FY 2008 Part 5 of 5

RNS Number : 3475O
Aviva PLC
05 March 2009
 



Part 5 of 5

Page 108


D1 - Consolidated income statement

For the year ended 31 December 2008

2008
€m




2008
£m

Restated 
2007

£m 



Income




45,258


Gross written premiums


36,206

 30,991

(2,301)


Premiums ceded to reinsurers


(1,841)

 (1,658)

42,957


Premiums written net of reinsurance


34,365

29,333

346


Net change in provision for unearned premiums


277

 (21)

43,303


Net earned premiums


34,642

29,312

2,356


Fee and commission income


1,885

 1,760

(20,054)


Net investment (expense)/income


(16,043)

 9,689

(1,410)


Share of loss after tax of joint ventures and associates


(1,128)

 (304)

9


Profit on the disposal of subsidiaries and associates


7

 49

24,204




19,363

40,506



Expenses




(36,691)


Claims and benefits paid, net of recoveries from reinsurers


(29,353)

(27,121)

4,856


Change in insurance liabilities, net of reinsurance


3,885

(3,508)

13,286


Change in investment contract provisions


10,629

(2,018)

5,603


Change in unallocated divisible surplus


4,482

2,922

(5,514)


Fee and commission expense


(4,411)

(4,244)

(6,770)


Other expenses


(5,416)

(3,473)

(1,934)


Finance costs


(1,547)

(1,217)

(27,164)




(21,731)

(38,659)

(2,960)


(Loss)/profit before tax


(2,368)

1,847

1,335


Tax attributable to policyholders' returns


1,068

 (15)

(1,625)


(Loss)/profit before tax attributable to shareholders' profits


(1,300)

1,832

1,854


Tax credit/(expense)


1,483

(349)

(1,335)


Less: tax attributable to policyholders' returns


(1,068)

15

519


Tax attributable to shareholders' profits


415

(334)

(1,106)


(Loss)/profit for the year


(885)

1,498



Attributable to:




(1,144)


Equity shareholders of Aviva plc


(915)

1,320

38


Minority interests


30

178

(1,106)




(885)

1,498



Earnings per share




(46.0)c


Basic (pence per share)


(36.8)p

48.9p

(46.0)c


Diluted (pence per share)


(36.8)p

48.5p


_________________

Page 109 

D2 - Consolidated statement of recognised income and expense 

For the year ended 31 December 2008


2008
€m




2008
£m

Restated 

2007
£m 

(2,976)


Fair value (losses)/gains on AFS securities, owner-occupied properties and hedging instruments


(2,381)

 172

(158)


Fair value gains transferred to profit


(126)

 (391)

1,036


Impairment losses on revalued assets


830

-

(116)


Share of fair value changes in joint ventures and associates taken to equity


(93)

9

(1,161)


Actuarial (losses)/gains on pension schemes


(929)

648

98


Actuarial losses/(gains) on pension schemes transferred to unallocated divisible surplus 


78

 (61)

3,316


Foreign exchange rate movements


2,653

723

294


Aggregate tax effect - shareholder tax


235

(179)

333


Net income recognised directly in equity


267

921

(1,106)


(Loss)/profit for the year


(885)

1,498

(773)


Total recognised income and expense for the year


(618)

2,419



Attributable to:




(1,399)


Equity shareholders of Aviva plc


(1,119)

2,140

626


Minority interests


501

279

(773)




(618)

2,419



D3 - Reconciliation of movements in consolidated shareholders' equity

For the year ended 31 December 2008


2008
€m




2008
£m

Restated
2007

£m 

16,424


Balance at 1 January as published


15,931

14,064

-


Prior year adjustment


-

(319)

16,424


Balance at 1 January restated


15,931

13,745

(637)


Total recognised income and expense for the year


(618)

2,419

(1,005)


Dividends and appropriations


(975)

(871)

21


Issues of share capital


20

48

175


Shares issued in lieu of dividends


170

301

37


Capital contributions from minority shareholders


36

-

(109)


Minority share of dividends declared in the year


(106)

(66)

44


Minority interest in acquired subsidiaries


43

315

(67)


Changes in minority interest in existing subsidiaries


(65)

-

(30)


Shares acquired by employee trusts


(29)

(10)

40


Reserves credit for equity compensation plans


39

50

14,893


Balance at 31 December


14,446

15,931


Page 110

D4 - Consolidated balance sheet

For the year ended 31 December 2008


2008
€m




2008
£m

Restated
2007

£m 



Assets




3,689


Goodwill


3,578

3,082

4,163


Acquired value of in-force business and intangible assets


4,038

3,197

1,791


Interests in, and loans to, joint ventures


1,737

2,576

1,285


Interests in, and loans to, associates


1,246

1,206

994


Property and equipment


964

942

14,872


Investment property


14,426

15,391

43,543


Loans


42,237

36,193



Financial investments




154,902


    Debt securities


150,255

121,312

44,692


    Equity securities


43,351

58,829

37,233


    Other investments


36,116

36,269

236,827




229,722

216,410

8,138


Reinsurance assets


7,894

8,054

2,724


Deferred tax assets


2,642

590

641


Current tax assets


622

376

10,119


Receivables and other financial assets


9,816

8,619

6,337


Deferred acquisition costs and other assets


6,147

4,487

3,878


Prepayments and accrued income


3,762

2,986

24,929


Cash and cash equivalents


24,181

16,089

1,598


Assets of operations classified as held for sale


1,550

1,128

365,528


Total assets


354,562

321,326

 


Equity




685


Ordinary share capital


664

655

4,644


Capital reserves


4,505

4,494

(34)


Shares held by employee trusts


(33)

(10)

2,175


Other reserves


2,110

1,469

3,924


Retained earnings


3,806

6,338

11,394


Equity attributable to ordinary shareholders of Aviva plc


11,052

12,946

1,227


Preference share capital and direct capital instrument


1,190

1,190

2,272


Minority interests


2,204

1,795

14,893


Total equity


14,446

15,931



Liabilities




180,258


Gross insurance liabilities


174,850

152,839

110,886


Gross liabilities for investment contracts


107,559

98,244

2,397


Unallocated divisible surplus


2,325

6,785

7,132


Net asset value attributable to unitholders


6,918

6,409

3,076


Provisions


2,984

1,937

3,113


Deferred tax liabilities


3,020

2,532

662


Current tax liabilities


642

1,225

15,671


Borrowings


15,201

12,657

21,485


Payables and other financial liabilities


20,840

18,060

4,696


Other liabilities


4,556

3,765

1,259


Liabilities of operations classified as held for sale


1,221

942

350,635


Total liabilities


340,116

305,395

365,528


Total equity and liabilities


354,562

321,326


______________

Page 111


D5 - Consolidated cash flow statement 

For the year ended 31 December 2008

The cash flows presented in this statement cover all the Group's activities and include flows from both policyholder and shareholder activities.



Long-term business operations
£m

 Non-long- term business operations
£m

Total
2008

£m

Restated 
Total

2007

£m

Cash flows from operating activities






Cash-generated from operations 


7,920

875

8,795

4,944

Tax paid 


(394)

(248)

(642)

 (801)

Net cash from operating activities 


7,526

627

8,153

4,143

Cash flows from investing activities






Acquisitions of subsidiaries, joint ventures and associates, net of cash acquired 


(93)

(243)

(336)

(769)

Disposals of subsidiaries, joint ventures and associates, net of cash transferred 


180

173

353

283

Purchase of minority interest in subsidiary 


(65)

-

(65)

-

New loans to joint ventures and associates


(182)

-

(182)

(126)

Repayment of loans to joint ventures and associates


52

-

52

159

Net repayment loans to joint ventures and associates 


(130)

-

(130)

33

Purchases of property and equipment 


(57)

(159)

(216)

(227)

Proceeds on sale of property and equipment 


35

24

59

93

Purchases of intangible assets 


(34)

(26)

(60)

(48)

Net cash used in investing activities 


(164)

(231)

(395)

(635)

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


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

-

-

Net cash from financing activities 


(878)

(1,259)

(2,137)

(1,184)

Net increase in cash and cash equivalents 


6,484

(863)

5,621

2,324

Cash and cash equivalents at 1 January 


11,132

4,432

15,564

12,635

Effect of exchange rate changes on cash and cash equivalents 


2,525

359

2,884

605

Cash and cash equivalents at 31 December 


20,141

3,928

24,069

15,564

Of the total cash and cash equivalents, £493 million (2007: £96 million) was classified as held for sale (see note D6 c(ii)).

Cash and cash equivalents in long-term business operations of £20,141 million (2007: £11,132million) are primarily held for the benefit of policyholders and so are generally not available for use by the Group.


___________________

Page 112

D6 - Subsidiaries

(a) Acquisitions

(i) VIVAS Health

On 15 May 2008, the Group's Irish subsidiary, Hibernian Group plc, acquired a 70% holding in VIVAS Group Ltd. (VIVAS Health), an Irish health insurance company, for £26 million. Allied Irish Banks plc (AIB) will continue to hold the remaining 30% equity, further strengthening AIB and Hibernian's existing relationship. The company has since been re-branded as Hibernian Aviva Health. Its health insurance products will be distributed through Hibernian and AIB's distribution channels, including Hibernian Aviva Health's existing direct and non-direct channels. 

The acquisition of this shareholding has given rise to goodwill on acquisition of £22 million, calculated as follows: 

Purchase cost:

£m

Cash paid

25

Attributable costs

1

Total consideration

26

The estimated book and fair values of the assets and liabilities at the date of acquisition were:


Book value
£m

Fair value and accounting policy adjustments
£m

Fair value
£m

Assets 




Reinsurance assets

30

-

30

Cash and cash equivalents

27

-

27

Receivables and financial assets

32

-

32

Other assets 

2

-

2

Total assets 

91

-

91

Liabilities




Insurance liabilities

(49)

-

(49)

Payables and other financial liabilities

(35)

-

(35)

Other liabilities

(1)

-

(1)

Total liabilities

(85)

-

(85)

Total net assets 

6

-

6

Net assets acquired (70%)



4

Goodwill arising on acquisition of this holding 



22

The assets and liabilities as at the acquisition date in the table above are stated at their provisional fair values and may be amended in 2009 in accordance with paragraph 62 of IFRS 3, Business Combinations. The residual goodwill represents future cost and revenue synergies from integration with Hibernian Group.

The results of VIVAS Health have been included in the consolidated financial statements of the Group with effect from 15 May 2008, and have contributed £5 million profit to the consolidated loss before tax. 

(ii) UBI Vita

On 18 June 2008, the Group acquired 50% plus one share in UBI Assicurazioni Vita SpA (UBI Vita), an Italian life insurance company, from Unione di Banche Italiane Scpa (UBI Banca), for a consideration of £52 million. UBI Vita distributes life insurance products through a bancassurance agreement with Banca Popolare di Ancona and other channels.

