Preliminary results year ended 31 December 2008
05 March 2009
Appendix D – IFRS additional disclosures
D6 – Subsidiaries
(a) Acquisitions
(i) VIVAS Health
On 15 May 2008, the Group’s Irish subsidiary, Hibernian Group plc, acquired a 70% holding in VIVAS Group Ltd. (VIVAS Health), an Irish health insurance company, for £26 million. Allied Irish Banks plc (AIB) will continue to hold the remaining 30% equity, further strengthening AIB and Hibernian’s existing relationship. The company has since been re-branded as Hibernian Aviva Health. Its health insurance products will be distributed through Hibernian and AIB’s distribution channels, including Hibernian Aviva Health’s existing direct and non-direct channels.
The acquisition of this shareholding has given rise to goodwill on acquisition of £22 million, calculated as follows:
| Purchase cost: | £m |
|---|---|
| Cash paid | 25 |
| Attributable costs | 1 |
| Total consideration | 26 |
The estimated book and fair values of the assets and liabilities at the date of acquisition were:
| Book value £m |
Fair value and accounting policy adjustments £m |
Fair value £m |
|
|---|---|---|---|
| Assets | |||
| Reinsurance assets | 30 | – | 30 |
| Cash and cash equivalents | 27 | – | 27 |
| Receivables and financial assets | 32 | – | 32 |
| Other assets | 2 | – | 2 |
| Total assets | 91 | – | 91 |
| Liabilities | |||
| Insurance liabilities | (49) | – | (49) |
| Payables and other financial liabilities | (35) | – | (35) |
| Other liabilities | (1) | – | (1) |
| Total liabilities | (85) | – | (85) |
| Total net assets | 6 | – | 6 |
| Net assets acquired (70%) | 4 | ||
| Goodwill arising on acquisition of this holding | 22 |
The assets and liabilities as at the acquisition date in the table above are stated at their provisional fair values and may be amended in 2009 in accordance with paragraph 62 of IFRS 3, Business Combinations. The residual goodwill represents future cost and revenue synergies from integration with Hibernian Group.
The results of VIVAS Health have been included in the consolidated financial statements of the Group with effect from 15 May 2008, and have contributed £5 million profit to the consolidated loss before tax.
(ii) UBI Vita
On 18 June 2008, the Group acquired 50% plus one share in UBI Assicurazioni Vita SpA (UBI Vita), an Italian life insurance company, from Unione di Banche Italiane Scpa (UBI Banca), for a consideration of £52 million. UBI Vita distributes life insurance products through a bancassurance agreement with Banca Popolare di Ancona and other channels.
The acquisition of this shareholding has given rise to goodwill on acquisition of £10 million, calculated as follows:
| Purchase cost: | £m |
|---|---|
| Cash paid | 51 |
| Attributable costs | 1 |
| Total consideration | 52 |
The estimated book and fair values of the assets and liabilities at the date of acquisition were:
| Book value £m |
Fair value and accounting policy adjustments £m |
Fair value £m |
|
|---|---|---|---|
| Assets | |||
| Intangible assets | – | 41 | 41 |
| Reinsurance assets | 130 | – | 130 |
| Prepayments and accrued income | 20 | – | 20 |
| Cash and cash equivalents | 8 | – | 8 |
| Debt securities | 1,803 | (74) | 1,729 |
| Other investments | 407 | – | 407 |
| Property and equipment | 17 | 1 | 18 |
| Receivables and other financial assets | 45 | – | 45 |
| Other assets | 2 | 2 | 4 |
| Total assets | 2,432 | (30) | 2,402 |
| Liabilities | |||
| Insurance liabilities | (2,267) | 67 | (2,200) |
| Borrowings | (31) | – | (31) |
| Payables and other financial liabilities | (56) | – | (56) |
| Other liabilities | (12) | (18) | (30) |
| Total liabilities | (2,366) | 49 | (2,317) |
| Total net assets | 66 | 19 | 85 |
| Net assets acquired (50%) | 42 | ||
| Goodwill arising on acquisition of this holding | 10 |
The assets and liabilities as at the acquisition date in the table above are stated at their provisional fair values and may be amended in 2009 in accordance with paragraph 62 of IFRS 3, Business Combinations. The residual goodwill represents expected future revenue and cost synergies.
