Aviva 2009 Annual Report Download - page 41

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Performance review
Aviva plc Financial and operating performance continued
Corporate responsibility
Annual Report and Accounts 2009
insurance businesses in Ireland and the Netherlands, through
our Delta Lloyd subsidiary, and smaller general insurance
operations in several other countries; in North America we have
a large long-term insurance and savings business in the US and
a major general insurance business in Canada; in Asia Pacific we
predominantly have long-term insurance and savings businesses.
Our fund management businesses operate across all our
four regions.
Long-term insurance and savings business
For most of our life insurance businesses, such as those in
the UK, France and the Netherlands, operating earnings are
generated principally from our in-force books of business.
Our in-force books consist of business written in prior years
and on which we continue to generate profits for shareholders.
Nevertheless new business written in these markets, with the
exception of our UK with-profits business which is discussed
below, has a significant direct effect on our operating earnings.
Under IFRS, certain costs incurred in acquiring new business
must be expensed thereby typically giving rise to a loss in the
period of acquisition, though the degree of this effect will
depend on the pricing structure of product offerings. In markets
where we are experiencing strong growth, such as we have
experienced in Spain, Italy, the US and Asia in recent years,
current year sales have a more significant effect on current
year operating earnings.
UK with-profits business
With-profits products are designed to pay policyholders
smoother investment returns through a combination of small
annual bonuses and large terminal bonuses. Shareholders’ profit
emerges from this business in direct proportion to policyholder
bonuses, as shareholders receive up to one-ninth of the value
of each year’s bonus declaration to policyholders. Accordingly,
the smoothing inherent in the bonus declarations provides for
relatively stable annual shareholders’ profit from this business.
The most significant factors that influence the determination
of bonus rates are the return on the investments of the with-
profits funds and expectations about future investment returns.
Actual and expected investment returns are affected by, among
other factors, the mix of investments supporting the with-profits
fund, which in turn is influenced by the extent of the inherited
estate within the with-profits fund.
The annual excess of premiums and investment return
over operating expenses, benefit provisions and claims
payments within our with-profits funds that is not distributed
as bonuses and related shareholders’ profit, is transferred from
the income statement to the unallocated divisible surplus.
Conversely, if a shortfall arises one year, for example because of
insufficient investment return, a transfer out of the unallocated
divisible surplus finances bonus declarations and related
shareholders’ profit.
The unallocated divisible surplus therefore consists of
future (as yet undetermined) policyholder benefits, associated
shareholders’ profit and the orphan estate. The orphan estate
serves as working capital for our with-profits funds. It affords
the with-profits fund a degree of freedom to invest a substantial
portion of the funds’ assets in investments yielding higher
returns than might otherwise be obtainable without being
constrained by the need to absorb the cash-flow strain of
writing large volumes of new business and the need to
demonstrate solvency.
Other long-term insurance and savings business
Non-profit business falls mainly into two categories: investment
type business and risk cover business. Investment type business,
which accounts for most of our non-profit business, includes
Governance
Shareholder information
Financial statements IFRS
Financial statements MCEV
Other information
predominantly unit-linked life and pensions business, where
the risk of investing policy assets is borne entirely by the
policyholder. In addition investment type business also includes
life and pensions business where the risk of investing policy
assets is typically shared between policyholders and
shareholders, subject to a minimum rate of investment return
guaranteed to policyholders. Operating earnings arise from
unit-linked business when fees charged to policyholders based
on the value of the policy assets exceed costs of acquiring new
business and administration costs. In respect of remaining
investment type business, investment return generated from
policy assets has an effect on operating earnings though this is
often non-proportional. Finally in respect of all investment type
business, shareholders bear the risk of investing shareholder
capital in support of these operations.
Risk cover business includes term assurance, or term life
insurance business. The risk of investing policy assets in this
business is borne entirely by the shareholders. Operating
earnings arise when premiums, and investment return earned
on assets supporting insurance liabilities and shareholder capital,
exceed claims costs, costs of acquiring new business and
administration costs.
General insurance and health business
Operating earnings within our general insurance and health
business arise when premiums, and investment return earned
on assets supporting insurance liabilities and shareholder capital,
exceed claims costs, costs of acquiring new business and
administration costs.
Fund management
Fund management operating earnings consist of fees earned for
managing policyholder funds and external retail and institutional
funds on behalf of clients, net of operating expenses.
Approximately 30% of our fund management operating
earnings are derived from external clients. Arrangements for the
management of proprietary funds are conducted on an arm’s
length basis between our fund management and insurance
businesses. Such arrangements exist mainly in the UK, France,
the Netherlands, Ireland, Australia, US and Canada. Proprietary
insurance funds in other countries are externally managed.
Other business
Other business includes our operations other than insurance
and fund management. These incorporate mainly our roadside
recovery operation in the UK, and our banking and retail
mortgage operations in the Netherlands and Belgium.
Financial highlights
The following analysis is based on our consolidated financial
statements and should be read in conjunction with those
statements. In order to fully explain the performance of our
business, we discuss and analyse the results of our business in
terms of certain financial measures which are not based on IFRS
“non-GAAP measures” which we use for internal monitoring
and for executive remuneration purposes. We review these in
addition to GAAP measures such as profit before and after tax.
Non-GAAP measures
Sales
The total sales of the group consist of long-term insurance and
savings new business sales and general insurance and health
net written premiums. We classify our long-term insurance
and savings new business sales into the following categories:
Long-term insurance and savings new business sales
Sales of the long-term insurance and savings business consist of:
Covered business or life, pensions and savings products:
— Insurance and participating investment business
Performance review