Read here… 17 Performance review 75 Corporate responsibility 93 Governance 137 Shareholder information 167 Financial statements IFRS
UK 42 Europe 43 North America 11 Asia Pacifi c 1 Aviva Investors 3••
42% of Group operating profits 12 major centres in the UK
Hungary, Ireland, Italy, Lithuania, Netherlands*, Poland, Romania, Russia, Slovakia, Spain, Turkey (Delta Lloyd operations*)
Asia Pacific 1% of Group operating profits China, Hong Kong, India, Indonesia,
Our commitments Our customers For us, insurance is about people, not policies. That means responding to our customers with thought, care and understanding. We want people to choose us and stay with Aviva throughout their lives because they know we’ll be there for them – and they like dealing with us.
Our people We’re determined to stand apart from other financial services companies. We’ll only achieve this if our people are proud to work for Aviva, so we listen to them, respect them and recognise the personal contribution they make to our business.
“You did a super job for us. We’ll never forget you, ever.”
Our UK general insurance profits increased 8% to £579 million with sales increasing each quarter during 2010
We were voted the UK’s top life, general and health insurer by insurance intermediaries, and customer service improved across our businesses
Highlights We achieved a strong performance across all major markets in 2010 with 20% growth in IFRS operating profit to £1,434 million
Total sales in the year grew to £6.7 billion Our life and annuity business IFRS profits in the US more than doubled In Canada, our general insurance operating profit increased 54% to £222 million
We operate across Asia Pacific through joint ventures and wholly-owned operations and provide more than 8 million customers with life, general and health insurance products. The opportunity for Aviva to create franchise value through organic growth in Asia is significant. Robust economic growth, markets with favourable demographics and low life and pension penetration offer attractive long-term prospects in the region. China and India have large populations and relatively high economic growth and are capable of generating a significant proportion of our future new business in Asia. We are focusing on capitalising on these opportunities and continuing to improve our performance. We have taken action to reshape our product portfolio towards higher-margin products. Our multi-distribution platform is being reinforced by strengthening relationships with our bank partners. With the strengthening of our multichannel distribution capability and product portfolio management we are well positioned to benefit from the region’s long-term growth potential.
Highlights Our IFRS operating profit for 2010 was £31 million2 Total sales for the year increased 25% to £1,911 million2 (excluding Aviva Investors Australia sales)
We are the partner of choice for more than 50 prestigious banks across the region including DBS (South East Asia’s largest bank), Woori (Korea’s largest bank), CIMB (Malaysia’s second-largest bank), IndusInd Bank and Punjab Sind Bank in India, as well as over ten banks in China 2 Excludes the Australian life business that was sold on 1 October 2009
Highlights Focus on our customers enabled us to deliver improvements in our internal and external client service rankings in 2010
Our investment performance is ahead of target with 73% of funds where a benchmark is specified, beating their benchmark over one and three years (equally weighted)
Our global ‘Street to School’ programme helps our charity partners across the world make a real difference to children who are alone and at risk on the streets
In 2010 we invested £11.4 million in community and charity projects
We are working hard to ensure we have an effective gender and diversity mix at all levels within the organisation
Information on the company 27 Organisational structure 40 Selected consolidated financial data 42 Financial and operating performance 43 Analysis of investments 57 Property 64 Contractual obligations 65 Risk management 66 Capital management 70
Governance Board of directors 94 Executive management 96 Directors’ report 97 Corporate governance report 100 Nomination committee report 109 Audit committee report 110 Risk committee report 112 Corporate responsibility committee report 114 Directors’ remuneration report 115
Shareholder information Company address and Share capital 138 Related party disclosures 140 Dividend data 141 Guarantees, securitised assets and off-balance sheet arrangements
Financial statements MCEV Condensed consolidated income statement 316 Condensed statement of comprehensive income 317 Condensed statement of changes in equity 317 Condensed consolidated statement of financial position
Group MCEV analysis of earnings 320 Notes to the MCEV financial statements 321 Statement of directors’ responsibilities in respect of the Market Consistent Embedded Value (MCEV) basis
Operationally Aviva is doing extremely well; the executive team and our people across the Group have done a remarkable job in supporting our customers and delivering profits of £2.55 billion for the year.
I thought 2010 would not be an easy year for the financial markets and in some respects it was not. We have had to cope with volatility in the marketplace and increasing regulation. In spite of this, we have made very good progress over the last twelve months. The longerterm economic prospects are looking brighter and our single strong brand enhances Aviva’s resilience.
Looking forward to 2011 Predicting the future of the financial markets is never easy and the likelihood is that the situation will remain uncertain, perhaps for another 18 months. However, against this backdrop, we are in good shape and have a clear way forward. On behalf of the Board and the executive, I would like to publicly thank all of our people for the great job they continue to do every day in delivering our brand promise to recognise our customers and help provide them with prosperity and peace of mind.
This has been a successful year for Aviva. Despite the tough economic environment in 2010, we have grown the business and the benefits of Aviva’s transformation over recent years have started to come through. We have seen strong growth during the year: IFRS operating profits were up 26% to £2.55 billion and total sales were up 4% to £47.1 billion. We are selling more and improving profitability: we delivered a life new business internal rate of return (IRR) of 12.5% and a general insurance combined operating ratio (COR) of 96.8%. We have also beaten our target for capital generation, increasing net operational capital by 70% to £1.7 billion.
This is the result of a great deal of hard work across the group – focusing on our customers, growing the business and driving cost and capital efficiency. We are in good shape to continue building on last year’s strong performance. We have a clear strategy to concentrate on the markets where we have strength and scale and to make the most of running our life and general insurance businesses under a single strong brand.
...and the benefits are clearly evident in the numbers As expected, the economic situation remained difficult in 2010. The fact that we turned in such a strong financial performance under these circumstances underlines the strength of our business. We are seeing evidence of improved performance right across our business. We had another strong year in life insurance. General insurance is returning to growth from a low point in the cycle. Our asset management business, Aviva Investors, delivered significant growth in funded external sales.
... due to strong performances across our businesses We delivered a strong life insurance performance in 2010. Long-term savings sales increased by 4% to £37,360 million. Through our focus on profitable new business growth and disciplined allocation of capital the Group’s Internal rate of return (IRR) increased to 12.5% (from 10.0% in 2009) with a payback of 8 years (14 years in 2009). In the UK our life business is clearly winning in an attractive market and we were voted the UK’s top insurer by independent financial advisers. Not only did we grow long-term saving sales by 19% and increase our market share for the third consecutive quarter but we also delivered excellent profitability with a 15% IRR and significantly increased margins to 3.4% (FY 2009: 2.8%). In Europe we are well positioned in the world’s largest life and pensions market. We achieved a 13% IRR in Aviva Europe – ahead of the Group’s short term financial target – on life and pensions sales up 3% on a local currency basis. In North America we significantly increased profitability with an IRR of 14% and a four-year payback as a result of disciplined pricing management and our focus on more capitalefficient life products.
... and our balance sheet is stronger… We also provided further clarity on the strength and quality of our balance sheet which underpins our resilient profits and powerful capital generation. During the year our IFRS net asset value per share increased to 454 pence (31 December 2010) from 374 pence (31 December 2009), largely through the strength of our earnings and by reducing the pension deficit to zero (31 December 2010) from £1.7 billion (31 December 2009), but also partly through improving financial markets. The strength of Aviva’s balance sheet rests on our effective management of credit and insurance risk and our disciplined asset liability management. We have high-quality, well managed and diverse fixed income portfolios, and our asset manager Aviva Investors has helped to deliver a consistently strong performance across these assets over a number of years. In line with the prudent management of our balance sheet in the current economic environment and our strong capital generation, we plan to reduce Aviva’s hybrid debt by at least £700 million over the next three years.
In January 2011 we provided the market with further embedded value disclosure. This gave additional clarity to the value of Aviva’s future cash flows and allows greater comparability with other UK insurers. On a European Embedded Value equivalent basis Aviva’s net asset value per share is 621 pence at 31 December 2010. Our IFRS shareholder equity now exceeds the level before the global financial crisis, having increased during the year by £2.5 billion to £13.0 billion and our financial strength was recognised by the positive rating action by credit rating agencies S&P and Fitch at the start of 2011.
We have refreshed our strategy In November 2010, we set out the results of our strategic review. There is no doubt we are in a strong position because of the actions we have taken across the business. Equally, the world is a very different place to when we laid out our strategy in 2007. We are in a new economic environment as customers prefer to pay down debt and save more and constraints on capital require greater investment discipline, strategic focus and strong balance sheets. Given this changed environment in 2010 we took a step back and had a hard look at our strategic direction. There were three clear conclusions, as I outline here and set out in more detail in the following pages: 1. Increasing our geographic focus on 12 markets where we have strength and scale, particularly in the UK and Europe where our market-leading positions mean that we are well placed to make the most of the significant demographic opportunity in the region.
Strong platform for profitable growth Moved from 40 brands to a single, strong brand – Aviva Grown the scale of our customer base, now over 53 million strong and continuing to attract new customers Reshaped the portfolio to reallocate capital to higher return markets – such as the partial IPO
of Delta Lloyd and the sale of our sub-scale Australian life business Brought our businesses closer together – combined life and general insurance in the UK and implemented the transformation of our European business Delivered our £500 million cost savings target a year early – £750 million costs taken out of the business over the last 3 years Reduced our headcount by approximately 19% since 2007 Completed the reattribution of the inherited estate benefiting policyholders and shareholders Negotiated the closure of the final salary section of the UK staff pension schemes to future accruals
Aviva plc Annual Report and Accounts 2010 2. Benefiting from the combination of life and general insurance. Our life and general insurance operations are excellent businesses in their own right, with strong market positions, good growth prospects and attractive returns. In addition to their inherent strengths, there are significant advantages to running both under one strong brand. For example, Aviva benefits from diversification of risk that allows us to hold 30-40% less capital to write new general insurance business than on a standalone basis.
Delivering on short-term financial commitments In addition to our longer-term strategy, we have set out a number of near-term, demanding financial targets. We aim to deliver: At least £1.5 billion operational capital generation in 2011; Life IRR of a least 12% with payback of 10 years or less; 2011 general insurance COR of 97% or better; and £200 million of cost savings and £200 million of efficiency gains by the end of 2012.
Strength from our people and our customers We are reaping the benefits of the commitment and hard work of our people over the past few years and I am grateful to all of the Aviva team.
The real source of our success, of which I am always conscious, is the difference that our people can make to our customers’ lives. This is what motivates us and makes Aviva an exciting place to work.
Confident outlook We are in good shape with a clear way forward and strong momentum in our businesses. In our life business, we are confident that with our brand strength, leading market positions and great product offerings, we are in a strong position to benefit from our customers’ increasing propensity to save in these uncertain times. In our general insurance business, because of the actions we have taken and the improving market conditions, I believe the prospects are better than at any time in the last five years. We have come a long way in the last few years and I am confident that, although the economic environment may well be tough in 2011, we have a strong platform from which to deliver the continued success of Aviva.
Safeguarding our financial future With economies recovering at different speeds and a greater pressure on finances for both business and individuals, we are playing our part in finding new ways of thinking about how we should safeguard our financial futures.
We continue to monitor consumer attitudes to savings around the world. We now have seven years of rich data from which to create insight (www.aviva.com/customers/consumerattitudes -survey).
In August 2010 we launched ‘Mind the Gap’, a report which explores the difference, across 27 European countries, between the pension provision people will need in retirement and the pension amount they can currently expect to receive. It provides calls to action to address the pensions gap and incentivise higher levels of saving (www.aviva.com/europe-pensions-gap).
In October 2010, we convened the Future Prosperity Panel, bringing together leading international ‘thinkers’ from outside financial services to debate fresh approaches to ensuring financial prosperity. It uses insights from public policy, business and behavioural economics to look for new solutions to help people save (www.aviva.com/media/future-prosperity-panel).
A clear focused strategy However, there is no doubt that the world has changed significantly. Against a backdrop of changes to the economic, business and regulatory environments, we stepped back in the first half of 2010 and assessed our strategic direction. As a result, in this new economic environment we are now looking ahead to the next phase of Aviva’s growth – there are new challenges and exciting opportunities.
Financial targets for 2011 Our strategy gives us a clear way forward, but we are also focused on delivering strong performance in the near-term, so we have set out a number of clear financial deliverables: Increasing geographic focus We will prioritise our investment in 12 markets where we have strength and scale.
UK and Europe represents the largest life and pensions market in the world, offering the greatest absolute growth over the next five years
We will focus on risk and savings products in UK, France, Spain, Italy, Poland, Ireland, Turkey and Russia
In the US we will diversify the business mix by growing our life protection business to achieve a top ten position while continuing to build our core annuity business
In Asia Pacific we will pursue franchise growth through organic investment
Building on our core strengths We will succeed by building on four core strengths. We already perform well in these areas, but by focusing our efforts and resources, we aim to excel at each of them, and enhance Aviva’s position as a leading insurer and asset manager.
Capital The combination of our businesses provides capital benefits by diversifying risks
Aviva can hold 30-40% less capital to write new general insurance business than the general insurance business would need to hold on a standalone basis. It is anticipated that this benefit will be reinforced under Solvency II
We create cross-selling opportunities, with our single, trusted brand which is able to meet our customers’ complete insurance, pension and investment needs
We will exploit the strength of our brand, which is one of Aviva’s greatest assets
We will further develop our approach to understanding and taking measured risks, protected by optimised reinsurance
More details on our results can be found in the Performance review section
MCEV operating profit*** £m 3, 3, 3, 3, 3, 2009 MCEV operating profit has been restated – see Financial Statements MCEV
UK 42 Europe 43 North America 11 Asia Pacifi c 1 Aviva Investors 3•
* On an MCEV basis from 2007. Prior years presented on an EEV basis
Focusing on earnings per share allows us to align our strategic priorities with what our shareholders receive.
Total IFRS return takes into account everything affecting shareholder value, not just operating profits.
Proposed ordinary dividend per share and dividend cover Our Board has recommended a final dividend of 16.00 pence per share (2009: 15.00 pence). This brings the total dividend for the year to 25.50 pence and gives a dividend cover of 2.1 times (2009: 1.8 times) based on IFRS operating earnings after tax.
Group adjusted operating profit before tax IFRS operating profit increased by 26% to £2,550 million (2009: £2,022 million). MCEV operating profit increased by 5% to £3,760 million (2009: £3,592 million). These results reflect the improvement in our operating performance in the year, fuelled by the sales growth we observed on our UK, European and American markets.
We aim to achieve steady sustainable growth in our operating profit, both on an IFRS and market consistent embedded value (MCEV) basis. In seeking to achieve this growth, we continue to adopt strict financial management disciplines underpinned by strong corporate governance.
Operating capital generation is the operating movement in our free capital in the year.
Return on equity shareholders’ funds Return on Equity shareholders’ funds on an IFRS basis increased to 14.8% (2009: 10.9%) benefiting from the growth in operating profits.
Return on equity shareholders’ funds is calculated as after-tax operating return, before adjusting items, on opening equity shareholders’ funds, including life profits on an IFRS basis.
Employee engagement and leadership Key performance indicators relating to our employees’ views on Aviva are based on questions in our annual global ‘Employee Promise’ survey. We report and set targets in line with global financial service (GFS) benchmark norms and monitor our internal performance by using our historical data to assess annual progress.
Employee engagement represents the degree to which people believe Aviva is a great place to work and are contributing to help meet our collective goals and ambitions.
Our aim is to improve both measures over time and meet or exceed a global financial services benchmark.
Customer advocacy The 2010 Net Promoter Score® survey showed results broadly consistent with 2009. We maintained the proportion of businesses operating in the upper quartile (relative to local competition) despite an element of uncertainty in some of Aviva’s markets. Our geographic diversity means we are well positioned and optimistic about the long-term prospects for growth.
Winning in the UK Aviva is the leading insurance brand and customer franchise in the UK. Our combination of life, health and general insurance, together with motoring services from RAC, is unique in its scale and breadth in the UK market. We are the UK’s largest insurer with 19 million customers, and one in three households has a relationship with us. Customers can choose to buy our products through intermediaries, our corporate partners or from Aviva direct and we have become the partner of choice for many of the UK’s biggest organisations. We are ranked as one of the UK’s top ten most valuable brands.
Growing our unparalleled distribution network, maximising the potential of our strong brand and being the partner of choice for intermediaries, banks and other corporate partners
Managing a controlled expansion of our risk appetite into attractive growth markets where we are underweight, such as corporate risks and specialty lines
An excellent year with momentum building in profit, sales and service across our UK business In 2010 we delivered strong and profitable growth across our UK business. IFRS profit increased 21% to £1,411million; clearly demonstrating the significant value generated from our unique combination of life and general insurance businesses. We significantly increased our distribution strength during the year by expanding our corporate partnerships across our UK businesses while at the same time being voted the UK’s top insurer by insurance intermediaries across life, general insurance and health.
Our life business is winning in an attractive marketplace We delivered a record result in our UK life business with IFRS operating profits up 26% to £850 million as we drove increased earnings from our new and in-force business. We have created competitive advantage from our strong and diversified new business franchise, leading brand and multi-distribution. Total long-term savings were up 19% to £11,846 million and life and pensions sales increased 16% to £10,298 million. The UK market is growing again and we grew our market share for the third consecutive quarter (Q3 2010 11%; Q3 2009 9.7%) with a strong performance in annuities and core life protection. We increased margins significantly to 3.4% (2009: 2.8%) through our disciplined approach to business mix, costs and capital. Our IRR was 15% with a reduced payback period of 7 years. We are well placed for the Retail Distribution Review (RDR) in 2013 with our diverse distribution and broad product range.
Significant opportunity for future earnings growth as general insurance performance accelerates Our general insurance and health business delivered a strong performance with IFRS operating profit increasing 8% to £579 million and our general insurance combined operating ratio improving from 99% to 96%, demonstrating the quality of our portfolio and our continuing focus on cost control. Our enhanced pricing and risk selection techniques enable us to more accurately recognise individual risks with the most competitive premium, which in turn has been reflected in our improved claims experience. Our approach to reserving and prior year releases has remained consistent to previous years. Our general insurance business has delivered four consecutive quarters of sales growth with net written premiums 5% higher at £4,046 million. Our direct business is growing fast with over one million customers holding direct motor policies with Aviva, 200,000 more than at the start of 2010. Direct pricing has been rolled out to 2,300 brokers making a significant contribution to our growth and RAC Panel sales have more than doubled. We continue to exploit our market leading SME franchise in commercial lines and SME net written premiums increased 7%. We have made good progress in building our corporate risks and specialty lines business through the controlled expansion of our risk appetite and the recruitment of specialist expertise. We are attracting high-quality risks with £50 million of new gross premiums and a COR of 81%. Our disciplined approach to risk selection, claims excellence and our geographical spread helped mitigate some of the effects of the adverse winter weather experienced in late November and December. We have received over 23,000 weather related property claims for homes and businesses at a cost of £60 million above our long-term average weather assumptions. Weather in the rest of the year was better than expected, despite the January freeze, taking the overall impact to £40 million above long-term average for the whole of 2010.
