chief Executive, Chief Financial Officer, Chief Audit Officer, Group Chief Accountant, Chief Risk Officer and the external auditor normally attend, by invitation, all meetings of the Committee. Other members of senior management are also invited to attend as appropriate to present reports. It is the Committee’s practice at each meeting to meet separately with the Chief Audit Officer and the external auditor without any members of management being present. In performing its duties, the Committee has access to the services of the Chief Audit Officer, the Group Company Secretary and external professional advisers.
The Committee follows an agreed annual work plan. It reviews, with members of management and the internal and external auditors, the Company’s financial announcements including the annual report and accounts to shareholders and associated documentation. It places particular emphasis on their fair presentation and the reasonableness of the judgemental factors and appropriateness of significant accounting policies used in their preparation. At each meeting, the Committee receives a report from the Chief Audit Officer concerning the Company’s systems of internal financial control, including any significant new issues and actions taken on previously reported issues. Twice each year, the Committee receives reports on the adequacy of the Group’s life assurance and general insurance reserves. The Committee also reviews the annual work plan for the Group’s internal audit function. The Committee reports to the Board regarding the effectiveness of the Group’s overall systems of internal financial control including the risk management systems in relation to the financial reporting process. The Committee works closely with the Risk and Regulatory Committee, which reviews the Company’s overall internal controls and risk management systems.
Each of the Group’s major business units has an audit committee that provides an oversight role for its business. The Chief Audit Officer reviews the papers and minutes from these committees and brings all significant matters to the Committee’s attention. In addition during 2008 the members of the Committee attended several local audit committee meetings including those in Aviva USA, Norwich Union Life, Norwich Union Insurance, Aviva Canada, Aviva France, Hibernian and Aviva Italy. This programme of attendance at local audit committee meetings will continue during 2009.
Internal audit The Group’s internal audit function reports to management on the effectiveness of the Company’s systems of internal controls, the adequacy of these systems to manage business risk and to safeguard the Group’s assets and resources. The internal audit function is fully centralised and each country/region head has a full reporting line to the Chief Audit Officer (with the exception of Delta Lloyd). Through the Chief Audit Officer, the internal audit function provides objective assurance on risks and controls to the Committee. The plans, the level of resources and the budget of the internal audit function are reviewed at least annually by the Committee, which also undertakes an annual review of the effectiveness of the Group’s internal audit function against guidance criteria provided by the Institute of Chartered Accountants in England and Wales and by the Institute of Internal Auditors (IIA). This year the review has been undertaken by PricewaterhouseCoopers to meet the IIA standards requiring that an independent review of internal audit effectiveness be undertaken at least every five years. The results of the review confirmed that Group Internal Audit generally conformed with the International Standards for the Professional Practice of Internal Auditing. In addition, the Group Audit Committee is consulted in determining the objectives and remuneration of the Chief Audit Officer.
The policy regulates the appointment of former audit employees to senior finance positions in the Group and sets out the approach to be taken by the Group when using the services of the external auditor, including requiring that all services provided by the external auditor are pre-approved by the Aviva plc Audit Committee. It distinguishes between those services where an independent view is required and that should be performed by the external auditor (such as statutory and non-statutory audit and assurance work), prohibited services where the independence of the external auditor could be threatened and they must not be used, and other nonaudit services where the external auditor may be used. Non-audit services where the external auditor may be used include: nonrecurring internal controls and risk management reviews (i.e.
excluding outsourcing of internal audit work), advice on financial reporting and regulatory matters, due diligence on acquisitions and disposals, project assurance and advice, tax compliance services, and employee tax services.
In line with the Combined Code requirement the Board undertook a review of the effectiveness of all its committees during the year, including the Audit Committee. In addition, the Committee also carried out a self-evaluation of its effectiveness.
The purpose of the Committee is to assist the Board in providing leadership, direction and oversight with regard to the Group’s risk and regulatory policies and procedures, including those related to compliance, risk management, financial malpractice and internal controls. The Committee also monitors the Group’s risk exposures relative to appetite. The full terms of reference for the Committee can be found on the Company’s website, www.aviva.com, and are also available from the Group Company Secretary.
Mary Francis (Chairman) 14 January 2006 To date Nikesh Arora 1 July 2007 To date Wim Dik 14 January 2006 To date Russell Walls 14 January 2006 To date
During the year the work of the Committee fell into the following broad areas: Risk management The deteriorating economic and market environment required even greater attention to risk management in 2008, and heightened the interest of external stakeholders in the Company’s processes and controls. The Committee’s oversight focused on: continuing to improve the framework for identifying, monitoring and mitigating risks across the Group; ensuring that key financial risks – especially market and credit risks – were being identified and managed effectively; ensuring that operational risks, especially in IT and business protection and continuity, were well monitored and controlled; and monitoring how risk is managed at local and regional level within the Group through presentations from business unit leaders and risk teams. Between its formal meetings, the Committee received regular information from management on the Group's risk exposures and mitigating actions. Financial risk and capital management issues occupied the largest part of the Committee’s time during the year, and are likely to continue to do so for the foreseeable future.
Internal Audit The Group’s internal audit function provides the Committee with independent and objective assurance over the appropriateness, effectiveness and sustainability of the Company’s system of internal controls in place to mitigate significant risks. The Group Internal Audit plan is based on a robust and structured planning process using a risk based methodology that allows for quarterly updates to reflect changes to the Company’s risk profile. Key control issues reported by Group Internal Audit to management and to the Committee members are monitored on a quarterly basis until the risk exposure has been properly mitigated. Reports on financial malpractice are also presented to the Committee including incidence of fraud, anti-money laundering procedures and, at least on an annual basis, arrangements whereby persons can report in confidence any concerns about lack of probity (whistleblowing).
