Aviva 2009 Annual Report Download - page 38

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Aviva plc Financial and operating performance
Annual Report and Accounts 2009
Financial and operating performance
We are the fifth largest insurance group in the world, based on
gross written premiums for the 2008 fiscal year. We are one of
the top five providers of life and pensions products in the UK,
Ireland, Netherlands, through our Delta Lloyd subsidiary, Poland
and Spain and one of the top 10 providers of life and pensions
products in France, Italy and Romania, as based on total sales
for 2008. Our main activities are the provision of products and
services in relation to long-term insurance and savings, fund
management and general insurance.
Recent developments
On 5 January 2010, we announced the acquisition of River
Road Asset Management, a US equity manager, to support
the expansion of Aviva Investors’ third-party institutional asset
management business. Completion took place on 24 February
2010 for an estimated consideration of US$122 million
(£79 million).
On 17 February 2010, we sold our 35% holding in
Sogessur SA to that company’s main shareholder, Société
Générale, for a consideration of £35 million, realising a profit
on disposal of £24 million.
Factors affecting results of operations
Our financial results are affected, to some degree, by a number
of external factors, including demographic trends, general
economic and market conditions, government policy and
legislation and exchange rate fluctuations. See “Performance
review – Risk management” for more information on risks
associated with these and other factors. In addition, our
financial results are affected by corporate action taken by the
Group, including acquisitions, disposals and other actions aimed
at achieving our stated strategy. We believe that all of these
factors will continue to affect our results in the future.
Demographic trends
Our results are affected by the demographic make-up of the
countries in which we operate. The types of products that we
sell reflect the needs of our customers. For example, in regions
and countries with a high proportion of older people, a larger
proportion of our sales will reflect their needs for pre and post-
retirement planning. Our sales levels will also be impacted
by our ability to help provide useful information to such
policyholders on retirement planning and to offer products
that are competitive and respond to such policyholders’ needs.
In our long-term insurance and savings business we make
assumptions about key non-economic factors, such as the
mortality rate that we expect to be experienced by our
policyholders. In countries where the life expectancy is growing,
this will need to be reflected in our pricing models as lower
mortality rates will increase profitability of life insurance
products but will reduce the returns on annuity products.
We review our assumptions against our own experience
and industry expectations. During 2007, 2008 and 2009,
our results were not impacted by any major changes in
mortality assumptions.
Economic conditions
Our results are affected by the levels of economic activity in our
geographic markets and, consequently, by economic cycles in
those markets. High levels of general economic activity typically
result in high levels of demand for, and therefore sales of, our
products and services. Economic activity in turn is affected by
government monetary and fiscal policy as well as by global
trading conditions and external shocks such as terrorist activity,
war and oil price movements. During 2009, we saw improved
economic activity across our regions and although customers
continued to prefer cash deposits, we saw movement towards
investment products resulting in increased investment sales,
primarily across Europe and Asia.
Capital and credit market conditions
An important part of our business involves investing client
money and policyholders’ and shareholders’ funds across a wide
range of financial investments, including equities, fixed income
securities and properties. Our results are sensitive to volatility in
the market value of these investments, either directly, because
we bear some or all of the investment risk or indirectly, because
we earn management fees for investments managed on behalf
of policyholders. Investment market conditions also affect the
demand for a substantial portion of our life insurance products.
In general, rising equity price levels have a positive effect on the
demand for equity-linked products, such as unit trusts and unit-
linked life insurance products and conversely a negative effect
on the demand for products offering fixed or guaranteed
minimum rates of return. Declining equity price levels tend to
have the opposite effects.
During 2008 and the first half of 2009, the capital and
credit markets experienced extraordinary and extended volatility
and disruption. In the first quarter of 2009, the volatility and
disruption reached levels not seen in many years, although the
markets stabilised in the last quarter of 2009. The amount of
investment variance improved to £75 million adverse in 2009
(2008: £1,631 million adverse) due to the recovery in
investment markets. Positive variances on fixed interest assets
in Europe and the United States, driven by the narrowing of
credit spreads toward the end of the year, were offset by
losses from equity derivatives in the Netherlands.
With-profits business
We write products through our with-profits funds mainly in our
UK operating segment, with smaller funds in Ireland, Australia
and Singapore. These funds enable policyholders to participate
in a large pool of diverse investments, therefore reducing their
exposure to individual securities or asset classes. The investment
pool is managed by us with returns to with-profits policyholders
paid through bonuses which are added to the value of their
policy. In order to provide an element of stability in the returns
to policyholders, bonuses are designed to reduce policyholders’
exposure to the volatility of investment returns over time and
to provide an equitable share of surplus earned, depending
on the investment and operating performance of the fund.
Shareholders also have a participating interest in the with-profit
funds and any declared bonuses. Generally, policyholder and
shareholder participation in with-profit funds in the UK is
split 90:10.
The level of bonuses declared to policyholders is influenced
by the actual returns on investments and our expectation of
future rates of return. While bonuses can never be negative,
a predicted sustained fall in equity markets could lead to a
reduction in annual and terminal bonus rates, and so reduce
both policyholder returns and shareholders’ profit under IFRS.
Over the early part of this decade, the combination of a decline
in equity markets and the general outlook for lower interest
rates led to reductions in annual bonus rates, and the
corresponding shareholders’ share of profits. The subsequent
recovery in equity markets over 2003-2007 led to a partial
reversal of this trend. During 2008 and 2009 the worsening
economic conditions have impacted on UK bonus levels but
the annual effect of this for both policyholders and shareholders
has been offset by the benefit from the one-off special bonus
mentioned below.
Shareholders’ profits arising on with-profits business under
IFRS depend on the total bonuses declared to policyholders on