Preliminary results year ended 31 December 2008
05 March 2009
1. Basis of preparation
The results for the year ended 31 December 2008 have been prepared using International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and endorsed by the European Union (EU). The results in this preliminary announcement have been prepared in accordance with IFRS applicable at 31 December 2008 and have been taken from the group’s Annual Report and Accounts which will be available on the company’s website on 26 March 2009.
The preliminary announcement for the year ended 31 December 2008 does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The results on an IFRS basis for the full year 2008 and 2007 have been audited by Ernst & Young LLP. The auditor has reported on the 2008 and 2007 financial statements and the report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The group’s 2007 Report and Accounts have been filed with the Registrar of Companies.
The preliminary announcement includes the regulated information required to be made public under DTR 4.1.3, as defined in DTR 6.3.5 of the Transparency Directive.
The directors confirm that, to the best of each person’s knowledge:
- the Group financial statements in this report, which have been prepared in accordance with IFRS as adopted by the EU, IFRIC interpretation and those parts of the Companies Act 1985 applicable to companies reporting under IFRS, give a true and fair view of the assets, liabilities, financial position and results of the Group taken as a whole; and
- the commentary contained in this report includes a fair review of the development and performance of the business and the position of the Group taken as a whole, together with a description of the principal risks and uncertainties that they face.
Restatement of prior period figures
Change to operating segments
In November 2006, the IASB issued IFRS 8, Operating Segments. Although its requirements are applicable for accounting periods beginning on or after 1 January 2009, the Group has decided to adopt IFRS 8 early and reflect its impact in these financial statements.
The Group has determined its operating segments along regional lines and the results for the year are presented on this basis, using UK Life and UK General Insurance within the United Kingdom, Europe, North America, Asia Pacific and Aviva Investors as the main segments.
- The UK general insurance business covers the Group’s UK general insurance business and includes the results of Aviva Re, the Group’s captive reinsurance business and agencies in run off;
- The UK Life segment includes the result of the UK health business which it manages;
- Europe incorporates all European operations excluding the UK as set out above;
- North America is made up of our life business in the United States and general insurance business in Canada;
- Asia Pacific includes all our Asian and Australian businesses; and,
- Aviva Investors comprises the Aviva Investors UK, France, the United States, Canada and the international fund management businesses.
Restatement for the change in accounting policy for latent reserves
As part of the Company’s aim to continuously improve the relevance and reliability of its external financial reporting, Aviva undertook a review of the group’s General Insurance Reserving Policy in 2008.
As part of this review, the group concluded that estimating our latent claim provisions on an undiscounted basis, and discounting back to current values, represented an improvement to the existing estimation technique. This approach is in line with best practice for long-term liabilities and moves the measurement of latent claims onto a more economic basis, consistent with our internal model for economic capital and the measurement model being proposed for both IFRS Phase II and Solvency II. This approach also improves consistency with the reporting of other long-tail classes of business which are already being discounted, namely certain London Market latent claims and our Dutch Permanent Health and Injury Business.
The discount rate that has been applied is based on the relevant swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement of the claims. The discount rate is set at the start of the accounting period with any change in rates between the start and end of the accounting period being reflected below operating profit as an economic assumption change. The range of discount rates used depends on the duration of the claim and the reporting date. We estimate that latent claims will be payable for around the next 35 to 40 years with an average duration of 15 years.
The application of discounting to our latent claims reserves represents a change in accounting policy and has therefore been applied retrospectively. The cumulative impact of discounting on our opening reserves as at 1 January 2007 is to reduce insurance liabilities by £214 million and reinsurance assets by £61 million, and to increase retained earnings by £153 million. These have been treated as prior year adjustments in these financial statements.
The impact of the change in accounting policy on the general insurance and health claims provisions and our results for the year ended 31 December 2007 and the opening 1 January 2007 position is set out below.
| General insurance and health claims provisions | Audited 31 December 2007 £m |
Audited 1 January 2007 £m |
|---|---|---|
| Carrying amount as reported, net of reinsurance | 11,424 | 10,980 |
| Impact of discounting: | ||
| Prior period adjustment brought forward | (153) | (153) |
| Impact on operating profit | 12 | – |
| Impact on short term fluctuations and economic assumption changes | (2) | – |
| Impact of foreign exchange movements | (2) | – |
| (145) | (153) | |
| Carrying amount restated, net of reinsurance | 11,279 | 10,827 |
The impact on shareholders’ funds after tax was £107 million and £112 million at 31 December 2007 and 1 January 2007 respectively.
Consolidation of managed funds
The Group manages a number of specialised investment vehicles around the world, in which our insurance and investment funds have invested. The Group’s percentage ownership in these vehicles can fluctuate from day to day according to the Group’s and third party participation in them, and control is determined based on an analysis of the guidance in IAS 27. During 2008, we identified that certain such vehicles required consolidation in accordance with IAS 27 which therefore results in grossing up assets and liabilities for the effect of the third party participation.
As a result, certain balance sheet categories have been restated for the gross up. This resulted in increases to cash and cash equivalents (£315 million), investment property (£314 million), debt securities (£2,375 million), equity securities (£2,811 million), and net asset value attributable to unitholders (£1,671 million), and a decrease to other investments (£4,144 million) as at 31 December 2007. The impact on the 2007 income statement has been to restate net investment income and fee and commission expense by reducing both by £139 million and, in the 2007 cash flow statement, to increase cash flows from operating activities by £101 million.
In addition, certain property investment vehicles, which were consolidated in accordance with IAS 27, required restatement in the year ended 31 December 2007 to reanalyse amounts previously classified as minority interests to net asset value attributable to unitholders. This change recognises that the property investment vehicles are unit trusts and, as a result, the third party holding should have been recognised as a liability rather than as a non-controlling interest. Prior year comparatives have been restated with a reduction in minority interests and an increase in amounts due to unitholders of £758 million at 31 December 2007 and £431 million at 1 January 2007.
None of these adjustments has any impact on profit for the period, operating profit or earnings per share in the full year 2007, nor on retained earnings, net assets or total equity at either 1 January 2007 or 31 December 2007.
Treatment of shares held by employee trusts
Employee share trusts have purchased the Company’s shares in the market to satisfy awards under various share plans. At 31 December 2007, these trusts held shares with a cost of £10 million which, on materiality grounds, were included within other financial assets rather than being shown as a deduction from total shareholders’ equity in the consolidated balance sheet. In view of the Company’s current policy of purchasing shares in the market rather than issuing new shares, which will lead to larger balances on this account, we have restated the 2007 figures accordingly.