The results of UBI Vita have been included in the consolidated financial statements of the Group with effect from 18 June 2008, and have contributed £2 million loss to the consolidated loss before tax.
(iii) Swiss Life Belgium
On 30 June 2008, the Group acquired 100% of the shares in Swiss Life Belgium, a multi-line insurer, from SNS REAAL for £112 million. By combining Swiss Life Belgium with our Belgian insurance operation, managed through our Dutch subsidiary Delta Lloyd, the Group will further strengthen its position in the Belgian life insurance market.
The acquisition of this shareholding has given rise to goodwill on acquisition of £48 million, calculated as follows:
| Purchase cost: | £m |
|---|---|
| Cash paid | 112 |
| Attributable costs | 0 |
| Total consideration | 112 |
The estimated book and fair values of the assets and liabilities at the date of acquisition were:
| Book value £m |
Fair value and accounting policy adjustments £m |
Fair value £m |
|
|---|---|---|---|
| Assets | |||
| Acquired value of in-force business on insurance contracts | – | 17 | 17 |
| Reinsurance assets | 28 | – | 28 |
| Prepayments and accrued income | 33 | – | 33 |
| Cash and cash equivalents | 60 | – | 60 |
| Equity securities | 464 | – | 464 |
| Debt securities | 1,735 | – | 1,735 |
| Property and equipment | 19 | – | 19 |
| Investment property | 80 | – | 80 |
| Loans | 21 | – | 21 |
| Receivables and other financial assets | 46 | – | 46 |
| Other assets | 19 | – | 19 |
| Total assets | 2,505 | 17 | 2,522 |
| Liabilities | |||
| Insurance liabilities | (1,635) | 92 | (1,543) |
| Liabilities for investment contracts | (818) | 52 | (766) |
| Borrowings | (49) | – | (49) |
| Payables and other financial liabilities | (41) | – | (41) |
| Other liabilities | (59) | – | (59) |
| Total liabilities | (2,602) | 144 | (2,458) |
| Total net assets | (97) | 161 | 64 |
| Net assets acquired (100%) | 64 | ||
| Goodwill arising on acquisition | 48 |
The assets and liabilities as at the acquisition date in the table above are stated at their provisional fair values and may be amended in 2009 in accordance with paragraph 62 of IFRS 3, Business Combinations. The residual goodwill represents cost and revenue synergies from integrating the business with our existing Belgian operations.
The results of Swiss Life Belgium have been included in the consolidated financial statements of the Group with effect from 30 June 2008, and have contributed £35 million loss to the consolidated loss before tax.
(iv) Material acquisitions summary
| 2008 £m |
|
|---|---|
| Total net assets of subsidiaries described above | 155 |
| Less: Minority interests | (45) |
| Net assets acquired | 110 |
| Cash paid | 188 |
| Attributable costs | 2 |
| Total consideration | 190 |
| Goodwill arising on material acquisitions above | 80 |
| Other goodwill arising (see (v) below) | |
| Addition to existing shareholding in Cajamurcia | 3 |
| Other goodwill arising | 23 |
| Total goodwill arising in the year | 106 |
(v) Other goodwill arising
Addition to existing shareholding in Cajamurcia Vida
As disclosed in the 2007 financial statements, on 6 June 2007 the Group acquired 5% of the share capital of Caja Murcia Vida y Pensiones, de Seguros y Reaseguros SA (Cajamurcia Vida) from the Spanish savings bank Caja de Ahorros de Murcia (Cajamurcia). Cajamurcia Vida was fully consolidated as a subsidiary from that date, as the Group has the power to govern its financial and operating policies, through having the majority vote at meetings of the company’s board of directors.
On signing the shareholders’ agreement, Cajamurcia granted the Group a call option over a further 45% of the shares in Cajamurcia Vida. On 27 March 2008, the Group exercised this option and acquired 45% of the shares for £81 million. The fair value of the net assets of the company at the date the option was exercised was £176 million, and the acquisition of the additional shareholding gave rise to additional goodwill of £3 million.
