This year we have created a suite of three reporting channels which can be seen at www.aviva.com/2009reports. To help us minimise our paper usage and our impacts on the environment, if you haven’t already done so, we would encourage all of our shareholders to opt to receive our reporting documents electronically.
In our online Annual Review, you will see exclusive interviews of the Group chief executive and members of our Executive management team.
What’s inside 02 Financial highlights 03 Chairman’s introduction 04 Group chief executive’s review 06 Group strategy 08 Group structure
Performance review 10 Key performance indicators 12 Regional performance 19 Information on the company 33 Organisational structure 35 Selected consolidated financial data 36 Financial and operating performance 50 Analysis of investments 56 Property 56 Risk management 60 Contractual obligations 61 Capital management
Governance 80 Board of directors 82 Executive management 83 Directors’ report 87 Corporate governance report 93 Nomination committee report 94 Audit committee report 96 Risk and regulatory report
Financial statements IFRS 128 Independent auditor’s report 130 Accounting policies 143 Consolidated income statement 144 Pro forma reconciliation of Group operating profit to profit before tax 146 Consolidated statement of comprehensive income 147 Consolidated statement of changes in equity 149 Consolidated statement of financial position 150 Consolidated statement of cash flow 151 Notes to the consolidated financial statements 275 Financial statements of the Company
Shareholder information 323 Shareholder services 118 Major shareholders and related party disclosures 119 Dividend data 119 Controls and procedures 120 Audit committee financial expert 120 Code of ethics 120 Regulation
Visit Aviva at Worldwide sales* £m MCEV operating profit*** £m www.aviva.com 3, 3, 3, 3,
.0 * From continuing operations including share of associates’ premiums ** Before tax attributable to shareholders *** On a MCEV basis from 2007. Prior years presented on an EEV basis £45.1bn Worldwide sales
Performance reviewAviva plc Chairman’s statementAnnual Report and Accounts 2009 Corporate responsibility Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
We have strengthened Aviva’s capital position substantially over the past year and IGD solvency surplus, the buffer we hold above our liabilities, has more than doubled to £4.5 billion reflecting some bold capital management initiatives and a recovery in investment markets.
In driving Aviva forward, we will retain our disciplined approach. We expect the external environment to remain unpredictable for some time but are encouraged that we saw the first signs of an improved appetite to save among our customers in the final quarter of last year.
Progress Creating a global brand has been the most visible sign of ‘One Aviva’ so far. We're working hard to ensure it's much more than a name change.
We're making progress towards delivering ‘twice the value’ – improving the way we serve our customers, increasing our efficiency, focusing on profitability, removing cost from the business and delivering strong results.
In light of Aviva’s lower IFRS operating earnings, the continuing economic uncertainty and our desire to retain flexibility, we felt it was the right decision to make. So in spite of it being a tough decision, we believe it was the right one.
What's really pleasing is that during this period our customer satisfaction has improved, with nearly 70% of our businesses at or above the local market benchmark and 50% are in the upper quartile.
I'm most proud of our people: their dedication and resilience over the past year has been incredible. They've remained focused on what we're here for – delivering prosperity and peace of mind to our customers – and have done a great job.
In support of our purpose and our ‘One Aviva, Twice the Value’ vision, Aviva provides a composite portfolio of life and pensions, general insurance, health insurance and asset management products through a multi-channel distribution approach. Working together across regions under one Aviva brand provides greater financial stability and flexibility through diversification and a reduced reliance on any one channel, product, country or customer group.
Build global asset management Launched in September 2008, Aviva Investors is a clear example of the ‘One Aviva, Twice the Value’ strategy in action. Integrating our global asset management businesses under one umbrella, Aviva Investors is now a leading asset manager, with offices in 15 countries and £250 billion of funds under management. We plan to continue to grow Aviva Investors and significantly increase its contribution to group profits.
— Brought UK life and general insurance businesses together under a single management team
— Achieved robust investment performance across all key markets around the globe — Experienced positive net flows of £2.4 billion from third party clients in difficult market conditions — Enhanced our global distribution and manufacturing capability — Made significant progress in building a truly global business development capability and achieved a strong sales pipeline across a range of asset classes and markets
— Achieved top quartile ranking in the most recent UK Greenwich Quality Index measuring client service and investment performance
Allocate capital rigorously Capital management will continue to be a key focus. Capital is treated as a scarce resource, and is allocated to provide the highest sustainable returns for shareholders. We continuously seek improvements in capital structure and efficiency.
Multi-channel customer reach We sell our products in 28 countries in ways that our customers choose to buy them. We will get closer to our customers through better understanding of their needs and by providing products and services that customers want. We will continue looking for the right distribution in the right markets.
— Implemented initiatives to improve the customer experience and support the Aviva brand overall (such as introducing the Aviva Customer Cup to promote customer focused projects)
— Successfully carried out our major rebrand campaign in the UK creating a significant increase in spontaneous awareness among consumers
— Created further value from our leading and unique bancassurance franchise in Aviva Europe with sales growth of 14% in 2009
— 50% of all business units participating in our annual benchmarked relationship survey were ranked upper quartile by customers when compared to local market averages
— Developed a leaner ‘One Aviva’ operating model through: – Increased use of regional shared services in all regions – Implementation of centres of excellence in technology – Outsourced part of the UK Life book to Swiss Re, outsourced IT data centres in UK and Canada and transferred UK Life Lifetime and Collectives administration to Scottish Friendly and IFDS, respectively
Performance reviewAviva plc Group strategy continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
UK Market leadership — Drive up profitability — Generate capital — Insurance excellence — Operational excellence
Europe — Scale, growth, capital — Seize unique growth opportunities — ‘One Europe’ operating model — Generate capital
North America Profitable growth — Optimise business mix, growth and margin — Diversify distribution and products — Generate net capital returns
IFRS operating profit by line of business % — Manage our general insurance business for value and FM growthLife GIH
— Drive profitable growth and long-term value creation in our life and pensions business — Strategically manage our investment in Delta Lloyd following the IPO — Successfully progress the restructuring of our Aviva
— Further develop the global integration of our business with an expanding footprint across mature and across all asset classes and markets — Further enhance business effectiveness and nurture our 0 high performance culture
opportunities by country, product and business line — Participate actively in all consultations with European regulators to develop an appropriate outcome for Solvency II regulations
Cost savings £m — Focus on strong cost discipline through reducing operational complexity and simplifying product ranges 600 — Continue to focus on expense management and customer retention35500 Target: £500m
— General insurance: personal: motor, home, travel, breakdown (RAC), commercial: motor,
Products — Long-term insurance and savings: protection, bonds and savings, pensions
North Asia America Pacific Products — Long-term insurance and savings: protection, annuity, savings, wellness
— General insurance: personal: motor, home, niche products commercial: motor, property, liability
Aviva Investors Products Our investment capabilities, products and services comprise: — alternatives — equities — fixed income — global investment solutions — real estate property, liability — Health
Distribution — Bancassurance — Corporate partnerships — IFAs/brokers — Direct (phone/online)
Distribution — Business to business — Wholesale distributors — Asset allocators — IFAs/fund platforms — Institutional/pensions
Aviva Investors Australia Canada China France Germany Ireland Italy Luxembourg Poland Romania Singapore Spain Taiwan United Kingdom United States * Delta Lloyd operations ** Australia business disposed of on 1 October 2009
In this section 10 Key performance indicators 12 Regional performance 19 Information on the company 33 Organisational structure 35 Selected consolidated financial data 36 Financial and operating performance 50 Analysis of investments 56 Property and risk management 60 Contractual obligations 61 Capital management 64 Basis of preparation 65 Accounting basis of preparation
Corporate responsibility Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
Our IFRS earnings per share for 2009 was 37.8 — To demonstrate our 100commitment to ‘One Aviva,pence (2008: 36.8 pence loss). This mainly reflects Twice the Value’ we are
This is in line with last year’s decision to reduce the 15.0
dividend to a sustainable level from which it can grow. 10.0 1.00
Group adjusted operating profit before tax — We aim to achieve steady sustainable growth in ourIn 2009 MCEV operating profit increased 3% to operating profit, both on £3,483 million (2008: 3,367 million). IFRS operating a MCEV and IFRS basis. In profit reduced 12% to £2,022 million (2008: seeking to achieve this growth, we continue to£2,297 million).
* On a MCEV basis from 2007. Prior years presented on an EEV basis
Performance reviewAviva plc Key performance indicators continued Corporate responsibilityAnnual Report and Accounts 2009
Employee engagement and leadership Key performance indicators relating to our employees’ views on Aviva are based on questions in our annual global ‘Employee Promise’ survey. We changed our external provider in 2009 and we now report and set targets in line with their stronger global financial service (GFS) benchmark norms. To ensure consistency, we have therefore removed the historical trend data.
— Customer advocacy gives us, in a single, simple measure, an accurate predictor of customer retention and cross-sell opportunity.
A leader in our home market From 1 January 2010 we have brought together the Aviva UK life and general insurance businesses, creating a new organisation led by one chief executive officer. In 2009, in addition to completing the rebranding to Aviva, both businesses have continued their extensive transformation programmes, which will make significant improvements to customer service, and they have delivered combined cost savings of £450 million, a year ahead of plan.
Strategy Our core strategies for the UK business are: — to leverage our extensive distribution network and customer base to increase profits in a mature but evolving marketplace — to maintain market leadership through balanced distribution and broad product mix, improved customer retention and the simplification of processes, services and costs
The rebrand to Aviva in the UK took place on 1 June 2009. Our successful advertising campaigns, highlighting Aviva’s products and services and encouraging customers to ‘get the Aviva deal’, have increased recognition and awareness of the Aviva brand significantly.
We delivered new propositions recognising consumer needs, including offering 12-months, free life cover to new parents, the launch of a With-Profit Guaranteed bond and recently re-opening our Wrap and Sipp platforms to new business. Our innovative Simplified Life protection product continues to go from strength to strength with a 147% increase in new applications compared to 2008, whilst our marketleading individual annuity pricing capability attained record new business volumes for this product in the fourth quarter of 2009.
We have continued to invest in our e-commerce offerings with the launch of further new propositions to help our customers and distribution partners. ‘Customer Portal’ and ‘Aviva for Advisers’ provide secure online access to over 4.5 million policies, enabling customers and advisers to manage their Aviva life products quickly and easily at a time convenient to them. We were also the first in the industry to offer a virtual online guide as part of our innovative ‘Pension Tracker’, making it possible for almost 1.5 million customers to manage their Aviva pension plans online. This approach contributed to Aviva winning the Personal Finance ‘Pension Provider of the Year’ award voted for by customers and judged on proposition quality, brand, service and sustainability.
Throughout 2009 our commitment to deliver service excellence has driven improved satisfaction and advocacy results. By listening to and understanding what matters most to our customers and distributors, we can ensure they have a better service experience.
Fair reattribution payments Following the announcement in May 2009 of a new, more flexible offer – and the subsequent FSA and High Court approval in September – the reattribution of our inherited estate completed on 1 October. Our objective was always to create a reattribution that was fair to both shareholders and policyholders, making sure that customers had a choice of whether they wished to accept the offer, depending on their personal circumstances. As a result, over 87% of eligible policyholders voted during the election process, with 96% of these voting in favour of the offer. By the end of 2009, the majority of the £471 million reattribution payment had been distributed to those policyholders who accepted the offer.
We have refocused our brands to offer our customers the best price when they buy direct from Aviva supported by our ‘Get the Aviva Deal’ marketing campaign, complemented by the RAC panel which is available on all major online price comparison sites and supported by 17 insurers. The impact has been extremely positive: we sold more direct personal motor policies in the fourth quarter than in the same period in the previous three years and the RAC panel had gained a share of around 3.5% of new business in the UK personal motor market by the end of 2009.
This is particularly true in the case of Commercial lines and there is little evidence that the market is hardening significantly.
In January 2009 we launched our car insurance panel under the iconic RAC brand to complement our existing direct offering from Aviva. This ensures that almost every customer that calls us can be provided cover at competitive prices. The panel is on all the major online price comparison sites and it is writing growing volumes of business through this channel of distribution.
Strategy Our strategy is to capitalise on the significant opportunities within Europe through: — Aviva Europe’s Quantum Leap transformation plan, creating one market leading pan-European business from 12 federated businesses,
— the strategic development of our 58% investment in Delta Lloyd following the IPO in November 2009.
Since January 2010, Aviva Europe has assumed responsibility for developing Aviva’s business interests in the Middle East, based in the United Arab Emirates. We expect this highpotential market to grow, benefiting from Aviva Europe’s experience and resources.
Our bancassurance franchise is the largest in Europe with 50 bank agreements and our retail4 channel accesses nine million customers through 18,000 financial advisers. With this proven ability to operate across distribution channels, we are able to meet different customer preferences and respond favourably to market developments.
Long-term and savings operating profit £m Europe Delta Lloyd * On a MCEV basis from 2007. Prior years presented on an EEV basis.
Delta Lloyd performance Our Delta Lloyd business is one of the top-five financial services providers in the Netherlands and also operates in Belgium and Germany. In 2009, we completed the successful IPO and partial sale of Delta Lloyd on Euronext Amsterdam with gross proceeds of £1 billion for a 42% stake. This was a significant strategic milestone in our management of Delta Lloyd and gives us further opportunity to reallocate capital within the group.
Delta Lloyd continues to offer innovative, high quality products backed by strong fund management performance. In June, in collaboration with Rabobank, Delta Lloyd launched a €200 million fund, which offers an alternative source of capital for promising Dutch ventures.
Aviva Europe: Making a ‘Quantum Leap’ in performance In 2009, we announced our new strategy to make a ‘Quantum Leap’ in performance by integrating the operations of our 12 separate Aviva Europe businesses. We are creating a single pan-European organisation which will create significant value for Aviva’s customers and shareholders.
Our two pan-European distribution channels, bancassurance and retail, supported by pan-European product development, operations and governance will enable us to take full advantage of the significant growth potential and opportunities in Europe and contribute fully to the 'One Aviva, Twice the Value' target.
General insurance and health net written premiums £m Europe Delta Lloyd
Market environment The US economy, and its financial sector in particular, suffered a severe contraction as a result of the financial crisis. The recession also had a major impact on Canada, the US’ largest trading partner. There are now increasing signs of economic recovery and, despite the recession, North America’s economies remain among the world’s largest and its population among the world’s wealthiest.
Performance Total sales were £6,345 million in 2009, down 13% on 2008. IFRS operating profit for the year improved 43% to £213 million reflecting the improved long-term and savings result. Our financial results are discussed in more detail on page 47 of this report.
In the Canadian business we have focused on initiatives that improve our operational and underwriting effectiveness. Examples include the implementation of our three-company model, enabling us to price the auto business in the heavily regulated Ontario market more accurately, and enhanced underwriting through the use of more standardised and automated processes. Elsewhere the Canadian business has seen an unusually high frequency of large losses through a combination of commercial fires and Ontario personal auto claims.
As part of the ‘One Aviva, Twice the Value’ strategy, we are consolidating each of our non-market-facing functions into single North American business areas giving us improved capability at lower cost.
Innovative pricing In the Canadian business we have successfully implemented an innovative approach to the pricing of personal property business known as ‘Rate by Peril’. We have used a detailed and sophisticated mapping approach combined with proprietary and public information to deconstruct the blended approach to pricing used for multi-peril household policies. Using this approach we are able to determine a unique rate for each individual property reflecting its unique exposure to the perils covered by the policy including fire, water damage, wind-storm, sewer back-up, theft and liability. The increased pricing precision that we are able to apply enables us to ‘right-price‘ each property.
Performance Total sales were £2,712 million in 2009, down 22% on 2008. IFRS operating profit for the year improved 114% to £77 million reflecting the improved long-term and savings result. Our financial results are discussed in more detail on page 48 of this report.
As part of our commitment to achieving ‘One Aviva, Twice the Value’, we launched a number of new initiatives in the region. These included our wrap platform in Hong Kong and new protection, savings and investment products, both conventional and Takaful (Islamic insurance), in Malaysia through our shared services platform.
We expanded our customer reach in local markets during the year with a particular focus on bancassurance: we renewed our partnership with DBS Bank in Singapore and Hong Kong until 2015, extended to additional markets in India, China and Taiwan, and also agreed extended terms with key partners in
India. We opened our tenth provincial branch in China, ahead of our 2010 target; achieved encouraging sales through Woori Bank in South Korea and opened 13 new branches around the Seoul area.
Joint venture in Malaysia We signed a joint venture partner deal with CIMB, the second largest bank in Malaysia in 2007 to capitalise on its distribution network by providing market leading insurance products and excellent servicing capability. To achieve this we drew on our regional shared services capability and technical infrastructure in Singapore to deliver and administer the product set. We successfully launched a portfolio (EasyLife Solutions) of 10 investment-linked products within a six-month timeframe. Sales of EasyLife Solutions have gone from strength to strength, contributing to our position as fourth in the industry for single premium business in 2009. This has also strengthened our partnership with CIMB at all levels.
Strategy Our core strategic objective is to build our presence as a globally integrated asset manager and establish Aviva Investors as a leading player in the market for retirement solutions. We aim to increase revenues and profitability by delivering significant growth in higher-margin assets under management from external clients.
The key strategic imperatives central to our success are: — our commitment to client focus, delivering investment solutions that fully meet their requirements — delivering strong investment performance to underpin product sales activity — finalising the roll-out of a global business development function with a footprint in mature and emerging markets — a high performance culture that rewards those who make the strongest contribution to the achievement of our goals — further increases in business effectiveness and efficiency through the adoption of global core processes
Market environment Following a turbulent start to 2009, market conditions improved with some markets registering their best annual performance in over 20 years. The pace of any further rally across markets is likely to be more modest with the uncertainty around central banks removing stimulus measures. Although some economies remain in recession, we remain optimistic that recovery will gather pace.
Our liquidity funds attracted strong inflows in France and the UK and from our continental European distribution channel through our SICAV range. In the UK, our Sterling Government Liquidity and Sterling Liquidity Funds gained Standard & Poor’s highest possible ‘AAAm’ stability rating.
History and development of Aviva General We are a public limited company incorporated under the laws of England and Wales. We are one of the world’s leading global insurance groups. We are the fifth largest insurance group in the world, based on gross written premiums for the 2008 year. We are one of the top five providers of long-term insurance and savings products in the UK, Ireland, the Netherlands, Poland and Spain and one of the top 10 providers of long-term insurance and savings products in France, Italy, Hungary and Romania for 2008. More detail is provided within the operating segment review later in this section. Our main activities are the provision of products and services in relation to long-term insurance and savings, general insurance and fund management.
