**From continuing operations, including share of associates’ premiums. † On an EEV basis.
Preference shares First dividend payment for 83⁄8% cumulative irredeemable preference shares 31 March First dividend payment for 83⁄4% cumulative irredeemable preference shares 30 June Second dividend payment for 83⁄8% cumulative irredeemable preference shares 30 September Second dividend payment for 83⁄4% cumulative irredeemable preference shares 31 December
Individual Savings Accounts (Isas) Lloyds TSB Registrars The Causeway 0870 242 4244 (Isa Manager) Worthing
Aviva has had a good year, with robust performance. Patient and persistent actions to improve efficiency and productivity have created higher earnings of improved quality.
The insurance sector has not offered easy opportunities to show positive results, particularly as the underlying assets – equities and fixed income – have had a bumpy ride, although there have been some improvements in 2004.
Growth has been modest in the UK, but we have consolidated our market share. Our life portfolio is yielding better returns and the general insurance business continues to deliver excellent and consistent results.
Our general insurance businesses in Ireland and Canada are making good progress with high profitability. We have sold our small general insurance portfolio in South East Asia for a good price, and are concentrating our efforts on growing our life businesses in the expanding markets of China and India.
Our exposure to the catastrophic effects of the tsunami in Asia was limited. We were obviously shocked and saddened by the suddenness and severity of this disaster and we feel deep sympathy for the victims and their families. Thankfully, none of our growing number of staff in this region lost their lives.
The successful growth of our important front and back office activities in India and Sri Lanka has contributed to lower total costs, higher efficiency and gradually improved service levels for our customers. It must be admitted that we have not provided the required service in every case, but we are making intense efforts to get there and have seen improvements. Our Asian administrative capacity has helped us to contain and reduce problems.
We have managed our capital situation with care. Our sound profits and cash flow have allowed us to increase our dividend in line with our policy. We have gone to the market twice for subordinated debt and most recently in November 2004 we issued a direct capital instrument. We managed to get the timing right for good terms and high demand. Consequently we are in a very good capital position.
After several years of difficult market conditions we can see the fruits of our systematic efforts to increase efficiency and financial strength. Your company is therefore gradually entering a phase of more aggressive growth, whether organically or through acquisitions.
It is important to have good governance, and the board is completely supportive of this ambition. I believe we are one of the best in class in terms of compliance.
The European Financial Services Round Table, which I founded and which I chair, continues to push for an open and transparent European market for financial services. Progress is slow, but we are heard and we are moving forward. We have just welcomed three new members from Switzerland.
As regards accounting standards, new demands are put upon us. We are well prepared for the adoption of the new international financial reporting standards (IFRS) and are also meeting the capital and solvency requirements that have been introduced.
Market conditions have not been easy. Our staff are resilient, hard working, and show high morale in spite of tough conditions. I think they have done an excellent job.
• In the run-up to depolarisation in the UK, announcement of multi-tie agreements with leading IFA networks and discussions with a number of other major distributors.
Long-term savings 2 Continental Europe £11,138m 3 Rest of world £954m Total £21,199m Including health premium income of £994 million.
Worldwide long-term savings new business sales £billion * On a modified statutory solvency basis (MSSB). On a European embedded value (EEV) basis the operating profit of our fund management business is £23 million.
Rigorous cost control, disciplined underwriting, excellent customer service and product innovation are at the core of our general insurance business. We aim to deliver high quality sustainable earnings from market-leading positions in personal insurance and selected commercial lines. Our profitability gives us a solid platform to provide high-quality service, strengthen relationships with our customers and broaden our range of propositions. Aviva is the leading general insurer in the UK and Ireland, the second-largest in Canada, and among the top five in the Netherlands. We also have a significant business in France.
• Strong investment performance in France recognised through winning a significant number of prestigious awards.
• Improved investment performance led to an increase in funds under management to £273 billion, including significant mandate wins in the UK and the Netherlands.
• Investment administration service in conjunction with JPMorgan Investor Services fully operational allowing us to focus on our core capabilities.
• Quality of our property operation recognised through winning the title of property fund manager of the year in Property Week’s Property Awards 2004.
• Norwich Union the winner of a number of awards for customer service and for most trusted insurance company in Reader’s Digest 2004 Trusted Brand Awards.
Fund management General insurance 1 UK £859m 2 Continental Europe £527m 3 Rest of world £243m Total £1,629m 2 Continental Europe £2,018m 3 Rest of world £1,363m Total £8,815m
Overview During 2004 we strengthened our competitive position in our key markets. Our continuing rigorous focus on profitable growth has resulted in Aviva delivering another strong performance.
The long-term savings environment continues to be tough, but there are some signs of recovery. The general insurance markets in which we operate are becoming more competitive.
We achieved our operational targets for the year. We set about improving value for money, and delivering cost and service excellence for our customers. We manage our performance against return on capital targets. We employ an efficient capital structure which means we can allocate our capital across the group in a manner that maximises the potential for profitable growth.
Group results Our pre-tax operating profit* of £2,344 million (2003: £1,906 million) reflected a stronger performance across our businesses coupled with the benefit of the actions we have taken to reduce costs. Our annualised return on capital employed of 14.4%** (2003: 13.1%) reflects these strong results.
Group capital and financial strength Shareholders’ funds‡ increased to £12.9 billion (2003: £10.8 billion) boosted by our strong operational performance and the issuance of the direct capital instrument. Net asset value per share‡ was up 10% to 532 pence (2003: 484 pence per share).
The solvency position of our main trading operations remains robust, with excess capital measured on the Insurance Groups Directive of £3.6 billion (2003: £2.4 billion) and the orphan estate of our UK life businesses was £4.5 billion (2003: £4.3 billion), based on a realistic assumption of liabilities.
The trust of stakeholders in our industry has been eroded. Customer confidence has been damaged by the fall in value of their savings. We have worked with regulators to introduce far-reaching changes to further protect consumers and raise standards. This has occurred most recently with the introduction of new standards in general insurance.
As we emerge from these tough times, the winners will be those companies that demonstrate their integrity and regain the trust of their customers and shareholders first.
Depolarisation in the UK will bring further changes to the industry, with many independent financial advisers (IFAs) choosing to represent a reduced number of core providers, while single-company suppliers may add others to their range. We are responding to these changes, having signed a series of multi-tie agreements with major IFAs, and we are in discussion with a number of other major distributors.
People Aviva excels in managing complexity. We face a number of challenges, including an increasingly tough regulatory environment, changes to accounting standards, evolving customer needs, diverse markets and distribution channels.
We are turning these challenges into a potential competitive advantage by using our size to drive down costs and achieve economies of scale, by transferring our best ideas across the group, and by directing resource and expertise to manage change. We have made great efforts to listen to our customers and respond to their needs.
Outlook Overall, Aviva is in a strong, competitive position. Our long-term saving operations are focused on writing profitable business and improving margins ahead of increased sales volumes. We have a disciplined general insurance business producing high-quality earnings. Our cost-efficiency initiatives put us in a strong position to achieve growth with improved profitability.
G ro up c hi ef e xe cu ti ve ’s re vi ew
* Including life European embedded value (EEV) operating return before amortisation of goodwill and exceptional items.
**Return based on opening equity shareholders’ funds on an EEV basis. † Combined operating ratio (COR) broadly expresses the total of claims costs, commission and expenses as a percentage of premiums, and is one of our key performance measures. ‡ On an EEV basis. ≠ Including life achieved operating profit before amortisation of goodwill and exceptional items and has not been restated.
Market position Aviva is one of the leading providers of life and pensions in Europe, the UK’s largest long-term savings company, and has a leading bancassurance business in the Spanish life market. Norwich Union consolidated its position as the UK leader, and continues to focus on retaining its position while growing both value and market share. It has over six million customers. We have grown our Spanish business considerably in the past few years and we have a life market share of
Independent advisers continue to be our largest source of new business, providing around 47% of worldwide sales. Bancassurance is important, generating 23% of the group’s business, and is the dominant sales channel in a number of our markets. Direct sales represent 26% of the total and partnerships with non-banking organisations provide the remaining 4% of sales.
Our strategy is to align our distribution model to each market and our distribution mix continues to evolve as we develop our businesses.
Multi-distribution capability In more developed markets, such as the UK, the Netherlands and France, we have built the capacity to meet customer demand for a wider choice of products sold in a variety of ways, including through independent advisers.
We have focused on improving cost-efficiency over the past two years, an important factor in sustaining our profitability.
This, along with our operating model, customer service improvements and geographical spread, has put us in a strong position to benefit from further market upturns. Aviva’s leading market positions in the UK and continental Europe mean we are well-placed for further growth. Our operations in the developing markets of Eastern Europe and Asia provide us with excellent opportunities for the long term.
Aviva France sells through a mix of tied agents, brokers, a salaried sales force, direct operations and a partnership with France’s largest savings association, AFER. In addition, our bancassurance partnership with Crédit du Nord, launched in October 2004, has greatly strengthened our distribution capability in what is the main sales channel in the French long-term savings market. The joint venture has access to the bank’s 1.3 million customers for the sale of long-term savings products.
In the Netherlands, Delta Lloyd’s bancassurance joint venture with ABN AMRO has brought significant benefits to sales volumes and profitability. This channel sells life and general insurance products and is an important part of what we believe is an industry-leading approach in the choice we offer to customers. We also sell through independent advisers under our Delta Lloyd operating brand and directly to customers through our OHRA brand. Our agreement with MKB Nederland, the Dutch organisation advising small and medium-sized businesses on pension schemes, gives us access to an important part of the market with significant potential for growth.
In Ireland, Hibernian’s key strength is its leading position in the broker market, through which its life and pensions products are predominantly sold. We are experiencing an environment of increased regulation, but expect brokers to continue to be the main distribution channel, and aim to increase our market share.
In Australia, independent advisers are the main channel for distribution. Navigator, our online investment platform, has also been very effective in winning new business. In the United States we have a network of agents and brokers, and distribution agreements with several leading banks.
Bancassurance Aviva has a leading position in bancassurance distribution. We generate significant sales volumes through our agreements across a number of markets. Bancassurance has become a highly important source of new business in recent years reflected by the new agreements we have recently entered into. It is an integral part of our strategy in some countries, and the dominant channel in others.
Our Italian and Spanish bancassurance businesses present us with strong growth prospects as market penetration for life and pension products still remains at relatively low levels.
Sales through our bancassurance partners in Italy – UniCredito Italiano, Banca Popolare di Lodi Group, Banca delle Marche and Banche Popolari Unite – account for over 90% of our new business sales in that country. We have extended our agreement with Banche Popolari Unite to include a further 380 branches, with sales starting in early 2005.
Our Spanish bancassurance business contributes over 95% of our total new business sales in that market and gives us access to 10 million customers through 3,800 branches. Our partners – Bancaja, Unicaja, Caixa Galicia, Caja España and Caja de Granada – provide a strong presence in the fastest-growing regions of Spain.
Our bancassurance partnerships with DBS in Singapore and Hong Kong continue to develop, and we have a leading position in the developing broker market.
Direct sales Business generated through direct sales forces, by phone and over the internet provides a valuable stream of income in many of the countries in which we operate. We see this as an important channel for more commoditised products due to the low cost base.
Our businesses in the emerging markets of Central and Eastern Europe use specialist direct sales forces as their main distribution method, but we are also looking for opportunities to diversify distribution as customer preferences and demands change.