Other
Other goodwill has arisen on smaller acquisitions and increases in shareholdings in existing subsidiaries, as well as fair value adjustments to acquisitions made in 2007. None of these is considered material for separate disclosure.
(vi) Unaudited pro forma combined revenues and profit
Shown below are unaudited pro forma figures for combined revenues and profit as though the acquisition date for all business combinations effected during the year had been 1 January 2008, after giving effect to purchase accounting adjustments and the elimination of intercompany transactions. The pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisitions taken place at 1 January 2008, nor is it necessarily indicative of future results.
| 2008 £m |
|
|---|---|
| Revenues (net earned premiums and fee income) | 36,620 |
| Loss before tax attributable to shareholders | (1,388) |
£32 million of the above pre-tax loss has risen since acquisition.
(b) Disposal of subsidiaries, joint ventures and associates
The profit on the disposal of subsidiaries, joint ventures and associates comprises:
| 2008 £m |
2007 £m |
|
|---|---|---|
| United Kingdom (see (i) below) | (38) | (7) |
| Turkey | – | 71 |
| Offshore operations (see (iii) below) | 14 | – |
| Other small operations | 31 | (15) |
| Profit on disposal before tax | 7 | 49 |
| Tax on profit on disposal | – | 3 |
| Profit on disposal after tax | 7 | 52 |
(i) UK non-core operations
As part of its strategy to exit certain UK non-core operations, the Group completed the disposals of HPI Limited to Solera Holdings Inc. and RAC Autowindscreens Limited to Arques Management GmbH in December 2008. The loss on disposal of these wholly-owned subsidiaries was £38 million, calculated as follows:
| 2008 £m |
|
|---|---|
| Assets | |
| Goodwill and intangible assets | 99 |
| Investments and property and equipment | 10 |
| Deferred acquisition costs and other assets | 9 |
| Receivables and other financial assets | 25 |
| Cash and cash equivalents | 37 |
| Total assets | 180 |
| Liabilities | |
| Payables and other financial liabilities | (20) |
| Other liabilities | (28) |
| Tax liabilities and other provisions | (17) |
| Total liabilities | (65) |
| Net assets disposed of | 115 |
| Consideration: | |
| Cash consideration | 67 |
| Non-cash consideration | 15 |
| Less: transaction costs | (5) |
| Total consideration | 77 |
| Loss on disposal | (38) |
(ii) Luxembourg life operations
On 5 November 2008, the Group’s Dutch subsidiary, Delta Lloyd NV, exchanged its 100% holding in Commercial Union International Life SA (CUIL) for a 15% shareholding in NewPEL SA, a Luxembourg-registered investment company. No profit or loss was realised on disposal.
The assets and liabilities of CUIL at the date of disposal were:
| 2008 £m |
|
|---|---|
| Assets | |
| Intangible assets | 5 |
| Investments | 373 |
| Cash and cash equivalents | 5 |
| Other assets | 16 |
| Total assets | 399 |
| Liabilities | |
| Liability for investment contracts | (372) |
| Borrowings | (3) |
| Other liabilities | (10) |
| Total liabilities | (385) |
| Net assets disposed of | 14 |
| Consideration: | |
| Non-cash consideration | 14 |
| Profit on disposal | – |
(iii) Sale of offshore operations
On 11 July 2008, the Group sold its offshore operations, administered through Aviva Global Services Singapore Pte Ltd (AGS), to WNS (Holdings) Limited (WNS). As part of this agreement, we have entered into a master services agreement with WNS, who will provide business process services to the Group’s UK, Irish and Canadian businesses through to 2016. The consideration for the shares in AGS was £35 million and the relevant net assets of AGS at the disposal date were £21 million, giving rise to a profit on disposal of £14 million.
