Our purpose is to bring prosperity and peace of mind. We will do this by realising our vision:“One Aviva, twice the value”. By working together across our businesses, we will optimise our performance in the global marketplace and maximise the value we can generate for all our stakeholders. Andrew Moss Group chief executive
1 Introduction 2 Group structure 4 Chairman’s statement 6 Group chief executive’s statement 10 Basis of preparation 11 Group strategy 14 Key performance indicators 16 Group performance
Financial Statements – Information on the European Embedded Value (EEV) basis 246 Independent auditor’s report to the directors of Aviva plc on the alternative method of reporting long-term business profits 247 Alternative method of reporting long-term business profits 268 Aviva Group of Companies 270 Shareholder services
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On 28 February we announced the launch of Aviva Investors, our global asset management operation. For 2007, total investment sales of £6,983 million (2006: £4,910 million) and total fund management operating profit on an IFRS basis of £155 million (2006: £155 million) are reported in the regional split below.
Long-term savings £864m Fund management £41m General insurance £433m Other operations £(8)m £1,330m
Major operating brands Norwich Union is a market leader in the UK long-term savings market
Major operating brands Aviva has market leading presence across Europe in long-term savings and continues to lead the general insurance market in Ireland and the Netherlands. In addition we have a highly successful fund management business supporting the results in the region
Long-term savings £91m Fund management £15m General insurance £4m Other operations £(13)m £97m
Australia Malaysia China Singapore Hong Kong Sri Lanka India Taiwan South Korea#
2: Europe 3: North America 4: Asia Pacific * Based on gross worldwide premiums at 31 December 2006.
It has been a busy year for Aviva. I am pleased to report that the group has performed well and made great progress in pursuit of our ambition to provide prosperity and peace of mind for our customers.
At the same time, we achieved a robust set of results for 2007 while dealing with the floods in the UK. We have completed the integration of AmerUs in the United States and Ark Life in Ireland, and undertaken a cost and efficiency review in the UK.
External view The economic picture during the last months of 2007 was extremely volatile. Losses on sub-prime lending in the US sparked a crisis in financial markets and share prices fell as investors lost confidence. Although major central banks have cut interest rates, an economic slowdown during the first half of 2008 seems likely before the markets begin to recover. We are also operating in an increasingly difficult general insurance environment, with substantial weather-related losses caused by floods in the UK, and markets generally hardening.
However, many countries around the world are becoming richer. People are living longer, in better health, and are becoming wealthier. They want to put aside money for their future, and will look for a trustworthy provider such as Aviva. In addition, as people become better off, they become more conscious of protecting what they have. They want to insure their motor cars and their homes and their property. Again, that creates business for Aviva.
There are still significant long-term growth opportunities in the mature markets of the UK, Europe and the United States, but there are other big markets emerging. Not just in Asia, but also in central and eastern Europe.
That, I think, is a very exciting prospect. It will be good for the insurance industry generally, but for Aviva in particular, because I think we understand better than most the nature of these tremendous opportunities and how to take advantage of them.
Dividend I am pleased to announce that our recommended final ordinary dividend is 21.10 pence per share, bringing the total dividend for the year to 33.00 pence, an increase of 10% against last year (2006: 30.00 pence). This increase reflects our intention to increase the dividend on a progressive basis, while retaining capital to support future business growth. As a guide, we use dividend cover in the 1.5 to 2.0 times range, based on IFRS operating earnings after tax.
Scott Wheway was appointed to the board as a new independent non-executive director with effect from 5 December 2007. Scott was most recently managing director of Boots the Chemist at Alliance Boots and prior to that he was CEO of Tesco in Japan where he established the business and shaped the long-term strategy for the country. I’m delighted that Scott is joining us. He brings a wealth of retail experience to Aviva, and in particular he has championed first rate customer service, putting the customer at the heart of the businesses he’s worked for. I am confident he will be a real asset to the Aviva board.
Employees I thank all of our employees for their skill and dedication in helping to deliver a robust set of results. We recognise that the longer term performance of Aviva depends on the inextricable link between motivated staff and satisfied customers.
Recognition External recognition provides some reassurance that we continue to perform to high standards. Indicators of our success include the fact that, in 2007, for the second consecutive year, Aviva was named one of The Times newspaper’s “Top 50 Places Where Women Want to Work”. We earned a bronze award for excellence in people management in India, and an international award for our leadership in managing diversity in the workplace.
This is my first report on our annual results since becoming group chief executive last July. I am pleased to say that Aviva delivered another robust performance in challenging circumstances in 2007. Strong growth across our long-term savings and asset management businesses more than offset weather-related losses from our UK general insurance operation.
‘One Aviva, twice the value’ Our vision of “one Aviva, twice the value” puts a clear focus on growth and efficiency. It signals a period of transformation which will bring us closer to building a truly integrated, global business. Over the past few years, we have grown substantially both organically and by acquisition. Our scale and international reach means that we can now move towards managing Aviva as one group, drawing on our collective knowledge and resources to accelerate the pace of change.
The creation of Aviva Investors, will seek to harness the potential and power of our investment businesses across the globe. We want to improve the discipline and rigour that we apply in choosing to allocate capital as a composite company, and thinking as “One Aviva” will help in achieving this aim. We can also achieve more benefits from our global brand by having a more consistent and unified approach to how we position ourselves in global markets.
Now is the time to set ourselves a target in line with our vision and we will aim to double IFRS total earnings per share by 2012, at the latest, to drive dividend growth.
Prosperity and peace of mind Our business is about creating prosperity and peace of mind for our customers. Our long-term savings and asset management businesses aim to create financial prosperity and peace of mind, while our general insurance operations protect health and property when things go wrong; for example, during the worst floods in 60 years in the UK last summer. Our staff responded brilliantly to the crisis, doubling the numbers manning our call centres and providing mobile claims centres to provide help on the spot.
Regionalisation We are becoming a truly global organisation, starting from our historic roots as a UK-based company, developing a major European presence and now growing in Asia Pacific and North America. The regional structure that we have now put in place reflects this development and gets more of our people closer to our customers, making it easier to offer products and services that are relevant in today’s changing markets. For example, some 400 people are moving out of the group centre and closer to the businesses.
Growth Insurance is a growth business. Demographics show there will be an increasing need for people to invest for their future well-being, not only in mature economies but also in developing markets. In this context, we have set demanding growth targets for each of our regions which are set out in the regional sections of this report.
Efficiency Alongside our growth targets, we have also announced new cost savings initiatives. These aim to save £350 million by 2009 from our UK and mature European businesses. During 2007 we successfully achieved the UK cost and efficiency targets we set in 2006, realising annualised savings of £250 million. We have now also realised the integration savings announced when we acquired AmerUs towards the end of 2006.
Financial results On an EEV basis, our pre-tax operating profit of £3,286 million (2006 restated: £3,251 million) reflects the strength of our diversified business model. Return on equity shareholders’ funds was 11.3% (2006: 13.1%).
On an IFRS basis, the group delivered an overall profit before tax attributable to shareholders of £1,842 million (2006: £2,977 million).
In North America, our presence took a step change when we bought AmerUs in 2006. Overnight we went from a business on the margin of the US market to one that was five times bigger and right at the heart of an important part of the savings sector. With the baby-boomer generation heading for retirement, we see exciting further potential.
Our presence in Asia Pacific is growing fast, and we want it to be even bigger. We have good businesses in Singapore, Hong Kong and Australia, and have made a great start with joint venture partnerships in India and China. We have now entered new markets in Malaysia and Taiwan, and recently announced our entry into the South Korean market.
“One Aviva, twice the value” signals our plan to increase growth and improve efficiency. I am delighted to be leading Aviva at such an important stage of its development, and am confident that we have created an excellent platform for future success.
This business review complies with the recommendations of the European Union (EU) Modernisation Directive, the Companies Act 1985 (Operating and Financial Review and Directors’ Report) Regulations 2005 (the Companies Act) and is in line with current best practice. It is addressed to, and written for, the members of Aviva plc with the aim of providing a fair review of our business development, performance and position at the current time. In producing this review, we aim to present a view that is balanced and comprehensive and that is consistent with the size and complexity of our business.
Key Performance Indicators The Companies Act requires that a fair review of the business contains financial and, where applicable, non-financial key performance indicators (KPIs). We consider that our financial KPIs are those that communicate to the members the financial performance and strength of the group as a whole. These KPIs comprise: – Earnings per share (IFRS basis)
This business review contains “forward-looking statements” about: – Our future plans
By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events that are beyond our control. For example, certain insurance risk disclosures are dependent on our choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that we have estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statement include, but are not limited to: – Global economic business conditions
– The timing and impact of acquisitions and business combinations in relevant industries
Following the appointment of Andrew Moss as chief executive in July 2007, and the new Executive team, we have refreshed our strategy, building on past achievements, under the banner of “one Aviva, twice the value”.
We have communicated our financial targets to the market. Internally, we have invested considerable effort in energising the organisation and its employees to deliver the results.
To achieve our vision, we are focused on delivering against our five key strategic priorities. These are set out below: Manage composite portfolio: We are fully committed to maintaining the composite nature of the group. We firmly believe in the benefits of life insurance, general insurance and asset management as complementary parts of an overall business model that balances cashflow, returns and long-term value creation, and delivers prosperity and peace of mind to customers.
We made good progress in 2007 against priorities set out in last year’s Annual Report. Some of our achievements are detailed below, under our strategic priorities, and some covered in the regional sections, where we also describe our regional growth/profitability targets. We have also set out below the measures that we use to assess our success in achieving our group strategic priorities and what we plan to do in 2008.
– Extending our life and pensions footprint in North America and Asia, building on strong foundations
– Taking steps to maintain our number 1 position in European Life and Pensions
– Drive rapid profitable growth and long term value creation from the life and pensions business
2007 Progress What we achieved in 2007 against these priorities 2007 Measurement/KPIs How we measure progress against each strategic priority 2008 Priorities What we are focused on in 2008
Manage composite portfolio: – Hired Alain Dromer, with a mandate to create and lead a global asset management operation
– Launch Aviva Investors as the global asset management arm of Aviva, under unified management
– Develop solutions matching client needs through bundling capabilities and services throughout the group
– Gained access to over 50 million potential new customers through bancassurance deals
– Entered new markets via JVs in Malaysia and Taiwan, and expanded in our existing markets, for example, through new distribution in Italy, Turkey and Russia
– Implement a variety of customer initiatives, including UK customer services improvement programme (”One and Done”)
– Roll out TCF (Treating Customers Fairly) internationally 2007 Progress What we achieved in 2007 against these priorities 2007 Measurement/KPIs How we measure progress against each strategic priority 2008 Priorities What we are focused on in 2008
– By end 2009 we will have achieved: – £100 million UK Life cost savings
– £50 million Aviva Europe cost savings 2007 Progress What we achieved in 2007 against these priorities 2007 Measurement/KPIs How we measure progress against each strategic priority 2008 Priorities What we are focused on in 2008
* North America excluded due to the early stages of this work following AmerUs integration ** Asia Pacific shown against target as first year of introduction
Average extent to which 2007 local customer measures improved on 2006*
Our IFRS earnings per share for 2007 was 49.2 pence (2006: 87.5 pence). This reflects the reduction in operating profit, mainly due to lower results in the general insurance segment as a result of adverse weather in the UK and increased competition, and net adverse short-term fluctuations and economic assumption changes due to closing market conditions.
We aim to deliver an after-tax operating return on opening equity shareholders’ funds, including life profits on a European Embedded Value (EEV basis), equivalent to 12.5%.
Our board has recommended a final dividend of 21.10 pence per share (2006: 19.18 pence), bringing the total dividend for the year to 33.00 pence (2006: 30.00 pence). This is a 10% increase (2006: 10%). Dividend cover is 1.60 times (2006: restated 2.26 times), within our target range.
Employee engagement and leadership Our global employee climate survey continues to provide measures of employee engagement and leadership. For Aviva, employee engagement represents the degree to which people believe in this being a great place to work and are contributing to help meet our collective goals and ambitions. The survey results are used each year to determine and implement actions with the aim of achieving continuous improvement. The climate survey measures employees’ perceptions of leadership, verifying alignment with our strategic direction and immediate business plans. Our aim is to improve both measures over time and meet or exceed a global financial services benchmark.
Customer satisfaction All Business Units measure and track progress in customer advocacy, and, where feasible, benchmark performance against local competitors.
Our operating profit before tax, including long-term operating return on an EEV basis, grew to £3,286 million (2006 restated: £3,251 million). This reflected a strong result in our life businesses offset by decreased profits from the general insurance business largely due to the exceptional adverse weather experienced in the UK during the year.
Interest on the £990 million direct capital instrument issued in 2004 is not included within group debt costs as it is instead treated as an appropriation of profits retained in the period.
Reconciliation of group operating profit to profit before tax – EEV basis
Short-term fluctuation in return of investments backing general insurance and health business (184) 149
The variance in longer term investment return reflects long-term economic assumptions which are set with reference to bond yields.
£153 million of integration and restructuring costs have been included in the results to 31 December 2007 (2006: £246 million). These include £45 million relating to the UK cost and efficiency programme announced back in 2006. This initiative has now been completed at a total cost of £250 million. The costs also include £82 million relating to the new savings targets announced in October 2007; further costs of this programme are expected to be £248 million spread over the next two years. The balance of £26 million relates to the completion of integration activity on Ark Life in Ireland and the former AmerUs business in the United States, which were both acquired in 2006.
On an IFRS basis, the negative short-term fluctuations on the non-life business of £184 million (2006: £149 million favourable) were due to lower market returns compared to our longer term investment return assumptions. The group reduced their exposure to equities through an active sell-off of the equity book in the second half of the year.
Dividend The Board has recommended a 10% increase in the final dividend to 21.10 pence per share (2006: 19.18 pence), payable on 16 May 2008 to shareholders on the register at 28 March 2008. This equates to 10% growth in the total dividend for the year of 33.00 pence (2006: 30.00 pence). Our IFRS operating profits cover this dividend 1.60 times (2006: restated 2.26 times) in line with our dividend cover target of 1.5 - 2.0 times.
Basic – IFRS total profit after tax basis 49.2p 87.5p * Based on worldwide long-term savings new business sales, plus general insurance and health business net written premiums.
Life and pension sales in Aviva Europe grew 15% to £14,914 million (2006: £12,840 million), reflecting the success of our multi-distribution strategy, broad product offerings and our diversified portfolio. Investment sales were up 74% to £1,572 million (2006: £891 million) driven by strong inflows in the Netherlands and Poland.
Sales in our US life business were up 39% on a pro forma basis to £3,602 million (2006: £884 million), representing growth across all product lines. This was mainly driven by new product launches and supported by the impact of the recent AM Best rating upgrade to A+.
Aviva Asia Pacific continued to achieve a high rate of growth, with total sales 60% higher at £4,089 million (2006: £2,546 million), driven primarily by strong Navigator (wrap administration platform) sales across the region.
Net written premiums from our general insurance and health business were £10,569 million (2006: £10,702 million) reflecting price competition across most regions.
Long-term new business contribution and margin Our new business contribution before the effect of required capital increased by 30% to £1,174 million (2006: £892 million), generating an improved group margin of 3.7% (2006: 3.5%). The large increase in US sales following the acquisition of AmerUs, in November 2006, has been a key driver in new business contribution growth. Margins have also improved in the UK and Europe reflecting efficiency savings and favourable operating assumption changes.
After the effect of required capital, our new business contribution increased by 33% to £912 million (2006: £683 million) reflecting the factors above and lower cost of capital, mainly in the UK from changes to the annuity business and in the US from implementation of an efficient financing solution to free up capital previously held to support redundant reserves.
Earnings per share Our IFRS earnings per share for 2007 was 49.2 pence (2006: 87.5 pence). This reflects the reduction in operating profit, mainly due to lower results in the general insurance segment as a result of adverse weather and increased competition, and net adverse short-term fluctuations and economic assumption changes.
Combined operating ratio The worldwide general insurance combined operating ratio (COR) worsened to 100% (2006: 94%) mainly as a result of adverse weather in the UK and increased competitive pressures in this business segment across most regions. Excluding the impact of weather, our COR would have been 95%, within our meet or beat target of 98%.
The COR in our Dutch operations improved to 85% (2006: 89%) following the favourable development of prior year claims and the retention of premium rates in key areas. In Ireland the COR remained strong but deteriorated to 80% (2006: 77%) reflecting intensifying competition and higher claims costs. In Canada and France, CORs were held at 2006 levels.
The reserves in the group are set conservatively with the aim to protect against adverse future claims experience and development. Our business is predominantly short tail in nature and loss development experience is generally stable. As a result of the prudence applied in setting the reserves, there are releases of £832 million (net of reinsurance) in 2007 which reflect releases across most of our businesses from the 2006 accident year and prior. We continue to apply our reserving policy consistently and our reserves remain at very strong levels. Of the total released this year, we would expect around £440 million to repeat, with the balance being exceptional releases.
Return on equity shareholders’ funds Our post-tax operating return on equity shareholders’ funds was 11.3% (2006: 13.1%). The reduction against 2006 reflects higher opening shareholders’ funds, which have increased by £2.6 billion. The return is below our target of 12.5% due to the impact of the adverse weather in the UK which has suppressed the return on our general insurance operations.
Balance sheet and cash flow Summarised group consolidated balance sheet As at 31 December 2007
Acquired value of in-force business and intangible assets 3,197 2,728 3,197 2,728
Interests in and loans to joint ventures and associates 3,782 3,690 3,782 3,690
Gross liability for insurance and investment contracts 251,284 232,588 251,284 232,588
At 31 December 2007, our total assets on an IFRS basis were £320 billion (restated 2006: £295 billion). Under EEV principles, our total assets are £328 million higher (restated 2006: £302 million), the difference relates to the recognition as an asset under EEV of internally generated additional value of in-force (AVIF) long-term business. The growth in assets was substantially driven by an increase in financial investment of £11 billion following strong new business sales and effective management of the active equity portfolio minimising the exposure to the downturn in the equity markets.
Net increase in cash and cash equivalents 1,849 374 2,223 964
Financing activities generated a cash outflow of £1,174 million (2006: £659 million inflow) primarily driven by interest paid on borrowings.
