Subordinated debt 6.125% £700 million subordinated notes 2036 689 £ — — — — 700 700 5.750% €800 million subordinated notes 2021 586 € — — — 588 — 588 5.250% €650 million subordinated notes 2023 474 € — — — — 477 477 5.700% €500 million undated subordinated notes 364 € — — — — 367 367 6.125% £800 million undated subordinated notes 790 £ — — — — 800 800 Floating rate US$300 million subordinated notes 2017 151 US$ — — 151 — — 151
Debenture loans 9.5% guaranteed bonds 2016 198 £ — — 200 — — 200 2.5% subordinated perpetual loan notes 127 £ — — — — 360 360 Other loans 10 various — 10 — — — 10
Total contractual undiscounted cash flows for core structural borrowings 1,191 844 1,374 1,457 3,329 8,195
Amounts owed to credit institutions Bank loans 2,182 Various 313 698 806 290 75 2,182
Securitised mortgage loan notes UK lifetime mortgage business 1,674 £ — 14 125 — 1,613 1,752 Dutch domestic mortgage business 5,620 € — — — — 5,890 5,890
Contractual undiscounted interest payments are calculated based on underlying fixed interest rates or prevailing market floating rates as applicable. The reduction in future contractual undiscounted interest payments mainly reflects lower average interest payable at 31 December 2009 on floating rate securitised loan notes issued by our Dutch business, compared to 31 December 2008. Year end exchange rates have been used for interest projections on loans in foreign currencies.
All the above borrowings are stated at amortised cost, except for the loan notes issued in connection with the UK lifetime mortgage business £1,444 million (2008: £1,590 million, 2007: £1,674 million) and £3,664 million (2008: £3,842 million, 2007: £3,337 million) of the loan notes issued in connection with the Dutch domestic mortgage business, which are carried at fair value. Fair values are modelled on risk-adjusted cash flows for defaults discounted at a risk-free rate plus a market-determined liquidity premium, and are therefore classified as “Level 2” in the fair value hierarchy. These have been designated at fair value through profit and loss in order to present the relevant mortgages, borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch.
(d) Description and features (i) Subordinated debt A description of each of the subordinated notes is set out in the table below: Callable at par at option In the event the Company does not call the notes, Notional amount Issue date Redemption date of the Company from the coupon will reset at each applicable reset date to £700 million 14 Nov 2001 14 Nov 2036 16 Nov 2026 5 year Benchmark Gilt + 2.85% €800 million 14 Nov 2001 14 Nov 2021 14 Nov 2011 3 month Euribor + 2.12% €650 million 29 Sep 2003 02 Oct 2023 02 Oct 2013 3 month Euribor + 2.08% €500 million 29 Sep 2003 Undated 29 Sep 2015 3 month Euribor + 2.35% £800 million 29 Sep 2003 Undated 29 Sep 2022 5 year Benchmark Gilt + 2.40% US$300 million 19 Dec 2007 19 Jun 2017 19 Jun 2012 3 month US LIBOR + 0.84% £400 million 20 May 2008 20 May 2058 20 May 2038 3 month LIBOR + 3.26% £200 million 8 Aug 2008 20 May 2058 20 May 2038 3 month LIBOR + 3.26% €500 million 22 May 2008 22 May 2038 22 May 2018 3 month Euribor + 3.35% £200 million 31 Mar 2009 31 Mar 2019 31 Mar 2014 3 month LIBOR + 8.10% €50 million 30 Apr 2009 30 Apr 2019 30 Apr 2014 3 month Euribor + 8.25%
The subordinated notes were issued by the Company. They rank below its senior obligations and ahead of its preference shares and ordinary share capital. The dated subordinated notes rank ahead of the undated subordinated notes. The fair value of these notes at 31 December 2009 was £4,372 million (2008: £2,979 million, 2007: £3,006 million), calculated with reference to quoted prices.
Other loans totalling £13 million (2008: £14 million) comprise borrowings in the United States. All these borrowings are at fixed rates and their fair value at 31 December 2009 was £552 million (2008: £663 million), calculated with reference to quoted prices or discounted future cash flows as appropriate.
(iv) Bank loans Bank loans comprise: Non-recourse Loans to property partnerships (see (a) below) 790 978 485 Loans to Irish investment funds (see (b) below) 36 60 74 UK Life reassurance (see (c) below) 114 103 — US 150 — — Other non-recourse loans 169 44 16 1,259 1,185 575 Banking loans 145 184 103 Other loans (see (d) below) 778 522 386
(a) As explained in accounting policy D, the UK long-term business policyholder funds have invested in a number of property limited partnerships (PLPs). The PLPs have raised external debt, secured on their respective property portfolios, and the lenders are only entitled to obtain payment of both interest and principal to the extent there are sufficient resources in the respective PLPs. The lenders have no recourse whatsoever to the policyholder or shareholders’ funds of any companies in the Aviva Group. Loans of £790 million (2008: £978 million, 2007: £485 million) included in the table relate to those PLPs which have been consolidated as subsidiaries.
For the Dutch securitised mortgage loan notes carried at amortised cost of £2,221 million (2008: £2,353 million, 2007: £2,283 million), their fair value is £2,170 million (2008: £2,224 million, 2007: £2,283 million), calculated based on the future cash flows discounted back at the market rate of interest.
(e) Movements during the year Movements in borrowings during the year were: Core Total structural Operational 2009 £m £m £m
New borrowings drawn down, net of expenses 3,929 1,586 5,515 Repayment of borrowings (3,496) (1,721) (5,217)
Net cash inflow 433 (135) 298 Foreign exchange rate movements 779 1,779 2,558 Borrowings acquired for non-cash consideration — (3) (3) Acquisitions — 81 81 Fair value movements — (404) (404) Amortisation of discounts and other non-cash items 2 — 2
All movements in fair value in 2009 and 2008 on securitised mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions. These loan notes have external credit ratings which have not changed since the inception of the loans.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 49 – Payables and other financial liabilities This note analyses our financial liabilities at the end of the year.
(b) Asbestos, pollution and social environmental hazards In the course of conducting insurance business, various companies within the Group receive general insurance liability claims, and become involved in actual or threatened related litigation arising there from, including claims in respect of pollution and other environmental hazards. Amongst these are claims in respect of asbestos production and handling in various jurisdictions, including Europe, Canada and Australia. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents which they cover and the uncertainties associated with establishing liability and the availability of reinsurance, the ultimate cost cannot be determined with certainty. However, on the basis of current information having regard to the level of provisions made for general insurance claims, and the strengthening of latent claims that took place during 2008, the directors consider that any additional costs arising are not likely to have a material impact on the financial position of the Group.
(e) Endowment reviews In December 1999, the FSA announced the findings of its review of mortgage endowments and expressed concern as to whether, given decreases in expected future investment returns, such policies could be expected to cover full repayment of mortgages.
mortgage endowment policyholders received policy-specific letters advising them whether their investment was on track to cover their mortgage.
The directors believe each of the Group’s regulated businesses dedicates appropriate resources to its compliance programme, endeavours to respond to regulatory enquiries in a constructive way, and takes corrective action when warranted. However, all regulated financial services companies face the risk that their regulator could find that they have failed to comply with applicable regulations or have not undertaken corrective action as required.
(g) Aviva USA litigation In November 2006, the Group completed the acquisition of the AmerUs Group, a US-based insurer. In common with other companies operating in the sector, AmerUs is subject to litigation, including class-action litigation, arising out of its sale of equitybased index-linked annuity products. The Group is aware of a multi-district class action filed against AmerUs in Pennsylvania but is not aware of any adverse development. The directors continue to monitor the situation and consider that the litigation will not have a material effect on the Group’s ability to meet shareholder expectations.
(i) Structured settlements In Canada annuities have been purchased from licensed Canadian life insurers to provide for fixed and recurring payments to claimants. As a result of these arrangements, the Group is exposed to credit risk to the extent that any of the life insurers fail to fulfil their obligations. The Group's maximum exposure to credit risk for these arrangements is approximately £984 million as at 31 December 2009 (2008: £1,029 million, 2007: £742 million) based on estimated replacement cost for the underlying annuities. The credit risk is managed by acquiring annuities from a diverse portfolio of life insurers with proven financial stability. The risk is reduced to the extent of coverage provided by Assuris, the Canadian life insurance industry compensation plan. As at 31 December 2009, no information has come to the Group's attention that would suggest any weakness or failure in the Canadian life insurers from which it has purchased annuities.
The Company and several of its subsidiaries have guaranteed the overdrafts and borrowings of certain other Group companies. At 31 December 2009, the total exposure of the Group and Company is £nil (2008: £nil, 2007: £7 million) and £77 million (2008: £88 million, 2007: £113 million) respectively and, in the opinion of the directors, no material loss will arise in respect of these guarantees and indemnities.
The Group’s insurance subsidiaries pay contributions to levy schemes in several countries in which we operate. Given the economic environment, there is a heightened risk that the levy contributions will need to be increased to protect policyholders if an insurance company falls into financial difficulties. The directors continue to monitor the situation but are not aware of any need to increase provisions at the statement of financial position date.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 52 – Commitments This note gives details of our commitments to capital expenditure and under operating leases.
(a) Capital commitments Contractual commitments for acquisitions or capital expenditures of investment property, property and equipment and intangible assets, which have not been recognised in the financial statements, are as follows: Investment property Property and equipment Intangible assets
(b) Cash flows in respect of the acquisition of subsidiaries, joint ventures and associates: Cash consideration for subsidiaries, joint ventures and associates acquired 601 437 Less: Cash and cash equivalents acquired with subsidiaries (5) (101)
Of the total cash and cash equivalents shown above, £nil has been classified as held for sale (2008: £493 million, 2007: £96 million) (see note 3d).
54 – Group capital structure Accounting basis and capital employed by segment The table below shows how our capital, on an MCEV basis, is deployed by segment and how that capital is funded.
In April 2009 we issued a private placement of £245 million equivalent of Lower Tier 2 hybrid in a dual tranche transaction (£200 million on 1 April 2009 and a further €50 million on 30 April 2009). These transactions had a positive impact on group IGD solvency and economic capital measures.
Financial leverage, the ratio of external senior and subordinated debt to MCEV capital and reserves, was 31.8% (2008: 34.0%). If centre assets were offset against this debt the financial leverage would be 19.0% (2008: 25.4%). Fixed charge cover, which measures the extent to which external interest costs, including subordinated debt interest and preference dividends, are covered by MCEV operating profit was 8.5 times (2008: 9.2 times).
Old with- New with- with- UK life Other Total Overseas Restated profit sub- profit sub- profit Sub­ with-profit UK life UK life life Total life Other 2009 2008 2007 fund fund fund3 funds operations operations operations operations operations4 Total Total Total £m £m £m £m £m £m £m £m £m £m £m £m
Total shareholders’ funds 2 (185) 28 (155) 4,648 4,493 12,577 17,070 (1,984) 15,086 14,573 15,931 Other sources of capital1 — — — — 200 200 359 559 4,529 5,088 4,915 3,230 Unallocated divisible surplus 182 65 1,639 1,886 5 1,891 1,975 3,866 — 3,866 2,325 6,785 Adjustments onto a regulatory basis: Shareholders’ share of accrued bonus (37) (215) (324) (576) — (576) — (576) — (576) (756) (1,192) Goodwill and other intangibles5 — — — — (319) (319) (4,060) (4,379) (2,449) (6,828) (8,293) (6,814) Regulatory valuation
Analysis of liabilities: Participating insurance liabilities 2,159 17,584 13,180 32,923 — 32,923 31,779 64,702 — 64,702 66,863 66,093 Unit-linked liabilities — — — — 5,370 5,370 17,788 23,158 — 23,158 22,060 20,601 Other non-participating
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 55 – Capital statement continued Analysis of movements in capital of long-term businesses For the year ended 31 December 2009
Further analysis of the movement in the liabilities of the long-term business can be found in notes 38 and 39. The analysis of movements in capital provides an explanation of the movement in available capital of the Group's life business for the year. This analysis is intended to give an understanding of the underlying causes of changes in the available capital of the Group's life business, and provides a distinction between some of the key factors affecting the available capital.
NWPSF is fully supported by the reattributed estate of £1,177 million, known as the Reattribution Inherited Estate External Support Accounts (RIEESA), at 31 December 2009, held within NPSF1 (a non-profit fund within UKLAP included within other UK life operations), in the form of a capital support arrangement. This support arrangement will provide capital to NWPSF to ensure that the value of assets of NWPSF are at least equal to the value of liabilities calculated on a realistic regulatory basis therefore it forms part of the NWPSF available capital resources.
For UKLAP/RIEESA, equity market performance has had little impact, as the funds mitigate materially all of the equity risk of the estate/RIEESA through internal hedging.
For the Overseas life operations, the positive variance between actual and expected experience is driven mainly by market movements which has led to capital appreciation of fixed interest assets and consequential increase of the unallocated divisible surplus in France and other European businesses.
Within the Aviva Group there exist intra-group arrangements to provide capital to particular business units. Included in these arrangements is a subordinated loan of £200 million from Aviva Life Holdings UK Limited to the Aviva Annuity Limited to provide capital to support the writing of new business.
Estimated Estimated Estimated realistic Estimated Capital excess realistic Realistic inherited risk capital support available assets liabilities*1 estate2 margin3 arrangement5 capital Excess Excess £bn £bn £bn £bn £bn £bn £bn £bn
NWPSF 21.2 (21.2) — (0.5) 1.1 0.6 0.3 1.1 OWPSF 3.0 (2.8) 0.2 (0.1) — 0.1 0.3 0.8 Existing UKLAP WP4 20.3 (18.7) 1.6 (0.2) — 1.4 0.5 1.3
For overseas businesses in the EEA, US, Canada, Hong Kong and Singapore, the available capital and the minimum requirement are calculated under the locally applicable regulatory regimes. The businesses outside these territories are subject to the FSA rules for the purposes of calculation of available capital and capital resource requirement.
— (iii) Overseas life operations – the capital requirements and corresponding regulatory capital held by overseas businesses are calculated using the locally applicable regulatory regime. The available capital resources in all these businesses are subject to local regulatory restrictions which may constrain management’s ability to utilise these in other parts of the Group. Any transfer of available capital may give rise to a tax charge subject to availability of tax relief elsewhere in the Group.
56 – Risk management This note sets out the major risks our businesses face and describes our approach to managing these. It also gives sensitivity analyses around the major economic and non-economic assumptions that can cause volatility in our earnings and capital requirements.
