Overview 2 Structure and performance 6 Chairman’s statement 8 Group chief executive’s statement
Governance 72 Board of directors 74 Directors’ report 77 Corporate governance report 82 Audit committee report 84 Nomination committee report 85 Risk and regulatory committee report 86 Corporate social responsibility committee report 87 Directors’ remuneration report 101 Independent auditors’ report
Financial statements 104 Accounting policies 114 Consolidated income statement 115 Pro forma reconciliation of Group operating profit to profit before tax 117 Consolidated statement of recognised income and expense 117 Reconciliation of movements in consolidated shareholders’ equity 118 Consolidated balance sheet 119 Consolidated cash flow statement 120 Notes to the consolidated financial statements 211 Financial statements of the Company 219 Independent auditors’ report to the directors of
Also we take care to minimise the impact on the environment in the paper we use, the paper we have used, 9lives 55TM, is produced using 55% recycled fibre from both pre- and post consumer sources using an elemental chlorine free process and the remaining virgin fibre using a totally chlorine free process. The virgin fibre is sourced from well managed forests. The paper is FSC certified and manufactured at an ISO 14001 accredited mill.
ISO 14001 – A pattern of control for an environmental management system against which an organisation can be credited by a third party.
Business review 12 Basis of preparation 13 Group strategy 16 Key performance indicators 18 Group performance 22 Business unit overview 24 UK 32 Europe 42 International and Morley 50 Finance 62 Employees and responsibility
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Aviva is the world’s fifth largest insurance group and the largest insurance services provider in the UK. We are one of the leading providers of life and pension products in Europe and are actively growing our long-term savings businesses in Asian markets, Australia and the USA. Our main activities are long-term savings, fund management and general insurance*.
We have premium income and investment sales of £41.5 billion and £364 billion of assets under management. We have 59,000 employees serving over 40 million customers.
**Present value of new business premium (PVNBP) is equal to total single premium sales received in the year plus the discounted value of annual premiums expected to be received over the term of new contracts, and is expressed at the point of sale.
We have a balanced portfolio that benefits from diversification of distribution, products and geography
We have achieved strong growth in sales and profits across our worldwide portfolio of businesses
We have completed the purchase of AmerUs in the United States, giving us greater access to the world’s largest savings market
Our European and International businesses have announced their confidence in achieving average annual sales growth† of at least 10% over the next five years, while growing profits‡ at least as quickly
† Our growth ambition is an annual average growth after minority interests and before acquisitions, from 2006 to 2010 inclusive, and assuming no major changes in economic conditions.
During the year, we completed the purchase of AmerUs in the US, giving us greater access to the world’s largest savings and capital market. Our challenge is now to integrate and grow this business quickly and to demonstrate the value that we believe it brings to our Group. We also completed major new bancassurance partnerships in Ireland (with Allied Irish Banks) and in India (with Centurion Bank of Punjab). Already, we are seeing strong performances from both partnerships. In March, we approached the board of Prudential plc with a proposal to merge our respective companies on an agreed basis. The proposal set out the significant commercial benefits and value-creation potential of the merger. The board of Prudential plc declined to enter into discussions with us and the proposal was consequently withdrawn.
I have recently been involved with the development of the Companies Act 2006 and its progress through Parliament in the UK. The Bill is one of the largest ever to be passed and is a significant step towards a far-reaching reform of UK company law. It clarifies the requirements being placed on public companies and pushes them to consider further their internal governance and their social and economic impacts. I strongly support the reforms and am certain that Aviva is in excellent shape to handle the upcoming changes.
I am pleased to announce that our recommended final ordinary dividend is 19.18 pence per share, bringing the total dividend for the year to 30.00 pence, an increase of 10% against last year (2005: 27.27 pence). This increase reflects our intention to increase the dividend on a basis judged prudent, while retaining capital to support future business growth, using dividend cover on an IFRS operating earnings after tax basis in the 1.5 to 2.0 times range as a guide.
During 2006, we held the first meetings of the newly formed risk and regulatory committee and corporate social responsibility committee. The board remains committed to maintaining the highest levels of governance and compliance particularly in light of the increasing demands in this area. We are also keenly aware of the need to develop our business to be sustainable and responsive to the needs of customers, staff and the wider community. Both committees will provide clear leadership and give the board oversight of the work we are
Chairman doing in these areas. In September, we met in India, and combined the meeting with visits to some of our key sites there and in Sri Lanka. It is important that, as a board, we speak directly to people in our business, and see first-hand the exciting developments that are going on. This particular visit gave us a valuable insight into one of the fastest-growing insurance markets in the world, and the excellent work being performed by our people.
I would like to thank our employees for their hard work and commitment in helping to deliver an excellent set of results. This admirable performance comes against the backdrop of the reduction in the number of UK staff we announced as part of our cost-efficiency programme. During 2006, we made progress in aligning the remuneration of our senior management with the needs of employees and customers. For the first time this year, an element of senior management pay and bonuses will be dependent on employee engagement and customer satisfaction measures, helping to acknowledge that the longer term performance of Aviva depends on motivated staff and satisfied customers.
It was very pleasing to see that Aviva has been recognised as one of the top 50 best places for women to work in the UK, according to The Times. Particularly satisfying for me was that we were the only company to be named in each of the assessed categories, emphasising our progressive approach.
We have earned awards in a large number of our businesses across Europe, Asia and North America. The recognition has come in areas such as product innovation, sustainability, fund performance, diversity, customer satisfaction, media campaigns and many more. The sheer breadth of this recognition demonstrates to me that across the group we are performing to a high level and pushing ourselves to be the best.
We are in a great position and our businesses around the world are performing strongly. We have a diverse geographic spread and multiple product types and distribution channels in our core markets. This balance, particularly the split between long-term savings and general insurance, is a significant advantage as it allows us to be flexible and to fund organic growth internally. When allied to the external market environment and the increasing need for higher retirement savings, it is clear that we have a significant opportunity ahead of us.
It has been a good year for Aviva. During 2006 we produced our best ever set of financial results and we ended the year in a strong position to continue our good progress. This success was achieved while completing the integration of RAC in the UK and the purchase of AmerUs in the US.
In the UK, we have generated exceptional growth in our long-term savings business. Total sales increased by 31% to over £13 billion, helped by strong pension sales resulting from changes brought about by pension simplification following “A-Day” in April. We have increased our share of a market that is itself growing very strongly.
Our UK general insurance and health businesses produced a strong result, proving again that we are able to produce sustainable returns from this business. During the year, we completed the integration of RAC and the disposal of its non-core subsidiaries.
Our confidence in our international businesses was highlighted by our announcement that we expect to achieve double-digit sales growth* over the next five years, while growing new business contribution at least as quickly.
During 2006, we saw strong sales from our new bancassurance partnership with Allied Irish Banks in Ireland and continuing rapid expansion in Asia. This growth demonstrates our commitment to the continued development of our distribution capacity and our ability to deliver results from new opportunities.
If we are to achieve our growth plans, it is important for us to have a strong brand to support us. We’ve made great progress in building the Aviva brand this year. The “Forward thinking” campaign has been hugely successful in raising our brand profile with our target audience this year and we will continue to invest in it over the next three years.
Our pre-tax operating profit** of £3,245 million (2005: £2,904 million) reflects continued strong operational performances from our portfolio of businesses and the success of our proven strategy. Our return on equity shareholders’ funds was 13.1% (2005: 15.0%). On an IFRS basis, the group operating profit before tax was £3,110 million (2005: £2,128 million). The group delivered an overall profit before tax attributable to shareholders of £2,977 million (2005: £2,528 million).
In January, I announced my intention to retire in July this year. I’m proud to have had the opportunity to help create a leading company in the global insurance industry. With almost ten years as group chief executive under my belt, there are other dimensions to my life and other things that I want to achieve in both international charity work and the business world. Now is the right time for me to set out on those adventures while I have the energy and desire to make a difference. I wish Andrew Moss and Philip Scott every success as they step into their new roles of group chief executive and group finance director, respectively.
We are a diverse organisation, something that I see as an important strength. Diversity not only benefits individuals, it enriches our pool of talent, offers new ways of thinking and improves our understanding of customers.
We are continually working to get the right balance between risk, return and growth, and I think that this set of results shows that we are making excellent progress. Managing risk against return is integral to everything that we do and will remain a consistent theme in 2007. We continue to benefit from our diverse geography, distribution and product range and we actively use this balanced portfolio approach to manage away a significant proportion of risk.
In the stable and mature markets of the UK and continental Europe, I believe that access to distribution will be our key driver of growth. We will seek to expand our bancassurance channel and significantly enhance our direct capability. We see the capital generated by our general insurance and health businesses and our superior understanding of customer needs as key differentiators.
I believe that we are in the right markets, at the right time. We have produced an excellent set of results for 2006 and have put ourselves in a strong position to build on these results in 2007.
Our objectives for this are: Offering a superior range of long-term savings, investment and protection products in markets that offer significant opportunities for growth
Working closely with business partners to deliver efficient and effective distribution channels
Attracting, motivating and retaining talented people who are committed to our values and ambitions
Generating increased profitable sales by providing the products and services that our customers want at a fair price
Improving our score in independent external assessments of service (eg the FASA rating in the UK)
Improving further our employee engagement and leadership performance in our global employee survey and against the global financial services benchmark
Progress in 2006 Established performance measures in our businesses based on customer satisfaction and advocacy (ie actively recommending us to others)
Came second overall in independent insurance customer satisfaction surveys in China and India
Introduced a group-wide customer policy, setting common governance standards for how we deal with customers
Established new key partnerships in the UK with Barclays Bank, the Post Office, Cooperative Insurance Services and Volkswagen
Voted the Insurance Times “General Insurer of the Year” for the fourth consecutive year in the UK
Grew our direct sales forces in India, where it almost doubled
Enhanced our e-commerce capabilities (eg in Canada) making us easier to do business with
Improved our group-wide employee survey results in the key areas of leadership and employee engagement
Setting and meeting customer advocacy and satisfaction benchmarks, both at group level and across all of our businesses
Continuing to strengthen our relationships with key brokers and other partners
Improving further our key stakeholders’ perceptions of Aviva (e.g. regulators, shareholders and investors)
Meeting published cost and revenue targets for the acquisitions of AmerUs and Ark Life
Growing our long-term sales in our European and International regions by on average at least 10% pa over next five years, while growing new business profit at least as quickly
Establishing a 10% market share in China in ten cities/provinces by 2010
Establishing a top-five market position and a 10% life market share in Russia within five years
Reinforced the message that Aviva is a progressive company in all it does through our pan-European “Forward thinking” campaign
Gained valuable media exposure when Dee Caffari was the first woman to successfully sail solo non-stop around the world against the prevailing wind and currents
Established Aviva Global Services to provide offshore support to UK and Canadian businesses
Collected investment awards in France (best fund manager over five years) and the UK (two property fund manager awards)
Gained access to additional bank branches in Italy through our joint venture with UniCredit Group
Developing further the Aviva brand through co-ordinated “Forward thinking” campaigns across our markets
Establishing an international Aviva brand tracker to provide a global baseline and local targets
Delivering on our target integration benefits in the USA and Ireland
Continuing to exploit our scale by sharing knowledge and skills in multi-channel distribution, product development and service delivery
Exploiting the know-how and product set that AmerUs has in the indexed-annuity market segment
Simplifying our business model in the UK to reduce duplication and drive efficiencies
Generating increased sales in the Netherlands through our focus on small to medium enterprise pension contracts and developing “white label” products
Capturing the opportunities presented by the retirement of the “baby boomer” generation
Capturing opportunities arising from increasing wealth in Russia and Central and Eastern Europe by continuing to invest in our businesses
In 2006, 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: Business review continued * Return on equity shareholders’ funds is calculated using opening equity capital and after-tax return based on operating profit, including long-term savings profit on a European Embedded Value (EEV) basis before adjusting items.
**Dividend cover is measured on operating earnings after tax on an IFRS basis, expressed as a multiple of the ordinary dividend in respect of the financial year.
We aim to deliver an after-tax operating return on opening equity shareholders’ funds, including life profits on a European Embedded Value (EEV basis), equivalent to 12.5%. This is a change to our previously stated aim of a 10% net real return.
Our post-tax operating return on equity shareholders’ funds was 13.1% (2005: 15.0%), ahead of our 12.5% target, notwithstanding opening shareholders’ funds being £3.2 billion higher and so impacting the return.
Excluding the beneficial impacts of one-offs in 2006 and applying a normalised tax rate, the dividend cover was 2.0 times.
Our EEV operating profit grew by 12% to £3,245 million (2005: £2,904 million). On an IFRS basis, operating profit before tax amounted to £3,110 million (2005: £2,128 million). Both results reflect strong operational performance, expanding and strengthening distribution channels and the benefit of rising investment markets.
O therinform ation Aviva plc Annual Report and Accounts 2006 17
Our global employee climate survey provides a measure of employee engagement. For Aviva, employee engagement represents the degree of effort that our people put into the organisation, the quality of that effort and their loyalty to the company. The survey results are used to plan for the year ahead, with the aim of achieving continuous improvement. The climate survey also measures employees’ perceptions of leadership, verifying that employee engagement is harnessed and aligned with our strategic direction and immediate business plans. Our aim is to improve both measures over time and to meet or exceed a global financial services benchmark.
During 2006, our employee engagement score has risen by 8% to 67% and our leadership metric has risen by 4% to 55%. These increases represent ongoing improvement and actions taken in response to our 2005 employee climate survey. Additionally, we are making progress towards a global financial services benchmark‡.
All Aviva business units are required to measure customer satisfaction. The maturity of our business units and the varied business models and distribution channels mean that, at present, a single, combined measure of group-wide customer performance is not available. While different metrics are in place in business units, key principles govern the methodology for defining customer satisfaction KPIs. These principles include that KPIs should reflect the level of satisfaction/advocacy achieved with customers and that the KPIs should reference a meaningful external benchmark.
In 2006, the majority of our business units reached an “on target” level of customer performance, with four business units achieving “stretch” goals. Every business unit has produced an action plan as a result of 2006 customer performance and stretching targets have been set for 2007 to drive continuous improvement. In 2007, we will be exploring ways to consolidate the various approaches to customer performance measurement such that in future years, aggregated performance data may be disclosed.
Long-term business* 1,896 1,065 Fund management*† 155 124 General insurance and health 1,680 1,551 Other: Other operations*† (80) (40) Corporate costs (160) (136) Net unallocated interest charges (381) (436)
EEV operating profit before tax and adjusting items 3,245 2,904 * The results of Norwich Union Equity Release, the proportion of the results of the group’s UK and French asset management operations and the proportion of the results of Norwich Union Life Services that arise from providing fund management and other services to the life business have been included in the long-term business operating return on an EEV basis. On an IFRS basis, they are included in fund management and other operations.
Our other operations reported a loss of £80 million (2005: loss of £40 million) on an IFRS basis. This loss comprises £45 million of profits from RAC non-insurance operations (2005: £30 million profit), lower losses from NU Life Services of £50 million (2005: loss of £66 million), a loss of £29 million relating to the development of the Lifetime and SIPP platforms (2005: £14 million) and a loss of £46 million (2005: £10 million profit) from our other non-insurance operations, including our Dutch banking division.
Our operating profit from RAC non-insurance operations, which include BSM, HPI, Auto Windscreens and Solus, amounted to £45 million, reflecting the inclusion of results for the entire year (2005: £30 million post-acquisition). In July 2006, we completed the sale of the Lex brand for a profit of £3 million. In total, this transaction, and the previous disposals of the other non-core operations of the RAC group in 2006, generated sale proceeds of £358 million, and a profit on disposal of £69 million (2005: £5 million). The disposed businesses contributed £17 million to our operating profit in the year.
O therinform ation Aviva plc Annual Report and Accounts 2006 19
The tables below set out our financial and operational performance for the year ended 31 December 2006.
Operating profit before tax – IFRS basis 3,110 2,128 Adjusted for the following: Impairment of goodwill (94) (43) Amortisation and impairment of acquired value of in-force business (100) (73) Amortisation and impairment of other intangibles (70) (45) Financial Services Compensation Scheme and other levies 6 – Short-term fluctuations in return on investments backing general insurance and health business 149 517 Profit on the disposal of subsidiaries and associates 222 153 Integration costs and restructuring (246) (109)
Reconciliation of group operating profit to profit before tax – EEV basis £m £m
During the year, we completed the sale of our remaining RAC noncore businesses and our associate holding in a French online brokerage company generating disposal profits of £148 million. The sale of a minority stake in our Irish life business as part of the Ark life transaction contributed a lower profit on disposal on an EEV basis of £25 million compared to £86 million on an IFRS basis; the additional value of longterm in-force business is excluded from the IFRS balance sheet. Other small disposals produced a loss of £12 million.
The variance from the longer term investment return primarily reflects higher than assumed equity returns, particularly in the second half of the year. The FTSE All Share index rose by 13%, the CAC 40 by 18% and the AEX by 13% from end of 2005 levels. This was partially offset by lower market values of fixed income securities due to the rise of 50 basis points and 70 basis points in UK and euro zone bond yields, respectively in 2006. Long-term economic assumptions, which are set by reference to long-term bond yields, were revised upwards at 31 December 2006 and these higher assumptions have increased the expected value of future profits from in-force life contracts, increasing profits by £671 million.
The non-life short-term fluctuations amounted to a profit of £149 million (2005: £517 million profit) as equity markets outperformed our longer term investment return assumptions in the year. The effect of the non-life investment market movements, profit on disposal together with integration and restructuring costs are included in the IFRS profit before tax attributable to shareholders’ profits of £2,977 million (2005: £2,528 million).
Worldwide sales* £41,464m £35,894m Life and pensions new business contribution before required capital £892m £808m Life and pensions new business contribution after required capital £683m £612m Life and pensions margin before required capital 3.5% 3.6% Life and pensions margin after required capital 2.6% 2.8% General insurance business combined operating ratio 94% 95% Return on equity shareholders’ funds 13.1% 15.0% Earnings per share
Basic – EEV operating profit after tax basis 79.2p 74.5p Basic – IFRS operating profit after tax basis 86.9p 60.5p * Based on worldwide long-term savings new business sales, plus general insurance and health business net written premiums.
We achieved strong sales growth in 2006, with total worldwide sales increasing to £41,464 million (2005: £35,894 million).