Our history The Group was formed by the merger of CGU plc and Norwich Union plc on 30 May 2000. CGU plc was renamed CGNU plc on completion of the merger, and subsequently renamed Aviva plc on 1 July 2002.
Since 2002, we have grown in part through carefully selected acquisitions, in particular the acquisitions of RAC in 2005 and AmerUs in 2006.
Further details of recent acquisitions and disposals can be found in the section “Financial statements IFRS – Note 3 – Subsidiaries”.
Business overview Our aims and strategy In support of our purpose and our ‘One Aviva, Twice the Value’ vision, Aviva provides a composite portfolio of life and pensions, general insurance, health insurance and asset management products through a multi-channel distribution approach. Working together across regions under one Aviva brand provides greater financial stability and flexibility through diversification and a reduced reliance on any one channel, product, country or customer group. In summary our five strategic priorities are: Shareholder information Financial statements IFRS Financial statements MCEV Other information
— To build a global asset management business that will foster investment performance and create solutions We have significant asset management functions across the group. These businesses have historically been managed separately and we are now bringing them together in a global asset management business, Aviva Investors, in order to capitalise on existing strengths around the world and leverage those strengths in key product and specialist areas. Our goal is that Aviva Investors will foster investment performance and create solutions under a single brand across the world, with an increased focus on obtaining new external clients.
— To increase our customer reach through better understanding customer needs We sell our products in 28 countries in the way that our customers choose to buy them. We will continue looking for the right distribution in the right markets. We believe we can get closer to our customers through better understanding their needs, which would further our goal to generate profitable sales, by providing products and services that customers want at a fair price.
— To boost productivity to increase our competitiveness, improve our services and deliver higher value to our customers We constantly look for ways to boost our productivity, to support our sustainable growth, increase our competitiveness, improve our services and deliver higher value to our customers. Working together as ’One Aviva‘, we deliver operational excellence through shared services, shared knowledge, rationalised systems and effective outsourcing.
Our business Overview Our principal activity is the provision of financial products and services, focused on the following lines of business: long-term insurance and savings business, fund management and general insurance and health.
In North America the purchase of AmerUs in the United States was completed on 15 November 2006 for consideration of £1.7 billion. This operation has been rebranded to trade as Aviva USA and is ranked first in both fixed indexed life and fixed indexed annuity products in 2008, according to LIMRA and AnnuitySpecs.
In the Asia Pacific region we operate in eight countries with businesses at different stages of development.
— Annuities – a type of policy that pays out regular amounts of benefit, either immediately and for the remainder of a person’s lifetime, or deferred to commence from a future date. Immediate annuities may be purchased for an individual and his or her dependents or on a bulk purchase basis for groups of people. Deferred annuities are asset accumulation contracts, which may be used to provide benefits in retirement, and may be guaranteed, unit-linked or index-linked.
— Bonds and savings – accumulation products with single or regular premiums and unit-linked or guaranteed investment returns. Our product ranges include single premium investment bonds, regular premium savings plans, mortgage endowment products and funding agreements.
Market position We are the leading general insurer in the UK and Ireland based on gross written premiums for the year ended 31 December 2008 and we are one of the top five general insurers in Canada and the Netherlands, as based on gross written premiums for the year ended 31 December 2008. The group has other European general insurance operations in France, Italy, Poland and Turkey, and in Asia Pacific we sell general insurance and health products in Malaysia, Singapore and Sri Lanka.
Brands and Products Our general insurance business currently operates under different brand names, with Aviva and the RAC in the UK, Delta Lloyd in the Netherlands and Commercial Union Aviva in Poland. Our other general insurance operations in Europe, Canada and Asia Pacific operate under the Aviva brand. During 2010, the business in Poland will complete its transition across to the Aviva brand as part of a global branding exercise. RAC in the UK and Delta Lloyd in the Netherlands will remain unchanged.
Our general insurance business concentrates on personal lines and commercial lines insurance through the provision of motor, household, travel, creditor, commercial liability and commercial property coverage. Our health insurance business concentrates on private health insurance, income protection and personal accident insurance, as well as a range of corporate healthcare products.
Distribution We have various distribution agreements with bancassurance partners and joint ventures across many markets in which we operate. The agreements contain similar terms and depending on our line of business in that market offer long-term insurance products, general insurance and health products, asset management services or a combination thereof. The agreements have a defined contract term, frequently with the option to extend. In return for offering our products to their customers, the bank or joint venture partners receive a commission as a percentage of sales and in some cases achieve extra commission if agreed target levels of sales are met. Certain agreements have a profit sharing element based on a predetermined percentage. The success of the agreement is regularly monitored against certain performance indicators which are those typically used by the management of the business. In some cases, if the agreed targets are not met, the terms of the contract can be renegotiated, typically with respect to the level of commission
Brands and products Our business in the UK manages investments including equities, fixed income, property, hedge fund and socially responsible investments (SRIs) on behalf of institutional, pension fund and retail clients. We also sell retail ISAs, unit trusts, OEICs and structured products under the Aviva Investors and the Royal Bank of Scotland Group (RBSG) brands.
United Kingdom Aviva Life Business overview and strategy Our UK life insurance business is a leading long-term insurance and savings provider in the UK with a market share of 10% based on 2009 ABI returns. Our main operations are based in York though we have a significant presence in Norwich, Eastleigh, Bristol and Sheffield. We also have outsourcing relationships with a number of partners including Swiss Re, Scottish Friendly and International Financial Data Services (IFDS) in the UK, and WNS in India. We employ over 9,000 people and have more than seven million customers as at 31 December 2009.
We believe that we provide a broad product offering, with a wide distribution reach throughout the UK. We identify brand, financial strength, with-profits performance, investment performance and rates on protection products as our key strengths.
Our core strategy is to leverage our extensive distribution network and customer base to increase profits in a mature but evolving marketplace. We seek to outperform the UK market while delivering enhanced margins. To achieve this, our strategy includes the rigorous use of capital, further improving customer retention, reducing new business acquisition costs while boosting productivity, all of which will drive greater value for shareholders.
In 2009 the long-term insurance and savings markets have continued to be affected by the turbulent economic conditions, the slowdown in the housing market and regulatory impacts, such as the ban on the sale of single premium payment protection insurance.
Products We provide an extensive product range in the UK that covers pensions, annuities, protection, bonds and savings and equity release products, as well as investment products. We hold strong positions in each of our key markets of savings, protection, and annuity products based on APE in 2009 according to ABI returns.
We write both non-profit and with-profit business. Non-profit business means that shareholders retain 100% of the distributed profits. With-profit business means that policyholders are entitled to at least 90% of the distributed profits, with shareholders receiving the balance.
The pensions and retirement products we offer include stakeholder, personal pensions, equity release, annuities, income drawdown and with-profits products. Our annuity offerings include immediate life, enhanced, and with-profit pension annuities.
The majority of our sales are through independent financial advisers (IFAs). This is particularly the case for our savings and investment products as customers seek advice due to the complex nature of the products, the regulation surrounding them and the need for these products to meet the individual circumstances of the customer.
United Kingdom Aviva General Insurance Business overview and strategy Our UK general insurance business currently operates in the UK through two major brands, Aviva (which was changed from Norwich Union in June 2009) and the RAC. The combined business was the leading general insurer in the UK for 2008, with a market share of 13% (2007: 14%) according to Datamonitor. We focus on personal and commercial insurance and are also a leading provider of roadside assistance through the RAC, as voted by the JD Power survey since 2006. We operate from a number of locations in the UK, India and Sri Lanka.
We aim to maintain our market leading position through underwriting excellence and product and distribution leadership. Our strategy is to focus on insurance fundamentals to maximise returns through the insurance cycle. We seek to control the impact of claims inflation, provide excellent customer service and maintain disciplined underwriting and pricing. To this end, we are nearing completion of the process to transform our customer service centres and simplify our policy range.
Insurance profits in the UK general insurance market are cyclical in nature and after a lengthy period of soft market conditions in commercial lines, characterised by high competition and falling prices, we have seen some tentative signs of hardening since late 2008. There are also signs of market rating increases in personal lines, particularly within personal motor.
Our commercial products focus on insurance for small to medium enterprises and, from 2010, we plan to expand our product range in the larger UK corporate risk market.
Europe Regional overview and strategy Aviva operates in 15 countries across Europe (excluding the UK) offering a range of life, pensions and insurance products distributed through a wide range of channels. We are one of the leading providers of life and pension products in Europe, based on 2007 gross written premiums according to the Comité Européen des Assurances (CEA), a European insurance and reinsurance federation.
The Quantum Leap transformation plan will build a panEuropean approach to operations, governance and product development. Distribution has been centralised into two panEuropean channels, bancassurance and retail, allowing us to take advantage of the significant growth potential in Europe, build competitive advantage and shorten time to market. A single holding company has been established in Ireland which, subject to regulatory approval, will deliver economic, operational and regulatory benefits to Aviva.
Delta Lloyd As a result of the IPO, the strategic management of our investment in Delta Lloyd is now managed independently from our other operations.
Performance reviewAviva plc Information on the company continued Corporate responsibilityAnnual Report and Accounts 2009
Delta Lloyd is one of the top five financial services providers in the Netherlands, with a significant operation in Belgium. In November 2009, Aviva successfully completed an IPO of Delta Lloyd which is now listed on NYSE Euronext Amsterdam. Aviva retains 58.3% of the ordinary share capital and 54.0% of the voting rights in Delta Lloyd after having raised £1 billion of gross disposal proceeds. Its listing enables Delta Lloyd to strengthen its profile and brand, as well as more effectively pursue its growth strategy in the Netherlands and Belgium, in particular, ahead of anticipated sector consolidation in those countries.
Aviva Europe As the leading bancassurer in Europe we have sustained our performance by leveraging our unique bancassurance model, serving customers through our 50 bancassurance agreements. We also have a significant retail franchise, operating through more than 8,000 brokers and agents, and a direct sales force of over 10,000 consultants.
Our pan-European distribution model aims to exploit our market leading bancassurance model by leveraging existing banking relationships, by expanding our product mix into higher margin products such as protection and general insurance and by reducing the cost per policy through the roll out of a panEuropean shared platform. The shared platform will also give us the ability to meet the demands of each prospective partner’s requirements, in a rapid and efficient way, creating value for both Aviva and our partner.
Our Aviva Europe business has substantial operations in France, Ireland, Italy, Poland and Spain, with significant longterm insurance businesses. Following early success in Poland, we have been building our long-term insurance and savings business in developing markets in Central and Eastern Europe, and now have businesses in the Czech Republic, Hungary, Lithuania (which for financial reporting purposes we include in Poland), Romania, Russia, Turkey and a distribution capability in Slovakia (which for financial reporting purposes we include in Hungary).
In addition, we have large general insurance businesses in Ireland and France, as well as developing general insurance businesses in Italy, Poland and Turkey. Fund management operations exist in France, Ireland, Poland and Romania. The fund management operations in France, Ireland and Romania are managed by Aviva Investors, and since 1 January 2010 the fund management operation in Poland has transferred to Aviva Investors.
Since January 2010, Aviva Europe has also had responsibility for developing Aviva’s business interests in the Middle East, based in the United Arab Emirates.
Market and competition The region is split between mature Western European markets with high wealth and insurance penetration and the developing markets of Central and Eastern Europe. We expect to see growth of the European long-term insurance and savings market above GDP growth over the next decade as a result of a growing ageing population and the developing markets in the Central and Eastern Europe region.
Competitive intensity and market consolidation varies across the region depending on the size and stage of
Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information development of each market. Our competitors comprise a mixture of large pan-European insurers, such as Allianz and AXA, and local insurers, such as Powszechy Zaxlad Ubezpieczan (PZU) in Poland and CNP Assurances (CNP) in France. Across the region consolidation is low; based on total insurance premiums from the CEA the top five insurers hold only 35% of the market. The CEA data shows that Aviva has a 4.8% share of the market (including UK, excluding business written outside of Europe, non primary insurance and inaccessible markets eg compulsory healthcare) which makes us the fourth largest. The largest insurers are Allianz, Generali and AXA. If the UK is excluded, Aviva’s market share on the same basis is 4.1%.
France Business overview and strategy Aviva France is one of the top 10 long-term insurance and savings businesses in France based on 2008 new business premiums, according to L’Argus de L’Assurance. We offer a range of long-term insurance and savings products, primarily for individuals, which focus on the unit-linked market. We have a partnership with the Association Française d’Epargne et de Retraite (AFER), which is the largest retirement savings association in France. Aviva France operates through two main companies: Aviva Vie and Aviva Direct.
Our general insurance business in France has a 2.3% share of the market as based on 2008 premium income according to L’Argus de L’Assurance. We predominantly sell personal and small commercial lines insurance products through an agent network and our direct insurer, Eurofil. We believe Eurofil is the second-largest direct sales insurer in France, based on total written premiums, and it sells motor, home and health insurance. Direct sales to private customers are conducted through the internet and by telephone.
Aviva plc Information on the company continued Annual Report and Accounts 2009
With profits savings products are traditional savings products with an agreed duration, a minimum guaranteed credit rate and a profit sharing mechanism to pass part of the excess return to policyholders. Unit-linked savings products return all investment returns earned on policyholder assets directly back to the policyholder.
Aviva France’s general insurance business sells personal and small commercial insurance including motor, home, commercial, agricultural and construction products, as well as health insurance.
Ireland Business overview and strategy Our recently rebranded business in Ireland is one of the country’s leading multi-line insurers with more than one million customers. As the initial part of the move to a global Aviva brand, the business was renamed Hibernian Aviva in early 2009 and from 11 January 2010 has traded as Aviva Ireland. It provides long-term insurance and savings products, asset management (which is managed by Aviva Investors), general insurance and health insurance products. We had a 16.7% share of the Irish long-term insurance and savings market in 2008 based on gross written premiums according to the Irish Insurance Federation (IIF), and were the third largest life and pension provider in Ireland. Our general insurance business is the largest in Ireland, with a market share of 20% in 2008 according to the IIF.
Our strategy in our life business in Ireland is to maximise market opportunities through re-energising the broker distribution channel and pushing forward new initiatives with our bancassurance partner Allied Irish Banks plc (AIB). This includes developing products with attractive safety features to meet customer needs when investment markets are more volatile. In our general insurance business we aim to take advantage of opportunities to grow our business through building innovative products, increasing scale and exploiting distribution advantages.
Products Our long-term insurance and savings business offers a comprehensive range of protection, bonds and savings and pension products. The protection products include single, dual and joint life insurance, mortgage protection, specified illness and guaranteed whole life cover products. The pension range covers retirement and investment products including government promoted personal retirement savings account (PRSA) schemes.
Distribution Aviva has a wide range of distribution channels in the Irish market. Customers can purchase our products through intermediary channels such as brokers, corporate partners and through retail channels including call centres, a nationwide branch network and the internet.
Our long-term insurance and savings products are distributed through a broker network and our bancassurance partnership with AIB. This partnership gives us access to more than 280 branches. We also provide branded products for a number of financial institutions.
The majority of our general insurance business is sold through brokers, with an increasing proportion offered by direct and corporate partners.
In the Italian market, we believe that many consumers prefer investment products from well established long-term insurance companies as long-term savings vehicles. We also think that consumers prefer developing a personal relationship with the bank distributing products through one-to-one contact. Internet and telephone channels are not widely used in Italy.
A growing area of the market is credit protection insurance, where protection on death and disability is provided for mortgages and credit loans. Individual and group pension plans are also available and this part of the market is expected to grow in the long-term given the ageing population and government reforms to reduce the cost of state retirement provision.
Distribution Our products are distributed principally through bancassurance partnerships with UniCredit Group, Banco Popolare Italiana Group (BPI), Banca Popolari Unite (BPU) and Unione di Banche Italiana (UBI). Our partnership with Banca Delle Marche ended in May 2009. These partnerships give us access to more than 6,200 branches and additionally we also have 650 insurance agents and access to approximately 5,800 sales advisers.
In December 2007, Aviva Italy entered into an exclusive long-term partnership with Banco Popolare and acquired a 50% interest in Avipop Assicurazioni, a general insurance company, for a total consideration of £188 million. This replaced our previous agreement with BPI to distribute long-term insurance and savings products.
Poland (including Lithuania) Business overview and strategy Our operations in Poland and Lithuania provide long-term insurance and savings products. Our businesses have a 4,200­ member direct sales force, with 66 sales offices across the country as at 31 December 2009. Completing the move to a global brand, our Polish business, currently known as Aviva Commercial Union, will commence trading as Aviva in June 2010.
Our Polish life operation is the second-largest overall life insurer, with a market share of 10% based on total premium income in 2008 according to the Polish Financial Supervision Authority (KNF). It has more than 900,000 individual and group customers and manages over £2.5 billion of customers' assets. The pension business has been leading the second-pillar pension fund market since its launch in 1999, with a market share of around 26% and almost 3 million customers and over £9.8 billion of assets under management, according to KNF. Second pillar pension funds are those privately managed, first pillar are the pay-as-you-go state pensions and third pillar are voluntary contributions.
In 1999, Poland launched a comprehensive reform of its state pension system and created privately managed funds. This enabled private companies to offer pension products and made it obligatory for all employees under 30 years of age to join one of the competing pension funds.
The general insurance market is continuing to grow, although at a slower rate than the long-term insurance and savings market. The general insurance market is mainly driven by the motor insurance market. Distribution has been dominated by direct sales force and agents, however direct sales are now growing.
We offer general insurance products to both institutions and individuals in Poland. For institutions we offer selected commercial lines risks such as fire and loss-of-profit insurance, technical insurance, insurance against loss of property during transportation, civil liability insurance and commercial health insurance. For individuals we offer home, accident and travel insurance, which are primarily sold by tied agents, whilst motor insurance is sold through our direct operation.
Spain Business overview and strategy Aviva Spain sells long-term insurance and savings, health and accident insurance in Spain through a bancassurance network based on joint ventures with six banks (Bancaja, Caja España, Caixa Galicia, Unicaja, Caja de Granada and Cajamurcia) and through Aviva Vida y Pensiones, the wholly owned Aviva­ branded long-term insurance company. Aviva Spain is the country’s fifth-largest long-term insurer by gross written premiums with a market share of 6% in 2009 according to Investogación Cooperativa entre Entidades Aseguradoras y Fondos de Pensiones (ICEA).
