This year’s report features examples of the new and different ways in which we are working in order to make this happen.
Our business Aviva is the world’s fifth largest* insurance group, serving 50 million customers across Europe, North America and Asia Pacific. Our main business activities are long-term savings, fund management and general insurance**. We are the largest insurance services provider in the UK and one of the leading providers of life and pension products in Europe.
O ve rv ie w Bu si ne ss re vi ew
Dear Shareholder, In my experience, the situation in which we find ourselves as we enter 2009 is unprecedented. The recent period will long be remembered as one of the most turbulent for financial markets, and indeed the world economy, since records began. Banks have been nationalised, global insurance businesses have failed, interest rates and share prices have plunged, mortgage lending has been reduced to a trickle, and no one can accurately forecast where and when the current situation will be resolved.
Aviva is well placed to weather this crisis, and for both our life and general insurance operations it is business as usual. We have made sensible decisions in the past, greatly reducing our exposure to equities and introducing a robust risk management strategy. We have good liquidity and a strong balance sheet. Our vision, “one Aviva, twice the value”, is proving its worth and during the past year we have continued to attract and retain customers wherever we do business.
We are not immune to the effects of the current situation. No one is. Our 2008 results demonstrate our resilience and our ability to focus on what we are good at, namely providing prosperity and peace of mind for our customers, as well as maintaining the strength of our balance sheet.
Board developments Our thanks are due to Guillermo de la Dehesa who retired from the board at the end of 2008 after a long period of service. His experience of international financial and economic matters has been invaluable to us and we wish him well.
Chairman l 04 – 11 More on the events of 2008 l 84 – 85 More on our Board l 70 – 79 More on our people Lord Sharman of Redlynch OBE
Dear Shareholder, Last year I outlined our vision to unlock value and drive growth from our existing business – “one Aviva, twice the value”. Events in 2008 have certainly made it harder to achieve our medium term objectives but we remain 100% committed to their delivery. I’m confident that we can deliver our vision for our customers, our shareholders and our people.
As a global group with 63% of our total sales coming from outside the UK we have benefited from currency movements in the year, mainly the appreciation of the euro and US dollar. However, our results also reflect the impact of the financial volatility that we’ve seen in 2008. On an IFRS basis shareholder funds have fallen to £11,052 million (2007: £12,946 million). However, using the MCEV methodology, the impact of market movements is significantly greater and shareholder funds are reduced to £12,912 million (2007 restated: £19,998 million). The great majority of this reduction in shareholders’ funds is due to prudent marking to market of our assets rather than realised cash losses. As markets recover, as they will to some degree, at some point, our shareholders’ funds will also increase.
The enormous financial volatility of 2008 has led to a reduction in the capital that we hold in excess of regulatory requirements. We remain in a strong position with an IGD capital surplus of £2.0 billion at the end of 2008. Maintaining this capital strength has been a priority in 2008 and will remain so in 2009.
Maintaining our dividend Our group dividend policy remains unchanged. With savings rates at a record low, this is good news for our shareholders as well as a mark of our financial strength. Our recommended final ordinary dividend is 19.91 pence per share, bringing the total dividend for the year to 33.00 pence, unchanged from 2007.
Strength of our business In 2008 we benefited more than ever from the diversity of our business model, as the spread of our businesses and geographical reach helped to mitigate risk.
Despite the downturn, we achieved our highest ever life and pensions sales in our UK Life market. In the United States we met our target of doubling new business sales, a year earlier than expected. In our general insurance business, profits improved despite continuing tough market conditions and our focus now is on sustainable profitability rather than volumes.
Back in 2007 we made a sound decision to manage our equity risk when we sold £3.4 billion of equities and we’ve also taken steps to safeguard ourselves against further falls in equity markets through the derivatives markets.
Financial volatility has also meant that we have had to reassess the policyholder and shareholder elements of the reattribution of the inherited estate in the UK to ensure fairness between shareholders and policyholders. This negotiation continues in a constructive way.
Delivering for our customers Our purpose is to provide prosperity and peace of mind to our 50 million customers around the world. I am pleased with the progress we are making towards measuring customer advocacy across our group. It will help us measure and improve customer experience and build customer loyalty. Currently over two thirds of our businesses are at or better than the external benchmark and we aim to be world-class. In the end the number of customers that stay with us and recommend us to others is the ultimate measure of our success. It has been pleasing to see the strong growth in our customer numbers, particularly in China and central and eastern Europe.
Building the Aviva brand Through the year we’ve moved several steps closer to our goal of a global brand. We already operate as Aviva in 21 markets and by June 2009, Norwich Union will have been renamed as Aviva. Hibernian in Ireland and Commercial Union in Poland move fully to the Aviva name in 2010. You can read more about our brand on page 16.
Pride in our people If our 54,000 people around the world feel valued and that their contribution matters, they will in turn provide excellent service for our customers. I’m particularly pleased that in this difficult year, our global employee climate survey shows improvements in almost every area of activity. Our staff have weathered an unsettling year with enormous professionalism and dedication, and I am grateful to them.
In 2008, I appointed the final members of my leadership team. I now have the support of a ten strong executive team; talented and dedicated individuals who are working together to achieve our vision.
In the following pages you’ll find more about the general trading conditions and our business activities over the last year, plus our plans for the year ahead. I hope you’ll take the time to read on.
In the UK, the pound has weakened dramatically against the dollar and the euro. The UK economy continues to shrink after 16 years of growth – total government debt is now projected to grow by 50% to well over £1 trillion, which is nearly 60% of GDP. UK interest rates are at an all-time low and unemployment is rising fast, with some forecasters predicting three million out of work by the end of 2009.
Our own industry is not unscathed. In September 2008 we saw AIG, once the world’s largest insurer, being bailed out with $150 billion from the US government largely due to its non-insurance activities.
At Aviva, we have seen a fall in the value of the investments we hold. The majority of our investments are measured at fair value according to International Financial Reporting Standards (IFRS) and our balance sheet, and consequently our net asset value, reflects substantial unrealised losses on these investments. However, we hold these instruments for the long term and as markets return to normal behaviour patterns we expect to see these valuations recover.
Our share price Our share price has fallen significantly during the year and we ended 2008 down 42.1%, against a backdrop of dramatic falls in markets. In 2008 we have outperformed FTSE 350-life, down 43.3% and FTSE Euro 300-Life, down 62.5%. Whilst we underperformed the FTSE 100 which ended 2008 down 31.3%, we fared better than most of our European counterparts.
What action have we taken towards achieving“one Aviva, twice the value?”
We moved into 2009 with £2.0 billion of regulatory surplus capital and even if the markets fell a further 40%, our IGD surplus would still be around £1.2 billion. We’re constantly looking to improve our capital structure and efficiency.
We have a strong balance sheet and strong liquidity. Our current Standard & Poors group rating is AA-, or ‘very strong’. These ratings reflect our strong liquidity, competitive position, capital base, increasing underlying earnings and strategic and operational management.
We’re in the sixth year of a survey into customer attitudes to saving. In 2008 we surveyed 28,500 people across 25 markets, bringing the total to over 100,000 responses since we started. We also launched a challenge, the Customer Cup, in which we invite teams from Aviva’s offices around the world to identify and implement ways of making a difference to customers and help build customer loyalty.
Our regional structure is helping us to get closer to markets and be more responsive to local opportunities and conditions. We want Aviva customers to have all the benefits of a global organisation that shapes products to their varying needs and lifestyles, wherever they live.
Our customers are at the heart of what we do, we understand that they want to be recognised and treated as individuals.
Valuing our customers means giving them products and services that they need and there are many successful examples throughout the company. This year in the UK for example, we’ve launched a ground-breaking new website. We’ll tell customers our competitors’ prices for motor insurance against our own, even if the alternatives are cheaper. They can also check their existing cover with other insurers against comparable cover from Norwich Union. In the savings market we are giving customers a fairer deal with a new pricing system for annuities which uses postcodes to reflect their lifestyles and circumstances more accurately.
In the Asia Pacific region, where both incomes and life expectancy are on the rise, people are also looking for safe savings opportunities. Our new joint venture in South Korea takes us into the second largest life insurance market in Asia.
Making our business more transparent We have always been committed to improving the transparency of our business and so we became one of the early adopters of a new way of reporting in 2008 – Market Consistent Embedded Value (MCEV).
We believe that it gives useful insight into the financial performance of the group’s life and related businesses. You can read more about MCEV reporting and how it affects our results on pages 286-327.
In 2007 we announced a total cost reduction programme of £500 million. The UK life business is on track to deliver £100 million of savings by the end of 2009. In the UK general insurance business, we have completed the first phase to deliver cost savings of £200 million in 2008.
We are also simplifying our legacy systems. In 2007, we announced a deal with Swiss Re to outsource the administration of nearly three million Norwich Union Life policies. This has already allowed us to decommission over 200 systems, and improve our service both to IFAs and policyholders.
Delivered life and pension new business sales ahead of analyst expectations with a second consecutive record year in the UK
Improved our Financial Adviser Service awards rating to four stars in UK life and pensions business
Achieved target of doubling sales in our US life business a year ahead of plan
Maintained good growth in China with a 66% increase following significant expansion of our distribution network
Expanded our distribution footprint through new joint ventures in South Korea and Taiwan coming on-line
Maintained a strong capital and liquidity position. IGD surplus of £2.0 billion and direct access to £1.4 billion of liquid assets with further £2.1 billion of undrawn committed credit facilities
Embarked on the global rebranding programme with Norwich Union to become Aviva in 2009. Poland and Ireland to complete rebrand in 2010
£2.0bn IGD solvency surplus Aviva has a strong capital position. Insurers are required to hold a financial buffer over and above statutory solvency levels, known as the capital resource requirement. The IGD surplus is the amount of capital held in addition to this regulatory requirement.
33.00p Dividend per share In an environment of low interest rates, dividends are important to shareholders. We’ve maintained our dividend in line with 2007 while balancing the requirements of our investors and the need to maintain capital to develop the business.
£51.4bn Worldwide sales Sales were up in 2008 with growth in both life and pensions sales and general insurance and health net written premiums. This was offset by lower sales of investment products reflecting the volatility experienced in financial markets during the year.
Economic outlook We moved into 2009 in the midst of a recession. Industrial production and corporate profits are falling sharply and unemployment rising equally fast. Economic growth is expected to be extremely poor in 2009 but is likely to recover in 2010 led by the US and China. From start to finish the recession is likely to cut western GDP by at least 4%. Looking out beyond 2009, with no return to normal lending and a sustained rise in savings, we expect economic growth to be very subdued over the next cycle.
What’s next for our markets? Looking ahead we expect the UK and European markets to remain subdued in 2009. In North America, sales of indexed annuity products will not grow as fast as they did in 2008, but this is set against very strong growth over the past two years. In the Asia Pacific markets we anticipate steady growth in the major economies, although investors are likely to be more cautious.
We do expect to see growth returning to our bancassurance business as the banks concentrate on their retail operations and bancassurance becomes even more important to them. At a time when some banks are facing huge difficulties, we continue to do business in this area.
l 18 – 19 More on our strategy l 32 – 35 More on managing risk
In the current economic climate, performing in line with the market is a realistic aim. Our priority will be to maintain our capital strength by making the most efficient and profitable investment choices. By doing this we expect to emerge from the current climate even stronger.
We’ll place less emphasis over the coming year on top-line sales targets, though we will maintain a strong presence in each of our markets. In our general insurance business we remain committed to meeting or beating our target of 98% COR for the group.
It is not surprising that in difficult times customers can be neglected and forgotten.
We’re taking great care to stay in touch with all our customers and partners as we become Aviva around the world and to remind them how central they are to the continued success of our business.
Executive management team l 70 – 79 More on employees and responsibility l 22 – 27 More on group performance l 16 – 17 More on our global brand l 18 – 19 More on group strategy l 42 – 49 Regional overview l 50 – 57 Regional overview l 58 – 63 Regional overview l 64 – 69 Regional overview
Australia Ireland Singapore Canada Italy Spain China Luxembourg Taiwan France Poland United Kingdom Germany Romania United States l 36 – 41 Divisional overview
Alongside this work, we also developed detailed plans to enable us to manage the name change in those markets that are yet to become Aviva. Although the current market conditions are tough we took the decision to proceed with our plans. We are a long term business and our growth will be achieved more successfully by making the investment in our global brand. As a business we are in a sound capital position so what better time to make the investment when we can benefit from the significant reduction in media costs and greater impact for those remaining advertisers operating in a less cluttered market. Further, it is well documented that those brands that continue to maintain their profile in downturns significantly outperform their rivals when markets recover.
How we will make the name change We are managing the change of name in a careful, considered way appropriate for each market and it will take two years to complete in full. Our asset management business completed the change to Aviva Investors in September 2008. And at the end of the year we began to communicate the planned change of Norwich Union to Aviva in the UK, which will complete in June this year. Poland and Ireland have also started their name change process, moving to Commercial Union Aviva and Hibernian Aviva respectively as an initial step before adopting fully the Aviva name.
Recognising our customers Throughout the name change our key priority is to ensure we keep our customers, corporate partners and brokers in all these markets well informed. Moving to Aviva creates an opportunity to give our customers a clear sense of our scale and financial strength and of how they will benefit in the future. But it is also an opportunity to remind them how central we know they are to the continued success of our business.
The creation of a single global brand is a key part of delivering ‘one Aviva, twice the value’ and the implications go far beyond changing the name on our brochures or signs. We know that if we are to achieve our objective of being our customers’ most recommended brand we will be judged by what we do, not what we say.
In addition, our commercial partners, shareholders, regulators and customers, as well as our people, operate increasingly across national and cultural boundaries that once separated us. Through ensuring that Aviva operates in a consistent and integrated way across our markets will make it easier for people to do business with us.
Creating opportunities A strong global brand helps us to open doors as we enter new markets and secure new business partnerships. This is about doing things once and doing things right by utilising the best expertise from wherever it is across Aviva and applying it once for all our markets. This also means that good ideas – whether for improved service, new products or better ways of doing things – are shared across all parts of the business.
…to our shareholders and investors Our business has its roots in the 300 year old heritage of Norwich Union, Commercial Union and General Accident and we have built our business on helping and supporting our customers, protecting their goods, properties and their families and providing for their futures. We are just as committed now as we have always been. Through the creation of a single global brand we will be better placed to ensure we are using all our resources from across Aviva, in the most effective way, to improve service and develop products that better meet our customers’ needs.
During 2008 we created advisory councils formed of customers and commercial partners around the UK, in addition to our existing customer research programmes. These councils provided us with a real understanding of what the brand change would mean for them and how we could best communicate the change.
So at the heart of moving to a global brand is our commitment to creating a strong, unified business that understands what our customers need and is organised in a way that can deliver consistently. This means using our resources and expertise from across Aviva to create ways of delivering prosperity and peace of mind for all our customers, wherever they are around the globe.
In the UK we used detailed modelling to increase the efficiency of our media spend. The initial stage of building awareness of Norwich Union moving to Aviva has delivered well against the targets set, putting us ahead of our plan. Acting as a single brand we have been able to minimise the cost of producing high profile, high impact advertising by sharing work across markets.
2008 was a very challenging year for the world economy, especially for the financial sector, characterised by slow growth and extreme market volatility, with most major economies contracting towards the end of the year. Throughout this period we have remained focused on our vision and made steady progress against the five strategic priorities we set in 2007 (shown below).
2008 progress Launched Aviva Investors as a global business under one brand, leveraging the resources of several of Aviva’s established asset management businesses
Created a scalable infrastructure for launching new products and driving cross-border sales 2008 progress Maintained a strong capital position under tough market conditions
2008 progress The composite model provided us with strength in a challenging economic environment, allowing us to adapt profitably. In 2008 we actively managed the composite portfolio, specifically: Continued the transformation of our UK and Canadian GI businesses
Introduced a consistent measure to track customer advocacy and drive improvements in customer experience
We constantly look for ways to boost our productivity, to support 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.
Overview Business review Governance Financial statements IFRS Financial statements MCEV Other information
l 36 – 41 Divisional overview l 42 – 49 Regional overview l 50 – 57 Regional overview l 58 – 63 Regional overview l 64 – 69 Regional overview * Total funds managed by Aviva managers.
Cost savings 2008 measurement/indicator £m 2009 priorities Continue to drive investment performance
Drive profitable growth and long-term value creation from the life and pensions business
Implement a variety of initiatives, to improve customer experience and support the new brand promise
– Tailored use of shared services for regional operations, including UK, Asia and Europe
Our IFRS earnings per share for 2008 was a loss of 36.8 pence (2007 restated: 48.9 profit). This reflects the net adverse short-term fluctuations and economic assumption changes due to adverse market movement, continued investment in developing the business and strengthening our provisions for latent claims.
* Dividend cover is measured on operating earnings after tax on an IFRS basis, expressed as a multiple of the ordinary dividend in respect of the financial year.
**Group MCEV operating profit is calculated using long-term savings operating profit on a MCEV basis before the impairment of goodwill. Group IFRS operating profit is calculated using long-term savings operating profit on an IFRS basis before the impairment of goodwill.
† On an MCEV basis for 2008 and 2007. Prior years presented on an EEV basis.
In 2008 we saw improvements in every area of the survey including Aviva’s leadership, understanding of company values and levels of engagement. More employees said they felt more customer focused and empowered in the workplace. Awareness of Aviva’s diversity policies and practices was also higher and more employees felt that their talents were being managed effectively by their managers.