(c) Operations and assets classified as held for sale
Assets held for sale as at 31 December 2008 comprises:
| 2008 £m |
2007 £m |
|
|---|---|---|
| Property and equipment held for sale (see (i) below) | 102 | – |
| Assets of operations classified as held for sale (see (ii) below) | 1,448 | 1,128 |
| Total assets classified as held for sale | 1,550 | 1,128 |
(i) Property and equipment held for sale
As part of its restructuring, the UK data centres, presently owned and managed by Norwich Union Central Services Limited, have been classified as held for sale at 31 December 2008 at their fair value of £102 million. In remeasuring the data centres at fair value, an impairment charge of £44 million has been recognised in the income statement within integration and restructuring costs. The data centres were sold on 25 February 2009 at their fair value above.
(ii) Assets and liabilities of operations classified as held for sale
The assets and liabilities of operations classified as held for sale as at 31 December 2008 relate to our Dutch health insurance business and certain UK non-core operations, and were as follows:
| 2008 £m |
2007 £m |
|
|---|---|---|
| Goodwill and intangible assets | 14 | – |
| Investments and property and equipment | 396 | 316 |
| Receivables and other financial assets | 386 | 554 |
| Deferred acquisition costs and other assets | 1 | – |
| Prepayments and accrued income | 158 | 145 |
| Tax assets | – | 17 |
| Cash and cash equivalents | 493 | 96 |
| Total assets | 1,448 | 1,128 |
| Gross insurance liabilities | (709) | (627) |
| Borrowings | – | (12) |
| Payables and financial liabilities | (22) | (72) |
| Other liabilities | (478) | (220) |
| Tax liabilities and other provisions | (12) | (11) |
| Total liabilities | (1,221) | (942) |
| Net assets | 227 | 186 |
The 2007 figures relate to our Dutch health insurance business.
(iii) Dutch health insurance business
On 16 July 2007, the Group announced that its Dutch subsidiary, Delta Lloyd Group ("DL"), had reached an agreement to sell its health insurance business to OWM CZ Groep Zorgverkeraar UA ("CZ"), a mutual health insurer, and create a long-term alliance for the cross-selling of insurance products. Under the terms of the agreement, CZ will purchase the DL health insurance business and take on its underwriting risk and policy administration. DL will continue to market and distribute health insurance products from CZ to its existing customers and continue to provide asset management for the transferred business. DL will also have exclusive rights to market life, general insurance and income protection products to CZ’s customers. The transaction completed on 1 January 2009.
The relevant assets and liabilities of the DL health insurance business have been classified as held for sale, at their carrying values, in the consolidated balance sheet as at 31 December 2008.
(iv) UK non-core operations
In 2008, the Group decided to sell, and was actively marketing certain companies as part of its strategy to exit certain UK non-core operations. As at 31 December 2008, The British School of Motoring Limited and its subsidiaries had yet to be sold and, as a result, their relevant assets and liabilities have been classified as held for sale, at their carrying values, in the consolidated balance sheet as at 31 December 2008. On 11 February 2009, these companies were sold to Arques Consulting GmbH, realising a loss on disposal of £9 million which has been provided for within exceptional items in these financial statements.
(d) Other information
One of the Group’s subsidiaries, Delta Lloyd NV, is subject to the provisions of Dutch corporate law and particularly the Dutch "structure company" regime. Under this regime, Delta Lloyd operates under a Supervisory Board which has a duty to have regard to the interests of a wide variety of stakeholders. The Supervisory Board includes two Aviva Group representatives and is responsible for advising and supervising Delta Lloyd’s Executive Board. The shareholder is one of the most important stakeholders to whom the Supervisory Board has a duty.
Dutch Law changed in October 2004 to ensure that Supervisory Board directors in Dutch companies were henceforth to be elected by a company’s shareholders voting on nominations made by its Supervisory Board and the Works Council. Under the previous system, Supervisory Board directors appointed their own successors. In 2006, Delta Lloyd commenced proceedings against Aviva plc to try to compel the Company to adhere to the system that existed prior to the change in the law, on the basis of agreements they say were entered into in 1973 when the Group acquired Delta Lloyd. The Company disputes these claims and does not expect the litigation, whatever its outcome, to have any adverse effect on the financial or operational performance of Delta Lloyd or the Group. The court gave a judgement in 2008, requiring Aviva to adhere to the previous system of appointment, which Aviva is appealing.
