Aviva plc Annual Report and Accounts 2009 09 Performance review 67 Corporate responsibility 79 Governance 117 Shareholder information 127 Financial statements IFRS
Our Annual Report and accounts is available online and to download.
Financial statements MCEV 284 Condensed consolidated income statement 285 Condensed statement of comprehensive income 285 Condensed statement of change in equity 286 Condensed consolidated statement of financial position 287 Reconciliation of shareholders’ equity on an IFRS
and MCEV basis 287 Reconciliation of IFRS total equity to MCEV net worth for life and related businesses 288 Group MCEV analysis of earnings 289 Notes to the MCEV financial statements 315 Statement of directors’ responsibilities in respect of the Market Consistent Embedded Value (MCEV) basis 316 Independent auditor’s report 98 Corporate responsibility committee report Other information 99 Directors’ remuneration report 318 Glossary
IFRS operating profit** £m IFRS total return after tax £m IFRS Dividend cover IFRS total return after tax EPS
Full year dividend Pence Equity shareholders’ funds*** £m MCEV Return on equity
Dividend I am pleased to announce that the final dividend for 2009 will be 15 pence, bringing the total dividend to 24 pence. This follows our decision last year to reduce the dividend to a sustainable level, from which Aviva can grow over time. Our dividend policy remains unchanged and the final dividend cover of 1.8 times remains within the 1.5 to 2.0 times target range, which is based on IFRS operating earnings after tax.
We further strengthened our Board with the appointment of Andrea Moneta, chief executive of Aviva Europe, Middle East and Africa, in September 2009. Other Board changes include: the retirement after nearly ten years of our senior independent non-executive director, Wim Dik; the resignation of Nikesh Arora, due to relocation to the United States; the appointment of new independent nonexecutive directors, Leslie Van de Walle, former chief executive officer of Rexam plc, who joined us in May 2009 and, from January 2010, Michael Hawker, who was previously chief executive and managing director of Insurance Australia Group.
I’m pleased with our progress this year. It has been a year of strong financial performance and delivery against our strategic plans. I’m proud of the way my team has performed and I’m confident that by remaining focused on our strategy we will make further progress in 2010.
We will continue to deliver against the strategy that has helped us to navigate the global economic crisis so successfully. We will maximise the value of being a single, global group, as we aim to deliver a consistently positive experience for our 53 million customers around the world.
Highlights — Improved financial strength with IGD solvency more than doubled in 2009 — Successful partial sale of Delta Lloyd in the Netherlands for £1 billion — Sale of Australian life business — £471 million paid to policyholders from reattribution of inherited estate
Aviva plc Group chief executive’s review continued Annual Report and Accounts 2009
We’ve seen a marked improvement in our capital position. Focusing on costs in order to improve margins has meant that, whilst we have seen volumes drop, we still reported a resilient operating profit and a strong balance sheet. We have worldwide sales of £45 billion and £379 billion of funds under management. We are managing our financial risks prudently and skilfully.
We have made good progress towards our target this year. If you compare earnings per share of 37.8 pence in 2009 with those of 2008 (a loss of 36.8 pence), it's a great improvement.
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. Our senior management team is committed to this target and it remains our focus in 2010.
In 2008 we initiated a programme to create a simplified and more modern way of doing business to improve efficiency and reflect customers’ preference to do business online; we’ve invested in new technology and streamlined our processes.
I’ve already talked about our financial strength and the strategically significant achievements in our business. However, none of this could have been done without the hard work of all of our people around the world.
Looking forward – how would youQ sum up your priorities for 2010? 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.
Aviva plc Group strategy Our purpose is to deliver prosperity and peace of mind to our customers. We will do this by realising our vision: ’One Aviva, Twice the Value’.
Manage composite portfolio We are fully committed to maintaining the composite nature of the group. We firmly believe in the benefits of life insurance, general insurance and asset management as complementary parts of an overall business model that balances cashflow, returns and long-term value creation, and delivers prosperity and peace of mind to customers.
Active management of our composite model provided us with strength in a challenging environment, specifically: — Focused on profitability above sales volume by exercising price discipline and leadership in general insurance and by increasing margins and driving long-term value creation in life and pensions
— Robust performance in Europe benefiting from our strong bancassurance relationships despite the challenging environment with excellent sales performance in Italy (55%) and France (26%)
— Strengthened our position in Asia through strong growth in China (15%) and Korea (93%). Withdrew capital intensive products in Hong Kong and Taiwan
Strengthened our capital position through a combination of successful strategic initiatives and disciplined capital and balance sheet management including: — Robust underlying earnings rebuilding our capital base — IPO of Delta Lloyd in the Netherlands — Sale of Australian business — Reattribution of inherited estate in UK
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. Working together as ’One Aviva‘, we deliver operational excellence through shared services, shared knowledge, rationalised systems and effective outsourcing.
— Expanded our distribution reach through renewal of DBS bancassurance agreement which now extends to markets such as China and India
— Invested in our e-commerce capability in the UK with the launch of Aviva for Advisers website and made our online pension tracker proposition available to over 1 million customers
— Achieved £510 million of cost savings against £500 million target including reducing total headcount from 54,000 in 2008 to 46,000 in 2009
Our strategy and priorities need to be responsive to any changes in the external environment that may provide opportunities or cause strategic risks. These potential changes include capital market developments, an evolving regulatory environment, changes in the competitive landscape, development of major trends (such as climate change, changing consumer behaviour and improving longevity) or the emergence of potential discontinuities (such as a pandemic).
We manage these risks and opportunities through disciplined risk management. For further details refer to the risk management section on pages 56 to 59.
Asia Pacific Scale, growth — Prioritised portfolio — Regional operating model — Investment required
Aviva Investors — Globally integrated business — Transform the investment model — Increase third party business
Europe division to create a single business benefiting from increased use of shared services and a simplified, more integrated corporate structure
Funds under management £m — Continue to drive robust and consistent investment performance
IGD surplus and cover £bn — Maintain a strong balance sheet Cover — Continue to focus on strong capital management and financial flexibility IGD surplus 5.0 2.0 — Monitor and manage market and operational risks in 1.6 an uncertain, external environment4.0 — Allocate capital to the highest risk-adjusted return emerging markets — Focus on our client-centric solutions driven investment approach — Continue our focus on attracting third party business and cross border sales and developing a strong pipeline im e ve 3.
— Continue to invest in our brand and in improving customer experience to increase customer advocacy and consumer demand for our products
— Continue to focus on developing new products to suit our customers’ changing needs
— Continue to increase customer access through our multi-channel distribution approach
Finance, Risk, Procurement and Marketing © 2006-2010 Satmetrix Systems, Inc. 100 All Rights Reserved. Net Promoter, NPS
and Net Promoter Score are trademarks — Increased use of outsourcing where appropriate 0 of Satmetrix Systems Inc., Bain & Co.,
Achieved Achieved Expected Total and Fred Reichheld to 2008 in 2009 in 2010
— Continue executing our tailored shared services strategy including: – Regional service centres, centres of excellence and shared processes – Globally consistent operating models for IT, HR, 200
Distribution — Bancassurance — Corporate partnerships — IFAs/brokers/agents — Direct (phone/online) — Direct sales force
Aviva plc Key performance The key measures that are used by the board and executive management team to
.8 the improvement in financial markets in 2009. Economic and investment return assumptions during the year were in line with our long-term expectations with a positive variance of £77 million (2008: £2,544 million adverse).
— This ambition is based on total IFRS return, including investment volatility and non-operating items over the weighted average number of shares.
Proposed ordinary dividend per share and dividend cover Our board has recommended a final dividend of 15.00 pence per share (2008: 19.91 pence). This brings the total dividend for the year to 24.00 pence and a dividend cover of 1.8 times (2008: 1.9 times) based on IFRS operating earnings after tax.
— Our intention is to pay a dividend on a basis judged prudent using dividend cover of 1.5-2.0 times, while retaining capital to fund future growth.
Proposed ordinary dividend per share and dividend cover Pence Dividend Cover
These results reflect higher long-term and management disciplines 2,500 savings results offset by lower general insurance and underpinned by strong 2,000 corporate governance.health profits and increased group debt costs. 1,500
Worldwide sales — While our focus is on capital Worldwide sales £m efficiency and profit ratherTotal worldwide sales decreased by 12% in 2009 than volumes, sales remain to £45,068 million (2008: £51,377 million). an important indicator. 60
Long-term and savings sales decreased 11% Worldwide sales comprise 50the PVNBP of long-termto £35,875 million (2008: £40,240 million) mainly
Customer advocacy 24 businesses took part in our 2009 Net Promoter Score® survey (2008: 12). 16 met or exceeded the benchmark with 12 in the upper quartile. The ratio beating benchmark is the same as 2008; however, more businesses are in the upper quartile rankings.
— 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.
— The survey results are used each year to determine and implement actions with the aim of achieving continuous improvement. The climate survey measures employees’ perceptions of leadership, verifying alignment with our strategic direction and immediate business plans.
— Our aim is to improve both measures over time and meet or exceed a global financial services benchmark.
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. These results are discussed in more detail on page 44 of this report.
UK life business Market environment During 2009 the overall long-term savings market declined by 17%1. This contraction, for the second consecutive year, was primarily driven by falls in the pension and bond markets as lower consumer confidence, limited salary increases and higher unemployment reduced customers’ propensity to save and invest for the future. Specific regulatory events, such as the cessation of sales of single premium creditor business, also impacted the market. Despite this, we have maintained a disciplined focus on profitability, significantly improving our new business margin.
As a result of our major simplification and efficiency initiatives, designed to better meet customer needs, we have outsourced the administration of almost three million policies to industry experts: Swiss Re, Scottish Friendly and International Financial Data Services. We have decommissioned over 300 IT systems, delivered a more flexible cost base and made £100 million of annualised cost savings.
Outlook We expect the market to remain challenging in the short term as the impact of the recession continues to influence demand for investment and savings products. Longer term, major regulatory changes including the Retail Distribution Review and Solvency II will be implemented. Our strategies will enable us to exploit the opportunities emerging in our market as we continue to build on our e-commerce and service capability and product and distribution breadth.
UK general insurance business Market environment 2009 has been a challenging year, with strong competition and the recession impacting all lines of business. More customers are searching for cheaper deals, while fewer are making discretionary purchases such as breakdown cover. A significant fall in creditor volumes, resulting from lower lending, was compounded by a sharp rise in creditor claims. Fewer start-ups, more business failures and reduced exposures have resulted in shrinking commercial markets. However, there have been some recent encouraging signs that more realistic pricing is emerging in the market, particularly in personal motor.
Performance The UK general insurance operation has significantly improved the profitability of business written in 2009. By simplifying the business, reducing costs, achieving scale benefits and taking a disciplined approach to underwriting and distribution, we have created a platform for future growth.
Progress on our transformation programme remains ahead of plan, with all business now being undertaken in our new ‘centres of excellence’. We are on track to deliver annualised savings of more than our £150 million target from this phase by 2010, in addition to savings of £200 million already delivered.
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.
RAC insurance RAC continues from strength to strength as a leading UK service brand, coming fifth in the Institute of Customer Service’s 2009 survey, comparable with John Lewis, Waitrose and M&S. In its core breakdown category it won the JD Power survey for an unprecedented fourth consecutive year. The service culture is not just delivered by our patrol staff either: RAC’s membership call centre entered the Times Top 50 UK call centres at 14th.
Building a truly pan-European 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.
Aviva Europe performance Aviva Europe operates in 12 businesses across Europe (excluding the UK) with substantial operations in France, Italy, Ireland,
Poland and Spain. We also have a presence in the developing markets in Central and Eastern Europe of Czech Republic,
As part of our strategy, we are transforming our 12 federated businesses through our Quantum Leap programme into one market leading pan-European business.
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 chanel through our direct sales force, IFAs, brokers or internet sales.
We achieved total sales of £16,258 million during 2009, up 8% on 2008. IFRS operating profit for the year decreased 4% to £797 million, reflecting exceptional weather losses in France and Ireland. These results are discussed in more detail on page 45 of this report.
Our business is performing strongly in both distribution channels. In retail, our partnership with AFER, a leading savings association in France, continues to be extremely successful with customer numbers growing by 5% to 712,000 in 2009. In bancassurance, our Italian partnership with Banco Popolare that commenced in 2008 performed strongly in highly profitable protection products, one of our key strategic objectives.
In 2009, we developed our suite of guaranteed products which have proved attractive particularly in France, Spain and Italy.
General insurance and health IFRS operating profit £m Europe Delta Lloyd
Poised to benefit from recovery in the world’s wealthiest market The North American marketplace provides us with access to a strategically attractive population with a growing demand for products that offer prosperity and peace of mind in both the general insurance and life and annuities marketplaces.
Strategy We will continue to grow our existing businesses and raise our profile in North America on the back of the strength of the global brand, communicating with financial analysts, key financial and business media, consumers and distributors.
Outlook A number of economic indicators are starting to point to a steady recovery in 2010. We will continue to grow our life insurance portfolio in the US and our contribution to total Aviva profits, building on 2009 successes. We await the outcome of the SEC151A debate concerning the future regulation of annuity products and will respond appropriately. In Canada we will further enhance our underwriting processes to improve risk selection, profitability and capital efficiency.
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.
During 2009, customers’ increased caution has led to a growing demand for protection and health products and those savings products with guarantee features. We have strengthened our proposition in these areas which, together with our investment product capabilities, will enable us to harness the expected economic rebound.
Outlook Looking forward, we expect recovery in Asia Pacific to be ahead of other regions. Prospects for 2010 are more optimistic with the Asia Development Bank predicting GDP growth of 6.6% for emerging Asia versus 4.3% in 2009. We are committed to building a high-growth and value-creating region and establishing Aviva as a leading international player in Asia.
* On an MCEV basis from 2007. Prior years presented on an EEV basis.
Focused on clients, focused on performance Aviva Investors combines the group’s asset management components into a single, globally integrated business. We manage internal funds for Aviva, as well as for a growing range of institutional and retail third party clients. Our focus on client service has brought external recognition and contributed to a strong performance in 2009.
A number of positive trends emerged to support our strategic objectives in 2009. Our focus on client service gained us improved rankings in UK-focused independent client service/investment performance surveys for investment quality. Investment performance was also an area of strength. Where clients have specified performance benchmarks, Aviva Investors has met or exceeded 83% of these over one year and 68% over three years, with particularly strong performance in France, Australia and Poland. We also generated record levels of performance fees.
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.
We were able to act quickly and decisively to resolve these concerns. FSITC’s response was very positive: our actions had shown that we had listened to their feedback at a senior level, creating a much stronger relationship.
CGU plc and Norwich Union plc were both major UK-based insurers operating in the long-term insurance business and general insurance markets. Both companies had long corporate histories. CGU plc was formed in 1998 from the merger of Commercial Union plc and General Accident plc. Hand in Hand, which was incorporated in 1696, was acquired by Commercial Union in 1905, which itself was incorporated in 1861. General Accident plc was incorporated in 1865. Norwich Union plc was founded as a mutual society in 1797 and operated as such until 1997, when Norwich Union plc demutualised and became an English public limited company.
Between 2000 and 2002 we actively withdrew from lines of business and markets that did not offer the potential for market-leading positions or superior returns, or did not otherwise meet our strategic objectives, principally through the disposal of property and casualty businesses in the UK London Market, the US, Australia, New Zealand and certain European countries.
During 2009, we disposed of our long-term and savings and wealth management in Australia and through an IPO we sold approximately 42% of our Dutch business, Delta Lloyd.
— To manage the composite portfolio of life, general insurance and fund management We are fully committed to maintaining the composite nature of the group. We firmly believe in the benefits of life insurance, general insurance and fund management as complementary parts of an overall business model that seeks to balance cash flow, returns and long-term value creation.
— To allocate capital rigorously to provide the highest sustainable returns for our shareholders Capital management will continue to be a key focus for us going forward. We treat capital as a scarce resource, and strive to allocate capital to provide the highest sustainable returns for shareholders. We continuously seek improvements in capital structure and efficiency.
Our business is managed on a geographic basis through a regional management structure based on four regions, UK, Europe, North America and Asia Pacific. The four regions function as six operating segments as both the UK and Europe regions are split into two operating segments. Due to the size of the UK region it is split into the UK Life and UK General Insurance segments, which undertake long-term insurance and savings business and general insurance respectively. In Europe, Delta Lloyd is managed separately from the other European businesses; therefore the region is split into Aviva Europe and Delta Lloyd operating segments.
Aviva Investors, our fund management business and sixth operating segment, operates across all four regions providing
Aviva plc Information on the company continued Annual Report and Accounts 2009 fund management services to third-party investors and to our long-term insurance business and general insurance operations. Our geographic operating segments offer the following lines of business to a greater or lesser extent: Long-term insurance and savings business Long-term insurance and savings business accounted for over 80% of our total business based on sales for the year ended 31 December 2009. We reported total long-term insurance and savings new business sales of £32.0 billion and investment sales of £3.9 billion for the year ended 31 December 2009. Our focus remains on growing our business profitably and improving our operational efficiency so that we can fully benefit as our major markets return to economic growth.
Market position In the UK we have a market share of 10% based on annual premium equivalent (APE) according to the Association of British Insurers (ABI) 2009 data. APE is a recognised sales measure in the UK and is the total of new annual premiums plus 10% of single premiums. Long-term insurance and savings products in the UK represented 22% of our worldwide sales for the year ended 31 December 2009.
Long-term insurance products from our European businesses (excluding the UK) represented 42% of total group worldwide sales for the year ended 31 December 2009.
Brands and products In the UK we operated under the Norwich Union brand until June 2009, when Norwich Union became Aviva. Following the rebrand of Hibernian Aviva in Ireland to Aviva on 11 January 2010, we operate under the brand name Aviva throughout Europe and the rest of the world, except in Poland and the Netherlands, where we operate under the names Aviva Commercial Union and Delta Lloyd, respectively. The business in Poland will fully adopt the Aviva name in June 2010. The brand in the Netherlands, Delta Lloyd, will remain unchanged.
Our long-term insurance and savings businesses offer a broad range of life insurance and asset accumulation products. Our products are split into the following categories: — Pensions – a means of providing income in retirement for an individual and possibly his or her dependants. Our pension products include personal and group pensions, stakeholder pensions and income drawdown.
— Protection – an insurance contract that protects the policyholder or his or 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.
