Aviva relative to FTSE Eurotop 300 Life and FTSE Eurotop 300
Our employees continue to adapt, as we face more challenging competition and market forces. I thank them for their willingness and capability to embrace change in the pursuit of our cost effectiveness and customer service ambitions.
Independent advisers continue to introduce the majority of our business, providing about 48% of worldwide sales. Bancassurance has become an increasingly important source, generating 25% of new business for the group. Direct sales represent 23% of the total, and partnerships with non-banking organisations provide the remaining 4% of our business.
UK Norwich Union, our largest long-term savings business, produces 45% of our total sales. New business sales including investment products were £6.6 billion (2002: £7.4 billion), having stabilised during 2003. This followed a reduction in market volumes from mid-2002 arising from the effect on customer confidence of prolonged equity market falls. We took early action to lead price increases in a number of product areas as we focused on improving margins.
Aviva France ourselves who have the scale, brand and financial strength to develop new products, improve distribution and provide reassurance to customers as the Government seeks to reform pension provision and stimulate levels of personal saving. We are well placed to benefit from a market upturn.
“We have created an excellent formula. We have ambitious plans for business development to ensure Aviva remains a permanent fixture as market leader” Gerardo Arostegui, chief executive, Aviva Spain
Sales of unit-linked and other savings products were £779 million (2002: £699 million), despite an overall contraction of 15% in the unit-linked market. A successful series of limitedoffer products, featuring a one-year guaranteed return followed by a choice of long-term investment options at the end of the period, were launched during the year, with the last of these sales being made during November 2003.
Spain New business sales in Spain increased to £1,464 million (2002: £1,309 million), including one-off sales of £149 million (2002: £177 million). This reflected the continued success of our bancassurance partnerships, with sales of £1,407 million (2002: £1,252 million) accounting for over 96% of the total.
Business strategy Aviva’s in-house fund management business aims to generate superior investment performance for shareholders, policyholders and institutional clients. Our operations in the UK, France and the Netherlands support our long-term savings businesses by investing funds on their behalf. We are developing our presence as a leading international fund manager through application of our investment and research expertise.
Performance Total retail investment sales rose 6% to £1,141 million (2002: £1,028 million), with increases in the UK, Netherlands and Poland.
Morley secured £3.9 billion of new funded external mandates (2002: £3.7 billion) from its combined institutional and retail UK-based businesses. In addition, it secured £0.7 billion of new funded external mandates for its property partnership vehicles, £0.5 billion from overseas operations and £0.2 billion in respect of pooled pension business.
“Our new, pioneering investment administration service with JPMorgan Investor Services will allow us to focus on our core capabilities – the manufacture and distribution of investment products to our target European markets” Keith Jones, chief executive,
Our philosophy demands that we achieve market-leading positions and superior returns. As a result, we closed or disposed of small-scale operations in Portugal, Greece, Malta, Switzerland and Belgium during 2003.
Our ability to provide customers with solutions beyond insurance is demonstrated by the rapid growth of Norwich Union Rescue, our UK vehicle breakdown service.
Community investment We are committed to supporting community activities and charitable causes worldwide. In 2003 we donated some £4.6 million to various initiatives, according to Business in the Community’s PerCent standard, which in addition to cash recognises gifts in kind, employee time and management costs.
– – 1,138 1,022 Health 61 61 61 61 Fund management 10 5 10 5 General insurance 911 881 911 881 Non-insurance operations* (64) (99) (64) (99) Corporate costs (160) (218) (160) (218)
The effective rate of tax on operating profit from continuing operations was lower at 27.0% (2002: 30.4%). This decrease reflects an increased proportion of profits arising from our overseas businesses which bear a lower tax charge than that levied in the UK. The charge for the year was £403 million (2002: £370 million).
Cost savings (see figure 3) One of our key objectives for 2003 has been to focus on reducing costs and to improve our operational efficiency. In 2003 we have announced and taken actions to reduce our cost base through a series of initiatives. We have increased hurdle rates on new developments and internal projects.
Expected return 757 849 Experience variances (12) (110) Operating assumption changes* 38 9
We are targeting a group COR of 100% for each of the next three years.
The group expense ratio from continuing operations remained stable at 11.3% (2002: 11.3%). This improvement has been achieved after absorbing an additional allocation of £43 million relating to group profit share and other incentive plan costs which were previously included within corporate costs.
Exchange fluctuation Approximately half of the group’s premium income arises in currencies other than sterling. Similarly on an achieved profit basis, the group’s net assets are denominated in a variety of currencies, of which the largest are sterling (43%) and the euro (43%).