The risks faced by the Group can be categorised as follows: — Financial risks cover market and credit risk, insurance risk, liquidity and capital management. — Strategic risks include issues such as customer, brand, products and markets as well as any risks to our business model arising from changes in our market and risks arising from mergers and acquisitions. — Operational risk arises from inadequate or failed internal processes, or from people and systems or from external events. — Operational risks include business protection, information technology, people, legal and regulatory compliance.
The risk management framework provides the means to identify, assess, mitigate, manage, monitor and report all of the different types of risk faced by the Group to provide a single picture of the threats and uncertainties faced and opportunities that exist.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 56 – Risk management continued The Group has developed economic capital models that support the measurement, comparison and monitoring of our risks. The results of the modelling are incorporated into key decision making processes. These models show the relative impact to economic capital from the risks we face. In turn this supports the assessment of appropriate and effective mitigating strategies where risks are outside of appetite.
Stress and scenario testing help give an indication of the size of losses that could be experienced in extreme but plausible events and complements other risk measurement techniques. It helps identify concentration risk across businesses and portfolios and is a useful tool for management to use in their capital planning process. A number of stress tests and economic scenarios have been developed to capture the adverse impact on the businesses of extreme events. The stress tests are designed to cover major asset classes and insurance risks. The stress tests are produced at least monthly and are reviewed and discussed by senior management.
The sensitivity of Group earnings to changes in economic markets is regularly monitored through sensitivities to investment rate and investment return and asset values in IFRS and MCEV reporting.
The Group has established a policy on market risk which sets out the principles that businesses are expected to adopt in respect of management of the key market risks to which the Group is exposed. The Group monitors adherence to this market risk policy and regularly reviews how business units are managing these risks locally, through the Group Assets Committee and ultimately the Group Asset Liability Committee. For each of the major components of market risk, described in more detail below, the Group has put in place additional processes and procedures to set out how each risk should be managed and monitored, and the approach to setting an appropriate risk appetite.
The Group market risk policy sets out the minimum principles and framework for matching liabilities with appropriate assets, the approaches to be taken when liabilities cannot be matched and the monitoring processes that are required. The Group has criteria for matching assets and liabilities for all classes of business to minimise the impact of mismatches between the value of assets and the liabilities due to market movements. The local regulatory environment for each business will also set the conditions under which assets and liabilities are to be matched.
Equity price risk The Group is subject to equity price risk due to daily changes in the market values of its equity securities portfolio. The Group’s shareholders are exposed to the following sources of equity risk: — Direct equity shareholdings in shareholder funds and the Group defined benefit pension funds. — The indirect impact from changes in the value of equities held in policyholders’ funds from which management charges or a share of performance are taken; and — Its interest in the free estate of long-term with profits funds.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 56 – Risk management continued At a business unit level, equity price risk is actively managed in order to mitigate anticipated unfavourable market movements where this lies outside the risk appetite of either the company in respect of shareholder assets or the fund in respect of policyholder assets concerned. In addition local asset admissibility regulations require that business units hold diversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have material holdings of unquoted equity securities.
As at 31 December 2009, no material derivative contracts had been entered into to mitigate the effects of changes in property prices.
Sensitivity to changes in property prices is given in section (i) below.
Interest rate risk is monitored and managed by the Group Assets Committee, and the Group Asset Liability Committee. Exposure to interest rate risk is monitored through several measures that include Value-at-Risk analysis, position limits, scenario testing, stress testing and asset and liability matching using measures such as duration. The impact of exposure to sustained low interest rates is regularly monitored.
As at 31 December 2009, the Group had entered into a number of initiatives, including interest rate swap agreements and changes in asset mix, to mitigate the effects of potential adverse interest rate movements, and to enable closer matching of assets and liabilities.
Sensitivity to changes in interest rates is given in section (i) below. Further information on borrowings is included in note 48.
Capital 31 December 2009 Capital 31 December 2008 restated Capital 31 December 2007 restated
A 10% change in sterling to euro/US$ foreign exchange rates would have had the following impact on total equity.
Derivatives risk Derivatives are used by a number of the businesses, within policy guidelines agreed by the Board of Directors, as set out in the Group policy on derivatives use. Activity is overseen by the Derivatives Approvals Committee, which monitors implementation of the policy, exposure levels and approves large or complex transactions proposed by businesses. Derivatives are primarily used for efficient investment management, risk hedging purposes or to structure specific retail savings products. Derivative transactions are covered by either cash or corresponding assets and liabilities. Speculative activity is prohibited, unless prior approval has been obtained from the Derivatives Approvals Committee. Over the counter derivative contracts are entered into only with approved counterparties and using ISDA documentation and credit support annexes (or equivalent) in accordance with the Group derivatives policy. Adherence to the collateral requirements as set out in the Group derivatives and Group credit policies thereby reduces the risk of credit loss.
The Group manages its credit risk at business unit, regional and Group levels. All business units and regions are required to implement local credit risk processes (including limits frameworks), operate specific risk management committees, and ensure detailed reporting and monitoring of their exposures against pre-established risk criteria. At Group level, we manage and monitor all exposures across our business units on a consolidated basis, and operate group limit frameworks that must be adhered to by all.
The Group risk management framework also includes the market related aspect of credit risk. This is the risk of a fall in the value of fixed interest securities from changes in the perceived worthiness of the issuer and is manifested through changes in the fixed interest securities’ credit spreads.
Management of credit risk is effected by five core functions: — The maintenance and adherence of an effective governance structure. This includes clear guidance, scope and frameworks for all aspects of the credit risk function to ensure accountability and clarity. This also includes delegated authority to the Group Credit Approvals Committee, a quorum of key senior risk officers, that is authorised to make key decisions within certain risk appetite levels.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 56 – Risk management continued — Additional committee and credit risk function oversight is provided on all credit risk related matters. This includes regular consideration and review of our key counterparties, monitoring and addressing key credit themes and news that emerge in the markets. The Group Credit Approvals Committee provides an effective forum to ensure that all key recommendations are considered, and decisions implemented throughout the Group. The regional and Group credit divisions ensure that all qualitative aspects of risk management are considered and evaluated to provide further oversight and balance to the quantitative aspects.
Debt securities 39.1% 17.8% 24.6% 12.6% 2.3% 3.6% 160,510 Reinsurance assets 10.5% 52.1% 26.7% 0.4% 0.2% 10.1% 7,572 Other investments 0.2% 3.1% 1.8% 1.1% — 93.8% 34,826 Loans 6.2% 7.7% 0.9% 0.5% 1.0% 83.7% 41,079
Debt securities 44.0% 16.2% 26.1% 8.4% 1.5% 3.8% 150,734 Reinsurance assets 12.9% 70.0% 8.1% 0.4% 0.2% 8.4% 7,894 Other investments 0.6% 2.7% 6.0% 0.8% — 89.9% 36,116 Loans 6.1% 5.3% 5.2% 0.3% 1.0% 82.1% 42,237
The carrying amount of assets included in the statement of financial position represents the maximum credit exposure.
The Group loan portfolio principally comprises: — Policy loans which are generally collateralised by a lien or charge over the underlying policy; — Loans and advances to banks which primarily relate to loans of cash collateral received in stock lending transactions. These loans are fully collateralised by other securities; and — Mortgage loans collateralised by property assets.
Unit trusts and other investment vehicles The credit quality of the underlying debt securities within these vehicles is managed by the safeguards built into the investment mandates for these funds. We rely on our understanding that the trusts and their asset managers are only approved if they satisfy certain selection criteria (including due diligence in the form of a questionnaire and/or research by dedicated teams). In addition, the asset managers are mandated to make investments in line with the funds’ risk profiles as marketed to prospective customers and policyholders. Accordingly, as part of reviewing the asset quality of unit trusts and other investment vehicles, we monitor the assets within the funds and their performance to ensure they remain in line with the respective investment mandates for these funds.
For certain of the unit trusts in our other investments, we apply minimum requirements affecting both the underlying counterparties and the investments issued by those counterparties such as a minimum size for the counterparty’s programme, a limit on the size of the overall exposure to the underlying counterparty and, where appropriate, explicit approval of the counterparty by internal credit risk management teams is required. These criteria are indicators of the asset quality for these investments, as they represent minimum criteria for liquidity and diversification.
A proportion of the assets underlying these investments are represented by equities and so credit ratings are not generally applicable. Equity exposures are managed against agreed benchmarks that are set with reference to overall market risk appetite.
Reinsurance credit exposures The Group is exposed to concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures, by limiting the reinsurers that may be used and applying strict limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that the overall risk is within appetite. The Credit Approvals Committee has a monitoring role over this risk.
Debt securities 160,400 — — — — 110 160,510 Reinsurance assets 7,572 — — — — — 7,572 Other investments 34,811 — — — — 15 34,826 Loans 40,039 355 35 17 6 627 41,079 Receivables and other financial assets 8,814 647 61 32 71 7 9,632
Debt securities 121,440 — — — — 71 121,511 Reinsurance assets 8,052 — — — — 2 8,054 Other investments 36,500 — — — — — 36,500 Loans 35,937 210 11 3 15 17 36,193 Receivables and other financial assets 8,337 200 21 13 2 46 8,619
The Group and Company have a strong liquidity position (£2.2 billion of financial assets held at Group) and through the application of a Group Liquidity policy seek to maintain sufficient financial resources to meet its obligations as they fall due. In addition to this strong liquidity position, the Group and Company maintain significant committed borrowing facilities (£2.1 billion) from a range of highly rated banks to further mitigate this risk.
Asset liability matching Generally, our individual business units generate sufficient capital from the receipt of premiums, fees and investment income, along with planned asset sales and maturities, to pay claims and expenses. However, there may be instances where additional cash requirements arise in excess of that available within the operating businesses. In such instances, we have several options to fund these cash requirements including the selling of assets from the investment portfolios, using centre funds, issuing commercial paper and the committed borrowing facilities.
ALM strategy may be determined at a sub-fund level for a block of closely related liabilities. Alternatively, if ALM strategy is determined at a fund or company level, it will usually be appropriate (for pricing, financial reporting and risk management purposes) to develop a hypothecation of assets to notional sub-funds with different liability characteristics. It is for this reason that Group Risk provides a framework of corporate objectives within which the operating businesses develop specific and appropriate ALM methodologies, to seek to ensure that our businesses have sufficient liquidity to settle claims as they are expected to arise.
Maturity analyses The following tables show the maturities of our insurance and investment contract liabilities, and of the financial and reinsurance assets to meet them. A maturity analysis of the contractual amounts payable for borrowings and derivatives is given in notes 48 and 57 respectively. Contractual obligations under operating leases and capital commitments are given in note 52.
(i) Analysis of maturity of insurance and investment contract liabilities For non-linked insurance business, the following table shows the gross liability at 31 December 2009 analysed by remaining duration. The total liability is split by remaining duration in proportion to the cash-flows expected to arise during that period, as permitted under IFRS 4, Insurance Contracts.
Long-term business Insurance contracts – non-linked 106,758 9,480 27,726 44,305 25,247 Investment contracts – non-linked 45,492 2,957 10,263 17,205 15,067 Linked business 82,033 82,033 — — —
Notes to the consolidated financial statements continued Performance review Corporate responsibility Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 56 – Risk management continued
Debt securities 160,510 17,309 44,051 98,792 358 Equity securities 43,343 — — — 43,343 Other investments 34,849 32,423 414 493 1,519 Loans 41,079 6,867 4,146 30,066 — Cash and cash equivalents 25,176 25,176 — — —
The committee also considers the reinsurance coverage across the life businesses. It confirms that guidance and procedures are in place for each of the major components of life insurance risk, and that the businesses mitigate against any life insurance risk outside local appetite, within the parameters for the overall Group risk appetite.
The committee has also developed guidance for business units on management of a number of areas of life insurance risk to ensure best practice is shared throughout the Group and common standards are adopted.
— Longevity risk is carefully monitored against the latest external industry data and emerging trends. Whilst individual businesses are responsible for reserving and pricing for annuity business, the Group monitors the exposure to this risk and the capital implications to manage the impact on the group-wide exposure and the capital funding that businesses may require as a consequence. The Group has used reinsurance solutions to reduce the risks from longevity where possible and desirable and continually monitors and evaluates emerging market solutions to mitigate this risk further.
— Expense risk is primarily managed by the business units through the assessment of business unit profitability and frequent monitoring of expense levels.
Embedded derivatives The Group has exposure to a variety of embedded derivatives in its long-term savings business due to product features offering varying degrees of guaranteed benefits at maturity or on early surrender, along with options to convert their benefits into different products on pre-agreed terms. The extent of the impact of these embedded derivatives differs considerably between business units.
Examples of each type of embedded derivative affecting the Group are: — Options: call, put, surrender and maturity options, guaranteed annuity options, options to cease premium payment, options for withdrawals free of market value adjustment, annuity options, and guaranteed insurability options. — Guarantees: embedded floor (guaranteed return), maturity guarantee, guaranteed death benefit, and guaranteed minimum rate of annuity payment. — Other: indexed interest or principal payments, maturity value, loyalty bonus.
Business units have developed mechanisms that identify, quantify and manage accumulated exposures to contain them within the limits of the appetite of the Group. The Group has pioneered various developments, such as the Aviva UK Digital Flood Map to effectively manage exposures arising from specific perils. Where appropriate such projects are employed throughout the business units to promote the adoption of best practice as standard.
The adequacy of the Group’s general insurance claims provisions is ultimately overseen by the General Insurance Committee. A number of business units also have periodic external reviews by local consultant actuaries (often as part of the local regulatory requirement).
For the 2010 underwriting year the Group will participate in a share of a reinsurer’s US property catastrophe reinsurance portfolio. This exposure is not correlated with the Group’s other General Insurance exposure and therefore provides diversification benefit. The total expected loss from a one in ten year annual loss scenario is approximately £50 million compared to approximately £145 million when measured on a one in a hundred year annual loss scenario.
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 56 – Risk management continued (f) Operational risk Types of operational risk Operational risk is the risk of loss, arising from inadequate or failed internal processes, or from people and systems, or from external events. Operational risks include business protection, information technology, people, legal and regulatory compliance risks.
Our businesses are primarily responsible for identifying and managing operational risks in line with minimum standards of control set out in our policies. Each operational risk is assessed by considering the potential impact and the probability of the event occurring. Impact assessments are considered against financial, operational and reputation criteria.