Our European and International total long-term savings new business sales increased by 13% to £17,161 million (2005: £15,238 million), reflecting strong growth in a number of our main markets and from businesses acquired during the year in Ireland and the United States. Growth in Asia was 91% and the region now accounts for 6% of our total international sales. Life and pension new business sales were 13% higher at £14,706 million (2005: £13,061 million), while investment sales grew by 14% to £2,455 million (2005: £2,177 million), primarily reflecting increased sales through our Navigator platform in Australia and Singapore.
Our European and International net written premium increased to £4,762 million (2005: £4,184 million), benefiting primarily from strong sales growth in the Netherlands as a result of healthcare reforms that amalgamated public healthcare provision into the private sector. The majority of our other European and International business units have produced modest growth in net written premium as they continue to focus on strict underwriting disciplines.
Our new business contribution before the effect of required capital grew by 11% to £892 million (2005: £808 million), generating a group-wide new business margin of 3.5% (2005: 3.6%). Within the total, our UK margin was maintained at 2.9% (2005: 2.9%), with the combined margin of our European and International business units falling to 3.8% (2005: 4.1%). This reduction was caused primarily by a lower margin in Ireland, resulting from an adverse lapse and other experience variances leading to consequential changes in operating assumptions. Additionally, the margin in our Dutch business was adversely affected by lower bond yields at the start of the year being included in our EEV operating assumptions. Conversely, the continued focus on higher-margin capital-efficient unit-linked business led to a higher margin in France, our second-largest business unit.
The group COR benefited from better than expected weather in the UK, of £75 million (2005: neutral) below the longer term average. Additionally, the COR in our Dutch operations improved to 89% (2005: 93%), reflecting a strong premium rating environment and a favourable claims experience, including a low incidence of large claims. Across our other major general insurance businesses, the CORs were largely stable.
Our operating earnings per share after tax on an EEV basis increased to 79.2 pence (2005: 74.5 pence) and on an IFRS basis increased to 86.9 pence (2005: 60.5 pence). Both increases reflect the strength of our operational performance, the greater increase in earnings per share on the IFRS basis reflects the benefit of a lower effective tax rate on our operating profit.
Acquired value of in-force business and intangible assets 2,728 803 2,728 803 Additional value of in-force long-term business – – 6,794 6,454 Investment properties, properties and equipment 16,027 14,160 16,027 14,160 Investments in joint ventures
Liabilities Gross liability for insurance and investment contracts 232,588 209,911 232,588 209,911
Goodwill has increased by £636 million during the year primarily driven by the acquisitions of AmerUs and Ark Life. These acquisitions have also generated the majority of the £1,925 million increase in AVIF and intangibles.
Non- Long-term long-term Total Total business business Full year Full year operations operations 2006 2005 £m £m £m £m
We announced annualised cost savings of £250 million across our UK life and general insurance businesses by the end of 2007
We commenced a major new bancassurance partnership in India with Centurion Bank of Punjab
We increased our presence in China and are now licensed in six provinces, with a total of 15 city branches.
We commenced trading in Russia, having received our licence in March 2006
Continued expansion in India and China of our bancassurance and direct sales channels
Developing further our relationship with Development Bank of Singapore (DBS) in Singapore and Hong Kong
Any international insurer must be strong in its home market, and our decision to bring together the Norwich Union life and general insurance businesses, including RAC, at the beginning of 2006, has been a key step in meeting this requirement.
Our 17 million customers expect us to deal with them in a joined up way, and closer working will enable us to meet this challenge. One example is bringing together our IT functions into one unit. This has removed overlap and enabled us to move forward with a new infrastructure to meet the demands of our customers in the emerging “e” world.
We have already taken action to improve the efficiency of our UK business, following our announcement in September 2006 that we plan to deliver £250 million of annualised cost savings by the end of 2007. This programme will enable us to strengthen our competitive position and take advantage of customer self-service.
Within our general insurance business, we launched our Pay As You Drive™ proposition in October, partly in response to growing concerns about how, when and where people drive. Our aim is to bring down the cost of motoring and encourage safer driving, especially by young people at night time.
We believe Pay As You Drive™ will also encourage motorists to cut the number of miles they drive and help reduce carbon emissions. In fact, Norwich Union is playing a leading role helping to mitigate the effects of global warming. We are involved in a number of activities, from high profile (lobbying the Government to further invest in flood defences), to customer marketing (via our portfolio of ethical investments), to keeping our own house in order (giving our employees assistance in buying bicycles).
Our aim is to keep the promises we make to our customers and our shareholders, and to live up to our market leadership position in the UK.
This unique partnership, which brings together the UK’s largest insurer with the nation’s leading online marketplace, reflects our forward thinking strategy.
U For more examples of “Forward thinking” in our businesses visit www.aviva.com/forwardthinking
Split of UK PVNBP by product type 1 Individual pensions 2 Group pensions 3 Annuities 4 Bonds 5 Protection 6 Equity release
Split of UK PVNBP by distribution channel 1 Independent financial advisers 2 Bancassurance partnership with RBSG 3 Other partnerships and direct
Our ambition is to create value for our customers and protect what is important to them. We aim to be easy to do business with and to keep the promises we make to both our customers and shareholders.
O therinform ation Aviva plc Annual Report and Accounts 2006 27
Our people have continued to perform with dedication throughout this period of uncertainty and change. Our measure for the percentage of people who are broadly satisfied to be working at Norwich Union increased from 52% to 61%, whereas those who believe in our leadership increased from 77% to 82%, against a target of 75%.
During 2006, we launched 18 new products, including our innovative “simplified life insurance” product that is sold directly to consumers. Products such as this will improve consumer accessibility and address the widening protection gap. We introduced a Retail Price Index Guarantee on with-profit bonds, resulting in 93% yearon -year growth. We also expanded our fund offering, including the launch of new equity funds, and built on our established property funds, most recently through the introduction of a global property fund managed by Morley.
We launched our “make sense of it” website, responding to consumer demand for information that is simple to understand and helps with the basics of investing. The website was received positively, with over 200,000 hits in the first three days and we have since added information on pensions and annuities. Our new IFA fund centre has significantly enhanced the adviser experience through the provision of online quotes and fund performance charting tools.
Our new business contribution rose 22% to £327 million (2005: £269 million) largely driven by higher volumes, leading to a stable margin for the full year at 2.9% (2005: 2.9%) demonstrating the company’s focus on value and volume.
On a post cost of capital basis, our new business contribution was £263 million (2005: £217 million) with a margin of 2.4% (2005: 2.4%).
iNorwich Union launches Simplified Life Cover We have launched a new-style life insurance product that makes it faster and easier for customers and advisers to take out life policies. The new product, Simplified Life Cover, is available through Norwich Union’s website and call centres. It uses a streamlined, interactive system that can produce instant policy quotations and acceptance offers. It will also tailor policy premiums to reflect an individual’s circumstances. We are hopeful that this straightforward system will help to reduce the number of under-insured families in the UK.
U For more information on Norwich Union Life products visit www.norwichunion.com/life
Life EEV operating return was 26% higher at £744 million (2005: £589 million) reflecting higher levels of new business contribution and improved performance from our in force book. Total experience variances in the year were £140 million adverse (2005: £95 million adverse) driven by exceptional expenses and lower than expected persistency experience. Positive experience variances in areas such as credit and morbidity have continued, but at a lower level than in 2005.
Persistency experience has continued to be adverse at £66 million (2005: £78 million adverse) particularly in relation to bonds and the re-broking of regular premium pensions business following A-Day. This is after a £75 million release from specific A-Day provisions made in 2005, in line with expectations.
Business review continued iAviva launches six-steps website Aviva’s online financial education initiative, six-steps, was launched in November 2006. The website, at www.six-steps.org, is based around six simple steps that people can follow to help them take control of their finances and prepare for their retirement: 1. Take control 2. Know yourself 3. Save little and often 4. Invest for the future 5. Protect yourself, and 6. Get advice
U Find more examples of Forward thinking in our UK businesses at www.aviva.com/forwardthinking
Our bancassurance joint venture with RBSG has continued to perform well with growth in both sales and margin. The joint venture now accounts for more than 10% of our life and pension sales. Strong growth was supported by new product launches and a growth in sales advisers. There are now over 760 sales advisers and further investment in 2007 will increase adviser numbers to
We are confident that we will grow at least in line with anticipated market growth of 5%-10% in 2007. We will simplify our business model by reducing duplication, continuing to focus on reducing our number of systems. We will improve our processes, both to drive value and efficiency for our shareholders and to provide better service for our customers. We will thereby enhance our position and safeguard the interests of our shareholders and customers.
Norwich Union Insurance (NUI) is the leading general insurer in the UK, with a market share of 15%. Our principal goal is to deliver consistent earnings, and we are committed to “meet or beat” a combined operating ratio of 98% across the insurance cycle. Our Norwich Union and RAC brands are both strong and trusted, and we have an excellent reputation for value and service to customers and distributors.
We believe the development of service excellence is key to enhancing long-term customer value and, during the course of the year, we implemented a range of service and rating measures to protect profitability in challenging market conditions. By investing in the quality of our customer experience and improving the appeal and range of propositions we offer, we are increasing cross-selling opportunities and strengthening customer retention.
Split of UK net written premium by class of business (GI only)
We are also taking action to redress the impact of competitive pressures on our core personal insurance business, where the market’s response to the underlying rise in the cost of claims has been slow and inadequate. In the second half of the year, we applied significant rate increases to selected segments of our personal motor account, producing an average increase of 5% in the year (2005: 4%). We expect the inevitable adverse pressure on business volumes to be short-term, and we are already seeing a positive impact on profitability with the full year combined operating ratio of 104%, 1% lower than at the half year.
We have seen some small rate increases in the fleet market at the end of the year, although the intense competition in commercial lines has led to an overall reduction in rates of around 3% (2005: 1% decrease). Our disciplined approach to risk selection and underwriting has maintained excellent levels of profitability in these accounts.
NUI has had another excellent year, delivering record operating profits of £1,075 million (2005: £970 million) and a COR of 95%, despite a reduction in general insurance net written premiums to £5,583 million (2005: £5,832 million), as we continue to focus on our commitment to increase shareholder value by writing profitable business. The result includes a benefit of £75 million from better than expected weather (2005: neutral), together with savings on prior year claims that have arisen as a result of management action to control costs and improve processes, and our reserving approach. Of the £435 million of prior year claims reserve releases, of which £50 million relates to weather, approximately half reflect exceptional releases as a result of the management actions noted above.
The record profits have enabled us to invest substantially in brand presence and technology to secure future profitability. As a consequence of this investment, we have seen a rise in distribution costs in 2006, with our expense ratio increasing to 13.9% (2005: 10.9%). The expense ratio has also been impacted by a full year of expenses associated with RAC Rescue, whose model includes higher costs of acquiring and administering business. In September, we announced details of our UK cost and efficiency programme, which will deliver cost base savings and enhanced cost flexibility.
The integration of RAC is complete and made a contribution of £160 million to operating profit in the year of which £115 million is recognised as general insurance, with the remainder included in the non-insurance result. Specifically, we have delivered cost savings of £100 million and we remain on track to meet the target profit of £220 million in 2008. The remaining RAC non-core businesses held at the end of 2005 have been sold, generating sale proceeds of £358 million, and a profit on disposal of £69 million in 2006 (2005: £5 million).
Business review continued i RAC launches search for tomorrow’s engineers During 2006, we launched a £100,000 national initiative to find and train the motor engineers of the future. We are linking up with schools to provide vocational training that will give students a head-start in the automotive industry.
NU Healthcare is a leading UK health insurer providing private medical insurance (PMI) and income protection to over 800,000 customers. The PMI health result was break-even (2005: £4 million profit) reflecting increased strategic focus and investment in the healthcare business.
We have added to the existing group of nurses and advisers to create a team with a vast wealth of knowledge and experience in managing cancer cases.
As a result, this service is now available to all of Norwich Union’s customers who have been diagnosed with cancer. Every customer handled by the team has a nominated claims handler allowing us to develop a supportive and customer focused relationship.
Our primary fund management business in the UK is Morley Fund Management, which falls under the responsibility of Philip Scott. Therefore, Morley’s performance is reported within Philip Scott’s business unit review, International and Morley.
Our operating losses from these businesses amounted to £6 million (2005: £8 million profit) where increased sales through the company’s collectives investment business with RBSG resulted in a higher new business strain.
Continental Europe now contributes 41% of the group’s total sales and is a key source of growth and profits for Aviva. We continued to grow at a healthy pace in 2006, increasing our total long-term sales by 8% to £14 billion.
In the emerging markets of Central and Eastern Europe, we have made good progress. In Poland our long-term sales increased by 74% and profits by 19%. We are leveraging our multi-channel distribution skills acquired in the more mature markets of Western Europe to accelerate the development of strong long-term businesses in Hungary, the Czech Republic, Romania and Turkey.
Benefiting from our highly diversified geography and distribution network, we achieved growth of profits and sales in 2006 reflecting good operational performances across our long-term, fund management and general insurance businesses. Total operating profit was up to £1,634 million (2005: £1,558 million). Our general insurance and health operations across Europe have once again delivered a strong performance, achieving a general insurance only COR of 89% (2005: 92%), therefore beating the group target of 98%.
Although the markets of continental Europe are highly competitive, we believe that they offer excellent growth opportunities to players who have the right skills and the right geographic spread. We invest significant resources in research and development to stay ahead of our competition, and to understand our customers and our distribution partners better.
Access to our customers – distribution – is crucial to unlocking Europe’s growth potential. Our primary focus is to sell more to our existing 18 million customers; therefore, penetration rates, cross-selling and up-selling have become part of the day-to-day vocabulary of all our European staff. In Spain, for instance, working ever more closely with our banking partners, we have been able to more than double the proportion of the banks’ customers using our products and services over the past five years. Organic growth is central to our strategy and critical to our success, yet we are also keen to capture value-creating opportunities to increase our distribution reach.
Finally, we will continue to invest in Central and Eastern Europe, which after Asia, is one of the fastest growing economic areas in the world. These economies are expected to grow at double the rate of Western European economies. As income and private wealth increase in these countries, we know that consumers will invest a significant proportion of their growing disposable income in the kind of products and services that we provide. Our 2006 achievements in Poland and Hungary, to name just two countries, illustrate the kind of potential available in that region.
Our priority is to achieve strong, sustainable and profitable growth. We will continue to work hard to increase the penetration rate of our existing customer base, to increase our distribution reach through new partnerships and to grow our presence in the emerging markets of Central and Eastern Europe.
Aviva France is one of the top-ten long-term savings businesses in France with a market share of 4%. Our business focuses on higher-margin unit-linked products in which our market share is 6%. We offer a comprehensive range of life and savings products, mainly for private clients, with a strong focus on providing a lifetime service to customers and a long-term approach to savings and investments. Our distribution is multi-channel, including a direct sales force, brokers, AFER (the largest retirement savings association in France), the UFF network of financial advisers, a direct distribution channel, Aviva Assurances tied agents and our bancassurance partnership with Crédit du Nord.
In 2006, in line with our focus on unit-linked business and customers’ needs, we accelerated our focus on encouraging Fourgous≠
≠ The Fourgous amendment of 2005 enabled the tax-efficient transfer of existing 100% euro funds into more balanced euro and unit-linked portfolios.
1 France 2 Ireland 3 Italy 4 Netherlands 5 Poland 6 Spain 7 Other Europe
Although we exclude these transfers from our new business sales figures, they enable a greater proportion of future new business from existing customers to be invested in unit-linked funds.
We continue to encourage our diverse and strong distribution networks to share best practice and initiatives. Further efficiency gains have enabled us to maintain a firm control on expenses despite the increased level of work in the area of process improvement. The standardisation of sales and administration processes is regarded as one of our key strengths. To complement our networks, a key focus of 2006 has been the launch of our customer internet site in November, which supplements the pre-existing AFER site. This site enables customers to view their policies online, offers customers some online transaction capabilities, promotes our products and creates greater awareness of our businesses. As the site develops, customers will be able to perform a greater number of transactions online.
Our life EEV operating return rose to £402 million (2005: £321 million). The underlying profitability of in-force life business has been enhanced with the proportion of AFER in-force funds invested in unit-linked products having increased to 18% at the end of 2006 up from 11% at the end of 2005. This increase reflects the positive impact of Fourgous transfers and is supported by the success of our sales networks’ efforts in providing our market-leading “Le Bon Conseil” approach to advising existing customers. The operating return primarily reflects the increased contribution from new business sales, higher expected returns and experience variances partially offset by a reduced level of favourable operating assumption changes. The favourable experience variance of £71 million (2005: £32 million) includes mortality profits and the impact of the reduction in required capital following Fourgous transfers.
We have already seen the benefits of the partnership with AIB through the successful sales of the reopened property fund. During 2006, we have also successfully revised and relaunched the Horizon pension products. There have been further product developments aimed at the bancassurance channel and new rollover products designed to capture maturities from special savings incentive accounts (SSIAs) are in place.
Delta Lloyd Group is a top-five financial services group based in the Netherlands, with operations in Belgium and Germany. We sell a comprehensive range of life and pension products in both the group and individual markets through our principal distribution channels: our bancassurance joint venture with ABN AMRO Bank; directly to customers under our OHRA brand; and via independent financial advisers under our Delta Lloyd brand.
Our vision is to be the most trusted financial services provider by excelling in customer service, innovation, efficiency and financial strength through a combination of effective back-offices and strong financial disciplines.
Business review continued i Ireland: Hibernian publishes new report into pension crisis In April 2006, Hibernian published a report called “The Global Pensions Puzzle”, which examined the Irish pensions industry in an international context. It compared the situation in Ireland with conditions in France, the USA and the UK, and reviewed initiatives under way in countries such as New Zealand, Sweden, Chile and Australia.
The purpose of the report was to add to the debate around financial planning for retirement. The challenges that Ireland faces are not unique, nor are they as extensive as in some other developed economies. We believe that solutions from other countries such as those examined in the report deserve to be investigated further, as they could be adapted for use in many European countries.
