Operational cost base

Operating cost base

The Group’s announced cost savings target of £500 million has been achieved ahead of schedule with a total of £510 million of annualised cost savings delivered as at 31 December 2009. Of the £510 million costs savings achieved, £340 million was achieved in the year ended 31 December 2008 and £170m in the year ended 31 December 2009.

From this programme an additional £35 million has been identified for delivery in the year ending 31 December 2010, bringing the latest estimate of total annualised cost saves to £545 million.

The Aviva operating cost base is calculated from reported IFRS expenses as set out in the table below:

	2009 £m	2008 £m
Other expenses (as reported)	5,366	5,416
Less: Non operating items included above (amortisation and impairments)	(2,032)	(1,732)
Add: Claims handling costs1	673	742
Non commission acquisition costs2	1,137	1,324
Operating cost base	5,144	5,750

1. As reported within Claims and benefits paid of £27,549 million (2008: £29,353 million)

2. As reported within Fee and commissions expense of £4,396 million (2008: £4,411 million)

During 2009, the operating cost base decreased 11% to £5,144 million (2008: £5,750 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. These adjustments account for the impact of foreign exchange, businesses acquired/disposed of during the year and elimination of one-off restructuring and integration spend from the cost base in both years. After adjustments, the operating cost base decreased by 13% to £4,756 million compared with a 2008 like-for-like cost base of £5,483 million.

Movement in operating costs base

	£m
Total operating cost base 2008	5,750
Less: restructuring, integration and brand costs 2008	(382)
Impact of acquisitions and disposals1	(193)
Foreign exchange	308
2008 like-for-like operating cost base	5,483
Inflation2	121
UK Life3	(142)
UK General Insurance3	(245)
Europe3	(133)
Delta Lloyd3	(209)
Other businesses (including group centre)3	(119)
2009 like-for-like operating cost base	4,756
Restructuring, integration and brand costs 2009	388
Total operating cost base 2009	5,144

1. Impact of acquisitions & disposals – restatement of the 2008 cost base for the impact of acquisitions and disposals in both 2008 and 2009 to achieve a cost base on a like-for-like basis.

2. Inflation – Notional level of Inflation that would have impacted the operating cost base during the period. This is calculated using the Consumer Price Index for individual countries, applied to operating expenditure i.e. excluding restructuring & integration costs (but including adjustments for acquisitions & disposals). The overall weighted average is calculated at 2.2%.

3. Regional operating costs reduction – Includes realised savings from cost initiatives productivity and other savings (decrease in the cost base driven by the revenue fall in the business as well as by saving initiatives not attributable to the specific initiatives linked to the cost savings committed externally).