Business management teams must be satisfied that all material risks falling outside our risk appetite are being mitigated, monitored and reported to an appropriate level. Any risks with a high potential impact level are monitored centrally on a regular basis. Businesses use key indicator data to help monitor the status of the risk and control environment. They also identify and capture loss events; taking appropriate action to address actual control breakdowns and promote internal learning from these occurrences.
(g) Strategic risk We are exposed to a number of strategic risks. Our strategy needs to support our vision, purpose and objectives and be responsive to both the external and internal environment, for example changes in the competitive landscape, customer behaviour, regulatory changes, merger and acquisition opportunities and emerging trends (such as climate change, pandemic and improving longevity). Strategic risk is explicitly considered throughout our strategic review and planning process. Developments are assessed during our quarterly performance management process where all aspects of our risk profile are considered.
(h) Brand and reputation risk We are dependent on the strength of our brands, the brands of our partners and our reputation with customers and agents in the sale of our products and services.
If we do not manage successfully the perception of our brands and reputation, it could cause existing customers or agents to withdraw from our business and potential customers or agents to be reluctant or elect not to do business with us. This would adversely impact our business and results of operations.
For long-term business in particular, sensitivities of MCEV performance indicators to changes in both economic and non­ economic experience are continually used to manage the business and to inform the decision making process. More information on MCEV sensitivities can be found in the presentation of results on an MCEV basis in the supplementary section of this report.
These methods extrapolate the claims development for each accident year based on the observed development of earlier years. In most cases, no explicit assumptions are made as projections are based on assumptions implicit in the historic claims.
Total (810) 810 615 (595) (45) (30) (320) 1. The comparative 2008 economic sensitivities for insurance non-participating business have been restated to reflect modelling enhancements in Delta Lloyd.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 56 – Risk management continued Impact of the reattribution of the inherited estate on IFRS long-term business sensitivities Prior to the reattribution of the inherited estates of CGNU Life Assurance Limited (CGNU) and Commercial Union Life Assurance Company Limited (CULAC) (as detailed in note 44(b)), movements in the value of assets and liabilities in the with-profit funds of CGNU and CULAC would result in corresponding movements in the value of the unallocated divisible surplus. IFRS profit in these funds would only arise on the shareholders’ share of bonuses paid on claims during the year or added to policies at the end of the year.
The impact on the Group’s results from sensitivity to these assumptions can also be found in the MCEV sensitivities included in the alternative method of reporting long-term business profits section.
Sensitivities as at 31 December 2008 Impact on profit before tax (£m)
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 56 – Risk management continued Sensitivities as at 31 December 2008 restated1
Interest Interest Equity/ Equity/ rates rates property property +1% -1% +10% -10%
Total — 5 90 (90) 1. The comparative 2008 economic sensitivities for life and non-insurance businesses have been restated to reflect modelling enhancements in Delta Lloyd.
Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Group’s view of possible near-term market changes that cannot be predicted with any certainty; and the assumption that all interest rates move in an identical fashion.
57 – Derivative financial instruments This note gives details of the various derivative instruments we use to mitigate risk.
The fair values do not provide an indication of credit risk, as many over-the-counter transactions are contracted and documented under ISDA (International Swaps and Derivatives Association Inc) master agreements or their equivalent. Such agreements are designed to provide a legally enforceable set-off in the event of default, which reduces credit exposure. In addition, the Group has collateral agreements in place between the individual Group entities and relevant counterparties.
(a) Hedged derivatives The Group has formally assessed and documented the effectiveness of its hedged derivatives in accordance with IAS 39, Financial Instruments: Recognition and Measurement. To aid discussion and analysis, these derivatives are analysed into cash flow, fair value and net investment hedges, as detailed below.
(i) Cash flow hedges The Group uses forward starting interest rate swap agreements in the United States to hedge the variability in future cash flows associated with the forecasted purchase of fixed-income assets. These agreements reduce the impact of future interest rate changes on the forecasted transaction. Fair value adjustments for these interest rate swaps are deferred and recorded in equity until the occurrence of the forecasted transaction, at which time the interest rate swaps will be terminated. The accumulated gain or loss in equity will be amortised into investment income as the acquired asset affects income. The Group is hedging its exposure to the variability of future cash flows from interest rate movements for terms up to 10 years, therefore the cash flows from these hedging instruments are expected to affect profit and loss for approximately the next 10 years. For the year ended 31 December 2009, none of the Group’s cash flow hedges was ineffective or discontinued.
The notional value of these interest rate swaps was £3 million at 31 December 2009 and their fair value was £0.1 million liability. The Group had no cash flow hedge activity at 31 December 2008.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 57 – Derivative financial instruments continued (ii) Fair value hedges The Group has entered into a number of interest rate swaps in order to hedge fluctuations in the fair value of part of its portfolio of mortgage loans and debt securities in the Netherlands and the United States. The notional value of these interest rate swaps was £3,060 million at 31 December 2009 (2008: £1,088 million, 2007: £nil) and their fair value was £184 million liability (2008: £86 million liability, 2007: £nil). These hedges were fully effective during the year.
(iii) Net investment hedges To reduce its exposure to foreign currency risk, the Group has entered into the following net investment hedges: — The Group has designated a portion of its Euro and US dollar denominated debt as a hedge of the net investment in its
— The foreign exchange gain of £255 million (2008: loss of £716 million) on translation of the debt to sterling at the statement of financial position date has been recognised in the hedging instruments reserve in shareholders’ equity. This hedge was fully effective throughout the current and prior years.
The losses on the Group’s net investment hedges during the year were more than offset by gains on the relevant subsidiaries which are recognised in the currency translation reserve (see note 34).
(b) Non-hedge derivatives Non-hedge derivatives either do not qualify for hedge accounting under IAS 39 or the option to hedge account has not been taken.
Fair value assets are recognised as “Derivative financial instruments” in note 24(a), whilst fair value liabilities are recognised as “other financial liabilities” in note 49.
The Group’s derivative risk management policies are outlined in note 56(b).
(c) Collateral Certain derivative contracts, primarily interest rate and currency swaps, involve the receipt or pledging of collateral. The amounts of collateral receivable or repayable are included in notes 25 and 49 respectively.
Performance reviewAviva plc Notes to the consolidated financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information 58 – Assets under management In addition to the assets included in the consolidated statement of financial position, the Group manages many funds for third parties. This note details the total funds under management.
The total Group assets under management are: Restated Restated 2009 2008* 2007*
Total IFRS assets included in the consolidated statement of financial position 354,391 354,562 321,326 Less: Third party funds included within consolidated IFRS assets (9,980) (6,025) (5,845)
Aviva plc Notes to the consolidated financial statements continued Annual Report and Accounts 2009 59 – Related party transactions continued Our UK fund management companies manage most of the assets held by the Group’s main UK staff pension scheme, for which they charge fees based on the level of funds under management. The main UK scheme and the Dutch scheme hold investments in Group-managed funds and insurance policies with other Group companies, as explained in note 47(e)(iii).
Services provided by related parties There were no services provided by related parties in 2007, 2008 or 2009.
Performance reviewAviva plc Corporate responsibilityFinancial statementsAnnual Report and Accounts 2009 Governance Shareholder informationof the Company Financial statements IFRS Financial statements MCEV Other information
Expenses Operating expenses Interest payable to Group companies Interest payable on borrowings
Statement of comprehensive income For the year ended 31 December 2009
Profit for the year 571 858 Other comprehensive income Fair value gains/(losses) on investments in subsidiaries B 883 (8,113) Actuarial (losses)/gains on pension scheme (3) 2 Other comprehensive income, net of tax 880 (8,111)
Balance at 1 January 664 200 1,234 735 5,770 113 3,287 12,003 990 12,993 Profit for the year — — — — — — 571 571 — 571 Other comprehensive income — — — — 883 — (3) 880 — 880 Total comprehensive income for the year — — — — 883 — 568 1,451 — 1,451 Dividends and appropriations 15 — — — — — — (853) (853) — (853) Issues of share capital 28 1 — — — — — — 1 — 1 Shares issued in lieu of dividends 35 27 — (27) — — — 299 299 — 299 Employee trust shares distributed in the year 30 — — — — — — (18) (18) — (18) Reserves credit for equity compensation plans 10 — — — — — 56 — 56 — 56 Shares issued under equity compensation plans — — — — — (60) 60 — — — Aggregate tax effect — — — — — — 17 17 — 17 Balance at 31 December 692 200 1,207 735 6,653 109 3,360 12,956 990 13,946
For the year ended 31 December 2008 Ordinary Preference Investment Equity Direct share share Share Merger valuation compensation Retained capital Total capital capital premium reserve reserve reserve earnings Equity instrument equity
Balance at 1 January 655 200 1,223 735 13,883 89 3,207 19,992 990 20,982 Profit for the year — — — — — — 858 858 — 858 Other comprehensive income — — — — (8,113) — 2 (8,111) — (8,111) Total comprehensive income for the year — — — — (8,113) — 860 (7,253) — (7,253) Dividends and appropriations 15 — — — — — — (975) (975) — (975) Issues of share capital 28 2 — 18 — — — — 20 — 20 Shares issued in lieu of dividends 35 7 — (7) — — — 170 170 — 170 Employee trust shares distributed in the year 30 — — — — — — (6) (6) — (6) Reserves credit for equity compensation plans 10 — — — — — 39 — 39 — 39 Shares issued under equity compensation
Assets Non-current assets Investments in subsidiaries Investment in joint venture Loans owed by subsidiaries Deferred tax assets Current tax assets
Current liabilities Borrowings Loans owed to subsidiaries Other amounts owed to subsidiaries Other creditors
Statement of cash flows For the year ended 31 December 2009
Cash flows from financing activities Funding provided by subsidiaries 477 401 New borrowings drawdown, net of expenses 2,490 3,905 Repayment of borrowings (2,541) (3,463) Net drawdown of borrowings (51) 442 Preference dividends paid (17) (17) Ordinary dividends paid (476) (732) Interest paid on borrowings (7) (30)
Aviva plc Notes to the Company’sAnnual Report and Accounts 2009 financial statements
A – Restatement of prior year figures The Company runs sterling and currency intercompany accounts with subsidiaries. During the year, it was discovered that incorrect foreign exchange rates had been applied to one of these accounts, with the result that the Company incorrectly recorded a foreign exchange loss of £87 million in 2008. The correcting entry has resulted in a reduction in expenses in 2008 of £87 million, an increase to the 2008 tax charge of £25 million, a reduction in the 2008 current tax asset of £25 million, an increase in other amounts owed by subsidiaries of £87 million and an increase in retained earnings of £62 million as at 31 December 2008.
Fair values are estimated using applicable valuation models underpinned by the Company’s market capitalisation, and are classified as Level 2 in the fair value hierarchy described in note 24(b) to the Group consolidated financial statements.
Defined benefit schemes (see (iii) below) 6 6 Defined contribution schemes 6 3
D – Tax (i) Tax credited to income statement £m £m
(iii) Tax credited to equity Tax credited to equity comprises £17 million (2008: £16 million) in respect of coupon payments on the direct capital instrument.
Tax calculated at standard UK corporation tax rate of 28% (2008: 28.5%) (116) (143) Adjustment to tax charge in respect of prior years 7 5 Non-assessable dividends 375 512 Disallowable expenses (3) (6) Unpaid group relief (102) — Deferred tax asset not recognised — (11) Other (3) 1
(v) Deferred tax asset (i) The movement in the net deferred tax asset was as follows: Net asset at 1 January — 9
Within 1 year 1 – 5 years 5 – 10 years 10 – 15 years Over 15 years
Total contractual undiscounted cash flows 5,389 5,544 10,933 5,412 6,619 12,031 4,215 3,105 7,320
The fair value of the subordinated debt at 31 December 2009 was £4,372 million (2008: £2,979 million). The fair value of the 9.5% guaranteed bonds 2016 at 31 December 2009 was £238 million (2008: £224 million). The fair value of the commercial paper is considered to be the same as its carrying value.
Further details of these borrowings and undrawn committed facilities can be found in the Group consolidated financial statements, note 48.
G – Contingent liabilities Details of the Company’s contingent liabilities are given in the Group consolidated financial statements, note 51(j).
Performance reviewAviva plc Notes to the Company’s financial statements continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
Financial liabilities owed by the Company as at the balance sheet date are largely in respect of borrowings (details of which are provided in note F and the Group consolidated financial statements, note 48) and loans owed to subsidiaries. Loans owed to subsidiaries were within agreed credit terms as at the balance sheet date.
The majority of the Company’s external borrowings are at fixed rates of interest and are therefore not exposed to changes in these rates. However, for those borrowings that are at floating rates, the Company is affected by changes in these rates. Further details of the Company's borrowings are provided in note F and the Group consolidated financial statements, note 48.
Currency risk The Company’s direct subsidiaries are all incorporated and operating in the UK, and therefore are not exposed to currency risk. However, these subsidiaries are themselves exposed to foreign currency risk arising from fluctuations in exchange rates during the course of providing insurance and asset management services around the world. The exposure of the subsidiaries to currency risk is considered from a Group perspective in the Group consolidated financial statements, note 56.
I – Related party transactions The Company receives dividend and interest income from subsidiaries and pays interest and fee expense to those subsidiaries in the normal course of business. These activities are reflected in the table below.
Within 1 year — — 132 1 – 5 years 2,050 1,402 1,359 Over 5 years 1,111 2,015 1,248
In this section 284 Condensed consolidated income statement 285 Condensed consolidated statement of comprehensive income 285 Condensed consolidated statement of changes in equity 286 Condensed consolidated statement of financial position 287 Reconciliation of shareholders’ equity on
net worth 288 Group MCEV analysis of earnings 289 M1 – Basis of preparation 293 M2 – Geographical analysis of MCEV operating earnings 297 M3 – Geographical analysis of fund management operating earnings 297 M4 – Analysis of other operations and regional costs 298 M5 – Segmentation of condensed consolidated statement of financial position 299 M6 – Analysis of life and pension earnings 300 M7 – Life MCEV operating earnings 300 M8 – Present value of life new business premiums 301 M9 – Geographical analysis of value of new business 302 M10 – Post tax internal rate of return and payback period on life and pensions new business 302 M11– Free surplus emergence 303 M12 – Maturity profile of business 304 M13 – Segmental analysis of life and related business embedded value 304 M14 – Risk allowance within present value of in-force (VIF) 305 M15 – Implied discount rates (IDR) 306 M16 – Analysis of fund management and service company business within embedded value 306 M17 – Summary of minority interest in life and related businesses’ MCEV results 307 M18 – Principal economic assumptions 311 M19 – Sensitivity analysis 315 Statement of directors’ responsibilities in respect of the Market Consistent Embedded Value (MCEV) basis 316 Independent auditor’s report to the directors of Aviva plc on the consolidated Market Consistent Embedded Value (MCEV) financial statements
Operating profit before tax attributable to shareholders’ profits 3,851 Long-term business 3,389 2,810 1,091 General insurance and health 960 1,198
65 Economic assumption changes on general insurance and health business 57 (94) (70) Impairment of goodwill (62) (66)
4,244 Profit/(loss) before tax 3,735 (11,262) (1,050) Tax on operating profit (924) (841)
3,335 Profit/(loss) for the year 2,935 (7,707) All profit is from continuing operations. 1.Excludes the proportion of the results of Aviva Investors fund management businesses and other fund management operations within the group that arises from the provision of fund management services to our life businesses. These results are included within the life MCEV operating earnings consistent with the MCEV methodology.