Some of our insurance and investment contracts contain a discretionary participating feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contacts.
Operating segments Each operating segment has a member of our executive management team who is responsible for it and who is accountable to the group chief executive for the operating performance of their segment. The full membership of our executive management team is set out on page 82. This structure for our operating segments is intended to ensure the Group’s ability to take advantage of market opportunities, improve speed of response, eliminate duplication of effort, and encourage the sharing of best practice in the interests of our customers and shareholders, while providing local knowledge.
We aim to maintain market leadership through balanced distribution and broad product mix and the simplification of processes, services and costs.
Market and competition The UK long-term insurance market is highly competitive. However, there is a potential annual savings gap of some £30 billion, the difference between what an individual saves today, and what they need to save in order to pay for a comfortable standard of living in retirement, as well as a potential protection gap of £2.3 trillion, which is the difference between the life insurance and financial protection cover an individual has and the amount they need to meet their needs, according to the ABI and Swiss Re respectively. We believe these shortfalls offer significant opportunities for long-term insurance companies within this market.
We consider our main competitors to be Prudential, Legal & General, AEGON, Standard Life and Lloyds Banking Group. The principal competitive factors for our life insurance business in the UK are: — Financial strength and ratings — Brand strength and customer advocacy — Focus on customer and quality of service — Range of product lines and quality of products on offer — Strength of distribution channels — Pricing — Investment management performance
The with-profit products share profits and losses of the with-profit fund with its investors. This is achieved through a system of bonuses. In deciding the regular bonuses Aviva aims to smooth the return of the policyholder’s plan. As bonuses are added to the plan, valuable guarantees build up. These guarantees are unique to with-profits investments. At the close of the plan the investor receives a terminal bonus based on the performance of the fund.
We provide a number of traditional life insurance products including level-term, decreasing-term and guaranteed whole life insurance, guaranteed lifelong protection plans and critical illness cover products.
Our savings and investment products include ISAs, investment bonds, funds, base rate trackers, capital protected plan and with-profits products.
Distribution We are a leading provider in the UK financial adviser market and also have a successful joint venture with the Royal Bank of Scotland Group, strong relationships with a number of banks and building societies, distribution deals with the Co-operative Insurance Society and the Post Office, and growing corporate and direct channels.
Market and competition The UK is the third largest insurance market in the world according to the ABI based on data for 2008. In 2008, the top four companies had approximately 38% (2007: 35%) of the general insurance market share, based on Datamonitor figures for gross written premiums.
In 2009, we believe the proportion of customers buying insurance online has continued to increase and this is now a major distribution channel. In particular we believe that internet price comparison sites for personal motor and homeowner insurance have again grown their market share as customers seek price transparency.
We consider our main competitors to be RBS, RSA, AXA, Zurich, Lloyds Banking Group, Allianz, and Admiral Group. The principal competitive factors for our general insurance business in the UK are: — Range and quality of products — Access to distribution — Pricing and underwriting discipline — Brand association — Customer satisfaction, claims handling — Cost management
Products We provide a range of general insurance products focused on personal and commercial customers. We held top one or two positions in all our major classes of business for 2008, according to Datamonitor. Our general insurance business mix is approximately 60% personal lines and 40% commercial lines.
Our home insurance products include building and contents insurance and home emergency cover.
Distribution We have a multi-distribution strategy. Our personal products are sold directly to customers over the phone and through our website www.aviva.co.uk, via brokers, through over 100 corporate partnerships and our RAC Insurance offering is also available through price comparison sites. For commercial insurance, we focus on broker distribution and believe that independent brokers remain the best source of the advice required by business customers.
In 2009, we announced a clear two-part strategy to exploit the considerable opportunities in Europe.
Aviva Europe In 2009 we announced a new strategy to make a ‘Quantum Leap’ in performance by integrating the operations of 12 previously separate businesses (excluding the operations of Delta Lloyd), under a single pan-European executive team.
We are also building a single retail operating model with common tools and methods supported by centralised sales support and a pan-European customer retention centre of excellence. This strategy will enable us to increase our sales force productivity, improve customer retention and create economies of scale through pan-European retail cost management.
We consider our competitive factors in the European region (with such factors to a greater and lesser extent for mature and rapidly developing markets) to be: — Bancassurance partnerships — Existing retail franchise — Pan-European distribution model — Position in large emerging markets (Russia, Poland, Turkey) — Customer-centric range of products and services — Global scale — Depth of technical expertise across region and ability to transfer to developing business units — Europe-wide approach to distribution management, product development and support functions — Pricing — Brand strength and customer advocacy — Focus on customer and quality of service — Financial strength and ratings — Investment management performance
Market We believe that the long-term insurance and savings market in France has long-term growth potential due to the ageing population and need for private pensions. We believe that the recent volatility in the market has affected sales as some consumers are lacking confidence in long-term investments, preferring safer forms of investment while they await a recovery in financial markets.
Recent changes in the inheritance tax system have eroded the long-term insurance tax advantages compared to other asset accumulation businesses, which has impacted our individual single premium savings product and undertakings for collective investment in transferable securities (UCITS).
We believe that the general insurance market in France is mature, showing signs of saturation and increased competition. In this market we aim to offer competitive pricing and a wide range of products and services.
Products Aviva France long-term insurance and savings business sells mainly protection and bonds and savings products. These include protection and unit-linked and with profits savings products. We are the sole distributor of AFER products, which includes unit linked and with-profits products.
Distribution Aviva France sells products through a complete range of distribution channels, including approximately 1,800 branch staff, 400 insurance advisers, more than 1,000 active partner brokers, as well as Aviva Assurances’ 875-member network. It has partnerships with AFER, the Union Financière de France (UFF) network of financial advisers, Médéric, and a bancassurance partnership with Crédit du Nord, a subsidiary of Société Générale, which gives Aviva access to 1.4 million customers through approximately 780 branches as at 31 December 2009. We also have direct sales to private customers through the internet and by telephone.
AFER is a market reference savings association, which we believe has strong customer loyalty. AFER products are sold through Epargne Actuelle, an Aviva Vie network and other brokers and makes up approximately 53% of our total French life sales in 2009.
We also have a joint venture with Crédit du Nord called Antarius. We have exclusive rights to distribute Antarius­ branded life products, which include protection, and unit-linked bonds and savings products, through Crédit du Nord bank branches.
In May 2008 we acquired 70% of VIVAS Health (now renamed Aviva). We believe that this initiative presents significant growth opportunities in a new market sector and extends our existing partnership with AIB who own the remaining 30% of this company.
Market The life insurance market in Ireland is largely consolidated with approximately 71% of the market share being held by the top three providers, including Aviva, according to a report by IFF based on 2008 gross written premiums. Price competition in the market continues to increase, with focus increasingly on market share. We believe that customers have moved away from traditional life products in Ireland because of volatility in the stock markets and a slowdown in the housing market in the last two years.
We believe that the general insurance market in Ireland continues to be very competitive for both personal and commercial lines business and there is continued downward pressure on premium rates.
Our general insurance and health businesses provide a wide range of products including property, motor, travel, farm and business insurance. Our motor business is more focused on personal lines, while our property business is primarily commercial lines.
Italy Business overview and strategy Aviva Italy is the country’s seventh-largest life insurer, with a market share of 5% in terms of 2008 gross written premiums according to Associazione Nazionale fra le Imprese Assicuratrici (ANIA) and has over 1.3 million customers. We also have a stake in Banca Network Investimenti, a 900-member financial adviser network. Aviva is the 13th largest general insurance company in Italy with a market share of 1% according to the Associazione Nazionale fra le Imprese Assicuratrici (ANIA).
Market In the Italian life market, large groups dominate the market, with the top four providers writing more than 50% of the life premium income in 2007 according to AXCO Insurance Information Services. While the market has been reasonably stable over the last five years, it shrank in both 2007 and 2008 (by 11.2% and 11.7% respectively), with total market premiums at about €55 billion for the year, according to ANIA.
Products Our long-term insurance and savings business offers a wide range of products covering protection, bonds and savings and pensions. The largest segment is single and regular premium savings and investment products. These include unit-linked policies linked to a range of investment funds and profit-sharing policies where there is a minimum annual return credited to the policy, with the potential for an additional bonus. Also we provide index-linked products where there is typically some protection of capital at the end of the policy term and a pay-out linked to the performance of an index or basket of shares.
In 2007, we also purchased, together with other investors, a stake in Banca Network Investimenti, a 900-member financial adviser network, from BPI. We believe that this network will further extend and diversify our distribution reach in the market for long-term insurance and savings business.
We distribute general insurance products primarily through agents and brokers, with a growing proportion of bancassurance sales.
Our long-term insurance strategy is to expand our distribution network, particularly in the direct channel, and to also develop other alternative points of contact for potential clients, for example, bancassurance. We seek to capitalise on our new product launches and maximise cross-selling opportunities. Our product strategy for pensions is to retain our status as the market leader in terms of customers and assets.
Our general insurance business in Poland commenced in 1997 and continues to develop. In 2007 we launched a direct motor insurance product in order to pursue further potential for growth in this dynamic market. For reporting purposes the general insurance business is shown within “Other Europe” in the general insurance segment.
Market The Polish market for protection products has seen significant growth since 1999, although penetration rates remain relatively low according to our analysis of KNF statistics. Insurance companies in Poland are either state-owned or private, with the public sector companies continuing to have a strong share of the market. The private companies are often under the control of international insurers.
Products Our life business in Poland provides a broad range of protection, annuities and bonds and savings products. For individuals it offers unit-linked life policies, annuities, single premium savings and, for institutions, group life insurance and employee pension programmes, which are both unit-linked products.
Our pension business offers a standard product for all customers as part of the privately managed pensions market.
Distribution The direct sales force is the main distribution channel for most of the Poland group and is made up of 4,200 tied insurance agents whose work is co-ordinated by a network of our sales offices run by sales managers.
In 2008 we increased the productivity and size of our direct sales force and entered a joint venture with Bank Zachodni WBK (a subsidiary of AIB) to sell both life and general insurance products through the bank’s network of over 500 branches.
We also co-operate with independent insurance agencies and brokers. We believe that these insurance brokers play a key role in selling commercial lines general insurance. Our mutual funds are also sold in brokerage houses and our individual products are supported by call centre and website sales.
In February 2008, we exercised an option to acquire an additional 45% shareholding in our joint venture with the Spanish savings bank Caja de Ahorros de Murcia, Cajamurcia Vida, which brings our total shareholding to 50% and enables the migration of the majority of the Cajamurcia protection products to this joint venture company. The new company distributes long-term insurance and savings products via Cajamurcia’s network of over 400 branches.
Our strategy in Spain is to further develop our bancassurance relationships and attract new partners if the opportunities arise. We hope to develop our general insurance offerings through our existing partnerships. Overall, we want to continue to be customer-focused, react quickly to market trends and maximise the sales of our core products, such as pensions and savings.
Market Spain’s financial market has a strong banking tradition, and as such customers are accustomed to receiving advice through traditional banking channels. We believe that customers have a high level of financial understanding and require comprehensive advice on products and services. The top positions in the longterm insurance market are dominated by bank-owned or bankinsurer joint ventures, with the overall bancassurance channel accounting for more than 70% of new business premiums in 2007 in the Spanish life insurance market according to ICEA.
The PIAS ‘pension’ product was launched in 2007: this is a savings contract with attractive tax benefits if the policy remains in force for at least 10 years and if an annuity is purchased at the maturity of the product.
Other Europe Business overview and strategy Aviva’s other European businesses are in Turkey, the Czech Republic, Hungary, Romania, Russia and Slovakia.
In 2007, our Turkish long-term insurance and savings business merged with Ak Emeklilik, the long-term insurance and savings company of Sabancı Holdings, to form a joint venture company, AvivaSA. The new company merged on 31 October 2007 to become the largest pensions’ provider in the market, with a market share of 22% in 2008 according to the Turkish Pensions Monitoring Centre, and the fourth largest life insurer with a market share of 6% in 2009 according to the Association of Insurance and Reinsurance Companies of Turkey. Under the merger, AvivaSA has a bancassurance agreement with Akbank T.A.S. (Akbank), Turkey’s second largest privately-owned bank based on total assets according to the Banks Association of Turkey.
In the Czech Republic we are the 13th largest life insurer, with a 1.6% market share in 2008 according to the Czech Insurance Association. We have more than 46,000 customers and 117 staff as at 31 December 2009.
In Russia, we started trading in early 2006, with a strategy to position the business to take advantage of the growth expected to occur as the life insurance industry develops. We were the fourth largest life insurer in 2009 compared to 21st in the prior year, with a 5% market share based on Aviva Russia’s estimates based on statistics from the insurance market regulator and Interfax news agency.
Our strategy in the “Other Europe” region is to grow our direct sales force numbers and productivity, whilst continuing development of other distribution channels, including bancassurance, to enhance our product range and to continue to investigate profitable opportunities in new markets. In all of these markets, pension reform continues to offer long-term potential.
We believe that Russia and Turkey, with their large populations and rapid economic growth, are highly attractive markets for the medium term. Countries such as Romania represent longer-term potential. With pension reform starting later in these countries, markets are at an early stage of development.
Competitiveness varies by country depending on its size and stage of development. In more developed markets competition is with regional players (eg AXA/Allianz), ex-state­ owned insurers and new entities. The less developed markets do not have the same competitive intensity, although competition is growing.
In Hungary, we offer flexible unit-linked and traditional life products. Aviva also acts as a distributor for various banking products, such as mortgage loans and current accounts, as well as selling a combined product.
In Romania, we provide traditional life insurance products and started to offer pension products to customers following government reforms introducing compulsory pensions in 2008.
In Russia, we focus on individual accident insurance, group non-state pensions, accident and sickness insurance.
Distribution In Turkey, we have a multi-channel distribution strategy through brokers, agencies, a direct sales force, corporate sales and bancassurance through an agreement with Akbank, which gives us access to their approximate six million retail customers through 868 branches. Our general insurance business is predominantly sold through agents, with the remainder coming through direct sales, a call centre and bank agents.
In Hungary, in addition to the direct sales force we also sell through brokerage partners. We commenced cross-border sales into Slovakia in August 2008, selling a single product through Brokernet Slovakia, which has increased our geographical coverage.
In November 2009 Aviva successfully completed an IPO of Delta Lloyd which is now listed on NYSE Euronext Amsterdam. Aviva retains 58% of the ordinary share capital and 54% of the voting rights in Delta Lloyd after having raised £1 billion of gross disposal proceeds. Its listing enables Delta Lloyd to strengthen its profile and brand, as well as more effectively pursue its growth strategy in the Netherlands and Belgium, in particular ahead of anticipated sector consolidation in those countries. Delta Lloyd is considering its strategic options in Germany.
Aviva plc Information on the company continued Annual Report and Accounts 2009 insurance in the Netherlands in 2008 based on gross written premiums according to an analysis of competitor press releases. The sale of our health operations to O.W.M CZ Groep Zorgverkeraar U.A (CZ) which was effective on 1 January 2009 realising a gain on sale of £31 million, has also given us an opportunity to sell long-term insurance and savings, and general insurance products to CZ’s existing customer base.
Delta Lloyd Asset Management manages investments both for Delta Lloyd’s own insurance operations and for third parties, including individual and institutional customers. In addition to managing equity and fixed interest funds, our operations include management of a property portfolio.
Delta Lloyd aims to be one of the leading financial service providers in the Netherlands and Belgium. To achieve this goal, our business is focused on achieving operating efficiencies and product and distribution innovation, while building the trust of our customers through improving customer service and strengthening financial disciplines.
The credit crisis has resulted in a number of Delta Lloyd’s competitors seeking state or shareholder support. We expect this situation to result in further industry reorganisation and consolidation in the coming years.
Products The long-term insurance and savings business of Delta Lloyd offers a range of protection, bonds and savings and pensions services, including group pension schemes, annuities, unit-linked bonds, savings products and protection insurance.
Our general insurance business sells a range of products including personal, motor, travel and home insurance and small to medium sized commercial policies.
Distribution Delta Lloyd distributes long-term insurance and savings and general insurance products under three brands: Delta Lloyd, OHRA and through a joint venture with ABN AMRO. In the Netherlands the Delta Lloyd brand works exclusively with independent insurance intermediaries, while OHRA focuses on direct channels such as telephone, internet and mail. Delta Lloyd’s third brand comprises a joint venture with ABN AMRO, reaching customers through the extensive distribution networks of ABN AMRO bank. In January 2009, Delta Lloyd and ABN AMRO bank confirmed that the joint venture remains the exclusive insurance partner for the current and future Dutch banking operations of ABN AMRO, including Fortis branches when they rebrand in 2010.
North America Regional overview and strategy Aviva North America consists of two businesses: the life insurance and annuity business in the US and the general insurance business in Canada. Our strategic priorities for the region are to improve margins and optimise capital usage, to selectively expand into market adjacencies and to optimise the regional operating model.
To enhance the growth in our existing businesses, we also seek to increase Aviva’s profile in North America by building on the strength of the global brand through concerted communication efforts with financial analysts, key financial and business media, consumers and distributors. We continue to expand our distribution network with a focus on larger brokerage general agents.
Market and competition The North America region is home to two of the world’s largest and richest economies. Aviva has two businesses that currently serve their respective home markets and are led by our regional headquarters in Chicago.
We consider our competitive factors in the North America region to be: — Tailored products — Product innovation — Technical expertise — Quality of distribution partnerships — Financial strength and performance — Strong financial ratings — Investment management performance — Global brand
Prior to the acquisition of AmerUs Group, the US business was headquartered in Boston and had a niche strategy, focused on retirement and estate planning with distribution through independent agents, banks and structured settlement brokers.
Market The US is the world’s largest national economy, according to the World Bank, based on 2008 GDP, as well as the largest insurance market according to the Swiss Re Sigma Report, No.3/2009. This is especially true for retirement savings products as 78 million members of the baby boom generation move into retirement in the US.
At the same time, the US economy, and its financial sector in particular, suffered a severe contraction as a result of the financial crisis. There are now increasing signs of economic recovery and, despite the recession, North America’s economies remain among the world’s largest and its population among the world’s wealthiest. Retirement savings represent 34% of household assets in the US, according to a report by Investment Company Institute, and, despite the uncertainty affecting the financial markets, we believe that people are still saving and buying insurance from brands they trust. In Aviva USA, we believe we are well positioned to respond to this customer need for safety, having savings and investment products with downside guarantees as a major component of our product portfolio. The indexed annuity and indexed life markets in which Aviva USA operates are dominated by a small number of large insurers. According to the fourth quarter 2008 Advantage Indexed Sales and Market Report by AnnuitySpecs, the top five providers hold 62% of the indexed annuities market, while for indexed life, the top five account for 64% of the market.
