£14.6bn worldwide long-term savings new business sales 23p £9.7bn shareholders’ funds £959m operating profit before tax from general insurance†
We have announced that Sir Michael Partridge, a non-executive director and member of the audit committee, will retire on 7 May 2003, at the close of our annual general meeting. Sir Michael originally joined the board of Norwich Union in 1996. I thank him for his invaluable contribution during this period.
We have a broad product offering, focused on individual savings, protection and unit-linked products. These are sold through a mixture of distribution channels, including tied agents, brokers, a salaried sales force, direct operations and an agreement with the AFER savings association. AFER is the largest retirement savings organisation in France, with around 560,000 members.
During 2002, sales of unit-linked and other savings products were lower at £699 million (2001: £892 million). This was in a unitlinked market that fell by an estimated 32%. Sales of single premium fixed interest AFER products were £983 million (2001: £930 million). Operating profit was £228 million (2001: £227 million).
In September 2002 we agreed a new bancassurance joint venture with savings bank Caja de Granada and our existing partner, Unicaja, to take effect from 2003. This means our bancassurance network, which also includes Bancaja, Caixa Galicia and Caja España, will comprise 3,500 branches with access to about nine million customers.
2002 – Worldwide new business sales by distribution channels 1 – IFA 2 – Partnerships 3 – Direct 4 – Bancassurance Total £7,092m £799m £3,725m £3,030m £14,646m 2001 – Worldwide new business sales by distribution channels 1 – IFA 2 – Partnerships 3 – Direct 4 – Bancassurance Total £7,600m £977m £4,265m £2,112m £14,954m
As a major shareholder in many organisations we are actively involved in issues of corporate governance. This includes talking directly with companies in which we invest. We introduced several new socially responsible investment (SRI) products during 2002 to help institutional investors apply more social and environmental investment criteria. We also launched our first US mutual funds from our Boston office, which represents a step towards building capability in the North American market.
We believe that investing in CSR is good for business and for all those associated with it.
The next few years will see this trend continue, improving corporate accountability and increasing the prospect of stable financial markets – a benefit to capital providers and policyholders alike.
In the UK, we have sacrificed some volume to achieve rating increases, which is contributing significantly to the COR as the increases earn through. We expect increasing competition in the personal lines market in 2003 which will slow rating increases further. We remain committed to our strict underwriting strategy across all our target markets.
The operating performance of the group, including life achieved profit, generated £1.1 billion of after-tax profits, which has been more than offset by £3.1 billion of after-tax short-term fluctuations in investment returns and other non-operating items. Aviva’s shareholders’ funds are sensitive to movements in global investment markets. We estimate the sensitivity to a 10% fall in global equity markets or a 1% rise in global interest rates to be as follows: Sensitivity analysis 31 Equities Interest
Total continuing operations 17,326 19,138 Discontinued operations – Australia and New Zealand – 357
United Kingdom employees The Group is committed to continuing communication and dialogue with employees. News about the Group is provided through a variety of channels, but primarily through the intranet, television broadcasts and face-to-face briefings.
Internal controls The Board has ultimate responsibility for the systems of internal control maintained by the Group and for reviewing their effectiveness. The systems are intended to provide reasonable assurance, but not an absolute guarantee, against material financial misstatement or loss, and include the safeguarding of assets, the maintenance of proper accounting records, the reliability of financial information, compliance with appropriate legislation, regulation and best practice, and the identification and control of business risks.
Control environment The Group has an established governance framework. This framework is designed to oversee the Group’s operations world-wide and assist the Group in achieving its ambitions. The key features of the control environment within this governance structure include: the terms of reference for the Board and each of its committees; a clear organisational structure, with documented delegation of authority from the Board to executive management; a Group policy framework, which sets out risk management and control standards for the Group’s operations world-wide; and procedures for the approval of major transactions and capital allocation.
No material changes have been made to the remuneration policy during the year and none are planned for the current year. However, the Committee will continue to review and develop the policy to reflect market conditions and changes in best practice.
Basic salaries In determining the level of basic salaries, the Committee gathers data from a number of independent sources concerning the level of salaries paid to senior executives performing comparable functions within the largest 50 listed companies in the United Kingdom, with an additional focus on leading United Kingdom and European financial services companies. Salaries are reviewed annually.
If the performance targets have not been met at all at the end of the performance period, they will be retested at the end of five years, the ROCE performance condition being adjusted accordingly, (i.e. the cumulative ROCE would need to be at least 40% in excess of the rate of inflation over the extended performance period for any awards under that part of the plan to vest). The Committee is aware that certain institutions are not in favour of performance
The CGU Deferred Bonus Plan was approved by shareholders in 1999. Awards under this plan were granted to participants in lieu of some or all of the cash bonuses earned under the annual cash bonus plan. This plan, which operated in respect of bonuses awarded in 1999 and 2000, was replaced by the Aviva Deferred Bonus Plan referred to above. Awards vest on the third anniversary of their grant.
Long-term business investment income and unrealised gains and losses are included in the long-term business technical account and, where applicable, a transfer is made to the non-technical account to ensure that the return remaining in the long-term technical account attributable to shareholders reflects the longer term investment return.