2.Excludes the proportion of the results of subsidiaries providing services to the Life business. These results are included within the life MCEV operating earnings consistent with the MCEV methodology.
Other comprehensive income (98) Fair value losses on AFS securities, owner-occupied properties and hedging instruments (86) (278) (34) Fair value gains transferred to profit (30) (8)
Condensed consolidated statement of changes in equity – MCEV basis For the year ended 31 December 2009 €m £m £m 19,809 Balance at 1 January 17,432 23,928 965 Total comprehensive (income/(expense) for the year 849 (5,645)
(60) Shares acquired by employee trusts (53) (29) 64 Reserves credit for equity compensation plans 56 39 18 Aggregate tax effect – shareholder tax 17 16
Assets 3,842 Goodwill 3,381 3,578 3,250 Acquired value of in-force business and intangible assets 2,860 4,038 3,835 Additional value of in-force long-term business1 3,376 2,859 1,933 Interests in, and loans to, joint ventures 1,701 1,737 1,456 Interests in, and loans to, associates 1,281 1,246 856 Property and equipment 753 964 14,116 Investment property 12,422 14,426 46,681 Loans 41,079 42,237
Financial investments 182,398 Debt securities 160,510 150,398 8,605 Reinsurance assets 7,572 7,894 1,394 Deferred tax assets 218 2,642 408 Current tax assets 359 622 10,946 Receivables and other financial assets 9,632 9,816 6,388 Deferred acquisition costs and other assets 5,621 6,147 4,095 Prepayments and accrued income 3,604 3,762 28,609 Cash and cash equivalents 25,176 23,643 60 Assets of operations classified as held for sale 53 1,550
(77) Shares held by employee trusts (68) (33) 3,892 Retained earnings 3,425 3,902 2,803 Additional retained earnings on an MCEV basis1 2,466 554 14,813 Equity attributable to ordinary shareholders of Aviva plc 13,035 13,162 1,352 Preference share capital and direct capital instruments 1,190 1,190 4,814 Minority interests1 4,237 3,080
Equity attributable to ordinary shareholders of Aviva plc 10,356 2,679 13,035 Preference share capital 200 — 200 Direct capital instruments 990 — 990 Minority interests 3,540 697 4,237
Equity attributable to ordinary shareholders of Aviva plc 11,179 1,983 13,162 Preference share capital 200 — 200 Direct capital instruments 990 — 990 Minority interests 2,204 876 3,080
Life and related businesses net assets on a statutory IFRS net basis 17,317 16,581 Goodwill and other intangibles (2,606) (2,947) Acquired value of in-force business (1,493) (2,490) Adjustment for share of joint ventures and associates (377) (472) Adjustment for assets to regulatory value net of tax (19) 1,474 Adjustment for DAC and DIR net of tax (2,653) (2,680) Adjustment for differences in technical provisions 1,414 406 Other accounting and tax differences 630 937
Group MCEV analysis of earnings Non-covered but related to Non-covered Total nonCovered life Total life relating to covered business1 business2 business3 non-life business Total
Operating MCEV earnings 1,760 — 1,760 509 509 2,269 Non-operating MCEV earnings (8,678) (53) (8,731) (1,203) (1,256) (9,934)
Equity attributable to ordinary shareholders of Aviva plc on an MCEV basis 13,162 1.Covered business represents the business that the MCEV calculations cover, as detailed in the Basis of preparation note. The embedded value is presented net of minority interests and tax. 2.Non-covered but related to life business represents the adjustments to the MCEV, including goodwill, to calculate the long-term business net assets on an MCEV basis. An analysis of net assets on an MCEV basis gross of minority interests is provided on page 298. 3.Net assets for the total life businesses on an MCEV basis presented net of minority interests.
M1 – Basis of preparation The condensed consolidated income statement and condensed consolidated statement of financial position on pages 284 to 286 present the group’s results and financial position for the life and related businesses on the Market Consistent Embedded Value (MCEV) basis and for its non-life businesses on the International Financial Reporting Standards (IFRS) basis. The MCEV methodology adopted is in accordance with the MCEV Principles published by the CFO Forum in October 2009.
The directors consider that the MCEV methodology gives useful insight into the drivers of financial performance of the group’s life and related businesses. This basis values future cash flows from assets consistently with market prices, including more explicit allowance for the impact of uncertainty in future investment returns and other risks.
Embedded value is also consistent with the way pricing is assessed and the business is managed. The results for 2009 and 2008 have been audited by our auditors, Ernst & Young. Their report in respect of 2009 can be found on page 316 in the Report and Accounts.
CFO Forum principles update The CFO Forum issued updated MCEV Principles and Guidance in October 2009, replacing the guidance issued in June 2008. The main change was to permit the use of liquidity premium on contracts with predictable cashflows. Aviva’s methodology of applying liquidity premium to contracts where backing assets can be held to maturity is unchanged. Further details are given on page 308. Aviva’s methodology is compliant with the updated CFO Forum Principles.
For products sold to individuals, premiums are considered to represent new business where a new contract has been signed, or where underwriting has been performed. Renewal premiums include contractual renewals, non-contractual variations that are reasonably predictable and recurrent single premiums that are pre-defined and reasonably predictable.
For group products, new business includes new contracts and increases to aggregate premiums under existing contracts. Renewal premiums are based on the level of premium received during the reporting period and allow for premiums expected to be received beyond the expiry of any guaranteed premium rates.
The free surplus is the market value of any assets allocated to, but not required to support, the in-force covered business at the valuation date. The level of required capital across the business units expressed as a percentage of the EU minimum solvency margin (or equivalent) can be found on page 308.
Future profits are projected using best estimate non-economic assumptions and market consistent economic assumptions. In principle, each cash flow is discounted at a rate that appropriately reflects the riskiness of that cash flow, so higher risk cash flows are discounted at higher rates. In practice, the PVFP is calculated using the “certainty equivalent” approach, under which the reference rate is used for both the investment return and the discount rate. This approach ensures that asset cash flows are valued consistently with the market prices of assets without options and guarantees. Further information on the risk-free rates is given in note M18.
Where evidence exists that persistency rates are linked to economic scenarios, dynamic lapse assumptions are set that vary depending on the individual scenarios. This cost is included in the TVOG. Dynamic lapses are modelled for parts of the US and French businesses. Asymmetries in non-economic assumptions that are linked to economic scenarios, but that have insufficient evidence for credible dynamic assumptions, are allowed for within mean best estimate assumptions.
Frictional costs are calculated by projecting forwards the future levels of required capital. Tax on investment return and investment expenses are payable on the assets backing required capital, up until the point that they are released to shareholders.
Participating business Future regular bonuses on participating business are projected in a manner consistent with current bonus rates and expected future market-consistent returns on assets deemed to back the policies.
For with-profit funds in the UK and Ireland, for the purpose of recognising the value of the estate, it is assumed that terminal bonuses are increased to exhaust all of the assets in the fund over the future lifetime of the in-force with-profit policies. However, under stochastic modelling there may be some extreme economic scenarios when the total assets in the group’s with-profit funds are not sufficient to pay all policyholder claims. The average additional shareholder cost arising from this shortfall has been included in the TVOG.
(ii) The 2008 figures for present value of new business premiums and value of new business have been restated to reclassify premium on Annual Renewable Term (ART) business in Spain as other operating existing business variances rather than new business. There is no impact on profit.
(iv)During 2009, the Group undertook a review of our accounting policy for cash and cash equivalents. Previously, we defined these as normally having a maturity of three months or less from date of acquisition. To avoid ambiguity, our accounting policy has been refined to impose a cut-off date of exactly three months, allowing us to delete “normally” from the policy wording. This refinement of policy has resulted in a reclassification of certain short-dated instruments between cash and cash equivalents and financial investments. The impact of this refinement has been to increase financial investments and reduce cash and cash equivalents in 2008 by £538 million compared to the amounts previously stated. As a consequence of this, cash flows from operating activities in 2008 have decreased by £58 million, with the effect of exchange rate movements accounting for the remaining £50 million.
Exchange rates The group’s principal overseas operations during the period were located within the Eurozone and the United States.
Operating assumption changes: – maintenance expense5 1 (22) 5 (31) 54 (94) 10 (78) 275 197 (9) (10) 8 (2) 187 – project and other related expenses — — — — — (13) — (13) — (13) — — — — (13) – mortality/morbidity6 5 64 7 12 58 (9) (1) 131 (4) 127 (20) (1) 5 4 116 – lapses7 (51) (22) (9) (37) 83 (69) (7) (61) (40) (101) (105) (9) 4 (5) (262) – other8 (22) 3 12 1 (1) — (2) 13 (60) (47) 96 (6) (5) (11) 16
6.Favourable mortality assumption changes in France, Poland reflecting recent experience. The adverse impact in the Delta Lloyd reflects the net impact of using updated mortality tables in the Netherlands, Germany and Belgium, following the issuance of revised advice from the respective actuarial associations.
8.Other assumption changes in the US primarily relate to the timing of management action in setting policyholder credited rates. In Delta Lloyd, the change represents tax effects resulting from a reallocation of assets.
9.Other operating variances in France, Poland and Asia have arisen as a result of more accurate modelling. In the Delta Lloyd, these relate to revisions to investment and bonus strategies and expenses in Delta Lloyd Germany following the decision to close this operation to new business. In Spain, these reflect the impact of re-pricing actions on risk products. Financial statem ents M CEV
M2 – Geographical analysis of MCEV operating earnings continued Gross of tax and minority interests Other Aviva Delta North Asia 2008 Restated UK France Ireland Italy Poland Spain Europe Europe Lloyd Europe America Asia Australia Pacific Total £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
Value of new business1 204 135 15 71 65 202 29 517 (47) 470 55 30 13 43 772 Earnings from existing business – expected existing business
Operating assumption changes: – maintenance expense6 (15) (12) (2) (9) 4 — (12) (31) (167) (198) (5) (3) — (3) (221) – project and other related expenses 13 — — — — — — — 9 9 — — — — 22 – mortality/morbidity7 54 — 25 11 4 (1) — 39 (79) (40) — 1 (1) — 14 – lapses8 (73) 108 7 (9) (10) (19) (20) 57 — 57 — (12) 1 (11) (27) – other9 16 (1) 23 3 24 — 13 62 (28) 34 1 (10) 6 (4) 47
Earnings before tax and minority interests 883 692 78 131 241 286 23 1,451 196 1,647 201 31 48 79 2,810 1. In Spain £34 million has been reclassified from value of new business to other operating variances. 2. Project and other related expenses in the UK reflect project costs associated with strategic initiatives, including developments designed to offer a wider range of products to customers, and the simplification of systems and processes. Expenses in Delta Lloyd reflect an overrun in Belgium following the acquisition of Swiss Life Belgium, and restructuring within the intermediary division. 3. Mortality experience continues to be better than the assumptions set across a number of our businesses. 4. Lapse experience has been volatile, in part reflecting wider economic volatility. In Poland, lapse experience continued to be better than the long-term assumptions for both life and pension products. 5. In France, other experience profits include the reduction in value arising from reductions in fees and commissions received. In Ireland, certain statutory provisions were increased following a review. The movement in Delta Lloyd reflects changes on group pension scheme contribution. In the USA, other experience reflects the cost of enhancing policyholder crediting rates. 6. In Delta Lloyd, expense assumptions have been updated following a review of expense allocations. 7. In UK, favourable mortality assumption changes are in respect of mortality and morbidity changes across a range of products. In Delta Lloyd, mortality assumption changes reflect the impact of using a new industry mortality basis. 8. In the UK, an additional lapse provision has been set up in anticipation of higher short-term recession related withdrawals (pre tax £50 million) and higher mortgage and income protection claims (pre tax £20 million) to reflect rising unemployment. In France, persistency assumptions have been weakened following continual favourable experience on AFER products. 9. In the UK, other operating assumption changes include the impact of the with-profit special distribution. In Ireland, other assumption changes reflect a reduction in the assumed future tax charges. In Poland, other assumptions reflect a change in the pattern of future mortality charging structure. 10.Other operating variances in France are mainly in respect of the impact of the mutualisation of funds following the merger of two legal entities. In Delta Lloyd, changes are mainly in respect of aligning the profit sharing policy for existing group business in Belgium, following the acquisition of Swiss Life Belgium.
Value of new business 177 94 8 38 39 51 8 238 (78) 160 16 9 13 22 375 Earnings from existing business – expected existing business
Experience variances – maintenance expense 27 — 4 (1) 10 (8) 4 9 4 13 — 5 — 5 45 – project and other related expenses1 (26) — (5) — — (3) (6) (14) (21) (35) (35) — — — (96) – mortality/morbidity2 4 30 5 1 9 (3) 6 48 (17) 31 5 3 5 8 48 – lapses3 (22) 36 (16) (15) 12 (20) (14) (17) 5 (12) (17) (31) — (31) (82) – other4 (4) (49) 1 37 5 1 1 (4) 35 31 (40) (1) (2) (3) (16)
9.Other operating variances in France, Poland and Asia have arisen as a result of more accurate modelling. In the Delta Lloyd, these relate to revisions to investment and bonus strategies and expenses in Delta Lloyd Germany following the decision to close this operation to new business. In Spain, these reflect the impact of re-pricing actions on risk products.