This report provides details of the role of the Corporate Social Responsibility Committee and the work it has undertaken during the year.
During the year the Committee reviewed and approved the content and scope of the Company’s 2008 CSR Report, monitored the management of the CSR risks affecting the Group and helped establish a process by which regions could report performance and progress to the Committee.
The Committee reviewed each region’s performance and progress during the year. During the Board’s visit to the Group’s French operations in September 2008 the Committee held a meeting with the senior managers responsible for CSR. The meeting allowed the Committee to gain a deeper understanding of the relevant local issues and assess how CSR was being embedded in the business.
The Committee received ongoing updates on the Group’s key CSR programme activities, including climate change, community investment, diversity and external benchmarking. The Committee also reviewed the Group’s carbon offset projects as part of management’s commitment to be carbon neutral on a global basis.
Aviva’s Chairman, the Chairman of the Committee and a nonexecutive director committee member participated in the Group’s Annual CSR Conference that took place in September 2008. Members of the Committee are interviewed as part of the external assurance process of the CSR programme and the subsequent management report, including Aviva’s action plan, is reviewed by the Committee to assist the strengthening and future direction of the programme.
– The Committee has decided to defer for one year Aviva’s five-yearly comprehensive compensation review. The existing authorities and approvals, granted by shareholders in 2005, will allow the current schemes to continue to operate up until the Annual General Meeting in 2010.
– Mark Hodges, Chief Executive, Norwich Union Life, was appointed an Executive Director of Aviva plc in June 2008. Information on his remuneration therefore appears in this report for the first time.
Introduction This report sets out the remuneration policy for the Company’s directors, describes its implementation and discloses the amounts paid in 2008. In addition to meeting statutory requirements, particularly the Companies Act 1985, Schedule 7A, the Remuneration Committee (the “Committee”) has aimed to comply with best practice guidelines, including guidance produced by the Association of British Insurers (ABI) and the National Association of Pension Funds, in producing this report. Relevant sections of this report have been audited in accordance with Corporate Governance best practice and legislation
The Committee’s objectives The Committee is a committee of the Board. Its terms of reference are available from the Group Company Secretary and can be found on the Company’s website www.aviva.com. The Committee’s key objectives are to: – Establish a competitive remuneration package to attract, retain and motivate scarce, high quality leaders; – Promote the achievement of both the Company’s annual plans and its strategic objectives by providing a remuneration package that contains appropriately motivating targets; and
The Committee’s main responsibilities are to: – Recommend to the Board the Group’s remuneration policy for the EDs and members of senior management, covering basic salary, bonus, long term incentives, retirement provision, long term wealth creation and other benefits; – Strike an appropriate balance between (i) the fixed and variable and (ii) the cash, equity and equity related components of the total remuneration package; – Ensure the remuneration package is congruent with, and provides the incentives to realise, short and long term goals; – Review and determine the terms of employment and remuneration of the individual EDs, including any specific recruitment or severance terms; – Assess and, within the broad policy from time to time approved by the Board, determine the remuneration terms of the Chairman of the Board; – Recommend to the Board the establishment of any employee share plans and exercise all the Board’s powers in relation to the operation of all share and incentive plans, including the granting of awards, the setting and testing of performance conditions (where appropriate), and any discretion on behalf of the Board regarding any material amendments to the plans’ rules not requiring the approval of shareholders; and
– Select, appoint and determine terms of reference for independent remuneration consultants to advise the Committee on remuneration policy and levels of remuneration.
Committee membership Table 1 below shows the independent NEDs who served on the Committee during the year: Table 1: Members of the Committee during 2008
Richard Karl Goeltz (Chairman from January 2006) 3 May 2004 1 January 2009 Mary Francis 25 January 2006 To date Carole Piwnica 25 January 2006 To date Scott Wheway (Chairman from 1 January 2009) 5 December 2007 To date
The Committee was advised in 2008 by David Hope, the Group Human Resources Strategy Director, on market practice and the alignment of reward arrangements to business strategy and by the Group Chief Accountant on matters relating to the performance measures and targets for the Group’s incentive plans. Tim Harris held that role for part of 2008 and was succeeded by David Rogers.
In line with Combined Code requirements, the Board undertook a review of the effectiveness of the Committee during the year. Additionally, the Committee reviewed its own performance and agreed steps to enhance its effectiveness.
January – None – Consideration of proposals for the creation of a “One Aviva, Twice the Value” Bonus Plan (OATTV)
February – A review of EDs’ basic salaries and benefits in kind – Approval of revised proposals for the (Twice) – Consideration and approval of EDs’ bonus awards for OATTV plan 2007 and approval of share awards under the Annual Bonus Plan (ABP)
– A performance test of subsisting LTIP grants – A decision on the operation of the UK’s All Employee
– A review of dilution limits – A review and approval of recommendations on contributions into the Aviva Capital Accumulation Plan (ACAP)
– Approval of an invitation to UK employees to participate in a Save As You Earn scheme
September – None – Review of a paper on the proposed approach to future targets given Aviva’s move from an EEV to an MCEV basis for reporting results
– A review of Aviva’s remuneration for its senior management below ED level
– A review of the proposed approach to the 2008 regulatory environment Directors’ Remuneration report
Planned Future Changes The Company does not anticipate any significant changes to the structure of EDs’ compensation packages in 2009, compared with that outlined below. There are, however, two points to note:-
– Aviva is changing its financial reporting from a European Embedded Value (EEV) to a Market Consistent Embedded Value (MCEV) approach. This required the Committee to consider how financial targets should be stated on the new MCEV basis. In particular, the Committee has discussed how to treat the Return on Capital Employed (ROCE) element of new and subsisting LTIP grants on an MCEV basis. It is comfortable that a move to MCEV ROCE will not make targets materially easier or more difficult to achieve.