All business units measure and track progress in customer advocacy, and, where feasible, benchmark performance against local competitors.
Return on equity shareholders’ capital is calculated as after-tax operating return, before adjusting items, on opening equity shareholders’ funds, including life profits on a market consistent embedded value (MCEV) basis†. The improvement in 2008 to 11.0% (2007 restated: 10.4%) reflects the increase in post-tax MCEV operating return, partly offset by an increase in opening shareholders’ funds of £2.6 billion.
Australia Hong Kong Netherlands South Korea Belgium Hungary Malaysia Spain Canada India Poland Sri Lanka China Ireland Romania Taiwan Czech Republic Italy Russia Turkey France Lithuania Singapore United Kingdom Germany Luxembourg Slovakia United States
What we do Aviva is the world’s fifth largest insurance group, serving 50 million customers across Europe, North America and Asia Pacific. Our main business activities are long-term savings, fund management and general insurance. We are the largest insurance services provider in the UK and one of the leading providers of life and pension products in Europe.
What action have we taken? Performance – Maintained our focus on profitable growth – Adopted interim reporting in line with the FSA’s Disclosure and Transparency rules – Implemented our Financial Reporting Controls Framework (FRCF) across most of the group – Early adoption of market consistent embedded value (MCEV) methodology for our long-term savings business
Capital – Proactively managed our financial and IGD solvency position – Kept the market and regulator informed of our position – Continued to be heavily involved with the development of Solvency II – Efficient raising of external debt
What have we achieved? Performance – We increased our operating profit on both MCEV and IFRS bases – FRCF has been rolled out across most of the group. This control framework, similar to Sarbannes-Oxley, is designed to mitigate the risk of material financial misstatement in our external announcements and publications
Capital – We have achieved an estimated IGD surplus of £2.0 billion at 31 December 2008, demonstrating the resilience of our capital position and the benefits of our proactive capital management approach – We maintained our Group Standard & Poor’s and Moody’s ratings
Long-term business 1,694 1,610 Fund Management 123 179 General insurance and health 1,198 1,021 Other operations and regional costs** (198) (74) Regional operating profit before tax 2,817 2,736 Corporate centre (141) (157) Group debt costs and other interest (379) (363) IFRS operating profit before tax 2,297 2,216
Long-term business 2,801 2,544 Fund Management 42 90 General insurance and health 1,198 1,021 Other operations and regional costs** (163) (70) Regional operating profit before tax 3,878 3,585 Corporate centre (141) (157) Group debt costs and other interest (379) (363) MCEV operating profit before tax 3,358 3,065 * We have changed our approach to reserving for latent claims this year and restated our 2007 comparatives. In addition, the creation of Aviva Investors has resulted in a restatement of 2007 long-term business and fund management operating profit. Details are shown in note 2 to the financial statements **The results of the group’s asset management and other operations that arise from providing fund management and other services to the life business have been included in the longterm business operating return on an MCEV basis. On an IFRS basis, they are included in fund management and other operations.
Operating profit before tax on an IFRS basis grew 4% to £2,297 million (2007 restated: £2,216 million). Improved results from our long-term savings and general insurance businesses were offset by lower profits from fund management operations, impacted by the poor conditions in financial markets, and increased losses from non-insurance operations and regional costs.
On an MCEV basis, operating profit increased by 10% to £3,358 million (2007 restated: £3,065 million). The operating results of our long-term savings, fund management, general insurance and other operations are discussed in detail in the regional sections of this report. Our results on both bases have benefited from the impact of currency movements, particularly the appreciation of the euro and US dollar.
Group debt costs and other interest Group debt costs and other interest of £379 million (2007: £363 million) comprise internal and external interest on borrowings, subordinated debt and intra-group loans not allocated to local business operations. External interest costs increased to £286 million (2007: £259 million) reflecting higher interest on subordinated debt, due to the hybrid debt issues in May and August 2008 offset by lower commercial paper interest as proceeds from the hybrid debt raising were used to repay some commercial paper. Internal interest costs increased to £197 million (2007: £179 million) driven by changes in our internal loan balances.
Interest on the £990 million direct capital instrument issued in 2004 is not included within unallocated interest as it is instead treated as an appropriation of profits retained in the period.
Reconciliation of group operating profit to profit before tax – IFRS basis
IFRS operating profit before adjusting items and tax attributable to shareholders’ profits 2,297 2,216
Integration and restructuring costs (326) (153) Exceptional items (551) – IFRS (loss)/profit before tax attributable shareholders’ profits (1,300) 1,832
IFRS (loss)/profit for the financial year (885) 1,498 Attributable to: Equity shareholders (915) 1,320 Minority interests 30 178
MCEV operating profit before adjusting items and tax attributable to shareholders’ profits 3,358 3,065
Adjusted for the following: Economic variances on long-term business (12,422) (19) Short-term fluctuation in return of investments backing non-long-term business (819) (184)
Impairment of goodwill (66) (10) Amortisation and impairment of intangibles (108) (89) Profit on the disposal of subsidiaries and associates 7 20 Integration and restructuring costs (326) (153) Exceptional items (754) – MCEV (loss)/profit before tax attributable to shareholders’ profits (11,224) 2,632
MCEV (loss)/profit for the period (7,710) 1,946 Attributable to: Equity shareholders (7,632) 1,704 Minority interests (78) 242 * We have changed our approach to reserving for latent claims this year and restated our 2007 comparatives. Details are in note 2 to the financial statements.
Profit on the disposal of subsidiaries of £7 million (2007: £49 million) reflects £45 million profit on sale of our offshore operations and sundry small businesses offset by a loss of £38 million on the sale of certain UK non-core operations.
Integration and restructuring costs incurred in the year amounted to £326 million (2007: £153 million). This includes £287 million for the cost savings initiatives in the UK life and general insurance businesses and Europe, which have delivered £340 million annualised cost savings in the year. Also included are integration costs of £39 million which mainly relate to the work to set up our global asset management operation, Aviva Investors.
Under MCEV exceptional items were £754 million, reflecting the higher cost of the Netherlands unit-linked settlement on an MCEV basis.
Life and pensions margin before tax and minority interests 2.1% 2.7% Life and pensions margin net of tax and minority interests 1.3% 1.8% General insurance combined operating ratio 98% 100% Return on equity shareholders’ funds 11.0% 10.4% Earnings per share Basic – MCEV operating profit 83.4p 70.4p Basic – IFRS total return after tax (36.8)p 48.9p Dividend per share 33.0p 33.0p * Based on worldwide long-term savings new business sales, plus general insurance and health business net written premiums.
Worldwide sales In 2008 we achieved total worldwide sales of £51,415 million (2007 restated: £50,274 million) reflecting growth in both life and pension sales and general insurance and health net written premiums. Sales of investment products fell reflecting the volatility experienced in financial markets during the year.
Long-term new business sales were up 1% to £40,278 million (2007 restated: £39,705 million). Within this, life and pension sales increased 11% to £36,283 million (2007 restated: £32,722 million), reflecting excellent growth in the US, where we have doubled the scale of our business in two years, and the benefit of the euro on sales in our European businesses. Sales of investment products decreased 43% to £3,995 million (2007: £6,983 million).
Value of new business and margins Total value of new business for 2008 was £780 million (2007: £897 million) resulting in a new business margin of 2.1% (2007: 2.7%). The reduction in margin in 2008 reflects the volatility inherent in MCEV profit methods at times of economic and financial stress. Annuity new business margins reduced in 2008 as risk free return rates fell relative to asset yields, the effect of which is expected to reverse in future years as the benefit of asset yields emerge in operating earnings “expected returns”. After removing tax and minority interests, the margin was 1.3% (2007: 1.8%).
Combined operating ratio The worldwide general insurance combined operating ratio (COR) improved to 98% (2007: 100%) in line with our “meet or beat” target. The improvement reflected lower adverse weather related claims offset by reduced levels of prior year claims releases. The general insurance markets are increasingly competitive and our businesses in the Netherlands, Ireland and Canada all reported a deterioration in their CORs. In the UK, the COR improved due to the absence of adverse weather and the benefit derived from initiatives to deliver cost savings and control claims inflation but these were partly offset by lower prior year claims releases and difficult market conditions.
Return on equity shareholders’ funds Our post tax return on equity shareholders’ funds was 11.0% (2007 restated: 10.4%). This reflects the increased operating profit and reduced tax charge largely offset by £2.6 billion increase in opening shareholders’ funds.
Additional retained profit on an MCEV basis – – 431 7,342 Equity attributable to shareholders of Aviva plc 11,052 12,946 12,912 19,998
At 31 December 2008, our total assets on an IFRS basis were £354,562 million (2007 restated: £321,326 million). On the MCEV basis our total assets were £357,231 million (2007 restated: £329,084 million). The difference relates to the recognition of internally generated additional value of in-force business (AVIF) under MCEV. The growth in assets reflects the strengthening of the euro and dollar against sterling, which offset the fall in market values, and an increase in holdings of cash and cash equivalents.
business business 12 months 12 months operations operations 2008 2007 £m £m £m £m
Cash and cash equivalents at 31 December comprised: Cash at bank and in hand 11,249 4,004 Cash equivalents 13,425 12,181
Cash flows from operating activities were £8,153 million (2007 restated: £4,143 million) reflecting higher levels of premium income partly offset by higher levels of paid claims. Investing activities used a lower amount of cash at £395 million (2007: £635 million), due to lower acquisition expenditure. Financing activities used higher levels of cash at £2,137 million (2007 £1,184 million), reflecting increased interest paid on borrowings and higher dividend payments due to the removal of the scrip dividend.
Capital management objectives Aviva’s capital management philosophy is focused on capital efficiency and effective risk management to support a progressive dividend policy and EPS growth. Rigorous capital allocation is one of our primary strategic priorities and is ultimately governed by the group Executive Committee.
Overall capital risk appetite is set and managed with reference to the requirements of a range of different stakeholders including shareholders, policyholders, regulators and rating agencies. In managing capital we seek to: maintain sufficient, but not excessive, financial strength to support new business growth and satisfy the requirements of our regulators and other stakeholders, and thus give both our customers and stakeholders assurance of our financial strength; optimise our overall debt to equity structure to enhance our returns to shareholders, subject to our capital risk appetite and balancing the requirements of the range of stakeholders; retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit lines and access to a range of capital markets; allocate capital rigorously across the group, to drive value adding growth in accordance with risk appetite; increase the dividend on a basis judged prudent, while retaining capital to support future business growth, using dividend cover on an IFRS operating earnings after tax basis in the 1.5 to 2.0 times range as a guide.
Capital resources The primary sources of capital used by the group are equity shareholders’ funds, preference shares, subordinated debt and borrowings. We also consider and, where efficient to do so, utilise alternative sources of capital such as reinsurance and securitisation in addition to the more traditional sources of funding. Targets are established in relation to regulatory solvency, ratings, liquidity and dividend capacity and are a key tool in managing capital in accordance with our risk appetite and the requirements of our various stakeholders.
In February, the Standard & Poors (S&P) rating committee downgraded NU Life from AA to AA-, which is now aligned with the other 'core' group subsidiaries. At the same time S&P have changed the outlook on NU Life's ratings from “negative” to “stable”. There are no changes to any of the group's other ratings or outlooks. The group’s financial strength rating from Moody’s is Aa3 (“excellent”) with a stable outlook from AM Best.
Accounting basis and capital employed by segment The table below shows how our capital, on an MCEV basis, is deployed by segment and how that capital is funded.
Net asset value per share – MCEV basis 486p 763p * The “Corporate” net liabilities represent the element of the pension scheme deficit held centrally.
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.
Insurance Groups Directive (IGD) capital resources 5.7 9.8 15.5 16.2 Less: capital resource requirement (5.7) (7.8) 13.5 13.3 Insurance Group Directive (IGD) excess solvency – 2.0 2.0 2.9 Cover over EU minimum (calculated excluding UK Life funds) 1.3 times 1.5 times
We have a regulatory obligation to have positive solvency on a regulatory IGD basis at all times. Our risk management processes ensure adequate review of this measure. At 31 December 2008, the estimated excess regulatory capital was £2.0 billion (31 December 2007: £2.9 billion). This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in the UK and Ireland with-profit life funds.
The minimum solvency requirement for our European businesses is based on the Solvency I Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked life reserves respectively and for our general insurance portfolio of business is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our major non-European businesses (the US, Australia and Canada) a risk charge on assets and liabilities approach is used. The IGD is a pure aggregation test with no credit given for the considerable diversification benefits of Aviva.
In the current economic conditions we are proactively managing balance sheet risk. In addition to the de-risking exercise we undertook in 2007 we have taken out further equity hedges during 2008 and continue to actively manage our equity risk exposures. We expect our IGD surplus would be approximately £1.2 billion in the event of a 40% fall in equity markets from the 31 December 2008 position.
Minimum capital level (ie level of solvency capital at which local regulator is empowered to take action).
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 non-participating life business, expressed as a percentage of the EU minimum (or equivalent) solvency margin has remained stable at 142% (31 December 2007: 141%).
Regulatory basis – UK Life with-profit funds The available capital of the with-profit funds is represented by the realistic inherited estate. The estate represents the assets of the long-term with-profit funds less the realistic liabilities for non-profit policies within the funds, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs, guarantees and promises.
Realistic balance sheet information is shown below for the three main UK with-profit funds; CGNU Life, Commercial Union Life Assurance Company (CULAC) and Norwich Union Life & Pensions (NUL&P). These realistic liabilities have been included within the long-term business provision and the liability for insurance and investment contracts on the consolidated IFRS balance sheet at 31 December 2008 and 31 December 2007.
‡ The risk capital margin (RCM) is 1.8 times covered by the inherited estate (31 December
# The NUL&P fund includes the Provident Mutual (PM) fund which has realistic assets and liabilities of £1.8 billion and therefore does not impact the realistic inherited estate.
Regulatory basis – Solvency II Solvency II represents new EU legislation which totally redefines prudential supervision of EU insurers. It aims to establish a new economic risk sensitive approach to capital and solvency calculation and a new harmonised EU supervisory regime which places importance on effective internal governance and risk management practices. Aviva has already recognised that Solvency II offers a blueprint for industry best practice and is fully prepared to meet the challenge that offers. To that end we are an active participant in the key European industry working groups who provide the voice of industry in ongoing negotiations in Brussels.
What sorts of risks do we face? We group the type of risks we face into three categories: financial, strategic and operational.
Financial risks cover market and credit risk, insurance risk, liquidity and capital management.
Strategic risks include issues such as customer, products and markets as well as any risks to our business model arising from changes in our market and risks arising from mergers and acquisitions.
Operational risks arise from inadequately controlled internal processes or systems, human error or non-compliance as well as from external events. Operational risks include taxation, reputation and regulatory risks, such as compliance.
At Aviva, we coordinate all group-wide risk management activities through a central risk team, led by the group chief risk officer. In each of our regions, local chief risk officers ensure that the regional risk profiles remain within the limits set centrally. The local chief risk officers work with business unit management to ensure that our risk management framework is being used consistently across all our businesses. They also work with the group chief risk officer to coordinate and communicate decisions that are taken at a group level.
– Set strategic objectives – Monitor performance – Set and uphold values
This process allows us to: assess the overall risk exposures we face as a group; identify risk exposures across specific areas of our business or business activities; and define the risks we’re prepared to accept.
The central risk team monitors these risk exposures on a regular basis with a specific focus on financial risks via a fortnightly report, and reports the findings to the 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 the regions. These relationships are summarised in the diagram on page 32.
These committees monitor the aggregate risk profile, provide challenge and recommend risk management activity and ensure that our risk policies are used to manage risk to agreed standards.
Board oversight is maintained on a regular basis through its Risk and Regulatory Committee. The group chief risk officer has a reporting line to the chief financial officer as well as to the chairman of the Risk & Regulatory Committee assuring independence of the function.
As our business needs to change and respond to market conditions and customer needs, we regularly monitor our policies and risk appetite to ensure they remain relevant and up-to-date. This helps to provide assurance to the various governance and 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 continue to develop our economic capital models to allow us to measure, compare and further understand our risks. The results of the modelling are incorporated into our key decision making processes. These models show us the relative impact to economic capital from the risks we face. In turn this allows us to consider appropriate and effective mitigating strategies where risks are outside of appetite.
Financial risks We’re exposed to financial risk as a result of changes in the values of our investments and the value of our insurance liabilities. This risk is caused by potential market movements in equity and property prices, the impact of interest rate changes and inflation expectations, credit risk exposures, foreign exchange rate movements and liquidity demands.
To ensure we manage the risks around assets backing technical liabilities, we have set standards for the way businesses should match their liabilities with appropriate assets. Businesses also need to follow a clear decision-making and monitoring process when liabilities cannot be matched or a degree of mismatching is desired.
We monitor the financial impact of the changes to market values (including our staff pension schemes) through our measurement of economic capital and sensitivities to our key performance measures and set our risk appetite in respect of the amount to be invested in different types of asset.
Equity price risk Falls in equity prices is our largest market risk exposure. We continually monitor our exposures relative to our risk appetite and have reduced our overall exposures to equity risk during 2008 by extending our portfolio of equity hedges. This is in addition to the significant equity de-risking we performed in 2007 within our main staff pension scheme and general insurance businesses. These hedges tend to take the form of a portfolio of options designed to provide protection against falls in equity prices at the lowest cost possible. Over the year we have actively managed our portfolio of equity hedges to ensure our equity risk remains within appetite without any adverse liquidity impacts.“Hedging” is a strategy used to reduce exposures to price risk movements.