Our life and general insurance businesses are based in York and Norwich respectively, with operations in over 35 UK locations. We also have overseas operations in India and Sri Lanka
Norwich Union Insurance is the leading general insurer in the UK and we also provide a wide range of motoring services through the RAC
How will we achieve this? Competitive advantage with brand, breadth of distribution and product range
UK life – Winning combination of balanced distribution and broad product mix – Top three by market share across all product categories – Legacy simplification with service, cost and retention improvements
– Re-engineering the business to leverage a single IT platform and simplify the product set – Build on service excellence
Delivered on our cost-saving targets – Our operational review announced in September 2006 has delivered the targeted £250 million of annualised savings at a cost of £250 million
* Excludes investment sales. Investment sales totalled £2,751 million (2006: £2,455 million) giving overall new business sales of £14,406 million (2006: £13,601 million).
Aviva UK Life has reported record sales and profits for the second year, delivering on “one Aviva, twice the value”. In doing so we are beginning to realise the full potential of our scale position.
In 2007 we’ve focused on improving our customers’ experience, and at the same time created value from our existing business through reducing costs. We’ve made great progress towards reducing the complexity of our life and pensions operations through an innovative agreement with Swiss Re, which is helping us become a much more efficient organisation.
We’ve grown sales and improved brand value through joint advertising with Norwich Union Insurance. We continued to grow our presence in the corporate market, putting Norwich Union products directly into customers’ workplaces; maintained a strong presence in the financial adviser market; and launched a distribution deal with the Post Office, offering innovative products such as our simplified life insurance product. In 2008, we’ve continued to innovate and recently announced the launch of a SIPP-lite product to enhance our pensions product range.
Nevertheless, I am confident that our scale, brand, strong distribution footprint and broad product offering puts us firmly on track to realise our long term goal of clear UK market leadership.
Our ambition is to create value for our customers and to protect what is important to them. We aim to be easy to do business with and to keep the promises we make to both our customers and shareholders. Our goal is to be the clear market leader.
We are a market leading brand. Our “we just make it easier” advertising campaign with our general insurance business has helped to underpin existing high levels of brand awareness.
We have made significant service improvements during the year, with service now supporting our ambition to make it easier for customers. We now offer service promises across our full life and pension product range.
Life EEV operating return increased strongly by 15% to £864 million (2006: £744 million) benefiting from higher new business profitability and operational improvements in the management of existing business supported by lower costs and improved retention. In 2006 we committed to cutting costs at the same time as improving service. We successfully completed the efficiency review announced in 2006 and have delivered the promised £125 million of annualised savings, £108 million of which contributed to 2007 financial performance. A further £100 million annualised savings are targeted by the end of 2009 which will eliminate our existing business expense overrun. Improved customer retention has been driven through a wide programme of initiatives including the creation of a dedicated advice team, improved customer communications and more active management of distributor commission terms. For similar reasons, our IFRS life operating profit has increased by 15% to £723 million (2006 restated: £629 million).
We have utilised our core expertise in finance to develop an educational programme to improve the financial literacy of 14-19 year olds. The nationwide programme, launched with the Citizenship Foundation, includes in-school pupil mentoring with over 300 staff volunteers working with small groups of young people on economic citizenship topics such as money, environment and public spending.
The programme is also supported by a website drawing on the characteristics of social networking sites and providing the opportunity to use Lifescan, a unique tool which lets you measure the impact your financial decisions have on society as a whole.
We are confident in our medium to long term outlook for market growth at between 5-10%. However, given the uncertainty over the performance of the UK economy, market growth in 2008 may be slightly slower than in 2007. The UK is the fifth largest economy in the world, yet within this market there remain large numbers of people who either do not save or who are underprotected. In 2008, our focus will remain on completing our simplification programme, driving further operational efficiencies and building on service improvements. At the same time we will remain engaged with the Government, FSA, ABI and other stakeholders on the Retail Distribution Review and NPSS in order to influence an outcome that is satisfactory for customers, distributors and the industry as a whole.
We believe that all companies should be taking steps to return unclaimed assets to their rightful owners. The “Find the Fisherman” campaign was launched in January 2007, to track down fishermen who worked on the fishing fleets around the UK during the 60s and 70s and had not claimed their pensions. The campaign was a resounding success, generating around 10,000 telephone enquiries from the public, enabling 6,000 policies to be traced and the return of £2.8 million to customers or their families.
UK – General insurance, health and related services IFRS IFRS Combined profit operating operating Net written Underwriting before tax profit ratio* premium result £m £m % £m £m * General insurance business only.
Split of net written premium by class of business (general insurance only)
1 Personal motor 26 3 Personal other 15 4 Commercial motor 12 5 Commercial property 15 6 Commercial other 10
Norwich Union Insurance (NUI) is the leading general insurer in the UK, with a market share of 15%. Our principal goal is to deliver across the insurance cycle by producing consistent earnings and creating long-term shareholder value. Our Norwich Union and RAC brands are both strong and trusted, and we have an excellent reputation for value and service to customers and distributors.
The action we took during the summer floods is a clear example that providing excellent customer service to our partners, brokers and policyholders is a top priority for NUI, a fact recognised by a number of achievements in 2007. NUI has been voted General Insurer of the Year at the Insurance Times Awards for the fifth successive year, demonstrating the confidence and trust that independent brokers have in NUI. We were also voted General Insurer of the Year at the Personal Finance & Savings Readership Awards. NU Direct’s Retention team won Customer Service Team of the Year at the National Customer Service Awards. RAC has been rated as number one for motorists in the annual JD Power survey for the second consecutive year and was also named as Breakdown and Recovery Company 2007 by the Institute of Transport Management recognising the efficient and reliable service offered.
RAC was named breakdown and recovery company of the year by both the Institute of Transport Management and the Greenfleet Awards 2007. It was praised for providing top-quality motoring benefits and high levels of customer service across Europe, and was recognised for its efforts towards environmental best practice. Motorists also voted RAC top for roadside assistance for the second consecutive year in a survey conducted by consumer research company JD Power and Associates.
Analysis of UK general insurance and health results IFRS operating profit Net written premiums
In our core insurance markets, we have continued to use our leading position to provide rating leadership in the current very competitive marketplace. In personal motor, following the correction in the second half of 2006, rating has been broadly in line with claims inflation at 6% (2006: average increase of 5%), which has helped contribute to an improved combined operating ratio in this business line of 102% (2006: 104%). In August we announced average rating increases of 10% on household buildings and contents policies following almost a decade of flat rates in the market. This has contributed to an overall homeowner rate increase of 7% in the year (2006: 3%).
Generally, the market is showing some sign of hardening. In private motor there is now a clear upward trend particularly within the broker channel and we expect this to continue in 2008. There are signs that household is beginning to move too as insurers react to several years of flat rates and the summer floods. In commercial lines, most large insurers are applying modest rate increases and this too is expected to continue in 2008. In both the personal and commercial markets there are still elements of severe price competition but the overall direction is upwards.
The cost and efficiency programme announced in September 2006 will deliver its anticipated benefits of £125 million from 2008. Despite the benefits accruing from this programme in 2007, our expense ratio of 13.9% is in line with the 2006 ratio, reflecting the pressure on business volumes and the fact that overall rating has been behind cost inflation. We are committed to operational efficiency and, in October, we announced a programme to leverage the investments we have already made and deliver further cost savings. The programme will be introduced in three phases. Phase one is already in train and is set to deliver £200 million of annualised savings by the end of 2008. The remaining phases will concentrate on simplifying our structure (a process that is already well underway) and re-engineering service and processing centres designed to deliver additional benefits in 2009 and beyond.
We made good progress in 2007 in expanding our global reach. We opened new offices in Spain and Germany, agreed a joint venture in China and established a property presence in the Asia Pacific region. All this was achieved while maintaining our focus of operating a client-centric business based on a suite of high quality products that are differentiated by performance.
Our challenge now is to move fast to draw these strengths together with the fantastic potential elsewhere in the group’s asset management businesses and create a truly global Aviva investment operation.
Fund managers across the group currently manage £316 billion in funds across a broad range of asset classes. Bringing the separate operations together allows us to bring the best capabilities and performance from around the world to all our clients. Alain Dromer CEO, Morley Fund Management and Aviva Investors
The Royal Bank of Scotland (9) (7) (9) (7) Norwich Union investment funds (1) 1 (1) 1
Morley Morley is one of the UK’s largest active fund managers and the largest fund management business in the Aviva group, with £165 billion (2006: £166 billion) of total funds under management.
Morley’s strategy is to optimise client satisfaction and service by offering a suite of high quality products differentiated by performance and focused on our core areas of fixed income, pan-European equities, property and asset allocation. We continue to develop products in specialist areas such as alternatives, strengthen our infrastructure and maintain our focus on developing the talent and skills of all our people.
In July, Morley was ranked number one for the third year running for its understanding of socially responsible investing (SRI) and extra-financial issues in the annual Thomson Extel SRI and Extra-Financial survey. Corporate and social responsibility remains a key business driver and the SRI team has done outstanding work in building Morley’s reputation as a responsible investor.
Morley is one of the largest managers in European commercial property assets and in a move to try and replicate that kind of success we announced in April plans to expand Morley’s property investments across Japan and the rest of Asia. Morley will work with multiple property partners throughout Asia to develop partnerships in the same way it has done across Europe. The first of these joint ventures is with Mitsubishi UFJ Trust and Banking Corporation (MUTB) of Japan.
The strength of our individual teams and our innovative new products are expected to sustain growth into 2008 and we will continue to explore new ways of adding value for our client base moving forward.
Belgium* Luxembourg* Czech Republic Netherlands France Poland Germany* Romania Hungary Russia Italy Spain Ireland Turkey Lithuania * Belgium, Germany and Luxembourg are reported as part of the Netherlands results.
Business review **The Fourgous amendment of 2005 enabled the tax efficient transfer of existing 100% Euro funds into more balanced Euro and unit-linked portfolios.
Our strategic priorities: Scale, growth and capital – Leverage the scale of the organisation – Seize the unique growth opportunities present in the region – Generate capital for the group
Progress in 2007: Deliver on target integration benefits in Ireland – We successfully integrated the life businesses of Ark Life and Hibernian and now, from a single location, we are able to deliver new product offerings across both distribution channels
Generate increased sales in the Netherlands through focus on SME pension contracts and developing “white label” products – Our pensions strategy resulted in higher new pension premiums, including several large group sales, most notably in the final quarter of the year – We now offer a white-label health product through a leading pharmacy chain
Aviva Romania to provide high quality asset management services to its pension, investment and life insurance clients
Looking forward: Our medium-term targets are to: – Grow life new business premiums and new business contribution by an average 10% pa to 2010 – Realise cost savings in our mature businesses of £50 million by end 2009 – Meet or beat a combined operating ratio of 98%
IFRS IFRS EEV New New profit operating operating business business before tax profit profit PVNBP†contribution‡ margin‡
* Includes Belgium, Luxembourg and Germany. ** Includes Lithuania. † Excludes investment sales. Investment sales totalled £1,572 million
IFRS IFRS Combined Net Underprofit operating operating written writing before tax profit ratio≠ premium result £m £m % £m £m
IFRS IFRS Combined Net profit operating operating written Underwriting before tax profit ratio≠ premium result £m £m % £m £m
Over the year our businesses in southern Europe have grown strongly and further increased market share. The distribution landscape in Spain and Italy is dominated by bancassurance and we have made significant steps in both markets, strengthening existing partnerships and signing new agreements with leading banks in both countries.
Aviva Europe continued to deliver profitable long term savings (including investment sales) growth, with sales volumes 19% higher at £16,486 million (2006: £13,731 million) and EEV life operating profit 30% higher at £1,543 million (2006: £1,171 million). This performance reflects the benefits of our portfolio of businesses at different stages of development.
Our general and health insurance businesses performed strongly in markets where competition is intensifying. Net written premiums decreased by 2% to £3,233 million (2006: £3,287 million). Profitability remains strong across the region, with a general insurance combined operating ratio of 89% (2006: 90%) and operating profit of £442 million (2006: £417 million). We continue to innovate and are making good progress in developing our online proposition in Ireland.
Aviva France is one of the top-ten long-term savings businesses in France with a market share of 5%. Our business focuses on the higher-margin unit-linked segment in which our market share is 7%. We offer a comprehensive range of life and savings products, primarily for private clients. This includes our partnership with AFER, the largest retirement savings association in France. Our distribution is multi-channel, including a direct sales force, brokers, the UFF network of financial advisers, a direct distribution channel, Aviva Assurances, tied agents and our bancassurance partnership with Crédit du Nord.
Aviva Gestion d’Actifs (AGA) continues to be widely recognised in the French market as a leading asset manager, with 89% of our funds ranked in the top half for performance over a five year period. AGA continues to earn industry awards; for the fourth consecutive year Aviva’s multi-fund life policies received a Gold Award at the 2007 Life Insurance Trophies, held by the leading financial weekly Le Revenu. IFRS operating profit was stable at £33 million (2006: £33 million).
Operating as Hibernian Life, we are a top three life and pension provider in Ireland. We distribute our products through a successful broker network and our bancassurance partnership with Allied Irish Banks (AIB), which has the largest branch network in the country.
The full integration of Ark Life with Hibernian is now complete. Sales from both companies are now processed on a single new business platform, representing an important step in terms of future operational efficiency.
Hibernian is the largest general insurer in Ireland, and has maintained its market share against the backdrop of intense market competition. The majority of our business is sourced through brokers with an increasing proportion sourced from direct and corporate partners.
In 2007 we launched Hibernian Rescue and Hibernian Driving School and a number of innovative product offerings, including a multi-vehicle policy called “All Drive”. We now sell direct motor insurance through AIB’s website, consolidating our position as distribution leaders. During 2007, we teamed up with the Road Safety Authority as the sponsor of the new high-profile multimedia Irish road safety campaign. We also successfully retained the Excellence Ireland Quality Association (EIQA) Q Mark award in October 2007.
The combined operating ratio was 80% (2006: 77%) and our underwriting result was £101 million (2006: £121 million) reflecting competitive market conditions, increasing pressure on premium rates and increasing claims frequency. Total operating profit, including longer term investment return, was £162 million (2006: £172 million).
Although market profitability is expected to decline during 2008, reflecting continued pressure on premium rates, Hibernian is well positioned to grow while maintaining acceptable levels of profitability, due to its innovative product lines, scale and strong distribution capability.
In 2007 Aviva has formed a joint venture with Banco Popolare, which includes a new long-term agreement to sell protection and non-life insurance products which began on 1 January 2008. This replaces our previous agreement with Banco Popolare Italiana to distribute life and long-term savings products.
In January 2008 Aviva Italy reached an agreement with UBI Banca for acquisition of 50% plus 1 share in UBI Assicurazioni Vita S.p.A., an Italian life insurance company currently wholly-owned by UBI Banca. It distributes life insurance products through Banca Popolare di Ancona and other channels. The transaction, which remains subject to certain conditions, is expected to be completed in the first half of 2008.
EEV Operating profit increased in line with the growth in the business, up 3% to £137 million (2006: £110 million). Total sales grew by 5% to £2,924 million (2006: £2,768 million), contrasting favourably with the Italian market which declined by over 5% during 2007. This strong performance was generated through high quality marketing campaigns and the continued development of our relationships with our bank partners.
New business profitability has increased in 2007, with new business margin rising to 2.8% (2006: 2.5%). Growth in margin reflects an increased emphasis on higher margin products, including stronger sales of unit linked contracts. The growth in volumes, and the changed product mix, contributed to an overall new business contribution of £82 million (2006: £70 million).
New business contribution increased by 66% to £93 million (2006: £56 million), reflecting the sales growth and a higher margin of 3.2% (2006: 2.4%). The increase in new business profitability follows an increase in interest rates, in a market where competition and pricing remain fierce. EEV operating profit rose to £352 million (2006: £329 million), with the strong gains on new business profitability and increased expected returns on the in-force business being partially offset by an allowance for worsening annuitant mortality.
The acquisition of the Erasmus Groep was completed at the end of March 2007, and these operations are now integrated into the Delta Lloyd group.
Delta Lloyd Asset Management manages investments both for Delta Lloyd’s own insurance operations and for third parties including individual and institutional customers. As well as managing equity and fixed interest funds, our operations also include management of a property portfolio. The acquisition of Cyrte Investments has brought new expertise in technology and media to our fund offering, and provides a platform for further innovative growth.
IFRS operating profit was £23 million (2006: £37 million), reflecting lower performance related fees following the exceptional levels earned in 2006 and included £2 million in respect of Cyrte Investments since its consolidation at the end of September 2007.
Delta Lloyd is a top-five general and health insurance provider in the Netherlands selling a range of products including personal motor, household and small commercial policies as well as healthcare policies. Distribution is through a variety of routes, including intermediaries, direct and white-label business, and through our bancassurance joint venture with ABN AMRO Bank.
The Delta Lloyd growth and efficiency programme is expected to have a major impact in general insurance where centralising specialist areas such as IT and simplifying the organisation, as well as initiatives designed to grow revenues, are expected to deliver benefits from 2008.
A new flagship life insurance product “Nowa Perspektywa” was launched during the final quarter, offering individual unit-linked life insurance. This has been designed to offer a modern product that combines protection with investment and the flexibility to vary the contract as life circumstances change.
Our life EEV operating return grew strongly to £206 million (2006: £162 million) with favourable lapse and mortality experience boosting profitability of the in-force book. Our life and pension sales grew by 53% to £844 million (2006: £534 million) with both life and pensions business showing strong performances. New business contribution was £35 million (2006: £28 million), with a margin of 4.1% (2006: 5.2%).
The outlook for 2008 remains promising, despite more unstable market conditions, and we expect continued profitable growth. Through our product initiatives and the development of distribution channel capabilities we are very well positioned in this rapidly growing market.
Our general insurance business in Poland continues to develop. Late in 2007 we launched a direct motor insurance product to provide further potential for growth in this dynamic market. IFRS operating profit is reported within Other Europe.
Spain Aviva Spain is the country’s third-largest life insurer, with a market share of 9.5%. The life insurance market is dominated by bancassurance distribution and Aviva has partnerships with Bancaja, Caja España, Caixa Galicia, Unicaja, Caja de Granada and, more recently, Cajamurcia.
Earlier in the year we successfully launched a new savings product (PIAS), which is optimised to the new tax environment and in which Aviva Spain is the market leader. Sales of savings products, including PIAS, were very strong, and offset lower sales of mortgage linked protection business, which were affected by the slow down in the Spanish housing market. Pension sales were boosted by the efficient transfer late in the year of a portfolio of pension policies into the new joint venture with Cajamurcia.
Life EEV operating return increased to £239 million (2006: £221 million) reflecting overall growth in new business together with good returns on the in-force book of business. Total sales continued to show strong growth, up 15% to £2,392 million (2006: £2,059 million). Increased sales of savings products which offset the decline in protection products, led to an overall increase in new business contribution to £189 million (2006: £184 million) with a new business margin of 7.9% (2006: 8.9%).