________________

Page 113 

D6 - Subsidiaries continued

The acquisition of this shareholding has given rise to goodwill on acquisition of £10 million, calculated as follows:

Purchase cost:

£m

Cash paid

51

Attributable costs

1

Total consideration

52

The estimated book and fair values of the assets and liabilities at the date of acquisition were:


Book value
£m

Fair value and accounting policy adjustments
£m

Fair value
£m

Assets 




Intangible assets

-

41

41

Reinsurance assets

130

-

130

Prepayments and accrued income

20

-

20

Cash and cash equivalents

8

-

8

Debt securities

1,803

(74)

1,729

Other investments

407

-

407

Property and equipment

17

1

18

Receivables and other financial assets

45

-

45

Other assets 

2

2

4

Total assets 

2,432

(30)

2,402

Liabilities




Insurance liabilities

(2,267)

67

(2,200)

Borrowings

(31)

-

(31)

Payables and other financial liabilities

(56)

-

(56)

Other liabilities 

(12)

(18)

(30)

Total liabilities

(2,366)

49

(2,317)

Total net assets 

66

19

85

Net assets acquired (50%)



42

Goodwill arising on acquisition of this holding 



10

The assets and liabilities as at the acquisition date in the table above are stated at their provisional fair values and may be amended in 2009 in accordance with paragraph 62 of IFRS 3, Business Combinations. The residual goodwill represents expected future revenue and cost synergies.

The results of UBI Vita have been included in the consolidated financial statements of the Group with effect from 18 June 2008, and have contributed £2 million loss to the consolidated loss before tax. 

(iii) Swiss Life Belgium

On 30 June 2008, the Group acquired 100% of the shares in Swiss Life Belgium, a multi-line insurer, from SNS REAAL for £112 million. By combining Swiss Life Belgium with our Belgian insurance operation, managed through our Dutch subsidiary Delta Lloyd, the Group will further strengthen its position in the Belgian life insurance market. 

The acquisition of this shareholding has given rise to goodwill on acquisition of £48 million, calculated as follows: 

Purchase cost:

£m

Cash paid

112

Attributable costs

-

Total consideration

112


Page 114

D6 - Subsidiaries continued

The estimated book and fair values of the assets and liabilities at the date of acquisition were:


Book value
£m

Fair value and accounting policy adjustments
£m

Fair value
£m

Assets 




Acquired value of in-force business on insurance contracts

-

17

17

Reinsurance assets

28

-

28

Prepayments and accrued income

33

-

33

Cash and cash equivalents

60

-

60

Equity securities

464

-

464

Debt securities

1,735

-

1,735

Property and equipment

19

-

19

Investment property

80

-

80

Loans

21

-

21

Receivables and other financial assets

46

-

46

Other assets 

19

-

19

Total assets 

2,505

17

2,522

Liabilities




Insurance liabilities

(1,635)

92

(1,543)

Liabilities for investment contracts 

(818)

52

(766)

Borrowings

(49)

-

(49)

Payables and other financial liabilities

(41)

-

(41)

Other liabilities

(59)

-

(59)

Total liabilities

(2,602)

144

(2,458)

Total net assets 

(97)

161

64

Net assets acquired (100%)



64

Goodwill arising on acquisition 



48

The assets and liabilities as at the acquisition date in the table above are stated at their provisional fair values and may be amended in 2009 in accordance with paragraph 62 of IFRS 3, Business Combinations. The residual goodwill represents cost and revenue synergies from integrating the business with our existing Belgian operations.

The results of Swiss Life Belgium have been included in the consolidated financial statements of the Group with effect from 30 June 2008, and have contributed £35 million loss to the consolidated loss before tax.

(iv) Material acquisitions summary


2008
£m

Total net assets of subsidiaries described above

155

Less: Minority interests

(45)

Net assets acquired

110

Cash paid

188

Attributable costs

2

Total consideration

190

Goodwill arising on material acquisitions above

80

Other goodwill arising (see (v) below)


Addition to existing shareholding in Cajamurcia

3

Other goodwill arising 

23

Total goodwill arising in the year

106



_________________

Page 115 

D6 - Subsidiaries continued

(v) Other goodwill arising

Addition to existing shareholding in Cajamurcia Vida 

As disclosed in the 2007 financial statements, on 6 June 2007 the Group acquired 5% of the share capital of Caja Murcia Vida y Pensiones, de Seguros y Reaseguros SA (Cajamurcia Vida) from the Spanish savings bank Caja de Ahorros de Murcia (Cajamurcia). Cajamurcia Vida was fully consolidated as a subsidiary from that date, as the Group has the power to govern its financial and operating policies, through having the majority vote at meetings of the company's board of directors. 

On signing the shareholders' agreement, Cajamurcia granted the Group a call option over a further 45% of the shares in Cajamurcia Vida. On 27 March 2008, the Group exercised this option and acquired 45% of the shares for £81 million. The fair value of the net assets of the company at the date the option was exercised was £176 million, and the acquisition of the additional shareholding gave rise to additional goodwill of £3 million.

Other

Other goodwill has arisen on smaller acquisitions and increases in shareholdings in existing subsidiaries, as well as fair value adjustments to acquisitions made in 2007. None of these is considered material for separate disclosure.

(vi) Unaudited pro forma combined revenues and profit

Shown below are unaudited pro forma figures for combined revenues and profit as though the acquisition date for all business combinations effected during the year had been 1 January 2008, after giving effect to purchase accounting adjustments and the elimination of intercompany transactions. The pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisitions taken place at 1 January 2008, nor is it necessarily indicative of future results.


2008
£m

Revenues (net earned premiums and fee income)

36,620

Loss before tax attributable to shareholders

(1,388)

£32 million of the above pre-tax loss has risen since acquisition.

(b) Disposal of subsidiaries, joint ventures and associates

The profit on the disposal of subsidiaries, joint ventures and associates comprises:


2008
£m

2007
£m

United Kingdom (see (i) below)

(38)

 (7)

Turkey 

-

71

Offshore operations (see (iii) below)

14

-

Other small operations

31

(15)

Profit on disposal before tax

7

49

Tax on profit on disposal

-

3

Profit on disposal after tax

7

52


_______________

Page 116 

D6 - Subsidiaries continued

(i) UK non-core operations

As part of its strategy to exit certain UK non-core operations, the Group completed the disposals of HPI Limited to Solera Holdings Inc. and RAC Autowindscreens Limited to Arques Management GmbH in December 2008. The loss on disposal of these wholly-owned subsidiaries was £38 million, calculated as follows: 


2008
£m

Assets


Goodwill and intangible assets

  99 

Investments and property and equipment

  10 

Deferred acquisition costs and other assets

Receivables and other financial assets

25  

Cash and cash equivalents

37 

Total assets

180  

Liabilities


Payables and other financial liabilities

(20) 

Other liabilities

(28) 

Tax liabilities and other provisions

(17)

Total liabilities

(65) 

Net assets disposed of

  115 

Consideration:


    Cash consideration  

67

    Non-cash consideration

15

Less: transaction costs

(5)

Total consideration

77

Loss on disposal 

(38)

(ii) Luxembourg life operations

On 5 November 2008, the Group's Dutch subsidiary, Delta Lloyd NV, exchanged its 100% holding in Commercial Union International Life SA (CUIL) for a 15% shareholding in NewPEL SA, a Luxembourg-registered investment company. No profit or loss was realised on disposal.

The assets and liabilities of CUIL at the date of disposal were: 


2008
£m

Assets


Intangible assets

5

Investments

373

Cash and cash equivalents

5

Other assets

16

Total assets

399

Liabilities


Liability for investment contracts

(372)

Borrowings

(3)

Other liabilities

(10)

Total liabilities

(385)

Net assets disposed of

14

Consideration:


    Non-cash consideration

14

Profit on disposal 

-


___________

Page 117 

D6 - Subsidiaries continued

(iii) Sale of offshore operations 

On 11 July 2008, the Group sold its offshore operations, administered through Aviva Global Services Singapore Pte Ltd (AGS), to WNS (Holdings) Limited (WNS). As part of this agreement, we have entered into a master services agreement with WNS, who will provide business process services to the Group's UK, Irish and Canadian businesses through to 2016. The consideration for the shares in AGS was £35 million and the relevant net assets of AGS at the disposal date were £21 million, giving rise to a profit on disposal of £14 million.

(c) Operations and assets classified as held for sale

Assets held for sale as at 31 December 2008 comprises: 


2008
£m

2007
£m

Property and equipment held for sale (see (i) below)

102

-

Assets of operations classified as held for sale (see (ii) below)

1,448

1,128

Total assets classified as held for sale

1,550

1,128

 (i) Property and equipment held for sale 

As part of its restructuring, the UK data centres, presently owned and managed by Norwich Union Central Services Limited, have been classified as held for sale at 31 December 2008 at their fair value of £102 million. In remeasuring the data centres at fair value, an impairment charge of £44 million has been recognised in the income statement within integration and restructuring costs. The data centres were sold on 25 February 2009 at their fair value above.

 (ii) Assets and liabilities of operations classified as held for sale

The assets and liabilities of operations classified as held for sale as at 31 December 2008 relate to our Dutch health insurance business and certain UK non-core operations, and were as follows:


2008
£m

2007
£m

Goodwill and intangible assets

14

-

Investments and property and equipment

396

316

Receivables and other financial assets

386

554

Deferred acquisition costs and other assets

1

-

Prepayments and accrued income

158

145

Tax assets

-

17

Cash and cash equivalents

493

96

Total assets

1,448

1,128

Gross insurance liabilities

(709)

(627)

Borrowings

-

(12)

Payables and financial liabilities

(22)

(72)

Other liabilities

(478)

(220)

Tax liabilities and other provisions

(12)

(11)

Total liabilities

(1,221)

(942)

Net assets

227

186

The 2007 figures relate to our Dutch health insurance business.

______________________

Page 118 

D6 - Subsidiaries continued

(iii) Dutch health insurance business

On 16 July 2007, the Group announced that its Dutch subsidiary, Delta Lloyd Group ('DL'), had reached an agreement to sell its health insurance business to OWM CZ Groep Zorgverkeraar UA ('CZ'), a mutual health insurer, and create a long-term alliance for the cross-selling of insurance products. Under the terms of the agreement, CZ will purchase the DL health insurance business and take on its underwriting risk and policy administration. DL will continue to market and distribute health insurance products from CZ to its existing customers and continue to provide asset management for the transferred business. DL will also have exclusive rights to market life, general insurance and income protection products to CZ's customers. The transaction completed on 1 January 2009. 

The relevant assets and liabilities of the DL health insurance business have been classified as held for sale, at their carrying values, in the consolidated balance sheet as at 31 December 2008.

(iv) UK non-core operations 

In 2008, the Group decided to sell, and was actively marketing, certain companies as part of its strategy to exit certain UK non-core operations. As at 31 December 2008, The British School of Motoring Limited and its subsidiaries had yet to be sold and, as a result, their relevant assets and liabilities have been classified as held for sale, at their carrying values, in the consolidated balance sheet as at 31 December 2008. On 11 February 2009, these companies were sold to Arques Consulting GmbH, realising a loss on disposal of £9 million which has been provided for within exceptional items in these financial statements.

(d) Other information

One of the Group's subsidiaries, Delta Lloyd NV, is subject to the provisions of Dutch corporate law and particularly the Dutch 'structure company' regime. Under this regime, Delta Lloyd operates under a Supervisory Board which has a duty to have regard to the interests of a wide variety of stakeholders. The Supervisory Board includes two Aviva Group representatives and is responsible for advising and supervising Delta Lloyd's Executive Board. The shareholder is one of the most important stakeholders to whom the Supervisory Board has a duty.

Dutch Law changed in October 2004 to ensure that Supervisory Board directors in Dutch companies were henceforth to be elected by a company's shareholders voting on nominations made by its Supervisory Board and the Works Council. Under the previous system, Supervisory Board directors appointed their own successors. In 2006, Delta Lloyd commenced proceedings against Aviva plc to try to compel the Company to adhere to the system that existed prior to the change in the law, on the basis of agreements they say were entered into in 1973 when the Group acquired Delta Lloyd. The Company disputes these claims and does not expect the litigation, whatever its outcome, to have any adverse effect on the financial or operational performance of Delta Lloyd or the Group. The court gave a judgement in 2008, requiring Aviva to adhere to the previous system of appointment, which Aviva is appealing.