Distribution Through bancassurance partnerships we have established subsidiaries to distribute our products with each of the banks as set out below: — Aseval – in conjunction with Bancaja since 2000 — Unicorp Vida – in conjunction with Unicaja since 2001 — Bia Galicia – in conjunction with Caixa Galicia since 2001 — Caja España Vida – in conjunction with Caja España since 2001 — General Vida – in conjunction with Caja de Granada since 2002 — Cajamurcia Vida – in conjunction with Cajamurcia since 2007
Aviva Vida y Pensiones distributes our products through professional intermediaries (financial advisers, agents and brokers) and a direct sales force, supported by a branch office network and call centres.
In Hungary, we are the sixth largest life insurance business, measured by 2008 gross written premiums, with an 8% market share, according to the Association of Hungarian Insurers. We have a tied agent sales force consisting of more than 600 agents and 22 agencies nationwide.
Aviva Romania is the eighth largest life insurer as measured by premium income in 2008 according to the local insurance regulator, CSA. We were also the fourth largest voluntary pensions' provider in 2008 as measured by fund value according to the Private Pension Regulator (CSSPP). Aviva Romania has over 550 direct sales force agents and 157 staff. We have established a new company to sell newly created mandatory pensions.
Products Aviva Turkey’s products include unit-linked pensions, supplemented by protection insurance and other savings products, which are aimed at high-net-worth customers and leading national and multinational corporations. The general insurance segment offers motor, household, fire, marine, personal accident, travel and liability insurance.
In Romania, we distribute through a direct sales force branch network and have bancassurance partners, which include local units of Piraeus Bank and ABN AMRO.
At the end of 2009 Aviva Russia had 43 financial consultants, servicing approximately 390,000 clients. Agreements with 13 leading retail banks have been signed and bancassurance sales are growing rapidly.
Delta Lloyd Business overview and strategy Delta Lloyd operates in the long-term insurance and savings, general insurance and the fund management markets in the Netherlands, Belgium and Germany. The group employs about 6,300 staff as of 31 December 2009.
On 24 March 2010 Delta Lloyd Germany has announced the intention to discontinue writing new business. This is in line with the decision, as indicated in the prospectus for the initial public offering, to discontinue Germany as a core market. Delta Lloyd was one of the top five providers of life and general
In the general insurance market there has been stiff competition on premium rates, particularly in the key motor account, and increasing claims frequencies linked with the economic downturn.
Delta Lloyd also sells retail investment fund and mortgage products in the Netherlands and retail banking products in Belgium.
Mutual funds are primarily sold through third-party banks such as ABN AMRO, ING and Rabobank.
We view both the US long-term insurance and annuity market and the Canadian property and casualty insurance market as highly fragmented markets with a large number of insurers, none of whom is in a truly dominant position. Competitors for the products in which we specialise, include global insurers such as AIG, Allianz, Royal & Sun Alliance, Manulife Financial, Old Mutual and AXA. Local market competitors also feature in various product segments.
Our new strategy is to improve margins, optimise capital usage and to leverage our core life insurance and annuity distribution and product capabilities into adjacent markets. A key theme for Aviva is one of recognition; treating both employees and customers as unique people with unique circumstances.
Performance reviewAviva plc Information on the company continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
Products Aviva USA has a strategic focus on protection, annuity and savings products. Our life products include our universal life, indexed life, no lapse guaranteed and term assurance products. Our savings products are primarily funding agreements. Our annuity products include indexed annuities, fixed index annuities, deferred fixed annuities, immediate annuities, guaranteed lifetime withdrawal benefits, and structured settlements. During 2008 we announced our withdrawal from the structured settlement business.
In addition, we now offer wellness products and services through our relationship with Mayo Clinic Health Solutions. We have also launched enhancements to our guaranteed income withdrawal benefits and a new bonus index deferred annuity.
We believe that we are well placed in Canada for steady organic growth and that our success is underpinned by stable broker relationships, underwriting excellence and a balanced portfolio of commercial and personal lines. Looking ahead, we aim to create value by repositioning our personal lines book in Ontario through greater pricing sophistication and customer segmentation. We will also continue to address increasing customer demand for choice and simplicity through our brokerdistribution model and brand investment in key territories. In commercial lines, we aim to retain our current market position through our expertise in distribution and product innovation.
Distribution We operate in Canada through a distribution network primarily focused on approximately 1,700 independent retail brokers, who distribute our core personal and commercial lines. In addition, we work closely with both independent and wholly owned speciality brokers to distribute group insurance and speciality personal lines, such as insurance for antique cars.
Asia Pacific Regional overview and strategy Aviva Asia Pacific operates in eight countries across the region through both joint ventures and wholly owned operations. India and China, our ‘must-win markets’, have large populations, relatively high economic growth and are expected to generate a significant portion of the insurance growth in Asia in the future. Most of our ‘developing businesses’ in our other countries (Singapore, Hong Kong, South Korea, Malaysia, Taiwan and Sri Lanka) are bancassurance led with strong joint venture partners. We had an established business in Australia, which we sold on 1 October 2009. We believe that there is potential for growth in the Asia Pacific market due to low insurance penetration in most countries, an expanding middle class and relatively high gross domestic product (GDP) growth.
We consider our competitive factors in Asia Pacific to be: — Balanced portfolio of markets — Established presence in “must-win” markets — Multi-channel distribution, with particular strength in bancassurance — Strength in wrap administration platforms — Brand recognition — Technical expertise
In China, through our joint venture with COFCO Limited (COFCO), we are ranked fourth in terms of total premium among 28 foreign insurers in China according to China Insurance Regulatory Commission. We currently have a presence in 10 provinces, with a total of 40 city branches. Our “new five year strategy” aims to achieve a top 10 position by 2014 in terms of life APE.
In India, we operate in partnership with the Dabur Group through an associate, Aviva Life Insurance Company India Limited. We currently rank 11th among the private life insurance companies in India based on first year premium as at 31 December 2009, according to the Insurance Regulatory and Development Authority (IRDA) and we aim to be a top 10 life insurer by leveraging our bancassurance expertise and transforming our agency sales force.
In Sri Lanka, we own a 51% stake in Eagle Insurance (Eagle). Eagle is ranked the third largest life insurer and fifth largest general insurer in the country, as based on gross written premiums in 2008 according to the Insurance Board of Sri Lanka. In the third quarter 2009, we signed a distribution agreement with Lanka ORIX Leasing Company PLC, a large leasing company. In Sri Lanka, we aim to attain no.1 position by 2012 in terms of new business, in life business and to become the fourth largest general insurance player in Sri Lanka.
In July 2007, we entered the Malaysian market through the acquisition of a 49% stake in two of CIMB Group’s subsidiaries, Commerce Life Assurance Berhad and Commerce Takaful Berhad who have entered into bancassurance agreements with another CIMB Group subsidiary, CIMB Bank. This has provided Aviva access to over four million potential new customers as well as introducing takaful insurance to the Aviva group. We believe there is significant growth opportunity in takaful in the next few years. We aim to become a top five life and takaful company in Malaysia by 2014 by APE.
Distribution We operate a multi-distribution strategy in Asia, with particular strength in bancassurance, and aim to continue to harness the benefits of multi-distribution in all of our markets as we expect the regionally dominant agency sales force model to decline in the region over coming years as markets mature.
Aviva Singapore has a multi-channel distribution strategy building on the core bancassurance relationship with DBS Bank and an expanding network of IFAs. We believe that our UK and Australia expertise have helped grow this network.
In Hong Kong, we distribute the majority of our products through bancassurance and IFAs.
In China, India, Malaysia, Taiwan and South Korea bancassurance is the main distribution method. However, direct sales force is growing in importance for our business in India.
Australia For details on the sale of our Australian business, which completed on 1 October 2009, see “Financial statements IFRS – Note 3 – Subsidiaries”.
Aviva Investors provides investment management services to a broad range of client types. Our largest client group are the long-term insurance and savings, and general insurance businesses of Aviva plc. For these clients we provide bespoke asset management services, across a broad spectrum of asset classes. We work extremely closely with these clients to develop tailored solutions to their policyholder needs.
Our distribution model to external clients is a business-to­ business model, and this is consistent across all regions. We provide both bespoke segregated solutions for larger clients or offer access to a variety of fund ranges. Our target clients for the larger segregated solutions tend to be large pension schemes and large financial institutions such as insurance companies and banks.
In addition, we continue to look at UK-based providers who have significant overseas operations, including both insuranceowned players such as Standard Life Investments and the combined asset management businesses of Prudential plc (primarily M&G), as well as independent, listed managers like Schroders and Aberdeen Asset Management.
We manufacture hedge funds in the UK, US and Poland. These funds are generally registered offshore and are primarily sold to the hedge funds industry, although we do also promote single strategy funds to institutional clients, family offices and wealth managers. The asset classes include fixed interest, multi asset, convertibles and equities.
We also have four Dublin domiciled money market funds addressing the sterling and Euro money market segments. These funds are sold by a specialist sales team based in London and target corporate treasury functions.
Our investment capabilities, products and services comprise: — Alternatives – We offer a range of alternative investment products from private equity fund of funds to hedge funds. — Equities — Fixed Income – Our Fixed Income teams cover the complete product set: UK government securities, liquidity products, corporate bonds, European and global sovereigns, indexlinked bonds, emerging markets (hard and local currency debt) and high-yield instruments.
— Global Investment Solutions – Our new Global Investment Solutions team constructs client solutions across markets.
Aviva plc has a 50% interest in the joint venture *** Incorporated in Scotland **** Includes other UK general insurance subsidiaries and certain investment management businesses
Ireland Aviva group Ireland plc and its principal subsidiaries: Ark Life Assurance Company Limited (75%) Aviva Health Insurance Ireland Limited (70%) Aviva Insurance (Europe) Plc Aviva Life & Pensions Ireland Limited (75%)
The selected consolidated financial data for the five years ended 31 December 2009 have been derived from, and should be read in conjunction with, our audited consolidated financial statements and the related notes in these financial statements.
Tax attributable to shareholders’ profits (490) 415 (334) (594) (630) Profit/(loss) for the financial year 1,315 (885) 1,498 2,400 1,898
Profit/(loss) per share attributable to equity shareholders: Basic 37.8p (36.8)p 48.9p 88.0p 73.5p Diluted 37.5p (36.8)p 48.5p 87.0p 72.9p
Number of shares in issue at 31 December 2,767 2,658 2,622 2,566 2,396 Weighted average number of shares in issue for the year 2,705 2,643 2,588 2,469 2,340
Financial and operating performance We are the fifth largest insurance group in the world, based on gross written premiums for the 2008 fiscal year. We are one of the top five providers of life and pensions products in the UK, Ireland, Netherlands, through our Delta Lloyd subsidiary, Poland and Spain and one of the top 10 providers of life and pensions products in France, Italy and Romania, as based on total sales for 2008. Our main activities are the provision of products and services in relation to long-term insurance and savings, fund management and general insurance.
On 17 February 2010, we sold our 35% holding in Sogessur SA to that company’s main shareholder, Société Générale, for a consideration of £35 million, realising a profit on disposal of £24 million.
Factors affecting results of operations Our financial results are affected, to some degree, by a number of external factors, including demographic trends, general economic and market conditions, government policy and legislation and exchange rate fluctuations. See “Performance review – Risk management” for more information on risks associated with these and other factors. In addition, our financial results are affected by corporate action taken by the Group, including acquisitions, disposals and other actions aimed at achieving our stated strategy. We believe that all of these factors will continue to affect our results in the future.
Shareholders’ profits arising on with-profits business under IFRS depend on the total bonuses declared to policyholders on
Natural and man-made disasters Our general insurance and health business results are affected by the amount of claims we need to pay out which, in turn, can be subject to significant volatility depending on many factors, including natural and man-made disasters. Natural disasters arise from adverse weather, earthquakes and other such natural phenomena. Man-made disasters include accidents and intentional events, such as acts of terrorism. These events are difficult to predict with a high degree of accuracy, although they generally occur infrequently at a material level. Our exposure to large disasters has been somewhat reduced through the recent strategic refocusing of our general insurance business towards personal lines business and small- to mediumsized commercial risks. Our costs in connection with natural and man-made disasters are also significantly mitigated by reinsurance arrangements with external parties such that our maximum exposure is limited to no more than approximately £400 million for a one in ten year event or £850 million for a one in hundred year event. See “Financial Statements IFRS – Note 56 – Risk Management” and “Financial Statements IFRS – Note 41 – Reinsurance Assets” for further information on our reinsurance programme.
During 2007, the UK results were adversely impacted by £475 million for claims relating to the winter storms and summer floods. In 2008, Ireland and Canada incurred some
In 2006, the Financial Services Authority in the UK amended the rules regarding the valuation of non-profit life reserves. The impact on Aviva was a £167 million benefit to operating profit in 2007 and a £149 million benefit in 2006. In 2008, the ombudsman in the Netherlands investigated the level of charges paid by unit-linked policyholders across the life insurance industry. As a result of this investigation, our Delta Lloyd life business agreed to recompense their policyholders and provided £126 million for this cost.
Exchange rate fluctuations We publish our consolidated financial statements in Pounds sterling. Due to our substantial non-UK operations, a significant portion of our operating earnings and net assets are denominated in currencies other than sterling, most notably the euro and the US dollar. As a consequence, our results are exposed to translation risk arising from fluctuations in the values of these currencies against sterling. Total foreign currency movements during 2009 resulted in a loss recognised in the income statement of £154 million, an improvement of £173 million from a £327 million loss in 2008.
Movements in exchange rates may affect the value of consolidated shareholders’ equity, which is expressed in sterling. Exchange differences taken to other comprehensive income arise on the translation of the net investment in foreign subsidiaries, associates and joint ventures. This aspect of foreign exchange risk is monitored centrally against limits that we have set to control the extent to which capital deployment and capital requirements are not aligned. We use currency borrowings and derivatives when necessary to keep currency exposures within these predetermined limits, and to hedge specific foreign exchange risks when appropriate; for example, in any acquisition or disposal activity. During 2009, sterling had strengthened recovering some of its loss in value against the euro and dollar in 2008 resulting in a foreign currency loss in other comprehensive income of £951 million. During 2008,
Continuing with the group’s strategy to exit non-core operations, we disposed of the British School of Motoring Limited for a consideration of £4 million.
Activity in 2008 During 2008, we acquired subsidiaries in Ireland, Italy and Belgium. In Belgium we acquired Swiss Life Belgium, further strengthening our position in the Belgium life insurance market. The acquisition of UBI Vita in Italy provides us with a new bancassurance distribution channel and the acquisition of Vivas Group Ltd. in Ireland has enabled us to enter the Irish health insurance market. Total consideration for these acquisitions, including costs, was £189 million.
As part of our strategy to exit non-core operations, we disposed of HPI Limited and RAC Autowindscreens Limited in the UK and our life operations in Luxembourg. In addition, we disposed of our offshore administration operations. These offshore operations will continue to provide administration services to our UK, Irish and Canadian businesses under a master services agreement with the new owners. Consideration for these disposals was £126 million, realising a net profit on disposal of £7 million.
Activity in 2007 During 2007, we acquired subsidiaries in Spain, Italy and the UK in connection with bancassurance agreements with Cajamurcia, Banco Popolare and HSBC, with the objective of further increasing our distribution channels and access to customers in these markets. In the Netherlands we acquired Erasmus Group and an 85% interest in Cyrte Investments NV, further strengthening the position of our Dutch subsidiary, Delta Lloyd, in the Dutch insurance and fund management markets. Total consideration for these acquisitions, including costs, was £397 million.
In addition to these acquisitions we entered into joint venture agreements with local banks in Turkey, Malaysia and Taiwan. Our joint ventures in Malaysia and Taiwan gave us access to these emerging markets for the first time, while our joint venture in Turkey considerably strengthens our position in the Turkish life and pensions market. Total consideration for these joint ventures was £208 million.
We disposed of a number of businesses, the most material of which was the contribution of our Turkish business, Aviva HE, to our Turkish joint venture, referred to above. This gave rise to a profit on disposal of £71 million. Other disposals of smaller operations gave rise to a loss on disposal before tax of £22 million.
Performance reviewAviva plc Financial and operating performance continued Corporate responsibilityAnnual Report and Accounts 2009 insurance businesses in Ireland and the Netherlands, through our Delta Lloyd subsidiary, and smaller general insurance operations in several other countries; in North America we have a large long-term insurance and savings business in the US and a major general insurance business in Canada; in Asia Pacific we predominantly have long-term insurance and savings businesses. Our fund management businesses operate across all our four regions.
UK with-profits business With-profits products are designed to pay policyholders smoother investment returns through a combination of small annual bonuses and large terminal bonuses. Shareholders’ profit emerges from this business in direct proportion to policyholder bonuses, as shareholders receive up to one-ninth of the value of each year’s bonus declaration to policyholders. Accordingly, the smoothing inherent in the bonus declarations provides for relatively stable annual shareholders’ profit from this business. The most significant factors that influence the determination of bonus rates are the return on the investments of the withprofits funds and expectations about future investment returns. Actual and expected investment returns are affected by, among other factors, the mix of investments supporting the with-profits fund, which in turn is influenced by the extent of the inherited estate within the with-profits fund.
The unallocated divisible surplus therefore consists of future (as yet undetermined) policyholder benefits, associated shareholders’ profit and the orphan estate. The orphan estate serves as working capital for our with-profits funds. It affords the with-profits fund a degree of freedom to invest a substantial portion of the funds’ assets in investments yielding higher returns than might otherwise be obtainable without being constrained by the need to absorb the cash-flow strain of writing large volumes of new business and the need to demonstrate solvency.
Other long-term insurance and savings business Non-profit business falls mainly into two categories: investment type business and risk cover business. Investment type business, which accounts for most of our non-profit business, includes
General insurance and health business Operating earnings within our general insurance and health business arise when premiums, and investment return earned on assets supporting insurance liabilities and shareholder capital, exceed claims costs, costs of acquiring new business and administration costs.
— Non-participating investment business – This includes unit-linked business and pensions business – The amounts received for this business are treated as deposits under IFRS and an investment management fee is earned on the funds deposited.
For our general insurance and health business we report sales based on IFRS net written premiums.
For our long-term insurance and savings business, we believe that sales is an important measure of underlying performance and a better measure for new business than IFRS net written premiums. We consider the use of sales over IFRS net written premiums provides: — Consistent treatment of long-term insurance and investment contracts: IFRS net written premiums do not include deposits received on non-participating investment contracts. Longterm insurance contracts and participating investment contracts also contain a deposit component, which are included in IFRS net written premiums, in addition to an insurance risk component. Therefore, to appropriately assess the revenue generated on a consistent basis between types of contracts, we evaluate the present value of new business sales of long-term insurance and investment products on the basis of total premiums and deposits collected, including sales of mutual fund type products such as unit trusts and OEICs.