The outlook for 2008 is more cautious, with the bancassurance market expected to continue to be impacted by the slowdown in the mortgage market and the Europe-wide credit squeeze. Long-term growth potential, however, remains strong in the market and Aviva Spain continues to develop its bancassurance relationships.
Aviva’s other European businesses are in Turkey, the Czech Republic, Hungary, Romania and Russia.
In 2007, our Turkish life and pensions business merged with AK Emeklilik, the life and pensions company of Sabancı Holdings, to form AvivaSA. The new company merged on 31 October 2007 to become the largest pensions provider in the market, with a market share of 25%, and the third largest life insurer with a market share of 11%. Under the merger, AvivaSA has an exclusive long-term bancassurance agreement with Akbank, Turkey’s second largest privately-owned bank.
Following the launch of operations in Russia during the latter part of 2006, rapid sales growth has been achieved in 2007, especially in corporate protection business. Agreements with ten leading retail banks have been signed and bancassurance sales are growing rapidly.
How will we achieve this? – Meet the retirement needs of the “baby boomer” generation – Deliver competitive advantage through product innovation – Build upon the recent re-rating of our US life business to widen distribution – Leverage group expertise to expand asset management capabilities in the region – Streamline back-office processes, enhance risk selection and pricing sophistication – Build brand awareness across the region, including employee brand – Instill customer centricity
Progress in 2007: Delivered on target integration benefits – Our life operations located in Boston were successfully combined with those of the former AmerUs companies – Exceeded our target of £23 million in cost savings within our cost target of £25 million
Capture opportunities presented by retirement of the “baby boomer” generation – Launched innovative market leading products such as Wellness for Life – Achieved ratings upgrade from AM Best which will help us be more competitive
The US is home to our rapidly growing life business and our general insurance business is based in Canada. These great businesses currently serve their home markets and we are exploring possible cross-border selling opportunities across the North American region.
We’re in the right markets, with the right products, at the right time. We have achieved terrific growth in the last year and I am confident that our growth and profitability will continue to enhance shareholder value into the future.
Long-term savings IFRS IFRS EEV New New profit operating operating business business before tax profit profit PVNBP contribution* margin*
General insurance IFRS IFRS Combined Net profit operating operating written Underwriting before tax profit ratio premium result £m £m % £m £m
In the fourth quarter of the year we opened our regional head office in Chicago. This was an important step, providing a focal point for our businesses across the North American region and a central hub from which business development opportunities across the Americas can be pursued.
USA Aviva USA has had a record year with sales of £3,602 million (pro forma 2006: £2,821 million) up 39% on a pro forma basis following the acquisition of the former AmerUs Group completed in late 2006. This excellent performance was achieved through the introduction of new products and our expanding distribution network. We are on track to double the size of the business within three years following the acquisition.
Our annuity sales increased 47% on a pro forma basis to £2,600 million (pro forma 2006: £1,921 million) which is a terrific result. This performance has been achieved against a backdrop of an annuity market which has been unsettled by equity volatility and a low yield environment. The outlook remains compelling particularly as the “baby boomer” generation reach and enter retirement over the coming years.
Other sales grew by 21% on a pro forma basis to £1,002 million (pro forma 2006: £900 million), including funding agreement sales of £429 million (pro forma 2006: £330 million) which are large corporate transactions. The US life market has grown by 8% in the year, fuelled by increasing consumer demand for guaranteed benefits.
Rating upgrades were announced in October and November 2007, with AM Best increasing our rating to A+ “superior”, and Standard & Poors and Fitch to AA-. These upgrades recognise Aviva USA as being core to the Aviva group and reflect the strength of our business in indexed markets, strong earnings performance and strong capitalisation. The upgrades are very important to our customers and agents and will help us continue to grow by being more competitive in existing distribution channels as well as through accessing a broader product and distribution platform.
Customers have the opportunity to reduce the cost of their life insurance by meeting some wellness-oriented criteria, such as having regular physical examinations by a doctor or by maintaining their body weight within a range established at the time they purchase the policy.
Wellness for Life is consistent with our commitment to improving the lives of our customers and providing them with the best possible products and services.
Our success in 2007 has been achieved by remaining focused on our customers, agents and employees while going through a major transformation integrating our businesses following the acquisition of AmerUs in November 2006. The operations located in Boston have now been successfully combined with those of the former AmerUs companies, with all of the goals associated with the integration of those operations met, including exceeding the key financial target of achieving £23 million of annualised savings at a cost of £25 million.
The increase in EEV life operating profit to £255 million (2006: £32 million) reflects the benefit of the AmerUs acquisition and improved new business profits following the excellent sales performance. The acquistion also contributed to the increase in IFRS operating profit to £103 million (2006: £13 million). During the year, our total assets grew by 10% to £20 billion.
Canada Aviva Canada provides innovative, market-leading products to clients across Canada. Supported by over 3,000 independent brokers, we operate through a multi-channel, multi-distribution network including retail customers, groups, affinities, small to medium commercial and programme business.
We achieved growth without compromising profitability. Net written premiums were £1,412 million (2006: £1,389 million), an increase of 4%, reflecting growth in both personal and commercial lines.
Our operating profit improved to £154 million (2006: £148 million) which is a good result in challenging market conditions. A reduction in underwriting profit was offset by an increase in investment return, resulting from higher fixed income yields and higher average asset balances.
In personal lines, our premiums increased by 3% in a market with flat rates in Ontario and auto reform impacting several provinces. Our warranty business experienced organic growth of over 60%. In the specialty personal lines market we continued as the number one provider of leisure and lifestyle insurance products.
Management of claims costs is a core expertise. We proactively manage claims costs through our Premiere Healthcare programme and have partnered with the University Health Network to deliver ground-breaking research on treatment for soft tissue injuries. Our claims satisfaction is exceptional and stands at an impressive 93%. We are the only insurer in the world to have achieved accreditation by CARF (Commission on Accreditation of Rehabilitation Facilities), an independent, non-profit accreditor of service providers in many areas of healthcare, community programmes and medical rehabilitation.
We are making substantial investments in the business to secure our future profitability and growth. Our investments will help us streamline back-office processes, enhance risk selection and pricing sophistication and improve the overall broker and consumer experience.
Through investment and engagement Aviva Canada continues to be successful in attracting, building and retaining the best talent in the industry. Our approach to training has won international acclaim with our Core Insurance Skills programme recognised by Skillsoft (a global provider of e-learning content).
Australia Malaysia China Singapore Hong Kong Sri Lanka India Taiwan South Korea*
* Aviva announced on 31 January 2008 that it is to enter the South Korean life insurance market by forming a consortium with Woori Finance Holdings Company Ltd.
Continue to strengthen our relationships with key brokers and other partners – In Australia, we acquired a strategic stake in Meritus Financial Group which resulted in Aviva having equity holdings in four Dealer Groups – In Taiwan, we entered into a JV partnership with First Financial Holdings Company which will have an exclusive bancassurance agreement with its flagship subsidiary, First Commercial Bank, Taiwan’s second largest bank network
– In Malaysia, we bought a strategic stake in two of CIMB Group’s subsidiaries which will provide access to over four million customers as well as introducing takaful (Islamic Insurance) to the Aviva Group
Looking forward: Our medium-term target is to: – Grow long-term savings new business sales by an average of at least 20% a year to 2010
General insurance, health and related services IFRS IFRS Combined Net profit operating operating written Underwriting before tax profit ratio* premium result £m £m % £m £m * General insurance business only.
While we are exploring new markets in the region, we are also focusing on achieving our full potential in our existing businesses, particularly those where we have just begun operations.
One of our main strengths lies in the “one Aviva” operating model which enables us to share skills and services across the region and group. For example, we are investigating opportunities to implement our very successful Navigator product in more countries. When entering new markets we can use expertise from elsewhere in the region, adapting tried and tested distribution approaches to the local market and establish ourselves quickly.
We have already achieved rapid growth in Asia Pacific. The Aviva brand is becoming well known, our business model is successful, and we are confident that we can continue to build on this strong base. Simon Machell Chief executive, Asia Pacific
We now have operations in nine markets. Our businesses are all at different stages of development and in tandem with the economic outlook for Asia, which predicts growth rates of between 4.1% in Taiwan to 8.6% in China for the next five years, our outlook is very positive. We currently have the opportunity to actively grow our existing businesses in the region, in particular in the high growth markets of India and China and at the same time, we are assessing the potential of other markets in the region. In order to grow efficiently, we are also focusing on maximising the use of shared services and knowledge across the region.
Aviva has a strong agenda for growth in the region, aiming to build scale and expand into new markets. A strong regional office, based in Singapore, has been established to act as a hub of expertise and to provide support to the region. The regional operating model will provide cost savings and synergies as well as facilitate the sharing of product expertise and transfer of ideas between markets.
We operate a multi-distribution strategy, with particular strength in bancassurance, and aim to continue to harness the benefits of multi-distribution in all of our markets. Initiatives to achieve this will see the growth of channels beyond the dominant agency sales force, which we expect to decline in the region over coming years due to increased deregulation.
Building our brand has become more important than ever with commoditised products and increased competition. In 2007, our customer advocacy scores across most of our markets improved, meeting key performance targets. Our focus to build brand awareness made further progress as the operations in Singapore, Australia, Hong Kong and India launched a shared brand campaign utilising a common consumer theme, raising prompted brand awareness scores across each of these markets.
Aviva Asia Pacific continues to achieve a strong rate of growth with total new business sales 60% higher at £4,089 million (2006: £2,546 million) driven primarily by strong Navigator sales across the region.
Sales for the rest of Asia Pacific of £1,689 million (2006: £946 million) continued to grow as a result of our expanding distribution and broadening geographical presence.
Life EEV operating profit for the region increased by 6% to £91 million (2006: £86 million), with an improvement in new business contribution to £62 million (2006: £43 million) reflecting the strong sales performance in the year. New business margin remained strong at 4.3% (2006: 4.4%). Operating profit in fund management was £15 million (2006: £9 million) mainly due to higher funds under administration following the Navigator sales performance.
China Aviva-COFCO operates a multi-channel, multi-product strategy which now includes direct telemarketing. We have always been focused on our 10x10x10 strategy – to achieve 10% new business market share across 10 provinces by 2010 – and 2007 was a significant year, being the joint venture’s fifth anniversary. In the space of those five years we already have eight branch licences with operations in 25 cities. We are ranked second largest foreign life provider in terms of total premium among 25 foreign insurers in China.
The survey is based on the views of more than 1,600 protection advisers across the industry.
China – Aviva-COFCO recognised for foresight with best channel strategy award
In an industry-wide ceremony, Aviva-COFCO, our joint venture in China, was given the “Best Channel Strategy” award by China Insurance Marketing, a national magazine for Chinese business professionals. This recognises the company’s foresight and initiative in creating a centre for the training and development of brokers. The training programme includes product knowledge, customer service, sales, business administration and management.
India India’s young urban population base provides strong growth potential in the long-term savings market. Our strategy is to acquire new customers through distribution relationships with banks as well as through our 30,000 strong direct sales force (2006:14,000). The quality of our direct sales force is key for incremental growth and we are investing in capability and infrastructure to improve the quality of sale and productivity per agent. We currently rank eighth among the private insurance companies in the market.
Singapore In Singapore, we rank first in combined sales of long-term savings products, including unit trusts. We employ a multi-channel distribution strategy led by a strong partnership with DBS Bank. Our IFA channel has been growing aggressively and we established a new channel in 2007, wholesaling through Manulife and TM Asia. In the employee benefits and healthcare business, we are the leading provider, providing insurance for one out of every three insured employees in Singapore. Our Navigator business crossed S$2 billion (£700 million) funds under administration in October 2007. We aim to continue to build our market share through further development in the various channels, increasing brand awareness and improving customer engagement.
We have made significant progress on the development of the global finance strategy this year. This will enable us to lay firm foundations for future growth, meet future regulatory requirements and prepare for financial reporting change. In 2007 we focused on two areas: the creation of robust governance to secure the timely and efficient delivery of the strategy; and the development of the policies, frameworks and guidelines that we will use in 2008 to deliver and embed the change group-wide.
Allocate capital – We completed our work on the individual capital assessment (ICA) of the group for 2006
– We achieved an AM Best upgrade for the US business to A+ (“superior”) from A (“excellent”). Additionally, Standard & Poor’s have reaffirmed their rating of our core subsidiaries as AA/AA- (very strong) including upgrading the Aviva USA rating to AA-, all with a “stable” outlook
– We appointed Marcelo Cruz as our new chief risk officer
– In line with other CFO forum members, we are working to roll out market consistent embedded value reporting for year end 2008
The Group’s overall capital risk appetite is set and managed with reference to the requirements of a range of different stakeholders including shareholders, policyholders, regulators and rating agencies. In managing capital we seek to: – maintain sufficient, but not excessive, financial strength to support new business growth and satisfy the requirements of our stakeholders; – optimise our overall debt to equity structure to enhance our returns to shareholders, subject to our capital risk appetite and balancing the requirements of the range of stakeholders; – retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit lines and access to a range of capital markets; – allocate capital rigorously across the Group, to drive value adding growth in accordance with risk appetite; – increase the dividend on a basis judged prudent, while retaining capital to support future business growth, using dividend cover on an IFRS operating earnings after tax basis in the 1.5 to 2.0 times range as a guide.
The primary sources of capital used by the Group are equity shareholders’ funds, preference shares, subordinated debt and borrowings. We also consider and, where efficient to do so, utilise alternative sources of capital such as reinsurance and securitisation in addition to the more traditional sources of funding. Targets are established in relation to regulatory solvency, ratings, liquidity and dividend capacity and are a key tool in managing capital in accordance with our risk appetite and the requirements of our various stakeholders.
Management Committee. These processes incorporate various capital profitability metrics, including an assessment of return on capital employed and internal rates of return in relation to hurdle rates to ensure capital is allocated efficiently and that excess business unit capital is repatriated where appropriate.
(ii) Regulatory bases Individual regulated subsidiaries measure and report solvency based on applicable local regulations, including in the UK the regulations established by the Financial Services Authority (FSA). These measures are also consolidated under the European Insurance Groups Directive (IGD) to calculate regulatory capital adequacy at an aggregate Group level. The Group has fully complied with these regulatory requirements during the year.
(iv) Economic bases The Group also measures its capital using an economic capital model that takes into account a more realistic set of financial and non-financial assumptions. This model has been developed considerably over the past few years and is increasingly relevant in the internal management and external assessment of the Group’s capital resources. The economic capital model is used to assess the Group’s capital strength in accordance with the Individual Capital Assessment (ICA) requirements established by the FSA. Further developments are planned to meet the emerging requirements of the Solvency II framework and other external agencies.
**Minority interests have increased to £3,131 million (2006: £2,137 million) due to foreign exchange movement, capital contributions from property investment vehicles and acquired subsidiaries, primarily Cajamurcia and Avipop.
At 31 December 2007 the Group had £29.8 billion (Restated 31 December 2006: £26.3 billion) of total capital employed, in its trading operations measured on an EEV basis. The significant increase in shareholders’ funds reflects the strong operational performance in the period and foreign exchange impacts. Net asset value per ordinary share, based on equity shareholders’ funds, has grown to 772 pence per share (2006: 683 pence per share).
Regulatory bases Regulatory basis – Group: European Insurance Groups Directive (IGD)
The minimum solvency requirement for the Group’s European businesses is based on the Solvency 1 Directive.
For the Group’s non-participating worldwide life assurance businesses, our capital requirements, expressed as a percentage of the EU minimum, are set for internal management and embedded value reporting purposes as the higher of: – Target levels set by reference to internal risk assessment and internal objectives, taking account of the level of operational, demographic, market and currency risk.
– Minimum capital level (ie level of solvency capital at which local regulator is empowered to take action).
Estimated Estimated Estimated realistic risk realistic Realistic inherited capital Estimated Estimated assets liabilities* estate** margin† excess excess £bn £bn £bn £bn £bn £bn * These realistic liabilities include the shareholders’ share of future bonuses of £1.2 billion (31 December 2006: £0.7 billion). Realistic liabilities adjusted to eliminate the shareholders’ share of future bonuses are £48.8 billion (31 December 2006: £48.6 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 £0.7 billion, £0.8 billion and £3.0 billion for CGNU Life, CULAC and NUL&P respectively (31 December 2006: £0.5 billion, £0.7 billion and £3.0 billion for CGNU Life, CULAC and NUL&P respectively).
**Estimated realistic inherited estate at 31 December 2006 was £2.5 billion, £2.5 billion and £1.8 billion for CGNU Life, CULAC and NUL&P respectively. The distribution has resulted in a £2.3 billion reduction in the estimated realistic inherited estate.
† The risk capital margin (RCM) is 3.5 times covered by the inherited estate (31 December 2006: 4.2 times). The RCM is lower as a result of de-risking the cost of guarantees.
‡ The NUL&P fund includes the Provident Mutual (PM) fund which has realistic assets and liabilities of £2.1 billion and therefore does not impact the realistic inherited estate.
Investment mix The aggregate investment mix of the assets in the three main with-profit funds at 31 December 2007 was: 31 December 31 December
The equity backing ratios, including property, supporting with-profit asset shares are 75% in CGNU Life, and CULAC and 70% in NUL&P. New with-profit business is mainly written through CGNU Life.
Potential reattribution of the inherited estate Aviva’s negotiations with the Policyholder Advocate, Clare Spottiswoode, regarding the potential reattribution of the remainder of the inherited estates of CGNU Life and CULAC continue. We are keen to bring this to a conclusion soon so that we can put an offer to policyholders as early as possible. We will only complete this process if we are able to negotiate an arrangement that is fair to policyholders and shareholders.
Rating agency bases Ratings are important in supporting access to debt capital markets and in providing assurance to business partners and policyholders over the financial strength of the Group and its ability to service contractual obligations. In recognition of this, the Group has solicited rating relationships with a number of rating agencies. Rating agencies generally assign ratings based on an assessment of a range of financial (e.g. capital strength, gearing and fixed charge cover ratios) and non financial (e.g. competitive position and quality of management) factors. Managing our capital and liquidity position in accordance with the Group’s target rating levels is a core consideration in all material capital management and capital allocation decisions.
Economic bases The Group uses a risk based capital (RBC) model to assess its economic capital requirements and to aid in risk and capital management across the Group. This model is used to support the Group’s Individual Capital Assessments (ICA) which are reported to the FSA for all UK regulated insurance businesses.