The Aviva brand is strong; customer recognition and consideration levels improved in 2010 with spontaneous awareness at 54% at the year end. We have also adopted a single approach to TV advertising using Paul Whitehouse which has both contributed to growing customer interest and sales. Our unrivalled product range means Aviva can meet customer needs throughout their lives and our customer research highlights the significant opportunity we have to increase value and deliver a wider service to our UK customers. The number of customers who hold multiple Aviva products is growing and we are focussing on further developing this
Market environment Throughout 2010 many markets within Europe have faced a turbulent economy, including a suppressed housing market, political change and a shift in the regulatory environment. As a result, new regulations have been introduced which have created challenges for us as an insurer. These include pension legislation changes pending in Poland and new taxes introduced in France and Italy. There has been volatility in the financial markets with sovereign and corporate debt concerns particularly for Ireland, Spain and Italy. This has had a corresponding impact on consumer sentiment in all markets, with customers preferring savings products that have an element of guarantee. We have chosen to manage our product propositions to balance this need while ensuring an appropriate focus on capital management and shareholder returns. However, the economic environment also provides opportunities for us, not least the mergers of the Spanish savings banks, the €2.4 trillion2 gap in pensions savings and changing customer sentiment. We will utilise our expertise across the region and leverage the capabilities provided by our transformation to deliver returns to shareholders and market-leading products to policyholders.
Positive general insurance sales General insurance and health net written premiums increased 4% to £1,953 million (2009: £1,883 million). This is supported by management action in Poland, where we have expanded the product offering sold through independent agents, strong growth in Italian personal motor and creditor business, and strong health sales in both Ireland and France. General insurance and health profits are 17% lower at £109 million (2009: £132 million) as a result of lower long term investment returns of £147 million (2009: £175 million). Adverse weather and a significantly lower level of reserve margin release than prior year has led to a COR of 103% (2009:103%).
‘My Aviva Customer Bundling’ was launched as a pilot in Ireland to maximise cross-selling of general, life and health products for our most profitable customers.
Europe continued enabled Aviva Europe to maintain like for like costs at the same level as 2009. This is a great achievement that negates the impact of inflation. In addition to the pan-European product initiative above, another example of how we share expertise across the region is our approach to brand and marketing initiatives. This enables high media exposure via cost-efficient campaigns. Poland and Ireland rebranded in 2010; this was supported by the opening in Dublin of the Aviva Stadium and an extensive branding campaign in Poland. The ‘Faces’ advertising campaign, launched across France and Italy, clearly demonstrates the efficiencies gained from a single brand and extends the reach of Aviva’s global ‘You are the Big Picture’ campaign.
Europe presents a significant opportunity Europe has significant long-term potential for Aviva with a $1.7 trillion growth in life and pensions assets expected between 2009 and 2014. The strategic attractiveness of the region was underscored by research we conducted in 2010 into Europe’s pensions gap. For further detail see case study below.
This pioneering research shows that European citizens need to find an additional €2.4 trillion3 in savings every year to fully close the gap. Using our depth and breadth of life experience in the region, we are working in close partnership with governments, local regulators and the European Commission to generate tangible solutions to increase pension savings, such as our proposal for a European Quality Standard for pensions and the issue of annual pensions statements to all citizens. While this raises significant challenges across Europe, it also demonstrates the size and potential of the European pensions market and the significant opportunity that exists for Aviva. For further detail visit: www.aviva.com/europe-pensions-gap
3 Includes the 27 countries of the European Union and the countries of Russia and Turkey
Market environment There are increasing signs of economic recovery and, despite the recession, North America’s economies remain among the world’s largest and its population among the world’s wealthiest. The US life insurance and annuity market and the Canadian property and casualty insurance market are very competitive and highly fragmented with a large number of insurers.
Healthy profit growth in US life and annuity business In the US, our disciplined pricing management led IFRS operating profits from our life and annuity business to more than double, with life new business profitability also improving significantly to a 14% IRR (2009: 7%). Our US protection sales as measured on a PVNBP basis rose 15% to £999 million and are the largest across Aviva. Annuity sales grew moderately as we focused on profitable growth and capital efficiency. We continue to focus on diversifying our business mix, specifically targeting the growth of life sales in existing and new channels.
Outlook Regional economic growth is recovering and the outlook is for moderate growth overall. In this context, our disciplined underwriting and operational effectiveness in our general insurance business – combined with a continued focus on profitable growth underpinned by compelling value propositions to our customers in our life business – positions the North America region well to further grow our contribution to Aviva’s overall profits.
Committed to building franchise value through organic growth Aviva Asia Pacific operates in nine countries across the region through both joint ventures and wholly owned operations. China and India, both with large populations and relatively high economic growth, are ‘must-win’ markets and are expected to generate a significant proportion of our future new business. We will continue to pursue franchise value growth through organic investment and improved margins, focusing on these key markets.
Evolving our product portfolio to improve margin and profit. Strengthening our multi-channel distribution capability. Strengthening our talent pool.
Franchise value growth through organic investment We continue to progress against our strategic priorities, pursuing franchise growth though organic investment and improved margins. While we operate in nine countries, we have further sharpened our focus on markets where we have strength and scale such as China, India and Singapore where we expect to generate a significant proportion of our new business growth.
Total sales were £1,911 million in 2010. This represents an increase of 25% on 2009, with margin on a Present Value of New Business Premium (PVNBP) basis increasing from 0.9% to 3.2%. Life and pensions sales increased by 48%, reflecting the growth and development of Aviva’s franchise in Asia. We delivered a strong performance in our priority markets of China and India where sales increased by 28% and 22% respectively. Outside China & India, life and pension sales increased from £665 million to £1,085 million. This reflects the region’s strong economic recovery as well as our renewed strategic focus on delivering strong new business margins. Markets such as Singapore recorded a rise in life and pensions sales to £345 million from £155 million and Korea is now our second largest market after China in terms of sales volumes, growing by 41%. IFRS operating profit of £31 million was lower than prior year, which included favourable reserve releases in Singapore and Aviva’s Australian life business (sold 1 October 2009). Excluding these one-off factors and the one-off impact from the change in China’s GAAP accounting basis this year, underlying adjusted operating profit increased by £40 million reflecting our increased 4 Asian Development Bank outlook 2010 update, 28 September 2010 5 Excludes the Australian life business sold on 1 October 2009 scale and focused cost management. We have also focused on capital efficiency. Our internal rate of return (IRR) has improved significantly from 6% to 11% through increasing benefits of scale coupled with careful portfolio management and capital discipline.
Strengthening our multi-channel distribution capability Our improved performance in 2010 can be largely attributed to strengthened relationships with our bank partners. This has encouraged an evolving product portfolio focused on highermargin products in areas such as protection and saving. We have continued to build our multi-distribution platform and now have over 50 bank partnerships, with sales from our bancassurance operations increasing by 76% since 2009.
Aviva Advisors The financial needs of our customers are evolving rapidly in Asia. To address this, in Singapore and Hong Kong, we are transforming the traditional agency model with the launch of a truly innovative channel – Aviva Advisors. This ‘owned’ channel, unique in the market, is led by professional advisors who are equipped with innovative and differentiated life insurance products, services and state of the-art tools to meet their clients’ needs. It bridges the gap between the traditional agency and independent financial advisors.
Sales include Aviva Investors Australia, and excludes the Australian business sold on 1 October 2009
Strong progress in the development of our global infrastructure Aviva Investors is the globally integrated asset management business of the Aviva Group. We manage funds for Aviva and a growing range of thirdparty clients. We enjoy a close and mutually beneficial relationship with Aviva, supported by the financial strength and global brand presence of the Group, and in return, delivering investment know-how, strong and sustainable returns and supporting financial risk management initiatives.
Strategy Aviva Investors’ strategy is to leverage our Aviva parentage and insurance heritage to grow third-party sales, maintain and, where possible, increase the assets we manage on behalf of Aviva, and through these actions materially increase our contribution to Group profitability. Our nine key strategic imperatives are: Focusing on external sales and revenues. Establishing the right product and solution offering –
Growth in external sales We made strong progress in the development of our global business development infrastructure during 2010 and saw encouraging signs that our business model is supporting our primary objective of delivering strong growth in external fund sales. Net funded external sales (excluding liquidity funds) rose from an outflow of £236 million in 2009 to inflows of £2,364 million in 2010, gross external sales were £8,320 million offset by higher than expected redemptions of £5,956 million. Net liquidity fund sales were an outflow of £745 million (2009: inflows of £2,593 million). During 2010, we re-oriented our business towards more durable, higher margin funds, which resulted in an increased average fee rate on gross external sales, excluding liquidity funds. Assets under management of £260 billion (at 31 December 2010) were up 4% on 2009’s figure of £250 billion, with assets managed for external clients increasing 13% to £51 billion (2009: £45 billion).
Business overview Our aims and strategy We have simplified and streamlined the Group, moving from a federation of independent businesses to a successful global business. However there is no doubt the world has changed significantly in the last few years. This is particularly true for Aviva’s customers, who are responding to the uncertain economic climate and lower disposable incomes by paying down debt and saving more, to ensure a more secure financial future for themselves and their families. For insurance companies, such as Aviva, the capital constraints of today demand investment discipline, greater strategic focus and strong balance sheets. In addition, the regulatory environment has moved towards greater regulatory scrutiny and the advent of Solvency II. We assessed our strategic direction against the backdrop of these changes and came away with three principal conclusions: Increasing geographic focus We will focus on markets where we have strength and scale. In determining our focus we will judge markets on their potential to generate both $100 million of IFRS operating profits and a 12% return on capital employed, or $1 billion of franchise value for younger businesses. This focus will allow us to capitalise on our leading market positions in the UK and Europe, the world’s largest life and pensions market.
Building on our core strengths To be the best in both life and general insurance, we will focus on our four core strengths of marketing and distribution, financial discipline, technical excellence and operational effectiveness, benefiting from a powerful brand and growing customer franchise.
Our business Overview Our principal activity is the provision of financial products and services, focused on the following lines of business: long-term insurance and savings business, general insurance and health and fund management. Our business is managed on a geographic basis through a regional management structure based on four regions: UK, Europe, North America and Asia Pacific. The four regions function as six operating segments as both the UK and Europe regions are split into two operating segments. Due to the size of the UK region it is split into the UK Life and UK General Insurance segments, which undertake long-term insurance and savings business and general insurance respectively. In Europe, Delta Lloyd is managed separately from the other European businesses; therefore the region is split into Aviva Europe and Delta Lloyd operating segments. Aviva Investors, our fund management business and sixth operating segment, operates across all four regions providing fund management services to third-party investors and to our long-term insurance business and general insurance operations. For information on the main categories of products sold in each of these geographic segments over the last three years, see ‘Financial and operating performance – Regional performance’. Our geographic operating segments offer the following lines of business to a greater or lesser extent: Long-term insurance and savings business Long-term insurance and savings business accounted for over 75% of our total business based on sales for the year ended 31 December 2010. We reported total long-term insurance and savings new business sales of £33.4 billion and investment sales of £4.0 billion for the year ended 31 December 2010. Our focus remains on growing our business profitably and improving our operational efficiency so that we can fully benefit as our major markets return to economic growth.
Annuities – a type of policy that pays out regular amounts of benefit, either immediately and for the remainder of a person’s lifetime, or deferred to commence from a future date. Immediate annuities may be purchased for an individual and his or her dependants or on a bulk purchase basis for groups of people. Deferred annuities are asset accumulation contracts, which may be used to provide benefits in retirement, and may be guaranteed, unit-linked or index-linked.
Protection – an insurance contract that protects the policyholder or his or her dependants against financial loss on death or ill-health. Our product ranges include term assurance, mortgage life insurance, flexible whole life and critical illness cover.
Investment sales comprise of retail sales of mutual fund type products such as unit trusts, individual savings accounts (ISAs) and Open Ended Investment Companies (OEICs).
Brands and products Our general insurance business currently operates under different brand names, with Aviva and the RAC in the UK and Delta Lloyd in the Netherlands. Our other general insurance operations in Europe, Canada and Asia Pacific operate under the Aviva brand. During 2010, businesses in Ireland and Poland completed their transition to the Aviva brand as part of a global branding exercise. RAC in the UK and Delta Lloyd in the Netherlands will remain unchanged. Our general insurance business concentrates on personal lines and commercial lines insurance through the provision of motor, household, travel, creditor, commercial liability and commercial property coverage. Our health insurance business concentrates on private health insurance, income protection and personal accident insurance, as well as a range of corporate healthcare products.
Distribution We have various distribution agreements with bancassurance partners and joint ventures across many markets in which we operate. The agreements contain similar terms and depending on our line of business in that market offer long-term insurance products, general insurance and health products, asset management services or a combination thereof. The agreements have a defined contract term, frequently with the option to extend. In return for offering our products to their customers, the bank or joint venture partners receive a commission as a percentage of sales and in some cases achieve extra commission if agreed target levels of sales are met. Certain agreements have a profit sharing element based on a predetermined percentage. The success of the agreement is regularly monitored against certain performance indicators which are those typically used by the management of the business. In some cases, if the agreed targets are not met, the terms of the contract can be renegotiated, typically with respect to the level of commission or profit sharing percentage. Under joint venture agreements, the costs of running the venture are often split between the partners.
Market position Aviva Investors is ranked 32nd globally by assets under management, according to Cerulli Associates’ December 2009 ranking of asset managers by assets under management. Aviva Investors operates under a single brand in 15 countries across our regions of the UK, Europe, North America and Asia Pacific.
The other fund management businesses of Aviva comprise our collective investment business with the Royal Bank of Scotland Group in the UK, Delta Lloyd in the Netherlands and our Navigator wrap administration business in Hong Kong and Singapore. Total worldwide funds managed by Aviva Investors at 31 December 2010 was £260 billion, the substantial majority of which currently relates to Aviva’s insurance and savings operations.
Brands and products Our business in the UK manages investments including equities, fixed income, property, hedge fund and socially responsible investments (SRIs) on behalf of institutional, pension fund and retail clients. Up until 31 December 2010, we also sold retail ISAs, unit trusts, OEICs and structured products under the Aviva Investors and the Royal Bank of Scotland Group (RBSG) brands.
Operating segments Each operating segment has a member of our executive management team who is responsible for it and who is accountable to the group chief executive for the operating performance of their segment. The full membership of our executive management team is set out on page 96. This structure for our operating segments is intended to ensure the Group’s ability to take advantage of market opportunities, improve speed of response, eliminate duplication of effort, and encourage the sharing of best practice in the interests of our customers and shareholders, while providing local knowledge.
United Kingdom Aviva Business overview and strategy As a leading UK insurer, our UK business operates through two major brands, Aviva and RAC. Our aim is to provide prosperity and peace of mind to the 19 million customers, or one in three UK households, who hold either long-term insurance, general insurance, healthcare or motoring services products with us. Aviva is a leading insurance brand and customer franchise in the UK. We have significant customer reach with customers able to purchase our products direct, through intermediaries, and through significant partnerships with the top UK banks and other institutions such as the Post Office. We employ 21,000 people and operate from a number of locations throughout the UK, including York, Norwich, Perth, Glasgow, Eastleigh, Bristol and Sheffield. We also have outsourcing relationships with a number of partners including Swiss Re, Scottish Friendly and International Financial Data Services (IFDS) in the UK, and WNS in India and Sri Lanka. The UK life and general insurance businesses were drawn together under common leadership at the start of 2010, creating significant opportunities for shareholders and customers. We identify brand, financial strength and a commitment to service, as our key strengths. Our core strategy is to leverage our range of market-leading products, our extensive distribution network and our customer base to outperform the UK market. We believe that our rigorous use of capital, further improvement in customer retention, reduction in new business acquisition costs and increase in productivity through the simplification of processes, services and costs will drive greater value for shareholders. In 2010, Aviva’s UK markets have continued to be affected by the challenging economic conditions experienced by the UK as a whole, including the slowdown in the housing market.
United Kingdom Aviva Life Business overview and strategy Our UK life insurance business is a leading long-term insurance and savings provider in the UK with a market share of 11% based on third quarter 2010 ABI returns. Our key strengths include a balanced distribution and broad product mix, a strong brand, and underwriting and risk management expertise. This breadth of distribution and product range aims to makes us more resilient to changes associated with the implementation of the Retail Distribution Review. We seek to outperform the UK Life market while delivering enhanced margins and an increase in Internal Rate of Return (IRR).
Aviva plc Annual Report and Accounts 2010 Information on the company continued independent financial advisers (IFAs). This is particularly the case for our savings and investment products as customers seek advice due to the complex nature of the products, the regulation surrounding them and the need for these products to meet the individual circumstances of the customer. We are a leading insurance partner for the biggest UK banks and building societies. We recently agreed the renewal of our successful strategic partnership with Royal Bank of Scotland Group with a new, exclusive seven year distribution agreement for the sale of life, protection and pensions products from 1 January 2011. We will also be launching life protection products through the extension of our existing general insurance distribution agreement with Santander from June this year. We have strong existing relationships with a number of banks and building societies, distribution deals with the Co-operative Insurance Society and the Post Office, and growing corporate and direct channels.
Distribution We have a multi-distribution strategy. Our personal products are sold directly to customers over the phone and through our website www.aviva.co.uk, via brokers and through over 100 corporate partnerships. Our RAC insurance offerings are also available through price comparison sites. For commercial insurance, we focus on broker distribution and believe that independent brokers remain the best source of the advice required by business customers. As part of our strategy to increase our appetite in the Corporate Risks Sector (CRS), we now have a bespoke trading floor in the City of London, providing direct access to our CRS specialists.
Europe Regional overview and strategy Europe (excluding the UK) offers a huge opportunity for Aviva, with $1.7 trillion growth in life and pensions assets expected between 2009 and 2014, according to Oliver Wyman. We have a major presence in the five markets of France, Ireland, Italy, Poland and Spain, which between them represent nearly 80% of our new business premiums. We are also focused on increasing our presence in the growing markets of Russia and Turkey and continue to manage our strategic investment in Delta Lloyd in the Netherlands. Through our leading bancassurance franchise and established retail networks, we offer a range of life, pensions, general and health insurance and asset management propositions, providing the diversity and competitive strength that only a composite insurance model can offer. We are already a top six provider in our five largest markets for life products5 and have a strategy to grow our general insurance presence.
Information on the company continued product mix by increasing sales of protection and unit-linked products and to expand our general insurance distribution. Our strategy is focused on developing five core capabilities, which are: Customer-focused multi-channel distribution; Product simplification and innovation; Shared operational excellence; General insurance claims management; and Governance and risk management.