The increased competition experienced in 2006 is expected to continue, with distribution capability important for commercial success. We are optimistic that we will see results from our new pension strategy, which focuses on selling pension contracts in the small- to medium-sized enterprise market, supported by our expertise in providing dedicated pensions and employee benefits advice. In addition, our distribution arrangements with ABN AMRO have been extended and we are developing “white-label” products using the OHRA platform. In Germany, our market presence is strengthened by the name change to Delta Lloyd Leben and new product introductions, with a focus on annual premium products that will help to improve performance in 2007. In Belgium, the collaboration between our life and banking operations will be increased. Internally, product development activity and back offices will be shared to an increased extent in a programme of change that will run until 2009.
On 8 February 2007, Delta Lloyd announced its acquisition of the Erasmus Group in the Netherlands which remains subject to regulatory approval. This transaction has a good strategic fit and is expected to add approximately 3% to our existing life insurance business volumes.
Our EEV operating return of £329 million (2005: £349 million) reflected lower contribution from new business partly offset by increased expected returns due to a higher start of year embedded value. The reduced contribution from new business of £56 million (2005: £90 million) reflected lower sales volumes and the impact of a 40 basis point decrease in the bond yield within the EEV assumptions at the end of 2005 which resulted in a lower margin of 2.4% (2005: 3.3%). Our life and pension sales were £2,346 million (2005: £2,739 million) affected by the challenging market conditions. Profits on the IFRS basis of £458 million (2005: £172 million) benefited from the rise in long-term interest rates during 2006 prompting a release from the provision for guarantees on unit-linked contracts, and from an increase in equity and property investment gains.
In Poland, we sell principally through our 3,000-strong direct sales force, complemented by our bancassurance partners Deutsche Bank and BZ WBK. We have been the largest pension provider in Poland since 1999, with a 27% market share, and have the second-largest life insurance business, with a 12% market share. In Lithuania, we are the third-largest life and pension provider.
Supported by strong market growth in the year, we have seen success from our single premium unit-linked products, while there has also been improvement in our regular premium business sold to both individuals and groups. Our pension business sells a unit-linked regular premium product in the compulsory private pension market.
We are well positioned to capture a significant share of market growth through our wide client base and multi-channel distribution network. We aim to extend our leading position in the Polish pension market to the long-term savings market by providing excellent service and returns to our customers. Recently we have implemented plans to increase further the size of our direct sales force through the recruitment of advisers focused on selling only pension business.
Our life EEV operating return increased to £162 million (2005: £132 million) due to the higher contribution from new business together with favourable experience and operating assumption changes for persistency and mortality. Our life and pension sales grew by 63% to £534 million (2005: £320 million) with both life and pensions business showing strong performances. New business contribution was £28 million (2005: £16 million), resulting in a margin of 5.2% (2005: 5.0%).
In January 2006, it was announced that there would be changes in the effective tax rates relating to insurance savings and investment policies on surrender or maturity. The detailed legislation remains under discussion by the Spanish Congress but has already introduced a new savings product, the Systematic Individual Savings Plan (PIAS), in 2007. PIAS savings products have valuable tax benefits if monies invested in the product are used to purchase an annuity after ten years.
Business review continued i Aviva Spain won 1st prize for their pension plan Plusfondo Renta Fija In Spain we won a top prize in the Expansión-Standard & Poor’s Pension Plan Awards. Our Plusfondo Renta Fija pension plan came first in the “eurozone fixed income over three years” category. The award measures the profitability of funds versus the risk involved, allowing customers to identify, with greater ease, the funds, pension plans and agencies that offer more stable profitability.
During 2006, our protection sales have increased, buoyed by the strong housing market, while sales of savings products were adversely affected by uncertainty surrounding the details of tax changes noted above. We have developed our PIAS savings products that we launched at the start of 2007, which take advantage of the more favourable tax regime. We continue to seek opportunities to expand our distribution reach in Spain while continuing to work with our existing bancassurance partners to improve penetration of the customer base.
Our EEV operating return of £221 million (2005: £214 million) reflected a higher contribution from new business. We achieved underlying sales growth, excluding one-off sales, of 4% to £2,059 million (2005: £2,013 million), benefiting from concentrating on higher-margin protection and pension products.
This focus has also seen an increase in our new business contribution to £184 million (2005: £175 million) and the new business margin to 8.9% (2005: 8.7%).
In Turkey, our main products are unit-linked pension plans supplemented by life, saving and protection policies, predominantly sold through our direct sales force. We continue to develop our direct sales force, exploiting pension opportunities as the market continues to grow rapidly, while exploring options to expand our distribution network.
Strong underlying life and pension sales growth of 60% (excluding 2005 sales in Portugal) was achieved in our other European operations. Growth was principally generated by an increase in sales through the broker channel in Hungary, which benefited from high levels of new business, ahead of tax regime changes on 1 September 2006. Despite these tax changes, sales continued to be strong in the final quarter of 2006. In Turkey, we achieved higher sales of regular premium pensions business, boosted by an increase in the number of sales advisers and productivity in the final quarter of 2006. The business also benefited from increased transfers from existing life policies ahead of an October 2006 regulatory deadline.
We generated a life EEV operating loss of £13 million (2005: £6 million loss, including £3 million profit from Portugal) through our other European operations. Total life and pension sales were £308 million (2005: £240 million, including £45 million of sales from our Portuguese business, which was sold in 2005).
O therinform ation Aviva plc Annual Report and Accounts 2006 39
IFRS profit IFRS Combined Net before operating operating written Underwriting tax profit ratio* premium result £m £m % £m £m
IFRS profit IFRS Combined Net before operating operating written Underwriting tax profit ratio* premium result £m £m % £m £m * General insurance business only.
Our French general insurance business sells predominantly personal, small commercial and health insurance and has a market share of 2%. We sell products primarily through an 875-strong agent network. Our agent network is particularly focused in provincial cities where its key strength is its proximity to, and understanding of, customers. Eurofil is the second-largest direct insurer in the French market and is fully integrated with our other general insurance operations.
We continue to focus on increasing profitability through improvements to the quality of our underwriting and processes, and through further successful development of our agent network. To achieve these goals we have recruited additional agents this year as part of our strategy to renew and grow our agent network. We are also seeking to increase cross-selling of life products through our agents, particularly AFER unit-linked products.
i Hibernian Direct launches partnership with Vivas Health Hibernian Direct has linked up with health insurance provider Vivas Health to provide private medical cover under the brand name Hibernian Health Insurance Plan. The plan, launched in November 2006 on a pilot basis for six months, offers customers hospital cover, maternity benefits, out-patient benefits, accident and emergency cover abroad and comprehensive cover for scans. The partnership enhances the range of products that we can offer our customers in Ireland.
U For more information on Hibernian’s healthcare products please visit www.hibernian.ie
Delta Lloyd is a top-five general and health insurance provider in the Netherlands selling a range of products including personal motor, household and small commercial policies as well as healthcare policies. Distribution is through intermediaries under the Delta Lloyd brand, directly under the OHRA brand and through our bancassurance joint venture with ABN AMRO Bank.
Developments in our general insurance business in 2006 have included the introduction of the “Xclusive” range of prestige personal insurance products through the intermediary channel, and white label insurance product sales through a pharmacy chain.
On 8 February 2007, Delta Lloyd announced its acquisition of the Erasmus Group in the Netherlands, which remains subject to regulatory approval. This transaction has a good strategic fit and it is expected to add 12-15% to our existing general insurance business volumes.
Profitability in general insurance has been strong, although we have witnessed some weakening of general insurance premium rates towards the end of 2006, a trend we expect will continue into 2007. However, with our focus on cost control through more efficient back-office processes and high quality customer service, we regard 2007 prospects as good.
We continue to focus on a multi distribution strategy with organic growth delivered through the enhanced flow of new offerings and creative solutions and the expansion of market segments where we operate.
We won in all general insurance categories and retained the best overall general insurer at the 2006 Irish Broker Association service excellence awards. We also won the most effective use of software at the Information Age Effective IT awards. Our motor, van and home insurance policy documents have won the crystal mark for plain English.
Operating profit was stable at £172 million (2005: £171 million) while the COR improved marginally to 77% (2005: 78%). Despite the Irish general insurance market remaining highly competitive, net written premiums increased to £519 million (2005: £499 million). Lower claims costs resulted in an improvement to our underwriting result to £121 million (2005: £116 million).
The market has remained profitable in 2006; however, with premium rates being reduced in key classes of business at present, we expect to see a decline in market profitability from 2007 onwards. There also remains continued uncertainty regarding the impact on the cost of settling claims on the establishment of the Personal Injuries Assessment Board. However, the opportunities provided by the Ark Life acquisition give us the platform from which to grow our business in this developing market.
Aviva Gestion d’Actifs (AGA) is widely recognised in the French market as a leading asset manager and we primarily focus on managing funds of the Aviva group. At the end of December 2006, 96% of our managed funds were ranked in the top half for returns over five years. Our strong performance continues to be recognised through a number of awards. In September 2006, Mieux Vivre Votre Argent magazine ranked AGA as the best fund manager over the last five years. Eric Duval de la Guierce, head of AGA, was ranked top in Citywire’s August league table of the 59 leading French fund managers for his performance over the last three years.
Our other European fund management businesses primarily consist of a small operation in Poland, which generated operating profits of £3 million (2005: £2 million).
The purchase of AmerUs in the US has transformed our business in that country, giving us greater access to the world’s largest savings market. AmerUs is a leader in the indexed market, ranking number one in sales of indexed life insurance and third in sales of indexed annuities. The combined Aviva USA business is now the fourth-largest long-term savings operation in the Aviva group.
During 2006 we completed a major new bancassurance agreement in India with Centurion Bank of Punjab, and are already seeing a strong performance from this partnership. Aviva India greatly strengthened its market presence, with nearly 200 branches across the country and over 30 bancassurance partnerships.
In February we acquired a 51% stake in Eagle Insurance, the third-largest insurer in Sri Lanka. Through Eagle, we have entered into bancassurance agreements with National Development Bank and Standard Chartered Bank.
Our business in China is now licensed in 15 cities across six provinces. We are on course to achieve our vision of 10% new business market share across ten cities by 2010. We are ranked fifth among foreign joint venture insurance companies in China.
Our confidence in our International long-term savings businesses is highlighted by our expectation that, combined with our European businesses, we shall achieve double-digit organic sales growth over the next five years, while growing new business contribution at least as quickly. We are also committed to meeting or beating the group COR target of 98%.
Customers in our key markets show an increasing appetite to save for the future. They also want a choice of how to do business with us. These market conditions present a sizeable opportunity, and we are fully committed to working with governments and business partners to satisfy our customers’ expectations.
We plan to grow our existing channels. This includes the successful integration of AmerUs into Aviva USA, acceleration of our bancassurance and direct sales success in India and China, deepening our relationship with DBS in Singapore and Hong Kong, and delivery of additional corporate partnerships in Canada.
During 2006, Morley, our largest fund management business, agreed to establish a single investment sales team with our UK long-term savings business, Norwich Union. This agreement will strengthen our presence in the retail and wholesale UK distribution channels. Additionally, Morley acquired ORN Capital, a hedge fund manager, accelerating the development of our alternative investment business. It is vital to the overall strength of the group that we have capacity to offer customers investment products that meet their individual needs.
* Excludes investment sales. Investment sales totalled £1,564 million (2005: £1,151 million) giving overall new business sales of £3,430 million (2005: £2,411 million).
Aviva has a broad range of operations throughout Asia with businesses based in Hong Kong, Singapore, India, Sri Lanka and China. The product ranges, distribution channels and strategies of each operation vary according to local market conditions.
Our business in Singapore remains the market leader in the developing IFA segment and in the employee benefits and healthcare segment, with our employee benefits business covering one-in-three working Singaporeans. Our strategy is to broaden and deepen business opportunities with DBS while developing the IFA and international financial solutions market.
We expect continued growth in 2007 in the more mature markets of Singapore and Hong Kong.
Aviva India is our joint venture with the Dabur Group in which we have a 26% shareholding, the maximum stake currently allowed by law. Aviva India is ranked seventh overall among private insurance companies and we are a leader in the bancassurance market, where we have over 30 (2005: 17) bancassurance agreements in place. The most significant new agreement in 2006 was announced in January and is with the Centurion Bank of Punjab. On 16 January 2007, we announced a further major bancassurance agreement with IndusInd Bank, one of India’s fastest-growing private sector banks with 1.4 million customers and 148 branches, thereby extending our leadership in the bancassurance market. The Indian long-term savings market has significant growth potential. We are continuing to increase our distribution relationships with banks, and have more than doubled our direct sales force to over 14,000 (2005: 6,700), with more than 6,000 in training.
In China, our joint venture, Aviva-COFCO, operates a multi-channel, multi-product strategy. We distribute individual products through our direct sales force, agencies and brokers and banks. We also sell group business both directly and through intermediaries. As our business grows in China, we seek to obtain “first mover” advantage in new cities. In 2006, Aviva-COFCO increased its presence to six provinces, with a total of 15 city branches. We are looking forward to the rapid development of this new market. As at November 2006, AvivaCOFCO was the fifth-largest foreign joint venture (out of a total of 25), based on first year premiums.
O therinform ation Aviva plc Annual Report and Accounts 2006 45
Overall, the life EEV operating return from our Asia businesses was £37 million (2005: £30 million) principally due to higher new business contribution which increased by 30% to £26 million (2005: £20 million) driven by our substantial life and pension sales growth of 70% to £685 million (2005: £396 million). Our new business margin was 3.8% (2005: 5.1%), reflecting stronger sales of lower margin limited period single premium offerings in Singapore.
Aviva Australia primarily focuses on individual protection products and provides wealth management services through the Navigator platform (included under the fund management section). We are ranked seventh in the individual protection market with a rapidly growing market share and we provide market-leading products and services. New business sales in the protection market grew by 13% during 2006. Our strategy is to grow through expanding and diversifying our independent adviser distribution and continuing to expand into new distribution channels through alliances and bancassurance partnerships.
In 2006, new distribution arrangements have been established with AON and AMP for the distribution of our protection products. We have also been placed on the approved product list for Bendigo Bank and ANZ advisers, which provide access to significant new distribution. Our protection product is highly regarded and it was ranked ahead of all competitors in terms of business quality by NMG Consulting. Our business superannuation product has been given the top rating by Chant West Financial Services; however, we have seen a shift from corporate pension sales towards Navigator retirement funds, which we record as investment sales, as a result of changes to superannuation legislation. This trend is expected to continue and is reflected in lower life and pension sales of £297 million (2005: £337 million).
1 India and Sri Lanka 2 Hong Kong 3 China 4 Singapore
Aviva’s presence in the United States market increased four-fold* with the completion of the acquisition of AmerUs on 15 November 2006. AmerUs ranks in the top three in the fixedindexed segment of the annuity markets and is number one in the indexed life segment, reflecting our strong customer focus and pioneering product development. We are currently integrating the operations of AmerUs with our long established operations based in Boston and generating economies of scale. We plan to grow the combined business by leveraging the knowledge, relationships, products and expertise of both constituent companies.
Business review continued i Australia: Navigator helps UK pensions move down under Navigator, our online fund administration system, has improved the process involved in UK pension transfers. Now, Australian residents with money in UK pension schemes can transfer their funds quicker and more easily.
U For more information on Navigator visit www.navigator.com.au * Measured in terms of pro forma PVNBP.
Rest of the World – General insurance and health premium and profit
O therinform ation Aviva plc Annual Report and Accounts 2006 47
Aviva Canada is the second-largest general insurer in Canada, with a 9% market share and is the leading insurer in Ontario, Canada’s largest general insurance market. Supported by 3,200 employees, in 40 locations and by more than 3,000 independent broker partners, we provide innovative home, motor and business insurance, and a healthcare claims service to over three million personal and commercial customers.
Our business in Canada continues to meet the needs of customers through innovative, market-leading products and services. Where required, the “Premiere Healthcare” claims service provides quality medical services for customers delivered through a network of preferred healthcare providers and this service is also an effective method of managing the cost of claims. We are also continuing the expansion of Autograph, Canada’s first pay-as-youdrive motor insurance product.
Our operating profit was stable at £148 million (2005: £147 million) and our COR was 98% (2005: 97%). Our results benefited by £11 million from lower than average weather-related claims. However, this benefit has been offset by lower premium rates on commercial lines and flat rates on personal lines, driven by legislative rate changes. Additionally, rising claims inflation has caused a deterioration in the claims ratio. Although the number of policies written increased in 2006, small decreases in premium rates and high retention levels, which have resulted from customers’ lower propensity to switch insurer, have led to net written premiums remaining stable on a local currency basis at £1,389 million (2005: £1,324 million).
We expect 2007 to be another competitive year and we expect that rates will fall slightly. Retention levels are high in the market given stable insurance rates and this is leading to consolidation in the broker channel driven by insurers seeking to buy distribution. During 2006, we have invested in two market-leading group brokers in Quebec, consolidating our position in this key market. The focus for 2007 is to increase our long-term value by broadening our distribution with innovative products, maintaining underwriting discipline and writing only profitable business.
Our fund management businesses are a key element of the group’s strength and balance. They manage the assets of our internal funds and provide fund management services to financial services companies, external pension funds, public sector organisations and specialist distributors of retail financial products. It is important for our customers that we are able to offer funds that are directly invested for the customer in addition to more traditional insurance products, and that we are able to offer a diverse range of funds that meet our customers’ individual preferences.
Morley is one of the largest UK-based active fund managers, with total funds under management of £166 billion (2005: £154 billion) and offices in London, Melbourne, Dublin, Luxembourg, Warsaw, Boston, Milan and Madrid.
We seek to compete against the best in our industry, by offering high quality products with repeatable out performance in our core areas of fixed income, pan-European equities, property and tactical asset allocation. We also continue to provide and develop a small number of specialist asset classes in areas such as sustainable and responsible investment (SRI) and alternatives.
We also set up new specialist funds to satisfy increasing client demand for absolute return products: the Convertible Arbitrage Hedge Fund, the Absolute Bond Fund and the Absolute Tactical Asset Allocation Fund. Together with Barclays Capital, we launched the Global Balanced and Global Cautious funds, which use derivatives to deliver higher income than could normally be expected from a standard investment portfolio. Our innovative management of these products was recognised by Institutional Investor awarding our fund managers the “equity derivatives end user of the year’”award, and we have seen strong early sales flows.
To meet high demand for new property-related investments, we launched new specialist funds, including the European institutional fund Encore+ and a global real estate investment trust product in conjunction with property company CB Richard Ellis Global Real Estate Securities.