— Better reflection of current management actions in the year: IFRS net written premiums include premiums on regular premium contracts, which incepted in prior years, and therefore reflect the actions of management in prior years.
General insurance and health sales General insurance and health sales are defined as IFRS net written premiums, being those premiums written during the year net of amounts reinsured with third parties, as set out in the segmental analysis of results in “Financial Statements IFRS – Note 3 – Segmental information”. For sales reporting, we use the GAAP measure for general insurance and health business.
The table below presents our consolidated sales for the years ended 31 December 2009, 2008 and 2007, as well as the reconciliation of sales to net written premiums in IFRS.
JVs and associates (1,277) (1,062) (789) Annualisation impact of regular premium long-term business (446) (731) (560) Deposits taken on non-participating investment contracts (4,181) (7,523) (8,762) Retail sales of mutual fund type products
(investment sales) (3,872) (3,995) (6,983) Add: IFRS gross written premiums from existing long-term business 7,164 7,236 4,661 Less: long-term insurance and savings business premiums ceded to reinsurers (1,730) (1,044) (858)
Analysed as: Long-term insurance and savings net written premiums 22,921 23,228 18,764 General insurance and health net
— Annualisation impact of regular premium long-term business: As noted above, the calculation of PVNBP includes annualised regular premiums. The impact of this annualisation is removed in order to reconcile the non-GAAP new business sales to IFRS premiums and will vary depending on the volume of regular premium sales during the year.
— Retail sales of mutual fund type products (investment sales): Investment sales included in the total sales number represent the cash inflows received from customers to invest in mutual fund type products such as unit trusts and OEICs. We earn fees on the investment and management of these funds which are recorded separately in the IFRS income statement as “fees and commissions received” and are not included in statutory premiums.
— IFRS gross written premiums from existing long-term business: The non-GAAP measure of long-term and savings sales focuses on new business written in the year under review while the IFRS income statement includes premiums received from all business, both new and existing.
While these excluded items are significant components in understanding and assessing our consolidated financial performance, we believe that the presentation of adjusted operating profit enhances the understanding and comparability of the underlying performance of our segments by highlighting net income attributable to ongoing segment operations.
Adjusted operating profit for non long-term insurance business is based on expected investment returns on financial investments backing shareholder funds over the period. Expected investment returns are calculated for equities and properties by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of return. This rate of return is the same as that applied for the long-term business expected returns. The longer-term return for other investments is the actual income receivable for the period. Changes due to market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, are disclosed as non-operating items. The impact of changes in the discount rate applied to claims provisions is also treated outside adjusted operating profit.
Adjusted operating profit is not a substitute for profit before income taxes and minority interests in earnings or net income as determined in accordance with IFRS. Our definition of adjusted operating profit may differ from similar measures used by other companies, and may change over time.
The table below presents our consolidated adjusted operating profit for 31 December 2009, 2008 and 2007, as well as the reconciliation of adjusted operating profit to profit before tax attributable to shareholders’ profits under IFRS.
Add back adjusting items: Investment return variances and economic assumption changes on long-term insurance business (75) (1,631) 15
United Kingdom 14,261 18,756 20,445 Europe 21,750 21,806 20,488 North America 6,345 7,316 5,058 Asia Pacific 2,712 3,499 4,283
Expenses Claims and benefits paid, net of recoveries from reinsurers (27,549) (29,353) (27,121) Change in insurance liabilities, net of reinsurance (5,682) 3,885 (3,508) Change in investment contract provisions (11,185) 10,629 (2,018) Change in unallocated divisible surplus (1,547) 4,482 2,922 Fee and commission expense (4,396) (4,411) (4,244) Other expenses (5,366) (5,416) (3,473) Finance costs (1,336) (1,547) (1,217)
Income Year ended 31 December 2009 Net written premiums in 2009 were £32,114 million, a decrease of £2,251 million, or 7%, from £34,365 million in 2008. Longterm insurance and savings and general insurance and health both reported decreases in net written premiums primarily in the UK with a 36% decrease in long-term insurance and savings and 22% decrease in general insurance and health net written premiums in the UK. Europe reported a 12% increase in net written premiums with both North America and Asia Pacific reporting a decrease in net written premiums of 2% and 11% respectively.
Year ended 31 December 2008 Net written premiums in 2008 were £34,365 million, an increase of £5,032 million or 17% from £29,333 million in 2007. This increase reflects a 24% increase in life and pension premiums due to strong new business sales across most of our operations and a 5% increase in general insurance and health sales predominantly driven by our operations in France, the Netherlands and Canada.
Year ended 31 December 2008 Net investment income decreased by £25,732 million to a loss of £16,043 million (2007: £9,689 million profit). This decrease reflects the lower market value of properties in the UK, 30% to 50% fall in equity values across the world and the impact of falling yields and widening credit spreads on fixed income securities.
Year ended 31 December 2008 Claims and benefits paid in 2008 were £2,232 million higher at £29,353 million (2007: £27,121 million). The increase occurred across all regions, with the exception of the UK, due to unfavourable foreign exchange movement.
Changes in insurance liabilities in 2008 were £7,393 million lower resulting in a £3,885 million credit (2007: charge of £3,508 million). The favourable movement was primarily a result of investment variances across the world and greater lapses than expected in France.
Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information £4,482 million (2007: credit of £2,922 million) mainly reflecting the impact of falling market values on participating assets and related liabilities. These were partly offset by a write-down of the negative balance in Spain which created a charge in the income statement of £203 million.
Fees and commission expense, other expenses and finance costs in 2008 were £2,440 million higher at £11,374 million (2007: £8,934 million). The increase was driven by corporate restructuring and brand expense across the group and £1,040 million of impairments of financial assets mainly in the Netherlands and the US.
Profit/(loss) before tax attributable to shareholders’ profits Year ended 31 December 2009 Profit attributable to shareholders in 2009 was £1,805 million against a loss of £1,300 million in 2008. The increase is primarily due to favourable investment performance in 2009 which more than offset the decrease in premiums and increase in expenses as discussed above.
Year ended 31 December 2008 Loss before tax attributable to shareholders in 2008 was £1,300 million, a reduction of £3,132 million against the previous year (2007: £1,832 million profit). This decrease reflected the 52% reduction in income mainly due to investment performance, which was partly offset by lower expenses, discussed above, and a policyholder tax credit of £1,068 million (2007: tax charge of £15 million).
Adjusting items Year ended 31 December 2009 The long-term insurance and savings business investment variances and economic assumption changes on long-term insurance business was a charge of £75 million (2008: £1,631 million charge). The favourable change is driven by positive market movements across our regions and the inclusion in 2008 of a £550 million provision for credit defaults in the UK.
The short-term fluctuations and economic assumption changes on the non-life business were a £152 million credit (2008: £913 million charge). Favourable market movements across our regions were the primary driver for the change in the current year result.
Impairment of goodwill was £62 million in 2009 (2008: £66 million) driven by impairments in our UK life business and on an Italian associate.
Year ended 31 December 2008 The long-term insurance and savings business investment variances and economic assumption changes on long-term insurance business were a charge of £1,631 million in 2008 (2007: £15 million credit). The change is attributable to a provision for credit defaults of £550 million in the UK, with the balance primarily driven by investment losses across Europe.
The short-term fluctuations and economic assumption changes on the non-life business in 2008 were £913 million unfavourable (2007: £182 million unfavourable). These were due to lower investment market returns compared to our longer-term investment return assumptions and £94 million for the impact of changes in discount rates for latent claims provisions.
Impairment of goodwill was £66 million in 2008 (2007: £10 million). This was mainly driven by impairments in the Netherlands and on an Italian associate company.
Adjusted operating profit Year ended 31 December 2009 Adjusted operating profit decreased by £275 million, or 12%, to £2,022 million (2008: £2,297 million) for the reasons set forth above.
Year ended 31 December 2008 Adjusted operating profit before tax in 2008 increased by £81 million, or 4%, to £2,297 million (2007: £2,216 million) for the reasons set forth above.
Profit before tax was £611 million for 2009 (2008: £149 million loss). The loss for 2008 included an additional £550 million provision for credit defaults over and above the long-term provisions, which has been retained in 2009, and £97 million for the cost of transferring the investment wrap platform to a third-party supplier, which were one off events in that year.
Year ended 31 December 2008 Sales in our UK long-term insurance and savings business decreased by £1,205 million, or 8%, to £13,343 million (2007: £14,548 million). The decrease was driven by sales in bonds down 21% and investment sales down 46% compared to 2007 due to investment market turbulence, with protection down 9% due to the decline in mortgage approvals. Pensions and
Profit before tax was £434 million, an increase of £825 million from a loss of £391 million in 2008. The increase predominately reflects the impact of investment variances of £397 million and an exceptional charge in 2008 of £279 million relating to the discounted cost of strengthening our latent claims.
Year ended 31 December 2008 Net written premiums in our UK general insurance and health business decreased by £484 million, or 8%, to £5,413 million in 2008 (2007: £5,897 million). This decrease was across all personal and commercial lines with personal motor and creditor business showing the greatest fall against 2007. This reflected the increasingly competitive market and our strategy of writing business for profit rather than volume, as well as reflecting
Adjusted operating profit in 2008 was £656 million, an increase of £235 million on 2007 of £421 million. The principal factor in the improved profitability for the general insurance business was that weather related claims were in line with normal expectations compared with a £475 million adverse impact in 2007. This favourable impact was partly offset by a reduction in the benefit of prior year claims development to £285 million (2007: £430 million), the decline in net written premiums and a reduction in long-term investment returns to £585 million (2007: £656 million). These factors outweighed the earned benefits we have derived from our initiatives to deliver cost savings and control claims inflation.
Loss before tax in our UK general insurance and health business was £391 million in 2008, a decrease of £533 million from a £142 million profit in 2007. This decrease reflected the impact of investment variances and £279 million for strengthening of latent claims provisions.
France 4,891 3,880 3,790 Ireland 1,072 1,299 1,780 Italy 3,607 2,331 2,975 Poland (including Lithuania) 1,161 1,906 1,388 Spain 2,454 2,489 2,433 Other Europe 1,190 1,410 946
The table below presents adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from our operations in Europe for the years ended 31 December 2009, 2008 and 2007.
Fund management 31 14 27 Non-insurance (148) (151) (49) Total operating profit 1,196 1,141 1,197
Year ended 31 December 2009 Europe sales in 2009 were in line with the prior year at £21,750 million (2008: £21,806 million). A 6% increase in long-term insurance and savings sales to £18,704 million (2008: £17,716 million) offset a 26% decrease in general insurance and health net written premiums to £3,046 million (2008: £4,090 million).
Adjusted operating profit in 2009 was £1,196 million, an increase of 5%, or £55 million, from £1,141 million.
Europe’s profit before tax attributable to shareholders’ profits was £941 million in 2009, an increase of £893 million from £48 million in 2008. The increase is mainly attributable to favourable investment returns.
Aviva Europe’s long-term insurance and savings business adjusted operating profit was £761 million, an increase of £76 million, or 11%, from £685 million in 2008, reflecting increased profits from existing business in France and Italy due to favourable experience in claims, lapses and surrenders.
Delta Lloyd Delta Lloyd reported long-term and savings sales of £4,329 million, a decrease of £72 million, or 2%, on 2008 (2008: £4,401 million). Life and pension sales decreased by 11% to £3,665 million with investment sales reported at £664 million, an increase of 118% on 2008.
Delta Lloyd reported net written premiums of £4,341 million, a decrease of £1,542 million, or 26%, on 2008 (2008: £5,883 million) primarily due to lower group pension contracts and the sale of the health business.
Delta Lloyd’s increased sales were due to a significant increase in corporate pension sales with five contracts contributing a total of £1,106 million, which was partly offset by lower annuity sales as a result of increased competition from the banking sector. Sales in Other Europe increased due to a one-off payment of £545 million in Romania from the introduction of compulsory pensions. These improvements were offset by decreased sales in Italy and Ireland predominantly as a result of the worsening economic environment.
Investment sales in Europe in 2008 decreased by £808 million or 51% to £764 million (2007: £1,572 million) due to reduced sales across all countries as a result of the volatile investment markets.
Performance reviewAviva plc Financial and operating performance continued Corporate responsibilityAnnual Report and Accounts 2009 new bancassurance agreement with Banco Popolare. The Dutch health business, which contributed sales of £1,250 million, was sold with effect from 1 January 2009.
Net written premiums in our long-term insurance and savings businesses were £10,976 million in 2008, an increase of £1,077 million, or 11%, from £9,899 million in 2007. This increase resulted from new product launches in Poland, securing five corporate schemes in the Netherlands and the introduction of compulsory pensions in Romania.
General insurance and health net written premiums were £4,090 million in 2008, an increase of £858 million, or 27%, from £3,232 million in 2007 as explained above.
Europe’s long-term insurance and savings business adjusted operating profit was £881 million, an increase of £104 million, or 13%, from £777 million in 2007. This result is partially attributable to the strengthening of the euro, which has had a positive impact on all our major markets. The main countries contributing to the increase were Poland, reflecting higher management fees and cost efficiencies and Spain, which earned higher profits on protection business following growth in the underlying portfolio from the acquisition of Cajamurcia in the fourth quarter of 2007.
Europe’s profit before tax attributable to shareholders’ profits was £48 million in 2008, a decrease of £1,274 million, or 96%, from £1,322 million in 2007. The decrease was mainly due to adverse investment returns and the cost of the unitlinked compensation in the Netherlands of £126 million.
The table below presents sales, net written premiums, adjusted operating profit and profit/(loss) before tax attributable to shareholders’ profits under IFRS of Aviva North America for the years ended 31 December 2009, 2008 and 2007.
Protection 871 623 617 Annuities 3,674 4,244 2,600 Other long-term business — 848 429 General insurance 1,800 1,601 1,412
Adjusted operating profit Long-term insurance business 85 16 79 General insurance 144 145 154 Non-insurance (16) (12) (4)
Aviva North America’s net written premiums decreased by £92 million, or 1%, to £6,176 million (2008: £6,268 million). The decrease is a result of lower long-term insurance and savings sales in the US offset by improved sales in Canada as stated above.
Aviva North America’s profit before tax attributable to shareholders’ profits was £244 million, an increase of £582 million (2008: £338 million loss). The increase is mainly as a result of favourable investment performance during the year.
Aviva North America’s net written premiums were £6,268 million in 2008, an increase of £1,842 million, or 42%, from £4,426 million in 2007. The increase was mainly due to increased annuity sales in the US and improved sales across all lines of business in Canada.
Aviva North America’s loss before tax attributable to shareholders’ profits was £338 million in 2008, an increase in loss of £300 million, from £38 million loss in 2007. The increased loss was mainly due to significantly lower investment income and the recognition of impairment losses, both driven by the downturn in the economic environment.
Asia Pacific Aviva Asia Pacific operates in eight countries across the region, following the sale of the Australia operations on 1 October 2009, through both joint ventures and wholly-owned operations. We have businesses in markets at various stages of development, with established businesses in Singapore and Hong Kong, high potential businesses in India and China and developing businesses in South Korea, Taiwan, Malaysia and Sri Lanka.
Net written premiums decreased to £455 million, a decrease of £56 million, or 11%, on 2008 (2008: £511 million). The decrease was mainly due to the impact of the uncertain economic environment in the region as highlighted above and the disposal of the Australian business.
Increase in adjusted operating profit of £41 million to £77 million (2008: £36 million) was mainly due to the benefit from a one-off release of reserves of £68 million following an actuarial review of assumptions in Singapore, partly offset by the impact of the Australian disposal.
Profit before tax of £146 million (2008: £68 million loss) reflects the favourable movements in the market across the Asia Pacific region.
Aviva Asia Pacific’s net written premiums were £511 million in 2008, a decrease of £91 million, or 15%, from £602 million in 2007. The decrease was mainly due to the volatile investment markets impacting sales in Hong Kong, where the products are mainly investment-related.
Adjusted operating profit was £36 million in 2008, a decrease of £1 million, or 3%, from £37 million in 2007. This reflects increased regional costs including one-off costs associated with recruitment, offset by an increase in the longterm insurance and savings business due to lower new business strain from sales and business mix.
Aviva Investors Aviva Investors, our fund management business, operates across all four regions providing fund management services to thirdparty investors and supporting our long-term insurance and savings and general insurance operations.
Year ended 31 December 2008 Aviva Investors’ adjusted operating profit was £114 million in 2008, a decrease of £33 million, or 22%, from £147 million in 2007. The decrease was mainly due to the investment market volatility in the year, with all geographical areas experiencing downward pressure on fee income.
Corporate centre and group debt costs and other interest 2009 2008 2007 £m £m £m
Year ended 31 December 2009 Corporate centre costs were £108 million, a decrease of £33 million, or 23%, on £141 million in 2008. The decrease reflects lower central spend. Staff incentive costs were in line with 2008 and projects spending decreased by £23 million reflecting lower costs following the completion of the brand migration, financial controls and MCEV projects initiated in 2008.
In 2008 group debt costs and other interest totalled £379 million (2007: £363 million). External interest costs increased to £286 million (2007: £259 million) reflecting higher interest in subordinated debt, due to our hybrid debt issues in May and August 2008, offset by lower commercial paper interest as proceeds from the issue were used to repay some commercial paper. Internal interest costs increased to £197 million (2007: £179 million) driven by changes to our internal loan balances. Net pension income increased to £104 million (2007: £75 million) reflecting higher expected rates of return on assets offset by higher discount rates on liabilities.
Analysis of investments We invest our policyholders’ funds and our own funds in order to generate a return for both policyholders and shareholders. The financial strength of our group and both our current and future operating results and financial performance are, therefore, in part dependent on the quality and performance of our investment portfolios in our UK, continental European, North America and Asia Pacific operations.
The UK with-profits business is comprised largely of longterm contracts with some guaranteed payments. We are therefore able to invest a significant proportion of the funds supporting this business in equities and real estate. This is because the long-term nature of these contracts allows us to take advantage of the long-term growth potential within these classes of assets, while the level of guaranteed payments is managed to mitigate the level of risk that we bear in relation to the volatility of these classes of assets.