We have a strong bancassurance model that serves customers throughout Europe via 55 banking agreements. We have strong partnerships including Credit du Nord in France, six of the savings banks in Spain, Allied Irish Bank in Ireland and relationships with five banks in Italy, including UniCredit Group. We also have a significant retail franchise, with a presence in all of our markets, operating through more than 8,000 direct and tied agents across 30 networks and with an independent sales force of 6,000 consultants. This is supported by our move to a single retail operating model, where shared tools and the creation of centres of excellence are enabling us to maximise our sales capability. We are also building a shared platform that will provide us with the ability to meet the demands of each prospective partner’s requirements in a rapid and efficient way, creating value for both Aviva and our partners, all whilst driving down the cost per policy. This strategy is enabling us to increase our sales force productivity, improve customer retention, develop and price innovative and customer-centric product propositions and create economies of scale through pan-European cost management.
Market We believe that the long-term insurance and savings market in France has longer-term growth potential due to the ageing population and the growing need for private pensions. We also believe that the current volatility in the financial markets has affected customer confidence in purchasing risk bearing products although we believe that over a longer period, multi-funds policies and unit-linked funds are the best insurance vehicles for performance. In the context of the ageing population and economic crisis, we believe our customers are expressing the need to be reassured and protected financially. We believe that there are real needs for protection in the form of long-term care and safeguarding wealth. The increase in health spending and the public authorities’ difficulties in financing the system are leading to a gradual transfer of health spending to private insurers. The general insurance market in France is mature and characterised by fierce competition. For several years, price competition was high as they aimed to gain market share, particularly in the personal lines market. Price competition has, however, reached its limits as the market currently faces increased claims frequency and a higher average claims cost. In the last few years, the industry has also faced major climatic events (storms Quentin, Klaus and Xynthia as well as floods) which have impacted general insurers’ results.
Italy Business overview and strategy Aviva Italy is the country’s sixth-largest life insurer, with a market share of 5% based on 2009 premiums according to Associazione Nazionale fra le Imprese Assicuratrici (ANIA). We are the 13th largest general insurance company in Italy with a market share of 1%, and over 2.3 million customers, according to ANIA. Our strategy is to continue to work with our partners on new products, suited to the current markets, to develop our bancassurance relationships and to expand our customer reach, through customer penetration and expanding our distribution reach.
Information on the company continued different insurers. This has opened up the general insurance marketplace to increased competition from different channels.
Distribution The direct sales force is the main distribution channel for most of the Polish group and is made up of 2,400 tied insurance agents whose work is co-ordinated by a network of our sales branches run by over 250 sales managers. We are developing our bancassurance distribution channel. Our biggest relationship is a joint venture with Bank Zachodni WBK (a subsidiary of AIB) that sells both life and general insurance products through the bank’s network of over 600 branches. We also co-operate with independent insurance agencies and brokers. We believe that these insurance brokers play a key role in selling commercial lines general insurance. Our mutual funds are also sold in brokerage houses and our individual products are supported by call centre and website sales. We also have a direct platform (internet and call centre) for distribution of motor insurance.
Spain Business overview and strategy Aviva Spain is the country’s fifth-largest long-term insurer by gross written premiums with a market share of 7% in the third quarter of 2010 according to Investigación Cooperativa entre Entidades Aseguradoras y Fondos de Pensiones (ICEA). Aviva Spain sells long-term insurance and savings, health and accident insurance in Spain through a bancassurance network based on joint ventures with six banks (Bancaja, Caja España, Caixa Galicia, Unicaja, Caja Granada and Cajamurcia) and through Aviva Vida y Pensiones, the wholly owned Aviva branded long-term insurance company. Our strategy in Spain is to further develop our bancassurance relationships and attract new partners when the opportunities arise. We also intend to develop our general insurance offerings through our existing partnerships. Overall, we will continue to be customer-focused, react quickly to market trends and maximise the sales of our core products, such as pensions and savings.
Market We believe Spain’s savings banks, ‘the cajas’, continue to be under pressure and a number may have to pursue mergers to secure their positions. Any opportunities arising from this will be considered by Aviva on their individual merits. In relation to distribution agreements with bancassurance partners, Aviva is also protected financially within our contracts with the cajas should a merger result in the insurance services of the newly merged company being awarded to the insurer of the other party involved. The top positions in the long-term insurance market are dominated by bank-owned or bank-insurer joint ventures, with the overall bancassurance channel accounting for more than 65% of gross written premiums in the third quarter of 2010 in the Spanish life insurance market according to ICEA. Customers in Spain are accustomed to receiving advice through traditional banking channels, and we leverage our cajas’ distribution channels to capitalise on this characteristic. We believe that customers have a high level of financial understanding and require comprehensive advice on products and services.
Distribution Through bancassurance partnerships we have established subsidiaries to distribute our products with each of the banks as set out below: Aseval – in conjunction with Bancaja since 2000 Unicorp Vida – in conjunction with Unicaja since 2001 CxG – in conjunction with Caixa Galicia since 2001 Caja España Vida – in conjunction with Caja España since 2001 Caja Granada Vida – in conjunction with Caja de Granada since 2002 Cajamurcia Vida – in conjunction with Cajamurcia
Aviva Vida y Pensiones distributes our products through professional intermediaries (financial advisers, agents and brokers) and a direct sales force, supported by a branch office network and call centres. The strength of our distribution relationships has enabled us to maintain our position as the second largest provider of protection products in the market, according to the ICEA at 30 September 2010.
Russia Business overview and strategy Aviva Russia is ranked fifth in the life insurance market with a 7.8% market share according to the data published by the market regulator, Finance and the Federal Service for Insurance Supervision (FSSN) and first in the non-captive Pillar III pension market with 17.5% market share, as at 30 September 2010. We began trading in early 2006, with a strategy that we continue to pursue, to position the business to take advantage of the growth expected to occur as the Russian life insurance industry develops. Compared with the same period last year, in the third quarter of 2010 Aviva’s gross written premiums grew by 142%, which is four times faster than the market, according to FSSN and the insurance market regulator. Aviva Russia is made up of a life company and two non-state pension funds. Aviva Russia has a Net Promoter Score of 86 in 2010, a score that has been consistently high (2009: 85).
Market We believe that Turkey, with its large population and strong economic growth, is a highly attractive market in the medium term. The pensions market, for example, is growing very fast, increasing 31% in the year to 31 October 2010 according to the TSRBS. The general insurance market is slightly more tempered, growing 5% in the year to 30 September 2010, according to the TSRBS.
Distribution In Turkey, we operate through a multi-channel distribution framework consisting of bancassurance, direct sales force, corporate sales, agencies and brokers.
Other Europe Business overview and strategy Aviva’s other European businesses are in the Czech Republic, Hungary, Slovakia and Romania. In the Czech Republic we are the 13th largest life insurer, with a 1.4% market share as at 31 December 2010 according to the Czech Insurance Association. We have more than 50,000 customers and 115 staff as at 31 December 2010. In Hungary, we are the seventh largest life insurance business, measured by gross written premiums as at 30 September 2010. Aviva Romania is the fifth largest voluntary pensions provider as at 31 December 2010 as measured by fund value according to the Private Pension Regulator (CSSPP) and the seventh largest life insurance provider as at 30 September 2010 according to data gathered by Signal Iduna in Romania. We are currently continuing to manage these markets for profitable growth.
Market Across these new European markets there are countries at different stages of development. Hungary and the Czech Republic are the most developed markets although they still have a gap as compared to Western European markets.
Distribution In the Czech Republic, our sales force is made up of over 380 agents operating across 14 regional offices, with 17 independent distributors. In Hungary, in addition to the direct sales force we also sell through brokerage partners. In Romania, we distribute through a direct sales force branch network of approximately 500 agents and have bancassurance partners, which include local units of Piraeus Bank, Emporiki and Credit Europe Bank.
Economies of scale through volumes. We will position ourselves through our brands Delta Lloyd, OHRA and ABN Amro Verzekeringen and develop standardised, flexible ‘white-label’ products.
Prudent risk management by using hedging strategies to protect against interest rate and equity risk.
Take a disciplined approach to consolidation. We believe we are well placed for expected future consolidation within our target markets. Delta Lloyd will only consider pursuing mergers and acquisitions if strategic opportunities arise and will create shareholder value.
The credit crisis has resulted in a number of Delta Lloyd’s competitors seeking state or shareholder support. We expect this situation to result in further industry reorganisation and consolidation in the coming years. In 2010, the Dutch Actuaries’ Association commented that current longevity models have underestimated the longevity improvement trend in the last two decades. A new set of mortality tables has been issued by the ‘Actuarieel Genootschap’ (AG), CBS and the Insurers Association (Verbond van Verzekeraars). The whole Dutch market will be impacted by the assumption changes arising from these new tables.
Distribution Delta Lloyd distributes long-term insurance and savings and general insurance products under three brands: Delta Lloyd, OHRA and through a joint venture with ABN AMRO. In the Netherlands the Delta Lloyd brand works exclusively with independent insurance intermediaries, while OHRA focuses on direct channels such as telephone, internet and mail. The third brand comprises a joint venture with ABN AMRO, reaching customers through the extensive distribution networks of ABN AMRO bank. The joint venture remains the exclusive insurance partner for the current and future Dutch banking operations of ABN AMRO, including Fortis branches which were integrated in 2010. We believe the Fortis integration will improve the distribution opportunities in bancassurance. Individual investment products are sold through private banks including ABN Amro, ING and Rabobank.
North America Regional overview and strategy Aviva North America consists of two businesses: our life insurance and annuity business in the US and our general insurance business in Canada. Our strategic priorities for the region are focused on driving profitable growth through improving our position and competitiveness in North America through: focusing on our customers with compelling value propositions, enhanced service and personalised customer experience; improving the profitability and capital generation of the North American Region, which is a net capital contributor to the Group; selectively expanding and growing our core life insurance and annuity distribution, products and capabilities; leveraging the sophisticated underwriting capabilities in our general insurance business; and building on our strong high quality relationships with our distribution partners.
Market and competition The North American region is home to two of the world’s largest and richest economies. Aviva has two businesses that currently serve their respective home markets and are led by our regional headquarters in Chicago.
USA Business overview and strategy Aviva USA is a leading provider of both fixed indexed life insurance and fixed indexed annuities according to sales reports released in 2010 by the industry’s Life Insurance and Market Research Association (LIMRA) and Indexed Sales and Market Reports from AnnuitySpecs.com. Over the last several years, Aviva USA has achieved significant growth and market penetration in the US market. Aviva USA’s strategy is to accelerate our growth of life insurance and protection business and to expand our access to savings and income markets. Today, Aviva USA has approximately one million customers and employs more than 1,500 people across the country from its headquarters in West Des Moines, Iowa, and offices in Topeka, Kansas, and Melville, N.Y. Underlying our strategy is a focus on developing compelling customer value propositions including enhanced product offerings, personalised service and deeper relationships with key distribution partners. We believe that US consumers want to be understood and recognised for the distinct financial needs they face. In 2010 Aviva USA introduced Building insurance around YOU, a strategic focus on the customer with products designed for their individual stage of life. By understanding our customers’ priorities, we believe we can best deliver life and annuity products to meet their changing needs.
Information on the company continued record sales growth in 2010, and continues to expand with new carriers introducing new product options, particularly in the life insurance side of the business.
Distribution Aviva USA uses a multi-channel distribution strategy to bring its products to market. We leverage these relationships to promote and sell our fixed indexed annuities and life insurance products. Our network covers all 50 states and includes 30,000 annuity and life insurance producers, including career marketing organisations, personal producing general agents, independent marketing organisations and brokerage general agents.
Products We provide a number of general insurance products through our Canadian companies including: Property, home and automobile insurance, including recreational vehicles and mobile homes insurance; Niche personal insurance products including holiday and park model trailers, horses, hobby farms, sailboats, power boats and antique classic and custom cars; and
Small and medium-size enterprise commercial insurance, including motor, property, liability, boiler and machinery, and surety.
Asia Business overview and strategy Aviva has operations in nine markets in Asia, with businesses at different stages of development. In China, through our joint venture with COFCO Limited (COFCO), we are ranked second in terms of annualised premium equivalent (APE) among 28 foreign insurers according to China Insurance Regulatory Commission as at 30 September 2010. We have a presence in 11 provinces at 31 December 2010, with a total of 44 city branches. We aim to achieve a top ten position by 2014, whilst improving profitability/margins. We will do so by strengthening our multi-distribution competencies and continue to be cost efficient, whilst developing talent and improving customer experience. In India, we operate in partnership with the Dabur Group through an associate, Aviva Life Insurance Company India Limited. We currently rank 11th among the private life insurance companies in India based on APE as at 30 November 2010, according to the Insurance Regulatory and Development Authority (IRDA). We aim to be amongst India’s top 10 insurers by evolving our product portfolio towards traditional products, increasing productivity of our current bancassurance operations, establishing new bank relationships and continuing to upgrade our agency network into a high-performance channel. In South Korea we own a 47% stake in Woori Aviva Life Insurance Co., Ltd. through a partnership formed with Woori Finance Holdings Company Ltd. Woori Bank is the second-largest commercial bank in South Korea by market capitalisation. Our business is young and growing; by the end of 2010 we have increased our market share to 2.2% since our entry in April 2008, and we aim to become a top ten player in the medium-term. In Singapore, we rank fifth in the life long-term insurance market by APE as at 30 September 2010 according to the Life Insurance Association. We are one of the leading bancassurance players in the market. We aim to be a top five player in the life and health market, whilst continuing to improve margins, building on the sales momentum in DBS in 2010 (306% above 2009) and through the launch of our financial advisory channel Aviva Advisors. In Hong Kong we are ranked 19th in the long-term insurance market by APE as at 30 September 2010 according to the Office of the Commissioner of Insurance. Our strategy is to build scale in this high-margin market by expanding our distribution channels. In Malaysia we own a 49% stake in two of CIMB Group’s subsidiaries, Commerce Life Assurance Berhad and Commerce Takaful Berhad who have entered into bancassurance agreements with another CIMB Group subsidiary, CIMB Bank. We are ranked 14th with a market share of 1.8% at 30 September 2010. We aim to become a top five life and takaful company in Malaysia. In 2010, Aviva entered Indonesia through a joint-venture with Asuransi Wahana-Tata. Our business is a top five provider of group health and pension products and we aim to grow the life insurance business. In Sri Lanka, we own a 51% stake in Aviva NDB. We were ranked the third largest life insurer and fifth largest general insurer in the country, based on gross written premiums in 2009 according to the Insurance Board of Sri Lanka. We aim to become a market leader in the life business . In Taiwan, we have a 49% stake in First-Aviva Insurance Company, a joint venture with First Financial Holdings Company (FFHC). After three years of operation, we have recently announced our decision to exit this market as we do not believe we can achieve our desired financial returns.
Aviva Investors Business overview and strategy Aviva Investors was set up in 2008 to combine major fund management components of the Aviva Group into a single global fund management business. We have £260 billion in assets under management as at 31 December 2010 and offer a broad range of expert investment skills and experience around the world. We manage internal funds for our long-term insurance and savings, and general insurance operations as well as a range of external retail and institutional funds. We provide these services across most of our geographic operating segments, with services in 15 countries around the world, including the UK, the US, Canada, France, Poland and Australia. Aviva Investors provides investment management services to a broad range of client types. Our largest client group are the long-term insurance and savings, and general insurance businesses of Aviva plc. For these clients we provide bespoke asset management services, across a broad spectrum of asset classes. We work extremely closely with these clients to develop tailored solutions to their policyholder needs. Our distribution model to external clients is a business-tobusiness model, and this is consistent across all regions. We provide both bespoke segregated solutions for larger clients or offer access to a variety of fund ranges. Our target clients for the larger segregated solutions tend to be large pension schemes and financial institutions such as insurance companies and banks. Our strategy is to rapidly grow our external business through offering client-centric solutions and products to our customers across an expanding global footprint. This will be achieved in conjunction with the establishment of a globally integrated organisation, supported by a high-performance culture and global core processes.
Products Our product range is broad and covers most asset classes. In Europe we have a range of SICAVs (domiciled in France, Luxembourg and Poland). These funds cover all key asset classes and normally have different share classes depending on the size and type of investor. Our normal distribution model for these funds focuses on wholesale distributors, asset allocators and smaller institutional investors. In the UK, we supply products to the UK retail and wholesale markets. These funds are mostly ‘owned’ by Aviva UK Life with Aviva Investors as asset manager, although we have a small number of funds registered in the Aviva Investors name. These funds are promoted to investors via IFAs, fund platforms, supermarkets and discretionary asset managers. In addition, we have a range of pooled pension funds which are aimed at the smaller pension fund market. These funds are normally defined benefit schemes and tend to be advised by investment consultants. We manufacture hedge funds in the UK, US and Poland. These funds are generally registered offshore and are primarily sold to the hedge funds industry, although we do also promote single strategy funds to institutional clients, family offices and wealth managers. The asset classes include fixed interest, multiasset, convertibles and equities. We also have an expanding range of specialist property funds. These funds are targeted at specialist real estate buyers and large institutions (mostly pension funds and local authorities), and provide real estate solutions to a wide range of risk appetites, ranging from secure income generating funds to highly leveraged growth funds. These funds address the UK, European and Asian markets. In Australia, we have a range of unit trusts that are primarily marketed to retail clients. The funds we manufacture are primarily equity related funds with an Australian and Asian focus. We also have four Dublin domiciled money market funds addressing the sterling and euro money market segments. These funds are sold by a specialist sales team based in London and target corporate treasury functions.
Fixed Income – Our Fixed Income teams cover a comprehensive product set: UK government securities, liquidity products, corporate bonds, European and global sovereigns, index-linked bonds, emerging markets (hard and local currency debt) and high-yield instruments.
Global Investment Solutions – our Global Investment Solutions team constructs client solutions across markets.
United Kingdom Aviva Annuity UK Limited Aviva Central Services UK Limited Aviva Consumer Products UK Limited Aviva Employment Services Limited Aviva Equity Release UK Limited Aviva Health UK Limited Aviva Insurance Limited Aviva Insurance Services UK Limited Aviva Insurance UK Limited Aviva International Insurance Limited Aviva Investors Global Services Limited Aviva Investors Pensions Limited Aviva Investors UK Fund Services Limited Aviva Investors UK Funds Limited Aviva Life & Pensions UK Limited Aviva Life Services UK Limited Aviva Risk Management Solutions UK Limited Aviva UKGI Investments Limited CGU Underwriting Limited Gresham Insurance Company Limited Hamilton Insurance Company Limited London and Edinburgh Insurance Company Limited National Westminster Life Assurance Limited RAC Financial Services Limited RAC Insurance Limited RAC Motoring Services RAC plc Royal Scottish Assurance plc
Netherlands Delta Lloyd N.V. (54.0%) and its principal subsidiaries: Delta Lloyd ABN AMRO Verzekeringen Holding BV (51.0%) Delta Lloyd Asset Management N.V. Delta Lloyd Groep Particuliare Schadeverzekeringen N.V. Delta Lloyd Bankengroep N.V. (Banking) Delta Lloyd Levensverzekering N.V. Delta Lloyd Schadeverzekering N.V. OHRA Levensverzekeringen N.V.