We have established a major operational site in Pune, India, which employs around 600 people and provides us with enhanced service capability and flexibility. Customer service levels in India are ranked on a par with those in the UK, where we have seen consistent improvements following a series of initiatives focused on raising standards. At the beginning of 2004 we began a process excellence programme reviewing over 50% of our major processes in the UK, resulting in service and quality improvements together with significant cost savings. We also launched market-leading technology for point-of-sale and tele-underwriting for term assurance and mortgage protection products.
Performance Many of our businesses outperformed in their market, particularly in continental Europe, despite some tough economic conditions.
Worldwide long-term savings new business sales* were higher at £17.2 billion (2003: £14.9 billion). This reflected improving confidence in some markets, while others remained difficult. Life and pension new business sales were up at £15.6 billion (2003: £13.8 billion). A good performance by our continental European businesses saw an increase in new business life and pensions sales of 22% to £7.8 billion (2003: £6.6 billion). Continental European new business sales account for half of our total life and pension sales and over half of our operating return on a European embedded value (EEV) basis.
We are one of only three significant remaining players in the with-profit market and expect to benefit from a continued flight to quality as customers seek the reassurance of trusted brands. We are also building business in the unit-linked market where there is evidence of returning confidence.
Sales of bonds were up 21%, and sales of investment funds – supported via our bancassurance joint venture with The Royal Bank of Scotland Group (RBSG) – rose by 26%. During 2005 we plan to launch a stakeholder child trust fund product through a relationship with The Children’s Mutual, and are developing a stakeholder medium-term savings plan.
We reported an operating return** of £551 million (2003: £597 million), which reflected higher new business contribution and returns on assets, offset by increased lapse experience and costs associated with implementing regulatory change and the restructuring of our UK business.
France Our long-term savings business in France, which serves some 1.5 million customers, reported total new business sales of £2.5 billion (2003: £2.0 billion) and an operating return** of £286 million (2003: £228 million). This business is positioned for further growth following the launch of our bancassurance partnership with Crédit du Nord, and the continuation of a strong relationship with our long-term partner, AFER.
New business sales of single-premium euro funds through the AFER savings association increased by 23% to £1,389 million (2003: £1,157 million). Encouraging signs for this partnership included a significant increase of 38,000 new AFER members.
Total new business sales of unit-linked funds almost doubled to £698 million (2003: £358 million), against overall growth of around 34% in the unit-linked life and savings market. The unit-linked proportion of our total new business sales increased year-on-year from 18% to 28% in 2004. This reflected our strategy of promoting unit-linked investments to our customers, supported by steadily improving stock markets.
The proportion of bancassurance new business is expected to increase when our agreement covering additional branches of Banche Popolari Unite starts in early 2005.
Aviva is one of the most cost-efficient providers in the Italian bancassurance market. Our business model allows us to maintain a low ratio of expenses to premiums.
Other European operations Total new business sales from our other European operations were £848 million (2003: £576 million), reflecting growth in life and pension sales across all our other European territories.
In Turkey we are achieving good growth and are now the second-largest provider in the life market and third-largest in the pensions market. Sales of individual pensions increased encouragingly and we will enter the group pension market in 2005.
Sales in Germany were £218 million (2003: £163 million), benefiting from sales of tax-efficient products ahead of the introduction of a revised tax regime in 2005.
Worldwide new business sales* by distribution channels 1 Independent advisers £8,073m 4 Partnerships with non-banking organisations £697m Total £17,224m
CU Polska remains a leading provider in Poland, with a share of the life market of around 14% (measured by premium income) and 28% of the private pensions market (measured by assets under management). Sales of life products increased but sales of mutual funds were lower. However, following accession to the European Union, the economic outlook looks more positive.
We saw strong growth in Lithuania, including good sales of pension products launched in late 2003. Sales through Norwich Union’s Dublin-based offshore life and savings business were £110 million
Our business in Australia reported life and pension new business sales of £230 million (2003: £230 million), with encouraging sales of our corporate pension products. Unit trust sales rose as customer sentiment improved in line with more stable equity markets. During 2004, financial advisers voted Aviva equal first in Australia’s largest independent study of the life insurance and wealth management industry.
Sales of single premium fixed annuities in the United States continue to be affected by the low interest rate environment, which was reflected in reduced total sales of £359 million (2003: £538 million). We are maintaining price disciplines and revising our product terms as appropriate.
Business strategy Aviva’s in-house fund management businesses operate on behalf of shareholders, policyholders and institutional clients, with the aim of generating superior investment performance. Our operations in the UK, France and the Netherlands support our long-term savings businesses by investing funds on their behalf.
Market position Although some stability returned to global equity markets during 2004, the second half witnessed a period of some stagnation. There are, however, signs of investor confidence slowly returning, particularly in continental Europe.
Worldwide assets under management at the end of 2004 increased to £273 billion (2003: £240 billion), reflecting the benefit of new business flows and improved investment markets. Operating profit, on a modified statutory solvency basis (MSSB), rose to £43 million (2003: £10 million). This included profits of £20 million (2003: £14 million) from the management of group internal life funds. The improvement in profits reflected higher fee income and lower operating costs.
We have made significant progress in reshaping our business through our initiative with JPMorgan to create a ground-breaking investment administration service. We have transferred almost 200 employees to JPMorgan Investor Services, allowing us to focus on our core capabilities of the manufacture and distribution of investment products in our target European markets.
During 2004 we continued to centralise our international equity fund management operation, transferring our US equity fund management and analysis function from Boston to London. Fund administration for our Irish subsidiary, Hibernian Investment Managers, has been moved from Dublin to London. We have also announced the closure of our Singapore office.
The investment and distribution activities of our fund management businesses are concentrated in markets where our expertise means we can compete against the best. We are focusing on improving investment performance, building on the progress made in the past 12 months.
Other UK In addition to mutual fund sales under the Morley brand, we sell retail Isas, unit trusts, open-ended investment companies (Oeics) and structured products under the Norwich Union and The Royal Bank of Scotland Group (RBSG) brands.
France Aviva Gestion d’Actifs maintained its reputation for strong investment performance, with over 65% of our funds in the top quartile for returns over three years. Our excellent investment performance was once again widely recognised in the financial press.
Awards won in 2004 included best provider with a large range of funds over one, three and five years from La Tribune/Standard & Poor’s – the first time this has been achieved. We won seven awards from Le Revenu, one of France’s leading investment magazines, for fund management performance over three and 10 years, and our AFER/SFER fund earned the AGEFI grand prix for our diversified funds.
Netherlands and Belgium Delta Lloyd is among the leading fund managers in the Netherlands, with an increase in assets under management to £36 billion (2003: £34 billion).
Navigator Navigator is a one of Australia’s largest investment portfolio administration services, with £4.0 billion of combined funds under administration.
Outlook We saw some improvement and stabilisation in world markets during 2004, leading to a gradual return of investor confidence.
We concentrate our investment and distribution activities in markets where our expertise means we can compete against the best. We will continue to focus on improving investment performance, building on the progress made in the past 12 months.
+44% Increase in worldwide sales of investment products during the year
Business strategy Our general insurance businesses are focused on their core strategy of disciplined underwriting, product innovation, excellent customer service and strict cost control. Our overall aim is to deliver a strong and sustainable operating result from our chosen markets of personal lines and small and medium-sized commercial lines. We have set a group COR target of 100% in each of the three years from the start of 2004.
We have a strong multi-distribution capability using, where possible, a range of sales channels in each market. Providing choice is a key factor in meeting our customers’ changing needs and, along with high standards of service and a range of innovative products, this will allow us to maintain our leading market positions and sustain our excellent performance.
Multi-distribution capability A key part of our strategy is to use a range of distribution methods appropriate to individual markets. We offer our customers choice in the way they do business with us, while ensuring that our distribution methods meet their needs and make buying our products as straightforward as possible.
Among developments in 2004 were our new three-year partnership with HSBC to provide household insurance products and the renewal of our partnership with Abbey. Norwich Union is in advanced negotiations with Barclays to become their sole provider of general insurance products. This deal will include the provision of household products and adds to the Barclays motor and travel business that we already underwrite.
Geographical analysis of pre-tax general insurance operating profit 1 UK £832m 2 Continental Europe £295m 3 Rest of world £199m Total £1,326m
Customer offering We believe that high standards of customer service and satisfaction are crucial. Our strategy is to offer our customers innovative products at a fair price, backed by high-quality service.
In March 2004, Norwich Union launched its digital flood maps, which give us a better understanding of flood risks, and enable us to offer household insurance to 600,000 more properties in high-risk areas. With Pay As You DriveTM, we have reached our target to recruit over 5,000 customers in the UK to pilot this new approach to motor insurance. We have launched a Pay As You Drive™ Young Drivers product aimed at customers aged 18-21. Young drivers now have the chance to get more affordable insurance premiums, which will be based on when and how often they drive their car.
A key achievement during the year for Aviva Assurances in France was completing the rollout of our dedicated web portal to the entire network of agents. This online tool is a valuable means of streamlining communications between agents and ourselves, thereby improving the service delivered to the customer.
In Ireland, we have begun to roll out a series of customer service initiatives during 2005 including the Provisional Licence Holder initiative as part of the Ignition inexperienced driver lifecycle solution. We are also adopting geocoding across our property accounts. This process will provide us with more information on the locations of our exposures, and the associated risk of flooding and other perils, and assist us in our underwriting decisions and pricing.
Performance Our general insurance operations had another strong year in 2004, despite market conditions becoming increasingly competitive, particularly across our commercial lines business. Our disciplined approach to underwriting and pricing, coupled with efficient claims handling and strict cost control, enabled us to deliver a consistently strong operational result.
Our focus remains to deliver operational efficiencies through cost reductions and continuing efficiency improvements across product delivery, administration and claims handling. We continue to develop innovative products to meet customers’ changing needs and help sustain our market-leading positions.
UK Norwich Union Insurance in the UK contributes 62% of Aviva’s general insurance business sales. Quality and consistency of earnings are central to our strategy. Our cost-efficient processes help to ensure that we remain profitable and competitive in a challenging environment.
The success of our strategy is demonstrated in an improved operating profit of £832 million (2003: £676 million) and a 6% year-on-year growth in net premiums written to £5.4 billion (2003: £5.1 billion). Better-than-expected weather benefited the result by £50 million (2003: £30 million). We achieved an excellent COR of 97% (2003: 99%).
We achieved an expense ratio of 10.0% (2003: 10.5%). Our substantial investment in operational efficiency, including our offshore capability in India, and product development initiatives, create competitive advantage and help to provide a sound platform for future profitability.
France Our business in France reported an operating profit of £32 million (2003: £35 million), with net premiums written of £524 million (2003: £515 million). We achieved an improved COR of 101% (2003: 102%) through our selective rating approach, underwriting discipline and strict cost controls. We are focused on continuing to drive down the COR going forward.
A number of products were updated and new products launched during the year to complement our existing offering. Our focus is on the personal insurance sector, primarily motor and household policies, and on small commercial business, particularly in the income protection and absenteeism sectors, where we believe a profitable market will continue to grow.
Canada Aviva Canada, our second-largest general insurance business, reported a COR of 97% (2003: 108%) and operating profit of £152 million (2003: £12 million). This reflected improvements in claims frequencies and lower costs following the government’s auto reforms. In addition the profit reflected an improvement in the results from the Involuntary Auto Pools and the non-recurrence of £70 million reserves strengthening in Pilot, one of our subsidiaries, in 2003.
There have been concerns over motor insurance costs in Canada. Motor insurance reforms and changes in legislation have been completed in a number of provinces, which provides a more stable environment in which to price our products profitably.
