The year’s achievements 2006: £2,609m £m £m tim es £m £m pe nc e pe nc e £b n %
Double IFRS EPS by 2012 at the latest 1.5-2 x dividend cover
The Aviva triangle has been developed to explain the purpose, vision, strategy and regional performance of the group in a single and straight forward way.
We have premium income and investment sales of £49.2 billion and £364 billion of funds under management. We have 57,000 employees serving around 45 million customers.
Morley our fund management business is based in the UK and has offices spread across the globe
Czech Republic Netherlands France Poland Germany‡ Romania Hungary Russia Italy Spain Ireland Turkey Lithuania
Long-term savings £255m Fund management £3m General insurance £154m Other operations £(4)m £408m
Major operating brands In Singapore, we rank first in combined sales of long-term savings products, including unit trusts
**Typically includes motor, household, creditor, health, commercial motor, commercial property and commercial liability insurance. † Present value of new business premium (PVNBP) is equal to total single premium sales received in the year plus the discounted value of annual premiums expected to be received over the term of new contracts, and is expressed at the point of sale. ‡ Belgium, Germany and Luxembourg are reported as part of the Netherlands results. # Aviva announced on 31 January 2008 that it is to enter the South Korean life insurance market by forming a consortium with Woori Finance Holdings
Board developments Richard Harvey stepped down as group chief executive in July. I wish him all the best for his retirement and extend the thanks of everyone at Aviva for the substantial part he played in the success of the group over the past 15 years. The board is delighted that Andrew Moss has succeeded Richard, having made an impressive contribution since joining the company as group finance director in 2004. We are equally pleased that Philip Scott has brought his considerable experience to the role of group finance director.
We welcomed Nikesh Arora to the board as an independent non-executive director in July. Nikesh is president of Europe, Middle East and Africa operations at Google, with responsibility for the company’s business in more than 25 countries. He brings great experience in managing international businesses, combined with cutting-edge understanding of technology, innovation and marketing.
Besides accolades specifically for employment practices, we continue to win plaudits across our business operations. These range from awards as “best general insurer” and “best property manager” to endorsements for product innovation, e-business, socially responsible investment, online financial education and online communications.
Outlook We look forward to building on Aviva’s achievements as we work towards our new vision of “one Aviva, twice the value”. I know what talented people we have working in the group’s businesses around the world. Thanks to them, we have made great progress. With their support, Aviva will continue to serve its customers well and flourish into the future.
As group chief executive, my intention is to build on the achievements of my predecessor, Richard Harvey. I have set out a clear direction and a set of common goals to take Aviva further up the premier league of international financial services groups. It is an ambitious and exciting agenda. We remain committed to our diversified model of long-term savings, general insurance and investment management, but with a new regional organisation. Our top priority is to realise the full potential of Aviva’s existing businesses.
Our new executive management team Standing from left to right: John Ainley, Mark Hodges, Simon Machell, Tom Godlasky, Igal Mayer, Anupam Sahay, Philip Scott and Alain Dromer. Seated: Andrew Moss.
Our customers are the reason we have a business. Constant attention to meeting the needs of our customers will create extra sales momentum and deliver growth. By eliminating unnecessary complexity and drawing our operations across the world closer together, we can share services, cut costs, boost productivity and produce tailored products at affordable prices for our 45 million customers in different markets.
My new senior management team bring energy and fresh thinking to Aviva, together with a great deal of experience and expertise. They are crucial to the successful running of our business, and I intend that they should be both visible and accountable. You can find out more about each of them on page 78 of this report.
To achieve these ambitious targets, it is important that we continue to invest in ways to reach new customers, whether by direct sales, bancassurance, independent agents or a multi-distribution approach. In particular, bancassurance has proved to be a very successful channel for us. During the course of 2007 we signed multiple new agreements with partners in the UK, Europe and Asia Pacific regions, giving us access to over 50 million potential new customers. Our relationship management and partnering expertise remains a core competence of Aviva.
Earnings per share (based on IFRS total return) was 49.2 pence (2006: 87.5 pence) mainly reflecting the impact of adverse weather and market conditions in 2007.
People We have 57,000 people employed around the world, and it is vital that they all understand the part they have to play in attaining our objectives. Our new structure encourages a greater sense of teamwork, and provides more clarity about how our people contribute towards our overall goals. I am very grateful for the support and commitment of all our employees. During periods of uncertainty and challenge they have continued to work with great professionalism and dedication to achieve the best possible results for our customers and shareholders.
Based on feedback from our global staff opinion surveys, we are actively managing our talent across the group to provide more opportunities for people to develop. If we succeed in our aims and ambitions over the next few years, this will be a company that grows – and growing companies are exciting places to work, with interesting jobs and fantastic career opportunities for staff.
Outlook The UK remains the largest of our businesses. It is responsible for 42% of our sales and is the bedrock of the group’s success. We intend to maintain a market leadership position in the UK in both our long-term savings and general insurance businesses. Europe continues to be a big success story. We are the number one writer of life and pensions business across Europe (including the UK), based on multi-distribution channels in the larger, more developed, markets, and through successful partnering with banks, notably in Spain, Italy and our new market-leading agreement with Akbank in Turkey. Growth prospects across Europe remain excellent.
Turkish Aviva advertising In 2007 Turkey launched the ‘Touch the future’ brand campaign. The campaign creates a link between the past and future by emphasising the 300 year old history of Aviva to reinforce Aviva as an established and trustworthy company to have the capability for building better tomorrows. The campaign was featured on TV, press, radio and cinema.
The review is written in the context of the risks and uncertainties facing our business. We anticipate that the format and content of the review will evolve over time, along with developments in our business and the external environment.
Management also use a variety of Other Performance Indicators (OPIs) in both running and assessing the performance of individual business segments and units, rather than the group as a whole. OPIs include measures such as new business margins, combined operating ratio and underwriting profit.
– Our expectations of our future financial condition, performance and results
Consequently, our actual future financial condition, performance and results could differ materially from the plans, goals and expectations set out in our forward-looking statements. We undertake no obligation to update the forward-looking statements contained in this review or any other forward-looking statements we make.
Accounting basis of preparation In addition to presenting our results and financial position on an International Financial Reporting Standards basis, we also use European Embedded Value (EEV) as an alternative performance measure. Details of the accounting basis of preparation are set out in the “financial reporting” section of this business review on page 63.
In doing so, we have clarified the five strategic priorities we will pursue at a Group wide level (shown on the right), to maximise the value we can generate for all our stakeholders.
Equally, we have distilled what this means specifically in each of our new 'Regions' formed in 2007: UK, Europe, North America and Asia Pacific, as well as our asset management business. These priorities are described in further detail in subsequent sections.
We have made significant progress against our strategic objectives in 2007, amid a challenging external environment, and look forward to accelerating from our strong starting position into 2008 and beyond. Anupam Sahay Group strategy & development director
Build global asset management: We have significant asset management functions across the group. These businesses have historically been managed separately, and we are now bringing them together in a global asset management business – Aviva Investors – that will foster investment performance and creation of solutions, with an increased focus on winning external clients.
Increase customer reach: We sell our products in 27 countries in the way that our customers choose to buy them. We will continue looking for the right distribution in the right markets. We also get closer to our customers through better understanding their needs, which helps us to generate profitable sales, by providing products and services that customers want at a fair price.
Boost productivity: We constantly look for ways to boost our productivity, in order to increase our competitiveness, improve our services and deliver higher value to our customers. This will enable Aviva to deliver further sustainable growth.
– The composite model allows us to focus on areas of the business where we can grow profitably at any given time. In 2007 we actively managed the composite portfolio by: – Restructuring our UK GI business
– Continued to build our core product range by leveraging expertise in specialist areas such as asset allocation and alternatives
– Foster improved performance, through global sharing of knowledge and information
Build global asset management: Asset Management GI & Health Long-term business
– Invested in selected high growth / high margin opportunities (e.g. partnerships in Turkey, China, Italy, Spain)
– 2007 return on equity shareholders’ funds is below our target of 12.5% as explained on page 15
– Focus on realising the full potential of Aviva’s existing businesses
– Continue progressive dividend policy 2007 Progress What we achieved in 2007 against these priorities 2007 Measurement/KPIs How we measure progress against each strategic priority 2008 Priorities What we are focused on in 2008
– Further developed the Aviva brand through advertising campaigns across our regions
– Continue to build access to customers through bancassurance, partners, agencies, sales forces and direct distribution
Increase customer reach: – Met our targets on a number of major cost saving initiatives across the group: – £250 million annualised cost savings from UK cost and efficiency review
– Announced a further set of cost saving initiatives (see 2008 Priorities)
– By end 2008 we will have achieved: – £200 million UK GI cost savings
In 2007, the group’s strategy was underpinned by focusing on a number of key financial performance measures. The key measures that are used to assess performance at a group level are set out below: Aviva plc Annual Report and
Business review continued: Key performance indicators 1,500O pe ra tin g pr of it
Group operating profit before tax* We aim to achieve steady sustainable growth in our operating profit, both on an EEV and IFRS basis. In seeking to achieve this growth, we continue to adopt strict financial management disciplines underpinned by strong corporate governance.
Our EEV operating profit remained strong at £3,286 million (2006 restated: £3,251 million). On an IFRS basis, operating profit was £2,228 million (2006 restated: £2,609 million). These results reflect strong performances in the life segment offset by lower results in the general insurance segment as a result of adverse weather and increased competition.
Earnings per share (IFRS)Earnings per share To demonstrate our commitment to our vision of “one Aviva twice the value”, we have announced our ambition to double IFRS earnings per share by 2012. This ambition is based on total IFRS return, including investment volatility and non-operating items over the weighted average number of shares.
Long-term savings new business sales During 2007 we announced regional growth targets for our life businesses. These are as follows: – UK to grow at least in line with the market
– Europe to grow sales by an average of 10% per year to 2010
– North America to double sales within three years of AmerUs acquisition (2009)
– Asia Pacific to grow sales by an average of 20% per year to 2010
Our total new business sales, including investment sales, increased by 25% in 2007 to £38,583 million (2006: £30,762 million). This reflected strong growth across all our regions, performing in line with their individual targets.
Our post-tax operating return on equity shareholders’ funds was 11.3% (2006: 13.1%). The reduction against 2006 reflects higher opening shareholders’ funds, which have increased by £2.6 billion. The return is below our target of 12.5% due to the impact of the adverse weather in the United Kingdom which has suppressed the return on our general insurance operations.
Proposed ordinary dividend per share and dividend cover** Our intention is to increase the total dividend on a basis judged prudent using a dividend cover in the 1.5 to 2.0 times range as a guide, while retaining capital to support future business growth.
During 2007, we showed progress on both our engagement and leadership scores which is reflective of the work undertaken to focus and embed the people strategy. While we have shown progress against external benchmarks, we recognise that we need to continue to improve as we are slightly lower than the global financial services norm on both measures.
In 2007, over three quarters of our business units exceeded their 2007 target levels of customer performance and stretching targets have been set for 2008 to drive continuous improvement.
We are committed to greater harmonisation of customer measures across the group and a common ‘dashboard’ of ten key customer KPIs was introduced at the end of 2007 for the UK businesses, and will be rolled out internationally in 2008.
EEV operating profit before tax 3,286 3,251 * 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 long-term business operating return on an EEV basis. On an IFRS basis, they are included in fund management and other operations.
** We have changed the definition of IFRS basis operating profit this year and restated our 2006 comparatives. This also has a small impact on the general insurance results shown in the EEV basis. Details are shown in note 2 to the financial statements.
On an IFRS basis, operating profit decreased by 15% to £2,228 million (2006 restated: £2,609 million).
Interest costs in the period were lower at £438 million (2006: £458 million) reflecting a reduction in internal interest following the restructuring of internal loan agreements. This was offset by an increase in the interest on subordinated debt due to amounts raised in December 2006 to repay locally held AmerUs debt and on commercial paper raised to help fund the AmerUs acquisition.
Profit before tax The tables below set out our financial and operational performance for the year ended 31 December 2007.
Adjusted for the following: Investment return variances and economic assumption changes on long-term business 15 401
Profit before tax on an EEV basis was lower at £2,937 million (2006: £4,165 million), reflecting an adverse variance from longer term investment return of £634 million (2006: £468 million favourable) and a positive impact from economic assumption changes of £517 million (2006: £671 million).
The long-term business favourable investment variance (reflecting our new IFRS operating profit definition) of £15 million (2006: £401 million) comprises favourable investment variances in Europe offset by negative effects in the USA and UK. In Europe, the positive variances relate mainly to the realisation of capital gains on securities in the Netherlands and France.
Profit on disposal of subsidiaries and associates includes the sale of 50.3% of the Turkish life business as part of the joint venture agreement with Aksigorta A.S. This produced a profit of £74 million on an IFRS basis (£45 million on an EEV basis due to the additional value of long-term in-force business). This was partly offset by losses on a number of small disposals.
Tax The taxation charge was £803 million (2006: £1,286 million) on an EEV basis and includes a charge of £992 million (£2006: £1,028 million) on operating profit, which is equivalent to an effective rate of 30.2% (2006: 31.6%). On an IFRS basis the effective rate of tax on operating profit was 27.2% (2006: 24.7%).
Life and pensions new business contribution before required capital 1,174 892
Worldwide sales In 2007 we achieved total worldwide sales of £49,152 million (2006: £41,464 million) reflecting strong growth in long-term business sales offset by weaker general insurance and health net written premiums.
Long-term new business sales were up 25% to £38,583 million (2006: £30,762 million), comprising a 22% increase in life and pension sales of £31,600 million (2006: £25,852 million) and 41% growth in investment sales of £6,983 million (2006: £4,910 million).
Additional retained profit on an EEV basis – – 7,694 6,817
Equity attributable to shareholders of Aviva plc 12,849 11,176 20,253 17,531
During 2007, the equity attributable to our ordinary shareholders on an IFRS basis increased by 15% to £12,849 million (2006: £11,176 million) primarily reflecting the growth in retained earnings. On an EEV basis, the equity attributable to our ordinary shareholders was £20,253 million (2006: £17,531 million).
Increase in other assets of £10 billion to £62,498 million (restated 2006: £52,101 million) was primarily driven by an increase in loans of £7 billion resulting from the restatement of stock lending collateral.
Non Long- long- Restated term term Total Total business business Full year Full year operations operations 2007 2006 £m £m £m £m
Cash and cash equivalents at 1 January 9,388 3,033 12,421 11,623
Cash and cash equivalents at 31 December 11,701 3,548 15,249 12,421
Cash flows from operating activities were £4,032 million (2006: £1,879 million). Investing activities generated a cash outflow of £635 million (2006: £1,574 million).
Morley is one of the UK’s largest active fund managers and the largest fund management business in the Aviva group
Our strategic priorities: Market leadership – Address legacy systems issues – Transform business model – Exploit UK synergies – Generate capital
UK general insurance – Managing through the cycle by: - Premium rating leadership - Flattening the impact of claims inflation - Expense management
Asset management – Combine our global asset management businesses to create a one Aviva global investors capability
Progress in 2007: Improved to a three star (out of five) Financial Adviser Service Awards rating – We improved our Financial Adviser Service Award for the second year running, receiving a three star rating in the Life & Pension and the Investment Provider categories
Simplified our business model to reduce duplication and drive efficiencies – In March 2007, our life operation announced a partnership with Swiss Re to outsource the administration of almost three million life and pensions policies, expected to complete in early 2009, enabling us to reduce our 550 product systems to 220
Looking forward: Our medium-term targets are to: – Grow long-term savings new business sales at least as fast as the market, while at least maintaining margins – Deliver an additional £200 million of cost savings by 2008 in the general insurance business and a further £100 million in the life business by the end of 2009 – Deliver insurance excellence, achieving a 98% combined operating ratio or better – Launch Aviva Investors as the global asset management arm of Aviva, under unified management
Long-term savings IFRS IFRS EEV New New profit operating operating business business before tax profit profit PVNBP* contribution** margin**
The UK market is challenging as the credit crunch and stockmarket volatility continue to impact the economy.
Norwich Union is a market leader in the long-term savings market with an unparalleled combination of strong brand, financial flexibility, product breadth and distribution reach. We are based in York, with significant operations in Norwich, Eastleigh and Sheffield in the UK and overseas in India and Sri Lanka.
In 2007 we took 1.3 million calls from customers, 2 million calls from distributors, received 7 million pieces of post, made 750,000 outbound calls, paid £1 billion to bond customers, £500 million to pension customers, paid 11,000 protection claims and raised £3 million for charity, all supported by the commitment of our 11,000 people.
Our business is becoming increasingly profitable. This year, we successfully grew our new business margin and improved the profitability of our existing business. We also made significant progress in our contribution to the “one Aviva, twice the value” strategic priorities of simplifying our legacy systems issues, transforming our business model, continuing to exploit UK synergies and generating capital for the Aviva group.
We help and support our customers’ changing needs through the provision of an extensive product range, accessible through a choice of distribution channels. We hold top-three positions in each of our key markets of savings, protection, annuities and pensions, and leverage our scale and breadth to manage our portfolio for long-term value creation.
