Front cover imagery: Extraordinary portraits of some of the extraordinary customers and employees who are celebrated in our You Are The Big Picture campaign. Our business isn’t about policies. It’s about people.
Corporate responsibility report online In our online Corporate responsibility report you can fi nd out more about our commitment to acting as a responsible member of the international business community.
You can view our Corporate responsibility report here www.aviva.com/cr2010 2010 Annual report and accounts You can fi nd more detailed information regarding Aviva’s performance during 2010 from our online Annual report and accounts. Providing our reports electronically online allows us to reduce the paper we print and distribute.
“In good and bad times people need to feel secure. As a leading insurance company, we’re here to help create prosperity and peace of mind for our customers.”
Aviva is the world’s sixth-largest insurance group. Our premium income and investment sales were £47.1 billion in 2010. We provide more than 53 million customers with insurance, savings and investment products. We are the UK’s largest insurer and one of Europe’s leading providers of life and general insurance. We combine strong life and general insurance and asset management businesses under a single strong brand, focused on providing customers with prosperity and peace of mind. This combination provides us with reliable revenues from diverse sources and helps us to fund and grow our business more efficiently.
Aviva Investors 3% of Group operating profits 300 years of heritage £260bn Aviva Investors funds under management (as at 31 December 2010)
25.5p 2010 full year dividend 26.1% Growth in operating profit (as at 31 December 2010)
£2.55bn IFRS Group operating profit 14.8% IFRS return on equity (as at 31 December 2010)
Our business Our business helps our customers to manage the risks of everyday life and protects them long into the future. We must be there for them throughout their lives and beyond, so it’s crucial we are a sustainable and profitable business, for the mutual benefit of our customers and our shareholders.
Society We want to encourage more people to secure their financial futures. We’re committed to working with our customers, Governments, regulators, charity partners and business partners to find solutions that increase the financial well- being of both individuals and society.
On a Saturday afternoon, Sylvia Cooper was rushed into hospital for a life-saving operation. First thing on Monday morning her husband Allen phoned Aviva. He was a little apprehensive because he had not been able to clear the operation costs beforehand. Aviva advisor Hayley Gerrard told him not to worry. She took it upon herself to make sure that all the expenses were cleared and called Allen daily to check on Sylvia’s progress.
“I said to my son before I called, I just hope I don’t get a jobsworth,“ Allen recalls. “But I didn’t. I got Hayley – an angel.”
At Aviva, we know insurance is not about policies. It’s about recognising the people behind them. That’s why our ‘You are the Big Picture’ campaign, through giant portraits and online stories, celebrated the people who are most important to us – our customers and our employees.
Highlights In 2010 we delivered total IFRS operating profit growth of 21% to £1,411 million We achieved record operating profits in our life business up 26% to £850 million with sales up 19% to £11,846 million
Aviva provides 18 million customers across Europe with life, general and health insurance products, through our multi-channel distribution network. We are creating one market-leading, pan-European business to capitalise on the opportunities in the world’s largest life and pensions market. By bringing together our European markets to form one business, we are able to operate more efficiently, and take full advantage of our scale and market-leading position. As we have rationalised our product suite and established new pan-European centres of excellence, we have adopted best practice across the region, enhancing Aviva’s customerfocus and multi-channel distribution. Aviva is a clear leader in bancassurance in Europe, with 55 relationships across the region. In 2010 we identified an annual pension savings gap of €2.4 trillion1 in Europe, demonstrating the size and potential of the European pensions market and the significant opportunity that exists for Aviva.
1 Includes the 27 countries of the European Union and the countries of Russia and Turkey
Our Quantum Leap transformation plan, a simplified product set and management focus on cost discipline have enabled run costs to be maintained level with 2009
The North America region is home to two of the world’s largest and richest economies. We are focusing on building our position and competitiveness in these markets to actively capitalise on Aviva’s financial strength and leverage our strong high quality relationships with our distribution partners. Aviva North America has four million customers and operates through two businesses - our life and annuity insurance business in the United States and general insurance business in Canada. This gives us access to a population with attractive demographics and a growing desire for products that offer peace of mind. We continue to grow our share of the Group’s operating earnings, through active management of our spread and insurance underwriting businesses together with disciplined cost management. We have a clear focus on delivering compelling propositions supported by enhanced service to our customers and also strengthening and expanding our successful distribution relationships throughout the region.
Highlights In 2010 we delivered strong results growing our total regional IFRS operating profit by 77% to £376 million
Aviva Investors is the integrated asset management business of the Aviva Group, managing funds for Aviva and a growing range of third party clients. Our strategy for growth is focused on leveraging our Aviva parentage and insurance heritage to further increase thirdparty assets under management. We enjoy a close and mutually beneficial relationship with Aviva, supported by the financial strength and global brand presence of the Group and, in return, delivering investment know-how, strong and sustainable returns and support financial risk management initiatives. We have made considerable progress in developing the infrastructure necessary to meet our objectives and are seeing the benefits of this through improved sales performance. Our focus in 2011 will be on accelerating growth in third-party sales to deliver improved profitability.
We achieved strong growth in net funded external sales (excluding liquidity funds), up from an outflow of £236 million in 2009 to inflows of £2,364 million (at 31 December 2010)
As a leader in the insurance industry we have an important role to play in partnership with governments to address the challenge of long-term savings and pensions, and more broadly with climate change.
Last year our staff volunteered over 57,250 hours of their time
We are working with the United Nations on its sustainable stock exchange initiative, established to encourage stock listing organisations to require inclusion of sustainability-related information in annual reporting www.aviva.com/corporate-responsibility/street-to-school/
Corporate responsibility Perform ance review Aviva plc Annual Report and Accounts 2010
Chairman’s statement 08 Group chief executive’s review 10 Our strategy 14 Financial highlights 16
Independent auditor’s report 168 Accounting policies 170 Consolidated income statement 183 Pro forma reconciliation of Group operating profit to profit before tax
Consolidated statement of changes in equity 187 Consolidated statement of financial position 189 Consolidated statement of cash flows 190 Notes to the consolidated financial statements 191 Financial statements of the Company 306
Reconciliation of IFRS total equity to MCEV net worth for life and related businesses
Corporate responsibility Aviva has continued to lead the way in helping to shape better futures for people around the world. For example, we have driven the debate about creating a cultural change in how people think about saving by convening the Future Prosperity Panel in conjunction with the Economist Intelligence Unit. We have also worked hard to promote our corporate responsibility principles across the business and they have become part of everyday life at Aviva. This year we have continued to support Save the Children and Child Rights and You, through our inspiring Street to School initiative. We are carbon neutral worldwide and have been so since 2006 and have a corporate sustainability programme which is industry-leading. You can read more about these and our other commitments in our Corporate Responsibility report on page 75.
Changes to the Board In January 2011, we announced that Andrea Moneta, chief executive of Aviva Europe, Middle East and Africa, would be leaving the Group. We welcomed Igal Mayer, formerly chief executive of Aviva North America, as the new CEO, Aviva Europe, who has been appointed to the Board.
Leadership and effectiveness of the Board I am pleased to confirm that the Board is compliant with the principles of the new UK Corporate Governance Code relating to the leadership and effectiveness of the Board. These principles are closely aligned to the corresponding principles of the Combined Code on Corporate Governance (Combined Code) which are still applicable for the financial year ending 31 December 2010. In applying these principles, the Board has ensured that there is a clear distinction between the leadership of the Board and the executive leadership of the Company by the Group chief executive officer. The Board has also adopted detailed terms of reference for the Board and its committees, as well as a rigorous and transparent procedure for the appointment of new directors. The continued effectiveness of the Board is assessed annually through a formal evaluation process. For further details of how we have applied the principles of the Combined Code, please see our Corporate Governance Report on pages 100 to 108.
Aviva plc Annual Report and Accounts 2010 Group chief executive’s review
We have created a strong platform for profitable growth... With the global economy in the grip of a financial crisis, we have created a strong platform for profitable growth, taking decisive management actions to improve our productivity and efficiency. The steps we have taken as part of our ‘One Aviva, twice the value’ strategy have helped us achieve this. We have simplified and streamlined the Group, moving from a federation of independent businesses to a successful, global business operating under a single, strong brand. This has strengthened the business and enabled us to serve our customers better.
Our customers are at the heart of our success... Aviva’s resilience and improving performance are underpinned by the scale of our customer base, now over 53 million strong. Against an uncertain economic backdrop, customers are looking to save more for their financial security. Investment performance and customer demand for our products increased total funds under management by £23 billion to £402 billion in the year. Through our determination to focus on meeting customers’ needs effectively and efficiently, we are attracting new customers and giving existing customers greater reason to stay with Aviva.
...as we continued to grow the business profitably... During the year we maintained our emphasis on growing the business profitably. We ensured that we allocated our capital to areas where we could earn optimal returns and continued to bear down on costs. We reduced our cost base by £149 million, a reduction of 3%, and over the last three years we have taken more than £750 million of costs out of the business. With this combination of keeping down costs and pursuing profitable growth, Aviva’s life business is now significantly more profitable than it was three years ago and the momentum is continuing. In general insurance, absolute cost savings combined with rising sales and disciplined underwriting have driven a significant improvement in profitability. These improvements helped to drive IFRS operating profit up by 26% to £2,550 million and earnings per share increased by 33% to 50 pence. In addition, the consultation on the planned closure of Aviva’s final salary staff pension scheme was completed during the year. Moving all UK staff to a defined contribution scheme from 1 April 2011 has benefited Aviva’s net asset value by £286 million and will reduce funding costs by £50 million a year.
In Asia Pacific we have made great strides in the growth of our franchise. Life and pensions sales were up 48%5 and IRRs improved significantly from 6%5 to 11% through active management of the product mix and capital discipline. Our general insurance performance is a very important highlight of 2010. Over the last couple of years, we took tough decisions to move away from unprofitable business, particularly in the UK. This means that, from a sound footing, we are now growing in a market which shows some signs of improvement and total general insurance and health net written premiums increased by 6% to £9,699 million. Our offering is proving very successful. In the UK general insurance business, net written premiums were 5% higher at £4,046 million in 2010 and we delivered four consecutive quarters of sales growth. In Aviva Europe the COR was 103%, and although some of this was due to poor weather this is an area for further improvement in 2011. In Canada – our secondlargest general insurance business – our decision to exit unprofitable business contributed to a 54% increase in operating profit to £222 million on slightly lower sales, down 3% to £1,958 million on a constant currency basis. Across the general insurance business we achieved a COR of 96.8%, better than our 2011 target of 97%. The strength of our bancassurance performance was particularly pleasing. Our combination of life and general insurance and our excellent products and services in both areas make us an attractive business partner and during 2010 we announced new arrangements with Santander and Royal Bank of Scotland. We have over 100 bank partnerships and longterm savings sales in this area grew by 10% in the year. Aviva Investors, our global asset management business, grew assets under management by 4% to £260 billion. IFRS operating profits were down from £115 million in 2009 to £100 million in 2010 as we continued to invest in the business. Despite the unpredictable nature of the financial markets, investment performance was ahead of target for Aviva Investors with 73% of its funds beating benchmark. The business has also made good progress in the development of a global infrastructure which will help to reinforce the focus on delivering strong growth in third-party business. Net funded external sales rose from £236 million outflows in 2009 to £2,364 million inflows in 2010. Overall, our results in life, general insurance and asset management have been largely unaffected by foreign exchange movements.
Cash and capital is a clear differentiator... We took time in 2010 to highlight to analysts and shareholders the strength of our cash and capital generation. Indeed, we generate substantially more capital than any other insurer in the UK. Given the strength of our business across life and general insurance, and with over 30 million customers on long-term contracts, a key characteristic of Aviva is the strength of our cash flows and our capital position. 2010 saw a £3 billion increase in expected future cash flows from our in-force life book to £36 billion. Last year we forecast net operating capital for the year of £1.5 billion. We have beaten that guidance, delivering £1.7 billion net operating capital in 2010 – an increase of 70% on 2009.
...supporting a healthy and growing dividend It is the strength of our capital generation and our balance sheet which support a healthy and growing dividend. For 2010, we intend to pay a dividend of 25.5 pence, an increase of 6% over 2009.
3. Building on our core strengths in marketing and distribution expertise, technical excellence, operational effectiveness and financial discipline. We already perform well in these areas, but by focusing our efforts and resources we aim to excel at each of them, and enhance Aviva’s position as a leading insurer.
In 2010 we demonstrated our ability to meet these targets as we generated £1.7 billion net operational capital; delivered a life new business IRR of 12.5% and a general insurance COR of 96.8%.
Building a strong and sustainable business. Our business helps our customers to manage the risks of everyday life and to secure their financial futures. We must be there for them throughout their lives and beyond, so it is crucial we are a sustainable and profitable business, for the mutual benefit of our shareholders and our customers. Our sustainability and financial strength are underpinned by effective risk management, which allows us to predict future changes, move more quickly and take better decisions for our customers, giving them prosperity and peace of mind.
Poland Ireland £1.5bn of net operational capital generation in 2011 £200m of cost savings and £200m of cost effi ciency gains by the end of 2012 97% COR or better in general insurance by 2011 12% Life IRR with payback of ten years or less
Strong platform for profitable growth We have simplified and streamlined the Group, moving from a federation of independent businesses trading across 40 different brands to a successful business operating under a single strong brand. We have reduced costs significantly, strengthened the balance sheet and improved profitability.
We will focus on growing profits in Canada and the US
In Canada we will focus on being a great underwriting company
We will focus on the high priority markets of China and India
Benefiting from the combination of life and general insurance Our life and general insurance operations are excellent businesses in their own right, but in addition to their inherent strengths there are significant advantages to running these businesses under one brand and in one group. Aviva Investors, our global asset manager, is dedicated to building and providing focused investment solutions for clients and continues to target growth in third-party assets to drive franchise value.
Cash flows The diversity of our business drives more resilient cash flows and earnings than single line insurers through the cycle
Half of Aviva’s net cash flow is generated from general insurance businesses
Cost and efficiency We gain clear scale benefits and cost synergies from having life, general insurance and asset management in one group, including the operational benefits of shared back-office functions, IT and finance resources
Customer and distribution The power of Aviva’s brand differentiates our life, general insurance and asset management businesses This combination makes Aviva an attractive business partner and has allowed us to develop global leadership in bancassurance
Marketing and distribution expertise Leveraging our multi-channel distribution network will provide access to millions of potential new customers We will further develop our sales effectiveness to deliver a broad range of products and services to new and existing customers
Technical excellence First class technical skills will enable us to offer our customers excellent products at competitive prices
We will continue to develop our disciplined approach to underwriting and pricing
Operational effectiveness Our focus on meeting customer needs will enhance loyalty, improve retention and enable us to sell more products
Continually seeking opportunities to streamline our processes will drive efficiency and improve customer service
We will continue to invest in our market-leading claims management expertise
Financial discipline We will allocate capital rigorously to the opportunities that provide the best risk-adjusted returns Managing our portfolio selectively will enable us to invest and deepen our presence in our priority markets We will balance sales growth with profitability of new business We will manage investment risk and gearing effectively
Aviva plc Annual Report and Accounts 2010 * From continuing operations including share of associates’ premiums ** Before tax attributable to shareholders *** On a MCEV basis from 2007. Prior years presented on an EEV basis
The key measures used by the Board and executive management team to assess performance at a Group level are set out below.
Earnings per share Our IFRS earnings per share for 2010 was 50.4 pence (2009: 37.8 pence). This reflects strong growth in UK, Europe and the US.
Our intention is to pay a dividend on a basis judged prudent using dividend cover of 1.5–2.0 times, while retaining capital to fund future growth.
3, 3, 3, 3, 3, 2, 2, 2, 2, 2, 2009 MCEV operating profit has been restated – see Financial Statements MCEV
Worldwide sales Total worldwide sales increased by 4% in 2010 to £47,059 million (2009: £45,068 million). Long-term and savings sales increased by 4% to £37,360 million (2009: £35,875 million). General insurance and health sales of £9,699 million (2009: £9,193 million) were up by 6%.
The survey results are used each year to determine and implement actions with the aim of achieving continuous improvement. The survey measures employees’ perceptions of leadership, engagement and more, verifying alignment with our strategic direction and immediate business plans.
Customer advocacy gives us, in a single, simple measure, an accurate predictor of customer retention and cross-sell opportunity.
Strategy We want to become the most recommended company in our market – by our customers, distributors and our people. To do this we aim to excel in each of the markets in which we operate, while creating additional value by operating our life and general insurance businesses together. We aim to maintain our market leadership by: Offering a broad range of market-leading products across long-term savings, health, general insurance and motoring services
Maintaining a clear focus on the customer; simplifying our processes and improving our service and retention, while increasing the number of policies each customer holds
Ensuring strong financial discipline, including excellence in underwriting, claims management, asset liability management and an ongoing focus on costs.
Market environment In 2010 economic uncertainty continued, with its consequent impact on consumer confidence, discretionary spending and investment performance. However the long-term savings market returned to growth, following two consecutive years of contraction. We gained market share in annuities and core protection as customers turned to strong brands they can trust, like Aviva. The general insurance market remained highly competitive. The most notable trend in 2010 was a rise in personal motor premiums across the industry in response to the recent increases in bodily injury claims costs and frequencies. Elsewhere, the competitive environment has constrained increases in homeowner and commercial lines.
Benefiting from the trust, confidence and visibility of being the UK’s leading insurance brand and customer franchise We have 19 million customers in the UK, meaning that one in three households has an Aviva relationship and we continue to invest in developing our brand and customer franchise. We have embedded strong customer focus in everything we do by making it part of our reward package for every member of staff. In 2010 service improved across our business on all measures and we launched a number of innovative new services that allow customers to benefit from our expertise through their mobile devices.
Becoming the partner of choice Our strategic partnerships with leading banks and other leading organisations delivered strong financial results in 2010 with an IRR of 15% and a COR of 96%. We are now the leading UK bancassurer based on both new business volume and breadth of offer. We strengthened this market-leading distribution with some significant wins in 2010 and will build further on these in 2011. In our exclusive relationship with Santander we are adding life protection products to our existing general insurance distribution agreement. Our long-term successful strategic partnership with RBS was renewed in 2010 on the basis of a new exclusive distribution agreement for the sale of life, protection and pensions products. In general insurance we also secured or renewed ten partnership arrangements with bank and building society partners in 2010.
