Group chief executive's perspective

What’s happened?

The global economy

2008 was one of the most turbulent years in economic history as a wide range of assets posted record or near record falls. What began in 2007 as a crisis in US sub-prime mortgages spread first through the global banking system and then the broader economy as credit markets froze and equity markets fell.

Governments introduced a series of measures aimed at restarting lending and supporting economies. By year-end a large part of the global banking system was effectively under government control. In a further step, huge stimulus packages were launched to limit the damage, as economies slipped into recession. However, by the end of the year most of the world’s equity markets had fallen by between 30% and 50%.

In the UK, the pound has weakened dramatically against the dollar and the euro. The UK economy continues to shrink after 16 years of growth – total government debt is now projected to grow by 50% to well over £1 trillion, which is nearly 60% of GDP. UK interest rates are at an all-time low and unemployment is rising fast, with some forecasters predicting three million out of work by the end of 2009.

Our own industry is not unscathed. In September 2008 we saw AIG, once the world’s largest insurer, being bailed out with $150 billion from the US government largely due to its non-insurance activities.

At Aviva, we have seen a fall in the value of the investments we hold. The majority of our investments are measured at fair value according to International Financial Reporting Standards (IFRS) and our balance sheet, and consequently our net asset value, reflects substantial unrealised losses on these investments. However, we hold these instruments for the long term and as markets return to normal behaviour patterns we expect to see these valuations recover.

Our share price

Our share price has fallen significantly during the year and we ended 2008 down 42.1%, against a backdrop of dramatic falls in markets. In 2008 we have outperformed FTSE 350-life, down 43.3% and FTSE Euro 300-Life, down 62.5%. Whilst we underperformed the FTSE 100 which ended 2008 down 31.3%, we fared better than most of our European counterparts.

There is no doubt that there is a disconnect between our current share price and the underlying value of the business. This is true of many sectors, and while investors remain nervous it is likely to persist. But customers continue to buy insurance, invest and save, with trusted brands like Aviva. As a result our operating performance has improved in 2008. Read full details of our operating performance.