A 10% decrease in equity prices would decrease total shareholders’ funds net of tax by £1,100 million on an MCEV basis and £600 million on an IFRS basis. Lines of business sensitivities to increases in equity prices are shown in note 55 to the financial statements and in the section on MCEV reporting. These figures are based on an instantaneous shock and include the impact of the hedges in place.
A 1% increase in interest rates would decrease total shareholders’ funds net of tax by £500 million on an MCEV basis and £600 million on an IFRS basis. Lines of business sensitivities to increase in interest rates are shown in note 55 and in the section on MCEV reporting.
We have implemented a portfolio of hedges in Delta Lloyd to protect against the interest rate guarantees within the business. This strategy protected our position in the light of the rapidly falling interest rates environment we have witnessed.
Credit risk We have significant exposures to credit risk through our investments in corporate bonds, commercial mortgages, and other securities. We hold these investments for the benefit of both our policyholders and shareholders.
We’re also exposed to credit risk through our use of reinsurance. Reinsurance arrangements are only placed with providers who meet our counterparty credit standards.
Foreign exchange risk As an international business we’re exposed to fluctuations in exchange rates in the countries in which we undertake business. Over half of our premium income comes from currencies other than sterling. Generally, we don’t hedge these currency risks as profits are retained to support growth in the business units. However significant dividends from overseas business units are hedged as they are declared.
Movements in exchange rates will affect the value of shareholders’ funds which are expressed in sterling. This aspect of foreign exchange risk is monitored centrally against limits aimed at aligning capital deployed with capital required. We use currency borrowings and derivatives when necessary to keep currency exposures within these limits. We hedge specific foreign exchange transaction risks when we feel it’s appropriate; for example, acquisition or disposal activity.
We’re also exposed to some exchange risk from assets held in staff pension schemes, as a part of the investment strategy agreed with the scheme trustees.
Derivatives risk We use derivatives in a number of our businesses to enable efficient investment management or as part of structured retail savings products. In addition we use derivatives to hedge the financial risks discussed above. Derivatives can involve complex financial transactions and, to minimise the risks involved we set minimum standards of control that we require our businesses to adopt when using derivatives.
Liquidity risk We need to ensure that we maintain sufficient liquid assets to meet our cash flow obligations as they fall due. All our businesses identify their sources of liquidity risk and monitor the potential exposures.
Insurance risk management As an insurance business, we evaluate exposures to determine whether or not to insure risks and set terms and conditions for any insurance products underwritten.
5 Debt securities 43 6 Other investments 10 7 Other net assets 12 Total 100 £150bn
Life insurance risk Our life insurance businesses are exposed to a range of life insurance risks from various products. These risks are, typically, longevity (the risk that people will live longer than we have assumed), mortality (the death of a policyholder), and morbidity (ill health), as well as experience risks to changes in the underlying assumptions made at the start of the insurance policy, for example duration of the policy and expenses.
Inevitably, there remains uncertainty about the development of longevity that cannot be removed. Should our assumptions in respect of annuitant mortality worsen by 5% then shareholders’ funds would decrease by £320 million pre-tax on an IFRS basis and decrease embedded value by £415 million on an MCEV basis, net of tax.
General insurance risk Our general insurance businesses are exposed to a variety of risks, including fluctuations in the timing, frequency and severity of claims and claim settlements, inadequate reinsurance protection and inadequate reserves.
We use reinsurance to help reduce the financial impact of a catastrophe and to manage the volatility of our earnings. We use extensive financial modelling and analysis to ensure we understand the catastrophe risk and to ensure we get maximum benefit in terms of cost of providing the catastrophe reinsurance covers.
Strategic risk is explicitly considered throughout our strategic review and planning process. Developments are assessed during our quarterly performance management process where all aspects of our risk profile are considered.
Where we identify any potential supply risk – detailed actions plans are put in place and local senior management are informed to ensure appropriate focus is applied.
In addition we complete regular assessments of our major suppliers and ensure that we have robust alternative supply options available. We assess the ongoing financial health of our major suppliers globally, coupled with a review of the business contingency plans to ensure an adequate standard of assurance is maintained.
Australia Ireland Singapore Canada Italy Spain China Luxembourg Taiwan France Poland United Kingdom Germany Romania United States
What we do Aviva Investors is a global asset management business dedicated to building and providing our clients with focused investment solutions. Our client base ranges from among the largest financial institutions to individuals investing for the future. We operate under a single brand in 15 countries so our clients benefit not only from our unique access to, and experience of, our local markets – but also from our ability to leverage an infrastructure that comes with global representation.
Investors look for security – Government bonds and guaranteed products perform well in volatile market conditions
Protecting our clients – We took action to improve transparency for our clients in liquidity funds
Global research – We launched a global research centre that will allow collaboration and sharing of information worldwide
What’s next? Our medium-term targets are to: – Complete the integration of our business across the world – Transform the business model – Increase our third party business – Grow contribution to group profits
Profile and strategy Our global asset management arm, Aviva Investors, is a leading institutional asset management company**. We operate under a single brand in 15 countries across our regions of the United Kingdom, Europe, North America and Asia Pacific.
The marketplace 2008 was one of the most volatile economic periods in history with a wide range of assets posting record or near record falls. What began in 2007 as a crisis in US sub-prime mortgages spread first through the global banking system and then the broader economy. As credit markets froze, investors aggressively cut leverage causing many other asset prices to collapse.
Within equity markets there was nowhere to hide in 2008, with all global markets being dragged down together. UK equities fared better than most despite clear signs of a serious recession. Bond markets were more varied with government bonds performing well as investors sought security. The spread on investment grade corporate bonds widened to unprecedented levels as investors became scarce and default risks increased. Real estate investments generally fared badly with both commercial and residential property prices falling sharply, particularly in the US and the UK. Finally, commodity prices, which had performed very well early in 2008, collapsed along with global growth expectations.
* On an MCEV basis for 2008 and 2007. Prior years presented on an EEV basis. **34th globally, 3rd based in the United Kingdom, based on Cerulli Associates’ December 2007 ranking of asset managers by assets under management.
£bn 1 Aviva investors 236 2 Other Aviva managers 120 3 External fund managers 25 Total 381
2008 was a busy year for us and key operational developments included: Business Development Alain Dromer built his executive team in 2008. In addition, further key appointments were made in the year, increasing the capacity of our global organisation while shaping a high performance culture that continues to attract, cultivate and retain talent.
We are building a business focused on clients, aiming to generate transferable benefits from partnerships with both internal and external clients and excel at cross-border sales. We delivered significant progress in client services in 2008, with a substantial improvement in the UK institutional business rating by the annual Greenwich survey.
We reshaped our investment portfolios by separating those that benefit from a global scale and reach from those that leverage local market knowledge. We also launched a global research centre that allows investment teams to collaborate and share internal research and information worldwide, strengthened our platform of investment solutions and established a global solutions team.
We’ve already received positive feedback from numerous trustees. “An excellent series of seminars pitched at the right level and well delivered,” comments one trustee. Meanwhile, another adds: “Excellent presenters. Very well paced. Good coverage of the topics at an appropriate level.” Finally, one trustee concludes: “As a new trustee I’ve found this an excellent starting point.”
All Quality Long Convertible Bond Manager, No. 1 for 1-Year Period ended 30 June 2008, eVestment Alliance (North America)
Best Trustee Education Provider, Trustee Tutor, Engaged Investor Trustee Awards * Based on findings from Property Funds Research/FT Banker magazine (issued May 2008, data as at December 2007).
We’re not just investment managers. We also want our key institutional clients to regard us as trusted advisers – offering sound advice and contributing to their strategic planning.
When one of our largest pension fund clients wanted to de-risk their portfolio, we worked with them to devise a solution. The plan utilised derivative instruments and bond purchases to meet risk objectives. Crucially, it was also sufficiently flexible to adapt to current volatile market conditions.
Outlook The global economy begins 2009 in the midst of a deep recession. Industrial production and corporate profits are falling sharply and unemployment rising equally fast. Economic growth is expected to be significantly negative in 2009 but should benefit from the considerable amount of money injected by governments worldwide and is likely to recover in 2010 led by the US and China. From start to finish the recession is likely to cut western GDP by at least 4%, with the risk to that figure being on the downside. Looking out beyond 2009, we expect that the de-leveraging of the private sector – a rise in savings rate – is likely to remain in place for several years. With no return to normal lending and a sustained rise in savings, we expect economic growth to be very subdued over the next cycle. Chinese growth should be helped by a reversal of the prior objective to cool growth, with increased lending and infrastructure building.
Conditions in real estate markets remain challenging, with most expected to see further capital value decline during the course of this year as the economic contraction feeds through into lower corporate demand for property space and investor sentiment remains weak.
Imagine spending a year painstakingly restoring a car – only to have it stolen.
That’s what happened recently to a policyholder. We settled the claim, but it wasn’t the end of the story… Our policyholder continued searching car websites for his beloved Land Rover. After two years, he finally discovered it for sale on-line (despite significant modifications) and notified the police.
Regulatory changes – Capital gains tax and value added tax (VAT) changes – Level of creditor business impacted by the Financial Services Authority’s reviews of payment protection insurance – Review by FSA of retail distribution
Maintained market share – Life and Pensions market share increased to 11.3% along with our top three ranking in key savings, protection, pensions and annuities markets
Operational excellence – Made significant progress on our transformation change programme designed to deliver true operational excellence
Focus on profit – Great strides in reshaping our book – Rate increases achieved across all commercial lines – Improved our price competitiveness and introduced sophisticated pricing techniques – Delivery on the promise of scale – £265 million of cost savings in the year
What’s next? Our medium-term targets are to: – Continue to transform our business model – Exploit the synergies of our separate UK businesses – Generate capital for the group
Norwich Union has a compelling combination of balanced distribution and broad product choice. We have significant reach into the Independent Financial Adviser (IFA) sector where we transact with over 3,500 registered advisers and conduct significant volumes of business through all the leading networks and service providers. We have successful strategic partnerships with the Royal Bank of Scotland Group (RBSG) and many leading UK financial services brands including Post Office Financial Services and 18 building societies.
Our product range includes life assurance and healthcare products which protect our customers and their families in times of difficulty as well as our pension and savings products which provide prosperity and help secure a more comfortable retirement for our customers.
Our people have continued to perform with dedication throughout 2008. In our latest survey, the percentage of our people who are personally committed to achieving our organisational goals has increased to 89% (2007: 86%), a significant achievement given the current economic climate and the degree of change within the organisation.
1 Individual pensions 31 2 Group pensions 9 6 Equity release 2 Total 100
The combination of lower disposable income, cost of living increases, investment market falls and the onset of an economic recession have seen the savings ratio decline to its lowest level since the 1940s, resulting in an increase in the savings gap and the percentage of the population that are financially unprotected. Overall, people have invested less than in previous years and have already experienced a significant decline in the value of their retirement savings and investments.
Norwich Union customers have not been immune to these measures. We recognise that this has caused disappointment to many of our customers but these actions reflect our prudent management of our funds in these conditions.
They also ensure that all customers are treated fairly by striking a balance between those wishing to access their capital and those remaining in the affected funds.
All of these events have had an adverse effect on the life insurance sector as a whole and we expect further slowdown in new business sales in 2009 across the majority of product lines. Opportunities for growth remain in some market segments, particularly within the corporate sector as companies remove pension risk from their balance sheets. In the medium to longer term we expect to see the market return to growth as there remains a significant savings and protection gap. The current economic conditions have left a number of smaller and less well diversified companies in a weaker capital position. This will drive better capital discipline and may encourage further market consolidation.
Operational performance In 2008 we worked across the business towards making a real difference to our customers. Actions ranged from simplifying our direct debit forms to improvements in our service promises by supporting our ambition to make it easier for customers. We improved the accessibility of our offering through e-commerce propositions such as the Simplified Life, introduced new rating factors for our annuity business and helped 7,500 of our customers unlock more value from their homes through our equity release products.
We continue to provide our staff with the tools to meet customer needs by developing their knowledge of our industry, products and customers. In 2008 over 1,000 of our colleagues graduated from the Service Academy, a joint venture with the Chartered Insurance Institute (CII) which provides an accredited qualification for Customer Experience employees. A further 2,722 employees are currently enrolled in the programme.
We recognise that service levels in 2008 have fallen below our aspirations in some areas and we have taken the appropriate action to remedy this situation. We continue to look for ways of improving service and are prepared to partner with third parties where they have greater expertise. One such example is our wrap offering where, despite our best endeavours to address service and operational issues, we concluded that the proposition was better delivered through a third party and have outsourced the administration to Scottish Friendly.
**Read more about the Retail Distribution Review on the FSA website at www.fsa.gov.uk
Throughout 2008 we continued to be customer centric and diversify and improve our product offering and distribution footprint. We successfully launched our Norwich Union Income drawdown product and enhanced our annuities ratings factors to include postcode, smoking and marital status, enabling us to satisfy customer needs with products that are designed to meet their individual requirements throughout their lives.
Our simplification strategy has proceeded at pace throughout 2008 We have made significant progress in our partnership with Swiss Re with over one million policies now administered on their systems. This in turn has allowed us to switch off over 200 systems and we remain on track to meet our £100 million annualised cost savings target by the end of 2009, £60 million of which has already been achieved.
Financial commentary In 2008 we delivered our highest life and pension sales, up 1% to £11,858 million (2007 restated: £11,797 million) increasing our market share to 11.3% (2007: 10.4%). This performance was underpinned by; the success of our pensions strategy, growth in annuities and higher sales through our joint venture with RBSG whose sales were £1,639 million (restated 2007: £1,615 million).
Our operating profit for the year on an MCEV basis was up 7% to £883 million (2007 restated: £822 million) as we improved performance from our in-force book, maintained our focus on our control of persistency variances and continued to deliver on our efficiency saving commitments.
Our continued focus on retention initiatives have enabled us to contain our lapse experience to a loss of £23 million, against a backdrop of changes to capital gains tax rules for bonds and the prevailing economic climate. In addition, we have taken the prudent step of establishing an additional provision of £50 million in anticipation of higher short-term recessionary related withdrawals and a further provision of £20 million in relation to likely increases in mortgage and income protection related claims as unemployment rises.
The value of new business declined in 2008 to £204 million (2007: restated £278 million) leading to a new business margin of 1.7% (2007: restated 2.4%). The reduction in margin in 2008 is attributable to annuity business and reflects non recognition of asset yield (net of credit default allowances) which we have secured above risk-free rate. In 2008 an estimated 0.5% of additional asset yield has been achieved (net of default allowances) but not recognised. This is equivalent to a value £130 million (pre-tax) and this will emerge in future years through the expected return. The effect in 2007 is less pronounced. Excluding this effect new business contribution has improved reflecting pricing changes, management of business mix and the benefit of operational efficiencies.
On an IFRS basis, life operating profit increased by 4% to £751 million (2007: £723 million), driven by the with-profits business and supported by £124 million of profit relating to the shareholder proportion of the special distribution announced in February 2008.
In 2008 we have strengthened our allowances for credit defaults on commercial mortgages and corporate bonds held by shareholders by £550 million bringing total allowances at 31 December 2008 to £1.13 billion, equating to 85 bps over the lifetime of these securities. Despite the effects of falling investment markets and the increases in default allowances, the solvency position of our funds remain healthy.
Finally, on an MCEV basis the embedded value of our life business has fallen to £4.9 billion (2007: £6.9 billion) reflecting the impact on net worth and future profits of adverse investment market movements.
Profile and strategy As Norwich Union Insurance (NUI) we are the leading general insurer in the UK, with 14% of the total market. We focus on personal and SME (small to medium enterprise) insurance and are also a leading provider of roadside assistance through the RAC.
We have unparalleled distribution reach. Our personal products are sold directly to customers over the phone and through our website www.norwichunion.com, via brokers and through over 100 corporate partnerships. For commercial insurance we focus on broker distribution and believe that independent brokers remain the best source of the advice SME customers require.
We contribute to the “one Aviva, twice the value” vision by sharing our experience as market leader in the UK general insurance market with the group’s general insurance businesses across the world, providing peace of mind to our customers and generating cash and capital overtime to support group expansion.
To underpin these key themes we are executing a series of major initiatives across the business.
The growth of broker consolidators – This has directly impacted costs through demands for higher commissions from the consolidated broker businesses. Lately, however, this growth has slowed as capital to fund acquisitions has been increasingly difficult to raise and insurers seek to reduce commissions in an effort to drive down costs.
General insurance and health IFRS Combined Long-term operating operating Net written Underwriting investment profit ratio* premium result return £m % £m £m £m * Norwich Union Insurance only.
The level of creditor business within the market has fallen as a result of reduced lending due to the economic environment and the response of distributors to the Financial Services Authority’s review into the sale of payment protection insurance. Looking forward, the payment protection insurance market will undergo further significant change when the final remedies* of the Competition Commission are fully implemented but the protection provided to customers by this product continues to be of vital importance particularly in this time of economic instability. We are actively working with the distributors to ensure our products are designed to provide this protection in a manner that also addresses the Competition Commission’s concerns.
Operational performance In 2008 we were delighted to be voted “General Insurer of the Year” at the Insurance Times Awards for the sixth successive year, demonstrating the confidence and trust that independent brokers have in us. In addition, RAC was voted by JD Power as the best Roadside Assistance provider for the third year running.
We made significant progress on our transformational change programme designed to enable us to maintain our market-leading position. This programme, first announced in October 2007, will deliver our core objective of insurance excellence and is underpinned by our focus on building a world class underwriting capability that uses the data and expertise we have to ensure that we write the right risks at the right price.
