Mark Hodges, chief executive officer of Norwich Union Life, joined the board in June 2008 and brings with him a rare mix of operational and strategic expertise. We also welcome Euleen Goh who joined us in January 2009. Most recently chief executive of Standard Chartered Bank in Singapore (2001-2006), Euleen has a wealth of experience both as an executive and non-executive and will bring fresh insight into important areas of activity in South East Asia.
I would also like to thank all our Aviva people, led by Andrew Moss and his team, for their skill and dedication during what has undoubtedly been a challenging year for everyone.
In a challenging year, the most difficult that I or any of my colleagues have had to encounter, we’ve remained true to our core purpose of bringing prosperity and peace of mind to our customers. We are not immune to the financial crisis, but we are confident that we have the right strategy for a successful future. I’m pleased to report that this is reflected in sound trading performance, with growth in both our life and pensions and general insurance businesses. In addition we have undertaken a thorough review of the value of our assets and liabilities and provided prudently for possible future losses so that we can withstand future volatility and uncertainty.
On an IFRS basis, the group operating profit before tax was £2,297 million (2007 restated: £2,216 million) and total IFRS return was a loss of £885 million (2007 restated: £1,498 million profit) which again reflected the significant impact of investment market volatility during the period. This resulted in IFRS earnings per share being a loss of 36.8 pence (2007 restated: 48.9 pence profit).
Managing our risk Sound risk management has always been at the heart of our business. This discipline has served us well in 2008.
Committed to our vision We remain committed to our vision of “one Aviva, twice the value”. It has given us the focus to remain on course during one of the most difficult years in financial memory. Providing prosperity and peace of mind for our customers is a long term enterprise. This long term view of our business has meant that we’ve managed our resources carefully and avoided excessive risk. That gives me real confidence as I look to the future.
However, cutting costs is not without impact, sadly and most notably on our people. There have been some redundancies this year, but these decisions have been made to ensure the ongoing development of the business.
Our people acting as a global team not only means ensuring we leverage our scale, expertise and ideas more effectively but it also opens up more opportunities for our people to develop and grow.
Reshaped the investment model, separating investment portfolios that benefit from global scale and reach from those that leverage local market knowledge
Become a provider of solutions to address individual client requirements by leveraging all internal capabilities
Also included is UK net pension income which represents the expected return on pension scheme assets less the interest charge on pension scheme liabilities. Net pension income increased to £104 million (2007: £75 million) reflecting higher expected rates of return on assets partly offset by higher discount rate on the liabilities.
The group aims to maintain strong reserves in respect of general insurance and health business to protect against adverse future claims development. In 2008 we continued to benefit from favourable prior year claims development, although at a lower level than in 2007. Going forward we expect the size of these prior year releases to reduce as we have improved our reserving policy to set more stringent guidelines across the group.
Acquired value of in-force business and intangible assets 4,038 3,197 4,038 3,197
Total capital employed 24,750 29,146 Financed by: Equity shareholders’ funds 12,912 19,998 Minority interests 3,013 2,501 Direct capital instrument 990 990 Preference shares 200 200 Subordinated debt 4,606 3,054 External debt 919 1,257 Net internal debt 2,110 1,146
† Estimated realistic inherited estate at 31 December 2007 was £1.4 billion, £1.2 billion and £1.9 billion for CGNU Life, CULAC and NUL&P respectively.
Operational risks We’re exposed to operational risk arising from inadequately controlled internal processes or systems, human error or non-compliance as well as from external events. Operational risks include taxation, reputation and regulatory risks, such as compliance.
Working in partnership with them, we listen to client requirements, understand their objectives and approach to risk, and then design a bespoke solution.
What action have we taken? Consolidated our fund management business under Aviva Investors – As a global asset management business we can provide our clients with focused investment solutions
The business combines the former Aviva operations in the UK (Morley), France (Aviva Gestion d’Actifs), Ireland (Hibernian Investment Managers), Poland (CUIM Polska), Romania (CertInvest), North America (Aviva Capital Management, Aviva Investment Canada) and Australia (Portfolio Partners). In 2008 we also established operations in China, Taiwan and Singapore.