The final dividend for 2003 will be paid on 17 May 2004 to all holders of ordinary shares on the Register of Members at the close of business on 26 March 2004. The Company’s Dividend Reinvestment Plan will be available to shareholders in respect of the payment of the final dividend. In addition, a local currency payment service will be available to shareholders residing in certain participating countries outside the United Kingdom. Further details of these arrangements can be found within the shareholder information on page 112.
Directors The names of the present members of the Board and their biographical notes appear on pages 36 to 37.
The Company has no trade creditors. In respect of Group activities in the United Kingdom, the amounts due to trade creditors at 31 December 2003 represented approximately 29 days of average daily purchases through the year (2002: 29 days).
The Financial Services Authority requires listed companies to disclose, in relation to Section 1 of the Combined Code produced by the Committee on Corporate Governance in June 1998 (the Combined Code), how they have applied its principles and whether they have complied with its provisions throughout the accounting year. In July 2003, the Financial Reporting Council issued a revised Combined Code taking into account reviews concerning the role and effectiveness of non-executive directors (the Higgs Report) and audit committees (the Smith Report). This revised Combined Code takes effect in respect of reporting years beginning on or after 1 November 2003 and accordingly, does not apply to the year under review. The directors have however reviewed the Company’s corporate governance arrangements in the light of the revised Combined Code and have included in this report details of the extent to which the Company would have complied with the revised Combined Code had it been in force for the 2003 financial year.
The Company’s Annual report and accounts and Annual review, together with the Company’s interim reports, trading statements and other public announcements are designed to present a balanced and understandable view of the Group’s activities and prospects. The Chairman’s statement, Group Chief Executive’s review and business and financial reviews on pages 2 to 35 provide an assessment of the Group’s affairs and will be supported by a presentation to be made at the Annual General Meeting.
Had the revised Combined Code been in force for the 2003 financial year the Company would have complied with its provisions save for the fact that Board performance reviews are conducted over a two year cycle rather than annually as recommended by the revised Combined Code and there was no formal process in place during the year for the senior independent director to meet with major shareholders and communicate their views to the Board. From 2004 the Audit Committee will, in line with the revised Combined Code put in place annual reviews covering the effectiveness of both the internal and external audit functions and the implementation of the policy concerning the use of the external auditor.
Sir Michael Partridge served as a member of the Committee until his retirement at the close of the Company’s Annual General Meeting in May 2003.
The Company has established a policy, approved by the Board, aimed at safeguarding and supporting the independence of the auditor by avoiding conflicts of interests. The policy sets out the approach to be taken by the Group when using the services of the auditor and distinguishes between those matters where the Company requires an independent view, such as audit and assurance work, from other consultancy work. In addition to statutory audits, audit and assurance work includes statutory returns, actuarial assurance, regulatory advice which requires auditor reporting, due diligence associated with acquisitions and disposals, fraud investigations and control and audit reviews. The auditor cannot be used for any other purpose, although, the policy recognises that there may be a small number of areas where, for pragmatic or historical reasons, it may be in the Company’s interests to use the external auditors for this work. Such appointments are subject to a transparent approval process. Over a number of years Ernst & Young LLP has provided support to the Company in respect of advice concerning senior executive remuneration. Management has now appointed KMPG LLP to provide this service in respect of a major remuneration review to be undertaken during the current year. From 2004 the Committee will, in line with the best practice recommendations contained in the revised Combined Code, review annually the implementation of the policy concerning the use of the external auditor.
Risk identification, assessment and management The Group has an established system of business risk management, which is integrated into the Group’s business planning and performance monitoring processes. The Group’s risk management and control framework is designed to support the identification, assessment, monitoring and control of risks that are significant to the achievement of the Group’s business objectives. There is an established risk management network across the Group, with dedicated risk management teams within Head Office and within each of the businesses in the United Kingdom. The overseas businesses also have risk management functions, a number of which are combined with either compliance or internal audit. These teams use a consistent methodology, and are responsible for assessing and reporting the potential impact and probability of the most significant risks identified across the Group and the adequacy of the mitigating action programmes. These impact assessments are based on financial, reputational and operational criteria and take into account social, ethical and environmental risks as well as business risks.
The terms of reference of the Committee require it to deal with the constitution of the Board, evaluating the balance of skills and experience of the directors and anticipating the skills and knowledge requirements for the future. The Committee identifies, assesses and nominates to the Board the appointments of new directors as and when required. 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.
On two occasions during the year, the Committee reviewed the Group Chief Executive’s performance against the written objectives considered by the Remuneration Committee and approved by the Board.