Aviva plc Annual Report and Accounts 2010 Selected consolidated financial data
Income Gross written premiums 36,274 34,690 36,206 30,991 28,735 Premiums ceded to reinsurers (1,863) (2,576) (1,841) (1,658) (1,501)
Premiums written net of reinsurance 34,411 32,114 34,365 29,333 27,234 Net change in provision for unearned premiums (75) 559 277 (21) 93
Profit/(loss) before tax attributable to shareholders’ profits 2,440 1,805 (1,300) 1,832 2,994
Profit/(loss) per share attributable to equity shareholders: Basic 50.4p 37.8p (36.8)p 48.9p 88.0p Diluted 49.6p 37.5p (36.8)p 48.5p 87.0p
Number of shares in issue at 31 December 2,820 2,767 2,658 2,622 2,566 Weighted average number of shares in issue for the year 2,784 2,705 2,643 2,588 2,469
Gross insurance liabilities 177,700 171,092 174,850 152,839 144,230 Gross liabilities for investment contracts 117,787 110,015 107,559 98,244 88,358 Unallocated divisible surplus 3,428 3,866 2,325 6,785 9,465 Core structural borrowings 6,066 5,489 5,525 4,311 4,195 Other liabilities 47,401 48,843 49,730 43,120 34,539 2009 comparative figures for net investment income/(expense) and finance costs have been reclassified to conform with the treatment adopted in 2010. Please refer to ‘Financial Statements IFRS Note 2(a) – Presentation changes’ – for more detail.
Demographic trends Our results are affected by the demographic make-up of the countries in which we operate. The types of products that we sell reflect the needs of our customers. For example, in regions and countries with a high proportion of older people, a larger proportion of our sales will reflect their needs for pre-and postretirement planning. Our sales levels will also be impacted by our ability to help provide useful information to such policyholders on retirement planning and to offer products that are competitive and respond to such policyholders’ needs. In our long-term insurance and savings business we make assumptions about key non-economic factors, such as the mortality rate that we expect to be experienced by our policyholders. In countries where the life expectancy is growing, this will need to be reflected in our pricing models as lower mortality rates will increase profitability of life insurance products but will reduce the returns on annuity products. We review our assumptions against our own experience and industry expectations. During 2008 and 2009 our results were not impacted by any major changes in mortality assumptions. In 2010, a new set of Dutch mortality tables has been issued by the ‘Actuarieel Genootschap’ (AG), CBS and the Insurers Association (Verbond van Verzekeraars). Following this, we made an exceptional strengthening of longevity assumptions in the Netherlands, which reduced IFRS profit by approximately £483 million before tax and non-controlling interests.
With-profits business We write products through our with-profits funds mainly in our UK operating segment, with smaller funds in Ireland and Singapore. These funds enable policyholders to participate in a large pool of diverse investments, therefore reducing their exposure to individual securities or asset classes. The investment pool is managed by us with returns to with-profits policyholders paid through bonuses which are added to the value of their policy. In order to provide an element of stability in the returns to policyholders, bonuses are designed to reduce policyholders’ exposure to the volatility of investment returns over time and to provide an equitable share of surplus earned, depending on the investment and operating performance of the fund. Shareholders also have a participating interest in the with-profit funds and any declared bonuses. Generally, policyholder and shareholder participation in with-profit funds in the UK is split 90:10. The level of bonuses declared to policyholders is influenced by the actual returns on investments and our expectation of future rates of return. While bonuses can never be negative, a predicted sustained fall in equity markets could lead to a reduction in annual and terminal bonus rates, and so reduce both policyholder returns and shareholders’ profit under IFRS. Over the early part of this decade, the combination of a decline in equity markets and the general outlook for lower interest rates led to reductions in annual bonus rates, and the corresponding shareholders’ share of profits. The subsequent recovery in equity markets over 2003–2007 led to a partial reversal of this trend. During 2008 and 2009 the worsening economic conditions impacted on UK bonus levels but the annual effect of this for both policyholders and shareholders was offset by the benefit from the one-off special bonus mentioned below. Improving investment returns over 2010 have increased bonus rates although the impact of smoothing inherent within bonus calculations means that this is not universal.
Natural and man-made disasters Our general insurance and health business results are affected by the amount of claims we need to pay out which, in turn, can be subject to significant volatility depending on many factors, including natural and man-made disasters. Natural disasters arise from adverse weather, earthquakes and other such natural phenomena. Man-made disasters include accidents and intentional events, such as acts of terrorism. These events are difficult to predict with a high degree of accuracy, although they generally occur infrequently at a material level. Our exposure to large disasters has been somewhat reduced through the recent strategic refocusing of our general insurance business mainly towards personal lines business and small- to medium-sized commercial risks. Our costs in connection with natural and man-made disasters are also significantly mitigated by reinsurance arrangements with external parties such that our maximum exposure is limited to no more than approximately £300 million for a one in ten year event or £550 million for a one in one hundred year event. See ‘Financial Statements IFRS – Note 57 – Risk Management’ and ‘Financial Statements IFRS – Note 42 – Reinsurance Assets’ for further information on our reinsurance programme. In 2008, Ireland and Canada incurred some weather-related losses and in 2009 the UK, Ireland and France were all impacted.
Government policy and legislation Changes in government policy and legislation applicable to our business in any of the markets in which we operate, particularly in the UK, may affect our results of operations. These include changes to the tax treatment of financial products and services, government pension arrangements and policies, the regulation of selling practices and the regulation of solvency standards. Such changes may affect our existing and future business by, for example, causing customers to cancel existing policies, requiring us to change our range of products and services, forcing us to redesign our technology, requiring us to retrain our staff or increase our tax liability. As a global business, we are exposed to various local political, regulatory and economic conditions, business risks and challenges which may affect the demand for our products and services, the value of our investments portfolio and the credit quality of local counterparties. Our regulated business is subject to extensive regulatory supervision both in the UK and internationally. For details please refer to the section ‘Shareholder information – Regulation’.
Exchange rate fluctuations We publish our consolidated financial statements in pounds sterling. Due to our substantial non-UK operations, a significant portion of our operating earnings and net assets are denominated in currencies other than sterling, most notably the euro and the US dollar. As a consequence, our results are exposed to translation risk arising from fluctuations in the values of these currencies against sterling. Total foreign currency movements during 2010 resulted in a gain recognised in the income statement of £34 million, a decrease from a £154 million gain in 2009. We generally do not hedge foreign currency revenues, as we prefer to retain revenue locally in each business to support business growth, to meet local and regulatory market requirements and to maintain sufficient assets in local currency to match local currency liabilities. Movements in exchange rates may affect the value of consolidated shareholders’ equity, which is expressed in sterling. Exchange differences taken to other comprehensive income arise on the translation of the net investment in foreign subsidiaries, associates and joint ventures. This aspect of foreign exchange risk is monitored centrally against limits that we have set to control the extent to which capital deployment and capital requirements are not aligned. We use currency borrowings and derivatives when necessary to keep currency exposures within these predetermined limits, and to hedge specific foreign exchange risks when appropriate; for example, in any acquisition or disposal activity. During 2010, sterling had strengthened in value against the euro, but marginally weakened against the dollar, resulting in a foreign currency loss in other comprehensive income of £78 million (2009: £951 million loss). The impact of these fluctuations is limited to a significant degree, however, by the fact that revenues, expenses, assets and liabilities within our non-UK operations are generally denominated in the same currencies.
Activity in 2009 On 1 October 2009, we completed the sale of our Australian life and pension business and wealth management platform to the National Australia Bank for A$902 million (£443 million). The sale supports Aviva’s strategy of focusing on the key growth markets in Asia where leading positions can be achieved. On 3 November 2009, we completed the Initial Public Offering (IPO) of approximately 42% of Delta Lloyd N.V. raising €1.1 billion (£1 billion). The IPO enabled Aviva to monetise part of its holding in Delta Lloyd, giving Aviva greater financial flexibility, including the option to explore balance sheet restructuring and further growth opportunities. It will also enhance the value and liquidity of Aviva’s retained stake in Delta Lloyd. Delta Lloyd, at the start of the year, sold its health business for £235 million to OWM CZ Groep Zorgverkeraar UA (CZ). The sale to CZ removed the underwriting risk and administration out of Delta Lloyd whilst continuing to sell health products and also market general insurance and income protection products to CZ’s customers. Continuing with the Group’s strategy to exit non-core operations, we disposed of the British School of Motoring Limited for a consideration of £4 million.
Reattribution of inherited estate The ‘inherited estate’ refers to the assets of the long-term withprofit funds less the realistic reserves for 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 policyholders in the future in respect of smoothing costs and guarantees.
The reattribution of our inherited estate completed on 1 October 2009 following the High Court’s approval of the offer in September and final approval by the Aviva plc and Aviva UK Life boards. From a shareholder perspective the reattribution is expected to enhance the cash flow profile of Aviva’s UK life business and will bring significant financial benefits. In return for the £471 million paid to policyholders at the time of the deal, shareholders are expected to gain access to around £650 million of additional capital over five years, to fund new, non-profit business.
Basis of earnings by line of business Our earnings originate from three main lines of business: our long-term insurance and savings business, which includes a range of life insurance and savings products; fund management, which manages funds on behalf of our long-term insurance and general insurance businesses, external institutions, pension funds and retail clients; and general insurance and health, which focuses on personal and commercial lines. These lines of business are present in our various operating segments to a greater or lesser extent. In the UK, we have major long-term insurance and savings businesses and general insurance businesses; in Europe we have long-term insurance and savings businesses in all countries in which we operate, large general insurance businesses in Ireland and the Netherlands, through our Delta Lloyd subsidiary, and smaller general insurance operations in several other countries; in North America we have a large long-term insurance and savings business in the US and a major general insurance business in Canada; in Asia Pacific we predominantly have long-term insurance and savings businesses. Our fund management businesses operate across all our four regions.
Aviva plc Annual Report and Accounts 2010 our with-profits funds that is not distributed as bonuses and related shareholders’ profit, is transferred from the income statement to the unallocated divisible surplus. Conversely, if a shortfall arises one year, for example because of insufficient investment return, a transfer out of the unallocated divisible surplus finances bonus declarations and related shareholders’ profit. The unallocated divisible surplus therefore consists of future (as yet undetermined) policyholder benefits, associated shareholders’ profit and the orphan estate. The orphan estate serves as working capital for our with-profits funds. It affords the with-profits fund a degree of freedom to invest a substantial portion of the funds’ assets in investments yielding higher returns than might otherwise be obtainable without being constrained by the need to absorb the cash-flow strain of writing large volumes of new business and the need to demonstrate solvency.
Other business Other business includes our operations other than insurance and fund management. These incorporate mainly our roadside recovery operation in the UK, and our banking and retail mortgage operations in the Netherlands and Belgium.
Non-participating investment business – This includes unit-linked business and pensions business – The amounts received for this business are treated as deposits under IFRS and an investment management fee is earned on the funds deposited
There is no insurance risk borne by the Group therefore under IFRS, these are treated as deposits and investment management fee income is earned on the funds deposited.
JVs and associates (1,446) (1,277) (1,062) Annualisation impact of regular premium long-term business (538) (529) (613) Deposits taken on non-participating investment contracts and equity release contracts (3,803) (3,481) (8,134)
Add: IFRS gross written premiums from existing long-term business 5,963 6,547 7,730
Analysed as: Long-term insurance and savings net written premiums 24,712 22,921 23,228 General insurance and health net
Deposits taken on non-participating investment contracts and equity release contracts: Under IFRS, non-participating investment contracts are recognised on the statement of financial position by recording the cash received as a deposit and an associated liability and are not recorded as premiums received in the income statement. Only the margin earned is recognised in the income statement.
Retail sales of mutual fund type products (investment sales): Investment sales included in the total sales number represent the cash inflows received from customers to invest in mutual fund type products such as unit trusts and OEICs. We earn fees on the investment and management of these funds which are recorded separately in the IFRS income statement as ’fees and commissions received’ and are not included in statutory premiums.
IFRS gross written premiums from existing long-term business: The non-GAAP measure of long-term and savings sales focuses on new business written in the year under review while the IFRS income statement includes premiums received from all business, both new and existing.
United Kingdom 1,411 1,165 1,377 Europe 1,434 1,196 1,141 North America 376 213 149 Asia Pacific 31 77 36 Aviva Investors 97 115 114 Other (799) (744) (520)
Short-term fluctuation in return on investments on non-long-term business (243) 95 (819)
Impairment of goodwill (24) (62) (66) Amortisation and impairment of intangibles (216) (144) (117) Profit on the disposal of subsidiaries and associates 159 153 7 Integration and restructuring costs (243) (286) (326) Exceptional items (273) 45 (551)
Consolidated results of operations The table below presents our consolidated sales for the years ended 31 December 2010, 2009 and 2008.
The table below presents our consolidated income statement under IFRS for the years ended 31 December 2010, 2009 and 2008.
Change in investment contract provisions (8,741) (11,185) 10,629 Change in unallocated divisible surplus 329 (1,547) 4,482 Fee and commission expense (5,867) (4,396) (4,411) Other expenses (3,537) (5,366) (5,416) Finance costs (1,422) (1,519) (1,547)
Income Year ended 31 December 2010 Net written premiums in 2010 were £34,411 million, an increase of £2,297 million, or 7%, from £32,114 million in 2009. All regions reported increases on 2009 levels. General and health insurance increased by 6% on 2009, and life insurance and savings increased by 8%, fuelled by strong annuity sales in the UK. Europe reported a £585 million increase in net written premiums over 2009, whilst North America and Asia showed increases in net written premiums of 4% and 27% respectively.
Year ended 31 December 2009 Net written premiums in 2009 were £32,114 million, a decrease of £2,251 million, or 7%, from £34,365 million in 2008. Longterm insurance and savings and general insurance and health both reported decreases in net written premiums primarily in the UK with a 36% decrease in long-term insurance and savings and 22% decrease in general insurance and health net written premiums in the UK. Europe reported a 12% increase in net written premiums with both North America and Asia Pacific reporting a decrease in net written premiums of 2% and 11% respectively.
Other income Year ended 31 December 2010 Other income (which consists of fee and commission income, share of profit/(loss) after tax of joint ventures and associates, and profit on disposal of subsidiaries and associates) increased by £634 million to £2,072 million in 2010 (2009: £1,438 million). The increase was primarily due to improved financial performance by joint ventures and associates, with the share of profit in the year being £131 million against a loss in 2009 of £504 million.
Aviva plc Annual Report and Accounts 2010 investment markets across our regions resulting in increases in our contract liabilities. The change in unallocated divisible surplus (UDS) of £329 million credit (2009: £1,547 million charge) reflects rising government bond yields in Italy, Spain and Ireland in the fourth quarter of 2010. Fee and commission expense, other expenses and finance costs of £10,826 million decreased by £455 million from £11,281 million in 2009. Increased fee and commission expenses were offset by lower other expenses, impairment charges and finance costs: see ‘Financial Statements – Note 6 – Details of expenses’.
Profit/(loss) before tax attributable to shareholders’ profits Year ended 31 December 2010 Profit before tax attributable to shareholders in 2010 was £2,440 million against a profit of £1,805 million in 2009. The increase is primarily due to the increase in premiums and decrease in expenses, which more than offsets the drop in net investment income.
Year ended 31 December 2009 Profit before tax attributable to shareholders in 2009 was £1,805 million against a loss of £1,300 million in 2008. The increase is primarily due to favourable investment performance in 2009 which more than offset the decrease in premiums and increase in expenses as discussed above.
Adjusted operating profit Year ended 31 December 2010 Adjusted operating profit increased by £528 million, or 26%, to £2,550 million (2009: £2,022 million) for the reasons set out above.
Year ended 31 December 2009 Adjusted operating profit decreased by £275 million, or 12%, to £2,022 million (2008: £2,297 million) for the reasons set forth above.
Regional performance United Kingdom Our operations in the UK consist of long-term insurance and savings business, which provides products such as bonds and savings, pensions, protection, annuities, equity release and investment products, including both with-profits and non-profit business, and our general insurance and health business, which provides a range of general and health insurance products focused on personal and business customers, such as household, motor and liability insurance, together with a range of breakdown products from the RAC.
Long-term and savings business The table below presents sales, net written premiums, adjusted operating profit and profit/(loss) before tax attributable to shareholders’ profits under IFRS from our UK long-term business for the years ended 31 December 2010, 2009 and 2008.
Protection 944 965 1,126 Pensions 4,062 3,752 4,753 Annuities 3,170 1,897 2,433 Bonds 1,686 2,024 3,296 Equity release 436 276 250 Investment sales 1,548 1,049 1,485
Year ended 31 December 2010 On a PVNBP basis, sales in our UK long-term insurance and savings business increased by £1,883 million, or 19%, to £11,846 million (2009: £9,963 million). Protection sales have stayed broadly level as a 14% increase in core protection products offset a reduction in other areas. Pension sales increased by 8% supported by a strong performance in group personal pensions. Annuities increased by 67% supported by higher sales of bulk purchase annuities and a 34% increase in the sale of individual annuities. Bonds decreased 17% as we continued to manage for value rather than volume. Investment sales increased by 48% due to growth in managed and structured fund sales and as consumers reinvested in property as an asset class. Equity release showed an increase of 58%. Net written premiums in our UK long-term insurance and savings business were £5,469 million, an increase of £1,080 million, or 25%, from £4,389 million in 2009. The increase is primarily due to higher bulk purchase annuity sales. Adjusted operating profit in our UK long-term insurance and savings business increased by 30% to £853 million (2009: £658 million) reflecting the full year benefit of the Reattributed Inherited Estate External Support Account (RIEESA), increased annuity profitability and improved market conditions resulting in higher annual management charge (AMC) income. This was partly offset by a reduction in with-profits shareholder transfers driven by reduced bonus rates and a lower, final special distribution. Profit before tax was £784 million for 2010 (2009: £611 million) which includes a £128 million one-off benefit from the restructuring of our joint venture with the Royal Bank of Scotland.
Year ended 31 December 2009 Sales in our UK long-term insurance and savings business decreased by £3,380 million, or 25%, to £9,963 million (2008: £13,343 million). Protection sales have decreased by 14% as a result of regulatory changes affecting creditor sales volumes. Pension sales decreased by 21% due to the reduced number of large schemes written in the year. Annuities decreased by 22% due to lower bulk purchase annuity volumes, bonds decreased 39% and investment sales decreased by 29%. Equity release showed an increase of 10%. Net written premiums in our UK long-term insurance and savings business were £4,389 million, a decrease of £2,718 million, or 38%, from £7,107 million in 2008. The decrease is primarily due to lower bulk purchase annuity and bond sales. Adjusted operating profit in our UK long-term insurance and savings business decreased by 10% to £658 million (2008: £733 million) reflecting lower asset values on bonuses declared in our with-profits funds and on the level of the with-profit special distribution bonus. The non-profit result increased to £495 million (2008: £462 million) including the benefit of the reattribution but was partly offset by lower annual management charges. Profit before tax was £611 million for 2009 (2008: £149 million loss). The loss for 2008 included an additional £550 million provision for credit defaults over and above the long-term provisions, which has been retained in 2009, and £97 million for the cost of transferring the investment wrap platform to a third-party supplier, which were one off events in that year.