– We are leveraging the trusted RAC brand to provide the motorist with access to an even wider range of insurance options through the RAC panel, which has now been launched to serve those customers who wish to select their insurance provider through a trusted aggregator.
– We have improved price competitiveness through the introduction of sophisticated pricing techniques.
For the transformation to be successful we must have the full commitment of our staff as they are ultimately tasked with its delivery. As such, one of our priorities is to ensure we create an environment which recognises and fosters the contribution and the needs of individuals. To enable this we have initiated the roll-out of a new talent management framework in 2008, a process that will continue during 2009.
Our financial performance in 2008 reflects the continuing tough market conditions and our focus on sustainable profitability rather than volumes. We have seen net written premiums fall 8% to £4,981 million in 2008 (2007: £5,440 million). While all business lines have been affected the decline was most notable in creditor, where volumes have fallen by around 30% reflecting distributor response to the issues with payment protection insurance and the decline in lending.
In personal lines we have achieved motor rating increases of 5% (2007: 6%). Following our initiatives to improve the price competitiveness of our direct channel we have focused on better quality risks resulting in a reduction in our average premium levels. Homeowner rates have increased by 9% (2007: 7%). While overall rating in personal lines has been marginally better than headline claims inflation, the impact of claims farming and an increase in bodily injury claims have adversely impacted profitability.
The commercial market has remained particularly price competitive. Against this backdrop we have reversed the trend of declining rates seen in the past four years, achieving an overall rate increase in 2008 of 3% (a 5% improvement on the 2% reduction in 2007). Our stance on commercial pricing is underlined by the implementation of the second phase of rating action in the final quarter of the year. While this represents a significant improvement on recent trends, the rating achieved in the year remained below the level of claims inflation and has also contributed to a reduction in volumes.
While the income we have received from our investments has remained relatively stable, the unprecedented economic volatility experienced in 2008 had a significant adverse impact on our profitability as a result of unrealised losses on our investment portfolio. The decision we took last year to de-risk our balance sheet by disposing of our equity holdings has given greater stability to long-term capital returns; however, we remain a major investor in the market principally through our gilt and corporate bond holdings.
Our combined operating ratio has improved to 99% (2007 restated: 106%). 2008 saw a step change in our operational efficiency, with the expense ratio improving to 12.1% (2007 restated: 13.9%) despite the significant reduction in business volumes. This has been achieved by £265 million of cost savings in the year, including £200 million from the first phase of our programme announced in October 2007, together with the excellent progress already made on phase 2 with over 50 systems decommissioned and 14 properties (where NUI or RAC was the main occupier) vacated by the end of 2008.
An increase in the frequency and severity of claims driven by the economic climate and moral hazard issues (such as theft and fraud), offset in part by lower levels of activity
Offsetting this it is possible that a global shortage of capital and lower investment returns will be catalysts for the market to harden, leading to an improvement in underwriting profitability, and may also prompt customers to turn to trusted brands such as ours.
We are confident that the actions we are undertaking to deliver true operational excellence are the right ones. We have already seen tangible impacts from this programme, most notably in the improvement in efficiency within our organisation, although it will take time for all of the benefits to be reflected in our financial results. In addition, we will continue to move personal lines rates up generally and consistently with the trends we expect in the market, as well as applying targeted increases to specific segments within our book.
The global economic downturn has hit all parts of the world. And customers everywhere demand up-to-date information and advice. In Romania, for instance, we’re issuing a monthly savings and investment bulletin to help our agents understand the implications of the crisis – and ensure their customers make the best financial decisions. We’ve also updated our marketing materials, created an on-line risk profile detector and revised call centre scripts.
Elsewhere in Eastern Europe, we’re providing additional knowledge and training to our Hungarian agents and broker companies – including PR initiatives – to better inform customers.
Our core European business comprises the mature markets of France, Spain, Italy and Ireland, together with the central and eastern European, higher growth markets of Poland, Russia, Turkey, Hungary, Romania and the Czech Republic. In addition, we operate in the Netherlands, Belgium and Germany through our Dutch business Delta Lloyd. Delta Lloyd is managed independently from our other operations due to its governance structure and its performance is covered in more detail at the end of this review.
Customers are served through a diverse set of distribution channels, including banks, brokers, agents, direct sales force, telephone and the internet. We are the leading provider of insurance via the bancassurance channel in Europe with 31 bank partners. We have relationships with more than 5,000 brokers and independent agents and in addition we operate a direct sales force of more than 8,500 consultants. Our ability to operate across distribution channels allows us to meet different customer preferences and respond to market developments.
During the course of 2008 we have continued to strengthen our distribution capability across Europe. Our bancassurance channel has benefitted from the addition of agreements in Spain with Cajamurcia, in Poland with Bank Zachodni WBK, Turkey with Citibank and Tekstilbank and our acquisitions of Avipop and UBI Vita in Italy. In our retail channel, principally direct and intermediated business, we have successfully launched a direct motor business in Poland and acquired VIVAS Health in Ireland.
IFRS MCEV Value New operating operating of new business profit profit PVNBP business margin £m £m £m £m %
IFRS Combined Net Underoperating operating written writing profit ratio* premium result £m % £m £m
France 70 99 733 11 Ireland 162 80 474 101 Netherlands 169 85 1,717 75 Other Europe 41 94 308 10 Total 442 89 3,232 197 * General insurance business only.
We have also strengthened our leadership team with the appointment of Andrea Moneta as CEO. Andrea has extensive experience in the European financial services arena, having held a number of senior positions in UniCredit and the European Central Bank. Andrea has created a new European leadership team which will lead the transformation of the European business ensuring that our customers, our vision and our values are at the centre of our decision making.
We remain committed to achieving our “one Aviva, twice the value” targets for shareholders and bringing prosperity and peace of mind to our customers.
The impacts of economic turbulence and the credit crunch have been felt across the region. While insurers are far less exposed than banks to the availability of capital, business volumes have slowed as consumers adjust their spending and banks seek to increase liquidity and capital.
This changing environment presents us with opportunities. Insurance products offer a valuable profit stream for banks and can stimulate growth in new bancassurance opportunities. As the leading bancassurer in the region we are well placed to capitalise on this market trend.
We will also benefit from organic growth opportunities, arising from low market consolidation across the region, the migration of customers to brands in which they have confidence.
‘Pay as you drive’ insurance is being piloted in greater Paris. Launched throughout France later this year, it will allow young drivers to pay lower premiums – through actual kilometres driven and usage times.
Market harmonisation continues across the region as a result of converging regulations, cross-border bank and broker consolidation and the increasingly global nature of financial markets. While significant differences remain, such as taxation, customer expectations and demands are increasingly similar across the region. These trends, when combined with technology developments, are creating opportunities to leverage product design, efficient operations and expertise across national borders.
Working as a region ensures that we are able to give a consistent response to the challenges created by the credit crunch. A number of initiatives have been enacted to support our distributors and policyholders alike. For example, we contacted the 40,000 French unit-linked customers most affected by market volatility to explain what is happening in the markets and how this will impact them. In Italy, although not contractually obliged, we have signalled our intention to work with our bank partners to support our customers who were impacted by the collapse of Lehman Brothers and the Icelandic banks where customers assets were involved with these organisations. We have also adapted our savings products to provide customers with safer investment options.
Our businesses are focused on our customers, developing products and distribution based on their needs and supported by actively sharing knowledge and experience across the region. In 2008 we have adjusted our product and fund offerings to respond to the needs of customers in these difficult economic conditions.
Aviva Europe is also committed to delivering the benefits of “one Aviva” by capitalising on our scale to achieve further growth and to generate capital and in 2008 we have continued to expand our distribution capability across Europe.
Savings and pensions aren’t always easy to understand. That’s why we’ve launched two new educational websites to help French customers. Firstly, www.bonconseil.fr offers completely impartial guidance on investment choices. The website includes step-bystep learning materials – so individuals can discover what kind of saver they are and how to improve their capital management. Meanwhile, www.bienpreparersaretraite.fr offers a comprehensive collection of practical and objective information on pension issues.
Studies have already shown that the French population feel under-prepared for their retirement. That’s why this website aims to show how to best prepare a pension. We also offer each client a Personalised Pension Assessment. It all helps to prove that customers remain our main focus.
Mergers and acquisitions The acquisition of VIVAS Health in Ireland completed Hibernian Aviva’s product range and we are currently pursuing cross-selling opportunities with our existing life and general insurance operations.
In Poland we launched a new joint venture with Bank Zachodni WBK, the Polish subsidiary of AIB, which provides additional distribution coverage following the conclusion of our partnership with Deutsche Bank. We also completed our acquisition of UBI Vita in Italy, increased our holding in our profitable Spanish joint venture Cajamurcia Vida to 50% and entered into new bancassurance opportunities in Turkey with Citibank and Tekstilbank.
In 2008 we launched a pan European CR initiative, focusing on raising levels of understanding and engagement to embed our CR approach across the region. Aviva Europe has received several awards for its CR programme including Aviva Lithuania named as “Socially Responsible Company of the year 2007” and Aviva France’s diversity programme awarded the “Trophées de la diversité en Entreprise” by the National Agency for Social Cohesion and Equal Opportunities. Our focus in 2009 will be to continue this progression and to share best practices amongst our markets.
There are three distinct brands in the DL group. In the Netherlands the Delta Lloyd brand works exclusively with independent insurance intermediaries, whilst OHRA focuses on direct channels such as telephone, internet and mail. The third brand comprises a joint venture with ABN AMRO, reaching customers through the extensive distribution networks of ABN AMRO bank.
DL’s strategy concentrates on security for its customers and other stakeholders through income protection, wealth creation and risk insurance and is founded on five strategic pillars: reputation, distribution power, efficiency, expertise and core values. The DL group is aiming to secure a position among the top three insurers in the Netherlands by 2010 and, where appropriate, to grow its banking and asset management businesses. Scale and cost effectiveness are essential as customers focus on price and use different distribution channels to buy their financial products.
DL has actively committed to corporate responsibility ranging from complying with various codes of conduct to realising energy savings. In May 2008 DL teamed up with Rabobank to become co-owners of Econcern, a sustainable energy company which operates in 21 countries, and invests in a number of sustainable energy projects including an off-shore wind-park.
The Marketplace The Dutch insurance market is mature with cost reduction and economies of scale becoming increasingly important. There is a focus from the customer on increasing transparency through value-for-money high performance products. There is also an increase in legislation, for example, in the areas of customer protection and new compensation rules for brokers
The Dutch savings market is extremely competitive with banks now able to offer retirement products on the same terms as insurers. In addition, the 2007 industry review of charges on unit-linked insurance policies, combined with volatile equity markets, has reduced demand. The general insurance market has seen competition on premium rates, particularly in the key motor account.
DL is well placed due to it’s distribution strength, market position and investment in it’s brands to gain advantage from the current market downturns.
Hibernian Aviva is taking steps to reduce Ireland’s carbon ‘tyreprint’ by offering motorists reduced rates for selected lower CO2 producing cars. Specifically, we offer a discount of 20% to motorists driving eco-friendly cars such as the Toyota Prius, Honda Civic IMA Hybrid, Ford Focus Flexifuel and Saab 9-3 Flexifuel.
Life businesses Total life and pensions sales were up 8% at £16,990 million (2007 restated: £15,684 million), buoyed by the strong euro. On a local currency basis our sales were down by 7%. This decline is a direct result of the “credit crunch”, which also affected our investment sales, which dropped to £764 million (2007 restated: £1,572 million). Overall, this is a resilient performance supported by the diversity of our markets and distribution.
MCEV operating profit increased by 9% to £1,638 million (2007 restated: £1,503 million). Currency strengthening had a favourable impact on the result which declined 6% on a local currency basis. The underlying decrease mainly reflected a strengthening of allowances for annuitant mortality in Delta Lloyd and negative experience variances due to the worsening economic climate. This was partly offset by good growth across our central and eastern European operations, with increased value of new business and higher expected returns in these growing markets.
General insurance and health businesses Net written premiums increased by 27% to £4,090 million (2007: £3,232 million). Against a backdrop of increasing price competition across a number of countries, operating profit decreased to £397 million (2007: £442 million). This result has been favourably impacted by the strengthening of the euro and the development of new distribution channels and product launches in the year. However, these improvements were countered by the current competitive nature of insurance markets, particularly in Ireland and the Netherlands. Our business in Ireland was greatly impacted by a difficult year for the Irish economy and severe floods which led to an increase in weather related claims. A more favourable claims experience for our French business was reflected in a 50% increase in operating profits to £107 million (2007: £70 million).
Although the Europe COR has worsened compared with the prior period, at 97% (2007: 89%) it remains within the group target of “meet or beat” 98% and we expect to continue to achieve this target in the future.
Other businesses Regional costs of £28 million (2007: £11 million) reflects the first full year of regional costs.
Outlook The outlook for trading in 2009 is difficult to predict with any certainty. We expect new business markets to remain subdued across the region, particularly for life products where the current economic conditions mean that consumers’ propensity to save is relatively low. General insurance markets continue to perform better in terms of volume, although price competition is fierce, particularly in the more mature western European markets.
Our focus in 2009 will be the prudent management of capital, ensuring that we appropriately balance the need to generate current year profits with a desire to invest in business development. Despite difficult economic conditions the European market still presents a number of growth opportunities. We will be alive to these opportunities yet selective in where we choose to invest, maximising our short- and medium-term returns on capital. Within the context of these challenging economic conditions, customer retention will be a particular focus in 2009.
Case study: …an extra five miles on a snowmobile In early spring 2008, a customer had his seasonal cottage vandalised. Like most of Canada, the city of Fredericton (New Brunswick) had received lots of snow and the only way to access this particular property was by using snowshoes and a snowmobile. But that didn’t stop two field service representatives...
To ensure the customer received immediate service, one of our reps arranged for a snowmobile to get her and her colleague out to the customer’s property to assess the damage. The customer was very pleased because Aviva believes in going the extra mile…or even an extra five miles on a snowmobile.
What we do Our North America region is comprised of two distinct businesses. In Aviva USA we provide a comprehensive portfolio of life insurance and annuity products to more than one million customers in all 50 states through independent agents and brokers. Through Aviva Canada, we market a wide range of conventional personal and commercial lines insurance to more than three million customers using brokers and affinity groups.
What’s happened? Industry changes – Severe credit exposure experienced in the second half of 2008 by many of the largest financial institutions – US Security and Exchange Commission (SEC) adopts new rule which classifies equity indexed annuities as securities for federal regulatory purposes – Steady consolidation of highly fragmented general insurance business in Canada
What action have we taken? Focused on customer needs – Major change towards customers-centricity resulted in the launch of Aviva Canada’s “Let’s Change
Optimised regional business model – Implemented a major change programme in the highly competitive personal lines market that has streamlined and standardised underwriting – We have initiated efficiency improvements and expense reduction programmes focused on delivering streamlined IT infrastructure outsourcing, regional finance function transformation, consolidation of investment accounting and a structured approach to procurement
Expanded contribution of asset management – Exposure to a more diversified range of investment products became available since Aviva Investors became a single centre of excellence in 2008
Profile and strategy Our North America region is comprised of two major lines of business, each of which operates in a distinct geographic market: life insurance and annuities in the United States and general insurance in Canada.
In Aviva USA we provide a comprehensive portfolio of life insurance and annuity products to more than one million customers across all 50 states. We are currently number one in sales of both fixed indexed annuities and fixed indexed life insurance. In response to the evolving requirements of the marketplace, the company’s term products were improved and relaunched in 2008. At present, products are primarily distributed through independent agents and brokers, although opportunities may exist to expand our distribution capabilities.
Develop a customer-centric culture that is engaging to employees as well as customers.
United States The US is the world’s largest economy** as well as its largest insurance market†. This is especially true for retirement savings products as 78 million members of the baby boom generation‡
move into retirement. The US savings market is undergoing substantial structural changes. This is the result not only of the shifting demographics of an ageing population but also due to a cascading set of crises stemming from US sub-prime mortgage foreclosures, which in turn initiated a massive de-leveraging effect in the capital markets with a profound adverse impact on many financial institutions.
In a recent claim, the insured had passed away and the beneficiary named was his common-law wife. The insured died in a different state and his wife was refused the death certificate as she was not next of kin. She was very upset and worried about how the claim could be paid.
We contacted the office in charge and gave them her authorisation as well as documents naming her as the beneficiary. Shortly afterwards, they agreed to post her a copy of the death certificate.
The US Securities and Exchange Commission (SEC) has adopted a new rule (Rule 151A) which classifies equity indexed annuities as securities for federal regulatory purposes on contracts issued on or after 12 January 2011. In addition to creating additional administrative requirements for issuers, the ruling requires agents to be licensed to sell these products. Indexed products meet an important customer need and are a key element of our product suite. We are currently assessing the specific actions needed to position ourselves advantageously with respect to the potential adoption of this or a similar rule.
≈ in the world, Canada’s general insurance market is established and stable. The four largest provinces generate around 90% of total premiums with Ontario, the largest, representing 47% on its own#. The biggest growth market is western Canada, where economic development has resulted in significant population increases and a changing demographic profile.
Operational performance We made significant progress in implementing our four regional strategic priorities in 2008 and delivered exceptional growth results.
Grow in existing markets In Aviva USA we achieved new business sales of £5,715 million in 2008. In doing so, we have achieved our target of doubling the scale of the US business a year ahead of plan.