This model is based on a framework for identifying the risks that business units, and the Group as a whole, are exposed to. The FSA now uses the results of our ICA process when setting target levels of capital for the UK regulated businesses. In line with FSA requirements, the ICA estimates the capital required to mitigate the risk of insolvency to a 99.5% confidence level over a one year time horizon (equivalent to events occurring in one out of 200 years) against financial and non-financial tests. Currently our ICA uses a mixture of scenario based approaches and stochastic economic capital models.
Capital management actions During the year, we have undertaken a number of proactive actions in relation to capital management: – In the UK, Norwich Union generated operational capital of £0.3bn through financial reinsurance, improving the returns for shareholders through the use of leveraged capital. Norwich Union also recently completed a capital transaction transferring to Swiss Re an economic interest in part of the UK Life policy book to be administered by them under the outsourcing agreement made earlier in 2007, which comes into effect as this business migrates to Swiss Re over 2008 and 2009.
– In the US, our Life business completed a transaction to offset the onerous capital requirements imposed by regulation AXXX. The transaction relates to equity indexed life contracts including a no lapse guarantee.
At the end of 2007, approximately £0.1bn of liability was ceded to a captive reinsurance company. The amount ceded is expected to grow significantly in future years.
– Consistent with a focus on EPS growth, we have also announced the withdrawal of the current scrip dividend scheme and the introduction of a Dividend Reinvestment Plan, which avoids new share issuance, from the 2008 interim dividend onwards.
– We also continue to actively manage our exposure to investment risk and in the second half of 2007 we reduced our exposure to equity market volatility by selling £2.6bn and £0.8bn of equities in our general insurance shareholder funds and the staff pension schemes respectively. These actions are consistent with our ongoing focus on efficient capital management and enhancing returns to shareholders.
We have established a number of policies that deal with the management of both financial and non-financial risks. These policies define our risk appetite and set out risk management and control and business conduct standards for the group’s worldwide operations.
Risk management is coordinated by a central Group team, led by the Group Chief Risk Officer. Within our regional structure, each regional support office is in the process of appointing regional risk officers will that work under the leadership and coordination of Group Risk to ensure that the risk profile within the regions is under the limits established and agreed by the Group centre. The regional risk officers work with the business unit risk officers to ensure that the risk management framework is embedded and working appropriately in our businesses, and work with the Group senior management to communicate and coordinate risk management decisions that are taken at a group level.
Additionally, we operate a number of oversight committees to monitor aggregate risk data, take risk management decisions, and to ensure the implementation of the risk policies. Our risk management committee structure is set out below.
Group Risk also reports to the Chairman of the Risk & Regulatory Committee assuring independence of the function. Our governance structure and policies are regularly reviewed to reflect the changing commercial and regulatory environment, and our own organisational structure.
As previously explained, we have developed a capital management framework using Individual Capital Assessment (ICA) principles for identifying the risks that business units, and the group as a whole are exposed to, quantifying their impact on economic capital.
Market risk We are exposed to potential adverse financial impact from variation in the values of our investments, caused by changes in equity and property prices, credit risk, interest rates, liquidity, and foreign exchange rates.
Our business has market risk from fluctuations in both the values of assets held and the value of liabilities. At a group level, we have market risk from owning a portfolio of international businesses whose values can change, and from assets that support the liabilities of our staff pension scheme.
We recognise that market risk is part of the businesses that we run, and that a certain level of market risk is acceptable in order to deliver benefits to both policyholders and shareholders. For each type of market risk, we have developed clear policies and procedures on how that risk should be monitored and managed, either within our business units or at a group level. Our group investment committee (GIC) is responsible for overseeing market risk. For example, the GIC identifies the levels of market movement at which mitigating actions should be taken.
We manage market risk and apply our market risk policy to all of the group’s financial assets, including both policyholder assets (those assets supporting the technical liabilities) and shareholder assets (the surplus assets held within the businesses and Aviva group centre not required to meet policyholder benefits, and any additional assets held to cover regulatory margins). In practice assets can move between these categories. The total of policyholder and shareholder assets will account for all the investments of the business.
Asset liability management is ultimately overseen by the Group Asset Liability Management Committee in which all the members of the Executive Committee are members.
Several of our long term savings businesses sell products where the majority of the market risk is borne by the policyholder. Any market risk attributable to policyholders is prudently managed to satisfy the policyholders’ objectives for risk and reward.
A 1% decrease in interest rates would increase shareholders’ funds on an IFRS basis by £939 million pre-tax and on an EEV basis would increase embedded value by £685 million, net of tax. Sensitivities to increases in interest rates are shown in note 55 and the section on EEV reporting.
Investment in property is managed locally by our business units, subject to the risk appetite of that business unit, and within any local regulations on asset admissibility or liquidity.
At group level, we maintain a prudent level of liquidity consistent with the expectations of the FSA and the investment community. We also maintain a buffer of liquid assets to cover unforeseen contingencies including the provision of temporary funds to any of our business units that experience temporary liquidity shortfalls, and the group maintains significant committed borrowing facilities from a range of highly rated banks to further mitigate this risk.
Credit risk exposures 5 Speculative Grade 1 6 Not rated 34
Derivatives risk We use derivatives in a number of our businesses to enable efficient investment management, to hedge investment risks, or as part of structured retail savings products. Derivatives can involve complex financial transactions and to minimise the risks involved we have set minimum standards we expect our businesses to adopt when using derivatives and our group derivatives committee monitors exposures, the control framework, and approves any proposed transactions that fall outside the local business delegated authorities. A number of our investment management businesses operate hedge funds; these are subject to the same Aviva control framework for using derivatives in addition to local regulatory supervision of such funds.
We monitor and manage two types of credit risk. Firstly, we manage the exposure to individual counterparties, by measuring exposure against centrally set limits. The aggregate exposure we are prepared to accept takes account of credit ratings issued by rating agencies such as Standard & Poor’s. We also manage the level of risk we are prepared to take, and we are using increasingly detailed analysis to define our optimal balance between risk and reward, monitoring the types of investment available to us to achieve best our aims.
We also consider the risk of a fall in the value of fixed interest securities from changes in the perceived credit worthiness of the issuer which is typically recognised through changes in the fixed interest securities’ credit spreads.
Our group credit committee (GCC) takes responsibility for monitoring credit exposures to individual counterparties and determining who we are prepared to work with. Our GIC sets the credit risk appetite as part of our overall management of market risk. In 2008 we will be enhancing our capability to monitor and manage credit risk through the development of credit risk management systems.
Mortality and morbidity risk Our business units manage mortality and morbidity risk on protection business using reinsurance and while they can select reinsurers locally, we review reinsurance coverage across the group and our overall reinsurance programme is assessed centrally to manage group-wide risk exposures. Sensitivity tests show that we are not materially affected by mortality risk. Our equity reduces by only £20 million for a 5% worsening in assurance mortality experience on an IFRS basis and decreases embedded value by £145 million on an EEV basis, net of tax.
Persistency risk Persistency risk affects all of our life insurance businesses and is managed at a business unit level through frequent monitoring of current experience, benchmarked against local market information. Actual experience against the expected level of lapses is also assessed within the analysis of embedded value operating profit. Where possible, the financial impact of lapses is reduced through appropriate product design. The group life insurance risk committee has developed guidelines on persistency management, sharing best practice on the setting of lapse assumptions, product design, experience monitoring, and management action.
Expense risk Expenses are managed at a business unit level, as part of general day-to-day business management, and expense management is a key part of a business’ ability to meet financial targets.
Such risks include: – Fluctuation in the timing, frequency and severity of claims and claim settlements compared to that expected when the business was written
Claims ratios Another material risk is the impact of worsening claims ratios. This risk is actively managed through business unit focus on underwriting discipline, control of claims management, and finding innovative solutions to the way we measure and price the risk we underwrite. For example, our UK business has developed digital flood mapping to understand better the risk to household insurance from flood damage, and has developed “telematics”, our Pay As You Drive™ technology to provide a closer link between risk and pricing.
In general insurance potential risks include the impact of climate change. Emerging claims types are considered when setting latent claims reserves, and through the underwriting and pricing process.
Our businesses are primarily responsible for identifying, managing and reporting these risks as part of our quarterly risk reporting processes. Each operational risk is assessed by considering the potential impact and the probability of the event occurring. Impact assessments are made against financial, operational and reputational criteria.
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 2007.
The financial data contained in the report and accounts has been prepared using the group’s accounting policies set out on pages 114 to 125. Where applicable, the financial statements have also been prepared in accordance with the Statement of Recommended Practice (SORP) on accounting for insurance business issued by the Association of British Insurers (ABI) in December 2005, as amended in December 2006.
Following a review of certain balance sheet items, we have restated the 2006 comparative figures to gross up for cash collateral items and to reclassify certain certificates of deposit. Details are given in note 2 to the financial statements.
European Embedded Value (EEV) basis of reporting We present the results and financial position of our life and related businesses on an EEV basis, in addition to the IFRS basis. The directors consider that the EEV methodology represents a more meaningful basis of reporting the underlying value of the Group’s life and related businesses and the underlying drivers of performance than IFRS methodology. This basis allows for the impact of uncertainty in the future investment returns more explicitly and is consistent with the way the business is priced and managed.
The EEV methodology adopted is in accordance with the EEV Principles introduced by the CFO Forum in May 2004, and updated in October 2005. Under the EEV 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 EEV basis gives a fairer indication of the profitability of business on inception. Additionally, shareholders’ funds on an EEV basis incorporate internally generated additional value of in-force business (AVIF), which is excluded for IFRS reporting. Our incentive schemes and internal management reporting are largely aligned to the EEV basis. These financial statements include supplementary information on EEV reporting in the “Alternative method of reporting long-term business” section.
The major areas of judgement on policy application are considered to be over whether Group entities should be consolidated (set out in policy D), on product classification (set out in policy F) and in the classification of financial investments (set out in policy S).
All estimates are based on management’s knowledge of current facts and circumstances, assumptions based on that knowledge and their predictions of future events and actions. Actual results can always differ from those estimates, possibly significantly.
Dear Shareholder, 2007 has been a year of great progress in Aviva’s employee and responsibility agenda in support of our “one Aviva, twice the value” vision. Progress included the creation of a regional structure for Aviva, international moves of senior leaders, the effective implementation of our people strategy and improved visibility for corporate social responsibility (CSR). All these activities have strengthened Aviva and provide an excellent foundation for further progress in 2008.
This review is an update on our progress and achievements to date. It represents a level of performance of which we can be proud, and one on which we can build further to meet our plans to be an employer of choice and a responsible corporate citizen.
We report our progress on CSR fully in a separate CSR report, which is available online at www.aviva.com/csr.
Employees and responsibility Aviva’s ambition is to be the world’s most trusted savings, investment and insurance provider and we will achieve this in part by exciting our people to exceptional performance. This, then, is our goal as we deliver on our employee and responsibility agenda and strive to meet the expectations of our stakeholders: – Our shareholders, who wish to receive a return on their investment, but also to be assured that the company is behaving responsibly in how it operates
Governance Governance of our people and CSR agenda operates at Board level through regular updates and reviews and, in particular, through the activity of the Board Committees on CSR and Remuneration. The reports of both these committees can be found on pages 92 and 93 respectively.
In 2007, substantial work was undertaken to identify the risks in implementing the CSR, environment and people policy. In alignment with the group risk management process, we have established means to identify risks and mitigating actions through a robust set of metrics. In 2008 we will continue to embed these new policies as well as strengthening the risk assessment process.
People We employ some 57,000 people worldwide. In 2007 we put in place a new regionalised structure comprised of the UK, Europe, Asia Pacific and North America. Together with our group centre function, the strategy to create a lean, activist group centre and empowered regional teams is now operational, encouraging growth, the sharing of best practices and the achievement of regional business objectives and synergies.
During the course of 2007, we conducted a major redesign of the programmes offered through the Aviva Leadership Academy which continues to support our leadership work. Working with a range of the world’s foremost institutions in the field of leadership development, the programmes now provide a unique opportunity for Aviva managers to gain deeper self-insight and awareness of the impact of their leadership. It strongly supports the concept of “One Aviva” by encouraging an international network of colleagues to learn from each other while gaining insights and fresh perspectives from the outside world.
We measure our success in achieving our people strategy in part through our global climate survey, which is open to our workforce worldwide. The survey was completed by over 42,000 employees in 2007 and is a key performance management, governance and communication tool. Findings from this survey are presented to local executive teams and the Board.
Our European Consultative Forum and employee forum in the UK (“Your Forum”) provide an opportunity for regular sharing of information and dialogue at a more informal level with representatives of the wider employee population.
We also participate in external surveys and benchmark studies which allow us to compare ourselves with best practice and to learn from what others do. In 2007 Aviva in the UK was included in The Times “Top 50 Places Where Women Want to Work” list for the second consecutive year, while our businesses in Ireland, Australia and India were once again listed in national “Great Places to Work” surveys.
Diversity Being a global organisation spread across 27 countries, multiple time zones and cultures brings challenges. This is well understood and addressed through our diversity programme which embodies the key principles of respect, valuing differences and inclusion.
To embed our diversity vision we created a “Respect Diversity Toolkit” which is an online learning and knowledge resource. It includes training materials, interactive games, presentations, DVDs, and best practice and benchmarking information. Its success was recently recognised internally, with Norwich Union making its content available to 30,000 employees, and externally, with a City launch in London. This “toolkit” approach has been replicated this year in other work streams for HR and CSR since it is an excellent platform from which to cascade and share knowledge across the group. Our “Respect Diversity” initiative and toolkit have also been recognised as best practice by the Equal Opportunities Commission in the UK.
Business review 70% consider Aviva a great place to work (Employee survey 2007)
In a continued effort to create a strong annual feedback mechanism for employees’, we carried out our global employee climate survey for the third consecutive year. We had a strong overall participation rate of 70% (2006: 66%) with four business units achieving a 100% participation. The results showed improvement on all survey categories and improved performance against our external benchmark of performance in global financial services companies.
Our senior management pay is linked to employee survey results through clear targets on leadership and engagement. We also pay special attention to action-planning using the results: the businesses, regions and group draw up plans to address employee issues and to build on our existing strengths. Progress on these plans is then shared with employees before the next survey cycle.
The diversity agenda has been strengthened by employee networks. The Global Senior Women’s Network event in Madrid was well attended by 50 women in senior management from across the group. This network resulted in the creation of local networks in London and Norwich with over 200 members involved. Since its launch our gay, lesbian and bisexual network, Pride Aviva, has increased its membership to 150 in the UK. Pride Aviva was also instrumental in securing Aviva’s sponsorship and financial support for the first gay and lesbian youth conference in the UK to be organised by Stonewall*. Aviva France has also demonstrated its commitment to combating discrimination at work by adding its signature to a new diversity charter.
Our CSR policy ensures all employees are aware of our commitment to responsible business. The policy continues to tackle the challenge posed by financial crime, demonstrating the importance of transparent and honest business practices. In addition, each business unit is required to provide assurance every six months that they have complied with our business ethics principles.
Environment Our focus on environment intensified in 2007 with progress being made on three strategic areas to combat climate change: carbon reduction, carbon offsetting and enhanced employee education and engagement.
Employee awareness was enhanced by engaging staff in the environmental agenda and explaining the many aspects of environmental management, including an online carbon calculator, an “energy saving” week and internal communications. Our efforts have resulted in an improved response in the 2007 global climate survey on questions covering environmental responsibility, up six points from last year.
Externally, we had great opportunities this year to progress work on battling climate change with like-minded companies, non-governmental organisations, academics and governments. Andrew Moss joined fellow group chief executives and chairmen to work on the cross-sectoral CBI Climate Change Taskforce which called on government, business and consumers to factor climate change into dayto -day life now to avoid larger economic costs going forward.
Further, Aviva believes that institutional investors, like Morley, have an interest in promoting and supporting a strategic response by companies to the issue of climate change. The best measure is via corporate disclosure. In response to this belief, earlier this year, Morley engaged with 29 persistently non-responding companies in 2007 to request carbon disclosure project adherence. Over half of the companies engaged with provided a full response for the first time.
At a local level, our businesses continue to innovate for our customers. We encourage you to read our CSR report to be published in 2008, which highlights some unique best practice from around the world on this agenda.
Suppliers We understand that our suppliers play an important role in ensuring that we continue to meet the needs of our customers and the delivery of our services to them.
The embedding of CSR in the Aviva global purchasing policy means that we have identified our benchmarks and expectations on each procurement activity and can influence our large supplier base to deliver this. More importantly we can ensure that post contract award these principles continue to be delivered and enhanced rather than eroded.
In 2007, Aviva was honoured as “Best in Class” for our approach to climate change disclosure in a report released by the Carbon Disclosure Project (CDP5), a coalition of over 315 global investors with more than $41 trillion (£20 trillion) in assets. In the report, Aviva was included in the “Climate Disclosure Leadership Index” (CDLI), a prestigious roll of honour for global corporations addressing the challenges of climate change. The CDLI comprises 68 FTSE500 companies that show distinction in their responses to the Carbon Disclosure Project survey based on their reporting of greenhouse gas emissions and assessment of climate change strategies.
* Net Promoter is a registered trademark of Satmetrix Systems, Inc., Bain & Company and Fred Reichheld.
– Aviva was ranked 35 out of 100 in the 2007 Accountability Rating of the world’s largest companies – a tool for measuring the extent to which companies have built responsible practices into the way they do business.
Six-steps.org was named as the winner of the Best Corporate Social Responsibility Programme at the 2007 IFS Financial Innovation awards.
This is an accessible, engaging and jargon-free web site, which provides people with free, unbiased financial information and ideas. It is part of our commitment to play a leading role in financial education, and is initially aimed at the UK. This innovation meets a currently unfulfilled need across the population in the UK and hopes to address similar needs in other countries as plans are afoot to launch in other sites around the world.
As part of Aviva’s carbon offset programme, we are involved with a treadle pump project in Uttar Pradesh, northern India where a large percentage of the population live below the poverty line.
Irrigation is vitally important to crop production in the area but fuel for diesel pumps is both expensive and polluting.
Treadle pumps are humanpowered, designed to lift water from a depth of seven metres or less; they are cost effective and non-polluting. They typically replace rented diesel pumps which can have a spectacular income impact for the farmer. In the sample surveyed, rural households more than doubled their income.
Accounting for Sustainability Working with the Accounting for Sustainability project, Aviva is helping define a new reporting standard for sustainable business and a tool-kit to embed sustainable decision making. The table on pages 72 and 73 demonstrates some of the measures in the sustainability model.