Driving value across our UK business for customers and shareholders In 2010 total costs including brand and restructuring have fallen by £200 million to £1.7 billion. Costs continue to be an area of focus and we remain on track to deliver £200 million of cost and efficiency gains by the end of 2012. Following consultation with our staff, we are closing our UK final salary pension schemes to future accrual from 1 April 2011. This will reduce the pension fund deficit benefiting Aviva’s net asset value by £286 million and reducing future funding costs by approximately £50 million per year. We continue to simplify our business and improve our service to customers. Our new online services mean that 95% of new online general insurance customers receive their documents electronically.
Outlook: A growing business with a unique opportunity Aviva is growing profitably in the UK and we expect this momentum to continue in 2011 as we benefit from our strong brand, broad product range and diverse distribution. The long-term savings market continues to show resilience and is growing. While we remain cautious about the economy overall, we expect to continue to grow as we extend our competitive advantage and retain a disciplined approach. The growth dynamics in the UK market remain compelling with new research from Aviva finding that the UK has the largest pensions gap per person in Europe at £318 billion overall; in addition 61% of families have no life insurance protection. As a trusted brand Aviva is well placed to respond. The general insurance market remains competitive. Through disciplined deployment of our capital we will extend our risk appetite and business mix to drive superior returns. At the heart of this will be continued excellence in our risk selection and underwriting. We will drive additional and unique benefit from operating our life and general insurance businesses together and have clear plans to expand distribution, develop our customer agenda and further improve cost management.
Capitalising on our leading position in Europe Aviva has a strong presence in France, Ireland, Italy, Poland and Spain and continues to grow in Russia and Turkey. We also have a strategic investment in Delta Lloyd in the Netherlands. With $1.7 trillion growth in life and pensions assets expected between 2009 and 20141, Europe (including the UK) has huge long-term potential for the Group.
Capitalising on our multi-distribution network, where our single brand will support our retail network and continue to grow our market-leading bancassurance franchise.
Developing core strengths in product simplification and innovation, shared operational excellence, general insurance claims management, governance and risk management while remaining customer focused.
Delta Lloyd is independent of our other operations. Following a successful IPO in 2009, Aviva retained a 58.3% interest. In 2010 we chose not to exercise a scrip dividend option and this resulted in a dilution of the shareholding to 57.6%. We retain 54.0% of the voting rights.
1 Oliver Wyman 2 Includes the 27 countries of the European Union and the countries of Russia and Turkey
Aviva Europe performance Increased profit in a challenging market Aviva Europe increased IFRS operating profits by 13% to £898 million (2009: £797 million) underpinned by disciplined capital management and driven by a pan-European distribution model through our retail and bancassurance channels.
Life and pensions operating profit higher Life and pensions sales were maintained at £13,537 million (2009: £13,523 million), a 3% increase on a local currency basis. A number of initiatives have been enacted in 2010 including a reduction in the guaranteed interest rate in Italy and the redesign of unit-linked products in France, Ireland and Poland. This has helped to deliver a strong performance in operating profits with a 17% increase to £893 million (2009: £761 million). Furthermore it has helped to achieve a margin of 3.7% and an IRR of 13% with a payback period of 7 years, in line with the group’s short term financial targets.
Customer-focussed, multi-channel distribution We operate a pan-European distribution model through our retail and bancassurance channels. We benefit from offering both life and general insurance in France, Ireland, Italy, Poland and Turkey and will assess opportunities to leverage our skills across the region. We are a leader in bancassurance and continuously evaluate potential new relationships. This year we established a new general insurance bancassurance agreement with Ulster Bank in Ireland bringing our total number of bancassurance relationships to 55. Sales through the bancassurance channel increased by 9% to £8,040 million (2009: £7,353 million).
Delivering attractive propositions to our customers We have leveraged best practice in pricing and underwriting principles across Europe in both life and general insurance. This enables us to bring attractive propositions to our customers while ensuring we generate appropriate returns for shareholders: CPPI Fund, a unit-linked product with an element of guarantee, has launched successfully in Poland, Ireland and France.
In Turkey, we have launched a retirement savings product in anticipation of new pensions legislation. This has the potential to be a significant new market.
Transformation delivers operational excellence We’ve made good progress in developing our shared service capabilities to embed single and consistent ways of doing business. This combined with a management focus on cost discipline has
Outlook There is evidence that economies in Europe are recovering at different rates as well as continuing uncertainty around legislative changes. However our geographic diversity means that we remain well positioned. As we look ahead, while there may be an element of uncertainty in some of our markets, the need for people to save and protect what they have allied with our clear strategic direction mean that we are optimistic about the longterm prospects for growth. We expect consumer sentiment to continue to favour guaranteed savings products and the general insurance market to remain competitive. Our focus in 2011 will be on positively contributing towards group’s targets through margin growth and generating operational capital. We will continue executing our strategy: driving operational excellence, maximising the value from our combination of life and general insurance and competitive distribution network, and deepening our presence in growth markets.
Delta Lloyd performance Delta Lloyd is one of the top five financial services providers in the Netherlands, with a growing operation in Belgium. We continue to operate in a very saturated market, where cost reduction and economies of scale are becoming increasingly important. The focus for 2010 was on growth through cost discipline, strong capital and risk management, customer focus and leading market positions, Delta Lloyd increased IFRS operating profits by 34% to £536 million (2009: £399 million) driven by higher expected investment returns, higher fund management performance fees and improved expense margins. Life operating profit increased by 19% to £330 million (2009: £277 million). The life result was impacted by a change in longevity assumptions leading to an increase in the longevity provision as at year-end 2010 and a one-off negative impact of £483 million on the IFRS result before tax. General insurance COR improved to 95% (2009: 97%) with expense savings and reserve margin releases offsetting a higher claims ratio. Fund management operating profits are 268% ahead of prior year at £103 million (2009: £28 million). Delta Lloyd implemented a simplification plan during 2010 which aims to reduce the management cost base by 8% to €850 million by 2012.
Strong profits and progress against strategic priorities across the region In 2010, the North American businesses saw strong financial performance as a result of our focus and discipline. We increased our total regional IFRS operating profit by 77% to £376 million, benefiting from strong pricing and underwriting management, cost discipline and an improved economic environment.
Strong general insurance performance in Canada In Canada, operating profit rose 54% to £222 million reflecting improved underwriting performance combined with benign weather in the early part of 2010. Following our decision last year to exit unprofitable business we saw a moderate decline in premiums on a local currency basis and we concentrated efforts on growing profits from our book.
We made further progress enhancing our sophisticated underwriting capabilities and dealt successfully with new regulation in the Ontario auto market, further strengthening our position in that sector. We have taken difficult but necessary actions to improve our cost base and operational performance, including targeted cost reductions announced in November 2010 that form part of the overall £60 million of cost savings and efficiencies to be achieved across the North American Region by the end of 2012.
‘Building insurance around YOU’ Aviva USA approaches the life insurance and annuities marketplace in a very innovative way: by building insurance around the concept that every individual matters. Recent market shifts have made many customers wary of financial services in general which is why we wanted to make it clear that we put our customers at the centre of everything we do. Today’s consumers want to be understood and have recognition of the specific and unique reasons for considering and making decisions about financial products. We approach the market with products that are tailor-made for an individual’s stage in life. Launched in 2010, ‘Building insurance around YOU’ is the outcome of our commitment to customers, articulating our focus on getting to know them, fully understanding their priorities, and delivering life and annuity products to meet their changing needs.
Strategy Our strategy is to grow our franchise value through: Securing strong organic growth in our chosen markets, in particular China and India.
Market environment The economic forecast from Asia Development Bank4 predicts GDP growth for emerging markets in Asia (excluding Japan) of 8.2% in 2010 and 7.3% in 2011. While competition is increasing both as a result of international competitors focusing on Asia and domestic leaders leveraging strong brands, we believe that the opportunity for Aviva to create franchise value through organic growth in Asia is unprecedented.
including development of our fixed income proposition. Enhancing investment performance. Driving innovation by developing and implementing a new way of working. Expanding our global footprint and centres of excellence. Developing strong client service for a scaleable business. Integrating globally to provide a scaleable platform. Creating a robust risk-managed operating platform. Driving capability development by attracting, developing, motivating and retaining the talent that the business needs to meet its strategic aims.
Market environment Investors continued to take a more cautious view on investment opportunities in 2010. Pension funds in particular, the biggest source of global assets following the financial crisis, have increased attention to risk management. Aviva Investors has worked to adapt its products to meet this growing demand. We also see opportunities arising from increased regulation in developed markets, as this creates barriers for new entrants and opportunities for some existing firms.
Continuing investment in the business leads to a fall in operating profit Operating profit fell from £115 million in 2009 to £100 million in 2010 as a result of higher than expected redemptions and ongoing investment in the business which is starting to bear fruit as we see an increase in higher margin external assets. The £100 million profit in 2010 comprises £97 million (2009: £115 million) in respect of fund management operations and £3 million (2009: nil) from our pooled pensions business, which is reported within the long-term business segment.
Strengthening our mutually beneficial position within Aviva Our growth is focused on leveraging our Aviva parentage and insurance heritage to increase external assets under management. Our Guaranteed Managed Solutions (GMS) product in the US for example, brought in over £500 million of mandates in the last four months of the year. GMS was developed in partnership with Aviva USA and is an important product for both companies.
Outlook We have made considerable progress developing the infrastructure necessary to meet our objectives and are seeing the benefits of this through improved sales performance. In 2011 we will continue to focus on our core investment strategies to deliver added-value investment solutions to clients in our established markets of the UK, Europe and the US, as well as actively pursuing market share in potential high-growth markets in the Asia Pacific region.
Benefiting from the combination of life and general insurance Our life and general insurance operations are excellent businesses in their own right, but in addition to their inherent strengths there are significant advantages of running these businesses under one brand and in one group, supported by Aviva investors.
Brands and products In the UK we operated under the Norwich Union brand until June 2009, when Norwich Union became Aviva. Following the rebrand of Hibernian Aviva in Ireland to Aviva in January 2010 and Aviva Commercial Union in Poland to Aviva in June 2010, we operate under the brand name Aviva throughout Europe and the rest of the world. The exception to this is in the Netherlands, where we operate under the Delta Lloyd brand. Our long-term insurance and savings businesses offer a broad range of life insurance and asset accumulation products. Our products are split into the following categories: Pensions – a means of providing income in retirement for an individual and possibly his or her dependants. Our pension products include personal and group pensions, stakeholder pensions and income drawdown.
Bonds and savings – accumulation products with single or regular premiums and unit-linked or guaranteed investment returns. Our product ranges include single premium investment bonds, regular premium savings plans, mortgage endowment products and funding agreements.
General insurance and health General insurance and health insurance together accounted for 21% of our total sales for the year ended 31 December 2010. In the year ended 31 December 2010, we reported general and health insurance net written premiums of £9.7 billion.
Market position We are one of the leading general insurers in the UK and Ireland based on gross written premiums for the year ended 31 December 2009 and we are one of the top five general insurers in Canada and the Netherlands, as based on gross written premiums for the year ended 31 December 2009. The Group has other European general insurance operations in France, Italy, Poland and Turkey, and in Asia Pacific we sell general insurance and health products in Malaysia, Singapore, Indonesia and Sri Lanka. In the year ended 31 December 2010, 47% of our total general insurance and health business was written in the UK.
Fund management The fund management businesses manage the funds of Aviva’s general insurance and long-term insurance and savings operations and provide investment management for institutional pension funds, as well as developing and selling retail investment products. Our main brand for fund management is Aviva Investors. The main fund management operations are in the UK, France, the Netherlands, Ireland, the US and Australia. All sales of retail fund management products are included in our long-term insurance and savings business sales.
Market and competition The UK long-term insurance market is highly competitive. According to research undertaken by Aviva, in conjunction with Deloitte, there is a potential annual pensions gap of some £317 billion, the difference between what an individual saves today, and what they need to save in order to pay for a comfortable standard of living in retirement. Research by Swiss Re also identifies a potential protection gap of £2.4 trillion, which is the difference between the life insurance and financial protection cover an individual has and the amount they need to meet their needs. We believe these shortfalls offer significant opportunities for long-term insurance companies within this market. The UK long-term insurance market is highly competitive. We consider our main competitors to be Prudential, Legal & General, AEGON, Standard Life and Lloyds Banking Group. The principal competitive factors for our life insurance business in the UK are: Financial strength and ratings; Brand strength and customer advocacy; Focus on customer and quality of service; Range of product lines and quality of products on offer; Strength of distribution channels; Pricing; and Investment management performance.
Products We provide an extensive product range in the UK that covers pensions, annuities, protection, bonds and savings and equity release products, as well as investment products. We hold strong positions in each of our key markets of savings, protection, and annuity products based on APE in 2010 according to ABI returns. We write both non-profit and with-profit business. Non-profit business means that shareholders retain 100% of the distributed profits. With-profit business means that policyholders are entitled to at least 90% of the distributed profits, with shareholders receiving the balance. The with-profit products share profits and losses of the withprofit fund with its investors. This is achieved through a system of bonuses. In deciding the regular bonuses Aviva aims to smooth the return of the policyholder’s plan. As bonuses are added to the plan, valuable guarantees build up. These guarantees are unique to with-profits investments. At the close of the plan the investor receives a terminal bonus based on the performance of the fund. We provide a number of traditional life insurance products including level-term, decreasing-term and guaranteed whole life insurance, guaranteed lifelong protection plans and critical illness cover products. Our savings and investment products include ISAs, investment bonds, funds, base rate trackers, capital protected plan and withprofits products. The pensions and retirement products we offer include stakeholder, personal pensions, equity release, annuities, income drawdown and with-profits products. Our annuity offerings include immediate life, enhanced and with-profit pension annuities.
Distribution We have a multi-distribution strategy. We are a leading provider in the intermediary market with the majority of our sales through
Market and competition The UK is the third largest insurance market in the world according to the ABI based on data for 2009. In 2009, the top four companies had approximately 36% (2008: 39%) of the general insurance market share, based on Datamonitor figures for gross written premiums. Insurance profits in the UK general insurance market are cyclical in nature, with different segments of the market at different stages in the cycle. In personal motor we have seen significant premium rate increases in 2010 in response to recent increases in claims costs and frequencies, most notably for bodily injury claims. Homeowner rates have seen little movement reflecting a competitive environment and the depressed housing market. Conditions in commercial lines have also remained competitive with rating increases proving difficult to achieve. We are growing our capability in Corporate Risks and Specialty Lines business, building on our core underwriting and pricing strengths to win in these markets. In recent years, the growing proportion of commercial brokers seeking to trade with us online has led us to invest more heavily in our e-commerce propositions, ensuring we remain competitive and alert to evolving customer needs in this important distribution channel. We consider our main competitors to be RBS, RSA, AXA, Zurich, Lloyds Banking Group, Allianz and The Admiral Group. The principal competitive factors for our general insurance business in the UK are: Range and quality of products; Access to distribution; Pricing and underwriting discipline; Brand association; Customer satisfaction; Claims handling; and Cost management.
Aviva Europe Our Quantum Leap transformation plan is focused on delivering benefits in the markets of France, Ireland, Italy, Poland, Spain, Russia and Turkey. Across these we operate a composite model, selling life and pensions products, general insurance products and providing asset management propositions. In Russia and Spain we currently have a purely life distribution model. This pan-European composite distribution model enables us to exploit our existing relationships and networks in order to develop higher margin customer targeted products, to improve our 5 Based on regulatory data from FFSA,, IIF, ANIA, KNF, ICEA
Market and competition The region is split between mature Western European markets with high wealth and insurance penetration and the developing markets of Central and Eastern Europe. Competitive intensity and market consolidation varies across the region depending on the size and stage of development of each market. Across the region consolidation is low; based on total insurance premiums from the CEA the top five insurers hold less than 35% of the market. Our competitors comprise a mixture of large pan-European insurers, such as Allianz and AXA, and local insurers, such as Powszechy Zaxlad Ubezpieczan (PZU) in Poland and CNP Assurances (CNP) in France. The largest insurers across the region are Allianz, Generali and AXA. Market data from SwissRe SIGMA shows that as at 31 December 2009, Aviva has a 5.5% share of the life markets in which we operated (including the UK and non-participatory investment contracts, excluding business written outside of Europe, non-primary insurance and inaccessible markets, for example compulsory healthcare), which makes us the fourth largest insurer in Europe. We have several strengths that we believe give us a competitive advantage in Europe, which include: our strong bancassurance franchise; our diversified insurance model; our firm establishment in the markets in which we have chosen to compete; and our pan-European transformation plan.
Aviva plc Annual Report and Accounts 2010 Information on the company continued
Aviva France holds a majority stake in Union Financière de France (UFF) which we believe has gained a reputation for expertise in managing, selecting and distributing mutual funds and sourcing tax optimisation products. In the general insurance market, our product range includes household, motor, health, legal protection products and also a broad range of insurance products for farms, craftsmen, tradesmen and small to medium sized entities and specific products for building firms and motor fleets.
Ireland Business overview and strategy Aviva Ireland had a 16% share of the Irish long-term insurance and savings market in 2009 based on gross written premiums according to the Irish Insurance Federation (IIF), and is the fourth largest life and pension provider in Ireland. Our general insurance business is the largest in Ireland, with a market share of 16% in 2009 according to the IIF. Aviva has a 13% market share making it the third largest health insurer in Ireland based on research conducted by REDC Research and Marketing (REDC) on behalf of the Irish Health Insurance Authority (HIA). Aviva Ireland has over one million customers across its general insurance, life & pensions, asset management (which is managed by Aviva Investors) and health insurance businesses. Our strategy is focused on delivering sustainable, profitable growth, maximising capital generation and leveraging our product portfolio.
Market The life insurance market in Ireland is largely consolidated with approximately 78% of the market share being held by the top four providers, including Aviva, according to a report by IFF based on 2009 gross written premiums. We believe that customers have moved away from traditional life products in Ireland because of volatility in the stock markets and a slowdown in the housing market in the last three years. We believe that the general insurance market in Ireland remains extremely competitive in both personal and commercial lines, with large weather related losses in 2010 across the market in January, November and December. Motor is the largest class of business representing 43% of the general insurance market followed by property which accounts for 30% of the market at 31 December 2009, according to the IIF.