– The external economic climate against which financial targets for 2009 have been set is unprecedentedly volatile. The level of stretch in the targets is very sensitive to the depth and duration of the economic downturn, which is currently highly uncertain. The Committee have therefore decided to review mid year the financial targets used for bonus purposes for EDs and other senior managers. Only in exceptional circumstances would the Committee consider amending financial targets, either up or down, and any significant change would be the subject of appropriate consultation. Any changes would be fully disclosed and explained in the 2009 Annual Report issued in 2010.
The Company is required every five years to seek shareholder approval for the operation of its share based incentive plans. The Committee has, in the past, carried out a comprehensive review of senior executive remuneration to coincide with this. This has allowed the Company to put to shareholders proposals that reflect a thorough review of the Company’s remuneration package taking into account changing market and regulatory practice and the requirement to ensure that the package remains competitive. It had been the Committee’s intention to carry out such a review in 2009 with a view to putting proposals to the AGM in 2010. Following due consideration, the Committee has determined that this review should be deferred until 2010. Given the current turbulence in the economy, significant developments in relation to shareholder attitudes on executive pay, and emerging regulatory involvement from the Financial Services Authority (FSA), the Committee considers that a more durable outcome will be obtained from a review carried out in 2010, when a number of these factors will be more settled.
Alignment with Group Strategy The Committee considers alignment between Group strategy and the remuneration of its senior executives, including EDs, to be critical. It believes that senior executives should be highly rewarded (on a market competitive basis) for the delivery of stretching goals but should receive reduced rewards when the business performs poorly. To achieve this alignment Aviva’s remuneration package is leveraged, with a high percentage of pay “at risk” against the achievement of stretching goals. Furthermore two-thirds of any bonus and any LTIP grant are delivered in the form of Aviva shares. The element of deferred bonus that is matched under the OATTV bonus plan only vests if very demanding EPS targets are met. The requirements to defer bonus, participation in the LTIP and the OATTV bonus plan closely tie the long term value of executive remuneration to the Company’s share price performance.
The Group’s strategic priorities and targets are set out elsewhere in this report. Those priorities are reflected closely in the remuneration package: – Basic Salary: Internal and external equity in basic salary positioning is an important contributor to a motivational remuneration package. A range of market data is used to inform decision making taking into account the Company’s policy with regard to the FTSE 30 and FTSE 50.
The Committee also considers how, given changing economic circumstances, the Group’s priorities and consequently the targets underpinning its bonus structures need to change. Given the challenging current environment the Committee has agreed that financial targets for 2009 should focus more on capital conservation and strengthening the Group’s liquidity than in previous years. Financial targets sit alongside targets on customer advocacy and employee engagement introduced in 2005 that the Committee believes are critical to long-term organisational health. The personal objectives of executive committee members are reviewed by the Committee to ensure they adequately reflect the strategic aims of the Group, good governance and best practice.
– Long Term Incentive Plan (LTIP): The LTIP encourages a longer-term management focus on ROCE and relative Total Shareholder Return (TSR). These metrics measure how the Company is performing in both absolute and relative terms.
Table 3a and 3b: Breakdown of Remuneration for the Chief Executive Total remuneration elements Total remuneration elements
Total remuneration – Total remuneration package levels are informed by relevant pay data, – Basic salary in particular the lower quartile to median range of the FTSE 30 and – ABP the median to upper quartile range of the FTSE 50. – OATTV plan
– These reference points are chosen to reflect Aviva’s market – LTIP capitalisation and comparability to other large, sophisticated – Long-term savings multinational companies and the positioning that is appropriate – Aviva Staff Pension Scheme (ASPS) to Aviva in those different comparator groups. – Benefits
Basic salary – Benchmarked as for total remuneration but with positioning and progression – Monthly in cash taking account of individual and business performance and the levels of – Reviewed annually in February, increase provided for the broader UK employee population (basic salaries with changes taking effect from of the UK staff increased by 3.5% on average in 2008). 1 April.
– The Committee takes seriously institutional investors’ concerns on the ratcheting of basic salaries and does not unquestioningly accept a particular market position or salary.
Discretionary Annual Bonus Plan (ABP) – The ABP is intended to motivate executives to achieve the annual business – Annually, one-third is paid in cash plan, based on a series of key financial, employee and customer performance and two-thirds in deferred shares. indicators (KPIs), which make up 70% of the bonus opportunity, and personal objectives (30%).
– Deferred shares vest on the third anniversary of the date of grant, subject to the recipient remaining in service. On resignation during the three-year deferral period all or part of the grant is forfeited (100% in year of grant, 50% in following year and 25% in year after that). Additional shares are awarded in lieu of the dividends paid on the deferred shares during the deferral period.
on the average annual growth in EPS during the three-year performance period, thus: – Less than 10% growth pa Nil – 10% growth pa 0.1 for 1 – 26% growth pa 2 for 1
– Matching is on a straight-line basis for performance from 10% to 26%. No additional shares are awarded for the dividends paid during the three year performance period on those shares that vest.
Long-term savings – The Aviva Capital Accumulation Plan (ACAP) is a long-term savings vehicle – Discretionary payments into a which aids retention whilst recognising a need for flexibility in long-term trust where they are held for wealth planning. a minimum of five years.
