We compare ourselves with the “best in class” in all that we do. Our consistent efforts have made us market leaders in many aspects of our business. Our aim is to continue to outperform.
We are registering higher growth in continental Europe and can see the promising development of our business model and of our profits. Our operations in France, Spain, the Netherlands and Italy are all doing well. In Poland and other markets in Eastern Europe we are prominent or gaining market share.
To take a focused approach to general insurance, with disciplined underwriting and efficient claims handling.
**New business contribution is the present value of the projected stream of distributable profit from new business sales.
• Launch of a number of new funds during 2004 – further expansion into European property funds planned in 2005.
Our general insurance operating profit of £1,326 million (2003: £911 million) was another excellent result. We achieved a combined operating ratio (COR)† of 97%, beating our group COR target, which is 100% in each of the three years from the start of 2004.
Reflecting this spirit of focus, in 2004 we have continued the rollout of the Aviva brand. We now manage a more focused brand portfolio. Aviva has a presence across Europe, Asia and North America and in 2005 we will work to further strengthen this young brand. The international reach of the brand has helped unite our people and opened the door to new international marketing opportunities – such as our sponsorship of the Asian badminton tour and the Australian Open tennis tournament.
We operate in a combination of mature and developing markets, which offer excellent opportunities for both short-term and long-term growth. We have leading businesses in the UK and continental Europe, and more recent businesses in India, China and Eastern Europe where we see opportunities for substantial long-term growth. Our diverse and cost-efficient business model puts us in a strong position to benefit from further market upturns, particularly with the need for increased retirement savings in many countries. We share product knowledge and distribution expertise across the group to benefit all our businesses.
UK Total new business sales, including investment products and sales through our UK equity release business, were £7.9 billion (2003: £7.1 billion). Investor confidence returned slowly and the overall market was broadly flat. We increased business levels against 2003 but remain selective about where we compete. We are aiming to build long-term sustainable business with good margins rather than chase sales volume.
Ireland Investor confidence in Ireland is returning only slowly, despite more stable markets. Unit-linked sales have been similarly slow to recover. Hibernian reported total new business sales of £269 million (2003: £250 million). Operating return** was £40 million (2003: £57 million) reflecting increased competition and a change in lapse assumptions in certain product classes.
1 UK £551m 2 Continental Europe £977m 3 Rest of world £83m Total £1,611m * Including share of associates’ premiums. **On a European embedded value (EEV) basis.
Sales increased to £648 million (2003: £617 million) as more stable investment markets saw a gradual improvement in investor confidence. Sales through our Navigator business in Singapore were £13 million (2003: £8 million).
Aviva Canada sells a broad range of traditional personal and small commercial insurance products through a network of independent brokers. In addition, in 2003 we launched our first corporate partner relationship with Loblaws, Canada’s largest supermarket chain, under the highly regarded President’s Choice brand. This partnership continues to progress well.
We are also pursuing a strategy to distribute life products, particularly unit-linked savings, through our Aviva Assurances network. We are undertaking specialised agent recruitment and training initiatives as part of a managed programme of expansion.
In Canada, our focus on delivering a high standard of customer service is reflected in the complimentary feedback our claims team has received from policyholders about its claims service. In 2005 testing will begin on Autograph, an innovative programme that enables drivers to track their daily driving habits and to gain potential premium discounts.
In the UK, the successful partnership between Norwich Union and NCH, the UK’s leading children’s charity, has enabled some 630 employees to help make a difference to the lives of vulnerable young people.
The directors believe that the EEV methodology is a refinement to the achieved profits basis and represents the most meaningful and transparent basis of reporting the underlying value of our life business and the underlying drivers of performance. The financial statements include supplementary information on EEV reporting on pages 128 to 145 and the group’s incentive schemes and internal management reporting are aligned to that basis.
Dividend cover The proposed full year ordinary dividend of £575 million is covered by the post tax statutory basis operating profit 2.25 times (2003: 1.82 times).
UK Life 43 UK General insurance 27 Other businesses – Corporate costs (18)
* Includes NUER and excludes retail investment sales and is stated before the effect of required capital.
