Preliminary results year ended 31 December 2008
05 March 2009
Appendix C – Operational cost base and cost savings
C1 – Analysis of operational cost base
The Aviva operating cost base is calculated from total IFRS expenses - with all charges relating to claims (excluding claims handling), commissions, provisions and liabilities, financing, amortisation and impairments, and foreign exchange, removed as set out in the table below:
| 2008 £m |
Restated 2007 £m |
|
|---|---|---|
| Total reported expenses | 21,731 | 38,659 |
| Less: | ||
| Claims, commissions and changes in provisions and liabilities | (12,885) | (32,115) |
| IFRS adjustments and amortisation | (1,549) | (332) |
| Finance costs | (1,547) | (1,217) |
| Operating cost base | 5,750 | 4,995 |
During 2008, the operating cost base increased by 15% to £5,750 million (2007: £4,995 million). The table and notes below set out and explain the methodology and inherent assumptions used for the calculation of the like-for-like adjustments and different components which have caused the increase in the operating cost base. These adjustments account for the impact of foreign exchange, impact of businesses acquired/disposed of during the year and adjustments to eliminate the impact of one-off restructuring and integration spend from the cost base in both years. After adjustments, the 2008 operating cost base increased by 2.4% to £5,368 million compared with a 2007 like-for-like cost base of £5,242 million.
Movement in operating costs base
| £m | |
|---|---|
| Total operating cost base 2007 | 4,995 |
| Less: restructuring and integration spend 2007 | (153) |
| Impact of acquisitions and disposals1 | 32 |
| Costs relating to RAC non-insurance2 | 33 |
| Foreign exchange | 335 |
| 2007 like-for-like operating cost base | 5,242 |
| Inflation3 | 191 |
| Organic growth4 | 84 |
| Investment in business5 | 201 |
| Realised cost savings6 | (373) |
| Other7 | 23 |
| 2008 like-for-like operating cost base | 5,368 |
| Restructuring and integration spend 2008 | 382 |
| Total operating cost base 2008 | 5,750 |
- Impact of acquisitions & disposals – Represents acquisitions in the European Region and Canada offset by the restructure of Turkey Life as a Joint Venture.
- Costs relating to RAC non insurance – These represent the costs of windscreens and other materials relating to the Auto Windscreen business that are a cost of sale and therefore excluded from the operating cost base comparison.
- Inflation – Notional level of Inflation that would have impacted the operating cost base during the year. This is calculated using the Consumer Price Index for individual countries, applied to operating expenditure ie excluding restructuring & integration costs (but including adjustments for acquisitions & disposals). The overall weighted average is calculated at 3.6%
- Organic growth – Increase in the cost base implied by the growth of the organisation in revenue terms (GWP used as proxy for the GI businesses; a combination of PVNBP, business volumes and VIF movements excluding investment variances used for the Life businesses). The growth proxies, adjusted for any acquisitions/disposals, are then applied to operating expenditure ie excluding restructuring & integration costs (but including adjustments for acquisitions & disposals).
- Investment in business – This represents a net investment in the business and is calculated as the difference between the growth in the cost base implied by the organic growth calculation and the actual change that has taken place. In 2008 this includes investment in regional offices as well as other initiatives and projects across the group.
- Realised savings from cost initiatives – Cost savings realised in the year, and attributable to specific initiatives (equivalent run-rate savings may be different). This total saving of £373 million (comprising £64 million for Norwich Union Life, £265 million for Norwich Union Insurance and £44 million for Europe) includes £309 million, being the in year impact of the £340 million annualised savings delivered in 2008 (set out in C2), together with £64 million of savings (£25 million in Norwich Union Life, £39 million in Norwich Union Insurance) arising from actions taken as part of previous cost and efficiency reviews commenced prior to October 2007.
- Other – Movements in the Operating Cost Base which are specifically identifiable and one-off in nature.