The growth of our property funds under management continues apace with strong fund inflows. Our leading property team continues to be recognised by the industry, winning property fund manager of the year from both Property Week and Pensions Management.
People are our core asset and the competition for talent in fund management is particularly intense; hence, we are pleased to have been successful in attracting a number of high quality managers as part of a continuous programme of development and growth. We have been particularly successful in recruiting into our UK equity team during the year.
Corporate responsibility is integral to the way Morley runs its business. Through SRI and our corporate governance activity, we continue to build on Morley’s reputation as a responsible investor. Our SRI team continues to be highly regarded in the market and was the only UK-based team to win a UK equities mandate from France’s state pensions reserve fund. It was also recognised as “SRI Provider of the Year” by Global Pensions 2006.
The Morley group as a whole achieved strong profit growth in 2006 as operating profit increased to £79 million (2005: £52 million), including a £3 million contribution (2005: £3 million) from our pooled pension business which is reported in the UK long-term savings segment. Our fund management operating profit grew significantly to £76 million (2005: £49 million), reflecting increased investment management fee revenue and higher performance fees, which contributed £14 million (2005: £10 million) to profit and were mainly recognised in the second half of the year. £62 million of the profit was in respect of the UK (2005: £36 million) while overseas businesses, including Hibernian Investment Managers, accounted for £14 million (2005: £13 million). Our fee income benefited from new business mandates and strongly performing investment markets that, coupled with our management of our expense base, delivered a further improvement in our cost/income ratio to 72% (2005: 77%).
In Australia, Navigator offers full-service and low-cost platforms that give customers access to wealth-creation and post-retirement products and we are ranked seventh in this platform market.
During 2006, we completed a strategic investment in the financial advisory group Infocus Wealth Management as part of our strategy of acquiring strategic stakes in high potential distribution groups. Professional Investment Holdings and Financial Technology Services, in which we purchased stakes in 2005, are performing well.
In Singapore, Navigator is a fund administration platform that offers customers cost effective access to a range of mutual funds from different fund managers through one product wrapper. The business continued to grow strongly during 2006 with significantly higher sales of £261 million (2004: £90 million), reflecting strong distribution relationships with key brokers, an increased fund choice and an ongoing buoyant economic environment.
Our businesses reported operating profits of £12 million (2005: £7 million) reflecting strong product offerings and the benefit of buoyant investment markets.
Our sustainable and responsible investment (SRI) team continues to be highly regarded in the market and was the only UK-based team to be awarded a UK equities mandate by France’s state pension reserve fund. We were recognised as SRI provider of the year by Global Pensions 2006, and we retained our top ranking for our understanding of SRI and extra-financial issues in the Thomson Extel Survey for the fourth successive year.
We are delighted that our hard work, forward thinking approach to asset management and focus on SRI issues continues to be recognised by our peers, clients and industry associates.
To achieve leading financial management and control, we are required to have an increasingly forward-looking view. We are actively involved in the many debates that will affect reporting developments in our industry such as IFRS phase II on insurance contracts and the EU’s Solvency II directive. These are some time from being implemented, yet the debates that will influence their final positions are happening now.
During 2006, we have continued to develop a capital management framework that utilises individual capital assessment (ICA) principles. Using an ICA model provides a close link between capital and risk management. It is important that we increasingly match the amount of capital that we hold to the relative risks that we face. Our ICA model clearly demonstrates that our diversified business, in terms of geography, products and distribution dramatically reduces the amount of economic capital required to protect against the risk of insolvency. Such risk-based capital models are increasingly being used to inform our decision-making processes and will, in time, allow us to improve capital efficiency.
Our return on equity shareholders' funds of 13.1% (2005: 15.0%), exceeds our stated target return of 12.5%, notwithstanding our opening shareholders’ funds being £3.2 billion higher than a year earlier.
Reporting changes 2006 has been a year of considerable change and development in the financial reporting arena. In March, we published our first financial statements under IFRS, requiring changes to accounting systems and extra disclosures. Additionally, we are now seeing the introduction of enhanced requirements for the narrative elements of our reporting. These changes are challenging our finance teams to understand, produce and explain a much greater volume of information. I was therefore delighted that our hard work in these areas was recognised at the prestigious 2006 IR Magazine UK awards where we won the prize for “best disclosure by a FTSE-100 company”, an excellent achievement.
Solvency II represents a great opportunity for us to establish a fairer deal while promoting Europe as a truly single market. The current system of insurance supervision and regulation is a blunt instrument that has not succeeded in creating a level playing field for insurers, is capital inefficient and can ultimately lead to higher prices for consumers. The industry already suffers from a myriad of different measures against which it is assessed. It will be important to align regulatory and accounting measures more closely with the underlying economics of the business. This is a unique opportunity to shape 21st century supervision to the benefit of all and we are fully committed to the project.
– Capability – Attracting and retaining talented professionals who add value to our business
The four strands of the strategy set out above are fundamental to us achieving our longer term aims for our finance community. They will allow us to provide an operating platform that has a robust risk and control environment, meets FSA requirements and meets the governance expectations of the Aviva board.
We maintain an efficient capital structure using a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. This structure is consistent with our risk profile and the regulatory and market requirements of our business. We believe that the European Embedded Value (EEV) provides a more meaningful view of our life operations than IFRS; accordingly, our capital structure is analysed on an EEV basis.
– Maintain financial strength to support new business growth while still satisfying the requirements of policyholders, regulators and rating agencies
The table below shows how our capital is deployed by segment and how that capital is funded: £m £m
Long-term savings 19,663 15,598 General insurance and health 5,344 5,581 Other business 1,425 1,876
In 2006, the total capital employed increased by £3.4 billion reflecting growth in our long-term savings operations; these increased by £4.0 billion driven by the acquisitions of AmerUs, operational results and movements in equity markets in the year.
The corporate net liabilities represent the element of the pension scheme deficit held centrally.
Financial leverage, the ratio of the group’s external senior and subordinated debt to EEV capital and reserves was 20% (2005: 22%). Fixed charge cover, which measures the extent to which external interest costs, including subordinated debt interest and preference dividends, are covered by EEV operating profit was 10.3 times (2005: 9.6 times).
The ratings of the group’s main operating subsidiaries are AA/AA- (very strong) with a stable outlook from Standard & Poor’s and Aa3 (excellent) with a stable outlook from Moody’s. These ratings reflect our strong liquidity, competitive position, capital base, increasing underlying earnings and positive strategic management.
We are required to report our results on an IFRS basis; however, the directors consider that EEV principles provide a more relevant and meaningful view of our life operations and so we analyse and measure the net asset value and total capital employed for the group on this basis.
Accordingly, our net asset value per ordinary share, based on equity shareholders’ funds was higher at 683 pence per share (2005: 622 pence per share).
Insurance Groups Directive (IGD) excess solvency £3.6bn £3.6bn Cover (times) 1.8 times 1.8 times
As at 31 December 2006, we had an estimated excess regulatory capital of £3.6 billion (2005: £3.6 billion), as measured under the European Insurance Groups Directive. This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in our UK life funds.
In broad terms, for our long-term business, the minimum solvency requirements are set at 4% and 1% for non-linked and unit-linked reserves respectively. For our general insurance portfolio of business, the minimum solvency requirement is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our other major nonEuropean businesses (USA, Australia and Canada), a risk charge on assets and liabilities approach is used.
Our excess solvency of £3.6 billion reflects operational performance generating solvency capital during the year, offset by the acquisition of AmerUs, which reduced the solvency surplus by £0.7 billion, and the funding of the pension deficit. From 31 December 2006, we have been required to have positive solvency on an IGD basis. Our risk management processes ensure adequate review of this measure at all times.
The realistic inherited estate represents the available capital of our with-profit funds. It is comprised of the assets of the long-term with-profit funds less the realistic liabilities of non-profit policies, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policy holders in the future in respect of smoothing costs, guarantees and promises.
Realistic balance sheet information is shown below for the three main UK with-profit funds: – CGNU Life
The realistic liabilities have been included in the gross insurance liabilities and the gross liability for investment contracts on our IFRS balance sheet at 31 December 2006.
† Realistic liabilities make allowance for guarantees, options and promises on a market consistent stochastic basis. The value of this provision included in realistic liabilities is £0.5 billion, £0.7 billion and £3.0 billion for CGNU Life, CULAC and NUL&P respectively (31 December 2005: £0.7 billion, £0.9 billion and £3.4 billion respectively).
≠ The risk capital margin is 4.2 times covered by the estimated realistic inherited estate (31 December 2005: 2.7 times).
O therinform ation Aviva plc Annual Report and Accounts 2006 55
The aggregate investment mix of assets in the three main with-profit funds at 31 December 2006 was: 31 December 31 December
The equity backing ratios, including property, supporting with-profit asset shares are 74% in CGNU Life, 74% in CULAC and 65% in NUL&P. With-profit business is mainly written through CGNU Life.
– Agreed her terms of reference for any reattribution with Aviva, in consultation with the FSA.
At this stage, no decision has been taken to proceed with the reattribution, which will only take place if there is agreement on a fair outcome for policyholders and shareholders. This will include agreement by us and the independent policyholder advocate on any incentive payments to eligible with-profit policyholders.
We use a number of measures of risk-based capital to assess the capital requirements for our general insurance businesses. Financial modelling techniques enhance our practice of active capital management, verifying that sufficient capital is available to protect against unforeseen events and adverse scenarios, and to manage risk. Our aim continues to be an optimal use of capital.
Our main UK regulated general insurance subsidiaries are Aviva International Insurance Group (AII) and Norwich Union Insurance (NUI). The combined businesses of AII and NUI have strong solvency positions. The table below sets out the regulatory capital position of the general insurance groups at 31 December 2006: NUI and AII NUI and AII group group
In aggregate, the estimated excess solvency surplus, representing the capital resources assets over the capital resources requirement, was £4.0 billion (31 December 2005 restated: £3.5 billion) after covering a minimum capital base of £4.5 billion (31 December 2005 restated: £4.0 billion).
As part of our overall corporate governance framework described on pages 77 to 81 we have established a risk and financial management structure whose primary objective is to protect the group from events that hinder the achievement of our objectives, our financial performance, or cause us to fail to exploit opportunities.
We have established a number of policies that deal with the management of both financial and non-financial risks. These policies set out risk appetite, risk management and
Business review continued control and business conduct standards for the group’s worldwide operations. They enable a broadly consistent approach to the management of risk by business units.
For each policy, a member of senior management is responsible for overseeing compliance with that policy throughout the group.
Additionally, we operate a number of oversight committees, to monitor aggregate risk data, take risk management decisions, and to enforce the implementation of the policies. Our finance and risk management committee structure is set out below.
The events that are tested may not occur at the same time; therefore we allow for the degree of correlation between them that we might expect. We also allow for diversification benefits (ie when two very different risks have offsetting impacts if they happen at the same time) when aggregating risks, or when aggregating business unit results. This means that the sum of the risks is less than the total of all the individual risks.
The ICA works to a 99.5% confidence level of solvency over one year (equivalent to events occurring in one out of 200 years), in line with UK Financial Services Authority (FSA) regulatory requirements.
Our ICA uses a mixture of scenario-based testing and risk-based capital models. We are continuing to develop our risk-based capital modelling capability for all of our businesses as part of our longer term program to introduce more complex risk modelling techniques. These risk-based capital techniques will provide a more detailed assessment of the capital needs of the business over a range of probabilities of insolvency and different time horizons. We intend to operate our business increasingly by reference to economic and risk-based capital (RBC) requirements.
We also use financial condition reports (FCRs). FCRs cover the medium-term financial outlook of the business, including forecasts of the overall financial position and key performance indicators under a variety of economic and operating scenarios, allowing for new business sales, to inform our capital and risk management decisions.
This process enables us to assess the overall risk exposure of the group, to develop a group-wide risk map identifying concentrations of risk and to define the risks that we are prepared to accept. This risk map is continually monitored and is refreshed quarterly.
Our ICA models inform us about the relative impact on economic capital from the risks we face, enabling us to formulate mitigating strategies. The types of risks in our business and the way in which we manage them are discussed in detail below.
We are exposed to considerable potential adverse financial impact from changes in the values of our investments, caused by changes to interest rates, property prices, and foreign exchange rates. Our business has market risk from fluctuations in both the values of assets held and the value of liabilities. At a group level, we have market risk from owning a portfolio of international businesses whose values can change, and from assets that support the liabilities of our staff pension scheme.
For example, the GIC identifies the levels of market movement at which mitigating actions should be taken. Actions could include buying downside protection against movements in equity prices or interest rates. The GIC also considers aggregation of market risk, including indirect market risk exposure from our staff pension schemes, and formulates risk appetite decisions for the amounts invested in different types of asset.
Our market risk policy sets out the minimum principles that business units are expected to follow in managing the assets backing the technical insurance liabilities. We have set standards for the way businesses should match their liabilities with appropriate assets, and have a clear decision-making and monitoring process to be followed when liabilities cannot be matched or a degree of mismatching is desired. We regularly monitor how business units are performing asset liability management (ALM) at both the group investment committee and group asset liability management committee. ALM issues are considered as part of our business risk reporting, and in determining ICA and RBC capital requirements.
We monitor concentrations of equity risk, for example from material shareholdings in our strategic business partners, or from equities held in our staff pension schemes. We formulate our equity risk management strategy taking into account the full range of our equity holdings.
Business review continued * Effect of decrease in equity prices includes the effect of a 10% decrease in property prices.
Our policy on life insurance risk sets out the practice standards we expect our business units to follow in underwriting such risks, and our life insurance risk committee regularly monitors its application, and develops detailed guidance on managing the major areas of risk, and sponsors the sharing of best practice between businesses.
We have a significant exposure to annuity business and our most significant life insurance risk is associated with longevity. Longevity statistics are monitored in detail, compared with emerging industry trends, and the results are used to inform both the reserving and pricing of annuities. Inevitably, there remains uncertainty about the development of future longevity that cannot be removed. Should our annuitant mortality assumptions worsen by 5% then shareholders’ equity would decrease by £300 million pre-tax on an IFRS basis and decrease embedded value by £185 million on an EEV basis, net of tax.
Shareholders equity by currency 1 Sterling 2 Euro 3 US dollar 4 Other
Credit risk exposures 1 AAA 2 AA 3 A 4 BBB 5 Speculative grade and not rated**
Persistency risk is managed at a business unit level through frequent monitoring of current experience, benchmarked against local market information. Actual experience against the expected level of lapses is also assessed within the analysis of embedded value operating profit. Where possible, the financial impact of lapses is reduced through appropriate product design. The group life insurance risk committee has developed guidelines on persistency management, sharing best practice on the setting of lapse assumptions, product design, experience monitoring, and management action.
Expenses are managed at a business unit level, as part of general business management.
Our general insurance businesses are exposed to a typical range of general insurance risks from the business that they underwrite. Such risks include: – Fluctuation in the timing, frequency and severity of claims and claim settlements compared to that expected when the business was written
Our group general insurance risk committee (GIRC) oversees the risk management framework, within a clearly communicated underwriting strategy. We have, as a group, made a clear statement on the target for the combined operating ratio (COR). To achieve this goal, we operate technical management committees focusing on each of our key general insurance risks in detail for example, underwriting, claims management, and reinsurance.
Another material risk is the impact of worsening claims ratios. This risk is actively managed through business unit focus on underwriting discipline, control of claims management, and finding innovative solutions to the way we measure and price the risk we underwrite. For example, our UK business has developed digital flood mapping to understand better the risk to household insurance from flood damage, and has developed “telematics”, our Pay As You Drive™ technology to provide a closer link between risk and pricing.
We are also exposed to operational risk arising from inadequately controlled internal processes or systems, human error and from external events. This includes all risks that we are exposed to, other than the financial risks described above and strategic and group risks. Operational risks include, for example, information technology, information security, human resources, project management, outsourcing, tax, legal, fraud and compliance.
Where applicable, the financial statements have also been prepared in accordance with the Statement of Recommended Practice (SORP) on accounting for insurance business issued by the Association of British Insurers (ABI) in December 2005, as amended in December 2006.
In contrast, on an IFRS basis, the value of a sale does not take into account future cash flows. These subsequent cash flows are recorded in the year in which they occur. The recorded value of a sale will reflect the premium received to date, the cost of setting up an appropriate reserve, costs incurred in acquiring that business and an allowance to recognise some of these acquisition costs should be deferred and earned in line with the premium. Therefore, the value associated with writing the same business will be recorded differently in the year of sale on EEV and IFRS bases. However, the total profit recognised over the full lifetime of an insurance policy is the same as under the IFRS basis of reporting. We believe that the EEV basis gives a fairer indication of the profitability of business on inception.
Additionally, shareholders’ funds on an EEV 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 aligned to the EEV basis. These financial statements include supplementary information on EEV reporting in the “Alternative method of reporting long-term business” section.
The table below sets out those items that we consider particularly susceptible to changes in estimates and assumptions, and the relevant accounting policy. Full details of the accounting policies are set out on pages 104 to 113.
We seek to take an active role in the development of new accounting standards, via industry forums and working parties, and reviewing and providing comment on proposals from the International Accounting Standards Board (IASB).
Around the world Aviva is committed to attracting and retaining the best talent available. We aim to engage our people in their work, achieve our ambitions and provide a great customer experience. The key to our success is great leaders, making the most of all our talents and exploiting our international opportunities. Aviva has to be a company people want to work with and our people strategy is focused on achieving that.
We are aware of our responsibilities and are committed to behaving in a socially responsible way. How we do business helps us to achieve our ambition of being the world’s most trusted savings, investments and insurance provider.
Keeping Aviva fit for the future remains vital and not all the answers are easy ones. In 2006, we announced plans to restructure our UK businesses to improve both efficiency and the service we provide to our customers, with the loss of 4,000 jobs. We will do all we can to minimise the impact on individuals through management of turnover, redeployment and voluntary departure. We will help those who leave the business to do so with dignity and support.
Our rapid progress as a forward thinking employer has been recognised through several awards, such as inclusion in The Times “top 50 places where women want to work,” (Aviva being the only company to feature in all categories assessed) and the city category award from Opportunity Now.
We have begun 2007 by welcoming, as Aviva employees, 1,500 people in India who had been serving our customers through third-party employers. That process will continue this year.