Our efficient claims operations continue to use technology and shared experience from around the group to achieve low costs and high standards of customer service. This included creating a number of jobs offshore in 2004 to service our Canadian business.
Outlook We continue to adhere to our strategy of delivering consistent performance and sustainable profits across the cycle. We achieved a COR of 97% in the year, beating the group’s COR target, which is to achieve 100% in each of the three years from the start of 2004. We have also delivered further cost savings through improved efficiency in distribution and claims handling.
Our general insurance operations continue to focus on product and distribution innovation within their core insurance businesses, as well as looking to extend our product offerings to non-insurance products where clear synergies are identified. This, along with our scale and the strength of our brand, means we are confident of achieving our long-term goal of delivering sustainable results.
We operate in over 25 countries worldwide. In each, our strategy is to: • Attract and retain top talent while embodying corporate governance best practice; • Foster morale in times of radical change; • Deliver excellent customer service while exploring and implementing new customer service models; and
• Invest in the development of our employees while controlling costs.
Norwich Union Life has been working with its leadership team to develop a vision to lead it through the next three years. Consultation and engagement has been a key part of this process with over 1,000 managers taking part in discussions about the vision and its implications for how we work together to achieve our aspirations. The vision work has produced a real emphasis on enhancing the customer experience.
The aim is to maximise performance through changing the culture. 2004 surveys show a 9% reduction in customer service blockages with staff turnover in call centres dropping from 25% to 15% on average.
Our competitive advantage depends on business teams that include people with different backgrounds, experiences and perspectives, who feel valued for the positive contribution they can make to Aviva’s success.
We drew up a diversity vision and the steering group has created a strategy and action plans to embed diversity in Aviva.
Our UK investment arm Morley Fund Management, successfully developed a “Respect at Work” programme aimed at fostering teamwork and ensuring that we embody integrity at all times. So far, all Morley Managers and more than half of Morley’s UK-based staff have participated in the workshops. Morley designed the programme to promote the ethos of a positive working environment, by addressing issues such as organisational culture and climate, working relationships and embracing difference.
This section on Our people is a new entry in the Annual Report and Accounts. Its inclusion reflects the recognition of the contribution of all our employees towards the success and competitive advantage of Aviva.
Aviva believes that the practice of CSR contributes strongly to both the short and long-term value of our business. We are now in the seventh year of reporting on this subject and our CSR programme, which has both an internal and an external focus, grows incrementally stronger each year. Internally, we aim to improve progressively our performance across the CSR spectrum. Externally, we are keen participants in ventures which seek to explore and illuminate the practice of good CSR.
A central focus for our future progress can be found in the direction given by the United Nations Global Compact. We chair the UK Forum of the Global Compact and devote significant effort to developing this important new mechanism to engage the global corporate world in meeting the challenges of sustainability, while interacting with European partners to help develop a joint approach. We also participate in a joint venture between the European Foundation for Management Development and the Global Compact – the Global Responsibility Initiative – which seeks to develop and disseminate learning, which will help enhance global responsibility among future business leaders.
We continue to review and manage the key CSR issues impacting our business and the industry as a whole. These are climate change, offshoring and the promotion of trust and integrity. Fuller coverage of these issues and how they are managed can be found in our CSR report.
Standards of business conduct and human rights In January 2004, the Aviva board approved the revised policies of Standards of Business Conduct and Human Rights, following internal and external consultation. The revisions were made to enhance understanding and in the case of human rights, the revision took account of the International Labour Organisation’s core labour standards. We continue to work to further integrate the provision of these policies into our operational practice.
Customers Fair treatment of customers is, fundamentally, good business practice and is key to securing customer confidence in financial services. All our businesses are focused on that goal.
Suppliers In the UK, Norwich Union Central Services began to include questions on a company’s CSR performance in the supplier tendering process, having previously only sought information on environmental performance. Most of our other large businesses also include elements of CSR performance in their supplier tendering process.
In 2004, Aviva was ranked first in its sector in Business in the Community's CR Index.
Community In 2004, we donated over £4.6 million to various community initiatives and charitable causes worldwide. This figure includes not only cash support, but also strong elements of staff volunteering, gifts in kind and management time.
Additionally, businesses around the group reacted swiftly to the worldwide call for aid to help those affected by the tsunami in Asia. By the end of February, the group had committed more than £500,000, some of which represented matched funding for donations by staff.
Staff involvement in company-supported initiatives continues to grow, with some 19,000 hours of volunteering taking place in 2004. Besides volunteering opportunities, the company supports schemes such as payroll giving, whereby staff can donate directly to charities through their salary, and also matched funding by the company of staff supported initiatives.
Environment In 2004, the environmental management programme continued to be further embedded throughout all our businesses worldwide. Innovative environmental initiatives, sharing of best practice and increased staff awareness in the businesses helped to facilitate such development.
In the UK, our managed properties reached their target consumption of 100% carbon neutral electricity – the equivalent of removing 46,273 tonnes of carbon dioxide from the atmosphere. Also, Hibernian in Ireland obtained 28% of its electricity from renewable sources. In addition, many businesses have focused on reducing consumption of one or more energy sources and in some cases have achieved a reduction of 10% or more.
Norwich Union’s “Pay As You Drive” and “Autograph” in Aviva Canada reward not only safer, but more environmentally responsible driving practices. Further, the highly regarded digital flood mapping initiative in the UK gives a more accurate assessment of exposure to flood than was possible before. We have freely shared elements of this research with the Environment Agency. In addition, Morley Fund Management continues to play its part as a responsible investor by encouraging environmental reporting.
In November 2004, the Aviva executive agreed the establishment of a Climate Change Forum, which will review the separate responses our businesses make to the climate change challenge and seek to promote synergies.
How others view Aviva Aviva continues to be seen as one of the CSR leaders within the industry. In 2004 we were ranked top of our sector and overall fifth in Business in the Community’s CR Index results. We continue to be included in Business in the Environment's Index of Corporate Environmental Engagement and were placed first in our sector and 29th overall in 2004.
We are committed to the ongoing embedding of CSR across all our businesses in 2005 and will strive to maintain our leading position in the financial services community. Further details of our programme activities in 2004 and commitments for 2005 can be found in the 2005 CSR Report, available at www.aviva.com/csr. Alternatively, a printed summary copy can be obtained from the group company secretary.
Co rp or at e so ci al r es po ns ib ili ty
Developments in the year Throughout 2004 we have continued to focus on cost and operational efficiency and to build on the progress made to date. As a result of our ongoing cost management initiatives, the benefit to the profit and loss account in 2004 was £52 million, relative to 2003.
As part of our focus on improving our balance sheet strength, we took advantage of the low interest rate environment and favourable market conditions to issue a direct capital instrument which was four times oversubscribed and raised a sterling equivalent of £990 million: this allowed us to lock into favourable funding rates and the proceeds are being used to repay existing, senior debt over the course of 2005. The transaction enhanced our strong regulatory capital position, whilst leaving the financial leverage of the group unchanged.
The UK insurance industry continues to experience unprecedented levels of change and developments in statutory, regulatory and value-based reporting, as well as preparing for the introduction of the Financial Services Authority’s (FSA) new prudential supervision regime. Our preparation for all these changes is well-advanced. We have been among the leaders in the debate over the direction of life insurance financial reporting and have pursued a strategy of communicating early the impact on our financials. In line with this, we have early adopted European embedded value (EEV) principles in our 2004 supplementary reporting.
In anticipation of these changes, Aviva has made a significant investment of £171 million to date in our global finance transformation programme, in anticipation of these changes and we are now moving into a phase of embedding these new requirements into our underlying processes and overall governance framework. We have made good progress though we still have much to do.
Performance management Key financial objectives In 2004, the group’s strategy was underpinned by the following key financial objectives: • Delivering an after-tax operating profit, including profit on a European Embedded Value (EEV) basis, equivalent to a 10% net real return on opening equity capital; • Maintaining a dividend cover between 1.5 and 2.0 times based on statutory after tax operating profits; and
• Achieving a combined operating ratio (COR), on general insurance business across the group, of 100% in each of the three years from the start of 2004.
Return on Capital Employed (ROCE)* 10% + inflation‡ 14.4% 13.1% 9.7% COR** 100% 97% 100% 102% Proposed ordinary dividend per share increase by around 5% pa 25.36p 24.15p 23p Dividend cover† 1.5-2.0x 2.25x 1.82x 1.51x * Calculated using after-tax returns and opening equity capital, based on operating profit, including profit on an EEV basis, before amortisation of goodwill and exceptional items. The ROCE for 2002 is on an achieved profits basis and has not been restated.
**Combined Operating Ratio (COR) expresses the extent to which expenses and claims cover insurance premiums. It is the sum of expenses, including commissions, expressed as a percentage of net written premiums, and claims as a percentage of net earned premiums.
‡ Inflation in the years 2004, 2003 and 2002 was 3.5%, 2.8% and 2.9% respectively.
In May 2004 the CFO Forum, a group representing the Chief Financial Officers of major European insurers and of which Aviva is a member, launched the EEV Principles, with the intention of improving comparability and transparency in embedded value reporting across Europe. The CFO Forum members agreed that all participants will implement the principles in the form of supplementary reporting from the 2005 year end, with optional early implementation at the 2004 year end. The directors have decided to adopt these principles in respect of the financial year ended 31 December 2004 and to restate comparative financial information.
The directors and many of our investors continue to believe that shareholders’ funds incorporating internally-generated AVIF presents a more realistic view of assets. We have therefore included an EEV basis summarised consolidated balance sheet within the supplementary information section of these accounts. This combines the modified statutory basis net assets with the internally-generated AVIF. All growth rates in the financial review are quoted at constant rates of exchange.
Financial Reporting Standard 27 (FRS27), “Life Assurance” FRS27 was issued by the Accounting Standards Board (ASB), on 13 December 2004, following the Penrose enquiry and is mandatory for reporting periods ending on or after 23 December 2005. Aviva, along with other major insurance companies and the ABI, has signed a Memorandum of Understanding (MoU) with the ASB relating to FRS27.
Pre-tax operating profit, before amortisation of goodwill and exceptional items – Life modified statutory solvency profit 1,185 1,122 – – – Life result on an EEV basis – – 1,611 1,496 Health 58 61 58 61 Fund management 43 10 23 (4) General insurance 1,326 911 1,326 911 Non-insurance operations (108) (48) (31) 8 Corporate costs (178) (160) (178) (160) Unallocated interest charges (465) (406) (465) (406) Operating profit before amortisation of goodwill and exceptional items 1,861 1,490 2,344 1,906 Deduction for: taxation on operating profit, minorities preference dividends and direct capital instrument appropriation (570) (499) (828) (713) Operating profit* – including modified statutory solvency profit 1,291 991 – – – including result on an EEV basis – – 1,516 1,193 Operating earnings per share – modified statutory solvency basis 57.2p 44.0p – – – result on an EEV basis 67.2p 53.0p Proposed ordinary dividend per share 25.36p 24.15p 25.36p 24.15p * Operating profit before amortisation of goodwill and exceptional items after tax, attributable to equity shareholders in respect of continuing operations. The modified statutory solvency operating earnings is also stated before the amortisation of acquired additional value of in-force long-term business.
Results on a modified statutory basis Modified statutory operating profit (see figure 1) On a modified statutory basis operating profit before tax showed a 27% increase to £1,861 million (2003: £1,490 million), which is predominantly driven by the excellent general insurance result. The life result has also improved, albeit to a lesser extent, to £1,185 million (2003: £1,122 million).