Distribution We use Independent Marketing Organisations (“IMOs”) to promote and sell our fixed indexed annuities and protection products. Our network covers all 50 states and includes 11,500 annuity producers and 27,000 life insurance producers. The large majority of annuity sales are made through fewer than 3,000 producers, of who approximately one third are SEC registered. We believe that SEC registration provides a number of significant opportunities for the business, including the ability to cross-sell life products through the registered distribution force and product penetration of distribution organisations that already operate within the registered market. We also distribute through career marketing organisations, personal producing general agents and brokerage general agents.
Canada Business overview and strategy Aviva Canada has an 8% share of the Canadian general insurance market, with a top five position in all major provinces according to a report by MSA Research Inc.
Market As the seventh largest in the world, according to the Axco Insurance Market Report, Canada’s general insurance market is established and stable. The four largest provinces generate around 90% of total premiums with Ontario, the largest, representing 47% on its own, according to a report by MSA Research Inc in 2008. The biggest growth market is western Canada, where economic development has resulted in significant population increases and a changing demographic profile.
The Canadian general insurance industry is highly fragmented with many small players and no dominant consumer brand. Steady consolidation has resulted in the top five companies sharing 36% of the market with the top two companies, Intact Insurance (formerly ING Canada) and Aviva, controlling 19%. The rest of the industry consists of smaller, provincially based or niche companies. Further consolidation is anticipated.
Distribution is primarily through the traditional broker channel, estimated by market commentators, including Axco, to account for over 70% of distribution, with the direct and affinity channels gradually increasing their share of the market. Competition for growth has moved to investment in brokers, direct to consumer marketing, and technology.
Products We provide a number of general insurance products through our Canadian companies including: — Property, home and automobile insurance, including recreational vehicles and mobile homes insurance — Niche personal insurance products including holiday and park model trailers, horses, hobby farms, sailboats, power boats and antique classic and custom cars
— Small and medium-size enterprise commercial insurance, including motor, property, liability, boiler and machinery, and surety
Aviva Asia Pacific aims to build a high growth and valuecreating region driven primarily by ‘must win’ markets of China and India by increasing new business sales for long-term insurance and savings products through development of existing businesses, investment in new business development, leveraging shared services and harnessing the benefits of multiple distribution channels in all of our markets.
At a regional level, Aviva Asia Pacific competes mainly with other large international insurance and financial services groups. The most significant competitors include AIG, ING, Prudential plc, HSBC and AXA. These groups are all early entrants into the region and most have significant operations and experience in all of the Asian markets. Nevertheless, in our chosen markets, we believe our strong distribution partnerships, wide footprint and regional operational model position us well to compete effectively in the region and create a solid platform for continued growth.
Asia Business overview and strategy Aviva has operations in eight markets in Asia, with businesses at different stages of development.
In Singapore, we rank fifth in the life long-term insurance market by annualised premium equivalent (APE) as at 30 September 2009 according to the Life Insurance Association. We are one of the leading bancassurance players in the market. We have recently extended our partnership with DBS Bank (DBS), one of the largest banks in Southeast Asia, until 2015, to provide long-term insurance, savings and health and protection insurance products. Importantly, the agreement now covers additional markets such as India, China, and Taiwan.
In Hong Kong we are ranked 21st in the long-term insurance market by APE as at 30 September 2009 according to the Office of the Commissioner of Insurance. Our strategy is to leverage our core bancassurance partnership with DBS and independent financial adviser (IFA) channels to deliver profitable growth.
In 2007, Aviva formed a long-term insurance joint venture, First-Aviva, with First Financial Holdings Company (FFHC) in Taiwan. First-Aviva, in which we have a 49% shareholding, started operations in early 2008 and distributes long-term insurance and savings products through a bancassurance agreement with FFHC’s flagship subsidiary, First Commercial Bank, which is Taiwan’s second largest bank network in terms of number of branches according to the Financial Supervisory Commission. By leveraging over five million bank customers, we aim to become the most profitable insurance company in the bancassurance channel.
Market We believe that the fundamentals of the Asian markets remain attractive. The low insurance penetration in most countries and relatively higher GDP growth indicate that prospects for continued growth in the long-term insurance and savings industry are good. The economic forecasts from Asia Development Bank predict GDP growth for the region of 4.3% in 2009 and 6.6% in 2010 (Asian Development Outlook 2009 Update, 22 September 2009).
Products Our Asian businesses generally offer a range of protection, bonds and savings and pension products including universal life, participating life, unit-linked single and regular premium life insurance, other savings and pensions products and a range of accident and health insurance products.
In Singapore and Hong Kong, we offer access to a wide range of mutual funds through Navigator, a wrap administration platform which allows investors to plan, choose, manage and track their investments easily and more effectively. We are looking at opportunities to roll out our Navigator platform to other attractive markets.
In Australia, Aviva provided protection products including life insurance, total and permanent disability insurance, and critical illness insurance products.
We distributed protection insurance in Australia through all major channels with a focus on the IFA channel.
Aviva Investors Business overview and strategy Aviva Investors was set up in 2008 to combine major fund management components of the Aviva group into a single global fund management business. We have £250 billion in assets under management as at 31 December 2009 and offer a broad range of expert investment skills and experience around the world. We manage internal funds for our long-term insurance and savings, and general insurance operations as well as a range of external retail and institutional funds. We provide these services across most of our geographic operating segments, with services in 15 countries around the world, including the UK, the US, Canada, France, Poland, China and Australia.
Our strategy is to rapidly grow our external business through offering client centric solutions to our customers across an expanding global footprint. This will be achieved in conjunction with the establishment of a globally integrated organisation, supported by a high performance culture and global core processes.
Market and competition Following the creation of Aviva Investors, we consider our competitor peer group to include large-scale global asset managers such as those owned by Blackrock, AXA and Allianz.
Where appropriate, we also look at other managers with a strong presence in the UK institutional and retail markets such as F&C Asset Management, Henderson Global Investors, Jupiter Asset Management and Threadneedle. These managers also have non-UK operations, particularly in Europe.
Key identified competitive factors for Aviva Investors include: — Investment performance — Brand — Our Aviva group parentage — Client service — Scale — Global product breadth and distribution reach — Capabilities to provide solutions — Risk management expertise
In the UK, we supply products to the UK retail and wholesale markets. These funds are mostly “owned” by Aviva UK Life with Aviva Investors as asset manager, although we have a small number of funds registered in the Aviva Investors name. These funds are promoted to investors via IFAs, fund platforms, supermarkets, and discretionary asset managers. In addition, we have a range of pooled pension funds which are aimed at the smaller pension fund market. These funds are normally defined benefit schemes and tend to be advised by investment consultants.
We also have an expanding range of specialist property funds. These funds are targeted at specialist real estate buyers and large institutions (mostly pension funds and local authorities), and provide real estate solutions to a wide range of risk appetites, ranging from secure income generating funds to highly leveraged growth funds. These funds address the UK, European and Asian markets.
In Australia, we have a range of unit trusts that are primarily marketed to retail clients through the Navigator platform. This platform enables investors to select from a range of funds, not just those manufactured by Aviva Investors. The funds we manufacture are primarily equity related funds with an Australian and Asian focus.
— Real Estate – We offer funds specific to property assets in the UK, Europe and Asia, in addition to a Global fund, clientspecific segregated funds and a multi-manager service.
The following chart shows, in simplified form, the organisational structure of the group as at 31 December 2009. The Registrant, Aviva plc, is the holding company of the group: Subsidiaries
The principal subsidiaries of the Company are listed below by country of incorporation. All are wholly-owned, directly or indirectly, and transact insurance or reinsurance business, fund management or services in connection therewith, unless otherwise stated.
United Kingdom Aviva Annuity UK Limited Aviva Central Services UK Limited Aviva Consumer Products UK Limited Aviva Employment Services Limited Aviva Equity Release UK Limited Aviva Health UK Limited Aviva Insurance Limited Aviva Insurance Services UK Limited Aviva Insurance UK Limited Aviva International Insurance Limited Aviva Investors Global Services Limited Aviva Investors Pensions Limited Aviva Investors UK Fund Services Limited Aviva Investors UK Funds Limited Aviva Life & Pensions UK Limited Aviva Life Services UK Limited Aviva Risk Management Solutions UK Limited Aviva UKGI Investments Limited CGNU Life Assurance Limited CGU Underwriting Limited Commercial Union Life Assurance Company Limited Gresham Insurance Company Limited Hamilton Insurance Company Limited Hamilton Life Assurance Company Limited London and Edinburgh Insurance Company Limited Norwich Union Life (RBS) Limited RAC Financial Services Limited RAC Insurance Limited RAC Motoring Services RAC plc
France Aviva Participations SA and its principal subsidiaries: Antarius S.A. (50.0%) Aviva Assurances SA Aviva France SA Aviva Investors France SA Aviva Vie S.A. Eurofil SA Société d’Epargne Viagére SA (83.7%) Union Financière de France Banque (Banking) (74.3%)
Germany Delta Lloyd Deutschland AG and its principal subsidiary: Delta Lloyd Lebensversicherung AG
Italy Aviva Italia Holding S.p.A and its principal subsidiaries: Aviva Assicurazioni S.p.A (50.0%) Aviva Assicurazioni Vita S.p.A (50.0%) Aviva Italia S.p.A Aviva Life S.p.A (50.0%) Aviva Previdenza S.p.A (55.0%) Aviva Vita S.p.A (25.5%) Eurovita Assicurazioni S.p.A (40.5%)
United States Aviva USA Corporation and its principal subsidiary: Aviva Life and Annuity Company Aviva Investors North America, Inc.
Associates and joint ventures The Group has ongoing interests in the following operations that are classified as associates or joint ventures. Further details of those operations that were most significant in 2009 are set out in notes 18 and 19 to the financial statements.
Selected Consolidated Financial Data The following table sets forth our selected consolidated financial data for the periods indicated. This data is derived from our consolidated financial statements prepared in accordance with IFRS as issued by the IASB.
Income Gross written premiums 34,690 36,206 30,991 28,735 26,299 Premiums ceded to reinsurers (2,576) (1,841) (1,658) (1,501) (1,317)
Premiums written net of reinsurance 32,114 34,365 29,333 27,234 24,982 Net change in provision for unearned premiums 559 277 (21) 93 (123)
Profit/(loss) before tax 2,022 (2,368) 1,847 3,340 3,450 Tax attributable to policyholders’ returns (217) 1,068 (15) (346) (922)
Gross insurance liabilities 171,092 174,850 152,839 144,230 132,602 Gross liabilities for investment contracts 110,015 107,559 98,244 88,358 77,309 Unallocated divisible surplus 3,866 2,325 6,785 9,465 8,978 Core structural borrowings 5,489 5,525 4,311 4,195 3,645 Other liabilities 48,843 49,730 43,120 34,539 29,821
Recent developments On 5 January 2010, we announced the acquisition of River Road Asset Management, a US equity manager, to support the expansion of Aviva Investors’ third-party institutional asset management business. Completion took place on 24 February 2010 for an estimated consideration of US$122 million (£79 million).
Demographic trends Our results are affected by the demographic make-up of the countries in which we operate. The types of products that we sell reflect the needs of our customers. For example, in regions and countries with a high proportion of older people, a larger proportion of our sales will reflect their needs for pre and post­ retirement planning. Our sales levels will also be impacted by our ability to help provide useful information to such policyholders on retirement planning and to offer products that are competitive and respond to such policyholders’ needs.
Economic conditions Our results are affected by the levels of economic activity in our geographic markets and, consequently, by economic cycles in those markets. High levels of general economic activity typically result in high levels of demand for, and therefore sales of, our products and services. Economic activity in turn is affected by government monetary and fiscal policy as well as by global trading conditions and external shocks such as terrorist activity, war and oil price movements. During 2009, we saw improved economic activity across our regions and although customers continued to prefer cash deposits, we saw movement towards investment products resulting in increased investment sales, primarily across Europe and Asia.
During 2008 and the first half of 2009, the capital and credit markets experienced extraordinary and extended volatility and disruption. In the first quarter of 2009, the volatility and disruption reached levels not seen in many years, although the markets stabilised in the last quarter of 2009. The amount of investment variance improved to £75 million adverse in 2009 (2008: £1,631 million adverse) due to the recovery in investment markets. Positive variances on fixed interest assets in Europe and the United States, driven by the narrowing of credit spreads toward the end of the year, were offset by losses from equity derivatives in the Netherlands.
The level of bonuses declared to policyholders is influenced by the actual returns on investments and our expectation of future rates of return. While bonuses can never be negative, a predicted sustained fall in equity markets could lead to a reduction in annual and terminal bonus rates, and so reduce both policyholder returns and shareholders’ profit under IFRS. Over the early part of this decade, the combination of a decline in equity markets and the general outlook for lower interest rates led to reductions in annual bonus rates, and the corresponding shareholders’ share of profits. The subsequent recovery in equity markets over 2003-2007 led to a partial reversal of this trend. During 2008 and 2009 the worsening economic conditions have impacted on UK bonus levels but the annual effect of this for both policyholders and shareholders has been offset by the benefit from the one-off special bonus mentioned below.
Performance reviewAviva plc Financial and operating performance continued Corporate responsibilityAnnual Report and Accounts 2009 an annual basis. A special bonus distribution has been announced for policyholders of two of our UK with-profits funds, reflecting the financial strength of those funds, which has provided an uplift to IFRS profits in both 2008 and 2009 and will provide an uplift in 2010 of approximately £100 million.
General insurance and health underwriting cycle Our general insurance and health business is comprised of our property and casualty insurance and health insurance operations. In 2009, general insurance accounted for 29% of group net premiums written from continuing operations and 35% of our group operating earnings before interest and corporate costs respectively. Demand for general insurance is usually price-sensitive because of the limited degree of product differentiation inherent in the industry. As a result, the price of insuring property and casualty risks is subject to a cycle (called an underwriting cycle). In periods when the price of risk is high, the high profitability of selling insurance attracts new entrants and hence new capital into the market. Increased competition however drives prices down. Eventually the business becomes uneconomic and some industry players, suffering from losses, exit the market while others fail, resulting in lower capital invested within the market. Decreased competition leads to increasing prices, thereby repeating the cycle. Although our various general insurance markets are not always at the same stage of the underwriting cycle, price competition has been increasing within the UK and the rest of the world across most of our general insurance business lines in recent years. We are now seeing early evidence of increased rating discipline in the UK resulting from volatile investment markets.
We expect the underwriting cycle to continue to operate in the future but to be less pronounced than in the past because of structural changes to the industry over the past decade. Capital markets are imposing financial discipline by being increasingly more demanding about performance from insurance companies before extending new capital. Such discipline, together with the increased concentration of competitors within the market, recent natural disasters and the adoption of more scientific pricing methods is expected to make the underwriting cycle less pronounced in the future.
Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information weather-related losses and in 2009 the UK, Ireland and France were all impacted.
Government policy and legislation Changes in government policy and legislation applicable to our business in any of the markets in which we operate, particularly in the UK, may affect our results of operations. These include changes to the tax treatment of financial products and services, government pension arrangements and policies, the regulation of selling practices and the regulation of solvency standards. Such changes may affect our existing and future business by, for example, causing customers to cancel existing policies, requiring us to change our range of products and services, forcing us to redesign our technology, requiring us to retrain our staff or increase our tax liability. In the UK, the government has recently conducted a number of reviews of the long-term insurance and savings industry with the aim of promoting long-term insurance and saving by simplifying and reducing the cost of product offerings. As a global business, we are exposed to various local political, regulatory and economic conditions, business risks and challenges which may affect the demand for our products and services, the value of our investments portfolio and the credit quality of local counterparties. Our regulated business is subject to extensive regulatory supervision both in the UK and internationally. For details please refer to the section “Shareholder Information – Regulation”.
We generally do not hedge foreign currency revenues, as we prefer to retain revenue locally in each business to support business growth, to meet local and regulatory market requirements, and to maintain sufficient assets in local currency to match local currency liabilities.
Aviva plc Financial and operating performance continued Annual Report and Accounts 2009 we reported a foreign currency translation gain in other comprehensive income of £2,684 million as sterling weakened significantly against the euro and the dollar. During 2007, the currency translation gain was lower at £723 million.
The impact of these fluctuations is limited to a significant degree, however, by the fact that revenues, expenses, assets and liabilities within our non-UK operations are generally denominated in the same currencies.
Acquisitions and disposals Over the last three years we have engaged in a significant amount of acquisitions and disposals, some of which have had a material impact on our results. These transactions reflect our strategic objectives of maximising value for our shareholders by building top five positions in key markets, withdrawing from lines of business or markets that do not offer the potential for market-leading positions and taking advantage of particular opportunities as they arise.
Activity in 2009 On 1 October 2009, we completed the sale of our Australian life and pension business and wealth management platform to the National Australia Bank for A$902 million (£443 million). The sale supports Aviva’s strategy of focusing on the key growth markets in Asia where leading positions can be achieved.
On 3 November 2009, we completed the Initial Public Offering (IPO) of approximately 42% of Delta Lloyd N.V. raising €1.1 billion (£1 billion). The IPO enabled Aviva to monetise part of its holding in Delta Lloyd, giving Aviva greater financial flexibility, including the option to explore balance sheet restructuring and further growth opportunities. It will also enhance the value and liquidity of Aviva’s retained stake in Delta Lloyd.
Reattribution of inherited estate The “inherited estate” refers to the assets of the long-term with-profit funds less the realistic reserves for non-profit policies, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs and guarantees.
The reattribution of our inherited estate completed on 1 October 2009 following the High Court’s approval of the offer in September and final approval by the Aviva plc and Aviva UK Life boards. Our objective was always to create a reattribution that was fair to both shareholders and policyholders, making sure that customers had a choice of whether they wished to accept the offer, depending on their personal circumstances. As a result, over 87% of eligible policyholders voted during the election process, with 96% of these voting in favour of the offer. By the end of 2009, the majority of the £471 million reattribution payment had been distributed to those policyholders who accepted the offer.