Real estate Our real estate business is the world’s largest manager of European commercial real estate assets* and is well positioned to build a global business. It has a large and highly experienced team, a reputation for innovation, offices in six locations across the world, a tried-and-tested investment process, exemplary customer service, a strategy team producing quality research and a constant emphasis on improving and expanding its capability. Highlights of 2008 included the launch of the Aviva Investors Asia Pacific Property fund, the first and only daily priced fund focused on the region, and the beginning of the integration of the French real estate team. Additional developments included the acquisition in April of Madison Harbor LLC, a US real estate multi manager.
Long-term savings £883m Fund management £(18)m General insurance £656m Other operations £(12)m £1,509m
The strategy we embarked on in 2006 has already seen us extract greater value from our business. Our major simplification and operational initiatives will complete during 2009, and through our investment in technology and customer propositions, will accelerate our transformation into an e-commerce business. In addition, we will seize the opportunity of our re-brand to Aviva to improve customer experience, deliver first class service and build customer loyalty.
Throughout the second half of 2008 we have experienced an increase in both the number and frequency of customer calls driven by the ongoing market volatility and the media coverage of the global financial crisis. The majority of customers enquired about the value of their policies, as consumer confidence was impacted by market turbulence. The focus of our service teams was to provide the necessary help and support to customers and re-assure them that their savings are safe. Furthermore, our dedicated retention team has concentrated its efforts on reminding our customers of the features of their policies and associated benefits. In addition the team’s proactive customer service engagement led to the retention of over 9,000 policyholders contemplating early surrender of their policies.
The new business internal rate of return has increased for the third successive year and now stands at 14% for business written in 2008 (2007: 13%).
It’s all part of our commitment to keeping both colleagues and customers in the loop.
What’s next? Our medium-term targets are to: – Seize unique growth opportunities – Leverage our scale across the region – Generate capital
Other operations losses of £123 million (2007: £38 million) includes holding company costs in a number of our markets, principally France, Italy and Delta Lloyd. Additional costs of £30 million have been incurred this year in relation to the implementation of the global financial strategy and other projects. In addition, Delta Lloyd’s banking and retail mortgage divisions reported an operating loss of £22 million (2007: profit £8 million) as a result of the adverse economic climate, and in Italy we incurred a loss of £6 million in our distribution associate Banca Network Investimenti, acquired in December 2007. The 2007 result benefited from a one-off pension scheme adjustment in France of £17 million.
The regional executive office is based in Chicago. This office provides governance to the US and Canadian business units, leads business development opportunities and determines the strategic direction of the region. Our four regional strategic priorities in 2008 were: Grow in existing and new markets; Expand the contribution of asset management by leveraging the capabilities of Aviva Investors; Optimise the regional business model to achieve efficiencies and accelerate performance; and
‡ US Census Bureau, July 2005. ~ Investment Company Institute, “Research Fundamentals”, October 2008, Vol. 17,
General insurance IFRS Combined Net Underoperating operating written writing profit ratio premium result £m % £m £m
Engage our people and customers The launch of Aviva Canada’s brand campaign “Let’s Change Insurance” was a major step change in the industry, resulting in a substantial increase in consumer awareness of Aviva in our target territories. The brand commitment to earn the trust of Canadians is underpinned by a mission to change insurance for the better by being honest about the things people don’t like about insurance and taking steps to change them. A key element of this commitment was the introduction of a unique Claims Service Guarantee in 2008. The guarantee promises customers great claims service at every step of the experience, with a commitment to refund the customer’s full premium if they are not completely happy.
New business margins of 1.0% (2007 restated: 1.4%) were consistent with 2007. Annuity margins are lower than those of life products but the increases in annuity volumes allowed the value of new business to increase to £55 million (2007 restated: £52 million).