Responsibility Our ambition is simple: we want to be the world’s most trusted savings, investment and insurance provider. This means that we must always work to the highest standards of business conduct. This sits at the heart of our approach to corporate social responsibility (CSR).
– Our customers, who rightly expect us to treat them fairly and to be open and honest in the products and services we offer them
– The communities in which we operate, and the suppliers and organisations with which we work, who want us to be a responsible employer and partner, thinking about the way we do business and acting responsibly to the benefit of all.
We report annually in accordance with the FORGE management and reporting guidelines, and respect the disclosure guidelines issued by the Association of British Insurers.
We held an annual CSR review group meeting, bringing together CSR representatives from our business units, partner nongovernmental organisations and external auditors. The review group looks at performance, developments and best practice; it exchanges ideas and initiatives and sets the direction for the year ahead. A CSR steering group meets three times a year to review progress.
The committee comprises Lord Sharman, group chief executive Richard Harvey and non-executive directors Carole Piwnica, Guillermo de la Dehesa and is chaired by Aviva’s senior independent director, Wim Dik. The CSR committee met three times in 2006 to provide guidance and direction for the group’s CSR programme and monitor its progress.
To mitigate CSR risks, we have an established system of risk management embedded into our business planning and performance monitoring processes. Further details of this process are contained in the internal controls section of the corporate governance report.
Given our ambition, we put our customers at the heart of everything we do. We are committed to: – Having better insight on the events that shape our customers financial needs and designing products and service to help them meet those needs
– Where appropriate, working with our customers’ financial advisers to serve our customer’s interests.
In 2006, the Board approved a group customer policy that embeds these commitments into the way we work in our businesses around the world.
This policy means that leaders in our businesses must demonstrate an uncompromising standard of commitment to customers, with performance against the policy measured as part of the way we look at business performance.
– a panel with members from both the industry and outside to oversee the scheme, advise the ABI and report on progress.
In helping to champion consumer issues, Norwich Union is collecting data from telematics black boxes on how often, when and where motorists drive. This enables both transparent insurance premiums and appropriate safety messages to different customers.
In addition, Norwich Union has numerous product innovations for example, discounted insurance for bio-ethanol fuelled Ford cars and a simplified life insurance product.
Aviva India has implemented various initiatives to help control mis-selling, from enforcing guidelines for policy sales, taking action against agents who do not comply and carrying out “mystery shopping” activities to monitor how policies are sold to carrying out independent customer satisfaction studies. Similarly, to avoid agent mis-selling in Aviva-COFCO China, we have training programmes in place that provide strict certification of agents across China.
During the year, Morley’s sustainable and responsible investment (SRI) team reached the £1 billion mark in its SRI funds under management. The SRI team, has seen continued growth from both retail and institutional channels since joining Morley in 2001.
We are committed to a programme of management, continuous improvement and reporting of our direct and indirect environmental impacts.
We are also looking at ways in which to help our customers reduce their own CO2 emissions through the provision of innovative products such as “Pay As You Drive™” and by offering reduced premium insurance for drivers of hybrid and flexi-fuel Ford cars.
Community investment 1 Cash and gifts in kind 2 Staff time 3 Management time
O therinform ation Aviva plc Annual Report and Accounts 2006 67
We are committed to working in partnership with the communities in which we operate. In 2006, we invested £6.3 million in community initiatives worldwide. Our investment includes 34,000 hours of staff volunteering.
Our forward thinking approach is reflected in our support for numerous community initiatives around the group.
In September 2006, Aviva became one of the founding partners of Oxfam’s 365 Alliance. This unique alliance enables corporate donors to fund Oxfam’s initial response operations that will enable it to immediately deal with disasters whenever and wherever they occur around the world. This includes a global rapid response team of aid workers and the UK’s biggest warehouse with a stockpile of emergency supplies.
We supported two Breakthrough Breast Cancer walks in the UK to help raise money and awareness for this very worthy cause. Aviva Canada supported a similar event by hosting “pit stops” in seven Canadian cities during The Weekend to End Breast Cancer.
i Leading the way in micro-finance In India, we continue to build on our partnerships with leading development finance institutions. These institutions excel in the provision of microfinancial services to the underprivileged section of Indian society. To date we have covered over 650,000 lives in the social sector.
U For more information on our CSR programmes visit www.aviva.com/csr i Sponsorship of breast cancer events – UK and Canada In line with the spirit of our “Forward thinking” campaign, we supported two major events in 2006 with the shared vision of a future free from the fear of breast cancer.
In seven cities across Canada last summer, we were national sponsors of “The Weekend to End Breast Cancer”, which saw thousands of people take part in fundraising walks. We sponsored a “pit stop” in each city – designated places along the 60km course where walkers could rest briefly during their trek. The stops were staffed by Aviva volunteers, friends and family, and £27 million was raised in total by the event.
Aviva’s strategy and focus is changing. We know that fundamental to achieving our ambition to become the world’s most trusted savings, investment and insurance provider is keeping our promises to customers and employees. We need to become a truly customer and employee centric organisation. As a result, in 2006, we have developed a new people strategy that looks to the future, towards positioning us as a great brand for our customers and employees, in both our mature and developing markets. Our people strategy comprises five aims: – To create a “leaderful” organisation, recognising the right of each employee to be led by great leaders who excite their teams to exceptional performance in serving customers
– To move beyond succession planning to talent management, to maximise developmental and business rewards for the company and its people
– To build Aviva as a strong employment brand, clearly communicating what we stand for, so that we can draw talent into the organisation and deliver a great employee experience across the employment life cycle.
In each of our 32 business units around the world, this people strategy, along with our values and our human resources policies, drives and governs our interactions with our employees.
Our human resources policies govern our relationships with our people. The policies cover management development and training, reward, diversity, recruitment and health and safety. View these at www.aviva.com/csr.
Additionally, we are making progress against a global financial services benchmark
Being progressive is having a vision of the future, encouraging innovation and improvement, and championing continuous learning. It is about leading the industry by listening and responding to customers and keeping ahead of the competition.
Integrity is behaving in a way consistent with professional and ethical standards. It is being open, honest and keeping commitments, taking personal responsibility for what we say and do. It is about earning trust and respect through honesty and fairness.
We want our employees, the external recruitment market and our shareholders to recognise us as an organisation that develops exceptional leaders. At Aviva, we passionately believe that all our people have talent. We aim to create an environment where our people can give their best, feel valued and be able to develop competitive skills for the future. While adopting this inclusive view of talent, we need to become more rigorous in differentiation, providing our people with development paths that are tailored to their particular needs. The cornerstone of this approach will be the development and implementation of a common framework across the group for describing talent in terms of past performance and the predictive indicators of potential. The focus for 2007 will be the implementation of the infrastructure, systems and capabilities to enable this.
The Aviva leadership academy (ALA) underpins our talent development strategy and delivers a range of highly sought after, world-class programmes in conjunction with renowned international business schools.
To emphasise the importance of great leadership, each of our business units is required to measure leadership performance. This performance, along with measurements of engagement and customer satisfaction, is a key element of determining senior manager bonuses across the group.
To reflect our customer base, we continue our focus on diversity and on making our workforce increasingly international. In 2006, our global diversity steering group oversaw the implementation of a “respect” campaign promoting diversity best practice. The group also made a decision to sponsor networks for women and for lesbian, gay and bi-sexual employees. Plans are in place for 2007 to develop more networks, particularly to promote multi-cultural understanding, and to introduce targets for the number of international assignments in place around the business.
We are seeking to minimise the number of compulsory redundancies from this restructuring through voluntary turnover and redeployment. In addition, we are supporting those who may be facing redundancy by offering consultancy, out placement, financial planning services and job search assistance.
In 2007, we will be undertaking specific projects towards the goals articulated in our people strategy, including embedding a methodology for accounting for our human capital in the group’s performance management system and in its external reporting.
Chairman of the board and nomination committees and a member of the corporate social responsibility committee.
Chairman of the risk and regulatory committee and a member of the audit and remuneration committees.
Richard Karl Goeltz (64) Independent non-executive director Appointed to the board in May 2004. Currently a non-executive director of the Warnaco Group Inc (clothing), Federal Home Loan Mortgage Corporation (Freddie Mac) (financial services), New Germany Fund (investment trust) and a director of The London School of Economics and Political Science. A former chief financial officer of American Express Company (financial services), NatWest Group plc (banking) and The Seagram Company Ltd (drinks) and a former member of the Accounting Standards Board (UK).
Guillermo de la Dehesa Wim Dik Mary Francis Russell WallsCarole PiwnicaRichard Karl Goeltz
The directors submit their report and accounts for Aviva plc, together with the consolidated accounts of the Aviva Group of companies, for the year ended 31 December 2006. Pursuant to amendments made to the Companies Act 1985 in 2005 companies are required to produce a business review as part of their directors’ report in respect of financial years beginning on or after 1 April 2005. The business review is contained on pages 12 to 69. Certain matters that are required to be disclosed within the directors’ report have been included within the Business Review and accordingly, the review of the Group’s operations, current position and future prospects together with a description of the principal activities of the Group can be found within the business review. Details of material acquisitions and disposals made by the Group during the year are contained in note 3 to the accounts.
Results The Group results for the year are shown in the Consolidated income statement on page 114.
Share capital At the Company’s Annual General Meeting, held on 10 May 2006, shareholders approved an increase in the Company’s authorised share capital from £1.45 billion and a700 million to £1.95 billion and a700 million by the creation of 500 million preference shares of £1 each.
The biographical details of the persons currently serving as directors appear on pages 72 to 73.
O therinform ation Aviva plc Annual Report and Accounts 2006 75
On 20 January 2007 the Companies Act 1985 provisions in respect of substantial shareholdings were repealed and the Disclosure and Transparency Rules of the Financial Services Authority came into force. At 28 February 2007, the Company had received notifications that the holdings exceeding the 3% notification threshold were those of Barclays Plc which held 153,862,359 voting rights (representing 5.99% of the total voting rights attaching to the issued ordinary share capital of the Company), Legal & General Group Plc which held 93,312,175 voting rights (3.65%) and Axa S.A. and its Group companies which held a total of 262,220,441 voting rights (10.22%) of which 29,277,260 (1.14%) were held beneficially and 232,943,181 (9.08%) were held non-beneficially.
Financial instruments Aviva Group companies use financial instruments to manage certain types of risks including those relating to credit, foreign currency exchange, cash flow, liquidity, interest rates, and equity and property prices. Details of the objectives and management of these instruments are contained in the Business Review and an indication of the exposure of the Group companies to such risks is contained in note 51 to the accounts.
In 2006, the Group’s community investment in the United Kingdom totalled £3.7 million (2005: £3.9 million) of which £1.4 million (2005: £1.7 million) was given in the form of donations to charitable organisations. The Company allocates a part of its budget to matching contributions raised by staff and to providing financial support to charities and communities where members of staff give a personal commitment in terms of their time. In addition, the Company provides a significant level of support to a number of national charities. During 2006, the Company continued its commitment to Breakthrough Breast Cancer, Wheelpower (the British wheelchair sports association), The Princess Royal Trust for Carers, NCH (the children’s charity) and Muscular Dystrophy, which was chosen by employees in the United Kingdom as their “charity of the year”. In support of its “Forward Thinking” initiative the Company has become a founder partner of the Oxfam 365 Alliance which provides immediate humanitarian aid to disasters occurring throughout the world. The Company has committed to support the 365 Alliance for three years.
In accordance with Section 385 of the Companies Act 1985, a resolution is to be proposed at the Annual General Meeting for the reappointment of 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 non-audit fees paid. Further details on the work of the auditor and the Audit Committee are set out below in the Audit Committee report.
Annual General Meeting The Annual General Meeting of the Company will be held on 26 April 2007 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.
The Combined Code on Corporate Governance The Combined Code on Corporate Governance sets out guidance in the form of principles and provisions on how companies should be directed and controlled to follow good governance practice. The Financial Services Authority requires companies listed in the UK to disclose, in relation to Section 1 of the Combined Code, how they have applied its principles and whether they have complied with its provisions throughout the accounting year. Where the provisions have not been complied with companies must provide an explanation.
The Combined Code was reviewed by the Financial Reporting Council during 2006 with a revised Code becoming effective in respect of financial years commencing on or after 1 November 2006 and accordingly the changes do not apply to the year under review.
The Board and its committees operate in line with work plans agreed prior to the start of each year. At Board and committee meetings, directors receive regular reports on the Group’s financial position, risk management, regulatory compliance, key business operations and other material issues. Directors are fully briefed in advance of Board and committee meetings on all matters to be discussed. The Group Company Secretary is responsible for following Board procedures and advising the Board, through the Chairman, on governance matters. All directors have access to his advice and services.
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. No director obtained any such independent professional advice during 2006.
The performance of the Chairman is also included in the above process and therefore 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.
Directors’ attendance The Company requires directors to attend all meetings of the Board and the committees on which they serve and to devote sufficient time to the Company in order to perform their duties. The attendance of the directors at the Board and committee meetings held in 2006 was as follows: Board and Board committee attendance 2006 Corporate
Throughout the year the chairman of each committee provides the Board with a summary of the key issues considered at the meetings of the committees and the minutes of the committee meetings are circulated to the Board. The committees operate within defined terms of reference, copies of which are published on the Company’s website www.aviva.com and 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.
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; – Identify and adopt best practice.
The principal features of the control framework and the methods by which the Board satisfies itself that it is operating effectively are detailed below.
The Boards, audit committees and management of the operational businesses also consider local risk reports in a similar way. Regular reports are supported by escalation procedures for new or deteriorating risks that are classified at the highest impact levels. In addition, all business unit heads and Group functional heads provide a certificate every six months to confirm compliance with the Group’s governance and risk management framework, and the terms of their delegated authority. They must also specify any risk or control issues not already reported through the regular risk management processes.
The Board has conducted a review of the effectiveness of the Group’s systems of internal control. Where weaknesses are identified as part of the control review, mitigating actions are taken or plans are put in place. These are then monitored by the appropriate committee on behalf of the Board. The Board is not aware of any significant weaknesses that do not have mitigating actions in place.
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The Board is equally interested in the concerns of private shareholders and, on its behalf, the Group Company Secretary oversees communication with these investors. It is the practice of the Company to issue a postage paid reply form with its Annual General Meeting documentation to enable shareholders to put relevant questions to the directors. This is considered to be particularly helpful for those shareholders who are unable to attend the meeting. Written responses are provided through a brochure containing answers to the most frequently asked questions that is also placed on the Company’s website. All material information reported to the regulatory news services is simultaneously published on the Company’s website affording all shareholders full access to Company announcements.
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 revised 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 Morley Fund Management Limited (Morley), the Group’s asset management company, believes that good governance contributes to better performance and practices. Therefore, as a major investor, the Group monitors the governance of the companies in which it invests. To this end, Morley holds regular meetings with the senior management of companies where it will raise matters which may affect the future performance of those companies.
This report provides details of the role of the Audit Committee and the work it has undertaken during the year. The purpose of the Committee is to assist the Board in discharging its responsibilities for the integrity of the Company’s financial statements, the assessment of the effectiveness of the systems of internal financial controls and monitoring the effectiveness and objectivity of the internal and external auditors. The full terms of reference for the Committee can be found on the Company’s website www.aviva.com and are available from the Group Company Secretary.
Russell Walls 1 July 2004 To date (Chairman from 1 January 2007)
Russell Walls succeeded Derek Stevens as the chairman of the Committee on 1 January 2007 and Mary Francis became a member from that date. The Committee met on four occasions in 2006 and each member attended every meeting. The Group Company Secretary acts as the secretary to the Committee.
Russell Walls, a Fellow Chartered Certified Accountant, is a former Group Finance Director of BAA plc, Wellcome plc and Coats Viyella plc. Richard Karl Goeltz is a former Chief Financial Officer of American Express Company, NatWest Group plc and The Seagram Company Ltd. The Board is satisfied that these directors have recent and relevant financial experience.
The Group Chief Executive, Group Finance Director, Group Audit Director 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 Group Audit Director and the external auditor without any members of management being present. In performing its duties, the Committee has access to the services of the Group Audit Director, the Group Company Secretary and external professional advice.
In addition, the Committee reviewed the Group’s capital and risk frameworks against the regulatory reforms incorporated in the Financial Services Authority’s Prudential Sourcebook (PSB) concerning the Group’s individual capital assessments (ICA). The Committee considered the proposed assumptions, methodology and process followed in determining the amount of capital required to support the Group’s business plans and the adequacy of its capital resources.
Each of the Group’s major business units has an audit committee that provides an oversight role for its business. All such committees include members who are independent of the relevant business. The Group Audit Director reviews the papers and minutes from these committees and brings all significant matters to the Committee’s attention.
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Internal audit The Group’s internal audit function advises management on the effectiveness of the Company’s internal control systems, the adequacy of these systems to manage business risk and to safeguard the Group’s assets and resources. Through the Group Audit Director, the internal audit function provides objective assurance on risks and controls to the Committee. The plans and level of resources of the internal audit function are reviewed each year 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. As a result of the restructuring of the Group’s internal audit function during 2006 and 2007, the proposed independent review of the function has been deferred. However, during 2006 the effectiveness of the internal audit peer review was independently evaluated by KPMG.
The Group paid £9.0 million to Ernst & Young LLP for audit services in 2006, relating to the statutory audit of the Group and Company financial statements and the audit of Group subsidiaries and associates pursuant to legislation (2005: £9.0 million). In addition, the Group engaged Ernst & Young LLP in relation to certain assurance work including verification of its Corporate Social Responsibility Report. The fees for other services which included advice on accounting and regulatory matters, reporting on internal controls, corporate governance matters, and due diligence work were £6.6 million giving a total fee to Ernst & Young LLP of £15.6 million (2005: £13.8 million). Further details are provided in note 11 to the accounts.
The Committee met on five occasions in 2006 and the members’ attendance record is set out in the Corporate governance report above. The Group Company Secretary acts as the secretary to the Committee. Russell Walls was appointed a member of the Committee on 23 January 2007.
The above recommendations were approved by the Board and announced to the Market on 10 January 2007 and will become effective on 11 July 2007.
In line with the Combined Code requirement the Board undertook a review of the effectiveness of all its committees during the year, including the Nomination Committee.
This report was reviewed and approved by the Board on 28 February 2007.