Other charges: (6) Net (loss)/profit arising on the disposal of subsidiary undertakings (17c) (4) 287
(327) Tax on (loss)/profit on ordinary activities (I & 14a) (206) (198)
6,803 Additional value of in-force long-term business (O & 24a) 4,422 5,948 125 Deposits with ceding undertakings 81 208 45,443 Assets held to cover linked liabilities (25) 29,538 28,704
The effects of implementing FRS19 are as follows: (i) An incremental provision for deferred tax was established at 31 December 2001 of £945 million and has been accounted for as a prior year adjustment. This incremental provision has reduced to £112 million at 31 December 2002. The establishment of the incremental provision has resulted in the following at the respective balance sheet dates: £m £m
Notes to the accounts continued 58 Aviva plc Annual report + accounts 2002
Total long-term savings *The figures for associates comprise the Group’s share of the associated partnership in RBS Life Investments Limited.
(d) The table below shows the sensitivity to changes in the longer term rates of return: Movement in investment return By Change in By
Wages and salaries 1,433 1,794 Social security costs 194 208 Pension costs 117 89 63 Aviva plc Annual report + accounts 2002
Current tax (credit)/charge at standard UK corporation tax rate of 30% (2001: 30%) (85) 154 Adjustment to tax charge in respect of prior years (2) (1) Non-assessable dividends (9) (16) Non-taxable loss/(profit) on the sale of subsidiaries and associates 58 (57) Non-taxable amortisation of goodwill 21 28 Other disallowable expenses 20 26 Utilisation of brought forward tax losses – (36) Different local basis of tax on overseas profits 51 55 Deferred tax credit arising from movement in unrealised gains and losses 154 248 Other deferred tax movements 23 20 Deferred tax assets not recognised 96 23 Other items 35 17
18 – Goodwill The carrying value of goodwill comprises: Positive Negative Total Total goodwill goodwill 2002 2001 £m £m £m £m
All the above undertakings perform property ownership and management activities, and are incorporated and operate in Great Britain. All these investments are held by subsidiary undertakings.
All investments above are shown at current value unless otherwise indicated. The cost of financial investments above was £116,233 million (2001: £109,767 million).
DL receives payments from the Arena companies in respect of fees for loan administration services, and also under the terms of interest rate swaps written between DL and the Arena companies to hedge their respective exposures to movements in interest rates arising from these transactions. In each case, the effect of the interest rate swaps is that the Arena companies swap all or part of the interest flows receivable from customers in respect of the securitised mortgage loans into fixed interest flows which are designed broadly to match the interest payable to the noteholders. Included in investment income is £71 million (2001: £36 million) relating to the securitisation of these mortgage loan portfolios.
Foreign exchange rate movements 75 21 96 Adjustment to in-force long-term business previously acquired – (15) (15) Amortisation charge for the year – (100) (100) Other movements during the year
Option price Number Normally Option price Number Normally Share Option Scheme p of shares exercisable p of shares exercisable
CGU plc Option price Number Normally Option price Number Normally Deferred Bonus Plan p of shares exercisable p of shares exercisable
The fair value of these shares at 31 December 2002 was £213 million (2001: £273 million).
Retained profit for the year – – 870 870 Unrealised losses (17d) (2,964) – – (2,964)
The assumptions used to calculate the long-term business provision depend on the circumstances prevailing in each of the life operations. The principal assumptions in the United Kingdom, France and the Netherlands are: Interest % Mortality tables used
Pensions 5 to 5.3 PMA80/PFA80 adjusted plus allowance for future mortality improvement*
The 9.5% and the 8.625% guaranteed bonds were issued at a discount of £1.1 million and £0.2 million respectively. These amounts, together with the issue expenses, are being amortised over the full term of the bonds. Although these bonds were issued in sterling, the loans have been converted into euro liabilities through the use of financial instruments in a subsidiary undertaking.
(h) The Group has the following undrawn committed central borrowing facilities available to it, of which £1,000 million (2001: £1,000 million) is used to support the commercial paper programme: £m £m
Date of most recent actuarial valuation 1.4.02 Various 31.12.01 31.12.00 31.12.01 1.1.01 Various 1.4.00
Operating profit – continuing operations before tax, 2,730 amortisation of goodwill and exceptional items 1,720 1,935
New business contributions have been calculated using the same economic assumptions as those used to determine the embedded values as at the beginning of each year and operating assumptions used to determine the embedded values as at the end of the year. The effect of solvency margin represents the impact of holding the minimum European Union (EU) solvency margin (or equivalent for non-EU operations) and discounting to present value the projected future releases from the solvency margin to shareholders.
Minority interest in life achieved profit Shareholders’ Minority interest interest Group Group £m £m £m £m
Risk discount rate 7.7% 8.3% 8.4% Pre-tax investment returns: Base government fixed interest 4.6% 5.3% 5.4%
Turkey Commercial Union Hayat Sigorta AS Commercial Union Sigorta AS (98.63%)
Shareholders with disabilities Alternative versions of this publication (including Braille, large print and audio-tape) are available on request from the Company’s registrar.
01 Highlights of the year 02 Chairman’s statement 04 Group at a glance 06 Group Chief Executive’s review 08 Operating review 20 Corporate social responsibility 22 Financial review 28 Board of directors 31 Directors’ report 33 Corporate governance 35 Directors’ remuneration report 43 Statement of directors’ responsibilities 43 Independent auditors’ report 44 Accounting policies 47 Consolidated profit and loss account