Products Our long-term insurance and savings business offers a comprehensive range of protection, bonds and savings and pension products. The protection products include single, dual and joint life insurance, mortgage protection, specified illness and guaranteed whole life cover products. The pension range covers retirement and investment products including government promoted personal retirement savings account (PRSA) schemes. Our general insurance and health businesses provide a wide range of products including property, motor, travel, farm and business insurance. Our motor business is more focused on personal lines, while our property business is primarily commercial lines. Our health insurance business provides a range of plans in both the personal and company plan sector with access to hospitals, treatment and scan centres.
Distribution Aviva Ireland has a wide range of distribution channels, including intermediary channels such as brokers, bancassurance partners, corporate partners and direct channels including call centres, internet and a nationwide branch network. Our long-term insurance and savings products are distributed through our broker network, our bancassurance partnership with Allied Irish Bank plc (AIB) and our branch network. Our general insurance business is sold through all of our distribution channels, with an increasing proportion offered by direct and corporate partners. We also provide branded products for a number of financial institutions, namely AIB, Ulster Bank and Postbank. Traditionally the majority of our health business was sold via our direct channels; however there has been a significant increase in the business sold through the intermediary channel in 2010.
Market In the Italian life market, large groups dominate the market, with the top four providers writing 50% of the life premium income in 2009 according to ANIA. After the decline in the market in 2008, the insurance industry in Italy reported a strong growth in volumes in 2009 with gross written premiums up by 28% to €118 billion according to ANIA. The life segment grew by 49% driven by the strong demand by customers for with-profit products. The general insurance segment declined 2% due to a reduction in the motor segment. In the Italian market, we believe that many customers prefer investment products from well-established long-term insurance companies as long-term savings vehicles. We also think that consumers prefer developing a personal relationship with the bank distributing products through one-to-one contact. Internet and telephone channels are not widely used in Italy. Over the last few years, the Italian government has introduced legislation to break the exclusive relationship between general insurance companies and their ‘tied’ agents and therefore has widened the availability of general insurance products from
Products Our long-term insurance and savings business offers a wide range of products covering protection, bonds and savings and pensions. The largest segment is single and regular premium savings and investment products. These include unit-linked policies linked to a range of investment funds as well as profit-sharing policies where there is a minimum annual return credited to the policy and the potential for an additional bonus. Also, we provide index-linked products where there is typically some protection of capital at the end of the policy term and a pay-out linked to the performance of an index or basket of shares. A growing area of the market is credit protection insurance, where protection on death and disability is provided for mortgages and credit loans. Individual and group pension plans are also available and this part of the market is expected to grow in the long-term given the ageing population and government reforms to reduce the cost of state retirement provision. Our general insurance business in Italy mainly provides motor and home insurance products to individuals, as well as small commercial risk insurance, including marine insurance, to businesses. For reporting purposes the Italian general insurance business is shown within ‘Other Europe’ in the general insurance segment.
Distribution Our products are distributed principally through bancassurance partnerships with UniCredit Group, Banco Popolare Italiana Group (BPI), Banca Popolari Unite (BPU) and Unione di Banche Italiana (UBI). These partnerships give us access to more than 6,300 branches. In addition, we also have 650 insurance agents and access to approximately 5,100 sales advisers, as at 31 December 2010. We distribute general insurance products primarily through agents and brokers, with a growing proportion of bancassurance sales.
Poland (including Lithuania) Business overview and strategy Our Polish life operation is the fourth largest overall life insurer in Poland (including JV Life), with a market share of 6% based on total premium income as at 30 September 2010 according to the Polish Financial Supervision Authority (KNF). Aviva Poland completed its rebrand to Aviva in June 2010. It has more than 900,000 individual and group customers and manages over £3.1 billion of customers’ assets, providing both long-term insurance and savings products. Our businesses have approximately 2,600 direct sales force members with 60 sales branches across the countries as at 31 December 2010. Aviva Poland has been one of the leaders of the second-pillar pension fund market since its launch in 1999. Second pillar pension funds are privately managed with first pillar being the pay-as-you-go state pensions and third pillar being voluntary contributions. We have seen two tranches of significant legislative changes to the pensions market in the last two years. In 2010 a change was made to pensions’ legislation which limited pension funds’ potential income through a reduction of contract fees and a cap on total asset management revenues. From 1 April 2011, a further change has been announced whereby contributions received by mandatory pension funds will be reduced from 7.3% of gross salary to 2.3%. This has had the effect that our pensions business in Poland has a market share of around 24% down from 25% last year and 2.8 million customers. Our product strategy for pensions is to retain our status as one of the market leaders in terms of assets and customers. In the short term we have overhauled our compensation and bonus structure for our sales force with the aim of linking compensation directly with the value generated by the sale. Our general insurance business in Poland commenced in 1997 and continues to develop. For reporting purposes the general insurance business is shown within ‘Other Europe’ in the general insurance segment.
Market The Polish market for protection products has seen significant growth since 1999, although penetration rates remain relatively low according to our analysis of KNF statistics. In 1999, Poland launched a comprehensive reform of its state pension system and created privately managed funds. This enabled private companies to offer pension products and made it obligatory for all employees under 30 years of age to join one of the competing pension funds. As described above, from 2010 the Polish government started to implement restrictions on the fees that pension fund management companies can charge, and it is expected that the government will start to take higher proportions of pension payments in 2011. The general insurance market is continuing to grow, although at a slower rate than the long-term insurance and savings market. Growth is mainly driven by household and travel personal lines and an increase in rates in commercial lines.
Products Our life business in Poland provides a broad range of protection, annuities and bonds and savings products. For individuals it offers unit-linked life policies, annuities, single premium savings and health insurance. For institutions it offers group life insurance and employee pension programmes, which are both unit-linked products. Our pension business offers a standard product for all customers as part of the privately managed second pillar pensions market. We offer general insurance products to both institutions and individuals in Poland. For institutions we offer selected commercial lines risks such as fire and loss-of-profit insurance, technical insurance, insurance against loss of property during transportation, civil liability insurance and commercial health insurance. For individuals we offer home, accident and travel insurance, which are primarily sold by tied agents, as well as motor insurance, which is sold primarily through our direct operation.
Market The life insurance market in Russia has grown rapidly from a low base over the last five-year period. Life insurance penetration in Russia is much lower than in other BRIC countries (Brazil, Russia, India and China are all countries that are deemed to be at a similar stage of newly advanced economic development) and we believe demonstrates strong potential for further growth.
Products In Russia, we sell a range of products including individual accident insurance largely through bank partners, group protection and non-state pension products.
Distribution At the end of 2010 Aviva Russia had 966,000 customers. Aviva Russia has 19 distribution agreements with banks, operating in 63 out of 83 Russian regions. Approximately 50% of new business sold is Group protection and corporate pensions.
Turkey Business overview and strategy AvivaSA, our long-term insurance and savings business in Turkey, is the second largest pension provider in the market in terms of assets under management (‘AuM’), with a market share of 21% as of 24 December 2010 as reported by the Turkish Pensions Monitoring Centre. Our largest competitor in this market, Anadolu, ranks first with a market share of 22%. We are also the fourth largest life insurer in Turkey with a market share of 7% as of 30 November 2010, as reported by the Association of Insurance and Reinsurance Companies of Turkey. AvivaSA has a bancassurance agreement with Akbank T.A.S. (Akbank), Turkey’s second largest privately-owned bank based in terms of total assets according to The Banks Association of Turkey. Aviva Sigorta, our general insurance business in Turkey, is the 12th largest general insurer in Turkey with a market share of 3% as of September 2010 according to the Insurance Union of Turkey. Aviva Sigorta has over 750,000 customers and a sales force of over 750 independent agents and brokers. Our strategy in Turkey is to pursue the high growth potential that we believe this market offers.
Products Czech Republic sells flexible unit-linked insurance products and group life insurance schemes for corporate clients. Hungary sells flexible unit-linked and traditional life products and sells unitlinked savings products through Brokernet Slovakia. Romania provides traditional life insurance products and started to offer pension products to customers following government reforms introducing compulsory pensions in 2008.
Asset accumulation for the longer term via long term pension and investment contracts.
Enhance knowledge of the customer and respond to changing customer needs.
Market Delta Lloyd continues to operate in a competitive saturated market. We believe that the Dutch insurance market is mature and cost reduction and economies of scale are becoming increasingly important. Customers are increasingly demanding that suppliers provide value-for-money high-performing products with transparent charges. The Dutch savings market is extremely competitive with banks now able to offer retirement products on the same terms as insurers. In the life segment the focus is on profitable growth, for example in the group pension market, and retaining customers through the tax favourable bank savings product. In the general insurance market there continues to be competition on premium rates, particularly in the motor sector, and increasing claims frequencies linked with the economic downturn and weather related events. Managing the claims ratio and cost savings are the top priority in this highly competitive market.
Products The long-term insurance and savings business of Delta Lloyd offers a range of protection, bonds and savings and pensions services, including group pension schemes, annuities, unit-linked bonds, savings products and protection insurance. Our general insurance business offers a well diversified product portfolio including personal, motor, travel and home insurance and small to medium-sized commercial policies. We also sell retail investment fund and mortgage products in the Netherlands and retail banking products in Belgium.
Market According to the World Bank, the US is the world’s largest national economy, based on 2009 GDP. It is also the largest insurance market according to an August 2010 Swiss Reinsurance report on total premiums. This is especially true for retirement savings products as more than 78 million members of the baby boom generation move into retirement in the US. At the same time, the US economy – and its financial sector in particular – continues to feel the impact of the severe contraction due to the financial crisis of the past two years. There are increasing signs of economic recovery and, despite the recession, North America’s economies remain among the world’s largest and its population among the world’s wealthiest. Retirement savings represent 34% of household assets in the US, according to a report by Investment Company Institute, and, despite the uncertainty affecting the financial markets, people continue to save and buy insurance from brands they trust. In Aviva USA, we believe we are well positioned to respond to customer needs, having savings and investment products with downside guarantees as a major component of our product portfolio. The indexed annuity and indexed life markets in which Aviva USA operates are dominated by a small number of insurers. According to third quarter 2010 data compiled by LIMRA, the top five indexed annuity providers hold 61% of the indexed annuities market, while for indexed life insurance, the top five providers account for 68% of the market. This product segment has seen
Products Aviva’s broad product portfolio offers flexible solutions to multiple customer needs. We offer traditional universal life (UL) and indexed UL products which are designed to accumulate cash values that can later be used, if needed, by our customers. In the protection market, the product offerings include term insurance and secondary guarantee UL insurance designed to offer lower cost death benefit protection with little to no cash accumulation potential. In addition, Aviva offers a wide array of riders to customise the coverage to meet each customer’s unique needs. Amongst the riders is the innovative ‘Wellness for Life’ that offers cost of insurance discounts to insureds that meet certain wellness criteria. The rider benefits include a menu of wellness information services provided through an exclusive relationship with Mayo Clinic Health Services. In the savings market, Aviva’s fixed annuity portfolio offers customers tax-advantaged savings opportunities and protection against the risk of outliving one’s assets. We are receiving greater demand for the guaranteed lifetime withdrawal benefit which gives customers an opportunity to accumulate premiums at an attractive guaranteed interest rate for the purposes of taking withdrawals over his or her lifetime. In 2010, Aviva USA entered the managed account guaranteed investment contract (GIC) market with a product offering that leverages the investment management capabilities of both our life insurance business and those of Aviva Investors North America. In the past, Aviva has also issued funding agreements in the institutional market.
Canada Business overview and strategy Aviva Canada has an 8% share of the Canadian general insurance market, with a top five position in all major provinces according to 2009 industry data provided by MSA Research Inc. We believe that we are well placed in Canada for steady organic growth and that our success is underpinned by strong broker relationships, underwriting excellence and a balanced portfolio of commercial and personal lines. We will continue to develop and leverage our sophisticated pricing and underwriting capabilities. We will also continue to address increasing customer demand for choice and simplicity through our broker-distribution model. In commercial lines, we aim to continue to profitably grow our business by leveraging techniques developed in personal lines in the small and medium enterprise sector.
Market As the seventh-largest in the world, according to Swiss Re’s Sigma World Insurance Report, Canada’s general insurance market is established and stable. The four largest provinces generate around 90% of total premiums with Ontario, the largest, representing 47% on its own, according to 2009 industry data provided by MSA Research Inc. In recent years the most significant growth rates have been seen in western Canada, where economic development has resulted in significant population increases and a changing demographic profile.
With over 200 insurance companies, the Canadian general insurance industry is highly fragmented with many small players and no dominant consumer brand. Steady consolidation has resulted in the top five companies sharing 35% of the market with the top two companies, Intact Insurance and Aviva, controlling 19%. The rest of the industry consists largely of smaller, provincially based or niche companies. While the direct and affinity channels are gradually increasing market share, the traditional broker channel accounts for over 70% of distribution according to Axco’s Insurance Market Report for Canada. Competition for growth has moved to investment in brokers, direct to consumer marketing, and technology.
Asia Pacific Regional overview and strategy Aviva Asia Pacific operates in nine countries across the region through both joint ventures and wholly-owned operations. China and India, our key strategic markets, have large populations, relatively high economic growth and are expected to generate a significant portion of the insurance growth in Asia in the future. Most of our businesses in our other countries (Singapore, Hong Kong, South Korea, Malaysia, Sri Lanka, Taiwan and Indonesia) are bancassurance led with strong joint venture partners. Aviva Asia Pacific aims to create franchise value through organic growth. Our goal remains to increase new business sales and increase margins by strengthening our multi-channel distribution platform. In November 2010 we announced our intention to exit Taiwan as we do not believe we can achieve our desired financial returns in this market.
Market and competition The Asia Pacific insurance market includes both mature markets such as Singapore, Hong Kong and South Korea and emerging markets such as China and India. China and India are ‘must-win’ markets given their demographics and are expected to generate a very significant portion of the insurance new business in the future. These markets accounted for around 33% of the Asia Pacific segment’s long-term and pension sales in 2010. Markets in South East Asia (Singapore, Hong Kong and Malaysia) remain attractive given their high margins and double-digit growth. These markets represented 36% of the segment’s long-term and pension sales in 2010. South Korea is a large market where we have a successful growing business, accounting for 25% of the segment’s long-term and pension sales in 2010. Other small markets accounted for 6% of the segment’s long-term and pension sales in 2010.
In long-term insurance and savings, we believe that the outlook is positive, with high growth rates expected in the medium-term owing to currently low penetration rates of insurance products in many markets, high GDP growth, generally high savings rates and the growing need for old age provision. We believe that fundamentals of the Asia Pacific region are highly attractive and competition from both local and international players is increasing as a result. Local companies are our main competitors in most markets. We believe that the following factors position us well to compete effectively in the region and provide a solid platform for creating franchise value: Balanced portfolio of fast-growing and high-margin markets; Strong position and/or partner in most major markets; Multi-channel distribution, with particular strength in bancassurance; A clear strategy with a sharp focus on franchise value creation and organic growth; and Global group (brand, expertise, capital).
Products Our Asian businesses generally offer a range of protection, bonds and savings and pension products including universal life, participating life, unit-linked single and regular premium life insurance, other savings and pensions products and a range of accident and health insurance products. We believe that Aviva has established itself as a strong player in the health and protection market as well as in the child education segment. In April 2010 Aviva launched an innovative direct insurance business in Singapore by offering car, home and travel insurance online.
Distribution We operate a multi-distribution strategy in Asia, with particular strength in bancassurance. We aim to continue to harness the benefits of multi-distribution in all of our markets as we expect the regionally dominant agency sales force model to decline as Asian markets mature. Aviva Singapore has a multi-channel distribution strategy building on a core bancassurance relationship with DBS Bank and an expanding network of IFAs. We have launched Aviva Advisors in 2010, an innovative owned channel led by high performing advisors. We also launched the first online motor sales platform in the market in 2010. In Hong Kong, we distribute the majority of our products through bancassurance and IFAs. In China, India, Malaysia and South Korea bancassurance is the main distribution channel. However, as we continue building our multi-distribution platform across the region, other channels are increasing in importance, diversifying our sources of revenue.
Market and competition Following the creation of Aviva Investors, we consider our competitor peer group to include large-scale global asset managers such as those owned by Blackrock, AXA and Allianz. In addition, we continue to look at UK-based providers who have significant overseas operations, including both insuranceowned companies such as Standard Life Investments and the combined asset management businesses of Prudential plc (primarily M&G), as well as independent, listed managers like Schroders and Aberdeen Asset Management. Where appropriate, we also look at other managers with a strong presence in the UK institutional and retail markets such as F&C Asset Management, Henderson Global Investors, Jupiter Asset Management and Threadneedle. These managers also have non-UK operations, particularly in Europe. Key identified competitive factors for Aviva Investors include: Investment performance; Brand; Our Aviva Group parentage; Client service; Scale; Global product breadth and distribution reach; A range of capabilities to provide tailored solutions for clients; Risk management expertise; and Capability in socially responsible investing and corporate governance.
Equities – locally based teams focused on generating above market performance.
Real Estate – We offer funds specific to property assets in the UK, Europe and Asia, in addition to a global fund, clientspecific segregated funds and a multi-manager service.
Organisational structure The following chart shows, in simplified form, the organisational structure of the Group as at 31 December 2010. Aviva plc, is the holding company of the Group.
Subsidiaries The principal subsidiaries of the Company are listed below by country of incorporation. All are whollyowned, directly or indirectly, and transact insurance or reinsurance business, fund management or services in connection therewith, unless otherwise stated.
France Aviva Participations SA and its principal subsidiaries: Antarius S.A. (50.0%) Aviva Assurances SA Aviva France SA Aviva Investors France SA Aviva Vie S.A. Aviva Epargne Retraite Eurofil SA Union Financière de France Banque (Banking) (74.3%)
Hong Kong Aviva Life Insurance Company Limited Aviva Portfolio Investment Services Limited
Ireland Aviva Europe SE and its principal subsidiaries: Aviva Insurance Europe SE Aviva Life and Pensions Europe SE Aviva Investment Management Services Europe SE Aviva Investment Management Europe SE Aviva Health Group Ireland Limited (70.0%) Aviva Life & Pensions Ireland Limited (75.0%) Aviva Investors Ireland Limited
Spain Aseguradora Valenciana SA, de Seguros y Reaseguros (Aseval) (50.0%) Aviva Vida y Pensiones, S.A. de seguros y reaseguros (Sociedad Unipersonal) Caja Espana Vida, Compania de Seguros y Reaseguros (50.0%) Caja Murcia Vida y Pensiones, de Seguros y Reaseguros S.A. (50.0%) Caja Granada Vida, de Seguros y Reaseguros, S.A. (25.0%) CxG Aviva Corporación Caixa Galicia de Seguros y Reaseguros, S.A. (50.0%) Unicorp Vida, Compania de Seguros y Reaseguros (50.0%)
Associates and joint ventures The Group has interests in the following operations that are classified as associates or joint ventures. Further details of those operations that were most significant in 2010 are set out in notes 18 and 19 to the financial statements.