_____________________

Page 119 

D7 - Segmental information

(a) Operating segments 

The Group has determined its operating segments along regional lines. These reflect the management structure whereby a member of the Executive Management team is accountable to the Group Chief Executive for the operating segment for which he is responsible. The activities of each operating segment are described below:

United Kingdom

The United Kingdom comprises two operating segments - UK Life and UK General Insurance (UK GI). The principal activities of UK Life are life insurance, long-term health and accident insurance, savings, pensions and annuity business, whilst UK GI provides insurance cover to individuals and to small and medium-sized businesses, for risks associated mainly with motor vehicles, property and liability, such as employers' liability and professional indemnity liability, and medical expenses. UK GI also includes the RAC motor recovery business, the group reinsurance result and the results of run off business.

Europe

Activities reported in the Europe operating segment exclude operations in the UK and include those in Russia and Turkey. Principal activities are long-term business in France, the NetherlandsIrelandItalyPoland and Spain, and general insurance in France, the NetherlandsIreland and Italy, as well as the fund management activity of Delta Lloyd.

North America

Our activities in North America principally comprise our long-term business operations in the USA and general insurance business operation in Canada.

Asia Pacific

Our activities in Asia Pacific principally comprise our long-term business operations in AustraliaChinaIndiaSingaporeHong KongSri LankaTaiwanMalaysia, and South Korea.

Aviva Investors

Aviva Investors operates in most of the regions in which the Group operates, in particular the UK, France, the United States and Canada and other international businesses, managing policyholders' and shareholders' invested funds, providing investment management services for institutional pension fund mandates and managing a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. Fund management activities of Delta Lloyd are included in the Europe operating segment. 

Other Group activities

Investment return on centrally held assets and head office expenses, such as Group treasury and finance functions, together with certain taxes and financing costs arising on central borrowings are included in 'Other Group activities'. Similarly, central core structural borrowings and certain tax balances are included in 'Other Group activities' in the segmental balance sheet. Also included here are consolidation and elimination adjustments.

Measurement basis

The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are on normal commercial terms and market conditions. The Group evaluates performance of operating segments on the basis of: 

(i)     profit or loss from operations before tax attributable to shareholders.

(ii)     profit or loss from operations before tax attributable to shareholders, adjusted for non-operating items outside the segment management's control, including investment market performance and fiscal policy changes.

_________________

Page 120 

D7 - Segmental information continued

(i) Segmental income statement for the year ended 31 December 2008


United Kingdom

Europe
£m

North 
America

£m

Asia Pacific
£m

Aviva 
Investors†

£m

Other 
Group activities

£m

Total
£m

Life
£m

GI#
£m

Gross written premiums

8,108

5,496

15,529

6,486

587

-

-

36,206

Premiums ceded to reinsurers

(612)

(498)

(442)

(214)

(75)

-

-

(1,841)

Internal reinsurance revenue

-

26

(21)

(4)

(1)

-

-

-

Net written premiums

7,496

5,024

15,066

6,268

511

-

-

34,365

Net change in provision for unearned premiums 

6

344

(21)

(50)

(2)

-

-

277

Net earned premiums 

7,502

5,368

15,045

6,218

509

-

-

34,642

Fee and commission income 

310

362

711

40

168

294

-

1,885

 

7,812

5,730

15,756

6,258

677

294

-

36,527

Net investment income

(8,844)

326

(6,168)

444

(626)

(407)

(768)

(16,043)

Inter-segment revenue 

-

-

-

-

-

203

-

203

Share of loss of joint ventures 
and associates

(1,058)

-

(38)

-

(32)

-

-

(1,128)

Profit on the disposal of subsidiaries and associates

-

(38)

24

-

-

-

21

7

Segmental income*

(2,090)

6,018

9,574

6,702

19

90

(747)

19,566

Claims and benefits paid, 
net of recoveries from reinsurers

(8,620)

(3,944)

(13,411)

(2,912)

(464)

-

(2)

(29,353)

Change in insurance liabilities, 
net of reinsurance

2,674

280

3,409

(2,774)

296

-

-

3,885

Change in investment contract provisions

7,240

-

2,765

(126)

401

349

-

10,629

Change in unallocated divisible surplus 

2,151

-

2,331

-

-

-

-

4,482

Amortisation of deferred acquisition costs and acquired value of in-force business

-

-

(44)

(285)

(4)

-

-

(333)

Depreciation and other amortisation expense

(70)

(108)

(120)

(51)

(5)

(5)

-

(359)

Other operating expenses

(1,787)

(2,599)

(2,970)

(633)

(296)

(362)

552

(8,095)

Impairment losses**

-

(26)

(814)

(200)

-

-

-

(1,040)

Inter-segment expenses

(137)

(2)

(18)

(42)

(3)

-

(1)

(203)

Finance costs

(541)

(10)

(703)

(17)

-

-

(276)

(1,547)

Segmental expenses

910

(6,409)

(9,575)

(7,040)

(75)

(18)

273

(21,934)

(Loss)/profit before tax

(1,180)

(391)

(1)

(338)

(56)

72

(474)

(2,368)

Tax attributable to policyholders' returns

1,031

-

49

-

(12)

-

-

1,068

(Loss)/profit before tax attributable to shareholders

(149)

(391)

48

(338)

(68)

72

(474)

(1,300)

*    Total reported income, excluding inter-segment revenue, is split United Kingdom £3,928 million, France £1,005 million, Netherlands £6,759 million, USA £4,954 million and Rest of the World £2,717 million. Income is attributed on the basis of geographical origin which does not materially differ from revenue by geographical destination, as most risks are located in the countries where the contracts were written.

**    Impairment losses, and reversal of such losses, recognised directly in equity were £830 million and £nil.

    Aviva Investors comprises the Aviva Investors UK, France, the United StatesCanada and International fund management businesses.

#    United Kingdom GI includes the Group reinsurance business, agency run off business and the non-insurance business for the RAC


____________________

Page 121 

D7 - Segmental information continued


United Kingdom

Europe
£m

North 
America

£m

Asia Pacific
£m

Aviva 
Investors†

£m

Other 
Group activities

£m

Total
£m

Life 

£m

GI

£m

(Loss)/profit before tax attributable to shareholders

(149)

(391)

48

(338)

(68)

72

(474)

(1,300)

Adjusted for 
non-operating items:









Reclassification of corporate costs and unallocated interest

7

(71)

54

15

-

-

(5)

-

Investment return variances and economic assumption changes on long-term business

694

-

400

433

104

-

-

1,631

Short-term fluctuation in return on investments backing non-long-term business

-

334

389

(47)

-

-

143

819

Economic assumption changes on general insurance and health business

-

91

3

-

-

-

-

94

Impairment of goodwill

-

-

66

-

-

-

-

66

Amortisation and impairment of intangibles 

3

33

34

44

-

3

-

117

(Profit)/loss on the disposal of subsidiaries and associates

-

38

(24)

-

-

-

(21)

(7)

Exceptional item

108

312

133

42

-

6

(50)

551

Integration and restructuring costs 

60

195

38

-

-

33

-

326

Operating profit/(loss) before tax attributable to shareholders

723

541

1,141

149

36

114

(407)

2,297


_______________________

Page 122 

D7 - Segmental information continued

(ii) Segmental income statement for the year ended 31 December 2007


United Kingdom

Europe
£m

North 
America

£m

Asia
Pacific

£m

Aviva
Investors†

£m

Other 
Group

activities

£m

Restated
Total

£m

Life
£m

GI
£m

Gross written premiums

6,128

6,039

13,538

4,628

658

30,991

Premiums ceded to reinsurers

(444)

(577)

(388)

(195)

(54)

(1,658)

Internal reinsurance revenue

-

28

(19)

(7)

(2)

-

Net written premiums

5,684

5,490

13,131

4,426

602

29,333

Net change in provision for unearned premiums

(18)

60

(22)

(40)

(1)

(21)

Net earned premiums 

5,666

5,550

13,109

4,386

601

-

29,312

Fee and commission income 

246

385

638

30

168

299 

(6)

1,760


5,912

5,935

13,747

4,416

769

299 

(6)

31,072

Net investment income

5,186

699

2,761

875

286

(15)

(103)

9,689

Inter-segment revenue 

-

-

-

-

-

199 

-

199

Share of profit/(loss) of joint ventures and associates

(304)

3

6

-

(9)

-

(304)

Profit/(loss) on the disposal of subsidiaries and associates

-

(7)

(5)

-

-

61

49

Segmental income*

10,794

6,630

16,509

5,291

1,046

483

(48)

40,705

Claims and benefits paid, net 
of recoveries from reinsurers

(9,000)

(4,064)

(11,192)

(2,486)

(377)

-

(2)

(27,121)

Change in insurance liabilities, 
net of reinsurance

(729)

417

(949)

(1,920)

(327)

-

-

(3,508)

Change in investment contract provisions

(694)

-

(1,091)

(153)

(35)

(45)

-

(2,018)

Change in unallocated divisible surplus 

1,882

-

1,040

-

-

-

2,922

Amortisation of deferred acquisition costs and acquired value of in-force business

-

-

(35)

(122)

(3)

-

(160)

Depreciation and other amortisation expense

(24)

(104)

(53)

(45)

(6)

(17) 

-

(249)

Other operating expenses

(1,110)

(2,723)

(2,318)

(545)

(251)

(289) 

(15)

(7,251)

Impairment losses**

-

-

(50)

(7)

-

-

(57)

Inter-segment expenses

(141)

(4)

(18)

(32)

(3)

(1)

(199)

Finance costs

(405)

(10)

(527)

(19)

-

(256)

(1,217)

Segmental expenses

(10,221)

(6,488)

(15,193)

(5,329)

(1,002)

(351) 

(274)

(38,858)

Profit/(loss) before tax

573

142

1,316

(38)

44

132

(322)

1,847

Tax attributable to policyholders' returns

(9)

-

6

-

(9)

(3)

-

(15)

Profit/(loss) before tax attributable to shareholders 

564

142

1,322

(38)

35

129

(322)

1,832

*    Total reported income, excluding inter-segment revenue, is split United Kingdom £17,424 million, France £5,731 million, Netherlands £5,922 million, 
USA £3,777 million and Rest of the World £7,853 million. Income is attributed on the basis of geographical origin which does not materially differ from revenue by geographical destination, as most risks are located in the countries where the contracts were written.

**    Impairment losses, and reversal of such losses, recognised directly in equity were £nil and £1 million.

    Aviva Investors comprises the Aviva Investors UK, France, the United StatesCanada and International fund management businesses.