Our decision to exit certain markets in late 2007 to focus on selling higher margin products contributed to a slight decrease in the sales of life products in 2008. To pave the way for our future growth, we made changes to our product mix in response to customer needs. This included the introduction of new term insurance products and new fixed universal life products as well as the expansion of our distribution network with focus on larger brokerage general agents.
While we will put greater emphasis on life sales in 2009, we will continue to market indexed annuities and refresh our traditional fixed annuity product set in order to capitalise on the growing savings and retirement demographic.
Expand contribution of asset management As Aviva Investors became a single centre of excellence in 2008, the combined funds under management became larger. This increased scale has given us exposure to a more diversified range of investments.
Optimise the regional business model We have wholeheartedly adopted the group’s “one Aviva, twice the value” vision and worked hard to implement efficiency improvements and reduce expenses. This includes ongoing initiatives such as IT infrastructure outsourcing, regional finance function transformation, consolidation of investment accounting and a structured approach to procurement.
The Claims Service Guarantee was the first in a series of ‘proof points’ designed to showcase our leadership in customer-centricity.
In Aviva USA we introduced customers to our “Wellness for Life” programme which provides premium reductions to customers who maintain healthy lifestyles. We provide wellness information services through our affiliation with the world-renowned Mayo Clinic Health Solutions. We have also maintained our industryleading approach to conducting suitability reviews. These reviews are designed to ensure that customers understand the design and nature of the product they are purchasing, and that it is appropriately matched to their needs.
Employee engagement in the region remained strong, as demonstrated by a 96% overall response rate to the 2008 climate survey and an employee engagement score of 84%, well above the industry norm.
General insurance business Aviva Canada continues to deliver profitable growth. Net written premiums increased 13% to £1,601 million (2007 restated: £1,412 million) with growth in both personal and commercial business and high retention across all lines of business. In personal lines premiums grew by 10% despite increased competition and challenging pricing in a large part of Ontario. Commercial lines premiums increased 20% due to strong new business coupled with a major broker acquisition in the second half of the year.
We achieved rate increases on all lines of business. Both personal motor and homeowner rates increased by 6% (2007: 3% and 4% respectively) reflecting general claims experience in the market. Commercial motor continues to be a profitable line for us, and we improved rates by 3% during the year (2007: 6% decrease). We were able to increase commercial property rates by 4% (2007: 1%) keeping in line with claims inflation and loss experience felt across the market. Liability rates remain extremely competitive but we are beginning to achieve rate increases that are broadly in line with claims inflation.
Our combined operating ratio was 99% (2007: 98%). The claims ratio was in line with 2007 as good prior year loss development was offset by higher claims following a harsh winter and significant storm activity. However, the expense ratio was slightly higher in 2008 reflecting increased spending to support our corporate change programmes and strategic investment.
Operating profit decreased 6% to £145 million (2007: £154 million). Underlying this was an increase in underwriting result to £21 million (2007: £18 million), offset by lower investment income following the equity de-risking that took place in the latter half of 2007 as well as lower reinvestment rates on our bond portfolio.
Outlook We believe that 2009 will be turbulent as the economy combats the adverse effects of a crisis many believe is only exceeded by the Great Depression of the 1930’s.
Despite significant challenges in the financial markets and a weaker economy we also believe that in North America we are in the right place at the right time with the right products. Our established focus on products with downside guarantees and an ongoing commitment to value-adding programmes and features that are important to customers provide a strong foundation for the future.
We will also continue to address increasing customer demand for choice and simplicity through our multi-distribution 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.
In addition, we will continue to progress the efficiency and effectiveness of the region’s operating model. The North America region was in a start-up position at the beginning of 2008; by the end of the year we had established the regional office in Chicago and staffed all key positions. For 2009, our focus will be on ensuring the region’s business concepts and processes continue to progress the group model with clarity of accountabilities and focus across the region.
Funding agreement sales were very strong as the volatile investment markets created a favourable environment for these large institutional transactions.
What action have we taken? Leveraged bancassurance expertise in new and emerging markets – New bancassurance partnerships have been formed to consolidate our strong position in the high growth potential markets of India and China – Focused on developing successful bancassurance partnerships with our JV partners in new markets of Malaysia, Taiwan and South Korea
Realising synergies across the region – Substantial investment made to expand our distribution network and optimise our shared service model into high growth potential and new markets
Exceptional performance in developing markets – We achieved exceptional growth in the developing China market and had a successful first year of operations in Taiwan along with promising sales in new markets such as South Korea
Profile and strategy We have been present in Asia Pacific for over 100 years and today operate in nine markets across this region. Our footprint spans the markets of Australia, Singapore, Hong Kong, India, China, South Korea, Malaysia, Sri Lanka and Taiwan. We are particularly focused on providing long-term savings products and believe that Asia is still an attractive region for growth due to low insurance penetration in most countries, an ageing population, a fast expanding middle class and high gross domestic product (GDP) growth.
Our ambition in the region is to establish Aviva as a leading international player in Asia Pacific and grow the business to become a meaningful part of the group. During 2008, we made significant efforts and investments to strengthen the Asia Pacific regional team which, under the leadership of Simon Machell, will lead and support the implementation of our strategy in the region.
We have made important steps towards realising our ambition having achieved rapid growth in most of our markets in recent years.
Our strong distribution partnerships, wide footprint and regional operational model create a solid platform from which to compete effectively in the region.
The marketplace 2008 was a difficult trading year for the financial services industry. As a region Asia Pacific is not immune to the global economic crisis and local stock markets were significantly affected. Investor confidence dropped considerably over the year and sales of investment and investment-linked products were negatively impacted across the region.
Despite this, the Asia Pacific region remains highly attractive with markets ranging from large and mature to emerging powerhouses. The low insurance penetration in most countries, ageing populations and high GDP growth indicate that prospects for continued growth in the life and pensions industry are very good. The latest economic forecasts predict GDP growth for the region of 5.8% in 2009†.
We manage our portfolio of businesses in this region by their stage of development: Established: our operations in Australia, Singapore and Hong Kong are established businesses in advanced markets.
High potential: we have fast-growing businesses in India and China which we consider to be the markets with the highest potential for growth in the region.
New start: these are relatively new businesses with strong local bank partners, located in South Korea, Malaysia, Sri Lanka and Taiwan.
IFRS MCEV Value of New operating operating new business profit profit PVNBP business margin £m £m £m £m %
**On an MCEV basis for 2008 and 2007. Prior years presented on an EEV basis. † Source: Asia Development Bank, December 2008.
Malaysia is an emerging market where the government initiatives to make the country an international Islamic financing hub are expected to translate into a strong increase in Takaful business.
‡ Insurance Regulatory Commission (CIRC). ~ Insurance Board of Sri Lanka, based on gross written premiums.
In India and China bancassurance is a fast-growing channel and in 2008 we signed new bancassurance partnerships to consolidate our strong positions. We are also strengthening our multi-distribution approach by investing in new distribution channels such as direct marketing. In India, we have started up the Aviva Sales Training and Recruitment Academy (“ASTRA”) and have already seen the productivity of our agents improving.
The goal of making Aviva a great place to work is matched by our ambition to see Aviva recognised as an employer of choice around the region. A common talent management system was introduced across the region in 2008 along with a uniform reward and recognition programme, bringing the Aviva brand to life and taking us one step closer to achieving our “one Aviva” vision.
Finally, our aim to integrate responsible practices with corporate business strategy is now firmly embedded into the core culture of the company. In the past year we have demonstrated a strong belief in our corporate responsibility mission through a variety of social and environmental initiatives from providing aid to victims of the China earthquake to promoting micro-insurance in India. We also found ways to build corporate responsibility into our daily activities through developing energy efficiencies in the workplace, with Australia leading the charge.
Operating profit of £nil (2007: £4 million) included the costs of the closure of the Malaysia motor portfolio.
Outlook Despite the global economic and financial turbulence, Asia remains an attractive growth region. In 2009, while we will continue to grow the business in line with the market we will also focus on the efficient use of our capital. We have a sound business in Asia Pacific with successful, established partnerships and a strong financial position and we remain committed to building a strong presence in this region.
Total long-term savings sales for Asia Pacific were £3,466 million (2007 restated: £4,255 million). Within this, life and pensions sales grew by 8% to £1,720 million (2007 restated: £1,595 million). On a local currency basis, life and pension sales were 1% below the prior year and total sales down 26%.
Investment sales were down 34% to £1,746 million (2007: £2,660 million) reflecting consumers’ reticence to buy investment products in the current volatile market conditions. Further to this, investment sales were adversely impacted by a change to local pension laws in Singapore, which restricts external distributions from the government pension fund, and the one-off impact in 2007 of favourable changes in Australian superannuation legislation.
MCEV operating profit for our long-term businesses decreased by 17% to £79 million (2007 restated: £95 million). Lower value of new business of £43 million (2007 restated: £65 million) mainly reflected the lower volumes in Hong Kong, a change in lapse assumptions in India, following regulatory changes to a number of products, and the one-off benefit in 2007 from legislation changes in Australia. These, together with the impact of the start-up businesses in South Korea and Taiwan and changes in business mix to lower margin products in China and India, resulted in a lower new business margin of 2.5% (2007 restated: 4.1%).
Colleagues at Aviva Australia pulled together in response to the recent Victoria bushfire disaster.
At Aviva Australia headquarters in Melbourne, Victoria’s state capital, determined colleagues immediately assisted with the aid effort. Within days, they’d donated over AUD$20,000 to the Bushfire Appeal.
Free counselling was also offered to any staff member affected by the disaster. Allan Griffiths chief executive officer of Aviva Australia, was understandably proud of the magnificent response.
What we do Our People and Corporate Responsibility strategies promote the delivery of the Aviva purpose and vision. We work on getting great people to join Aviva and stay and engaging all 54,000 Aviva employees on corporate responsibility. We help our businesses embed best practice in CR and take a leading role in our industry to share our successes and challenges. Our aim is to make good business a part of everyone’s thinking so that together we can make sure Aviva is responsible in everything we do.
What’s next? Our short- and medium-term targets are to: – Meet or exceed tough global targets to reduce our emissions – Support and inspire all our employees to be the best they can be – Continue to embed CR programmes across all our businesses around the world – Build more innovative ways of engaging employees and customers in our community involvement activities – Report against our progress and build our programme of engagement with stakeholders on key issues
The key elements of our people and responsibility strategy are: Getting great people to join Aviva and stay
For the next three years we are focused on: Improving how we identify, develop and use our employees’ talents
Recognising each of our people – the difference each of us makes
This is the overarching aim and promise to our employees which our HR and People practices support. The programme consists of: A global intranet “Aviva World” for communicating across Aviva which encourages collaboration and an opportunity to get to know other employees as individuals right across the globe
A day when we will celebrate our global status, joining together and sharing in activities which support our strategy
Combating climate change is just such an issue and therefore an important part of our CR strategy. The actions we’ve taken over several years have resulted in our carbon emissions falling by a further 6.63% this year. Sustainable commercial growth is equally vital for the future of Aviva, our shareholders, customers and employees. However, operating in new markets, particularly emerging economies, brings with it not only opportunities for Aviva and the prospect of better financial security for our customers but also responsibilities and challenges for the group. Specifically, as an employer and also as a buyer of goods and services, we must apply consistently high standards wherever we operate internationally. We also look to the companies in which we invest to demonstrate their own socially responsible strategies, and this year we announced three new initiatives that further strengthen our sustainable and responsible investment (SRI) portfolio. Among these is the Aviva Investors European Renewable Energy Fund which specialises in developing and financing renewable energy projects in the EU.
Our governance structure is designed for responsiveness to risk as well as opportunity. This enables us to identify issues, mitigate adverse impacts and maximise positive ones. Our CSR committee, chaired by non-executive directors Wim Dik in 2008 and Carole Piwnica from 1 January 2009, approves our CR strategy, policies and plans, and reports to the board at regular intervals during the year. The committee’s report can be found on page 99.
Talent management Our Talking Talent programme, initiated in 2007, is a globally consistent approach to identify, manage and develop talent right across the group. Initially introduced to the top 400 leaders in the organisation, we are delighted with the enthusiasm with which it has been received around the world. The programme has been rapidly extended to other levels of the organisation, including all employees in the UK life business.
Our leadership development programme focuses our people managers on six outcomes which cause sustainable high performance by creating a team environment where people can give of their best. Now in its second year, activity has been focused on managers building relationships based on open and honest two-way feedback. An online feedback tool was introduced and will be freely available to all people managers from January 2009.
Our objectives for 2008 were to create the tools and awareness required to bring about a substantial change in the way we maximise the skills of our people. To this end, an extensive toolkit for HR, guidelines, training plans, handbook and performance management process have been delivered. We are already seeing change, with 87% of our employees agreeing that they “are clear what’s expected of them” in their day to day job (2008 global climate survey).
Financial crime The CR policy ensures that all employees are aware of our commitment to integrity through ethical and honest business practices. This is underpinned by our financial crime policy which ensures that the risks of fraud, money laundering and market abuse are adequately controlled and reinforces our zero tolerance approach to financial crime.
Case study: Conducting our business openly Clear and transparent communication about how we conduct our business is a fundamental principle. Aviva’s 2007 remuneration report (in the annual report and accounts) was recognised as such, by winning the 2008 “Building Public Trust” award. These prestigious awards celebrate the best of corporate reporting by the UK’s leading quoted companies and public sector bodies. The judges found Aviva’s approach to be “great reporting” and “innovative”, describing the report as “a very clear summary of remuneration policy”. The judges believe winners are helping to set the standards of excellence in reporting that all organisations can aim for.
Aviva sponsored the first ever Global Empowerment Award at the Women of the Future Summit. This was presented to Indra Nooyi, CEO of PepsiCo, by HRH Princess Michael of Kent and Louella Eastman, group CR director at Aviva plc.
Diversity, equality and human rights The Aviva principles and policies embody the key tenets of respect, valuing differences and inclusion and are aligned with the United Nations Universal Declaration of Human Rights (UNUDHR). In fact, our programmes have been recognised as going above and beyond the level of activity of many companies to ensure respect, fairness and equality among our employees.
Employee networks such as the Global Senior Women’s Network and Pride Aviva strengthen our diversity agenda and continue to thrive. This year, Pride Aviva, an employee network for lesbian, gay, bisexual and transgender professionals, launched its first national e-magazine. We also improved our position in Stonewall’s “Top 100 employers for gay people in Britain” to 78th place.
Our senior management pay is linked to the climate survey results through clear targets on leadership and engagement. We pay special attention to action planning using the results and for the first time held action planning workshops in each region. We also draw up a global action plan to address employee issues worldwide. Progress on these plans is then shared with employees before the next survey cycle.
With this in mind, our colleagues can now apply for up to three paid volunteering days. As a result, our businesses around the world have seen a significant increase in community volunteering among their people.
Here are just a few examples of how we have played our part this year: Responding to global crises – As a member of the Oxfam 365 Alliance, our funding enables the charity to respond immediately when an emergency occurs, delivering vital services and supplies around the world. Last year our employees in China also gave their time and donated generously to help the earthquake victims in Sichuan – please see page 67
Motivating the next generation – The Climate Change Champions project in the UK is harnessing the energy of Norwich Union volunteers to help schoolchildren to save energy. Twenty nine schools took part in 2007/08, reducing their carbon footprint, securing environmental pledges from the public and celebrating their success at a House of Commons reception
Increasing access to education – Eagle Insurance in Sri Lanka provided its eighth batch of scholarships to support students through their university degrees, bringing the total of student awards made since 1994 to 336
Building awareness among our employees – Aviva SA, our business in Turkey, has designed an online training programme to educate staff about CR, and this is the first of its kind in Turkey. Aviva SA also launched their first volunteering programme, to produce audio books for people in need
Increase percentage of recycled waste by 2% (until 80% recycled rate is achieved).
Case study: Global participation increased to 74% 72% of employees consider Aviva a great place to work.
As the first insurer to be carbon neutral on a global basis we continue to be committed to offsetting activities. This year we have continued to support renewable energy projects in developing countries where Aviva has a presence. Our signature project was in the Sichuan province of China, providing clean and renewable energy by way of a small-scale run of river hydro project. As well as reducing pollution in the area, this project has provided much needed skilled employment for the local region.
Part of our strategy is to share knowledge with our employees so that they can reduce their environmental impact at home. We have developed an interactive game to show our employees where they can make savings at home, at work and at play and put together an employee engagement action pack to help our businesses. This provides them with the technical information they need to support employees to make a difference, including a list of top tips for reducing carbon emissions.
We believe it is important to raise awareness of climate change and influence others. An example of this is the solar powered boat, sponsored by Delta Lloyd, which won the Frisian Solar Challenge race in the Netherlands this year. We also think it’s important to research ways to reduce the impact of climate change and this year we have committed to a five year research partnership with Earthwatch. This includes funding a project to research the potential of mangrove trees to provide an economic model for avoiding deforestation and ensure the sustainability of these natural flood defences in Kenya.
In the Netherlands, Delta Lloyd and ING have launched the first insurance for automatic external defibrillators (AEDs) and this is at cost price. This is in response to the Dutch Heart Foundation’s campaign on the importance of immediate resuscitation and the use of an AED in the event of a cardiac arrest.