UK 832 676 France 32 35 Ireland 153 91 Netherlands (including Belgium and Luxembourg) 71 35 Other Europe 39 32 Canada 152 12 Other international 47 30 Total 1,326 911
Fund management The continuing recovery across global equity markets during 2004 resulted in increased operating profits on an MSSB basis of £43 million (2003: £10 million) for our worldwide fund management operations. Assets under management at 31 December 2004 increased to £273 billion (2003: £240 billion), driven by the benefit of new business flows in the period and the improvement in worldwide investment markets.
International Financial Reporting Standards (IFRS) The European Union requires all European listed groups to prepare their consolidated financial statements using standards issued by the International Accounting Standards Board (IASB) with effect from 1 January 2005. The Aviva group’s consolidated accounts for 2005 will therefore be prepared under IFRS, rather than UK GAAP. Comparative figures will be required for 2004, together with reconciliations of income and shareholders’ equity to the previously-reported UK GAAP figures.
The group is subject to a number of regulatory capital tests and also employs a number of realistic tests to allocate capital and manage risk. Overall, the group comfortably meets all of these requirements and has significant resources and financial strength. We report on these below. The ratings of the group’s main operating subsidiaries are AA/AA (“very strong”) with a stable outlook from Standard & Poor’s and Aa2 (“excellent”) from Moody’s. These ratings were reaffirmed in September 2004 and reflect the group’s financial and capital strength, strong underlying earnings and positive strategic management.
Regulated asset value £bn 1.0 8.4 9.4 Required minimum margin £bn 0.4 3.5 3.9 Excess solvency margin £bn 0.6 4.9 5.5
The group’s UK life businesses are required to hold sufficient capital to meet the FSA’s capital requirements. Under the FSA’s realistic reporting regime, the UK with-profits business’ capital requirement is determined from the “twin peaks” approach, such that capital resources must be sufficient to cover the greater of the statutory and realistic liability and capital requirements. The businesses must also take into account the ICA which considers certain business risks not reflected in the twin peaks approach. For UK non-participating business, the capital requirement is calculated on the statutory basis, which is based on EU Directives.
Realistic balance sheet information is shown for the three main UK with-profit funds, CGNU Life, Commercial Union Life Assurance Company (CULAC) and Norwich Union Life and Pensions (NUL&P).
Estimated Estimated Estimated Estimated realistic required realistic realistic orphan capital Estimated assets liabilities*† estate‡ margin≠ excess £bn £bn £bn £bn £bn * Realistic liabilities include the shareholders’ share of future bonuses of £0.5 billion. Realistic liabilities adjusted to eliminate the shareholders’ share of future bonuses are £47 billion. † These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £0.6 billion, £0.9 billion and £3.3 billion for CGNU Life, CULAC and NUL&P respectively.
Aviva plc and £129 million subordinated perpetual loan issued by a Dutch subsidiary undertaking.
These GAOs are “in the money” at current interest rates but the exposure to interest rates under these contracts has been hedged through the use of reinsurance using derivatives (swaptions). The swaptions effectively guarantee that an interest rate of 5% will be available at the vesting date of these benefits so there is no exposure to a further decrease in interest rates. The current liability is therefore valued at its maximum value.
The process for managing life insurance risk is primarily carried out in our insurance businesses, in accordance with group policy. There is also a group Life Insurance Risk Committee which has an oversight role.
5. Wim Dik (66) Independent non-executive director Appointed to the board in 1999, having served as chairman of Nuts Ohra, a Dutch insurer acquired by the group in 1999. Currently chairman of the supervisory board of Casema Holding BV (telecommunications) and Tele Atlas NV (information systems), a member of the supervisory board of ABN AMRO NV (banking), a non-executive director of Unilever NV and Unilever plc (consumer) and of LogicaCMG plc (computer services). Former Minister for Foreign Trade in the Netherlands, a former chairman of Nederlandse Unilever Bedrijven BV (consumer) and former chairman and chief executive officer of KPN Royal Dutch Telecom (telecommunications). A former chairman of the supervisory board of Holland Casino (gaming) and a former member of the supervisory boards of TNT Post Group (mail services) and Vos Logistics (transport). Member of the nomination and remuneration committees.