___________________________

Page 123 

D7 - Segmental information continued


United Kingdom

Europe
£m

North 
America

£m

Asia Pacific
£m

Aviva   
Investors†

£m  

Other 
Group activities

£m

Restated
Total

£m

Life
£m

GI
£m

Profit/(loss) before tax attributable to shareholders

564

142

1,322

(38)

35

129

(322)

1,832

Adjusted for non-operating items:









Reclassification of corporate costs and unallocated interest

(6)

(63)

33

19

-

-

17

-

Investment return variances and economic assumption changes on long-term business

112

-

(309)

181

(1)

2

-

(15)

Short-term fluctuation in return on investments backing non-long-term business

-

86

112

9

-

-

(23)

184

Economic assumption changes on general insurance and health business

-

(1)

-

(1)

-

-

-

(2)

Impairment of goodwill

-

-

1

-

-

9

-

10

Amortisation and impairment of intangibles 

4

28

21

40

3

7

-

103

(Profit)/loss on the disposal of subsidiaries and associates

-

7

5

-

-

-

(61)

(49)

Integration and restructuring costs 

8

114

12

19

-

-

-

153

Operating profit before tax attributable to shareholders

682

313

1,197

229

37

147

(389)

2,216

____________________

Page 124 

D7 - Segmental information continued

(iii) Segmental balance sheet as at 31 December 2008


United Kingdom

Europe
£m

North 
America

£m

Asia 
Pacific

£m

Aviva 
 investors†

£m

Other 
Group activities

£m

Total
£m

Life
£m

GI
£m

Goodwill

52

1,208

1,357

903

55

3

-

3,578

Acquired value of in-force business and intangible assets

65

265

1,470

2,196

28

14

-

4,038

Interests in, and loans to, joint ventures and associates 

2,080

-

604

2

296

-

1

2,983

Property and equipment

123

173

519

106

32

10

1

964

Investment property

8,872

148

3,920

7

21

655

803

14,426

Loans

20,156

833

19,061

2,130

56

1

-

42,237

Financial investments

69,052

2,482

125,329

24,621

3,865

1,454

2,919

229,722

Deferred acquisition costs

1,221

998

1,254

2,627

43

3

1

6,147

Other assets

13,933

4,971

23,867

5,537

627

661

871

50,467

Total assets

115,554

11,078

177,381

38,129

5,023

2,801

4,596

354,562

Insurance liabilities









    Long-term business and 
  outstanding claims 

  provisions

62,070

6,103

72,464

26,939

2,120

-

-

169,696

     Unearned premiums

173

2,966

670

959

22

-

-

4,790

     Other insurance liabilities

-

91

182

91

-

-

-

364

Liability for investment contracts

35,109

-

65,106

3,403

1,643

2,298

-

107,559

Unallocated divisible surplus

2,727

-

(405)

-

3

-

-

2,325

Net asset value attributable to unitholders

986

-

3,304

-

175

-

2,453

6,918

External borrowings

2,716

11

6,970

163

-

-

5,341

15,201

Other liabilities, including inter-segment liabilities

8,164

(972)

18,635

4,041

190

324

2,881

33,263

Total liabilities

111,945

8,199

166,926

35,596

4,153

2,622

10,675

340,116

Total equity








14,446

Total equity and liabilities








354,562

Capital expenditure (excluding business combinations)

36

93

72

70

4

5

-

280

External borrowings by holding companies within the Group which are not allocated to operating companies are included in 'Other Group activities'.

    Aviva Investors comprises the Aviva Investors UK, France, the United StatesCanada and International fund management businesses.


___________________________

Page 125 

D7 - Segmental information continued

(iv) Segmental balance sheet as at 31 December 2007


United Kingdom

Europe
£m

North 
America

£m

Asia 
Pacific

£m

Aviva 
Investors

£m

Other 
Group activities

£m

Restated

Total
£m

Life
£m

GI
£m

Goodwill

71

1,276

1,053

642

40

-

-

3,082

Acquired value of in-force business and intangible assets

65

349

1,164

1,579

28

12

-

3,197

Interests in, and loans to, joint ventures and associates 

2,972

-

594

1

215

-

-

3,782

Property and equipment

177

317

374

28

37

7

2

942

Investment property

10,415

252

3,061

-

25

966

672

15,391

Loans

20,153

900

13,895

1,206

39

-

-

36,193

Financial investments

83,489

3,679

103,430

17,227

3,934

1,993

2,658

216,410

Deferred acquisition costs

1,477

1,212

914

830

45

4

5

4,487

Other assets

10,535

5,157

16,086

2,804

500

667

2,093

37,842

Total assets

129,354

13,142

140,571

24,317

4,863

3,649

5,430

321,326

Insurance liabilities









    Long-term business and 
  outstanding claims 

  provisions

65,017

6,429

56,505

17,335

1,820

-

-

147,106

    Unearned premiums

179

3,468

973

815

15

-

-

5,450

    Other insurance liabilities

-

92

113

78

-

-

-

283

Liability for investment contracts

41,845

-

49,551

1,756

1,952

3,140

-

98,244

Unallocated divisible surplus

4,944

-

1,838

-

3

-

-

6,785

Net asset value attributable to unitholders

758

-

2,680

-

189

-

2,782

6,409

External borrowings

2,184

12

6,153

133

-

6

4,169

12,657

Other liabilities, including inter-segment liabilities

10,474

(320)

13,129

1,615

160

294

3,109

28,461

Total liabilities

125,401

9,681

130,942

21,732

4,139

3,440

10,060

305,395

Total equity








15,931

Total equity and liabilities








321,326

Capital expenditure (excluding business combinations)

30

140

106

10

5

6

2

299

 (b) Further analysis by products and services

The Group's results can be further analysed by products and services which comprise long-term business, fund management, general insurance and health, and non-insurance activities.

Long-term business

Our long-term business comprises life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business and our share of the other life and related business written in our associates and joint ventures, as well as the Lifetime mortgage business written in the UK.

Fund management 

Our fund management business invests policyholders' and shareholders' funds, provides investment management services for institutional pension fund mandates and manages a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. Clients include Aviva Group businesses and third-party financial institutions, pension funds, public sector organisations, investment professionals and private investors. 

_______________________

Page 126 

D7 - Segmental information continued

General insurance and health

Our general insurance and health business provides insurance cover to individuals and to small and medium sized businesses, for risks associated mainly with motor vehicles, property and liability, such as employers' liability and professional indemnity liability, and medical expenses.

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.

(i) Segmental income statement - products and services for the year ended 31 December 2008


Long-term business
£m

Fund management
£m

General

Insurance

and health**
£m

Other
£m
 

 

Total
£m

Gross written premiums*

24,272

-

11,934

-

36,206

Premiums ceded to reinsurers

(1,044)

-

(797)

-

(1,841)

Net written premiums

23,228

-

11,137

-

34,365

Net change in provision for unearned premiums

-

-

277

-

277

Net earned premiums 

23,228

-

11,414

-

34,642

Fee and commission income 

753

567

160

405

1,885


23,981

567

11,574

405

36,527

Net investment (expense)/income

(16,671)

3

425

200

(16,043)

Inter-segment revenue

-

185

-

-

185

Share of loss of joint ventures and associates

(1,089)

(12)

(5)

(22)

(1,128)

Profit on the disposal of subsidiaries and associates

-

-

-

7

7

Segmental income

6,221

743

11,994

590

19,548

Segmental expenses

(7,532)

(662)

(12,100)

(1,622)

(21,916)

Tax attributable to policyholder returns

1,068

-

-

-

1,068

Profit/(loss) before tax attributable to shareholders

(243)

81

(106)

(1,032)

(1,300)

Adjusted for non-operating items

1,937

42

1,304

314

3,597

Operating profit before tax attributable to shareholders' profits

1,694

123

1,198

(718)

2,297

*    Gross written premiums includes inward reinsurance premiums assumed from other companies amounting to £255 million, of which £89 million relates to property and liability insurance £131 million to long-term business and the remainder health business.

**    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.

    Other includes the RAC non-insurance operations, our banking business, head office expenses, such as Group treasury and finance functions, and certain financing costs and taxes not allocated to business segments. 

______________________

Page 127 

D7 - Segmental information continued

(ii) Segmental income statement - products and services for the year ended 31 December 2007


 

 

 

 

 

 

Long-term business
£m

Fund management
£m

General 

insurance  
and health**

£m

Other
£m
 

Restated

Total
£m

Gross written premiums*

19,622

-

11,369

-

30,991

Premiums ceded to reinsurers

(858)

-

(800)

-

(1,658)

Net written premiums

18,764

-

10,569

-

29,333

Net change in provision for unearned premiums

-

-

(21)

-

(21)

Net earned premiums 

18,764

-

10,548

-

29,312

Fee and commission income 

692

494

179

395

1,760


19,456

494

10,727

395

31,072

Net investment income

8,529

45

827

288

9,689

Inter-segment revenue

-

152

-

-

152

Share of (loss)/profit of joint ventures and associates

(297)

(9)

3

(1)

(304)

Profit/(loss) on the disposal of subsidiaries and associates

-

-

(7)

56

49

Segmental income

27,688

682

11,550

738

40,658

Segmental expenses

(26,139)

(521)

(10,843)

(1,308)

(38,811)

Tax attributable to policyholder returns

(15)

-

-

-

(15)

Profit before tax attributable to shareholders

1,534

161

707

(570)

1,832

Adjusted for non-operating items

76

18

314

(24)

384

Operating profit before tax attributable to shareholders' profits 

1,610

179

1,021

(594)

2,216

(iii) Segmental balance sheet - products and services as at 31 December 2008


Long-term business 
£m

Fund management
£m

General insurance and health
£m

Other
£m

Total
£m

Segment assets

307,928

732

25,190

20,712

354,562

Segment liabilities 

(291,347)

(392)

(19,552)

(28,825)

(340,116)

Net assets

16,581

340

5,638

(8,113)

14,446

(iv) Segmental balance sheet - products and services as at 31 December 2007


Long-term business 
£m

Fund management
£m

General insurance 
and health

£m

Other
£m

Restated
Total

£m

Segment assets

280,375

1,871

24,341

14,739

321,326

Segment liabilities 

(265,736)

(1,517)

(18,581)

(19,561)

(305,395)

Net assets

14,639

354

5,760

(4,822)

15,931


___________________

Page 128 

D8 - Tax

(a) Tax (credit)/charged to the income statement

(i) The total tax (credit)/charge comprises:        


2008
£m

Restated 
2007

£m

Current tax



For this year

527

885

Prior year adjustments

(284)

(94)

Total current tax

243

791

Deferred tax



Origination and reversal of temporary differences

(1,814)

(348)

Changes in tax rates or tax laws

(7)

(88)

Write-down of deferred tax assets

95

(6)

Total deferred tax

(1,726)

(442)

Total tax (credited)/charged to income statement (note 13c)

(1,483)

349

In February 2009 an Australian tax court case was settled in our favour resulting in the release of tax provisions of £63 million which has reduced the tax charge in the income statement.

 (ii) The Group, as a proxy for policyholders in the UKIrelandSingapore and Australia, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Irish, Singapore and Australian life insurance policyholder returns is included in the tax charge. The tax credit attributable to policyholders' returns included in the credit above is £1,068 million (2007: £15 million charge).

(iii) The tax (credit)/charge can be analysed as follows:


2008
£m

Restated

2007
£m

UK tax

(1,482)

94

Overseas tax

(1)

255


(1,483)

349

(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce current tax expense and deferred tax expense by £139 million and £19 million, respectively (2007: £51 million and £6 million, respectively).

_________________________

Page 129 

D8 - Tax continued

(v) Deferred tax credited to the income statement represents movements on the following items:


2008
£m

2007
£m

Long-term business technical provisions and other insurance items

591

315

Deferred acquisition costs

224

34

Unrealised losses on investments

(1,706)

(793)

Pensions and other post-retirement obligations

16

40

Unused losses and tax credits

(413)

(272)

Subsidiaries, associates and joint ventures

(199)

(33)

Intangibles and additional value of in-force long-term business

30

(75)

Provisions and other temporary differences

(269)

342

Total deferred tax credited to income statement

(1,726)

(442)

(b) Tax (credited)/charged to equity

(i) The total tax (credit)/charge comprises:


 2008
£m

2007
£m

Current tax

(16)

(19)

Deferred tax



    In respect of pensions and other post-retirement obligations

(15)

269

    In respect of unrealised losses on investments

(204)

(71)


(219)

198

Total tax (credited)/charged to equity

(235)

179

(ii) The tax credit attributable to policyholders' returns included above is £nil (2007: £nil).