The introduction of a broader AGM voting remit on corporate responsibility for all global holdings on the MSCI global index
The creation of a new sustainable fund specialising in renewable energy projects including solar photovoltaic, geothermal, biomass, biogas and wind assets
External benchmarking Our achievements in 2008 were recognised by our continued inclusion in some of the leading external benchmarks: Dow Jones Sustainability World Index 2008 SAM (Sustainable Asset Management) Bronze Class / 2009 inclusion in SAM yearbook
ECPI Ethical Index Euro and Ethical Index Global indices, received second highest EE+ rating
Accountability rating – ranked 45th out of the world’s 100 largest companies
Carbon Disclosure Project Leadership Index – score of 83 out of 100
Other significant emissions Our operations do not generate material quantities of any other significant greenhouse gases.
Total disposal cost for hazardous and non hazardous waste in the UK was £629,000 (2007: £464,000), which includes UK landfill tax.
Paper usage We currently do not track the cost of paper usage.
Key indicators Direct company impacts to nn es to nn es p er e m pl oy ee
CO2 tonnes CO2 offset CO2 tonnes per employee New businesses * The 2007 CO2 emmissions has been restated. Each year the conversion factor for electricity generation varies. We therefore need to restate these figures every four years. We are restating the 2007 figures accordingly.
to nn es kg s pe r e m pl oy ee
We regularly review the viability of new products and services which can encourage customers to reduce their own CO2 emissions. Our Prestige Property Owners Policy includes a free energy assessment, advice and guidance on energy saving technologies and reassessment to demonstrate improvements.
Aviva Investors’ new European Renewable Energy Fund specialises in developing and financing renewable energy infrastructure projects in the European Union. The Environmental Technology Fund and New Energy Fund managed by Delta Lloyd asset management business and the Renewable Energy and Clean Technologies fund in Aviva Spain focuses on climate change mitigation.
The learning from our bin-less office system is being applied to the Canadian business in 2009 and complements their efforts in 2008 around the composting of organic waste.
We are working with our upstream partners to eliminate waste from the business through take back of packaging and switching to biodegradable wrapping etc. Environmental clauses are included in contracts with suppliers. Each new supplier has to sign up to Aviva’s CR Supplier Code of Conduct – focusing on environmental impact as well as human rights and social issues.
We adhere to all building regulations (insulation, proper disposal of waste material including building waste and white goods) and we are members of a responsible motor repair network which disposes of waste and spare parts in accordance with sustainable environmental practices.
We have trialled the use of boiler optimisation valves fitted to all our boilers. The trial suggested a reduction in gas use of 15% and our investment of £154,000 should see a positive return in just 38 weeks.
Capital expenditure work on energy conservation is proceeding with a payback period of less than 3 years.
Our strategy is to increase the use of recycled content paper, while reducing overall paper use. Cost and quality of recycled papers are now comparable with virgin content paper.
Work is continuing with our marketing departments and suppliers to provide marketing materials with recycled content and remanufactured stationery products.
Key Performance Indicators The Companies Act requires that a fair review of the business contains financial and, where applicable, non-financial key performance indicators (KPIs). We consider that our financial KPIs are those that communicate to the members the financial performance and strength of the group as a whole. These KPIs comprise: Earnings per share (International Financial Reporting Standards basis)
Forward-looking statements This business review contains “forward-looking statements” about: Our future plans
The financial data contained in the report and accounts has been prepared using the group’s accounting policies set out on pages 125 to 139. Where applicable, the financial statements have also been prepared in accordance with the Statement of Recommended Practice (SORP) on accounting for insurance business issued by the Association of British Insurers (ABI) in December 2005, as amended in December 2006.
Critical accounting policies and estimates The preparation of financial statements requires the group to select accounting policies and make estimates and assumptions that affect items reported in the consolidated income statement, balance sheet, other primary statements and notes to the financial statements. These are set out on pages 125 to 139.
The table below sets out those items that we consider particularly susceptible to changes in estimates and assumptions, and the relevant accounting policy.
Future accounting developments We continue to take an active role in the development of new accounting standards, via industry forums and working parties, and reviewing and providing comment on proposals from the IASB. Phase II of the IASB’s project on insurance contracts continues to be the most significant area of development for us. We commented on the IASB discussion paper published in 2007 and continue actively to engage in the debate. We fully support the timely development of a global standard for insurance accounting that reflects the economics of our business, and are working directly and through the CFO Forum of leading European insurers, to achieve this. These developments are still at a relatively early stage, so it is too soon to assess the impact this change in accounting will have. While this standard is under development, we will continue to focus on MCEV as the best measure of value for our long-term business. We continue to monitor other major IASB projects, including financial statement presentation, liabilities, revenue recognition, pensions accounting and fair value measurement.
Member of the corporate social responsibility and the risk and regulatory committees
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 in Lloyd’s (insurance) and formerly held a number of senior management positions at HSBC plc (banking).
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 (drinks) and AEA Technology plc (commercial/technology).
Chairman of the Board and nomination committee and member of the corporate social responsibility committee
Appointed to the Board in July 2007. Currently Senior Vice President, and President of Europe, Middle East and Africa Operations at Google (consumer services). Non-executive director of Bharti Airtel (telecommunications). Formerly chief marketing officer and a member of the management board at T-Mobile (communications) and held senior management positions at Deutsche Telekom (telecommunications), Fidelity Investments (financial services) and Putnam Investments (financial services).
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 and managing director of Norwich Union Insurance in 2005. Appointed chief executive of Norwich Union Life, the group’s long-term savings business in the UK, in April 2006.
Appointed to the Board in May 2003. Currently a member of the New York and Paris bars, a director of Naxos UK (private equity) and a non-executive director of Toepfer International GmbH (trading), Dairy Crest Group plc (dairy foods) and a member of the biotech advisory board of Monsanto (biotechnology). Former non-executive director and vice-chairman of governmental affairs for Tate & Lyle plc (agricultural/industrial) and a non-executive director of S A Spadel N.V. (food and beverages) and former chairman of Amylum Group (agricultural/industrial).
Chairman of the audit committee and a member of the nomination and the risk and regulatory committees
Appointed to the Board in December 2007. Former director of The Boots Company plc (now known as The Boots Company Limited) (pharmacy) and managing director of Boots the Chemist at Alliance Boots plc. Formerly held a number of senior management positions at Tesco plc (retail services).
Chairman of the remuneration committee and member of the corporate social responsibility committee
Joined the Group in 1999. Formerly held senior HR positions with WH Smith plc, ICL plc, Priory Hospitals Group and General Electric plc. Previously also 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.
Joined the Group in 1994. Formerly chief executive of Norwich Union Insurance in the UK and managing director of the RAC. Previously held positions with Ernst & Young LLP and Legal & General. Holds a BA Honours in Economics from the University of Durham and is a Fellow of the Institute of Chartered Accountants of England and Wales.
Joined the Group in 2008. Previously commercial and marketing director for British Gas and has more than 20 years of experience in the marketing and advertising profession. Holds a Bachelor of Science degree in Psychology from the University of London and is a graduate of the INSEAD advanced management programme. She is a fellow of the Royal Society of Arts, a member of the Government Strategic Marketing Advisory Board, a fellow of the Marketing Society and a governor of the National Youth Orchestra.
Joined the Group in 2008. Previously managing director of Dubai Financial Group. Has extensive experience of European financial services, having held senior executive positions at UniCredit, the European Central Bank and Accenture. Holds honours degrees in Political Sciences and Economics and Business Administration. Qualified Dottore Commercialista and Revisore Contabile.
The directors submit their report and accounts for Aviva plc, together with the consolidated accounts of the Aviva Group of companies, for the year ended 31 December 2008. The Business review for the Company is contained on pages 14 to 81 and includes a review of the Group’s operations, current position and future prospects together with a description of the principal activities of the Group and other information required to be included. Details of material acquisitions and disposals made by the Group during the year are contained in note 3 to the accounts.
Results The Group results for the year are shown in the consolidated income statement on page 140.
Share capital The issued ordinary share capital of the Company was increased by 35.9 million ordinary shares during the year. 35,908,796 shares were allotted under the Group’s employee share and incentive plans and the Aviva Scrip Dividend Scheme for the May 2008 dividend. At 31 December 2008 the issued ordinary share capital totalled 2,658 million shares of 25 pence each and the issued preference share capital totalled 200 million shares of £1 each. Accordingly, the issued ordinary share capital constituted 77% of the Company’s total issued share capital and the issued preference share capital constituted 23% of the Company’s total issued share capital at 31 December 2008. All the Company’s shares are fully paid up and quoted on the London Stock Exchange. Details of the Company’s share capital and shares under option at 31 December 2008 and shares issued during the year are given in notes 28 to 31 to the financial statements.
The rights and obligations attaching to the Company’s ordinary shares and preference shares as well as the powers of the Company’s directors, are set out in the Company’s articles of association, copies of which can be obtained from Companies House, or by writing to the Company Secretary and can also be found on the Company’s website. With the exception of restrictions on transfer of shares under the Company’s share incentive plan while the shares are subject to the plan, there are no restrictions on the voting rights attaching to the Company’s ordinary shares or the transfer of securities in the Company.
Authority to purchase own shares At the Company’s Annual General Meeting held on 1 May 2008, shareholders renewed the Company’s authorities to make market purchases of up to 262 million ordinary shares, up to 100 million 83⁄4% preference shares and up to 100 million 83⁄8% preference shares. These authorities were not used during the year and, at the forthcoming Annual General Meeting, shareholders will be asked to renew them for another year. Details are contained in the Notice of Meeting. The Company held no Treasury shares during the year.
Directors The following persons served as directors of the Company during the year: Nikesh Arora Guillermo de la Dehesa (retired on 31 December 2008) Wim Dik Mary Francis Richard Karl Goeltz Mark Hodges (appointed 26 June 2008) Andrew Moss Carole Piwnica Philip Scott Lord Sharman of Redlynch Russell Walls Scott Wheway
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 on page 32 of the Business review and an indication of the exposure of the Group companies to such risks is contained in note 55 to the accounts.
The definitions used in the Companies Act 2006 are broad in nature and this authority was sought to ensure that any activities undertaken throughout the Group’s businesses which could otherwise be construed to fall within these provisions could be undertaken without inadvertently infringing them. During the year the Company sponsored events in support of the rebranding of Norwich Union to Aviva amounting to a total of £8,627 which could be construed to fall within these provisions. It is not the policy of the Company to make donations to EU political organisations or to incur other political expenditure.
Group employees The Group’s statement on its employees is set out in the Business review.
Employee practice The Group respects all fundamental human rights and will be 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 2008 represented approximately 37 days of average daily purchases through the year (2007: 23 days).
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
The Combined Code requires that at least half the Board, excluding the Chairman, should comprise independent non-executive directors as determined by the Board. The Nomination Committee performs an annual review of directors’ interests in which all potential or perceived conflicts, including time commitments, length of service and other issues relevant to their independence, are considered. It is the Board’s view that an independent non-executive director also needs to be able to present an objective, rigorous and constructive challenge to management, drawing on his/her wider experiences to question assumptions and viewpoints and where necessary defend their beliefs. To be effective, an independent director needs to acquire a sound understanding of the industry and the Company so as to be able to evaluate properly the information provided. Having considered the matter carefully the Board is of the opinion that all of the current non-executive directors are independent and free from any relationship or circumstances that could affect, or appear to affect, their independent judgement, except Wim Dik due to his length of service as a non-executive director of the Company. Accordingly, over half of the directors, excluding the Chairman, are independent non-executive directors. Each of the directors being proposed for re-election at the 2009 Annual General Meeting has been subject to a formal performance evaluation and took part in a peer evaluation review during 2008. Details of the Directors standing for re-election at this year’s Annual General Meeting are set out in the Notice of Meeting. Wim Dik will retire at this year’s Annual General Meeting. Biographical details of all the directors are set out on pages 84 and 85.
The Chairman and Group Chief Executive The respective roles of the Chairman and Group Chief Executive are set out in the Board’s terms of reference. The Chairman’s priority is the leadership of the Board and the Group Chief Executive’s priority is the management of the Company. The Chairman’s commitment to the Company is two to three days per week and his main interests outside the Company are set out in his biographical details on page 84. During the year the Chairman retired as the chairman and from the board of Aegis plc.
Board effectiveness The effectiveness of the Board is vital to the success of the Group and the Company undertakes a rigorous evaluation each year in order to assess how well the Board, its committees, the directors and the Chairman are performing. The aim is to improve the effectiveness of the Board and its committees and the Group’s performance. The process is led by the Chairman and supported by the Group Company Secretary. This year the evaluation was carried out by Boardroom Review, an independent consultancy, and interviews were conducted with each Board member. All directors also completed a questionnaire evaluating the Board and committees’ processes, their effectiveness and where improvements may be considered. Boardroom Review prepared a report based on the interviews with the directors and the questionnaire circulated and the overall results of the evaluation were presented to and reviewed by the Board in January 2009.
Following this comprehensive review, the directors have concluded that the Board and its committees operate effectively and 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.
During the year, directors attended a number of courses ranging from external seminars for members of the Audit and Remuneration Committees and internal seminars on market risk. In addition, members of the Audit and the Risk and Regulatory Committees received tailored training sessions. Training sessions have also been built into the Board’s and committees’ work plans for 2009. The Board made visits to the Group’s businesses located in the United Kingdom and Europe during the year to gain a closer understanding of their operations.
Directors’ attendance The Company requires directors to attend all meetings of the Board and the committees on which they serve and to devote sufficient time to the Company in order to perform their duties. The attendance of the directors at the Board and committee meetings held in 2008 was as follows: Board and Board committee attendance 2008 Corporate
Euleen Goh (appointed 1 January 2009) n/a n/a n/a n/a n/a n/a Mark Hodges (appointed 26 June 2008) 7 – – – – –
Wim Dik (will retire on 29 April 2009) 9 – 3 1* 5 – Former directors Guillermo de la Dehesa (retired 31 December 2008) 10 – 3 1* – –
* Ceased to be a member of the Nomination Committee on 29 July 2008.
# Became a member of the Nomination Committee on 29 July 2008
Audit Committee; Corporate Social Responsibility Committee; Nomination Committee; Risk and Regulatory Committee; and
Reports of the committee chairmen are set out on pages 95 to 119.
Internal controls The Combined Code requires directors to review and report annually to shareholders on the effectiveness of the Company’s systems of internal control which include financial, operational and compliance controls and risk management. The Board has the overall responsibility for maintaining the systems of internal control of the Company and for monitoring their effectiveness; while the implementation of internal control systems is the responsibility of management. The Group’s systems of internal control are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material financial misstatement or loss.
Control procedures and monitoring systems The Group has a well-developed system of planning, incorporating Board approval of a rolling three-year Group plan. Performance against the plan is subsequently monitored and reported to the Board each time it meets. This report also includes updates on relevant measures of solvency and liquidity. Performance is reported through the half-yearly publication of the Company’s results based on accounting policies that are applied consistently throughout the Group. Operational management reports quarterly to the Executive Committee on a wide range of key performance and other significant matters and the Board receives regular representations from the senior executives responsible for each region and business function.
The Board has conducted a review of the effectiveness of the Group’s systems of internal control. This annual review has been supplemented by a major review of the adequacy and effectiveness of financial reporting controls across the Group. This additional review is being undertaken so that the Group will be able to meet the financial reporting requirements of the Sarbanes-Oxley Act 2002 in the event of a possible listing of the Company on the New York Stock Exchange. The necessary actions have been or are being taken to remedy significant failings or weaknesses identified from these reviews. These actions are being monitored by the Risk and Regulatory Committee or the Audit Committee as appropriate on behalf of the Board.
The Company’s annual report and accounts and annual review, together with the Company’s interim reports, interim management statements 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. The Chairman’s statement, Group Chief Executive’s review, and Business 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.
Directors’ responsibilities The directors are required to prepare accounts for each accounting period that comply with the relevant provisions of the Companies Act 1985, the Companies Act 2006 (where applicable) and International Financial Reporting Standards (IFRS) as adopted by the European Union, and which present fairly the financial position, financial performance and cash flows of the Company and the Group at the end of the accounting period. A fair presentation of the financial statements in accordance with IFRS requires the directors to: select suitable accounting policies and verify that they are applied consistently in preparing the accounts, on a going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business; present information, including accounting policies, in a manner that is relevant, reliable, comparable and understandable; provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company and the Group’s financial position and financial performance; and state that the Company and the Group have complied with applicable IFRS, subject to any material departures disclosed and explained in the accounts.
The directors are responsible for maintaining proper accounting records which are intended to disclose with reasonable accuracy, at any time, the financial position of the Company and the Group. They are also ultimately responsible for the systems of internal control maintained by the Group for safeguarding the assets of the Company and the Group and for the prevention and detection of fraud and other irregularities. Further details of the systems of internal controls maintained by the Group are more fully described on page 92.
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 1985 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 management report contained in this 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.
Going concern The group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Overview on pages 1 to 11 and the Business Review on pages 12 to 81. The business review includes sections on Group Performance (pages 22 to 27), Capital Management (pages 28 to 31), and Risk Management (pages 32 to 35). In addition the financial statements include notes on the group’s borrowings (note 47); its contingent liabilities and other risk factors (note 50); its capital structure and position (notes 53 and 54); management of its major risks including market, credit and liquidity risk (note 55); and derivative financial instruments (note 56).
The group has considerable financial resources together with a diversified business model, with a spread of businesses and geographical reach. As a consequence, the directors believe that the group is well placed to manage its business risks successfully despite the current uncertain economic outlook.
The main purpose of the Committee is to assist the Board by keeping the composition of the Board under review and conducting a rigorous and transparent process when making or renewing appointments of directors to the Board. It also advises the Board on issues of directors’ conflicts of interest and independence. The full terms of reference for the Committee can be found on the Company’s website, www.aviva.com, and are also available from the Group Company Secretary.
