Group chief executive’s review

This has been a successful year for Aviva. Despite the tough economic environment in 2010, we have grown the business and the benefits of Aviva’s transformation over recent years have started to come through.

We have seen strong growth during the year: IFRS operating profits were up 26% to £2.55 billion and total sales were up 4% to £47.1 billion. We are selling more and improving profitability: we delivered a life new business internal rate of return (IRR) of 12.5% and a general insurance combined operating ratio (COR) of 96.8%. We have also beaten our target for capital generation, increasing net operational capital by 70% to £1.7 billion.

This is the result of a great deal of hard work across the group – focusing on our customers, growing the business and driving cost and capital efficiency.

We are in good shape to continue building on last year’s strong performance. We have a clear strategy to concentrate on the markets where we have strength and scale and to make the most of running our life and general insurance businesses under a single strong brand.

We have created a strong platform for profitable growth..

With the global economy in the grip of a financial crisis, we have created a strong platform for profitable growth, taking decisive management actions to improve our productivity and efficiency.

The steps we have taken as part of our ‘One Aviva, twice the value’ strategy have helped us achieve this. We have simplified and streamlined the Group, moving from a federation of independent businesses to a successful, global business operating under a single, strong brand. This has strengthened the business and enabled us to serve our customers better.

...and the benefits are clearly evident in the numbers

As expected, the economic situation remained difficult in 2010. The fact that we turned in such a strong financial performance under these circumstances underlines the strength of our business.

We are seeing evidence of improved performance right across our business. We had another strong year in life insurance. General insurance is returning to growth from a low point in the cycle. Our asset management business, Aviva Investors, delivered significant growth in funded external sales.

Our customers are at the heart of our success...

Aviva’s resilience and improving performance are underpinned by the scale of our customer base, now over 53 million strong.

Against an uncertain economic backdrop, customers are looking to save more for their financial security. Investment performance and customer demand for our products increased total funds under management by £23 billion to £402 billion in the year.

Through our determination to focus on meeting customers’ needs effectively and efficiently, we are attracting new customers and giving existing customers greater reason to stay with Aviva.

...as we continued to grow the business profitably...

During the year we maintained our emphasis on growing the business profitably. We ensured that we allocated our capital to areas where we could earn optimal returns and continued to bear down on costs.

We reduced our cost base by £149 million, a reduction of 3%, and over the last three years we have taken more than £750 million of costs out of the business.

With this combination of keeping down costs and pursuing profitable growth, Aviva’s life business is now significantly more profitable than it was three years ago and the momentum is continuing. In general insurance, absolute cost savings combined with rising sales and disciplined underwriting have driven a significant improvement in profitability.

These improvements helped to drive IFRS operating profit up by 26% to £2,550 million and earnings per share increased by 33% to 50 pence.

In addition, the consultation on the planned closure of Aviva’s final salary staff pension scheme was completed during the year. Moving all UK staff to a defined contribution scheme from 1 April 2011 has benefited Aviva’s net asset value by £286 million and will reduce funding costs by £50 million a year.

... due to strong performances across our businesses

We delivered a strong life insurance performance in 2010. Long-term savings sales increased by 4% to £37,360 million. Through our focus on profitable new business growth and disciplined allocation of capital the Group’s Internal rate of return (IRR) increased to 12.5% (from 10.0% in 2009) with a payback of 8 years (14 years in 2009).

In the UK our life business is clearly winning in an attractive market and we were voted the UK’s top insurer by independent financial advisers. Not only did we grow long-term saving sales by 19% and increase our market share for the third consecutive quarter but we also delivered excellent profitability with a 15% IRR and significantly increased margins to 3.4% (FY 2009: 2.8%).

In Europe we are well positioned in the world’s largest life and pensions market. We achieved a 13% IRR in Aviva Europe – ahead of the Group’s short term financial target – on life and pensions sales up 3% on a local currency basis.

In North America we significantly increased profitability with an IRR of 14% and a four-year payback as a result of disciplined pricing management and our focus on more capital-efficient life products.

In Asia Pacific we have made great strides in the growth of our franchise. Life and pensions sales were up 48%⁵ and IRRs improved significantly from 6%⁵ to 11% through active management of the product mix and capital discipline.