We continue to diversify our distribution footprint to provide ease of access to our customers and maximise our ability to capitalise on emerging market opportunities. We are a leading provider in the financial adviser market, have a successful joint venture with The Royal Bank of Scotland Group (RBSG), strong relationships with a number of building societies, a strategic alliance with the Co-operative Insurance Society and growing corporate and direct channels. We continue to expand our distribution model and in August launched a partnership with the Post Office, the largest retail and financial services chain in the UK. Our Lifetime platform has continued to perform strongly; over 8,000 advisers have signed terms of business and funds under management reached £737 million (2006: £341 million) at the end of 2007.
To support our “one Aviva, twice the value” strategic objective of simplifying our legacy we are targeting a position where 80% of our business by value is on five core contract systems by the end of 2009. In March 2007, we announced a partnership with Swiss Re to outsource the administration of almost three million policies, which will enable us to reduce our 550 product systems to 220. To support this we successfully transferred 1,000 employees to Swiss Re in October. Policy migration is now underway with the first phase due for completion in March 2008, and all policies migrated by early 2009. This initiative combined with other simplification activity has already enabled us to decommission over 100 systems.
Our people have continued to perform with dedication throughout this period of change. The percentage of our people who are proud to work for NU Life has risen to 69%, whilst those who are personally committed to achieving our organisational goals has increased to 86%. The percentage of individuals who are satisfied with leadership within the company has also improved to 83%.
87% of customers believe that Norwich Union is easy to do business with, an increase of 7% since 2006. The number of customers who believe that Norwich Union cares about them and treats them fairly has also improved over the year, with customer service complaints falling by 30%. Maintaining service levels on our Lifetime platform has proved challenging. We temporarily restricted access to the platform for new advisers to enable us to carry out the required rectification work to invest in the underlying wrap platform.
In December we were fined £1.26 million by the FSA following the investigation into a series of frauds committed during 2006. Due to some weakness in internal controls, 74 policies were fraudulently surrendered and 558 other customers’ policies were placed at risk. We are sorry that this situation arose and apologised to the affected customers when it happened. We have extensive procedures in place to protect our customers but in this instance weaknesses were exploited and we were the target of organised fraud. Our customers can be assured that we have taken this matter extremely seriously and have thoroughly reviewed our systems and controls as a result. All of our seven million customers are protected by our promise that they will be fully reimbursed and will get help and support if they are innocent victims of fraud.
In 2007, despite the market becoming progressively tougher with rises in interest rates, a slowdown in the housing market and stock market volatility, Norwich Union delivered record sales for the second year in a row. Total sales, including investment sales, were up 6% to £14,406 million (2006: £13,601 million), driven by significant increases in sales of individual annuities, bonds and collective investments. Our bancassurance joint venture with RBSG also delivered a second consecutive year of record results with sales in 2007 double those in 2005.
Our new business contribution rose 10% to £360 million (2006: £327 million), the result of sales growth and an improvement in margin to 3.1% (2006: 2.9%). This was driven by a combination of the savings from our ongoing efficiency review and our commitment to maximising shareholder value through balancing price, volume and mix.
We continue to review the appropriateness of the operating assumptions that underpin the embedded value of our business. In 2007 we have revised the assumption relating to the rate of improvement of life expectancy, bringing it in line with latest industry studies.
This change has adversely impacted profitability by £153 million. We also revised our assumption about the amount of risk capital that we believe we should hold for annuity business to reflect the outcome of our latest risk modelling, which has enhanced our new and existing business profitability by £14 million and £132 million respectively.
During 2007 we have continued to work towards the proposed reattribution of the inherited estate. We are the first company to do so under new rules from the FSA published in 2007, which require negotiation through a policyholder advocate. This is a complex process and has taken longer than anticipated. We have now agreed the eligibility criteria for the reattribution with the policyholder advocate and established the parameters for determining the surplus in the fund and obligations to current investors. Separately to this, we were delighted to announce a special bonus of £2.1 billion for around 1.1 million with-profits policyholders who have invested in CGNU Life and CULAC Life with-profits funds. The distribution of this special bonus clears the way to negotiate a fair price for the balance of the inherited estate, amounting to a further £2.6 billion.
Our scale, brand, broad product offering and strong distribution footprint position us well to succeed in an uncertain 2008. Our aim remains to improve profitability and grow our new business sales at least in line with the market, while maintaining or increasing our overall new business margin from current levels.
Customers can begin to trace a policy by completing a form available from either 0800 152465 or www.norwichunion.com/existingcustomer /trace-policies/index
Our UK general insurance business has had a difficult year. We saw the worst floods for 60 years, affecting 45,000 of our home insurance customers and 6,000 small business customers. Our priority has been to provide first class service to them during these difficult times and I am pleased to report that we have provided industryleading service in returning customers to their homes and property.
Looking to the future, I believe that we have a strategy that will allow us to maintain our market leading position through simplifying our structure, maximising the benefits of scale by rigorously managing our expense base and re-engineering our operations to provide efficient and effective service to customers. To achieve these aims, we have already taken market-leading rating action across many segments of our business, and have announced several measures to bring our expense base in line with the industry ‘best of breed’ within the United Kingdom.
We provide a range of insurance products focused on personal and small business customers, together with a range of motoring solutions through RAC and associated brands. We have a multi-distribution strategy, selling our full portfolio of products through brokers, partners such as banks and building societies, and direct to our customers through our two leading brands, NUD and RAC. Our headquarters are in Norwich and we operate from 35 locations in the UK, India and Sri Lanka.
We adhere to a clearly defined and communicated underwriting strategy supported by strong financial disciplines, and we aim to achieve continuous improvement in the efficiency, effectiveness and simplicity of our processes and structures.
Our RAC roadside assistance business has grown during the past year, with 9 million customers now on the books. In France, RAC won a contract to provide assistance to 2.2 million Aviva insurance customers. In addition, RAC now manages Hyundai’s customer service operation in the UK, and established a presence in the banking sector with membership provided to HBOS account holders.
In commercial lines, during the last quarter of 2007 we targeted increases at smaller risks and underperforming segments after experiencing four years of market rate reductions across the board. Overall these increases, commencing in November 2007, averaged 3.5% although rates still decreased by 2% across all commercial lines in 2007 (2006: 3% reduction).
In terms of our financial performance, NUI has experienced a very challenging year. The tough market conditions are reflected in net written premiums which have fallen by 3% to £5,440 million (2006: £5,583 million) and have also contributed to the decrease in operating profit from its record level of £1,081 million in 2006 to £380 million in 2007. However, the weather had the most significant impact on our 2007 results, with the summer flooding and storms in January 2007 adversely affecting profit by £475 million (2006: £75 million benefit). We continue to prudently manage our reserves to avoid future adverse claims experience. Our 2007 operating profit benefited from £430 million (2006: £385 million) in respect of prior years. Of this total, £215 million is nonrecurring in nature (2006: £220 million). Our combined operating ratio rose to 106% (2006: 95%). Excluding the adverse weather, the ratio would have been 97%.
Business review continued: UK – General insurance, health and related services continued
Norwich Union demonstrated its commitment to those affected by the flood crisis earlier this year. As is the case with any significant event, a major incident response team was instigated to manage the large increase in claims and to work with our customers, providing tips on restoration, discussing concerns and arranging accommodation. We purchased 200 mobile caravans to provide emergency accommodation and an NU-branded bus carried a team to help in any way they could.
Morley is entering an exciting phase as it forms a key component in Aviva’s global asset management business. In line with this strategic priority, Morley will be combined with Aviva’s other asset managers worldwide to create Aviva Investors, a global investor capability. We start this transformation from a position of strength. Morley is one of the UK’s largest active fund managers with more than £165 billion of funds under management and a broad range of specialist investment expertise, experience and performance.
Morley is working to form a fund management joint venture in China with COFCO. We plan to use this as a platform for developing a substantial asset management business in China and have already opened an office in Shanghai. The Chinese sector has grown rapidly in recent years with cUS$440 billion of assets under management and is expected to increase dramatically over the next decade. This joint venture strengthens the close relationship the Aviva group has had with COFCO since 2003 and marks the next step in Morley's expansion in the Asia Pacific region.
Our primary fund management business in the UK is Morley Fund Management. Morley also has operations in Europe and Asia Pacific regions which are reported in the numbers above as they fall under the management of Morley in the UK rather than the other regional offices.
Our aim at Morley is to build a client-centric business that is among the best in our chosen asset classes and markets and in line with the One Aviva strategic priority to build a global asset management operation.
Our commitment to excellence was recognised several times in 2007. Morley was named Best Property Manager at the Financial News Excellence in Institutional Management Awards and also Property Manager of the Year at the 2007 UK Pensions Awards, the G7 Fixed Income Fund also retained its title as Fixed Income Hedge Fund of the Year at the EuroHedge Awards. Our convertibles team was recognised with a AA / V4 rating by Standard & Poor’s for the Aviva Morley Global Convertibles Fund. The Fund, one of the largest global convertibles SICAVs, continued to grow strongly throughout the year, reaching the US$1 billion mark in September.
The strength of our existing product range was augmented throughout the year as Morley continued to launch new products, responding to demand from our clients. The Aviva Morley Emerging Markets Local Currency Bond Fund, the Morley Private Equity Programme fund of funds product and the Diversified Strategy Fund are all testament to the innovation within the Morley group and all have seen strong early fund flows.
Our property business performed well, despite returns from UK commercial property falling during the year from recent historic highs. Our Lime Property Fund in particular experienced an increase in fund inflows, raising £225 million in the first eight months of the year and signing its 40th institutional client.
Our geographical expansion hasn’t been confined to our property business. In February, we opened our Frankfurt office to increase our presence in that part of Europe. Our ambitions in the fast-growing Chinese market were boosted by the opening of Morley’s Shanghai Representative Office in November when we also announced that we had signed a memorandum of understanding to form a fund management joint venture with China National Oils, Foodstuffs and Cereals Corporation (COFCO). COFCO is also Aviva’s partner in the life business in China and both the relationship with COFCO and the new office should provide us with an excellent platform to grow in this exciting market.
Both in the UK and overseas, our people remain our core asset and we continue to invest in the talent at Morley and to strive to attract the best talent from elsewhere in the industry. We hired extensively throughout the year, bringing new expertise to all our teams and deepening the pool of talent available for our clients.
In September, Alain Dromer took on the leadership of Morley. Alain brings with him the skills and experience of working in large international organisations and as such he is also charged with building Aviva’s global asset management business. Previously global head of group investment businesses at HSBC, and with a seat on the group executive committee, Alain is well placed to fast develop Aviva’s plans in the investment area.
Sales were strong to third-party distributors and we won a number of institutional mandates across our key asset classes.
Our UK other operations reported an operating loss of £8 million (2006: £36 million profit) due to lower results from RAC non-insurance which included a contribution of £17 million in 2006 from disposed operations (Manufacturing Support Services and Lex Vehicle Leasing), and investment in the businesses of AutoWindscreens, BSM and HPI. Having completed the investment in transforming these businesses, we are looking to leverage maximum benefit from these operations.
In 2007 we also incurred costs of £31 million (2006: £29 million) through our continuing investment in Lifetime, our wrap platform business.
How will we achieve this? – Access to enormous potential customer base through bancassurance – Expertise in product innovation driven by a deep understanding of individual markets – Low cost platforms in southern Europe provide opportunities for profitable growth
– We completed the launch of a single new business platform which further cements our relationship with AIB and the integration of our two life businesses in Ireland
Continue to focus on higher-margin unit-linked products in France – We expanded our unit-linked offering through the launch of a new AFER fund and continued to encourage Fourgous** transfers which enable policyholders to diversify their fund
Grow faster than the market in northern Europe where low growth was expected in 2007 – Aviva’s growth in northern Europe in 2007 of 22% compared favourably to the overall market growth which was negative in France
Capture opportunities arising from increasing wealth in Russia and central and eastern Europe by continuing to invest in our business – The merger of our Turkish life and pensions business with AK Emeklilik, the life and pensions business of the Sabancı Holdings Group was completed on 31 October 2007 – The acquisition of Certinvest, a fund management company in Romania, will allow
IFRS basis EEV basis 12 months 12 months 12 months 12 months £m £m £m £m
Aviva Europe is committed to delivering the benefits of “one Aviva” by capitalising on our scale to achieve further growth and generate capital. With extensive resources and knowledge in the region, we have proved our ability to use regional experience and capability to add value to our distributors and partners through developing new products and distribution initiatives throughout Europe to meet customers’ needs.
Across northern Europe, our joint venture with Allied Irish Banks and the enhancements to our broker channel have led to an increase in market share in Ireland. We increased sales in France and the Netherlands despite difficult market conditions. In France, we successfully worked with the AFER association to modernise the core savings product and sales responded strongly. In the Netherlands we have grown sales through our success in the group pensions market. Our objective is to increase market share in these countries through the continued segmentation of our customer base, the provision of superior and targeted service and advice, cross-selling and the continued enhancement of product offerings.
In central and eastern Europe, sales have grown significantly in Poland reflecting the excellent pension sales and the development of our bancassurance partnerships and popular new products. In Turkey, we have transformed the business by merging our life and pensions business with AK Emeklilik, to create AvivaSA. Elsewhere across the region, our businesses continue to grow strongly and are well positioned to continue to capture the exciting growth opportunities in these emerging markets.
Volatility in the financial markets and uncertainty in the run-up to the May presidential elections led to a decline in overall market premiums. Even so, Aviva France out-performed the market, achieving a 2% growth in sales to £3,662 million (2006: £3,552 million). This strong sales performance, combined with a continued focus on profitability, resulted in a higher new business contribution of £169 million (2006: £153 million), with an increased margin of 4.6% (2006: 4.3%). The operating profit on an EEV basis of £537 million (2006: £402 million) was boosted by the recognition of benefits from the increased proportion of unit-linked assets within managed funds, efficiency gains and product development and continued positive experience variances on lapses and mortality.
The outlook for 2008 is for stable market conditions, although competition from rival banking products and equity market uncertainty will affect the life market.
Our French general insurance business has a 4% share of the agent and broker market, selling predominantly personal and small commercial insurance through our 875-strong agent network and our direct insurer, Eurofil, the second-largest direct distributor.
In 2007 we launched new household and multi-risk products, both of which were well supported by agents.
We are collaborating with Generali to achieve supply chain economies of scale in respect of motor repairs and we are continuing to develop our internet portal for agents. In addition, since the year end we have transferred our roadside assistance service to RAC.
A number of new product initiatives were completed during 2007. These included a re-launch of our term assurance protection products and the introduction of several new funds across both channels, including the launch of the highly successful Secure Capital Fund.
On an EEV basis, life operating profit in 2007 increased to £77 million (2006: £40 million loss). The loss reported in 2006 reflected an exceptional level of operating assumption changes. Total life and pension sales increased strongly, by 35%, to £1,730 million (2006: £1,273 million).
Growth in the bancassurance channel was 46% while sales through the broker channel grew by 26%. New business contribution has doubled from £15 million to £30 million reflecting growth in volumes, efficiency gains and an increased focus on higher margin products. The new business margin increased to 1.7% (2006: 1.2%).
We continue to develop our internet presence and the number of policies sold directly is increasing. Further development is planned for 2008 to ensure our internet capability remains market leading. The changes in the claims environment have enabled more efficient settlement of claims, which has led to strong profits.
In Ireland, staff looked at how they could make a difference to customer service by changing behaviours and “going the extra mile”. We focused on a different theme each month, such as improving the way we handle phone calls and reducing the amount of jargon in our communications. The programme emphasised Hibernian’s commitment to being a leader in customer service within the industry.
Our focus in 2007 continued to be on customer penetration and expanding our distribution reach whilst maximising the advantage of our cost efficient platform. Sales growth in 2007 was also supported by the implementation of 45 new products combined with successful marketing campaigns.
In September, Aviva Italy further strengthened and diversified its distribution by purchasing, together with other investors, a stake in Banca Bipielle Network, a 1,000-strong financial adviser network, from Banco Popolare. This network will further extend and diversify our distribution reach in the market.
Our general insurance business in Italy has continued to develop and will be boosted by the new long-term distribution agreement with Banco Popolare which will provide a strong basis for future growth. The IFRS operating profit is reported within Other Europe.
Our Netherlands life business, Delta Lloyd, is focusing on achieving operating efficiencies and product and distribution innovation, while building the trust of our customers through excelling at customer service and strong financial disciplines. Our pensions strategy focuses on sales to the SME market, with expertise centralised to best provide dedicated pensions and employee benefits advice.
Operating profit on an IFRS basis was £181 million (2006: £102 million) reflecting increased expected returns due to higher interest rates and more favourable mortality and other technical reserve movements.
The Dutch market is expected to remain highly competitive in 2008 following legislative changes in January enabling banks to compete for retirement savings business. Delta Lloyd continues its strategy of strengthening its position through broadening its distribution.
Operating profit from general insurance and health was £169 million (2006: £139 million). The general insurance underwriting result was £122 million (2006: £83 million) and the combined operating ratio improved to 85% (2006: 89%), following favourable development of prior year claims and the maintenance of premium rates in key areas. The health underwriting result deteriorated to a loss of £47 million (2006: £33 million loss) as a result of higher claims costs net of recoveries from the central health fund and reorganisation costs.
Our life and pensions businesses both continued to perform extremely well in 2007. Our life business is ranked number two in the market while we have retained the market leading position in the pensions market since 1999. We are also the third largest life and pensions provider in Lithuania. Our businesses, which currently trade under the Commercial Union brand name, launched a new logo and website which is more closely aligned with the Aviva brand.