The Committee met on two occasions in 2008 and the members’ attendance record is set out in the Corporate Governance report on page 91. Nikesh Arora and Richard Goeltz were appointed as members of the Committee on 29 July 2008 and Guillermo de la Dehesa and Wim Dik ceased to be members from that date. The Group Company Secretary acts as the secretary to the Committee.
The Committee keeps under review the balance of skills on the Board and the knowledge, experience, length of service and performance of the directors. It also reviews their external interests with a view to identifying any actual, perceived or potential conflicts of interests, including the time available to commit to their duties to the Company. The Committee monitors the independence of each non-executive director and makes recommendations concerning such to the Board. The results of these reviews are important when the Board considers succession planning and the re-election and reappointment of directors and members of the Committee take no part in any discussions concerning their own circumstances.
This report provides details of the role of the Audit Committee and the work it has undertaken during the year. The purpose of the Committee is to assist the Board in discharging its responsibilities for the integrity of the Company’s financial statements, the assessment of the effectiveness of the systems of internal financial controls and monitoring the effectiveness and objectivity of the internal and external auditors. The full terms of reference for the Committee can be found on the Company’s website, www.aviva.com, and are also available from the Group Company Secretary.
The Committee met on seven occasions in 2008 and the members’ attendance record is set out in the Corporate Governance report on page 91. 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. Russell Walls, a Fellow Chartered Certified Accountant, is a former Group Finance Director of BAA plc, Wellcome plc and Coats Viyella plc. Richard Karl Goeltz is a former Chief Financial Officer of American Express Company and NatWest Group plc. Euleen Goh, a Chartered Accountant and member of the Chartered Institute of Taxation, is a former Financial Controller of Pontiac Land and Chief Executive of Standard Chartered Bank, Singapore. The Board is satisfied that these directors have recent and relevant financial experience.
During the year the Committee and the Risk and Regulatory Committee held a joint meeting in Paris with the chairman of the Aviva France audit committee. 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 that business.
The Committee receives reports from the external auditor and regularly holds discussions with both the internal 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 deteriorating economic and market environment required even greater attention to internal financial controls in 2008. During 2008 the Group internal audit function carried out an assurance review of the Group’s management of the economic crisis conditions 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 was fit for purpose and recommended that a re-tender process should not be undertaken in 2008 but that the relationship and the effectiveness of the auditor be kept under review. The audit signing partner changed as part of a rotation process in 2007. 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 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.
Annually, the Committee reviews a formal letter provided by the external auditor confirming its independence and objectivity within the context of applicable regulatory requirements and professional standards.
The Group paid £12.1 million to Ernst & Young for audit services in 2008, relating to the statutory audit of the Group and Company financial statements and the audit of Group subsidiaries and associates pursuant to legislation (2007: £10.2 million). The fees for other services which included advice on accounting and regulatory matters, reporting on internal controls, corporate governance matters, and due diligence work were £12.9 million giving a total fee to Ernst & Young of £25.0 million (2007: £19.1 million). Further details are provided in note 12 to the accounts. In addition, the Group engaged the Corporate Citizenship in relation to certain assurance work including verification of its Corporate Social Responsibility report.
During the year, the Committee performed its annual review of the independence, effectiveness and objectivity of the external auditor; assessing the audit firm, the audit partner and audit teams. The process was conducted by means of a questionnaire, completed Group-wide by members of senior management and members of the Group’s finance community. The questionnaire sought opinions on the importance of certain criteria and the performance of the 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.
This report provides details of the role of the Risk and Regulatory Committee and the work it has undertaken during the year, and should be read in conjunction with the report on the Group’s approach to risk and capital management on pages 28 to 35.
The Committee met on five occasions in 2008 and the members’ attendance record is set out in the Corporate Governance report on page 91. In addition the Committee held separate meetings with members of senior management and Ernst & Young for the purposes of induction and training. The Group Company Secretary acts as the secretary to the Committee.
The Group Chief Executive, Chief Financial Officer, Chief Audit Officer, Chief Risk 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, the Group Company Secretary and external professional advisers.
During the year the Committee and the Audit Committee held a joint meeting in Paris with the chairman of the Aviva France audit committee. This meeting allowed the Committee to gain a deeper understanding of the relevant local issues and assess how the Group’s risk management framework, and regulatory policies and procedures were being embedded in the business.
The purpose of the Committee is to provide guidance and direction to the Group’s corporate social responsibility (CSR) programme, review the key CSR risks and opportunities and to monitor progress. 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.
Wim Dik (Chairman) 14 January 2006 31 December 2008 Guillermo de la Dehesa 14 January 2006 31 December 2008 Euleen Goh 1 January 2009 To date Andrew Moss 12 July 2007 To date Carole Piwnica 14 January 2006 To date Lord Sharman 14 January 2006 To date Scott Wheway 5 December 2007 To date
The Committee met on four occasions in 2008 and the members’ attendance record is set out in the Corporate Governance report on page 91. The Group Company Secretary acts as the secretary to the Committee.
Highlights – In 2008 the Committee agreed and implemented, with shareholder approval, the One Aviva Twice the Value
Bonus Plan. It also decided to maintain the 2008 financial targets set in December 2007 despite the unprecedented shocks to the macro-economic system and volatility in markets.
– The Committee approved the Executive Directors’ request to freeze their basic salaries for 2009. It is not proposing any major adjustments to Aviva’s executive remuneration structure in the coming year. It has further approved stretching financial targets for 2009 and agreed to review in mid 2009 their continued appropriateness
– The demanding financial and non-financial targets set for the 2008 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 the Chief Executive received a 2008 bonus of 54.2% of his maximum opportunity (2007: 65%).
– The Committee entered the 2009 reward review conscious of the economic background and widespread comment on over-generous executive remuneration. The Committee believes Aviva’s 2008 business results are strong and that Aviva’s remuneration practices already closely link pay to performance. The Committee has, however, looked to ensure prudent and proportionate reward outcomes.
This report covers the following: – The Committee’s objectives, membership and main activities in 2008; – A review of Aviva’s remuneration policy and practice; – Commentary on the alignment between remuneration and Aviva’s business strategy and objectives; – Details of the terms of executive directors’ (EDs) service contracts; – Aviva’s share ownership policy with respect to EDs; – Aviva’s policy on external board appointments; – Aviva’s UK all employee share plans and Share Incentive plans; – Aviva’s position against dilution limits; – Non-executive directors (NEDs), and; – Tables summarising the 2008 position on: – Directors’ remuneration – EDs’ pension arrangements – Share incentive plans – Directors’ interests in shares
– Align senior executives’ remuneration with the interests of shareholders and other stakeholders, including customers and employees.
Aviva announced on 4 December 2008 the appointment of Mr Goeltz as its Senior Independent Director with effect from 1 January 2009. From the same date Mr Goeltz ceased to be a member of the Committee and Mr Wheway succeeded him as Chairman.
The Committee met on nine occasions in 2008 and the meeting attendance record is set out in the Corporate Governance report on page 91.
Committee meetings are attended by the Chief Executive (other than when his own remuneration is being discussed) and John Ainley, the Group Human Resources Director. The Group Company Secretary acts as secretary to the Committee. The Chairman attends when discussing the remuneration of the Chief Executive.
In addition, the Committee appointed New Bridge Street Consultants (NBSC) to advise them on a review of senior executive remuneration (see below). NBSC provided no other material assistance to the Company in 2008. Deloitte LLP, which provided other services to the Group in 2008, advised the Committee on the calculation of Total Shareholder Return (TSR) in respect of the Long Term Incentive Plan (LTIP) vesting. The Group Company Secretary and Linklaters LLP (Linklaters) advised the Committee in relation to the operation of the Company’s share plans. Linklaters provided other legal services to the Company during 2008.
April – None – A review and approval of grants under the OATTV plan
June – None – Approval of Mark Hodges’ appointment terms as an ED
July – Approval of the performance targets for the US – A review of the proposed Aviva Investors’ Long-Term Incentive Plan reward strategy
– A review of EDs’ bonus targets following a rebase – Consideration of EDs’ 2008 bonus targets for exchange rates and capital assumptions
August – None – Further consideration of EDs’ 2008 bonus targets
December – Approval of the proposed 2009 financial and – Note the final Aviva Investors’ employee targets for the operation of the Reward Strategy Annual Bonus Plan – Consideration of the findings of a review of
– Comment upon and noting of the EDs’ personal remuneration in Aviva’s US business. objectives for 2009 – A review of the Executive Remuneration
– An update on progress with the Committee’s 2008 and proposed 2009 work plans
The Company’s EDs elected to take a basic pay freeze in 2009 and the Committee endorsed that proposal. A further 45 members of senior management have similarly accepted a 2009 basic pay freeze. The EDs will receive 2008 bonuses below (as a percentage of basic salary) those awarded in 2007 against the background of the overall performance of the Group, as set out in pages 22 to 27. This is due to some of the demanding targets originally set in December 2007 not being met in full.
The Committee is conscious of the shareholders’ loss of value over the last year. This loss was also felt by the EDs directly through the significantly lower value of the deferred ABP shares and LTIP shares granted in 2006, both of which will vest in March 2009. This is a direct consequence of our reward strategy that seeks alignment between the shareholder and Executives’ interests.
Financial targets for the 2008 bonus Despite the unprecedented changes in the economic position over the year no changes were made to the targets for Executive Directors for 2008 which were set in December 2007.
The introduction of a “One Aviva, Twice the Value” (OATTV) Bonus Plan Details of how the OATTV plan operates are provided later in this report. This plan is designed to align senior management firmly behind the Chief Executive’s aim of doubling Earnings per Share (EPS) from its end 2007 baseline by the end of 2012. After significant debate the Committee satisfied itself that this additional element of remuneration would assist the delivery of a key part of the Group’s strategy. It was also satisfied that all or part of the bonus will vest only if stretching performance conditions are met. Furthermore, grants under the plan are only expected to be made in 2009 and 2010 in addition to the grants made in 2008. The plan was subject to extensive formal consultation with institutional shareholders and other stakeholders in advance of being put to Aviva’s Annual General Meeting (AGM) in 2008 where it was approved.
The permission from shareholders given in 2005 will allow grants to be made under current arrangements up until the AGM in 2010. New proposals will therefore be put to shareholders in 2011.
Notwithstanding this deferral of the full review, the Committee has undertaken a high level review of Aviva’s remuneration practices against the preliminary good practice criteria issued by the FSA. The initial assessment identified generally strong alignment of the Company’s current practices with the FSA criteria. However, this is an area that will be kept under closer review during the year as the FSA develops its guidance both generally and specifically in relation to the insurance sector.
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.
– Annual Bonus Plan (ABP): Bonus structures are effective only if they drive, through the targets, the maintenance of the Company on a sound financial footing and sustained profitable growth. In addition, the targets must not provide an incentive to promote behaviours which could be detrimental to the Company’s long term interests. Management must justify the targets it recommends. The Committee assures itself that the targets, first, provide appropriate incentives and, second, are challenging.
– The One Aviva Twice the Value Bonus Plan (OATTV): This plan was introduced to emphasise the Chief Executive’s clear strategic imperative for the Group to deliver growth in Earnings Per Share (EPS), with a target of doubling EPS in five years from an end 2007 baseline. 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 shows how the Group’s remuneration policy translates in practice into the Chief Executive’s remuneration package. It shows the contribution each element makes to overall compensation at both “target” and “stretch” levels of performance. More than half of EDs’ total remuneration is performance related.
Table 3a shows the breakdown of the 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 Aviva Capital Accumulation Plan (ACAP) payment. Variable cash is the one-third of bonus paid in cash annually. The share element includes the two-thirds of bonus deferred into shares, the OATTV match and the LTIP.
– “Stretch” performance means a stretch ABP outcome (150% of basic salary), 100% vesting of the LTIP (175% of basic salary) and a 2:1 match from the OATTV bonus plan (200% of basic salary).
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.
Remuneration policy in practice for executive directors Table 4, below, summarises Aviva’s remuneration policy as it is applied in practice to EDs.
– 75% of basic salary is payable for “on target” performance and up to 150% for “stretch” performance.
Executive (75% for the other EDs). – Shares vest based on demanding – For the 2008 awards, the vesting of these matched shares is dependent EPS growth targets.
Long-Term Incentive Plan (LTIP) – The LTIP is intended to motivate achievement of the Company’s longer – Annual awards in restricted shares term objectives, to aid the retention of key personnel and to align executive that vest, subject to ROCE and interests to those of shareholders. relative TSR performance
– No share-based award may exceed 200% of basic salary. However, in 2008 – Awards that do not vest lapse. 6 grants were made in Aviva’s US business above 200% to a maximum of 300% of basic salary through a phantom scheme. The levels of grant made took into account US market practice. No additional shares are awarded for the dividends paid during the three year performance period on those shares that vest.
– Company contributions are discretionary and vary year-on-year, but would not normally exceed 50% of basic salary. Contributions for the executive directors are shown in the table on page 116.
– No one who participates in the ACAP is currently accruing benefits in the ASPS. A resignation or departure for breach of contract generally results in forfeiture of contribution for the relevant year.
salary depending on seniority and the date of joining the scheme. – Lump sum death in service benefit of four times basic salary is provided, as is a spouse’s or partner’s pension equal to two-thirds of actual or, on death in service and in certain other circumstances, prospective pension. Post retirement increases are equivalent to RPI up to a maximum of 10%. Retirement benefits can be accessed from age 60.
Other benefits – Other benefits are provided on a market competitive basis. – Cash car allowance
Other benefits £18,280 cash car allowance Mr Moss receives 2% of basic salary as a non2 % basic salary cash supplement pensionable cash supplement provided in Private medical insurance consideration of his surrendering his Unapproved
Unfunded Retirement Benefit (UURB) promise at the point when accrual in the ASPS ceased.
ABP £487,890 (81.3% of basic salary) Bonus is a function of the degree of achievement (£162,630 delivered in cash and of 2008 targets as follows: £325,260 deferred into shares for Financial 22.9% (maximum 50%) three years) Employee 5.6% (maximum 10%)
LTIP – face value £855,000 The face value of the grant represented 150% of grant of Mr Scott’s basic salary on 29 February 2008.
He therefore no longer accrues service related benefits but does continue to accrue additional benefits as a result of pensionable salary increases.
ABP £532,077 (102.3% of basic salary) Mr Hodges’ bonus is a function of the degree (£177,359 delivered in cash and of achievement of 2008 targets as follows: £354,718 deferred into shares for Financial 35.4% (maximum 50%) three years) Employee 8.3% (maximum 10%)
OATTV bonus £254,380 The face value of 75% of the two-thirds deferred plan element of 2007 annual bonus.
LTIP – face value £592,500 The face value of the grant represented 150% of grant of Mr Hodges’ basic salary on 29 February 2008.
ACAP £207,500 The Trustee of the Plan accepted Aviva’s recommendation and made an award into the plan equivalent to 50% of Mr Hodges’ basic salary as at 1 April.
Employee and customer targets (each accounting for up to 10% of annual bonus) are set taking into account performance to date and aspirations for the future. The employee targets on leadership and engagement are derived from the Group’s employee climate survey in which all business units participate and which over 42,000 staff completed in 2008. This survey is delivered through an independent third party able to provide extensive external benchmark data. Our aspiration is to reach the upper quartile positions compared to the relevant global and national norms on leadership and engagement over time.
Internal assurance that the outcomes on employee and customer targets were accurately calculated and reported was provided to the Committee by Group Audit.
As described above, the Committee took the view that it was important to maintain the integrity of the financial targets for the EDs, and so these were not adjusted during the year. In the same way, the Committee believes that it is appropriate to pay bonus based on pre-agreed rigorous targets when these have been met. As outlined earlier in this report, given the overall 2008 performance against the demanding targets set, the bonuses of the EDs fell in 2008 compared with 2007 as a percentage of basic salary.
To align with the business priorities for 2009, the financial measures at Group level for 2009 are operating profit, volume, new business margin, the Combined Operating Ratio (COR) of our general insurance businesses, net capital returns and cost savings.
Long-Term Incentive Plan – target setting The LTIP vests subject to the degree of achievement of two equally weighted performance measures chosen to reflect shareholders’ long-term interest in absolute ROCE and relative TSR performance.
ROCE over the three year performance period Percentage of shares in award that vests based on achievement of ROCE targets
Between 31.5% and 37.5% Pro rata between 15% and 50% on a straight-line basis 37.5% and above 50%
The same performance targets will apply for the 2009 LTIP, except that the measure will be calculated using an MCEV reporting basis and not EEV.
Total Shareholder Return (TSR) targets Relative TSR determines the vesting of the other 50% of any LTIP award. The comparator group for the assessment of relative TSR performance at the time of the 2008 grant comprised Aegon, Allianz, Axa, Fortis, Friends Provident, Generali, HBOS, ING, Legal and General, Lloyds TSB, Prudential, Royal Bank of Scotland, Royal and Sun Alliance, Standard Life and Zurich. HBOS has since been delisted. The 2006 and 2007 LTIP grants are based on the same comparator group, with the exception of Standard Life which was not included in 2006.
The same targets will apply for the 2009 LTIP awards. The comparator group will remain unchanged other than the removal of HBOS. The Committee has agreed a shortlist of companies that would be considered for inclusion in the comparator group, subject to final review, should any further member of the group be delisted.