Our general insurance performance is a very important highlight of 2010. Over the last couple of years, we took tough decisions to move away from unprofitable business, particularly in the UK. This means that, from a sound footing, we are now growing in a market which shows some signs of improvement and total general insurance and health net written premiums increased by 6% to £9,699 million.

Our offering is proving very successful. In the UK general insurance business, net written premiums were 5% higher at £4,046 million in 2010 and we delivered four consecutive quarters of sales growth. In Aviva Europe the COR was 103%, and although some of this was due to poor weather this is an area for further improvement in 2011. In Canada – our second-largest general insurance business – our decision to exit unprofitable business contributed to a 54% increase in operating profit to £222 million on slightly lower sales, down 3% to £1,958 million on a constant currency basis.

Across the general insurance business we achieved a COR of 96.8%, better than our 2011 target of 97%.

The strength of our bancassurance performance was particularly pleasing. Our combination of life and general insurance and our excellent products and services in both areas make us an attractive business partner and during 2010 we announced new arrangements with Santander and Royal Bank of Scotland. We have over 100 bank partnerships and long-term savings sales in this area grew by 10% in the year.

Aviva Investors, our global asset management business, grew assets under management by 4% to £260 billion. IFRS operating profits were down from £115 million in 2009 to £100 million in 2010 as we continued to invest in the business. Despite the unpredictable nature of the financial markets, investment performance was ahead of target for Aviva Investors with 73% of its funds beating benchmark. The business has also made good progress in the development of a global infrastructure which will help to reinforce the focus on delivering strong growth in third-party business. Net funded external sales rose from £236 million outflows in 2009 to £2,364 million inflows in 2010.

Overall, our results in life, general insurance and asset management have been largely unaffected by foreign exchange movements.

Cash and capital is a clear differentiator...

We took time in 2010 to highlight to analysts and shareholders the strength of our cash and capital generation. Indeed, we generate substantially more capital than any other insurer in the UK.

Given the strength of our business across life and general insurance, and with over 30 million customers on long-term contracts, a key characteristic of Aviva is the strength of our cash flows and our capital position. 2010 saw a £3 billion increase in expected future cash flows from our in-force life book to £36 billion.

Last year we forecast net operating capital for the year of £1.5 billion. We have beaten that guidance, delivering £1.7 billion net operating capital in 2010 – an increase of 70% on 2009.

... and our balance sheet is stronger…

We also provided further clarity on the strength and quality of our balance sheet which underpins our resilient profits and powerful capital generation.

During the year our IFRS net asset value per share increased to 454 pence (31 December 2010) from 374 pence (31 December 2009), largely through the strength of our earnings and by reducing the pension deficit to zero (31 December 2010) from £1.7 billion (31 December 2009), but also partly through improving financial markets.

The strength of Aviva’s balance sheet rests on our effective management of credit and insurance risk and our disciplined asset liability management. We have high-quality, well managed and diverse fixed income portfolios, and our asset manager Aviva Investors has helped to deliver a consistently strong performance across these assets over a number of years.

In line with the prudent management of our balance sheet in the current economic environment and our strong capital generation, we plan to reduce Aviva’s hybrid debt by at least £700 million over the next three years.

In January 2011 we provided the market with further embedded value disclosure. This gave additional clarity to the value of Aviva’s future cash flows and allows greater comparability with other UK insurers. On a European Embedded Value equivalent basis Aviva’s net asset value per share was 621 pence at 31 December 2010.

Our IFRS shareholder equity now exceeds the level before the global financial crisis, having increased during the year by £2.5 billion to £13.0 billion and our financial strength was recognised by the positive rating action by credit rating agencies S&P and Fitch at the start of 2011.

...supporting a healthy and growing dividend

It is the strength of our capital generation and our balance sheet which support a healthy and growing dividend. For 2010, we intend to pay a dividend of 25.5 pence, an increase of 6% over 2009.

We have refreshed our strategy

In November 2010, we set out the results of our strategic review.

There is no doubt we are in a strong position because of the actions we have taken across the business. Equally, the world is a very different place to when we laid out our strategy in 2007. We are in a new economic environment as customers prefer to pay down debt and save more and constraints on capital require greater investment discipline, strategic focus and strong balance sheets.