The directors retiring in accordance with the Company’s articles of association and proposed for re-election at the forthcoming Annual General Meeting are Guillermo de la Dehesa, Wim Dik, Derek Stevens and André Villeneuve. Guillermo de la Dehesa, a Spanish national, and Wim Dik, a Dutch national, have both served as directors for five years. In addition to their considerable management experience they bring a valuable European perspective to the Board’s discussions. Derek Stevens, who has now served as a director for nine years, is a member of the financial sector committee of the Accounting Standards Board and is a former Chief Financial Officer of British Airways and of the TSB Group. He therefore is able to contribute recent and relevant financial experience and chairs the Board’s Audit Committee. Andre Villeneuve has served as a director for just less than nine years. He has knowledge of the broking and financial markets and wide general management experience in the UK and the United States. In line with its succession plans it is the Board’s intention that Derek Stevens and Andre Villeneuve, if re-elected by shareholders at the forthcoming Annual General Meeting, will retire from the Board on or before 31 December 2006.
Directors are fully briefed in advance of Board and committee meetings on all matters to be discussed and at Board meetings they receive regular reports on the Group’s financial position, risk management, regulatory compliance, key areas of the Group’s business operations and other material issues. The Board and its committees operate in line with a work plan agreed prior to the start of each year.
The Company’s Annual General Meeting provides a valuable opportunity to communicate with private investors. At the meeting, the Company complies with the Combined Code as it relates to voting, including votes withheld, the separation of resolutions and the attendance of committee chairmen. The Company gave 26 working days’ notice of its Annual General Meeting in 2004.
Richard Goeltz and Russell Walls were appointed members of the Committee in July 2004 and George Paul and Guillermo de la Dehesa stood down from membership respectively in August and September 2004. The Committee met on five occasions in 2004 and the members’ attendance record is set out on page 47. The Group Company secretary acts as the secretary to the Committee.
The terms of reference of the Committee require it to deal with the constitution of the Board and to consider the succession of the directors. The Committee reviews the skills, experiences and independence of its directors and, as appropriate, identifies and assesses potential new directors. It also reviews those directors retiring by rotation in accordance with the Company’s articles of association with a view to making recommendations to the Board regarding their re-election. A copy of the Committee’s terms of reference is available from the Group Company Secretary and can be viewed on the Company’s website.
attract high calibre directors a proposal will be put to shareholders at the forthcoming Annual General Meeting that the limit on the aggregate remuneration which can be paid to directors be increased from £1 million pa to £1.5 million pa. Executive directors receive no remuneration for serving as directors.
The performance targets comprise numerous relevant measures, including Group and business unit operating profits, combined operating ratios, new business contribution, and the actual performance against these is aggregated to determine the bonus levels paid. The targets vary between participants depending upon their particular responsibilities and spheres of influence.
Performance graph The following graph compares the TSR performance of the Company over the past five years with the TSR of the FTSE100 Return Index which has been chosen because it is a recognised broad equity market index of which the Company is a member. The graph also includes the median TSR of the companies in the comparator group which is included as this is the group with which performance is measured for the purposes of the Aviva Long-Term Incentive Plan.
Below Median 0% Median 15% Median to Upper Quintile 15% – 50% (straight-line) Upper Quintile 50%
Guillermo de la Dehesa 67 64 – – – – 67 64
* From date of appointment: Richard Goeltz and Russell Walls – 3 May 2004 and Andrew Moss – 10 May 2004.
In calculating the level of bonus under the Annual Bonus Plan 70% is based on key financial targets and 30% is based on personal targets. The constitution of the financial targets varies between directors. For example, in respect of the Group Chief Executive and the Group Finance Director the financial targets are those relating to the Group, whereas for the other executive directors bonuses are based partly on the Group’s performance and partly on financial targets relating to the business units for which the directors have responsibility. Key performance targets are measured in order to determine the financial bonuses for all the executive directors. The 2004 key financial targets for the Group included new business contribution, operating profit, combined operating ratio (COR), total expenses and the return on capital. Overall performance against these key performance targets in 2004 was better than the targets set. In addition to the financial targets the directors were set individual personal targets.
2. “Benefits”. All the executive directors received the benefit of private medical insurance and, along with the Chairman, a car allowance. The above disclosure also includes, in respect of Richard Harvey and Philip Twyman, charges relating to the cost incurred by the Company of insuring the life assurance and spouses’ benefits for these directors which, had they died during the year, could not have been paid by the pension scheme as a result of the “earnings cap” and which would therefore have been met by the Company.