As previously stated, from a shareholder perspective the reattribution is expected to enhance the cash flow profile of Aviva’s UK life business and will bring significant financial benefits. In return for the £471 million shareholders are expected to gain access to around £650 million of additional capital over five years, to fund new, non profit business.
The reattribution resulted in an IFRS operating loss of £5 million (being the net impact of the value of the estate, project costs, tax and the ‘Policyholder Incentive Payment’). In addition to this, investment earnings on reattributed assets and the surplus generated from the ‘New With-Profits SubFund ’ during the period 1 October to 31 December 2009 generated IFRS operating profits of £79 million. The after tax contribution was £51 million in 2009.
Basis of earnings by line of business Our earnings originate from three main lines of business: our long-term insurance and savings business, which includes a range of life insurance and savings products; fund management, which manages funds on behalf of our long-term insurance and general insurance businesses, external institutions, pension funds and retail clients; and general insurance and health, which focuses on personal and commercial lines. These lines of business are present in our various operating segments to a greater or lesser extent. In the UK, we have major long-term insurance and savings businesses and general insurance businesses; in Europe we have long-term insurance and savings businesses in all countries in which we operate, large general
The annual excess of premiums and investment return over operating expenses, benefit provisions and claims payments within our with-profits funds that is not distributed as bonuses and related shareholders’ profit, is transferred from the income statement to the unallocated divisible surplus. Conversely, if a shortfall arises one year, for example because of insufficient investment return, a transfer out of the unallocated divisible surplus finances bonus declarations and related shareholders’ profit.
Risk cover business includes term assurance, or term life insurance business. The risk of investing policy assets in this business is borne entirely by the shareholders. Operating earnings arise when premiums, and investment return earned on assets supporting insurance liabilities and shareholder capital, exceed claims costs, costs of acquiring new business and administration costs.
Fund management Fund management operating earnings consist of fees earned for managing policyholder funds and external retail and institutional funds on behalf of clients, net of operating expenses. Approximately 30% of our fund management operating earnings are derived from external clients. Arrangements for the management of proprietary funds are conducted on an arm’s length basis between our fund management and insurance businesses. Such arrangements exist mainly in the UK, France, the Netherlands, Ireland, Australia, US and Canada. Proprietary insurance funds in other countries are externally managed.
Financial highlights The following analysis is based on our consolidated financial statements and should be read in conjunction with those statements. In order to fully explain the performance of our business, we discuss and analyse the results of our business in terms of certain financial measures which are not based on IFRS “non-GAAP measures” which we use for internal monitoring and for executive remuneration purposes. We review these in addition to GAAP measures such as profit before and after tax.
Non-GAAP measures Sales The total sales of the group consist of long-term insurance and savings new business sales and general insurance and health net written premiums. We classify our long-term insurance and savings new business sales into the following categories: Long-term insurance and savings new business sales Sales of the long-term insurance and savings business consist of: Covered business or life, pensions and savings products: — Insurance and participating investment business
– For new business reporting in the UK, companies continue to report non-participating investment business within their “covered business” sales, in line with the historic treatment under UK GAAP.
Non-covered business or investment sales: — These include retail sales of mutual fund type products such as unit trusts and OEICs. — There is no insurance risk borne by the group therefore under IFRS, these are treated as deposits and investment management fee income is earned on the funds deposited. This is in line with their previous treatment under UK GAAP.
— These have never been treated as “covered business” for long-term insurance and savings reporting so we show these separately as investment sales.
Sales is a non-GAAP financial measure and key performance indicator that we report to our key decision makers in the businesses in order to assess the value of new business from our customers and compare performance across the markets in which we operate. We consider sales to be a critical indicator of new business, and is the basis on which we provide analysis of our results to our shareholders and analysts. The non-GAAP measure of sales is also used internally in the determination of bonus awards as an executive performance measure.
PVNBP is equal to total single premium sales received in the year plus the discounted value of annual premiums expected to be received over the terms of newly incepted contracts and is calculated as at the date of sale. We adjust annual premiums to reflect the expected stream of business coming from this new business over future years. In the view of management this performance measure better recognises the relative economic value of regular premium contracts compared to single premium contracts. PVNBP is a European insurance industry standard measure of new business.
— Better reflection of the relative economic value of regular premium contracts compared to single premium contracts: Sales recognise the economic value of all expected contractual cash flows for regular premium contracts in the year of inception, whereas IFRS net written premiums only recognise premiums received in the year.
In comparison to IFRS net written premiums, sales do not include premiums received from contracts in-force at the beginning of the year, even though these are a source of IFRS revenue, as these have already been recognised as sales in the year of inception of the contract. In addition, unlike IFRS net written premiums, sales do not reflect the effect on premiums of any increase or decrease in persistency of regular premium contracts compared to what was assumed at the inception of the contract.
Total sales 45,068 51,377 50,274 Less: Effect of capitalisation factor on regular premium long-term business (8,612) (9,893) (7,650) Share of long-term new business sales from
Performance reviewAviva plc Financial and operating performance continued Corporate responsibilityAnnual Report and Accounts 2009
— Share of long-term new business sales from joint ventures and associates: Total long-term new business sales include our share of sales from joint ventures and associates. Under IFRS reporting, premiums from these sales are excluded from our consolidated accounts, with only our share of profits or losses from such businesses being brought into the income statement separately.
— Deposits taken on non-participating investment contracts: Under IFRS, non-participating investment contracts are recognised on the statement of financial position by recording the cash received as a deposit and an associated liability and are not recorded as premiums received in the income statement. Only the margin earned is recognised in the income statement.
Adjusted operating profit We report to our chief operating decision makers in the businesses the results of our operating segments using a financial performance measure we refer to herein as “adjusted operating profit”. We define our segment adjusted operating profit as profit before income taxes and minority interests in earnings, excluding the following items: investment return variances and economic assumption changes on long-term and non long-term business, impairment of goodwill, amortisation and impairment of other intangibles (excluding the acquired value of in-force business), profit or loss on the disposal of subsidiaries and associates, integration and restructuring costs and exceptional items.
Adjusted operating profit for long-term insurance and savings business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. The expected rate of return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification. Where assets are classified as fair value through profit and loss, expected return is based on the same assumptions used under embedded value principles for fixed income securities, equities and properties. Where fixed interest securities are classified as available for sale, such as in the US, the expected return comprises interest or dividend payments and amortisation of the premium or discount at purchase. Adjusted operating profit includes the effect of variances in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed as nonoperating items.
United Kingdom 1,165 1,377 1,126 Europe 1,196 1,141 1,197 North America 213 149 229 Asia Pacific 77 36 37 Aviva Investors 115 114 147 Other (744) (520) (520)
Short-term fluctuation in return on investments on non-long-term business 95 (819) (184)
Economic assumption changes on general insurance and health business 57 (94) 2
The table below presents our consolidated income statement under IFRS for years ended 31 December 2009, 2008 and 2007.
Income Gross written premiums 34,690 36,206 30,991 Premiums ceded to reinsurers (2,576) (1,841) (1,658)
Net earned premiums 32,673 34,642 29,312 Fee and commission income 1,789 1,885 1,760 Net investment income/(expense) 24,972 (16,043) 9,689 Share of loss of joint ventures and associates (504) (1,128) (304) Profit on the disposal of subsidiaries
Sales Year ended 31 December 2009 Sales in 2009 were £45,068 million, a decrease of £6,309 million, or 12%, from £51,377 million in 2008. All regions reported a decrease in sales in 2009. Long-term insurance and savings and general insurance and health sales decreased by 24% in the UK with Europe reporting an increase of 6% in long-term insurance and savings sales offset by a 26% decrease in general insurance and health sales mainly attributable to the sale of the Delta Lloyd health business on 1 January 2009. North America long-term insurance and savings sales decreased by £1,170 million, offset by a 12% increase in general insurance sales in Canada. Asia Pacific reported a decrease in sales of 22% mainly attributable to the sale of the Australian business on 1 October 2009.
Net investment income Year ended 31 December 2009 Net investment income for the year was £24,972 million, an increase of £41,015 million (2008: £16,043 million loss). During 2009, investment markets across the regions in which we operated improved significantly from the falls in property and equity markets that were experienced in 2008.
Other income Year ended 31 December 2009 Other income (which consists of fee and commission income, share of (loss)/profit after tax of joint ventures and associates, and profit/(loss) on disposal of subsidiaries and associates) increased by £674 million to £1,438 million in 2009 (2008: £764 million). Profit/(loss) on disposal of subsidiaries and associates includes the sale of our Dutch health business and our Australian long-term insurance and savings business resulting in a profit of £153 million. The loss after tax of joint ventures and associates was £504 million, an increase on 2008 of £624 million from increasing property values from our property partnerships.
Year ended 31 December 2008 Other income decreased by £741 million to £764 million in 2008 (2007: £1,505 million). The decrease was mainly due to the share of losses in joint ventures and associates in the UK, where reduced property market values led to lower property partnership results.
Expenses Year ended 31 December 2009 Claims and benefits paid in 2009 were £27,549 million, a decrease of £1,804 million (2008: £29,353 million). The decrease in claims and benefits paid are a result of a fall in surrenders during the year and our Dutch healthcare business being sold as of 1 January 2009.
Changes in insurance liabilities in 2009 were a charge of £5,682 million, an increase of £9,567 million (2008: £3,885 million credit). The unfavourable movement is a result of new business provision and the impact of the euro against sterling.
The change in investment contract provisions of £11,185 million charge (2008: £10,629 million credit) is a result of improved investment markets across our regions resulting in increases in our contract liabilities the impact of the euro against sterling.
Unallocated divisible surplus charge of £1,547 million (2008: £4,482 million credit) reflects the narrowing of investment spread on participating assets and related liabilities. In 2008, a negative balance in Spain created a charge of £203 million of which £159 million was reversed in 2009 with the remaining balance expected to be recovered in 2010.
Fee and commission expense, other expenses and finance costs of £11,098 million decreased by £276 million or 2% from £11,374 million in 2008. Lower staff costs and impairment charges were offset by higher exceptional costs following the reattribution of the inherited estate in the UK – see “Financial Statements – Note 6 – Details of expenses”.
The change in investment contract provisions in 2008 was a credit of £10,629 million (2007: charge of £2,018 million). The variance of £12,647 million from the prior year reflects the reduction in investment contract provisions as a result of lower new business and unrealised losses on investments. The change in the unallocated divisible surplus in 2008 was £1,560 million more than the prior year with a credit of
Amortisation of intangibles increased by £27 million to £144 million in 2009 (2008: £117 million) on higher levels of bancassurance and other distribution agreements held within the Group.
Profit on disposal of subsidiaries and associates were £153 million. The profit comprises £31 million from the sale of our Dutch Health Insurance business and £122 million from the sale of our Australian life and pensions business.
Integration and restructuring costs for 2009 were £286 million (2008: £326 million). This includes £210 million for the cost savings initiatives in the UK life and general insurance businesses and Europe, which have delivered £170 million annualised cost savings in the year.
Exceptional items for 2009 amounted to £45 million favourable (2008: £551 million adverse). This includes an exceptional gain resulting from the reattribution of the inherited estate offset by strengthening of reserves in respect of several specific discontinued commercial liability risks written in Canada a significant number of years ago and the migration of all remaining local brands, except Delta Lloyd and RAC, to the single global Aviva brand, which has been implemented over the two-year period 2008 to 2009.
Amortisation of intangibles increased by £14 million to £117 million in 2008 (2007: £103 million). This increase reflected the higher level of bancassurance and other distribution agreements held within the Group following new agreements entered into during 2007.
Profit on disposal of subsidiaries and associates was £7 million in 2008. The profit comprises £14 million from the sale of the Group’s offshore operations to WNS (Holdings) Limited and £31 million from other small operations, offset by £38 million loss on the disposal of HPI Limited to Solera Holdings Inc., and RAC Autowindscreens Limited to Arques Management GmbH.
Integration and restructuring costs were £326 million in 2008 (2007: £153 million). This includes £287 million for the cost savings initiatives in the UK life and general insurance businesses and Europe, which have delivered £340 million annualised cost savings in the year. Also included were integration costs of £39 million which mainly relate to the work to set up our global asset management operation, Aviva Investors.
Exceptional items for 2008 were £551 million. These included £142 million for the cost of transferring the lifetime wrap platform to a third-party supplier, write-down in preparation for sale of the British School of Motoring in the UK and closure of the structured settlement business in the US. The costs also included £304 million after reinsurance for the discounted cost of strengthening our latent claims provisions, mainly in the UK, and £126 million for the settlement agreed by our Netherlands life business for its unit-linked policyholders, following an industry-wide challenge on the level of fees. The remaining balance relates to brand migration costs of £37 million offset by £58 million benefit from settlement of a disputed Australian tax liability and the consequent release of a provision for interest charges.
Regional performance United Kingdom Our operations in the UK consist of long-term insurance and savings business, which provides products such as bonds and savings, pensions, protection, annuities, equity release and investment products, including both with-profits and non-profit business, and our general insurance and health business, which provides a range of general and health insurance products focused on personal and business customers, such as household, motor and liability insurance.
The table below presents sales, net written premiums, adjusted operating profit and profit/(loss) before tax attributable to shareholders’ profits under IFRS from our UK long-term business for the years ended 31 December 2009, 2008 and 2007.
Protection 965 1,126 1,241 Pensions 3,752 4,753 4,156 Annuities 1,897 2,433 1,965 Bonds 2,024 3,296 4,192 Equity release 276 250 243 Investment sales 1,049 1,485 2,751
Year ended 31 December 2009 Sales in our UK long-term insurance and savings business decreased by £3,380 million, or 25%, to £9,963 million (2008: £13,343 million). Protection sales have decreased by 14% as a result of regulatory changes affecting creditor sales volumes. Pension sales decreased by 21% due to the reduced number of large schemes written in the year. Annuities decreased by 22% due to lower bulk purchase annuity volumes, bonds decreased 39% and investment sales decreased by 29%. Equity release showed an increase of 10%.
Performance reviewAviva plc Financial and operating performance continued Corporate responsibilityAnnual Report and Accounts 2009 annuities showed an increase of 17% on 2007, with equity release up by 3% on 2007.
Net written premiums in our UK long-term insurance and savings business were £7,107 million in 2008, an increase of £1,830 million, or 35%, from £5,277 million in 2007. The increase was primarily driven by bulk purchase annuity and pension sales.
Adjusted operating profit in our UK long-term insurance and savings business increased by £20 million, or 3%, to £733 million in 2008 (2007: £713 million). This increase was driven by the £124 million profit relating to the shareholder proportion of the special bonus distribution announced in February 2008. The prior year result included a £167 million benefit from the reduction of the reserving levels permitted under new rules in the UK. Underlying earnings were up £84 million reflecting the cumulative benefits of the recent efficiency programmes of £65 million and lower new business strain.
Loss before tax in our UK long-term insurance and savings business was £149 million in 2008, a decrease of £713 million from £564 million profit in 2007. This decrease mainly reflects the £550 million provision for credit defaults and £97 million for the cost of transferring the investment wrap platform to a third party supplier offset by the increase in adjusted operating profit explained above.
General insurance and health The table below presents sales, net written premiums, adjusted operating profit and profit/(loss) before tax attributable to shareholders’ profits under IFRS from our UK general insurance and health business for the years ended 31 December 2009, 2008 and 2007.
Year ended 31 December 2009 UK general insurance and health net written premiums were £4,298 million, a decrease of £1,115 million, or 21%, on 2008 (2008: 5,413 million). The decrease reflects a combination of the actions taken to exit unprofitable business and difficult market conditions, most notably in creditor due to lower levels of lending, and commercial due to more business failures, fewer start-ups and reduced levels of exposure.
Adjusted operating profit in 2009 was £535 million, a decrease of £121 million, or 18% (2008: £656 million). The decrease in adjusted operating profit is a result of a decline in long-term investment returns, an increase in creditor claims resulting from the recession and a reduction in savings on prior year claims development to £105 million (2008: £285 million).
Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information distributor response to the issues with payment protection insurance and the decline in lending.
Europe Aviva Europe operates in 12 businesses across Europe with substantial long-term insurance and savings businesses in France, Italy, Ireland, Poland and Spain. We also have large general insurance businesses in France and Ireland as well as smaller operations in Italy, Poland and Turkey. Our Europe fund management operations are managed by Aviva Investors, except in Poland which has transferred to Aviva Investors from 1 January 2010.
Delta Lloyd operations include long-term insurance and savings, general insurance and fund management.
The table below presents sales and net written premiums from our operations in Europe for the years ended 31 December 2009, 2008 and 2007.
General insurance and health France 952 882 733 Ireland 474 513 474 Other Europe 457 417 308
Adjusted operating profit Long-term insurance and savings business France 272 275 243 Ireland 50 61 73 Italy 128 48 78 Poland (including Lithuania) 152 162 110 Spain 160 155 119 Other Europe (1) (16) (27)
Net written premiums in 2009 increased by £1,730 million or 12% to £16,796 million (2008: £15,066 million).
Aviva Europe Aviva Europe reported an increase in long-term insurance and savings sales of £1,060 million, or 8%, to £14,375 million (2008: £13,315 million) largely due to the strengthening of the euro against sterling. Life and pension sales contributed £668 million to the increase in long-term insurance and savings sales with £392 million from investment sales. Both France and Italy reported increases in life and pension sales of 26% and 55%, respectively, with all other markets reporting a decrease in sales. Poland sales were 41% down reflecting the impact of pension legislation changes and special promotions in 2008.
General insurance and health sales increased by 4% to £1,883 million (2008: £1,812 million) primarily due to increased sales in France and other European markets, offset by an 8% fall in sales in Ireland.
Net written premiums in long-term insurance and savings businesses were £10,572 million, an increase of £3,201 million, or 43% (2008: £7,371 million) driven by France and Italy. Sales in France have increased through AFER and Italy reported an increase in sales of profit sharing single premium products.
Adjusted operating profit was £399 million, an increase of £89 million on £310 million in 2008. Improved profits in the long-term and savings business resulted from lower new business strain, driven by a decrease in corporate pension sales, expense savings, and strengthening of the euro.
Year ended 31 December 2008 Total Europe sales in 2008 increased by £1,356 million or 6% to £21,806 million (2007: £20,488 million), with increases in both long-term insurance and savings business and general insurance largely due to the strength of the euro against sterling.