Net earned premiums 34,336 32,673 34,642 29,312 27,327 Fee and commission income 1,782 1,789 1,885 1,760 1,870 Net investment income/(expense) 21,993 25,155 (16,043) 9,689 15,908 Share of profit/(loss) after tax of joint ventures and associates 131 (504) (1,128) (304) 485 Profit on the disposal of subsidiaries and associates 159 153 7 49 222
Profit/(loss) before tax 2,834 2,022 (2,368) 1,847 3,340 Tax attributable to policyholders’ returns (394) (217) 1,068 (15) (346)
Financial and operating performance We are the sixth-largest insurance group in the world, based on gross written premiums for the 2009 fiscal year. We are one of the top five providers of life and pensions products in the UK, Ireland, Netherlands (through our Delta Lloyd subsidiary), Poland and Spain and one of the top ten providers of life and pensions products in France and Italy, as based on total sales for 2009. Our main activities are the provision of products and services in relation to long-term insurance and savings, fund management and general insurance.
Factors affecting results of operations Our financial results are affected, to some degree, by a number of external factors, including demographic trends, general economic and market conditions, government policy and legislation and exchange rate fluctuations. See ‘Performance review – Risk management’ for more information on risks associated with these and other factors. In addition, our financial results are affected by corporate actions taken by the Group, including acquisitions, disposals and other actions aimed at achieving our stated strategy. We believe that all of these factors will continue to affect our results in the future.
Economic conditions Our results are affected by the levels of economic activity in our geographic markets and, consequently, by economic cycles in those markets. High levels of general economic activity typically result in high levels of demand for, and therefore sales of, our products and services. Economic activity in turn is affected by government monetary and fiscal policy as well as by global trading conditions and external shocks such as terrorist activity, war and oil price movements. During 2009 and 2010, we saw improved economic activity across our regions and although customers continued to prefer cash deposits, we saw movement towards investment products resulting in increased investment sales, primarily across Europe and Asia.
Capital and credit market conditions An important part of our business involves investing client money and policyholders’ and shareholders’ funds across a wide range of financial investments, including equities, fixed income securities and properties. Our results are sensitive to volatility in the market value of these investments, either directly, because we bear some or all of the investment risk or indirectly, because we earn management fees for investments managed on behalf of policyholders. Investment market conditions also affect the demand for a substantial portion of our life insurance products. In general, rising equity price levels have a positive effect on the demand for equity-linked products, such as unit trusts and unit-linked life insurance products and conversely a negative effect on the demand for products offering fixed or guaranteed minimum rates of return. Declining equity price levels tend to have the opposite effects. During 2010, the capital and credit markets showed substantial recoveries from the end of 2009 as market sentiment improved. The amount of investment variance improved to £791 million in 2010 (2009: £75 million adverse), including £1,010 million related to Delta Lloyd. Of the £1,010 million, approximately £800 million is due to differing movements in asset and liability yield curves while the remainder primarily relates to gains on interest rate derivatives. Liabilities in Delta Lloyd are discounted using a yield curve based on a fully collateralised AAA bond portfolio. The discount rate increased in 2010 as an impact of around 80bps in credit spreads on collateralised bonds was only partially offset by lower risk-free yields. As a result, whilst lower interest rates increased the market value of assets, this has not been offset by a corresponding movement in liabilities. This was partly offset by negative economic variances of £154 million in Aviva Europe, primarily from the impact of increased bond yields and credit spreads on assets in Ireland, Italy and Spain.
Shareholders’ profits arising on with-profits business under IFRS depend on the total bonuses declared to policyholders on an annual basis. A special bonus distribution was announced for policyholders of two of our UK with-profits funds, with the final payment made in 2010. This special bonus reflects the financial strength of those funds, and provided an uplift to IFRS profits in 2008, 2009 and 2010. The uplift in 2010 is approximately £58 million, net of tax.
General insurance and health underwriting cycle Our general insurance and health business is comprised of our property and casualty insurance and health insurance operations. In 2010, general insurance accounted for 28% of Group net written premiums from continuing operations. Demand for general insurance is usually price-sensitive because of the limited degree of product differentiation inherent in the industry. As a result, the price of insuring property and casualty risks is subject to a cycle (called an underwriting cycle). In periods when the price of risk is high, the high profitability of selling insurance attracts new entrants and hence new capital into the market. Increased competition however drives prices down. Eventually the business becomes uneconomic and some industry players, suffering from losses, exit the market while others fail, resulting in lower capital invested within the market. Decreased competition leads to increasing prices, thereby repeating the cycle. Although our various general insurance markets are not always at the same stage of the underwriting cycle, price competition has been increasing within the UK and the rest of the world across most of our general insurance business lines in recent years. We are now seeing evidence of increased rating discipline in the UK resulting from volatile investment markets. We expect the underwriting cycle to continue in the future but to be less pronounced than in the past because of structural changes to the industry over the past decade. Capital markets are imposing financial discipline by being increasingly more demanding about performance from insurance companies before extending new capital. Such discipline, together with the increased concentration of competitors within the market, recent natural disasters and the adoption of more scientific pricing methods is expected to make the underwriting cycle less pronounced in the future.
In 2010 the UK was impacted by severe freezes in January, November and December.
Activity in 2010 On 17 February 2010, we sold our 35% holding in Sogessur SA to that company’s main shareholder for a consideration of £35 million, realising a profit on disposal of £24 million. On 24 February 2010, we acquired 100% of River Road Asset Management, a US equity manager, to support the expansion of Aviva Investors’ third-party institutional asset management business. The total consideration was estimated as £83 million (US$128 million). On 31 December 2010 the Group entered into transactions with RBS Group plc (RBSG) and agreed that, with effect from 31 December 2010, the Group would take ownership of the back book of RBS Life in exchange for RBSG taking 100% ownership of RBS Collective. Separately, a new distribution agreement was signed between our UK Life business and RBSG, with the new structure providing more flexibility in our long-term business operations.
Activity in 2008 During 2008, we acquired subsidiaries in Ireland, Italy and Belgium. In Belgium we acquired Swiss Life Belgium, further strengthening our position in the Belgium life insurance market. The acquisition of UBI Vita in Italy provides us with a new bancassurance distribution channel and the acquisition of Vivas Group Limited in Ireland has enabled us to enter the Irish health insurance market. Total consideration for these acquisitions, including costs, was £189 million. As part of our strategy to exit non-core operations, we disposed of HPI Limited and RAC Autowindscreens Limited in the UK and our life operations in Luxembourg. In addition, we disposed of our offshore administration operations. These offshore operations will continue to provide administration services to our UK, Irish and Canadian businesses under a master services agreement with the new owners. Consideration for these disposals was £126 million, realising a net profit on disposal of £7 million.
Fund management Fund management operating earnings consist of fees earned for managing policyholder funds and external retail and institutional funds on behalf of clients, net of operating expenses. Arrangements for the management of proprietary funds are conducted on an arm’s length basis between our fund management and insurance businesses. Such arrangements exist mainly in the UK, France, the Netherlands, Ireland, Australia, US and Canada. Proprietary insurance funds in other countries are externally managed.
Non-GAAP measures Sales The total sales of the Group consist of long-term insurance and savings new business sales and general insurance and health net written premiums. We classify our long-term insurance and savings new business sales into the following categories: Long-term insurance and savings new business sales Sales of the long-term insurance and savings business consist of: Covered business or life, pensions and savings products: Insurance and participating investment business – This includes traditional life insurance, annuity business and with-profits business – There is an element of insurance risk borne by the group therefore, under IFRS, these are reported within net written premiums.
Non-covered business or investment sales: These include retail sales of mutual fund type products such as unit trusts and OEICs.
These have never been treated as ‘covered business’ for long-term insurance and savings reporting so we show these separately as investment sales.
Sales is a non-GAAP financial measure and key performance indicator that we report to our key decision makers in the businesses in order to assess the value of new business from our customers and compare performance across the markets in which we operate. We consider sales to be a critical indicator of new business, and is the basis on which we provide analysis of our results to our shareholders and analysts. The non-GAAP measure of sales is also used internally in the determination of bonus awards as an executive performance measure. For our general insurance and health business we report sales based on IFRS net written premiums. For long-term insurance and savings new business, we define sales as the sum of the present value of new business premiums (PVNBP) of life, pension and savings products and investment sales. 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 terms of newly incepted contracts and is calculated as at the date of sale. We adjust annual premiums to reflect the expected stream of business coming from this new business over future years. In the view of management this
Financial and operating performance continued performance measure better recognises the relative economic value of regular premium contracts compared to single premium contracts. PVNBP is a European insurance industry standard measure of new business. For our long-term insurance and savings business, we believe that sales is an important measure of underlying performance and a better measure for new business than IFRS net written premiums. We consider the use of sales over IFRS net written premiums provides: Consistent treatment of long-term insurance and investment contracts: IFRS net written premiums do not include deposits received on non-participating investment contracts. Longterm insurance contracts and participating investment contracts also contain a deposit component, which are included in IFRS net written premiums, in addition to an insurance risk component. Therefore, to appropriately assess the revenue generated on a consistent basis between types of contracts, we evaluate the present value of new business sales of long-term insurance and investment products on the basis of total premiums and deposits collected, including sales of mutual fund type products such as unit trusts and OEICs.
Better reflection of current management actions in the year: IFRS net written premiums include premiums on regular premium contracts, which incepted in prior years, and therefore reflect the actions of management in prior years.
Total sales 47,059 45,068 51,377 Less: Effect of capitalisation factor on regular premium long-term business (7,797) (8,612) (9,893) Share of long-term new business sales from
Retail sales of mutual fund type products (investment sales) (4,002) (3,872) (3,995)
Less: long-term insurance and savings business premiums ceded to reinsurers (1,025) (1,730) (1,045)
Effect of capitalisation factor on regular premium long-term business: PVNBP is derived from the single and regular premiums of the products sold during the financial period and is expressed at the point of sale. The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts. The discounted value of regular premiums is calculated using the market consistent embedded value methodology proposed by the CFO Forum Principles. The discounted value reflects the expected income streams over the life of the contract, adjusted for expected levels of persistency, discounted back to present value. The discounted value can also be expressed as annualised regular premiums multiplied by a weighted average capitalisation factor (WACF). The WACF varies over time depending on the mix of new products sold, the average outstanding term of the new contracts and the projection assumptions.
Share of long-term new business sales from joint ventures and associates: Total long-term new business sales include our share of sales from joint ventures and associates. Under IFRS reporting, premiums from these sales are excluded from our consolidated accounts, with only our share of profits or losses from such businesses being brought into the income statement separately.
Adjusted operating profit We report to our chief operating decision makers in the businesses the results of our operating segments using a financial performance measure we refer to herein as ‘adjusted operating profit’. We define our segment adjusted operating profit as profit before income taxes and non-controlling interests in earnings, excluding the following items: investment return variances and economic assumption changes on long-term and non-long-term business, impairment of goodwill, amortisation and impairment of other intangibles (excluding the acquired value of in-force business), profit or loss on the disposal of subsidiaries and associates, integration and restructuring costs and exceptional items. While these excluded items are significant components in understanding and assessing our consolidated financial performance, we believe that the presentation of adjusted operating profit enhances the understanding and comparability of the underlying performance of our segments by highlighting net income attributable to ongoing segment operations. Adjusted operating profit for long-term insurance and savings business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. The expected rate of return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification. Where assets are classified as fair value through profit and loss, expected return is based on the same assumptions used under embedded value principles for fixed income securities, equities and properties. Where fixed interest securities are classified as available for sale, such as in the US, the expected return comprises interest or dividend payments and amortisation of the premium or discount at purchase. Adjusted operating profit includes the effect of variances in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed as nonoperating items.
Add back adjusting items: Investment return variances and economic assumption changes on long-term insurance business 791 (75) (1,631)
Income Gross written premiums 36,274 34,690 36,206 Premiums ceded to reinsurers (1,863) (2,576) (1,841)
Premiums written net of reinsurance 34,411 32,114 34,365 Net change in provision for unearned premiums (75) 559 277
Profit on the disposal of subsidiaries and associates 159 153 7
Expenses Claims and benefits paid, net of recoveries from reinsurers (29,152) (27,549) (29,353) Change in insurance liabilities, net of
Year ended 31 December 2009 Sales in 2009 were £45,068 million, a decrease of £6,309 million, or 12%, from £51,377 million in 2008. All regions reported a decrease in sales in 2009. Long-term insurance and savings and general insurance and health sales decreased by 24% in the UK with Europe reporting an increase of 6% in long-term insurance and savings sales offset by a 26% decrease in general insurance and health sales mainly attributable to the sale of the Delta Lloyd health business on 1 January 2009. North America long-term insurance and savings sales decreased by £1,170 million, offset by a 12% increase in general insurance sales in Canada. Asia Pacific reported a decrease in sales of 22% mainly attributable to the sale of the Australian business on 1 October 2009.
Net investment income Year ended 31 December 2010 Net investment income for the year was £21,993 million, a decrease of £3,162 million (2009: £25,155 million). Investment returns were generally lower than in 2009, with lower unrealised gains on investments in 2010 and improved fair value adjustments on investment properties.
Year ended 31 December 2009 Net investment income for the year was £25,155 million, an increase of £41,198 million (2008: £16,043 million loss). During 2009, investment markets across the regions in which we operated improved significantly from the falls in property and equity markets that were experienced in 2008.
Year ended 31 December 2009 Other income (which consists of fee and commission income, share of (loss)/profit after tax of joint ventures and associates, and profit/(loss) on disposal of subsidiaries and associates) increased by £674 million to £1,438 million in 2009 (2008: £764 million). Profit/(loss) on disposal of subsidiaries and associates includes the sale of our Dutch health business and our Australian longterm insurance and savings business resulting in a profit of £153 million. The loss after tax of joint ventures and associates was £504 million, an increase on 2008 of £624 million from increasing property values from our property partnerships.
Expenses Year ended 31 December 2010 Claims and benefits paid net of reinsurance in 2010 were £29,152 million, an increase of £1,603 million over 2009 (2009: £27,549 million) reflecting the overall growth of the portfolio and surrender values. This includes a marginal decrease in claims payments to general insurance and health policyholders. Changes in insurance liabilities in 2010 were a charge of £7,177 million, an increase of £1,495 million on the prior year (2009: £5,682 million charge). This is primarily due to changes in economic and non-economic assumptions. The change in investment contract provision of £8,741 million charge (2009: £11,185 million charge) is a result of improved
Year ended 31 December 2009 Claims and benefits paid in 2009 were £27,549 million, a decrease of £1,804 million (2008: £29,353 million). The decrease in claims and benefits paid are a result of a fall in surrenders during the year and our Dutch healthcare business being sold as of 1 January 2009. Changes in insurance liabilities in 2009 were a charge of £5,682 million, an increase of £9,567 million (2008: £3,885 million credit). The unfavourable movement is a result of new business provision and the impact of the euro against sterling. The change in investment contract provisions of £11,185 million charge (2008: £10,629 million credit) is a result of improved investment markets across our regions resulting in increases in our contract liabilities and the impact of the euro against sterling. Unallocated divisible surplus charge of £1,547 million (2008: £4,482 million credit) reflects the narrowing of investment spread on participating assets and related liabilities. In 2008, a negative balance in Spain created a charge of £203 million of which £159 million was reversed in 2009. Fee and commission expense, other expenses and finance costs of £11,281 million decreased by £93 million or 1% from £11,374 million in 2008. Lower staff costs and impairment charges were offset by higher exceptional costs following the reattribution of the inherited estate in the UK – see ‘Financial Statements – Note 6 – Details of expenses’.
Impairment of goodwill was £24 million in 2010 (2009: £62 million). The current year charge primarily relates to an impairment recognised in an Italian associate and £9 million against Taiwan. Amortisation of intangibles increased by £72 million to £216 million in 2010 (2009: £144 million) due to a £66 million higher amortisation charge recognised in UK Life relating to an accelerated amortisation period for certain assets. Profit on disposal of subsidiaries and associates was £159 million (2009: £153 million). The profit comprises principally of a £128 million profit in relation to the transaction with RBSG, as described in note 3 to the IFRS financial statements. Integration and restructuring costs for 2010 were £243 million (2009: £286 million). 2010 costs include expenditure on restructuring programmes across the Group of £123 million; costs in relation to the European ‘Quantum Leap’ transformation programme of £40 million; and costs associated with preparing the businesses for Solvency II implementation amounted to £59 million. Exceptional items in 2010 were £273 million adverse (2009: £45 million favourable). This included exceptional strengthening of longevity assumptions of approximately £483 million for Delta Lloyd following the introduction of new mortality tables in 2010, partially offset by a net gain on the closure of the UK pension schemes of £286 million.
Year ended 31 December 2009 The long-term insurance and savings business investment variances and economic assumption changes on long-term insurance business was a charge of £75 million (2008: £1,631 million charge). The favourable change is driven by positive market movements across our regions and the inclusion in 2008 of a £550 million provision for credit defaults in the UK. The short-term fluctuations and economic assumption changes on the non-life business were a £152 million credit (2008: £913 million charge). Favourable market movements across our regions were the primary driver for the change in the current year result. Impairment of goodwill was £62 million in 2009 (2008: £66 million) driven by impairments in our UK life business and on an Italian associate. Amortisation of intangibles increased by £27 million to £144 million in 2009 (2008: £117 million) on higher levels of bancassurance and other distribution agreements held within the Group. Profit on disposal of subsidiaries and associates were £153 million. The profit comprises £31 million from the sale of our Dutch health insurance business and £122 million from the sale of our Australian life and pensions business. Integration and restructuring costs for 2009 were £286 million (2008: £326 million). This includes £210 million for the cost savings initiatives in the UK life and general insurance businesses and Europe, which have delivered £170 million annualised cost savings in the year. Exceptional items for 2009 amounted to £45 million favourable (2008: £551 million adverse). This includes an exceptional gain resulting from the reattribution of the inherited estate offset by strengthening of reserves in respect of several specific discontinued commercial liability risks written in Canada a significant number of years ago and the migration of all remaining local brands, except Delta Lloyd and RAC, to the single global Aviva brand, which has been implemented over the twoyear period 2008 to 2009.