For the executive directors, shared Group-wide financial objectives are based on financial measures relevant to the business, including new business contribution, combined operating ratio and operating profit. For the Group Chief Executive and the Group Finance Director, Group-wide targets are the relevant performance measures for annual bonus purposes. For the other executive directors, Group-wide targets represent about 40% of their overall financial target with the remainder represented by targets pertaining to the businesses for which they have responsibility.
FTSE 100 Return Index 50 Dec 1999 Dec 2000 Dec 2001 Dec 2002 Dec 2003
The non-executive directors, including the Chairman, have letters of appointment which set out their duties and responsibilities. Such appointments are for three years and, subject to performance, may be renewed by mutual consent. The Company may terminate these appointments at any time upon giving one month’s written notice without the payment of compensation.
Tony Wyand* – Savings related options 1994 37,099 – – – 37,099 575.3 Mar 1997 – Mar 2004 1994 12,701 – – – 12,701 547.2 Nov 1997 – Nov 2004 1995 5,651 – – – 5,651 614.8 Aug 1998 – Aug 2005 1996 50,129 – – – 50,129 581.2 Mar 1999 – Mar 2006 1998 43,376 – – – 43,376 853.0 Dec 2001 – Dec 2008 1999 42,720 – – – 42,720 919.0 Aug 2002 – Aug 2009 2000 45,000 – – – 45,000 960.0 Sep 2003 – Sep 2010
Net premiums written – continuing operations (6a) 9,590 8,733 – discontinued operations (6a) – 692
1,375 Profit/(loss) for the financial year 949 (534) (24) Preference dividends (17) (17)
Reconciliation of Group operating profit to profit on ordinary activities before tax For the year ended 31 December 2003
8,978 As restated 5,836 6,474 1,196 Total recognised gains and losses arising in the year 1,278 (430) (814) Dividends (562) (536)
United Kingdom 594 626 Europe (excluding UK) France 179 142 Ireland 41 36 Italy 30 24 Netherlands (including Belgium and Luxembourg) 107 111 Poland 103 66 Spain 50 27 Other Europe (4) (19) International 38 9
Total life and pensions (including share of associates) 12,128 12,494 1,164 1,124 13,292 13,618
General business premiums excluding health business – continuing operations (note 6a(iv)) Discontinued operations
(a) The total investment return before tax comprises: Long-term business Non-long-term business
Net operating expenses in the technical accounts comprise: Long-term business General business
Audit services Statutory audit 6.4 4.0 Audit-related regulatory and supplementary reporting 3.3 3.3 9.7 7.3 Further assurance services 2.7 5.7 Other services 0.9 0.9
(a) Tax on profit/(loss) on ordinary activities Tax (charged)/credited in the non-technical account comprises: Current tax UK corporation tax (73) (15) Overseas tax (20) (89) Prior year adjustments 20 2 Tax attributable to balance on long-term business technical account (278) (260)
One of the Group’s subsidiaries, Delta Lloyd NV, is subject to the provisions of Dutch corporate law and particularly the Dutch “structure company” regime. Under this regime, Delta Lloyd’s Supervisory Board has to have regard to the interests of a wide variety of stakeholders including shareholders. Under the structure regime, the Supervisory Board appoints its own successors. The relationship between the Board and its shareholder is close and positive, strengthening the position of Delta Lloyd Group as a major division of the Aviva Group. The Supervisory Board includes two Aviva Group representatives and is responsible for advising and supervising Delta Lloyd’s Executive Board.
Investments in associated undertakings (note 21b) 725 £m £m £m £m £m £m
The purchases of the mortgages were funded by the issue of fixed rate, floating rate and index linked notes by the ERF companies.
NUER has purchased £12.5 million of subordinated fixed rate notes in ERF1, which are repayable in 2031 and has granted a £14 million floating rate subordinated loan to ERF3. These are included in debt securities and other fixed income securities within other financial investments in the consolidated balance sheet.
At 31 December 2003, DLL held £23 million of fixed rate notes in the Arena companies, which are repayable at various dates between 2053 and 2062. These are included in debt securities and other fixed income securities within other financial investments in the consolidated balance sheet at their market value of £24 million (2002: £5 million).