Aviva Staff Pension Scheme (ASPS) – The UK ASPS provides a competitive post retirement package. No ED is – Deferred cash payable on currently accruing service based benefits in the ASPS. retirement in the form of a – The scheme provides accrual at 1⁄30, 1⁄45 or 1⁄60 of annual basic lump sum/monthly payment.
Overview of the effect on current Executive Directors The effect of these policies in 2008 for current EDs is set out below. It should be emphasised that the figures shown for both the LTIP grant and OATTV bonus plan grant represent the face value of those grants, which would only be realised if very stretching performance conditions were to be met. Details on pension benefits are set out later in this report.
OATTV bonus plan £568,891 The face value of 100% of the two-thirds deferred element of 2007 annual bonus.
LTIP – face value £1,540,000 The face value of the grant represented 175% of of grant basic salary on 29 February 2008.
Basic salary £592,500 during the year Mr Scott received a basic salary increase from As at 1 January £570,000 1 April of £30,000 (5.3%). As at 31 December £600,000 His basic salary has been frozen for 2009
OATTV bonus £320,625 The face value of 75% of the two-thirds deferred plan element of 2007 annual bonus.
ASPS Membership of the Aviva Staff Pension Mr Scott has a fully accrued pension equivalent to Scheme two thirds of his pensionable salary at retirement.
Basic salary £462,500 during the year Mr Hodges was appointed an executive director As at 1 January £395,000 of Aviva plc on 26 June 2008 and received an As at 31 December £520,000 increase in basic salary from that date.
Customer metrics do not yet have the same degree of consistency and external comparability in all business units as our employee climate survey. During 2008 we moved towards a more consistent metric to measure customer advocacy. Although there is still not complete alignment, all business units do have customer satisfaction and/or advocacy targets from which we can derive suitable performance targets. We expect our new measure to be used in most business units during 2009 and in all business units in 2010.
The Group’s performance against its financial, employee and customer KPIs in 2008, as they affected the bonus of the Chief Executive, is shown in Table 6 below.
Actual Key performance indicators On target (%) Stretch (%) payment (%)
Combined Operating Ratio (COR) – General Insurance only 4.2 4.2 –
Personal measures (30%) Personal – individual strategic 15 30 22.8 * Totals in columns do not add up due to rounding.
Matching is on a straight-line basis for performance between 10% and 26%. The maximum match of 2 shares for each deferred share is paid for delivering a doubling of EPS by the end of 2010. The threshold matching of 0.1 of a share for each share deferred is equivalent to doubling EPS by 2014. The Committee reviews the performance conditions of this plan annually.
Return on Capital Employed (ROCE) targets ROCE targets are set annually within the context of the Company’s three year business plan and have to date been set on an EEV basis. Vesting depends upon performance over the three year period against a target return. The Company’s external auditor provides a formal opinion on the ROCE vesting calculation. The 2008 LTIP award ROCE targets are set out in Table 7 below: Table 7: 2008 LTIP ROCE targets
TSR position over the three year performance period Percentage of shares in award that vests based on achievement of TSR targets
Below median 0% Median 15% Between median and upper quintile Pro rata between 15% and 50% on a straight-line basis Upper quintile and above 50%
Details of subsisting LTIP awards are provided on page 112 and Table 9 below shows the vesting projections (non-audited) of those awards as at 31 December 2008. For subsisting grants where HBOS was a member of the comparator group the Committee has determined that HBOS TSR performance to the end of 2008 should be used and thereafter replaced by a “synthetic” TSR based on the average TSR performance of the remaining constituents of the comparator group for the remainder of the performance period.
At the end of the performance period for the 2005 LTIP grant, which vested in 2008, the Company was ranked 12th out of the 15 companies in the TSR comparator group (0% vesting) and ROCE was 39.4% (50% vesting). The total vesting was therefore 50%. The 50% of the award which did not vest lapsed.
The LTIP vesting history is set out in Table 11 below. Prior to the 2005 award vesting history is based on an earlier LTIP plan, the last award under which was made in 2004.
At 1 Awards Awards Awards At 31 Market price Market price January granted vesting lapsing December at date awards at date awards 2008 during year during year during year 2008 granted1 vested Number Number Number Number Number Pence Pence Vesting date
3.The performance conditions for awards granted and vested during 2008 are explained elsewhere in this report.
4.The money value of awards will be calculated by multiplying the relevant number of shares by the market price at the date of vesting.
5.The award date for the awards which vested in 2008 was 24th March 2005.
6.These awards were granted to Mark Hodges before he was appointed to the board, and were held at the date of his appointment.
7.These awards were released to Mark Hodges before he was appointed to the board, and were not held at the date of his appointment.
Notice period By the director – 6 months. By the Company – 12 months, rolling. No notice or payment in lieu to be paid where the
– Any amount is subject to phased payment and mitigation requirements.
Sickness – In line with senior management terms ie 100% basic salary for 52 weeks, and 75% thereafter.
Contract dates Director Date current contract commenced Andrew Moss 1 January 2007 Philip Scott 15 November 2006 Mark Hodges 26 June 2008
These plans include a share element of the Aviva All-Employee Share Ownership Plan (AESOP). Under this plan, eligible employees can receive up to a maximum of £3,000 per annum in shares based upon the profits of the Company’s UK businesses. The shares are free of tax subject to a retention period. In addition, the partnership element of the AESOP, which the Company also operates, allows participants to invest up to £125 per month out of their gross salary in the Company’s shares. There is no matching to this investment by the Company.