In 2004, the group disposed of its estate agency and e.surveying business for a total consideration of £42 million, with net assets disposed of £12 million. The loss on disposal of £141 million is calculated after writing back goodwill of £167 million previously written off to reserves and deducting the associated costs of sale of £4 million. The same goodwill amount is also credited directly to the profit and loss account reserve and therefore has a neutral effect on shareholders’ funds. Other disposals generated a profit on sale of £5 million in total.
The effective rate of tax on operating profit from continuing operations was 24.5% (2003: 27.0%). The total tax charge on profit on ordinary activities before tax was £355 million (2003: £367 million). The lower tax charge includes one-off tax credits of £200 million as a result of offsetting tax losses from prior years against current year profits.
Ordinary dividends The directors establish the appropriate level for dividends with reference to the longer-term trend in business performance, keeping in mind the need to retain earnings to fund future growth. Total ordinary dividends for 2004 were £575 million (2003: £545 million) representing an increase of 5.0% to 25.36 pence net per share (2003: 24.15 pence net per share), in line with the group’s dividend policy.
Our operating result has increased as a result of a good performance in our continental European life businesses which have increased in total by 20% to £977 million (2003: £835 million) combined with an excellent result from our portfolio of general insurance businesses. Profits from our general insurance businesses were up 47% to £1,326 million (2003: £911 million).
Cost savings (see figure 3) Reducing costs and improving our operational efficiency continued to be one of our key objectives for 2004. Throughout the year we have taken actions and announced a number of initiatives to reduce our cost base. At the 2003 year end, we announced that we expected to achieve in 2004 estimated annualised savings of £250 million and earned savings of £225 million, both relative to the 2002 cost base. We have successfully achieved these targets delivering earned savings of £225 million in 2004 and accordingly, we expect to achieve annualised savings of £250 million in 2005.
Netherlands (including Belgium and Luxembourg) 3.7 3.8 30.6 30.8 * Includes NUER and excludes retail investment sales and is stated before the effect of required capital. **The ratio of long-term savings new business contribution to sales measured on a present value of new business premium (PVNBP) basis. PVNBP is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale.
† The ratio of long-term savings new business contribution to sales measured on an annual premium equivalent basis.
Long-term savings Total new business sales were £17.2 billion (2003: £14.9 billion) which corresponds to life and pensions sales on a present value of new business premiums (PVNBP) basis of £20.7 billion (2003: £18.8 billion) and investment sales of £1,629 million (2003: £1,141 million). In 2004 we saw a gradual return of customer confidence in many of our markets.
In the UK, we continued our focus on profitable growth and the new business sales reflect a strong performance given pricing actions taken throughout the year in pensions, annuities and protection business. Our continental European businesses now account for over half of new business sales as our businesses in France, the Netherlands, Italy and Spain outperformed local market growth estimates and our bancassurance sales in these business units made strong contributions to local performance. Total bancassurance sales were up 17% to £4,022 million (2003: £3,507 million) and include our new arrangement in France with Crédit du Nord.
New business contribution increased by 11% to £706 million (see figure 4) for the year which represents a new business margin using PVNBP of 3.4% (2003: 3.4%). The strong growth in contribution is predominantly driven by increases in the UK, France and the Netherlands. The margin reflects the shift towards unit-linked products coupled with the benefits of pricing and cost control measures.
Life EEV operating profit before tax increased to £1,611 million (2003: £1,496 million) driven by new business and higher operational profits from existing business. Expected returns on existing business and shareholders’ net worth were higher at £1,117 million (2003: £1,034 million) due to the higher start of year embedded value. The net impact of experience variances and operating assumption changes were broadly flat compared to the prior period although there were a significant number of positive and negative variances in our life business.
In the UK, the life EEV operating return was lower at £551 million (2003: £597 million) predominantly driven by adverse experience variances and operating assumption changes, the most significant of which was the change in persistancy assumptions on bond, protection, pension and endowment products of £110 million. The change in assumptions reflects, in part, the actual experience. In addition, the UK life business has incurred adverse exceptional expenses of £153 million on project costs associated with the required regulatory change and the restructuring occurring within the business. These have been partially offset by the benefits of cost savings on maintenance expenses and improved mortality profits and default experience. In the continental European businesses, operating assumptions and experience variances are positive largely as a result of improved mortality profits across the businesses and tax profits in France and the Netherlands.
UK 97 99 France 101 102 Ireland 87 97 Netherlands (including Belgium and Luxembourg) 95 101 Other Europe 99 103 Canada 97 108 Other international 97 103 Group 97 100 * Combined Operating Ratio (COR) expresses the extent to which expenses and claims cover insurance premiums. It is the sum of expenses, including commissions, as a percentage of net written premiums, and claims as a percentage of net earned premiums.
The group COR improved to 97% (2003: 100%), beating our group COR target of 100% in each of the three years from the start of 2004.
The group operating result of £1,326 million (2003: £911 million) benefits from strong underwriting disciplines, lower claims frequency, better than expected weather-related claims of £50 million (2003: £40 million) and our continued focus on achieving further efficiencies in the business.
The improved group expense ratio of 10.9% (2003: 11.3%) reflects our continued focus on achieving enhanced efficiencies and the benefit of our cost savings initiatives. In particular we achieved lower expense ratios in the UK, France and the Netherlands.
Our UK fund management business comprises Morley Fund Management, a retail and institutional business, a retail investment operation operating as Norwich Union and our new collective investments business with the Royal Bank of Scotland Group (RBSG).
This brings the contribution that Morley makes to the total group result to £24 million (2003: £9 million).
On an EEV basis, fund management operating profits were £23 million (2003: loss of £4 million) which excludes the profits from the management of group internal life funds of £20 million (2003: £14 million).
Corporate costs Corporate costs were higher in the year at £178 million (2003: £160 million) due to the expected increase in costs associated with our global finance transformation programme (GFTP). The GFTP costs reflect the peak of the considerable investment required in response to the significant accounting and regulatory changes that the group must comply with now and in the foreseeable future. We expect these costs to reduce in 2005 to around £40 million. Other corporate costs were lower at £93 million (2003: £100 million).
In the course of 2004, we commenced a market education of the impact of IFRS on Aviva’s financials and highlighted the likely consequences of adopting these new reporting standards. In accordance with the guidance from The Committee of European Securities Regulators (CESR) we have incorporated within the 2004 Report and Accounts balance sheet restatement information relating to 31 December 2003, together with those accounting policies that Aviva will adopt for 2005, which apply to the balance sheet. Accounting policies relating to the income statement will be published in August 2005 with our first set of IFRS results.
Group capital structure The group maintains an efficient capital structure from a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings, consistent with the group’s risk profile and the regulatory and market requirements of its business.
Capital management In managing its capital, the group seeks to: (i) match the profile of its assets and liabilities, taking account of the risks inherent in each business. In the case of the group’s life operations, which have long-term liabilities, the majority of capital is held in fixed income securities. A significant proportion of the capital supporting the group’s general insurance and health operations is held in equities, reflecting the relatively low risk profile of these businesses; (ii) Maintain financial strength to support new business growth and satisfy the requirements of its policyholders, regulators and rating agencies; (iii) Retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit lines, and access to a range of capital markets; (iv)Allocate capital efficiently to support growth and repatriate excess capital where appropriate; and
(v) Manage exposures to movement in exchange rates by aligning the deployment of capital by currency with the group’s capital requirements by currency.
The group has a number of sources of capital available to it and seeks to optimise its debt to equity structure in order to ensure that it can consistently maximise returns to shareholders. The group considers not only the traditional sources of capital funding but the alternative sources of capital including reinsurance and securitisation, as appropriate, when assessing its deployment and usage of capital.
(iii) Economic bases Notwithstanding the required levels of capital laid out by the FSA, the group also measures its capital using risk based capital techniques which take into account a more realistic set of assumptions. These bases have been under considerable development over the past few years and have become more relevant in the assessment of the group’s financial strength. In addition they include measures used by rating agencies in measuring and assessing the financial strength of the group.
Group Accounting bases The group’s capital, from all funding sources, has been allocated such that the capital employed by trading operations is greater than the capital provided by its shareholders and its subordinated debt holders. As a result, the group is able to enhance the returns earned on its equity capital.
Additional value of in-force long-term business 5,326 4,828 Assets backing total capital employed in continuing operations 19,341 17,841 External debt (1,412) (1,709) Net internal debt (987) (1,613) Subordinated debt (2,823) (2,814)
Minority interests (1,182) (953) Direct capital instrument (990) – Preference capital (200) (200) Equity shareholders’ funds 11,747 10,552 * Restated for the effect of implementing European embedded value principles, and for the reclassification of internal debt.
From 1 January 2005, the group is required to monitor its capital in accordance with the requirements of the Prudential Sourcebook (PSB) as set out by the FSA. As a result, during the course of 2004 we have evolved the group’s risk and governance frameworks to ensure compliance and have finalised the parameters and assumptions that underpin the internal capital assessment (ICA). An evaluation of our framework by the FSA will take place during the course of 2005.
General insurance Regulatory basis Our principal UK general insurance regulated subsidiaries are CGU International Insurance group (CGUII) and Norwich Union Insurance (NUI). The combined businesses of the CGUII group and NUI group have strong solvency positions. On an aggregate basis the estimate excess solvency margin (representing the regulatory value of excess available assets over the required minimum margin) increased significantly to £5.5 billion (31 December 2003: £4.0 billion) after covering the required minimum margin of £3.9 billion (31 December 2003: £3.4 billion). The table below sets out the regulatory basis of these general insurance groups at 31 December 2004 and 31 December 2003.
The introduction of the Internal Capital Assessment (ICA) regime has resulted in the calculation of the realistic capital needed to meet policyholder requirements under a range of adverse scenarios. As a result we have been in discussion with our regulator for both our life and general insurance business to agree specific risk adjusted capital requirements. Our risk based capital model underpins our ICA modelling, and will form the basis of our discussions with the regulator in agreeing such capital requirements, along with our strong risk management processes. We continue to develop our risk based capital modelling capability for both our life and general insurance businesses as part of our longer-term development programme for more complex risk modelling techniques, and increasingly operate our business by reference to economic and risk based capital requirements.
Our current risk based capital methodology for general insurance business assesses insurance, market and credit risks and makes prudent allowance for diversification benefits. We look at the level of capital necessary to enable the general insurance business to meet the statutory minimum solvency margin over a five year period with 99% probability of not requiring further capital. We consider risks over a five year period allowing for planned levels of business growth. Based on our model, our risk based capital requirement may be expressed as 34% of net written premiums which is equivalent to £3.3 billion (2003: £3.3 billion) of capital. This compares with a total of £4.6 billion (2003: £4.5 billion) of shareholders’ capital deployed in the general insurance businesses.
Having undertaken an assessment of the level of operational, demographic, market and currency risk of each of our life businesses, we have quantified the levels of capital required for each business. We have expressed these as a percentage of the EU minimum. The required capital across all the group’s businesses varies between 100% and 200% of EU minimum or equivalent. In the UK we have assessed the required capital for our annuity book at 200% of the EU minimum and the remainder of the non-profit portfolio has been set at 100% of the EU minimum. The weighted average level of required capital for the totality of the group’s non-participating life business, expressed as a percentage of the EU minimum solvency margin is 135%. This is a blended rate and we would expect this to change over time with product mix. These levels of required capital are used in the calculation of the group’s embedded value to evaluate the cost of locked in capital. At 31 December 2004 the regulatory capital held in the group’s long term business amounted to £6.3 billion which represents 175% of the EU minimum requirements.