We serve our customers through a multi-channel distribution strategy with particular strength in bancassurance and wrap administration. We have more than 50 bancassurance partners throughout the region, including major players such as Development Bank of Singapore (DBS) in Singapore and Hong Kong, ABN AMRO in India and Bank of China and ICBC in China. In addition we operate joint ventures with prestigious banks in Taiwan (First Commercial Bank), Malaysia (CIMB), Sri Lanka (National Development Bank) and South Korea (Woori Bank). We are a leading provider in the wrap administration business in both Australia and Singapore with our successful Navigator platform.
In 2008 we again experienced exceptional growth in China and have had a successful first year of operations in Taiwan. We started operations in South Korea in April and achieved promising sales through the bancassurance channel. Significant progress was also made in delivering our key regional initiatives. For example, the “one Aviva” regional operating model has started providing synergies in IT and product development and is enabling us to share skills and services across the group and within the Asia Pacific region.
General insurance and health IFRS Combined Net Underoperating operating written writing profit ratio premium result £m %* £m £m * General insurance business only.
Operational performance During 2008 we have made substantial investments to expand our distribution network and optimise our “one Aviva” shared services model. This model enables us to realise synergies across the region and in 2008 we expanded the existing Singapore and Hong Kong services and introduced this into Malaysia. We remain committed to supporting expansion in high potential and new start markets to secure future profitability and growth.
Insurance ownership is still relatively low in Malaysia and in the 2008 Aviva Consumer Attitudes to Savings study, CIMB Aviva found that 35% of Malaysians said they did not understand insurance and 40% wished that somebody else could help to sort out their financial affairs.
We will achieve this through: Empowering regional HR teams and building strong centres of expertise
Environment Our environment strategy focuses on working within our spheres of control, influence and concern. Within our sphere of control we manage our own impact and use of resources including electricity, gas, water and waste. We are also committed to using our influence as an investor to encourage other organisations to adopt responsible strategies. Finally, we aim to promote environmentally aware choices among individuals, including our employees and customers.
2008 has been a benign year for weather related claims, although we do see a trend in the increased incidents of such events and believe the occurrence of these will rise with climate change.
Energy intensity Total cost of building-related energy in 2008 was £18.2 million (2007: £20.4 million).
Water consumption m3 per employee New businesses to nn es kg s pe r e m pl oy ee
Our RAC business has fitted speed limiters on its breakdown vehicles providing an anticipated saving on fuel and associated carbon emissions of 7.4% over the year to October 2009. We are trialling retrofitted hybrid drive systems on two of the breakdown vehicles which could save up to another 25% in associated emissions in 2008/09. We will continue to purchase zero emission/ renewable electricity where it is practical to do so. Currently 65% (2007: 61%) of our electricity worldwide is purchased from zero emission sources. Our remaining emissions will continue to be offset on a retrospective basis compensating for the carbon output of our consumption of non-renewable sourced electricity, gas and oil from buildings and business travel.
We anticipate having a complete UK carbon footprint of the properties we own through our Property Fund managed by Aviva Investors. Under the new UK Government Carbon Reduction Commitment scheme, electricity gas and oil used in the properties will be subject to an additional cost of £12 per tonne.
In addition to reporting on our financial performance, it is important that as a forward thinking company we are aware of our wider responsibilities and report on the non-financial aspects of our performance. We consider that our employees and customers are fundamental to the success of our business; as such, they form the basis for our non-financial measures, and include: Leadership and employee engagement
Directors’ interests and indemnity arrangements At no time during the year did any director hold a material interest in any contract of significance with the Company or any of its subsidiary undertakings other than an indemnity provision between each director and the Company and service contracts between each executive director and a Group company. The Company has purchased and maintained throughout the year directors’ and officers’ liability insurance in respect of itself and its directors. The directors also have the benefit of the indemnity provision contained in the Company’s articles of association. The Company has executed deeds of indemnity for the benefit of each director of the Company, and each person who was a director of the Company during the year, in respect of liabilities that may attach to them in their capacity as directors of the Company or of associated companies. These indemnities were granted at different times according to the law in place at the time and where relevant are qualifying third-party indemnity provisions as defined by Section 309B of the Companies Act 1985 and Section 234 of the Companies Act 2006. These indemnities were in force throughout the year and are currently in force. Details of directors’ remuneration, service contracts and interests in the shares of the Company are set out in the Directors’ remuneration report.
