Aviva 2009 Annual Report Download - page 39

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Performance review
Aviva plc Financial and operating performance continued
Corporate responsibility
Annual Report and Accounts 2009
an annual basis. A special bonus distribution has been
announced for policyholders of two of our UK with-profits
funds, reflecting the financial strength of those funds, which
has provided an uplift to IFRS profits in both 2008 and 2009
and will provide an uplift in 2010 of approximately £100 million.
General insurance and health underwriting cycle
Our general insurance and health business is comprised of
our property and casualty insurance and health insurance
operations. In 2009, general insurance accounted for 29%
of group net premiums written from continuing operations
and 35% of our group operating earnings before interest and
corporate costs respectively. Demand for general insurance is
usually price-sensitive because of the limited degree of product
differentiation inherent in the industry. As a result, the price of
insuring property and casualty risks is subject to a cycle (called
an underwriting cycle). In periods when the price of risk is high,
the high profitability of selling insurance attracts new entrants
and hence new capital into the market. Increased competition
however drives prices down. Eventually the business becomes
uneconomic and some industry players, suffering from losses,
exit the market while others fail, resulting in lower capital
invested within the market. Decreased competition leads to
increasing prices, thereby repeating the cycle. Although our
various general insurance markets are not always at the same
stage of the underwriting cycle, price competition has been
increasing within the UK and the rest of the world across most
of our general insurance business lines in recent years. We are
now seeing early evidence of increased rating discipline in the
UK resulting from volatile investment markets.
We expect the underwriting cycle to continue to operate in
the future but to be less pronounced than in the past because
of structural changes to the industry over the past decade.
Capital markets are imposing financial discipline by being
increasingly more demanding about performance from
insurance companies before extending new capital. Such
discipline, together with the increased concentration of
competitors within the market, recent natural disasters and
the adoption of more scientific pricing methods is expected
to make the underwriting cycle less pronounced in the future.
Natural and man-made disasters
Our general insurance and health business results are affected
by the amount of claims we need to pay out which, in turn,
can be subject to significant volatility depending on many
factors, including natural and man-made disasters. Natural
disasters arise from adverse weather, earthquakes and other
such natural phenomena. Man-made disasters include accidents
and intentional events, such as acts of terrorism. These events
are difficult to predict with a high degree of accuracy, although
they generally occur infrequently at a material level. Our
exposure to large disasters has been somewhat reduced
through the recent strategic refocusing of our general insurance
business towards personal lines business and small- to medium-
sized commercial risks. Our costs in connection with natural
and man-made disasters are also significantly mitigated by
reinsurance arrangements with external parties such that our
maximum exposure is limited to no more than approximately
£400 million for a one in ten year event or £850 million for
a one in hundred year event. See “Financial Statements
IFRS – Note 56 – Risk Management” and “Financial Statements
IFRS – Note 41 – Reinsurance Assets” for further information
on our reinsurance programme.
During 2007, the UK results were adversely impacted
by £475 million for claims relating to the winter storms and
summer floods. In 2008, Ireland and Canada incurred some
Governance
Shareholder information
Financial statements IFRS
Financial statements MCEV
Other information
weather-related losses and in 2009 the UK, Ireland and France
were all impacted.
Government policy and legislation
Changes in government policy and legislation applicable to our
business in any of the markets in which we operate, particularly
in the UK, may affect our results of operations. These include
changes to the tax treatment of financial products and services,
government pension arrangements and policies, the regulation
of selling practices and the regulation of solvency standards.
Such changes may affect our existing and future business by, for
example, causing customers to cancel existing policies, requiring
us to change our range of products and services, forcing us to
redesign our technology, requiring us to retrain our staff or
increase our tax liability. In the UK, the government has recently
conducted a number of reviews of the long-term insurance and
savings industry with the aim of promoting long-term insurance
and saving by simplifying and reducing the cost of product
offerings. As a global business, we are exposed to various local
political, regulatory and economic conditions, business risks and
challenges which may affect the demand for our products and
services, the value of our investments portfolio and the credit
quality of local counterparties. Our regulated business is subject
to extensive regulatory supervision both in the UK and
internationally. For details please refer to the section
“Shareholder Information – Regulation”.
In 2006, the Financial Services Authority in the UK amended
the rules regarding the valuation of non-profit life reserves.
The impact on Aviva was a £167 million benefit to operating
profit in 2007 and a £149 million benefit in 2006. In 2008,
the ombudsman in the Netherlands investigated the level
of charges paid by unit-linked policyholders across the life
insurance industry. As a result of this investigation, our Delta
Lloyd life business agreed to recompense their policyholders
and provided £126 million for this cost.
Exchange rate fluctuations
We publish our consolidated financial statements in Pounds
sterling. Due to our substantial non-UK operations, a significant
portion of our operating earnings and net assets are denominated
in currencies other than sterling, most notably the euro and
the US dollar. As a consequence, our results are exposed to
translation risk arising from fluctuations in the values of these
currencies against sterling. Total foreign currency movements
during 2009 resulted in a loss recognised in the income
statement of £154 million, an improvement of £173 million
from a £327 million loss in 2008.
We generally do not hedge foreign currency revenues,
as we prefer to retain revenue locally in each business to
support business growth, to meet local and regulatory market
requirements, and to maintain sufficient assets in local currency
to match local currency liabilities.
Movements in exchange rates may affect the value of
consolidated shareholders’ equity, which is expressed in sterling.
Exchange differences taken to other comprehensive income
arise on the translation of the net investment in foreign
subsidiaries, associates and joint ventures. This aspect of foreign
exchange risk is monitored centrally against limits that we have
set to control the extent to which capital deployment and
capital requirements are not aligned. We use currency
borrowings and derivatives when necessary to keep currency
exposures within these predetermined limits, and to hedge
specific foreign exchange risks when appropriate; for example,
in any acquisition or disposal activity. During 2009, sterling had
strengthened recovering some of its loss in value against the
euro and dollar in 2008 resulting in a foreign currency loss in
other comprehensive income of £951 million. During 2008,
Performance review