We are very excited by the potential of the direct motor insurance market in Poland. We have a proven track record in launching and running successful direct motor insurance businesses in other European markets including the UK, Ireland and the Netherlands, and we used this expertise together with our already sizeable customer base in Poland and highly recognised brands to give us a significant advantage in the market.
This year we have increased the productivity and size of our direct sales force, while continuing to develop other distribution channels. We recently announced the creation of a joint venture with Bank Zachodni WBK (a subsidiary of Allied Irish Banks) to sell both life and general insurance products through the bank’s network of 400 branches. This will significantly enhance our distribution network, providing access to 1.4 million customers.
We also distribute through an agency based network via Aviva Vida y Pensiones (AVP).
In June 2007 we announced a new joint venture with the Spanish savings bank Caja de Ahorros de Murcia (Cajamurcia) to form a joint venture life company. The new life company will distribute life and pensions products via Cajamurcia’s network of 413 branches.
In the Czech Republic and Hungary, sales through the broker and direct sales force channel have increased during the year. In Romania, we have established a new company to sell newly created mandatory pensions. In all of these markets, pension reform continues to offer a long term potential.
We generated an EEV operating loss of £5 million (2006: £13 million loss) reflecting the developing nature of these businesses. Total life and pensions sales increased strongly to £418 million (2006: £308 million) with notable contributions from Hungary, which benefited from an increase in demand for savings products, and Turkey where higher agent numbers generated larger case sizes and strong sales.
General insurance Our other European general insurance businesses are in Italy, Poland and Turkey. Our Turkish operation continues to progress well through geographical expansion. IFRS operating profit for our other European operations fell to £41 million (2006: £43 million).
Aviva Canada is ranked second in the Canadian general insurance market
Our strategic priorities are: Double scale – Grow in new and existing markets and geographies – Optimise our new regional business model – Engage our people and customers
Implementing specific local initiatives to improve service to attract and retain customers – Our Canadian business is the only insurer in the world to have achieved accreditation by the Commission on Accreditation of Rehabilitation Facilities, an independent, non-profit accreditor of service providers in many areas of healthcare, community programme and medical rehabilitation
Continuing to strengthen our relationship with key brokers and other partners – Achieved exceptional satisfaction scores from our brokers in Canada, with 88%
Exploiting and sharing our knowledge and skills in multi-channel distribution, product development and service delivery – Joined forces with colleagues in Asia Pacific on product design and industry trends – Led discussions on the potential for equity indexed annuity products in other Aviva businesses
Looking forward: Our medium-term targets are to: – Double the volume of US life new business sales within three years of the acquisition of AmerUs, while maintaining margins – Realise the benefits of our strategic investments in our general insurance business to accelerate growth and improve profitability – Further expand distribution and continue to deliver innovative products – Continue to meet or beat a 98% combined operating ratio
Aviva North America is an exciting place to be. The Americas region is of major global importance being home to some of the world’s largest and richest economies with almost half of world general insurance premiums and a quarter of life premiums.
Our focus on this important geographical region provides us with significant opportunities – to drive relentless profitable growth in our life business through the huge demand for retirement products from the ‘baby-boomer’ generation and deliver improved and sustained profits from our general insurance business.
Strengthening the Aviva brand across the North America region is a strategy that will figure prominently in our growth ambitions. We will continue to deliver high-value propositions for our customers and, as a leader in our sector, will set high standards. We shall excel in product innovation and be disciplined about expense management.
Aviva’s presence in the North America Region is underpinned by two highly successful and diverse businesses, the Aviva USA life business and the Aviva Canada general insurance business. The Aviva USA operation ranks first and second in the indexed life and indexed annuity markets respectively, having achieved significant growth and market penetration during the year. Aviva Canada continues to perform strongly through the insurance cycle and has maintained its number two position in the Canadian market and remains the leading insurer in Canada’s largest province, Ontario.
The outlook for the region is strong and we operate in some of the largest and richest economies in the world. We will continue the rapid and profitable growth in our life business and deliver sustainable profitable growth in our general insurance business. We will achieve our ambitions by leveraging the strengths of our existing businesses, exploiting cross-border opportunities and through developing the Aviva brand across the region.
North American life new business and general insurance premiums grew to £5,014 million (2006: £2,273 million) and regional EEV operating profit for North America was up 131% to £408 million (2006: £183 million) accounting for 11% of the Aviva group.
Innovation in product design has been a key part of our success. We launched the second generation of the Guaranteed Lifetime Withdrawal Benefit rider, improving a product already recognised as market leading, and introduced a new suite of products to our proprietary distribution network.
In addition we are now offering a variety of wellness products and services through an exclusive relationship with Mayo Clinic Health Solutions. These services are core to our new “Wellness for Life” programme, an innovative industry leading product expected to differentiate and enhance the Aviva brand in the United States.
We successfully launched a new national marketing campaign to build Aviva brand awareness across the United States through television, print media and trade magazines. Continuing to raise customer awareness of Aviva in the eyes of both our existing and prospective customers is an important part of our plans for 2008.
USA – Product split of total long-term savings sales 3 Funding agreements 12
An innovative new product is our ‘Wellness for Life’ Programme. This first-of-its-kind life insurance product has been developed with the world-renowned Mayo Clinic, rewarding consumers for leading a healthy lifestyle.
Our people are our greatest resource and remain at the heart of what we do. We successfully managed the integration of our two businesses, minimising job losses while retaining our key people during this challenging period of time. Being part of Aviva enabled us to benefit from the talent pool across the global organisation through the sharing of information, best practices and people.
In addition, recruitment at our life headquarters in Des Moines was at an all time high, reflecting the significant growth in the business. Over 245 new positions have been created and we were successful in attracting new talent locally, regionally and from across the US. This is an exciting time for our people in Aviva USA.
The future for the US business remains exciting. The attractiveness of our products, coupled with our expanding distribution and excellence in product innovation when set in the context of a long-term growth market, puts us in a great position going forward. The strong momentum upon which we finished 2007 will continue to fuel our performance in the year ahead.
In 2008 to 2009, we will start realising the benefits of the strategic investments we have made over the past few years. This will allow management to accelerate the growth of the business and improve underwriting performance. We are also making a strong investment in communicating the Aviva brand. The launch of our brand campaign in 2008 will significantly raise consumer awareness.
Aviva Canada launched a signature partnership in 2007 with ThinkFirst, a charitable organisation devoted to the prevention of injury in children and young people.
We have committed to C$500,000 in sponsorship over the next two years which will help to strengthen existing local ThinkFirst chapters and assist in the creation of new ones.
The partnership will provide opportunities for Aviva employees to volunteer at special events and with local chapters. It will connect Aviva and our employees with the concept of protection in the community at large.
Commercial lines net written premiums increased by 6% in a softening market. In particular, Fastrax, our broker portal for small commercial business, achieved good growth of 29%. Utilising this technology and with further growth, we expect to become the leader in this market.
Australia: seventh in individual protection market and sixth in the platform market
Our strategic priorities are: Scale and growth through: – Prioritised portfolio – Regional operating model – Investment required
How will we achieve this? – Take advantage of the huge and well understood demographic opportunities – Drive growth through the successful bancassurance model – Share expertise such as the Australian wrap platform – Expand further our geographical footprint in the region – Realise cost savings and synergies through the regional operating model
Progress in 2007: Continue to roll out our successful bancassurance distribution model, tailored to the specific needs of our markets – New bancassurance deals signed in Malaysia, India, Sri Lanka and Taiwan
– In Singapore, we acquired DollarDex which would enable us to build a direct customer base and further diversify distribution via our entry in the B-2-C segment
Exploit the scale of Aviva through knowledge sharing and skills in multi-channel distribution, product development and service delivery – Joined forces with Aviva USA and Spain to share knowledge on product design and industry trends. Delegates from Asia Pacific included Australia, China, Hong Kong, Singapore and Taiwan
* Excludes investment sales. Investment sales totalled £2,660 million (2006: £1,564 million) giving overall new business sales of £4,089 million (2006: £2,546 million).
There are huge opportunities in the Asia Pacific region to grow Aviva’s business over the coming years.
By continuing to expand our portfolio of long-term savings, protection and takaful insurance products across more countries in the region, by continuing to offer better service to customers and by continuing to invest in our people, we plan to achieve our targets and increase our share of the group result.
We have continued to make great progress towards our ambition of establishing Aviva as a leading international player in the Asia Pacific region. We plan to grow the business by at least 20% per year to 2010, aiming to make Aviva Asia Pacific a more significant part of the Aviva group.
During 2007 we added two new businesses to our Asia Pacific footprint, Taiwan and Malaysia. In January 2008, we formed a partnership with Woori Finance Holdings Company Ltd to enter the South Korean life insurance market by acquiring a stake in LIG Insurance Co Ltd which is expected to take place in the first half of 2008 subject to regulatory approval.
In Australia, total sales grew by 46% to £2,400 million (2006: £1,600 million) following strategic investment in key independent financial adviser groups and favourable changes to superannuation legislation. Within this total, life and pension sales increased 44% to £439 million (2006: £297 million) reflecting growth in protection business and a strongly performing retail investment sector.
Life and pension sales were up 51% to £990 million (2006: £685 million). In Singapore, sales grew through our strong relationships with key brokers and those in Hong Kong through the continued good performance of our partnership with the banking group DBS. In China we have increased our presence in the country to eight provinces and are now ranked second among foreign insurers and in India, sales have increased through bancassurance partnerships, ongoing expansion of the direct sales force and the addition of new branches in the year.
Our performance to date demonstrates the effectiveness of multi-channel distribution. Leveraging this core capability in 2007, we have established a further two new joint ventures in Malaysia and Taiwan, giving Aviva access to nine million potential new customers across these markets.
Australia Our strategy is for continued growth of our existing independent financial adviser channel while diversifying distribution into new channels. 2007 has been a year of outstanding growth for our investment and superannuation products provided through the Navigator platform and our protection business. This growth was based upon the continued strength of our product and service offer and significant contributions from the key adviser groups in which Aviva holds strategic stakes.
Favourable changes in superannuation legislation during 2007 have driven strong market growth for Navigator and we have seized these opportunities to outperform the market. We are currently ranked seventh in the individual protection market based on new business and sixth in the platform market based on net inflows and are increasing market share in both areas. Our service excellence on protection resulted in Aviva being recognised as the number one protection provider in the Taylor Life Insurance Survey. This survey is the benchmark in the Life Insurance sector.
Hong Kong Hong Kong is a dynamic financial market which plays a leading role in the regional economy. Our business here progressed significantly in 2007 with over 80% growth against 2006. Strong performance came from the rapid development of our independent financial adviser (IFA) channel, which now accounts for more than half of our sales, and our continued bancassurance success with the Development Bank of Singapore (DBS), South East Asia’s largest banking group. As one of the fastest growing life insurers in Hong Kong, we aim to continue to build our market share through further development in the growing bancassurance and IFA channels.
Australia – Riskfirst, changing the way the life insurance industry operates
Aviva’s new Riskfirst system, the first signature-free online underwriting platform in Australia, is changing the way the life insurance industry operates. The online process enables faster completion of life insurance policies which has improved advisers’ turnaround time by a third and benefited relationships with their clients.
The Riskfirst applications accounted for 25% of new business just three months after launch – a clear demonstration that this is breakthrough technology that sets Aviva apart. Our pioneering technology was a contributory factor as Aviva earned first place in the prestigious Taylor Life Insurance Industry Survey in December 2007.
Malaysia In July, we entered the Malaysian market through the acquisition of a 49% stake in two of CIMB Group’s subsidiaries, Commerce Life Assurance Berhad and Commerce Takaful Berhad who have entered into exclusive bancassurance agreements with CIMB Group’s subsidiary, CIMB Bank, giving Aviva access to over four million potential new customers as well as introducing takaful (Islamic insurance) to the Aviva group.
In October, we obtained regulatory approval from Bank of Negara on establishment of the International Currency Business Unit (ICBU). This ICBU establishment allows a window for companies to sell Takaful products in multiple currencies with a ten year tax waiver for the entity.
Sri Lanka In Sri Lanka, we own a 51% stake in Eagle Insurance (Eagle). Eagle is ranked the third largest life insurer and fifth largest general insurer in the country. During 2007, Eagle entered into its third bancassurance agreement, with Sampath Bank, gaining access to almost one million additional potential new customers.
Taiwan In December, we received approval from Taiwan’s regulator to set up our life insurance joint venture, First Aviva, with First Financial Holdings Company (FFHC). First-Aviva, in which we have a 49% shareholding, will distribute long-term savings and pension products through an exclusive bancassurance agreement with FFHC’s flagship subsidiary, First Commercial Bank, Taiwan’s second largest bank network. First-Aviva commenced operations on 2 January 2008.
At the end of August, I chaired the first finance directors’ forum since the creation of our regional structure. Its representatives come from every business and region and have a key role in defining our finance agenda. Our first meeting focused on managing our considerable finance talent – developing leaders for the future and finance professionals with the skills and experience to support our challenging plans.
Financial reporting – We introduced a new approach to reporting our life operating profit on an IFRS basis, which enables us to monitor underlying performance without the distortions caused by market volatility
– We continued to participate in development of IFRS Phase II and submitted our feedback on the International Accounting Standard’s Board preliminary views in November
Looking forward – We will build on the progress made to date to deliver and embed the Global Finance strategy across the group
– We will continue to embed ICA into our business decision making process for investment assessment and for capital allocation
Aviva’s capital management philosophy is focused on capital efficiency and effective risk management to support a progressive dividend policy and earnings per share growth. Rigorous capital allocation is one of the Group’s primary strategic priorities and is ultimately governed by the Group Executive Committee.
Overall, the Group has significant resources and financial strength. The ratings of the Group’s main operating subsidiaries are AA/AA- (“very strong”) with a stable outlook from Standard & Poor’s, Aa3 (“excellent”) with a stable outlook from Moody’s and A+ (“Superior”) with a stable outlook from AM Best. These ratings reflect the Group’s strong liquidity, competitive position, capital base, increasing underlying earnings and strategic and operational management. The Group is subject to a number of regulatory capital tests and also employs economic capital measures to manage capital and risk.
Capital allocation is undertaken based on a rigorous analysis of a range of financial, strategic, risk and capital factors to ensure that capital is allocated efficiently to value adding business opportunities. A clear management decision-making framework, incorporating ongoing operational and strategic performance review, periodic longer term strategic and financial planning and robust due diligence over capital allocation is in place, governed by the Group Executive Committee and Group Capital
In recognition of the requirements of different stakeholders, the Group measures its capital on a number of different bases, all of which are taken into account when managing and allocating capital across the Group. These include measures which comply with the regulatory regimes within which the Group operates and those which the directors consider appropriate for the management of the business. The primary measures which the Group uses are: (i) Accounting bases The Group reports its results on both an IFRS and a European Embedded Value basis. The directors consider that the European Embedded Value principles provide a more meaningful measure of the long term underlying value of the capital employed in the Group’s life and related businesses. This basis allows for the impact of uncertainty in the future investment returns more explicitly and is consistent with the way the life business is priced and managed. Accordingly, in addition to IFRS, we analyse and measure the net asset value and total capital employed for the Group on this basis. This is the basis on which Group Return on Equity is measured and against which the corresponding Group target is expressed.
Further details regarding the use of economic capital in risk management are set out in the “Risk management” section on page 58.
Long-term savings 23,272 20,094 General insurance and health 5,487 5,176 Other business including fund management 1,056 1,059
Total capital employed 29,784 26,310 Financed by: Equity shareholders’ funds 20,253 17,531 Minority interests** 3,131 2,137 Direct capital instrument 990 990 Preference shares 200 200 Subordinated debt 3,054 2,937 External debt 1,257 1,258 Net internal debt 899 1,257
Total capital employed is financed by a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. In addition to our external funding sources, we have certain internal borrowing arrangements in place which allow some of the assets that support technical liabilities to be invested in a pool of central assets for use across the Group. These internal debt balances allow for the capital allocated to business operations to exceed the externally sourced capital resources of the Group. Although intra-group in nature, they are included as part of the capital base for the purpose of capital management. These arrangements arise in relation to the following: – Certain subsidiaries, subject to continuing to satisfy standalone capital and liquidity requirements, loan funds to corporate and holding entities, these loans satisfy arms length criteria and all interest payments are made when due.
– Aviva International Insurance (AII) Ltd acts as both a UK general insurer and as the primary holding company for the Group’s 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.
Net internal debt represents the balance of the above amounts due from corporate and holding entities, less the tangible net assets held by these entities. Financial leverage, the ratio of the Group’s external senior and subordinated debt to EEV capital and reserves was 17% (2006: 20%). Fixed charge cover, which measures the extent to which external interest costs, including subordinated debt interest and preference dividends, are covered by EEV operating profit was 9.8 times (2006: 10.3 times).
Insurance Groups Directive (IGD) excess solvency £3.1 bn £3.5 bn Cover (times) over EU minimum 1.6 times 1.8 times
The Group has a regulatory obligation to have positive solvency on a regulatory IGD basis at all times. The Group’s risk management processes ensure adequate review of this measure. At 31 December 2007, the estimated excess regulatory capital was £3.1 billion (31 December 2006: £3.5 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 Group’s UK Life funds.
In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked life reserves respectively and for Aviva’s 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 the Group’s major nonEuropean 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.