We continue to work towards internalising the cost of carbon and demonstrating how environmental impacts of the business can be brought into our reporting and accounting process.
CO2 emissions Total cost of offsetting 100% of our global CO2 emissions in 2007 is approximately £909,000.
Aviva’s CO emissions 2.0to nn es to nn es p er e m pl oy ee
Aviva’s waste to nn es kg s pe r e m pl oy ee
Hazardous and non-hazardous waste Total disposal cost for hazardous and non hazardous waste in the UK was £464,000 in 2007 (2006: £585,000) which includes UK landfill tax at circa £80 per tonne.
Aviva’s water consumption 14m m pe r e m pl oy ee
Aviva’s paper consumption to nn es kg s pe r e m pl oy ee
Our top two areas for reducing our carbon footprint in 2008: – We are installing Telepresence systems in six locations worldwide to begin with to reduce the amount of business travel. We have set a reduction target of 10% for the routings.
– We are working with our vehicles service fleet (RAC) to investigate alternative lower intensity fuels.
Carbon Disclosure Project CDP 5. “Best in class” Innovest ranking “AAA”. BREEAM minimum ranking “Good” for new build and refurbishment.
We follow all building regulations (insulation, proper disposal of waste material including building waste and white goods).
We have a responsible motor repair network which disposes of waste and spare parts responsibly.
200 kgs of waste per employee per year. Recycling rate of 60–70% (BRE Office toolkit).
There is limited scope for the retro-fitting of latest technologies in water usage reduction in washrooms. However, where possible we take advantage of such technologies. Consideration of the use of greywater is included in requirements for new buildings.
Shareholders have been asked to switch to electronic transfer of dividends and receiving communications over electronic mediums.
Hong Kong Aviva advertising In 2007 Hong Kong launched their new brand campaign. The new strapline is ‘Focus on Today. Partner with us for a better tomorrow’, which is highlighted in the advertisements by a binocular visual to symbolise a vision to the future. The campaign was featured on TV, press, outdoor (including subway stations), radio and online.
Age 49 Appointed to the Board in May 2004. Joined as group finance director in May 2004 and became group chief executive in July 2007. Previously director – finance, risk management and operations in Lloyd’s (insurance) and formerly held a number of senior management positions at HSBC plc (banking).
Age 65 Appointed to the Board in January 2005 and became chairman in January 2006. Currently chairman of Aegis Group plc (media services), an independent non-executive director of BG Group plc (utility) and an independent non-executive director of Reed Elsevier plc (publishing). Former chairman of KPMG International (auditors), former deputy chairman of Group 4 Securicor plc (security services), former member of the supervisory board ABN AMRO N.V. (banking) and a former independent non-executive director of Young & Co.’s Brewery PLC (drinks) and AEA Technology plc (commercial/technology).
Chairman of the Board and nomination committee and member of the corporate social responsibility committee.
Age 66 Appointed to the Board in May 2000. Joined the board of Norwich Union as a non-executive director in 1999. Currently non-executive chairman of Aviva’s operations in Spain, a director of Campofrio (consumer) and of Banco Santander (banking) and also International Advisor of Goldman Sachs. Chairman for the Centre of Economic Policy Research (CEPR) and of the Instituto de Empresa Business School and a member of the Group of Thirty (consultative group on international economic and monetary affairs). A former deputy general manager of the Bank of Spain and former Secretary of State of Finance in Spain.
Chairman of the corporate social responsibility committee and member of the risk and regulatory and nomination committees.
Chairman of the risk and regulatory committee and a member of the remuneration and audit committees.
Age 65 Appointed to the Board in May 2004. Currently a non-executive director of the Warnaco Group Inc (clothing), Delta Air Lines, Inc. (transport), Federal Home Loan Mortgage Corporation (Freddie Mac) (financial services), New Germany Fund (investment trust) and a director of The London School of Economics and Political Science. Former chief financial officer of American Express Company (financial services), NatWest Group plc (banking) and The Seagram Company Ltd (drinks) and a former member of the Accounting Standards Board (UK).
Age 44 Joined the Group in 1994. Formerly chief executive of Norwich Union Insurance in the UK, Managing Director of RAC and auditor and management consultant at Ernst & Young. Holds an Economics degree and is a Fellow of the Institute of Chartered Accountants.
Age 53 Joined the Group in September 2007. Formerly global head of group investment businesses at HSBC, senior executive vice president and head of asset management and insurance at Credit Commercial de France and director of capital markets at La Compagnie Financiére Edmond de Rothschild. Previously at the French Treasury in the Ministry of Finance and the French Institute for Statistics and Economic Studies. Educated at l’École Polytechnique, Paris and l’École Nationale de la Statistique l‘Administration Économique.
Age 52 Joined the Group in 2006. Formerly chairman, president and chief executive officer of AmerUs Group and chief investment officer of AmerUs Capital. Previously with Providian Corporation, Federated Investors, Inc and Mellon Bank. Holds a Bachelor of Science degree in urban and regional planning from Indiana University of Pennsylvania and a master’s degree in public administration from the University of Pittsburgh. A graduate of Harvard Business School’s Advanced Management Program and is a Chartered Financial Analyst.
Age 46 Joined the Group in 1989. Formerly chief executive officer of Aviva Canada, chief financial officer and executive vice-president. Previously finance director Norwich Union and managing director for CGU Insurance in London. Holds a BA Honours in Commerce and Economics from the University of Toronto, is a chartered accountant and has received an honorary Chartered Insurance Professional designation from Insurance Institute of Canada.
Age 38 Joined the Group in 2007. Formerly a partner with the global financial services group at McKinsey & Company, advising leading insurers and banks in Europe, USA, Asia and Australia. Holds an undergraduate degree in Engineering and an MBA from the Indian Institute of Management.
The directors submit their report and accounts for Aviva plc, together with the consolidated accounts of the Aviva Group of companies, for the year ended 31 December 2007. The Business review for the Company is contained on pages 10 to 73 and includes a review of the Group’s operations, current position and future prospects together with a description of the principal activities of the Group and other information required to be included. Details of material acquisitions and disposals made by the Group during the year are contained in note 3 to the accounts.
56,039,397 shares were allotted under the Group’s employee share and incentive plans and the Aviva Scrip Dividend Scheme. At 31 December 2007 the issued ordinary share capital totalled 2,622 million shares of 25 pence each and the issued preference share capital totalled 200 million shares of £1 each. Accordingly, the issued ordinary share capital constituted 76.6% of the Company’s total issued share capital and the issued preference share capital constituted 23.4% of the Company’s total issued share capital at 31 December 2007. All the Company’s shares are fully paid up and quoted on the London Stock Exchange. Details of the Company’s share capital and shares under option at 31 December 2007 and shares issued during the year are given in notes 28 to 31 to the financial statements.
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 or by writing to the Company Secretary. With the exception of restrictions on transfer of shares under the Company’s share incentive plan while the shares are subject to 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.
Post balance sheet events On 5 February 2008, the Group’s UK long-term business operation Norwich Union Life, announced a one-off, special bonus worth £2.3 billion. Further details can be found in Note 59 on page 235.
The Company’s articles of association require one-third of the directors to retire by rotation each year and also require each director to retire at intervals of not more than three years. At the forthcoming Annual General Meeting Lord Sharman, chairman and non-executive director, and Andrew Moss and Philip Scott, both executive directors, will retire and, being eligible, will offer themselves for re-election. Guillermo de la Dehesa and Wim Dik who were re-elected by shareholders at last year’s Annual General Meeting will retire on 31 December 2008, in line with the Board’s plans to renew and refresh its composition. Andrew Moss and Philip Scott are executive directors and each has a service contract with the Company, details of which can be found in the Directors’ renumeration report. Nikesh Arora and Scott Wheway will offer themselves for election by the shareholders at the forthcoming Annual General Meeting being the first such meeting after their appointment.
Substantial shareholdings During 2007 the Company maintained a register of substantial shareholdings in accordance with the provisions of the Disclosure and Transparency Rules of the Financial Services Authority. As at 27 February 2008 the Company had received notifications that the holdings exceeding the 3% notification threshold were those of Barclays plc which held directly 133,026,405 voting rights (representing 5.08% of the total voting rights attaching to the issued ordinary share capital of the Company), Legal & General Group plc which held directly 104,107,838 voting rights (4.01%) and Axa S.A. and its Group companies which held a total of 259,452,649 voting rights (9.99%) of which 28,520,097 (1.10%) were held directly and 230,932,552 (8.89%) were held indirectly.
Financial instruments Aviva Group companies use financial instruments to manage certain types of risks including those relating to credit, foreign currency exchange, cash flow, liquidity, interest rates, and equity and property prices. Details of the objectives and management of these instruments are contained in the Business review and an indication of the exposure of the Group companies to such risks is contained in note 55 to the accounts.
In addition, the Group’s businesses are committed to supporting their local communities. For example, Aviva Canada has launched a two year partnership with ThinkFirst Canada, a national non-profit charity dedicated to injury prevention, particularly those associated with the brain and spinal cord and Aviva Global Services, together with the Akanksha Foundation, has opened the first of four “Aviva Akanksha” schools in Pune, India.
Political donations At the Annual General Meeting held in 2004, shareholders passed a resolution, on a precautionary basis, to authorise the Company to make donations to EU political organisations and to incur EU political expenditure (as such terms are defined in Section 347A of the Companies Act 1985) not exceeding £100,000. During the year the Company made no donations to EU political organisations and incurred no political expenditure.
The definitions used in the Companies Act 2006 are broad in nature and this authority is being sought to ensure that any activities undertaken throughout the Group’s businesses which could otherwise be construed to fall within these provisions can be undertaken without inadvertently infringing them. Further details of this are contained in the Notice of Meeting.
In summary, the Group’s commitment to communication and dialogue with employees continues. A strong emphasis is placed on the provision of news through a variety of media, including intranets (both a Group-wide intranet, Arena, and local business unit intranets), Aviva radio, which can be accessed via mobile phone or computer, and poster campaigns. Employees have opportunities to voice their opinions and ask questions through intranet sites, opinion surveys and the Group’s climate survey which is open to all employees. Face-to-face briefings and team meetings are actively encouraged and are held in all business units across the Group. The Group’s businesses in the United Kingdom have established employee consultative forums and a European Consultative Forum convenes annually to discuss matters impacting the business across Europe.
Employee practice Aviva Group companies are committed to providing equal opportunities to all employees, irrespective of their gender, sexual orientation, marital status, race, nationality, ethnic origin, disability, age, religion or union membership status.
Annual General Meeting The 2008 Annual General Meeting of the Company will be held on 1 May 2008 at The Barbican Centre, Silk Street, London EC2Y 8DS at 11am. A separate document accompanying the Annual Report and Accounts contains the Notice convening the Meeting and a description of the business to be conducted thereat.
It is the Board’s view that the Company has been fully compliant throughout the accounting period with the provisions set down in Section 1 of the Combined Code, apart from a period of 23 days in January 2007. During this period the majority of the members of the Nomination Committee were not independent non-executive directors. The Committee did not meet during this period. This report sets out details of how the Company has applied the principles and complied with the provisions of the Combined Code during 2007. Further information on the Combined Code can be found on the Financial Reporting Council’s website, www.frc.org.uk
The full terms of reference for the Board can be found on the Company’s website www.aviva.com and are available from the Group Company Secretary. Matters that are not specifically reserved for the Board and its committees under its terms of reference, or for shareholders in general meeting, are delegated to the Group Chief Executive. The Board’s terms of reference also set out those matters that must be reported to the Board, such as significant litigation or material regulatory breaches, and cover how matters requiring consideration by the Board that arise between scheduled meetings should be dealt with.
The directors The Board currently comprises the Chairman, eight independent non-executive directors and two executive directors. Each non-executive director serves for a fixed term not exceeding three years that may be renewed by mutual agreement. Subject to the Board being satisfied with a director’s performance, independence and commitment, there is no specified limit regarding the number of terms a director may serve. Each director is required to be elected by shareholders at the Annual General Meeting following his/her appointment by the Board and to be re-elected at least once every three years. Any non-executive director who has served on the Board for nine years or more is required to submit himself/herself for re-election annually. The Board’s policy is to appoint and retain non-executive directors who can apply their wider knowledge and experiences to their understanding of the Aviva Group, and to review and refresh regularly the skills and experience the board requires through a programme of rotational retirement. In addition to the strengths of experience, diversity and an international perspective, the Board also seeks to comply with the requirements of the Combined Code on the independence of directors. The process for appointing new directors is conducted by the Nomination Committee whose report, including a description of its duties, is set out on page 90.
The Combined Code requires that at least half the Board, excluding the Chairman, should comprise independent non-executive directors as determined by the Board. The Nomination Committee performs an annual review of directors’ interests in which all potential or perceived conflicts, including time commitments, length of service and other issues relevant to their independence, are considered. It is the Board’s view that an independent non-executive director also needs to be able to present an objective, rigorous and constructive challenge to management, drawing on his/her wider experiences to question assumptions and viewpoints and where necessary defend their beliefs. To be effective, an independent director needs to acquire a sound understanding of the industry and the Company so as to be able to evaluate properly the information provided. Having considered the matter carefully the Board is of the opinion that all of the current non-executive directors are independent and free from any relationship or circumstances that could affect, or appear to affect, their independent judgement.
The Chairman The respective roles of the Chairman and Group Chief Executive are set out in the Board’s terms of reference. The Chairman’s priority is the management of the Board and the Group Chief Executive’s priority is the management of the Company. The Chairman’s commitment to the Company is two to three days per week and his main interests outside the Company are set out in his biographical details on page 77. During the year the Chairman ceased to be a Supervisory Board member of ABN Amro NV.
Scott Wheway (appointed 5 December 2007) 0/0 – – – – 0/0 Former directors Richard Harvey (retired 11 July 2007) 7/7 – 4/4 – 1/1 – Patrick Snowball (resigned 8 May 2007) 4/4 – – – – – Tidjane Thiam (appointed 1 May 2007, resigned 21 September 2007) 4/4 – – – – –
Throughout the year the chairman of each committee provided the Board with a summary of the key issues considered at the meetings of the committees and the minutes of the meetings were circulated to the Board. The committees operate within defined terms of reference, copies of which are published on the Company’s website www.aviva.com and are available from the Group Company Secretary upon request. Board committees are authorised to engage the services of external advisers as they deem necessary in the furtherance of their duties at the Company’s expense.
Internal controls The Combined Code requires directors to review and report annually to shareholders on the effectiveness of the Company’s systems of internal control which include financial, operational and compliance controls, and risk management. The Board has the overall responsibility for maintaining the systems of internal control of the Company and for monitoring their effectiveness; while the implementation of internal control systems is the responsibility of management. The Group’s systems of internal control are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material financial misstatement or loss.
The principal features of the control framework and the methods by which the Board satisfies itself that it is operating effectively are detailed overleaf.
Risk identification, assessment and management There is in place an ongoing process for identifying, evaluating and managing the significant risks faced by the Group which has operated throughout 2007 and up to the date of signing this report. The Group’s risk management and control framework is designed to support the identification, assessment, monitoring, management and control of risks that are significant to the achievement of the Group’s business objectives. The Group has a set of formal policies which govern the management and control of both financial and non-financial risks. The adoption of these policies throughout the Group enables a broadly consistent approach to the management of risk at business unit level. At Group level, policy owners are responsible for the Group-wide aggregation and oversight of their specific risks. During 2007 the Group policy set has been revised and refreshed and the risk management framework has been reviewed and a Group Chief Risk Officer appointed.
These impact assessments are based on financial, reputational and operational criteria. This enables the Group risk function to assess the overall risk exposure and to develop a Group-wide risk profile that is refreshed quarterly. Material items in the Group risk report are reported to the committee of the Group’s senior executives (Executive Committee), the Risk and Regulatory Committee and in respect of social, environmental and ethical risks, the Board’s Corporate Social Responsibility Committee. The Executive Committee considers whether the residual risks are within the Group’s risk appetite, and the adequacy of the mitigating actions.
The Boards, audit committees and management of the operational businesses also consider local risk reports in a similar way. Regular reports are supported by escalation procedures for new or deteriorating risks that are classified at the highest impact levels. In addition, business unit heads and Group functional heads provide, in relation to their own areas of responsibility, a certificate every six months to confirm compliance with the Group’s governance and risk management framework, and the terms of their delegated authority. Any risk or control issues not already reported through the regular risk management processes must be specifically highlighted.
This report also includes updates on relevant measures of solvency and liquidity. Performance is reported through the half-yearly publication of the Company’s results based on accounting policies that are applied consistently throughout the Group. Operational management reports quarterly to the Executive Committee on a wide range of key performance and other significant matters and the Board receives regular representations from the senior executives responsible for each principal business operation.
The Company has taken full advantage of the provisions within the Companies Act 2006 allowing communications to be made electronically to shareholders where they have not requested hard copy documentation. As a result the Company's website has become the primary method of communication for the majority of its shareholders. Details of the information available for shareholders on the website can be found on the Shareholder information
Institutional investor Morley Fund Management Limited (Morley), the Group’s largest asset management company, believes that good governance contributes to better performance and practices. Therefore, as a major investor, the Group monitors the governance of the companies in which it invests. To this end, Morley holds regular meetings with the senior management of companies where it will raise matters which may affect the future performance of those companies.
The directors are responsible for maintaining proper accounting records which are intended to disclose with reasonable accuracy, at any time, the financial position of the Company and the Group. They are also ultimately responsible for the systems of internal control maintained by the Group for safeguarding the assets of the Company and the Group and for the prevention and detection of fraud and other irregularities. Further details of the systems of internal controls maintained by the Group are more fully described above.
Russell Walls (Chairman from 1 January 2007) 1 July 2004 To date Mary Francis 1 January 2007 To date Richard Karl Goeltz 1 July 2004 To date Carole Piwnica 24 September 2003 To date
The Group Chief Executive, Group Finance Director, Group Audit Director, Group Chief Accountant and the external auditor normally attend, by invitation, all meetings of the Committee. Other members of senior management are also invited to attend as appropriate to present reports. It is the Committee’s practice at each meeting to meet separately with the Group Audit Director and the external auditor without any members of management being present. In performing its duties, the Committee has access to the services of the Group Audit Director, the Group Company Secretary and external professional advice.