Europe’s general insurance and health net written premiums were £4,090 million in 2008, an increase of £858 million, or 27%, from £3,232 million in 2007. The increase in the sales result was driven by the strengthening of the euro, as well as competitively priced health products sold through our Dutch business and strong sales in Italy through our
Europe adjusted operating profit in 2008 was £1,141 million, a decrease of 5% or £56 million from £1,197 million.
In Europe, adjusted operating profit of our general insurance and health businesses was £397 million in 2008, a decrease of £45 million, or 10%, over £442 million in 2007, due to increased price competition across a number of countries, particularly in Ireland and the Netherlands. This was partly offset by the development of new distribution channels, product launches in the year across a number of our businesses and the strengthening of the euro.
North America Aviva North America includes the long-term insurance and savings business in the US, which provides life insurance and annuity products, and the general insurance business in Canada.
Adjusted operating profit was £213 million, an increase of £64 million, or 43%, on 2008 (2008: £149 million). Long-term insurance and savings adjusted operating profit increased to £85 million (2008: £16 million) driven by improved investment margin earned on existing equity indexed annuity business. General insurance adjusted operating profit is in line with 2008 at £144 million (2008: £145 million) with the benefits of increased sales volumes, higher long-term investment return, cost savings and foreign exchange movements being offset by the adverse movement in the claims experience.
Year ended 31 December 2008 Sales in Aviva North America in 2008 increased by £2,258 million or 45% to £7,316 million (2007: £5,058 million). This increase reflected higher US long-term insurance and savings business sales, driven by improved annuity sales, reflecting our expanded distribution, new product launches and successful marketing programmes. General insurance sales in Canada increased by 13% to £1,601 million, with growth across all lines and sales through the acquisition of National Home Warranty in July 2008.
Adjusted operating profit in Aviva North America was £149 million in 2008, a decrease of £80 million, or 35%, from £229 million in 2007. This is driven by lower annuity margins and lower yield on variable rate investments. Annuity margins were adversely impacted by increased option costs and lower account value, driven by underperformance of the equity markets and higher lapse rates. In our Canadian general insurance business the result was impacted by favourable prior year development, which was offset by difficult market conditions in the insurance cycle, weather related costs, higher expenses and lower investment income as a result of the sale of equities undertaken in the latter half of 2007.
The table below presents the sales, net written premiums, adjusted operating profit and profit/(loss) before tax attributable to shareholders’ profits under IFRS of Aviva Asia Pacific for the years ended 31 December 2009, 2008 and 2007.
Overall sales in Asia declined in 2008 as a result of volatile investment markets, particularly in Hong Kong and Singapore. This was partly offset by growth in long-term insurance and savings business sales in China, due to the expansion of the distribution network, and first time contributions from new ventures in South Korea and Taiwan.
Sales in Australia also decreased largely due to the benefit in 2007 of a one-off transfer of a group pension scheme and the favourable change in superannuation legislation, which impacted both long-term insurance and savings sales and investment sales.
The table below presents the adjusted operating profit, profit before tax attributable to shareholders’ profits under IFRS and funds under management of Aviva Investors for the years ended 31 December 2009, 2008 and 2007.
Profit before tax attributable to shareholders’ profits was £91 million, an increase of £19 million, or 25%, on 2008 (2008: £72 million). Profit in 2009 benefited from lower integration and restructuring costs on the set-up of Aviva Investors.
Performance reviewAviva plc Financial and operating performance continued Corporate responsibilityAnnual Report and Accounts 2009 was mainly due to the decline in investment markets and the integration and restructuring costs of setting up Aviva Investors. Aviva Investors’ funds under management were £236 billion in 2008, an increase of £1 billion, or less than 1%, from £235 billion in 2007. The increase was mainly due to exchange gains as sterling declined against other major currencies towards the end of the year, increasing the value of our non-sterling investments, offset by market factors where the fall in equity and property capital values and outflows from some openended property funds.
The group debt costs and other interest increased to £636 million, an increase of £257 million on 2008 of £379 million. External interest costs increased to £335 million (2008: £286 million) reflecting higher interest on subordinated debt, due to hybrid debt being issued in 2008 and 2009, which was offset by lower commercial paper interest as proceeds from the issue were used to repay some commercial paper. Internal interest costs increased to £227 million (2008: £197 million) driven by changes to our internal loan balances.
The net pension charge of £74 million (2008: £104 million income) represents the difference between the expected return on pension scheme assets and the interest charged on pension scheme liabilities. The increase is primarily due to lower rates of return on asset values offset by higher discount rates on liabilities.
Year ended 31 December 2008 The corporate centre costs for 2008 decreased to £141 million (2007: £157 million) due to lower central spend and staff incentive costs. Within this total are project spend costs totalling £34 million (2007: £26 million). The increase in project spend was driven by the corporate centre’s share of the ongoing implementation of the global finance strategy. The decrease in corporate centre spend is partly explained by increased costs being borne by the operating segments, as certain corporate centre activities and costs have either been transferred or recharged to regional offices.
For additional information on our financial investments, please see “Financial statements IFRS – Note 24 – Financial investments”. For a quantitative analysis of funds under management by Aviva and third-party fund managers, see ‘Financial statements IFRS – Note 58 – Assets under management’.
Long-term insurance and savings business As stated above, we aim to optimise investment returns while ensuring that sufficient assets are held to meet future liabilities and regulatory requirements. As different types of life insurance business vary in their cash flows and in the expectations placed upon them by policyholders, we need to hold different types of investment to meet these different cash flows and expectations.
Annuities and non-participating contracts, on the other hand, have a high level of guaranteed future payments. We endeavour to match the investments held against these types of business to future cash flows. We therefore have a policy of generally holding fixed income securities and mortgage loans with appropriate maturity dates.
Property partnerships As part of their investment strategy, the UK and certain European policyholder funds have invested in a number of property limited partnerships (PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The nature of our involvement in property partnerships is set out in the second and third paragraphs of the Investment vehicles section of “Financial Statements IFRS – Accounting policies – (C) Consolidation principles”. Property partnerships are accounted for as subsidiaries, joint ventures or financial investments depending on our participation and the terms of each partnership agreement. For each property partnership accounted for as a subsidiary, joint venture or financial investment, we are exposed to falls in the value of the underlying properties which are reflected as unrealised gains/losses on investment properties, our share of joint venture results and unrealised gains/losses on financial investments, respectively. However, these are all in policyholder funds (rather than shareholder funds) so such losses are offset by changes in the amounts due to policyholders or unitholders, or in the Unallocated Divisible Surplus (UDS).
Performance reviewAviva plc Analysis of investments continued Corporate responsibilityAnnual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
Investment property 3,941 6,338 2,151 12,430 (8) 12,422 Loans 1,468 7,543 32,068 41,079 — 41,079 Financial investments
As the table indicates, 34% of total investments can be directly attributed to shareholders. The apportionment of our shareholder assets is predominantly weighted towards debt securities and loans. In comparison, policyholder and participating funds contain a greater proportion of investment property, equities, and other investments (eg, unit trusts), reflecting the underlying investment mandates.
Amortised Amortised Amortised Fair value cost Total Fair value cost Total Fair value cost Total £m £m £m £m £m £m £m £m £m
Investment property 12,430 — 12,430 14,426 — 14,426 15,391 — 15,391 Loans 20,890 20,189 41,079 21,468 20,769 42,237 18,540 17,653 36,193 Financial investments
Debt securities 160,510 — 160,510 150,734 — 150,734 121,591 — 121,591 Equity securities 43,343 — 43,343 43,411 — 43,411 59,065 — 59,065 Other investments 34,849 — 34,849 36,511 — 36,511 36,500 — 36,500
For more information about financial investments analysed according to their accounting classification and valuation approach, as well as the cost, unrealised gains and losses, impairments, fair value and other information concerning financial investments, see the “Financial Statements IFRS – Note 24 – Financial investments”.
Debt securities We grade debt securities according to current external credit ratings issued. The credit rating used for each individual security is the second highest of the available ratings from Standard & Poor’s, Moody’s and Fitch. If a credit rating is available from only one of these three rating agencies then this rating is used. If an individual security has not been given a credit rating by any of these three rating agencies, the security is classified as “non-rated”.
Despite the increase in market downgrade activity during 2008 and 2009, debt securities with a credit rating of A or above at 31 December 2009 still represented 81.6% of total holdings (2008: 86.3%). Approximately 43% of total debt security holdings were in government bonds and 34% of total debt security holdings were in corporate bonds with a credit rating of A or above, as of 31 December 2009.
“Wrapped credit” is credit exposure that has been insured with monoline insurers to achieve a better credit rating. The monoline insurers suffered downgrades during 2008 and 2009 and this is reflected in the analysis that follows. The exposure is diversified across several monolines and the underlying bonds are diversified across many different counterparties. In general, we are a long-term holder of this debt, although we continue to review our holdings with reference to the underlying quality and prospects.
The vast majority of the corporate bonds that are not rated represent private placements and corporate bond investments made via unit trusts, where a “look-through” to the underlying securities has been performed. The private placements are US investments which are not rated by the major rating agencies but are rated an average equivalent of A- by the Securities Valuation Office of the National Association of Insurance Commissioners (NAIC), a US association of state insurance regulators.
Government UK government 20,069 1,354 — — — — 21,423 UK local authorities — 16 — — — — 16 Non-UK government 25,189 11,787 7,566 1,814 410 710 47,476
Corporate Public Utilities 696 721 3,680 1,215 246 72 6,630 Convertibles and bonds with warrants — 26 362 95 50 53 586 Other corporate bonds 10,440 11,973 26,201 15,029 2,682 3,018 69,343
CMBS1 1,350 266 245 91 84 4 2,040 ABS2 1,256 282 372 164 37 276 2,387 CDO (including CLO) 69 18 17 10 71 56 241 ABCP3 — 836 — — — — 836 ABFRN4 — — — — — — —
2008 66,298 24,452 39,308 12,750 2,197 5,729 150,734 2008 % 44.0% 16.2% 26.1% 8.4% 1.5% 3.8% 1. CMBS – Commercial Mortgage Backed Security 2. ABS – Asset Backed Security 3. ABCP – Asset backed commercial paper 4. ABFRN – Asset backed floating rate notes
Government UK government 5,085 257 — — — — 5,342 UK local authorities — — — — — — — Non-UK government 1,425 589 978 226 6 40 3,264
Aviva plc Analysis of investments continued Annual Report and Accounts 2009
Government UK government 12,318 1,097 — — — — 13,415 UK local authorities — — — — — — — Non-UK government 15,734 9,004 4,167 728 279 59 29,971
Government UK government 2,666 — — — — — 2,666 UK local authorities — 16 — — — — 16 Non-UK government 8,030 2,194 2,277 1,004 125 611 14,241
In respect of the wrapped credit investments, the table below shows the credit rating of the underlying securities, ie without the guarantee. As rating agencies do not provide credit ratings for individual wrapped credit securities without consideration of the insurance guarantee, the credit ratings disclosed in the table below for wrapped credit without the benefit of the insurance guarantee is based on the long-term issuer credit ratings for unsecured corporate debt of the issuer, where this information is available.
Public Utilities Banks, trusts and insurance companies Industrial miscellaneous and all other Non-redeemable preferred shares
Property Our global headquarters are located in St. Helen’s, 1 Undershaft, London, England. We also have the following regional headquarters: — UK – UK Life: York, England — UK – UK General Insurance: Norwich, England — Europe – London, England — North America – Chicago, Illinois, USA — Asia Pacific – Singapore — Aviva Investors – London, England
At Aviva, sound risk management is a key component of our business and is an integral part of maintaining financial stability for our customers, shareholders and other stakeholders. We group the type of risks we face into three categories: financial, strategic, and operational. — Financial risks cover market and credit risk, insurance risk, liquidity and capital management.
Performance reviewAviva plc Risk management continued Annual Report and Accounts 2009
We employ effective processes to identify, assess, mitigate, manage and monitor the risks to which we are exposed. We make appropriate decisions to limit and control the impact the risks may have on our strategic objectives.
We set limits to manage our material risks to ensure we stay within our risk appetite (the amount of risk we are willing to accept). To work out how “material” a risk is to our business we assess its size and scale based on how likely it is to occur and what potential impact it would have on our business and our stakeholders if it were to occur. Most importantly, when risks are outside of appetite, we agree what actions need to be taken to manage the risks.
What risk management activity happens in Aviva? To ensure that risks are effectively identified and assessed and that appropriate controls and responses are in place, our risk management activity needs to operate through clearly defined and agreed structures and processes.
At Aviva, we support and coordinate all group-wide risk management activities through a central risk team, led by the group chief risk officer. In each of our regions, regional chief risk officers ensure that the regional risk profiles remain within the limits set centrally.
Board — Set strategic objectives — Monitor performance — Set and uphold values
Region — Oversee risk management — Monitor regional risk profile — Operate in line with policy — Report to Group
These committees monitor the aggregate risk profile, provide challenge and recommend risk management activity and ensure that our ris0k policies are used to manage risk to agreed standards.
Board oversight is maintained on a regular basis through its Risk and Regulatory Committee (RRC). The group chief risk officer is a member of the Group Executive Committee and has a reporting line to the group chief executive and to the RRC with access to the RRC chairman, assuring independence of the function.
— Impact of market conditions on sales of investment products and our fund management business
— Products sold by the group that carry investment return and surrender value guarantees
— Insufficient capital generated from the receipt of premiums, fees and Liquidity investment income, along with planned asset sales and maturities to pay Risk of not maintaining sufficient financial resources to meet claims and expenses our business obligations as they fall due — Instances where additional cash requirements arise in excess of that available within operating businesses — Mismatches in the timing of cash flows relating to assets, liabilities and off balance sheet instruments
— Our largest general insurance risk is claims incurred from catastrophic events, such as flooding and windstorm
— Expense experience compared with assumptions at the start of the insurance policy
— A 1% increase in interest rates would decrease total shareholder funds by £1.3 billion net of tax on an IFRS basis and by £0.6 billion net of tax on an MCEV basis
— We expect that a 40% fall in equity prices (at 31 December 2009) would reduce IGD by £0.7 billion.
— Use of currency borrowings and derivatives to manage currency exposures within centrally set limits
— A 50 bps increase in credit spreads would increase shareholder funds by £0.3 billion net of tax on an IFRS basis and would decrease embedded value by £0.8 billion on a net of tax MCEV basis.
— The Liquidity stress tests performed and the size of the liquidity — Asset liability matching methodology develops optimal asset portfolio buffer held to cover unforeseen circumstances maturity structures in our businesses to ensure cash flows are sufficient to meet liabilities — Regular monitoring through liquidity stress and scenario testing — Sale of assets from investment portfolios, issuing commercial paper — Maintain committed borrowing facilities (£2.1 billion) from highly rated banks
— A 5% increase in gross loss ratios for our general insurance and health business reduces shareholders funds by £345 million on a pre-tax IFRS basis
— Regular reviews by Life insurance committee — Monitor longevity statistics compared with emerging industry trends and use of reinsurance solutions — Use of reinsurance solutions to mitigate mortality and morbidity risks — Guidelines to support businesses through complete cycle of product design, development and pricing — Regular monitoring of expense assumptions — Guidelines on persistency management apply best practice across the group
— How responsive we are to changes in the external environment that may provide opportunities or cause strategic risks
— Impact of the challenging economic environment and volatile financial markets
— Strategic review and planning process — Developments assessed during our performance management process — Maintaining a diverse distribution model and review of concentrations by channel, product, country or customer group — Challenging developments that could be damaging to our business and the industry as a whole
— Building long-term relationships with our customers and attracting new customers to Aviva
— Regular reviews by the group corporate reputation committee — Building our brand prominence and regularly monitoring brand metrics — Delivering a truly exceptional experience to our customers and treating customers fairly in line with the FSA principles — Monitor metrics including customer advocacy, retention and complaints
— Increasing our efficiency and reducing complexity — Framework of corporate responsibility, policies and business ethics code — Levels of investment and operating performance — Procedures to record properly and verify a large number of events — Capabilities across our organisation — Significant resources devoted to maintaining efficient and effective operations 1. IFRS sensitivities are shown gross of minority interest.
Contractual obligations Contractual obligations with specified payment dates at 31 December 2009 included the following: Between Between Less one and three After than one three and five five year years years years £m £m £m £m Total
Borrowings 1,336 1,244 1,751 23,613 27,944 Operating lease obligations 145 408 55 834 1,442 Capital commitments 133 93 47 52 325 Payables and other financial liabilities5 20,095 357 93 441 20,986 Net asset value attributable to unitholders 9,894 — — — 9,894
2. All linked contracts and almost all non-linked investment contracts may be surrendered or transferred on demand. For such contracts the earliest contractual maturity is therefore at the current statement of financial position date, for a surrender amount approximately equal to the current statement of financial position liability. Although we expect surrenders, transfers and maturities to occur over many years, the total liability for non-linked investment contracts is shown in the Within 1 year column above.
Capital management Capital management objectives Aviva’s capital management philosophy is focused on capital efficiency and effective risk management to support the dividend policy and earnings per share growth. Overall capital risk appetite is set and managed with reference to the requirements of a range of different stakeholders including shareholders, policyholders, regulators and rating agencies. In managing capital we seek to: — maintain sufficient, but not excessive, financial strength to support new business growth and satisfy the requirements of our regulators and other stakeholders thus giving both our customers and shareholders assurance of our financial strength: — optimise our overall debt to equity structure to enhance our returns to shareholders, subject to our capital risk appetite and balancing the requirements of the range of stakeholders; — retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit facilities and access to a range of capital markets; — allocate capital rigorously across the group, to drive value adding growth in accordance with risk appetite; and
Strategic capital allocation initiatives A number of key strategic initiatives have been delivered in the last quarter of 2009 which have significantly enhanced the Group’s capital position and financial flexibility.
On 1 October 2009 Aviva announced the completion of the sale of its Australian life business and wealth management platform. The total proceeds of the Australian sale were £0.4 billion (A$0.9 billion). The sale of the business benefited group IGD by £0.4 billion.
On 3 November 2009 Aviva announced the completion of the Delta Lloyd initial public offering (IPO) and the shares commenced trading on the Euronext Amsterdam. The IPO raised gross proceeds of £1.00 billion (€1.09 billion), including the 10% over-allotment option, and generated an IGD benefit of £0.5 billion.