– A review and approval of LTIP grants to the EDs and approval of the performance conditions for the 2008 grants
– “Target” performance means a target ABP outcome (75% of basic salary), a 50% vesting of the LTIP (87.5% of basic salary) and 1:1 match from the OATTV bonus plan (50% of basic salary).
“One Aviva, Twice the Value” (OATTV) Bonus Plan – The OATTV bonus aligns senior executives with the Chief Executive’s clear – Annually, a proportion of the strategic imperative of doubling EPS by the end of 2012. deferred element of the ABP is – The plan matches 100% of the deferred ABP shares for the Chief matched in shares
– The Chief Executive is eligible to receive an annual award of shares conditions being met at the end equal to 175% of basic salary. Other EDs are eligible to receive an of a three-year performance annual award of shares equal to 150% of basic salary. period
Basic salary £913,750 during the year Mr Moss received a basic salary increase from As at 1 January £880,000 1 April of £45,000 (5.1%). As at 31 December £925,000 His basic salary is frozen for 2009
ABP £752,164 (81.3% of basic salary) Bonus is a function of the degree of achievement (£250,721 delivered in cash and of 2008 targets as follows: £501,443 deferred into shares for Financial 22.9% (maximum 50%) three years) Employee 5.6% (maximum 10%)
One Aviva Twice the Value (OATTV) Bonus Plan The OATTV bonus plan aligns senior executives with the Chief Executive’s clear strategic imperative of doubling EPS by the end of 2012. The plan matches 100% of the deferred ABP shares for the Chief Executive (75% for other EDs). For the grant made in 2008 the vesting of these matched shares is dependent on the average annual growth in EPS during the three year performance period, thus: – Less than 10% growth pa Nil
TSR vesting operates as set out in Table 8 below: Table 8: TSR vesting schedule for the 2008 award
Aviva LTIP 2008 59.8% Aviva LTIP 2007 37.8% Aviva LTIP 2006 56.3%
Termination – By the director or the Company giving the other one month’s written notice without compensation.
3. “Benefits”. All the EDs received life assurance benefits during the year that relate to the cost incurred by the Company of insuring the directors’ life and relevant spouses’ benefits which, had the director died during the year, could not have been wholly paid by the pension scheme and would therefore have been met by the Company had the insurance not been in place. The disclosure also includes the cost of private medical insurance and, where appropriate, accompanied travel, accommodation and car benefits. All the numbers disclosed include the tax charged on the benefits. No directors received an expense allowance during the year.
Fees earned in 2008 by the non-executive directors are set out in Table 18 below.
Board Senior the Group’s Corporate membership independent operations Social Risk and fees director in Spain Remuneration Audit Nomination Responsibility Regulatory Total fees
Executive directors’ pension arrangements The positions of the EDs with respect to accumulated pension benefits under the defined benefits section of the ASPS is set out in Table 19 below.
At Options Options Options At 1 January granted exercised lapsing 31 December 2008 during year during year during year 2008 Exercise price Number Number Number Number Number Pence Exercise period
Critical accounting policies The major areas of judgement on policy application are considered to be over whether Group entities should be consolidated (set out in policy D), on product classification (set out in policy F) and in the classification of financial investments (set out in policy S).