Disclosed for each director is the “Pension accumulated 2004”, being the amount of pension to which the directors would have been entitled had they left service at 31 December 2004. The “Increase in pension” columns relate to the difference between the accumulated pensions at the end of 2003 and 2004 on both gross, and net, of inflation basis.
The Aviva Share Plan was established in May 2004 specifically to facilitate the recruitment of Andrew Moss. The awards made under the Plan compensate Andrew Moss for the value of long-term incentive awards granted to him by his previous employer and which lapsed when he resigned to join Aviva. Andrew Moss is the only participant in the Plan. On 10 May 2004, the date Andrew Moss joined the Company, 103,846 shares (with a market value of £540,000) which were in the Aviva Employee Trust were allocated to him. On 31 October 2004 67,307 of the shares vested, 23,077 will vest on 31 December 2005 and the balance of 13,462 will vest on 31 December 2006. The vesting of these shares is not subject to any performance conditions.
Lord Sharman of Redlynch was appointed to the Board on 14 January 2005. At the time of his appointment, and at 8 March 2005, he had no interest in any shares of the Company.
Independent auditors’ report to the members of Aviva plc We have audited the Group’s accounts for the year ended 31 December 2004 which comprise the Accounting policies, the Consolidated profit and loss account, Pro forma reconciliation of Group operating profit to profit on ordinary activities before tax, Consolidated statement of total recognised gains and losses, Reconciliation of movements in consolidated shareholders’ funds, Consolidated Group balance sheet, Consolidated cash flow statement, Company balance sheet and the related notes 1 to 51. These accounts have been prepared on the basis of the accounting policies set out therein. We have also audited the information in the Directors’ remuneration report that is described as having been audited.
V – Exchange rates The results of foreign enterprises are translated into sterling at average exchange rates while their assets and liabilities are translated at year end rates. The resulting exchange differences arising within long-term businesses are included within the long-term business technical account and form part of the transfer to the fund for future appropriations, while those arising within other businesses are taken directly to reserves.
(153) – non-long-term business subsidiary undertakings (17) (104) (88) (3) – non-long-term business associates (6a & 20c) (2) (2)
Operating profit before tax based on longer-term investment return after amortisation of goodwill and amortisation of acquired additional value of 2,303 in-force long-term business (3b) 1,566 1,252 Short-term fluctuation in investment return 98 – long-term business (6b) 67 129 94 – non-long-term business (6b) 64 83
Financing activities Issue of share capital (47c) 3 2 Issue of direct capital instrument (47c) 990 – Issue costs of direct capital instrument (9) – Proceeds from issue of subordinated debt (36 & 47c) – 1,567 Net drawdown/(repayment) of debt (47c) (312) (366) Net cash inflow from financing activities 672 1,203
Total life and pensions (including share of associates) 14,441 12,629 1,154 1,164 15,595 13,793
Total general insurance business and health business premiums written before reinsurance 10,553 10,395 6 – Analysis of investment return (a) The total investment return before tax comprises: Long-term business Non-long-term business £m £m £m £m
Expenses and charges, including allocated interest charges (307) (299) (43) (31) Unallocated interest charges: External – subordinated debt – – (168) ( 101) – other borrowings – – (78) (109)
(b) Longer term investment return (i) The longer term investment return, net of expenses, allocated to the general business technical account and transferred from the long-term business technical account was £1,085 million (2003: £1,039 million) and £67 million (2003: £129 million), respectively.
In addition to the above amounts payable to the principal auditors, fees for audit services of £2.0 million (2003: £2.2 million) were payable to other firms. The total fees payable for audit services were therefore £12.1 million (2003: £11.9 million).