UK Life operations We manage the strength of our funds through a variety of different means. We have the option to use, where appropriate, financial reinsurance, securitisation, shareholder funds and policyholder funds.
UK non-profit funds In July 2004 we announced our proposals to simplify the structure of many of our non-profit funds by transferring them into Norwich Union Life and Pensions (NUL&P). The transfer of these funds occurred effective 1 January 2005 and will create a simpler and more efficient structure for Norwich Union. We continue to evaluate the reattribution of the orphan estate as a strategy in the interests of both policyholders and shareholders.
The calculations also make allowance for how the with-profit funds are expected to be run, for example investment policy, and how policyholders are expected to behave, for example persistency.
‡ Realistic orphan estate at 31 December 2003 was £1.3 billion, £1.6 billion and £1.4 billion for CGNU Life, CULAC and NUL&P respectively.
≠ The Required Capital Margin (RCM) is 2.6 times covered by the orphan estate in aggregate (2003: 2.5 times).
Equity backing ratios, including property, supporting with-profit asset shares are 66% in CGNU Life and CULAC and 54% in NUL&P. With-profit new business is mainly written through CGNU Life.
Calculation of the realistic liabilities requires various assumptions to be made as follows: Investment related assumptions – Our objective in setting these assumptions is that, where parameters can be determined from instruments traded in the market, then our assumptions would reproduce the prices of these traded instruments. This approach is taken for assumptions for risk free rates, equity and fixed interest volatility. Where assumptions can not be determined in this way, for example correlation, then this is based on past market experience.
Demographic assumptions – Assumptions for persistency, mortality and option take up rates are set to achieve a realistic best estimate. Assumptions are based on own and industry experience, and allow for anticipated future trends.
FRS27 Group capital statement In addition to the new FSA realistic reporting regime, the UK Accounting Standards Board issued a new financial reporting standard in December 2004, known as FRS27, requiring certain capital disclosures to be made. The purpose of the capital statement is to set out the financial strength of the entity and to provide an analysis of the disposition and constraints over the availability of capital to meet risks and regulatory requirements. The capital statement also provides a reconciliation of shareholders’ funds to regulatory capital. The capital statement below has been prepared in accordance with the Memorandum of Understanding signed by Aviva in relation to the application of FRS27 in 2004, and shows available capital resources for the group.
**Including an adjustment for minorities. † Other UK life operations include £300 million of fund for future appropriations, relating to Hibernian life which is owned by UK life shareholders’ funds. ‡ Other operations include general insurance and fund management businesses.
In aggregate the group has at its disposal a total available capital of £12.8 billion, representing the aggregation of the solvency capital of all our businesses. This capital is available to meet risks and regulatory requirements set by reference to local guidance and EU directives.
For the remaining life and general insurance operations, the total available capital amounting to £8.3 billion is significantly higher than the minimum requirements established by regulators and, in principle, the excess is available to shareholders. In practice, management will hold higher levels of capital within each business operation to provide appropriate cover for risk.
With-profits policyholders are entitled to at least 90% of the distributed profits while the shareholders receive the balance. The latter distribution would be subject to a tax charge, which is met by the fund in the case of CGNU Life, CULAC and NUL&P.
Sensitivity analysis Sensitivity of group shareholders’ funds The sensitivity of the group’s shareholders’ funds at 31 December 2004 to a 10% fall in global equity markets or a rise of 1% in global interest rates is as follows: 31 December 31 December Equities Interest rates £bn £bn £bn £bn 5.8 General insurance and other 6.1 5.9 5.8 * Assumes EEV assumptions adjusted to reflect revised bond yields. **Comprising internal, external and subordinated debt, net of corporate tangible net assets.
These sensitivities assume a full tax charge/credit on market value appreciation/falls.
Assumptions – long-term trend differences in mortality, morbidity or persistency rates will result in the need to change assumptions. This may require a strengthening or release of reserves. Depending on policy type this sensitivity will differ, for example a change in mortality rates will have a different impact for annuity contract liabilities when compared to term assurance liabilities. In addition to assumptions made for persistency, assumptions are made about policyholders behaviour in relation to guarantees and options. In turn these assumptions are sensitive to both investment return and interest rates.
Provision for guarantees and options under MSSB reporting The costs of guarantees and options are not material to the level of technical provisions held and the overall level of shareholders’ capital. Most guarantees are in the UK with-profit fund and are covered by the estate. Elsewhere, where guarantees exist, they are matched by a high quality government and corporate bond portfolio which reduces the time value costs. Where the exposure is not fully matched, we adopt hedging techniques and hold appropriate technical reserves; and finally, where interest rate guarantees are provided in our current product set, these are set-up rates of 1-2% and are priced into the contracts. As required by FRS27, additional disclosure setting out details of material guarantees and options has been provided below. A financial option or guarantee is one whose potential value is affected by the behaviour of financial variables, and not by those features of life assurance contracts where the potential changes in policyholder benefits arise solely from insurance risk.
The group’s UK life insurance subsidiaries have written various withprofit life insurance contracts which include guarantees and options. The group’s with-profit liabilities measured on a realistic basis, include explicit provision for these guarantees and options, which have been measured in accordance with the FSA’s rules.
The material guarantees and options in UK with-profits are: Maturity value guarantees – Substantially all of the conventional with-profit business and a significant proportion of unitised with-profit business have minimum maturity values reflecting the sums assured plus declared annual bonus. In addition the guarantee fund has offered maturity value guarantees on certain unit linked products.
Non-profit business The group’s UK life business has also written contracts which include guarantees and options within its non-profit funds. The group’s UK non-profit funds are not subject to the requirements of the FSA’s realistic reporting regime and therefore liabilities are evaluated by reference to local statutory reserving rules. Provision for guarantees and options in the non-profit funds has been included within the MSSB liabilities.
Guaranteed annuity options – Similar options to those written in the with-profit fund have been written in relation to non-profit products. Provision for these guarantees does not materially differ from a provision based on a market consistent stochastic model and amounts to £47 million at 31 December 2004.
Guaranteed unit price on certain products – Certain unit linked pension products linked to long-term life insurance funds provide policyholders with a guaranteed unit price of £1 at retirement or death. No additional provision is made for this guarantee as the investment management strategy for these funds is designed to ensure that the guarantee can be met from the fund, mitigating the impact of large falls in investment values and interest rates.
The most significant of these contracts is the AFER Euro fund which has total liabilities of £21 billion at 31 December 2004. The guaranteed bonus on this contract equals 65% of the average of the last two years’ declared bonus rates (or 60% of the TME index rates if higher) and was 3.69% for 2004 in comparison to an accounting income from the fund of 5.25% after charges.
Non-AFER contracts with guaranteed surrender values had liabilities of £6 billion at 31 December 2004 and guaranteed annual bonus rates are between 0% and 4.5% (except for some larger guarantees of up to 7% on some older contracts which account for less than 2.4% of these liabilities). For non-AFER business, the accounting income return exceeded guaranteed bonus rates in 2004.
Guaranteed death and maturity benefit In France the group has also sold unit linked policies where the death and maturity benefit is guaranteed to be at least equal to the premiums paid. The reserve held in the group’s MSSB balance sheet at the end of 2004 for this guarantee is £17 million. The reserve for guaranteed death and maturity benefits is determined using a realistic reserving basis under which the cost of guarantees is calculated using a standard option pricing formula. At end 2004 total sums at risk for these contracts were £182 million in comparison to total unit linked funds of £6 billion. The average age of policyholders was approximately 53. It is estimated that this cost would increase by £18 million if yields were to increase by 1% per annum and equity markets were to decline by 10% from end 2004 levels. These figures do not take into account that Aviva has the ability to review the charges for this option.
Netherlands Guaranteed minimum return at maturity In the Netherlands it is market practice to guarantee a minimum return at maturity on traditional savings and pensions contracts. Guarantees on older lines of business are 4% per annum, while for business written since 1 September 1999 the guarantee is 3% per annum. In accordance with market practice, it is expected that guarantees will be financed from unrealised gains on assets. On group pensions business, it is often possible to recapture guarantee costs through adjustments to surrender values or to premium rates.
Delta Lloyd has certain unit-linked contracts which provide a guaranteed minimum return at maturity from 4% pa to 2% pa. Provisions consist of unit values plus an additional reserve for the guarantee. The additional provision for the guarantee was £118 million. An additional provision of £27 million in respect of investment return guarantees on group segregated fund business is held. It is estimated that the provision would increase by £234 million if yields were to reduce by 1% pa and by £49 million if equity markets were to decline by 10% from end 2004 levels.
Ireland Guaranteed annuity options Products with similar GAOs to those offered in the UK, have been issued in Ireland. The current net of reinsurance provision for such options is £125 million. This has been calculated on a deterministic basis, making conservative assumptions for the factors which influence the cost of the guarantee, principally annuitant mortality and long-term interest rates.
“No MVR” guarantees Certain unitised with-profit policies containing “no MVR” guarantees, similar to those in the UK, have been sold in Ireland. The current provision for these guarantees is £102 million which has been calculated on a deterministic basis as the excess of the current policy surrender value over the discounted value of the guarantees. The value of these guarantees is sensitive to the performance of investments held in the with-profit fund. Amounts payable under these guarantees are determined by the bonuses declared on these policies. An adverse change in market conditions such as a 20% fall in equity values would reduce available free assets by £69 million.
Spain and Italy Guaranteed investment returns and guaranteed surrender values The group has also written contracts containing guaranteed investment returns and guaranteed surrender values in both Spain and Italy, where traditional profit sharing products receive an appropriate share of the investment return, assessed on a book value basis, subject to a guaranteed minimum annual return of up to 6% in Spain and 4% in Italy. Liabilities are generally taken as the face value of the contract plus, if required, an explicit provision for guarantees calculated in accordance with local regulations. At end 2004, total liabilities for Spanish business were £2 billion with a further reserve of £13 million for guarantees. Total liabilities for Italian business were £4 billion with a further provision of £49 million for guarantees. Liabilities are most sensitive to changes in the level of interest rates; it is estimated that provisions for guarantees would need to increase by £56 million in Spain and £14 million in Italy if interest rates fell by 1% from end 2004 values. Under this sensitivity test, the guarantee provision in Spain is calculated conservatively assuming a long-term market interest rate of 1.68% and no lapses or premium discontinuances.
Risk management policies The group’s approach to risk and capital management The primary objective of our risk and financial management framework is to protect us from anything that hinders the sustainable achievement of the group’s objectives and financial performance, including failing to exploit opportunities. The group recognises the critical importance of having efficient and effective risk management systems in place. To this end, the group has an established governance framework which has three key elements: • Clear terms of reference for the board, its committees, and the associated executive management committees; • A clear organisation structure with documented delegated authorities and responsibilities; and
• A group policy framework which sets out risk appetite, risk management, control and business conduct standards for the group’s worldwide operations.
During 2004 the policies were reviewed and amended to reflect changing commercial and regulatory requirements. In particular, increased focus by the group on risk appetite and the FSA’s new Prudential Sourcebook which requires documentation of risk for each key risk area – market, credit, liquidity, insurance, operational risk as well as impact on overall group reputation, capital management and strategy.
Integration of risk and capital management The group has developed an Internal Capital Assessment (ICA) framework for identifying the risks to which each of its business units and the group as a whole are exposed, and quantifying their impact on the volatility of economic capital. The ICA estimates how much capital is needed to mitigate the risk of insolvency to a selected remote level of risk. This is carried out by all material parts of the group and combines the results of financial tests with the group’s risk reporting model. The financial tests are currently based on stress and scenario analyses although these have been informed by full stochastic risk-based capital (RBC) models where available. Although the ICA is an internal process, from 2005 the FSA will use ICA to inform the target regulatory capital levels it sets for the group and the UK insurance businesses.