Our excess solvency of £3.1 billion reflects a net decrease of £0.4 billion since 31 December 2006, driven by increased capital resource requirements due to changes in regulatory rules and a strengthening of the Group’s approach to the calculation of the resource requirement. These additional requirements offset the growth in resources due to strong operational performance.
Capital resources £9.2bn £8.3bn Capital resources requirement £5.5bn £4.5bn Solvency surplus £3.7bn £3.8bn Cover 1.7 times 1.8 times
The required capital across the Group’s life businesses varies between 100% and 250% of EU minimum or equivalent. During the year, we reduced the required capital for the UK annuity business from 150% to 100% of required minimum margin, bringing it into line with the remainder of the non-profit portfolio. The weighted average level of required capital for the Group’s nonparticipating life business, expressed as a percentage of the EU minimum (or equivalent) solvency margin has decreased to 130% (31 December 2006: 134%) reflecting the reduction in the level of required capital for the UK annuities business.
These levels of required capital are used in the calculation of the Group’s embedded value to evaluate the cost of locked in capital. At 31 December 2007 the aggregate regulatory requirements based on the EU minimum test amounted to £5.1 billion (31 December 2006: £4.3 billion). At this date, the actual net worth held in the Group’s long-term business was £10.5 billion (31 December 2006: £8.9 billion) which represents 205% (31 December 2006: 206%) of these minimum requirements.
Solvency II represents new legislation which proposes a fundamental review of the capital adequacy regime for the European insurance industry. It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current requirements applicable to European insurance firms and Groups. Solvency II is a unique opportunity to modernise the regulation of insurance companies and groups. Aviva is fully committed to contributing to the success of Solvency II and continues to play an active role in its development through participation in the consultation and quantitative impact studies run by the European Commission and European Regulators, as well as working with industry forums and working parties. Solvency II has the potential to align regulatory capital with internal risk processes and measures, provided the possible problems and pitfalls are avoided. While the proposed regime is still at an early stage, the progress has been encouraging; the European Commission published its draft proposal for the high level principles, “Level 1 Framework Directive”, in July 2007 and it is envisaged that the full suite of rules will be in place by the end of 2010, with full implementation by 2012.
Tests covering investment and insurance scenarios are specified centrally to provide consistency across businesses and to achieve a minimum standard. Where appropriate, businesses may also supplement these with tests specific to their own situation. In aggregating the various risk tests at business unit and Group level, we allow for correlation effects between different risks as well as diversification benefits. This means that the aggregate sum of the risks is less than the sum of all of the individual risks. Financial modelling techniques enhance our practice of active risk and capital management, ensuring sufficient capital is available to protect against unforeseen events and adverse scenarios. Our aim continues to be the optimal usage of capital through appropriate allocation to our businesses. We continue to develop our economic capital modelling capability for all our businesses as part of our development programme to increase the focus on economic capital management.
The Group’s approach to risk and capital management As part of our overall corporate governance framework described on pages 82 to 87 we operate a risk management structure, under the leadership of a Group Chief Risk Officer whose primary objective is to align the strategic decisions of the group with shareholder risk appetite. Group Risk has a mission also to manage risks by protecting the group from events that can hinder the achievement of our objectives, our financial performance, or cause us to fail to exploit opportunities.
Risk management incorporates an integrated group-wide approach to identify, assess, measure, manage, and monitor the risks to which our businesses are exposed. Group Risk is also responsible for regulatory risk and relationship with our regulators worldwide, for managing the corporate governance and for business continuity programmes.
They enable a broadly consistent approach to the management of risk by business units. For each policy, a member of senior management is responsible for overseeing compliance with that policy throughout the group.
ICA analysis is now incorporated into our key decision making processes. Our ICA models inform us about the relative impact on economic capital from the risks we face, enabling us to formulate mitigating strategies.
We also use financial condition reports which cover the medium-term financial outlook of the business, including forecasts of the overall financial position and key performance indicators under a variety of economic and operating scenarios, allowing for new business sales, to inform our capital and risk management decisions.
We monitor specific risks on a regular basis through our risk monitoring framework. Our businesses are required to disclose all material risks along with information on the likelihood and severity of these risks and the mitigating actions taken or planned. This process enables us to assess the overall risk exposure of the group, to develop a group-wide risk map identifying concentrations of risk and to define the risks that we are prepared to accept. This risk map is continually monitored and is refreshed quarterly.
The risks facing Aviva Aviva faces a wide variety of financial, insurance, and other risks from our business’s operations, which we have categorised in four groups. These are shown in the chart below: The types of risks in our business and the way in which we manage them are discussed in detail below.
Actions could include buying downside protection against movements in equity prices or interest rates. The GIC also considers aggregation of market risk, including indirect market risk exposure from our staff pension schemes, and formulates risk appetite decisions for the amounts invested in different types of asset, and where appropriate reduces or increases exposure to asset classes.
Our largest market risk exposure is to changes in equity prices. However, recent equity market rises in the past few years resulted in our equity risk rising to a level that was not optimal when compared to risk appetite, and so the equity holdings were reduced within a number of our general insurance shareholder funds. Equity risk was also reduced within the UK Staff Pension fund in the third quarter of 2007. This reduced our equity exposure by £3.5 billion.
A 10% decrease in equity prices causes a £775 million pre-tax decrease in the level of shareholders’ funds on an IFRS basis and on an EEV basis would reduce embedded value by £1,155 million, net of tax.
Interest rate risk is the risk that arises from both the products we sell and the value of our investments due to changes in the level of interest rates. For example, long-term debt and fixed income securities are both exposed to fluctuations in interest rates. We are exposed to reductions in interest rates on business carrying investment return guarantees, and to interest rate increases on business carrying surrender value guarantees.
We invest in physical property assets, in a variety of locations worldwide that are exposed to fluctuation in values. We believe investing in these assets provides long-term benefits for our businesses and clients.
Maintaining sufficient available liquid assets to meet our obligations as they fall due is an important part of our financial management practice. Our businesses must all operate controls to identify sources of liquidity risk, monitor potential exposures, and manage their liquidity requirements.
We operate internationally and we are therefore exposed to the financial impact arising from changes in the exchange rates of various currencies. Over half of our premium income arises in currencies other than sterling and our net assets are denominated in a variety of currencies, but predominantly in sterling, euros and US dollars.
We generally do not hedge foreign currency revenues, as we prefer to retain revenue locally in each business to support business growth, to meet local and regulatory market requirements, and to maintain sufficient assets in their local currency to match local currency liabilities. We are 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, although this has now been largely hedged.
Credit risk We have a significant exposure 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.
Insurance risk Our core business is insurance, and we carefully manage the risks arising from the life and general insurance business that we write.
Our life insurance businesses are exposed to the full range of life insurance risks from the products that they have written, typically longevity, mortality, and morbidity risk, as well as experience on persistency and unforeseen expenses.
Longevity risk We have a significant exposure to annuity business and our most significant life insurance risk is associated with longevity. Longevity statistics are monitored in detail, compared with emerging industry trends, and the results are used to inform both the reserving and pricing of annuities. Inevitably, there remains uncertainty about the development of future longevity that cannot be removed. Should our annuitant mortality assumptions worsen by 5% then shareholders’ equity would decrease by £295 million pre-tax on an IFRS basis and decrease embedded value by £210 million on an EEV basis, net of tax.
Our general insurance businesses are exposed to a typical range of general insurance risks from the business that they underwrite.
Catastrophe Risk Our largest risk is claims incurred from catastrophic events. This risk is controlled through monitoring risk aggregations and using catastrophe reinsurance cover.
Reinsurance cover We actively use reinsurance to help reduce the financial impact of a catastrophe and to manage the volatility of our earnings. Reinsurance purchases are reviewed annually at both business unit and group level to verify that the protection we have purchased matches the level of exposure. Reinsurance arrangements are only placed with providers who meet our counterparty security standards. We use extensive financial modelling and actuarial analysis to optimise the cost and risk management benefits from our reinsurance programme.
We cede much of our worldwide catastrophe risk to third-party reinsurers, but retain a pooled element for our own account, gaining diversification benefits. Our total retained risk increases as catastrophe events become more remote, so that our total loss from our most concentrated exposure (northern European wind storm) is approximately £370 million for a one in ten year event, compared to approximately £700 million for a one in 100 year event.
Both life and general insurance business are subject to new types of risk which may emerge. By their very nature these risks are evolving, uncertain, and difficult to quantify.
Recent developments relating to avian flu and other pandemic risks have raised considerable interest in the life insurance market. Our life insurance risk committee monitors developments in these risks based on published industry research, and makes assessments of the impact on the group through stress and scenario testing.
Operational risk We are also exposed to operational risk arising from inadequately controlled internal processes or systems, human error and from external events. This includes all risks that we are exposed to, other than the financial risks described above and strategic and group risks. Operational risks include risks relating to: – Regulation, information technology, financial crime, business protection, human resources, outsourcing, purchasing, communications, and legal
Business management teams must be satisfied that all material risks falling outside our risk appetite are being mitigated, monitored and reported at an appropriate level. Any risks with a high impact level are continually monitored centrally.
Longer term investment return The long-term nature of most of our operations means that short-term realised and unrealised gains and losses are shown as an adjustment to operating profit. We focus instead on operating profit incorporating a longer term investment return (LTIR). Our rates of return that we use for equity and property in our LTIR methodology are aligned with the rates that we use under EEV principles. For fixed interest securities, we include the amortisation of premiums or discounts arising on purchase, thereby producing an LTIR that is equivalent to the gross redemption yield.
Previously this methodology has been applied to our general insurance and health businesses but following the adoption of a new operating profit definition in November 2007, this has been extended to our long-term savings business. Further details of this change are set out in note 2 to the financial statements on page 132.
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 114 to 125.
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 remains the most significant area of development to us. We fully support the timely development of a global standard for insurance accounting that reflects the economics of our business. A discussion paper setting out the IASB’s preliminary view was published in May 2007 and we responded both directly and through the CFO Forum of leading European insurers, in which we play an active role. This is the first stage in the development of the IASB’s standard and it is unlikely to be finalised before the end of 2010 at the earliest. 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 EEV 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 and fair value measurement.
We have improved our talent management processes, the way we lead our people, and are building Aviva as an engaging place to work. This was supported by a 70% (2006: 66%) participation rate in the global employee survey, which showed strong and improving results, and in which 70% of participants agreed that Aviva is a great place to work.
Our CSR plans are key to our business strategy and we made further progress in 2007. Key initiatives included our carbon offsetting and carbon reduction programme, building employee awareness and engagement in all aspects of CSR, including volunteering.
Leading People Recruit and develop leaders who excite their people to exceptional performance, bringing to life the relationship between engaged employees and satisfied customers.
Experiencing Aviva Build Aviva as a strong employment brand by delivering a great employee experience.
Embedding our CSR vision Act responsibly for the long term in how we do business, to help meet our ambition of being the world’s most trusted savings, investment and insurance provider. Managing and steering performance on business ethics, values, environment and diversity is central in our interactions with customers, our people, community and suppliers.
– Our employees, whose engagement and commitment to delivering a great service to our customers is essential
– The communities in which we operate, and the suppliers and organisations with which we work, who want Aviva to be a responsible employer and partner, thinking about the way we do business and acting responsibly to the benefit of all
John Ainley, group human resources director, is responsible for implementing the employee and responsibility strategy and is supported by strong teams at the group, regional and business unit level who work together to deliver our objectives. Apart from regular monthly meetings and global task forces, annual global conferences are organised for this community to network, exchange best practices, review progress and agree on the collective agenda for the organisation.
Managing our employee talent is fundamental to the success of Aviva. Our “Talking Talent” process was piloted amongst the group’s senior managers in 2007 and will be rolled out globally across Aviva in 2008 and 2009. Talking Talent is underpinned by a shared belief that all of our people have talent that can be harnessed to the benefit of our customers. It is therefore in our interest that we understand those talents using a consistent framework and then deploy our employees in the right jobs at the right time.
In 2007, we conducted extensive research through focus groups into our employees’ experiences of working for Aviva to help us understand what Aviva meant to them as an employer. The findings from this exercise are now being worked into an employment brand strategy, enabling us to attract and retain talent in highly competitive markets. We are also providing business units with practical tools to bring the employment brand to life locally.
The quality of people leadership will be critical in delivering on our plans. In 2007 we developed a leadership feedback tool which we will roll out across the group in 2008 and 2009. The tool is for use by anyone with line management responsibility, recognising the importance of the line management relationship in employee engagement, and has been successfully piloted in 2007.
Being performance-driven is having and achieving clear goals through everyone working towards the goals in an effective manner.
Business review * Stonewall is a campaigning organisation in the UK that works with the government, companies and communities for equality and justice for lesbians, gaymen and bisexuals.
Community We recognise the responsibility we have to the communities in which we operate and have taken steps in 2007 to make our community efforts stronger and more effective.
Aviva was recognised for its international diversity programmes at the World Diversity Leadership Summit, hosted by the United Nations Global Compact in May 2007. The judging panel of World Diversity Leadership Council, a peer group of corporate diversity experts, selected Aviva for its innovative approach in embedding diversity within the company. Its Think Again campaign and Respect Diversity toolkit was noted in this award.
During 2007 we donated £6.8 million to charitable and community activities worldwide, an 8% increase over
Aviva was one of the first companies to sign up to the Oxfam 365 Alliance in 2006. Our funding ensures that Oxfam can maintain a state of constant preparedness, enabling them to respond immediately to emergencies wherever they occur in the world. This includes keeping the UK’s biggest emergencies warehouse full of supplies. During 2007, Oxfam responded to more than 30 emergencies worldwide, including hurricanes in Mexico, Central America and the Caribbean and severe flooding in India, Nepal and Bangladesh. Oxfam continues to provide emergency supplies of clean, safe water and sanitation facilities to hundreds of thousands of people in Darfur and Chad, as well as to communities in Angola and Ethiopia. In the UK we supported Breakthrough Breast Cancer’s largest fund-raising event, the Aviva Walk London, for a second consecutive year. In Canada, we launched a two year partnership with Think First Canada, a national non-profit charity dedicated to injury prevention. In India, our Global Services business has established a significant partnership with the Akanksha Foundation which works with underprivileged children in providing them with education and training to earn a livelihood.
As well as corporate support, we continue to promote employee volunteering as a means for our people to become engaged with their local communities.
Businesses continued to work on reduction targets for CO2 emissions, electricity, water and waste. Aviva was the first insurer to offset emissions on a global basis and become carbon-neutral. The projects chosen for offsetting are in countries where we operate and in Africa. They are a good balance of commercial and social projects, allowing some “signature” Aviva projects – wholly funded and branded by the group and include “green cement” production in the Netherlands and Ireland; a biogas project in Sri Lanka; providing more efficient woodburning stoves in Africa; pumps for irrigation in rural India; and wind turbines in both India and China.
We co-authored, and were a founder signatory to, the ClimateWise principles – the first climate change principles created to address the role that multi-line insurers can have in respect of risk analysis, business lines and operations. By signing up to the principles we have agreed that we will report annually on the progress we have made against them.
Aviva gained a Community Impact award from BITC for our “Better Together Day”, which was held at our London, St Helen’s office. The event saw the office opened up to local schools, enabling children to see what a real city establishment is like – from the basement archives to the boardroom. The leadership team was highly supportive of the day, offering some of its time to meet the participants and engage in a Q&A session.
Customers With our core purpose to provide prosperity and peace of mind to our customers, it is vital that our corporate social responsibility agenda is at the heart of the way we interact with our customers – in our vision and values, our strategies, our products and our services. In laying a strong foundation, our group customer policy directs uncompromising standards of commitment to customers from everyone.
In 2007, we continued to focus on embedding “customer-centricity” in our culture; a common dashboard of customer indicators, led by the Net Promoter Score®*. This was developed to provide a framework on which all businesses will report to the executive committee and Board their progress in improving the customer experience. Additionally, performance against customer targets help to determine senior management bonuses across the group.
Externally, Aviva UK procurement is leading the development of a standard financial services supply chain approach. This is being driven through the Financial Services Purchasing Forum CSR Sub-group of the Chartered Institute of Purchasing and Supply, chaired by Aviva. By employing a consistent approach and message across financial services procurement we simplify the achievement of CSR objectives for ourselves and our suppliers and, through greater leverage and co-operation, we should be able to effect positive change quickly with 30 financial services peer organisations working with us on this initiative.
– Aviva was awarded a bronze class distinction in the SAM (Sustainable Asset Management) Sustainability Yearbook 2008. Only the top-scoring 15% of the 2,500 largest companies in the world, as reflected in the Dow Jones Global Index and assessed by SAM, are included in the Sustainability Yearbook.
– The FTSE4Good Index Series measures the performance of companies that meet globally recognised standards on corporate social responsibility. It is a good benchmark as the criteria evolve over time, demanding continued improvement. Aviva continues to be included in the index.
– We also continue to be included in both the E. Capital Partners Investment’s (ECPI) Ethical Index Euro and Ethical Index Global indices. We were rated EE+ (where “E” stands for ethical) and were considered to be the best-performing CSR company in our sector.
IDE India have been working in 15 major Indian states, providing more than 850,000 farmers with green technology.
We incur up to a 2% premium for zero emission / renewable electricity compared to fossil fuels.
Furthermore, while it is not possible to attribute individual weather events such as the June-July 2007 UK flooding event to climate change, the increased incidence of such events has a significant impact on the insurance claims which we incur.