The Aviva Savings Related Share Option Scheme (SAYE) allows eligible employees to acquire options over the Company’s shares at a discount of up to 20% of their market value at the date of grant. In order to exercise these options, participants must have saved through a three, five or seven-year HMRC approved savings contract, subject to a maximum savings limit of £250 per month.
Details of holdings under these plans can be found on page 119.
Dilution Awards granted under the Aviva employee shares plans are met by the funding of an employee trust administered by an external trustee that acquires shares in the market. New issue shares will only be used where it is not possible to use trust shares and the funding policy is kept under review by the Committee and the Board. Details of the shares currently held in the employee trusts are set out in note 30 to the accounts.
Committee Chairman – Audit £35,000 (inclusive of committee membership fee) – Remuneration £20,000 (inclusive of committee membership fee) – Risk and Regulatory £17,500 (inclusive of committee membership fee)
Directors’ remuneration in 2008 Table 17 below sets out the remuneration paid or payable to the directors in respect of the year to 31 December 2008. This section (Directors’ remuneration in 2008) and those sections headed “Executive directors’ pension arrangements” and “Share incentive plans” along with their associated footnotes have been subject to audit.
Basic salary/fees Bonuses1 ACAP2 Benefits3 Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Non-executive directors Guillermo de la Dehesa 109 95 – – – – – – 109 95
2. During the year, shares granted to certain former EDs under the Company’s incentive plans vested. Details of these awards were fully disclosed in the year of grant.
4. Mark Hodges’ 2007 data is not disclosed as he was not an ED during the year. Mark Hodges’ 2008 data shown above includes all sums paid to him during 2008, not just those paid in respect of his services as a director.
5. For the purposes of the disclosure required by Schedule 6 to the Companies Act 1985 the total aggregate emoluments of the directors in respect of 2008 was £5.2 million (2007: £6.6 million, which included three Executive Directors who left in 2007). This reflects the total aggregate emoluments of Mark Hodges in respect of the period that he served as a director during the year, comprising basic salary of £269,000, bonus of £275,000 and benefits of £53,000.
7. Annual bonuses are one-third paid in cash and two-thirds deferred into shares for three years.
– Wim Dik ceased to be a member of the Nomination Committee from 29 July 2008 and retired as Senior Independent Director on 31 December 2008. He remains a member of the Corporate Social Responsibility and Risk Regulatory Committees
– Richard Goeltz joined the Nomination Committee from 29 July 2008.
Accrued annual pension at 1 January 2008 20 376 81 Increase in accrued annual pension during the year as a result of inflation 1 19 –
4.The “accrued pension” is the amount of annual pension to which the Directors would have been entitled to at age 60, had they left service at 31 December 2008.
5.Members of the Defined Benefit section of the ASPS made a contribution of 5% of their pensionable salary.
Savings related share options in Table 20 refer to options granted under the HMRC approved SAYE. Options are normally exercisable during the six month period following the end of the relevant (three, five or seven year) savings contract.
Table 20: Directors’ options to subscribe for, or awards over, Company shares
The mid-market price of an ordinary share in the Company on 31 December 2008, being the last business day of the year, was 390.0 pence, and the mid-market prices during the year ranged from 670.0 pence to 245.3 pence. During the year, no share options were exercised by directors.
Long-term Shares1 Bonus Plan Awards2 Incentive Awards3 OATTV4 Options5 31 31 31 31 31 1 January December 1 January December 1 January December 1 January December 1 January December
Nikesh Arora – – – – – – – – – – Guillermo de la Dehesa 144 144 – – – – – – – – Wim Dik 200 214 – – – – – – – – Mary Francis 1,800 1,800 – – – – – – – – Richard Karl
Carole Piwnica 2,500 2,500 – – – – – – – –
Lord Sharman 5,000 20,000 – – – – – – – – Russell Walls 4,000 4,000 – – – – – – – – Scott Wheway – 1,677 – – – – – – – –
3. “Long Term Incentive Awards” are awards granted under the LTIP which vest only if the performance conditions are achieved.
4. OATTV awards are granted as a match to the bonus plan awards under the ABP and vest only if the performance conditions are achieved.
The following changes to directors’ interests which relate to shares acquired each month under the partnership element of the AESOP during the period 1 January 2009 to 27 February 2009 have been reported to the Company.
This report was reviewed and approved by the Board on 4 March 2009.
Notes to the consolidated financial statements: 146 1 Exchange rates 146 2 Presentation changes 148 3 Subsidiaries 155 4 Segmental information 164 5 Details of income 165 6 Details of expenses 167 7 Finance costs 167 8 Long-term business economic volatility 169 9 Longer term investment return and economic assumption changes for non-long-term business 171 10 Employee information 171 11 Directors 172 12 Auditors’ remuneration 172 13 Tax 174 14 Earnings per share 176 15 Dividends and appropriations 176 16 Goodwill 181 17 Acquired value of in-force business (AVIF)
and intangible assets 183 18 Interests in, and loans to, joint ventures 186 19 Interests in, and loans to, associates 188 20 Property and equipment 189 21 Investment property 190 22 Loans 191 23 Securitised mortgages and related assets 193 24 Financial investments 200 25 Receivables and other financial assets 200 26 Deferred acquisition costs and other assets 202 27 Assets held to cover linked liabilities 202 28 Ordinary share capital 203 29 Equity compensation plans 207 30 Shares held by employee trusts 207 31 Preference share capital 208 32 Direct capital instrument 208 33 Merger reserve 209 34 Other reserves 210 35 Retained earnings 211 36 Minority interests 212 37 Contract liabilities and associated reinsurance 213 38 Insurance liabilities 223 39 Liability for investment contracts 225 40 Financial guarantees and options 228 41 Reinsurance assets 230 42 Effect of changes in assumptions and estimates during the year 231 43 Unallocated divisible surplus 232 44 Tax assets and liabilities 233 45 Provisions 234 46 Pension obligations 242 47 Borrowings 249 48 Payables and other financial liabilities 249 49 Other liabilities 250 50 Contingent liabilities and other risk factors 252 51 Commitments 253 52 Cash flow statement 253 53 Group capital structure 257 54 Capital statement 261 55 Risk management 274 56 Derivative financial instruments 276 57 Assets under management 277 58 Related party transactions 278 Financial statements of the Company
We have audited the Group and Parent Company financial statements (the “financial statements”) of Aviva plc for the year ended 31 December 2008 which comprise the Accounting Policies, the Consolidated and Parent Company Income Statements, the pro forma reconciliation of Group operating profit to profit before tax, the Consolidated and Parent Company statement of recognised income and expense the Consolidated and Parent Company reconciliation of movements in shareholders’ equity, the Consolidated and Parent Company balance sheets, the Consolidated and Parent Company cash flow statements and the related notes 1 to 58 and A to H. We have also audited the information in the Directors’ remuneration report that is described as having been audited.