General insurance and health business The general insurance and health business is comprised of shorter-term liabilities than the long-term insurance business. Furthermore, all the risk attaching to the investments is borne by our shareholders. As a result, the investment portfolio held to cover general insurance liabilities contains a higher proportion of fixed-income securities than the portfolio held to cover life insurance liabilities.
Analysis of financial investments We distinguish between policyholder, participating fund and shareholder investments, which are terms used to reflect the differing exposure to investment gains and losses. Policyholder assets are connected to our unit-linked business, where the policyholder bears the investment risk on the assets in the unit-linked funds. Our exposure to loss on policyholder assets is limited to the extent that income arising from asset management charges is based on the value of assets in the funds. Participating fund assets related to some of our insurance and investment contracts which contain a discretionary participating feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. Our exposure to investment losses on participating funds is generally limited to our participation in the fund. Shareholder assets are other assets held within our long-term businesses that are not backing unit-linked liabilities or participating funds. Investments held at 31 December 2009, 31 December 2008 and 31 December 2007 are analysed below: Less assets of operations classified as
Debt securities 17,596 86,464 56,450 160,510 — 160,510 Equity securities 28,638 9,678 5,027 43,343 — 43,343 Other investments 24,867 7,222 2,760 34,849 (23) 34,826
Measurement basis We carry investments on our statement of financial position at either fair value or amortised cost. As shown in the table below, at 31 December 2009, 93% of the group’s total investments were carried at fair value on the statement of financial position.
For the tables below we have used the standard Standard & Poor’s rating classifications. Investment grade debt securities are classified within the range of AAA (extremely strong) to BBB (good) ratings, with AAA being the highest possible rating. Debt securities which fall outside this range are classified as speculative grade. Where we use a rating provided by Moody’s or Fitch, we have expressed it as the Standard & Poor’s equivalent rating. For example, we consider Standard & Poor’s rating of AA (very strong) to be equivalent to Moody’s rating of AA (excellent) and Fitch’s rating of AA (very strong).
At 31 December 2009, our exposure to sub-prime debt securities was limited to £2 million (2008: £39 million), and our exposure to collaterised debt obligations (CDO) and collaterised loan obligations (CLO) was limited to £176 million. Investments in structured assets (excluding agency RMBS that are backed by GSEs) were £7,341 million, representing less than 5% of total debt securities.
Of the debt securities rated less than BBB, 77% are rated BB, while only 5%, amounting to £181 million, are rated below B.
Structured RMBS non-agency sub-prime 2 — — — — — 2 RMBS non-agency ALT A 18 100 16 22 81 — 237 RMBS non-agency prime 943 8 47 60 6 5 1,069 RMBS agency 2,534 — — — — 1 2,535
Corporate Public Utilities 19 159 935 99 3 3 1,218 Convertibles and bonds with warrants — — — 2 5 — 7 Other corporate bonds 1,274 1,291 3,234 570 34 267 6,670
Structured RMBS non-agency sub-prime — — — — — — — RMBS non-agency ALT A — 3 — — — — 3 RMBS non-agency prime 8 1 6 2 — 1 18 RMBS agency 32 — — — — — 32
CMBS 8 6 — 5 — — 19 ABS 21 5 29 6 — 1 62 CDO (including CLO) 2 — 2 — — — 4 ABCP — 156 — — — — 156 ABFRN — — — — — — —
Corporate Public Utilities 639 419 2,035 721 234 8 4,056 Convertibles and bonds with warrants — 26 259 — 18 20 323 Other corporate bonds 6,332 6,781 12,673 5,783 1,387 1,095 34,051
Structured RMBS non-agency sub-prime — — — — — — — RMBS non-agency ALT A — — — 2 2 — 4 RMBS non-agency prime 239 — — — — — 239 RMBS agency 248 — — — — — 248
CMBS 142 53 18 2 4 — 219 ABS 241 74 114 66 21 1 517 CDO (including CLO) — — — — — — — ABCP — 660 — — — — 660 ABFRN — — — — — — —
Corporate Public Utilities 38 143 710 395 9 61 1,356 Convertibles and bonds with warrants — — 103 93 27 33 256 Other corporate bonds 2,834 3,901 10,294 8,676 1,261 1,656 28,622
Structured RMBS non-agency sub-prime 2 — — — — — 2 RMBS non-agency ALT A 18 97 16 20 79 — 230 RMBS non-agency prime 696 7 41 58 6 4 812 RMBS agency 2,254 — — — — 1 2,255
CMBS 1,200 207 227 84 80 4 1,802 ABS 994 203 229 92 16 274 1,808 CDO (including CLO) 67 18 15 10 71 56 237 ABCP — 20 — — — — 20 ABFRN — — — — — — —
Wrapped Credit AAA 157 26.4% — — AA 93 15.7% 35 5.9% A 121 20.4% 111 18.7% BBB 129 21.7% 141 23.8% Less than BBB 40 6.7% 20 3.3% Non-rated 54 9.1% 54 9.1% Not available without insurance guarantee — — 233 39.2%
Of our £7,289 million exposure to equity investments in banks, trusts and insurance companies, £1,745 million relates to shareholder investments, which includes £766 million equities held by our business in the Netherlands and a strategic holding in UniCredit and other Italian banks of £927 million (£757 million net of minority interest share).
In addition to the above, our regions have major offices in the following locations: — North America: Des Moines, Iowa, USA and Scarborough, Ontario, Canada — Europe: Paris, France; Amsterdam, the Netherlands; Dublin, Ireland; Madrid, Spain; and Milan, Italy
We own or lease space in 27 countries around the world. As of 31 December 2009, we owned and occupied land and buildings for our own use with a total book value of £416 million (2008: £568 million). We believe that these facilities are adequate for our present needs in all material respects. We also hold other properties, both directly and indirectly, for investment purposes, valued at £10,756 million at 31 December 2009.
Risk management As a global company we face a diverse range of risks, each of which has the potential to impact financial performance or hinder the achievement of business objectives. If we do not manage these risks effectively we could also miss potential opportunities to further develop and expand our business.
— Operational risks arise from inadequate or failed internal processes, or from people and systems or from external events. This includes business protection, information technology, people, legal and regulatory compliance risks.
We operate within a three lines of defence model. Primary responsibility for risk identification and management lies with business management (the 1st line of defence). Support for and challenge on the completeness and accuracy of risk assessment, risk reporting and adequacy of mitigation plans are performed by specialist risk functions (the 2nd line of defence). Independent and objective assurance on the robustness of the risk management framework and the appropriateness and effectiveness of internal control is provided by group internal audit (the 3rd line of defence).
Risk management framework At group centre, the Risk Management Framework enables us to understand all the material risks that we currently face and to identify early emerging risks. This knowledge helps the risk teams to provide effective challenge and support to the regions and its businesses.
The central risk team monitors these risk exposures on a regular basis with a specific focus on financial risks via regular reporting to the Group Executive Committee and, as part of the performance management process, senior management review risk management information to ensure the successful delivery of our business objectives.
Corporate governance and oversight Our Risk Governance Framework allocates responsibility for the oversight of risk management to a number of committees at group centre with the Group Asset Liability Committee (ALCO) and the Group Operational Risk Committee (ORC) providing a key focus on financial and operational risk. The group centre committees are in turn supported by similar governance structures in the regions. These relationships are summarised in the diagram below.
Group — Set risk policies — Monitor performance — Oversee risk management — Provide challenge — Recommend risk activity
Policies and procedures We have formal risk policies that ensure a consistent approach to the management of all our risks across all the businesses and locations in which we operate. These risk policies define our risk appetite and set out risk management and control standards for the group’s worldwide operations. The risk policies also set out the roles and responsibilities of businesses, regions, policy owners, and the risk oversight committees.
As our business needs to change and respond to market conditions and customer needs, we regularly monitor the appropriateness of our risk policies and risk appetite to ensure they remain up-to-date. This helps to provide assurance to the various risk oversight committees that there are appropriate controls in place for all our core business activities, and that the processes for managing risk are understood and followed consistently across our global businesses.
Risk and economic capital We already use economic capital models within our decisionmaking and were early adopters of stress and scenario analysis across the risks we face, making us well placed for the forthcoming Solvency 2 regulatory regime. However, the use of models is balanced with sound business judgement.
Risk management continued Risk factors This table sets out the definitions of each key risk type; the key risk drivers for each category; sensitivities to economic and operating experience on the group’s performance; and a summary of the related risk mitigation processes that operate within the Risk Management Framework.
— Exposures to debt investments, structured asset investments, and Credit counterparties in our derivatives, mortgage loans and reinsurance placements Risk of financial loss as a result of the default or failure of third — Default and spread risks are considered, as both impact the value and risks parties to meet their payment obligations of assets
General insurance The inherent uncertainty as to the occurrence, amount and timing of insurance liabilities. This includes fluctuations in the timing, frequency, and severity of claims and settlements, inadequate reinsurance protection and inadequate reserves.
— Financial impact of worsening claims ratios and inadequate reserves — Reinsurance may not be available, affordable or adequate to protect the group against losses — Inappropriate risk selection and related pricing
— Adverse mortality experience (the death of a policy holder) and morbidity (ill health)
— Focus on our strategy of delivering ‘One Aviva, Twice the Value’Strategic — Our strategic response to changes in external environment including Risks to our business model arising from changes in external competitive landscape, customer behaviour, distributor regulatory changes, events, our markets and customer behaviour as well as risks merger and acquisition opportunities and emerging trends arising from mergers and acquisitions
— Processing large number of complex transactions across numerousOperational and diverse products The risks of direct or indirect loss resulting from inadequately — We are highly dependent on the proper functioning of information or failed internal processes, or from people and systems, or technology and communication systems to serve our customers from external events — We are partially reliant on the operational processing performance of our outsourced partners including certain servicing and IT functions
Risk mitigation — Regular reviews by group asset liability committee relative to risk appetite — Active management of exposure through hedging against unfavourable market movements and changes in asset mix — Regular monitoring of impact from changes in market risks (interest rates, equity prices, property values) through value at risk analysis, stress tests and scenario analysis
— Regular reviews by group general insurance committee — Use of reinsurance to help reduce the financial impact of a catastrophe and manage earnings volatility — Extensive use of data, financial models and analysis to improve pricing and risk selection — Underwriting and claims management disciplines — Digital mapping to better manage property flood risk
— Longevity – should our assumptions in respect of annuitant mortality worsen by 5% then shareholder funds would reduce by £320 million before tax on an IFRS basis and decrease embedded value by £365 million net of tax on an MCEV basis.
— Progress in building our Aviva global brand and transforming our business
— New product and distribution developments that suit our customers’ changing needs
Insurance and investment contracts Long term business — Insurance contracts – non-linked1 10,554 9,609 33,980 135,004 189,147 — Investment contracts – non-linked2 59,504 — — — 59,504 — Linked business2 80,206 — — — 80,206 General insurance3 7,215 4,549 2,467 4,111 18,342
Total liabilities per statement of financial position 339,305 1. Amounts shown in respect of long-term insurance contracts represent estimated undiscounted cash flows for the Group’s life assurance contracts. In determining the projected payments, account has been taken of the contract features, in particular that the amount and timing of the contractual payments reflect either surrender, death or contract maturity. In addition, the undiscounted amounts shown include the expected payments based on assumed future investment returns on assets backing insurance and investment contract liabilities. The projected cash flows exclude the unallocated surplus of with-profits funds (see below).
4. The Group has no material finance leases for property and equipment. 5. Includes obligations under stock lending and repurchase agreements. 6. When subordinated debt is undated or loan notes perpetual, the interest payments have not been included beyond 15 years. Annual interest payments for these borrowings are £75 million.
Contractual undiscounted interest payments are calculated using fixed interest rates or prevailing market floating rates as applicable. 7. The unallocated surplus represents the excess of assets over liabilities, including policyholder ‘‘asset share’’ liabilities, which reflect the amount payable under the realistic Peak 2 reporting regime of the FSA. Although accounted for as a liability, as permitted by IFRS 4, there is currently no expected payment date for the unallocated surplus. 8. Provisions include pension obligations, which have been excluded from the contractual obligations table above, due to the uncertainty of the amount and timing of future cash flows. The Group operates both funded defined benefit and funded defined contribution pension schemes around the world, full details of which are provided in “Financial Statements IFRS – Note 47 – Pension obligations”. We have a contractual obligation to fund these schemes. However, the amount and timing of the Group’s cash contributions to these schemes is uncertain and will be affected by factors such as future investment returns and demographic changes. Our cash funding of defined contribution schemes is based on percentages of salary. Our cash contribution to defined benefit schemes is agreed in advance with scheme trustees for the short term, typically a period of up to five years. However, these contributions are revisited annually in light of changes in expectations of investment returns and other assumptions. The scheme liabilities have an average duration of 22 years in the UK schemes and between 12 and 18 years in the non-UK schemes.
— declare dividends 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.
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.
– Aviva International Insurance (AII) Ltd acts as both a UK general insurer and as the primary holding company for our foreign subsidiaries. Internal capital management mechanisms in place allocate a portion of the total capital of the company to the UK general insurance operations. These mechanisms also allow for some of the assets backing technical liabilities to be made available for use across the group. Balances in respect of these arrangements are also treated as internal debt for capital management purposes.
Total capital employed is financed by a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings (including internal borrowings as described in footnote 2 above).
Financial leverage, the ratio of external senior and subordinated debt to MCEV capital and reserves, was 31.8% (31 December 2008: 34.0%). Fixed charge cover, which measures the extent to which external interest costs, including subordinated debt interest and preference dividends, are covered by MCEV operating profit was 8.5 times (31 December 2008: 9.2 times).
Financial flexibility The group’s borrowings are comprised primarily of long dated hybrid instruments with maturities spread over many years, minimising refinancing risk. In addition to central liquid asset holdings of £2.2 billion, the group also has access to unutilised committed credit facilities of £2.1 billion provided by a range of leading international banks.
As outlined above, a number of strategic initiatives impacting the IGD solvency position were completed during the year. The Delta Lloyd IPO and Australian Life disposal benefited solvency by £0.5 billion and £0.4 billion respectively, while the policyholder incentive payment paid as part of the inherited estate reattribution reduced solvency by £0.5 billion. Other material initiatives included a £0.4 billion benefit from central and Delta Lloyd hybrid issues and £0.1 billion from the disposal of the Dutch healthcare business. The IGD position also benefited from the change in value of non-regulated entities, which includes the recognition of intellectual property rights and movements in the value of distribution companies. The reintroduction of the scrip scheme, allowing investors the option of receiving dividends in the form of new Aviva shares, also delivered a capital benefit of £0.3 billion over the year.
Regulatory basis – Long-term businesses For our non-participating worldwide life assurance businesses, our capital requirements, expressed as a percentage of the EU minimum, are set for each business unit as the higher of: — The level of capital at which the local regulator is empowered to take action. — The capital requirement of the business unit under the group’s economic capital requirements; and, — The target capital level of the business unit.
The required capital across our life businesses varies between 100% and 325% of EU minimum or equivalent. The weighted average level of required capital for our non-participating life business, expressed as a percentage of the EU minimum (or equivalent) solvency margin has decreased to 130% (31 December 2008: 142%).
Estimated Estimated Estimated Estimate realistic Support risk 22008 realistic realistic inherited arrange- capital Estimated EEstimated assets liabilities1 estate2 ment5 margin3 excess eexcess £bn £bn £bn £bn £bn £bn ££bn
CGNU Life — — — — — — 0.3 CULAC — — — — — — 0.3 OWPSF 3.0 (2.8) 0.2 — (0.1) 0.1 — NWPSF 21.2 (21.2) — 1.1 (0.5) 0.6 — UKLAP4 20.3 (18.7) 1.6 — (0.2) 1.4 0.5
The equity backing ratios, including property, supporting withprofit asset shares are 58%% in OWPSF and NWPSF, and 54% in UKLAP.
Rating agency capital Credit ratings are an important indicator of financial strength and support access to debt markets as well as providing assurance to business partners and policyholders over our ability to service contractual obligations. In recognition of this we have solicited relationships with a number of rating agencies. The agencies generally assign ratings based on an assessment of a range of financial factors (eg capital strength, gearing, liquidity and fixed charge cover ratios) and non financial factors (eg strategy, competitive position, and quality of management).
Economic capital We use a risk-based capital model to assess economic capital requirements and to aid in risk and capital management across the group. The model is based on a framework for identifying the risks to which business units, and the group as a whole, are exposed. A mixture of scenario based approaches and stochastic models are used to capture market risk, credit risk, insurance risk and operational risk. Scenarios are specified centrally to provide consistency across businesses and to achieve a minimum standard. Where appropriate, businesses also supplement these with additional risk models and stressed scenarios specific to their own risk profile. When aggregating capital requirements at business unit and group level, we allow for diversification benefits between risks and between businesses, with restrictions to allow for non-fungibility of capital when appropriate. This means that the aggregate capital requirement is less than the sum of capital required to cover all of the individual risks.
The financial modelling techniques employed in economic capital enhance our practice of risk and capital management. They enable understanding of the impact of the interaction of different risks allowing us to direct risk management activities appropriately. These same techniques are employed to enhance product pricing and capital allocation processes. Unlike more traditional regulatory capital measures, economic capital also recognises the value of longer-term profits emerging from inforce and new business, allowing for consideration of longerterm value emergence as well as shorter-term net worth volatility in our risk and capital management processes. We continue to develop our economic capital modelling capability for all our businesses as part of our development programme to increase the focus on economic capital management. In addition we have initiated work on meeting the emerging requirements of the Solvency II framework and external agencies.
Solvency II 2009 has represented a significant step for Solvency II and the insurance industry. Since the approval of the Solvency II Directive in May 2009, the focus has been on the development of the Level 2 implementing measures advice published by the CEIOPS which fill in the detail under Level 1 and focused on technical issues. Aviva has been actively participating in the process by providing responses to the CEIOPS as well as participating in the key European industry working groups who provide the voice of industry in on-going negotiation in Brussels.
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.
In addition to reporting on our financial performance, it is important that as a forward thinking company we are aware of our wider responsibilities and report on the non-financial aspects of our performance. We consider that our employees and customers are fundamental to the success of our business; as such, they form the basis for our non-financial measures, and include: — Leadership and employee engagement — Customer advocacy
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 statements include, but are not limited to: — Global economic business conditions — Monetary and interest rate policies — Foreign currency exchange rates — Equity and property prices — The impact of competition, inflation and deflation — Changes to regulations, taxes and legislation — The timing and impact of acquisitions and business combinations in relevant industries — Natural and other disasters — Changes to consumer saving and spending habits — Our success in managing the above factors
The financial data contained in the report and accounts has been prepared using the group’s accounting policies set out on pages 130 to 142. Where applicable, the financial statements have also been prepared in accordance with the Statement of Recommended Practice (SORP) on accounting for insurance business issued by the Association of British Insurers (ABI), the most recent version of which was issued in December 2005 and amended in December 2006.