Other significant emissions Other than CO2 emissions our operations do not generate material quantities of any other significant greenhouse gases.
Total waste (tonnes) Recycled (tonnes) Total waste per employee (kgs) New businesses
Conservation investment Total capital expenditure for storage and recycling in the UK was £200,000.
Water The operating cost of water usage was £938,000 in 2007 (2006: £670,000).
Energy intensity Total cost of building-related energy in 2007 was £20.4 million (2006: £19.4 million).
Environmental incidents During 2007 there were no environmental incidents as a result of our operations, resulting in fines of £nil (2006: £nil).
In 2007, our total CO2 emissions increased, mainly due to the inclusion of emissions data from our new business in Aviva USA, Aviva Global Services, Sri Lanka and Russia.
From our existing businesses, emissions have shown an 11% decrease, by 13,555 tonnes reflecting significant focus on energy efficiency and resourcing renewable energy. Currently 61% (2006: 55%) of our electricity worldwide is purchased from zero emission sources. We offset our remaining emissions on a retrospective basis. We began this process in 2006, compensating for the carbon output of our consumption of non-renewable sourced electricity, gas and oil from buildings and business travel, including air, car and train, across all of our global operations.
Although we are growing organically and by acquisition, we will still strive to reduce our CO2 emissions per full-time equivalent employee over time.
In the Netherlands, Delta Lloyd Asset Management Business has two funds which concentrate on climate change mitigation (Environmental Technology Fund and New Energy Fund), with funds under management of 1103 million. Morley Fund Management with £165 billion funds under management engages with companies they invest in to encourage greater environmental reporting/disclosure.
In 2007, the total volume of waste decreased and the total amount recycled increased.
Plastic wrap from the Auto Windscreens operation is now being recycled – 70 tonnes per year with a value of £135 per tonne. Opportunities are being taken to reduce the amount of waste coming into the business through clauses in purchasing contracts around removal of packaging.
In 2007, with the proportion of waste recycled increasing from 64% to 88%, recycling costs (including secure destruction of all paper) and cleaning costs were lower as a result of segregation. In the UK we have recycling in place for 14 different waste streams.
We are working with our upstream partners to eliminate waste from the business through take back and to switch to biodegradable wrapping etc. Environmental clauses are included in contracts with suppliers. Each new supplier has to sign up to Aviva’s CSR Supplier Code of Conduct – focusing on environmental impact as well as human rights and social issues.
Our energy strategy is to invest in new energy saving technology and to reduce our energy dependency on fossil fuels. We are prepared to pay up to 2% premium for purchasing electricity from renewable/zero emission sources.
Energy conservation investment is now starting to be measured. Capital expenditure work on energy conservation is proceeding with a payback period of less than three years.
We have introduced self selection options, which enable policyholders to receive and save policy documentation online, thus reducing paper usage, printing and postage costs.
Work is continuing with marketing departments and suppliers to provide marketing materials with recycled content and remanufactured stationery products.
Age 54 Appointed to the Board in May 2000 and became group finance director in July 2007. Joined Norwich Union in 1973 and held a number of senior positions before joining the Norwich Union board in 1993. Formerly, responsible for the group’s insurance businesses outside Europe and Morley, the group’s UK fund management operations. Currently a non-executive director of Diageo plc (drinks).
Age 40 Appointed to the Board in July 2007. Currently President, Europe, Middle East and Africa Operations at Google (consumer services). Formerly chief marketing officer and a member of the management board at T-Mobile (communications) and held senior management positions at Deutsche Telekom, Fidelity Investments (financial services) and Putnam Investments (financial services).
Age 69 Appointed to the Board in December 1999. Currently chairman of the supervisory board of Zesko Holding B.V. (telecommunications) and Tele Atlas N.V. (information systems), a non-executive director of Unilever N.V. and Unilever plc (consumer) and of LogicaCMG plc (computer services). Former Minister for Foreign Trade in the Netherlands. Former chairman of Nederlandse Unilever Bedrijven B.V. (consumer) and former chairman and chief executive officer of KPN Royal Dutch Telecom (telecommunications). Former chairman of the supervisory board of Holland Casino (gaming) and a former member of the supervisory boards of TNT Post Group (mail services) and ABN AMRO N.V. (banking).
Age 59 Appointed to the Board in October 2005. Currently senior independent director of Centrica plc (utilities), a non-executive director of Alliance & Leicester plc (banking), a non-executive director of St Modwen Properties plc (property development) and a director of Almeida Theatre Company Limited. A member of the advisory board of the National Consumer Council and Governor of the Pensions Policy Institute. Formerly Director General of the Association of British Insurers, non-executive director of the Bank of England and Fund Distribution Limited and a senior civil servant.
Chairman of the remuneration committee and member of the audit committee.
Age 64 Appointed to the Board in May 2004. Currently a non-executive director of Signet Group plc (retail) and chairman of its audit committee. Chairman of Delphic Diagnostics Limited (medical) and treasurer and trustee of The British Red Cross. Former group finance director of BAA plc (transport), Wellcome plc (pharmaceuticals) and Coats Viyella plc (textiles). Former senior independent non-executive director of Stagecoach Group plc (transport) and Hilton International Group plc (leisure) and a former nonexecutive director of the Mersey Docks and Harbour Company (transport).
Age 41 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).
Age 42 Joined the Group in 1991. Formerly managing director of Norwich Union General Insurance, finance director of Norwich Union Insurance and finance director of Aviva general insurance international. A chartered certified accountant (FCCA) and holds an MBA from Cranfield Business School.
Results The Group results for the year are shown in the consolidated income statement on page 126.
Dividends The directors are recommending a final dividend of 21.10 pence per share (2006: 19.18 pence), which together with the interim dividend of 11.9 pence paid on 16 November 2007 (2006: 10.82 pence), produces a total dividend for the year of 33.00 pence per share (2006: 30.00 pence). The total cost of ordinary dividends paid in 2007, was £801 million (2006: £693 million), leaving £472 million to be transferred to reserves (2006: £1,468 million to reserves) after tax, minority investments, preference dividends and payments in respect of the direct capital instrument. The final dividend for 2007 will be paid on 16 May 2008 to all holders of ordinary shares on the Register of Members at the close of business on 28 March 2008. The Company’s Scrip Dividend Scheme will be available to shareholders in respect of the payment of the final dividend. In addition, a local currency payment service will be available to shareholders residing in certain participating countries outside the UK. Further details of these arrangements can be found in the shareholder services section on pages 270 to 272.
Share capital The issued ordinary share capital of the Company was increased by 56 million ordinary shares during the year.
Where, under an employee share plan operated by the Company, participants are the beneficial owners of shares, but not the registered owners, the voting rights are normally exercised at the discretion of the participants. No person holds securities in the Company carrying special rights with regard to control of the Company. The Company is not aware of any agreements between holders of securities that may result in restrictions in the transfer of securities or voting rights. Unless expressly specified to the contrary in the articles of association of the Company, the Company’s articles of association may be amended by special resolution of the Company’s shareholders. There are a number of agreements that take effect, alter or terminate upon a change of control of the Company, such as commercial contracts and joint venture agreements. None is considered to be significant in terms of their potential impact on the business of the Group as a whole. All of the Company’s share plans contain provisions relating to a change of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions.
Authority to purchase own shares At the Company’s Annual General Meeting held on 26 April 2007, shareholders renewed the Company’s authorities to make market purchases of up to 256 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 (appointed 1 July 2007) Guillermo de la Dehesa Wim Dik Mary Francis Richard Karl Goeltz Richard Harvey (retired on 11 July 2007) Andrew Moss Carole Piwnica Philip Scott Lord Sharman of Redlynch Patrick Snowball (resigned 8 May 2007) Tidjane Thiam (appointed 1 May 2007, resigned 21 September 2007) Russell Walls Scott Wheway (appointed 5 December 2007)
Directors’ interests and indemnity arrangements At no time during the year did any director hold a material interest in any contract of significance with the Company or any of its subsidiary undertakings other than an indemnity provision between each director and the Company and service contracts between each executive director and a Group company. The Company has purchased and maintained throughout the year directors’ and officers’ liability insurance in respect of itself and its directors. The directors also have the benefit of the indemnity provision contained in the Company’s articles of association. The Company has executed deeds of indemnity for the benefit of each director of the Company, and each person who was a director of the Company during the year, in respect of liabilities that may attach to them in their capacity as directors of the Company or of associated companies. These indemnities were granted at different times according to the law in place at the time and where relevant are qualifying third-party indemnity provisions as defined by Section 309B of the Companies Act 1985. These indemnities were in force throughout the year and are currently in force. Details of directors’ remuneration, service contracts and interests in the shares of the Company are set out in the Directors’ remuneration report.
Health and safety The health and safety of the Group’s employees is a priority and is reviewed at regular intervals. Each business within the Group has an appointed health and safety representative, whose role is to bring to the attention of senior management any areas of concern that should be addressed within the health and safety programme. Information on health and safety matters is communicated to staff through the normal communication channels. Under the Group’s Business Protection Policy the Group Chief Executive is accountable for health and safety.
Charitable donations Aviva has continued to support community initiatives and charitable causes worldwide and the total Group commitment during the year, as measured in accordance with Business in The Community’s Community Investment Survey, was £6.8 million (2006: £6.3 million).
In 2007, the Group’s community investment in the United Kingdom totalled £4 million (2006: £3.7 million) of which £1.4 million (2006: £1.4 million) was given in the form of donations to charitable organisations. The Company allocates a part of its budget to matching contributions raised by staff and to providing financial support to charities and communities where members of staff give a personal commitment in terms of their time. In addition, the Company provides a significant level of support to a number of national charities. During 2007, the Company continued its commitment to Breakthrough Breast Cancer, Wheelpower (the British wheelchair sports association), The Princess Royal Trust for Carers and NCH (the children’s charity). In support of its “Forward Thinking” initiative the Company has continued with the partnership of the Oxfam 365 Alliance which provides immediate humanitarian aid to disasters occurring throughout the world. The Company has committed to support the Oxfam 365 Alliance for three years from 2006.
It is the Company’s policy not to make political donations of the type caught by the Companies Acts (although overseas subsidiaries do make other donations such as those made through Political Action Committees), and the Company does not intend to change this policy. However, at the forthcoming Annual General Meeting of the Company the shareholders’ approval will again be sought to authorise the Group to make political donations and/or incur political expenditure (as such terms are defined in Sections 362 to 379 of the Companies Act 2006 which superseded Section 347A of the Companies Act 1985) in amounts not exceeding £100,000.
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 2007 represented approximately 23 days of average daily purchases through the year (2006: 22 days).
Reappointment of the auditor and disclosure of information to the auditor In accordance with Section 385 of the Companies Act 1985, a resolution is to be proposed at the Annual General Meeting to reappoint Ernst & Young LLP as auditor of the Company. A resolution will also be proposed authorising the directors to determine the auditor’s remuneration. The Audit Committee reviews the appointment of the auditor, the auditor’s effectiveness and relationship with the Group, including the level of audit and non-audit fees paid. Further details on the work of the auditor and the Audit Committee are set out below in the Audit Committee report.
The Combined Code on Corporate Governance The Combined Code on Corporate Governance sets out guidance in the form of principles and provisions on how companies should be directed and controlled to follow good governance practice. The Financial Services Authority requires companies listed in the UK to disclose, in relation to Section 1 of the Combined Code, how they have applied its principles and whether they have complied with its provisions throughout the accounting year. Where the provisions have not been complied with companies must provide an explanation for this.
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 oversee 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
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 2008 Annual General Meeting has been subject to a formal performance evaluation and took part in a peer evaluation review during 2007. Biographical details of all the directors are set out on page 77.
Senior Independent Director Under the Combined Code the Board appoints one of the non-executive directors to act as Senior Independent Director. The main responsibility of the Senior Independent Director is to be available to shareholders should they have concerns that they have been unable to resolve through normal channels, or when such channels would be inappropriate. The Senior Independent Director is also responsible for leading the Board’s discussion on the Chairman’s performance and the appointment of a new chairman, when appropriate. Wim Dik served as the Senior Independent Director throughout 2007.
Board effectiveness The effectiveness of the Board is vital to the success of the Group. 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 process is led by the Chairman and supported by the Group Company Secretary. All directors complete a questionnaire evaluating the Board and committees’ processes, their effectiveness and where improvements may be considered. The process also includes a peer review in which directors assess their fellow directors’ performance against set criteria, including the skills that they bring to the Company and the contribution they make. This process is complemented by separate meetings between each director and the Chairman where feedback is discussed. In 2007, following the process introduced in 2006, the directors completed a comprehensive questionnaire which was returned to an independent third-party who had helped with the preparation of the questions, and who then collated comments, drew the conclusions and presented the findings to the Board.
During the year, directors attended a number of courses ranging from external seminars for members of the Audit and Remuneration Committees to internal seminars on directors’ duties and life assurance. In addition, members of the Audit and Risk and Regulatory Committees received two tailored training sessions. Training sessions have been built into the Board’s and committees’ work plans for 2008. The Board made visits to the Group’s businesses located in the United Kingdom and North America during the year to gain a closer understanding of their operations.
The Board has a comprehensive induction programme consisting of several separate sessions which take place over a number of months at times convenient for the director. The sessions include presentations from key members of senior management, visits to the Group’s main operating businesses, meetings with the external auditor, and one of the Company’s corporate brokers. Further or follow-up meetings are arranged where a director requires a deeper understanding on a particular item.
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 2007 was as follows: Board and Board committee attendance 2007 Corporate
Nikesh Arora (appointed 1 July 2007) 5/6 – – 2/3 – – Guillermo de la
During 2007 the Chairman and the non-executive directors met on one occasion in the absence of the executive directors and there was one meeting of the non-executive directors chaired by the Senior Independent Director at which the Chairman was not present in order to appraise the Chairman’s performance.
Board committees The Board has established the following standing committees to oversee and debate important issues of policy and oversight outside the main Board meetings.
– Audit Committee; – Corporate Social Responsibility Committee; – Nomination Committee; – Risk and Regulatory Committee; and
The systems are designed to: – Safeguard assets; – Maintain proper accounting records; – Provide reliable financial information; – Identify and manage business risks; – Maintain compliance with appropriate legislation and regulation; and
Control environment The Group has an established governance framework, the key features of which include: – Terms of reference for the Board and each of its committees; – A clear organisational structure, with documented delegation of authority from the Board to executive management; – A Group policy framework, which sets out risk management and control standards for the Group’s operations worldwide; – Defined procedures for the approval of major transactions and capital allocation; and
– Committees of senior executives responsible for reviewing the Group’s financial risks (Asset and Liability Management Committee) and non-financial i.e. operational risks (Group Operational Risk Committee).
The Group’s risk and governance framework has been structured in accordance with the Financial Services Authority’s risk-based framework for integrating and embedding risk and capital management (Prudential Sourcebook).
The Asset and Liability Management Committee is responsible for reviewing and monitoring the financial risks to the Group and, with the assistance of its sub-committees, considers the risks relating to life assurance, general insurance, reserving, capital management, credit and investment. Similarly, a Group Operational Risk Committee monitors risks associated with information technology, business protection, human resource management, business standards and regulatory compliance.
Management monitors the completeness of the Group’s risk profile on a regular basis through a Group risk monitoring framework. Each quarter, businesses report residual risk profiles and the adequacy of the mitigating action programmes, based on local materiality levels.
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.
Whilst the Audit Committee has the overall responsibility of monitoring the Group’s internal control process on behalf of the Board, it is assisted by the Risk and Regulatory Committee, which oversees the regulatory compliance and non-financial control processes and reports to the Board. In addition, the Audit Committee performs an annual review of the effectiveness of the internal audit function and the framework for the Group’s systems of internal control. Throughout 2007, the Audit Committee and the Risk and Regulatory Committee received quarterly reports from the Group Audit Director on issues arising, and updates on previously reported items. More detailed reports on the work of these committees during 2007 are set out overleaf.
The Board has conducted a review of the effectiveness of the Group’s systems of internal control. Where weaknesses were identified as part of the control review, mitigating actions have been taken or plans put in place. These are monitored by the appropriate committee on behalf of the Board. The Board is not aware of any significant weaknesses that do not have mitigating actions in place.
The Company’s Investor Relations Department is dedicated to facilitating communication with institutional investors.
The directors consider it important to understand the views of shareholders and, in particular, any issues which concern them. The Board receives reports on matters that have been raised with management at the regular meetings held with the large investors. During the year the Chairman held a meeting with the major institutional investors and attended investor meetings with management. In addition, the Senior Independent Director is available to meet with major shareholders to discuss any areas of concern that cannot be resolved through normal channels of investor communication and arrangements can be made to meet with the Senior Independent Director through the Group Company Secretary. Similarly, arrangements can be made for major shareholders to meet with newly appointed directors. In addition, the Board consults with shareholders in connection with specific issues where it considers appropriate.
The Company’s Annual General Meeting provides a valuable opportunity for the Board to communicate with private investors. At the meeting, the Company complies with the Combined Code as it relates to voting, the separation of resolutions and the attendance of committee chairmen. Whenever possible, all directors attend the Annual General Meeting and shareholders are invited to ask questions during the meeting and have an opportunity to meet with the directors following the conclusion of the formal part of the meeting. In line with the revised Combined Code, details of proxy voting by shareholders, including votes withheld, are made available on request and are placed on the Company’s website following the meeting.