We report to you our opinion as to whether the financial statements give a true and fair view and whether 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 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ report is consistent with the financial statements. The information given in the Directors’ report includes that specific information presented in the Business review that is cross referred from the Directors’ report.
We review whether the Corporate governance report reflects the Company’s compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises only the Overview, the Business review, the Board of directors, Executive management, the Directors’ report, the Corporate governance report, the Audit committee report, the Nomination committee report, the Risk and regulatory committee report, the Corporate social responsibility committee report, Other information, Aviva MCEV Financial statements and the unaudited part of the Directors’ remuneration report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.
The information given in the Directors’ report is consistent with the financial statements.
Separate opinion in relation to IFRSs As explained in the Accounting Policies to the Group financial statements, the Group, in addition to complying with its legal obligation to comply with IFRSs as adopted by the European Union, has also complied with the IFRSs as issued by the International Accounting Standards Board.
The Group is managed on a regional basis, reflecting the management structure whereby a member of the Executive Management team is accountable to the Group Chief Executive for the operating segment for which he is responsible. Further details of the reportable segments are given in note 4.
In November 2006, the IASB issued IFRS 8, Operating Segments. Although its requirements are applicable for accounting periods beginning on or after 1 January 2009, the Group has decided to adopt IFRS 8 early and reflect its impact in these financial statements. As noted above, details of the reportable segments are given in note 4.
FRS 27 Financial Reporting Standard 27, Life Assurance, (FRS 27) was issued by the UK’s Accounting Standards Board (ASB) in December 2004. Aviva, along with other major insurance companies and the Association of British Insurers (ABI), signed a Memorandum of Understanding (MoU) with the ASB relating to FRS 27. Under this MoU, Aviva voluntarily agreed to adopt in full the standard from 2005 in the Group’s IFRS financial statements.
(B) Operating profit The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management, short-term realised and unrealised investment gains and losses are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term and non long-term businesses. Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. Variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit. For non-long-term business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer term return and short-term fluctuations from that level. Further details of this analysis and the assumptions used are given in notes 8 and 9.
Further details on the estimation of amounts for insurance and participating investment contract liabilities are given in notes 38, 39 and 50 to these financial statements.
(D) Consolidation principles Subsidiaries Subsidiaries are those entities (including special purpose entities) in which the Group, directly or indirectly, has power to exercise control over financial and operating policies in order to gain economic benefits. Subsidiaries are consolidated from the date on which effective control is transferred to the Group and are excluded from consolidation from the date of disposal. All inter-company transactions, balances and unrealised surpluses and deficits on transactions between Group companies have been eliminated.
From 1 January 2004, the date of first time adoption of IFRS, the Group is required to use the purchase method of accounting to account for the acquisition of subsidiaries. Under this method, the cost of an acquisition is measured as the fair value of assets given up, shares issued or liabilities undertaken at the date of acquisition, plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill (see policy N below). Any surplus of the acquirer’s interest in the subsidiary’s net assets over the cost of acquisition is credited to the income statement.
The merger reserve is also used where more than 90% of the shares in a subsidiary are acquired and the consideration includes the issue of new shares by the Company, thereby attracting merger relief under the Companies Act 1985.
Investment vehicles In several countries, the Group has invested in a number of specialised investment vehicles such as Open-ended Investment Companies (OEICs) and unit trusts. These invest mainly in equities, bonds, cash and cash equivalents, and properties, and distribute most of their income. The Group’s percentage ownership in these vehicles can fluctuate from day-to-day according to the Group’s and third-party participation in them. Where Group companies are deemed to control such vehicles, with control determined based on an analysis of the guidance in IAS 27 and SIC 12, they are consolidated, with the interests of parties other than Aviva being classified as liabilities. These appear as “Net asset value attributable to unitholders” in the consolidated balance sheet. Where the Group does not control such vehicles, and these investments are held by its insurance or investment funds, they do not meet the definition of associates (see below) and are, instead, carried at fair value through profit and loss within financial investments in the consolidated balance sheet, in accordance with IAS 39, Financial Instruments: Recognition and Measurement.