Year end 31 December 2010 UK general insurance and health net written premiums were £4,539 million, an increase of £241 million, or 6%, on 2009 (2009: £4,298 million). The increase reflects a combination of factors including excellent retention, substantial growth in our direct channel, rolling out our direct prices to brokers, good levels of commercial new business and the launch of our corporate risks offering. Adjusted operating profit in 2009 was £579 million, an increase of £44 million, or 8% (2009: £535 million). The increase in adjusted operating profit results from an improvement in current year profitability which has more than offset an adverse impact from weather-related claims of £40 million compared to long-term average (2009: neutral), a £29 million reduction in investment return to £388 million (2009: £417 million) and lower savings on prior year claims development of £87 million (2009: £105 million).
Europe Aviva Europe has substantial long-term insurance and savings businesses in France, Ireland, Italy, Poland and Spain. We also have a growing presence in Russia and Turkey. We have large general insurance businesses in France, Ireland and Italy as well as smaller operations in Poland and Turkey. Our Europe fund management operations are managed by Aviva Investors. Delta Lloyd operations include long-term insurance and savings, general insurance and fund management. The table below presents sales and net written premiums from our operations in Europe for the years ended 31 December 2010, 2009 and 2008, including amounts relating to investment sales from Aviva Investors.
France 319 272 275 Ireland 122 50 61 Italy 119 128 48 Poland (including Lithuania) 157 152 162 Spain 179 160 155 Other Europe (3) (1) (16)
Fund management 103 31 14 Non-insurance (147) (148) (151) Total adjusted operating profit 1,434 1,196 1,141
General insurance and health sales increased 4% to £1,953 million (2009: £1,883 million). We saw growth in all our general insurance and health markets except in Ireland. In Ireland health insurance sales grew 19%, however general insurance sales declined as the market continues to be challenging. Net written premiums in long-term insurance and savings business were £13,041 million, an increase of £586 million, or 5% (2009: £12,455 million) driven by sales of our profit sharing single premium products in Italy. Aviva Europe’s long-term insurance and savings business adjusted operating profit was £893 million, an increase of £132 million, or 17%, from £761 million in 2009, reflecting increased profits from existing business in France, Italy and Spain offset by increased new business strain in Italy. The current year result includes £55 million from release of reserves for protection business following the adoption of realistic reserving in 2010. Aviva Europe’s adjusted operating profit of our general insurance and health businesses was £109 million in 2010, a decrease of £23 million, or 17%, over £132 million in 2009, primarily due to lower longer-term investment returns as a result of lower interest rate yields.
Delta Lloyd Delta Lloyd reported long-term and savings sales of £3,793 million, a decrease of £536 million, or 12%, on 2009 (2009: £4,329 million). Life and pension sales decreased by 13% to £3,178 million with investment sales reported at £615 million, a decrease of 7% on 2009. Excluding Germany, life and pension sales were 3% lower on a local currency basis. General insurance and health sales at £1,177 million are in line with prior year (2009: £1,163 million) and 5% higher on a local currency basis. This includes amounts from accelerating the reporting of brokered business onto an actual basis; excluding these amounts net written premiums were stable year on year. Delta Lloyd reported net written premiums of £4,340 million in line with 2009 (2009: £4,341 million) primarily due to lower group pension contracts and the closure of the German operation to new business being offset by an increase in annuity product sales. Adjusted operating profit was £536 million, an increase of £137 million on £399 million in 2009. Improved profits in the fund management segment resulted from a substantial one-off performance fee received in late 2010 while life operating profit benefited from increased technical margins and a reduction in administration costs.
Aviva Europe Aviva Europe reported an increase in long-term insurance and savings sales of £1,060 million, or 8%, to £14,375 million (2008: £13,315 million) largely due to the strengthening of the euro against sterling. Life and pension sales contributed £668 million to the increase in long-term insurance and savings sales with £392 million from investment sales. Both France and Italy reported increases in life and pension sales of 26% and 55%, respectively, with all other markets reporting a decrease in sales. Poland sales were 41% down reflecting the impact of pension legislation changes and special promotions in 2008. General insurance and health sales increased by 4% to £1,883 million (2008: £1,812 million) primarily due to increased sales in France and other European markets, offset by an 8% fall in sales in Ireland. Net written premiums in long-term insurance and savings businesses were £10,572 million, an increase of £3,201 million, or 43% (2008: £7,371 million) driven by France and Italy. Sales in France have increased through AFER and Italy reported an increase in sales of profit sharing single premium products. Aviva Europe’s long-term insurance and savings business adjusted operating profit was £761 million, an increase of £76 million, or 11%, from £685 million in 2008, reflecting increased profits from existing business in France and Italy due to favourable experience in claims, lapses and surrenders. Aviva Europe’s adjusted operating profit of our general insurance and health businesses was £132 million in 2009, a decrease of £88 million, or 40%, over £220 million in 2008, primarily due to extreme weather in Ireland and France during the year.
North America Aviva North America includes the long-term insurance and savings business in the US, which provides life insurance and annuity products, and the general insurance business in Canada. The table below presents sales, net written premiums, adjusted operating profit and IFRS profit/(loss) before tax attributable to shareholders for the years ended 31 December 2010, 2009 and 2008.
Asia Pacific 2,178 1,717 1,852 Australia long-term insurance and savings business — 995 1,647
Profit/(loss) before tax attributable to shareholders’ profits – Asia Pacific 39 101 (108)
Profit/(loss) before tax attributable to shareholders’ profits – Australia — 45 40
6 Excludes the contribution from the Australian life business sold on 1 October 2009
Year ended 31 December 2009 Corporate centre costs were £108 million, a decrease of £33 million, or 23%, on £141 million in 2008. The decrease reflects lower central spend. Staff incentive costs were in line with 2008 and projects spending decreased by £23 million reflecting lower costs following the completion of the brand migration, financial controls and MCEV projects initiated in 2008. The Group debt costs and other interest increased to £636 million, an increase of £257 million on 2008 of £379 million. External interest costs increased to £335 million (2008: £286 million) reflecting higher interest on subordinated debt, due to hybrid debt being issued in 2008 and 2009, which was offset by lower commercial paper interest as proceeds from the issue were used to repay some commercial paper. Internal lending arrangement costs increased to £227 million (2008: £197 million) driven by changes to our internal loan balances. The net pension charge of £74 million (2008: £104 million income) represents the difference between the expected return on pension scheme assets and the interest charged on pension scheme liabilities. The increase is primarily due to lower rates of return on asset values offset by higher discount rates on liabilities.
Analysis of investments We invest our policyholders’ funds and our own funds in order to generate a return for both policyholders and shareholders. The financial strength of our Group and both our current and future operating results and financial performance are, therefore, in part dependent on the quality and performance of our investment portfolios in our UK, continental European, North America and Asia Pacific operations. For additional information on our financial investments, please see ‘Financial statements IFRS – Note 25 – Financial investments’. For a quantitative analysis of funds under management by Aviva and third-party fund managers, see ‘Financial statements IFRS – Note 59 – Assets under management’.
Property partnerships As part of their investment strategy, the UK and certain European policyholder funds have invested in a number of property limited partnerships (PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The nature of our involvement in property partnerships is set out in the second and third paragraphs of the Investment vehicles section of ‘Financial Statements IFRS – Accounting policies – (C) Consolidation principles’. Property partnerships are accounted for as subsidiaries, joint ventures or financial investments depending on our participation and the terms of each partnership agreement. For each property partnership accounted for as a subsidiary, joint venture or financial investment, we are exposed to falls in the value of the underlying properties which are reflected as unrealised gains/losses on investment properties, our share of joint venture results and unrealised gains/losses on financial investments, respectively. However, the majority of these are in policyholder funds (rather than shareholder funds) so such losses are offset by changes in the amounts due to policyholders or unitholders, or in the Unallocated Divisible Surplus (UDS).
Investment property 4,015 7,062 1,987 13,064 — 13,064 Loans 35 8,314 34,725 43,074 — 43,074 Financial investments Debt securities 16,150 85,414 65,918 167,482 — 167,482 Equity securities 31,441 12,308 5,327 49,076 — 49,076 Other investments 26,814 6,608 3,308 36,730 — 36,730
As the table indicates, approximately 36% of total investments can be directly attributed to shareholders. The apportionment of our shareholder assets is predominantly weighted towards debt securities and loans. In comparison, policyholder and participating funds contain a greater proportion of equities and other investments (e.g., unit trusts), reflecting the underlying investment mandates. Financial investment balances included in the remainder of this disclosure include financial investments of operations classified as held for sale. During 2010, the Group undertook a review of investment classifications, the allocation of assets between shareholder, participating and policyholder funds, and credit rating classifications, with the following effect on 2009 previously reported amounts: In our Spanish business debt securities of £2,362 million and equity securities of £10 million previously recognised as participating fund assets have been reclassified as shareholder assets.
In our business in France, equity and debt securities held indirectly through majority owned consolidated mutual funds previously presented as unit trusts and other investment vehicles within other investments, are now presented as equity and debt securities. The effect is to increase equity and debt securities by £2,085 million and £1,247 million and decrease unit trusts and other investment vehicles within other investments by £3,332 million.
In our businesses in the UK the credit ratings of certain non-rated private placements and other bonds totalling £1,917 million have previously been classified according to their internal credit ratings. These are now classified as non-rated. The net effect of the adjustments above is to increase shareholder investment at 31 December 2009 by £4,262 million and decrease policyholder and participating fund investments by £1,890 million and £2,372 million respectively.
Measurement basis We carry investments on our statement of financial position at either fair value or amortised cost. As shown in the table below, at 31 December 2010, 93% of the group’s total investments were carried at fair value on the statement of financial position.
Government UK government 17,447 — — — — — 17,447 UK local authorities 1 10 — — — 5 16 Non-UK government 27,695 15,747 4,428 1,433 632 585 50,520
Corporate Public Utilities 76 639 4,797 2,455 80 320 8,367 Convertibles and bonds with warrants 5 46 101 329 42 60 583 Other corporate bonds 10,373 12,340 26,687 20,657 2,897 6,163 79,117
Structured RMBS non-agency sub-prime — — — — — — — RMBS non-agency ALT A 19 9 11 8 131 — 178 RMBS non-agency prime 758 21 44 67 30 — 920 RMBS agency 1,762 — — — — — 1,762
CMBS1 1,434 281 369 119 181 20 2,404 ABS2 1,113 256 365 129 63 181 2,107 CDO (including CLO) 97 57 22 17 86 53 332 ABCP3 — 15 — — — — 15 ABFRN4 — — — — — — —
Structured RMBS non-agency sub-prime — — — — — — — RMBS non-agency ALT A — — — — — — — RMBS non-agency prime 24 2 3 — — — 29 RMBS agency — — — — — — —
CMBS 7 2 — — — — 9 ABS 18 6 47 3 — 9 83 CDO (including CLO) — — — — — — — ABCP — — — — — — — ABFRN — — — — — — —
Debt securities, for which participating funds carry the exposure to investment losses, analysed by credit rating and product type are set out in the table below. Government and corporate debt securities are further analysed by type of issuer.
CMBS 128 50 6 16 9 1 210 ABS 88 32 113 53 37 1 324 CDO (including CLO) — — — — — — — ABCP — — — — — — — ABFRN — — — — — — —
Corporate Public Utilities 71 322 2,759 1,621 76 277 5,126 Convertibles and bonds with warrants 5 — 90 61 22 38 216 Other corporate bonds 2,882 4,795 10,847 9,180 1,451 4,240 33,395 2,958 5,117 13,696 10,862 1,549 4,555 38,737
In respect of the wrapped credit investments, the table below shows the credit rating of the securities as they are officially rated, and an estimate of their rating without the guarantee. As rating agencies do not provide credit ratings for individual wrapped credit securities without consideration of the insurance guarantee, the credit ratings disclosed in the table below are based on internal best estimates.
Public Utilities 2,690 1,395 23 4,108 Banks, trusts and insurance companies 4,331 1,854 1,436 7,621 Industrial miscellaneous and all other 24,402 9,019 3,279 36,700 Non-redeemable preferred shares 19 40 588 647
At 31 December 2010, shareholder investment in equity securities amounted to £5.3 billion, of which 79% related to our business in the Netherlands, 7% our Italian business and 14% other businesses. The Italian equity holdings are held both directly by our Italian subsidiaries and by Group holding companies. Of our £7.6 billion exposure to equity investments in banks, trusts and insurance companies, £1.4 billion relates to shareholder investments, which includes £803 million equities held by our business in the Netherlands and a £408 million strategic holding in UniCredit and other Italian financial institutions (£244 million net of minority interest). The remaining shareholder exposure to equity securities, other than banks, trusts and insurance companies, arises principally in our Netherlands business, amounting to approximately 88% of the total exposure of £3.9 billion.
Property Our global headquarters are located in St. Helen’s, 1 Undershaft, London, England. We also have the following regional headquarters: UK – UK Life: York, England; UK – UK General Insurance: Norwich, England; Europe – Dublin, Ireland; North America – Chicago, Illinois, USA; Asia Pacific – Singapore; and Aviva Investors – London, England.
In addition to the above, our regions have major offices in the following locations: North America: Des Moines, Iowa, USA and Scarborough, Ontario, Canada Europe: Paris, France; Amsterdam, the Netherlands; Dublin, Ireland; Madrid, Spain; Warsaw, Poland; Brussels, Belgium; and
Insurance and investment contracts Long-term business — Insurance contracts – non-linked1 11,871 22,734 23,199 151,843 209,647 — Investment contracts – non-linked2 63,197 — — — 63,197 — Linked business2 82,769 — — — 82,769 General insurance3 7,231 4,410 2,108 4,288 18,037 165,068 27,144 25,307 156,131 373,650 Other contractual obligations4 Borrowings 2,947 1,567 2,272 27,773 34,559 Operating lease obligations 136 233 190 737 1,296 Capital commitments 118 46 23 36 223 Payables and other financial liabilities5 19,194 772 115 914 20,995 Net asset value attributable to unitholders 9,032 — — — 9,032
Total liabilities per statement of financial position 352,382 1. Amounts shown in respect of long-term insurance contracts represent estimated undiscounted cash flows for the Group’s life assurance contracts. In determining the projected payments, account has been taken of the contract features, in particular that the amount and timing of the contractual payments reflect either surrender, death or contract maturity. In addition, the undiscounted amounts shown include the expected payments based on assumed future investment returns on assets backing insurance and investment contract liabilities. The projected cash flows exclude the unallocated surplus of with-profits funds (see below).
2. All linked contracts and almost all non-linked investment contracts may be surrendered or transferred on demand. For such contracts the earliest contractual maturity is therefore at the current statement of financial position date, for a surrender amount approximately equal to the current statement of financial position liability. Although we expect surrenders, transfers and maturities to occur over many years, the total liability for non-linked investment contracts is shown in the Less than 1 year column above.
Risk management As a global insurance group, risk management is at the heart of what we do and is the source of value creation as well as a vital form of control. It is an integral part of maintaining financial stability for our customers, shareholders and other stakeholders. The Group’s risk strategy is to invest its available capital to optimise the balance between return and risk whilst maintaining an appropriate level of economic (i.e. risk-based) capital and regulatory capital. Consequently, our risk management goals are to: Embed rigorous risk management throughout the business, based on setting clear risk appetites and staying within these; Ensure that capital is allocated where it will make the highest returns on a risk-weighted basis; and
Liquidity: the Aviva Board requires that the Group maintains significant liquid resources to meet both planned cash outflows and cover unexpected cash requirements under stress conditions. In addition the Group maintains substantial unutilised committed credit facilities to cover extreme adverse scenarios.
Franchise value: Aviva recognises that its long-term sustainability depends upon the protection of our franchise and our relationship with customers. As such, Aviva will not accept risks that materially impair the reputation of the Group and requires that customers are always treated with integrity.
The Group’s position against the quantitative risk appetite statements is monitored and reported to the Board on a monthly basis. The 2010 business planning process included explicit consideration of the reviewed Group level risk appetite statements and economic capital risk appetites were cascaded to individual business units at the end of 2010. More granular risk appetites or tolerances are set out in our risk management policies, which are implemented across the Group.
Risk and capital management Risk and capital management are strongly interlinked. We set our business strategy and plans, guided by our overarching strategy, risk appetite and goal of improving risk-weighted returns. We actively manage our risk profile through a wide range of techniques including product design, pricing, underwriting, asset allocation, investment management, duration matching, hedging, reinsurance, acquisitions and disposals, management of the capital structure and of committed credit facilities. The development and evaluation of our business plans and our various capital and risk management actions are supported by risk modelling, which has been a key area of further enhancement throughout 2010.
This helps to provide assurance to the various risk oversight committees that there are appropriate controls in place for all our core business activities, and that the processes for managing risk are understood and followed consistently across our global businesses. Businesses regularly review the risks identified against the tolerances specified in the risk policies and, where risks are outside of tolerance, action plans are required. Similarly, controls are regularly reviewed for effectiveness and remediation actions implemented where necessary. This process is supported by a semi-annual sign-off by the business chief executive and chief financial officers of policy compliance and of the completeness of the list of risks identified. A top-down, key risk identification and assessment process has been introduced in 2010 and is carried out monthly in the risk function at Group level based on Group and regional chief risk officer (CRO) and functional risk director input. This includes the consideration of emerging risks and is supported by deeper thematic reviews. The bottom-up and top-down risk assessment processes are used to generate risk reports which are shared with the relevant committees. As part of the annual business planning process, we formally consider the risks present in, and to, the draft plan, the consistency of the draft plan with the Group’s risk appetite and the appropriate management actions and controls to address any risks identified. The risk assessment forms part of the formal plan submitted to the Group Executive Committee and Board for discussion and approval.
— Set strategic objectives — Monitor performance — Set risk appetite — Set and uphold values
— Set risk policies — Monitor performance — Oversee risk management — Provide challenge — Recommend risk activity
Risk factors This table sets out the definitions of each key risk type; the key risk drivers for each risk category; sensitivities to economic and operating experience on the Group’s performance and a summary of the related risk mitigation processes within the risk management framework.