Morley maintains a detailed Corporate Governance and Voting Policy as part of its investment strategy, which underpins its approach to engaging and voting at company general meetings. The policy also extends to cover social, environmental and ethical issues. Its policy is applied pragmatically, after careful consideration of all relevant information. In addition, Morley makes detailed voting reports available to clients and publishes statistics on its website.
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 provides relevant, reliable, comparable and understandable information; – 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.
This report provides details of the role of the Audit Committee and the work it has undertaken during the year. The purpose of the Committee is to assist the Board in discharging its responsibilities for the integrity of the Company’s financial statements, the assessment of the effectiveness of the systems of internal financial controls and monitoring the effectiveness and objectivity of the internal and external auditors. The full terms of reference for the Committee can be found on the Company’s website, www.aviva.com, and are available from the Group Company Secretary.
The Committee met on six occasions in 2007 and each member attended every meeting. 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, NatWest Group plc and The Seagram Company Ltd. The Board is satisfied that these directors have recent and relevant financial experience.
Each of the Group’s major business units has an audit committee that provides an oversight role for its business. All such committees include members who are independent of the relevant business. The Group Audit Director reviews the papers and minutes from these committees and brings all significant matters to the Committee’s attention. In 2007 the Committee made contact with the chairmen of the local audit committees and some members attended local committee meetings.
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 2007 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 2002 and in line with that process there has been a further rotation in audit partner following the sign-off of the statements for the 2006 financial year. Ernst & Young audits all significant subsidiaries of the Group other than Delta Lloyd (the Group’s subsidiary operating in the Netherlands, Belgium, Luxembourg and Germany), which is audited by PricewaterhouseCoopers LLP (PwC). To fulfil its Group reporting responsibilities Ernst & Young reviews the work of PwC in accordance with standard auditing practices.
The Group paid £10.2 million to Ernst & Young LLP for audit services in 2007, relating to the statutory audit of the Group and Company financial statements and the audit of Group subsidiaries and associates pursuant to legislation (2006: £9.2 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 £8.9 million giving a total fee to Ernst & Young of £19.1 million (2006: £15.8 million). Further details are provided in note 12 to the accounts. In addition, the Group engaged the SMART Company in relation to certain assurance work including verification of its Corporate Social Responsibility Report.
Lord Sharman (Chairman) 25 January 2006 To date Guillermo de la Dehesa 21 June 2000 To date Wim Dik 26 April 2004 To date Richard Harvey 21 June 2000 11 July 2007 Andrew Moss 12 July 2007 To date Russell Walls 23 January 2007 To date
As a result of the restructuring of the senior management team during 2007 there has been a reduction in the number of executive directors on the Board. The Committee will review the position during 2008.
The appointment of two new non-executive directors during the year also helps to maintain the balance of the Board in the context of the intended retirement of Guillermo de la Dehesa and Wim Dik during 2008.
The purpose of the Committee is to assist the Board in providing leadership, direction and oversight with regard to the Group’s risk and regulatory policies and procedures, including those related to compliance, risk management, financial malpractice and internal controls. The full terms of reference for the Committee can be found on the Company’s website, www.aviva.com, and are available from the Group Company Secretary.
Mary Francis (Chairman from 1 January 2007) 14 January 2006 To date Nikesh Arora 1 July 2007 To date Wim Dik 14 January 2006 To date Russell Walls 14 January 2006 To date
The Group Chief Executive, Group Finance Director, Group Audit Director, the Chief Risk Officer, the Director of Group Compliance and the external auditor normally attend, by invitation, all meetings of the Committee. Other members of senior management are also invited to attend as appropriate to present reports. It is the Committee’s practice at each meeting to meet separately with the Group Audit Director and the external auditor without any members of management being present. In performing its duties, the Committee has access to the services of the Group Audit Director, the Chief Risk Officer, the Director of Group Compliance, the Group Company Secretary and external professional advisors.
The work of the Committee falls into the following broad areas: Risk management A particular focus of the Committee’s work in 2007 was on improvements to the framework for risk and control across the Group. The Committee was involved in a review of the risk policy (including risk appetite) statements for each of the main categories of risk faced by the Group, and in a review of the processes for identifying, controlling and reporting risks in the business units, regions and Group centre. A new Chief Risk Officer has been appointed. The Committee has also received regular oversight reports on the Group’s key risks and the measures being taken by management to contain them. It has increased its focus on market and other financial risks and will continue to do so in the year ahead.
Regulation and compliance The Committee has reviewed the Group’s regulatory operating plan and has received regular reports on its relationships with its external regulators. In particular, the Committee monitors the actions being taken by management in relation to the Risk Mitigation Programme agreed with the Financial Services Authority (FSA) and the overall relationship with the FSA as the Group’s lead regulator. Reports on any material compliance issues are received by the Committee, including any reputational issues which may arise and the lessons learned. In addition, the Committee receives reports on legislative and regulatory developments which may impact the Group, such as the FSA’s Treating Customers Fairly initiative and the European Union’s Directive on Markets in Financial Instruments.
Group Internal Audit The Group Internal Audit function provides the Committee with independent and objective assurance over the appropriateness, effectiveness and sustainability of the Company’s system of internal controls in place to mitigate significant risks. The Group Internal Audit plan is based on a robust and structured planning process using a risk based methodology that allows for quarterly updates to reflect changes to the Company’s risk profile. Key control issues reported by Group Internal Audit to management and to the Committee members are monitored on a quarterly basis until the risk exposure has been properly mitigated. Reports on financial malpractice are also presented to the Committee including incidence of fraud, anti-money laundering procedures and, at least on an annual basis, arrangements whereby persons can report in confidence any concerns about lack of probity (whistleblowing).
During the Board’s visit to the Group’s North American operations in September 2007, the Committee held joint meetings with the Audit Committee and members of the local business unit audit committees. The meetings allowed the Committee to gain a deeper understanding of the relevant local issues and assess how the Group’s risk, and regulatory policies and procedures were being embedded in the business.
In line with the Combined Code requirement the Board undertook a review of the effectiveness of all its committees during the year, including the Risk and Regulatory Committee.
The purpose of the Committee is to provide guidance and direction to the Group’s corporate social responsibility (CSR) programme, review the risks and opportunities relating to the seven individual elements in the programme (namely: standards of business conduct, environment, human rights and diversity, community, customers, suppliers and employees) 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 available from the Group Company Secretary.
Wim Dik (Chairman) 14 January 2006 To date Guillermo de la Dehesa 14 January 2006 To date Richard Harvey 14 January 2006 11 July 2007 Andrew Moss 12 July 2007 To date Carole Piwnica 14 January 2006 To date Lord Sharman 14 January 2006 To date
The Committee reviewed each business unit’s performance and progress during the year. During the Board’s visit to the Group’s North American operations in September 2007, the Committee held a meeting with the senior managers responsible for CSR in the Group’s businesses in the United States, while the Chairman of the Committee visited the general insurance business in Canada. The meetings allowed the Committee to gain a deeper understanding of the relevant local issues and assess how CSR was being embedded in the business.
Together with the Board, the Committee participated in a knowledge learning session on climate change in April 2007 addressed by a leading climate change scientist. The Committee also reviewed the Group’s carbon offset projects as part of Management’s commitment to become carbon neutral on a global basis.
This report sets out the remuneration policy for the Company’s directors, describes its implementation and discloses the amounts paid in 2007. In addition to meeting statutory requirements, particularly the Companies Act 1985, Schedule 7A, the Remuneration Committee (the “Committee”) has aimed to comply with best practice guidelines, including guidance produced by the Association of British Insurers (ABI) and the National Association of Pension Funds, in producing this report.
– A review of dilution limits – Approval of recommendations on contributions into the Aviva Capital Accumulation Plan – Approval of the 2006 Directors’ remuneration report
May – A review of the use of comparator/market data – Approval of appointment terms and consideration of market trends in executive for Group CEO, Andrew Moss director pay – Approval of the performance
– A market based review of total remuneration for conditions of Aviva USA’s LTIP senior management below executive director level – A review of currency exchange
– A review of Remuneration Committee effectiveness issues in calculating relative TSR for the Aviva LTIP
June – None – Approval of Group Chief Executive Richard Harvey’s retirement terms
– A review of corporate governance and compliance directors’ personal objectives with ABI guidelines on executive pay – Approval of the Terms of
– Consideration of the impact of foreign exchange movements on target setting
December (twice) – Approval of 2008 performance targets for the – A review of executive directors’ operation of the ABP total remuneration
– Approval of executive directors’ personal – Consideration of a proposal to objectives for 2008 introduce a matching element to
– Initial consideration of the 2007 Directors’ ABP deferrals remuneration report – A review of the remuneration of the Chief Executive, Aviva Investors
– Agreement on internal assurance on non-financial performance for the ABP
– A review of Aviva’s current policy on dividends on LTIP shares which vest
Remuneration policy Alignment with Group Strategy The Committee considers alignment between Group Strategy and the remuneration of its senior executives to be critical. It believes that senior executives should be highly rewarded (on a market competitive basis) for the delivery of stretching goals but also should receive reduced rewards when the business performs poorly. To achieve this alignment Aviva’s remuneration package is leveraged, with a high percentage of pay “at risk” against the achievement of stretching goals. Furthermore two-thirds of any bonus and any LTIP grant are delivered in the form of Aviva shares. The requirement to defer bonus and participation in the LTIP closely ties the long term value of executive remuneration to Aviva’s share price performance.
The Group’s strategic priorities and targets are set out elsewhere in this report. Those priorities are reflected closely in our remuneration package: – Basic Salary: Delivering our business plans requires talented senior executives focused on business performance. Overall remuneration is heavily influenced by basic salary. Internal and external equity in basic salary positioning is an important contributor to a motivational remuneration package and hence to delivering our business plan. A range of market data is used to inform decision making taking into account our policy with regard to the FTSE 30 and FTSE 50 data. We wish to win, keep and focus talented individuals on delivering sustained group performance.
– Bonuses: Bonus structures are effective only if they drive, through the targets chosen, sustained profitable growth for shareholders. In choosing targets careful thought also needs to be given to the unhelpful behaviours they might inadvertently promote. These considerations are regularly debated by the Committee. Management is asked to explain and justify the targets recommended for adoption. The Committee must assure itself that the final targets are, firstly, the correct ones to provide incentives and, secondly, are set at an appropriately challenging level. This debate has resulted in significant developments in Aviva’s target setting in recent years. In brief, the moves have been towards a smaller number of financial targets, with emphasis given through gearing to operating profit and new business contribution – two measures of particular relevance to a large life insurance business. The emphasis in 2007 has been to reduce and focus the number of financial measures further for 2008. These financial targets sit alongside targets on customer advocacy and employee engagement introduced in 2005 that the Committee believes are critical to long-term organisational health. The personal objectives of executive directors and executive committee members are also reviewed by the Committee to ensure they adequately reflect the strategic aims of the Group, good governance and best practice.
– The LTIP encourages a longer-term management focus on Return on Capital Employed (ROCE) and relative TSR. These metrics measure how the Company is performing in both relative and absolute terms. It also ensures direct line of sight for executives between, on the one hand, the actual experience of shareholders investing in the insurance sector and Aviva in particular and, on the other, their own financial interests and wealth creation opportunities.
The Committee considers all these elements, plus pension and other benefits, as a whole. They look to ensure that an appropriate balance is maintained between them so that the need for both short-term success and long-term sustainable growth is recognised. The Committee also ensures that the non-financial business measures and individual objectives reflect adequately Aviva’s environmental, social and governance responsibilities and send the right messages to management about the positive behaviours required to meet those responsibilities.
Constituent elements of reward as a percentage of total remuneration The bar charts below show how the Group’s remuneration policy translates in practice into the Chief Executive’s remuneration package. They show outcomes at both “target” and “stretch” levels of performance.
The first bar chart shows the breakdown of the package into its main constituent elements. The second bar chart shows a breakdown which highlights the proportion in the package of fixed cash, variable cash and shares. For the purposes of the second table, 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 both the two-thirds of bonus deferred into shares and the LTIP.
– “Stretch” performance means a stretch bonus outcome (150% of basic salary) and full LTIP vesting (100% of an LTIP award).
The breakdown does not include any share price growth, the dividends on the (ABP) deferred shares or other benefits (cash car allowance, value of Private Medical Insurance (PMI) and all-employee share ownership plans).
– These reference points are chosen to reflect Aviva’s market capitalisation – Long-term savings and comparability to other large, sophisticated multi-national companies – Pension and the positioning that is appropriate to Aviva in those different – Benefits comparator groups. – All-employee share schemes.
Basic salary – Benchmarked as for total remuneration but with positioning and progression – Monthly in cash taking account of individual and business performance and the levels of increase – Reviewed annually in February, provided for the broader UK employee population (basic salaries of the UK staff with changes taking effect increased by 3.5% on average in 2007). from 1 April.
– Deferred shares vest on the third anniversary of the date of grant, subject to the recipient remaining in service. On resignation during the three year deferral period all or part of the grant is forfeited (100% in year of grant, 50% in following year and 25% in year after that).
– Awards to other senior staff vary based on performance over time and potential and are normally up to 150% of basic salary.
Long term savings – The ACAP is a long-term savings vehicle which aids retention whilst recognising – Discretionary payments into a a need for flexibility in long-term wealth planning. trust where they are held for a – Company contributions are discretionary and vary year-on-year, but would not minimum of five years.
normally exceed 50% of basic salary. Contributions for the executive directors are shown in the table on page 97.
Aviva Staff Pension Scheme (ASPS) The UK ASPS provides a competitive post-retirement package. No executive director – Deferred cash payable on is currently accruing service based benefits in the ASPS. retirement in the form of The scheme provides accrual at 1/30, 1/45 or 1/60 of annual basic salary depending on a lump sum/monthly payment. 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/ 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 Retail Price Index (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
Overview of the effect on current executive directors The effect of these policies in 2007 for current executive directors is as follows (details on pension benefits are contained later in this report): Andrew Moss, Group Chief Executive Element Amount Commentary
Basic salary £790,000 during the year. Mr Moss was appointed Group Chief Executive from 1 July with a As at 1 January £700,000 commensurate increase in basic salary. He was previously Group As at 31 December £880,000 Finance Director.
Aviva Capital £398,750 The Trustee of the Plan accepted Aviva’s recommendation and Accumulation Plan made an award into the plan taking account of Mr Moss’s then current and pending roles.
LTIP – face value £825,000 The face value of the grant represented 150% of Mr Scott’s basic of grant salary on 28 February 2007.
Basic salary £525,000 during the year – Mr Harvey received no increase in basic salary during the year. As at 1 January £900,000 As at 31 July £900,000
LTIP – face value n/a – Mr Harvey received no LTIP award in 2007. His 2005 and 2006 of grant LTIP awards will vest in March 2008 and March 2009 to the extent that the Committee determines the performance conditions have been met. Any vested award will be subject to pro-rating for Mr Harvey’s service during the performance period.
Patrick Snowball (Left the Company by mutual agreement on 30 June 2007) Element Amount Commentary
Annual Bonus Plan No payment was made to – Mr Snowball received those ABP shares from the 2006 and 2007 Mr Snowball in respect of deferrals that vested by right under the scheme rules and, 2007 performance additionally, at the Remuneration Committee’s discretion, the balance of those deferrals. – Mr Snowball also received those shares from the 2005 Deferred
Bonus Plan (DBP) award that were his by right under the scheme rules. The Remuneration Committee determined that the 2005 DBP matching shares should be forfeited.
LTIP – face value £825,000 – The face value of the grant represented 150% of Mr Snowball’s of grant (forfeited on departure) basic salary on 28 February 2007.
Personal objectives based on delivery of key strategic priorities, personal leadership and operating performance of the relevant portion of the business account for up to 30% of annual bonus.
Operating profit (EEV/IFRS) 6 20 – Operating profit (IFRS) 3 3 –
Long Term Incentive Plan – target setting The Aviva LTIP vests subject to the achievement of two equally weighted performance measures chosen to reflect shareholders’ long-term interest in absolute (ROCE) and relative (TSR) performance.
ROCE targets are set annually within the context of Aviva’s three year business plan. Vesting depends upon performance over the three year period against a target return. Aviva’s external auditor provides a formal opinion on the ROCE vesting calculation. The 2007 LTIP award has the following three year ROCE targets: ROCE over the three year performance period Percentage of shares in overall LTIP award that vests based on achievement of ROCE targets
Relative TSR determines the vesting of the other 50% of any Aviva LTIP award. The comparator group for the assessment of relative TSR performance under the 2007 grant comprises 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. The 2005 and 2006 LTIP grants are based on the same comparator group but without Standard Life.
Below median 0% Median 15% Between median and upper quintile Prorata between 15% and 50% on a straight-line basis Upper quintile and above 50%
Aviva LTIP 2007 43% Aviva LTIP 2006 46.5% Aviva LTIP 2005 50%
Details of the assumptions used in valuing the LTIP for accounting purposes can be found on page 176 of this report. The vesting assumption made in respect of the 2007 grant for accounting purposes is 50%.
Assumptions are as follows: – Minimum 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.
The vesting history under the previous long term incentive plan is as follows: Percentage of award vesting
3. Richard Harvey resigned from the Board with effect from 11 July 2007. 4. Patrick Snowball resigned from the Board with effect from 8 May 2007. 5. Tidjane Thiam was appointed to the Board on 1 May 2007 and resigned from the Board with effect from 21 September 2007.