The Committee follows an agreed annual work plan. It reviews, with members of management and the internal and external auditors, the Company’s financial announcements including the annual report and accounts to shareholders and associated documentation. It places particular emphasis on their fair presentation and the reasonableness of the judgemental factors and appropriateness of significant accounting policies used in their preparation. At each meeting, the Committee receives a report from the Group Audit Director concerning the Company’s systems of internal financial control, including any significant new issues and actions taken on previously reported issues. Twice each year, the Committee receives reports on the adequacy of the Group’s life assurance and general insurance reserves. The Committee also reviews the annual work plan for the Group’s internal audit function. The Committee reports to the Board regarding the effectiveness of the Group’s overall systems of internal control. The Committee itself reviews the financial controls and works closely with the Risk and Regulatory Committee, which reviews the non-financial controls.
During the Board’s visit to the Group’s North American operations in September 2007, the Committee held joint meetings with the Risk and Regulatory Committee and members of the local business unit audit committees. The meetings allowed the Committee to gain a deeper understanding of the relevant local issues and assess the effectiveness of the systems of internal financial controls and the effectiveness and objectivity of the internal and external auditors.
In addition, the Committee reviewed the Group’s capital and risk frameworks against the regulatory reforms incorporated in the Financial Services Authority’s Prudential Sourcebook (PSB) concerning the Group’s individual capital assessments (ICA). The Committee endorsed the proposed assumptions, methodology and process followed in determining the amount of capital required to support the Group’s business plans and recommended the ICA to the Board for approval.
Internal audit The Group’s internal audit function reports to management on the effectiveness of the Company’s systems of internal controls, the adequacy of these systems to manage business risk and to safeguard the Group’s assets and resources. Through the Group Audit Director, the internal audit function provides objective assurance on risks and controls to the Committee. The plans, the level of resources and the budget of the internal audit function are reviewed at least annually by the Committee, which also undertakes an annual review of the effectiveness of the Group’s internal audit function against guidance criteria provided by the Institute of Chartered Accountants in England and Wales. In addition, the Group Audit Committee is consulted in determining the remuneration of the Group Audit Director. This review is complemented with a questionnaire to assess the effectiveness of Group Audit and completed by a sample of the major Business Units, audit committee members and Executive members. As of 1 April 2007, the Group internal audit structure was modified and the reporting line of all internal audit resources from each business unit have been centralised so that they report to the Group Audit Director, rather than to the business unit head.
As part of the Committee's continual drive for improvement, the policy in respect of external auditors underwent a detailed review this year. The policy was updated to reflect current global best practice on auditor independence, which is considered to be full compliance with all UK, US and International Federation of Accountants (IFAC) rules. The revised policy aims to be simpler to interpret, providing greater clarity on what services may and may not be provided by the Group’s auditors. This revised policy became operational from 1 January 2008.
During the year, the Committee performed its annual review of the independence, effectiveness and objectivity of the external auditor; assessing the audit firm, the audit partner and audit teams. The process was conducted by means of a questionnaire, completed Group-wide by members of senior management and members of the Group’s finance community. The questionnaire sought opinions on the importance of certain criteria and the performance of the auditor against those criteria. The questionnaires were collated by the Group Company Secretary. Based on this review, the Committee concluded that the audit service of Ernst & Young was fit for purpose and provided a robust overall examination of the Group’s business and the risks involved.
This report provides details of the role of the Nomination Committee and the work it has undertaken during the year.
The main purpose of the Committee is to assist the Board by keeping the composition of the Board under review and conducting a rigorous and transparent process when making or renewing appointments of directors to the Board. It also advises the Board on issues of directors’ conflicts of interest and independence. The full terms of reference for the Committee can be found on the Company’s website, www.aviva.com, and are available from the Group Company Secretary.
The Committee met on five occasions in 2007 and the members’ attendance record is set out in the Corporate governance report above. The Group Company Secretary acts as the secretary to the Committee. Russell Walls was appointed a member of the Committee on 23 January 2007 and Andrew Moss was appointed a member of the Committee on 12 July 2007.
The Committee keeps under review the skill requirements of the Board and the knowledge, experience, length of service and performance of the directors. It also reviews their external interests with a view to identifying any actual, perceived or potential conflicts of interests, including the time available to commit to their duties to the Company. The Committee also monitors the independence of each non-executive director and makes recommendations concerning such to the Board. The results of these reviews are important when the Board considers succession planning and the re-election and reappointment of directors. Members of the Committee take no part in any discussions concerning their own circumstances.
As part of the ongoing planning process for the smooth replacement of current non-executive directors, including refreshing the skill set with a view to the future, the Committee identified a number of candidates. During the year the Board accepted the Committee’s recommendations that Nikesh Arora and Scott Wheway join the Board. In respect of both appointments the Committee engaged a search agency to help it identify suitable candidates and assist with the preparation of an interview list.
Business protection The Committee has reviewed plans for maintaining and further enhancing the Group’s business continuity management, systems for information security and management of IT risks.
The chairman of the Committee reports at the subsequent meeting of the Board on the Committee’s work and the Board receives a copy of the minutes of each meeting of the Committee.
The Committee met on four occasions in 2007 and the members’ attendance record is set out in the Corporate governance report above. The Group Company Secretary acts as the secretary to the Committee.
During the year the Committee met to consider the conclusions of the Group’s CSR Annual Conference that took place in June 2007, and which was addressed by both the Chairman of the Committee and a non-executive director committee member. The Committee reviewed and approved the content and scope of the Company’s 2007 CSR Report, monitored the management of the CSR risks affecting the Group and helped establish a process by which CSR related targets and objectives within the Group’s individual businesses are set, monitored and embedded in the businesses. New policies on CSR and Environment were established as a result of this process. Members of the Committee are interviewed as part of the external assurance process of the CSR programme and the subsequent management report is reviewed by the Committee to assist the strengthening and future direction of the programme going forward.
The Remuneration Committee The Committee is a committee of the Board. The terms of reference for the Committee are available from the Group Company Secretary and can be found on the Company’s website. The Committee’s key objectives are to: – Establish a competitive remuneration package to attract, retain and motivate scarce, high quality leaders; – Promote the achievement of both our annual plans and our strategic objectives and ambitions by providing a remuneration package that contains appropriately motivating targets; and
Within the context of these objectives, the Committee’s main responsibilities are to: – Recommend to the Board the Group’s remuneration policy for the executive directors and members of senior management, covering basic salary, bonus, long term incentives, retirement provision, long term wealth creation and other benefits; – Strike an appropriate balance between (i) the fixed and variable and (ii) the cash, equity and equity related components of the total remuneration package; – Ensure the remuneration package is congruent with and provides the incentives to realise short and long term goals; – Review and determine the terms of employment and remuneration of the individual executive directors, including any specific recruitment or severance terms; – Review and, within the broad policy from time to time approved by the Board, determine the remuneration terms of the Chairman of the Board; – Recommend to the Board the establishment of any employee share plans and exercise all the Board’s powers in relation to the operation of all share and incentive plans, including the granting of awards, the setting and testing of performance conditions (where appropriate), and any discretion on behalf of the Board regarding any material amendments to the plans’ rules not requiring the approval of shareholders; and
Remuneration Committee membership The following independent non-executive directors served on the committee during the year: Period
Richard Karl Goeltz (Chairman from January 2006) 3 May 2004 To date Mary Francis 25 January 2006 To date Carole Piwnica 25 January 2006 To date Scott Wheway 5 December 2007 To date
The Committee is advised by David Hope, Group Human Resources Strategy Director, on market practice and the alignment of reward arrangements to business strategy and by Tim Harris, Group Chief Accountant, on matters relating to the performance measures and targets for the Group’s incentive plans. In addition, the Committee appointed New Bridge Street Consultants (NBSC) to advise on a review of senior executive remuneration (see below). NBSC provided no other material assistance to the Company in 2007. Deloittes LLP, which provided other services to the Group in 2007, advised the Committee on the calculation of Total Shareholder Return (TSR) in respect of the Long Term Incentive Plan (LTIP) vesting. The Group Company Secretary and Linklaters LLP (Linklaters) advised the Committee in relation to the operation of the Company’s share plans. Linklaters provided other legal services to the Company during 2007.
Remuneration Committee activity The Committee is required by its Terms of Reference to meet at least three times per year and has a standing calendar of items within its remit. In addition to these standing items, the Committee discusses matters relating to the operation of the remuneration policy and emerging market practices. In 2007 the Committee met eight times and discussed, amongst others, the following key issues: Meetings Standing agenda items Other agenda items
February – The annual review of executive directors’ basic salaries – An initial review of the potential and benefits in kind retirement terms of Group Chief
– Decisions on executive directors’ awards and approval Executive, Richard Harvey if he of grants of share awards under the Annual Bonus were to retire from the Company Plan (ABP) – A review of a new LTIP proposed
– Decisions on LTIP grants and associated performance for Morley Fund Management conditions for the 2007 grants and performance testing of subsisting grants
April (twice) – A decision on revised fees for the Chairman of the Board – Approval of departure terms for Aviva executive director, Patrick Snowball
– Approval of the appointment terms for Aviva executive director, Tidjane Thiam
August – A review of revised executive directors’ bonus – Consideration of a revised process targets following internal restructuring for setting and assessing executive
– Approval of amendments to UK all employee share ownership plans in response to legislative changes
Executives thus have high exposure to the same benefits and drawbacks of share price movement as other shareholders. The belief that our Executives should be shareholders is reinforced through formal guidelines requiring executive directors to build up and retain a significant holding of Aviva shares.
– “Target” performance means a target bonus outcome (75% of basic salary) and minimum LTIP vesting on both the TSR and ROCE elements (30% of an LTIP award).
Total remuneration – Total remuneration package levels are informed by relevant pay data, – Basic salary in particular the lower quartile to median range of the FTSE 30 – Annual Bonus Plan and the median to upper quartile range of the FTSE 50. – LTIP
– The Committee takes seriously institutional investors’ concerns on the “ratcheting” of basic salaries and does not unquestionably accept a particular market position or salary.
Discretionary Annual Bonus Plan (ABP) – The ABP is intended to motivate directors to achieve the annual business plan, – Annually, one-third is paid based on a series of key financial, employee and customer performance in cash and two-thirds in indicators (KPIs), which make up 70% of the bonus opportunity, and deferred shares. personal objectives (30%).
– 75% of basic salary is payable for “on target” performance and up to 150% is for “stretch” performance.
Long Term Incentive Plan (LTIP) – The LTIP is intended to promote achievement of the Company’s longer-term – Annual awards in restricted objectives, to aid the retention of key personnel and to align executive shares that vest, subject to interests to those of shareholders. performance conditions being
– The Group Chief Executive is eligible to receive an annual award of shares met at the end of a three year equal to 175% of basic salary. Other executive directors are eligible to performance period. receive an annual award of shares equal to 150% of basic salary. – Awards that do not vest lapse.
– No one who participates in the ACAP is accruing benefits in the Aviva Staff Pension Scheme. A resignation or departure for breach of contract generally results in forfeiture of contribution for the relevant year.
Annual Bonus Plan £853,336 Bonus is a function of the degree of achievement of 2007 targets (97.0% of basic salary) as follows: Financial 22.5% (maximum 50%) Employee 7.7% (maximum 10%) Customer 7.8% (maximum 10%) Personal 26.7% (maximum 30%).
LTIP – face value £1,050,000 The face value of the grant represented 150% of Mr Moss’s basic of grant salary on 28 February 2007. This reflected his role as Group Finance
Other benefits £16,120 cash car allowance Mr Moss receives 2% of basic salary as a non-pensionable cash 2% basic salary supplement supplement provided in consideration of his surrendering his Private medical insurance Unapproved Unfunded Retirement Benefit (UURB) promise at the cash supplement when accrual in the ASPS ceased.
Basic salary £565,000 during the year Mr Scott received a basic salary increase from 1 April of £20,000 As at 1 January £550,000 (3.6%). As at 31 December £570,000
Aviva Capital £600,000 – The Trustee of the Plan accepted Aviva’s recommendation and Accumulation Plan made an award to the benefit of Mr Harvey into the plan.
Basic salary £280,000 during the year – Mr Snowball received a basic salary increase from 1 April of As at 1 January £550,000 £20,000 (3.6%). As at 30 June £570,000
– In accordance with the rules of the Plan, on his departure, the Remuneration Committee determined that his 2007 award and the unvested 2005 and 2006 awards should be forfeited.
Tidjane Thiam (Resigned in September 2007 and is serving a contractual notice period on “garden leave” until 20 March 2008. Mr Thiam is bound by a non-compete covenant that runs concurrent with this period of garden leave). Element Amount Commentary
Annual Bonus No payment was made – Given his voluntary resignation, Mr Thiam received no bonus in Plan (ABP) to Mr Thiam in respect respect of 2007.
of 2007 performance – On his final departure Mr Thiam will receive those shares from the 2005 DBP award that are his by right under the scheme rules. The matching shares provided by the Company will lapse. He will forfeit his total 2007 ABP deferral and will receive that portion from the 2006 ABP deferral (50%) to which he is entitled under the scheme rules, whilst the remaining 50% balance will be forfeited.
LTIP – face value £600,000 – The face value of the grant represented 150% of Mr Thiam’s of grant (forfeited on resignation) basic salary on 28 February 2007.
– On his resignation his 2007 award and the unvested 2005 and 2006 awards were forfeited.
Annual Bonus Plan (ABP) – target setting The financial targets which underpin the ABP (accounting for 50% of annual bonus) are derived from Aviva’s return, growth and capital efficiency/capital generation goals. Two of the financial targets (operating profit and new business contribution) are “stretched” due to their importance in achieving these aspirations.
The ABP replaced the Aviva Deferred Bonus Plan (DBP), which was approved by shareholders in 2001 and provided for a one-for-one match on deferred awards. Vesting of awards is not subject to any further performance conditions and takes place on the third anniversary from grant. Final awards were made under the DBP in respect of the 2004 financial year in March 2005 and will vest in 2008.
The Group’s performance against its financial, employee and customer KPIs in 2007, as they affected the bonus of the Chief Executive, is shown in the table below.
TSR vesting operates as follows: TSR position over the three year performance period Percentage of shares in overall LTIP award that vests based on achievement of TSR targets
As at 31 December 2007, vesting projections (non-audited) of subsisting LTIP awards were as follows: LTIP award 31 December 2007 vesting projection (% of award)
The following table has been drawn up to assist in understanding the potential value of the LTIP grants made to executive directors in 2007: LTIP Andrew Moss Philip Scott
Face value of grant £1,050,000 £825,000 Minimum vesting £315,000 £247,500 Expected value £607,750 £477,500 Maximum vesting £1,397,500 £1,098,000
Deferred/Annual Bonus Plan and Long Term Incentive Plan Awards Market Market
At Awards Awards Awards At price at price at 1 January granted vesting lapsing 31December date awards date awards 20071 during year2 during year2 during year2 2007.2. granted vested Number Number Number Number Number Pence Pence Vesting date
Market Market At Awards Awards Awards At price at price at 1 January granted vesting lapsing 31December date awards date awards 20071 during year2 during year2 during year2 20072 granted vested
Notes 1. For the director appointed in 2007, the amounts disclosed relate to their awards at the date of appointment. 2. For former directors, the amounts disclosed relate to their awards held during their period of service as director. Where awards have lapsed or are due to lapse no vesting date is given.
Planned Future Changes The Committee reviewed in 2007 the remuneration package of Aviva’s senior executives. This was against a background of the Chief Executive, Andrew Moss’ clear strategic imperative for the Group to deliver “one Aviva, twice the value”. “Twice the value” will be measured in terms of growth in the Company’s Earnings Per Share (EPS) with a target of doubling EPS in five years. Management also has an incentive to achieve the goal more quickly. No current element of executive remuneration is focused on EPS growth. The use of this measure will achieve direct alignment between a portion of executive remuneration and the additional financial goals of the new strategy.
As a result of the review, and subject to the outcome of consultation with institutional investors, we therefore to intend to put to shareholders at the 2008 Annual General Meeting a proposal to introduce a matching element to a proportion of the shares deferred under the ABP, with the following key features: – The proportion of the deferred shares eligible for the matching award will be 100% for the CEO and 75% for the Finance Director and Executive Committee. The matching element will be extended to the top 400 executives within the Company with a reducing proportion of the deferred element matched depending on seniority.
Below threshold Less than 10% pa Nil Threshold 10% pa 0.1 for 1 Stretch 26% pa 2 for 1
– Subject to shareholder approval, the first award of matching shares will be made in 2008, matching a proportion of deferrals made under ABP in respect of 2007 performance.
Other than this proposal, we do not anticipate any further significant changes in remuneration in 2008.
Performance graph The following graph compares the TSR performance of the Company over the past five years with the TSR of the FTSE 100 Return Index. This index has been chosen because it is a recognised equity market index, of which Aviva is a member.
Executive directors’ service contracts Service contracts agreed with each executive director incorporate their terms and conditions of employment. Contracts were reviewed during 2006 and new contracts issued, bringing them into line with good market practice, particularly in respect of mitigation and phased payments. The aim is to strike a fair balance between the Company’s and the employee’s interests taking into account good market practice. The key terms are as follows: Provision Policy
– Any amount is subject to phased payments and mitigation requirements.
Remuneration and benefits – As described in this report. The detailed operation of the annual bonus and LTIP plans is at the Company’s discretion and in the case of the long-term savings plans at the trustees’ discretion.
Sickness – In line with senior management terms, ie 100% basic salary for 52 weeks, and 75% thereafter.
The only Executive Director who held such an appointment during 2007 was Philip Scott who was appointed to the Board of Diageo plc on 17 October 2007.
Dilution Awards granted under the Aviva ABP and the Aviva LTIP are met by the issue of new shares when awards vest. The Committee monitors the number of shares issued under its various share plans and their impact on dilution limits. The relevant dilution limits established by the Association of British Insurers in respect of all share plans (10% in any rolling ten year period) and executive share plans (5% in any rolling ten year period) were, based on the Company’s issued share capital at 31 December 2007, 2.6% and 0.90% respectively.
In December 2007 a loan of £10 million was made to the Employee Benefit Trust to ensure sufficient shares were available to meet its ongoing liabilities.
Period – Three year term which can be extended by mutual consent.
Expenses – Reimbursement of travel and other expenses reasonably incurred in the performance of their duties.