Given this changed environment in 2010 we took a step back and had a hard look at our strategic direction. There were three clear conclusions, as I outline here and set out in more detail in the following pages:

1. Increasing our geographic focus on 12 markets where we have strength and scale, particularly in the UK and Europe where our market-leading positions mean that we are well placed to make the most of the significant demographic opportunity in the region.

2. Benefiting from the combination of life and general insurance. Our life and general insurance operations are excellent businesses in their own right, with strong market positions, good growth prospects and attractive returns. In addition to their inherent strengths, there are significant advantages to running both under one strong brand. For example, Aviva benefits from diversification of risk that allows us to hold 30-40% less capital to write new general insurance business than on a standalone basis.

3. Building on our core strengths in marketing and distribution expertise, technical excellence, operational effectiveness and financial discipline. We already perform well in these areas, but by focusing our efforts and resources we aim to excel at each of them, and enhance Aviva’s position as a leading insurer.

Delivering on short-term financial commitments

In addition to our longer-term strategy, we have set out a number of near-term, demanding financial targets. We aim to deliver:

• At least £1.5 billion operational capital generation in 2011;
• Life IRR of a least 12% with payback of 10 years or less;
• 2011 general insurance COR of 97% or better; and
• £200 million of cost savings and £200 million of efficiency gains by the end of 2012.

In 2010 we demonstrated our ability to meet these targets as we generated £1.7 billion net operational capital; delivered a life new business IRR of 12.5% and a general insurance COR of 96.8%.

Strength from our people and our customers

We are reaping the benefits of the commitment and hard work of our people over the past few years and I am grateful to all of the Aviva team.

The real source of our success, of which I am always conscious, is the difference that our people can make to our customers’ lives. This is what motivates us and makes Aviva an exciting place to work.

Building a strong and sustainable business

Our business helps our customers to manage the risks of everyday life and to secure their financial futures. We must be there for them throughout their lives and beyond, so it is crucial we are a sustainable and profitable business, for the mutual benefit of our shareholders and our customers.

Our sustainability and financial strength are underpinned by effective risk management, which allows us to predict future changes, move more quickly and take better decisions for our customers, giving them prosperity and peace of mind.

Confident outlook

We are in good shape with a clear way forward and strong momentum in our businesses.

In our life business, we are confident that with our brand strength, leading market positions and great product offerings, we are in a strong position to benefit from our customers’ increasing propensity to save in these uncertain times.

In our general insurance business, because of the actions we have taken and the improving market conditions, I believe the prospects are better than at any time in the last five years.

We have come a long way in the last few years and I am confident that, although the economic environment may well be tough in 2011, we have a strong platform from which to deliver the continued success of Aviva.

Strong platform for profitable growth

• Moved from 40 brands to a single, strong brand – Aviva
• Grown the scale of our customer base, now over 53 million strong and continuing to attract new customers
• Reshaped the portfolio to reallocate capital to higher return markets – such as the partial IPO of Delta Lloyd and the sale of our sub-scale Australian life business
• Brought our businesses closer together – combined life and general insurance in the UK and implemented the transformation of our European business
• Delivered our £500 million cost savings target a year early – £750 million costs taken out of the business over the last 3 years
• Reduced our headcount by approximately 19% since 2007
• Completed the reattribution of the inherited estate benefiting policyholders and shareholders
• Negotiated the closure of the final salary section of the UK staff pension schemes to future

Safeguarding our financial future

• With economies recovering at different speeds and a greater pressure on finances for both business and individuals, we are playing our part in finding new ways of thinking about how we should safeguard our financial futures.
• We continue to monitor consumer attitudes to savings around the world. We now have seven years of rich data from which to create insight (www.aviva.com/customers/consumer-attitudes-survey).
• In August 2010 we launched ‘Mind the Gap’, a report which explores the difference, across 27 European countries, between the pension provision people will need in retirement and the pension amount they can currently expect to receive. It provides calls to action to address the pensions gap and incentivise higher levels of saving (www.aviva.com/europe-pensions-gap).
• In October 2010, we convened the Future Prosperity Panel, bringing together leading international ‘thinkers’ from outside financial services to debate fresh approaches to ensuring financial prosperity. It uses insights from public policy, business and behavioural economics to look for new solutions to help people save (www.aviva.com/fpp).

Andrew Moss
Group chief executive

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5. Excluding Australian life business sold on 1 October 2009