Market Risk of adverse financial impact due to changes in fair values or future cash flows of financial instruments from fluctuations in interest rates, equity prices and foreign currency exchange rates
Fluctuation in the value of, or income from, our investments including loans, debt, equity securities, mortgages and holdings of investment properties
Credit Risk of financial loss as a result of the default or failure of third parties to meet their payment obligations or as a result of changes in fair value resulting from movements in the credit standing of the third party or in credit spreads
Exposures to debt investments, structured asset investments, and counterparties in our derivatives, mortgage loans and reinsurance placements
Default and spread risks are considered, as both impact the value and risks of assets Concentrations of exposures to individual credits/counterparties or sectors/geographies
Instances where additional cash requirements arise in excess of that available within operating businesses
Failure or underperformance of providers of outsourced services including administration and distribution
Adverse changes in the external environment including the competitive landscape, customer behaviour, distributor regulatory changes, merger and acquisition opportunities and emerging trends
For further details refer to the ‘Financial statements IFRS – Note 57 – Risk management’.
A 1% increase in interest rates would decrease total shareholder funds by £1.4 billion net of tax on an IFRS basis and by £0.8 billion net of tax on an MCEV basis
A 10% decrease in equity prices would decrease total shareholders’ funds by £0.6 billion net of tax on an IFRS basis and by £1.0 billion net of tax on an MCEV basis. These sensitivities are shown net of equity hedges.
We expect that a 40% fall in equity prices (at 31 December 2010) would reduce IGD by £0.6 billion.
Investment strategy and long-term objectives agreed with scheme trustees Duration matching
Adherence to credit policy and limits frameworks by all businesses Regular monitoring and reviews by the Credit Approvals Committee of exposures and management against limits Maintaining a diversified portfolio and reviewing concentrations of exposure by types, sector, geography and credit ratings Utilisation of risk reduction techniques such as hedging and collateral posting requirements
Sensitivity information is not provided for this risk type Asset liability matching methodology develops optimal asset portfolio maturity structures in our businesses to ensure cash flows are sufficient to meet liabilities
Regular monitoring through liquidity stress and scenario testing and against liquidity risk appetite
Our total potential loss from our most concentrated catastrophe exposure zone (Northern European) is approximately £300 million for a one in ten year annual loss scenario, compared to approximately £550 million for a one in hundred year annual loss scenario
A 5% increase in gross loss ratios for our general insurance and health business reduces shareholders funds by £310 million, net of reinsurance on a pre-tax basis
Regular reviews by the General Insurance Committee Use of reinsurance to help reduce the financial impact of a catastrophe and manage earnings volatility Extensive use of data, financial models and analysis to improve pricing and risk selection Underwriting and claims management disciplines Digital mapping to better manage property flood risk
Regular reviews by the Life Insurance Committee Monitoring longevity statistics compared with emerging industry trends and use of reinsurance solutions Use of reinsurance solutions to mitigate mortality and morbidity risks Guidelines to support businesses through complete cycle of product design, development and pricing Regular monitoring of expense assumptions and the use of outsource providers governed by strict outsourcing policy Guidelines on persistency management and regular monitoring and investigation of persistency levels
Regular reviews by Operational Risk Committee Capture and investigation of operational risk loss events data Strong policy and control framework compliance which is subject to regular review and certification Strategic review and planning process combined with performance management process Challenging developments that could be damaging to our business and the industry as a whole
Sensitivity information is not provided for this risk type Regular reviews by the Corporate Reputation Committee Building our brand prominence and regularly monitoring brand metrics Delivering a truly exceptional experience to our customers and treating customers fairly in line with the FSA principles Monitoring metrics including customer advocacy, retention and complaints 1 IFRS sensitivities are shown gross of minority interest.
Capital management Capital management objectives The primary objective of capital management is to optimise the balance between return and risk, whilst maintaining economic and regulatory capital in accordance with risk appetite. Aviva’s capital and risk management objectives are closely interlinked, and support the dividend policy and earnings per share growth, whilst also recognising the critical importance of protecting policyholder and other stakeholder interests. Overall capital risk appetite, which is reviewed and approved by the Aviva Board, is set and managed with reference to the requirements of a range of different stakeholders including shareholders, policyholders, regulators and rating agencies. Risk appetite is expressed in relation to a number of key capital and risk measures, and includes an economic capital risk appetite of holding sufficient capital resources to enable the Group to meet its liabilities in extreme adverse scenarios, on an ongoing basis, calibrated consistently with the Group’s strategic target of maintaining credit ratings in the AA range. In managing capital we seek to: maintain sufficient, but not excessive, financial strength in accordance with risk appetite to support new business growth and satisfy the requirements of our regulators and other stakeholders giving both our customers and shareholders assurance of our financial strength; optimise our overall debt to equity structure to enhance our returns to shareholders, subject to our capital risk appetite and balancing the requirements of the range of stakeholders; retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit facilities and access to a range of capital markets; allocate capital rigorously across the Group, to drive value adding growth through optimising risk and return; and declare dividends on a basis judged prudent, while retaining capital to support future business growth, using dividend cover on an IFRS operating earnings after tax basis in the 1.5 to 2.0 times range as a guide.
Financed by: Equity shareholders’ funds 15,295 13,092 Minority interest 3,977 4,279 Direct capital instruments 990 990 Preference shares 200 200 Subordinated debt 4,572 4,637 External debt 1,494 852
— Certain subsidiaries, subject to continuing to satisfy stand-alone 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.
The required capital across our life businesses varies between 100% and 325% of EU minimum or equivalent. The weighted average level of required capital for our non-participating life business, expressed as a percentage of the EU minimum (or equivalent) solvency margin has decreased to 129% (31 December 2009: 130%). 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 2010 the aggregate regulatory requirements based on the EU minimum test amounted to £6.8 billion (31 December 2009: £6.1 billion). At this date, the actual net worth held in our long-term business was £10.0 billion (31 December 2009: £9.8 billion) which represents 147% (31 December 2009: 159%) of these minimum requirements.
Regulatory capital – UK Life with-profit funds The available capital of the with-profit funds is represented by the realistic inherited estate. The estate represents the assets of the long-term with-profit funds less the realistic liabilities for nonprofit policies within the funds, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs, guarantees and promises. Realistic balance sheet information is shown below for the three main UK with-profit funds: Old With-Profit Sub-Fund (OWPSF), New With-Profit Sub-Fund (NWPSF) and With-Profit Sub-Fund (WPSF). These realistic liabilities have been included within the long-term business provision and the liability for insurance and investment contracts on the consolidated IFRS balance sheet at 31 December 2010 and 31 December 2009.
2 Estimated realistic inherited estate at 31 December 2009 was £nil billion, £0.2 billion and £1.6 billion for NWPSF, OWPSF and WPSF respectively.
4 The WPSF fund includes the Provident Mutual (PM) fund which has realistic assets and liabilities of £1.7 billion, and therefore does not impact the realistic inherited estate.
5 The risk capital margin (RCM) is 3.7 times covered by the inherited estate and support arrangement (31 December 2009: 3.6 times).
Investment mix The aggregate investment mix of the assets in the three main with-profit funds at 31 December 2010 was: Equity 26% 21% Property 16% 12% Fixed interest 57% 59% Other 1% 8%
The equity backing ratios, including property, supporting withprofit asset shares are 69% in OWPSF and NWPSF, and 68% in WPSF.
Economic capital We use a risk-based capital model to assess economic capital requirements and to aid in risk and capital management across the Group. The model is based on a framework for identifying the risks to which business units, and the Group as a whole, are exposed. A mixture of scenario based approaches and stochastic models are used to capture market risk, credit risk, insurance risk and operational risk. Scenarios are specified centrally to provide consistency across businesses and to achieve a minimum standard. Where appropriate, businesses also supplement these with additional risk models and stressed scenarios specific to their own risk profile. When aggregating capital requirements at business unit and Group level, we allow for diversification benefits between risks and between businesses, with restrictions to allow for non-fungibility of capital when appropriate. This means that the aggregate capital requirement is less than the sum of capital required to cover all of the individual risks. This model is used to support our Individual Capital Assessments (ICA) which are reported to the FSA for all our UK regulated insurance businesses. The FSA uses the results of our ICA process when setting target levels of capital for our UK regulated insurance businesses. In line with FSA requirements, the ICA estimates the capital required to mitigate the risk of insolvency to a 99.5% confidence level over a one year time horizon (equivalent to events occurring in 1 out of 200 years) against financial and non-financial tests. The financial modelling techniques employed in economic capital enhance our practice of risk and capital management. They enable understanding of the impact of the interaction of different risks allowing us to direct risk management activities appropriately. These same techniques are employed to enhance product pricing and capital allocation processes. Unlike more
Capital management continued traditional regulatory capital measures, economic capital also recognises the value of longer-term profits emerging from inforce and new business, allowing for consideration of longer-term value emergence as well as shorter-term net worth volatility in our risk and capital management processes. We continue to develop our economic capital modelling capability for all our businesses as part of our development programme to increase the focus on economic capital management and meeting the emerging requirements of the Solvency II framework and external agencies.
Financial flexibility The Group’s borrowings are comprised primarily of long dated hybrid instruments with maturities spread over many years, minimising refinancing risk. In addition to central liquid asset holdings of £1.5 billion, the group also has access to unutilised committed credit facilities of £2.1 billion provided by a range of leading international banks.
Capital generation and utilisation The active management of the generation and utilisation of capital is a primary Group focus, with the balancing of new business investment and shareholder distribution with operational capital generation a key financial priority. The 2010 result of £1.7 billion represents a £0.7 billion increase on 2009 and reinforces our confidence in the capital generation position of the Group. This excludes the negative impact of the Delta Lloyd longevity assumption change of £0.2 billion which is included in the MCEV existing business free surplus generation. Profits from the life business remain strong, generating £2.1 billion of capital1 (31 December 2009: £1.9 billion), with a further £0.6 billion (31 December 2009: £0.6 billion) generated by the general insurance, fund management and non-insurance businesses. Capital invested in new business has reduced significantly to £1.0 billion (31 December 2009: £1.5 billion), benefiting in particular from management actions to improve capital efficiency in the US business, the utilisation of the RIEESA to finance new business in UK Life and reduced required capital on general insurance business.
Operational capital generation comprises the following components: — Operating Free surplus emergence, including release of required capital, for the life in-force business (net of tax and minorities); — IFRS operating profits for the general insurance and non-life businesses (net of tax and minorities); — Capital invested in new business. For the life business this is the impact of initial and required capital on free surplus.
As well as financing new business investment, operational capital generated is used to finance corporate costs, service the Group’s debt capital and to finance shareholder dividend distributions. After taking these items into account the net operational capital generated after financing remains at a £0.6 billion surplus, a strong improvement on the 2009 position.
Interest, corporate and other costs (0.6) (0.5) External dividend net of scrip (0.5) (0.6)
Key performance indicators The Companies Act requires that a fair review of the business contains financial and, where applicable, non-financial key performance indicators (KPIs). We consider that our financial KPIs are those that communicate to the members the financial performance and strength of the Group as a whole. These KPIs comprise: Earnings per share (International Financial Reporting Standards basis); Proposed ordinary dividend per share and dividend cover; Operating profit (Market Consistent Embedded Value basis); Operating profit (IFRS basis); Worldwide sales; Operational capital generation; and Return on equity shareholders’ funds.
By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events that are beyond our control. For example, certain insurance risk disclosures are dependent on our choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that we have estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements include, but are not limited to: Global economic business conditions; Monetary and interest rate policies; Foreign currency exchange rates; Equity and property prices; The impact of competition, inflation and deflation; Changes to regulations, taxes and legislation; The timing and impact of acquisitions and business combinations in relevant industries; Natural and other disasters; Changes to consumer saving and spending habits; and Our success in managing the above factors.
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, consolidated statement of financial position, other primary statements and notes to the financial statements. These are set out on pages 170 to 182.
Future accounting developments We continue to take an active role in the development of new accounting standards, via industry forums and working parties, and reviewing and providing comment on proposals from the IASB. Phase II of the IASB’s project on insurance contracts continues to be the most significant area of development for us, and we continue actively to engage in the debate. We fully support the timely development of a global standard for insurance accounting that reflects the economics of our business, and are working directly and through the CFO Forum of leading European insurers, to achieve this. While this standard is still under development, we will continue to focus on embedded value as the best measure of value for our long-term business. We continue to monitor other major IASB projects, including financial instruments, revenue recognition, leasing, pensions accounting and fair value measurement.
Highlights 76 Strategy and risk 76 Governance 76 Trust and integrity 77 Attracting and retaining talent 78 Developing communities 80 Climate change and environment 80 Financial capability 82 External benchmarking and recognition 83 Affiliations and engagements 83 Key indicators 84 Accounting for Sustainability 86 Independent assurance statement 91
At Aviva, corporate responsibility (CR) means embracing our responsibilities and developing opportunities to be a strong sustainable business. We want what we do every day to have a positive impact on the societies in which we operate. In this report we highlight how we are addressing the issues that are material for our business. These issues include responding to the need to improve trust in the financial services sector; attracting and retaining talent; developing communities; influencing the climate change agenda and promoting financial capability. The report that follows contains a summary of the progress and performance of our CR programme in 2010 aligned to these material issues. A more detailed review is available online at www.aviva.com/corporate-responsibility/reports
Report to an advisory vote of shareholders at the AGM Increasing perception of CR internally leading to an increasing sense of pride in what Aviva stands for – 74% of employees responding to our employee survey think that our commitment to CR is genuine, a rise of 8% from 2009
Focusing on a balanced leadership to ensure an effective gender mix throughout all levels in the organisation.
Strategy and risk Our CR strategy is an integral part of the way Aviva does business internally and externally. Our CR strategy was revised during the year. Starting with our belief that ‘by acting responsibly for the long term in how we do business we will meet our ambition to provide prosperity and peace of mind to our customers’ we took on feedback from a range of stakeholders to ensure our CR strategy was correctly aligned to the most significant challenges and opportunities we face. For example, one of our priorities is to improve consumer trust. The risk is that consumers lose faith in financial services. We know we need to conduct ourselves in line with the highest ethical standards as set out in our business ethics code and satisfy the customers’ expectations to ensure their loyalty. It is important that we recognise these issues and manage the associated risks. By working to turn these issues into opportunities for our business we help to shape the wider debate and action in our societies. We have developed a robust CR programme over the past ten years although we do acknowledge that we have differing levels of CR maturity within our markets. We are working hard to develop our capability globally. Our KPI section lists some areas where we are outperforming our targets and leading the agenda. In other areas we have a way to go to meet our ambitions. In all areas we are committed to continuous improvement. As an illustration, we are committed to reducing our impact on the environment and have long-term targets to focus performance. However, we note that while our absolute carbon emissions have reduced by 4% our actual emissions have risen by 22% due to growth in the business and the extended scope of reporting boundaries to include subsidiary companies. We want our growth to be sustainable so we will be working hard to reverse this trend.
Our achievements within our global community programme Street to School have helped us achieve a 43% rise in the amount of investment in our communities, but the amount of volunteering hours has reduced by 28%. This is because we no longer use brokers to find volunteering opportunities and volunteering opportunities with children require special training. We are exploring options to make it easier for our employees to make use of their three days volunteering leave to address this. We know this helps grow employee pride but there is more to be done on wider employee engagement which dropped by 1% in 2010. All teams across the Group are creating action plans to help us deliver on our employee promise of ‘At Aviva I am recognised for who I am, and my contribution matters’. We are proud of our extensive approach to diversity and inclusion. We have three female non-executive directors and good standing in benchmarks and indices. However, we have seen a slight drop in the percentage of women in senior management to 21% (2009: 22%). This is something we are intent on addressing. Throughout the report that follows we outline our performance and progress in 2010 and we are keen to continue our dialogue with our stakeholders to further develop our CR strategy, CR capability and positive contribution to the world we all share.
Financial crime Our financial crime policy reinforces our zero-tolerance approach and ensures that risks relating to fraud, money laundering, market abuse and bribery and corruption are adequately controlled. We provide mandatory computer-based training as part of our procedures for combating market abuse and insider trading, money laundering and fraud. In 2010 we enhanced understanding of bribery and corruption throughout the business, including at Board and senior manager level. Throughout 2011 we will be running training events with our 450 senior managers to raise awareness of bribery and corruption and reinforcing the importance of making ethical decisions. We encourage our employees to raise any concerns they might have through ‘Right Call’ – an Aviva-wide malpractice reporting service. This enables all employees to report any suspicions or concerns in a confidential manner for independent investigation. During 2010, 48 incidents were recorded across the Group. All cases were referred for independent investigation with 39 reaching conclusion and nine cases currently remaining under investigation.
Understanding our customers We continued to work to understand perceptions and needs in our markets and once again conducted our wide-ranging survey on Consumer Attitudes to Saving, using the results to inform ongoing product and service developments across the Group. The Net Promoter Score®1 (NPS) is our leading, Group-wide measure of customer advocacy, comprising a globally consistent relationship and benchmarking survey which is conducted annually. The focus for the business is to ensure we are acting on 1 Net Promoter, NPS, and Net Promoter Score are trademarks of Satmetrix Systems, Inc., Bain & Company, and Fred Reichheld.
Car insurance customers in some of our general insurance markets are rewarded by lower premiums if they opt to drive vehicles with low CO2 emissions.
We will do this by focusing globally on: developing leaders capable of winning for Aviva in our chosen markets embedding a culture of recognition, personal responsibility, risk awareness and performance building engagement and commitment by living the employee promise strengthening our CR performance by engaging employees and influencing our communities and stakeholders making it easier to work by simplifying and de-cluttering HR tools and processes building strong global HR and CR functions.
Locally, the use of global tools and ‘One Aviva’ processes supports the delivery of our business strategies.
Creating a culture of performance, responsibility and recognition Since their launch in 2008, the Aviva senior leadership summits in each region have become our primary means of engaging the top 500 leaders in our purpose, vision and strategy. This year, we used these gatherings to launch the concept of Living Leadership – which defines leadership simply as ‘the act of making a difference’. This model has three levels. Leading Myself clarifies our expectations of every Aviva employee – in terms of personal responsibility, accountability and contribution. It has provided a refreshed focus on ethics and risk as well as the foundations of both our employee and brand promise. Leading People reinforces our belief that excellence in line management is essential to turn the talents of individual employees into sustained superior business performance. Leading Organisations provides a focus on strategic leadership with the aim of beating the competition. Over the course of 2011, we will use Living Leadership to drive employee engagement and a recommitment to the Aviva values.