Appointment dates Director Date of last appointment Date appointment ends Nikesh Arora 1 July 2007 AGM 2010 Guillermo de la Dehesa 30 May 2006 30 May 2009 Wim Dik 7 December 2005 7 December 2008 Mary Francis 1 October 2005 1 October 2008 Richard Karl Goeltz 3 May 2007 31 May 2010 Carole Piwnica 8 May 2006 31 May 2009 Lord Sharman 15 January 2008 AGM 2008 Russell Walls 3 May 2007 31 May 2010 Scott Wheway 5 December 2007 AGM 2010
The Company’s Articles of Association provide that the total aggregate remuneration paid to the Chairman and NEDs will be determined by the Board within the limits set by shareholders. The current aggregate limit of £1.5 million was approved by shareholders at the Company’s 2005 Annual General Meeting. The amount paid in 2007 was £1.04 million. Executive directors are remunerated under their service contracts and receive no additional fee for serving as directors.
Committee membership – Audit £10,000 – Remuneration £10,000 – Nomination £5,000 – Risk and regulatory £5,000 – Corporate Social Responsibility £5,000
Basic salary/fees Bonuses ACAP Benefits Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Non-executive directors Nikesh Arora 32 – – – – – – – 32 – Guillermo de la Dehesa 95 86 – – – – – – 95 86
Scott Wheway 5 – – – – – – – 5 –
Notes 1. “Bonuses” include the value of shares granted under the Aviva All-Employee Share Ownership Plan (maximum £3,000) and the total amounts earned in respect of 2006 performance under the Annual Bonus Plan (ie the cash bonus paid plus the amount deferred and granted in the form of shares).
2. “Benefits”. All the executive directors received life assurance benefits during the year that relate to the cost incurred by the Company of insuring the directors’ life assurance and spouses’ benefits which, had they died during the year, could not have been wholly paid by the pension scheme and would therefore have been met by the Company. The disclosure also includes the cost of private medical insurance, and where appropriate, accompanied travel, accommodation and car benefits. All the numbers disclosed include the tax charged on the benefits. No directors received an expense allowance during the year.
3. Payments to former directors: Since his retirement as a director in 2003, Anthony Wyand has served as a consultant and as a director on the Boards of some of the Group’s European operations. Under this arrangement, a fee of £120,000 was paid to him in 2007. Derek Stevens, a former non-executive director who retired from the Board on 31 December 2006 received a fee of £25,000 in 2007 for continuing to serve as chairman of the Aviva Staff Pension Scheme.
7. Amounts paid to Tidjane Thiam relate only to the period for which he served as an executive director.
Lord Sharman, Chairman £450,000 – – – – – – – £450,000
Guillermo de la 8.1. Following a full review in March 2007 of Aviva’s fees against market benchmarks (the first full review for two years) the following changes in NEDs’ emoluments were made with effect from 1 April 2007: – The Chairman’s fee was increased from £375,000 pa to £475,000 pa
– Board membership fees were increased from £50,000 pa to £60,000 pa
– The additional fee payable to the Senior Independent Director was increased from £10,000 pa to £20,000 pa
– A fee of £15,000 pa was introduced for chairing the Risk and Regulatory Committee (inclusive of membership fee). Mary Francis had previously received a membership fee of £5,000 pa 8.2. Nikesh Arora joined the board and the Risk and Regulatory Committee with effect from 1 July 2007 8.3. Scott Wheway joined the board, the Remuneration Committee and the Corporate Social Responsibility Committee with effect from 5 December 2007
Accrued annual pension at 1 January 2007 75 20 361 289 49 Increase in accrued annual pension during the year as a result of inflation – – 14 6 2 Augmentation of benefits – – – – – Adjustment to accrued annual pension as a result of salary increase relative to inflation – – 1 1 15 Increase in accrued annual pension as a result of additional service – – – 9 9 Reduction due to lump sum settlement and early retirement (25) – – – –
Accrued annual pension at 31 December 20076 50 20 376 305 75
Notes 1. Mr. Harvey ceased to accrue pension benefits in the Pension Scheme with effect from April 2006. Instead, contributions have been paid into his ACAP. Mr. Harvey’s Pension Scheme Benefit at March 2006 was £75,000 pa. This increased in line with deferred pension increases (the lower of the increase in the RPI or 5%). Mr. Harvey subsequently took early retirement with effect from 31 July 2007. As part of Mr. Harvey’s agreed early retirement terms, the Company agreed to base the calculation of his pension on it being paid two years earlier than a retirement of age 60 rather than three. Consequently, his early retirement pension payable from 1 August 2007 amounted to £69,153 pa rather than £65,237 pa. To provide this additional £3,916 pa pension, a cost was incurred to the Company of £101,857. Mr. Harvey then surrendered £19,014 pa of his pension for a cash sum, reducing his pension payable from 1 August 2007 to £50,139 pa. This will increase annually in payment in line with RPI, subject to a maximum of 10%.
6. The “accrued pension” is the amount of annual pension to which the directors would have been entitled at age 60, had they left service at 31 December 2007. The amount shown in respect of Mr. Harvey is his annual pension in payment at 31 December 2007. See note 1 above.
8. The change in transfer values over the year includes the effect of changes made by the Trustee of the Pension Scheme to the assumptions used in respect of changes to market values and expected future investment returns. Transfer values represent the estimated liability on the Scheme to pay the stated level of benefits. They are not sums paid or due to a director, and do not represent the true cost of providing the pension benefit.
Savings related share options These are options granted under the HMRC approved Aviva Savings Related Share Option Scheme. Options are normally exercisable during the six month period following the end of the relevant (three, five or seven year) savings contract.
At Options Options Options At 1 January granted exercised lapsing 31 December 2007 during year during year during year 2007 Exercise price Exercise Number1 Number Number Number Number.2 Pence Period
Savings related options 2002 4,426 – – – 4,426 401.0 August 2007 – January 2008
3. Richard Harvey resigned from the Board with effect from 11 July 2007.
Accounting changes Major changes to accounting policies and practices in 2005, including adopting International Financial Reporting Standards and European Embedded Value principles for supplementary reporting, affected a number of the key performance indicators and performance measures used in connection with the Company’s long term incentive plans. During the transition period the Committee received reports showing the effects of these changes on the performance measures and satisfied itself that the evaluation of actual performance against the performance conditions which were originally set using prior accounting practices is appropriate having made allowance for the accounting changes.
Nikesh Arora – – – – – – – – Guillermo de la Dehesa 144 144 – – – – – – Wim Dik 200 200 – – – – – – Mary Francis 1,000 1,800 – – – – – – Richard Karl Goeltz 2,500 2,500 – – – – – –
Lord Sharman 2,000 5,000 – – – – – – Russell Walls 1,500 4,000 – – – – – – Scott Wheway – – – – – – – –
ii For former directors, the amounts disclosed relate to their awards held at the date of resignation from the Board.
4. “Options” are options over shares granted under the Aviva Savings Related Share Option Scheme.
This report was reviewed and approved by the Board on 27 February 2008.
We have audited the Group and parent company financial statements (the “financial statements”) of Aviva plc for the year ended 31 December 2007 which comprise the Accounting Policies, the Consolidated and Parent Company Income Statements, the pro forma reconciliation of Group operating profit to profit before tax, the Consolidated and Parent Company balance sheets, the Consolidated and Parent Company statement of recognised income and expense, the Consolidated and Parent Company reconciliation of movements in shareholders’ equity, the Consolidated and Parent Company cash flow statements and the related notes 1 to 59 and A to I. We have also audited the information in the Directors’ remuneration Report that is described as having been audited.
Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report, the Directors’ remuneration report and the financial statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities.
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the financial statements. The information given in the Directors' Report includes that specific information presented in the Business review that is cross referred from the Directors' report.
We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises only the Overview, the Business review, the Board of Directors, the Directors’ report, the Corporate Governance report, the Audit Committee report, the Nomination Committee report, the Risk and Regulatory committee report, the Corporate Social Responsibility committee and the unaudited part of the Directors’ remuneration report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.
Opinion In our opinion: – The financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s and the parent company's affairs as at 31 December 2007 and of the Group’s profit and the parent company’s loss for the year then ended; – The financial statements and the part of the Directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation; and
In our opinion the Group financial statements give a true and fair view, in accordance with IFRSs, of the state of the Group’s affairs as at 31 December 2007 and of its profit for the year then ended.
Financial statements – International Financial Reporting Standards US Aviva advertising In 2007 the US launched the ‘bright future’ brand campaign. The advertisements feature a box of golden light to convey that Aviva is an innovative life insurance and annuity company that will help to ensure our customer will have a bright future. The ads featured in mainstream TV, trade and consumer press.
(A) Basis of presentation Since 2005, all European Union listed companies have been required to prepare consolidated financial statements using International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and endorsed by the European Union (EU). The date of transition to IFRS was 1 January 2004. In addition to fulfilling their legal obligation to comply with IFRS as adopted by the European Union, the Group and Company have also complied with IFRS as issued by the International Accounting Standards Board and applicable at
IFRIC interpretation 11, IFRS 2 – Group and Treasury Share Transactions, and interpretation 12, Service Concession Agreements, were issued during 2006 but neither of them is applicable for the current accounting period. In addition, IFRIC interpretation 13, Customer Loyalty Programmes and IFRIC interpretation 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, have been issued during 2007. They have not yet been endorsed by the EU but neither of them is applicable for the current accounting period. On adoption, none of these interpretations will have any impact on the Group’s financial reporting.
FRS 27 Financial Reporting Standard 27, Life Assurance, (FRS 27) was issued by the UK’s Accounting Standards Board (ASB) on 13 December 2004, following the Penrose inquiry. Aviva, along with other major insurance companies and the Association of British Insurers (ABI), signed a Memorandum of Understanding (MoU) with the ASB relating to FRS 27. Under this MoU, Aviva voluntarily agreed to adopt in full the standard from 2005 in the Group’s IFRS financial statements.
(B) Operating profit The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management, short-term realised and unrealised investment gains and losses are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business, general insurance and health business. Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. Variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit. For general insurance and health business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer term return and short-term fluctuations from this. Further details of this analysis and the assumptions used are given in notes 8 and 9.
(C) Critical accounting policies and the use of estimates The preparation of financial statements requires the Group to select accounting policies and make estimates and assumptions that affect items reported in the consolidated income statement, balance sheet, other primary statements and notes to the financial statements.
Merger accounting and the merger reserve Prior to 1 January 2004, certain significant business combinations were accounted for using the “pooling of interests method” (or merger accounting), which treats the merged groups as if they had been combined throughout the current and comparative accounting periods. Merger accounting principles for these combinations gave rise to a merger reserve in the consolidated balance sheet, being the difference between the nominal value of new shares issued by the parent company for the acquisition of the shares of the subsidiary and the subsidiary’s own share capital and share premium account. These transactions have not been restated, as permitted by the IFRS 1 transitional arrangements.
Investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group’s share of that entity’s post-acquisition changes to shareholders’ funds, is included as an asset in the consolidated balance sheet. As explained in policy N, the cost includes goodwill identified on acquisition. The Group’s share of their post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. Equity accounting is discontinued when the Group no longer has significant influence over the investment.
The cumulative translation differences were deemed to be zero at the transition date to IFRS.
Translation differences on debt securities and other monetary financial assets measured at fair value and designated as held at fair value through profit or loss (FV) (see policy S) are included in foreign exchange gains and losses in the income statement. For monetary financial assets designated as AFS, translation differences are calculated as if they were carried at amortised cost and so are recognised in the income statement, whilst foreign exchange differences arising from fair value gains and losses are included in the investment valuation reserve within equity. Translation differences on non-monetary items, such as equities which are designated as FV, are reported as part of the fair value gain or loss, whereas such differences on AFS equities are included in the investment valuation reserve.
(F) Product classification Insurance contracts are defined as those containing significant insurance risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. Contracts can be reclassified as insurance contracts after inception if insurance risk becomes significant. Any contracts not considered to be insurance contracts under IFRS are classified as investment contracts.
General insurance and health premiums written reflect business incepted during the year, and exclude any sales-based taxes or duties. Unearned premiums are those proportions of the premiums written in a year that relate to periods of risk after the balance sheet date.
Deposits collected under investment contracts without a discretionary participating feature (non-participating contracts) are not accounted for through the income statement, except for the fee income (covered in policy H) and the investment income attributable to those contracts, but are accounted for directly through the balance sheet as an adjustment to the investment contract liability.
Claims handling costs include internal and external costs incurred in connection with the negotiation and settlement of claims. Internal costs include all direct expenses of the claims department and any part of the general administrative costs directly attributable to the claims function.
Present value of future profits (PVFP) on nonparticipating business written in a with-profit fund For with-profit life funds falling within the scope of the FSA realistic capital regime, and hence FRS 27, an amount may be recognised for the present value of future profits on non-participating business written in a with-profit fund where the determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value. This amount is recognised as a reduction in the liability rather than as an asset on the balance sheet, and is then apportioned between the amounts that have been taken into account in the measurement of liabilities and other amounts which are shown as an adjustment to the unallocated divisible surplus.
Other assessments and levies The Group is subject to various periodic insurance-related assessments or guarantee fund levies. Related provisions are established where there is a present obligation (legal or constructive) as a result of a past event. Such amounts are not included in insurance liabilities but are included under “Provisions” in the balance sheet.
Contract liabilities Deposits collected under non-participating investment contracts are not accounted for through the income statement, except for the investment income attributable to those contracts, but are accounted for directly through the balance sheet as an adjustment to the investment contract liability.
The fair value liability is in principle established through the use of prospective discounted cash-flow techniques. For unit-linked contracts, the fair value liability is equal to the current unit fund value, plus additional non-unit reserves if required on a fair value basis. For non-linked contracts, the fair value liability is equal to the present value of expected cash flows on a market-consistent basis.
The full embedded value of the long-term business and further details of the methodology and assumptions are included as supplementary information on pages 247 to 267.
Intangible assets Intangibles consist primarily of brands, certain of which have been assessed as having indefinite useful lives, and contractual relationships such as access to distribution networks and customer lists. The economic lives of the latter are determined by considering relevant factors such as usage of the asset, typical product life cycles, potential obsolescence, maintenance costs, the stability of the industry, competitive position, and the period of control over the assets. These intangibles are amortised over their useful lives, which range from five to 22 years, using the straight-line method.
Impairment testing For impairment testing, goodwill and intangibles with indefinite useful lives have been allocated to cashgenerating units by geographical reporting unit and business segment. The carrying amount of goodwill and intangible assets with indefinite useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. Goodwill and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support its carrying value. Further details on goodwill allocation and impairment testing are given in note 16(b).
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values. Debt securities are initially recorded at their fair value, which is taken to be amortised cost, with amortisation credited or charged to the income statement. Investments classified as trading, other than trading and AFS are subsequently carried at fair value. Changes in the fair value of trading and other than trading investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS, except for impairment losses and relevant foreign exchange gains and losses, are recorded in a separate investment valuation reserve within equity.
Impairment The Group reviews the carrying value of its investments on a regular basis. If the carrying value of an investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. The following policies are used to determine the level of any impairment: Listed AFS securities: The Group performs an objective review of the current financial position and prospects of the issuer on a regular basis, to identify whether any impairment provision is required. This review takes into account the likelihood of the current market price recovering to former levels.
Unlisted AFS securities: The Group considers the current financial position of the issuer and the future prospects in identifying the requirement for an impairment provision.
Interest rate futures, forwards and options contracts Interest rate futures are exchange-traded instruments and represent commitments to purchase or sell a designated security or money market instrument at a specified future date and price. Interest rate forward agreements are OTC where two-parties agree on an interest rate and other terms that will become a reference point in determining, in concert with an agreed notional principal amount, a net payment to be made by one-party to the other, depending what rate in fact prevails at a future point in time. Interest rate options, which consist primarily of caps and floors, are interest rate protection instruments that involve the potential obligation of the seller to pay the buyer an interest rate differential in exchange for a premium paid by the buyer. This differential represents the difference between current rate and an agreed rate applied to a notional amount. Exposure to gain or loss on all interest rate contracts will increase or decrease over their respective lives as interest rates fluctuate.
Collateral pledged in the form of cash, which is legally segregated from the Group, is derecognised from the balance sheet with a corresponding receivable for its return. Non-cash collateral pledged is not derecognised from the balance sheet unless the Group defaults on its obligations under the relevant agreement, and therefore continues to be recognised on the balance sheet within the appropriate asset classification.
(W) Deferred acquisition costs and other assets The costs directly attributable to the acquisition of new business for insurance and participating investment contracts (excluding those written in the UK) are deferred to the extent that they are expected to be recoverable out of future margins in revenues on these contracts. For participating contracts written in the UK, acquisition costs are generally not deferred as the liability for these contracts are calculated in accordance with the FSA’s realistic capital regime and FRS 27. For non-participating investment and investment fund management contracts, incremental acquisition costs and sales enhancements that are directly attributable to securing an investment management service are also deferred.
Costs charged to the income statement comprise the current service cost (the increase in pension obligation resulting from employees’ service in the current period, together with the schemes’ administration expenses), past service cost (resulting from changes to benefits with respect to previous years’ service), and gains or losses on curtailment (for example, when employees leave the scheme) or on settlements (for example, when a scheme’s obligations are transferred outside the Group). In addition, the difference between the expected return on scheme assets, less investment expenses, and the interest cost of unwinding the discount on the scheme liabilities (to reflect the benefits being one period closer to being paid out) is credited to investment income. All actuarial gains and losses, being the difference between the actual and expected returns on scheme assets, changes in assumptions underlying the liability calculations and experience gains or losses on the assumptions made at the beginning of the period, are recognised immediately in equity through the Statement of recognised income and expense.
Shares purchased by employee share trusts to fund these awards are shown as a deduction from shareholders’ funds at their original cost.
Deferred tax related to fair value re-measurement of available for sale investments, owner-occupied properties and other amounts taken directly to equity is recognised in the balance sheet as a deferred tax asset or liability. In addition to paying tax on shareholders’ profits, the Group’s life businesses in the UK, Ireland and Australia pay tax on policyholders’ investment returns (“policyholder tax”) on certain products at policyholder tax rates. Policyholder tax is accounted for as an income tax and is included in the total tax expense.
(AF) Earnings per share Basic earnings per share is calculated by dividing net income available to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding the average number of ordinary shares purchased by the Group and held as treasury shares.