Following a review of our accounting policy for cash and cash equivalents, we have restated the 2007 and 2008 comparative figures to avoid any ambiguity over the maturity dates of these financial instruments. We have also corrected some errors made in previous years in reporting pension obligations in our Dutch subsidiary. Details are given in “Financial statements IFRS – Note 2 – Presentation changes”.
Critical accounting policies 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).
IASB. Phase II of the IASB’s project on insurance contracts S
T continues to be the most significant area of development for
Corporate responsibilityIn this section 68 Highlights 68 Strategy and governance 68 Business ethics 68 Our people 70 Community investment 70 Environment 71 Customers 72 Supply chain 72 External benchmarking and recognition 72 Affiliations and engagements 73 Key indicators 74 Accounting for sustainability
At Aviva we believe that corporate responsibility (CR) means taking positive action, treating our colleagues, customers and suppliers with respect, applying consistently high standards in everything we do and having a constructive role in the communities in which we operate. As well as running our business responsibly we also work to influence sustainable behaviour among our customers, suppliers and the companies in which we invest. Last but not least, CR is about taking a proactive approach towards the shared global challenge of climate change.
The report that follows contains a summary of the progress and performance of our CR programme in 2009. A detailed review is available online at www.aviva.com/corporate­ responsibility/reports
This is our core purpose applied irrespective of whether economic conditions are favourable or challenging. Our global business strategy has stood Aviva in good stead to manage the risks and uncertainties experienced through the downturn in the world’s economy while preparing for recovery and long-term growth. Our people strategy and our CR strategy play an important part in this, in maintaining our reputation as a preferred employer and responsible corporate citizen, in managing our resources and in reducing costs.
Directing our approach is our Board CR Committee. Established in 2006, the Committee is chaired by Carole Piwnica and comprises our Chairman, our CEO and three non-executive directors. It meets four times a year to review Group CR strategy and policy and assess regional performance against consistently applied Group key performance indicators (KPIs). It also reviews Group functions within Aviva that contribute to our global CR programme. In 2009 our global procurement activities were presented to the Committee and in 2010 it will receive an update on our customer programme. Executive directors remuneration is based on a combination of financial outcomes along with targets related to customers, employees and personal objectives. The Committee’s report can be found on page 98.
We encourage our employees to raise any concerns they might have through ‘Right Call’ – an Aviva-wide malpractice reporting service. This enables all employees to report any suspicions or concerns in a confidential manner for independent investigation. In 2009, 67 incidents were recorded across the group. All cases were referred for independent investigation with 51 reaching conclusion and 16 cases currently remaining under investigation.
Our people Delivering on our strategic plans and commitments requires strong leadership and the energy, dedication and belief of all our employees. Over the past three years we have built a strong global human resources function to lead our cultural www.aviva.com/corporate
Performance reviewAviva plc Corporate responsibility continued Corporate responsibilityAnnual Report and Accounts 2009 transformation. We have a clear purpose – to drive a talent leadership and culture-led transformation to deliver exceptional business performance. We have approached this by implementing strategies designed to: — Encourage talented people to join Aviva and stay — Match the right people to the right roles and take action where there are gaps — Empower people to be the best they can be — Build pride in Aviva
We will do this by focusing globally on: — Developing leaders capable of winning for Aviva in our chosen markets — Embedding the ‘One Aviva, Twice the Value’ culture — Building engagement and commitment by living the employee promise — Strengthening our CR performance by engaging employees and influencing our communities and stakeholders — Making it easier to work by simplifying and de-cluttering
Our employee promise We want every employee to be able to say ‘At Aviva I am recognised for who I am and my contribution matters’. This is the cornerstone of our employee promise, developed after extensive research and consultation with our people on what matters most to them at work.
By implementing ‘One Aviva’ we are well on the way to becoming a global brand recognised wherever we operate. For example, in 2009 we reached a key milestone in the UK when Norwich Union completed the name change to Aviva. It is vital that we take our employees with us by inviting them to question, discuss and co-create the future. To support our line managers in leading their people on the brand journey, we organised a series of ‘This Is Our Story’ cinema events, featuring the experiences of employees in different parts of Aviva’s business. Managers were equipped with practical tools to help them to be effective in bringing to life the behaviours asked of all of us.
We want to create an employment brand that attracts and retains the best talent and differentiates Aviva as an employer of choice. Over the last 18 months we have introduced new management and leadership programmes to nurture talent and create proactive dialogue with leaders and their teams. New this year is the ‘Learn Your Strengths’ interactive tool, taken up by more than 7,000 employees. We also enhanced our induction programme and created recognition schemes, including Spotlight and Aviva Achievers, which give employees credit for exceptional performance.
We are changing the way in which services are delivered to employees and a wide range of supporting tools and materials are now available to all on our global intranet, Aviva World, which is fast becoming our first port of call for information. Aviva World includes news features and forum sites, it gives employees worldwide the opportunity to learn more about different businesses, discuss issues and get to know each other.
Listening to our employees We rebranded our annual employee survey in 2009 and included new questions to reflect the areas our people said were important. An extensive communication programme was implemented in the lead-up to the launch of the Employee Promise survey and our overall participation rate increased to
Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 76% (2008: 74%) with eight business units achieving 100% participation. Senior management pay continues to be linked to the survey results through clear benchmarked targets on leadership and engagement.
Strengthening our leadership capability During 2009 we continued our twin-track approach to developing leadership capability. We ran collective, regionally based summits for our top 500 leaders focused on our ‘One Aviva, Twice the Value’ vision. A continuation of the culture change started in 2008, these events have helped to increase the resilience of our senior leaders, improve understanding of the internal and external brand and create a global identity. We have designed a new approach to individual development that seeks to strengthen leadership capability by focusing specifically on career transition points. Associations with global partners including The Centre for Creative Leadership, INSEAD and FranklinCovey are providing innovative methods that enhance the quality and variety of development opportunities available. For 2010 we have already committed to bring the senior leaders together under the banner of Vision into Performance to strengthen the day-to-day actions being taken to achieve our vision.
Talent management Our Talking Talent programme has been running for two years and Aviva now has a consistent method for assessing individuals' performance and long-term potential. The process is used at all levels and is providing excellent visibility of the talent within our business.
Recruiting and retaining the best people in an increasingly competitive market is a strategic priority for Aviva and we have launched a new website (www.aviva.com/careers) to showcase career options across our worldwide markets. The site describes what it is like to work at Aviva, with video profiles of employees, information on our culture and values, career management insights and an overview of our hands-on approach to CR.
Diversity, equality and human rights Aviva’s diversity programme promotes a fair and respectful culture in which differences are valued. Our policy and practices are aligned with United Nations Universal Declaration of Human Rights and International Labour Organisation’s core labour standards. Gaining a detailed understanding of diversity issues is crucial in bringing our employee promise to life. To this end we have refreshed our training, beginning with a virtual conference in which external speakers and our HR specialists and CR team gave their insights. We will continue to focus on key diversity challenges in 2010.
Community investment As a responsible business, we are committed to helping address challenges facing people and society. Globally, we invested over £8.0 million in 2009 (2008: £9.6 million), in line with our strategic focus to support community and charitable initiatives in education, life trauma and financial literacy. We encourage employee volunteering in support of these areas as part of personal development and our people can apply for up to three paid volunteering days per year. Nearly 9,000 staff took up the opportunity in 2009, resulting in a total of 79,900 volunteering hours, an increase of 18% on 2008 (67,700 hours). We report the impacts of our activities against the London Benchmarking Group model and have developed tools to help our businesses around the world capture information on the impact of their investments in the communities they serve as well as employee time and cash donations.
In 2009 we launched ‘Street to School’, our five-year global charitable initiative, which aims to get children and young people off the street and into education. Working with leading charities and experts, and supported by our employees and customers, together we will champion the needs of street children in the communities in which we live and work. ‘Street to School’ has already been launched in the UK, Turkey and India, and will gradually be adopted in every country in which we operate, eventually accounting for 50% of our charitable donations.
The ‘Chance to be Chancellor’ competition was run in conjunction with The Times as part of the ‘Paying for It’ programme. It offers engaging activities to help young people find out more about the current economic challenges facing the country and act out the role of the Chancellor in delivering their vision for the economy.
Taiwan typhoon Typhoon Morakot, which hit Taiwan in August, resulted in over 400 deaths in the country. Aviva in Taiwan raised funds through employee donations to World Vision and employees were given up to two days leave to help those affected by the typhoon. A dedicated helpline was established to speed up claims and affected customers were offered a three-month deferral on their premiums.
Environment Today’s actions will affect future generations, and nowhere is this more evident than in our approach to climate change and the environment. Our established and proven strategy focuses on controlling our own impacts and resources, including gas, water, electricity and waste – and by pursuing this long-term policy we have reduced our carbon emissions by a further 5.2% this year. As an investor, we use our influence to encourage others to make responsible choices and we promote good environmental practice among our colleagues, customers and suppliers.
Performance reviewAviva plc Corporate responsibility continued Corporate responsibilityAnnual Report and Accounts 2009 its sale in October 2009. The data excludes Auto Windscreens and Aviva Global Services (AGS) which were sold at the end of 2008.
Reduce CO2 emissions by 5%* (5.2)% Reduce water use by 4% (8.8)% Reduce waste by 4% +9.6 % Increase percentage of recycled waste by 2% (until 80% recycled rate is achieved). (15.0)% * We also offset 105% of our remaining emissions by investing in sustainable projects such as renewable energy generation and small-scale run-of-river hydro electricity systems. All performance data is calculated on a like-for like basis taking into account new acquisitions and divestments in 2009.
We believe that climate change must be tackled now. As extreme weather events become more frequent and more severe, they become more challenging to insure. It is in everyone’s interest that insurance remains affordable and available so that people affected from severe weather events can recover quickly from unavoidable impacts.
Kong University. Launched in March 2009, the Aviva Junk incorporates a number of renewable energy efficient technologies and is being used to host educational tours as part of our environmental awareness programme in Asia Pacific.
As part of controlling and reducing impacts within Aviva, telepresence video conferencing has proved to be a significant asset. By implementing this technology and reducing domestic and international air travel we have made cost savings, promoted work-life balance and reduced our carbon footprint from air travel by 5% in 2009. In 2010 we plan to increase the number of facilities available to make telepresence a regular part of business and extend our capacity by using some of our suppliers’ conference facilities. In the UK our proactive work on climate change was recognised when we gained accreditation to the Carbon Trust Standard. The standard is a key milestone for Aviva as it is an early action metric that will count towards the UK government’s new Carbon Reduction Commitment regulation.
— Recognising low levels of confidence among consumers, Lisseo was launched in France to offer customers the opportunity to invest gradually in the equity markets without the need to commit a lump sum on one day.
— Carbon Trust Standard – first insurer to receive the standard for our year-on-year efforts to reduce our carbon footprint
Performance reviewAviva plc Corporate responsibility continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
CR Indicator 2007 2008 2009 2009 target Change over year 2010 target
Business ethics % of employees signing of receipt, — — 90% 100% of employees n/a � 100% of employees understanding and acceptance of our Business Ethics Code annually
Water consumption (m³) – absolute 851,070* 843,750* 751,750 Reduce water use (11)% � Reduce water use by 4% by 4%
Proportion of recycled waste 88% 84% 69% 80% or above (15)% � 80% or above
Suppliers Number of business unit suppliers, with — 233 adjusted 438 1,750 adjusted from +205 � 1,000 material spend, signing Aviva’s Supplier Code from 983 2,500 of Conduct
Number of detailed CR assessments of — 30 in the UK 138 globally 100 globally +108 � 200 globally Aviva’s major suppliers
% of employees participating in volunteering — — 16% New KPI n/a Increase the % of employee participation in volunteering
Number of employee hours spent — 67,700 79,900 Increase the % of +18% � Increase the % of employee volunteering employee participation participation in volunteering in volunteering
Notes on KPIs — Business ethics: This KPI covers 98% of our employees. — Customers: Using our NPS methodology, 67% of businesses met or exceed performance last year against a local market average (2008: 67%). However, within that percentage, 24 markets are participating in NPS compared to 12 in 2008 and 58% are exceeding the benchmark, compared to 33% in 2008. — Last year we reported the percentage of businesses that met/exceeded performance against local market average where no local benchmark was available (2009: 75%). Businesses that were covered by this metric are now all rated against a local market average. This metric has therefore been removed. Also in 2009, we replaced an employee survey question relating to the percentage of employees who consider that their business is customer focused with a new customer index KPI. This gives an average favourable employee response against five customer indicators.
— Suppliers: We adjusted our 2009 target and 2008 return for the number of business unit suppliers signing Aviva’s Supplier Code of Conduct due to a statement of compliance from our business in North America which could not be validated by Group Procurement.
We incur up to a 2% premium when purchasing renewable electricity in countries where the benefit of the related zero or reduced emissions are granted to the purchasing company. At the end of our current main UK electricity contract in July 2010 we will no longer pay a premium for zero emission electricity in the UK. Currently 64% (2008: 65%) of our electricity worldwide is purchased from zero emission sources.
The energy-related consumption of our UK data centres was included in the outsourcing contract. We put what we think is the first green service level agreement into place with an onus on our outsourcing partners to report performance in terms of energy efficiency, target setting, and standards of equipment used must sign up to the EU Code of Conduct for Data Centres. Our focus on IT, being an enabler to carbon reduction, and the more efficient use of energy in the ICT area will continue this year as well as use of new technologies with a longer return on investment to help us continue to meet our annual and long-term carbon reduction targets.
In August 2009, we became the first insurance company to gain accreditation to the Carbon Trust Standard. This provides further independent assurance that we have reduced our emissions and, along with installation of Automated Meter Readers, it means that our operations have met the early action metrics in respect of the UK government’s Carbon Reduction Commitment Energy Efficiency Scheme.
The fuel consumption of the RAC fleet has reduced from 10.3 million litres to 9.1 million litres, a reduction of 11.6%. This is due in part to the economic downturn, the use of more accurate satellite navigation systems in the vehicles and more technical staff in the call centres to talk customers through simple repairs. This means they can continue their journey
We have completed a carbon footprinting exercise for the properties we own through our Property Fund managed by Aviva Investors for 2008. Under the new UK Government Carbon Reduction Commitment scheme, electricity, gas and oil used in the properties will be subject to an additional cost of £12 per tonne. Aviva Investors’ European Renewable Energy and Infrastructure Fund, launched in November 2008, is open for investment. The target initial gross assets are set at €500 million.
In Canada, Aviva’s Premiere Auto Network became the first National Insurance Direct Repair programme to have all of their network repairers waterborne compliant. The new waterborne products will reduce volatile organic compounds (VOCs) by 40% by 2034. VOCs release fine particulates and ozone into the atmosphere. By working with water rather than solvent-based products, the reduction will lower the health risk for the paint sprayers and other repair shop technicians from contracting lung cancer and heart disease. Other procurement initiatives include providing alternative recycled-part solutions and paying for the disposal of hazardous waste.
Energy Intensity Total cost of buildings-related energy in 2009 was £17.7 million (2008: £18.2 million).
Environmental Incidents During 2009 there were no environmental incidents as a result of our operations (2008: none).
Aviva France is currently studying the possibility of using paper with a reduced weight at the Montaigne head office in order to reduce paper consumption. If this study is successful, Aviva will implement this solution throughout its entire network in France and will encourage its other subsidiaries to follow.
In Italy, our distributors can use Web-Bancassurance and WebAgenti IT support tools which provide online access to our legacy system containing the lifecycle of policies from issuance to liquidation. These tools have been extended to all intermediaries connected with the main banks and also to agents.
Industry benchmark information — Water: 7.7m3 per employee per year (National Water
Demand Management Centre) — Office Paper: good practice 4,000-5,000 sheets per employee per annum (Gartner Research)
iv) Customer advocacy Direct company impacts At Aviva, the Net Promoter Score® is our key customer metric. This measure is widely regarded as a predictor of future growth, with strong correlations to persistency and retention, repeat purchase and willingness to recommend. Results to date show that advocates are more likely to stay with us and to be more profitable over time, suggesting that using this metric to build advocacy will have a positive impact on business performance.
% below market average % at or above market average % in upper quartile
Compared to 2008, we have seen a modest improvement in the overall scores, which, given the tough economic climate, may be considered a success.
Performance reviewAviva plc Corporate responsibility continued Corporate responsibilityAnnual Report and Accounts 2009
In 2009 our Aviva India business began working with their ‘promoter’ customers to generate sales leads. The sales teams followed up with these potential customers to discern their needs and offer an appropriate product.
Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
v) Investing in communities Direct company impacts Our global investment in charitable and community projects in 2009 was over £8.0 million (2008: £9.6 million). This includes cash, time and in-kind donations as well as management costs calculated using the London Benchmarking Group (LBG) model4.
Community investment £m Community investment Employee volunteering hours ho ur s
— France: taking the insight that French customers are increasingly risk averse, we developed a product that would allow them to invest gradually in equity markets to smooth the risk.
— Singapore: held successful meetings with the Prime Minister’s Office and received acknowledgement for their plans to organise a workshop aimed at encouraging and educating on wellness and shrinking the gap on long-term care.
3 A copy of the IIWG report can be found at: 4 See www.lbg-online.net for more information http:www.lbg-online.net
Indirect impacts ‘Street to School’ is still in its infancy but is already generating interest and support from stakeholders including prospective charitable partners, media, governments and customers. It has also generated unprecedented support from employees who are motivating their friends and families to get involved with local projects. In 2010, we will continue to raise awareness of the issue, and provide more education, funding and practical help for children living on the margins of society.
In this section 80 Board of directors 82 Executive management 83 Directors’ report 87 Corporate governance report 93 Nomination committee report 94 Audit committee report 96 Risk and regulatory committee report 98 Corporate responsibility committee report 99 Directors’ remuneration report
Aviva plc Board of directorsAnnual Report and Accounts 2009 1. Lord Sharman of Redlynch OBE Chairman (Age 67) Appointed to the Board in January 2005 and became Chairman in January 2006. Currently an independent non-executive director of BG Group plc (utility) and Reed Elsevier plc (publishing). Former chairman of Aegis Group plc (media services) and KPMG International (auditors), former deputy chairman of Group 4 Securicor plc (security services), former member of the supervisory board of ABN AMRO N.V. (banking) and a former independent non-executive director of Young & Co.’s Brewery plc (hospitality) and AEA Technology plc (commercial/technology). Chairman of the Board and nomination committee and member of the corporate responsibility committee.