Insurance business risk A large portion of our long-term savings operations consists of products where the majority of investment risks are borne by our policyholders. Risks attributable to policyholders are actively managed to ensure that such risks are prudent and that they satisfy our policyholders’ risk and reward objectives. In addition, our worldwide insurance operations are subject to local regulatory requirements in most jurisdictions, which prescribe both the type, quality and concentration of investments and the level of assets to be maintained in local currency in order to meet local insurance liabilities. These requirements help to ensure that our risk levels are maintained at an acceptable level.
Management of financial and non financial risks Market risk Market risk is the risk of adverse impact due to changes in fair values of financial instruments, due to fluctuations in foreign currency exchange rates, interest rates, real estate prices and equity prices. Market risk arises within business units due to fluctuations in liabilities arising from products sold and the value of investments held. At group level it arises in relation to the overall portfolio of businesses. The management of market risk is undertaken at two levels: within business units, and at group level. Policies and procedures are in place for each of the major components of market risk, described in more detail below.
Interest rate risk Interest rate risk arises primarily from our investments, long-term debt and fixed income securities. Interest rate risk is managed through the use of a variety of derivative instruments, including futures, options and swaps, in order to hedge against unfavourable market movements in interest rates inherent in the underlying assets and liabilities.
As of 31 December 2004, the group had entered into interest rate swap agreements to mitigate the effects of potential adverse interest rate movements.
Equity price risk The group is subject to equity price risk due to daily changes in the market values of our equity securities portfolio. Equity price risk is actively managed through the use of derivative instruments, including futures and options, in order to mitigate anticipated unfavourable market movements. The group does not have material holdings of unquoted equity securities.
Credit risk Credit risk is the risk of loss in the value of financial assets due to counterparties failing to meet all or part of their obligations.
The group’s management of credit risk includes measurement of large individual counterparty exposures where aggregate data is monitored at group level, against centrally set limits reflecting the credit ratings by companies such as Standard & Poor’s. The process measures exposure to individual counterparties across a broad range of asset types including fixed income securities, bank deposits and mortgages. In addition, the group evaluates the concentration of exposures by industry sector and geographic region.
Liquidity risk Robust liquidity management forms an important component of the group’s financial management practices. Liquidity risk is the risk that the group does not have sufficient liquid assets to meet its obligations as they fall due.
General insurance risk management Risks are primarily managed within each of the business unit’s transacting general insurance. Mechanisms are in place within each business unit to identify, quantify and manage accumulated exposures to ensure that they are contained within the limits of the group risk appetite. Reinsurance is utilised to assist in the management of the catastrophic risk potential and reduce the volatility of earnings. The basis of these arrangements is underpinned by extensive financial modelling and actuarial analysis to optimise the cost and risk management benefits of these arrangements. The reinsurance is placed with providers who meet group counterparty security standards.
Life insurance risk Life insurance risk arises from the non-financial risks in life insurance contracts such as mortality, morbidity and lapses. These risks are managed in several ways; for example by underwriting of the health of potential policyholders, monitoring of the incidence of risk and consequent management of product pricing, claims management and reinsurance of risks exceeding risk appetite.
The group has exposure to the full range of life insurance risks. This includes a large exposure to annuity business and the associated longevity risk. Longevity statistics are monitored in detail, and the results are used to inform the reserving for, and pricing of, annuities. Inevitably, there remains uncertainty about future longevity that cannot be removed. This, and other insurance risks, will continue to be monitored.
Operational risk Operational risk arises as a result of inadequate or failed internal processes, people or systems; or from external events. This definition is intended to include all risk exposures that the group is exposed to, other than the financial risks described above, and strategic and group risks that are considered briefly below. Hence operational risks include, for example, IT, information security, project, outsourcing, tax, legal, fraud and compliance risks.
Conclusion 2004 has been a year of considerable progress in our business development. Our financial performance was strong, our balance sheet strength has been enhanced, we have improved our risk management and governance and we have achieved significant progress in preparing for external reporting changes and demonstrated this through continuous communication with the investment market. We are not complacent and will continue to seek excellence in our financial and risk management.
2. Richard Harvey FIA (54) Group chief executive Appointed group chief executive in April 2001. Joined Norwich Union in 1992, holding senior positions in New Zealand and the UK before joining the Norwich Union board in 1995 and becoming group chief executive of Norwich Union in 1998. Chairman of the Association of British Insurers. Member of the nomination committee.
7. Andrew Moss (46) Group finance director Appointed to the board in May 2004 upon joining the company. Previously director-finance, risk management and operations in Lloyd’s (insurance) and has held a number of senior management positions in HSBC plc.
10. Lord Sharman of Redlynch OBE (62) Independent non-executive director Appointed to the board in January 2005. Currently chairman of Aegis Group plc (media services), deputy chairman of Group 4 Securicor plc (security services), an independent non-executive director of BG Group plc (utility) and Reed Elsevier plc (publisher) and a member of the supervisory board of ABN AMRO NV (banking). A former independent non-executive director of Young & Co.’s Brewery PLC and AEA Technology plc. Former chairman of KPMG International.
13. Elizabeth Vallance (59) Independent non-executive director Appointed to the board in May 2000. Joined the board of Norwich Union as a non-executive director in 1995. Currently Fellow of Queen Mary College University of London, chairman of Council of the Institute of Education University of London, vice-chairman of the Health Foundation, non-executive director of Charter Pan European Trust plc (asset management), member of the Committee on Standards in Public Life, and a director of The Medical Protection Society. A former non-executive director of HMV Group Limited (music retail) and former chairman of both the NHS Advisory Committee on Distinction awards and Clinical Excellence awards. It is the intention that Dr Vallance will retire from the board on or before 31 December 2005. Member of the remuneration committee.
14. André Villeneuve (60) Independent non-executive director Appointed to the board in 1996. Non-executive chairman of Euronext Liffe (financial services), a non-executive director of United Technologies Corporation (aerospace) and a director of the Institut Français de Relations Internationales. A former executive chairman of Instinet Corporation (securities broker), a former executive director of Reuters plc (media) and a former chairman of Promethee. Member of the nomination and remuneration committees.
15. Russell Walls (61) Independent non-executive director Appointed to the board in May 2004. Currently a non-executive director of Signet Group plc (retail) and the senior independent non-executive director of Stagecoach Group plc (transport). A former group finance director of BAA plc (transport), Wellcome plc (pharmaceuticals) and Coats Viyella plc (textiles). Former non-executive director of Hilton Group plc (leisure) and the Mersey Docks and Harbour Company. Member of the audit committee.
The directors submit their report and accounts for Aviva plc, together with the consolidated accounts of the Aviva Group of companies, for the year ended 31 December 2004. The directors’ corporate governance and remuneration reports are set out on pages 47 and 53.
Review of operations, current position and future prospects Details of the Group’s operations for the accounting period, its current position and future prospects are contained in the Chairman’s statement, Group Chief Executive’s review, operating review and financial review set out on pages 2 to 41.
Principal activities Aviva plc is the holding company of the Aviva Group of companies. The principal activities of the Group are life assurance and long-term savings business, asset management and all classes of general insurance through its subsidiaries, associates and branches in the UK, continental Europe and Ireland, North America, Asia and Australia.
Details of material acquisitions and disposals made by the Group during the year are contained on pages 86 to 88.
Share capital The ordinary share capital of the Company was increased by 25.1 million ordinary shares during the year as a result of shares issued under the Group’s employee share plans and the Aviva Scrip Dividend Scheme. At 31 December 2004 the issued ordinary share capital totalled 2,282 million shares. Details of the share capital and shares under option as at 31 December 2004, and shares issued during the year, are given in note 30 on pages 96 and 97.
Authority to purchase own shares At the Annual General Meeting held on 27 April 2004 shareholders renewed the Company’s authority to make market purchases of up to 225 million ordinary shares, up to 100 million 83⁄4% preference shares and up to 100 million 83⁄8% preference shares. This authority was not used during the year and at the forthcoming Annual General Meeting shareholders will be asked to renew these authorities for another year. Details are contained in the Notice of Meeting. The Company held no Treasury shares during the year.
Directors The names of the present members of the Board and their biographical notes appear on pages 42 and 43.
On 3 May 2004 Richard Goeltz and Russell Walls were appointed to the Board and on 14 January 2005 Lord Sharman of Redlynch was appointed to the Board – each as an independent non-executive director. Andrew Moss joined the Board on 10 May 2004 as Group Finance Director. As these directors joined the Board after the date of the last Annual General Meeting they will, in accordance with the Company’s articles of association, retire at the forthcoming Annual General Meeting and, being eligible, offer themselves for election by shareholders. Andrew Moss has a service contract with a Group company, details of which can be found on page 56.
Details of directors’ remuneration, service contracts and interests in the shares of the Company are set out in the Directors’ remuneration report on page 53.
Corporate Social Responsibility (CSR) Aviva defines corporate social responsibility (CSR) as embracing corporate performance in respect of standards of business conduct, human rights, the environment and health and safety as well as the promotion of good and fair relations with employees, customers, suppliers and the community. The Group recognises that these issues present it with both opportunities and risks.
The Group’s businesses review their progress and undertake a self assessment of their performance annually. This assessment is subject to an external assurance review which in 2004 was carried out by Ernst & Young LLP.
Charitable donations Aviva has continued to support community initiatives and charitable causes worldwide and the total Group commitment during the year was over £4.6 million (2003: £4.6 million), as measured in accordance with Business in the Community’s PerCent Standard.
In 2004, the Group’s community investment in the UK totalled £3.4 million (2003: £3.2 million) of which £1.3 million (2003: £1.3 million) was in the form of cash donations to charitable organisations. The Company’s policy regarding charitable giving in the UK is to support local charities and community organisations particularly in the areas of the country in which the Group has significant operations. The Company allocates a part of its budget to matching contributions raised by staff and also to providing financial support to charities and communities where members of staff give a personal commitment in terms of their time. In addition, the Company provides a significant level of support to a small number of national charities. During 2004 the Company continued its commitment to Breakthrough Breast Cancer, Cruse Bereavement Care and The Princess Royal Trust for Carers and, in addition, supported the Association of Children’s Hospices, which was chosen by staff in the UK as their “charity of the year” and NCH, the children’s charity. At the end of 2004 the Group made a substantial donation to the Asian Tsunami appeal.
Political donations No political donations were made in the UK or elsewhere during the year (2003: £nil). It is the Company’s policy not to make donations to political organisations or for political causes, and it has no intention of changing this policy.
Aviva plc, the holding company of the Group, has no trade creditors. In respect of Group activities in the UK, the amounts due to trade creditors at 31 December 2004 represented approximately 21 days of average daily purchases through the year (2003: 29 days).
Auditor In accordance with Section 385 of the Companies Act 1985, a resolution is to be proposed at the Annual General Meeting for the reappointment of Ernst & Young LLP as auditor of the Company. A resolution will also be proposed authorising the directors to determine the auditor’s remuneration. The Audit Committee reviews the appointment of the auditor, its effectiveness and its relationship with the Group, including the level of audit and non-audit fees paid to the auditor. Further details on the work of the auditor and the Audit Committee are set out in the Audit Committee Report on pages 50 and 51.
Annual General Meeting The Annual General Meeting of the Company will be held on 26 April 2005 at The Barbican Centre, Silk Street, London EC2Y 8DS at 11am. A separate document accompanying the Annual Report and Accounts contains the notice convening the Annual General Meeting and a description of the business to be conducted thereat.