If the aggregate carrying value of liabilities for a particular participating business fund is in excess of the aggregate carrying value of its assets, then the difference is held as a negative unallocated divisible surplus balance, subject to recoverability from margins in that fund's participating business. Any excess of this difference over the recoverable amount is charged to net income in the reporting period.
Outstanding claims provisions are valued net of an allowance for expected future recoveries. Recoveries include non-insurance assets that have been acquired by exercising rights to salvage and subrogation under the terms of insurance contracts.
Cash flows from operating activities 52a Cash-generated from operations 7,920 875 8,795 4,944 Tax paid (394) (248) (642) (801)
Cash flows from financing activities Proceeds from issue of ordinary shares, net of transaction costs – 20 20 48 Treasury shares purchased for employee trusts – (29) (29) (10) New borrowings drawn down, net expenses 1,435 4,080 5,515 6,322 Repayment of borrowings (1,365) (3,852) (5,217) (6,000) Net drawdown of borrowings 47e 70 228 298 322 Interest paid on borrowings (712) (825) (1,537) (1,208) Preference dividends paid – (17) (17) (17) Ordinary dividends paid – (732) (732) (500) Coupon payments on direct capital instrument – (56) (56) (53) Finance lease payments – (14) (14) (7) Capital contributions from minority shareholders 36 – 36 307 Dividends paid to minority interests of subsidiaries (83) (23) (106) (66) Non-trading cash flows between operations (189) 189 – –
Cash and cash equivalents at 31 December 20,141 3,928 24,069 15,564
Carrying amount as reported, net of reinsurance 11,424 10,980 Impact of discounting Prior year adjustment brought forward (153) (153) Impact on operating profit 12 – Impact on short-term fluctuations and economic assumption changes (2) – Impact of foreign exchange movements (2) –
Notes to the consolidated financial statements continued 3 – Subsidiaries continued
Assets Goodwill and intangible assets 99 Investments and property and equipment 10 Deferred acquisition costs and other assets 9 Receivables and other financial assets 25 Cash and cash equivalents 37
North America Our activities in North America principally comprise our long-term business operations in the USA and general insurance business operation in Canada.
Non-insurance Non-insurance includes the RAC non-insurance operations, our banking businesses, service companies, head office expenses, such as Group treasury and finance functions, and certain financing costs and taxes not allocated to business segments.
** General insurance and health business segment includes gross written premiums of £1,945 million and premiums ceded to other companies of £35 million relating to health business. The remaining business relates to property and liability insurance.
Gross written premiums* 19,622 – 11,369 – 30,991 Premiums ceded to reinsurers (858) – (800) – (1,658)
Change in insurance liabilities Change in insurance liabilities (4,792) 3,361 Change in reinsurance asset for insurance provisions 907 147
Fee and commission expense Acquisition costs Commission expenses for insurance and participating investment contracts 3,521 3,351 Change in deferred acquisition costs for insurance and participating investment contracts (513) (627) Deferrable costs for non-participating investment contracts 160 265 Other acquisition costs 1,337 1,348 Change in deferred acquisition costs for non-participating investment contracts 185 (279) Investment income attributable to unitholders (679) (139) Reinsurance commissions and other fee and commission expense 400 325
The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business. This note explains the methodology behind this.
– in the USA the impact of credit spread widening on certain assets backing funding agreements that are classified as fair value through profit or loss, and write-downs on assets classified as available for sale, of £430 million.
– Other supplementary services 6,224 4,749 Fees payable to Ernst & Young LLP for services to Group pension schemes Audit of Group pension scheme 70 67
Gross amount At 1 January 3,273 3,086 Acquisitions (note 3a(iv)) 106 115 Movements in contingent consideration (59) (5) Disposals (84) (16) Transfers from other intangibles 11 – Foreign exchange rate movements 651 93
(b) Intangible assets with indefinite useful lives comprise: (i) the RAC brand, and the value of the Union Financière de France Banque distribution channel, where the existing lives of the assets and their competitive position in, and the stability of, their respective markets support this classification; and
(e) Following a review for indicators of impairment of the finite-lived intangible assets held by the UK general Insurance, RAC and health business, an impairment charge of £9 million has been recognised in the income statement in respect of the intangible asset representing the right to future income from a book of creditor business. The impairment charge arose as a result of current adverse trading experience.