2. Andrew Moss Group chief executive (Age 52) Appointed to the Board in May 2004. Joined as Group Finance Director and became Group Chief Executive in July 2007. Previously director – finance, risk management and operations at Lloyd’s of London (insurance) and formerly held a number of senior management positions at HSBC plc (banking). Member of the corporate responsibility and nomination committees.
Performance reviewAviva plc Board of directors continued Corporate responsibilityAnnual Report and Accounts 2009 3. Patrick Regan Chief financial officer (Age 44) Appointed to the Board in February 2010 as Chief Financial Officer. Previously group chief financial officer and group chief operating officer at Willis Group Holdings Limited (insurance broking). Formerly group financial controller for RSA plc (insurance) and finance and claims director, UK general insurance for Axa Insurance (insurance). He also held a number of senior management positions at GE Capital (financial services) and specialised in corporate finance and investigations at Grant Thornton (professional services).
4. Mark Hodges Executive director (Age 44) Appointed to the Board in June 2008. Joined Norwich Union in January 1991 and held a number of senior roles within the finance function before becoming finance director of Norwich Union Insurance in 1998, managing director of Norwich Union General Insurance in 2005 and chief executive of Norwich Union Life, the Group’s long-term savings business in the UK, in 2006. Appointed chief executive of Aviva UK, comprising Aviva UK Life (formerly Norwich Union Life), and Aviva UK General Insurance (formerly Norwich Union Insurance), the Group’s insurance and motoring services business in the UK, in January 2010.
5. Andrea Moneta Executive director (Age 44) Appointed to the Board in September 2009. Joined as chief executive of Aviva Europe in July 2008, and currently chief executive officer, Aviva Europe, Middle East and Africa. Previously managing director of Dubai Financial Group (financial services) and formerly held a number of senior executive positions with UniCredit (banking), the European Central Bank (banking), and Accenture (consulting).
6. Mary Francis CBE Independent non-executive director (Age 61) Appointed to the Board in October 2005. Currently senior independent director of Centrica plc (utilities), a non-executive director of Cable & Wireless plc (telecoms) and a director of Almeida Theatre Company Limited. A senior adviser to Chatham House and Governor of the Pensions Policy Institute. Formerly Director General of the Association of British Insurers, non-executive director of the Bank of England, Alliance & Leicester plc (banking), Fund Distribution Limited, St Modwen Properties plc (property development) and a senior civil servant.
7. Richard Karl Goeltz Senior independent non-executive director (Age 67) Appointed to the Board in May 2004. Currently a non-executive director of the Warnaco Group Inc (clothing), the New Germany Fund (investment trust), the Central Europe and Russia Fund (investment trust), the European Equity Fund (investment trust) and a governor of The London School of Economics and Political Science. Former vice chairman and chief financial officer of American Express Company (financial services) and director and chief financial officer of NatWest Group plc (banking). Former non-executive director of Delta Air Lines, Inc (transport) and Federal Home Loan Mortgage Corporation (Freddie Mac) (financial services) and a former member of the Accounting Standards Board (UK). Member of the audit and nomination committees.
9. Michael Hawker Independent non-executive director (Age 50) Appointed to the Board in January 2010. Currently an advisory board director at General Enterprise Management Services International Limited (GEMS), the Hong Kong-based private equity firm and a non-executive director of Australian Rugby Union. Formerly chief executive and managing director of Insurance Australia Group Limited (insurance), the largest general insurance company in Australia. Member of the risk and regulatory committee.
10. Carole Piwnica Independent non-executive director (Age 52) Appointed to the Board in May 2003. A member of the New York and Paris Bars. Currently a director of Naxos UK (private equity) and a non-executive director of Toepfer International GmbH (trading), Dairy Crest Group plc (dairy products)
Mark Hodges Chief executive, Aviva UK (Age 44) See page 81
Andrea Moneta Chief executive, Aviva Europe, Middle East and Africa (Age 44) See page 81
John Ainley Group human resources director (Age 53) Joined the Group in 1999. Formerly held senior HR positions with WH Smith plc, ICL plc, Priory Hospitals Group and General Electric plc. Previously Group HR Director for Norwich Union plc and HR Director for Norwich Union Insurance and Norwich Union Life. Holds a Law degree and is a companion of the Chartered Institute of Personnel Development.
Igal Mayer Chief executive, Aviva North America (Age 48) Joined the Group in 1989. Formerly chief executive of Aviva UK General Insurance (formerly Norwich Union Insurance), chief executive officer of Aviva Canada, chief financial officer and executive vice-president. Previously finance director for Norwich Union Insurance and managing director for CGU Insurance in London. Holds a BA Honours in Commerce and Economics from the University of Toronto, is a chartered accountant and has received an honorary Chartered Insurance Professional designation from the Insurance Institute of Canada.
With the exception of restrictions on transfer of ordinary shares under the Company’s employee share incentive plans while the shares are subject to the rules of the plan, there are no restrictions on the voting rights attaching to the Company’s ordinary shares or the transfer of securities in the Company.
At the forthcoming Annual General Meeting, shareholders will be asked to renew the directors’ authority to allot shares. Details are contained in the Notice of Meeting.
Substantial shareholdings As at 3 March 2010, in accordance with the provisions of the Disclosure and Transparency Rules of the Financial Services Authority, the Company had received the following notifications relating to the holding percentage of the total voting rights attaching to the issued ordinary share capital of the Company; Legal & General Group plc held 4.24%; Axa S.A held 3.86% and BlackRock, Inc. held 5.09%. The Company also received a notification from Barclays plc that following the sale of its Barclays Global Investors subsidiary it ceased to hold any ordinary shares in the Company.
Directors The following persons served as directors of the Company during the year: Nikesh Arora (resigned 5 August 2009) Wim Dik (retired 29 April 2009) Mary Francis Richard Karl Goeltz Euleen Goh (appointed 1 January 2009) Mark Hodges Andrea Moneta (appointed 29 September 2009) Andrew Moss Carole Piwnica Philip Scott (retired 26 January 2010) Lord Sharman of Redlynch Leslie Van de Walle (appointed 6 May 2009) Russell Walls Scott Wheway
The biographical details of the persons currently serving as directors appear on pages 80 to 81.
Directors’ interests and indemnity arrangements At no time during the year did any director hold a material interest in any contract of significance with the Company or any of its subsidiary undertakings other than an indemnity provision between each director and the Company and service contracts between each executive director and a Group company. The Company has purchased and maintained throughout the year directors’ and officers’ liability insurance in respect of itself and its directors. The directors also have the benefit of the indemnity provision contained in the Company’s Articles of Association. The Company has executed deeds of indemnity for the benefit of each director of the Company, and each person who was a director of the Company during the year, in respect of liabilities that may attach to them in their capacity as directors of the Company or of associated companies. These indemnities were granted at different times according to the law in place at the time and where relevant are qualifying third-party indemnity provisions as defined by section 234 of the Companies Act 2006. These indemnities were in force throughout the year and are currently in force. Details of directors’ remuneration, service contracts and interests in the shares of the Company are set out in the Directors’ Remuneration Report.
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 Performance Review on pages 9 to 66 and an indication of the exposure of the Group companies to such risks is contained in note 56 to the consolidated financial statements.
Charitable donations The Company has continued to support community initiatives and charitable causes worldwide in line with our strategy which focuses on education, financial literacy and life trauma. The total Group commitment, including cash support and employee time during the year was £8.0 million (2008: £9.6 million).
Political donations At the Annual General Meeting held in 2009, shareholders passed a resolution, on a precautionary basis, to authorise the Company to make political donations and/or incur political expenditure (as such terms are defined in sections 362 to 379 of the Companies Act 2006) in amounts not exceeding £100,000 in aggregate.
As the authority granted at the 2009 Annual General Meeting will expire on 28 April 2010, renewal of this authority is being sought at this year’s Annual General Meeting. Further details are available in the Notice of Meeting.
Group employees The Group’s statement on its employees is set out in the Performance Review.
In summary, the Group’s commitment to communication and dialogue with employees continues. The introduction of a truly group-wide intranet has enabled, for the first time, engagement and communication with employees throughout the Group on a single platform. It also helps management to share information, ideas and opportunities much faster across the entire business. A strong emphasis is placed on the provision of news and information through a range of media. Employees have opportunities to voice their opinions and ask questions through intranet sites, Question and Answer sessions with the Group Chief Executive, via telephone conferencing, opinion surveys and the Group’s Employee Promise 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 UK have established employee consultative forums and a European Consultative Forum convenes annually to discuss matters impacting the business across Europe.
On 2 June 2009, the Company’s celebrations on becoming “One Aviva” saw employees taking part in social and community events in every country in which the Group operates. Team activities took place in all businesses to welcome the new global brand, raise funds for good causes and heighten awareness of Aviva’s global commitment to corporate responsibility.
Employee practice The Group respects all fundamental human rights and is guided in the conduct of its business by the provisions of the United Nations Universal Declaration of Human Rights and the International Labour Organisation core labour standards. Aviva also supports the United Nations Global Compact Principles. 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. Aviva is an inclusive employer and values diversity in its employees. These commitments extend to recruitment and selection, training, career development, flexible working arrangements, promotion and performance appraisal. In the event of employees becoming disabled, every effort is made to ensure that their employment with the Group continues and to provide specialised training where this is appropriate.
Creditor payment policy and practice It is the Group’s policy to pay creditors when they fall due for payment. Terms of payment are agreed with suppliers when negotiating each transaction and the policy is to abide by those terms, provided that the suppliers also comply with all relevant terms and conditions. The Company has no trade creditors. In respect of Group activities in the UK, the amounts due to trade creditors at 31 December 2009 represented approximately 23 days of average daily purchases through the year (2008: 37 days).
Reappointment of the auditor and disclosure of information to the auditor In accordance with section 489 of the Companies Act 2006, a resolution is to be proposed at the forthcoming Annual General Meeting to reappoint Ernst & Young LLP as auditor of the Company. A resolution will also be proposed authorising the directors to determine the auditor’s remuneration. The Audit Committee reviews the appointment of the auditor, the auditor’s effectiveness and relationship with the Group, including the level of audit and non-audit fees paid. Further details on the work of the auditor and the Audit Committee are set out below in the Audit Committee report.
Andrew Moss Group chief executive 3 March 2010 Registered Office: St. Helen’s, 1 Undershaft, London EC3P 3DQ Registered in England No. 2468686
Performance reviewAviva plc Corporate responsibilityCorporate governance reportAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
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 during the year when the majority of the members of the Nomination Committee were not independent non-executive directors. This was due to the resignation of Nikesh Arora, a non-executive director, who resigned from the Board on 5 August 2009 following his relocation to the United States (US). Mary Francis was appointed to the Committee on 2 December 2009 and the Company is once again in compliance with this aspect of the Combined Code. This report sets out details of how the Company has applied the principles and complied with the provisions of the Combined Code during 2009. Further information on the Combined Code can be found on the Financial Reporting Council’s website, www.frc.org.uk
The Board The directors are responsible to shareholders for ensuring that the Company is appropriately managed and that it achieves its objectives. It meets regularly to determine the Company’s strategic direction, to review the Company’s operating and financial performance and to provide oversight that the Company is adequately resourced and effectively controlled. The specific duties of the Board are clearly set out in its terms of reference that address a wide range of corporate governance issues and list those items that are specifically reserved for decision by the Board. Matters requiring Board approval include: — Group strategy and business plans; — Acquisitions, disposals and other transactions outside delegated limits; — Financial reporting and controls; — Capital structure; — Dividend policy; — Shareholder documentation; — The constitution of Board committees; and — Key business policies, including the remuneration policy.
The full terms of reference for the Board 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.
Senior Independent Director Under the Combined Code the Board appoints one of the nonexecutive directors to act as Senior Independent Director. The main responsibility of the Senior Independent Director is to be available to shareholders should they have concerns that they have been unable to resolve through normal channels, or when such channels would be inappropriate. The Senior Independent Director is also responsible for leading the Board’s discussion on the Chairman’s performance and the appointment of a new chairman, when appropriate. Richard Goeltz has served as the Senior Independent Director since January 2009.
Following this comprehensive review, the directors have concluded that the Board and its committees operate effectively and have agreed actions in respect of certain processes identified for improvement. Additionally, the Chairman has concluded that each director contributes effectively and demonstrates full commitment to his/her duties.
Audit Responsibility Nomination Regulatory Remuneration Board Committee Committee Committee Committee Committee
Lord Sharman 15 — 4 6 — — Leslie Van de Walle (appointed 6 May 2009)† 7 — — — 2 1 Russell Walls 14 9 — 6 6 — Scott Wheway 12 — 3 — — 8 Former directors Nikesh Arora (resigned 5 August 2009) 4 — — 1 2 — Wim Dik (retired 29 April 2009) 5 — 1 — 2 — Philip Scott (retired 26 January 2010)
* There were 11 scheduled Board meetings during 2009 and four additional meetings. — Indicates not a member of that committee. # Became a member of the Nomination Committee on 2 December 2009. † Became a member of the Risk and Regulatory Committee and the Remuneration Committee on 24 September 2009.
Performance reviewAviva plc Corporate governance report continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
Board committees The Board has established the following standing committees to oversee and debate important issues of policy and oversight outside the main Board meetings: — Audit Committee; — Corporate Responsibility Committee; — Nomination Committee; — Risk and Regulatory Committee; and — Remuneration Committee.
Conflicts of interest In line with the Companies Act 2006, the Company’s Articles of Association now allow the Board to authorise potential conflicts of interest that may arise and to impose such limits or conditions as it thinks fit. The decision to authorise a conflict of interest can only be made by non-conflicted directors (those who have no interest in the matter being considered) and in making such decision the directors must act in a way they consider in good faith will be most likely to promote the Company’s success. The Board has established a procedure whereby actual and potential conflicts of interest are regularly reviewed and for the appropriate authorisation to be sought prior to the appointment of any new director or if a new conflict arises. During 2009 this procedure operated effectively.
A system of internal control reduces but cannot eliminate the possibility of errors, control circumvention, manual override, poor decision making or the impact of unforeseen circumstances. As such, a sound system of internal control provides reasonable but not absolute assurance over material misstatements or losses or that a company will not be hindered in achieving its business objectives.
The principal features of the system of internal control and methods by which the Board satisfies itself that this system operates effectively are set out below.
Group Audit operates as the third line of defence and is accountable for providing reliable independent assurance to the Audit and Risk and Regulatory Committees, local audit committees, Board members and the Executive Committee of the Group on the adequacy and effectiveness of the system of internal control.
Governance and Oversight Committee Structure The Board delegates oversight in relation to risk management and internal control to the following committees: — Audit Committee; and — Risk and Regulatory Committee
The Audit Committee is responsible for assisting the Board in discharging its responsibilities for the integrity of the Company's financial statements and the effectiveness of the system of internal financial control and monitoring the effectiveness, performance and objectivity of the internal and external auditors.
These Committees have clearly defined terms of reference and full reports for these Committees are set out on pages 94 to 97.
Aviva plc Corporate governance report continued Annual Report and Accounts 2009 undertaken as well as monitoring the completion of any Group level actions to a satisfactory conclusion.
Control activities A formal policy framework has been rolled out across the Group, which sets out and governs minimum standards around the management of financial and non-financial risks and the Group’s approach to internal controls.
Compliance with the policy framework is regularly assessed and reported upon on a quarterly basis. Such reporting includes any moves outside the Group’s risk appetite and tolerance and any emerging issues. Appropriate action plans are developed and undertaken where such moves are identified.
Internal Controls over financial reporting A Group Reporting Manual including International Financial Reporting Standards (IFRS) and Market Consistent Embedded Value (MCEV) requirements has been defined and rolled out across the Group. A Financial Reporting Control Framework (FRCF) is in place across the Group. FRCF relates to the preparation of reliable financial reporting and preparation of local and consolidated financial statements in accordance with IFRS and MCEV. FRCF also allows compliance with the requirements of the Sarbanes-Oxley Act 2002.
A company's objectives, its internal organisation and the environment in which it operates are continually evolving and, as a result, the risks it faces are continually changing.
The risk management process has been in place for the year under review and up to the date of approval of the annual report and accounts.
Internal audit The Group’s internal audit function provides independent assurance to management on the effectiveness of the internal control systems and, the adequacy of these systems to manage business risk and to safeguard the Group’s assets and resources. The internal audit function also provides objective independent assurance on risk and control to both the Audit Committee and the Risk and Regulatory Committee.
The Company’s investor relations department is dedicated to facilitating communication with institutional investors. The directors consider it important to understand the views of shareholders and, in particular, any issues which concern them. The Board receives reports on matters that have been raised with management at the regular meetings held with the Company’s major investors. During the year the Chairman and the Senior Independent Director held a meeting with the major institutional investors and attended investor meetings with management. In addition, the Senior Independent Director is available to meet with major investors to discuss any areas of concern that cannot be resolved through normal channels of investor communication, and arrangements can be made to
Performance reviewAviva plc Corporate governance report continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information meet with the Senior Independent Director through the Group Company Secretary. Similarly, arrangements can be made for major investors to meet with newly appointed directors. In addition, the Board consults with shareholders in connection with specific issues where it considers appropriate.
The Company’s annual report and accounts and annual review, together with the Company’s half-year report, interim management statements, 20F document (for filings with the United States Securities and Exchange Commission) (SEC) and other public announcements, are designed to present a balanced and understandable view of the Group’s activities and prospects and are available on the Company’s website, www.aviva.com. The Chairman’s statement, Group Chief Executive’s review, and Performance Review provide an assessment of the Group’s affairs and they will be supported by a presentation to be made at the Annual General Meeting.
Shareholder Tracing Programmes During the year, the Company undertook three shareholder tracing programmes in order to identify and locate shareholders with unclaimed payments. The exercises were conducted by professional tracing agencies on behalf of the Company and two subsidiaries, General Accident plc and RAC plc. The exercises, which were largely successful, related to shareholders who have had dividend payments returned and unclaimed, and dissentient shareholders who did not accept takeover offers when the Company acquired the subsidiaries.
As at 31 December 2009 the response rate across all three programmes ranged between 19% and 58%.