The total tax credited/(charged) in the non-technical account relates to the following: Parent company and subsidiary undertakings (353) (371)
Net (provision)/asset at 1 January (334) (382) 15 139 (319) (243) Amounts charged to the profit and loss account (note 13a and 13b) (196) (171) (74) (16) (270) (187)
(ii) The profit attributable to ordinary shareholders in the table above is calculated as follows: Operating profit Adjustments Total Operating profit Adjustments Total £m £m £m £m £m £m
Consequently, had the transaction been completed on 31 December 2004, the post tax profit on sale would have been £129 million and is summarised below: £m US$m
(b) In 2003, the Group commenced a review of its property requirements in the UK. This review was completed in 2004, resulting in the following: (i) In June 2004, the Group’s UK businesses entered into an agreement to dispose of certain core freehold and leasehold properties occupied for their own activities, and lease them back for periods up to 25 years. The majority of these properties were previously in life funds, owned by the policyholders, which then leased them to the operating shareholder companies. This new arrangement has not led to a material increase in the lease rentals payable. The rental expense to the shareholder companies on these properties in 2004 was £13 million (2003: £14 million).
(ii) The review concluded that a number of properties were considered to be surplus to the Group’s ongoing requirements and, as a result, would be disposed of. A provision of £80 million is held for the cost of future rents, service charges and maintenance, less any expected rental income, during the period until expected disposal of the relevant properties.
The redemption value of investments held at the year end was £1,473 million more (2003: £997 million more) than the amortised cost.
DLL and AMS received interest of £1 million in 2004 (2003: £2 million) on the loan notes they hold in the securitisation companies. They also receive fees from the securitisation companies for the administration of the loans and payments under the terms of interest rate swaps written between DLL, AMS and these companies to hedge their respective exposures to movements in interest rates arising from these transactions. In each case, the effect of the swaps is that the securitisation companies convert all or part of the interest flows receivable from customers in respect of the securitised mortgage loans into fixed interest flows which are designed substantially to match the interest payable to the noteholders. Included in investment income is £29 million (2003: £25 million) relating to these swaps.
Balance at 1 January 488 505 Foreign exchange rate movements 1 21 Additional in-force long-term business acquired in subsidiaries 30 36 Amortisation charge for the year (68) (74) Movements arising in the year (37) (17)
The fair value of these shares at 31 December 2004 was £276 million (2003: £224 million).
(ii) Substitution by, or variation so they become, alternative Qualifying Tier 1 Securities or Qualifying Upper Tier 2 Securities; or
41 – Provisions for other risks and charges Movements in provisions for other risks and charges were: Pensions and Deferred tax similar obligations (note 13e(iii)) Other Total £m £m £m £m
Accruals and deferred income 1,285 1,151 45 – Pension and other post-retirement benefit costs (a) The Group operates a large number of pension schemes around the world, whose members receive benefits on either a defined benefit basis or a defined contribution basis. The only material defined benefit schemes are in the UK, the Netherlands, Canada and Ireland and, of these, the UK scheme is by far the largest. The assets of the main UK, Irish and Canadian schemes are held in separate trustee-administered funds and, in the Netherlands, the main scheme is held in a separate foundation which invests in the life funds of the Group. An actuarial report has been submitted for each of the defined benefit schemes within the last three years, using appropriate methods for the respective countries on local funding bases. The substantial falls in stock markets worldwide from 2000 to 2002 have affected the funding position of the schemes. In the UK scheme, the employing companies have agreed to pay additional contributions.
(vi) Movements in the pension schemes’ deficits on a FRS17 basis comprise: Total £m £m
The pension net asset shown above is after deducting £56 million held within technical reserves in respect of future funding.
(a) The reconciliation of profit on ordinary activities to net cash inflow from operating activities is: £m £m
(d) Changes in cash holdings during the year were: £m £m
(ii) The 2001 profit and loss account figures and the balance sheet figures for 2000 and 2001 were restated in 2002 for the effects of implementing FRS19 “Deferred Tax”.
The industry is still debating the consolidation of mutual funds, such as OEICs and OPCVMs. Aviva has chosen to consolidate these vehicles but will continue to monitor industry developments.
Investments in joint ventures and associates 1,912 69 1,981 Financial investments and loans 129,032 40,480 169,512 Assets held to cover linked liabilities 40,665 (40,665) –
In some countries, the pension schemes have invested in the Group’s life funds. IAS19 requires us to consider the liquidity of the schemes’ assets and, if these are non-transferable, the relevant scheme surplus or deficit must be stated before taking account of such assets. Because of the medium-term nature of the contract, the Dutch scheme’s investment in the Delta Lloyd life fund is considered non-transferable and, under the terms of IAS19, the reported deficit in this scheme increased by £598 million at 1 January 2004 compared to the equivalent deficit under FRS17. The corresponding liability to the scheme has been retained within insurance liabilities and the scheme asset has been offset against the gross deficit for presentation purposes. This has had no effect on shareholders’ funds.
Investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group’s share of that entity’s post-acquisition changes to shareholders’ funds, is included as an asset in the consolidated balance sheet. Equity accounting is discontinued when the Group no longer has significant influence over the investment.
As noted in policy A above, insurance contracts and participating investment contracts continue to be measured and accounted for under existing accounting practices at the date of transition to IFRS.
2,025 Profit for the financial year attributable to equity shareholders 1,377 1,576 1,180 Retained profit for the financial year 802 1,031 * Restated for the effect of implementing European Embedded Value principles.
Acquired additional value of in-force long-term business 451 – 451 488 – 488
Net assets on a modified statutory basis 8,343 3,724 12,067 7,629 2,550 10,179 Additional value of in-force long-term business1 4,875 – 4,875 4,340 – 4,340
Andrew Moss Group Finance Director 1. The analysis between the Group’s and the minority interest’s share of the additional value of in-force long-term business is as follows: Movement in 2004 2003 the year £m £m £m
Stochastic modelling involves projecting the future cash flows of the business under thousands of economic scenarios that are representative of the possible future outcomes for market variables such as interest rates and equity returns. Allowance is made, where appropriate, for the effect of management and/or policyholder actions in different economic conditions on future assumptions such as asset mix, bonus rates and surrender rates. The time value is determined by deducting the average value of shareholder cash flows under these economic scenarios from the deterministic shareholder value under best estimate assumptions.
Life EEV operating return includes minority interests in 2004 of £186 million (2003: £157 million). This comprises minority interests in France of £9 million (2003: £4 million), Italy £43 million (2003: £37 million), Netherlands £26 million (2003: £13 million), Poland £16 million (2003: £21 million), Spain £90 million (2003: £81 million) and Other Europe £2 million (2003: £1 million).
Demographic assumptions Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva’s recent operating experience. Where appropriate, surrender and option take-up rate assumptions that vary according to the investment scenario under consideration have been used in the calculation of the time value of options and guarantees, based on our assessment of likely policyholder behaviour in different investment scenarios.
Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual Report, including, as described on page 49, the accounts prepared on the modified statutory solvency basis. Our responsibilities in relation to the Annual Report, including those accounts, are set out on page 63. The directors are also responsible for preparing the supplementary information on the above European Embedded Value basis.
Netherlands Delta Lloyd NV and its principal subsidiaries: Delta Lloyd ABN AMRO Verzekeringen Holding BV (51.0%) Delta Lloyd Asset Management NV Delta Lloyd Bankengroep NV (Banking) Delta Lloyd Levensverzekering NV Delta Lloyd Schadeverzekering NV Delta Lloyd Zorgverzekering NV OHRA Levensverzekeringen NV OHRA Schadeverzekeringen NV
Dividend payments direct to your bank account As an alternative to having dividends paid by cheque, shareholders can, if they wish, have them credited directly into their bank or building society account on the dividend payment date. For overseas shareholders, Transcontinental Account Payment Service (TAPS) is available, which allows shareholders in many countries to have dividends credited direct to their bank accounts in local currencies. To obtain further details and a mandate form please contact the Company’s registrar at the address on page 149.
Life profits reporting In reporting the Aviva plc headline operating profit, life profits have been included using the European embedded value (EEV) basis. The modified statutory basis, which is used in our accounts, is also identified in the headline figures. We have focused on the EEV basis, as we believe life EEV operating return is a more realistic measure of the performance of life businesses than the modified statutory basis. Life modified statutory operating profit before tax amounted to £1,185 million. The basis used for reporting EEV profit is consistent with the principles launched in May 2004 by the CFOs Forum, a group of 19 insurers with implementation required by no later than 31 December 2005. We have chosen to adopt the EEV principles early. This is used throughout the Aviva group to assess performance and as it is adopted by our peers will be used by the investment community to assess performance. The results for 2003 shown as comparatives which were previously reported to an achieved profits basis have been restated to an EEV basis.