General insurance and health The table below presents sales, net written premiums, adjusted operating profit and profit/(loss) before tax attributable to shareholders’ profits under IFRS from our UK general insurance and health business for the years ended 31 December 2010, 2009 and 2008.
Profit before tax was £457 million, an increase of £23 million from a profit of £434 million in 2009. The increase in operating profit and lower levels of restructuring costs were broadly offset by adverse movements in economic assumption changes and an increase in pension deficit funding in the year.
Year ended 31 December 2009 UK general insurance and health net written premiums were £4,298 million, a decrease of £1,115 million, or 21%, on 2008 (2008: 5,413 million). The decrease reflects a combination of the actions taken to exit unprofitable business and difficult market conditions, most notably in creditor due to lower levels of lending, and commercial due to more business failures, fewer start-ups and reduced levels of exposure. Adjusted operating profit in 2009 was £535 million, a decrease of £121 million, or 18% (2008: £656 million). The decrease in adjusted operating profit is a result of a decline in long-term investment returns, an increase in creditor claims resulting from the recession and a reduction in savings on prior year claims development to £105 million (2008: £285 million). Profit before tax was £434 million, an increase of £825 million from a loss of £391 million in 2008. The increase predominately reflects the impact of investment variances of £397 million and an exceptional charge in 2008 of £279 million relating to the discounted cost of strengthening our latent claims.
Sales Long-term insurance and savings business France 4,918 4,891 3,880 Ireland 938 1,072 1,299 Italy 4,456 3,607 2,331 Poland (including Lithuania) 751 1,161 1,906 Spain 2,084 2,454 2,489 Other Europe 1,740 1,190 1,410
General insurance and health France 968 952 882 Ireland 459 474 513 Other Europe 526 457 417
The table below presents adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from our operations in Europe for the years ended 31 December 2010, 2009 and 2008.
General insurance and health France 76 97 107 Ireland 51 57 68 Other Europe (18) (22) 45
Year ended 31 December 2010 Europe sales in 2010 were £21,810 million, marginally increased on the prior year (2009: £21,750 million) primarily due to increased sales in Italy and Other Europe more than offsetting lower sales levels in Delta Lloyd, Poland and Spain. Total adjusted operating profit increased to £1,434 million (2009: £1,196 million). Adjusted operating profit for long-term insurance and savings business in 2010 increased by £185 million to £1,223 million (2009: £1,038 million) with all regions showing an increase in profitability apart from Italy, where increased premiums were offset by increased new business strain. General insurance and health adjusted operating profit decreased by £20 million to £255 million (2009: £275 million) due to lower longerterm investment returns partially offset by expense savings. Europe’s profit before tax attributable to shareholders’ profits was £1,503 million in 2010, an increase of £562 million from 2009. The improved result was driven by growth in profits on existing life business in France and Spain, and stable results in other markets. Ireland also benefited from £95 million reserve releases in the year, including £55 million following the adoption of realistic reserving in 2010. Delta Lloyd operating profits increased by £137 million primarily due to higher expected investment returns and expense margins.
Aviva Europe Aviva Europe long-term insurance and savings sales were £512 million higher than prior year at £14,887 million (2009: £14,375 million), despite the continuing challenging economic environment. Sales through our bancassurance channel have increased 9% to £8,040 million (2009: £7,353 million), primarily as a result of strong sales in Italy. Retail sales have decreased 11% to £5,497 million (2009: £6,170 million). Nearly 60% of the decline in sales is from Poland as a result of significant pension legislation changes.
Year ended 31 December 2009 Europe sales in 2009 were in line with the prior year at £21,750 million (2008: £21,806 million). A 6% increase in long-term insurance and savings sales to £18,704 million (2008: £17,716 million) offset a 26% decrease in general insurance and health net written premiums to £3,046 million (2008: £4,090 million). Net written premiums in 2009 increased by £1,730 million or 12% to £16,796 million (2008: £15,066 million). Adjusted operating profit in 2009 was £1,196 million, an increase of 5%, or £55 million, from £1,141 million. Europe’s profit before tax attributable to shareholders’ profits was £941 million in 2009, an increase of £893 million from £48 million in 2008. The increase is mainly attributable to favourable investment returns.
Delta Lloyd Delta Lloyd reported long-term and savings sales of £4,329 million, a decrease of £72 million, or 2%, on 2008 (2008: £4,401 million). Life and pension sales decreased by 11% to £3,665 million with investment sales reported at £664 million, an increase of 118% on 2008. General insurance and health sales were £1,163 million (2008: £2,278 million), a decrease of £1,115 million, or 49%, as a result of the sale of their health business on 1 January 2009. Adjusting for the impact of the sale, Delta Lloyd general insurance sales were 13% higher on 2008 (2008: £1,028 million) benefiting from the strengthening of the euro and the inclusion of a full year’s contribution from Swiss Life Belgium. Delta Lloyd reported net written premiums of £4,341 million, a decrease of £1,542 million, or 26%, on 2008 (2008: £5,883 million) primarily due to lower group pension contracts and the sale of the health business. Adjusted operating profit was £399 million, an increase of £89 million on £310 million in 2008. Improved profits in the longterm and savings business resulted from lower new business strain, driven by a decrease in corporate pension sales, expense savings, and strengthening of the euro.
Protection 999 871 623 Annuities 3,729 3,674 4,244 Other long-term business — — 848 General insurance 1,958 1,800 1,601
Adjusted operating profit Long-term insurance business 174 85 16 General insurance 222 144 145 Non-insurance (20) (16) (12)
Year ended 31 December 2009 Sales in Aviva North America were £6,345 million, a decrease of £971 million, or 13%, (2008: £7,316 million). The decrease is driven by a reduction in annuity sales resulting from management action to focus on capital efficiency and the decision not to participate in funding agreement business in 2009. Protection product sales increased by 40% on actions to create innovative products and expand product distribution. General insurance sales in Canada increased by £199 million, or 12%, to £1,800 million (2008: £1,601 million), with growth driven by increased sales in homeowner while personal auto premiums were maintained at a similar level to 2008. Aviva North America’s net written premiums decreased by £92 million, or 1%, to £6,176 million (2008: £6,268 million). The decrease is a result of lower long-term insurance and savings sales in the US offset by improved sales in Canada as stated above. Adjusted operating profit was £213 million, an increase of £64 million, or 43%, on 2008 (2008: £149 million). Long-term insurance and savings adjusted operating profit increased to £85 million (2008: £16 million) driven by improved investment margin earned on existing equity indexed annuity business. General insurance adjusted operating profit is in line with 2008 at £144 million (2008: £145 million) with the benefits of increased sales volumes, higher long-term investment return, cost savings and foreign exchange movements being offset by the adverse movement in the claims experience. Aviva North America’s profit before tax attributable to shareholders’ profits was £244 million, an increase of £582 million (2008: £338 million loss). The increase is mainly as a result of favourable investment performance during the year.
Asia Pacific Aviva Asia Pacific operates in nine countries across the region through both joint ventures and wholly-owned operations. We have businesses in markets at various stages of development, with established businesses in Singapore and Hong Kong, high potential businesses in India and China and developing businesses in South Korea, Malaysia, Sri Lanka, Taiwan and Indonesia. The table below presents the sales, net written premiums, adjusted operating profit and profit/(loss) before tax attributable to shareholders’ profits under IFRS of Aviva Asia Pacific for the years ended 31 December 2010, 2009 and 2008.
Asia Pacific 579 377 425 Australia long-term insurance and savings business — 78 86 Net written premiums 579 455 511
Adjusted operating profit Asia Pacific long-term insurance and savings business 71 52 2 Australia long-term insurance and savings business — 40 44 General insurance and health (6) 6 — Fund management and non-insurance (34) (21) (10)
Year ended 31 December 2010 Total Asia sales excluding Australia increased by £461 million, or 27%, to £2,178 million (2009: £1,717 million6) underpinned by improving economic conditions and reflecting our business expansion in Asia and the success of our bancassurance partnerships. Life and pensions sales (in PVNBP terms) increased by 48%, with more than half of our sales coming from bancassurance channels. Investment sales through Navigator (our wrap administration platform) declined although total funds under administration grew by 23% over the year. Net written premiums increased by £202 million to £579 million (2009: £377 million6). This strong growth reflects the new online (direct) general insurance platform in Singapore and our entry into the Indonesia health market as well as growth in existing markets. This more than offsets the drop in net written premiums due to the disposal of the Australian business. Excluding one-off impacts on adjusted operating profit (2010: £27 million from a change in China GAAP basis; 2009: £68 million release of reserves in Singapore) and excluding the contribution from Australia, the underlying adjusted operating profit increased by £40 million reflecting scale and focused cost management. Profit before tax of £39 million is lower than the prior year (2009: £146 million) due to the profit arising in 2009 on the sale of the Australian business and the contribution from substantial investment market movements in 2009.
Year ended 31 December 2009 Sales in Asia Pacific decreased by £787 million, or 22%, to £2,712 million (2008: £3,499 million). In Australia, sales decreased by 40%, impacted by the sale of the Australian business on 1 October 2009. Sales in Asia decreased 7% as a result of the uncertain economic environment, leading to investor caution across Singapore, Hong Kong, India and our other Asian markets, together with the impact of the strategic decision to scale back the sale of capital intensive products in several Asian markets. Net written premiums decreased to £455 million, a decrease of £56 million, or 11%, on 2008 (2008: £511 million). The decrease was mainly due to the impact of the uncertain economic environment in the region as highlighted above and the disposal of the Australian business. Increase in adjusted operating profit of £41 million to £77 million (2008: £36 million) was mainly due to the benefit from a one-off release of reserves of £68 million following an actuarial review of assumptions in Singapore, partly offset by the impact of the Australian disposal. Profit before tax of £146 million (2008: £68 million loss) reflects the favourable movements in the market across the Asia Pacific region.
Year ended 31 December 2009 Aviva Investors’ adjusted operating profit in 2009 was £115 million, in line with 2008. Higher performance fees were earned in 2009, offset by lower average market levels through the year. Profit before tax attributable to shareholders’ profits was £91 million, an increase of £19 million, or 25%, on 2008 (2008: £72 million). Profit in 2009 benefited from lower integration and restructuring costs on the set-up of Aviva Investors. Aviva Investor’s funds under management were £250 billion, an increase of £14 billion, or 6%, on 2008. The increase is a result of investment performance and product sales together with capital appreciation in some fixed income markets, offset by the impact of sterling’s appreciation against the euro and US dollar.
Year ended 31 December 2010 Corporate centre costs were £143 million, an increase of £35 million, or 32%, on £108 million in 2009. The increase principally reflects a higher project spend of £26 million in the year, and higher central costs of £7 million arising from enhanced capacity to meet greater financial and regulatory reporting requirements. Group debt and other interest costs were £656 million, an increase of £20 million or 3% on 2009. The increase principally relates to higher lending arrangement costs (2010: £246 million; 2009: £227 million) driven by changes in internal loan balances throughout the year. Group debt costs and other interest includes the net pension charge of £87 million (2009: £74 million). This represents the difference between the expected return on pension scheme assets and the unwind of the discount on pension scheme liabilities.
Long-term insurance and savings business As stated above, we aim to optimise investment returns while ensuring that sufficient assets are held to meet future liabilities and regulatory requirements. As different types of life insurance business vary in their cash flows and in the expectations placed upon them by policyholders, we need to hold different types of investment to meet these different cash flows and expectations. The UK with-profits business is comprised largely of long-term contracts with some guaranteed payments. We are therefore able to invest a significant proportion of the funds supporting this business in equities and real estate. This is because the long-term nature of these contracts allows us to take advantage of the longterm growth potential within these classes of assets, while the level of guaranteed payments is managed to mitigate the level of risk that we bear in relation to the volatility of these classes of assets. Annuities and non-participating contracts, on the other hand, have a high level of guaranteed future payments. We endeavour to match the investments held against these types of business to future cash flows. We therefore have a policy of generally holding fixed income securities and mortgage loans with appropriate maturity dates. With unit-linked business, the primary objective is to maximise investment returns, subject to following an investment policy consistent with the representations that we have made to our unit-linked product policyholders.
Analysis of investments continued Aviva plc Annual Report and Accounts 2010
Analysis of investments We distinguish between policyholder, participating fund and shareholder investments, which are terms used to reflect the differing exposure to investment gains and losses. Policyholder assets are connected to our unit-linked business, where the policyholder bears the investment risk on the assets in the unit-linked funds. Our exposure to loss on policyholder assets is limited to the extent that income arising from asset management charges is based on the value of assets in the funds. Participating fund assets related to some of our insurance and investment contracts which contain a discretionary participating feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. Our exposure to investment losses on participating funds is generally limited to our participation in the fund. Shareholder assets are other assets held within our long-term businesses that are not backing unit-linked liabilities or participating funds. Investments held at 31 December 2010 and 31 December 2009 are analysed below: Policyholder assets £m
In our UK Life business investments and other assets backing indexed linked policies previously recognised as policyholder assets have been reclassified as shareholder assets. Reclassified assets total £1,890 million, split £1,214 million debt securities, £551 million loans, £97 million other investments and £28 million reinsurance assets.
Where relevant, 2009 comparative amounts in the table above and those that follow in this section have been adjusted accordingly. None of the adjustments above affects balances reported in the IFRS primary statements.
Investment property 13,064 — 13,064 12,430 — 12,430 Loans 21,028 22,046 43,074 20,890 20,189 41,079 Financial investments Debt securities 167,482 — 167,482 161,757 — 161,757 Equity securities 49,076 — 49,076 45,427 — 45,427 Other investments 36,730 — 36,730 31,518 — 31,518 Total 287,380 22,046 309,426 272,022 20,189 292,211
For more information about financial investments analysed according to their accounting classification and valuation approach, as well as the cost, unrealised gains and losses, impairments, fair value and other information concerning financial investments, see the ‘Financial Statements IFRS – Note 25 – Financial investments’.
Debt securities We grade debt securities according to current external credit ratings issued at the balance sheet date. The credit rating used for each individual security is the second highest of the available ratings from Standard & Poor’s, Moody’s and Fitch. If a credit rating is available from only one of these three rating agencies then this rating is used. If an individual security has not been given a credit rating by any of these three rating agencies, the security is classified as ‘non-rated’. For the tables below we have used the standard Standard & Poor’s rating classifications. Investment grade debt securities are classified within the range of AAA (extremely strong) to BBB (good) ratings, with AAA being the highest possible rating. Debt securities which fall outside this range are classified as speculative grade. Where we use a rating provided by Moody’s or Fitch, we have expressed it as the Standard & Poor’s equivalent rating. For example, we consider Standard & Poor’s rating of AA (very strong) to be equivalent to Moody’s rating of AA (excellent) and Fitch’s rating of AA (very strong). Despite the market downgrade activity during 2009 and 2010, debt securities with a credit rating of A or above at 31 December 2010 still represented 77% of total holdings (2009: 80%). Approximately 41% of total debt security holdings are in government bonds and 33% of total debt security holdings were in corporate bonds with a credit rating of A or above, as of 31 December 2010. ‘Wrapped credit’ is credit exposure that has been insured with monoline insurers to achieve a better credit rating. The monoline insurers suffered further downgrades during 2009 and 2010 and this is reflected in the analysis that follows. The exposure is diversified across several monolines and the underlying bonds are diversified across many different counterparties. In general, we are a long-term holder of this debt, although we continue to review our holdings with reference to the underlying quality and prospects. The majority of the residential mortgage-backed securities (RMBS) are US investments and over 85% of this exposure is backed by the US government-sponsored entities (GSEs) Fannie Mae and Freddie Mac. Under the conservatorship arrangements with the US government implemented in September 2008, these securities have an implicit guarantee, although they are not expressly backed by the full faith and credit of the US government. The majority of the remaining US RMBS are backed by fixed-rate loans that originated in 2005 or before. At 31 December 2010, we had no exposure to sub-prime debt securities (2009: £2 million), and our exposure to collaterised debt obligations (CDO) and collaterised loan obligations (CLO) was limited to £332 million (2009: £241 million). Investments in structured assets (excluding agency RMBS that are backed by GSEs) were £6.0 billion, representing less than 4% of total debt securities. During 2010, the proportion of our shareholder debt securities that are investment grade declined slightly to 88% (2009: 90%). This movement was primarily due to the increase in private placements to back UK annuity liabilities. The remaining 12.0% of shareholder debt securities that do not have an external rating of BBB or higher can be split as follows: 3.4% are debt securities that are rated as below investment grade 3.0% are US private placements which are not rated by the major ratings agencies, but are rated an average equivalent of Aby the Securities Valuation Office of the National Association of Insurance Commissioners (NAIC), a US national regulatory agency 5.6% are not rated by the major rating agencies or the NAIC.
Of the securities not rated by an external agency or NAIC most are allocated an internal rating using a methodology largely consistent with that adopted by an external ratings agency, and are considered to be of investment grade credit quality; these include £1.8 billion (2.7% of total shareholder debt securities) of private placements and other corporate bonds held in our UK Life business which have been internally rated as investment grade.
Debt securities analysed by credit rating and sector Total debt securities analysed by credit rating and product type are set out in the table below. Government and corporate debt securities are further analysed by type of issuer.
2009 62,489 28,045 38,747 20,777 3,936 7,763 161,757 2009 % 38.6% 17.3% 24.0% 12.8% 2.5% 4.8% 100.0% 1 CMBS – Commercial Mortgage Backed Security 2 ABS – Asset Backed Security 3 ABCP – Asset backed commercial paper 4 ABFRN – Asset backed floating rate notes
Debt securities, for which policyholders carry the exposure to investment losses, analysed by credit rating and product type are set out in the table below. Government and corporate debt securities are further analysed by type of issuer.
Corporate Public Utilities 1 37 170 67 3 2 280 Convertibles and bonds with warrants — — — 2 — 3 5 Other corporate bonds 363 981 2,603 3,138 283 226 7,594
Government UK government 11,842 — — — — — 11,842 UK local authorities — — — — — — — Non-UK government 15,357 11,586 2,011 675 350 — 29,979
Corporate Public Utilities 4 280 1,868 767 1 41 2,961 Convertibles and bonds with warrants — 46 11 266 20 19 362 Other corporate bonds 7,128 6,564 13,237 8,339 1,163 1,697 38,128
Structured RMBS non-agency sub-prime — — — — — — — RMBS non-agency ALT A — — — 3 2 — 5 RMBS non-agency prime 163 — 5 — — — 168 RMBS agency 134 — — — — — 134
Debt securities, for which shareholders carry the exposure to investment losses, analysed by credit rating and product type are set out in the table below. Government and corporate debt securities are further analysed by type of issuer.