Share of profit after tax (12) 47 – 35 Acquisitions and additions 39 257 – 296 Disposals – (25) – (25) Dividends received – (32) – (32) Foreign exchange rate movements 5 32 – 37
Share of results before tax – (54) – (54) Share of tax – (9) – (9)
This note analyses our tangible fixed assets, which are primarily properties occupied by Group companies and computer equipment.
In addition to the above, the Group has received and pledged cash collateral under stock lending arrangement that has been recognised on the balance sheet with a corresponding obligation or receivable for its return. These latter balances are shown separately in notes 48 and 25 respectively.
The euro and sterling direct capital instruments (the DCIs) were issued on 25 November 2004. They have no fixed redemption date but the Company may, at its sole option, redeem all (but not part) of the euro and sterling DCIs at their principal amounts on 28 November 2014 and 27 July 2020 respectively, at which dates the interest rates change to variable rates, or on any respective coupon payment date thereafter.
(note 3b) 3 – – – – 3 Fair value gains transferred to retained earnings on disposals (note 35) – (25) – – – (25) Share of fair value changes in joint ventures and associates taken to equity (note 18a) – – 9 – – 9 Reserves credit for equity compensation plans
– In the United States, there are two main business segments – protection products and accumulation products. Protection products include interest-sensitive whole life, term life, universal life and indexed life insurance policies. The accumulation product segment includes traditional fixed and indexed deferred annuities for individuals and funding agreements for business customers. In addition, there are two closed blocks of participating contracts arising from demutualisations of subsidiary companies. All products are classified as insurance contracts except for the funding agreements and term certain immediate annuities, which are classified as non-participating investment contracts.
Future policy benefit reserves for universal life insurance, indexed life, deferred annuity products and funding agreements are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. The weighted average interest crediting rates for universal life products were 4.77% in 2008 (2007: 5.45%). The range of interest crediting rates for deferred annuity products, excluding sales inducement payouts, was 2.50% to 6.00% in 2008 (2007: 2.50% to 7.00%). An additional liability is established for universal life contracts with death or other insurance benefit features, which is determined using an equally-weighted range of scenarios with respect to investment returns, policyholder lapses, benefit election rates, premium payout patterns and mortality. The additional liability represents the present value of future expected benefits based on current product assumptions.
As explained in note 2, the Group’s accounting policy for discounting has been changed in 2008 to present all latent claims on a discounted basis.
Carrying amount at 1 January – as reported 12,941 12,718 Prior year adjustment – impact of discounting on latent claims (note 2b(i)) – (214)
Carrying amount at 1 January 44,635 38,958 Provisions in respect of new business 5,314 8,575 Expected change in existing business provisions (2,273) (1,094) Variance between actual and expected experience (9,503) (3,231) Impact of operating assumption changes (28) (2) Impact of economic assumption changes 5 20 Other movements (169) 61 Change in liability (6,654) 4,329 Effect of portfolio transfers, acquisitions and disposals (14) 254 Foreign exchange rate movements 4,314 1,094
(iii) Guaranteed annuity options The Group’s UK with-profit funds have written individual and group pension contracts which contain guaranteed annuity rate options (GAOs), where the policyholder has the option to take the benefits from a policy in the form of an annuity based on guaranteed conversion rates. The Group also has exposure to GAOs and similar options on deferred annuities.
Notes to the consolidated financial statements continued 44 – Tax assets and liabilities
(iii) Investments in Group-managed funds and insurance policies Plan assets in the UK and Dutch schemes include investments in Group-managed funds and insurance policies with other Group companies. Their treatment in the relevant parts of the financial statements is as follows: Plan assets – The treatment of these funds and policies in the consolidated balance sheet is described in section (vii) below.