Value of new business1 147 79 10 21 46 68 24 248 (48) 200 36 24 9 33 416 Earnings from existing business – expected existing business
Earnings after tax and minority interests 635 426 50 38 172 97 17 800 136 936 132 24 33 57 1,760 1. In Spain £12 million has been reclassified from value of new business to other operating variances. 2.Project and other related expenses in the UK reflect project costs associated with strategic initiatives, including developments designed to offer a wider range of products to customers, and the simplification of systems and processes. Expenses in Delta Lloyd reflect an overrun in Belgium following the acquisition of Swiss Life Belgium, and restructuring within the intermediary division. 3.Mortality experience continues to be better than the assumptions set across a number of our businesses. 4.Lapse experience has been volatile, in part reflecting wider economic volatility. In Poland, lapse experience continued to be better than the long-term assumptions for both life and pension products. 5. In France, other experience profits include the reduction in value arising from reductions in fees and commissions received. In Ireland, certain statutory provisions were increased following a review. The movement in Delta Lloyd reflects changes on group pension scheme contribution. In the USA, other experience reflects the cost of enhancing policyholder crediting rates. 6. In Delta Lloyd, expense assumptions have been updated following a review of expense allocations. 7. In UK, favourable mortality assumption changes are in respect of mortality and morbidity changes across a range of products. In Delta Lloyd, mortality assumption changes reflect the impact of using a new industry mortality basis. 8. In the UK, an additional lapse provision has been set up in anticipation of higher short-term recession related withdrawals (pre tax £50 million) and higher mortgage and income protection claims
General Life and related business and Life and related General business businesses other Group businesses and other Group £m £m £m £m £m £m
Net assets on an MCEV basis2 20,693 (2,231) 18,462 19,440 (2,008) 17,432
Equity capital, capital reserves, shares held by employee trusts and other reserves 7,144 8,706
Preference share capital and direct capital instruments 1,190 1,190 Minority interests 4,237 3,080
Group’s share included in shareholders’ funds Minority interests’ share Movements in AFS securities
Transfers from VIF and required capital to the free surplus 1,869 (738) (1,131) —
Operating MCEV earnings 322 427 1,429 2,178 Economic variances 1,317 (324) (42) 951 Other non-operating variances (238) 909 (407) 264
Transfers from VIF and required capital to the free surplus 1,926 (637) (1,289) —
Closing MCEV 1,348 8,148 4,716 14,212 1.Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. 2. Included within capital and dividend flows is the transfer to Life and related businesses from other segments consisting of service company profits and losses during the reported period that have emerged from the value of in-force. Since the “look through” into service companies includes only future profits and losses, these amounts must be eliminated from the closing embedded value.
Value of new business 710 772 Earnings from existing business – expected returns at the reference rate 563 992 – expected returns in excess of the reference rate 1,365 429 – expected returns 1,928 1,421 – experience variances (99) (224) – operating assumption changes 44 (165) Other operating variance 294 305 Expected return on shareholders’ net worth 512 701
United Kingdom 531 5.3 2,803 6,111 8,914 France 92 6.6 608 4,283 4,891 Ireland 78 4.3 337 735 1,072 Italy 111 5.3 592 3,015 3,607 Poland 71 13.1 927 152 1,079 Spain 128 6.1 782 1,672 2,454 Other Europe 82 4.5 365 55 420 Aviva Europe 562 6.4 3,611 9,912 13,523 Delta Lloyd1 207 9.3 1,935 1,730 3,665 Europe 769 7.2 5,546 11,642 17,188 North America 90 9.6 861 3,684 4,545 Asia 185 4.5 828 267 1,095 Australia 49 4.0 196 65 261 Asia Pacific 234 4.4 1,024 332 1,356
Present Present value of value of Restated new Regular regular Single business premiums WACF premiums premiums premiums 31 December 2008 £m £m £m £m £m
M9 – Geographical analysis of value of new business Present value of new business premiums Value of new business New business margin
Restated Restated Life and pensions 2009 2008 2009 2008 2009 2008 (gross of tax and minority interest) £m £m £m £m % %
Total life and pensions 32,003 36,245 710 772 2.2% 2.1% 1. The restatement in Spain of £38 million in 2008 is due to the reclassification of incremental premiums on annual renewable term contracts from new business to existing business.
Total1 11.4% 838 1,208 2,046 1.For Delta Lloyd, the 2008 value of new business is a loss on a real world basis and so it is not possible to calculate a meaningful payback period. Consequently the total and Europe average payback period excludes Delta Lloyd.
Europe 670 146 (97) 167 886 (288) (405) (693) 193 North America 159 90 (100) 457 606 (192) (390) (582) 24 Asia Pacific 82 11 (5) 2 90 (55) (58) (113) (23)
M11 – Free surplus emergence continued Existing New Total business business business
Impact of experience variances Total Reduction in and Release of existing free surplus Total new
Transfer assumption required business from business Total free from VIF to Return on changes on capital to surplus Impact on required surplus surplus net worth net worth net worth free surplus generation net worth capital generation generation 2008 £m £m £m £m £m £m £m £m £m
Europe 1,649 1,248 774 451 186 4,308 3,339 North America (238) (251) 28 13 54 (394) (394) Asia Pacific 102 72 29 18 26 247 241
United Kingdom 91 74 69 50 10 294 294 Aviva Europe 250 120 73 47 65 555 417 Delta Lloyd (46) 22 28 26 201 231 220
Europe 204 142 101 73 265 786 637 North America 112 45 8 1 (12) 154 154 Asia Pacific 48 17 10 5 10 90 89
M13 – Segmental analysis of life and related business embedded value Required Total
United Kingdom2 1,270 2,568 2,065 5,903 France3 (71) 1,592 1,252 2,773 Ireland 175 226 487 888 Italy 263 268 129 660 Poland 60 131 950 1,141 Spain 135 212 265 612 Other Europe 38 33 188 259 Aviva Europe 600 2,462 3,271 6,333 Delta Lloyd 368 1,095 68 1,531 Europe North America3,4
Total 2,204 7,546 5,251 15,001 1.Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.
2.The large increase in required capital in the UK reflects the additional capital locked in following the Reattribution of the Inherited Estate.
Required Total Restated Free surplus capital1 VIF MCEV 2008 £m £m £m £m
United Kingdom 1,357 1,477 2,053 4,887 France2 (92) 1,567 1,092 2,567 Ireland 135 252 603 990 Italy 261 235 149 645 Poland 115 134 979 1,228 Spain 143 225 354 722 Other Europe 43 34 159 236 Aviva Europe 605 2,447 3,336 6,388 Delta Lloyd (333) 2,284 511 2,462 Europe North America2,3
Total 1,348 8,148 4,716 14,212 1.Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.
2.France, Delta Lloyd and Aviva USA have a positive surplus on a statutory basis.
PVFP costs risks guarantees VIF 2009 £m £m £m £m £m
Frictional hedgeable options and Restated PVFP costs risks guarantees VIF 2008 £m £m £m £m £m
United Kingdom 2,470 (176) (165) (76) 2,053 France 1,827 (174) (147) (414) 1,092 Ireland 637 (10) (24) — 603 Italy 196 (22) (12) (13) 149 Poland 1,074 (14) (73) (8) 979 Spain 422 (18) (32) (18) 354 Other Europe 169 (4) (4) (2) 159 Aviva Europe 4,325 (242) (292) (455) 3,336 Delta Lloyd 1,208 (246) (132) (319) 511 Europe 5,533 (488) (424) (774) 3,847 North America (1,224) (29) (43) (150) (1,446) Asia 262 (20) (23) (26) 193 Australia 132 (27) (26) (10) 69 Asia Pacific 394 (47) (49) (36) 262
M15 – Implied discount rates (IDR) In the valuation of a block of business, the implied discount rate is the rate of discount such that a traditional embedded value for the business equates to the MCEV.
M16 – Analysis of fund management and service company business within embedded value The MCEV methodology incorporates the impact of earnings arising from subsidiary undertakings providing administration, fund management and other services where these arise in relation to covered business. The principal subsidiaries of the Aviva group providing such services include Aviva Life Services Limited (UK) and Aviva Investors. The following table provides an analysis of the elements within the life and other related business embedded value: Fund management £m
In the United Kingdom, Aviva Life Services Limited (UK) (ALS) is the main provider of administration services to the UK Life business. ALS incurs substantially all of the UK businesses’ operating expenditure, comprising acquisition, maintenance and project costs. Costs are recharged to the UK Life companies (the product companies) on the basis of predetermined Management Services Agreements (MSAs).
Aviva Delta Asia holders’ France Ireland Italy Poland Spain Europe Lloyd Europe Pacific Total interest Group
M18 – Principal economic assumptions (a) Economic assumptions – Deterministic calculations Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each reporting period.
Reference rate 1 year 1.2% 2.8% 5.7% 5 years 3.5% 3.2% 5.1% 10 years 4.3% 3.5% 5.0% 15 years 4.6% 3.8% 4.9% 20 years 4.6% 3.8% 4.8%
Reference rate 1 year 1.3% 2.5% 4.8% 5 years 2.8% 3.3% 4.6% 10 years 3.7% 3.8% 4.7% 15 years 4.1% 3.9% 4.9% 20 years 4.2% 3.9% 4.9%
In current markets, the following adjustments are made to the swap rate for immediate annuity type contracts and all US contracts. The risk-free rate is taken as the swap yield curve for the currency of the liability, adjusted by: Embedded New business value
Risk premium – used for operating profit, Implied Discount Rates (IDR), Internal Rates of Return (IRR) and payback period For life and pensions operating earnings, Aviva uses normalised investment returns. For 2008, the normalised investment returns were expressed as one year swap returns plus an asset risk premium. For 2009, the normalised investment returns are expressed as a swap rate based on the typical duration of the assets held plus an asset risk premium. More detail is given in note M1 – Basis of Preparation.
Future returns on corporate fixed interest investments are calculated from prospective yields less an adjustment for credit risk.
United Kingdom1 28.0% 28.0% 28.0% 100%/110% 100%/110% France 34.4% 34.4% 34.4% 110% 110% Ireland 12.5% 12.5% 12.5% 150% 150% Italy2 32.4% 32.4% 32.4% 115%/184% 115%/184% Poland 19.0% 19.0% 19.0% 150% 150% Spain3 30.0% 30.0% 30.0% 110%/125% 110%/125% Delta Lloyd4 25.5% 25.5% 25.5% 139% 168% United States 0.0% 0.0% 35.0% 325% 325% 1.The required capital in the United Kingdom under MCEV is 100% for unit-linked and other non-participating business and 110% for annuity business. with 200% for an immaterial amount of BPA business. In addition, the reattribution of the inherited Estate has led to additional capital being locked in to support the with profit business, and this has been included within required capital.
5.Current tax legislation and rates have been assumed to continue unaltered except where changes in future tax rates have been announced.
The embedded value of the US spread based products anticipates the application of management discretion allowed for contractually within the policies, subject to contractual guarantees. This includes the ability to change the crediting rates and indexed strategies available within the policy. Consideration is taken of the economic environment assumed in future projections and returns in excess of the reference rate are not assumed. Anticipated market and policyholder reaction to management action has been considered. The anticipated management action is consistent with current decision rules and has been approved and signed off by management and legal counsel.
M18 – Principal economic assumptions continued Model – United Kingdom, Europe (excluding Delta Lloyd) and North America Swap rates are generated by a model, the LIBOR Market Model (LMM), that projects a full swap curve at monthly intervals. Forward rates are assumed to have a log-normal distribution which guarantees non-negative interest rates. The model is calibrated to at-the-money swaptions of a variety of terms and tenors. Swaption volatilities are taken from Bloomberg. Tests have been performed to ensure that sufficient scenarios have been used that the result converges to the stochastic value of the business being valued.
The total annual return on equities is calculated as the return on one-year swaps plus an excess return. This excess return is modelled using a log-normal model where volatility varies by time horizon. This allows the model to capture the term structure of implied volatilities. The model is calibrated to at-the-money options of a variety of terms. Option volatilities are taken from a survey of investment banks.
Assumptions for correlations between asset classes have been set based on historic data.
The interest rate model used is a short rate G2++ model. The model is calibrated to the DNB yield curve and the swaption implied volatilities. Swaption implied volatilities are taken from Bloomberg. The equity model is a Heston model.
UK sterling 10 years n/a n/a 14.1% n/a n/a n/a 11.8% n/a 15 years n/a n/a 14.6% n/a n/a n/a 11.9% n/a 20 years n/a n/a 14.4% n/a n/a n/a 12.1% n/a 25 years n/a n/a 14.0% n/a n/a n/a 12.4% n/a Euro 10 years 17.9% 17.8% 17.7% 17.6% 11.7% 11.7% 11.7% 11.8% 15 years 18.0% 17.6% 17.3% 16.9% 10.9% 10.9% 10.4% 10.9% 20 years 17.1% 16.7% 16.3% 15.7% 10.5% 10.4% 10.4% 10.3% 25 years 16.2% 15.6% 15.0% 14.4% 10.0% 10.0% 9.9% 9.5% Delta Lloyd 10 years 14.5% 15.3% 17.3% 18.6% 11.6% 11.6% 11.7% 11.7% 15 years 15.2% 15.8% 17.8% 18.9% 10.8% 10.7% 10.6% 10.8% 20 years 15.8% 16.7% 18.1% 18.5% 10.5% 10.3% 10.2% 10.3% 25 years 16.8% 17.5% 18.2% 18.3% 10.0% 9.8% 9.8% 9.7% US dollar 10 years 20.0% 18.9% 18.0% 17.3% 15.2% 14.4% 14.0% 14.0% 15 years 17.5% 16.4% 15.6% 15.0% 13.9% 13.0% 12.8% 12.7% 20 years 15.5% 14.5% 13.8% 13.2% 13.3% 12.4% 12.1% 12.1% 25 years 13.7% 12.9% 12.2% 11.6% 12.9% 11.9% 11.6% 11.7% For businesses, where stochastic scenarios are calibrated before the year end, the closing embedded value has been adjusted for the subsequent decrease in market volatilities up to the year end.
Option length UK France Italy Ireland Delta Lloyd Spain US UK France Italy Ireland
M18 – Principal economic assumptions continued Property implied volatilities Best estimate levels of volatility have been used, in the absence of meaningful option prices from which implied levels of volatility can be derived.
For the UK and Delta Lloyd, model property implied volatility is 15% for 31 December 2009 (31 December 2008: 15%).
Demographic assumptions Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva’s recent operating experience with a view to giving a best estimate of future experience. We have anticipated future changes in experience where that is appropriate, e.g. we have allowed for improvements in future policyholder longevity.
We have set the assumptions based on a best estimate of shareholder outcomes. In particular, where the policyholder behaviour varies with economic experience, we have set assumptions which are dynamic, i.e. vary depending on the economic assumptions. For example, surrender and option take up rate assumptions that vary according to the investment scenario under consideration have been used in the calculation of the time value of options and guarantees, based on our assessment of likely policyholder behaviour in different investment scenarios.