(c) Tax reconciliation

The tax on the Group's profit before tax differs from the theoretical amount that would arise using the tax rate of the home country of the Company as follows:


2008
£m

Restated

2007
£m

(Loss)/profit before tax

(2,368)

 1,847

Tax calculated at standard UK corporation tax rate of 28.5% (2007: 30%)

(675)

554

Different basis of tax - policyholders

(767)

 5

Adjustment to tax charge in respect of prior years

(283)

 (49)

Non-assessable income

(94)

 (124)

Non-taxable profit on sale of subsidiaries and associates

(2)

 (18)

Disallowable expenses

95

 7

Different local basis of tax on overseas profits

(61)

 56

Reduction in future UK tax rate (net of movements in unallocated divisible surplus)

-

 (64)

Deferred tax not recognised

292

 1

Other

12

 (19)

Total tax (credited)/charged to income statement (note 13a)

(1,483)

 349


________________________

Page 130

D9 - Earnings per share

(a) Basic earnings per share

(i) The profit attributable to ordinary shareholders is:




2008




Restated

2007


Operating profit
£m

Adjusting items
£m

Total
£m


Operating profit
£m

Adjusting items
£m

Total
£m

Profit/(loss) before tax attributable to 
shareholders' profits

2,297

(3,597)

(1,300)


2,216

(384)

1,832

Tax attributable to shareholders' (loss)/profits

(487)

902

415


(604)

270

(334)

Profit/(loss) for the year

1,810

(2,695)

(885)


1,612

(114)

1,498

Amount attributable to minority interests

(91)

61

(30)


(191)

13

(178)

Cumulative preference dividends for 
the year

(17)

-

(17)


(17)

-

(17)

Coupon payments in respect of direct capital instruments (DCI) (net of tax)

(40)

-

(40)


(37)

-

(37)

Profit/(loss) attributable to ordinary shareholders

1,662

(2,634)

(972)


1,367

(101)

1,266


(ii) Basic earnings per share is calculated as follows:




2008




Restated

2007


Before tax
£m

Net of tax, minorities, preference dividends and DCI
£m

Per share 
p


Before tax
£m

Net of tax, minorities, preference dividends 
and DCI

£m

Per share 
p

Operating profit attributable to ordinary shareholders

2,297

1,662

62.9


2,216

1,367

52.8

Non-operating items:








Investment return variances and economic assumption changes on long-term business 

(1,631)

(1,280)

(48.4)


15

92

3.6

Short-term fluctuation in return on investments backing non-long-term business 

(819)

(553)

(20.9)


(184)

(51)

(2.0)

Economic assumption changes on general insurance and health business

(94)

(67)

(2.5)


2

2

0.1

Impairment of goodwill 

(66)

(66)

(2.5)


(10)

(10)

(0.4)

Amortisation and net impairment of intangibles 

(117)

(89)

(3.4)


(103)

(72)

(2.8)

Profit on the disposal of subsidiaries and associates 

7

7

0.3


49

52

2.0

Integration and restructuring costs and








  exceptional items

(877)

(586)

(22.3)


(153)

(114)

(4.4)

(Loss)/profit attributable to ordinary shareholders

(1,300)

(972)

(36.8)


1,832

1,266

48.9

(iii) The calculation of basic earnings per share uses a weighted average of 2,643 million (2007: 2,588 million) ordinary shares in issue, after deducting shares owned by the employee share trusts. The actual number of shares in issue at 31 December 2008 was 2,658 million (2007: 2,622 million).

_______________

Page 131 

D9 - Earnings per share continued

(b) Diluted earnings per share

(i) Diluted earnings per share is calculated as follows:


2008


2007


Total
£m

Weighted average number 
of shares 

m

Per share 
p


Total
£m

Weighted average number 
of shares 

m

Per share 
p

(Loss)/profit attributable to ordinary shareholders

(972)

2,643

(36.8)


1,266

 2,588

48.9

Dilutive effect of share awards and options

-

24

-


 -

 24

(0.4)

Diluted (loss)/earnings per share

(972)

2,667

(36.8)


1,266

 2,612

48.5


 (ii) Diluted earnings per share on operating profit attributable to ordinary shareholders is calculated as follows:




2008




2007


Total
£m

Weighted average number 
of shares 

m

Per share 
p


Total
£m

Weighted average number 
of shares 

m

Per share 
p

Operating profit attributable to ordinary shareholders

1,662

2,643

62.9


1,367

2,588

52.8

Dilutive effect of share awards and options

-

24

(0.6)


 -

 24

(0.5)

Diluted earnings per share

1,662

2,667

62.3


1,367

2,612

52.3


D10 - Dividends and appropriations


2008
£m

2007
£m

Ordinary dividends declared and charged to equity in the year



    Final 2007 - 21.10 pence per share, paid on 16 May 2008 

554

-

    (Final 2006 - 19.18 pence per share, paid on 18 May 2007)

-

492

    Interim 2008 - 13.09 pence per share, paid on 17 November 2008

348

-

    (Interim 2007 - 11.90 pence per share, paid on 16 November 2007)

-

309


902

801

Preference dividends declared and charged to equity in the year

17

17

Coupon payments on direct capital instrument

56

53


975

871

Subsequent to 31 December 2008, the directors proposed a final dividend for 2008 of 19.91 pence per ordinary share (2007: 21.10 pence), amounting to £529 million (2007: £554 million) in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 15 May 2009 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2009.

Interest on the direct capital instrument issued in November 2004 is treated as an appropriation of retained profits and, accordingly, it is accounted for when paid. Tax relief is obtained at a rate of 28.5% (2007: 30%).

____________________

Page 131

D11 - Insurance liabilities

(a) Carrying amount

Insurance liabilities at 31 December comprise:




2008




Restated 2007


Long-term business 
£m 

General insurance and health
£m

Total
£m


Long-term business 
£m 

General insurance 
and health

£m

Total
£m

Long-term business provisions








    Participating

66,863

-

66,863


66,093

-

66,093

    Unit-linked non-participating

22,060

-

22,060


20,601

-

20,601

     Other non-participating

67,265

-

67,265


48,618

-

48,618


156,188

-

156,188


135,312

-

135,312

Outstanding claims provisions

907

11,842

12,749


727

10,842

11,569

Provision for claims incurred but not reported

-

2,518

2,518


-

2,099

2,099


907

14,360

15,267


727

12,941

13,668

Provision for unearned premiums

-

5,493

5,493


-

5,484

5,484

Provision arising from liability adequacy tests

-

13

13


-

24

24

Other technical provisions

-

-

-


-

3

3

Total

157,095

19,866

176,961


136,039

18,452

154,491

Less: Obligations to staff pension schemes transferred to provisions

(1,402)

-

(1,402)


(1,025)

-

(1,025)

Amounts classified as held for sale

-

(709)

(709)


-

(627)

(627)


155,693

19,157

174,850


135,014

17,825

152,839


(b) Movements in long-term business liabilities

The following movements have occurred in the long-term business provisions during the year:


2008
£m

2007
£m

Carrying amount at 1 January

135,312

126,614

Provisions in respect of new business

13,414

10,470

Expected change in existing business provisions

(6,423)

(6,280)

Variance between actual and expected experience

(9,401)

(877)

Effect of adjusting to PS06/14 realistic basis

(40)

(60)

Impact of other operating assumption changes

(812)

95

Impact of economic assumption changes

(604)

(909)

Effect of special bonus to with-profit policyholders 

-

1,728

Other movements

(527)

(324)

Change in liability recognised as an expense

(4,393)

3,843

Effect of portfolio transfers, acquisitions and disposals

1,872

571

Foreign exchange rate movements

23,397

4,284

Carrying amount at 31 December

156,188

135,312

________________

Page 133 

D11 - Insurance liabilities continued

(b) Movements in general insurance and health liabilities

The following changes have occurred in the general insurance and health claims provisions during the year:


2008
£m

Restated

2007
£m

Carrying amount at 1 January - as reported 

12,941

12,718

Prior year adjustment - impact of discounting on latent claims

-

(214)

Carrying amount at 1 January restated

12,941

12,504

Impact of changes in assumptions

120

(1)

Claim losses and expenses incurred in the current year

8,720

8,273

Decrease in estimated claim losses and expenses incurred in prior years

(828)

(956)

Exceptional strengthening of general insurance latent claims provisions 

356

-

Incurred claims losses and expenses

8,368

7,316

Less:



Payments made on claims incurred in the current year

(4,682)

(4,408)

Payments made on claims incurred in prior years

(4,307)

(3,686)

Recoveries on claim payments

293

315

Claims payments made in the year, net of recoveries

(8,696)

(7,779)

Unwind of discounting

33

35

Other movements in the claims provisions

(27)

36

Changes in claims reserve recognised as an expense

(322)

(392)

Effect of portfolio transfers, acquisitions and disposals

128

175

Foreign exchange rate movements

1,613

654

Carrying amount at 31 December

14,360

12,941


Prior year releases of £840 million reflect decrease in estimated claim losses and expenses incurred in prior years above of
£828 million and £12 million 
increase of reinsurance.

Exceptional strengthening of £304 million reflects gross amount of £356 million above and £52 million of reinsurance.

_______________________

Page 134

D11 - Insurance liabilities continued

(d) Loss development tables

(i) Gross figures

Before the effect of reinsurance, the loss development table is:

Accident year

All prior years
£m

2001
£m

2002
£m

2003
£m

2004
£m

2005
£m

2006
£m

2007
£m

2008
£m

Total
£m

Gross cumulative claim payments











    At end of accident year


(3,029)

(2,952)

(2,819)

(2,971)

(3,345)

(3,653)

(4,393)

(4,915)


    One year later


(4,766)

(4,486)

(4,190)

(4,561)

(5,011)

(5,525)

(6,676)



    Two years later


(5,303)

(4,921)

(4,613)

(4,981)

(5,449)

(5,971)




    Three years later


(5,701)

(5,233)

(4,972)

(5,263)

(5,784)





    Four years later


(5,966)

(5,466)

(5,258)

(5,448)






    Five years later


(6,121)

(5,618)

(5,409)







    Six years later


(6,223)

(5,715)








    Seven years later


(6,294)









Estimate of gross ultimate claims











    At end of 
accident year


6,590

6,250

6,385

6,891

7,106

7,533

8,530

9,508


    One year later


6,770

6,372

6,172

6,557

6,938

7,318

8,468



    Two years later


6,775

6,287

6,124

6,371

6,813

7,243




     Three years later


6,798

6,257

6,036

6,178

6,679





     Four years later


6,754

6,205

5,932

6,008






     Five years later


6,679

6,122

5,853







     Six years later


6,630

6,056








     Seven years later


6,576









Estimate of gross ultimate claims


6,576

6,056

5,853

6,008

6,679

7,243

8,468

9,508


Cumulative payments


(6,294)

(5,715)

(5,409)

(5,448)

(5,784)

(5,971)

(6,676)

(4,915)



3,600

282

341

444

560

895

1,272

1,792

4,593

13,779

Effect of discounting











Claims previously discounted

(187)

(4)

(4)

(4)

(2)

(3)

(4)

(7)

(12)

(227)

New discounted claims

(474)

-

-

-

-

-

-

-

-

(474)

Present value

2,939

278

337

440

558

892

1,268

1,785

4,581

13,078

Cumulative effect of foreign exchange movements

-

56

70

129

130

165

240

231

-

1,021

Effect of acquisitions

-

12

12

66

21

31

35

60

24

261

Present value recognised in the balance sheet

2,939

346

419

635

709

1,088

1,543

2,076

4,605

14,360

The effect of discounting on new discounted claims relates to the discounting of latent claims introduced for the first time in 2008. 