The Committee was established by the Board in January 2006 and held its first meeting in April 2006. The purpose of the Committee is to assist the Board in providing leadership, direction and oversight with regard to the Group’s governance and regulatory policies and procedures, including those related to compliance, risk management, financial malpractice and internal non-financial controls. The Committee was established as the Governance and Regulatory Committee but changed its name in June 2006 to the Risk and Regulatory Committee to more closely describe its main accountabilities. The full terms of reference for the Committee can be found on the Company’s website www.aviva.com and are available from the Group Company Secretary.
Business protection Reports on financial malpractice are presented to the Committee including incidences of fraud, anti-money laundering procedures and arrangements whereby persons can report in confidence any concerns about matters of probity (whistleblowing). The Committee proposes to increase its focus into other areas of business protection as its work progresses.
The Committee met on three occasions in 2006 and the members’ attendance record is set out in the Corporate governance report. The Group Company Secretary acts as the secretary to the Committee.
During the year the Committee met to consider the conclusions of the Group’s CSR Annual Conference that took place in June 2006, and which was addressed by both the Chairman of the Board and the Chairman of the Committee. The Committee reviewed the proposed content and scope of the Company’s 2007 CSR Report, monitored the management of the CSR risks affecting the Group and helped establish a process by which CSR related targets and objectives within the Group’s individual businesses are set and monitored.
The Committee considered a report from the Norwich Union business that explained how it was handling the social issues arising from a major cost and efficiency review in that business announced in September 2006, which would result in a significant reduction in its UK workforce.
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This report sets out the remuneration policy for the Company’s directors and senior executives in line with statutory requirements and good practice guidelines and describes the elements of their remuneration and discloses the amounts paid to the directors in 2006.
The Remuneration Committee The key purposes of the Committee are to ensure that the remuneration of senior executives is aligned to the Company’s strategy and that the Company is able to attract, retain and motivate high calibre people within a very competitive international market for talent.
The Committee reviews and recommends to the Board the Company’s remuneration policy and strategy and, within the policy, makes decisions on individual remuneration terms and compensation packages for the executive directors with particular reference to the Company’s performance. The Committee also sets the remuneration structure and terms for the Company’s other senior executives; sets the Chairman’s fee and exercises the powers of the Board in relation to the executive long-term incentive and all-employee share plans. The full terms of reference for the Committee are available from the Group Company Secretary and can be found on the Company’s website www.aviva.com.
Richard Karl Goeltz succeeded George Paul as the chairman of the Committee in January 2006. The Committee met on five occasions in 2006 and each member attended every meeting. The Group Company Secretary acts as the secretary to the Committee.
Changes to remuneration policy The remuneration policy is reviewed by the Committee on a regular basis to ensure that it is achieving its objectives and remains appropriate within the market. A major review was undertaken in 2004, which included salaries, annual bonus, share schemes and benefits. In respect of the Company’s share incentive plans the review included all aspects of their operation including the discretions exercised, levels of grant, performance criteria and vesting schedules. The changes resulting from the review became effective in 2005. Pensions and long-term savings benefits were assessed in 2005 and 2006 with the changes becoming effective from 6 April 2006.
Positioned at median against a FTSE 30 comparator group, although account is taken of relative size and complexity of comparator organisations.
Basic salary depends upon: – Benchmarked salaries for comparable roles in the FTSE 50 and UK/European financial institutions; – An individual’s performance; – Predicted market movement; – Aviva’s financial performance; and
Annual bonus The discretionary annual bonus plan exists to motivate directors towards the achievement of the annual business plan.
– The shares vest on the third anniversary of the date of grant, subject to the recipient remaining in service.
Business performance (of the Aviva Group in the case of the Group Chief Executive and the Group Finance Director and of the Group and appropriate business units in the case of the other executive directors) determines 70% of the bonus awards, with the remainder dependent upon the achievement of personal objectives, relating to strategic action, operating performance and leadership.
“Business performance” covers, inter alia, new business contribution, operating profit, combined operating ratio, total expenses, return on capital employed, customer satisfaction and employee engagement.
Remuneration package The remuneration package for the Group’s senior executives is described in the table below. It reflects the Board’s philosophy that senior executives’ interests should be aligned with those of the Company’s shareholders, and that, while paying a competitive basic salary, a substantial proportion of the total remuneration package should be closely linked to the performance of the business and paid in shares.
– Awards are made annually in the form of restricted shares that vest, subject to performance conditions, at the end of a three year performance period.
– Awards made to other senior employees vary based on an individual’s skills and longer term potential. Normally awards are made between 0% and 150% of basic salary.
For awards granted for the three-year performance period commencing 1 January 2006, the Company’s cumulative ROCE over the period must exceed 31.5% for 15% of the shares to vest, with the maximum 50% of shares vesting if the cumulative ROCE exceeds 37.5% over the period.
TSR vesting – 15% of the award vests for median performance rising to 50% vesting for upper quintile performance.
Long-term savings Aviva has taken the opportunity presented by changes to pension legislation to introduce a new long-term saving arrangement, the Aviva Capital Accumulation Plan (ACAP).
Contributions for the executive directors are shown in the Directors’ remuneration table below.
– A resignation or departure for breach of contract generally results in the forfeiture of contribution for the year in which resignation occurred.
All employee share plans To provide employees with the opportunity to acquire Aviva shares, where applicable.
– Eligible to participate in the Company’s UK all employee share plans.
– The long-term cost exposure associated with the current final salary arrangements should be reduced.
The effect of the pensions review on the executive directors was as follows: Director Impact of pensions simplification review
Philip Scott The value of Philip Scott’s pension benefits on 6 April 2006 was in excess of the LTA. Philip Scott elected to register with HMRC for enhanced protection. As a consequence, he will remain a member of the Pension Scheme; however he will not be entitled to accrue any additional entitlement and on retirement his benefits will be based upon his final pensionable salary and years of service at that time. On this basis, it is anticipated that Philip Scott will not be subject to a recovery charge (additional tax). Philip Scott will continue to pay an annual contribution of 5% of his basic salary to the Pension Scheme. Should any recovery charge become payable, the cost would be borne by Philip Scott.
Patrick Snowball The value of Patrick Snowball’s pension benefits on 6 April 2006 was in excess of the LTA, and he elected to register with HMRC for primary protection. As a consequence, he will continue to accrue benefits in the Pension Scheme but may be subject to a recovery charge (additional tax) on his benefits in excess of the amount registered. Patrick Snowball will continue to pay an annual contribution of 5% of his basic salary to the Pension Scheme. The cost of any recovery charge will be borne by Patrick Snowball.
UK all employee share plans Senior executives are eligible to participate in a number of HMRC approved all-employee share plans in the United Kingdom on the same basis as other eligible employees. These include the Free 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 the form of shares from the profits of the Company’s UK business, free of tax, subject to a retention period. The partnership element of the AESOP allows participants to invest up to £125 per month out of their gross salary in the Company’s shares.
Executive directors’ service contracts Service contracts agreed with each executive director incorporate their terms and conditions of employment. Contracts were reviewed during the year and new contracts issued, bringing them into line with good market practice in respect of mitigation and phased payments. The main objective of the contracts is to strike a fair balance between the Company’s and the employee’s interests taking into account good market practice. The key terms are as follows: Provision Policy
Notice period By the director Six months By the Company 12 months, rolling. No notice or payment in lieu to be paid where the Company terminates for cause.
Termination payment Pay in lieu of notice up to a maximum of 52 weeks’ basic salary. This may be increased by a discretionary redundancy payment (where appropriate) but any such further termination payment is capped at 52 weeks’ basic salary. Any amount is subject to mitigation and phased payments.
Sickness In line with senior management terms ie 100% basic salary for 52 weeks, and 75% thereafter.
Appointment dates Director Date of last appointment Date appointment terminates Guillermo de la Dehesa 30 May 2005 30 May 2008 Wim Dik 7 December 2005 7 December 2008 Mary Francis 1 October 2005 1 October 2008 Richard Karl Goeltz 3 May 2004 3 May 2007 Carole Piwnica 10 May 2006 AGM 2009 Lord Sharman 14 January 2005 14 January 2008 Russell Walls 3 May 2004 3 May 2007
Non-executive directors’ fees were reviewed in 2005 and will be reviewed again in 2007.
Directors’ remuneration in 2006 This section of the report sets out the remuneration paid or payable to the directors in respect of the year to 31 December 2006. The following sections headed “Directors’ Remuneration”, “Executive Directors’ Pension Arrangements”and “Share incentive plans” along with their associated footnotes have been subject to audit.
Basic salary decisions The Committee’s decisions on basic salary increases were made in February 2006 (and implemented from 1 April 2006) against a backdrop of strong financial performance by the Group as reported in the Company’s 2005 Annual Report and Accounts.
In deciding basic salary increases, the Committee reviewed: – FTSE 50 basic salaries for executive directors; – Deloitte’s and Towers Perrin’s basic pay increase projections for 2006; and
The 1 April 2006 pay review resulted in an increase of 10% to the aggregate basic salaries of the executive directors. This included increases for Richard Harvey and Andrew Moss that brought their basic salaries into line with FTSE 50 peers and reflected Mr Moss’s increasing contribution to the Company. The basic salaries of the executive directors are positioned between the median and upper quartile ranking for companies with a market capitalisation over £16 billion. Given the executive directors’ contribution and experience the Committee considers this to be an appropriate position. The basic salary increases for the Company’s employees in the UK averaged 4% in 2006 and ranged from 0% to 15%.
Bonus decisions In December 2005, the Remuneration Committee agreed business targets based upon the Group’s annual business plan and each executive director’s personal objectives. In August 2006 the financial assumptions used in the planning process were affirmed or amended by the Committee and in December 2006 it used its discretion to determine how corporate activity and changes in executive responsibilities during the year should be dealt with in deciding bonuses for 2006. In 2007, once the Group’s results for 2006 were known, the Committee determined the executive directors’ bonus payments. The Group’s strong financial performance in 2006 resulted in the bonuses shown in the directors’ remuneration table.
Directors’ remuneration Basic salary/fees Bonuses ACAP Benefits Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Notes 1. “Bonuses” include the value of shares granted under the free share part of the Aviva All-Employee Share Ownership Plan (maximum £3,000) and the total amounts earned in respect of 2006 performance under the Annual Bonus Plan (ie including the amounts deferred and granted in the form of shares).
2. “Benefits”. All the executive directors received life assurance benefits during the year that relate to the cost incurred by the Company of insuring the directors’ life assurance and spouses’ benefits which, had they died during the year, could not have been wholly paid by the pension scheme and would therefore have been met by the Company. The disclosure also includes the cost of private medical insurance, and when appropriate, accompanied travel, accommodation and car benefits. All the numbers disclosed include the tax charged on the benefits. No directors received an expense allowance during the year.
5. No compensation payment for loss of office was made to any director, or former director, during the year.
6. Andrew Moss did not benefit from the LTIPs that vested in 2006 as he was not an employee in 2003, when they were granted.
Pension benefits During the year to 31 March 2006, each of the executive directors accumulated pension benefits under the defined benefits section of the Pension Scheme. Richard Harvey and Andrew Moss, who were subject to the pre-April 2006 Earnings Cap, ceased accruing further benefits in the scheme from that date.
Executive directors’ pension arrangements Richard Andrew Philip Patrick Harvey1 Moss2 Scott3 Snowball3 £’000 £’000 £’000 £’000
Accrued annual pension at 1 January 2006 527 17 343 231 Transfer of UURB in excess of Lifetime Allowance (458) – – – Increase in accrued annual pension during the year as a result of inflation 4 – 12 8 Augmentation of benefits – – – 20 Adjustment to accrued annual pension as a result of salary increase relative to inflation 2 – 6 13 Increase in accrued annual pension as a result of additional service – 3 – 17
Employee contributions during the year5 10 6 27 27 Transfer value of accrued pension at 31 December 20056 7,681 166 4,357 3,465 Transfer value of accrued pension at 31 December 20066 1,252 231 5,236 4,833 Change in transfer value during the period less employee contributions6 (6,433) 61 852 1,341
Notes 1. Mr Harvey was subject to the HMRC Earnings Cap; hence a large part of the liability to pay his pension fell outside the Pension Scheme and was provided by the Company through an UURB. In line with material changes affecting pensions which became effective from 6 April 2006 the Company crystallised the value of its liability for Mr Harvey’s UURB in excess of the LTA and transferred £11.6 million, being the actuarially calculated, and independently reviewed, value of the pension crystallised, into an EFRBS. As a result Mr Harvey’s pension benefit, post March 2006 is £75,000 pa. and subject to increase in line with deferred pensions (the lower of the increase in the Retail Prices Index or 5%) subject to the LTA. In addition Mr Harvey is entitled to a pension benefit of cNZ$25,000 pa from a New Zealand defined benefit scheme in respect of his service with the Group’s former operations in that country. In calculating the actuarial value of the amount to be transferred to the EFRBS an appropriate reduction was made to reflect the benefit of his New Zealand pension.
– Less the amount of £700,000 transferred to the Pension Scheme to provide a pension up to the LTA.
2. Mr Moss ceased accrual in the pension scheme after 31 March 2006 and as a result his pension benefit, post March 2006 is c£20,000 pa and subject to increase in line with deferred pensions (the lower of the increase in the Retail Prices Index or 5%) subject to the LTA.
3. Mr Snowball and Mr Scott have been accruing benefits in the Pension Scheme since before June 1989 and therefore were not subject to HMRC’s Earnings Cap and can continue to accrue benefits in the Pension Scheme, which they did throughout 2006. For a number of years Mr Snowball had been accruing additional benefits which were due to accrue uniformly up to his normal retirement date in 2010. Mr Snowball’s benefits were augmented to accrue in full in 2006, to reflect his increased duties following a restructuring of the UK businesses when no change was made to any other element of his remuneration. A payment of £429,000 was made into the pension scheme to fund this and therefore that part of the annual accrual ceased.
Savings related share options These are options granted under the HMRC approved Savings Related Share Option Scheme. Options are normally exercisable during the six month period following the end of the relevant (three, five or seven year) savings contract.
Andrew Moss Savings related options 2005 3,279 – – – 3,279 491.0 December 2010 – May 2011
The mid-market price of an ordinary share in the Company on 29 December 2006, being the last business day of the year, was 822 pence, and the mid-market prices during the year ranged from 690 pence to 850.5 pence. During the year, directors made an aggregate gain of £8,355 upon the exercise of share options.
Share awards The Aviva Long-Term Incentive Plan 2005 was approved by shareholders at the 2005 Annual General Meeting and is described above. This “2005 Plan” replaced the original Aviva Long-Term Incentive Plan (Aviva LTIP) which was approved by shareholders in 2001 and under which awards were made on an annual basis up to and including 2004.
This index has been chosen because it is a recognised equity market index, of which Aviva is a member. The graph also includes the median TSR of the companies in the comparator group as this is the group against which performance is measured for the purpose of the Aviva Long-Term Incentive Plan. The companies which compose the comparator group for TSR purposes were amended when the new Long-Term Incentive Plan was introduced in 2005 so that the group matches more closely the companies which offer similar products in similar geographic markets to Aviva. The TSR graph for the comparator group has therefore been plotted using the 19 companies (excluding Aviva) in the comparator group pre-2005 and the 14 companies (excluding Aviva) in the group for 2005 and
The Aviva Deferred Bonus Plan was approved by shareholders at the 2001 Annual General Meeting. The awards disclosed include those made in lieu of some or all of the cash bonus earned and deferred under the Company’s Annual Bonus Plan and also the matching awards granted on a “one-for-one” basis. The vesting of the awards on the third anniversary of their grant is not subject to performance conditions. This plan was replaced by the Aviva Annual Bonus Plan in 2005 and therefore no awards have been granted under the Plan
Aviva five-year TSR performance against the FTSE100 Index and the median of the Comparator Group
O therinform ation Aviva plc Annual Report and Accounts 2006 99
Dilution Awards granted under the Aviva Annual Bonus Plan 2005 and the Aviva Long-Term Incentive Plan 2005 are met by the issue of new shares at the time that the awards vest. The Committee monitors the number of shares issued under its various all employee and discretionary share plans and their effect on dilution limits. The relevant dilution limits established by the Association of British Insurers in respect of all share plans (10% in any rolling ten year period) and executive share plans (5% in any rolling ten year period) were, based on the Company’s issued share capital at 31 December 2006, 2.60% and 1.12% respectively.
Between March 1998 and March 2003, the Company met its liability for shares awarded under the incentive plans by funding an employee trust that acquired shares in the market at the time of grant. Details of the shares currently held in the employee trusts are set out in note 29 to the accounts.
Senior executives’ remuneration The total compensation paid during the year to key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Company, including the Company’s directors and non-executive directors (as required to be disclosed by International Accounting Standard 24) was £53 million (2005: £34 million) and is set out below in note 53 to the Accounts.
Committee Chairman – Audit (inclusive of committee membership fee) £35,000 pa – Remuneration (inclusive of committee membership fee) £20,000 pa
Other than for the Chairman’s fee, which was increased by £15,000 pa from 1 January 2006 to reflect the loss of a car allowance of £18,000 pa from that date, no increases were made to the level of directors’ fees during the year. However, fees payable to the senior independent director, chairman of the Remuneration Committee and for membership of the Risk and Regulatory and Corporate Social Responsibility committees were introduced from 1 April 2006 following changes to the Board committee structure and directors’ responsibilities.
In addition to the Board membership and committee membership fees Derek Stevens received an additional amount of £10,000 per annum for serving as the chairman of the Aviva Staff Pension Scheme. The fee for Guillermo de la Dehesa includes an amount of 140,000 per annum for serving as the non-executive chairman of the Group’s operations in Spain. No non-executive director accrued retirement benefits during the year.
Directors’ interests in Aviva shares The interests held by each person who was a director at the end of the financial year in the ordinary shares of 25 pence each in the Company are shown below. All the disclosed interests are beneficial. The table also summarises the interests in shares held through the Company’s various all-employee and executive share schemes. Details of the options and long-term incentive awards are shown on pages 96 to 98 and the Aviva Share Plan is described on page 97.
Notes 1. “Shares” are the directors’ beneficial holdings in the ordinary shares of the Company and in respect of the executive directors include shares held in trust under the Company’s
4. “Options” are options over shares granted under the Savings Related Share Option Scheme.
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Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities.
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.