Long-term savings 20,693 19,440 General insurance and health 4,562 5,516 Fund management 269 340 Other business (246) (199) Corporate1 (34) (30)
Financed by: Equity shareholders’ funds 13,035 13,162 Minority interest 4,237 3,080 Direct capital instruments 990 990
Subordinated debt 4,637 4,606 External debt 852 919 Net internal debt2 1,293 2,110 25,244 25,067 1. The “corporate” net liabilities represent the element of the pension scheme deficit held centrally. 2. In addition to our external funding sources, we have certain internal borrowing arrangements in place which allow some of the assets that support technical liabilities to be invested in a pool of central assets for use across the group. These internal debt balances allow for the capital allocated to business operations to exceed the externally sourced capital resources of the group. Net internal debt represents the balance of the amounts due from corporate and holding entities, less the tangible net assets held by these entities. Although intra-group in nature, they are included as part of the capital base for the purpose of capital management. These arrangements arise in relation to the following: – Certain subsidiaries, subject to continuing to satisfy stand alone capital and liquidity requirements, loan funds to corporate and holding entities. These loans satisfy arm’s length criteria and all interest payments are made when due.
At 31 December 2009 we had £25.2 billion (31 December 2008: £25.1 billion) of total capital employed in our trading operations, measured on an MCEV basis. Over the period the benefit of operating profits and investment gains have been offset by foreign exchange losses and actuarial losses on staff pension schemes.
Regulatory bases Individual regulated subsidiaries measure and report solvency based on applicable local regulations, including in the UK the regulations established by the Financial Services Authority (FSA). These measures are also consolidated under the European Insurance Groups Directive (IGD) to calculate regulatory capital adequacy at an aggregate group level, where we have a regulatory obligation to have a positive position at all times. This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in the UK and Ireland with-profit life funds. The minimum solvency requirement for our European businesses is based on the Solvency 1 Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked life reserves respectively and for our general insurance portfolio of business is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our major nonEuropean businesses (the US, and Canada) a risk charge on assets and liabilities approach is used.
The EU Insurance Groups Directive (IGD) regulatory capital solvency surplus has increased by £2.5 billion since 31 December 2008 to £4.5 billion. This increase reflects a combination of operating and market performance as well as the benefit of a number of strategic initiatives. Following individual guidance from the FSA in 2008 we now recognise surpluses in the non-profit funds of our UK life and pensions business which is available for transfer to shareholders of £0.2 billion (31 December 2008 £0.4 billion). The IGD is a pure aggregation test with no credit given for the considerable diversification benefits of Aviva.
These levels of required capital are used in the calculation of the group’s embedded value to evaluate the cost of locked in capital. At 31 December 2009 the aggregate regulatory requirements based on the EU minimum test amounted to £6.1 billion (31 December 2008: £6.0 billion). At this date, the actual net worth held in our long-term business was £9.8 billion (31 December 2008: £9.5 billion) which represents 159% (31 December 2008: 157%) of these minimum requirements.
Regulatory basis – UK Life with-profit funds The available capital of the with-profit funds is represented by the realistic inherited estate. The estate represents the assets of the long-term with-profit funds less the realistic liabilities for non-profit policies within the funds, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs, guarantees and promises. Realistic balance sheet information is shown below for the three main UK with-profit funds: Old With-Profit Sub-Fund (OWPSF), New With-Profit Sub-Fund (NWPSF) and UK Life and Pensions (UKLAP). These realistic liabilities have been included within the long-term business provision and the liability for insurance and investment contracts on the consolidated IFRS balance sheet at 31 December 2009 and 31 December 2008.
Aggregate 44.5 (42.7) 1.8 1.1 (0.8) 2.1 1.1 1. These realistic liabilities include the shareholders’ share of future bonuses of £0.6 billion
(31 December 2008: £0.8 billion). Realistic liabilities adjusted to eliminate the shareholders’ share of future bonuses are £42.1 billion (31 December 2008: £43.2 billion). These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £0.3 billion, £2.2 billion and £3.1 billion for OWPSF, NWPSF and UKLAP respectively (31 December 2008: £1.4 billion, £1.5 billion and £4.1 billion).
2. Estimated realistic inherited estate at 31 December 2008 was £0.7 billion, £0.7 billion and £1.2 billion for CGNU Life, CULAC and UKLAP respectively.
4. The UKLAP fund includes the Provident Mutual (PM) fund which has realistic assets and liabilities of £1.7 billion, and therefore does not impact the realistic inherited estate.
5. This represents the reattributed estate of £1.1 billion at 31 December 2009 held within the non-profit fund with UKLAP included within other UK life operations.
Investment mix The aggregate investment mix of the assets in the three main with-profit funds at 31 December 2009 was: Equity 21% 24% Property 12% 12% Fixed interest 59% 56% Other 8% 8%
The group’s overall financial strength is reflected in our credit ratings. The group’s rating from Standard and Poor’s is AA- (very strong) with a Negative outlook; Aa3 (excellent) with a Negative outlook from Moody's; and A (“excellent”) with a Stable outlook from A M Best . These ratings continue to reflect our strong competitive position, positive strategic management, strong and diversified underlying earnings profile and robust liquidity position.
This model is used to support our Individual Capital Assessments (ICA) which are reported to the FSA for all our UK regulated insurance businesses. The FSA uses the results of our ICA process when setting target levels of capital for our UK regulated insurance businesses. In line with FSA requirements, the ICA estimates the capital required to mitigate the risk of insolvency to a 99.5% confidence level over a one-year time
Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information horizon (equivalent to events occurring in 1 out of 200 years) against financial and non-financial tests.
Standards basis) — Proposed ordinary dividend per share and dividend cover — Operating profit (Market Consistent Embedded Value basis) — Operating profit (IFRS basis) — Worldwide sales — Return on equity shareholders’ funds
Management also use a variety of other performance indicators (OPIs) in both running and assessing the performance of individual business segments and units, rather than the group as a whole. OPIs include measures such as new business margins, combined operating ratio and underwriting profit.
Forward-looking statements This business review contains “forward-looking statements” about: — Our future plans — Our current goals — Our expectations of our future financial condition, performance and results
Consequently, our actual future financial condition, performance and results could differ materially from the plans, goals and expectations set out in our forward-looking statements. We undertake no obligation to update the forwardlooking statements contained in this review or any other forward-looking statements we make.
Accounting basis of preparation International Financial Reporting Standards (IFRS) Our consolidated financial statements are prepared under IFRS, using standards issued by the International Accounting Standards Board (IASB) and endorsed by the EU. In addition to fulfilling this legal obligation, the group has also complied with IFRS as issued by the IASB and applicable at 31 December 2009.
Market Consistent Embedded Value (MCEV) basis of reporting We present the results and financial position of our life and related businesses on an MCEV basis, in addition to the IFRS basis. MCEV methodology represents a more meaningful basis of reporting the value of the group’s life and related businesses and the drivers of performance than IFRS methodology. This basis values cashflow from assets consistently with market prices and is consistent with the way pricing is assessed and the business is managed.
Longer-term investment return The long-term nature of most of our operations means that short-term realised and unrealised gains and losses are shown as an adjustment to operating profit. We focus instead on operating profit incorporating a longer-term investment return (LTIR). Our rates of return that we use for equity and property in our LTIR methodology are aligned with the rates that we use under MCEV principles. For fixed interest securities, we include the amortisation of premiums or discounts arising on purchase, thereby producing an LTIR that is equivalent to the gross redemption yield.
Critical accounting policies and estimates The preparation of financial statements requires the group to select accounting policies and make estimates and assumptions that affect items reported in the consolidated income statement, consolidated statement of financial position, other primary statements and notes to the financial statements. These are set out on pages 130 to 142.
Accounting Future accounting developments Item policy We continue to take an active role in the development of new Insurance and participating investment contract liabilities Goodwill, AVIF and other intangible assets Fair values of financial investments Impairment of financial investments Fair value of derivative financial instruments Deferred acquisition costs and other assets Provisions and contingent liabilities Pension obligations Deferred income taxes
F & K accounting standards, via industry forums and working parties, N and reviewing and providing comment on proposals from the S
W us, and we continue actively to engage in the debate. We fully Z support the timely development of a global standard for
AA insurance accounting that reflects the economics of our AB business, and are working directly and through the CFO Forum of leading European insurers, to achieve this. While this standard is under development, we will continue to focus on MCEV as the best measure of value for our long-term business. We continue to monitor other major IASB projects, including financial statement presentation, liabilities, revenue recognition, pensions accounting and fair value measurement.
Highlights from 2009 include: — Executive directors’ remuneration based on financial outcomes and targets related to customer advocacy and employee leadership and engagement
Strategy and governance ’By acting responsibly for the long term in how we do business we will meet our ambition to provide prosperity and peace of mind to our customers.’
Our CR Advisory Group supports and advises on the management and implementation of the global CR programme. Reporting to the Executive Committee through the Group HR Director, it includes Group CR specialists, regional CR directors and HR directors who work together to adopt and refine CR strategies, assess progress, identify actions that need to be taken and embed our programmes in different parts of the business. In addition, the Aviva plc Board receives an annual update on CR strategy, activities and progress. Our CR programme is also featured regularly on the agenda at executive management committees and regional performance against Group KPIs is reviewed quarterly.
We also report our performance using the HRH Prince of Wales’ Accounting for Sustainability (A4S) connected reporting framework (see page 74), a methodology that integrates financial and non-financial data to provide a comprehensive picture of our performance.
We were one of the first companies to help develop the framework and have incorporated it in our Annual Report and Accounts since 2007. By reporting the links between sustainability, financial performance and strategic direction more explicitly the framework increases our understanding and the visibility of sustainability issues. We have found that it has helped our finance and sustainability teams to work together more effectively, identifying cost savings as well as providing clear disclosure to investors. This year we have extended the use of the framework further by adding customer and community investment indicators.
Bringing CR into the Boardroom Aviva Investors has taken a leading position in encouraging global companies to enhance their governance and transparency in CR reporting. In 2008, Alain Dromer, Chief Executive of Aviva Investors, called on all stock market listing authorities to make it a requirement that companies: — consider how responsible and sustainable their business model is, and — put a forward looking sustainability strategy to the vote at their AGM
In November 2009 Aviva announced plans to put 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. We hope that this will encourage other companies to bring CR issues to the heart of the boardroom and engage openly and transparently with stakeholders on sustainability issues.
Business ethics We aspire to the highest standards of conduct and set out our principles in our business ethics code. This stipulates fairness, honesty and transparency in all we do. Everyone at Aviva has a part to play in upholding our standards and we raise awareness of these responsibilities through our induction programmes and acceptance and sign-off of the code by all staff.
Financial crime Our financial crime policy reinforces our zero tolerance approach and ensures that risks relating to fraud, money laundering, market abuse and bribery and corruption are adequately controlled. We provide mandatory computer-based training as part of our procedures for combating market abuse and insider trading, money laundering and fraud. In 2009 we enhanced our bribery and corruption controls and rolled out a worldwide training programme for employees.
HR tools and processes — Building strong global HR and CR functions.
Visibility of our survey results has increased with most team managers receiving their own localised team results. Senior leaders are also engaged, taking the time to speak to employees about the survey results, sharing their personal reflections and taking direct questions on the survey outcomes. For every survey completed we gave a donation to our new ‘Street to School’ charity programme raising £37,000 for Save the Children in India.
Within our senior management group, representation of female colleagues was maintained at 22% in 2009. We were recognised in The Times/Aurora Where Women Want to Work
Top 50 list in 2009 and featured in Cranfield University’s study of women in the boardroom. Our chief marketing officer, Amanda Mackenzie, was named in The Female FTSE Report as one of 100 Women to Watch in 2009. Our employee groups, including the Aviva Women’s Network and Pride Aviva, are firmly established. They have evolved from small beginnings to become thriving networks, hosting events and contributing support for local community projects. This year, we significantly improved our position in Stonewall’s Workplace Equality Index, achieving 54th position, compared to 78th in 2008. We are the only insurer to be included by Stonewall in the top 100 employers in the UK, and Pride Aviva also received special recognition as a ‘star performing employee network group’.
Here are just a few of the community activities we supported this year: ‘Street to School’ in India Aviva India has partnered with CRY (Child Rights and You) and Save the Children in India to help over 50,000 street children get access to education and training by 2012. To date, 70% of staff have volunteered to donate a day’s salary to CRY, and in November, 30 staff members took part in the Airtel Delhi Half Marathon to raise funds for the charity. In partnership with the Hindustan Times, Aviva India also held a five-day book donation drive which resulted in 125,000 books donated by employees, schools and members of the public. Save the Children will use the books to help give 38,000 under- privileged children access to education.
Economic citizenship education for teenagers ‘Paying for It’ (www.payingforit.org.uk) launched by Aviva in 2007, continued to take economic citizenship teaching into schools up and down the country with the help of over 100 specially trained Aviva volunteers. Using specially tailored resources available online for all schools to access, classes address issues of financial and social importance, such as housing, the environment and health.
Aviva Canada’s Community Fund The Aviva Community Fund gives members of the public the opportunity to turn great ideas into action to benefit their local communities. Launched in October, a unique website, www.avivacommunityfund.org enables Canadians to register their ideas with accompanying photos or video. Special outreach efforts were made to raise awareness of the new fund to charities and not-for-profit organisations and approximately 8,000 schools, colleges and universities were contacted across the country. Through various forms of communication including social media sites, the people who submitted the ideas encouraged as many people as possible to vote for their idea. More than 2,000 ideas were registered and an impartial panel of judges awarded a total of $500,000 to eight winning entries, announced in January 2010. From coast to coast, ideas ranged from building playgrounds for children, driving awareness of environmental programmes and providing services for at-risk youth.
We also set global annual targets in other key areas, summarised below: Performance – accounting for 2009 Targets divestments
The role of insurers in climate change The insurance industry has a fundamental part to play in society’s responses to climate change. As a major insurer Aviva has first-hand understanding of the impact of extreme weather events on our customers. On their behalf, we are committed to help mitigate the threat of climate change and support everyone in society to adapt to changes caused by man-made emissions already in the atmosphere. Our industry can also draw on its knowledge of historical weather data to identify patterns of change, applying our understanding of risk to map future temperature scenarios and determine likely impacts. Finally, we can offer the financial tools to help manage the burden of climate change, for example the pooling and transfer of risk.
Our actions and commitments Proactive participation in leading global forums and associations is a key part of our climate change strategy. This year we were involved in the lead-up to the Copenhagen Summit in December 2009 through our membership of working groups of the UNEP Finance Initiative and as signatories to the following: — The Geneva Association Kyoto Statement — The UNEP FI Investor Statement on a Global Agreement on
Our senior executives also take the opportunity to engage personally and as widely as possible on climate change and other environmental issues. In September, a senior delegation including Carole Piwnica, chair of our Board CR Committee, Euleen Goh (Aviva Group Board member) and Simon Machell (CEO Aviva Asia Pacific) led a roundtable discussion in Hong Kong with NGOs, corporates, academics and students from Hong Kong University. The event included strong debate on the climate change agenda and Aviva’s role in making a difference, providing valuable perspectives that are being shared within the organisation. The group also visited the Aviva Junk, a ‘green’ Chinese sailing vessel, developed in collaboration with Hong
Raising our employees’ levels of engagement and participation in environmental projects is an important part of our efforts to encourage good practices, both at work and at home. Many of the employee volunteering activities that took place around the world in June as part of our celebrations to become ‘One Aviva’ focused on the environment, including a recyclathon and a series of tree planting events. We publish regular articles and updates on environmental matters on our global intranet site and, in November, teamed up with our environmental partner ClimateWise with an interactive, webbased project to give employees the chance to have their say on risks and opportunities associated with climate change and the insurance industry.
We are both a signatory and responding company to the Carbon Disclosure Project (CDP), and this year were ranked eighth in the Carbon Disclosure Leadership Index for the FTSE350, third in the financial services sector and 38th overall in the FSTEGlobal 500. Our Chairman, Lord Sharman, spoke at the CDP London launch event and called on industry to provide more consistency and transparency in reporting and move from disclosure to mitigation.
Our environmental planning is now being extended to our partners, and, in a first move for Aviva, we signed a ‘green’ service level agreement with Hewlett Packard (HP) for the provision and running of two data centres. As a key part of the contract, HP is charged with using ‘eco friendly’ or renewable power sources to run the centres, develop an environmental management system, conduct audits and hold an annual review with Aviva to assess progress, set targets and investigate new technologies and processes.
The Net Promoter Score ®1 (NPS) is our leading, Groupwide measure of customer advocacy, comprising a globally consistent relationship and benchmarking survey which is regularly conducted. We continued to extend this across our global operations and next year will develop the metric further 1 Net Promoter, NPS, and Net Promoter Score are trademarks of Satmetrix Systems, Inc., Bain & Company, and Fred Reichheld.
Aviva plc Corporate responsibility continued Annual Report and Accounts 2009 to learn more about how customers interact with Aviva and gain a better understanding of their preferences. NPS performance targets form part of our executive directors’ annual remuneration.
Products and services Through our product portfolio customers can make informed choices about their insurance and financial needs that can at the same time provide wider socioeconomic and environmental benefits: — Our affordable microfinance and insurance products for lowincome earners have reached around 1.4 million rural lives in India to date, in many cases offering financial protection for as little as two dollars a year.
— With research showing that half of new parents do not have adequate insurance, we launched Parent Life Cover in the UK which includes free protection until the child’s first birthday.
Extreme weather events are an increasingly common occurrence and 2009 was no exception. Aviva in Ireland launched an advance payment mechanism in response to the extensive flooding in November to help householders and businesses who were most seriously affected. In a co-ordinated campaign, the team also worked with local and national media and local councillors to keep customers informed about the steps to take if they were affected.
In the UK, by activating our major incident plan in a timely manner ahead of predicted floods and storms at the year end, we were well prepared to respond. In Cockermouth, Cumbria, particularly hard hit by severe flooding, Aviva claims staff were immediately stationed at the evacuation centre and stayed until the last evacuee had left, providing advice and support to anyone who needed it, irrespective of who their insurer was.
Supply chain Our challenge is to support our suppliers in meeting the highest social, environmental and ethical standards in the delivery of goods and services. For 2009 we agreed a global approach and targets for our regional procurement teams focusing on our approach to: — Sourcing ethical suppliers in the context of Aviva’s annual third-party spend of around £6 billion — Ensuring an ethical relationship between our suppliers and
— Encouraging our suppliers to further develop CR within their own businesses and supply chains.