Accounting for the PUTs and PLPs as subsidiaries, joint ventures or other financial investments depends on the shareholdings in the GPs and the terms of each partnership agreement. Where the Group exerts control over a PLP, it has been treated as a subsidiary and its results, assets and liabilities have been consolidated. Where the partnership is managed by a contractual agreement such that no party exerts control, notwithstanding that the Group’s partnership share in the PLP (including its indirect stake via the relevant PUT and GP) may be greater than 50%, such PUTs and PLPs have been classified as joint ventures. Where the Group holds minority stakes in PLPs, with no disproportionate influence, the relevant investments are carried at fair value through profit and loss within financial investments.
Investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group’s share of that entity’s post-acquisition changes to shareholders’ funds, is included as an asset in the consolidated balance sheet. As explained in policy N, the cost includes goodwill identified on acquisition. The Group’s share of their postacquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. Equity accounting is discontinued when the Group no longer has significant influence over the investment.
The Company’s investments In the Company balance sheet, subsidiaries and joint ventures are stated at their fair values, estimated using applicable valuation models underpinned by the Company’s market capitalisation. These investments are classified as available for sale (AFS) financial assets, with changes in their fair value being recorded in a separate investment valuation reserve within equity.
General insurance and health premiums written reflect business incepted during the year, and exclude any salesbased taxes or duties. Unearned premiums are those proportions of the premiums written in a year that relate to periods of risk after the balance sheet date. Unearned premiums are calculated on either a daily or monthly pro rata basis. Premiums collected by intermediaries, but not yet received, are assessed based on estimates from underwriting or past experience, and are included in premiums written.
(I) Other fee and commission income Other fee and commission income consists primarily of fund management fees, income from the RAC’s noninsurance activities, distribution fees from mutual funds, commissions on reinsurance ceded, commission revenue from the sale of mutual fund shares, and transfer agent fees for shareholder record keeping. Reinsurance commissions receivable are deferred in the same way as acquisition costs, as described in policy W. All other fee and commission income is recognised as the services are provided.
In the United States, shadow adjustments are made to the liabilities or related deferred acquisition costs and are recognised directly in equity. This means that the measurement of these items is adjusted for unrealised gains or losses on the backing assets such as AFS financial investments (see policy S), that are recognised directly in equity, in the same way as if those gains or losses had been realised.
The long-term business provisions are calculated separately for each life operation, based either on local regulatory requirements or existing local GAAP at the later of the date of transition to IFRS or the date of the acquisition of the entity, and actuarial principles consistent with those applied in the UK. Each calculation represents a determination within a range of possible outcomes, where the assumptions used in the calculations depend on the circumstances prevailing in each life operation. The principal assumptions are disclosed in note 38(b). For liabilities of the UK withprofit fund, FRS 27 requires liabilities to be calculated as the realistic basis liabilities as set out by the UK’s Financial Services Authority, adjusted to remove the shareholders’ share of future bonuses. For UK non-profit insurance contracts, the Group applies the realistic regulatory basis as set out in the FSA Policy Statement 06/14, Prudential Changes for Insurers, where applicable.
Present value of future profits (PVFP) on non-participating business written in a with-profit fund For UK with-profit life funds falling within the scope of the FSA realistic capital regime, and hence FRS 27, an amount may be recognised for the present value of future profits on non-participating business written in a withprofit fund where the determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value. This amount is recognised as a reduction in the liability rather than as an asset on the balance sheet, and is then apportioned between the amounts that have been taken into account in the measurement of liabilities and other amounts which are shown as an adjustment to the unallocated divisible surplus.
Liability adequacy At each reporting date, an assessment is made of whether the recognised long-term business provisions are adequate, using current estimates of future cash flows. If that assessment shows that the carrying amount of the liabilities (less related assets) is insufficient in light of the estimated future cash flows, the deficiency is recognised in the income statement by setting up an additional provision in the balance sheet.
Provisions for latent claims are discounted, using rates based on the relevant swap curve, in the relevant currency at the reporting date, having regard to the expected settlement dates of the claims. The discount rate is set at the start of the accounting period with any change in rates between the start and end of the accounting period being reflected below operating profit as an economic assumption change. The range of discount rates used is described in note 38(c). This is a change in accounting policy, the effects of which are given in note 2(b)(i).
(N) Goodwill, AVIF and intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired subsidiary, associate or joint venture at the date of acquisition. Goodwill on acquisitions prior to 1 January 2004 (the date of transition to IFRS) is carried at its book value (original cost less cumulative amortisation) on that date, less any impairment subsequently incurred. Goodwill arising before 1 January 1998 was eliminated against reserves and has not been reinstated. Goodwill arising on the Group’s investments in subsidiaries since that date is shown as a separate asset, whilst that on associates and joint ventures is included within the carrying value of those investments.
Financial guarantees are recognised initially at their fair value. They are subsequently measured at the higher of either the expected asset or liability under the guarantee, or the amount initially recognised less any cumulative amortisation.
For AFS securities identified as being impaired, the cumulative unrealised net loss previously recognised within the investment valuation reserve is transferred to realised losses for the year.
The notional or contractual amounts associated with derivative financial instruments are not recorded as assets or liabilities on the balance sheet as they do not represent the fair value of these transactions. These amounts are disclosed in note 56.
Exposure to gain or loss on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate.
(iii) a hedge of a net investment in a foreign operation (net investment hedge)
To the extent that a loan is uncollectable, it is written-off as impaired. Subsequent recoveries are credited to the income statement.
Collateral received in the form of cash, which is not legally segregated from the Group, is recognised as an asset on the balance sheet with a corresponding liability for the repayment. Non-cash collateral received is not recognised on the balance sheet unless the Group either sells or repledges these assets in the absence of default, at which point the obligation to return this collateral is recognised as a liability.