Application of the Combined Code The directors’ report on the Company’s compliance with the applicable provisions of the Combined Code during 2004 is set out below.
The Financial Services Authority requires listed companies to disclose, in relation to Section 1 of the Combined Code (Combined Code), how they have applied its principles and whether they have complied with its provisions throughout the accounting year.
It is the Board’s policy to appoint and retain non-executive directors who are able to apply their wider knowledge and experiences to their understanding of the Aviva Group and, through a programme of rotational retirement, to refresh regularly the skills and experiences which it requires. In addition to the strengths of experience, diversity and an international perspective, the Board also seeks to comply with the requirements of the Combined Code relating to the independence of directors.
The principal commitments of all the directors are summarised in the biographical details on pages 42 and 43. Pehr Gyllenhammar was appointed chairman of AB Kinnevik in August 2004 and prior to his appointment the Board was consulted and satisfied itself that the appointment would have no material effect on the time which he would have available to commit to the Company.
Pehr Gyllenhammar 100 – – 80 Anna Catalano 66 – 50 – Guillermo de la Dehesa 88 66 – 100
The Board’s terms of reference set out the procedure whereby directors may, in the furtherance of their duties, seek independent professional advice at the Company’s expense if considered appropriate. No director obtained any such independent professional advice during 2004. The document also sets out the separate roles and responsibilities of the Chairman and the Group Chief Executive.
The Group Company Secretary is responsible for advising the Board, through the Chairman, on governance matters and ensuring that Board procedures are followed. All directors have access to his advice and services.
In line with the Board’s work plan the Chairman and the non-executive directors met on two occasions in the absence of the executive directors to discuss the Group Chief Executive’s performance and executive succession planning.
The performance of the Chairman is also reviewed annually using a similar peer review process. Prior to the Board meeting at which the review is to take place the directors are asked for their views about the Chairman’s performance against the key aspects of the role. At the meeting the Chairman leaves whilst a summary of the views expressed by the directors is used as an introduction for discussion. This process is managed by the senior independent non-executive director who completes it by providing feedback to the Chairman.
The Board believes strongly in the development of all its employees, including its directors, and it is a requirement of directors’ appointments that they commit to continue their development. The form which this development takes varies depending upon each director’s requirements and the quality/relevance of the training available. During the year directors attended a number of external courses and seminars on issues ranging from board effectiveness to pensions simplification. In addition, directors received an internal training session outside of the formal Board meeting regarding life assurance profit reporting. Two such internal training sessions have been built into the Board’s work plan for 2005. The Board made two site visits during the year in order to gain a closer understanding of the businesses visited. Richard Goeltz and Russell Walls who joined the Board in May 2004 completed a detailed induction programme which was conducted over a six month period comprising 13 separate sessions including external visits to the Group’s main operating businesses and meetings with the external auditor and one of the Company’s corporate brokers. Lord Sharman who joined the Board in January 2005 has commenced a similar programme.
Relations with shareholders The Company places considerable importance on communication with shareholders and engages with them on a wide range of issues. As part of a comprehensive review of senior management remuneration conducted in 2004 the chairman of the Remuneration Committee consulted with institutional shareholder bodies, including the Association of British Insurers and the National Association of Pension Funds, and also with the Company’s 20 largest shareholders. The Company’s Investor Relations Department is dedicated to facilitating communication with institutional investors and won a number of investor relations awards in 2004. The Group has an ongoing programme of dialogue and meetings between the executive directors and its major institutional shareholders, where a wide range of relevant issues including strategy, performance, management and governance are discussed within the constraints of the information already known to the market.
The Board is equally interested in the concerns of the Company’s private shareholders. In March 2004 the Company issued a postage paid reply card with its Annual General Meeting documentation to enable shareholders to put questions to the directors. This was particularly helpful for those shareholders unable to attend the meeting. Each question received a written response either through a brochure containing answers to the most frequently asked questions or, where appropriate, a personal letter. All material information reported to the regulatory news services is simultaneously published on the Group’s website affording all shareholders full access to the announcements.
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, operating and financial reviews on pages 2 to 41 provide an assessment of the Group’s affairs and will be supported by a presentation to be made at the Annual General Meeting.
The directors are responsible for maintaining proper accounting records which are intended to disclose with reasonable accuracy at any time the financial position of the Company and the Group. They are also ultimately responsible for the systems of internal control maintained by the Group for safeguarding the assets of the Company and the Group and for the prevention and detection of fraud and other irregularities.
The Audit Committee The Audit Committee currently comprises the following independent non-executive directors, appointed by the Board: Derek Stevens (Chairman) Richard Goeltz Carole Piwnica Russell Walls
Derek Stevens, a Chartered Accountant, is a member of the financial sector committee of the Accounting Standards Board and is a former Chief Financial Officer of British Airways plc and the TSB Group plc. Richard Goeltz is a former Chief Financial Officer of American Express Company, NatWest Group plc and The Seagram Company Limited. Russell Walls is a former Group Finance Director of BAA plc, Wellcome plc and Coats Viyella plc. The Board is satisfied that all these directors have recent and relevant financial experience.
The Group Chief Executive, Group Finance Director, Group Audit Director and the external auditor normally attend, by invitation, all meetings of the Committee. Other members of senior management are also invited to attend as appropriate in order to present reports. In undertaking its duties, the Committee has access to the services of the Group Audit Director and the Group Company Secretary and their resources, as well as access to external professional advice.
The Committee undertakes its duties in line with an agreed annual work plan. It reviews, with members of management and the internal and external auditors, the Company’s formal financial announcements including the Annual report and accounts to shareholders and associated documentation, with a particular emphasis on their fair representation and the reasonableness of the judgmental factors and appropriateness of significant accounting policies used in their preparation. At each meeting, the Committee receives a report from the Group Audit Director. Twice each year, the Committee receives reports regarding the adequacy of the Group’s life assurance and general insurance reserves and on a regular basis it receives reports on risk management, fraud, anti money laundering, legal and corporate governance matters in order to help it assess the effectiveness of the risk management and control frameworks. These reports include material notifications arising under the Group policy on “whistleblowing”. The Committee also reviews the annual operating plan for the Group’s internal audit function. The Group Compliance Director reports to the Committee regularly on the Group’s compliance with appropriate rules and regulations and highlights any significant regulatory developments and compliance issues which have arisen.
The Committee receives reports from the external auditor and regularly holds discussions with both the internal and external auditors in the absence of Management. In order that the Board is kept fully appraised of the Committee’s work, the chairman of the Committee reports at the subsequent meeting of the Board and the Board receives a copy of the minutes of each meeting of the Committee.
External auditor Ernst & Young LLP was appointed auditor of the Company in 2001 having previously been the auditor of Norwich Union plc. The audit signing partner changed as part of a rotation process in 2002. Ernst & Young LLP audits the whole of the Group other than Delta Lloyd, the Group’s subsidiary in the Netherlands (which also has operations in Belgium and Germany) which is audited by PricewaterhouseCoopers LLP (PwC). To fulfil its Group reporting responsibilities Ernst & Young LLP reviews the work of PwC in accordance with standard auditing practices.
During the year the external auditor was appointed to undertake assurance work in relation to the Group’s major finance transformation programme and its preparedness for PSB requirements which came into effect at the beginning of 2005. In addition, the external auditor has audited and reviewed the Group’s results on the EEV basis for the year ended 31 December 2003 and for the first half year 2004. The external auditor also continues to provide audit services on the Group’s implementation of the new standards on the IFRS basis.
The total fees paid to Ernst & Young LLP in 2004 were £14.9 million of which £4.8 million related to non-audit work reflecting substantial projects referred to above. Further details are provided in note 12 on
Internal audit At the beginning of 2004 the Group’s internal audit function formed part of a wider Group Business Risk department which had responsibility for the risk management process and a number of other governance issues. However during the year, in line with emerging best practice, the internal audit and risk management functions were separated at the Group level to ensure a sharper focus and to emphasise the independence of the internal audit assurance function. Accordingly the Group Audit Director is now solely responsible for internal audit and financial crime which covers fraud and money laundering investigations. Following this restructuring the Committee has approved several changes aimed at enhancing the utilisation of the internal audit resources across the Group. The Committee is planning a review of the effectiveness of internal audit in 2006.
Businesses report residual risk profiles, based on local materiality levels on a regular basis. A consolidated Group risk report is reviewed regularly by a Group Business Risk Committee, under the chairmanship of the Group Finance Director. Each quarter, material items in the Group risk report are reported to the Group’s Executive Committee, the Audit Committee and the Board, who consider whether residual risks are within risk appetite and the adequacy of the risk mitigating actions. Local business unit boards, audit committees and management also consider local risk reports in a similar way. These regular reports are supported by escalation procedures for new or deteriorating risks that are classified at the highest impact levels.
In addition, all business unit heads and Group functional heads provide to the Group a formal certificate every six months confirming compliance with the Group’s governance and risk management frameworks and the terms of their delegated authority. They are also required to specify any risks or control issues not already reported through the regular risk management processes.
Control procedures and monitoring systems The Group has a well-developed system of planning and monitoring, which incorporates Board approval of a rolling three-year Group Plan. Performance against the Plan is subsequently monitored and reported to the Board each time it meets. This report also includes reports on risk, audit, compliance, solvency and liquidity. Performance is also reported formally through the publication of Group results, and accounting policies are applied consistently throughout the Group. Operational management report frequently to the executive directors and the Board receives regular representations from management responsible for each principal business operation.
This report was reviewed and approved by the Board on 8 March 2005.
Wim Dik was appointed a member of the Committee in April 2004 in place of Elizabeth Vallance. 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.
In fulfilling its duties the Committee monitors the skill requirements of the Board and the knowledge, experience, length of service and performance of the directors. It also reviews their external interests with a view to identifying any actual or perceived/potential conflicts of interests, including the time which they are able to commit to their duties to the Company. The Committee also monitors matters relating to the independence of each non-executive director. The results of these reviews are taken into account when the Board considers succession planning and the reappointment of directors.
The Committee also made a recommendation to the Board that Andrew Moss, who was Director of Finance, Risk Management and Operations at Lloyd’s be invited to join the Board as Group Finance Director to succeed Mike Biggs who resigned with effect from December 2003. The Committee’s recommendation was approved and Andrew Moss joined the Company in May 2004.
The Company’s Chairman, Pehr Gyllenhammar, will attain age 70 in 2005 and therefore during the year the Committee has been giving consideration to the appointment of a successor. George Paul, the senior independent non-executive director joined and chaired the Committee for these particular discussions.
This report sets out the remuneration policy for the Company’s directors and senior executives, outlines the various elements of their remuneration and discloses the amounts of remuneration paid to the directors in 2004. The report also contains details of the remuneration review undertaken during the year and explains the changes to the remuneration packages which are proposed from 2005.
Shareholders will be invited to approve this report at the Annual General Meeting to be held on 26 April 2005.
The Remuneration Committee The Remuneration Committee comprises the following independent non-executive directors appointed by the Board: George Paul (Chairman) Wim Dik Richard Goeltz Elizabeth Vallance André Villeneuve
All members of the Committee served throughout the year other than Richard Goeltz who was appointed to the Committee in May 2004. The Committee met on six 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 Committee considers all aspects of the Company’s policy governing the remuneration paid to the the Group’s senior executive population (which comprises the executive directors and the most senior members of management, totalling approximately 40 executives) and makes recommendations to the Board on the remuneration policy, strategy and framework for this group of employees. The remuneration policy is reviewed by the Committee on a regular basis to ensure that it remains appropriate within the market and for the achievement of its objectives. Within the scope of the policy, the Committee determines the level of remuneration paid to each of the executive directors. The Committee also reviews and sets the fee payable to the Chairman as well as exercises, on behalf of the Board, discretion in relation to the operation of the Group’s various share schemes and incentive plans. 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.