Our employee promise We want every employee to be able to say ‘At Aviva I am recognised for who I am and my contribution matters’. Our employee promise, launched in 2009, helps us to create an employment brand that differentiates Aviva as an employer of choice. We use ‘Aviva Day’, an annual celebration in June, to mark achievements across the Group. In 2010, a key part of this event was to raise awareness for our global community programme Street to School. This included participation in a variety of fundraising activities where employees raised in excess of £100,000. Employees were able to post information about their Aviva Day activities on Aviva World, our global intranet, in
Listening to our employees One of the ways that we listen to our employees is through our Employee Promise survey. In 2010, this achieved an 80% response rate, our highest response rate to date (2009: 76%). The survey measures our employees’ engagement levels, our leadership capabilities, delivery of Aviva’s strategy and tells us how we are doing in other areas that are important to our employees. As well as telling us what our key strengths are it gives detailed analysis of where we need to improve. One example of a key strength is our commitment to CR, 74% of employees think that this is genuine (2009: 66%). Our employees’ perception of our reputation for the quality of our products and services is also a growing strength. We need to improve the perception amongst our employees that we value diverse perspectives in the workplace. The survey results not only inform action planning for the following year but are also linked to senior management remuneration. We make sure that each manager with five direct reports or more receives their own local survey results, helping them to have honest conversations on the successes and challenges the survey results present and most importantly to decide on actions to take locally as a team. As with last year, each completed survey triggers a £1 donation to our global Street to School charity partner Save the Children. This year we raised £37,000 (2009: £37,000). We also focus on talking and listening to our employees when working on more challenging changes which we have to address as a business. This year, in the UK, we announced that in order to provide a sustainable pension scheme, changes would need to be made to the current arrangements. Following a three-month consultation with employees, the trade union Unite, and pension trustees we announced that the final salary scheme would close in April 2011. The 7,600 employees impacted by the changes have been fully consulted throughout the process. We ran 344 workshops across 34 locations, attended by 5,038 employees. All impacted employees were also kept informed of progress by post to their home addresses.
Diversity, equality and human rights Being respectful of each other’s differing backgrounds, cultures, needs and views is key to our delivery of the employee promise – ‘I am recognised for who I am and my contribution matters’. Our Diversity and Inclusion policy and practices are aligned with the United Nations Universal Declaration of Human Rights and the International Labour Organisation’s core labour standards. Last year, our Employee Promise survey results showed that our commitment to valuing diversity in our organisation could be improved. In response to this we have run a series of online discussions and employee forums to gain an insight into what is understood by diversity and how employees would like us to improve the perception and management of diversity issues. Based on this we have started to focus on instilling balanced leadership to create an effective gender mix at all levels in the organisation. We are recognised for being one of the few FTSE 100 companies for having three female non-executive directors, one of whom, Carole Piwnica, chairs our Corporate Responsibility Committee. Within our senior management group however, representation of female colleagues has declined slightly to 21% (2009: 22%) making our commitment to achieving balanced leadership all the more important. Whilst we have been making some improvement in terms of the internal promotion of our senior managers, we are committed to monitoring gender throughout this process to ensure a balance exists. Following a series of workshops with our senior management group we have implemented an action plan with a staged approach which comprises: embedding balanced leadership in our talent management programme senior leaders role modelling personal behaviours that support balanced leadership. One example is the group executive committee reciprocal mentoring scheme which will be launched in 2011 raising awareness and building engagement around balanced leadership principles hardwiring balanced leadership into HR practices and processes embedding balanced leadership into our regional HR strategies.
Our employee network group Aviva Pride successfully launched Friends of Aviva Pride in York this year with guest speaker Welsh rugby player, Gareth Thomas to encourage all colleagues to support a working environment that is open and inclusive. In North America our Aviva Pride and diversity networks have been formed this year as part of the programme launched by the Diversity and Inclusion advisory council set up by Aviva North America in 2009. We further improved our position in Stonewall’s Workplace Equality Index, achieving 42nd position (2009: 54th), which puts us in the top ten private sector companies. We continue to be the only insurer in the top 100. We have also received another Star Performing Network award recognising the activities of our employee network group as an example of best practice, with special acknowledgement for our work supporting local community projects.
Developing communities To be a sustainable business, we believe we have a role to play in the development of our communities. Moving beyond passive giving we strive to listen carefully, collaborate and together create a genuine and lasting impact. Using our strengths and working around our strategic focus on education, life trauma and financial literacy we have collaborated right across private, public and third sectors to help develop the wellbeing of our communities - to which our current and future investors, customers, talent and supply chain belong. We are actively contributing to the Millennium Development Goals and our history of engagement with the UN Global Compact (UNGC) led to an invitation to become one of the 54 UNGC LEAD companies. LEAD companies are committed to being at the leading edge of addressing environmental, social, and governance issues, and broadening and deepening partnerships with the entire United Nations system. Globally, we contributed over £11.4 million in 2010, a 43% increase on 2009 (2009: £8 million) and we have improved our measurement approach to record our inputs and outputs more accurately in order to demonstrate the benefit of this investment for our employees, our communities and our brand. Engaging our employees is vital. We delivered over 57,250 hours of volunteering in 2010. We measure the development gained by volunteers and the impact on their perception of Aviva and 80% of volunteers reported positive benefits2. This is reflected in a 4% uplift in employees who think we do a good job of contributing to our communities and an 8% increase in employees who believe Aviva’s commitment to CR is genuine. Aviva has a clear track record of working with field experts in community development across the third and public sector. We recognise the importance of our partnerships with organisations such as UK Athletics, Save the Children, Consortium for Street Children and Oxfam to enable us to develop and share best practice programmes and to work effectively in areas of community advocacy. We also recognise the mutual benefit of our community development activity; our employees feel engaged and proud, our communities benefit and our brand reputation is enhanced.
Street to School Our flagship global community development programme Street to School, a five-year commitment to help 500,000 children fulfil their potential, shows our approach in action. 2010 saw a significant increase in the volume and profile of our partnership work to help children off the streets and into education. In collaboration with leading charities and experts, and supported by our employees, partners and customers we have positively impacted 128,000 children through preventative education, outreach, healthcare, safe housing and education projects. Street to School partnerships and programmes are up and running in 17 of our markets and we have begun to use Street to School for cause-related marketing. Here are just a few examples of what we have achieved: In India our ‘Great Wall of Education’, supported by politicians and sports stars, collected a staggering 950,000 educational books for underprivileged children this year. With an average campaign reach of 48% of the population in Kolkata, Chennai, Delhi and Mumbai and a combined media value of over £875,000, we achieved significant exposure for our brand. This also attracted several awards including the CMO Asia Award for Excellence in ‘Social 2 ‘Volunteering: the business case’, Corporate Citizenship 2010, citizenship.com/archive/volunteering-the-most-cost-effective-way-to-train-and-develop-your-staff
In China our ‘Twinkling Stars’ project works with the issues of children left behind due to economic migration. This year we have built ten Care Houses, worked in 20 poor rural elementary schools and reached 24,000 children. In addition to significant publicity this helped Aviva Cofco win the award for ‘China’s Best Corporate Citizen’.
Our Grassroots Athletics and Rugby programmes reach out to tens of thousands of children every year to help them develop a healthy and active lifestyle
Climate change and environment Tackling climate change and protecting the environment are key priorities for Aviva that we believe require action today, not tomorrow. Our strategy to deliver action focuses firstly on control of our own environmental impacts to reduce greenhouse gas emissions from energy, waste and travel. We continue to compensate for our operational emissions worldwide by purchasing carbon credits from the voluntary carbon market. We apply our understanding to work within our sphere of influence externally to encourage sustainable practices with our customers, suppliers, governments and the companies in which we invest.
Our focused attention on driving down energy use has been rewarded this year with a reduction in gross emissions by 4% (2009: 13%). Last year we announced our long-term target of a reduction of 30% CO2 emissions by 2020. Taking the 2010 figures into account we have achieved an 10% reduction since our baseline of 2006. Our annual target reduction is set at 5% to help us achieve the longer-term target. We also set global annual targets in other key areas, summarised below: Performance – accounting for divestments
Reduce CO2 emissions by 5%* 4% Reduce water use by 4% 8% Reduce waste by 4% (2)% Increase percentage of recycled waste by 2% (until 80% recycled rate is achieved) 75%
All performance data is calculated on a like-for-like basis taking into account new acquisitions and divestments in 2010.
Leadership and participation We work in collaboration with leading organisations to provide a collective business and sector-specific response to the climate change agenda. This year we have participated in: The Cancun Communiqué; Open letters from the Aldersgate Group on mandatory reporting of climate related data; and 2010 Global Investor Statement on Climate Change.
Working with government stakeholders Aviva is committed to working with regulators, government and across our sector to build greater financial capability. As part of this, we believe that individuals need to take greater responsibility for their own retirement provision. The biggest influence on an individual’s ability to maintain their standard of living is how much they save during their working lives relative to their retirement expectations. To encourage individuals to plan their financial futures, it is important to understand current attitudes and concerns and we are sharing findings from our seven-year study into consumer attitudes to savings in our markets. Findings from our consumer attitudes survey have been shared with HM Treasury in the UK particularly around retirement concerns. We also presented our ‘Mind the Gap’ pensions research and recommendations to the European Commission (EC). In Europe, for people retiring in the next 40 years an additional €2.4 trillion will be required each year to fill the pensions gap3. Aviva has called on the EC to create a European Quality Standard for Pensions to restore consumer confidence in pensions savings vehicles and to establish and monitor a European Pensions Savings Target. It is hoped that through this national governments will be encouraged to rebalance their pensions systems with greater funded schemes.
Sustainable stock markets The most significant project on voting and engagement issues is our involvement in the Sustainable Stock Exchanges initiative. This is focused on enabling all investors to vote directly on the sustainability disclosure of listed companies, rather than using a surrogate such as the annual report and accounts. In 2008 Aviva Investors CEO Alain Dromer called on all the listing authorities of the global stock markets to consider whether their corporate governance codes should be updated to include a provision promoting CR reporting. Specifically, we proposed that all stock market listing authorities establish a listing requirement that companies: consider how responsible and sustainable their business model is; and present a forward-looking sustainability strategy at their annual general meeting (AGM) for shareholder approval.
3 Source: Mind the Gap – quantifying Europe’s pensions gap: Aviva & Deloitte, Sept 2010
Business ethics % of employees signing of receipt, understanding and acceptance of our Business Ethics Code
Customers % of businesses that are in or above the upper quartile relative to the local market average
% of employees who rate us favourably on customer index — — 67% 69% Meet/exceed GFS benchmark (2010: 75%)
Environment % of remaining CO2 emissions offset annually 100% 100% 100%
Water consumption (m³) – absolute 851,070 843,750 751,750 690,369 Reduce water use by 4%
Waste generated (tonnes) – absolute 18,877 19,311 11,812* 12,042 Reduce waste generated by 4%
Proportion of recycled waste 88% 84% 79% 75% 80% or above
% of employees who rate us favourably on engagement index — — 64% 63% Meet/exceed GFS benchmark (2010: 73%)
Suppliers Number of business unit suppliers, with material spend, signing Aviva’s Supplier Code of Conduct
*Notes on KPIs Gross emissions – Data according to Defra guidelines i.e. UK electricity rated as grid average but renewable recognised in other countries. Includes Solus for 2010 Absolute emissions – Data excluding the Defra guidelines rating UK renewable electricity as grid average. Includes Solus emissions for 2010 Relative emission – Restated 2009 emissions taking account of acquisitions and divestments that have occurred over the year and increased scope of reporting in 2010. Waste – 2009 waste has been restated based on availability of more accurate data.
Customers: Using NPS methodology we calculate the performance of businesses relative to their local market.
Environment: We want to show clearly that we have reduced our emissions as a result of energy management and behavioural change and not merely due to divestments. However, we also do not wish new businesses that we include in our reporting scope to detract from the progress we have made in our existing businesses. This data covers all employees as well as joint venture employees. Our reporting continues to evolve and improve to capture all areas of environmental data in all businesses.
Suppliers: We have increased the amount of suppliers signing the code of conduct, however, we have found that some suppliers are reluctant to sign a code as it is not a legal document. Therefore, we are implementing a code of behaviour alongside minimum contractual clauses for new contracts from Q2 2011, to address some of this issue. This data does not include European claims data. These KPIs will be revised in 2011 in light of our changing processes.
Accounting for Sustainability We also report our performance using Accounting for Sustainability’s connected reporting framework, which integrates financial and non-financial data to provide a comprehensive picture of our impacts. We were one of the first companies to help develop the framework and have used this approach for environmental reporting in our Annual Report and Accounts since 2007. We continue to explore ways to extend this framework and have included customer and community indicators since 2009.
We have reported the following indicators for 2010: Developing communities; Greenhouse gas emissions; Waste; Resource usage; and Customer advocacy.
* Data according to Defra guidelines i.e. UK electricity rated as grid average but renewable recognised in other countries
Scope 1 – operational emissions from owned sources e.g. gas, vehicle fleet as part of product/service. Scope 2 – operational emission from non-owned sources e.g. electricity. Scope 3 – business activity emissions from non-owned sources – e.g. business travel
Performance, strategy and targets Aviva’s gross carbon emissions have reduced again this year by 4%; a reduction for the third year running. Our absolute carbon footprint has increased as a result of us purchasing grid average electricity in the UK from July 2010. The amount of renewable/zero emission electricity on a worldwide basis has reduced accordingly from 63% in 2009 to 39% in 2010. Our green IT programme focuses on reducing IT related emissions as it is estimated 40% of our electricity consumption is IT-related. We are currently looking at ways that we can more accurately benchmark this impact and so further identify reduction measures we can employ. The other aspect is our work to decarbonise our communications through the use of telepresence, webex and MS Office Communicator. In 2010 we held 1,151 meetings (2009: 1,030) via telepresence, accommodating a total of 10,853 attendees over a total of 5,505 meeting hours (2009: 4,927). 43% of those meetings had at least one Executive Committee member attending. Similarly 9,000 meetings (2009: 5,450) were held over webex providing training, and hosting collaborative meetings. This equates to 30,627 hours (2009: 24,000) an increase of 28%. With the migration to the One Aviva model in Europe, and Dublin as the regional head office, there has been an inevitable increase in air travel within the Europe region. Air kilometres have increased from 5,116,951km in 2009 to 14,307,089km in 2010. In order to address this increase, Aviva Europe has installed new telepresence systems in Paris, Madrid, Warsaw, Dublin and Milan; along with a further four high-definition video conferencing suites in Paris, Warsaw, Turkey and Russia. The investment in these suites along with the roll out of MS Office Communicator should provide a realistic future way of working. We have recently appointed a new travel agency to provide travel services for the following Aviva business: UK, US, Ireland, Canada, France, Spain, Poland and Dubai. This new service will include management information on air kilometres and CO2 emissions to provide a further improvement in the consistency and quality of reporting. Our focus for energy efficiency has been electricity consumption in 2010 and will be again in 2011. 1E Nightwatchman, software which switches off networked laptops, PCs and monitors remotely, was trialled at one location in the UK and demonstrated a 6.5% reduction in electricity usage. The cost benefit analysis of this shows a projected payback period of one year five months, a saving in electricity costs of £427,000 and 2,800 tonnes of carbon per annum. This has therefore been rolled out across the UK and will be implemented in Europe and the Asia Pacific region in 2011. For one of our larger UK offices we have trialled Powerperfector voltage optimisers which have reduced electricity consumption by 8% per annum for that site, saving £692,000 and 324 tonnes CO2. Our Group annual CO2 reduction target still stands at 5% with a long term reduction of 30% by 2020 compared to our 2006 baseline. We have achieved an 10% reduction to date.
Products/suppliers/investors The demand by customers for green products is still low, the cost of the insurance product being paramount. In the UK we have therefore turned our attention to reducing the environmental impact of our claims supply chain. We continue to roll out the ‘repair over replacement’ process working with our suppliers and our own accident repair centres. We commissioned a report to ascertain the benefits of this revision in the process and through a focus on reducing waste, sustainability became the route to the following benefits: ongoing cost reduction; the supplier reducing their operational carbon footprint and energy bills by 34%; wasted parts were reduced by 42%; increased customer satisfaction (quicker to repair than waiting for replacement parts); and secured 30 jobs whilst increasing the skill set of the workers.
Industry benchmark information Carbon Disclosure Project Score 70 out of 100 in FTSE Global 500 and FTSE350; and BREEAM5 minimum ranking ’Good‘ for new build and refurbishment.
Performance, strategy and targets 2010 saw a slight increase in our overall operational waste of 2%. Aviva US has implemented a state of the art recycling process along with a solar powered waste compactor for the general waste which they are currently unable to recycle. The UK business continues with its plans to reach its zero-to-landfill target by 2015 with an increase in its recycling rate to 88.9% as a proportion of total operational waste. We have worked with our IT supplier to remove the polystyrene packaging in which the equipment is delivered, increasing our IT waste recycling rate to 98%. Aviva’s Group head office was awarded the prestigious Chairman's Cup in the City of London’s Clean City Awards in January 2011. This is the first time that any company has won the cup twice. It signifies our achievements in waste reduction over the past year and recognises our commitment and leadership in waste management.
Industry benchmark information 200kg of waste per employee per year; and recycling rate of 60–70% (BRE Office toolkit).
Targets annual 4% reduction in total waste; annual recycling rate greater than 80%; and long-term target – zero to landfill for UK operations by 2015 and worldwide by 2020.
Water consumption m3 Water consumption m3 per employee 6, 1, 3, 1, 0,
Customer advocacy Direct Company impacts At Aviva, the Net Promoter Score® is our key customer metric. This measure is widely regarded as a predictor of future growth, with strong correlations to retention, repeat purchase and referrals, suggesting that using this metric to build advocacy will have a positive impact on business performance. This KPI is derived from the annual Relationship NPS survey conducted across all markets and comparing the local Aviva results with the local competition. Engaged employees deliver better customer experiences which drive greater shareholder value. By deepening our understanding of the relationship between our NPS results and actual customer behaviour we will prove that building advocacy by consistently delivering a customer experience aligned to our brand promise will see our customers stay longer, buy more, recommend us to others and cost less to serve; which all have an impact on our overall ability to generate capital.