Aviva Investors Aviva Investors, the Group’s core asset management company, believes that good governance plays an important role in protecting and enhancing shareholder value. In keeping with the Group’s values, Aviva Investors looks to act as a responsible investor, monitors the governance of the companies in which it invests and seeks to maintain an effective dialogue and engagement with companies on matters which may affect the future performance of those companies.
US Listing requirements The Company was admitted to the NYSE on 20 October 2009 and its ordinary shares are traded as American Depositary Shares. As a foreign company listed on the NYSE, the Company is required to comply with the NYSE corporate governance rules to the extent that these rules apply to foreign private issuers such as the Company. As a foreign private issuer, the Company is therefore required to comply with NYSE Rule 303A.11 by making a disclosure of the differences between the Company’s corporate governance practices and the NYSE corporate governance rules applicable to US companies listed on the NYSE. These differences are summarised below: Independence criteria for directors Under NYSE listing rules applicable to US companies, independent directors must form the majority of the board of directors. 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 NYSE listing rules for US companies also state that a director cannot qualify as independent unless the Board affirmatively determines that the director has no material relationship with the company, and the NYSE rules prescribe a list of specific factors and tests that US companies must use for determining independence. The Combined Code sets out its own criteria that may be relevant to the independence determination, but permits the Board to conclude affirmative independence notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, so long as it shall state its reasons.
Non-Executive Director Meetings Pursuant to NYSE listing standards, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management and, if that group includes directors who are not independent, listed companies should at least once a year schedule an executive session including only independent directors. Under the
Shareholder Approval of Equity-Compensation Plans Under the NYSE listing standards, shareholders must be given the opportunity to vote on all equity-compensation plans and “material revisions” to those plans. Under the Combined Code, shareholder approval is also necessary for certain equitycompensation plans and “significant changes” thereto, subject to certain exceptions. The Combined Code does not provide a detailed definition or explanation of what are considered to be “significant changes”, in contrast to the detailed definition of “material revisions” provided by the NYSE.
— state that the Company and the Group have complied with applicable IFRS, subject to any material departures disclosed and explained in the financial statements.
Directors’ responsibility statement pursuant to the Disclosure and Transparency Rule 4 The directors confirm that, to the best of each person’s knowledge: (a) the Group and Company financial statements in this report, which have been prepared in accordance with IFRS as adopted by the EU, International Financial Reporting Interpretations Committee’s interpretation and those parts of the Companies Act 2006 applicable to companies reporting under IFRS, give a true and fair view of the assets, liabilities, financial position and results of the Company and of the Group taken as a whole; and
(b) the Directors’ report includes a fair review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face.
Andrew Moss Patrick Regan Group Chief Executive Chief Financial Officer 3 March 2010
The Group has considerable financial resources together with a diversified business model, with a spread of business and geographical reach. As a consequence, the directors believe that the Group is well placed to manage its business risks successfully.
The following directors served on the Committee during the year: Period
Lord Sharman (Chairman) 25 January 2006 To date Nikesh Arora 29 July 2008 5 August 2009 Mary Francis Richard Goeltz
Andrew Moss* 12 July 2007 To date Russell Walls 23 January 2007 To date * The Nomination Committee notes that the Combined Code does not preclude the Group
Chief Executive from membership of the Committee and the Committee believes that his input is essential and invaluable in its discussions and therefore important that this is obtained through his membership of the Committee. Any concern about this will be allayed by the predominant membership of independent non-executive directors on the Committee.
In line with the Combined Code requirement, the Board undertook a review of the effectiveness of all its committees during the year, including the Nomination Committee.
This report provides details of the role of the Audit Committee and the work it has undertaken during the year. The purpose of the Committee is to assist the Board in discharging its responsibilities for the integrity of the Group and Company’s financial statements, the assessment of the effectiveness of the systems of internal financial controls and monitoring the effectiveness and objectivity of the internal and external auditors. The full terms of reference for the Committee can be found on the Company’s website, www.aviva.com, and are also available from the Group Company Secretary.
The following independent non-executive directors, served on the Committee during the year: Period
Russell Walls (Chairman) 1 July 2004 To date Mary Francis 1 January 2007 To date Richard Goeltz 1 July 2004 To date Euleen Goh 1 January 2009 To date
The Committee met on nine occasions in 2009 and the members’ attendance record is set out in the Corporate Governance report on page 88. In addition, the Committee held separate meetings with members of senior management for the purpose of induction and training. The Group Company Secretary acts as the secretary to the Committee.
The Committee follows an agreed annual work plan. It reviews, with members of management and the internal and external auditors, the Company’s financial announcements including the annual report and accounts to shareholders and associated documentation. It places particular emphasis on their fair presentation and the reasonableness of the judgemental factors and appropriateness of significant accounting policies used in their preparation. At each meeting, the Committee receives a report from the Chief Audit Officer concerning the Company’s systems of internal financial control, including any significant new issues and actions taken on previously reported issues. The Committee also reviews, approves and monitors the annual work plan for the Group’s internal audit function. Twice each year, the Committee receives reports on the adequacy of the Group’s life assurance and general insurance reserves. The Committee reports to the Board regarding the effectiveness of the Group’s overall systems of internal financial control including the risk management systems in relation to the financial reporting process. The Committee works closely with the Risk and Regulatory Committee, which reviews the Company’s overall internal controls and risk management systems.
The Committee receives reports from the external auditor and, at all scheduled meetings, holds discussions with both the Chief Audit Officer and external auditors in the absence of management. The chairman of the Committee reports to 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 held two joint meetings with the Risk and Regulatory Committee and one with the members of the business unit audit committees in the Asia Pacific region. This meeting 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 those businesses.
Internal audit The Group’s internal audit function reports to management on the effectiveness of the Company’s systems of internal controls, the adequacy of these systems to manage business risk and to safeguard the Group’s assets and resources. The internal audit function is fully centralised and each country/region head has a full reporting line to the Chief Audit Officer (with the exception of Delta Lloyd). The Chief Audit Officer reports to the Group Chief Executive and to the chairman of the Group Audit Committee. Through the Chief Audit Officer, the internal audit function provides objective assurance on risks and controls to the Committee. The plans, the level of resources, the budget of the internal audit function and the remuneration of the Chief Audit Officer are reviewed and approved at least annually by the Committee, which also undertakes an annual review of the effectiveness of the Group’s internal audit function against guidance criteria provided by the Institute of Chartered Accountants in England and Wales and by the Institute of Internal Auditors (IIA). Every five years the review is performed by an independent party as required by the IIA standards. The last independent review was performed in 2008.
The continuing deteriorating economic and market environment required even greater attention to internal controls in 2009. During 2009 the Group internal audit function carried out assurance reviews of the Group’s capital and liquidity http:www.aviva.com
Performance reviewAviva plc Audit committee report continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information management including a review of its risk management function and the management actions put in place to maintain business as usual activities.
External auditor Ernst & Young LLP (Ernst & Young) was appointed auditor of the Company in 2001 having previously been the auditor of Norwich Union plc. Following the annual external audit effectiveness review, the Committee concluded that the audit service was fit for purpose and recommended that a re-tender process should not be undertaken in 2009 but that the relationship and the effectiveness of the auditor be kept under review. Ernst & Young audits all significant subsidiaries of the Group.
The Company introduced a revised external auditor policy on 1 January 2008 aimed at safeguarding and supporting the independence and objectivity of the external auditors. The policy was updated to reflect current global best practice on auditor independence, and is in full compliance with all UK, US and International Federation of Accountants (IFAC) rules. The revised external auditor policy aims to be simpler to interpret, providing greater clarity on what services may and may not be provided by the Group’s external auditors.
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 and the Committee. The questionnaire sought opinions on the importance of certain criteria and the performance of the external auditor against those criteria. 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.
Aviva plc Risk and Regulatory committee reportAnnual Report and Accounts 2009
This report provides details of the role of the Risk and Regulatory Committee and the work it has undertaken during the year.
The purpose of the Committee is to assist the Board in providing leadership, direction and oversight of the Group’s management of risk. The full terms of reference for the Committee can be found on the Company’s website, www.aviva.com, and are also available from the Group Company Secretary.
The Group Chief Executive, Chief Risk Officer, Chief Financial Officer, Chief Audit Officer, Group Regulatory Director and the external auditor normally attend, by invitation, all meetings of the Committee. Other members of senior management are also invited to attend as appropriate to present reports. It is the Committee’s practice at each meeting to meet separately with the Chief Audit Officer and the external auditor without any members of management being present. In performing its duties, the Committee has access to the services of the Chief Audit Officer, the Chief Risk Officer, the Group Regulatory Director, and the Group Company Secretary and external professional advisers. During 2009 the Committee appointed Keith Nicholson, a former partner at KPMG LLP, as an external adviser to the Committee.
Committee activities during 2009 The Committee’s main functions are to assist the Board in making decisions on the Group’s risk appetite; to oversee the monitoring and control of risks so that they remain aligned with appetite; to ensure that management is reviewing emerging risks and testing the Group’s resilience through scenario planning and stress testing; to give broad direction to the way the Group assesses its capital requirements and how it is optimising the balance between risk and reward when allocating capital for new business; and to ensure that management and the Board have high quality information on risk when reviewing Group strategy and future plans.
— Capital management: this was a strong focus of the Committee throughout the year. Group capital requirements were monitored against existing risk appetite and capital availability in a rapidly changing market. The Committee reviewed scenario and stress testing and also considered reinsurance and hedging strategies to understand their contribution to capital management.
— Regulatory risks and relationships: The Committee received regular reports on compliance issues and regulatory and other public policy initiatives. In particular, it monitored the actions being taken by management in response to the FSA’s Risk Mitigation Programme; monitored worldwide regulatory reform developments arising from the financial crisis and government and regulatory responses to it; monitored management responses to proposed changes in the prudential requirements for financial services companies; and oversaw measures to strengthen oversight of the Group’s compliance functions, particularly outside the UK.
Aviva plc Risk and Regulatory committee report continued Annual Report and Accounts 2009
— Internal controls: the Group’s internal audit function provided the Committee with independent and objective assurance over the appropriateness, effectiveness and sustainability of the Company’s system of internal controls. Key control issues reported by Group internal audit to management and to the Committee members were monitored on a quarterly basis until the risk exposure had been properly mitigated.
The purpose of the Committee is to provide guidance and direction to the Group’s corporate responsibility (CR) programme, review the key CR risks and opportunities and to monitor progress. The Committee also reviews the Group’s strategy for CR together with the Group’s CR targets. The full terms of reference for the Committee can be found on the Company’s website, www.aviva.com, and are also available from the Group Company Secretary.
Members of the Committee are interviewed as part of the external assurance process of the CR programme and the subsequent management report, including Aviva’s action plan, is reviewed by the Committee to assist the strengthening and future direction of the programme.
In line with the Combined Code requirement, the Board undertook a review of the effectiveness of all its committees during the year, including the Corporate Responsibility Committee.
The Committee met on four occasions in 2009 and the members’ attendance record is set out in the Corporate Governance report on page 88. The Group Company Secretary acts as the secretary to the Committee.
— The demanding financial and non-financial targets set for the 2009 annual bonus were met in part during the year. The combination of financial outcomes, along with those targets relating to employees, customers, and personal objectives mean that the Group Chief Executive received a 2009 bonus of 74% of his maximum opportunity (2008: 54%).
— Andrea Moneta, Chief Executive Officer, Aviva Europe, Middle East and Africa was appointed as ED of Aviva plc on 29 September 2009. Information on his remuneration therefore appears in this report for the first time.
— On 1 January 2010, Mark Hodges was appointed Chief Executive Officer of the whole of Aviva’s UK Insurance operations, which brought together the Life and General Insurance businesses. As a result of this significant expansion of his managerial responsibilities, his basic salary was increased.
— On 26 January 2010, Philip Scott retired from the Board. He continues to be employed by the Group and will retire on 31 July 2010. Details of his leaving arrangements are disclosed in this report.
— 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 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
Mary Francis 25 January 2006 To Date Carole Piwnica 25 January 2006 To Date Scott Wheway (Chairman from 1 January 2009) 5 December 2007 To Date Leslie Van de Walle 24 September 2009 To Date
Aviva announced on 24 September 2009 the appointment of Mr Van de Walle as a member of the Committee. The Committee met on eight occasions in 2009 and the meeting attendance record is set out in the Corporate Governance report on page 88. Committee meetings are attended by the Group Chief Executive, Andrew Moss (other than when his own remuneration is being discussed) and the Group Human Resources Director, John Ainley. The Group Company Secretary, Graham Jones, acts as secretary to the Committee. The Chairman, Lord Sharman, also attends meetings of the Committee at the discretion of the Committee Chairman but specifically when discussing the remuneration of the Group Chief Executive.
In addition, the Committee appointed Hewitt Associates (HNBS) to advise on matters relating to senior executive remuneration. HNBS provided no other material assistance to the Company in 2009. PricewaterhouseCoopers (PwC) provide advice to management on relevant remuneration matters. PwC also provided consultancy services to the Group in 2009. Deloitte LLP, which also provided consultancy services to the Group in 2009, 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 advised the Committee in relation to the operation of the Company’s share plans. Linklaters LLP provided other legal services to the Company during 2009.
In line with Combined Code requirements, the Board undertook a review of the effectiveness of the Committee during the year. Additionally, the Committee reviewed its own performance and agreed steps to enhance its effectiveness and addressed the issues identified.
Performance reviewAviva plc Directors’ remuneration report continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
February — A review of EDs’ basic salaries and benefits in kind — Assurance of non-financial bonus targets — Consideration and approval of EDs’ bonus awards for 2009 and approval of share awards under the Annual Bonus Plan (ABP)
— A review and approval of Long Term Incentive Plan (LTIP) grants to the EDs and approval of the performance conditions for the
— Approval of the 2008 Directors’ Remuneration Report — Approval of the 2009 One Aviva Twice The Value Bonus Plan
June — None — Approval of the departure terms of Philip Scott
September — None — Approval of Andrea Moneta’s appointment terms as an ED
— Approval of Patrick Regan’s appointment terms as an ED from February 2010
remuneration report — A review of the Committee’s 2010 work plan
— A review and update of proposed governance and regulatory changes
— Review of the workplan for the 2010 Strategic Reward Review
— Approve proposals for changes to two share incentive plans, as a result of the 2009 Finance Act
Committee Decisions The Company’s EDs elected to take a basic salary freeze in 2009 and to take a 10% reduction on the personal element of their annual bonus. A further 45 members of senior management similarly accepted a 2009 basic pay freeze. The 2008 Annual Report and Accounts stated the Committee had decided to review mid year the financial targets used for bonus purposes for EDs and other senior managers. This was in addition to the mechanical rebasing for exchange rate and capital assumptions that is carried out annually. Only in exceptional circumstances would the Committee consider amending financial targets, either up or down, and any significant change would be the subject of appropriate consultation. Having reviewed the targets, it was agreed that they remained valid and therefore the bonuses paid for the 2009 performance year, which are disclosed in this report, are based on unaltered financial and non-financial targets.
Future actions and changes The Company does not anticipate any significant changes to the structure of EDs’ compensation packages in 2010, compared with those outlined in this report. There are, however, three main areas of activity in 2010 which are worth noting: i) Increased regulation in executive remuneration and changes in corporate governance 2009 has seen a series of regulatory and governance guidelines issued by a wide ranging group of organisations, from the Financial Services Authority, the Company’s primary regulator, to the Financial Stability Board of the G20. Whilst many of the issued guidelines do not yet formally apply to Aviva, the Company has already reviewed its existing remuneration arrangements against these and Aviva’s current remuneration structures are broadly in line with the requirements laid down by the majority of the codes of practice and corporate governance expectations. A good example of this is the high level of deferral on the annual bonus (two­ thirds) which would be considered best practice in the new environment. In addition, the Company has introduced clawback provisions into the Company’s share incentive plans. The Group Risk and Regulatory Committee is also mindful of the recommendations and that its involvement will be required including its input into the setting of financial objectives.
Remuneration policy Alignment with Group Strategy The Committee considers alignment between Group strategy and the remuneration of its senior executives, including EDs, to be critical. It believes that senior executives should be highly rewarded (on a market competitive basis) for the delivery of stretching goals but should receive reduced rewards when the business performs poorly. The pay and employment conditions of employees of the Company and Group were also taken into account when determining directors’ remuneration for the financial year. To achieve this alignment Aviva’s remuneration package is leveraged, with a high percentage of pay “at risk” against the achievement of stretching goals which is aligned with the Company’s risk profile and employee behaviour. Furthermore two-thirds of any bonus and any LTIP grant are delivered in the form of Aviva shares. The element of deferred bonus that is matched under the OATTV Plan only vests if very demanding Earnings Per Share (EPS) targets are met. The requirements to defer bonus, participation in the LTIP and the OATTV Plan closely tie the long-term value of executive remuneration to the Company’s share price performance. Senior executives thus have high exposure to the same benefits and drawbacks of share price movement as all shareholders. The belief that senior executives should be shareholders is reinforced through formal guidelines requiring EDs to build up and maintain a significant holding of shares in the Company.
— OATTV Plan: This plan was introduced to emphasise the Group Chief Executive’s clear strategic aim for the Group to deliver growth in EPS, with a target of doubling EPS in five years from a baseline at the end of December 2007. No other element of executive remuneration was focused on EPS growth, and this bonus scheme directly aligns a portion of executive remuneration to this key strategic goal.
Constituent elements of reward as a percentage of total remuneration Tables 3a and 3b below show how the Group’s remuneration policy translates in practice into the Group Chief Executive’s remuneration package. The tables outline the contribution each element makes to overall compensation at both “Target” and “Stretch” levels of performance. More than 50% of EDs’ total remuneration is performance related. For the remainder of EDs, 43% of total remuneration is paid in cash for on “Target” performance and 27% for “Stretch” performance (excluding ACAP which EDs participate in to varied degrees, see Table 5).
Table 3a shows the breakdown of the Group Chief Executive’s remuneration package into its main constituent elements. Table 3b gives the proportions of fixed cash, variable cash and shares. For the purposes of Table 3b, fixed cash includes basic salary and the discretionary ACAP payment. Variable cash is the one-third of bonus paid in cash annually. The share element includes the twothirds of the annual bonus deferred into shares, the OATTV Plan match and the LTIP.
The breakdown does not include any share price growth, the dividends on the ABP deferred shares or other benefits (eg cash car allowance, value of Private Medical Insurance (PMI) and all employee share ownership plans).