In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all information and explanations we require for audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed.
The principal accounting policies adopted in the preparation of these financial statements are set out below.
In November 2006, the IASB issued IFRS 8, Operating Segments, the requirements of which are applicable for accounting periods beginning on or after 1 January 2009. This standard has not yet been endorsed by the EU, nor has it yet been adopted by the Group. On adoption, it will result in amendments to the disclosure of our segmental results but will have no impact on the results overall.
In accordance with Phase I IFRS 4, Insurance Contracts, the Group has applied existing accounting practices for insurance and participating investment contracts, modified as appropriate to comply with the IFRS framework and applicable standards. Further details are given in policy E below.
The separate financial statements of the Company are on pages 211 to 218.
Investment vehicles In several countries, the Group has invested in a number of specialised investment vehicles such as OIECs. These invest mainly in equities, bonds, cash and cash equivalents, and properties, and distribute most of their income. Where Group companies own more than 50% of such vehicles, they are consolidated. The interests of parties other than Aviva in such vehicles are classified as liabilities and appear as “Net asset value attributable to unitholders” in the consolidated balance sheet. Where the Group owns less than 50% of such vehicles, its interests are included in the consolidated balance sheet within financial investments as permitted by IAS 28, Investments in Associates.
Translation differences on debt securities and other monetary financial assets measured at fair value and designated as held at fair value through profit or loss (FV) (see policy R) are included in foreign exchange gains and losses in the income statement. For monetary financial assets designated as AFS, translation differences are calculated as if they were carried at amortised cost and so are recognised in the income statement, whilst foreign exchange differences arising from fair value gains and losses are included in the investment valuation reserve within equity. Translation differences on non-monetary items, such as equities which are designated as FV, are reported as part of the fair value gain or loss, whereas such differences on AFS equities are included in the investment valuation reserve.
(E) Product classification Insurance contracts are defined as those containing significant insurance risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. Contracts can be reclassified as insurance contracts after inception if insurance risk becomes significant. Any contracts not considered to be insurance contracts under IFRS are classified as investment contracts.
Deposits collected under investment contracts without a discretionary participating feature (non-participating contracts) are not accounted for through the income statement, except for the fee income (covered in policy G) and the investment income attributable to those contracts, but are accounted for directly through the balance sheet as an adjustment to the investment contract liability.
(G) Other investment contract fee revenue Investment contract policyholders are charged fees for policy administration, investment management, surrenders or other contract services. These fees are recognised as revenue in the period in which they are collected unless they relate to services to be provided in future periods. Amounts are considered to be assessed when the policyholder’s balance has been adjusted for those fees. If the fees are for services to be provided in future periods, then they are deferred and recognised as the service is provided.
(I) Net investment income Investment income consists of dividends, interest and rents receivable for the year, movements in amortised cost on debt securities, realised gains and losses, and unrealised gains and losses on FV investments (as defined in policy R). Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest income is recognised as it accrues, taking into account the effective yield on the investment. It includes the interest rate differential on forward foreign exchange contracts. Rental income is recognised on an accruals basis.
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 35(b). For liabilities of the UK with-profit 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 certain UK non-profit insurance contracts, the Group has adopted the realistic regulatory basis as set out in the FSA Policy Statement 06/14 Prudential Changes for Insurers from 31 December 2006.
(iii) Liability adequacy At each reporting date, the Group reviews its unexpired risks and carries out a liability adequacy test for any overall excess of expected claims and deferred acquisition costs over unearned premiums, using the current estimates of future cash flows under its contracts after taking account of the investment return expected to arise on assets relating to the relevant general business provisions. If these estimates show that the carrying amount of its insurance liabilities (less related deferred acquisition costs) is insufficient in light of the estimated future cash flows, the deficiency is recognised in the income statement by setting up a provision in the balance sheet.
(K) Non-participating investment contract liabilities Claims For non-participating investment contracts with an account balance, claims reflect the excess of amounts paid over the account balance released.
The full embedded value of the long-term business and further details of the methodology and assumptions are included as supplementary information on pages 220 to 243.
Intangible assets Intangibles consist primarily of brands, certain of which have been assessed as having indefinite useful lives, and contractual relationships such as access to distribution networks and customer lists. The economic lives of the latter are determined by considering relevant factors such as usage of the asset, typical product life cycles, potential obsolescence, maintenance costs, the stability of the industry, competitive position, and the period of control over the assets. These intangibles are amortised over their useful lives, which range from five to 22 years, using the straight-line method. The amortisation charge for the year is included in the income statement under “Other operating expenses”.
Impairment testing For impairment testing, goodwill and intangibles with indefinite useful lives have been allocated to cash-generating units by geographical reporting unit and business segment. The carrying amount of goodwill and intangible assets with indefinite useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. Goodwill and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support its carrying value. Further details on goodwill allocation and impairment testing are given in note 15(b).
Land is not depreciated. Depreciation is calculated on the straightline method to write down the cost of other assets to their residual values over their estimated useful lives as follows: – Properties under construction No depreciation – Motor vehicles Three years, or lease term if longer – Computer equipment Three to five years – Other assets Three to five years
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(P) Impairment of non-financial assets Property and equipment and other non-financial assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of an asset’s net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows.
Interest rate and currency swaps Interest rate swaps are contractual agreements between two-parties to exchange periodic payments in the same currency, each of which is computed on a different interest rate basis, on a specified notional amount. Most interest rate swaps involve the net exchange of payments calculated as the difference between the fixed and floating rate interest payments. Currency swaps, in their simplest form, are contractual agreements that involve the exchange of both periodic and final amounts in two different currencies. Exposure to gain or loss on both types of swap contracts will increase or decrease over their respective lives as a function of maturity dates, interest and foreign exchange rates, and the timing of payments.
Hedge accounting is used for derivatives designated in this way, provided certain criteria are met. At the inception of the transaction, the Group documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and the strategy for undertaking the hedge transaction. The Group also documents its assessment of whether the hedge is expected to be, and has been, highly effective in offsetting the risk in the hedged item, both at inception and on an ongoing basis.
For certain securitised lifetime mortgages, the Group has taken advantage of the revised fair value option under IAS 39 to present the mortgages, associated borrowings and derivative financial instruments at fair value, since they are managed as a portfolio. This presentation provides more relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for these three items. The fair values of mortgages classified as FV are estimated using discounted cash flow forecasts, based on a risk-adjusted discount rate which reflects the risks associated with these products. They are revalued at each period end, with movements in their fair values being taken to the income statement.
(V) 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 with less than 90 days’ maturity from the date of acquisition. For the purposes of the cash flow statement, cash and cash equivalents also include bank overdrafts, which are included in payables and other financial liabilities on the balance sheet.
The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. Contingent liabilities are disclosed if the future obligation is probable and the amount cannot be reasonably estimated, or if they are possible but not probable.
Pension obligations The Group operates a number of defined benefit and defined contribution plans throughout the world, 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.
For defined benefit plans, the pension costs are assessed using the projected unit credit method. Under this method, the cost of providing pensions is charged to the income statement so as to spread the regular cost over the service lives of employees, in accordance with the advice of qualified actuaries. The pension obligation is measured as the present value of the estimated future cash outflows using a discount rate based on market yields for high quality corporate bonds. The resulting pension scheme surplus or deficit appears as an asset or obligation in the consolidated balance sheet. All actuarial gains and losses are recognised immediately in equity through the Statement of recognised income and expense.
When the options are exercised and new shares are issued, the proceeds received, net of any transaction costs, are credited to share capital (par value) and the balance to share premium. Where the shares are already held by employee trusts, the net proceeds are credited against the cost of these shares, with the difference between cost and proceeds being taken to retained earnings. In both cases, the relevant amount in the equity compensation reserve is then credited to retained earnings.
Provision is made for deferred tax liabilities, or credit taken for deferred tax assets, using the liability method, on all material temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements.
The principal temporary differences arise from depreciation of property and equipment, revaluation of certain financial assets and liabilities including derivative contracts, provisions for pensions and other post-retirement benefits and tax losses carried forward; and, in relation to acquisitions, on the difference between the fair values of the net assets acquired and their tax base. The rates enacted or substantively enacted at the balance sheet date are used to determine the deferred tax.
O therinform ation Aviva plc Annual Report and Accounts 2006 113
(AA) Borrowings Borrowings are recognised initially at their issue proceeds less transaction costs incurred. Subsequently, most borrowings are stated at amortised cost, and any difference between net proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest rate method. All borrowing costs are expensed as they are incurred.
Where loan notes have been issued in connection with securitised lifetime mortgages, 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. This presentation provides more relevant information and eliminates any accounting mismatch which would otherwise arise from using different measurement bases for these three items.
Treasury shares Where the Company or its subsidiaries purchase the Company’s share capital or obtain rights to purchase its share capital, the consideration paid (including any attributable transaction costs net of income taxes) is shown as a deduction from total shareholders’ equity. Gains and losses on sales of own shares are charged or credited to the treasury share account in equity.
For the diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares, such as convertible debt and share options granted to employees. Potential or contingent share issuances are treated as dilutive when their conversion to shares would decrease net earnings per share.
Income 5 42,257 Gross written premiums 28,735 26,299 (2,207) Premiums ceded to reinsurers (1,501) (1,317)
40,050 Premiums written net of reinsurance 27,234 24,982 137 Net change in provision for unearned premiums 93 (123)
40,187 Net earned premiums F 27,327 24,859 2,750 Fee and commission income G & H 1,870 1,851 22,754 Net investment income I 15,473 23,722 713 Share of profit after tax of joint ventures and associates C 485 340 327 Profit on the disposal of subsidiaries and associates 222 153
Expenses 6 (34,476) Claims and benefits paid, net of recoveries from reinsurers (23,444) (19,706) (3,853) Change in insurance liabilities, net of reinsurance (2,620) (10,376) (8,826) Change in investment contract provisions (6,002) (7,814)
(821) Change in unallocated divisible surplus (558) (1,474) (7,416) Fee and commission expense (5,043) (4,330)
4,378 Profit before tax attributable to shareholders’ profits 2,977 2,528 (1,374) Tax expense Z & 12 (934) (1,552)
509 Less: tax attributable to policyholders’ returns 12 346 922 (865) Tax attributable to shareholders’ profits (588) (630)
Earnings per share AD & 13 128.7c Basic (pence per share) 87.5p 73.5p 127.4c Diluted (pence per share) 86.6p 72.9p
Pro forma reconciliation of Group operating profit to profit before tax For the year ended 31 December 2006 1m Note £m £m
4,574 Operating profit before adjusting items and tax attributable to shareholders’ profits 3,110 2,128 Adjusted for the following: (138) Impairment of goodwill – non-long-term business subsidiaries 15 (94) (43) Amortisation and impairment of acquired value of in-force business
(103) Amortisation and impairment of intangibles 16 (70) (45) 9 Financial Services Compensation Scheme and other levies 6 –
Short-term fluctuation in return on investments backing 219 general insurance and health business 8b 149 517 326 Profit on the disposal of subsidiaries and associates 3b 222 153
The accounting policies (identified alphabetically) on pages 104 to 113 and notes (identified numerically) on pages 120 to 210 are an integral part of these financial statements.
Pro forma reconciliation of Group operating profit to profit before tax continued For the year ended 31 December 2006
General Long-term Fund insurance business management and health Total Year ended 31 December 2005 £m £m £m £m
Consolidated statement of recognised income and expense For the year ended 31 December 2006 1m Note £m £m
(168) Actuarial (losses) on pension schemes 42 (114) (547) (509) Foreign exchange rate movements 32b & 34b (346) (2)
– Aggregate tax effect – policyholder tax 12b – 3 (7) Aggregate tax effect – shareholder tax 12b (5) 272
(1,137) Dividends and appropriations 14 (762) (657) Issue of share capital for the acquisition of AmerUs (2005: RAC plc), 1,331 net of transaction costs 3a 892 530 64 Other issues of share capital, net of transaction costs 27 43 59 303 Shares issued in lieu of dividends 33 203 100 593 Capital contributions from minority shareholders 34b 397 212
Assets 4,343 Goodwill M & 15 2,910 2,274 4,072 Acquired value of in-force business and intangible assets M & 16 2,728 803 4,172 Investments in joint ventures C & 17 2,795 2,129 1,336 Investments in associates C & 18 895 885 1,349 Property and equipment N & 19 904 885
957 Ordinary share capital 27 641 599 299 Preference share capital 30 200 200
– Liabilities of operations classified as held for sale AE & 3d – 145 436,899 Total equity and liabilities 292,722 263,447
Consolidated cash flow statement For the year ended 31 December 2006
Net increase in cash and cash equivalents 432 513 945 989 Cash and cash equivalents at 1 January 48d 10,107 2,960 13,067 12,126 Effect of exchange rate changes on cash and cash equivalents (119) (47) (166) (48)
Of the total cash and cash equivalents shown for 2005, £25 million was classified as held for sale (see note 3d).
Notes to the consolidated financial statements 1 – Exchange rates The Group’s principal overseas operations during the year were located within the Eurozone and the United States. The results and cash flows of these operations have been translated into sterling at an average rate for the year of a1 = £0.68 (2005: a1 = £0.68) and £1 = US$1.84 (2005: £1= US$1.82). Assets and liabilities have been translated at the year end rate of a1 = £0.67 (2005: a1 = £0.69) and £1 = US$1.96 (2005: £1= US$1.72).
Total foreign currency movements during 2006 resulted in a gain recognised in the income statement of £99 million (2005: £203 million loss).
The assets and liabilities at the date of acquisition were: Fair value and accounting Book value policy Fair value £m £m £m
As disclosed in the supplementary information on page 231, the embedded value of the long-term business acquired was £310 million, representing the net assets adjusted for other intangible assets net of tax.
(ii) Eagle Insurance Company Limited On 1 February 2006, the Group acquired a 51% interest in Eagle Insurance Limited (Eagle), the third-largest insurer in Sri Lanka, by buying a majority shareholding in Eagle’s immediate holding company, NDB Finance Lanka (Pvt) Limited. At the same time, Eagle entered into a ten year bancassurance agreement with National Development Bank Limited (NDB), Sri Lanka’s biggest development bank and Eagle’s other major shareholder. The cash consideration, including purchase costs, was £15 million. The fair value of the Group’s share of net assets acquired was £12 million, including intangibles of £2 million, giving rise to £3 million of goodwill on acquisition.
(iii) Canadian brokers On 28 April 2006, the Group acquired a 20% holding in Dale-Parizeau L.M. Inc, a Canadian insurance broker, for a consideration of £16 million which includes purchase costs. The allocation of the risks and rewards of ownership between the Group and third-party investors in the broker has led the Group to consolidate its results for the period since acquisition to 31 December 2006. The fair value of the net assets acquired, including intangibles of £10 million, was £9 million, giving rise to £7 million of goodwill on acquisition.
On 4 December 2006, the Group acquired a 20% holding in a second Canadian Insurance broker, Morris & Mackenzie Inc (M&M), for a consideration of £28 million including purchase costs. The allocation of the risks and rewards of ownership between the Group and third-party investors in the broker has led the Group to consolidate its results for the period since acquisition to 31 December 2006. Due to the proximity of the acquisition date to the year end, provisional fair values have been used and will be adjusted within 12 months. The provisional fair value of the net assets acquired, including intangibles of £14 million, was £12 million, giving rise to £16 million of goodwill on acquisition. On 31 December 2006, the Group completed the disposal of M&M’s non-Quebec based operations for £9 million. The sale did not give rise to any gain or loss. Net assets at disposal represented goodwill, intangible assets and deferred tax liabilities.
The total purchase price of US$3.1 billion (£1.7 billion) represents cash consideration for AmerUs shares and stock options, and stock-based compensation vesting on change of control. The purchase consideration was partly financed by a £903 million placing of the Company’s ordinary shares, with the balance of funding being provided by internal resources and external debt. The share placing was completed on 13 July 2006, with 129 million shares issued on 18 July, at £7 per share.
Notes to the consolidated financial statements continued 3 – Subsidiaries continued The assets and liabilities at the date of acquisition were: Fair value and accounting
Assets Acquired value of in-force business on insurance and investment contracts 179 1,387 1,566 Other intangible assets 126 165 291 Investments 11,539 5 11,544 Other assets 2,717 (1,270) 1,447
Other intangible assets of £291 million are represented by AmerUs’ distribution channels and have been valued by an independent thirdparty, using estimated post-tax cash flows and discount rates. The distribution channels have been assessed as having a life of between six and nine years and their value is being amortised over that period, with a corresponding release of the applicable deferred tax provision.
(vi) Other In addition to the goodwill arising on the above acquisitions, the Group also made a number of smaller acquisitions giving rise to additional goodwill of £9 million. Total goodwill arising in the year was £761 million (see note 15a). On 1 January 2006, following the introduction of a new Health Insurance Act, a Netherlands subsidiary acquired 100% of the share capital of O.W.M. Delta Lloyd and OHRA Zorgverzekeringen U.A. for nil consideration. Assets and liabilities acquired amounted to £272 million and £258 million respectively giving rise to £14 million of negative goodwill which has been recognised in the income statement.
Profit on disposal before tax 69 Tax attributable to profit on disposal (11)
(c) Integration and restructuring costs £246 million of integration and restructuring costs have been included in the results for 2006. £21 million related to the restructuring of the combined Norwich Union Insurance and RAC businesses and this completes the integration spend on the RAC businesses. £8 million relates to the integration of Ark Life into the Hibernian business and £12 million to the integration of AmerUs into the US business. The remaining £205 million relates to Norwich Union’s restructuring to reduce duplication and improve efficiency.
Intangible assets 9 Investment and property and equipment 320 Receivables and other financial assets 68 Deferred acquisition costs and other assets 40 Cash and cash equivalents 25
As described in note 3(b) above, the RAC non-core businesses, which were treated as held for sale as at 31 December 2005, have been sold during 2006. No operations have been classified as held for sale as at 31 December 2006.
O therinform ation Aviva plc Annual Report and Accounts 2006 125 3 – Subsidiaries continued (e) Other information Principal subsidiaries at 31 December 2006 are listed on pages 244 to 245.