_______________

Page 135

D11 - Insurance liabilities continued

(ii) Net of reinsurance

After the effect of reinsurance, the loss development table is:

Accident year

All prior years
£m

2001
£m

2002
£m

2003
£m

2004
£m

2005
£m

2006
£m

2007
£m

2008
£m

Total
£m

Net cumulative claim payments











    At end of accident year


(2,970)

(2,913)

(2,819)

(2,870)

 (3,281)

(3,612)

(4,317)

(4,808)


    One year later


(4,624)

(4,369)

(4,158)

(4,378)

(4,925)

(5,442)

(6,542)



    Two years later


(5,088)

(4,779)

(4,565)

(4,712)

(5,344)

(5,881)




    Three years later


(5,436)

(5,064)

(4,924)

(4,986)

(5,671)





    Four years later


(5,648)

(5,297)

(5,180)

(5,163)






    Five years later


(5,763)

(5,424)

(5,325)







    Six years later


(5,841)

(5,508)








    Seven years later


(5,896)









Estimate of net ultimate claims











    At end of accident year


6,186

6,037

6,218

6,602

6,982

7,430

8,363

9,262


    One year later


6,333

6,038

6,093

6,266

6,818

7,197

8,302



    Two years later


6,321

5,997

6,037

6,082

6,688

7,104




    Three years later


6,329

5,973

5,942

5,882

6,544





    Four years later


6,286

5,912

5,851

5,709






    Five years later


6,219

5,855

5,772







    Six years later


6,173

5,786








    Seven years later


6,109









Estimate of net ultimate claims


6,109

5,786

5,772

5,709

6,544

7,104

8,302

9,262


Cumulative payments


(5,896)

(5,508)

(5,325)

(5,163)

(5,671)

(5,881)

(6,542)

(4,808)



2,100

213

278

447

546

873

1,223

1,760

4,454

11,894

Effect of discounting











Claims previously discounted

(19)

(4)

(4)

(4)

(2)

(3)

(4)

(6)

(11)

(57)

New discounted claims

(390)

-

-

-

-

-

-

-

-

(390)

Present value

1,691

209

274

443

544

870

1,219

1,754

4,443

11,447

Cumulative effect of foreign exchange movements

-

42

63

115

123

153

224

220

-

940

Effect of acquisitions

-

10

10

43

19

26

29

44

26

207

Present value recognised in the balance sheet

1,691

261

347

601

686

1,049

1,472

2,018

4,469

12,594

The effect of discounting on new discounted claims relates to the discounting of latent claims introduced for the first time in 2008. 

In the loss development tables shown above, the cumulative claim payments and estimates of cumulative claims for each accident year are translated into sterling at the exchange rates that applied at the end of that accident year. The impact of using varying exchange rates is shown at the bottom of each table. Disposals are dealt with by treating all outstanding and IBNR claims of the disposed entity as 'paid' at the date of disposal.

The loss development tables above include information on asbestos and environmental pollution claims provisions from business written before 2001. The undiscounted claim provisions, net of reinsurance, in respect of this business at 31 December 2008 were £1,019 million (2007: £323 million). The movement in the year reflects exceptional strengthening of provisions by £668 million due to the increased market trend in mesothelioma claim notifications, other strengthening of £16 million (2007: £20 million), foreign exchange rate movements and timing differences between claim payments and reinsurance recoveries.

______________

Part 136 

D12 - Liability for investment contracts

(a) Participating investment contracts


2008
£m

2007
£m

Carrying amount at 1 January

53,609

49,400

Provisions in respect of new business

3,391

3,009

Expected change in existing business provisions

(1,909)

(1,978)

Variance between actual and expected experience

(4,661)

(404)

Impact of operating assumption changes

(166)

(3)

Impact of economic assumption changes

244

178

Effect of special bonus to with-profit policyholders 

-

399

Other movements

13

(176)

Change in liability recognised as an expense

(3,088)

1,025

Effect of portfolio transfers, acquisitions and disposals

2,181

-

Foreign exchange rate movements

12,576

3,184

Other movements

-

-

Carrying amount at 31 December

65,278

53,609


(b) Non-participating investment contracts


2008
£m

2007
£m

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

Carrying amount at 31 December

42,281

44,635

The negative variance between actual and expected experience relates mainly to lower than expected investment returns on unit funds. 


___________________

Part 137

D13 - Reinsurance assets

(a) Carrying amounts

The reinsurance assets at 31 December comprised:


2008
£m

Restated

2007
£m

Long-term business



Insurance contracts

4,466

4,298

Participating investment contracts

52

22

Non-participating investment contracts

1,047

1,461

Outstanding claims provisions

145

94


5,710

5,875

General insurance and health



Outstanding claims provisions

1,737

1,634

Provisions for claims incurred but not reported

29

29


1,766

1,663

Provision for unearned premiums

418

511

Other technical provisions

-

5


2,184

2,179

Total

7,894

8,054

Of the above total, £6,097 million (2007: £4,796 million) is expected to be recovered more than one year after the balance sheet date.

(b) Assumptions

The assumptions, including discount rates, used for reinsurance contracts follow those used for insurance contracts.

Reinsurance assets are valued net of an allowance for their recoverability.

(c) Movements

The following movements have occurred in the reinsurance asset during the year:

(i) In respect of long-term business provisions


2008
£m

2007
£m

Carrying amount at 1 January

5,781

5,534

Asset in respect of new business

235

216

Expected change in existing business asset

243

(124)

Variance between actual and expected experience

(1,141)

52

Impact of other operating assumption changes

(761)

14

Impact of economic assumption changes

306

(122)

Other movements

(231)

(40)

Change in asset

(1,349)

(4)

Effect of portfolio transfers, acquisitions and disposals

140

24

Foreign exchange rate movements

993

227

Carrying amount at 31 December

5,565

5,781

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D13 - Reinsurance assets continued

(ii) In respect of general insurance and health outstanding claims provisions and IBNR


2008
£m

Restated

2007
£m

Carrying amount at 1 January as published

1,663

1,738

Prior year adjustment - impact of discounting on latent claims  

-

(61)

Carrying amount at 1 January restated

1,663

1,677

Impact of changes in assumptions

21

-

Exceptional strengthening of latent claims provisions (see below)

52

-

Reinsurers' share of claim losses and expenses 



    Incurred in current year

228

169

    Incurred in prior years

12

12

Reinsurers' share of incurred claim losses and expenses

240

181

Less:



Reinsurance recoveries received on claims



    Incurred in current year

(107)

 (75)

    Incurred in prior years

(257)

(223)

Reinsurance recoveries received in the year

(364)

(298)

Unwind of discounting

24

26

Change in reinsurance asset recognised as income 

(27)

(91)

Effect of portfolio transfers, acquisitions and disposals

27

39

Foreign exchange rate movements

105

42

Other movements

(2)

(4)


1,766

1,663

The one-off strengthening of latent claims reserves during 2008 resulted in an increase in the reinsurers' share of claims and losses of £52 million. 

(iii) Reinsurers' share of the provision for unearned premiums (UPR)


2008
£m

2007
£m

Carrying amount at 1 January

511

484

Premiums ceded to reinsurers in the year

798

800

Less: Reinsurers' share of premiums earned during the year

(909)

(797)

Changes in reinsurance asset recognised as income

(111)

3

Reinsurers' share of portfolio transfers and acquisitions

8

18

Foreign exchange rate movements

10

6

Carrying amount at 31 December

418

511


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Page 139

D14 - Effect of changes in assumptions and estimates during the year

This disclosure only allows for the impact on liabilities and related assets, such as reinsurance, deferred acquisition costs and AVIF, and does not allow for offsetting movements in the value of backing financial assets.


Effect on profit
2008

£m

Effect on profit
2007

£m

Assumptions



Long-term insurance business



Interest rates

(521)

850

Expenses

24

(13)

Persistency rates

2

(2)

Mortality for assurance contracts

44

16

Mortality for annuity contracts

26

11

Tax and other assumptions

93

60

Investment contracts



Interest rates

(75)

12

Expenses

(27)

5

Persistency rates

2

-

Tax and other assumptions

36

7

General insurance and health business



Change in loss ratio assumptions

(1)

-

Change in discount rate assumptions

(94)

3

Change in expense ratio assumptions

-

(4)

Total

(491)

945

The impact of interest rates for long-term business relates primarily to the UKIreland and the Netherlands, driven by the market level of risk-free rates. Lower valuation interest rates in 2008 had the effect of increasing liabilities for traditional business and hence a negative impact on profit. This follows an increase in market interest rates in 2007 which had the reverse effect. The overall impact on profit also depends on movements in the value of assets backing the liabilities, which is not included in this disclosure. 

Favourable impacts from expense and mortality assumption changes relate mainly to the UK. Other assumption changes include further implementation of FSA Policy Statement PS06/14 for non-profit business and expense inflation adjustments in the UK, and reserve releases in Asia, partly offset by compensation for unit-linked policies in the Netherlands.

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D15 - Unallocated divisible surplus

(a) Movements

The following movements have occurred in the year:


2008
£m

2007
£m

Carrying amount at 1 January

6,785

9,465

Change in participating contract assets

(12,022)

2,463

Change in participating contract liabilities

7,699

(3,244)

Effect of special bonus to with-profit policyholders 

(89)

(2,127)

Other movements

(70)

(14)

Change in liability recognised as an expense

(4,482)

(2,922)

Effect of portfolio transfers, acquisitions and disposals

-

3

Movement in respect of change in pension scheme deficit 

(78)

61

Foreign exchange rate movements

88

173

Other movements

12

5

Carrying amount at 31 December

2,325

6,785

In France, Italy and Spain the unallocated divisible surplus balances were £924 million negative in total at 31 December 2008 (2007: £166 million negative) because of an accounting mismatch between participating assets carried at market value and participating liabilities measured using local practice; in each case the negative balance is considered to be recoverable from margins in the existing participating business liabilities.

(b) Special bonus declared by UK Life business

On 5 February 2008, the Group's UK long-term business operation, Norwich Union Life, announced a one-off, special bonus worth an estimated £2.3 billion, benefiting around 1.1 million with-profit policyholders in its CGNU Life and CULAC with-profit funds. The bonus is being used to enhance policy values by around 10% in total, in three instalments, with the qualifying dates being 1 January 2008, 1 January 2009 and 1 January 2010. In accordance with the way the funds are managed, the bonus distribution is being split on a 90/10 basis between policyholders and shareholders. Over the three years, policyholders will receive a total currently estimated as £2,127 million and shareholders will receive a total currently estimated as £236 million.