The remuneration review also showed that the potential rewards represented by Aviva’s long-term incentives fall short of benchmark figures in the comparator groups for our executive directors.
– The maximum match will be two shares for each share eligible for matching. Vesting of the matching shares will depend upon the Company’s EPS performance over a three year period as follows:Performance Level Annualised EPS Growth Matching Ratio
The Committee has satisfied itself that following the introduction of the matching share element the total remuneration of the CEO and Finance Director would be positioned consistent with our policy on FTSE 30 and FTSE 50 benchmarking. Further details on the proposals are included in the notice of meeting for the 2008 Annual General Meeting.
Aviva plc five-year TSR performance against the FTSE 100 Index and median of the two comparator groups Aviva FTSE 100 Comparator Group Median
Notice period By the director – Six months. By the Company – 12 months, rolling. No notice or payment in lieu to be paid where the Company terminates for cause.
Termination payment – Pay in lieu of notice up to a maximum of 12 months’ basic salary. This may be increased by a discretionary redundancy payment (where appropriate) but any such further termination payment is capped at 12 months’ basic salary.
As at 31 December 2007, based on that day’s closing share price of 673p, Mr Moss’s shareholding of 73,208 shares represented 56% of his basic salary of £880,000 (his holding of 43,377 shares at 1 January 2007 representing 33.2%) and Mr Scott’s shareholding of 291,106 shares represented 344% of his basic salary of £570,000 (his holding of 274,896 shares at 1 January 2007 representing 325%).
External Board appointments Aviva recognises its senior executives can benefit from serving in a personal capacity as a non-executive director of non-Aviva Group companies. Aviva therefore has a policy of allowing senior executives to serve as a non-executive director of one external company, subject to approval by the Board, and to retain any board fees. Exceptionally, a second non-executive directorship might be approved.
All-employee share plans Executive directors 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.
These plans include a share element of the Aviva All-Employee Share Ownership Plan (AESOP). Under this plan, eligible employees can receive up to a maximum of £3,000 per annum in shares based upon the profits of the Company’s UK business. The shares are free of tax subject to a retention period. In addition, the partnership element of the AESOP, which the Company also operates, allows participants to invest up to £125 per month out of their gross salary in the Company’s shares. There is no matching to this investment by the Company.
The Aviva Savings Related Share Option Scheme allows eligible employees to acquire options over the Company’s shares at a discount of up to 20% of their market value at the date of grant. In order to exercise these options, participants must have saved through a three, five or seven-year HMRC approved savings contract, subject to a maximum savings limit of £250 per month.
Between March 1998 and March 2003, the Company met its liability for shares awarded under the incentive plans by funding an employee trust that acquired shares in the market at the time of grant. Details of the shares currently held in the employee trusts are set out in note 30 to the accounts.
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 as follows: Provision Policy
Time commitment – Between 25 and 50 days per annum depending upon Board and Committee requirements and corporate activity.
From 2007 fees will be 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 executive directors, 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 receive no benefits in addition to their fees nor do they participate in any incentive or performance plans or pension arrangements.
NED fees payable from 1 April 2007 are as follows: Chairman £475,000
Committee Chairman – Audit £35,000 (inclusive of committee membership fee) – Remuneration £20,000 (inclusive of committee membership fee) – Risk and Regulatory £15,000 (inclusive of committee membership fee)
Directors’ remuneration in 2007 This section of the report sets out the remuneration paid or payable to the directors in respect of the year to 31 December 2007. The following sections headed “Directors’ remuneration”, “Executive directors’ pension arrangements” and “Share incentive plans” along with their associated footnotes have been subject to audit.
Former directors Derek Stevens* – 99 – – – – – – – 99 André Villeneuve* – 65 – – – – – – – 65 * Retired on 31 December 2006.
4. During the year, shares granted to certain former executive directors under the Company’s incentive plans vested. Details of these awards were fully disclosed in the year of grant.
5. For the purposes of the disclosure required by Schedule 6 to the Companies Act 1985 the total aggregate emoluments of the directors in respect of 2007 was £6.6 million (2006: £7.9 million).
Senior executives’ remuneration The total compensation paid during the year to key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Company, including the Company’s directors and NEDs (as required to be disclosed by International Accounting Standard 24) was £50 million (2006: £53 million) and is set out below in note 58 to the Accounts.
Executive directors’ pension arrangements During 2007 executive directors, with the exception of Mr Harvey and Mr Moss, accumulated pension benefits under the defined benefits section of the Pension Scheme as detailed below.
Richard Harvey1 Andrew Moss2 Philip Scott3 Patrick Snowball4 Tidjane Thiam5 £’000 £’000 £’000 £’000 £’000
Employee contributions during the year7 – – 28 14 12 Transfer value of accrued pension at
3. Mr Scott has been accruing benefits in the Pension Scheme since before June 1989, so was not therefore subject to the HMRC 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 and inflation. 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.
4. Mr. Snowball had been accruing benefits in the pension scheme since before June 1989, so was not therefore subject to HMRC’s Earnings Cap. He continued to accrue benefits in the Pension Scheme until he left the Company on 30 June 2007. His deferred pension at that date is that shown above at 31 December 2007, which will increase until his retirement in line with RPI subject to a maximum of 5%.
5. Mr. Thiam was appointed as Group Executive Director with effect from 1 May 2007. The above shows his benefits, including pensionable service prior to him being appointed an executive director. He ceased to be Group Executive Director with effect from 21 September 2007. The above only allows for benefits up to that date.
9. 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.
Savings related options 2006 1,593 – – – 1,593 593.0 Options lapse March 2008
Notes 1. For the directors appointed in 2007, the amounts disclosed relate to their awards at the date of appointment.
The mid-market price of an ordinary share in the Company on 31 December 2007, being the last business day of the year, was 673 pence, and the mid-market prices during the year ranged from 625 pence to 854 pence. During the year, directors made an aggregate gain of £10,957 upon the exercise of share options.
Shares1 Bonus Plan Awards2 Long Term Incentive Awards3 Options4 1 January 31 December 1 January 31 December 1 January 31 December 1 January 31 December 2007i 2007ii 2007i 2007ii 2007i 2007ii 2007i 2007ii
Former directors i For the directors appointed in 2007, the amounts disclosed relate to their awards at the date of appointment.
* Tidjane Thiam was appointed to the board on 1 May 2007 and resigned from the board with effect from 21 September 2007.
† Richard Harvey resigned from the board with effect from 11 July 2007.
Notes 1. “Shares” are the directors’ beneficial holdings in the ordinary shares of the Company and in respect of the executive directors include shares held in trust under the Company’s 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.
The following changes to directors’ interests which relate to shares acquired each month under the partnership element of the AESOP during the period 1 January 2008 to 29 February 2008 have been reported to the Company.
We review whether the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
Aviva plc (the “Company”), a public limited company incorporated and domiciled in the United Kingdom (UK), together with its subsidiaries (collectively, the “Group” or “Aviva”) transacts life assurance and long-term savings business, fund management, and most classes of general insurance and health business through its subsidiaries, associates and branches in the UK, Ireland, continental Europe, United States (US), Canada, Asia, Australia and other countries throughout the world. The Group also invests in securities, properties, mortgages and loans and carries on the business of trading in property.
The Group is managed using reportable segments based on the above activities. These are long-term business, fund management, general insurance and health, further details of which are given in note 4.
In November 2006, the IASB issued IFRS 8, Operating Segments, the requirements of which are applicable for accounting periods beginning on or after 1 January 2009. On adoption, it will result in amendments to the disclosure of our segmental results but will have no impact on the results overall. The IASB also issued IAS 1, Presentation of Financial Statements: A Revised Presentation, and an amendment to IAS 23, Borrowing Costs, during 2007, neither 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.
Since the year end, the IASB has issued a revised version of IFRS 3, Business Combinations, and an amendment to IAS 27, Consolidated and Separate Financial Statements, which are applicable to accounting periods beginning on or after 1 July 2009, and amendments to IAS 1, Presentation of Financial Instruments, IAS 32, Financial Instruments: Presentation, and IFRS 2, Share-Based Payments: Vesting Conditions and Cancellations, which are applicable to accounting periods beginning on or after 1 January 2009. None of these has yet been endorsed by the EU and, on adoption, will not have any material impact on the Group’s financial reporting.
In accordance with Phase I IFRS 4, Insurance Contracts, the Group has applied existing accounting practices for insurance and participating investment contracts, modified as appropriate to comply with the IFRS framework and applicable standards. Further details are given in policy F below.
The separate financial statements of the Company are on pages 236 to 243.
The table below sets out those items we consider particularly susceptible to changes in estimates and assumptions, and the relevant accounting policy. Item Accounting policy
Insurance and participating investment contract liabilities F & K Goodwill, AVIF and other intangible assets N 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 tax AB
(D) Consolidation principles Subsidiaries Subsidiaries are those entities (including Special Purpose Entities) in which the Group, directly or indirectly, has power to exercise control over financial and operating policies in order to gain economic benefits. Subsidiaries are consolidated from the date on which effective control is transferred to the Group and are excluded from consolidation from the date of disposal. All inter-company transactions, balances and unrealised surpluses and deficits on transactions between Group companies have been eliminated.
Investment vehicles In several countries, the Group has invested in a number of specialised investment vehicles such as Open-ended Investment Companies (OEICs) and unit trusts. These invest mainly in equities, bonds, cash and cash equivalents, and properties, and distribute most of their income. The Group’s percentage ownership in these vehicles can fluctuate from day-to-day according to the Group’s and third party participation in them. Where Group companies are deemed to control such vehicles, with control determined based on an analysis of the guidance in IAS 27 and SIC 12, they are consolidated, with the interests of parties other than Aviva being classified as liabilities. These appear as “Net asset value attributable to unitholders” in the consolidated balance sheet. Where the Group does not control such vehicles, and these investments are held by its insurance or investment funds, they do not meet the definition of associates and are, instead, carried at fair value through profit and loss within financial investments in the consolidated balance sheet, in accordance with IAS 39, Financial Instruments: Recognition and Measurement.
(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.
Unearned premiums are calculated on either a daily or monthly pro rata basis. Premiums collected by intermediaries, but not yet received, are assessed based on estimates from underwriting or past experience, and are included in premiums written.
(H) Other investment contract fee revenue Investment contract policyholders are charged fees for policy administration, investment management, surrenders or other contract services. The fees may be for fixed amounts or vary with the amounts being managed, and will generally be charged as an adjustment to the policyholder’s balance. The fees are recognised as revenue in the period in which they are collected unless they relate to services to be provided in future periods, in which case they are deferred and recognised as the service is provided.
(J) Net investment income Investment income consists of dividends, interest and rents receivable for the year, movements in amortised cost on debt securities, realised gains and losses, and unrealised gains and losses on FV investments (as defined in policy S). Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest income is recognised as it accrues, taking into account the effective yield on the investment. It includes the interest rate differential on forward foreign exchange contracts. Rental income is recognised on an accruals basis.
(K) Insurance and participating investment contract liabilities Claims Long-term business claims reflect the cost of all claims arising during the year, including claims handling costs, as well as policyholder bonuses accrued in anticipation of bonus declarations.
The long-term business provisions are calculated separately for each life operation, based either on local regulatory requirements or existing local GAAP at the later of the date of transition to IFRS or the date of the acquisition of the entity, and actuarial principles consistent with those applied in the UK. Each calculation represents a determination within a range of possible outcomes, where the assumptions used in the calculations depend on the circumstances prevailing in each life operation. The principal assumptions are disclosed in note 38(b). For liabilities of the UK with-profit fund, FRS 27 requires liabilities to be calculated as the realistic basis liabilities as set out by the UK’s Financial Services Authority, adjusted to remove the shareholders’ share of future bonuses. For UK non-profit insurance contracts, the Group applies the realistic regulatory basis as set out in the FSA Policy Statement 06/14 Prudential Changes for Insurers where applicable.
(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. Provisions for certain claims are discounted, using rates having regard to the returns generated by the assets supporting the liabilities. Any estimate represents a determination within a range of possible outcomes. Further details of estimation techniques are given in note 38(c).
The majority of the Group’s contracts classified as nonparticipating investment contracts are unit-linked contracts and are measured at fair value, to be consistent with the value of the backing assets. Certain liabilities for nonlinked non-participating contracts are measured at amortised cost.
Amortised cost is calculated as the fair value of consideration received at the date of initial recognition, less the net effect of principal payments such as transaction costs and front-end fees, plus or minus the cumulative amortisation (using the effective interest rate method) of any difference between that initial amount and the maturity value, and less any write-down for surrender payments. The effective interest rate is the one that equates the discounted cash payments to the initial amount. At each reporting date, the amortised cost liability is determined as the value of future best estimate cash flows discounted at the effective interest rate.
(M) Reinsurance The Group accepts and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Premiums on reinsurance assumed are recognised as revenue in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies, using assumptions consistent with those used to account for these policies.
Gains or losses on buying retroactive reinsurance are recognised in the income statement immediately at the date of purchase and are not amortised. Premiums ceded and claims reimbursed are presented on a gross basis in the consolidated income statement and balance sheet as appropriate.
Acquired value of in-force business (AVIF) The present value of future profits on a portfolio of long-term insurance and investment contracts, acquired either directly or through the purchase of a subsidiary, is recognised as an asset. In most cases, this is classified as AVIF but, for non-participating investment contracts, it is included within intangibles. If this results from the acquisition of an investment in a joint venture or an associate, the AVIF is held within the carrying amount of that investment. In all cases, the AVIF is amortised over the useful lifetime of the related contracts in the portfolio on a systematic basis. The rate of amortisation is chosen by considering the profile of the additional value of in-force business acquired and the expected depletion in its value. The value of the acquired in-force long-term business is reviewed annually for any impairment in value and any reductions are charged as expenses in the income statement.
Investment properties under construction are included within property and equipment until completion, and are stated at cost less any provision for impairment in their values.
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 – Properties under construction No depreciation – Owner-occupied properties 25 years – Motor vehicles Three years, or lease term if longer – Computer equipment Three to five years – Other assets Three to five years
(Q) Impairment of non-financial assets Property and equipment and other non-financial assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of an asset’s net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows.
In general, the FV category is used as, in most cases, the Group’s investment or risk management strategy is to manage its financial investments on a fair value basis. Debt securities and equity securities, which the Group buys with the intention to resell in the short term, are classified as trading, as are non-hedge derivatives (see policy T below). All other securities in the FV category are classified as other than trading. The AFS category is used where the relevant long-term business liability (including shareholders’ funds) is passively managed.
The fair values of investments are 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. 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.
Financial guarantees are recognised initially at their fair value. They are subsequently measured at the higher of the expected receivable or liability under the guarantee and the amount initially recognised less any cumulative amortisation.
For both listed and unlisted AFS securities identified as being impaired, the cumulative unrealised net loss previously recognised within the AFS reserve is transferred to realised losses for the year.
(T) Derivative financial instruments and hedging Derivative financial instruments include foreign exchange contracts, interest rate futures, currency and interest rate swaps, currency and interest rate options (both written and purchased) and other financial instruments that derive their value mainly from underlying interest rates, foreign exchange rates, commodity values or equity instruments. All derivatives are initially recognised in the balance sheet at their fair value, which usually represents their cost. They are subsequently remeasured at their fair value, with the method of recognising movements in this value depending on whether they are designated as hedging instruments and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. Premiums paid for derivatives are recorded as an asset on the balance sheet at the date of purchase, representing their fair value at that date.
Changes in the fair value of derivatives that are designated and qualify as net investment or cash flow hedges, and that prove to be highly effective in relation to the hedged risk, are recognised in a separate reserve within equity. Gains and losses accumulated in this reserve are included in the income statement on disposal of the relevant investment or occurrence of the cash flow as appropriate.
(V) Collateral The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions, certain derivative contracts and loans in order to reduce the credit risk of these transactions. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty.
Where such business is reinsured, an appropriate proportion of the deferred acquisition costs is attributed to the reinsurer, and is treated as a separate liability.
(Y) Leases Leases, where a significant portion of the risks and rewards of ownership is retained by the lessor, are classified as operating leases. Assets held for use in such leases are included in property and equipment, and are depreciated to their residual values over their estimated useful lives. Rentals from such leases are credited to the income statement on a straight-line basis over the period of the relevant leases. Payments made as lessees under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straightline basis over the period of the relevant leases.
(AA) Employee benefits Annual leave and long service leave Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long service leave as a result of services rendered by employees up to the balance sheet date.
The Group has decided to show separately the amounts of policyholder tax to provide a more meaningful measure of the tax the Group pays on its profits. In the pro forma reconciliations, operating profit has been calculated after charging policyholder tax.
(AC) Borrowings Borrowings are recognised initially at their issue proceeds less transaction costs incurred. Subsequently, most borrowings are stated at amortised cost, and any difference between net proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest rate method. All borrowing costs are expensed as they are incurred.
Share issue costs Incremental external costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds of the issue.