UK Netherlands Canada Ireland Total £m 2007 £m £m £m £m £m £m
IAS 19 net (deficits)/ surplus in the schemes (445) (126) (1,417) (1,046) (68) (58) (85) 27 (2,015) (1,203)
The present value of unfunded post-retirement benefit obligations included in the totals in both of the tables above is £104 million (2007: £107 million).
This note analyses our financial liabilities at the end of the year.
This note gives further detail behind the figures in the cash flow statement.
Total capital employed is financed by a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. In addition to our external funding sources, we have certain internal borrowing arrangements in place which allow some of the assets that support technical liabilities to be invested in a pool of central assets for use across the group. These internal debt balances allow for the capital allocated to business operations to exceed the externally sourced capital resources of the group. Although intra-group in nature, they are included as part of the capital base for the purpose of capital management. These arrangements arise in relation to the following: – Certain subsidiaries, subject to continuing to satisfy standalone capital and liquidity requirements, loan funds to corporate and holding entities, these loans satisfy arms length criteria and all interest payments are made when due.
– Aviva International Insurance (AII) Ltd acts as both a UK general insurer and as the primary holding company for our foreign subsidiaries. Internal capital management mechanisms in place allocate a portion of the total capital of the company to the UK general insurance operations. These mechanisms also allow for some of the assets backing technical liabilities to be made available for use across the Group. Balances in respect of these arrangements are also treated as internal debt for capital management purposes.
Financial leverage, the ratio of external senior and subordinated debt to MCEV capital and reserves was 34.7% (2007: 19.2%). Fixed charge cover, which measures the extent to which external interest costs, including subordinated debt interest and preference dividends, are covered by MCEV operating profit was 9.2 times (2007: 9.2 times).
This capital is available to meet risks and regulatory requirements set by reference to local guidance and EU directives.
2. Estimated realistic inherited estate at 31 December 2008 was £1.4 billion, £1.2 billion and £1.9 billion for CGNU Life, CULAC and NUL&P respectively. 3. The risk capital margin (RCM) is 1.8 times covered by the inherited estate (31 December 2007: 3.5 times). 4. The NUL&P fund includes the Provident Mutual (PM) fund, which has realistic assets and liabilities of £1.8 billion and therefore does not impact the realistic inherited estate.
The available capital resources in each regulated entity are generally subject to restrictions as to their availability to meet requirements that may arise elsewhere in the Group. The principal restrictions are: – (i) UK with-profit funds – (CGNU Life, CULAC and NUL&P) – any available surplus held in each fund can only be used to meet the requirements of the fund itself or be distributed to policyholders and shareholders. With-profit policyholders are entitled to at least 90% of the distributed profits while the shareholders receive the balance. The latter distribution would be subject to a tax charge, which is met by the fund in the case of CGNU Life, CULAC and NUL&P.
55 – Risk management continued The Group’s management of credit risk includes monitoring exposures at a Group level and requiring business units to implement local credit risk processes (including limit frameworks). The local business unit credit risk processes involve the establishment and operation of specific risk management committees and the detailed reporting and monitoring of the financial asset portfolio against pre-established risk criteria. Individual counterparty exposures are aggregated and monitored at Group level against centrally-set limits reflecting the credit ratings by multiple ratings agencies and the type of exposure. In addition, the Group evaluates the concentration of exposures by industry sector and geographic region and monitors evolving credit spreads through the Credit Approvals Committee.
Derivative credit exposures The Group is exposed to counterparty credit risk through derivative trades. This risk is mitigated through collateralising almost all trades (the exception being certain FX trade where it has historically been the market norm not to collateralise). The Group operates strict standards around collateral management and controls including the requirement that all “Over the Counter” derivatives are supported by credit support annexes and ISDAs.