(b) Banking liabilities (see note 43), excluding intra-group balances, comprise: 2003 2002 £m £m
Movements in the cost of shares held by employee trusts comprise: 2003 2002
Restated opening balances Profit for the year attributable to equity shareholders, including dividends received or receivable from subsidiary undertakings Dividends Retained loss for the year Unrealised gains (note 17e)
Repayable as follows: One year or less 1,172 1,433 Between one and two years 199 75 Between two and five years – 199 After five years 198 198
UK defined benefit schemes 39 50 UK defined contribution schemes 34 27 Overseas defined benefit schemes 33 34 Overseas defined contribution schemes 10 6
(i) The valuation used for FRS17 disclosures has been based on the most recent actuarial valuations, updated to take account of the requirements of FRS17 in order to assess the liabilities of the major schemes at 31 December 2003. The updating was made by actuaries in each country, with overall co-ordination by external consultants, Watson Wyatt. Other than the actuary of the Aviva Staff Pension Scheme, the actuaries making the calculation were independent of the Group. Scheme assets are stated at their market values at 31 December 2003. The details for the main defined benefit schemes are shown below. Where schemes provide both defined benefit and defined contribution pensions, the assets and liabilities shown exclude those relating to defined contribution pensions.
Profit/(loss) on ordinary activities before tax, excluding exceptional items 1,404 (283) Adjustments for financing expense and items not involving movements of cash: Depreciation of tangible fixed assets 75 82 Amortisation of goodwill 103 135 Amortisation of acquired additional value of in-force long-term business 135 139 Increase in general business underwriting liabilities and provisions 1,011 461 Realised and unrealised (gains)/losses on investments (166) 894 Net loss on the disposal of subsidiary undertakings 6 4 Decrease in deferred acquisition costs (71) (30) Movement in banking assets and liabilities 143 40 Movement in other assets/liabilities (648) (293) Profits not yet transferred from long-term business funds (1,030) (412) Loan interest expense 241 264
(c) Changes in financing during the year were: Share capital Borrowings
(d) Changes in cash during the year were: 2003 2002 £m £m
Net movement in opening and closing non-long-term portfolio investments Balance at 1 January Total non-long-term portfolio investments Non-recourse funding
(c) Guarantees on long-term savings products As a normal part of their operating activities, various Group companies have given guarantees, including interest rate guarantees, in respect of certain long-term insurance and fund management products. In the United Kingdom, in common with other pension and life policy providers, the Group wrote individual and group pension policies in the 1970s and 1980s with a guaranteed annuity rate option (“GAO”). Since 1993, such policies have become more valuable to policyholders, and more costly for insurers, as current annuity rates have fallen in line with interest rates. Reserving policies for the cost of GAOs varied until a ruling by the House of Lords in the Equitable Life case in 2000 which effectively required full reserving by all companies. Prior to the ruling, consistent with the Group’s ordinary reserving practice in respect of such obligations, full reserves for GAOs had already been established. No adjustment was made, or was necessary, to the Group‘s reserving practice as a result of the ruling. The directors continue to believe that the existing provisions are sufficient.
In May 2002, in accordance with FSA requirements, the Group commenced sending out the second phase of endowment policy update letters, which provide policyholders with information about the performance of their policies and advice as to whether these show a projected shortfall at maturity. The Group will continue to send these updates annually to all mortgage endowment holders, in accordance with FSA requirements. The Group has made provisions totalling £80 million (2002: £50 million) to meet potential mis-selling costs and the associated expenses of investigating complaints. It continues to be the directors’ view that there will be no material effect either on the Group’s liability to meet the expectations of policyholders or on shareholders.
(f) Split capital investment trusts The Group’s fund management subsidiary, Morley Fund Management Limited, acts as fund manager for a number of split capital investment trusts. In May 2002, the FSA launched extensive and industry-wide investigations into allegations of collusion by fund managers, mis-selling by intermediaries, and the production and distribution of misleading marketing material. In July 2003, the FSA announced that it had broadened the coverage of the collusion investigations to cover a larger number of firms and individuals. As part of these investigations, Morley Fund Management Limited has been asked to supply information to the FSA. These investigations are ongoing and are likely to continue for some time. The FSA is expected to publish its findings in due course.
Operating profit on continuing operations before tax, amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items 1,490 1,218 1,464 946 1,284
2,380 Profit/(loss) for the financial year 1,642 (2,045) (24) Preference dividends (17) (17)
2,356 Profit/(loss) for the financial year attributable to equity shareholders 1,625 (2,062) (790) Ordinary dividends (545) (519)
Modified statutory basis retained profit Additional achieved profit basis retained profit (1)
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 period. 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.
A lte rn at iv e m et ho d of r ep or tin g Alternative method of reporting long-term business continued
Economic assumptions The table below shows the sensitivity to a one percentage point increase in the assumed investment returns for equity and property investments, and in the discount rate for the Group’s 2003 new business contribution and embedded value.