Our performance, strategy and targets The 2010 Relationship NPS survey showed results broadly consistent with 2009. We maintained the proportion of businesses operating in the upper quartile (relative to local competition) despite a generally improving market environment.
In Asia, China and Korea have outperformed when compared to the local market benchmark. There were also strong improvements in the Indian business.
The US business saw significantly improved scores this year through single-minded focus on the main driver of detraction in 2009. By testing a number of initiatives designed to build a stronger relationship with their customers they were able to identify the ones that would make the biggest difference.
Corporate responsibility Aviva plc Annual Report and Accounts 2010 Corporate responsibility continued
Limitations of our review Our review of data processes included the following data sets: environmental and community investment. We did not review environmental or community investment performance data for years prior to 2010.
1 International Federation of the Accountants’ International Standard for Assurance Engagements Other Than Audits or Reviews of Historical Financial Information (ISAE3000).
Inclusivity Has Aviva been engaging with stakeholders across the business to further develop its approach to corporate responsibility?
We are not aware of any matters that would lead us to conclude that Aviva has not applied the inclusivity principle in developing its approach to corporate responsibility.
Materiality Has Aviva provided a balanced representation of material issues concerning its corporate responsibility performance?
With the exception of the subject areas listed below, we are not aware of any material aspects of Aviva’s corporate responsibility performance which have been excluded from the CR Report.
We consider that Aviva could have covered the following subject areas in more depth in the CR Report: – The role of Aviva Investors in voting on corporate responsibility disclosures and driving greater transparency in reporting.
– The corporate responsibility challenges of growing Aviva businesses in developing countries.
Nothing has come to our attention that causes us to believe that Aviva management has not applied its processes for determining material issues to be included in the CR Report.
Performance information How plausible are the statements and claims within the CR Report?
With the exception of the limitations identified in the CR Report, we are not aware of any material reporting units that have been excluded from Group data.
Aviva has introduced a data collection tool, Credit360, as a means of standardising the environmental and community data collation process. Aviva should consider improving the guidance for the collation and reporting of environmental performance data to enhance consistency across the Group.
Our independence As auditors to Aviva p.l.c., Ernst & Young are required to comply with the independence requirements set out in the Auditing Practices Board’s (APB) Ethical Standards for Auditors. Ernst & Young’s independence policies apply to the firm, partners and professional staff. These policies prohibit any financial interests in our clients that would or might be seen to impair independence. Each year, partners and staff are required to confirm their compliance with the firm’s policies.
Aviva plc Annual Report and Accounts 2010 Board of directors 1. Lord Sharman of Redlynch OBE Chairman (Age 68) Appointed to the Board in January 2005 and became chairman in January 2006. Currently an independent non-executive director of BG Group plc (oil and gas) and Reed Elsevier plc (publishing). Former chairman of Aegis Group plc (media services) and KPMG International (auditors). Former deputy chairman of Group 4 Securicor plc (and former chairman of Securicor plc) (security services), former member of the supervisory board of ABN AMRO Holding N.V. (banking) and a former independent non-executive director of Young & Co.’s Brewery plc (hospitality) and AEA Technology plc (commercial/technology). Chairman of the Board and Nomination Committee and member of the Corporate Responsibility Committee.
2. Andrew Moss Group chief executive (Age 53) Appointed to the Board in May 2004. Joined as group finance director and became group chief executive in July 2007. Previously director of finance, risk management and operations at Lloyd’s of London (insurance) and formerly held a number of senior management positions at HSBC plc (banking). Member of the Corporate Responsibility and Nomination committees and member of the supervisory board of Delta Lloyd N.V.
6. Mary Francis CBE Independent non-executive director (Age 62) Appointed to the Board in October 2005. Currently senior independent director of Centrica plc (utilities) and a non-executive director of Cable & Wireless Communications plc (telecoms). A senior adviser to Chatham House and chair of governors, James Allen’s Girls’ School. Formerly a senior civil servant, director general of the Association of British Insurers and a non-executive director of the Bank of England, Alliance & Leicester plc (banking), St Modwen Properties plc (property development) and the Almeida Theatre Company Limited. Chairman of the Risk Committee and a member of the Audit, Nomination and Remuneration committees.
8. Euleen Goh Independent non-executive director (Age 55) Appointed to the Board in January 2009. Currently non-executive director of DBS Group Holdings Ltd, DBS Bank Limited (banking), Singapore Airlines Limited (aviation), Singapore Exchange Limited and the Singapore Chinese Girls’ School. Chairman of the Accounting Standards Council of Singapore and the Singapore International Foundation. Former chief executive officer of Standard Chartered Bank in Singapore (banking). Member of the Audit and Corporate Responsibility committees.
9. Michael Hawker AM Independent non-executive director (Age 51) Appointed to the Board in January 2010. Currently a non-executive director of Macquarie Bank Limited, Macquarie Group Limited (banking) and Australian Rugby Union, Chairman of the George Institute and a member of the Advisory Council at General Enterprise Management Services International Limited (GEMS), the Hong Kong-based private equity firm. Formerly chief executive and managing director of Insurance Australia Group Limited (insurance). Member of the Risk Committee.
10. Carole Piwnica Independent non-executive director (Age 53) Appointed to the Board in May 2003. A member of the New York and Paris Bars. Currently managing director of Naxos UK (private equity), a non-executive director of Amyris Biotechnologies, Inc. (renewable products), Sanofi-aventis (healthcare products) and Eutelsat Communications (satellite operator). Formerly a non-executive director of Dairy Crest Group plc (dairy products), Toepfer International GmbH (trading) and a member of the biotech advisory board of Monsanto (biotechnology). Former chairman of Amylum Group (agricultural/ industrial) and nonexecutive director and vice-chairman of Tate & Lyle plc (agricultural/industrial) and a non-executive director of S A Spadel N.V. (food and beverages). Chairman of the Corporate Responsibility Committee and member of the Remuneration Committee.
11. Leslie Van de Walle Independent non-executive director (Age 54) Appointed to the Board in May 2009. Currently chairman of SIG plc (construction products), non-executive director of DCC plc (business support) and La Seda de Barcelona, S.A. (plastic packaging). Formerly chief executive officer of Rexam plc (packaging), executive vice-president of retail for oil products and head of oil products, a division of Shell Europe, Royal Dutch Shell plc and nonexecutive director of Aegis Group plc (media services). Formerly held a number of senior management positions with Cadbury Schweppes plc (consumer goods) and United Biscuits Limited (consumer goods). Member of the Remuneration and Risk committees.
13. Scott Wheway Independent non-executive director (Age 44) Appointed to the Board in December 2007. Currently a strategic advisor to Best Buy Co., Inc. (retail services). Formerly chief executive officer of Best Buy Europe Distributions Limited (retail services). 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 executive positions at Tesco plc (retail services). Chairman of the Remuneration Committee and member of the Corporate Responsibility Committee.
John Ainley Group human resources director (Age 54) Joined the Group in 1999. Formerly held senior HR positions with WH Smith plc, ICL plc and General Electric plc. Previously Group HR Director for Norwich Union plc and HR Director for Norwich Union Insurance and Norwich Union Life. Holds a Law degree and is a Companion of the Chartered Institute of Personnel Development.
Alain Dromer Chief executive, Aviva Investors (Age 56) Joined the Group in September 2007. Formerly global head of group investment businesses at HSBC, senior executive vicepresident and head of asset management and insurance at Credit Commercial de France and director of capital markets at La Compagnie Financiére Edmond de Rothschild. Formerly at the French Treasury in the Ministry of Finance and the French Institute for Statistics and Economic Studies. Educated at l’École Polytechnique, Paris and l’École Nationale de la Statistique l’Administration Économique, Paris.
Robin Spencer Chief risk officer (Age 41) Joined the Group in 1995. Formerly chief executive officer of Aviva Canada, chief financial officer of Aviva Canada and held various senior management positions in the finance function of Norwich Union and was finance director for London & Edinburgh Insurance Company Limited. Previously spent five years with Procter & Gamble Limited. Holds an MA in Economics from Aberdeen University and is a chartered management accountant. Former chairman of Canada’s Property and Casualty Insurance Compensation Corporation.
Dividends The directors are recommending a final dividend of 16.00 pence per ordinary share (2009: 15.00 pence), which, together with the interim dividend of 9.50 pence per ordinary share paid on 17 November 2010 (2009: 9.00 pence), produces a total dividend for the year of 25.5 pence per ordinary share (2009: 24.00 pence). The total cost of ordinary dividends paid in 2010, was £681 million (2009: £775 million). Subject to shareholder approval at the 2011 Annual General Meeting, the final dividend for 2010 will be paid on 17 May 2011 to all holders of ordinary shares on the Register of Members at the close of business on 25 March 2011 (and approximately five business days later for holders of American Depositary Receipts).
Authority to purchase own shares At the Company’s Annual General Meeting held on 28 April 2010, shareholders renewed the Company’s authorities to make market purchases of up to 276 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 or up to the date of this report. At the 2011 Annual General Meeting, shareholders will be asked to renew these authorities for another year and will once again propose a maximum aggregate number of ordinary shares which the Company can purchase of less than 10% of the issued ordinary share capital. Details are contained in the Notice of AGM. The Company held no treasury shares during the year or up to the date of this report.
Substantial shareholdings As at 2 March 2011, in accordance with the provisions of the Disclosure and Transparency Rules of the Financial Services Authority, the Company had received the following notifications relating to the holding percentage of the total voting rights attaching to the issued ordinary share capital of the Company; BlackRock, Inc. held 5.09%, Legal & General Group plc held 3.98% and AXA S.A. held 3.86%.
The biographical details of the persons currently serving as directors appear on pages 94 and 95. The new UK Corporate Governance Code (the Code) provides that all directors of FTSE 350 companies should be subject to annual re-election by shareholders. The Company is within this category of listed companies and has adopted this provision early. Therefore, at the 2011 Annual General Meeting, all directors of the Company will offer themselves for election/re-election in compliance with this provision of the Code.
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. There is no arrangement or understanding with any shareholder, customer, supplier, or any other external party, to appoint a director or a member of the Executive Committee. The Company has purchased and maintained throughout the year, directors’ and officers’ liability insurance in respect of itself and its directors. The directors also have the benefit of the indemnity provision contained in the Company’s articles of association. The Company has executed deeds of indemnity for the benefit of each director of the Company, and each person who was a director of the Company during the year, in respect of liabilities that may attach to them in their capacity as directors of the Company or of associated companies. These indemnities were granted at different times according to the law in place at the time and where relevant are qualifying third-party indemnity provisions as defined by section 234 of the Companies Act 2006. These indemnities were in force throughout the year and are currently in force. Details of directors’ remuneration, service contracts and interests in the shares of the Company are set out in the Directors’ Remuneration Report.
Financial instruments Aviva Group companies use financial instruments to manage certain types of risks including those relating to credit, foreign currency exchange, cash flow, liquidity, interest rates, and equity and property prices. Details of the objectives and management of these instruments are contained in the Shareholder information section on pages 153 to 166 and an indication of the exposure of the Group companies to such risks is contained in note 57 to the consolidated financial statements.
As the authority granted at the 2010 Annual General Meeting will expire on 4 May 2011, renewal of this authority will be sought at this year’s Annual General Meeting. Further details are available in the Notice of AGM.
Group employees The Group’s statement on its employees is set out in the Corporate Responsibility Report. In summary, the Group’s commitment to communication and dialogue with employees continues. The existence of a Groupwide intranet enables engagement and communication with employees throughout the Group on a single platform. It also helps management to share information, ideas and opportunities much faster across the entire business and to achieve a common awareness on the part of all employees of the financial and economic factors affecting the performance of the Company. A strong emphasis is placed on the provision of news and information through a range of media. Employees have opportunities to voice their opinions and ask questions through intranet sites, question and answer sessions with the group chief executive, via telephone conferencing, opinion surveys and the Group’s Employee Promise Survey which is open to all employees. Face-to-face briefings and team meetings are actively encouraged and are held in all business units across the Group. The Group’s businesses in the UK have established employee consultative forums and a European Consultative Forum convenes annually to discuss matters impacting the business across Europe. The Group ensures that involvement of employees in its performance is encouraged by allowing eligible employees to participate in the Group’s all employee share ownership plans. On 2 June 2010, in commemoration of the first year of the Company becoming ‘One Aviva’, employees participated in and contributed to various activities to raise funds for charity.
Employee practice The Group respects all fundamental human rights and is guided in the conduct of its business by the provisions of the United Nations Universal Declaration of Human Rights and the International Labour Organization core labour standards. Aviva also supports the United Nations Global Compact Principles. Aviva Group companies are committed to providing equal opportunities to all employees, irrespective of their gender, sexual orientation, marital status, race, nationality, ethnic origin, disability, age, religion or union membership status. Aviva is an inclusive employer and values diversity in its employees. These commitments extend to recruitment and selection, training, career development, flexible working arrangements, promotion and performance appraisal. In the event of employees becoming disabled, every effort is made to ensure that their employment with the Group continues and to provide specialised training where this is appropriate.
Corporate Governance Statement In compliance with the Disclosure and Transparency Rules (the DTRs), the disclosures required by DTR 7.2.2 to 7.2.7 can be found in the Corporate Governance Report on pages 100 to 108 which is incorporated into this Directors’ Report by reference.
Reappointment of the auditor and disclosure of information to the auditor In accordance with section 489 of the Companies Act 2006, a resolution is to be proposed at the 2011 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, independence 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 in the Audit Committee Report. The directors in office at the date of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which Ernst & Young LLP are unaware and each director has taken all steps that ought to have been taken as a director to be aware of any relevant audit information and to establish that Ernst & Young LLP are aware of that information.
The full terms of reference for the Board are available from the group company secretary. Matters that are not specifically reserved for the Board and its committees under its terms of reference, or for shareholders in general meeting, are delegated to the group chief executive. The Board’s terms of reference also set out those matters that must be reported to the Board, such as significant litigation or material regulatory breaches, and cover how matters requiring consideration by the Board that arise between scheduled meetings should be dealt with. The Board and its committees operate in line with work plans agreed prior to the start of each year. At Board and committee meetings, directors receive regular reports on the Group’s financial position, risk management, regulatory compliance, key business operations and other material issues. Directors are fully briefed in advance of Board and committee meetings on all matters to be discussed. The group company secretary is responsible for following Board procedures and advising the Board, through the chairman, on governance matters. All directors have access to her advice and services. The Board has adopted a procedure whereby directors may, in the performance of their duties, seek independent professional advice at the Company’s expense if considered appropriate. During the year the members of the Remuneration Committee sought independent advice from Hewitt New Bridge Street Consultants on issues surrounding senior executive remuneration. The Audit Committee and the Risk Committee also sought independent advice from Keith Nicholson, a former partner at KPMG LLP.
• UK 7 • Continental Europe 3 • US 1 • Other 2
Summary of directors’ skills and experience Mary Francis CBE Mrs Francis has a distinguished record with extensive experience of business at an international level. Her experience in government affairs and in the financial services industry is an invaluable asset to the Company.
Richard Karl Goeltz Mr Goeltz has a strong financial background with over 30 years experience of international business and leadership in major global corporations. In addition, he has excellent experience of audit and governance committees.
Mark Hodges Mr Hodges has made a significant contribution to the Board’s discussions and brings both operational and strategic expertise as well as significant experience and knowledge about the Group’s business in the UK.
Igal Mayer Mr Mayer has implemented significant changes to the Company’s North American business, resulting in a strong performance from the region in 2010. He brings to the Board an international perspective and a detailed knowledge of the Group in particular and the insurance industry in general.
Andrew Moss Mr Moss has extensive experience and knowledge of the financial services industry. He has successfully led the Group since 2007, transforming it into a successful global business operating under a single brand. Mr Moss’s strong leadership skills and clear strategic vision make him a valuable contributor to Board discussions.
Leslie Van de Walle Mr Van de Walle has brought to the Board extensive marketing and brand knowledge together with a wealth of experience in growing and developing businesses. With his multi-sector experience and strong analytical ability, he has contributed significantly to the deliberations of the Board.
The chairman and group chief executive The respective roles of the chairman and group chief executive are set out in the Board’s terms of reference. The chairman’s priority is the leadership of the Board and ensuring its effectiveness and the group chief executive’s priority is the management of the Company. The chairman’s commitment to the Company is two to three days per week and his main interests outside the Company are set out in his biographical details on page 94.
Training and development The Board believes strongly in the development of all its employees and directors and it is a requirement of each director’s appointment that they commit to continue their development. The form that this development takes is subject to individual director’s requirements and the quality and relevance of the training available. During the year, directors attended a number of internal and external courses including training on Solvency II for the Board and on IFRS Phase II for members of the Audit Committee. There was a joint training session for members of the Risk and Audit committees on the global corporate structure and the Risk Committee members also attended training on economic capital and stress testing. Training sessions have also been built into the Board’s and committees’ work plans for 2011. The Board made visits to the Group’s businesses located in the UK, Spain, Turkey, Italy and Poland 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, and 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 issue.
Board attendance 2010 Number of meetings held* 10 Mary Francis 10 Richard Karl Goeltz 10 Euleen Goh 10 Michael Hawker 10 Mark Hodges 10 Andrea Moneta** 10 Andrew Moss 10 Carole Piwnica 9 Patrick Regan*** 9 Lord Sharman 10 Leslie Van de Walle 9 Russell Walls 9 Scott Wheway 10 * There were eight scheduled Board meetings during 2010 and two additional meetings called at short notice. ** Resigned on 19 January 2011. ***Appointed to the Board on 22 February 2010.
During 2010, the chairman and the non-executive directors met in the absence of the executive directors and the non-executive directors met in the absence of the chairman, including one meeting chaired by the senior independent director 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 Responsibility Committee; Nomination Committee; Remuneration Committee; and Risk Committee.
Aviva plc Annual Report and Accounts 2010 Corporate governance report continued
Conflicts of interest In line with the Companies Act 2006, the Company’s articles of association allow the Board to authorise potential conflicts of interest that may arise and to impose such limits or conditions as it thinks fit. The decision to authorise a conflict of interest can only be made by non-conflicted directors (those who have no interest in the matter being considered) and in making such a decision the directors must act in a way they consider in good faith will be most likely to promote the Company’s success. The Board has established a procedure whereby actual and potential conflicts of interest are regularly reviewed and for the appropriate authorisation to be sought prior to the appointment of any new director or if a new conflict arises. During 2010 this procedure operated effectively.