Gross of reinsurance (310) 300 90 (90) (170) (435) Net of reinsurance (360) 360 90 (90) (170) (425)
Sensitivities as at 31 December 2007 Impact before profit before tax (£m)
Total IFRS assets included in the consolidated balance sheet 354,562 321,326
Loans to and from subsidiaries are made on normal arm’s-length commercial terms. The maturity analysis of the related party loans is as follows: Loans owed by subsidiaries
Our responsibilities, as independent auditor, in relation to the consolidated Aviva MCEV financial statements are set out in our engagement letter dated 28 July 2008. We report to you our opinion as to whether the consolidated Aviva MCEV financial statements have been properly prepared in all material respects in accordance with the basis of preparation set out on pages 295 to 299. We also report to you if we have not received all the information and explanations we require for our audit of the consolidated Aviva MCEV financial statements.
Opinion In our opinion the consolidated Aviva MCEV financial statements for the year ended 31 December 2008 has been properly prepared, in all material respects, in accordance with the basis of preparation set out on pages 295 to 299.
Equity attributable to ordinary shareholders of Aviva plc 11,052 1,860 12,912 Preference share capital 200 – 200 Direct capital instruments 990 – 990 Minority interests 2,204 809 3,013
− expected renewals on new contracts and expected future contractual alterations to new contracts.
The embedded value is calculated on an after-tax basis applying current legislation and practice together with future known changes. Where gross results are presented, these have been calculated by grossing up post-tax results at the full rate of corporation tax for each country based on opening period tax rates.
The PVFP includes the capitalised value of profits and losses arising from subsidiary companies providing administration, investment management and other services to the extent that they relate to covered business. This is referred to as the “look through” into service company expenses. In addition, expenses arising in holding companies that relate directly to acquiring or maintaining covered business have been allowed for. Where external companies provide services to the life and related businesses, their charges have been allowed for in the underlying projected cost base.
United Kingdom 192 114 55 31 48 440 440 Europe 283 140 91 56 29 599 450 North America 85 61 6 (1) (11) 140 140 Asia Pacific 46 41 5 3 4 99 98
2. Mortality experience continues to be better than the assumptions set across a number of our businesses.
3. Lapse experience in Poland continues to be better than assumptions set across both Life and Pensions businesses.
United Kingdom 7.9% 8.4% France 6.4% 6.8% Ireland 4.7% 6.2% Italy 5.9% 6.5% Netherlands (including Belgium and Germany) 1 n/a 9.0% Poland 6.0% 7.2% Spain 9.7% 6.5% Other Europe 9.8% 11.3% Europe1 n/a 7.5% North America1 n/a 14.3% Asia 7.2% 9.5% Australia 7.8% 9.1% Asia Pacific 7.5% 9.4%
Value of new business, net of tax 14 6 27 3 5 70 125 1 126 504 630
(b) Economic Assumptions – Stochastic calculations The calculation of time value of options and guarantees allows for expected management and policyholder actions in response to varying future investment conditions. The management actions modelled include changes to asset mix, bonus rates and rates of interest and other guarantees granted to policyholders. Modelled policyholder actions are described under “Other assumptions”.
For many businesses, including US, France and Netherlands, the most important assets are fixed rate bonds of various durations.
Market values 2008 Embedded value (net of tax and minority interest)
Life business Subsidiaries selling life and pensions contracts that are classified as covered business under MCEV.
The risk-free return that can be earned on investments in the currency of the liability being valued. In stable markets, including the period from 31 December 2006 to 30 June 2007, the risk-free rate is taken as the swap curve yield. In current markets, including the period from 1st July 2007, the risk-free rate is taken as swaps except for UK and Netherlands immediate annuities and immediate annuities, deferred annuities and other US contracts. The adjusted risk-free rate is taken as swaps plus the additional return available for products and where backing asset portfolios can be held to maturity.
Aviva plc’s ordinary and preference shares are listed on the London Stock Exchange and the Luxembourg Stock Exchange.
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