Deferred acquisition costs are reviewed by category of business at the end of each reporting period and are writtenoff where they are no longer considered to be recoverable.
(X) Cash flow statement Cash and cash equivalents Cash and cash equivalents consist of cash at banks and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with less than three months’ maturity from the date of acquisition, and include certificates of deposit.
Pension obligations The Group operates a large number of pension schemes around the world, whose members receive benefits on either a defined benefit basis (generally related to a member’s final salary and length of service) or a defined contribution basis (generally related to the amount invested, investment return and annuity rates), the assets of which are generally held in separate trustee-administered funds. The pension plans are generally funded by payments from employees and the relevant Group companies, taking account of the recommendations of qualified actuaries.
Deferred tax related to fair value re-measurement of available for sale investments, owner-occupied properties and other amounts taken directly to equity is recognised in the balance sheet as a deferred tax asset or liability.
In addition to paying tax on shareholders’ profits, the Group’s life businesses in the UK, Ireland, Singapore and Australia pay tax on policyholders’ investment returns (“policyholder tax”) on certain products at policyholder tax rates. Policyholder tax is accounted for as an income tax and is included in the total tax expense. The Group has decided to show separately the amounts of policyholder tax to provide a more meaningful measure of the tax the
Where loan notes have been issued in connection with certain securitised mortgage loans, the Group has taken advantage of the revised fair value option under IAS 39 to present the mortgages, associated liabilities and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch which would otherwise arise from using different measurement bases for these three items.
Income 5 45,258 Gross written premiums 36,206 30,991 (2,301) Premiums ceded to reinsurers (1,841) (1,658)
42,957 Premiums written net of reinsurance 34,365 29,333 346 Net change in provision for unearned premiums 277 (21)
43,303 Net earned premiums G 34,642 29,312 2,356 Fee and commission income H & I 1,885 1,760
9 Profit on the disposal of subsidiaries and associates 7 49
Expenses 6 (36,691) Claims and benefits paid, net of recoveries from reinsurers (29,353) (27,121)
4,856 Change in insurance liabilities, net of reinsurance 3,885 (3,508) 13,286 Change in investment contract provisions 10,629 (2,018) 5,603 Change in unallocated divisible surplus 4,482 2,922
(2,960) (Loss)/profit before tax (2,368) 1,847 1,335 Tax attributable to policyholders’ returns 13 1,068 (15)
(1,625) (Loss)/profit before tax attributable to shareholders’ profits (1,300) 1,832 1,854 Tax credit/(expense) AB & 13 1,483 (349) (1,335) Less: tax attributable to policyholders’ returns 13 (1,068) 15 519 Tax attributable to shareholders’ profits 415 (334)
Earnings per share AF & 14 (46.0)c Basic (pence per share) (36.8)p 48.9p (46.0)c Diluted (pence per share) (36.8)p 48.5p
Pro forma reconciliation of Group operating profit to profit before tax For the year ended 31 December 2008
Operating profit before tax attributable to shareholders’ profits 2,118 Long-term business 1,694 1,610 154 Fund management 123 179 1,498 General insurance and health 1,198 1,021
2,872 IFRS operating profit before adjusting items and tax attributable to shareholders’ profits 2,297 2,216
Pro forma reconciliation of Group operating profit to profit before tax continued
The accounting policies (identified alphabetically) on pages 125 to 139 and notes (identified numerically) on pages 146 to 277 are an integral part of these financial statements.
Consolidated statement of recognised income and expense For the year ended 31 December 2008
(2,976) Fair value (losses)/gains on AFS securities, owner-occupied properties and hedging instruments 34 (2,381) 172 (158) Fair value gains transferred to profit 34 (126) (391)
(773) Total recognised income and expense for the year (618) 2,419
Assets 3,689 Goodwill N & 16 3,578 3,082 4,163 Acquired value of in-force business and intangible assets N & 17 4,038 3,197 1,791 Interests in, and loans to, joint ventures C & 18 1,737 2,576 1,285 Interests in, and loans to, associates C & 19 1,246 1,206 994 Property and equipment O & 20 964 942 14,872 Investment property P & 21 14,426 15,391 43,543 Loans U & 22 42,237 36,193
Financial investments R,S & 24 154,902 Debt securities 150,255 121,312 44,692 Equity securities 43,351 58,829 37,233 Other investments 36,116 36,269 236,827 229,722 216,410 8,138 Reinsurance assets M & 41 7,894 8,054 2,724 Deferred tax assets AB & 44b 2,642 590 641 Current tax assets 44a 622 376 10,119 Receivables and other financial assets 25 9,816 8,619 6,337 Deferred acquisition costs and other assets W & 26 6,147 4,487 3,878 Prepayments and accrued income 26d 3,762 2,986 24,929 Cash and cash equivalents X & 52d 24,181 16,089 1,598 Assets of operations classified as held for sale AG & 3c 1,550 1,128
685 Ordinary share capital 28 664 655 206 Preference share capital 31 200 200 891 864 855
Capital reserves 1,272 Share premium 28b 1,234 1,223 3,372 Merger reserve D & 33 3,271 3,271 4,644 4,505 4,494
2 – Presentation changes (a) Change to operating segments In November 2006, the IASB issued IFRS 8, Operating Segments. Although its requirements are applicable for accounting periods beginning on or after 1 January 2009, the Group has decided to adopt IFRS 8 early and reflect its impact in these financial statements.
(iii) Europe incorporates all European operations excluding the UK as set out above; (iv) North America is made up of our life business in the United States and general insurance business in Canada; (v) Asia Pacific includes all our Asian and Australian businesses; and,