Structured RMBS non-agency sub-prime — — — — — — — RMBS non-agency ALT A 19 9 11 5 129 — 173 RMBS non-agency prime 571 19 36 67 30 — 723 RMBS agency 1,628 — — — — — 1,628 2,218 28 47 72 159 — 2,524 CMBS 1,299 229 363 103 172 19 2,185 ABS 1,007 218 205 73 26 171 1,700 CDO (including CLO) 97 57 22 17 86 53 332 ABCP — 15 — — — — 15 ABFRN — — — — — — —
Wrapped Credit AAA — — — — AA 288 44.8% 37 5.7% A 92 14.3% 100 15.6% BBB 157 24.5% 215 33.6% Less than BBB 55 8.5% 59 9.2% Non-rated 49 7.9% 47 7.3% Not available without insurance guarantee — — 183 28.6%
Unit trusts and other investment vehicles 26,040 5,743 737 32,520 Derivative financial instruments 187 131 1,956 2,274 Deposits and credit institutions 28 38 492 558 Minority holdings in property management undertakings 11 593 60 664 Other 548 103 63 714
We own or lease space in 26 countries around the world. As of 31 December 2010, we owned and occupied land and buildings for our own use with a total book value of £440 million (2009: £416 million). We believe that these facilities are adequate for our present needs in all material respects. We also hold other properties, both directly and indirectly, for investment purposes, valued at £11,241 million at 31 December 2010 (2009: £10,757 million).
Total contractual obligations above 439,755 Effect of discounting contractual cash flows for insurance contracts (78,163) Contractual undiscounted interest payments6 (19,653) Difference between carrying value of borrowings and undiscounted cash flows of principle 43 Contractual cash flows under operating leases and capital commitments (1,519) Difference between derivative liabilities contractual cash flows and carrying value (703) Liabilities of operations classified as held for sale — Non-contractual / short-term obligations — Unallocated divisible surplus7 3,428 — Provisions8 2,943 — Current and deferred tax liabilities 2,072 — Other liabilities 4,179
3. Amounts shown in respect of general insurance contracts are based on undiscounted estimates of future claim payments, including for those classes of business for which discounted provisions are held, see ‘Financial Statements IFRS – Note 39 – Insurance liabilities’. The timing of cash flows reflects a best estimate of when claims will be settled.
4. The Group has no material finance leases for property and equipment. 5. Includes obligations under repurchase agreements amounting to £853 million and obligations for repayment of collateral received under stock lending arrangements and derivative transactions amounting to £4,825 million. 6. When subordinated debt is undated or loan notes perpetual, the interest payments have not been included beyond 15 years. Annual interest payments for these borrowings are £84 million. Contractual undiscounted interest payments are calculated using fixed interest rates or prevailing market floating rates as applicable. 7. The unallocated surplus represents the excess of assets over liabilities, including policyholder ‘asset share’ liabilities, which reflect the amount payable under the realistic Peak 2 reporting regime of the FSA. Although accounted for as a liability, as permitted by IFRS 4, there is currently no expected payment date for the unallocated surplus. 8. Provisions include pension obligations, which have been excluded from the contractual obligations table above, due to the uncertainty of the amount and timing of future cash flows. The Group operates both funded defined benefit and funded defined contribution pension schemes around the world, full details of which are provided in ‘Financial Statements IFRS – Note 48 – Pension obligations’. We have a contractual obligation to fund these schemes. However, the amount and timing of the Group’s cash contributions to these schemes is uncertain and will be affected by factors such as future investment returns and demographic changes. Our cash funding of defined contribution schemes is based on percentages of salary. Our cash contribution to defined benefit schemes is agreed in advance with scheme trustees. In 2010 a long-term funding agreement was agreed with the scheme trustees which is expected to eliminate the funding deficit over time. However, these contributions are revisited annually in light of changes in expectations of investment returns and other assumptions. The discounted scheme liabilities have an average duration of 18 years in the UK schemes and between 12 and 19 years in the non-UK schemes.
Meet the expectations of our customers, investors and regulators that we will maintain capital surpluses to ensure we can meet our liabilities even if a number of extreme risks materialise.
In 2010, in support of these goals, the Group continued its work to enhance its risk management capabilities by developing a comprehensive Risk Plan. The Risk Plan sets out a phased programme for designing, implementing and embedding enhancements to the existing risk management framework (RMF) across the Group. Key components of the RMF and some of the enhancements made in 2010 are described below.
Risk appetite Risk appetite is an expression of the level of risk we are willing and able to accept in pursuit of our strategic objectives and thus provides the context for our risk and capital management. The following appetite statements, which were reviewed and approved by the Board in June 2010, demonstrate a key focus on balance sheet strength and protection of the franchise value. They supplement existing risk appetite statements relating to the regulatory solvency position.
Economic capital: the Aviva Board requires that the Group has sufficient capital to remain able to meet its liabilities in extreme adverse scenarios, on an ongoing basis, calibrated consistently with the Group’s strategic target of maintaining a credit rating in the AA range.
Risk modelling For the purposes of risk identification and measurement, risks are usually grouped by risk type: market, credit, liquidity, general insurance, life insurance and operational risk. Risks falling within these types may affect a number of key metrics including those relating to balance sheet strength, liquidity and profit. They may also affect the performance of the products that we deliver to our customers and the service to our customers and distributors, which can be categorised as risks to our brand and reputation. To evaluate the impact of these risks, we carry out a range of stress (where one risk factor, such as equity returns, is assumed to vary) and scenario (where combinations of risk factors are assumed to vary) tests to evaluate their impact on the business and the management actions available to respond to the conditions envisaged. These stress and scenario tests are sometimes prescribed by supervisory authorities, but are supplemented by scenarios drawn from historical periods of adverse conditions, from risk models and from management discussions. In addition, ‘reverse stress tests’ are now generated where the intention is to identify the extreme scenarios which would test the business model to the point of failure. These are used to facilitate discussions on whether business plans should be modified. More details on our capital modelling, including our internal risk-based, economic capital model, can be found in the capital management section on page 70. Risk modelling is an area of focus for continued enhancement and development.
— Oversee risk management — Monitor regional risk profile — Operate in line with policy — Report to Group
Impact of market conditions on the sales of investments, pensions and other savings products and our fund management business
Products sold by the Group that carry investment return and surrender value guarantees Movements in the value of assets and liabilities, cash flows or dividends received from subsidiaries as a result of movements in currency exchange rates Fluctuation in the value of assets held by the staff pension schemes Movements in yield curves or market implied volatilities that affect the values placed on assets and liabilities are not perfectly matched
Liquidity Risk of not maintaining sufficient financial resources to meet our business obligations as they fall due
Insufficient capital generated from the receipt of premiums, fees and investment income, along with planned asset sales and maturities to pay claims, expenses, interest costs and dividends
Mismatches in the timing of cash flows relating to assets, liabilities and off balance sheet instruments
General insurance The inherent uncertainty as to the occurrence, amount and timing of insurance liabilities. This includes fluctuations in the timing, frequency and severity of claims and settlements.
Claims incurred from catastrophic events, such as flooding and windstorm Financial impact of worsening claims ratios and inadequate reserves Claims inflation
Life insurance The inherent uncertainty as to the occurrence, amount and timing of insurance liabilities. This includes exposure to mortality and morbidity insurance and exposure to worse than anticipated operating experience on factors such as persistency levels and management and administrative expenses
Adverse longevity experience (the risk that people will live longer than we have assumed) Adverse mortality experience (the death of a policy holder) and morbidity (ill health) Expense experience compared with assumptions at the start of the insurance policy Poorly designed or inadequately priced products Persistency risk arising from customers lapsing their policies earlier, or in some circumstances later, than has been assumed Adverse take-up rates of options embedded in insurance contracts
Operational The risks of direct or indirect loss resulting from inadequate or failed internal processes, or from people and systems, or from external events, including changes in the legislative or regulatory environment.
Failure of key processes and controls resulting in misselling, fraud, or losses requiring customer compensation
Failure of information technology and communications systems that affects the delivery of services to our customers
Brand and reputation Our dependence on the strength of our brands, the brands of our partners, and our reputation with customers, distributors and regulators in the sale of our products and services
Media speculation, negative publicity, adverse market and customer perception Products or services recommended by us not performing as expected
Regular reviews by the Asset Liability Committee relative to risk appetite Active management of exposure through changes in asset mix and hedging against unfavourable market movements Regular monitoring of impact from changes in market risks (interest rates, equity prices, property values) through value at risk analysis, stress tests and scenario analysis
Use of currency borrowings and derivatives to manage currency exposures within centrally set limits
A 50 bps increase in credit spreads would have no net impact on IFRS shareholder funds but would decrease embedded value by £1.4 billion on a net of tax MCEV basis.
Mortality/ morbidity – a 5% worsening in assurance mortality/morbidity experience would reduce shareholder funds by £55 million before tax on an IFRS basis and decrease embedded value by £220 million net of tax on an MCEV basis.
Longevity – should our assumptions in respect of annuitant mortality worsen by 5% then shareholder funds would reduce by £355 million before tax on an IFRS basis and decrease embedded value by £420 million net of tax on an MCEV basis.
In line with these objectives, the capital generated and invested by the Group’s businesses is a key management focus. Operating capital generation, which measures net capital generated after taking into account capital invested in new business (before the impact of non-operating items) is a core regulatory capital based management performance metric used across the Group. This is embedded in the Group business planning process and other primary internal performance and management information processes. Capital is measured and managed on a number of different bases. These are discussed further in the following sections.
Total capital employed 26,528 24,050 1 ‘Corporate’ includes centrally held tangible net assets, the element of the staff pension scheme deficit or surplus allocated centrally and also reflects internal lending arrangements. These internal lending arrangements, which net out on consolidation, arise in relation to the following: — Aviva International Insurance Limited (AII) acts as both a UK general insurer and as the primary holding company for our foreign subsidiaries. Internal capital management mechanisms in place allocate a portion of the total capital of the company to the UK general insurance operations, giving rise to notional lending between the general insurance and holding company activities. These mechanisms also allow for some of the assets of the general insurance business to be made available for use across the Group.
Total capital employed is financed by a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. At 31 December 2010 we had £26.5 billion (31 December 2009: £24.1 billion) of total capital employed in our trading operations, measured on an MCEV basis. Financial leverage, the ratio of external senior and subordinated debt to MCEV capital and reserves, was 31.5% (31 December 2009: 31.6%). Fixed charge cover, which measures the extent to which external interest costs, including subordinated debt interest and preference dividends, are covered by MCEV operating profit was 9.4 times (31 December 2009: 8.7 times).
Regulatory capital – overview Individual regulated subsidiaries measure and report solvency based on applicable local regulations, including in the UK the regulations established by the Financial Services Authority (FSA). These measures are also consolidated under the European Insurance Groups Directive (IGD) to calculate regulatory capital adequacy at an aggregate group level, where we have a regulatory obligation to have a positive position at all times. This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in the UK and Ireland with-profit life funds. The minimum solvency requirement for our European businesses is based on the Solvency 1 Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked life reserves respectively and for our general insurance portfolio of business is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our major non-European businesses (the US, and Canada) a risk charge on assets and liabilities approach is used.
Cover of EU minimum (calculated excluding UK Life funds) 1.6 times
The EU Insurance Groups Directive (IGD) regulatory capital solvency surplus has decreased by £0.7 billion since 31 December 2009 to £3.8 billion. The key movements over the period are set out in the following table: £bn
IGD solvency surplus at 31 December 2009 4.5 Operating profits net of other income and expenses 1.0 Dividends net of scrip (0.5) Market movements including foreign exchange (0.2) Pension scheme funding (0.3) Increase in Capital Resource Requirement (0.3) Acquisitions (River Road and other small transactions) (0.2) Other (0.2)
The capital requirement of the business unit under the group’s economic capital requirements; and,
Estimated excess £bn excess £bn 1 These realistic liabilities include the shareholders’ share of future bonuses of £0.7 billion (31 December 2009: £0.6 billion). Realistic liabilities adjusted to eliminate the shareholders’ share of future bonuses are £41.5 billion (31 December 2009: £42.1 billion). These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £1.9 billion, £0.3 billion and £3.1 billion for NWPSF, OWPSF and WPSF respectively (31 December 2009: £2.2 billion, £0.3 billion and £3.1 billion).
3 This represents the reattributed estate of £1.2 billion at 31 December 2010 (31 December 2009: £1.1 billion) held within the non-profit fund with WPSF included within other UK life operations.
Rating agency Credit ratings are an important indicator of financial strength and support access to debt markets as well as providing assurance to business partners and policyholders over our ability to service contractual obligations. In recognition of this we have solicited relationships with a number of rating agencies. The agencies generally assign ratings based on an assessment of a range of financial factors (e.g. capital strength, gearing, liquidity and fixed charge cover ratios) and non-financial factors (e.g. strategy, competitive position, and quality of management). Certain rating agencies have proprietary capital models which they use to assess available capital resources against capital requirements as a component in their overall criteria for assigning ratings. Managing our capital and liquidity position in accordance with our target rating levels is a core consideration in all material capital management and capital allocation decisions. The Group’s overall financial strength is reflected in our credit ratings. The Group’s rating from Standard and Poors is AA- (‘very strong’) with a Stable outlook; Aa3 (‘excellent’) with a Stable outlook from Moody’s; and A (‘excellent’) with a Positive outlook from A M Best. These ratings continue to reflect our strong competitive position, positive strategic management, strong and diversified underlying earnings profile and strong liquidity position.
Operational capital generation: Life in-force profits1 2.1 1.9 General insurance, fund management and non-insurance profits 0.6 0.6
For general insurance businesses this reflects the movement in required capital, which we have assumed to equal two times the regulatory minimum. Where appropriate, the movement in capital requirements excludes the impact of foreign exchange movements.
1 Life in-force profits exclude the negative impact of the Delta Lloyd longevity assumption change of £0.2 billion which is included in the MCEV analysis of free surplus generated.
Management also use a variety of other performance indicators (OPIs) in both running and assessing the performance of individual business segments and units, rather than the Group as a whole. OPIs include measures such as new business margins, combined operating ratio and underwriting profit. In addition to reporting on our financial performance, it is important that as a forward-thinking company we are aware of our wider responsibilities and report on the non-financial aspects of our performance. We consider that our employees and customers are fundamental to the success of our business; as such, they form the basis for our non-financial measures, and include: Leadership and employee engagement; and Customer advocacy.
Forward-looking statements This business review contains ‘forward-looking statements’ about: Our future plans; Our current goals; and Our expectations of our future financial condition, performance and results.
Accounting basis of preparation International Financial Reporting Standards (IFRS) Our consolidated financial statements are prepared under IFRS, using standards issued by the International Accounting Standards Board (IASB) and endorsed by the EU. In addition to fulfilling this legal obligation, the Group has also complied with IFRS as issued by the IASB and applicable at 31 December 2010. The financial data contained in the report and accounts has been prepared using the Group’s accounting policies set out on pages 170 to 182. 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), the most recent version of which was issued in December 2005 and amended in December 2006.
Market Consistent Embedded Value (MCEV) basis of reporting We present the results and financial position of our life and related businesses on an MCEV basis, in addition to the IFRS basis. MCEV methodology represents an alternative basis of reporting the value of the Group’s life and related businesses and the drivers of performance. This basis values cashflow from assets consistently with market prices and is consistent with the way pricing is assessed and the business is managed. The MCEV methodology adopted is in accordance with the MCEV Principles published by the CFO Forum in October 2009. Under this methodology, the total profit recognised over the full lifetime of an insurance policy is the same as under the IFRS basis of reporting. However, the MCEV basis gives a market-consistent indication of the profitability of business on inception. Additionally, shareholders’ funds on an MCEV basis incorporate internally-generated additional value of in-force business (AVIF), which is excluded for IFRS reporting. These financial statements include supplementary information on MCEV reporting in the ‘Alternative method of reporting long-term business’ section.
Longer-term investment return The long-term nature of most of our operations means that shortterm realised and unrealised gains and losses are shown as an adjustment to operating profit. We focus instead on operating profit incorporating a longer-term investment return (LTIR). Our rates of return that we use for equity and property in our LTIR methodology are aligned with the rates that we use under MCEV principles. For fixed interest securities, we include the amortisation of premiums or discounts arising on purchase, thereby producing an LTIR that is equivalent to the gross redemption yield.
Item Accounting policy Insurance and participating investment contract liabilities F & K Goodwill, AVIF and other intangible assets N Fair values of financial investments S Impairment of financial investments S Fair value of derivative financial instruments T Deferred acquisition costs and other assets W Provisions and contingent liabilities Z Pension obligations AA Deferred income taxes AB
Highlights from 2010 include: Being the first company to put our CR report in the Annual
Developing commercial insurance products to support development of a low carbon economy
Increasing community investment by 43% and increasing recognition of our global community programme Street to School, helping over 128,000 children
Governance Aviva is proud to have a well-established governance structure providing strong leadership and direction. Our Corporate Responsibility Committee is chaired by non-executive director Carole Piwnica, and comprises our chairman, group CEO and two other non-executive directors, Scott Wheway and Euleen Goh. The committee reviews strategy and policy and receives regional and functional reports four times a year. In 2010 it received a report from all regional offices and the IT, audit, procurement, SRI and customer teams. As standing items it had business ethics and the Street to School programme to discuss. The Corporate Responsibility Committee’s report can be found on page 114. Our CR Advisory Group supports and advises on the management and implementation of the global CR programme. Membership of the advisory group is being extended during 2011 to include external stakeholders representative of our strategic priorities. The internal members comprise Group CR specialists, regional CR leads and HR directors who work together to adopt and refine CR strategies, assess progress, identify actions that need to be taken and embed our programmes in different parts of the business. In addition, the Aviva Board receives both annual and ad hoc updates on CR strategy, activities and progress. Our CR programme is regularly on the agenda at executive management committees and regional performance against Group KPIs is reviewed quarterly. A percentage of our senior executive remuneration is dependent on performance against our CR key performance indicators.
Stakeholder communications By being open and transparent about what we do and how we run our business we believe we will be seen to have a high degree of integrity and therefore continue to build trust in Aviva for all of our stakeholders. Key to this is the way that we report our CR commitments and performance. We prepare stand-alone detailed annual reports for the Carbon Disclosure Project, UN Global Compact, ClimateWise and Principles of Responsible Investment. As well as
BIS call for evidence – ‘A long-term focus for corporate Britain’
In addition to these consultations we have engaged with MPs on the Street to School programme with our UK partner Railway Children to raise awareness of children at risk on our streets in the UK. The Opinion Leader Research carried out independently each year suggests that our strategy for engagement is well received. The research shows that Aviva is seen as the most trusted insurer amongst UK MPs, this has been the case for three years.