Additionally, where demographic experience is not driven by economic scenarios but is asymmetric on a stand-alone basis, the best estimate assumption considers the weighted-average expected experience, not simply the median or most likely outcome.
Expense assumptions Management expenses and operating expenses of holding companies attributed to life and related businesses have been included in the MCEV calculations and split between expenses relating to the acquisition of new business, the maintenance of business inforce and project expenses. Future expense assumptions include an allowance for maintenance expenses and a proportion of recurring project expenses. Certain expenses of an exceptional nature, when they occur, are identified separately and are generally charged as incurred. No future productivity gains have been anticipated.
Where subsidiary companies provide administration, investment management or other services to our life businesses, the value of profits or losses arising from these services have been included in the embedded value and value of new business.
Borrowings per summarised consolidated statement of financial position – MCEV basis 15,000 15,201 Add: amount included within held for sale — — Less: Securitised mortgage funding (7,329) (7,785) Borrowings excluding non-recourse funding – MCEV basis 7,671 7,416 Less: Operational financing by businesses (2,182) (1,891) External debt and subordinated debt – MCEV basis 5,489 5,525 Add: Preference shares (including General Accident plc) and direct capital instrument 1,440 1,440 External debt, subordinated debt, preference shares and direct capital instrument – MCEV basis 6,929 6,965 Effect of marking these instruments to market (295) (2,054)
United Kingdom 5,903 120 (155) 85 (350) 255 France 2,773 5 (170) 100 (380) 60 Ireland 888 — (30) 35 (60) 55 Italy 660 — 20 (25) 25 (80) Poland 1,141 — (50) 60 (100) 135 Spain 612 5 (10) 10 (25) 20 Other Europe 259 — (5) 10 (15) 15 Aviva Europe 6,333 10 (245) 190 (555) 205 Delta Lloyd 1,531 50 250 (460) 380 (1,210) Europe 7,864 60 5 (270) (175) (1,005) North America 694 110 235 (225) (5) (1,275) Asia 540 — 15 (30) 15 (120) Australia — — — — — — Asia Pacific 540 — 15 (30) 15 (120)
United Kingdom 5,903 205 (215) (250) France 2,773 125 (115) (140) Ireland 888 15 (15) — Italy 660 5 (5) — Poland 1,141 5 (5) — Spain 612 10 (10) (5) Other Europe 259 — — — Aviva Europe 6,333 160 (150) (145) Delta Lloyd 1,531 220 (215) (25) Europe 7,864 380 (365) (170) North America 694 — — — Asia 540 15 (15) — Australia — — — — Asia Pacific 540 15 (15) —
United Kingdom 5,903 — (665) 730 10 France 2,773 (190) (65) 145 15 Ireland 888 — — — 5 Italy 660 — — — 5 Poland 1,141 — — — 5 Spain 612 — (45) 40 — Other Europe 259 — — — 5 Aviva Europe 6,333 (190) (110) 185 35 Delta Lloyd 1,531 115 (80) 85 30 Europe 7,864 (75) (190) 270 65 North America 694 (245) (515) 390 5 Asia 540 (5) (15) 15 15 Australia — — — — — Asia Pacific 540 (5) (15) 15 15
New business Interest rates 10bp increase in adjustment 2009 As reported to risk-free 1% 1% 2% 2% Value of new business on page 295 rates increase decrease increase decrease (net of tax and minority interest) £m £m £m £m £m £m
As Volatility 2009 reported 10% 10% 25% Value of new business on page increase decrease increase (net of tax and minority interest) 295 £m £m £m £m
United Kingdom 177 2 (2) — France 94 5 (4) (8) Ireland 8 — — — Italy 38 — — — Poland 39 — — — Spain 51 — — — Other Europe 8 — — — Aviva Europe 238 5 (4) (8) Delta Lloyd (78) 20 (21) — Europe 160 25 (25) (8) North America 16 — — — Asia 9 — — — Australia 13 — — — Asia Pacific 22 — — —
United Kingdom 177 — (53) 59 — France 94 — (2) — 1 Ireland 8 — — — 1 Italy 38 — — — 1 Poland 39 — — — — Spain 51 — (4) 4 — Other Europe 8 — — — — Aviva Europe 238 — (6) 4 3 Delta Lloyd (78) 4 (7) 6 5 Europe 160 4 (13) 10 8 North America 16 (62) (75) 62 1 Asia 9 — — — 2 Australia 13 — — — — Asia Pacific 22 — — — 2
M19 – Sensitivity analysis continued (b) Non-economic assumptions The following tables below show the sensitivity of the embedded value and the value of new business to the following changes in non-economic assumptions: — 10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of £10 pa would represent an expense assumption of £9 pa). Where there is a “look through” into service company expenses the fee charged by the service company is unchanged while the underlying expense decreases; — 10% decrease in lapse rates (a 10% sensitivity on a base assumption of 5% pa would represent a lapse rate of 4.5% pa); and — 5% decrease in both mortality and morbidity rates disclosed separately for life assurance and annuity business.
No future management actions are modelled in reaction to the changing non-economic assumptions. In each sensitivity calculation all other assumptions remain unchanged. No changes to valuation bases have been included.
2009 As reported maintenance decrease in rates – life annuity Embedded value on page 304 expenses lapse rates assurance business (net of tax) £m £m £m £m £m
United Kingdom 5,903 185 50 40 (250) France 2,773 45 50 35 (15) Ireland 888 20 25 5 (5) Italy 660 10 — — — Poland 1,141 40 50 15 — Spain 612 10 45 15 (5) Other Europe 259 10 15 5 — Aviva Europe 6,333 135 185 75 (25) Delta Lloyd 1,531 100 5 10 (70) Europe 7,864 235 190 85 (95) North America 694 65 (60) 55 (20) Asia 540 15 10 5 — Australia — — — — — Asia Pacific 540 15 10 5 —
In preparing this supplementary information, the directors have done so in accordance with these MCEV Principles and have also fully complied with all the guidance included therein. Specifically, the directors have: — determined assumptions on a realistic basis, having regard to past, current and expected future experience and to relevant external data, and then applied them consistently; — made estimates that are reasonable and consistent; and, — provided additional disclosures when compliance with the specific requirements of the MCEV Principles is insufficient to enable users to understand the impact of particular transactions, other events and conditions and the group's financial position and financial performance.
Independent auditor’s report to the directors of Aviva plc on the consolidated Market Consistent Embedded Value (MCEV) financial statements We have audited the consolidated MCEV financial statements of Aviva plc for the year ended 31 December 2009 which comprise an MCEV basis Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Statement of Financial Position, the Reconciliation of Shareholders’ Equity on IFRS and MCEV bases, the Reconciliation of IFRS Total Equity to MCEV Net Worth, the Group MCEV Analysis of Earnings and the related notes M1 to M19. The consolidated MCEV financial statements have been properly prepared in accordance with the Market Consistent Embedded Value Principles issued in October 2009 by the CFO Forum (“the MCEV Principles”) and the basis of preparation set out on pages 289 to 292.
We have reported separately on the statutory Group financial statements of Aviva plc for the year ended 31 December 2009. The information contained in the consolidated MCEV financial statements should be read in conjunction with the financial statements prepared on an IFRS basis.
This report is made solely to the Company in accordance with our engagement letter dated 5 August 2009. Our audit work has been undertaken so that we might state to the Company those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors The directors are responsible for preparing the consolidated MCEV financial statements in accordance with the MCEV Principles.
Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the consolidated MCEV financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the consolidated MCEV financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the consolidated MCEV financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the consolidated MCEV financial statements.
Performance reviewAviva plc Corporate responsibility Governance Shareholder information Financial statements IFRS Financial statements MCEV
Investment sales Comprise retail sales of mutual fund type products such as unit trusts, individual savings accounts (ISAs) and Open Ended Investment Companies (OEICs).
Protection An insurance contract that protects the policyholder or his/her dependants against financial loss on death or ill-health. Our product ranges include term assurance, mortgage life insurance, flexible whole life and critical illness cover.
Whole life Whole life insurance is a protection policy that remains in force for the insured’s whole life. Traditional whole life contracts have fixed premium payments that typically cannot be missed without lapsing the policy. Flexible whole life contracts allow the policyholder to vary the premium and/or amount of life cover, within certain limits.
General terms Available for Sale (AFS) Securities that have been acquired neither for short-term sale nor to be held to maturity. These are shown at fair value on the statement of financial position and changes in value are taken straight to equity instead of the income statement.
Combined Code on Corporate Governance The Combined Code on Corporate Governance sets out guidance in the form of principles and provisions on how companies should be directed and controlled to follow good governance practice. The Financial Services Authority requires companies listed in the UK to disclose, in relation to the Combined Code, how they have applied its principles and whether they have complied with its provisions throughout the accounting year. Where the provisions have not been complied with, companies must provide an explanation for this.
“Hard” insurance market A term used to describe the state of the general insurance market. A “hard” insurance market is characterised by high levels of underwriting profits and the ability of insurers to charge high premium rates. Hard insurance markets generally occur when capital is scarce and are the opposite of “soft” insurance markets.
Independent Financial Advisers (IFAs) A person or organisation authorised to give advice on financial matters and to sell the products of all financial service providers. In the UK they are legally obliged to offer the product that best suits their clients’ needs. Outside the UK IFAs may be referred to by other names.
Group MCEV A measure of the total consolidated value of the group with covered life business included on an MCEV basis and non-covered business (including pension schemes and goodwill) included on an IFRS basis.
Required capital The amount of assets, over and above the value placed on liabilities in respect of covered business, whose distribution to shareholders is restricted.
Performance reviewAviva plc Corporate responsibilityShareholder services Annual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
Shareholder profile The categories of shareholders and the range and size of shareholding as at 31 December 2009 are set out below: Analysis of shareholders No. of shareholders % No. of shares %
Total 606,624 100 2,766,611,374 100 + The number of registered ordinary shares represented by American Depositary Receipts (ADRs). Please note that each Aviva ADR represents two (2) ordinary Aviva plc shares.
Group financial calendar for 2010 Annual General Meeting 28 April 2010 Announcement of first quarter Interim Management Statement 11 May 2010 Announcement of unaudited half-year results 05 August 2010 Announcement of third quarter Interim Management Statement 04 November 2010
Annual General Meeting Aviva’s Annual General Meeting will be held at: The Barbican Centre Silk Street London EC2Y 8DS on: Wednesday 28 April 2010
Ordinary shares – 2009 final dividend Ex-dividend date 24 March 2010 Record date 26 March 2010 Scrip dividend price setting period 24, 25, 26, 29, 30 March 2010 Scrip dividend price announcement date 31 March 2010 Last date for receipt of Scrip elections 16 April 2010 Dividend payment date* 17 May 2010 at 11.00am The Notice of Meeting, together with details of the business to be conducted at the meeting, is available on the Company’s website at www.aviva.com/agm
Dividends Dividends on our ordinary shares are normally paid in May and November; please see the following table for 2009 final dividend dates. Dividends paid on our preference shares are normally paid in March, June, September and December; please visit www.aviva.com/preferenceshares for the latest dividend payment dates.
* Please note that the ADR local payment date will be approximately five business days after the proposed dividend date for ordinary shareholders.
Share price You can access the current share price of Aviva plc ordinary shares and ADRs at www.aviva.com/shareprice
Shareholders are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free company reports. If you receive any unsolicited advice: — Make sure you get the correct name of the person and organisation — Check that they are properly authorised by the FSA before getting involved by visiting www.fsa.gov.uk/register/
Form 20-F Aviva is a foreign private issuer in the US and as such is subject to the reporting requirements of the US Securities and Exchange Commission (SEC). Aviva files its Form 20-F with the SEC, copies of which can be found at www.aviva.com/reports
Email: aviva@equiniti.com * Calls to 0871 numbers are charged at 8p per minute from a BT landline. Charges from other telephone providers may vary. Lines are open from 8.30am to 5.30pm, Monday to Friday.
Other useful links for shareholders: Aviva Shareholder Services Centre www.aviva.com/shareholderservices American Depositary Receipt holders www.aviva.com/adr Aviva preference shareholders www.aviva.com/preferenceshares Dividend information www.aviva.com/dividends Annual General Meeting information www.aviva.com/agm Electronic voting for Annual General Meeting†
UK A leader in our home market Europe Building a truly pan-European business with a broad and diverse portfolio North America Poised to benefit from recovery in the world’s wealthiest market Asia Pacifi c Committed to building a high-growth and value-creating region Aviva investors Focused on clients, focused on performance
North Asia Aviva UK Europe America Pacific Investors Products — Long-term insurance and savings: pensions, annuities, protection, bonds and savings, equity release
Products Our investment capabilities, products and services comprise: — alternatives — equities — fixed income — global investment solutions — real estate
European Locations Belgium* Czech Republic France Germany* Hungary Ireland Italy Lithuania Netherlands* Poland Romania Russia Slovakia Spain Turkey
24.00p £13,035m (27)% (1)% * From continuing operations, including share of associates’ premiums ** Before tax attributable to shareholders *** On a MCEV basis
Dear Shareholder It is traditional for the Chairman to close his statement by formally thanking employees. This year, however, I think it’s more appropriate to begin by saying that our strong results for 2009 are due to the extraordinary efforts made by the executive team and our people throughout the Aviva group.
Looking forward As a realist, I am sure that 2010 will not be an easy year for the financial markets but there may be some cause for optimism as the year progresses. I am particularly pleased at how well we have reorganised the business and are ready to take full advantage of the upturn when it arrives.
Progress Creating a global brand has been the most visible sign of ‘One Aviva’ so far. We’re working hard to ensure it’s much more than a name change.
We’re making progress towards delivering ‘Twice the Value’ – improving the way we serve our customers, increasing our efficiency, focusing on profitability, removing cost from the business and delivering strong results.
In the past 12 months we’ve increased the pace of transformation and restructured our portfolio, giving us new opportunities to redeploy capital to support profitable growth.
There’s no question that the economic climate remains uncertain: 2010 is still challenging but I’m confident we have the right team, strategy and commitment to make it another successful year. We will continue to deliver our strategy, maintain our capital strength and focus on the profitable growth of our company.
“ We have made good progress towards our target this year”
Listen to Andrew discuss our year in our new online review
Manage composite portfolio We are committed to maintaining the composite nature of the group: our business model creates long-term value – delivering prosperity and peace of mind to customers.