Dutch Law changed in October 2004 to ensure that Supervisory Board directors in Dutch companies were henceforth to be elected by a company’s shareholders voting on nominations made by its Supervisory Board and the Works Council. Under the previous system, Supervisory Board directors appointed their own successors. In 2006, Delta Lloyd commenced proceedings against Aviva plc to try to compel the Company to adhere to the system that existed prior to the change in the law, on the basis of agreements they say were entered into in 1973 when the Group acquired Delta Lloyd. The Company disputes these claims and does not expect the litigation, whatever its outcome, to have any adverse effect on the financial or operational performance of Delta Lloyd or the Group.
Net written premiums 16,532 – 10,702 – 27,234 Net change in provision for unearned premiums – – 93 – 93
Operating profit before tax attributable to shareholders’ profits 1,896 155 1,680 (621) 3,110
Notes to the consolidated financial statements continued 4 – Segmental information continued General
For the year ended 31 December 2005 £m £m £m £m £m
Net earned premiums 14,671 – 10,188 – 24,859 Fee and commission income 598 318 218 717 1,851 15,269 318 10,406 717 26,710 Net investment income 21,985 15 1,603 119 23,722 Inter-segment revenue – 112 – – 112 Profit/(loss) on the disposal of subsidiaries and associates (10) – 41 122 153
Amortisation of acquired value of in-force business (27) – – – (27) Net Impairment of acquired value of in-force business (28) – – – (28) Amortisation and net impairment of intangible assets (24) – (5) (16) (45) Impairment of goodwill (14) – – (29) (43) Other impairment losses recognised in the income statement (37) – – – (37) Inter-segment expense (103) – (9) – (112)
Unallocated costs Finance costs on central borrowings (see below) (248) Tax attributable to policyholders’ returns (922) Tax attributable to shareholders’ profits (630)
O therinform ation Aviva plc Annual Report and Accounts 2006 129 4 – Segmental information continued Pro forma reconciliation to operating profit before tax attributable to shareholders’ profits
General Long-term Fund insurance business management and health Other Total For the year ended 31 December 2005 £m £m £m £m £m
Segmental result before tax 1,865 124 1,995 (286) 3,698 Finance costs on central borrowings – – – (248) (248) Adjusted for the following items: Impairment of goodwill 14 – – 29 43 Amortisation and impairment of acquired value of in-force business 73 – – – 73 Amortisation and impairment of intangibles 24 – 5 16 45 Financial Services Compensation Scheme and other levies – – – – – Short-term fluctuations in return on investments backing general insurance and health business – – (517) – (517) Loss/(profit) on the disposal of subsidiaries and associates 10 – (41) (122) (153)
Goodwill 1,316 9 390 1,195 2,910 Acquired value of in-force business and intangible assets 2,301 18 287 122 2,728 Investments in joint ventures and associates 3,526 44 39 81 3,690 Property and equipment 416 4 94 390 904 Investment property 14,714 – 384 25 15,123 Loans 18,805 – 735 6,905 26,445 Financial investments 188,050 30 11,248 3,525 202,853 Other assets 24,383 534 9,755 1,854 36,526
Central borrowings are borrowings by holding companies within the Group which are not allocated to operating companies. In 2006, there has been a reclassification of Amstelhuys loans into “Other” business from our general insurance and health segment.
Insurance liabilities 114,176 – 18,426 – 132,602 Liability for investment contracts 77,309 – – – 77,309 Unallocated divisible surplus 8,978 – – – 8,978 Net asset value attributable to unitholders 3,137 – – – 3,137 External borrowings 4,060 – 2,565 578 7,203 Other liabilities, including inter-segment liabilities 6,149 293 (224) 9,607 15,825
(b) Secondary reporting format – geographical segments (i) Reporting segments Although the Group’s business segments are managed on a worldwide basis, they operate in six main geographical areas. These are United Kingdom (UK), France, Netherlands (including Belgium, Germany and Luxembourg), Other Europe, United States and Rest of the World.
Rest of United Kingdom France Netherlands Other Europe United States the World Total
Net written premiums 11,240 4,308 3,833 4,935 932 1,986 27,234 Net change in provision for unearned premiums 130 (5) (3) (15) – (14) 93
Net earned premiums 11,370 4,303 3,830 4,920 932 1,972 27,327 Fee and commission income 929 224 239 317 4 157 1,870
Segment liabilities 137,424 46,770 36,542 31,190 16,411 1,787 270,124 Unallocated liabilities – central borrowings and tax liabilities 8,534
Capital expenditure (excluding business combinations) 273 4 43 32 23 10 385
Net written premiums 10,586 4,279 3,852 4,009 517 1,739 24,982 Net change in provision for unearned premiums (115) (10) 6 23 – (27) (123)
Notes to the consolidated financial statements continued 4 – Segmental information continued (iii) Life and pensions and investment sales – new business and total income For the purpose of recording life and pensions new business premiums, the Group’s policy is to include life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business and our share of the other life and related business written in our associates and joint ventures, as well as the lifetime mortgage business written in the UK. This includes both insurance and investment contracts as defined under IFRS 4, Insurance Contracts, and is consistent with the definition of covered business used for our supplementary embedded value reporting.
Sales from the Navigator funds administration business, previously excluded from investment sales figures, are now included in the new single premiums figures above. This change has increased total investment sales for 2006 by £1,371 million (2005: £938 million).
O therinform ation Aviva plc Annual Report and Accounts 2006 133 5 – Details of income £m £m
Fee and commission income Fee income from investment contract business 410 288 Fund management fee income 395 274 Other fee income 779 925 Reinsurance commissions receivable 204 274 Other commission income 98 99 Net change in deferred revenue (16) (9)
Realised gains and losses 124 (78) Unrealised gains and losses 208 42
Realised gains on loans 59 38 Foreign exchange gains and losses on investments other than trading 128 (207) Other investment income/(expenses) 8 (14)
Notes to the consolidated financial statements continued 6 – Details of expenses £m £m
Insurance contracts 12,460 10,325 Participating investment contracts 4,350 2,465 Non-participating investment contracts 428 1,188
Insurance contracts (1,009) (697) Participating investment contracts (17) (50) Non-participating investment contracts – (48)
Change in insurance liabilities Change in insurance liabilities 1,649 9,673 Change in reinsurance asset for insurance provisions 971 703
O therinform ation Aviva plc Annual Report and Accounts 2006 135 6 – Details of expenses continued £m £m
Finance costs Interest expense on: Subordinated debt 169 169 Debenture loans 29 41 Amounts owed to credit institutions 169 37 Commercial paper 29 24 Securitised mortgage loan notes
Share of results after tax of joint ventures 462 326 Share of results after tax of associates 37 32 Net rental income from investment properties 730 728 Interest, dividend and similar income 8,510 8,174 Foreign exchange gains and losses on investments designated as at fair value through profit or loss 128 (207) Realised investment gains on financial investments, loans, investment property and owner occupied property 5,380 4,657 Net impairment losses on investments designated as available for sale and on loans – (57) Other investment income/(expenses) 8 (14) Finance costs
Total net investment return included in profit before tax 15,142 23,414
8 – Longer term investment return (a) The longer term investment return, net of expenses, attributable to the general insurance and health business result was £1,073 million (2005: £1,046 million).
Actual return attributable to shareholders 3,934 Longer term return credited to operating results (3,107)
Wages and salaries 1,798 1,677 Social security costs 216 210 Post-retirement obligations
Defined benefit schemes (note 42c) 213 158 Defined contribution schemes (note 42c) 71 47
Profit sharing and incentive plans 148 116 Equity compensation plans (notes 28d & 32b) 48 22 Termination benefits 31 10
Acquisition costs 597 600 Claims handling expenses 253 221 Corporate costs 76 62 Other operating expenses 1,599 1,357
Notes to the consolidated financial statements continued 10 – Directors Information concerning individual directors’ emoluments, interests and transactions is given in the Directors’ remuneration report.
– Other supplementary services 1,660 995 Fees payable to Ernst & Young LLP for services to Group pension schemes
In addition to the above amounts payable to the principal auditors, fees for audit services of £2.1 million (2005: £2.8 million) were payable to other firms. The total fees payable for audit services were therefore £11.1 million (2005: £11.8 million).
12 – Tax (a) Tax charged to the income statement (i) The total tax charge comprises: £m £m
O therinform ation Aviva plc Annual Report and Accounts 2006 139 12 – Tax continued (iii) The tax charge can be analysed as follows: £m £m
(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce current tax expense and deferred tax expense by £73 million and £24 million, respectively (2005: £49 million and £33 million, respectively).
(v) Deferred tax charged to the income statement represents movements on the following items: £m £m
Long-term business technical provisions and other insurance items 364 (107) Deferred acquisition costs (47) 56 Unrealised (gains)/losses on investments (144) 562 Provisions and other temporary differences (192) 35 Impairment of assets 1 (1) Pensions and other post-retirement obligations 166 19 Unused losses and tax credits (247) 247 Other temporary differences 298 154
(b) Tax charged/(credited) to equity (i) The total tax charge/(credit) comprises: £m £m
(ii) The tax credit attributable to policyholders’ returns included in the credit above is £nil (2005: £3 million).
Notes to the consolidated financial statements continued 13 – Earnings per share (a) Basic earnings per share (i) The profit attributable to ordinary shareholders is: Operating Adjusting Operating Adjusting profit items Total profit items Total £m £m £m £m £m £m
Profit before tax 3,110 (133) 2,977 2,128 400 2,528 Tax attributable to shareholders’ profits (725) 137 (588) (536) (94) (630)
Coupon payments in respect of direct capital instrument (net of tax) (37) – (37) (29) – (29)
Profit attributable to ordinary shareholders 2,146 15 2,161 1,415 306 1,721
(ii) Basic earnings per share is calculated as follows: Net of tax, Net of tax, minorities, minorities, preference preference dividends dividends
Before tax and DCI Per share Before tax and DCI Per share £m £m p £m £m p
(iii) The calculation of basic earnings per share uses a weighted average of 2,469 million (2005: 2,340 million) ordinary shares in issue, after deducting shares owned by the employee share trusts. The actual number of shares in issue at 31 December 2006 was 2,566 million (2005: 2,396 million).
O therinform ation Aviva plc Annual Report and Accounts 2006 141 13 – Earnings per share continued (b) Diluted earnings per share Diluted earnings per share is calculated as follows: Weighted Weighted average average number number
Subsequent to 31 December 2006, the directors proposed a final dividend for 2006 of 19.18 pence per ordinary share, £492 million in total, making a total dividend for the year of 30.00 pence (2005: 27.27 pence). Subject to approval by shareholders at the AGM, the dividend will be paid on 17 May 2007 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2007.
Interest on the direct capital instrument issued in November 2004 is treated as an appropriation of retained profits and, accordingly, it is accounted for when paid. Tax relief is obtained at a rate of 30%.
Irish shareholders who are due to be paid a dividend denominated in euros will receive a payment at the exchange rate prevailing on 28 February 2007.
Notes to the consolidated financial statements continued 15 – Goodwill (a) Carrying amount £m £m
UK (General insurance RAC (non-insurance Spain United States and health) operations) (Long-term business) (Long-term business) Other Total £m £m £m £m £m £m £m £m £m £m £m £m
Carrying amount of intangibles with indefinite useful lives 185 185 36 75 – – – – 42 42 263 302
As explained in accounting policy M, the carrying amount of goodwill and intangible assets with indefinite useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. The tests led to impairment of goodwill of £94 million.
Key assumptions used for the calculation were: – Budgeted operating profit represents the operating profit in the business plans, approved by management and as such reflects the best estimate of future profits based on both historical experience and expected growth rates for the UK general insurance industry. Some of the assumptions that underline the budgeted operating profit include market share, premium rate changes, claims inflation and commission rates.
Key assumptions used for the calculation were: – Budgeted operating profit represents the operating profit in the business plans, approved by management and as such reflects the best estimate of future profits based on both historical experience and expected growth. Some of the assumptions that underline the budgeted operating profit include market share, fee income and customer numbers.
Spain (long-term business) The recoverable amount of the Spanish unit has been determined based on a fair value less costs to sell calculation. This calculation is an actuarially-determined appraisal value and is based on the embedded value of the business together with the present value of expected profits from future new business. The recoverable amount significantly exceeds the carrying value of the cash generating unit including goodwill and a reasonably possible change in a key assumption will not cause the carrying value of the cash generating unit to exceed its recoverable amount.
At 31 December 2005 614 302 323 1,239 Additions 22 – 58 80 Acquisition of subsidiaries 1,642 – 470 2,112 Disposals – – (14) (14)
Impairment losses recognised (28) – 2 (26) Foreign exchange rate movements 6 – 3 9
Additions to gross AVIF includes £20 million for the movement in the shadow adjustment made to the carrying value of the AVIF in Aviva USA.
Notes to the consolidated financial statements continued 17 – Investments in joint ventures continued (ii) The principal joint ventures are as follows: Company GP proportion held PLP proportion held
(c) Other The Group also has a 50% holding in AVIVA-COFCO Life Insurance Company Limited, a life assurance company incorporated and operating in China. These shares are held by the Company, with a share of net assets of £18 million (2005: £10 million) and a fair value of £35 million (2005: £22 million).
The joint ventures have no significant contingent liabilities to which the Group is exposed, nor has the Group any significant contingent liabilities in relation to its interests in the joint ventures.
O therinform ation Aviva plc Annual Report and Accounts 2006 147 18 – Investments in associates (a) Carrying amount
Share of results before tax – 39 – 39 Share of tax – (7) – (7)
Share of profit after tax – 23 – 23 Acquisitions and additions 28 10 – 38 Disposals – (26) – (26) Dividends received – (12) – (12) Foreign exchange rate movements – (4) – (4) Loans repaid – – (9) (9)
The loans are not secured and no guarantees were received in respect thereof, and bear interest at an annual rate of 4.2%.
Aviva Life Insurance Company India Pvt. Limited Insurance Ordinary Rs1 shares 26.0% India RBSG Collective Investments Limited Investment Ordinary £1 shares 49.99% Great Britain RBS Life Investments Limited Insurance Ordinary £1 shares 49.99% Great Britain The British Aviation Insurance Company Limited Insurance Ordinary £1 shares 38.1% Great Britain
O therinform ation Aviva plc Annual Report and Accounts 2006 149 19 – Property and equipment Properties Ownerunder occupied Motor Computer Other construction properties vehicles equipment assets Total £m £m £m £m £m £m
Cost or valuation At 1 January 2005 57 441 27 582 327 1,434 Additions 10 2 18 106 63 199 Capitalised expenditure on existing assets 7 – – – – 7 Acquisitions of subsidiaries – 35 44 9 49 137 Disposals (19) (7) – (42) (70) (138) Fair value gains (see note 32b) – 32 – – – 32 Foreign exchange rate movements (1) (4) – – (1) (6)
Charge for the year – – (4) (77) (31) (112) Disposals – – – 26 12 38 Foreign exchange rate movements – – – 1 – 1
Charge for the year – – (11) (85) (26) (122) Disposals – – 24 16 33 73 Foreign exchange rate movements – – – 7 3 10
Investment properties are stated at their market values as assessed by qualified external valuers or by local qualified staff of the Group in overseas operations, all with recent relevant experience. Values are calculated using a discounted cash flow approach and are based on current rental income plus anticipated uplifts at the next rent review, assuming no future growth in rental income. This uplift and the discount rate are derived from rates implied by recent market transactions on similar properties.
Policy loans 1,217 1,020 Bank loans 170 125 Securitised mortgage loans (see note 22) 6,709 7,476 Non-securitised mortgage loans 15,185 15,224 Other loans 3,164 699
Of the above loans, £23,243 million (2005: £23,031 million) is expected to be recovered more than one year after the balance sheet date.
(b) Collateral The Group holds collateral in the form of liens or charges over properties and, in the case of policy loans, the underlying policy for the majority of the loan balances above. In the event of a default, the Group is able to sell or repledge the collateral. The Group did not hold any collateral which it was permitted to sell or repledge in the absence of default, at the end of either 2006 or 2005.
O therinform ation Aviva plc Annual Report and Accounts 2006 151 22 – Securitised mortgages and related assets The Group has loans secured by mortgages, subject to non-recourse finance arrangements, in a UK long-term business subsidiary and in three Dutch subsidiaries. Details of the relevant transactions are as follows: (a) UK In a long-term business subsidiary (NUER), the beneficial interest in certain portfolios of lifetime mortgages has been transferred to five special purpose securitisation companies, Equity Release Funding (No 1) plc (ERF1), Equity Release Funding (No 2) plc (ERF2), Equity Release Funding (No 3) plc (ERF3), ERF Trustee (No 4) Limited (ERF4T) held on trust for the benefit of Equity Release Funding (No. 4) plc (ERF4), and ERF Trustee (No 5) Limited (ERF5T) held on trust for the benefit of Equity Release Funding (No. 5) plc (ERF5) (together “the ERF companies”), in return for initial consideration and, at later dates, deferred consideration. The deferred consideration represents receipts accrued within the ERF companies after meeting all their obligations to the noteholders, loan providers and other third-parties in the priority of payments. No gain or loss was recognised on the transfers to ERF1, ERF3 and ERF5T, and gains of £5 million and £9 million were recognised on the transfers to ERF2 and ERF4T respectively. The purchases of the mortgages were funded by the issue of fixed rate, floating rate and index-linked notes by the ERF companies.
All the shares in the ERF companies are held by independent companies, whose shares are held on trust. Although NUER does not own, directly or indirectly, any of the share capital of the ERF companies or their parent companies, these have been treated as subsidiaries in the consolidated financial statements. NUER has no right to repurchase the benefit of any of the securitised mortgage loans, other than in certain circumstances where NUER is in breach of warranty or loans are substituted in order to effect a further advance.
NUER has purchased subordinated notes and granted subordinated loans to some of the ERF companies. These have been eliminated on consolidation through offset against the borrowings of the ERF companies in the consolidated balance sheet.
Notes to the consolidated financial statements continued 23 – Financial investments (a) Financial investments comprise: At fair value through profit or loss
Equity securities Corporate – UK – 30,580 140 30,720 Corporate – Non-UK 34 24,666 1,342 26,042
Equity securities Corporate – UK – 29,036 13 29,049 Corporate – Non-UK 58 21,610 1,327 22,995
Included within financial investments are £722 million (2005: £461 million) of debt securities and other fixed income securities which have been sold under stock repurchase arrangements. The obligations arising under these arrangements are included in other financial liabilities (see note 44).