Since the LTIP has performance conditions attached to it, then one potential outcome is that neither performance condition is met and the whole of the LTIP lapses. Table 10 below has been drawn up to assist in understanding the potential value of the LTIP awards made to executive directors in 2008 should the performance conditions be met in part or in whole.
Table 10: Potential value of 2008 LTIP awards (rounded to nearest £100)
Assumptions are as follows: – Threshold vesting assumes TSR and ROCE elements vest at the minimum level, producing a 30% vesting of the total award. No share price growth is assumed; – Expected value, based on the vesting assumption made for accounting purposes, assumes TSR and ROCE elements vest at a combined rate of 50% of the total award. Share price growth of 5% per annum is assumed over the three year performance period; – Maximum vesting assumes both TSR and ROCE elements vest in full, producing a 100% vesting. Share price growth of 10% per annum is assumed over the three year performance period.
Share awards Table 12 below sets out the current position of those share based awards made to EDs under current remuneration arrangements.
The companies which comprise the current LTIP comparator group for TSR purposes were chosen on the basis of product and geographic match to Aviva and are listed above. The TSR graph for the comparator group has been plotted using the 20 companies (including Aviva) in the comparator group for pre-2005 grants, the 15 companies (including Aviva) in the comparator group for 2005-07 grants and the 16 companies (including Aviva) in the comparator group for the 2008 grant.
Executive Directors’ service contracts Service contracts agreed with each ED incorporate their terms and conditions of employment. Contracts were reviewed during 2006 and new contracts issued, bringing them into line with good market practice, particularly in respect of mitigation and phased payments. The aim is to strike a fair balance between the Company’s and the employee’s interests taking into account good market practice. The key terms are set out in Table 14 below.
Remuneration and benefits – As described in this report. The operation of the ABP, the OATTV bonus plan, and LTIP plans is at the Company’s discretion and in the case of the longterm savings plans at the trustees’ discretion.
Table: 13: Aviva plc 5-year TSR performance against the FTSE 100 Index and median of the Comparator Group
Share ownership requirements A requirement was introduced in 2005 that the Chief Executive and any EDs should build, over a five year period, a shareholding in the Company equivalent to 175% of basic salary and 150% of basic salary respectively. Shares held in compulsory bonus deferrals and performance shares held in unvested LTIPs are not taken into account in applying this test.
As at 31 December 2008, based on that day’s closing share price of 390p, Mr Moss’ shareholding of 176,067 shares represented 74% of his basic salary of £925,000 (his holding of 73,208 shares at 1 January 2008 represented 30.8% of his basic salary of £925,000 using the 31 December 2008 share price). Mr Scott’s shareholding of 400,973 shares represented 261% of his basic salary of £600,000 (his holding of 291,106 shares at 1 January 2008 represented 189%) and Mr Hodges’ shareholding of 100,086 shares represented 75% of his basic salary of £520,000 (his holding of 79,873 shares at 26 June 2008 represented 59.9%).
External Board appointments Aviva recognises its senior executives can benefit from serving in a personal capacity as a non-executive director (NED) of non-Aviva Group companies. It is, at the same time, conscious of the corporate governance recommendations that EDs should take account of the time commitment required by a NED position and ensure any such role does not impact their ability to carry out fully their executive duties. The Company therefore has a policy of normally allowing senior executives to serve as a NED of one external company, subject to approval by the Board, and to retain any board fees.
The only ED who held an external NED appointment during 2008 was Philip Scott who was appointed to the Board of Diageo plc on 17 October 2007. As an NED of Diageo plc Mr Scott received fees totalling £90,000 in 2008.
All-employee share plans EDs are eligible to participate in a number of HM Revenue & Customs (HMRC) approved all-employee share plans on the same basis as other eligible employees.
During November 2008 a loan of £32 million was made to RBC Trustees (CI) Limited to ensure sufficient shares were available to meet its ongoing liabilities.
Non-executive directors (NEDs) The NEDs, including the Chairman, have letters of appointment which set out their duties and responsibilities. The key terms of the appointments are set out in Table 15 below.
Appointment dates Director Date of last appointment Date appointment ends Guillermo de la Dehesa 30 May 2006 31 December 2008 Wim Dik 7 December 2008 AGM 2009 Mary Francis 1 October 2008 AGM 2009 Richard Karl Goeltz 3 May 2007 31 May 2010 Carole Piwnica 8 May 2006 31 May 2009 Lord Sharman 14 January 2008 AGM 2011 Russell Walls 3 May 2007 31 May 2010 Nikesh Arora 1 July 2007 AGM 2010 Scott Wheway 5 December 2007 AGM 2010
It is the Company’s policy to set the fees paid to its Chairman and NEDs taking account of the median market payments in international companies of similar size and complexity. NEDs receive a basic annual fee in respect of their Board duties. A further fee is paid to NEDs (other than the Chairman) in respect of membership and, where appropriate, chairmanship of Board Committees.
Fees are reviewed annually and are set by the Board to attract individuals with the required range of skills and experience. In determining the level of fees paid to the NEDs the Board receives recommendations from the EDs, who consider the NEDs duties and responsibilities, together with the time commitment required in preparing for and attending meetings, and the amounts paid by competitors and similar-sized companies.
The Chairman and NEDs do not participate in any incentive or performance plans or pension arrangements.
NED fees payable from 1 April 2008 are set out in Table 16 below.
Notes 1. Bonuses show the value at the date of award inclusive of the two thirds of bonus which Aviva requires its EDs to defer into Aviva shares for three years.
6. No compensation payment for loss of office was made to any director, or former director, during the year.
Colin Sharman, Chairman £490,000 – – – – – – – £490,000
Following a review in March 2008 of Aviva’s fees against market benchmarks the following changes in NEDs’ emoluments were made with effect from 1 April 2008: – The Chairman’s fee was increased from £475,000 pa to £495,000 pa (an increase of 4.2%).
– Board membership fees were increased from £60,000 pa to £63,000 pa (an increase of 5%).
– The fee for chairing the Risk and Regulatory Committee (inclusive of membership fee) was increased from £15,000 pa to £17,500 pa (an increase of 16.7%).
The following changes to NED responsibilities took place during the year: – Guillermo de la Dehesa ceased to be a member of the Nomination Committee from 29 July 2008 and retired from the Board and Corporate Social Responsibility Committee from 31 December 2008.
– Nikesh Arora joined the Nomination Committee from 29 July 2008.
Senior executives’ remuneration The total compensation paid during the year to key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Company, including the Company’s EDs and NEDs (as required to be disclosed by International Accounting Standard 24) was £53 million (2007 restated: £60 million) and is set out below in note 58 to the Accounts.
Employee contributions during the year5 – 30 – Transfer value of accrued pension at 31 December 2007 248 5,609 549 Transfer value of accrued pension at 31 December 2008 231 6,300 660 Change in transfer value during the period less employee contributions6 (17) 661 111
Notes 1.Mr Moss ceased accrual in the ASPS with effect from 31 March 2006, and as a result, his post March 2006 Pension Benefit was £19,556 pa. This will increase in line with deferred pensions (the lower of the increase in RPI or 5%) subject to the life time allowance. At 31 December 2008 it had increased to £21,042 pa.
2.Mr Scott has been accruing benefits in the ASPS since before June 1989, so was not therefore subject to the HMRC’s Earnings Cap. Following pensions’ simplification Mr Scott registered with HMRC for enhanced protection. He remains a member of the scheme and continues to accrue benefits as a result of salary increases. However, he is not accruing benefits as a result of additional service. Mr Scott’s pension will be based upon his final pensionable salary and years of service at retirement, subject to an overriding limit of two-thirds of final pensionable salary. Mr Scott has a pre-existing commitment that were he to retire up to two years before his normal retirement age of 60, then he would receive a non-discounted pension. This commitment was entered into prior to the publication of ABI Guidelines issued in December 2006, which made reference to early retirement terms for directors.
3.Mr Hodges ceased accrual in the ASPS with effect from 31 March 2006, and as a result, his post March 2006 Pension Benefit was £75,000 pa. This will increase in line with deferred pensions (the lower of the increase in RPI or 5%). Mr Hodges was appointed as an ED from 26 June 2008. His benefits shown above are therefore as at that date (not 1 January 2008) and as at 31 December 2008. At 31 December 2008 his “accrued pension” was £80,700 pa.
6.The change in transfer values over the year include the effect of changes made by the Trustee of the ASPS to the assumptions used in respect of changes to market values and expected future investment returns. The Trustees changed the long term financial and mortality assumptions for transfer values with an effective date of 1 July 2008. Transfer values represent the estimated liability on the Scheme to pay the stated level of benefits. They are not sums paid or due to a Director, and do not represent the true cost of providing the pension benefit.
7.No former Directors received any increase in retirement benefits in excess of the amount to which they were entitled, on the later of the date when the Benefits first became payable, or 31 March 1997.
Share incentive plans Details of the directors who held executive office for any part of the financial year, and hold or held options to subscribe for ordinary shares of the Company or hold or held awards over shares in the Company, pursuant to the Company’s share-based incentive plans, are set out in Table 20 below.
Directors’ interests in Aviva shares The interests held by each person who was a director at the end of the financial year in the ordinary shares of 25 pence each in the Company are shown in Table 21 below. All the disclosed interests are beneficial. The table also summarises the interests in shares held through the Company’s various all-employee and executive share schemes. Details of the options and long term incentive awards are shown above.
Notes 1. “Shares” are the directors’ beneficial holdings in the ordinary shares of the Company and in respect of the EDs include shares held in trust under the Company’s All-Employee Share Ownership Plan (AESOP) being shares purchased by them under the partnership element and shares granted under the free share element of the AESOP.
2. “Bonus Plan Awards” relates to entitlements to shares arising through the current, or former, Aviva Bonus Plans. Under these plans some of the earned bonuses are paid in the form of shares and deferred for three years. The transfer of the shares to the director at the end of the period is not subject to the attainment of performance conditions but a proportion of the shares can be forfeited if the executive leaves service before the end of the period.
6. The interests of connected persons to the Directors are included in the Directors’ interests above.
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Contents 123 Independent auditor’s report 125 Accounting policies 140 Consolidated financial statements 140 Consolidated income statement 141 Pro forma reconciliation of Group operating profit to profit before tax 143 Consolidated statement of recognised income and expense 143 Reconciliation of movements in consolidated shareholders’ equity 144 Consolidated balance sheet 145 Consolidated cash flow statement
This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report, the Directors’ remuneration report and the financial statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of directors’ responsibilities.
Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ remuneration report to be audited. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed.
In our opinion, the Group financial statements give a true and fair view, in accordance with IFRSs, of the state of the Group’s affairs as at 31 December 2008 and of its loss for the year then ended.
(A) Basis of presentation Since 2005, all European Union listed companies have been required to prepare consolidated financial statements using International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and endorsed by the European Union (EU). The date of transition to IFRS was 1 January 2004. In addition to fulfilling their legal obligation to comply with IFRS as adopted by the European Union, the Group and Company have also complied with IFRS as issued by the International Accounting Standards Board and applicable at 31 December 2008.
During 2007 and 2008, the IASB issued IAS 1, Presentation of Financial Statements : A Revised Presentation, and amendments to IFRS 1, First Time Adoption of IFRS, IFRS 2, Share-Based Payment, IAS 1, IAS 23, Borrowing Costs, IAS 27, Consolidated and Separate Financial Statements, IAS 32, Financial Instruments: Presentation, and IAS 39, Financial Instruments: Recognition and Measurement, and the results of its annual improvements project. It also issued revised versions of IFRS 1, and IFRS 3, Business Combinations, as well as further amendments to IAS 27 and IAS 39, none of which has yet been endorsed by the EU. These are not applicable for the current accounting period and, on adoption, they will not have any material impact on the Group’s financial reporting.
IFRIC interpretation 13, Customer Loyalty Programmes, was issued during 2007 but is not applicable for the current accounting period. In addition, IFRIC interpretation 15, Agreements for the Construction of Real Estate, interpretation 16, Hedges of a Net Investment in a Foreign Operation, and interpretation 17, Distributions of Non-cash Assets to Owners, were issued during 2008. They have not yet been endorsed by the EU but none of them is applicable for the current accounting period. On adoption, none of these interpretations will have any impact on the Group’s financial reporting.
The separate financial statements of the Company are on pages 278 to 285.
Insurance and participating investment contract liabilities F & K Goodwill, AVIF and other intangible assets N Fair values of financial investments S Impairment of financial investments S Fair value of derivative financial instruments T Deferred acquisition costs and other assets W Provisions and contingent liabilities Z Pension obligations AA Deferred income taxes AB
(E) Foreign currency translation Income statements and cash flows of foreign entities are translated into the Group’s presentation currency at average exchange rates for the year while their balance sheets are translated at the year end exchange rates. Exchange differences arising from the translation of the net investment in foreign subsidiaries, associates and joint ventures, and of borrowings and other currency instruments designated as hedges of such investments, are taken to the currency translation reserve within equity. On disposal of a foreign entity, such exchange differences are transferred out of this reserve and are recognised in the income statement as part of the gain or loss on sale. The cumulative translation differences were deemed to be zero at the transition date to IFRS.
Long-term business provisions Under current IFRS requirements, insurance and participating investment contract liabilities are measured using accounting policies consistent with those adopted previously under existing accounting practices, with the exception of liabilities remeasured to reflect current market interest rates and those relating to UK with-profit and non-profit contracts, to be consistent with the value of the backing assets. For liabilities relating to UK with-profit contracts, the Group has adopted FRS 27, Life Assurance, which adds to the requirements of IFRS but does not vary them in any way. Further details are given in policy A above.
(i) Outstanding claims provisions General insurance and health outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the balance sheet date, whether reported or not, together with related claims handling costs. Significant delays are experienced in the notification and settlement of certain types of general insurance claims, particularly in respect of liability business, including environmental and pollution exposures, the ultimate cost of which cannot be known with certainty at the balance sheet date. Any estimate represents a determination within a range of possible outcomes. Further details of estimation techniques are given in note 38(c).
Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract.
Reinsurance contracts that principally transfer financial risk are accounted for directly through the balance sheet and are not included in reinsurance assets or liabilities. A deposit asset or liability is recognised, based on the consideration paid or received less any explicitly identified premiums or fees to be retained by the reinsured.
Impairment testing For impairment testing, goodwill and intangibles with indefinite useful lives have been allocated to cash-generating units by geographical reporting unit and business segment. The carrying amount of goodwill and intangible assets with indefinite useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. Goodwill and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support its carrying value. Further details on goodwill allocation and impairment testing are given in note 16(b).
(O) Property and equipment Owner-occupied properties are carried at their revalued amounts, which are supported by market evidence, and movements are taken to a separate reserve within equity. When such properties are sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings. These properties are depreciated down to their estimated residual values over their useful lives. All other items classed as property and equipment within the balance sheet are carried at historical cost less accumulated depreciation.
Depreciation is calculated on the straight-line method to write-down the cost of other assets to their residual values over their estimated useful lives as follows: – Land No depreciation
– Owner-occupied properties, and related mechanical and electrical equipment 25 years
(R) Derecognition and offset of financial assets and financial liabilities A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: – The rights to receive cash flows from the asset have expired; – The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third-party under a “pass-through” arrangement; or
Investments carried at fair value are measured using a fair value hierarchy, described in note 24(b), with values based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Equity securities for which fair values cannot be measured reliably are recognised at cost less impairment.
When securities classified as AFS are sold or impaired, the accumulated fair value adjustments are transferred out of the investment valuation reserve to the income statement.
Impairment The Group reviews the carrying value of its investments on a regular basis. If the carrying value of an investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. The following policies are used to determine the level of any impairment: AFS securities: The Group performs an objective review of the current financial position and prospects of the issuer on a regular basis, to identify whether any impairment provision is required. For listed AFS securities, this review takes into account the likelihood of the current market price recovering to former levels.
Mortgages, investment property and securitised loans: Impairment is measured based on the present value of expected future cash flows discounted at the effective rate of interest of the loan, subject to the fair value of the underlying collateral. When a loan is considered to be impaired, the income statement is charged with the difference between the carrying value and the estimated recoverable amount. Interest income on impaired loans is recognised based on the estimated recoverable amount.
Interest rate and currency swaps Interest rate swaps are contractual agreements between two parties to exchange periodic payments in the same currency, each of which is computed on a different interest rate basis, on a specified notional amount. Most interest rate swaps involve the net exchange of payments calculated as the difference between the fixed and floating rate interest payments. Currency swaps, in their simplest form, are contractual agreements that involve the exchange of both periodic and final amounts in two different currencies. Exposure to gain or loss on both types of swap contracts will increase or decrease over their respective lives as a function of maturity dates, interest and foreign exchange rates, and the timing of payments.
For certain mortgage loans, the Group has taken advantage of the revised fair value option under IAS 39 to present the mortgages, associated borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for these three items. The fair values of mortgages classified as FV are estimated using discounted cash flow forecasts, based on a risk-adjusted discount rate which reflects the risks associated with these products. They are revalued at each period end, with movements in their fair values being taken to the income statement.
Long-term business deferred acquisition costs are amortised systematically over a period no longer than that in which they are expected to be recoverable out of these future margins. Deferrable acquisition costs for nonparticipating investment and investment fund management contracts are amortised over the period in which the service is provided. General insurance and health deferred acquisition costs are amortised over the period in which the related revenues are earned. The reinsurers’ share of deferred acquisition costs is amortised in the same manner as the underlying asset.
(Z) Provisions and contingent liabilities Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is more probable than not.