Build global asset management Aviva Investors is a leading asset manager, with £250 billion of funds under management. We plan to continue to grow Aviva Investors and significantly increase its contribution to group profits.
Boost productivity We constantly look for ways to boost our productivity, to support sustainable growth, increase our competitiveness, improve our services and deliver higher value to our customers.
— Robust performance in Europe benefiting from our strong bancassurance relationships
Strengthened our capital position through combination of successful strategic initiatives and capital management: — Robust underlying earnings rebuilding our capital base
— 50% of all participating business units ranked upper quartile by customers when compared to local market averages
— Manage GI for value and cash flow — Drive profitable growth and long-term value creation in the life and pensions business — Strategically manage our investment in
European division to create a single business benefiting from increased use of shared services and a simplified, more integrated corporate structure
— Continue our focus on attracting third party business and cross border sales
— Maintain a strong balance sheet — Continued focus on strong capital management and financial flexibility — Monitor and manage market and operational risks — Continue to allocate capital effectively — Participate actively in all consultations with
— Achieved £510 million of cost savings against £500 million target
— Focus on strong cost discipline through reducing operational complexity and simplifying product ranges
Our strategy and priorities need to be responsive to changes in the external For more on environment that may provide opportunities or cause strategic risks. We manage regional strategies 4 10 – 26 these risks and opportunities through disciplined risk management.
Earnings per share* IFRS earnings per share for 2009 increased to 37.8 pence. This mainly reflects the improvement in financial markets in 2009 partly offset by lower IFRS operating profits.
Proposed ordinary dividend per share and dividend cover* The total dividend for the year is 24.00 pence per share. This is in line with last year’s decision to reduce the dividend to a sustainable level from which it can grow.
Group operating profit before tax* 2009 operating profits reflect higher long-term and savings results (both IFRS and MCEV) offset by lower general insurance and health profits and increased group debt costs.
To demonstrate our commitment to ‘One Aviva, Twice the Value’ we are aiming to double earnings per share by 2012.
While our focus is on capital efficiency and profit rather than volumes, sales remain an important indicator. Worldwide sales comprise the PVNBP of long-term savings new business sales and net written premiums from the general insurance and health businesses.
Return on equity shareholders’ funds is calculated as after-tax operating return, before adjusting items, on opening equity shareholders’ funds, including life profits on a market consistent embedded value (MCEV) basis.
Employee engagement represents the degree to which people believe in Aviva being a great place to work and are contributing to help meet our collective goals and ambitions.
Customer advocacy gives us, in a single, simple measure, an accurate predictor of customer retention and cross-selling opportunity.
Aviva plc The Board is responsible to the shareholders Annual Review 2009 Board and for ensuring that the Company is appropriately managed and achieves its objectives. The Board determines strategic direction, reviews performance and provides support and expertise to the executive management team, responsible for the day to day management of the Company.
1. John Ainley Group human resources director (Age 53) Appointed Mar 2006 Joined the Group in 1999 and was previously Group HR Director for Norwich Union plc. Held senior HR positions with WH Smith plc, ICL plc, Priory Hospitals Group and General Electric plc.
7. Mary Francis CBE Independent non-executive director (Age 61) Appointed Oct 2005 Currently senior independent director of Centrica plc (utilities) and non-executive director of Cable & Wireless plc (telecoms). Former Director General of the Association of British Insurers and non-executive director of the Bank of England.
3. Alain Dromer Chief executive Aviva Investors (Age 55) Appointed Sep 2007 Joined the Group in 2007. Has held senior management roles in several financial services companies. Formerly at the French Treasury in the Ministry of Finance and the French Institute for Statistics and Economic Studies.
4. Igal Mayer Chief executive Aviva North America (Age 48) Appointed Jul 2007 Joined the Group in 1989. Formerly chief executive of Aviva UK General Insurance (formerly Norwich Union Insurance) and chief executive officer Aviva Canada and has held several other senior roles within Norwich Union and CGU Insurance.
12. Carole Piwnica Independent non-executive director (Age 52) Appointed May 2003 Member of the New York and Paris Bars. Currently director of Naxos UK (private equity) and non-executive director of Toepfer International GmbH (trading) and Dairy Crest Group plc (dairy foods). Member of biotech advisory board of Monsanto (biotechnology).
13. Michael Hawker Independent non-executive director (Age 50) Appointed Jan 2010 Currently advisory board director at GEMS (private equity) and non-executive director of Australian Rugby Union. Former chief executive and managing director of Insurance Australia Group (insurance).
6. Simon Machell Chief executive Aviva Asia Pacific (Age 46) Appointed Jul 2007 Joined the Group in 1994. Formerly chief executive of Norwich Union Insurance and managing director of RAC. Previously held positions with Ernst & Young LLP and Legal & General.
From 2010 we have brought together our UK life and general insurance businesses. Following extensive programmes of transformation, we have made significant improvements to customer service, increased profitability and have delivered substantial cost savings.
— Successful rebrand to Aviva — £450m cost savings delivered — Reattribution of inherited estate — Life: service excellence improves customer experience — GI: transformation ahead of plan
Strategy The core strategies for the UK business are: — to leverage our extensive distribution network and customer base to increase profits in a mature but evolving marketplace; — to maintain market leadership through balanced distribution and broad product mix, improved customer retention and the simplification of processes, services and costs.
Aviva UK Total sales were £14,261 million in 2009, down 24% on 2008. IFRS operating profit for the year decreased 15% to £1,165 million reflecting the impact of lower premiums and lower investment returns. For full details of our financial reporting visit www.aviva.com/reports. The rebrand to Aviva in the UK took place on 1 June 2009. Our successful advertising campaigns, highlighting Aviva’s products and services and encouraging customers to ‘get the Aviva deal’, have increased recognition and awareness of the Aviva brand significantly.
Peace of mind at a difficult time Paul* and his family have been through a really difficult time during the last year. In May his wife died of breast cancer, leaving him to look after their two young children on his own. After she was diagnosed as terminally-ill, her main concern was that the family she was leaving behind would be financially OK. Paul was determined to give her the peace of mind that she needed and also to make sure that, should anything subsequently happen to him, their children would be well provided for. He wrote to say thank you for the support that we gave him: “Your staff throughout that time were incredibly courteous and professional, and that really helped her. When we spoke to some other companies during that time you’d have thought she had just broken a nail – not had a critical illness. Thank you for everything.” * Pseudonym
Listen to Mark Hodges discuss our year in our new online review
UK floods For information on how Aviva helped customers affected by the floods
Performance In the UK life market, Aviva has built a leading position across a broad product range. We have gained competitive advantage through our financial strength, product development and taking actions to simplify the business making it easier for customers.
Outlook In the general insurance market, quality of earnings remains our priority and we aim to increase profitability through enhanced risk selection and tightly controlling our costs. Whilst there are some encouraging signs in personal motor, we continue to see intense competition in many segments of the market and we await the significant shift in attitude that the market requires. This is particularly true in the case of Commercial lines and there is little evidence that the market is hardening significantly.
To find out more about the RAC and what we offer customers, visit www.rac.co.uk
Building a truly panEuropean business with a broad and diverse portfolio We have a clear strategy to exploit the considerable opportunities in Europe. There is significant growth potential in the region, in both under-penetrated Western markets and developing markets in Eastern Europe. With our proven ability to operate across distribution channels, we will be able to respond favourably to market developments as customer confidence begins to return.
Looking out for you Better and faster access to healthcare in Ireland
Since January 2010, Aviva Europe has assumed responsibility for developing Aviva’s business interests in the Middle East, based in the United Arab Emirates. We expect this high-potential market to grow, benefiting from Aviva Europe’s experience and resources.
By moving to a panEuropean operating model, we are simplifying our product range, shortening the time to launch new products for our customers and making significant efficiency gains by centralising our operations, enabling us to improve cost management, grow net profits and enhance dividends remitted to the Group.
As part of our transformation, we are also establishing a single holding company for our European operations in Ireland. This new structure will deliver economic, operational and regulatory benefits, especially with the anticipated introduction of Solvency II in 2012.
1. Sigma (2008) – UK is excluded 2. Aviva/Oliver Wyman research (2007) – UK is excluded 3. Millward Brown Lansdowne study, Q3 2009 4. Retail refers to the sale of insurance products outside of the bancassurance channel through our direct sales force, IFAs, brokers or internet sales.
Delta Lloyd performance Our Delta Lloyd business is one of the top five financial services providers in the Netherlands and also operates in Belgium and Germany. In 2009, we completed the successful IPO and partial sale of Delta Lloyd on Euronext Amsterdam with gross proceeds of £1 billion for a 42% stake. This was a significant strategic milestone in our management of Delta Lloyd and gives us further opportunity to reallocate capital within the group.
In 2009, we successfully integrated the Swiss Life Belgium operation with our existing Belgian life operations. Belgium extended the ABN AMRO distribution arrangement to include Fortis branches when they are rebranded in 2010.
Listen to Andrea Moneta discuss our year in our new online review
North America has a strategically attractive population with a growing demand for products which offer prosperity and peace of mind in both the general insurance and life and annuities marketplaces.
Our strategic priorities for the region are: — to enhance capital efficiency and optimise margins — to selectively expand and grow our core life insurance and annuity distribution and product capabilities — to operate as a great underwriting company — to make best use of the synergies created within the regional operating model — to enhance strong and valuable relationships with our customers and distributors.
Exceptional customer service Jane* has been an Aviva customer since 1999. Recently divorced and on her own for the first time in a long time, she returned home one day to find she had been robbed. The break-in left her “scared to death”.
Listen to Igal Mayer discuss our year in our new online review
— Sale of Australia business — Expanded customer reach in local markets
We expect recovery in Asia Pacific to be ahead of other regions. Prospects for 2010 are optimistic with GDP growth of 6.6% forecast for emerging Asia
Committed to building a highgrowth and valuecreating region We operate in eight countries across the Asia Pacific region through both joint ventures and wholly-owned operations. India and China, both with large populations and relatively high economic growth, are ‘must-win’ markets capable of generating a significant proportion of our future expansion within Asia. Throughout the rest of the region, our focus is on developing the strength of our bancassurance business with joint venture partners.
Strategy Our ambition is to build a high-growth and value-creating region driven by the ‘must-win’ markets of China and India. We will achieve this by: — securing strong organic growth across all our markets — leveraging our multi-distribution platforms and core capabilities in bancassurance — exploring new growth opportunities, in particular health and general insurance — expanding our regional footprint in fast-growing, high potential insurance markets — investing in the Aviva brand.
China: Health angels lend a helping hand Jessica* admits that she had been very sceptical about making an insurance claim when a minor operation last year meant that she was unable to work for some weeks. With very little savings to fall back on, she was naturally anxious about how she would find the money to cover her everyday expenses. So she was pleasantly surprised when Aviva China sent their ‘health angels’ to visit her in hospital to provide a face-to-face medical consultation and to assist with her claim. Jessica’s reaction is indicative of a
As part of our commitment to achieving ‘One Aviva, Twice the Value’, we launched a number of new initiatives in the region. These included our wrap platform in Hong Kong and new protection, savings and investment products, both conventional and takaful (Islamic insurance), in Malaysia through our shared services platform.
Listen to Simon Machell discuss our year in our new online review
We signed a joint venture partner deal with CIMB, the second largest bank in Malaysia in 2007, to capitalise on its distribution network by providing market leading insurance products and excellent servicing capability. To achieve this we drew on our regional shared services capability and technical infrastructure in Singapore to deliver and administer the product set. We successfully launched a portfolio (EasyLife Solutions) of ten investment-linked products within a six-month timeframe. Sales of EasyLife Solutions have gone from strength to strength, contributing to our position as fourth in the industry for single premium business in 2009. This has also strengthened our partnership with CIMB at all levels.
— Focus on client service recognised — Improved investment performance and revenues — Strong third party inflows — Progress in developing global distribution capability
Strategy Our core strategic objective is to build our presence as a globally-integrated asset manager and establish Aviva Investors as a leading player in the market for retirement solutions. We aim to increase revenues and profitability by delivering significant growth in higher-margin assets under management from external clients.
— further increases in business effectiveness and efficiency through the adoption of global core processes.
‘ New business model comes together in 2009’ Outlook Since Aviva Investors launched in September 2008 we have made strong progress. The loss of confidence in financial markets has meant that clients are increasingly looking for risk-aware investment options and, as an insurance-owned asset manager, we are well placed to capitalise on that trend. We look forward to 2010 with confidence and anticipation.
Listen to Alain Dromer discuss our year in our new online review
Listening to our clients First Securities Investment Trust (FSITC) is a leading asset manager, marketing investment products to customers in Taiwan. In 2009, we won a mandate to handle a new global high yield product through our high yield investment team in North America. We supported the local Aviva Investors team in Taiwan and managed FSITC’s successful initial offering.
As a follow-up, we initiated a customer survey to ensure that issues and insights from FSITC were captured and acted upon. Despite the significant commercial success of the new launch the survey uncovered some concerns and a need for improvement on operations and communications.
Below is a summary of the corporate responsibility (CR) report which shareholders will be asked to approve at the forthcoming Annual General Meeting (AGM). The CR report, contained in the Company’s Annual Report and Accounts 2009, includes more information on our CR strategy, progress and performance during 2009.
— Established long-term carbon reduction target — Launched ‘Street to School’ global community programme — Included in some of the world’s leading indices and benchmarks
The Aviva CR programme encompasses our business ethics and values, our customers, our people and suppliers, our community investment and the environment. Our Board CR committee reviews group CR strategy, policy and assesses regional performance against group key performance indicators. Our CR advisory group supports and advises on the management and implementation of the global CR programme. The Aviva plc Board receives an annual update on CR strategy, activities and progress. Executive directors’ remuneration is based on a combination of financial outcomes along with targets related to customers, employees and personal objectives.
We report our performance using the HRH Prince of Wales’ Accounting for Sustainability (A4S) connected reporting framework and for the first time we are putting our CR report to a separate shareholder vote at the 2010 AGM. We are the first company in the UK and the first financial institution in the world to take this proactive step.
Diversity, equality and human rights Aviva’s principles and policies embody the key tenets of respect, valuing differences and inclusion and are aligned with the United Nations Universal Declaration of Human Rights (UNUDHR) and International Labour Organisation’s core labour standards.
Employee volunteering in support of these areas is encouraged as part of their personal development. Our people can apply for up to three days’ paid leave per year, as well joining company-led programmes.
Suppliers In 2009 we agreed a global approach and targets for our regional procurement teams. We helped to develop a set of industry-leading questions in collaboration with the UK-based Financial Services CR forum. A CR weighting is now included in our sourcing decisions.