43,137 Premiums written net of reinsurance 29,333 27,234 (31) Net change in provision for unearned premiums (21) 93 43,106 Net earned premiums G 29,312 27,327 2,588 Fee and commission income H & I 1,760 1,870 14,453 Net investment income J 9,828 15,490 (447) Share of (loss)/profit after tax of joint ventures and associates (304) 485 72 Profit on the disposal of subsidiaries and associates 49 222
(518) Tax expense AB & 13 (352) (934) 22 Less: tax attributable to policyholders’ returns 13 15 346
Earnings per share AF & 14 72.4c Basic (pence per share) 49.2p 87.5p 71.6c Diluted (pence per share) 48.7p 86.6p
Operating profit before tax attributable to shareholders’ profits 2,403 Long-term business 1,634 1,334 1,519 General insurance and health 1,033 1,686
(271) insurance and health business 9b (184) 149 73 Profit on the disposal of subsidiaries and associates 3b 49 222
Tax attributable to shareholders’ profits 2,213 Profit for the year 1,505 2,389 2006 has been restated to reflect the change in the definition of group operating profit on an International Financial Reporting Standards (IFRS) basis. See note on page 132.
Operating profit can be further analysed into the following geographical segments: General
General Long-term Fund insurance Other Restated business management and health operations Total Year ended 31 December 2006 £m £m £m £m £m
(575) Fair value gains transferred to profit 34 (391) (162) – Impairment losses on revalued assets 34 – (2)
Share of fair value changes in 13 joint ventures and associates taken to equity 34 9 –
953 Actuarial gains/(losses) on pension schemes 46e(iv) 648 (117) Actuarial (gains)/losses on pension schemes transferred
(90) to unallocated divisible surplus and other movements 46c(i) (61) 3 1,087 Foreign exchange rate movements 34 & 36b 739 (346) (263) Aggregate tax effect – shareholder tax 13b (179) (5)
1,378 Net income recognised directly in equity 937 (255) 2,213 Profit for the year 1,505 2,389 3,591 Total recognised income and expense for the year 2,442 2,134
Consolidated statement of recognised income and expense For the year ended 31 December 2007 5m Note £m £m 19,266 Balance at 1 January 14,064 11,092 3,345 Total recognised income and expense for the year 2,442 2,134
– net of transaction costs – 892 66 Other issues of share capital, net of transaction costs 28 48 43 412 Shares issued in lieu of dividends 35 301 203 421 Capital contributions from minority shareholders 36b 307 397 (90) Minority share of dividends declared in the year 36b (66) (75) 434 Minority interest in acquired/(disposed) subsidiaries 36b 317 92 68 Reserves credit for equity compensation plans 34 50 48
Financial investments R, S & 24 808 Deferred tax assets AB & 44b 590 1,199 515 Current tax assets 44a 376 344 11,823 Receivables and other financial assets 25 8,629 8,098 6,147 Deferred acquisition costs and other assets V & 26 4,487 3,476 4,090 Prepayments and accrued income 26d 2,986 2,585 21,608 Cash and cash equivalents X & 52d 15,774 13,117 1,545 Assets of operations classified as held for sale AG & 3d 1,128 –
Capital reserves 17,875 Equity attributable to shareholders of Aviva plc 13,049 11,376 1,356 Direct capital instrument 32 990 990
Cash flows from financing activities Proceeds from issue of ordinary shares, net of transaction costs 28b – 48 48 935 New borrowings drawn down, net of expenses 784 5,538 6,322 6,119
Net drawdown of borrowings 47e 286 36 322 901 Interest paid on borrowings (608) (600) (1,208) (825) Preference dividends paid – (17) (17) (17) Ordinary dividends paid – (500) (500) (490) Coupon payments on direct capital instrument – (53) (53) (52) Finance lease payments – (7) (7) (22) Capital contributions from minority shareholders 278 29 307 304 Dividends paid to minority interests of subsidiaries (48) (18) (66) (75) Non-trading cash flows between operations (444) 444 – –
Net increase in cash and cash equivalents 1,849 374 2,223 964 Cash and cash equivalents at 1 January 52d 9,388 3,033 12,421 11,623 Effect of exchange rate changes on cash and cash equivalents 464 141 605 (166)
Cash and cash equivalents at 31 December 52d 11,701 3,548 15,249 12,421
The accounting policies (identified alphabetically) on pages114 to125 and notes (identified numerically) on pages132 to 235 are an integral part of these financial statements.
Total foreign currency movements during 2007 resulted in a gain recognised in the income statement of £45 million (2006: £99 million gain).
2 – Presentation changes (a) Change to definition of operating profit IFRS operating profit is one of the key indicators of performance for the Group and we have changed its definition to provide greater clarity and insight into the factors driving our results, in particular the impact of economic volatility from the underlying business performance.
(iv) The result for Norwich Union Life Services has been reclassified as long-term business instead of other operations, to match its treatment under EEV.
The table below sets out the effect of the above changes to IFRS operating profit for the year ended 31 December 2006: Effect of restating the As definition of reported IFRS operating Restated £m £m £m
Operating profit before tax attributable to shareholders’ profits Long-term business 1,896 (562) 1,334 Fund management 155 – 155 General insurance and health 1,680 6 1,686 Other: Other operations and regional costs (80) 55 (25) Corporate centre (160) – (160)
Operating profit before adjusting items and tax attributable to shareholders’ profits 3,110 (501) 2,609 Adjusted for the following: Investment return variances and economic assumption changes on long-term business – 401 401 Impairment of goodwill (94) – (94) Amortisation and impairment of acquired value of in-force business (100) 100 – Amortisation and impairment of intangibles (70) 6 (64) Short-term fluctuation in return on investments backing general insurance and health business 149 – 149 Profit on the disposal of subsidiaries and associates 222 – 222 Integration and restructuring costs (246) – (246) Financial Services Compensation Scheme and other levies 6 (6) –
Profit before tax attributable to shareholders’ profits 2,977 – 2,977 Tax attributable to shareholders’ profits
In addition, we identified that the interest paid on cash collateral received and the interest earned from onlending this cash had previously been offset and reported as net interest income. The 2006 comparative figures have therefore been restated in order to report this interest expense and interest income separately, by increasing both by £17 million.
(ii) Restatement of cash equivalents As described in accounting policy X, cash equivalents include short-term highly liquid investments which normally have maturity dates of less than three months from the date of acquisition. During the year, we have reviewed the application of this policy to all such investments, as a result of which we have determined that certain investments, previously classified as cash equivalents, would be more appropriately classified as financial investments.
The application of this review to prior year balances has led to a reduction of the cash equivalents balance at 31 December 2006 by £1,425 million, with a corresponding increase in the debt securities total of the same amount. This restatement has no impact on net assets or total equity. The effect on the opening balances in the prior year is to reduce cash equivalents and increase debt securities by £1,444 million. The effect on the cash flow statement is therefore to reduce the prior year cash flows from operating activities by £19 million.
Notes to the consolidated financial statements continued 3 – Subsidiaries continued The assets and liabilities at the date of acquisition were: Fair value and accounting policy Book value adjustments Fair value £m £m £m
The assets and liabilities as at the acquisition date in the table above are stated at their provisional values, and may be amended in 2008, in accordance with paragraph 62 of IFRS 3, Business Combinations.
The results of Erasmus have been included in the consolidated financial statements of the Group with effect from 26 March 2007, and have contributed £5 million to the consolidated profit before tax.
(ii) Bancassurance partnership with Cajamurcia On 6 June 2007, the Group announced that it had entered into a long-term bancassurance agreement with Spanish savings bank Caja de Ahorros de Murcia (Cajamurcia) that will enhance the Group’s leading position in the Spanish life market. Cajamurcia will provide exclusive access to its network of branches to Caja Murcia Vida y Pensiones, de Seguros y Reaseguros SA (Cajamurcia Vida), the newly-created life insurance company jointly-owned by the Group and Cajamurcia, to sell insurance and pension products. Regulatory approval to write new business was received on 21 November 2007 and the new company began trading on 30 November 2007.
On signing the agreement, the Group acquired 5% of the share capital of Cajamurcia Vida and Cajamurcia granted the Group a call option over a further 45% of the shares in this company which may be exercised in the two month period following the first anniversary of the agreement being signed. Further consideration of £69 million would be payable on exercising the option, with additional amounts of up to £187 million payable, dependant on the performance of the new company. If it does not exercise this option during this period, the Group has granted a call option over its 5% holding to Cajamurcia.
The Group paid £8 million for the initial 5% holding on completion on 6 June 2007. The Group has the power to control the financial and operating policies of Cajamurcia Vida through having the majority vote at meetings of the company’s board of directors. We have therefore consolidated its results and balance sheet since that date.
The value of the agreement to distribute through Cajamurcia’s branch network has been identified as a separate intangible asset with a value of £202 million, using estimated post-tax cash flows and discount rates.
As noted above, the results of Cajamurcia Vida have been included in the consolidated financial statements of the Group and have contributed £nil to the consolidated profit before tax since it began trading on 30 November 2007.
(iii) Italian transactions with Banco Popolare During the year, the Group’s Italian holding company has entered into three sets of transactions with an Italian bank, Banco Popolare Societa Cooperativa (Banco Popolare). Details of these transactions are as follows : (a) Petunia and Banca Network On 18 September 2007, the Group made a capital contribution of £19 million to Petunia SpA (Petunia), an investment holding company, previously held as a financial investment. The Group’s holding in Petunia has increased to 40.62% but, as the Group has 51% of voting rights and management control, the Group has consolidated this company as a subsidiary. The total capitalisation of the company at this date was £47 million, which was used to purchase a 49.75% stake in Banca Bipielle Network SpA, an Italian distribution network, from Banco Popolare on 26 September 2007. The acquired company has since been renamed Banca Network Investimenti SpA (Banca Network).
This residual goodwill has been calculated based on the provisional fair values of the net assets and liabilities of Banca Network, and may be restated in 2008, in accordance with paragraph 62 of IFRS 3, Business Combinations.
(b) Area Life On 26 September 2007, the Group acquired a 55% stake in Area Life International Assurance Limited (Area Life), a life assurance company based in Ireland, selling exclusively to Italian residents, from Banco Popolare for £7 million.
This acquisition has not given rise to any goodwill on acquisition. The relevant calculation is as follows: Purchase cost: £m
3 – Subsidiaries continued The assets and liabilities at the date of acquisition were: Fair value and accounting policy
Assets Acquired value of in-force business on insurance contracts – 20 20
Reinsurance assets 20 – 20 Cash and cash equivalents 12 – 12 Other assets 4 – 4
The assets and liabilities of the company at the date of acquisition were: Fair value and accounting policy Book value adjustments Fair value £m £m £m
The results of Avipop Assicurazioni have been included in the consolidated financial statements of the Group with effect from 14 December 2007, and have contributed £nil to the consolidated profit before tax.
(iv) Cyrte Investments On 27 September 2007, the Group acquired an 85% stake in Cyrte Investments BV (Cyrte Investments), a Dutch fund management company, for £37 million. The net assets of Cyrte Investments at the date of acquisition were £nil, giving rise to residual goodwill of £37 million.
The net assets as at the acquisition date are stated at their provisional values, and may be amended in 2008, in accordance with paragraph 62 of IFRS 3, Business Combinations.
(v) Hamilton Insurance Company Limited and Hamilton Life Assurance Company Limited On 1 November 2007, the Group completed the acquisition of Hamilton Insurance Company Limited and Hamilton Life Assurance Company Limited (the Hamilton companies) from HFC Bank Limited, a subsidiary of HSBC Finance Corporation. In addition, the Group’s UK general insurance businesses signed a number of five-year agreements to underwrite creditor business for HFC Bank and some of its subsidiaries, and to provide home, protection and travel insurance products to 10.2 million of HSBC Bank’s UK customers.
The acquisition of Hamilton Insurance Company Limited has given rise to goodwill on acquisition of £2 million, calculated as follows: Purchase cost: £m
The assets and liabilities at the date of acquisition were: Fair value and accounting policy
Liabilities Gross insurance liabilities (34) – (34) Investment contract liabilities (68) – (68) Other liabilities (4) – (4)
The assets and liabilities as at the acquisition date in both the tables above are stated at their provisional values, and may be amended in 2008, in accordance with paragraph 62 of IFRS 3, Business Combinations.
(viii) Unaudited pro forma combined revenues and profit Shown below are unaudited pro forma figures for combined revenues and profit as though the acquisition date for all business combinations effected during the year had been 1 January 2007, after giving effect to purchase accounting adjustments and the elimination of intercompany transactions. The pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisitions taken place at 1 January 2007, nor is it necessarily indicative of future results.
(b) Acquisition of Swiss Life Belgium On 21 January 2008, the Group announced that it had signed a memorandum of understanding with SNS REAAL to buy Swiss Life Belgium, a multi-line insurer, for 1135 million. By combining Swiss Life Belgium with its Belgian insurance operation, managed through its Dutch subsidiary Delta Lloyd, the Group would further strengthen its position in the Belgian group life insurance market.
The transaction is conditional upon completion of SNS REAAL’s acquisition of the Dutch and Belgian activities of Swiss Life Holding, which was announced on 19 November 2007. The completion of Delta Lloyd’s acquisition of Swiss Life Belgium will be subject to approval from the relevant regulators and works council, and is expected to take place in the second quarter of 2008.
(b) Disposal of subsidiaries, joint ventures and associates The profit on the disposal of subsidiaries, joint ventures and associates comprises: £m £m
United Kingdom (see note 19(b)) (7) 69 Turkey (see note 18(c)) 71 – Ireland – 86 France – 79 Other small operations (15) (12)
Financial investments 316 – Receivables and other financial assets 554 – Prepayments and accrued income 146 – Tax assets 16 – Cash and cash equivalents 96 –
The relevant assets and liabilities of the DL health insurance business have been classified as held for sale, at their carrying values, in the consolidated balance sheet as at 31 December 2007.
(e) Other information Principal subsidiaries at 31 December 2007 are listed on pages 268 to 269.
The Group’s results can be segmented, either by activity or by geography. Our primary reporting format is by business activity, whilst our secondary segmentation is by geographical area. This note provides segmental information on the consolidated income statement and balance sheet.
(i) Reporting segments The principal activity of the Group is financial services, which is managed using the following reportable segments: longterm business, fund management, general insurance and health.
Head office expenses, such as Group treasury and finance functions are also reported as “Other”, together with eliminations and any other reconciling items. Certain financing costs and taxes are not allocated across the segments. The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are on normal commercial terms and market conditions.
For the year ended 31 December 2007 £m £m £m £m £m
Inter-segment revenue – 152 – – 152 Profit /(Loss) on the disposal of subsidiaries and associates – – (7) 56 49
Claims and benefits paid, net of recoveries from reinsurers (19,640) – (7,481) – (27,121) Change in insurance liabilities, net of reinsurance (3,900) – 393 – (3,507) Change in investment contract provisions (2,018) – – – (2,018) Change in unallocated divisible surplus 2,922 – – – 2,922
Notes to the consolidated financial statements continued 4 – Segmental information continued Finance costs on central borrowing comprise interest payable on borrowings by holding companies within the Group which are not allocated to operating companies.
Impairment losses, and reversal of such losses, recognised directly in equity were £(1) million and £nil respectively in longterm business.
Operating profit before tax attributable to shareholders’ profits 1,634 155 1,033 (594) 2,228
For the year ended 31 December 2006 £m £m £m £m £m
Amortisation of acquired value of in-force business (58) – – – (58) Net Impairment of acquired value of in-force business (28) – – – (28) Amortisation and net impairment of intangible assets (32) (1) (18) (19) (70) Impairment of goodwill – – – (94) (94) Other impairment losses recognised in the income statement 6 – (5) (1) – Inter-segment expense (191) – (8) – (199)
Impairment losses, and reversal of such losses, recognised directly in equity were £nil and £2 million respectively in longterm business.
Notes to the consolidated financial statements continued 4 – Segmental information continued Pro forma reconciliation to operating profit before tax attributable to shareholders’ profits
General Long-term Fund insurance Restated business management and health Other Total For the year ended 31 December 2006 £m £m £m £m £m
Finance costs on central borrowings – – (2) (228) (230) Adjusted for the following items: Investment return variances and economic assumption changes on long-term business (401) – – – (401)
Impairment of goodwill – – – 94 94 Amortisation and impairment of intangibles 26 1 18 19 64 Short-term fluctuation in return on investments backing general insurance and health business – – (149) – (149) Profit on the disposal of subsidiaries and associates (12) – (88) (122) (222) Integration and restructuring costs 21 – 95 130 246
Liability for investment contracts 88,358 – – – 88,358 Unallocated divisible surplus 9,465 – – – 9,465 Net asset value attributable to unitholders 3,786 1 23 – 3,810
Revenue by destination does not differ materially from revenue by geographical origin, as most risks are located in the countries where the contracts were written.
Kingdom Europe America Asia Pacific Total Year ended 31 December 2007 £m £m £m £m £m
Financial statements 5 – Details of income This note gives further detail on the items appearing in the first section of the consolidated income statement.
Gross written premiums (note 4a) Long-term: Insurance contracts 15,589 13,188 Participating investment contracts 4,033 4,120
Less: premiums ceded to reinsurers (note 4a) (1,658) (1,501) Gross change in provision for unearned premiums (note 38e) (24) 89 Reinsurers’ share of change in provision for unearned premiums (note 41c(iii)) 3 4 Net change in provision for unearned premiums (21) 93
From financial instruments designated as trading and other than trading 6,427 5,444 From AFS investments and financial instruments at amortised cost 1,485 968
Realised gains and losses 5,017 4,989 Unrealised gains and losses (see policy J) (5,968) (998)
Expenses relating to these properties (27) (27) Realised gains on disposal 105 46 Fair value (losses)/gains on investment properties (745) 1,507
Realised gains on loans 7 59 Foreign exchange gains and losses on investments other than trading 11 128 Other investment income 72 8
Net investment income 9,828 15,490 Share of (loss)/profit after tax of joint ventures (note 18a) (339) 462 Share of profit after tax of associates (note 19a) 35 23 Share of (loss)/profit after tax of joint ventures and associates (304) 485 Profit on disposal of subsidiaries and associates (note 3b) 49 222
Notes to the consolidated financial statements continued 6 – Details of expenses This note gives further detail on the items appearing in the second section of the consolidated income statement.
Impairment of goodwill on subsidiaries (note 16a) 10 94 Amortisation of acquired value of in-force business (note 17) 160 58 Amortisation of intangible assets (note 17) 106 72 Net impairment of acquired value of in-force business (note 17) – 28 Impairment/(reversal of impairment) of intangible assets (note 17) 4 (2) Integration and restructuring costs (note 3c) 153 246
Interest on banking customer deposits 166 95 Interest on reinsurance deposits 37 38 Interest on collateral received 190 32 Other similar charges 193 92
These are analysed as: Allocated interest and similar charges 845 466 Group debt costs and other interest 363 381 8 – Long-term business economic volatility The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business. This note explains the methodology behind this.