We made progress in sourcing with the development of a set of industry-leading questions in collaboration with the UK-based Financial Services CR forum. These take account of CR issues for different categories of spend, helping Aviva to make informed choices about potential new suppliers. A CR weighting is included in our sourcing decisions.
To support and maintain ethical relationships with suppliers we are implementing processes and tools that identify hospitality offered by suppliers to ensure that this does not conflict with our internal rules and is not offered during commercial negotiations. Similarly, we have implemented a register of interests to ensure complete transparency of any interest that our employees might have in an existing supplier.
Finally, in relation to encouraging our suppliers to adopt sustainable practices, we are reviewing Aviva's suppliers to assess them against a ‘CR maturity curve’ and develop relevant improvement plans. Aviva's suppliers are asked to sign our code of conduct, which provides an obligation to comply with relevant standards relating to the environment, ethical business conduct and respect for human rights. All regions are making good progress in embedding these activities into business processes, but we acknowledge that this needs to remain a focus area in 2010.
External benchmarking and recognition Our achievements in 2009 were recognised by our inclusion in some of the world’s leading external benchmarks: — Dow Jones Sustainability World and STOXX Indices — SAM sustainability year book — FTSE4GOOD Index Series — FTSE KLD Europe, Asia Pacific and Global Sustainability indices (excluding the US Index) — ECPI Ethical Index Euro and Ethical Index Global indices — Building Public Trust award for clear and transparent reporting of our executive remuneration policy — Gold status in Business in the Community’s (BITC) Corporate
— Carbon Disclosure Project Leadership Index – score of 80 out of 100
— Stonewall Workplace Equality Index – ranked 54th in the top 100 employers in the UK
— Ranked in The Times/Aurora top 50 companies – Where Women Want to Work.
Affiliations and engagements We work closely with leading organisations to share good practice, identify emerging issues and improve our performance. Here are just a few of the organisations we collaborated with in 2009: — CBI Climate Change Board — HRH Prince of Wales Accounting for Sustainability — ClimateWise — UNEP Finance Initiative — UN Global Compact (UNGC) and represented on UN
Customers % of businesses that met/exceeded — 67% 67% Continue to embed 0% � Develop and test performance against local market average customer metrics across Transactional NPS
Aviva. UK life and guidelines. Pilot Distributor general insurance and NPS metric Canadian business to adopt NPS metrics in 2009
Environment % of remaining CO2 emissions offset 100% 100% 100% Offset remaining 0% � Offset remaining CO2 annually emissions CO2 at emissions at group level group level
CO2 emissions (tonnes) – based on 2009 n/a 110,051 104,351 Reduce CO2 emissions (5)% � Reduce CO2 emissions ownership by 5% by 5%
Waste generated (tonnes) – absolute 18,877 19,311 14,592 Reduce waste (24)% � Reduce waste generated generated by 4% by 4%
People % of women in senior management 22% 22% 22% Increase percentage 0% � Increase percentage of of women in senior women in senior management group management group
Number of business units that have — 5 11 10 +6 � 18 implemented and embedded use of ‘Supplier Hospitality register’ and ‘Register of Interests’
Community Amount of community investment £6.8m £9.6m £8.0m Establish and report (17)% � Total community investment in line with group at/above previous year community strategy
% of investment in Aviva ‘Street to School’ — — — New KPI 50%
— 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.
We have reported the following indicators: (i) Greenhouse gas emissions (ii) Waste (iii)Resource usage (iv)Customer advocacy (v) Investing in communities i) Greenhouse gas emissions Direct company impacts Cashflow performance CO2 emissions: Total cost of offsetting 105% of our global CO2 emissions – 104,351 tonnes in 2009 – was in the region of £620,000. These CO2 emissions offset on a retrospective basis compensate for the carbon output of our consumption of non­ renewable sourced electricity, fugitive emissions from airconditioning system gases, gas and oil from buildings and business travel.
Other significant emissions: Our operations do not generate material quantities of any other significant greenhouse gases; however we are beginning to measure and report on our fugitive emissions in line with the Defra Voluntary Reporting Guidelines on GHG for Companies.
Aviva’s CO2 emissions 000 tonnes CO2 tonnes CO2 offset CO2 tonnes per employee
Aviva plc – operational carbon footprint covering 100% of employees GHG Emissions data from 1 Jan 2009 to 31 Dec 2009
Scope 1 42,224 61,886 52,847 Scope 2* 81,994 88,712 90,591 Scope 3 30,508 26,409 21,952 Gross CO2 emissions* 154,726 177,077 165,390 absolute CO2 footprint 104,351 122,791 125,400 Carbon offsetting (109,568) (132,000) Total net emissions (5,217) (6,139) (6,600) * Data according to Defra guidelines ie UK electricity rated as grid average but renewable recognised in other countries Scope 1 – operational emissions from owned sources eg gas, vehicle fleet as part of product/service. Scope 2 – operational emission from non-owned sources eg electricity. Scope 3 – business activity emissions from non-owned sources – eg business travel
Performance, strategy and targets In 2009, our total CO2 emissions decreased with 26 of our 28 businesses reporting consistently on their footprint and applying practices to reduce their emissions. These have been achieved by using technologies to dematerialise the carbon in the way we work, changing behaviours, and by purchasing zero emission and renewable electricity. Through our divestment in AutoWindscreens, AGS and Aviva Australia, our footprint reduced by 12,740 tonnes.
Our telepresence facilities were used for 1,030 meetings in 2009, a total of 4,927 meeting hours. Over the same period our air kilometres (km) reduced by 20% from 105 million km to 84 million km. Our telepresence sites are reaching optimal utilisation so we have begun to investigate other desktop video communication technologies to meet the everyday demands of the business. For the first time we ran a virtual HR and CR conference using webex facilities, replacing the traditional ‘venue’ format and reducing costs and emissions associated with air travel. Held over five weeks, a total of 1,650 attendees joined sessions during the 50-hour conference, using 2,475 webex hours. The conference enabled us to reach the entire global HR and CR community at a significant reduction in cost on previous events and this format is now being considered by other functions in Aviva.
Indirect impacts We are conscious of the potential impacts that climate change has on our business. We constantly update our understanding of the effect of these impacts through catastrophe modelling tools – using computer-assisted calculations to estimate the losses that could be sustained as a result of an extreme weather event such as a windstorm or storm surge. In 2009 Aviva was represented on the latest ABI Climate Change Research steering group which sought to combine catastrophe models with climate change models to explore the variation in risk based on different temperature scenarios. We consider the financial risk climate change poses for Aviva and accordingly build this into our levels of capital reserves and risk management processes. Further detail on this can be found on page 56.
Score 80 out of 100 in FTSE Global 500 and FTSE350 — BREEAM2 minimum ranking ’Good‘ for new build and refurbishment ii) Waste Direct company impacts Hazardous and non-hazardous waste Total disposal cost for hazardous and non-hazardous waste in the UK was £748,000 (2008: £629,000), which includes UK landfill tax.
Performance, strategy and targets In 2009, the headline figure for the total volume of waste generated globally by Aviva shows a reduction of 24%. However, this includes a figure of some 6,000 tonnes, the result of divestment of businesses such as Aviva in Australia, AGS and AutoWindscreens. When we take divestments into account, the actual waste shows a net increase of 9.6%, and this has also affected our recycling waste figure which at 69% is short of our target of 80%. Our global rebranding to Aviva generated rebranding waste; however, we monitored it in the run up to the day to ensure it was kept as low as possible. The UK business recycled 161 tonnes of obsolete media and 26 tonnes of other branded products. Aviva in the USA took the opportunity to remove office clutter with a two-day recyclathon, which generated 18.5 tonnes of recyclable material – the equivalent of 101 m3 of landfill space. In 2007 the UK business set a zero to landfill target for 2012. This has been delayed due to the situation in the Chinese recyclate market and the UK’s economic position. We now have this target set for 2015. To achieve this we have made some significant changes to our waste management model. Where local facilities exist, our remaining waste, following segregation in the office, is processed via material recycling facilities which provides a further 85% recycling rate on our waste in these locations. This process will continue to be rolled out in 2010 but it has already lifted our recycling rate in the UK from 61% to 74%.
Indirect impacts Products/suppliers/investors We are rolling out a ‘repair over replacement’ process in our UK accident repair centre network to reduce the proportion of new parts used in repairs to customers’ vehicles.
iii) Resource usage Direct company impacts Water The operating cost of water usage was £1.3 million in 2009 (2008: £944,000).
We currently do not track the cost of paper on a global basis. 0 2 Building research establishment environmental assessment methodology
Water consumption m3 Water consumption m3 per employee 6, 1, 3, 1, m 3 /
Performance, strategy and targets Water consumption reduced by 8.8% in 2009, exceeding our target of 4%. Whilst the businesses in the UK continued to see savings from the water saving devices installed towards the end of 2008, Aviva France installed water filters on the bathroom taps of Montaigne Head Office in 2009. The filters reduce the flow of water by approximately 50% and achieve a reduction of around 5% in the total water consumption. This will now be rolled out to the regional offices in France.
Following the very successful use of double sided printing in the Group head office, the introduction of duplex printing as standard across the UK has resulted in a 20% reduction in paper purchased and a 5% volume reduction in the amount of office printing.
When buildings have reached their end of lease or are being refurbished, the environmental implications are considered. Some businesses like Aviva UK are turning to ‘space hopping’ (hot desk) solutions. Other Aviva businesses are consolidating their property space and as a result are able to manage their environmental impact more comprehensively. Aviva USA’s purpose-built head office, to be opened in June 2010, has been rated ‘excellent’ by LEED (Leadership in Energy and Environmental Design) and combines four existing offices into one.
Indirect impacts Products/suppliers/investors The economic situation has meant that companies are considering the added value of relationships. Recently we engaged with some of our IT providers to see how we can make further energy savings and, through conversations with our IT supplier Cisco, we learned that we are able to power down our desktop phones and other networked IT equipment remotely.
Continuing with our work around the impact of marketing materials, and building on our initiatives to make information available electronically and using degradable polywrap for literature sent through the post, we will be looking at our mailings and working with our distribution partners to ensure that our environmental impact in this area is kept to a minimum.
Aviva Canada’s ‘Save Waste, Eliminate Paper’ programme is supporting our efforts to reduce our carbon footprint. It focuses on eliminating printed policy documents for brokers, saving paper, ink, energy and time costs. So far 246 out of 1,855 brokers have signed up to this programme.
In France, Aviva’s agents and advisers are able to use laptops when with clients to carry out transactions online. This has increased the use of the online intranet portal and client email database, lowered levels of correspondence by paper mail and fax, and has resulted in a reduction in waste and increased efficiency for client-company exchanges.
Our performance, strategy and targets In 2009, we successfully moved to a single global provider of our annual relationship and benchmark NPS survey which has helped ensure a globally consistent approach to NPS across Aviva. Through the Group Remuneration Committee, each market is now set improvement targets relative to their local benchmark and 10% of our executive directors’ compensation is linked to these targets.
However, the Net Promoter discipline is about much more than simply measuring performance; what counts is how we use the data to improve the experience for all our customers and this is where we are encouraging businesses to place their attention.
Many of our businesses have already integrated Net Promoter into the rhythm of how they do business day-to-day. By conducting ’closed loop‘ follow-up calls with ‘detractor’ customers, our UK health business was able to better understand why their customers were unhappy and take action, for example, one follow-up call prevented a formal complaint and another, by reducing the customer’s premium, retained someone who may otherwise have lapsed.
Employee advocacy During 2010 we will be conducting work to understand and improve employee advocacy (ie the willingness of our own employees to recommend our products) as this will be a key driver of customer advocacy. We will report on our findings next year in the 2010 Annual Report and Accounts.
Our measures to understand the key facets of customer 0 advocacy feed into a broader need in society to establish a more 63 customer focused approach to insurance. This is a key part of the recommendations from the Insurance Industry Working Group (IIWG) which was co-chaired by Aviva’s CEO, Andrew Moss, and Alistair Darling, Chancellor of the Exchequer. The IIWG’s report – ‘Vision for 2020’3 – was published in July 2009 and set out recommendations for its members to increase consumer confidence and trust in UK insurance and create more awareness of consumers’ personal financial responsibility. In turn this would encourage the flow of capital into the UK insurance industry and ensure its competitive position in the global marketplace.
Our performance, strategy and targets Our global community investment (CI) strategy, focusing on financial literacy, education and life trauma, aligns to our corporate vision and channels financial support and the expertise of our employees into projects where we can see positive societal impacts. Our total community investment was £1.6 million lower than in 2008. A number of factors contributed, including budget constraints across our businesses and the sale of Aviva Australia. We also made exceptional cases of higher levels of investment in 2008, including our support for the victims of the earthquake in Sichaun province in China. Despite challenging conditions, employee volunteering is on the increase. 16% of employees participated in volunteering programmes in 2009, resulting in 79,900 hours of paid employee volunteering. Our target for 2010 is to further increase the numbers of employees taking up this opportunity. Employee attitudes are measured and benchmarked through our annual survey, which this year showed that 62% of employees believe that we do a good job of supporting the communities where we live and work.
Last year we launched ‘Street to School’, our five-year initiative to get young people off the streets and into education and training. The programme is in operation in the UK, Turkey and India and has so far involved various employee fundraising activities – including over 70% of employees in both India and Turkey participating in a salary donation drive. In India, Aviva invited all citizens of Delhi on National Education Day in November to join them in building a giant wall made entirely of books. The books from the wall will be used to educate thousands of underprivileged children supported by Save the Children India. Over 125,000 books were donated in five days. We aim to roll out ‘Street to School’ in all of our markets from 2010; a challenge for our businesses is to find viable third sector partnerships in both developed and developing markets that we operate in. By the end of 2010, our target is to invest 50% of our global community investment spend on these projects and we are now developing a set of impact targets, addressing the numbers of young people that have been positively affected by the ‘Street to School’ programme. We will publish these in our 2010 report. Also in development are linked cause-related marketing (CRM) initiatives which will enable our customers to engage in the programme in a number of ways, eg donate a percentage of their premiums towards the programme.
Chairman of the risk and regulatory committee and a member of the audit, nomination and remuneration committees.
8. Euleen Goh Independent non-executive director (Age 54) Appointed to the Board in January 2009. Currently a non-executive director of Singapore Airlines Limited (transport), DBS Bank Limited and DBS Group Holdings Ltd (banking) and the Singapore Exchange Limited. Former chief executive officer of Standard Chartered Bank in Singapore (banking). Member of the audit and corporate responsibility committees.
11. Leslie Van de Walle Independent non-executive director (Age 53) Appointed to the Board in May 2009. Formerly chief executive officer of Rexam plc (packaging), executive vice president of retail for oil products and head of oil products, a division of Shell Europe Royal Dutch Shell plc and non-executive director of Aegis Group plc (media services). Formerly held a number of senior management positions with Cadbury Schweppes plc (consumer goods) and United Biscuits Limited (consumer goods). Member of the remuneration and risk and regulatory committees.
12. Russell Walls Independent non-executive director (Age 66) Appointed to the Board in May 2004. Currently non-executive director of Signet Jewelers Limited (retail) and treasurer and trustee of The British Red Cross. Former group finance director of BAA plc (transport), Wellcome plc (pharmaceuticals) and Coats Viyella plc (textiles). Former nonexecutive director of Delphic Diagnostics Limited (medical), senior independent nonexecutive director of Stagecoach Group plc (transport) and Hilton Group plc (leisure) and a former non-executive director of the Mersey Docks and Harbour Company (transport). Chairman of the audit committee and a member of the nomination and the risk and regulatory committees.
13. Scott Wheway Independent non-executive director (Age 43) Appointed to the Board in December 2007. Currently chief executive of Best Buy Europe (retail services). Former director of The Boots Company plc (pharmacy) and managing director of Boots the Chemist at Alliance Boots plc. Formerly held a number of senior management positions at Tesco plc (retail services). Chairman of the remuneration committee and member of the corporate responsibility committee.
Alain Dromer Chief executive, Aviva Investors (Age 55) Joined the Group in September 2007. Formerly global head of group investment businesses at HSBC, senior executive vice president and head of asset management and insurance at Credit Commercial de France and director of capital markets at La Compagnie Financiére Edmond de Rothschild. Formerly at the French Treasury in the Ministry of Finance and the French Institute for Statistics and Economic Studies. Educated at l’École Polytechnique, Paris and l’École Nationale de la Statistique l‘Administration Économique, Paris.
Amanda Mackenzie Chief marketing officer (Age 46) Joined the Group in 2008. Previously commercial and marketing director for British Gas plc and has more than 20 years of experience in the marketing and advertising profession. Holds a Bachelor of Science degree in Psychology from the University of London and is a graduate of the INSEAD advanced management programme. She is a fellow of the Royal Society of Arts, a member of the Government Strategic Marketing Advisory Board, a fellow of the Marketing Society and a governor of the National Youth Orchestra.
Robin Spencer Chief risk officer (Age 40) Joined the Group in 1995. Formerly chief executive officer of Aviva Canada, chief financial officer of Aviva Canada and held various senior management positions in the finance function, including finance director for London & Edinburgh Insurance Company Limited. Previously spent five years with Procter & Gamble Limited. Holds an MA in Economics from Aberdeen University and is a chartered management accountant. Former chairman of Canada's Property and Casualty Insurance Compensation Corporation.
The directors submit their annual report and accounts for Aviva plc, together with the consolidated financial statements of the Aviva Group of companies, for the year ended 31 December 2009.
The Companies Act 2006 requires the directors to present a “business review” in this Directors’ Report. The information that fulfils this requirement can be found in the Performance Review on pages 9 to 66, which includes a review of the Group’s operations, current position and future prospects, a description of the principal activities of the Group, and principal risks and uncertainties. This Performance Review, the Corporate Governance Report and the Directors’ Remuneration Report are incorporated by reference into this Directors’ Report. Details of material acquisitions and disposals made by the Group during the year are contained in note 3 to the consolidated financial statements.
Results The Group results for the year are shown in the consolidated income statement on page 143.