Trust and integrity Building and maintaining trust in Aviva by our customers, our suppliers, shareholders and employees, is of prime importance within a sector that has been impacted by the economic crisis. We are doing this through a commitment to transparent disclosure of information via the aforementioned initiatives, particularly the Carbon Disclosure Project and Accounting for Sustainability. We build long-term partnerships with charities and communities to provide both a sustainable source of finance and to deliver on outcomes over a significant period of time.
All employees are required to sign our business ethics code annually. Each instance of financial crime is recorded and investigated independently and the highest controls are put in place to protect our customers’ data. By regularly researching the opinions and behaviours of our customers, through our Consumer Attitudes to Savings research for example, we are able to deliver products and services that are designed to provide prosperity and peace of mind to our customers.
Business ethics We aspire to the highest standards of conduct and set out our principles in our business ethics code. This stipulates fairness, honesty and transparency in all we do. Employees in all countries in which we operate are required to uphold the laws of the host country. Everyone at Aviva has a part to play in upholding our standards and we raise awareness of these responsibilities through our induction programmes and sign-off of acceptance of the code by all staff. Our code has been revised for 2011 to incorporate the increasing legislative requirements of the UK Bribery Act 2010 and US Foreign Corrupt Practices Act. We will also be increasing the level of awareness of the new legislation throughout the organisation to improve understanding and compliance. In addition to our business ethics code, Aviva has adopted a code of ethics for senior management as required by section 406 of the Sarbanes-Oxley Act 2002 and the rules issued by the Securities and Exchange Commission. This code can be found on Aviva’s website, www.aviva.com/investor-relations/corporategovernance /code-of-ethics
Aviva plc Annual Report and Accounts 2010 Corporate responsibility continued the feedback from our customers as well as including NPS performance targets as part of our executive directors’ annual remuneration.
Products and services Our product portfolio is designed to allow customers to make informed choices about their insurance and financial needs which provide socio-economic and environmental benefits: Our affordable microfinance and insurance products for lowincome earners have reached around three million rural lives in India to date, in many cases offering financial protection for as little as US$2 a year.
As part of our response to climate change we launched insurance products in February 2011 that support commercial development of low-carbon products including wind farms and biomass energy conversion plants.
We have continued this year to run the Aviva Customer Cup competition first launched in 2009. The Customer Cup challenges employees from around the Group to increase customer satisfaction and loyalty by improving our product offering and service delivery. Projects from more than 200 teams are evaluated by judges in three tournament stages with ten teams making it through to the grand final in June 2011. We are pleased that the Customer Cup has been recognised externally by the Financial World Innovation Awards 2010 for ‘Innovation in Staff Participation’. Our ‘You are the Big Picture’ campaign reflected the progress we have made in the transition towards a customer-focused organisation. The campaign featured our customers, employees, business partners and communities bringing to life our brand promise of individual recognition. Employees and customers relived their stories of the part Aviva played at a time of crisis to deliver peace of mind.
Simplifying our key people processes and tools Talking Talent is designed to match the right people to the right roles and equip individuals to take personal responsibility for their development. Over the last four years, this has been firmly established as a ‘signature process’ at Aviva and, since the end of 2010, has been deployed in all regions. The support material for Talking Talent has been simplified and translated into 11 languages so that staff at all levels can now use the same process worldwide. The outputs of Talking Talent are the cornerstone of our key people-related decisions – from rewarding great work to recruiting expertise from outside while ensuring we achieve a healthy mix of promotions from within. We have eliminated almost all of the bureaucracy previously associated with performance management. The focus is now on frequent, open, honest and informal conversations between individuals and their line manager throughout the year – with a much simpler and clearer annual mechanism for recording these formally. We are focusing on simplifying HR processes and procedures to reduce the administration burden and complexity apparent due to legacy. As part of this we are harmonising terms and conditions in employment contracts within the UK to apply consistent employment conditions to all UK employees. We are in the process of introducing a new HR management system, Workday, to consolidate all HR databases globally and have created New Beginnings, a central repository of information to help new employees at Aviva.
Corporate responsibility Aviva plc Annual Report and Accounts 2010 Corporate responsibility continued 11 different countries and nine different languages. The fact that there was a high level of engagement and input in this activity gained Aviva an International Visual Communications Association (IVCA) Gold Award for experiential digital events. A key part of our employee promise is to recognise the contribution of our employees. Our ‘You are the Big Picture’ brand campaign, recognises employees by celebrating their dedication to our customers. This campaign was shared online both internally and to an external audience. Indeed, our annual employee promise survey tells us that individual recognition is now our most important engagement priority.
Strengthening our leadership capability Over the last two years we have introduced new management and leadership programmes to nurture talent and create proactive dialogue with leaders and their teams. In the UK business we have implemented a programme to develop frontline managers, focused specifically on the Asia top 60 and introduced a Europewide learning and development curriculum. We have also improved the way that we provide information to senior leaders who are new to Aviva, to introduce them to our culture, values and management processes. Some 40 incoming senior leaders took part in a specially developed induction process this year and received take-away information packs.
Marketing’ and the ‘Corporate Social Responsibility Award’ at the Asia Insurance Industry Awards 2010 for demonstrating how CR can be closely and successfully tied with business strategy.
In the UK, over 7,000 children have been positively impacted. 2.4 million customers have been reached by our Street to School messages and the full media reach is estimated at £14 million. Over £500,000 has been raised for our UK partner Railway Children and we’ve contacted 650 MPs.
We used our global brand campaign ‘You are the Big Picture’ to raise awareness of street children, to engage the public including attracting 57,000 fans on Facebook and to raise £170,000 for Street to School.
In total over 61 million people had the chance to hear about Street to School in 2010.
Community projects We commit at least 50% of our community development budget to Street to School. Our approach to benefiting our people, community and brand is also found in the following examples: Our ongoing partnership with Oxfam 365 helps to equip Oxfam with the resources and materials to respond to emergencies as soon as they happen, such as those in Haiti and Pakistan
‘Paying for It’ (www.payingforit.org.uk) launched by Aviva in 2007, continued to take economic citizenship teaching into schools up and down the UK using trained Aviva volunteers and now with 3,300 teachers using our resources
We have streamlined our portfolio of projects to ensure alignment with our strategy but being conscious of the need to recognise that all our people have issues close to their hearts we continue to offer all staff three days paid volunteering leave and fundraising matching programmes.
Part of our approach to achieve these targets is to share best practice across the regions of value creating initiatives. Some examples of this over the past year have been the sharing of information on advances in low-energy IT solutions such as 1E Nightwatchman between the UK, Europe and Asia Pacific. We have also shared progress and implementation notes on the use of ‘low-water’ and ‘no-water’ urinals and centralised recycling. The impact that we have on the environment is not restricted to our own operations but extends to areas of our supply chain and properties that we hold within our investment funds. Sustainable supply chain work during 2010 has focused on the environmental benefits we can deliver throughout the claims fulfilment process. We have made savings in waste production through the ‘repair over replace’ schemes in both motor and home repairs. We have worked with our IT suppliers to minimise the polystyrene placed in packaging and have an agreement in place with Dell for them to take back and recycle polystyrene packaging. In February 2011 we are launching the first commercial insurance products to support the drive to a low-carbon economy. These products will cover wind turbines and solar power manufacturers, biomass and waste to energy production.
The role of insurers in climate change The insurance industry has a fundamental part to play in society’s responses to climate change. As a major insurer Aviva has firsthand understanding of the impact of extreme weather events on our customers. On their behalf, we are committed to help mitigate the threat of climate change and support everyone in society to adapt to changes caused by man-made emissions already in the atmosphere. Our industry can also draw on its knowledge of historical weather data to identify patterns of change, applying our understanding of risk to map future temperature scenarios and determine likely impacts. Finally, we can offer the financial tools to help manage the burden of climate change, for example the pooling and transfer of risk. Our Accounting for Sustainability statement on page 86 explains our progress against these areas. We believe that climate change must be tackled now. As extreme weather events become more frequent and more severe, they become more challenging to insure. It is in everyone’s interest that insurance remains affordable and available so that people affected by severe weather events can recover quickly from unavoidable impacts.
Since 2006, when we were a founder member of the ClimateWise Principles, we have been a part of the management committee and continue to report each year against these industry-wide principles. This year we hosted the ClimateWise review, where Aviva Investors UK CEO Paul Abberley spoke along with UK government ministers Chris Huhne and William Hague. Our senior managers have continued to support high-level initiatives to tackle climate change. Our chairman, Lord Sharman, a long-time advocate for addressing climate change issues, wrote an article in Environmental Finance calling for mandatory reporting of carbon emissions. Andrew Moss, Group CEO, highlighted the importance of translating sustainable development principles into business operations in the media leading up to the Davos summit in January 2011. Andrew attended the UN Global Compact LEAD launch in Davos, membership of which recognises Aviva as a leader in addressing environmental, social, and governance issues. John Ainley, Group HR director spoke on the subject of employee engagement to drive climate behavioural change to the UK CBI in April 2010. While in Singapore our director of HR change, Anuradha Purbey, spoke at the 1st Climate Change Conference, supported by ClimateWise. Our Corporate Responsibility Committee has taken the steps to become paperless, saving an estimated 8.8kg of paper per annum and energy associated with printing. We firmly believe that engaging our employees to raise awareness and address environmental impacts is an essential part of delivering our environmental strategy. 71% of our employees agree that we make business choices that support the environment which include measures such as our recycling initiatives, providing alternatives to business travel and energy reduction techniques. We are looking to further strengthen our communications to our employees and customers through our sponsorship of ClimateWeek during March 2011. At the London launch of the Carbon Disclosure Project in 2009 Lord Sharman called for more focus on carbon mitigation. We are working with the Carbon Disclosure Project to develop a project to collate carbon mitigation responses. We consider our supply chain to be part of our sphere of influence not only to address the carbon intensity of our supply chain but to encourage our suppliers to be more responsible and sustainable. Aviva is a large procurer, with a £5.3 billion spend and 27,000 suppliers. During 2010 we have started to investigate the nature of embedded carbon within our supply chain, both through conversations with suppliers and through examining the appropriate methodology for this task. We have also begun to introduce legally binding clauses within procurement contracts. During 2011 we will be continuing this work and developing a ‘code of behaviour’ for suppliers outlining a mutual moral commitment on which to conduct the supplier relationship.
Financial capability We believe it’s vital to help build financial capability as the capacity for consumers to save and make provision is the single most important ingredient for future prosperity. We work across a number of fronts, especially to help lower-income groups: increasing awareness of personal responsibility, improving financial education and ensuring access to products and services in our markets. We’re also working with government and policy makers to help create the right environment to close pensions and savings gaps. A lack of trust in financial institutions, made worse by the banking crisis, has further undermined customers’ trust and ability to save and make provisions. Aviva is determined to address this, and in particular, issues around the significant level of underprovision for retirement.
Empowering our customers We want to help our customers secure their financial futures by designing products and services to meet their needs. Individuals, too, have a responsibility to plan, decide and act. Across Aviva, communicating with our customers openly and effectively is fundamental to the business. We continue to develop all the channels available to us to reach our customers, and provide good, clear information, whether written or spoken, to help people with financial decisions. To illustrate this in the UK our customer portal now has 15,000 registered users who use the site to find up-to-date valuations and use a range of online help tools including a pension tracker and a retirement calculator. It remains a fact, however, that there is substantial underprovision for retirement. In Europe, for example, where we have carried out a significant amount of research to understand the pensions’ requirements, we estimate that some individuals will need to increase their savings by an average of €12,000 per annum to fully close their own personal pension gap. Our Consumer Attitudes to Saving research, which has now covered over 100,000 people, analyses what consumers are thinking and feeling about financial matters, revealing common concerns about retirement. However, these worries are not being translated into personal action. The issues are complex but we are looking at new ways to better engage consumers to take greater personal responsibility. This is why we have convened experts in behavioural change and psychology to join our Future Prosperity Panel, with the aim of publishing new thinking on the issues in 2011.
Community initiatives Through our community development programme we have defined financial capability as one of our key strategic areas. We are therefore supporting financial education, in young people and adults, by funding education programmes and by offering the time and expertise of our colleagues. In the UK our Paying for It and Learn and Thrive programmes educate young people to be financially literate while our Chance to be Chancellor competition gives 14 – 19 year-olds the opportunity to have their say on the economy, to develop their own Budget and identify their priorities for public spending. While in Sri Lanka, our community projects include helping small businesses to improve their financial capability and providing internships to university students to develop a greater awareness of a financial services workplace.
Overall, the main purpose of our proposed corporate responsibility reporting requirement, and the associated AGM vote, is to try to create the right kind of discussions within the boardrooms of listed companies around the world, and then between the company and its shareholders. Since 2008, the Sustainable Stock Exchange initiative has continued to gather momentum. In 2009 and 2010 we co-hosted events with the UN-backed Principles for Responsible Investment Initiative (PRI), UN Global Compact and the United Nations Conference on Trade and Development (UNCTAD), to examine the various ways in which stock exchanges promote sustainable business practices. We believe this initiative has significant potential to make capital markets work better and be more sustainable.
External benchmarking and recognition Our achievements in 2010 were recognised by our inclusion in some of the world’s leading external benchmarks: Dow Jones Europe and World Sustainability Indexes; SAM Sustainability Yearbook; FTSE4GOOD Index Series; FTSE KLD Europe, Asia Pacific and Global Sustainability indexes (excluding the US Index); ECPI Ethical Index Euro and Ethical Index Global; Ethibel Excellence and Pioneer Indexes; Gold status in Business in the Community’s (BITC) Corporate
Affiliations and engagements We work closely with leading organisations to share good practice, identify emerging issues and improve our performance. Here are just a few of the organisations we collaborated with in 2010: CBI Climate Change Board; Carbon Disclosure Project; HRH Prince of Wales Accounting for Sustainability; ClimateWise; UNEP Finance Initiative; UN Global Compact and represented on UN Principles for
Responsible Investment and Caring for Climate working groups; Consortium for Street Children; UN Women Empowerment Principles; Business in the Community; and ORC Global Diversity Forum.
% of employees who rate us favourably on leadership index — — 64% 63% Meet/exceed GFS benchmark (2010: 71%)
Number of detailed CR assessments of Aviva’s major suppliers — 30 in the UK
Number of business units that have implemented and embedded use of ‘Supplier Hospitality register’ and ‘Register of Interests’
% of investment in Aviva ‘Street to School’ — — — 52% 50% of cash donations
2% Meet/exceed GFS benchmark We have increased our performance on last year but are still below the external GFS benchmark for this KPI.
People: Data for women in senior management excludes Delta Lloyd. Whilst we have improved in most of these KPIs against our own performance, our targets are external benchmarks which we working towards achieving. 10% Meet/exceed GFS benchmark 2% Meet/exceed GFS benchmark n/a Improve past performance (no
Community: These KPIs exclude Delta Lloyd. The amount of volunteering hours has dropped significantly as we no longer pay a broker to find volunteering opportunities for us. We are exploring implementing an internal volunteering opportunities system throughout 2011.
Developing communities Direct company impacts Our global investment in charitable and community development projects in 2010 was £11.4 million (2009: £8.0 million). This includes cash, time and in-kind donations as well as management costs calculated using the London Benchmarking Group (LBG) model4. We also helped leverage an additional £1.5 million of investment where our activity attracted further contributions from our wide network of stakeholders including employees.
Indirect impacts We have taken the opportunity to partner with the Consortium for Street Children (CSC) to aid our ability to play our part in national and international advocacy activity as we know that legislative, policy and service delivery improvements will make the biggest difference to the most children. We have recently announced that we have seconded a senior Aviva Group director to the role of CEO of the CSC for the next 2 years. We are actively exploring and leveraging networks of interested parties, and their various capabilities, across public, third and private sectors as we seek means of non-competitive collaboration to achieve the recognition and realisation of street child rights, help deliver the Millennium Development Goals and increase the wellbeing of all in our global communities.
Greenhouse gas emissions Direct Company impacts Cash flow performance Through Aviva’s worldwide business operations in 2010, 127,685 tonnes of carbon dioxide (CO2) or equivalent were emitted into the atmosphere. To compensate for these emissions we purchased carbon offsets to 105% from the voluntary carbon market at a total cost in the region of £462,500. This is the fourth year in which we have addressed the issue in this way, complementing our internal carbon reduction programme of employing energy-efficient technologies and sourcing renewable electricity where the zero carbon nature of the electricity is recognised as a benefit to the Company.
Aviva plc – operational carbon footprint covering 100% of employees GHG Emissions data from 1 Jan 2010 to 31 Dec 2010
The fuel consumption of the RAC fleet has reduced further from 9.1 million litres to 7.4 million litres, a reduction of 19%. This is still due in part to the economic downturn and customers not using their cars as much, the use of more accurate satellite navigation systems in the vehicles and more technical staff in the call centres to talk customers through simple repairs. This means they can continue their journey sooner and breakdown assistance mileage is reduced. We are also making use of our local knowledge of reliable garages to reduce towing mileage and achieve a comprehensive repair quickly. These changes in our processes, together with speed limiters and minimising our carrying load, have all reduced the carbon intensity of our roadside breakdown service whilst still providing the highest level of customer satisfaction.
Indirect impacts We are conscious of the potential impacts that climate change has on our business. We have been a part of ClimateWise, the insurance sector collaborate forum on climate change, on workstreams around sustainable claims management and on investigating the linkages of climate change and morbidity rates. Both these workstreams will continue into 2011. We have also invested in pioneering technology to measure surface water flooding using a unique flood model that can estimate the damage freak downpours can inflict on homes and businesses in the UK. The research and modelling was identified following the rain storms events in the summer of 2007. Working in partnership with hydrologists JBA Consulting, the map has been developed using laser technology that recognises undulations in the ground as small as15cms. The map has then been “flooded” with a simulation of a 200-year rain storm event and a digital model created to show where the water falls and pools. Previously the map focused on coastal and river flooding risk together with historical claims data. The additional data means the model now addresses the ever-growing threat that freak downpours can have on our towns and cities. It is for insurance purposes only and will enable the underwriter to more accurately assess each customer's individual circumstances. We consider the financial risk climate change poses for Aviva and accordingly build this into our levels of capital reserves and risk management processes. We have completed a carbon footprinting exercise for the properties we own through our Property Fund managed by Aviva Investors in 2008. Aviva Investors’ European Renewable Energy Fund is targeting gross investment of approximately €1 billion and is currently open for investment.
Waste Direct company impacts Hazardous and non-hazardous waste Total disposal cost for hazardous and non-hazardous waste in the UK was £596,000 (2009: £748,000), which includes UK landfill tax.
Conservation investment Total capital expenditure for storage and recycling in the UK was zero (2009: £zero).