Income 5 45,575 Gross written premiums 30,991 28,735 (2,438) Premiums ceded to reinsurers (1,658) (1,501)
Other (109) Other operations and regional costs (74) (25) (231) Corporate centre (157) (160) (534) Group debt costs and other interest (363) (381)
IFRS operating profit before adjusting items and tax attributable 3,276 to shareholders’ profits 2,228 2,609
Adjusted for the following: Investment return variances and economic assumption changes on
(151) Amortisation and impairment of intangibles 17 (103) (64) Short-term fluctuation in return on investments backing general
Pro forma reconciliation of Group operating profit to profit before tax For the year ended 31 December 2007
Pro forma reconciliation of Group operating profit to profit before tax continued For the year ended 31 December 2007
Fair value gains on AFS securities, 253 owner-occupied properties and hedging instruments 34 & 36b 172 374
Issue of share capital for the acquisition of AmerUs in 2006,
Reconciliation of movements in consolidated shareholders’ equity For the year ended 31 December 2007
Assets 4,379 Acquired value of in-force business and intangible assets N & 17 3,197 2,728 3,529 Interests in, and loans to, joint ventures C & 18 2,576 2,795 1,652 Interests in, and loans to, associates C & 19 1,206 895
NonLong -term long-term Restated business business Total Total operations operations 2007 2006
Cash flows from operating activities Cash generated from operations 52a 3,215 1,618 4,833 2,474
Cash flows from investing activities Acquisitions of subsidiaries, joint ventures and associates, net of cash acquired 52b (661) (108) (769) (1,889) Disposals of subsidiaries, joint ventures and associates, net of cash transferred 52c 256 27 283 616 Loans to joint ventures and associates 18a & 19a 33 – 33 (104) Purchases of property and equipment 20 (46) (181) (227) (295) Proceeds on sale of property and equipment 28 65 93 156
Of the total cash and cash equivalents, £96 million (2006: £nil) was classified as held for sale (see note 3(d)).
Cash and cash equivalents in long-term business operations are primarily held for the benefit of policyholders and so are generally not available for use by the Group.
1 – Exchange rates The Group’s principal overseas operations during the year were located within the Eurozone and the United States. The results and cash flows of these operations have been translated into sterling at an average rate for the year of 11 = £0.68 (2006: 11 = £0.68) and £1 = US$2.00 (2006: £1= US$1.84). Assets and liabilities have been translated at the year end rate of 11 = £0.73 (2006: 11 = £0.67) and £1 = US$1.99 (2006: £1= US$1.96).
The new definition uses “expected rates of investment return” to report the operating profit of our long-term savings business, thus bringing this business into line with the way we report our general insurance and health operating profit. It also brings the methodology used for the IFRS basis into closer alignment with that used for the European Embedded Value (EEV) basis, which is the industry’s alternative performance measure.
The change in definition does not affect the underlying performance, the economics of our business, the profit before tax attributable to shareholders or the profit for the year being restated. It only changes the allocation of profit between operating and non-operating elements.
The key changes to our definition of IFRS operating profit are: (i) Operating profit is now based on the investment returns that the Group expects to make on the financial investments that back the shareholder and policyholder funds of its long-term business over the reporting period, rather than the actual returns on these investments. The difference between the expected return and the actual return on investments, and the corresponding impact on liabilities, is shown below the operating profit line.
(b) Restatement of prior year figures (i) Gross up for cash collateral received The Group enters into stock lending transactions and receives cash or non-cash collateral to reduce the Group’s exposure to counterparty credit risk. Collateral received in the form of cash is then lent out at market rates of interest. During 2007, we identified that certain cash collateral transactions should have been historically recognised on the balance sheet, with a corresponding obligation to return this collateral, instead of showing a net nil position.
As a result, the figures for loan assets and payables and other financial liabilities as at 31 December 2006 have been restated by increasing them both by £2,129 million. The equivalent adjustment at 1 January 2006, the start of the comparative period, would have been to increase both loan assets and payables and other financial liabilities by £120 million.
3 – Subsidiaries This note provides details of the acquisitions and disposals of subsidiaries that the Group has made during the year, together with details of businesses held for sale at the year end. The principal Group subsidiaries are listed on page 268 to 269.
(i) Erasmus Group On 26 March 2007, the Group’s Dutch subsidiary, Delta Lloyd, acquired 100% of the shares in Erasmus Groep BV (“Erasmus”) in the Netherlands. Erasmus writes both general insurance and long-term business, and the acquisition has further strengthened Delta Lloyd’s position in the Dutch insurance market.
The Erasmus acquisition has not given rise to any goodwill on acquisition. The relevant calculation is as follows: Purchase cost: £m
Assets Acquired value of in-force business on insurance contracts – 6 6
Reinsurance assets 33 – 33 Receivables and other financial assets 22 – 22 Prepayments and accrued income 13 – 13 Cash and cash equivalents 35 – 35
The value of Erasmus’s distribution channels has been identified as a separate intangible asset and valued by an independent third party at £8 million, using estimated post-tax cash flows and discount rates. It has been assessed as having a life of 20 years and is being amortised on a straight-line basis over that period. As permitted by IFRS 4, Insurance Contracts, an intangible asset of £12 million has also been recognised for the impact of discounting the non-life insurance liabilities, to bring them to fair value. This intangible asset will be amortised over the life of the relevant non-life insurance contracts.
3 – Subsidiaries continued The acquisition of the initial 5% shareholding has given rise to goodwill on acquisition of £2 million, calculated as follows: Purchase cost: £m
The Group does not have management control of Banca Network and so accounts for it as an investment in an associate. The total consideration was £49 million, comprising cash consideration of £46 million and contingent consideration of £3 million (representing the present value of future expected performance-related consideration). The fair value of the Group’s share of Banca Network’s identifiable net assets at the date of acquisition was £27 million. The residual goodwill of £22 million has been included in the carrying value of the investment in associate (see note 19).
The assets and liabilities above have been stated at their provisional fair values and may be amended in 2008, in accordance with paragraph 62 of IFRS 3, Business Combinations.
(c) Bancassurance agreement via Avipop Assicurazioni On 14 December 2007, the Group entered a long-term bancassurance partnership in protection and non-life insurance with Banco Popolare that will further strengthen the Group’s bancassurance presence in Italy and creates a new opportunity in the fast-growing protection sector.
The Group paid £184 million to secure the long-term bancassurance agreement with Banco Popolare and to acquire 50% plus one share of Avipop Assicurazioni SpA (Avipop Assicurazioni), a non-life subsidiary of the bank. Life protection business will be written in a subsidiary of Avipop Assicurazioni, which will begin trading later in 2008, subject to regulatory approval. The Group has the majority of the voting rights and management control of Avipop Assicurazioni and has therefore fully consolidated it as a subsidiary.
Liabilities Gross insurance liabilities (1) – (1) Deferred tax liability – (125) (125) Other liabilities (1) – (1)
The residual goodwill represents the impact of recognising a deferred tax liability on the intangible asset.
The assets and liabilities as at the acquisition date in the table opposite are stated at their provisional values, and may be amended in 2008, in accordance with paragraph 62 of IFRS 3, Business Combinations.
The residual goodwill represents the value of the company’s workforce and a premium paid for the investment concepts developed in the company, based on Cyrte’s expertise in the telecommunications, media and technology sectors. No material intangible assets were identified.
The Group has also invested £209 million in three funds, managed by Cyrte Investments, giving it an ownership interest in the three funds of between 13% and 18%. These funds have been accounted for as investments in associates, as Cyrte Investments is the general partner of the funds and the Group’s holding gives it significant influence on the investment committee, the management board of the funds. The Group’s investment of £209 million has been included in interests in associates in note 19.
Assets Investments 68 Reinsurance assets 24 Cash and cash equivalents 25 Other assets 24
3 – Subsidiaries continued The acquisition of Hamilton Life Assurance Company Limited (Hamilton Life) has given rise to goodwill on acquisition of £21 million, calculated as follows: Purchase cost: £m
Assets Acquired value of in-force business on investment contracts – 3 3
Included in the consideration paid and goodwill arising on the Hamilton Life acquisition is £20 million in respect of unrecognised deferred tax assets, which the Group may be able to utilise in future years but cannot recognise now.
Of the above pre-tax profit, £17 million has arisen since acquisition.
(ix) Non-adjusting post-balance sheet events (a) Acquisition of UBI Assicurazioni Vita On 17 January 2008, the Group announced that it had reached an agreement with Unione di Banche Italiane Scpa (UBI Banca) for the acquisition of 50% plus one share in UBI Assicurazioni Vita SpA., an Italian life insurance company whollyowned by UBI Banca, for a consideration of £49 million. Completion of the transaction is subject to certain conditions and the approval of the relevant regulatory authorities, and is expected to take place in the first half of 2008.
(c) Investment in LIG Life Insurance Co. Ltd. On 31 January 2008, the Group announced that it would be entering the South Korea life insurance market by agreeing to acquire jointly with Woori Finance Holdings Company Ltd (“Woori”) a 91.65% stake in LIG Life Insurance Co. Ltd (“LIG Life”), a South Korean life insurance company, for KRW 137.2 billion (£73 million). After completion, the Group will hold 40.65% of LIG Life. Aviva and Woori plan to develop LIG Life’s business distribution, predominantly through bancassurance via Woori’s banking network and independent financial advisors.
(c) Integration and restructuring costs £153 million of integration and restructuring costs have been included in the results to 31 December 2007 (2006: £246 million). These include £45 million relating to the UK cost and efficiency programme announced in 2006. This initiative has now been completed at a total cost of £250 million. The costs also include £82 million relating to the new savings targets announced in October 2007. Further costs of this programme are expected to be £248 million, spread over the next two years. The balance of £26 million relates to the completion of integration activity on Ark Life in Ireland and the former AmerUs business in the United States, which were both acquired in 2006.
(i) Assets and liabilities of operations classified as held for sale The assets and liabilities of operations classified as held for sale as at 31 December 2007 relate to our Dutch health insurance businesses, and were as follows: £m £m
Gross insurance liabilities (627) – Borrowings (12) – Payables and financial liabilities (72) – Other liabilities (220) – Tax liabilities and other provisions (11) –
(ii) Dutch health insurance business On 16 July 2007, the Group announced that its Dutch subsidiary, Delta Lloyd Group (DL), had reached an agreement to sell its health insurance business to OWM CZ Groep Zorgverkeraar UA (CZ), a mutual health insurer, and create a long-term alliance for the cross-selling of insurance products. Under the terms of the agreement, CZ will purchase the DL health insurance business and take on its underwriting risk and policy administration. DL will continue to market and distribute health insurance products from CZ to its existing customers, and to provide asset management for the transferred business. DL will also have exclusive rights to market life, general insurance and income protection products to CZ’s customers. The transaction is expected to take effect on 1 January 2009, subject to regulatory, competition and other relevant approvals.
Dutch Law changed in October 2004 to ensure that Supervisory Board directors in Dutch companies were henceforth to be elected by a company’s shareholders voting on nominations made by its Supervisory Board and the Works Council.
Under the previous system, Supervisory Board directors appointed their own successors. In 2006, Delta Lloyd commenced proceedings against Aviva plc to try to compel the Company to adhere to the system that existed prior to the change in the law, on the basis of agreements they say were entered into in 1973 when the Group acquired Delta Lloyd. The Company disputes these claims and does not expect the litigation, whatever its outcome, to have any adverse effect on the financial or operational performance of Delta Lloyd or the Group. We expect a judgement from the court on this issue sometime in 2008, which either party will then have the ability to appeal.
General insurance and health Our general insurance and health business provides insurance cover to individuals and to small- and medium-sized businesses, for risks associated mainly with motor vehicles, property and liability, such as employers’ liability and professional indemnity liability, and medical expenses.
Other Other activities not related to the core business segments or which are not reportable segments due to their immateriality, such as the RAC non-insurance operations, our banking businesses and service companies, are included as “Other” in the following tables.
Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance sheet but excluding items such as tax and certain borrowings.
Segment result before share of profit/(loss) of joint ventures and associates 1,868 148 714 (310) 2,420
Share of profit/(loss) of joint ventures and associates (297) (9) 3 (1) (304)
Unallocated costs Finance costs on central borrowings (see overleaf) (259) Tax attributable to policyholders’ returns (15) Tax attributable to shareholders’ profits (337)
Pro forma reconciliation to operating profit before tax attributable to shareholders’ profits General
Finance costs on central borrowings – – – (259) (259) Adjusted for the following: Investment return variances and economic assumption changes on long-term business (15) – – – (15)
Less: Tax attributable to policyholders’ returns (15) – – – (15)
Inter-segment revenue – 199 – – 199 Profit on the disposal of subsidiaries and associates 11 – 88 123 222
Claims and benefits paid, net of recoveries from reinsurers (16,523) – (6,921) – (23,444) Change in insurance liabilities, net of reinsurance (2,594) – (26) – (2,620) Change in investment contract provisions (6,002) – – – (6,002) Change in unallocated divisible surplus (558) – – – (558)
Share of profit/(loss) of joint ventures and associates 471 (7) 5 16 485
Unallocated costs Finance costs on central borrowings (see below) (230) Tax attributable to policyholders’ returns (346) Tax attributable to shareholders’ profits (588)
Less: Tax attributable to policyholders’ returns (346) – – – (346)
Operating profit before tax attributable to shareholders’ profits 1,334 155 1,686 (566) 2,609
Acquired value of in-force business and intangible assets 2,628 12 424 133 3,197 Interests in, and loans to, joint ventures and associates 3,509 47 4 222 3,782
Liability for investment contracts 98,244 – – – 98,244 Unallocated divisible surplus 6,785 – – – 6,785 Net asset value attributable to unitholders 3,934 – 46 – 3,980
Acquired value of in-force business and intangible assets 2,301 18 287 122 2,728 Interests in, and loans to, joint ventures and associates 3,526 44 39 81 3,690
(i) Reporting segments The Group’s business is managed on a regional basis in four main geographical areas. These are United Kingdom (UK), Europe, North America and Asia Pacific.
Notes to the consolidated financial statements continued 4 – Segmental information continued
(ii) Segmental results and balance sheets – geographical segment United North
Net change in provision for unearned premiums 42 (22) (40) (1) (21)
Net change in provision for unearned premiums 126 (22) (9) (2) 93
Fee and commission income Fee income from investment contract business 416 410 Fund management fee income 576 395 Other fee income 481 779 Reinsurance commissions receivable 223 204 Other commission income 110 98 Net change in deferred revenue (46) (16)
Dividend income 2,095 2,115 Other income from investments designated as trading
Insurance contracts 14,743 12,460 Participating investment contracts 5,604 4,350 Non-participating investment contracts 64 428
Claims and benefits paid to policyholders on general insurance and health business 7,779 7,232
Claims and benefits paid, net of recoveries from reinsurers 27,121 23,444
Change in insurance liabilities Change in insurance liabilities 3,360 1,649 Change in reinsurance asset for insurance provisions 147 971
Change in investment contract provisions Investment income allocated to investment contracts 885 3,122 Other changes in provisions
Staff costs and other expenses 2,724 2,750 Central costs and sharesave schemes 163 160
Impairments Net impairment/(reversal of impairment) on loans 9 (4) Net impairment/(reversal of impairment) on financial investments 49 (1) Net impairment on receivables and other financial assets 1 5 Net impairment on non-financial assets (1) –
Other net foreign exchange (gains)/losses (34) 29 Finance costs (note 7) 1,208 847
Financial statements 7 – Finance costs This note analyses the interest costs on our borrowings (which are described in note 47) and similar charges.
Interest expense on core structural borrowings Subordinated debt 179 169 Debenture loans 25 32 Commercial paper 55 29
Interest expense on operational borrowings Amounts owed to credit institutions 38 69 Securitised mortgage loan notes
The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return on investments and the impact of experience variances and assumption changes for non-economic items. The effect of differences between actual and expected experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside operating profit. For many types of long-term business, including unit-linked and with-profits funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business the profit impact of economic volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.
Where assets are classified as fair value through profit or loss, the Group has applied the same “real-world” economic assumptions for fixed interest securities, equities and properties as are used under EEV principles. The principal assumptions underlying the calculation of the expected investment return are: Expected return Expected return Expected return Fixed interest Equities Properties
9 – Longer term investment return for general insurance and health business For general insurance and health business, the total investment income, including realised and unrealised gains, is split between a calculated longer term return and short-term fluctuations from this. This note gives details of the longer term return calculation and the relevant assumptions.
Financial statements 9 – Longer term investment return for general insurance and health business continued
(c) The longer term investment return is calculated separately for each principal general insurance and health business unit. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer term rate of investment return. The longer term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated longer term return for other investments is the actual income receivable for the year.
(d) The total assets supporting the general insurance and health business, which contribute towards the longer term return were £18,291 million (2006: £19,718 million).
The principal assumptions underlying the calculation of the longer term investment return are: Longer term rates of return Longer term rates of return
The Group has applied the same economic assumptions for equities and properties as are used under EEV principles to calculate the longer term investment return for its general insurance and health business.
Equities 1% higher/lower Group operating profit before tax 27 31 Properties 1% higher/lower Group operating profit before tax 4 4 10 – Employee information This note shows where our staff are employed throughout the world and analyses the total staff costs.
Number Number Number Number * Including support staff in India and Sri Lanka.
** The lower average number in 2006 reflects the inclusion of AmerUs staff only since November 2006.
Wages and salaries 1,831 1,798 Social security costs 229 216 Post-retirement obligations
Defined benefit schemes (note 46d) 191 213 Defined contribution schemes (note 46d) 63 71
Profit sharing and incentive plans 169 148 Equity compensation plans (note 29d) 50 48 Termination benefits 9 31