Affiliations and engagements Here are some of the leading organisations with which we collaborated in 2009 to share good practice, identify emerging issues and improve our performance: — CBI Climate Change Board — HRH Prince of Wales Accounting for Sustainability — ClimateWise — UNEP Finance Initiative — UN Global Compact (UNGC) and represented on
— Carbon Disclosure Project Leadership Index – score: 80/100 — Carbon Trust Standard – first insurer to receive the standard for our year-on-year efforts to reduce our carbon footprint
Customers % of businesses that met/exceeded — 67% 67% Continue to embed 0% Develop and test Transactional performance against local market customer metrics NPS guidelines. Pilot Distributor average across Aviva. UK life NPS metric.
Environment % of remaining CO2 emissions 100% 100% 100% Offset remaining 0% Offset remaining CO2 emissions offset annually emissions CO2 at at group level group level
CO2 emissions (tonnes) – actual 127,002* 122,791 104,351 Reduce CO2 emissions (15)% Reduce CO2 emissions by 5% by 5%
Existing CO2 emissions (tonnes) – n/a 110,051 104,351 Reduce CO2 emissions (5)% Reduce CO2 emissions by 5% based on 2009 ownership by 5%
Waste generated (tonnes) – absolute 18,877 19,311 14,592 Reduce waste (24)% Reduce waste generated by 4% generated by 4%
People % of women in senior management 22% 22% 22% Increase percentage of women in senior 0% Increase percentage of women in senior management group management group
Suppliers Number of business unit suppliers, — 233 438 1,750 adjusted +205 1,000 with material spend, signing Aviva’s adjusted from 2,500 Supplier Code of Conduct from 983
— 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. The KPI for ‘Actual emissions’ are absolute emissions for total Aviva operations in each year stated while the KPI with ‘emissions based on 2009 ownership’ show our emissions over the last two years based on operations that we have in 2009 allowing for a like-for-like comparison. Water has been restated following an independent review of Aviva Canada’s water consumption between 2006 and 2008. This has increased the overall Group consumption figures.
— People: Current and historical data for women in senior management excludes Delta Lloyd group. We also report KPIs relating to employee engagement. These can be found in our on-line CR Report: www.aviva.com/corporate-responsibility/reports
— Community: These KPIs cover all Aviva employees and Aviva joint venture employees.
The auditor has issued unqualified reports on the full annual financial statements, the auditable part of the directors’ remuneration report and on the consistency of the directors’ report with those annual financial statements. Their report on the full annual financial statements and the auditable part of the directors’ remuneration report contained no statement under sections 498(2) or 498(3) of the Companies Act 2006.
A copy of the full Annual Report and Accounts is available on the Aviva internet site at www.aviva.com/reports or free of charge from Equiniti, at the address at the end of this document.
Review of operations Aviva plc is the holding company of the Aviva Group of companies. The principal activities of the Group are life insurance, long-term savings, fund management and all classes of general insurance carried out through its subsidiaries, associates and branches in the United Kingdom, continental Europe and Ireland, North America, Asia and Australia. The Group also undertakes motoring services in the UK and Ireland. Details of the Group’s operations for the accounting period, its current position and future prospects are contained in the Chairman’s introduction and Group Chief Executive’s review and business segment overviews on pages 3 to 26.
Corporate responsibility (CR) The Group has a well established corporate responsibility programme and continues to use its position to influence other companies to engage in sustainable business practices and to be open and transparent in the information they publicly report.
A summary CR report is set out on pages 27 to 29 and the full report can be viewed online at www.aviva.com/2009cr. Further details of the resolution are set out in the Notice of Annual General Meeting.
Shares1 ABP awards2 LTIP awards3 OATTV Plan awards4 Options5 1 January 31 December 1 January 31 December 1 January 31 December 1 January 31 December 1 January 31 December 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009
Mary Francis 1,800 1,800 — — — — — — — — Richard Karl Goeltz 2,500 2,500 — — — — — — — — Mark Hodges 100,086 139,028 125,876 231,712 198,549 459,029 41,838 145,759 1,705 1,705 Andrea Moneta7 73 394 — 159,375 — 249,023 — 119,531 — — Andrew Moss 176,067 239,848 205,488 353,716 477,633 1,022,153 93,567 289,443 3,279 3,279 Carole Piwnica 2,500 2,500 — — — — — — — — Philip Scott 400,973 512,652 176,097 256,013 343,028 599,469 52,734 148,025 2,341 2,341 Lord Sharman 20,000 33,531 — — — — — — — — Leslie Van de Walle — 2,485 — — — — — — — — Russell Walls 4,000 4,000 — — — — — — — — Scott Wheway 1,677 13,579 — — — — — — — —
Independent auditor’s statement to the members of Aviva plc We have examined the summary financial statements for the year ended 31 December 2009 which comprise the summarised consolidated income statement, the summarised consolidated statement of comprehensive income – IFRS basis, summarised consolidated statement of changes in equity, summarised consolidated statement of financial position – IFRS basis, and the supplemental statement of financial position information – MCEV basis.
Our responsibility is to report to you our opinion on the consistency of the summary financial statements within the Annual Review with the full annual financial statements, the Directors’ Remuneration Report and the Directors’ Report, and its compliance with the relevant requirements of section 428 of the Companies Act 2006 and the regulations made thereunder.
We also read the other information contained in the Annual Review and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the summary financial statement. The other information comprises only the Group structure, Financial summary, Chairman’s introduction, Group chief executive’s review, Group strategy, Key performance indicators, Board and executive team, Regional overviews, Summary corporate responsibility report and Shareholder information.
We conducted our work in accordance with Bulletin 2008/3 issued by the Auditing Practices Board. Our report on the company’s full annual financial statements describes the basis of our opinions on those financial statements, the Directors’ Remuneration Report, and the Directors’ Report.
Opinion In our opinion the summary financial statements are consistent with the full annual financial statements, the Directors’ Report and the Directors’ Remuneration Report of Aviva plc for the year ended 31 December 2009 and comply with the applicable requirements of section 428 of the Companies Act 2006, and the regulations made thereunder.
IFRS operating profit before tax attributable to shareholders’ profits 2,022 2,297 Investment return variances and economic assumption changes on long-term business (75) (1,631) Short-term fluctuation in return on investments backing non-long-term business 95 (819) Economic assumption changes on general insurance and health business 57 (94) Impairment of goodwill and other amounts expensed (62) (66) Amortisation and impairment of intangibles (144) (117) Profit on the disposal of subsidiaries and associates 153 7 Integration and restructuring costs (286) (326) Exceptional items 45 (551) Profit/(loss) before tax attributable to shareholders’ profits – IFRS basis 1,805 (1,300) Tax (490) 415 Profit/(loss) for the year 1,315 (885)
Other comprehensive income Fair value losses, net of transfers to income statement 1,280 (1,770) Actuarial (losses)/gains on pension schemes (1,116) (851) Foreign exchange rate and other movements (951) 2,684 Aggregate tax effect (196) 219 Other comprehensive income, net of tax (983) 282
Summarised consolidated statement Supplemental statement of financial position of changes in equity information – MCEV basis
Adjustment to other reserves 213 1,429 Additional retained profit on an MCEV basis 2,466 554
Changes in minority interest in existing subsidiaries (111) (65) Shares acquired by employee trusts (53) (29) Reserves credit for equity compensation plans Aggregate shareholder tax effect
Total earnings per share – Basic IFRS basis3 37.8p Total earnings per share – Diluted IFRS basis3 37.5p Net asset value per ordinary share – IFRS basis4 374p Net asset value per ordinary share – MCEV basis4 471p 421p 495p
2,204 The combination of financial outcomes, along with those objectives mean that the Group Chief Executive received 282,409 a 2009 bonus of 74% of his maximum opportunity 6,918 — The Committee entered the 2010 reward period conscious 15,201 33,136 of the challenging economic background and widespread Total liabilities 339,305 339,989 comment on over generous executive remuneration. The Total equity and liabilities 354,391 354,562 Committee believes Aviva’s 2009 business results are strong and that Aviva’s remuneration practices already closely link pay to performance and also align with current governance guidelines. The Committee has, however, continued to ensure prudent and proportionate reward outcomes.
— Andrea Moneta, Chief Executive Officer, Aviva Europe, Middle East and Africa, was appointed an ED of Aviva plc on 29 September 2009. Information on his remuneration therefore appears in this report for the first time.
Remuneration policy The Committee’s key objectives are to: — Establish a competitive remuneration package to attract, retain and motivate high quality leaders; — Promote the achievement of both the Company’s annual plans and its strategic objectives by providing a remuneration package that contains appropriately motivating targets that are within the Group’s risk appetite; and
— Align senior executives’ remuneration with the interests of shareholders and other stakeholders, including customers and employees.
The remuneration package Against this background, the Committee seeks to ensure that whilst a competitive basic salary is paid, a substantial element of the remuneration package should be closely linked to the performance of the business and delivered in the form of shares. During 2009, the remuneration package for the Company’s EDs comprised the following elements: — A basic salary. — An annual bonus plan (ABP) to encourage executives to meet annual targets relating to business and agreed personal performance targets. Two-thirds of any bonus is paid in the form of shares and deferred for three years.
— A One Aviva Twice The Value (OATTV) Plan to align senior executives with the Group Chief Executive’s clear strategic imperative of doubling earnings per share by the end of 2012. The plan matches 100% of the deferred ABP shares for the Group Chief Executive (75% for other EDs). For the 2009 awards, the vesting of these matched shares is dependent on the achievement of 49.2 pence per share and then compounded annual growth targets.
— A Long Term Incentive Plan (LTIP) to align executives’ longer term interests with those of shareholders.
— A pension entitlement, although no ED is currently accruing service based benefits in the Aviva Staff Pension Scheme.
— A car allowance, private medical insurance and participation in the Company’s all employee share plans.
Annual bonuses have targets set against a range of financial, customer and employee metrics, accounting for 70% of the bonus opportunity, with personal objectives accounting for the remaining 30%.
TSR performance chart Financial year end Aviva FTSE 100 Comparator Group Median
Future actions and changes The Company does not anticipate any significant changes to the structure of EDs’ remuneration packages in 2010, compared with that outlined below. There are, however, three points to note: — 2009 has seen a series of regulatory and governance guidelines issued by organisations such as the Financial Services Authority and the Financial Stability Board of the G20. Whilst many of the issued guidelines do not yet formally apply to Aviva, the Company has already reviewed its existing remuneration arrangements against these provisions.
— UK personal tax changes, effective April 2010, will create a significantly different tax position for some employees. Due to the relatively large deferral of senior manager remuneration, it is the Company’s view that they will be penalised more than their industry counterparts. The Company, therefore, has made available the option for these employees to receive deferred ABP awards as restricted stock. Any potential cost to the Company is judged to be minimal. In addition, the 2010 LTIP grant will be underpinned by an approved share option grant. This will have no additional cost to the Company. These changes have been discussed with Her Majesty’s Revenue and Customs before being implemented.
2009 awards In addition to the remuneration set out in the table below, the following shares were awarded to EDs in 2009 under the Company’s share incentive plans. The shares granted under the LTIP will only vest if certain conditions relating to the Company’s performance over the three financial years commencing 1 January 2009 are met, as explained previously.
Andrew Moss Philip Scott Mark Hodges Andrea Moneta * The aggregate net value of share awards granted to the directors in the period was £5.256 million (2008: £4.319 million). The net value has been calculated by reference to the market price at the date of grant.
Non-executive directors Nikesh Arora 44 69 — — — — — — 44 69 Wim Dik 24 95 — — — — — — 24 95 Mary Francis 103 99 — — — — — — 103 99 Richard Goeltz 98 94 — — — — — — 98 94 Euleen Goh 78 — — — — — — — 78 — Carole Piwnica 83 87 — — — — — — 83 87 Leslie Van de Walle 45 — — — — — — — 45 — Russell Walls 108 107 — — — — — — 108 107 Scott Wheway 88 77 — — — — — — 88 77 Total emoluments
3. Figures shown for Mr Moneta have been converted from Euro to Pound Sterling at the average exchange rate for 2009 of €1.12297 : £1.00. Further details of Mr Moneta’s benefits are contained in the full Annual Report and Accounts. The grossed element for schooling and housing as outlined in the full Annual Report and Accounts will be delivered in 2010.
Individual 590,483 97.34 252,515,052 9.13 Banks and nominee companies 12,461 2.05 2,451,903,945 88.62 Pension fund managers and insurance companies 94 0.02 125,276 0.01 Other corporate bodies 3,586 0.59 62,067,101 2.24 Total 606,624 100 2,766,611,374 100
1–1,000 556,054 91.66 152,958,583 5.53 1,001–5,000 45,597 7.52 84,171,156 3.04 5,001–10,000 2,496 0.41 17,206,332 0.62 10,001–250,000 1,803 0.30 90,026,034 3.26 250,001–500,000 189 0.03 69,482,343 2.51 500,001 and above 484 0.08 2,350,241,926 84.95 ADRs 1 0.00 2,525,000+ 0.09 Total 606,624 100 2,766,611,374 100 + The number of registered ordinary shares represented by American Depositary Receipts (ADRs). Please note that each Aviva ADR represents two (2) ordinary Aviva plc shares.
Holders of ordinary and preference shares receive their dividends in sterling and holders of ADRs will receive any dividends paid by the Company in US dollars.
If you would like to find out the price of Aviva preference shares, please visit the London Stock Exchange website via www.aviva.com/preferenceshares for a direct link.
Within the online centre you will be able to find our current and historic ordinary and ADR share prices, sharedealing information, news, updates, and when available, presentations from the Group Chief Executive. You will also be able to download an electronic copy of any current and past reports. There is also a range of frequently asked questions on holding ordinary shares, preference shares and ADRs in Aviva, which include practical help on transferring shares, dealing facilities and updating personal details.
Alternative format If you would like to request a copy of our reports in an alternative format, for example, braille or audio, please contact our Registrar, Equiniti, by calling 0871 384 2953*
www.avivainvestors.com Aviva preference shareholders www.aviva.com/agm Aviva worldwide internet sites www.aviva.com/preferenceshares Aviva Share Price www.aviva.com/websites www.aviva.com/shareprice * Calls to 0871 numbers are charged at 8p per minute from a BT landline. Charges from other telephone providers may vary. Lines are open from 8.30am to 5.30pm, Monday to Friday. † This service will only be available until 48 hours before the 2010 Annual General Meeting.