Indirect impacts Products/suppliers/investors In an effort to reduce the amount of waste generated through our claims fulfilment processes, we have sought to apply the ‘repair over replace’ principle to domestic property claims following water damage. Previously this consisted of ‘stripping out’ render and plaster on walls and ceilings. We target minimisation of strip out of the property affected by water damage through the introduction of a Repair Order to Aid Drying (ROTAD) whereby the suppliers are required to complete a documented request on a property prior to drying. This monitoring process has significantly reduced the instance of strip outs.
Resource usage Direct Company impacts Water The operating cost of water usage was £1.6 million in 2010 (2009: £1.3 million).
Energy intensity Total cost of buildings-related energy in 2010 was £17.7 million (2009: £17.7 million). The equivalent cost per m2 is £12.
Environmental incidents During 2010 there were no environmental incidents as a result of our operations (2009: none).
Performance, strategy and targets Water consumption reduced by 8% in 2010, exceeding our target of 4%. The UK business, having successfully trialled ‘nowater ’ urinals in one location has now rolled the process out to all other suitable locations. In locations where ‘low-water’ urinals had not already been installed there was a 38% reduction in water consumption, or 20 million litres across the UK property portfolio, and a saving of £40,000 per annum. In respect of paper the UK business has replaced 432 large photocopiers with 200 smaller multifunctional devices. 10% of all printers were also removed, meeting the target of 1,500 printers by the end of 2010. Aviva US has now received LEED Gold Certification for the new 33,444m2 head office in Des Moines from the US Green Buildings Council. It is one of only five buildings of its size or larger in the US to achieve this designation. The building, accommodating 1,300 employees, is constructed from locally sourced material and includes rainwater run-off and collection, food waste composting, natural lighting, motion sensors and auto-dimming in offices and conference rooms.
Indirect impacts Products/suppliers/investors Aviva UK has also signed up to the Royal Mail’s Responsible Mailing programme for direct marketing mail. This ensures that the paper used in the marketing is FSC accredited and that a recycling message is included on each piece of material. By 2010 year end 3.9 million items of direct mail had been delivered through this programme. Royal Mail also reduces its handling costs as part of this initiative providing a saving of £11, 000. The UK business is also using phone text messaging, following a Met Office severe weather warning for storm or extreme weather temperatures, to inform customers of the precautions they should take to safeguard their property and cars. Texts to 500,000 customers went out to warn them of the perils of the arctic conditions in December. Aviva’s new global brand campaign ‘You are the Big Picture’ required that the building wraps could be recycled in line with the recycling infrastructure available. Some were turned into biofuel whilst others were made into traffic cones and plastic kerbs. The energy used to illuminate the buildings and image projectors was calculated and CO2 emissions were offset; a total of 113 tonnes. The marketing and IT team in Singapore worked together to build a system to launch our general insurance products in 2010. The products are sold through an online system (the first in Singapore). When customers purchased their policy, they are given the option to ‘Go Green’ and if they chose this option the policy is sent to them electronically, reducing the need for printing. Since the launch of this product, 93% of customers have requested this option out of a total of 9,992 policies sold. Each policy is approximately 24 pages saving 1.2 tonnes of paper.
Industry benchmark information Water: 7.7m3 per employee per year (National Water
Demand Management Centre); and Office paper: good practice 4,000-5,000 sheets per employee per annum (Gartner Research).
% met or exceeded benchmark% below benchmark % in upper quartile
In Europe, the majority of markets continue to outperform when compared to the local market benchmark.
The UK results are largely consistent with 2009. The RAC maintains its market leadership position while others remain behind the market benchmarks.
Our long-term target is for all markets to be in the upper quartile relative to their local competition and so building customer advocacy is one of the primary objectives for the business as a whole. Using NPS as the discipline to listen to our customers and improve the experience we deliver to them will allow us to improve this metric and in turn our financial performance. We have developed a framework around Net Promoter that outlines the attributes of world-class customer focus and each market is making progress against this. For example: Our UK General Insurance business has implemented a state-of-the-art Transactional NPS system which enables the business to survey customers that have recently had contact, on a daily basis. This system allows the business to not only track how it is delivering to customers more frequently but also re-contact unhappy customers immediately to try and fix the problem.
Indirect impacts Building Aviva around our customers requires that we work as One Aviva – all employees have a role to play in delivering a consistent experience to our customers – and this will be a key focus for 2011. Listening to our customers is the first step in being able to deliver our brand promise. One of the major mechanisms we have to do this is our annual NPS survey discussed above; another is our global Consumer Attitudes to Savings survey, which covers a nationally representative sample of consumers in key markets. The results of this study have been used with policy makers across our markets as well as being used to drive product and proposition development for our customers. Equally important in ensuring that we are delivering the customer promise is that we act on what our customers have told us. One way we can do this is through structured action planning programmes as a result of surveying customers, as we do with our Relationship NPS results. Another way is to harness the engagement of our employee base through our open innovation competition, the Customer Cup. This is a programme designed to enable all employees to find innovative solutions that will deliver prosperity and peace of mind to our customers. We are also actively exploring challenging topics facing our customers globally and their implications for future prosperity as well as our industry: Aviva Europe’s ‘Mind the Gap’ report explored the adequacy of future pension provision by systematically quantifying Europe’s annual ‘pensions gap’. Among other things, the report called on the European Commission to create a European Quality Standard for Pensions to restore consumer confidence in pensions savings vehicles, and to establish and monitor a European Pensions Savings Target so that national governments are encouraged to rebalance their pensions systems with greater funded schemes.
Independent assurance statement The Aviva corporate responsibility content on pages 76-90 (the CR Report) has been prepared by the management of Aviva, who are responsible for the collection and presentation of information reported. Our responsibility, in accordance with management’s instructions, is to provide a limited assurance engagement on the CR Report content and on selected environmental and community investment data presented in the CR Report. We do not accept or assume any responsibility for any other purpose or to any other person or organisation. Any reliance any such third party may place on the CR Report is entirely at its own risk.
What we did to form our conclusions Our assurance engagement has been planned and performed in accordance with ISAE3000 and to meet the requirements of a Type 2 assurance engagement as defined by AA1000AS (2008) . The AA1000AS (2008) assurance principles of Inclusivity, Materiality and Responsiveness have been used as criteria against which to evaluate the CR Report. To form our conclusions on the CR Report we undertook the steps outlined below: 1. Interviewed a selection of executives and senior managers at Aviva’s Group headquarters in London and selected Aviva businesses to understand the current status of corporate responsibility activities, and progress made during the reporting period 2. Reviewed Aviva’s approach to stakeholder engagement through interviews with a selection of employees at Aviva businesses in the UK, India, USA and Group headquarters and reviewed selected associated documentation 3. Reviewed a selection of external media reports and selected corporate level documents relating to corporate responsibility aspects of Aviva’s performance to test the coverage of topics within the CR Report 4. Reviewed Aviva’s processes for determining material issues to be included in the CR Report 5. Reviewed the collation and aggregation of selected environmental and community investment performance data at Aviva businesses in the UK, India, USA and Group 6. Reviewed information or explanations about selected data, statements and assertions regarding Aviva’s corporate responsibility performance
Level of assurance Our evidence gathering procedures were designed to obtain a limited level of assurance (as set out in ISAE3000) on which to base our conclusions. The extent of evidence gathering procedures performed is less than that of a reasonable assurance engagement (such as a financial audit) and therefore a lower level of assurance is provided.
We are not aware of any key stakeholder groups that have been excluded from dialogue.
We are not aware of any inconsistencies in the assertions made with regards to performance and achievement.
How complete and accurate is the environmental and community investment data in the CR Report?
We are not aware of any errors that would materially affect the data as presented in the CR Report.
1 AA1000AS (2008) – A second edition of the AA1000 assurance standard from the Institute of Social and Ethical Accountability.
Observations on particular aspects of our engagement Our observations and areas for improvement will be raised in a report to Aviva management. Selected observations are provided below. These observations do not affect our conclusions on the CR Report set out above.
Aviva plc Annual Report and Accounts 2010 Board of directors continued 3. Patrick Regan Chief financial officer (Age 45) Appointed to the Board in February 2010 as chief financial officer. Previously group chief financial officer and group chief operating officer at Willis Group Holdings Limited (insurance broking). Formerly group financial controller of RSA Insurance Group plc (insurance) and finance and claims director, UK general insurance of AXA Insurance (insurance). He also held a number of senior management positions at GE Capital (financial services) and specialised in corporate finance and investigations at Grant Thornton (professional services). Member of the supervisory board of Delta Lloyd N.V.
4. Mark Hodges Executive director (Age 45) Appointed to the Board in June 2008. Joined Norwich Union in January 1991 and held a number of senior roles within the finance function before becoming finance director of Norwich Union Insurance in 1998, managing director of Norwich Union General Insurance in 2005 and chief executive of Norwich Union Life, the Group’s long-term savings business in the UK, in 2006. Appointed chief executive of Aviva UK, comprising Aviva UK Life (formerly Norwich Union Life), and Aviva UK General Insurance (formerly Norwich Union Insurance), the Group’s insurance and motoring services business in the UK, in January 2010.
5. Igal Mayer Executive director (Age 49) Appointed to the Board in January 2011. Joined the Group in May 1989 as assistant vice-president/controller of Canadian General Insurance Group. Formerly chief executive of Aviva North America, chief executive of Aviva UK General Insurance and chief executive officer, chief financial officer and executive vice-president of Aviva Canada. Previously finance director of Norwich Union Insurance and managing director, London Markets, for CGU Insurance in London.
12. Russell Walls Independent non-executive director (Age 67) Appointed to the Board in May 2004. Currently non-executive director of Signet Jewelers Limited (retail), treasurer and trustee of The British Red Cross and a member of the Finance Commission of the International Federation of the Red Cross. Former group finance director of BAA plc (transport), Wellcome plc (pharmaceuticals) and Coats Viyella plc (textiles). Former senior independent non-executive director of Stagecoach Group plc (transport) and Hilton Group plc (leisure) and a former non-executive director of Delphic Diagnostics Limited (medical), and the Mersey Docks and Harbour Company (transport). Chairman of the Audit Committee and a member of the Nomination and Risk committees.
Mark Hodges Chief executive, Aviva UK (Age 45) See page 95
Igal Mayer Chief executive, Aviva Europe (Age 49) See page 95
Richard Hoskins Chief executive, Aviva North America (Age 46) Joined the Group in 2009. Formerly executive vice-president and chief financial officer of Aviva North America. Previously executive vice-president and chief financial officer for Old Mutual US and acting group finance director and deputy group finance director for Old Mutual plc, London. Formerly head of National Australia Insurance Services, a subsidiary of National Australia Bank’s UK operations and chief financial officer of their European wealth management business. Previously held several senior management roles in Sydney at Lend Lease Corporation, Qantas Airways Limited and Deloitte and Touche. Holds a Bachelor of Arts degree in Business Studies from Sheffield University and is a Member of the Institute of Chartered Accountants of England and Wales.
Amanda Mackenzie Chief marketing and communications officer (Age 47) Joined the Group in 2008. Currently a non-executive director of Mothercare plc. Formerly commercial and marketing director for British Gas plc and has 25 years of experience in the marketing and advertising profession. Holds a Bachelor of Science degree in Psychology from the University of London and is a graduate of the INSEAD advanced management programme. She is a Fellow of the Royal Society of Arts and the Marketing Society and is a governor of the National Youth Orchestra. She is also a member of the Lord Davies inquiry into women on boards and the Cabinet Office review of the Central Information Office.
Performance review Corporate responsibility Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
The directors submit their Annual Report and Accounts for Aviva plc, together with the consolidated financial statements of the Aviva Group of companies, for the year ended 31 December 2010. The Companies Act 2006 requires the directors to present a ‘business review’ in this Directors’ Report. The requirement is for the Company to set out in this report, a fair review of the business of the Group during the financial year ended 31 December 2010, including an analysis of the position of the Group at the end of the financial year and the trends and factors likely to affect the future development, performance and position of the business. The contents of this Directors’ Report, together with the Performance review on pages 17 to 74, the Corporate Responsibility Report on pages 75 to 92, Shareholder information on pages 137 to 166 (which includes the risks relating to our business), the Corporate Governance Report on pages 100 to 108, and the Directors’ Remuneration Report on pages 115 to 136 constitute the business review and are therefore incorporated into this Directors’ Report by reference. Details of material acquisitions and disposals made by the Group during the year are contained in note 3 to the consolidated financial statements IFRS.
The rights and obligations attaching to the Company’s ordinary shares and preference shares, as well as the powers of the Company’s directors, are set out in the Company’s articles of association, copies of which can be obtained from Companies House and the Company’s website, www.aviva.com/investorrelations /corporate-governance/articles-of-association/, or by writing to the group company secretary. With the exception of restrictions on transfer of ordinary shares under the Company’s employee share incentive plans while the shares are subject to the rules of the plan, there are no restrictions on the voting rights attaching to the Company’s ordinary shares or the transfer of securities in the Company. Where, under an employee share incentive plan operated by the Company, participants are the beneficial owners of shares, but not the registered owners, the voting rights are normally exercised at the discretion of the participants. No person holds securities in the Company carrying special rights with regard to control of the Company. The Company is not aware of any agreements between holders of securities that may result in restrictions in the transfer of securities or voting rights. Unless expressly specified to the contrary in the articles of association of the Company, the Company’s articles of association may only be amended by special resolution of the Company’s shareholders in general meeting. There are a number of agreements that take effect, alter or terminate upon a change of control of the Company, such as commercial contracts and joint venture agreements. None is considered to be significant in terms of their potential impact on the business of the Group as a whole. All of the Company’s employee share incentive plans contain provisions relating to a change of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions and pro rata reduction as may be applicable under the rules of the employee share incentive plans. At the 2011 Annual General Meeting, shareholders will be asked to renew the directors’ authority to allot shares. Details are contained in the Notice of AGM.
Developing communities As a sustainable business, the Group is committed to playing its part in the development of the communities where it operates and it strives to listen carefully, collaborate and together create a genuine and lasting impact on the issues affecting those communities. This includes the broader Millennium Development Goals set by the United Nations to focus governments, businesses and civil society on major global concerns. Using the Group’s strengths and working around the strategic focus on education, life trauma and financial literacy, a contribution of over £11.4 million was made in 2010, a 42.5% increase on 2009. The Group delivered over 80,000 hours of volunteering and working in partnership with field experts across the public and third sector. There is also recognition of the mutual benefit of the Group’s community development activity as employees feel engaged and proud, communities where the Group operates feel the impact and the Group’s brand reputation is enhanced. The Group’s flagship global community development programme, Street to School, is a five-year commitment which aims to help 500,000 children fulfil their potential, and which showed the adopted approach in action. By the end of 2010, the Group had already helped 128,000 children through prevention work, community outreach, healthcare, safe housing and a significant focus on education and training projects. The Group’s community development activity also included: Grassroots Athletics and Rugby activity, financial literacy work in schools and adult education and the ongoing partnership with Oxfam 365 which helped them respond immediately to emergencies such as the earthquake in Haiti and flooding in Pakistan.
Political donations At the 2010 Annual General Meeting, shareholders passed a resolution, on a precautionary basis, to authorise the Company to make political donations and/or incur political expenditure (as such terms are defined in sections 362 to 379 of the Companies Act 2006), in each case in amounts not exceeding £100,000 in aggregate. The definitions used in the Companies Act 2006 are broad in nature and this authority was sought to ensure that any activities undertaken throughout the Group’s businesses which could otherwise be construed to fall within these provisions could be undertaken without inadvertently infringing them. During the year, the Company’s American subsidiary, Aviva USA, through its employee-funded Political Action Committee, made contributions to four different industry bodies and the re-election committee of a state governor, which could all be construed to fall within the political donations provisions. The total sum of the donations was $12,500 and the donations were used to support candidates for nomination and/or election to public office. It is not the policy of the Company to make donations to EU political organisations or to incur other political expenditure.
Annual General Meeting The 2011 Annual General Meeting of the Company will be held on Wednesday 4 May 2011 at the Barbican Centre, Silk Street, London EC2Y 8DS at 11am. The Notice of AGM convening the meeting describes the business to be conducted thereat.
Andrew Moss Group chief executive 2 March 2011 Registered Office: St. Helen’s, 1 Undershaft, London EC3P 3DQ Registered in England No. 2468686
The UK Corporate Governance Code The UK Corporate Governance Code (the Code) is the new edition of the Combined Code on Corporate Governance (the Combined Code) and was issued by the Financial Reporting Council in May 2010. The Code is applicable to financial years beginning on or after 29 June 2010 and has been applied by the Company since the start of the current financial year on 1 January 2011. The Board have, however, opted for an early adoption of some of the new provisions of the Code where it deems this to be appropriate, including the annual re-election of directors. The first time the Company will report on the Code will be in 2012, in respect of the 2011 financial year. This report is therefore based on compliance with the Combined Code which was applicable for the 2010 financial year and sets out details of how the Company has applied its principles and complied with its provisions. The Combined Code sets out standards of good practice in the form of principles and provisions on how companies should be directed and controlled to follow good governance practice. The Financial Services Authority (FSA) 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 period. Where the provisions have not been complied with, companies must provide an explanation for this. It is the Board’s view that the Company has been fully compliant throughout the accounting period with the provisions set down in section 1 of the Combined Code. Further information on the Code and Combined Code can be found on the Financial Reporting Council’s website, www.frc.org.uk
The Board The directors are responsible to shareholders for ensuring that the Company is appropriately managed and that it achieves its objectives. It meets regularly to determine the Company’s strategic direction, to review the Company’s operating and financial performance, to set the Company’s risk appetite and to provide oversight that the Company is adequately resourced and effectively controlled. The specific duties of the Board are clearly set out in its terms of reference that address a wide range of corporate governance issues and list those items that are specifically reserved for decision by the Board. Matters requiring Board approval include: Group strategy, business plans and performance monitoring; Financial reporting and controls, capital structure and dividend policy; Group risk appetite and framework, and risk management policies; Corporate governance; Others (shareholder documentation, Board and committee succession planning, constitution of Board committees, Board effectiveness review, committee reports and key business policies).
The directors The Board currently comprises the chairman, eight independent non-executive directors and four executive directors. Each nonexecutive director serves for a fixed term not exceeding three years that may be renewed by mutual agreement. Subject to the Board being satisfied with a director’s performance, independence and commitment, there is no specified limit regarding the number of terms a director may serve. Each director is required to be elected by shareholders at the Annual General Meeting following his/her appointment by the Board and there will now be annual re-election of all directors as stated in the Board terms of reference.
• Chairman 1 • Executive directors 4 • Non-executive directors 8
Euleen Goh Ms Goh has extensive experience and knowledge both from an executive and non-executive standpoint. She has a strong understanding of risk and product issues in financial services and has brought a new insight to the Company’s operations in Asia.