As explained in our group's accounting policies F and K, the Group's insurance and participating investment contract liabilities are measured in accordance with IFRS 4, Insurance Contracts, and FRS 27, Life Assurance. The latter requires liabilities for with-profit funds falling within the scope of the UK's Financial Services Authority's capital regime to be determined in accordance with this regime, adjusted to remove the shareholders' share of future bonuses. This required us to recognise planned discretionary bonuses within policyholder liabilities at 31 December 2007, even if there was no constructive obligation at the time. As a result of the announcement made above, a transfer of £2,127 million was made in 2007 from the UDS in order to increase insurance liabilities by £1,728 million and participating investment contract liabilities by £399 million. Of the £236 million due to shareholders, £89 million has been transferred from the UDS in 2008 (2007: £nil).

D16 - Pension obligations

(a)    Recognised in the income statement

The total pension expense for these schemes comprises:


2008
£m

2007
£m

Current service cost 

(162)

(173)

Past service cost 

(1)

-

Gain on curtailments 

(3)

(15)

Total pension cost charged to net operating expenses

(166)

(188)

Expected return on scheme assets 

706

614

Less: Income on insurance policy assets accounted for elsewhere (see (iii) above) 

(64)

(49)


642

565

Interest charge on scheme liabilities 

(585)

(515)

Credit to investment income 

57

50

Total charge to income 

(109)

(138)

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D16 - Pension obligations continued

(b) Recognised in the statement of recognised income and expense 


2008
£m

2007
£m

Expected return on scheme assets 

(706)

(614)

Actual (negative)/positive return on these assets 

(1,245)

404

Actuarial losses on scheme assets 

(1,951)

(210)

Less: losses on insurance policy assets accounted for elsewhere 

58

72

Actuarial losses on admissible assets

(1,893)

(138)

Experience gains/(losses) arising on scheme liabilities 

105

(80)

Changes in assumptions underlying the present value of the scheme liabilities 

859

902

Loss on acquisitions

-

(36)

Actuarial (losses)/gains recognised in the statement of recognised 
income and expense 

(929)

648

The cumulative amount of actuarial gains and losses on the pension schemes recognised in the statement of recognised income and expense since 1 January 2004 (the date of transition to IFRS) is a loss of £1,090 million at 31 December 2008 (2007: loss of £161 million).

(c) Movements in the scheme deficits and surpluses

Movements in the pension schemes' deficits and surpluses comprise:






2008


Scheme assets
£m

Scheme liabilities
£m

Pension scheme deficit 
£m

Adjust for Group insurance policies
£m

IAS 19 pensions deficit
£m 

Net deficits in the schemes at 1 January 

9,839

(10,017)

(178)

(1,025)

(1,203)

Employer contributions 

620

-

620

(70)

550

Employee contributions 

24

(24)

-

(7)

(7)

Benefits paid 

(368)

368

-

39

39

Current and past service cost (see (a) above) 

(5)

(158)

(163)

-

(163)

Losses on curtailments (see (a) above) 

-

(3)

(3)

-

(3)

Credit/(charge) to investment income (see (a) above) 

706

(585)

121

(64)

57

Other actuarial gains/(losses) (see (a) above) 

(1,951)

964

(987)

58

(929)

Buy-outs and other transfers 

(1)

1

-

1

1

Exchange rate movements on foreign plans 

474

(497)

(23)

(334)

(357)

Net deficits in the schemes at 31 December 

9,338

(9,951)

(613)

(1,402)

(2,015)

The change in the pension schemes' net deficits during 2008 is mainly attributable to the fall in equity and property investment values, partly offset by favourable changes in assumptions underlying the present value of the schemes' liabilities and further deficit contribution payments to the main UK scheme made by the employing companies.


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Page 142

D16 - Pension obligations continued            






2007


Scheme 
assets

£m

Scheme liabilities
£m

Pension scheme 
deficit 

£m

Adjust for Group insurance policies
£m

IAS 19 pensions deficit
£m 

Net deficits in the schemes at 1 January 

9,223

(10,196)

(973)

(1,086)

(2,059)

Employer contributions 

297

-

297

(41)

256

Employee contributions 

23

(23)

-

(4)

(4)

Benefits paid 

(339)

339

-

33

33

Current and past service cost (see (a) above) 

(4)

(169)

(173)

-

(173)

Losses on curtailments (see (a) above) 

-

(15)

(15)

-

(15)

Credit/(charge) to investment income (see (a) above) 

614

(515)

99

(49)

50

Acquisitions 

72

(91)

(19)

(15)

(34)

Other actuarial gains/(losses) (see (a) above) 

(210)

822

612

72

684

Buy-outs and other transfers 

6

(6)

-

(2)

(2)

Changes in asset admissibility

-

-

-

152

152

Exchange rate movements on foreign plans 

157

(163)

(6)

(85)

(91)

Net deficits in the schemes at 31 December 

9,839

(10,017)

(178)

(1,025)

(1,203)

D17 - Borrowings

(a) Movements during the year

Movements in borrowings during the year were: 


Core structural
£m

Operational
£m

Total
2008

£m

New borrowings drawn down, net of expenses 

3,929

1,586

5,515

Repayment of borrowings 

(3,496)

(1,721)

(5,217)

Net cash inflow 

433

(135)

298

Foreign exchange rate movements 

779

1,779

2,558

Borrowings acquired for non-cash consideration 

-

(3)

(3)

Acquisitions

-

81

81

Fair value movements 

-

(404)

(404)

Amortisation of discounts and other non-cash items 

2

-

2

Movements in the year 

1,214

1,318

2,532

Balance at 1 January 

4,311

8,358

12,669

Balance at 31 December 

5,525

9,676

15,201


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D17 - Borrowings continued

(b) Movements in borrowings during the previous year were:


Core 
structural

£m

Operational
£m

Total
2007

£m

New borrowings drawn down, net of expenses 

4,780

1,542

6,322

Repayment of borrowings 

(4,799)

(1,201)

(6,000)

Net cash inflow 

(19)

341

322

Foreign exchange rate movements 

133

499

632

Borrowings acquired for non-cash consideration 

-

18

18

Acquisitions

-

(174)

(174)

Fair value movements 

-

(268)

(268)

Amortisation of discounts and other non-cash items 

2

-

2

Movements in the year 

116

416

532

Balance at 1 January 

4,195

7,942

12,137

Balance at 31 December 

4,311

8,358

12,669

All movements in fair value in 2008 and 2007 on securitised mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions. These loan notes have external credit ratings which have not changed since the inception of the loans.

D18 - Risk management

As a global company, we face a large and diverse number of risks. Each of these risks has the potential to harm our financial performance or hinder the achievement of our strategic objectives. If we don't manage risk effectively we could miss potential opportunities to further develop and expand our business. 

What sorts of risks do we face?

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. 

-    Strategic risks include issues such as customer, products and markets as well as any risks to our business model arising from changes in our market and risks arising from mergers and acquisitions.  

-    Operational risks arise 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.

Naturally, it's impossible to analyse every single risk we encounter, so instead 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 that it will 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 (or groups of risks).  

Our Risk Management Framework provides the means for us to identify, assess, measure, manage and monitor all of these different types of risk to provide us with a single picture of the threats, uncertainties and opportunities we face. We're then able to make appropriate decisions to limit and control the impact that all of these risks may have on our strategic objectives.  

What risk management activity happens at 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 coordinate all group-wide risk management activities through a central risk team, led by the Group Chief Risk Officer. In each of our regions, local Chief Risk Officers ensure that the regional risk profiles remain within the limits set centrally. The local Chief Risk Officers work with business unit management to ensure that our risk management framework is being used consistently across all our businesses. They also work with the Group Chief Risk Officer to coordinate and communicate decisions that are taken at a group level.

As well as working with the regions, the central risk team is also responsible for managing group risk governance and oversight.

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D18 - Risk management continued

Our Risk Management Framework

At Group centre, we monitor risks on a regular basis through our Risk Management Framework. The framework includes all our risk management processes, systems and tools and helps set standards for identifying, managing and reporting risks and establishing minimum standards for our control environment. 

This process allows us to:

-    assess the overall risk exposures we face as a group; 

-    identify risk exposures across specific areas of our business or business activities; and 

-    define the risks we're prepared to accept. 

The central risk team monitors these risk exposures on a regular basis, with a specific focus on financial risks via a fortnightly report, and reports the findings to the Executive Committee. As part of the performance management process, senior management review risk management information to ensure the successful delivery of our business objectives.

As well as the ongoing monitoring activities the central risk team produces a formal quarterly risk report for the Risk and Regulatory Committee of the Board and the various risk oversight committees.

Corporate governance and oversight

Our risk governance framework allocates responsibility for the oversight of risk management to a number of committees at Group centre with the Group Asset Liability Committee ('ALCO') and the Group Operational Risk Committee ('ORC') providing a key focus on financial and operational risk. The Group centre committees are in turn supported by the regions. 

These committees monitor the aggregate risk profile, provide challenge and recommend risk management activity and ensure that our risk policies are used to manage risk to agreed standards. 

Board oversight is maintained on a regular basis through its Risk and Regulatory Committee. The Group Chief Risk Officer has a reporting line to the Chief Financial Officer as well as to the Chairman of the Risk & Regulatory Committee, assuring independence of the function. 

Policies and procedures

We have 35 policies that deal with the management of all our risks. These policies define our risk appetite and set out risk management and control standards for the group's worldwide operations. The policies also set out the roles and responsibilities of businesses, regions, policy owners, and the risk oversight committees. 

As our business needs to change and respond to market conditions and customer needs, we regularly monitor our policies and risk appetite to ensure they remain relevant and up-to-date. This helps to provide assurance to the various governance and risk oversight committees that there are appropriate controls in place for all our core business activities, and that the processes for managing risk are understood and followed consistently across our global businesses.

Risk and economic capital 

We continue to develop our economic capital models to allow us to measure, compare and further understand our risks. The results of the modelling are incorporated into our key decision making processes. These models show us the relative impact to economic capital from the risks we face. In turn this allows us to consider appropriate and effective mitigating strategies where risks are outside of appetite

The Financial Services Authority (FSA) requires Aviva to assess its economic capital requirements to ensure that it adequately reflects business and control risks. In turn this analysis supports our strategic planning and decision-making processes.  

How are financial, strategic and operational risks managed at Aviva?

Financial Risks 

We're exposed to financial risk as a result of changes in the values of our investments and the value of our insurance liabilities. This risk is caused by potential market movements in equity and property prices, the impact of interest rate changes and inflation expectations, credit risk exposures, foreign exchange rate movements and liquidity demands. 

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D18 - Risk management continued

Market risk

Aviva is exposed to market risk from owning a portfolio of international insurance businesses. A decline in markets or an increase in market volatility may also adversely affect sales of our investment products and our fund management business. We recognise that market risk is part of the businesses that we run, and that a certain level of market risk is acceptable in order to deliver benefits to both policyholders and shareholders. 

We manage market risk by applying our market risk policy to all of the assets under the Group's control. This includes policyholder assets (those assets supporting the technical liabilities) and shareholder assets (the surplus assets held that are not required to meet policyholder benefits and to cover regulatory margins). In practice assets can move between these categories. 

To ensure we manage the risks around assets backing technical liabilities, we have set standards for the way businesses should match their liabilities with appropriate assets. Businesses also need to follow a clear decision-making and monitoring process when liabilities cannot be matched or a degree of mismatching is desired. Several of our long term savings businesses sell products where the majority of the market risk is borne by the policyholder. Any market risk attributable to policyholders is managed to satisfy the policyholders' objectives for risk and reward.

We monitor the financial impact of the changes to market values (including our staff pension schemes) through our measurement of economic capital and sensitivities to our key performance measures and set our risk appetite in respect of the amount to be invested in different types of asset.