Dividends The directors are recommending a final dividend of 15.00 pence per ordinary share (2008: 19.91 pence), which, together with the interim dividend of 9.00 pence per ordinary share paid on 17 November 2009 (2008: 13.09 pence), produces a total dividend for the year of 24.00 pence per ordinary share (2008: 33.00 pence). The total cost of ordinary dividends paid in 2009, was £775 million (2008: £902 million). Subject to shareholder approval at the 2010 Annual General Meeting, the final dividend for 2009 will be paid on 17 May 2010 to all holders of ordinary shares on the Register of Members at the close of business on 26 March 2010 (and approximately five business days later for holders of American Depositary Receipts).
Where, under an employee share plan operated by the Company, participants are the beneficial owners of shares, but not the registered owners, the voting rights are normally exercised at the discretion of the participants. No person holds securities in the Company carrying special rights with regard to control of the Company. The Company is not aware of any agreements between holders of securities that may result in restrictions in the transfer of securities or voting rights. Unless expressly specified to the contrary in the Articles of Association of the Company, the Company’s Articles of Association may only be amended by special resolution of the Company’s shareholders in general meeting. At the 2010 Annual General Meeting shareholders will be asked to adopt new Articles of Association and further details can be found in the Notice of Meeting accompanying this annual report and accounts. There are a number of agreements that take effect, alter or terminate upon a change of control of the Company, such as commercial contracts and joint venture agreements. None is considered to be significant in terms of their potential impact on the business of the Group as a whole. All of the Company’s employee share and incentive plans contain provisions relating to a change of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions and pro rata reduction as may be applicable under the rules of the employee share incentive plans.
Authority to purchase own shares At the Company’s Annual General Meeting held on 29 April 2009, shareholders renewed the Company’s authorities to make market purchases of up to 265 million ordinary shares, up to 100 million 83/4% preference shares and up to 100 million 83/8% preference shares. These authorities were not used during the year. With effect from 1 October 2009, section 725 of the Companies Act 2006 was repealed with the effect that the Company is no longer subject to a limit of 10% of its total issued share capital in respect of the number of its own shares that the Company may buy back and hold in treasury. The regulation repealing section 725 also extended the validity period of the authority given to a company to purchase its own shares, from a maximum of 18 months to a maximum of five years. The Company will continue to follow guidelines which recommend the annual renewal of this authority as a matter of best practice for listed companies, unless such guidelines change. At the forthcoming Annual General Meeting, shareholders will be asked to renew this authority for another year and the resolution will also retain the 10% maximum aggregate number of ordinary shares which the Company can purchase. Details are contained in the Notice of Meeting. The Company held no treasury shares during the year.
In 2009, the Group’s community investment in the UK totalled £4.4 million (2008: £5.6 million) of which over £1.3 million (2008: £2.2 million) was given in the form of donations and time to charitable organisations. In late 2009 the Company launched a new global five-year community initiative – Street to School. Aviva’s Street to School programmes will focus on partnerships that enable and encourage street children back into education and training programmes. The vision for this new global commitment is summarised in the Company’s mission statement for this project initiative: “We recognise that every child living or working on the street has a right to fulfil their potential. Together, we will champion the needs of street children in the communities in which we live and work.” The Company also continues its global partnership with the Oxfam 365 Alliance which ensures that Oxfam can maintain a state of constant preparedness, enabling them to respond immediately to emergencies wherever they occur in the world. The Company promotes a strong volunteering policy and employees are entitled to up to three days annually to support volunteering activities. The Company allocates a part of its budget to matching contributions to charitable causes raised by staff and for providing financial support to charities and communities where members of staff give a personal commitment in terms of their time.
Performance reviewAviva plc Directors’ report continued Corporate responsibilityAnnual Report and Accounts 2009
See page 68 for details of how our businesses are supporting their local communities in line with the Company’s strategy.
The definitions used in the Companies Act 2006 are broad in nature and this authority was sought to ensure that any activities undertaken throughout the Group’s businesses which could otherwise be construed to fall within these provisions could be undertaken without inadvertently infringing them. During the year, the Company’s American subsidiary, Aviva USA, through its employee-funded Political Action Committee, made contributions to two different industry bodies, which could be construed to fall within the political donations provisions. The first contribution was the sum of $2,000 in July 2009, to the Federation of Iowa Insurers Political Action Committee and the second contribution was the sum of $4,000 to the American Council of Life Insurers Political Action Committee in October 2009. The donations are used to support candidates for nomination and/or election to public office. It is not the policy of the Company to make donations to EU political organisations or to incur other political expenditure.
The Group ensures that involvement of employees in its performance is encouraged by allowing eligible employees to participate in the Group’s all employee share ownership plans.
The Combined Code on Corporate Governance sets out standards of good practice in the form of principles and provisions on how companies should be directed and controlled to follow good governance practice. The Financial Services Authority (FSA) requires companies listed in the UK to disclose, in relation to section 1 of the Combined Code, how they have applied its principles and whether they have complied with its provisions throughout the accounting year. Where the provisions have not been complied with companies must provide an explanation for this.
The Board has adopted a procedure whereby directors may, in the performance of their duties, seek independent professional advice at the Company’s expense if considered appropriate. During the year the members of the Remuneration Committee sought independent advice from Hewitt New Bridge Street Consultants on issues surrounding senior executive remuneration. The Audit Committee and the Risk and Regulatory Committee also appointed Keith Nicholson, a former partner at KPMG LLP, to provide advisory services.
The Directors The Board currently comprises the Chairman, eight independent non-executive directors and four executive directors. Each nonexecutive director serves for a fixed term not exceeding three years that may be renewed by mutual agreement. Subject to the Board being satisfied with a director’s performance, independence and commitment, there is no specified limit regarding the number of terms a director may serve. Each director is required to be elected by shareholders at the Annual General Meeting following his/her appointment by the Board and to be re-elected at least once every three years. Any nonexecutive director who has served on the Board for nine years or more is required to submit himself/herself for re-election annually. The Board’s policy is to appoint and retain nonexecutive directors, who can apply their wider knowledge and experiences to their understanding of the Aviva Group, and to review and refresh regularly the skills and experience the Board requires through a programme of rotational retirement. In addition to the strengths of experience, diversity and an international perspective, the Board also seeks to comply with the requirements of the Combined Code on the independence of directors. The process for appointing new directors is conducted by the Nomination Committee whose report, including a description of its duties, is set out on page 93.
The Combined Code requires that at least half the Board, excluding the Chairman, should comprise independent nonexecutive directors as determined by the Board. The Nomination Committee performs an annual review of directors’ interests in which all potential or perceived conflicts, including time commitments, length of service and other issues relevant to their independence, are considered. It is the Board’s view that an independent non-executive director also needs to be able to present an objective, rigorous and constructive challenge to management, drawing on his/her wider experiences to question assumptions and viewpoints and where necessary defend their beliefs. To be effective, an independent director needs to acquire a sound understanding of the industry and the Company so as to be able to evaluate properly the information provided. Having considered the matter carefully the Board is of the opinion that all of the current non-executive directors are independent and free from any relationship or circumstances that could affect, or appear to affect, their independent judgement. Accordingly, over half of the Board members, excluding the Chairman, are independent non-executive directors. Each of the directors being proposed for re-election at the 2010 Annual General Meeting has been subject to a formal performance evaluation and took part in a peer evaluation
The Chairman and Group Chief Executive The respective roles of the Chairman and Group Chief Executive are set out in the Board’s terms of reference. The Chairman’s priority is the leadership of the Board and the Group Chief Executive’s priority is the management of the Company. The Chairman’s commitment to the Company is two to three days per week and his main interests outside the Company are set out in his biographical details on page 80.
Board effectiveness The effectiveness of the Board is vital to the success of the Group and the Company undertakes a rigorous evaluation each year in order to assess how well the Board, its committees, the directors and the Chairman are performing. The aim is to improve the effectiveness of the Board and its committees and the Group’s performance. The process is led by the Chairman and supported by the Group Company Secretary. This year the evaluation was carried out by Boardroom Review, an independent consultancy, and interviews were conducted with each Board member. All directors also completed a questionnaire evaluating the Board and committees’ processes, their effectiveness and where improvements may be considered. Boardroom Review prepared a report based on the interviews with the directors and the questionnaire circulated and the overall results of the evaluation were presented to and reviewed by the Board in January 2010.
The performance of the Chairman is also included in the above process and takes into account the views of both the executive and non-executive directors. The Chairman’s evaluation is managed by the Senior Independent Director who provides feedback to the Chairman. As part of the Chairman’s evaluation the non-executive directors meet separately under the chairmanship of the Senior Independent Director. The Board evaluation process assesses the executive directors in their capacities as directors of the Company. They are evaluated in respect of their executive duties through a separate process whereby the Chairman and the non-executive directors assess the Group Chief Executive and the Group Chief Executive assesses the executive directors.
Reports of the committee chairmen are set out on pages 93 to 116.
Internal Control A company’s system of internal control plays a key role in the management of risks that may impact the fulfilment of its objectives. Internal control facilitates effective and efficient operations, the development of robust and reliable internal and external reporting and compliance with laws and regulations.
As part of the Financial Reporting Council’s ‘Internal Control: Guidance for Directors on the Combined Code’, the Board should ‘maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets’. In addition, as part of their responsibilities 'The Directors should, at least annually, conduct a review of the effectiveness of the Group's system of internal control and should report to shareholders that they have done so. The review should cover all material controls, including financial, operational and compliance controls and risk management systems'.
The Board has overall responsibility for maintaining the system of internal control for the Group and monitoring its effectiveness. During the year, the Audit Committee, with the Risk and Regulatory Committee, on behalf of the Board, have regularly review the effectiveness of the Group's system of internal control. The necessary actions have been and are being taken to remedy significant failings and weaknesses identified from these reviews. The Audit Committee and the Risk and Regulatory Committee monitor resolution of any weaknesses to a satisfactory conclusion. In addition, the Company meets the Securities and Exchange Commission (Sarbanes-Oxley Act 2002) requirements for new registrants.
Control environment The Group operates a ‘three lines of defence’ model with management as the first line, having overall accountabilty for the management of all risks relevant to the Group’s business. Management is therefore responsible for designing, implementing and monitoring the operation of the system of internal control and for providing assurance to the Executive Committee, the Audit Committee, and the Risk and Regulatory Committee, as relevant, that it has done so.
The Group Risk and Compliance functions operate as the second line of defence and are accountable for providing objective challenge and oversight of the business’ management of all risk through the system of internal control. The functions operate globally with teams in all major regions and business units.
Oversight of the risk management framework and system of internal control is performed on behalf of the Board by the Risk and Regulatory Committee working with the Audit Committee. These Committees receive reporting over risk management and internal control procedures and consider where relevant whether appropriate actions have been
In addition to the regular reporting, a six monthly Group policy framework compliance management certification process is in place. Any risks, control weaknesses, or non-compliance with the Group policy framework or local delegation of authority must be highlighted as part of this process.
The FRCF process follows a risk based approach, with management identification, assessment (documentation and testing), remediation as required, reporting and certification over key financial reporting related controls. Management quality assurance procedures over the application of the FRCF process and FRCF controls are undertaken regularly. The results of the FRCF process are signed off by business unit and regional Chief Executives and Chief Financial Officers and at a Group level by the Group Chief Executive and Chief Financial Officer.
The Disclosure Committee, which has the role of overseeing the design and effectiveness of the Group’s disclosure controls, for both financial and non-financial information, evaluates the Group’s disclosure controls and reviews and endorses the Group’s key periodic external reports including the consolidated financial statements. This Committee is chaired by the Chief Financial Officer and reports to the Audit Committee and Executive Committee. A Group Technical Committee, reporting to the Disclosure Committee is in place, which presides over significant technical matters, reviewing technical decisions including key judgements, issues and application of assumptions.
Risk Management An Enterprise wide Risk Management Framework (ERMF), designed to identify, evaluate, manage and monitor significant risks to the achievement of business objectives is in place and embedded throughout the Group. The Group Risk function facilitates the implementation of the risk management framework, with management owning the management and monitoring of risks. The Group Risk function assesses and reports significant risks identified across the Group and corresponding action plans to the Executive Committee, the Risk and Regulatory Committee and Audit Committee.
Throughout 2009, the internal audit function through the Chief Audit Officer provided quarterly reporting on issues arising and the status of action items to the Audit Committee and Risk and Regulatory Committee. Similar reporting is undertaken on a regional and business unit basis to local executive management and local audit committees. The effectiveness of the Group’s internal audit function is reviewed annually by the Audit Committee.
Share capital and control The information required to be provided by the directors pursuant to section 992 of the Companies Act 2006 can be found on page 83 of the Directors’ report.
The Board is equally interested in the concerns of private shareholders and, on its behalf, the Group Company Secretary oversees communication with this group of investors. The Company has provided a dedicated email address to which questions can be sent, in addition to the facility on the Company’s website and a freepost address, which are all highlighted in the shareholder information section of the Notice of Meeting. These can be used by shareholders to put relevant questions to the directors. These are considered to be particularly helpful for those shareholders who are unable to attend the meeting. Written responses are provided through a brochure containing answers to the most frequently asked questions, which is also placed on the Company’s website, www.aviva.com/agm. All material information reported to the regulatory news service is simultaneously published on the Company’s website, affording all shareholders full access to Company announcements.
The Company’s Annual General Meeting provides a valuable opportunity for the Board to communicate with private shareholders. At the meeting, the Company complies with the Combined Code as it relates to voting, the separation of resolutions and the attendance of Board committee chairmen. Whenever possible, all directors attend the Annual General Meeting and shareholders are invited to ask questions during the meeting and have an opportunity to meet with the directors following the conclusion of the formal part of the meeting. The Company will also ensure that it continues to provide shareholders with the right to ask questions at meetings, which will ensure compliance with the recently enacted Companies (Shareholders’ Rights) Regulations 2009. In line with the Combined Code, details of proxy voting by shareholders, including votes withheld, are made available on request and are placed on the Company’s website following the meeting.
Aviva Investors maintains a detailed Corporate Governance and Voting Policy as part of its investment strategy, which underpins its approach to engaging and voting at company general meetings. The policy encompasses social, environmental and ethical issues and is applied pragmatically after careful consideration of all relevant information. In addition, Aviva Investors makes detailed voting reports available to clients, as well as providing some summary reporting on its website, www.avivainvestors.com.
Combined Code, the Chairman and non-executive directors must meet separately to assess the executive directors.
Committees Under NYSE standards, US companies are required to have a nominating/corporate governance committee. In addition to identifying individuals qualified to become Board members, this committee must develop and recommend to the Board a set of corporate governance principles. The Company’s Nomination Committee’s terms of reference do not require the Committee to develop and recommend corporate governance principles for the Company.
Code of Business Conduct and Ethics NYSE listing standards require US companies to adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. While the Company does not strictly follow this NYSE standard applicable to US companies, it is committed to ensuring that its business is conducted in all respects according to rigorous ethical, professional and legal standards. The Company has adopted a Business Ethics Code to which all employees are bound and a Code of Ethics for Senior Management to comply with the Sarbanes-Oxley Act 2002.
Directors’ responsibilities The directors are required to prepare accounts for each accounting period that comply with the relevant provisions of the Companies Act 2006 and International Financial Reporting Standards (IFRS) as adopted by the European Union (EU), and which present fairly the financial position, financial performance and cash flows of the Company and the Group at the end of the accounting period. A fair presentation of the financial statements in accordance with IFRS requires the directors to: — select suitable accounting policies and verify that they are applied consistently in preparing the accounts, on a going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business; — present information, including accounting policies, in a manner that is relevant, reliable, comparable and understandable; — provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company and the Group’s financial position and financial performance; and
Performance reviewAviva plc Corporate responsibilityNomination committee report Annual Report and Accounts 2009 Governance Shareholder information Financial statements IFRS Financial statements MCEV Other information
The Committee met on six occasions in 2009 and the members’ attendance record is set out in the Corporate Governance report on page 88. Nikesh Arora ceased to be a member of the Committee on 5 August 2009 following his resignation from the Board due to his relocation to the US. The Group Company Secretary acts as the secretary to the Committee.
During the year, the Board accepted the Committee’s recommendations that Andrea Moneta, Patrick Regan, Michael Hawker and Leslie Van de Walle join the Board. Andrea Moneta and Patrick Regan were appointed as executive directors of the Board, with Patrick Regan replacing Philip Scott as Chief Financial Officer and Andrea Moneta’s appointment increasing the number of executive directors to four. Leslie Van de Walle was appointed as a new non-executive director from 6 May 2009 and Michael Hawker’s appointment as a non-executive director took effect from 1 January 2010. In respect of Mr Van de Walle’s and Mr Hawker’s appointments, the Committee engaged a search agency to help it identify suitable candidates with the skills and capabilities required and to assist with the preparation of an interview list.
During the year, the Committee was integrally involved in the SEC registration and NYSE listing of the Company and received regular updates on progress of the project. The Committee reviewed and approved the registration document and the Company’s financial reporting control framework was developed to ensure compliance with the United States Sarbanes-Oxley Act 2002. This included ensuring all the risks associated with the project were understood and within risk appetite.
Each of the Group’s major business units has an audit committee that provides an oversight role for its business. The Chief Audit Officer reviews the papers and minutes from these committees and brings all significant matters to the Committee’s attention. The Chief Audit Officer also attends local audit committee meetings on a regular basis and reports back on the effectiveness of these local committees to the Committee. In addition, during 2009 the members of the Committee attended several local audit committee meetings, including those in Aviva USA, Aviva UK Life, Aviva UKGI, Aviva Investors and the Europe Region Oversight Committee. This programme of attendance at local audit committee meetings will continue during 2010.
The external auditor policy regulates the appointment of former audit employees to senior finance positions in the Group and sets out the approach to be taken by the Group when using the services of the external auditor, including requiring that all services provided by the external auditor are pre-approved by the Committee. It distinguishes between those services where an independent view is required and that should be performed by the external auditor (such as statutory and non-statutory audit and assurance work), prohibited services where the independence of the external auditor could be threatened and they must not be used, and other non-audit services where the external auditor may be used. Non-audit services where the external auditor may be used include: non-recurring internal controls and risk management reviews (ie excluding outsourcing of internal audit work), advice on financial reporting and regulatory matters, due diligence on acquisitions and disposals, project assurance and advice, tax compliance services, and employee tax services. The Committee receives a quarterly report of compliance against the external auditor policy and the policy has worked effectively during 2009.