Equity price risk

Falls in equity prices is our largest market risk exposure. We continually monitor our exposures relative to our risk appetite and have reduced our overall exposures to equity risk during 2008 by extending our portfolio of equity hedges. This is in addition to the significant equity de-risking we performed in 2007 within our main staff pension scheme and General Insurance businesses. These hedges tend to take the form of a portfolio of options designed to provide protection against falls in equity prices at the lowest cost possible. Over the year we have actively managed our portfolio of equity hedges to ensure our equity risk remains within appetite without any adverse liquidity impacts.

'Hedging' is a strategy used to reduce exposures to price risk movements. 

Our analysis of equity price risk shows that a 10% decrease in equity prices causes a £382 million pre-tax decrease in the level of shareholders' funds on an IFRS basis and a reduction of embedded value of £650 million, net of tax on an MCEV basis. Sensitivities to increases in equity prices are shown in note 55 and in the section on MCEV reporting. These figures are based on an instantaneous shock and include the impact of the hedges in place.

Interest rate risk

Changes in the level of interest rates affect both the products we sell and the value of our investments. For example, long-term debt and fixed income securities are both exposed to fluctuations in interest rates. We are also exposed to movements in interest rates on business carrying investment return and surrender value guarantees. 

A 1% decrease in interest rates would increase shareholders' funds by £420 million pre-tax on an IFRS basis and embedded value would decrease by £465 million, net of tax on an MCEV basis. Sensitivities to increases in interest rates are shown in note 55 and in the section on MCEV reporting.

For some categories of our long-term business, we reduce interest rate risk through the close matching of assets and liabilities. For short-term business such as general insurance, we require a close matching of assets and liabilities by duration to minimise this risk. If we can't entirely remove interest rate exposure through matching, then we may use a variety of derivative instruments in order to hedge against unfavourable market movements. 

We have implemented a portfolio of hedges in Delta Lloyd to protect against the interest rate guarantees within the business. This strategy protected our position in the light of the rapidly falling interest rates environment we have witnessed.

Property price risk 

We also invest in property assets in different global locations. These assets are also subject to fluctuations in their value. Property investment is managed locally by our business units, recognising any local regulatory restrictions in respect of asset admissibility or liquidity and with reference to the business units' risk appetite. 

A 10% decrease in property values would decrease shareholders' funds by £355 million pre-tax on an IFRS basis and embedded value would decrease by £355 million, net of tax on an MCEV basis. Sensitivities to property values are shown in note 55 and in the section on MCEV reporting.

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D18 - Risk management continued

Credit risk

We have significant exposures to credit risk through our investments in corporate bonds, commercial mortgages, and other securities. We hold these investments for the benefit of both our policyholders and shareholders.  

We manage the exposure to individual counterparties, by measuring exposure against centrally set limits. These limits take account of credit ratings issued by rating agencies such as Standard & Poor's. 

We manage the level of risk we're prepared to take via analysis that helps us define the optimal balance between the risk we take and the returns we can earn on the underlying assets, monitoring the types of investment available to us to achieve our aims. We also actively monitor and consider the risk of a fall in the value of fixed interest securities from changes in the perceived credit worthiness of the issuer. 

We're also exposed to credit risk through our use of reinsurance. Reinsurance arrangements are only placed with providers who meet our counterparty credit standards.

Foreign exchange risk

As an international business we're exposed to fluctuations in exchange rates in the countries in which we undertake business. Over half of our premium income comes from currencies other than sterling. Generally, we don't hedge these currency risks as profits are retained to support growth in the business units, however significant dividends from overseas business units are hedged as they are declared.

Movements in exchange rates will affect the value of shareholders' funds which are expressed in sterling. This aspect of foreign exchange risk is monitored centrally against limits aimed at aligning capital deployed with capital required. We use currency borrowings and derivatives when necessary to keep currency exposures within these limits. We hedge specific foreign exchange transaction risks when we feel it's appropriate; for example, acquisition or disposal activity. We're also exposed to some exchange risk from assets held in staff pension schemes, as a part of the investment strategy agreed with the scheme trustees.

Derivatives risk

We use derivatives in a number of our businesses to enable efficient investment management or as part of structured retail savings products. In addition we use derivatives to hedge the financial risks discussed above. Derivatives can involve complex financial transactions and, to minimise the risks involved, we set minimum standards of control that we require our businesses to adopt when using derivatives. 

Activity is overseen by the Derivatives Approvals Committee, which monitors implementation of the policy, exposure levels and approves large or complex transactions proposed by businesses. Speculative activity is prohibited, unless prior approval has been obtained from the Derivatives Approval Committee.

Liquidity risk

We need to ensure that we maintain sufficient liquid assets to meet our cash-flow obligations as they fall due. All our businesses identify their sources of liquidity risk and monitor the potential exposures. 

At group level, we maintain a prudent level of liquidity which meets the expectations of the FSA and the wider investment community. We maintain a buffer of liquid assets to cover unforeseen circumstances, including providing temporary funds to any of our business units that may experience temporary liquidity shortfalls. The group maintains significant committed borrowing facilities from a range of banks.

Insurance Risk Management

As an insurance business, we evaluate exposures to determine whether or not to insure risks and set terms and conditions for any insurance products underwritten.

Life insurance risk

Our life insurance businesses are exposed to a range of life insurance risks from various products. These risks are, typically, longevity (the risk that people will live longer than we have assumed), mortality (the death of a policyholder), and morbidity (ill health), as well as experience risks to changes in the underlying assumptions made at the start of the insurance policy , for example duration of the policy and expenses.

Longevity risk

We have a significant exposure to annuity business and our most significant life insurance risk is therefore associated with longevity. We monitor longevity statistics and compare these with emerging industry trends. We use the results of this analysis to decide both the reserving and pricing of annuities. 

Inevitably, there remains uncertainty about the development of longevity that cannot be removed. Should our assumptions in respect of annuitant mortality worsen by 5% then shareholders' funds would decrease by £320 million pre-tax on an IFRS basis and decrease embedded value by £380 million on an MCEV basis, net of tax.

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D18 - Risk management continued

Mortality and morbidity risk

Our business units manage mortality and morbidity risk arsing on insurance products through the setting of limits and the use of reinsurance to transfer excessive risk exposures. Sensitivity tests show that mortality risk is relatively low. A 5% worsening in assurance mortality experience reduces shareholder funds by £30 million on an IFRS basis and decreases embedded value by £265 million on an MCEV basis, net of tax.

Persistency risk

Persistency (or lapse) risk affects all of our life insurance businesses and is managed at a business unit level through frequent monitoring of experience. Where possible, the potential financial impact of lapses is reduced by the product design. Guidelines have been developed on persistency management, sharing best practice in the setting of lapse assumptions, product design requirements, experience monitoring, and required management actions.

Product Design and Pricing risk 

Poorly designed or inadequately priced products can lead to both financial loss and reputational damage for Aviva. Guidelines have been developed to support the businesses through the complete cycle of the product development process, financial analysis and pricing. 

Expense risk

Expenses are managed and monitored at a business unit level, as part of general day-to-day business management. Expense management is a key part of a business' ability to meet financial targets. Expense risk arises not only from any failure to control the overall level of expenses but also from any deviation of actual experience from the assumptions made in pricing our insurance policies. Expense assumptions are regularly monitored to ensure they remain appropriate.

General Insurance risk

Our general insurance businesses are exposed to a variety of risks, including fluctuations in the timing, frequency and severity of claims and claim settlements, inadequate reinsurance protection and inadequate reserves.

Catastrophe Risk

Our largest general insurance risk is claims incurred from catastrophic events, such as flooding and windstorm. We manage this risk through central monitoring of risk aggregations and, where we do not wish to retain the risk within the group, by purchasing catastrophe cover from third party reinsurers. 

We use reinsurance to help reduce the financial impact of a catastrophe and to manage the volatility of our earnings. We use extensive financial modelling and analysis to ensure we understand the catastrophe risk and to ensure we get maximum benefit in terms of cost of providing the catastrophe reinsurance covers.

As catastrophe events become more remote, the amount of risk we retain increases, so that our total potential loss from our most concentrated exposure (northern European wind storm) is approximately £400 million for a one in ten year event, compared to approximately £ 850 million for a one in a hundred year event.

Worsening Claims Ratios

Another material risk is the financial impact of worsening claims ratios. The business units manage this risk through underwriting disciplines, control of claims management and exploring different solutions to the way we measure and price the risks we underwrite. For example, our UK business has developed digital flood mapping to understand better the risk to household insurance from flood damage.

Strategic risks 

We are exposed to a number of strategic risks. Our strategy needs to support our vision, purpose and objectives and be responsive to both the external and internal environment, for example changes in the competitive landscape, regulatory changes, merger and acquisition opportunities and emerging trends (such as climate change, pandemic and improving longevity).

Strategic risk is explicitly considered throughout our strategic review and planning process. Developments are assessed during our quarterly performance management process where all aspects of our risk profile are considered.

We actively engage with external bodies to share the benefit of our expertise in supporting responses to emerging risks as well as challenging developments that could be damaging to our business and the industry as a whole.

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.

Our businesses are primarily responsible for identifying and managing operational risks in line with minimum standards of control set out in our policies. Each operational risk is assessed against financial, operational and reputation criteria. 


Business management teams must be satisfied that all material risks falling outside our risk appetite are being mitigated, monitored and reported to an appropriate level. Any risks with a high potential impact level are monitored centrally on a regular basis.

Supplier risk

Within Aviva, we have robust guidelines on how supplier risk should be assessed, mitigated and monitored through our Purchasing and Outsourcing policies. These policies are promoted and endorsed by Aviva's senior management. Aviva's local Procurement and Risk teams, who understand local service issues and concerns, have the responsibility to ensure these are implemented fully at a local level. Performance against these guidelines is then assessed at both regional and group level on an ongoing quarterly basis. Risk is measured against four areas: financial impact, internal service disruption, customer impact and risk to the Aviva brand. 

Where we identify any local potential supply risk - detailed actions plans are put in place to resolve and local senior management are informed to ensure appropriate management focus is applied. 

In addition we complete regular assessments of our major suppliers and ensure that we have robust alternative supply options available. We assess the ongoing financial health of our major suppliers globally coupled with a review of the business contingency plans to ensure an adequate standard of assurance is maintained.

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Page 148

19 - Related party transactions

The Group received income from related parties from transactions made in the normal course of business. 
Loans to related parties are made on normal arm's-length commercial terms.

Services provided to related parties



2008



2007


Income earned 
in year

£m

Receivable at year end
£m


Income earned 
in year

£m

Receivable at year end
£m

Associates 

61

-


58

-

Joint ventures 

5

3


4

2

Employee pension schemes 

24

6


26

6


90

9


88

8

The related parties' receivables are not secured and no guarantees were received in respect thereof. 
The receivables will be settled in accordance with normal credit terms. Details of guarantees, indemnities 

and warranties provided on behalf of related parties are given in note 50(h).

Services provided by related parties

There were no services provided by related parties in either 2007 or 2008.

Details of loans made to joint ventures and associates may be found in notes 18 and 19 respectively.

Key management compensation

The total compensation to those employees classified as key management, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the executive and 
non-executive directors is as follows:


2008
£m

2007
£m

Salary and other short-term benefits 

38

40

Post-employment benefits 

3

4

Equity compensation plans 

9

14

Termination benefits 

3

2

Total 

53

60

Information concerning individual directors' emoluments, interests and transactions is given in the Directors' remuneration report. 

End of 5 of 5





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