Mike Pemberton, the Group Human Resources Director, has provided material assistance to the Committee during the year advising on market trends, practices and appropriate levels of remuneration. Deloitte & Touche, which has provided actuarial and accounting services to the Group during the year, advised the Committee on the calculation of total shareholder return for the purposes of the long-term incentive plans. In addition, the Committee has taken into account the views of Pehr Gyllenhammar, Chairman, and Richard Harvey, Group Chief Executive, when assessing the performance of the executive directors.
In respect of the remuneration review detailed on page 56, the Company was supported by KPMG LLP which provided other material services to the Group during the year. New Bridge Street Consultants were appointed by the Committee to provide an independent opinion on the recommendations arising from the review. New Bridge Street Consultants have provided no other services to the Group during the year.
Remuneration policy Executive directors The Company’s remuneration policy seeks to provide remuneration packages appropriate for each particular market in which the Company operates which will attract and retain high calibre employees and encourage and reward superior performance in a manner consistent with the interests of shareholders. The policy seeks to ensure that senior executives are rewarded fairly for their individual and collective contributions to the Company’s performance and is designed to provide an appropriate balance between the delivery of the annual business plan and the long-term profitable growth of the Company.
Against this broad policy, the Committee sets the content of the senior executives’ total remuneration package by reference to a variety of factors, including market practices for companies of similar size, type and standing. It also considers the current economic and prevailing operating conditions within both the Group and the financial services industry generally as well as the skills and management capabilities which the Group must secure in order to attain its strategic objectives and notes the level of remuneration required to secure these skills.
The basic fee payable to each non-executive director during the year was £42,000 pa with an additional £25,000 pa paid to the chairman of the Audit Committee. The fee paid to the Chairman is £300,000 pa and the fee paid to the Deputy Chairman (which includes acting as the chairman of the Remuneration Committee and as the senior independent non-executive director) is £160,000 pa. No changes were made to these fees during the year.
Cash bonuses Senior executives participate in a discretionary annual bonus plan that provides for the payment of cash bonuses. For executive directors the bonus for “Target” performance is 35% of basic salary and for achieving “Stretch” performance a payment of up to 50% could be made. Of the potential payment, 70% is dependent upon financial targets and the remaining 30% is based upon the director’s attainment of personal objectives including measures of customer service and employee satisfaction. Once the Group’s business plan has been approved by the Board, the Committee meets to ensure that the targets set under the annual bonus plan against the various key performance indicators are consistent with the business plan, and also to determine what levels of performance would constitute “Target” and “Stretch” performance for the various key performance indicators.
A fundamental part of the annual bonus plan is the requirement that a stated proportion of any cash bonus awarded under the plan be taken in the form of shares through the Deferred Bonus Plan. Executive directors were required to defer 50%, and could elect to defer up to 100%, of any cash bonuses to be awarded to them under the annual cash bonus plan. In respect of bonuses deferred, participants were granted an award of shares of equal value to the amount of cash bonus deferred and this was matched on a “one for one” basis with a further award of shares. The shares granted under the plan vest automatically after three years. In addition, at vesting, participants received shares to represent the notional dividends paid on the award shares during the deferral period.
If a participant leaves service during the vesting period for reasons of ill-health, retirement or redundancy, the matching shares are released in full at the end of the vesting period. In other cases, the matching shares normally lapse.
Long-term incentives The Aviva Long-Term Incentive Plan is a discretionary share plan. It is the Committee’s policy to make an annual award of shares to executive directors with a value equal to 100% of their basic salary as at 31 December of the previous year.
All awards are made subject to the achievement of stretching performance conditions which contain two elements. The first element compares the Total Shareholder Return (TSR) produced by the Company over a three-year performance period with the TSR of companies in a chosen comparator group (70% of award). The second element of the performance condition measures the Return on Capital Employed (ROCE) within the Company over the performance period against a target return (30% of award). The Committee believes that this combination is an appropriate way of incentivising executives since it takes into account both the comparative returns to shareholders and the Company’s underlying performance.
The other 30% of the award vests if the Company achieves a given return in excess of inflation on the ROCE over the performance period. Awards under this performance condition will begin to vest if the cumulative ROCE over the performance period is 24% in excess of the rate of inflation, with the full 30% vesting if the ROCE is 30%, or higher.
Dilution The Company monitors the awards of shares made under the various all-employee and discretionary share plans which it operates in relation to their effect on dilution limits. The relevant percentages in respect of the rolling 5 and 10 years’ tests established by the Association of British Insurers were 1.2% and 2.8% respectively based on the issued share capital at 31 December 2004.
Between March 1998 and March 2003 it was the Company’s practice to buy shares in the market at the time of grant, through employee trusts in order to meet its liability for shares awarded under the incentive plans. Details of the shares held in the employee trusts are set out in note 30(d) on page 97. At 31 December 2004 there were 5,894,264 shares held in the trusts which, in the Committee’s opinion, remain adequate to cover the number of shares considered likely to vest in relation to awards granted in the said period. Since March 2003 it has been the Company’s practice to meet its obligations in respect of shares awarded under the all-employee share plans and incentive plans through the issue of new shares at the time the awards vest.
Pension arrangements The remuneration package for senior executives in the UK includes Company contributions into the Aviva Staff Pension Scheme (the Scheme). All executive directors are members of the defined benefit section of the Scheme.
Under the Scheme, executive directors have a normal retirement age of 60 and accrue pensions at a rate of either one thirtieth (Richard Harvey, Philip Scott and Patrick Snowball) or one forty-fifth (Andrew Moss) of their final pensionable salary for each year of service since they became a senior executive, subject to a maximum pension of two-thirds of their final pensionable salary. No pension benefits are accrued on bonuses or other benefits. The Scheme provides a lump sum death-in-service benefit of four times the member’s basic salary at the date of death and a spouses’ pension equal to two-thirds of a member’s actual or prospective pension. Post-retirement, pensions are reviewed annually and increases are guaranteed at a rate equivalent to the annual increase in the Retail Prices Index up to a maximum of 10% pa.
Prior to 1 April 2004 membership of the Scheme for the majority of members of the defined benefit section was on a non-contributory basis. However from that date, all members of the Scheme, including the executive directors, who were not already contributing were required to pay 2.5% pa of their total gross pensionable salary to the Scheme. The level of contribution will increase to 5% pa from 1 April 2005. The benefits paid from the Scheme are subject to Inland Revenue limits. There is in place an unfunded pension top-up arrangement to ensure that senior executives receive the benefits promised by the Scheme notwithstanding an Inland Revenue limit relating to their level of earnings which, in some cases, caps the amount of pension that can be paid from a tax-approved scheme. Where this limit applies the benefits which cannot be paid from the Scheme are provided from the unfunded arrangement. Richard Harvey and Andrew Moss are affected by this limit and therefore will, at retirement, receive some of their pension benefits from the unfunded arrangement.
D ir ec to rs ’ r em un er at io n re po rt
Service contracts Service contracts agreed with each executive director incorporate their terms and conditions of employment.
Executive directors have rolling service contracts which can be terminated by the Company giving 12 months’ notice and by the director giving six months’ notice. In respect of the early termination of a service contract by the Company, other than on the grounds of dismissal for cause, the Company would, depending upon the circumstances, either seek to make a payment in respect of damages, less an amount for appropriate mitigation, or would invoke a provision in the contract allowing it to be terminated by the Company making a payment of one year’s basic salary in lieu of notice. For senior executives who joined the Company after November 2003 the Company introduced service contracts which meet recommended corporate governance practice, including a specific requirement for employees to mitigate their losses and the phasing of termination payments over the notice period. Andrew Moss joined the Company after that date and therefore his service contract contains these provisions.
Under the Company’s discretionary redundancy arrangements, which apply to UK based employees, an executive director may, depending on his length of service, receive an ex-gratia payment of up to one year’s basic salary should he leave employment on the grounds of redundancy. In any event the maximum severance payment receivable by an executive director on termination of his contract is two times his basic salary. No special arrangements would apply should there be a change in the control of the Company.
It is the Company’s practice to notify the market of the terms offered to executive directors upon their appointment.
Andrew Moss 10 May 2004 Rolling 1 year None 1 year
Pehr Gyllenhammar 31 May 2004 AGM 2006 Guillermo de la Dehesa 30 May 2003 30 May 2006
Wim Dik 7 Dec 2002 7 Dec 2005 Richard Goeltz 3 May 2004 3 May 2007 George Paul* 30 May 2003 30 May 2006 Carole Piwnica 8 May 2003 8 May 2006 Lord Sharman of Redlynch 14 January 2005 14 January 2008 Derek Stevens 31 May 2004 31 May 2005 Elizabeth Vallance* 30 May 2003 30 May 2006 André Villeneuve 31 May 2004 31 May 2005 Russell Walls 3 May 2004 3 May 2007 * It is the Board’s intention that George Paul and Elizabeth Vallance will retire from the Board on or before 31 December 2005.
**The Company may terminate these appointments at any time without the payment of compensation.
• Consulting with the Company’s 20 largest shareholders and reassessing, challenging and amending the proposals in the light of the views expressed at the various stages throughout this process.
Proposed changes Based on the review the Committee decided that major structural changes to its current policy and package were not necessary as they were largely operating as intended. However, it is proposed to make a number of refinements in line with investor guidelines and to realign the balance between fixed and variable pay and make a more focussed and selective use of key performance targets in order to assess performance.
The proposed changes bring the Plan into line with investor guidelines and enhance the linkage between performance and reward through a more selective focus on key performance targets whilst providing the opportunity for higher bonus at more stretching levels of outperformance.
Given current market practice the bonus potential for directors will be 75% of salary at “Target” and 150% of salary at “Stretch” performance. As historically the majority of directors have elected to defer their bonuses, the bonus at “Target” performance effectively increases by 5%. The higher potential at “Stretch” performance will require, as stated above, a higher level of outperformance against the Group’s business plan.
One-third of the bonus will be paid in cash when the bonus is awarded and two-thirds will be automatically deferred into Aviva shares, which will vest after three years, provided that the director is still in service with the Company. If voluntary resignation occurs prior to the end of the year in which the shares are granted all would be forfeited. If resignation takes effect in the following year 50% of the shares would be forfeited, with 25% being forfeited if resignation takes effect in the third year. All the shares would be forfeited if a director was dismissed for cause during the vesting period. There will be no matching shares.
In future the remuneration report will comment on performance against the key performance targets in the prior year and the resultant bonuses awarded.
Currently, directors are eligible to receive an award of shares under the Company’s long-term incentive plan equivalent to 100% of their base salary at the preceding year end.
The targets for the ROCE element of the performance condition will be set in the context of the Group’s three-year business plan, the trading conditions and shareholder expectations at the time of each award. ROCE targets will be fully disclosed in the Directors’ remuneration report for the year. Details of the three-year ROCE targets for the 2005 award will be disclosed in the Remuneration Report 2006. At threshold performance 15% of the award will vest moving to 50% of the award at higher levels of performance. Awards granted under the long-term incentive plan which do not vest at the end of the performance period will lapse – there will be no retesting.
Service contracts New contracts in line with current corporate governance best practice were introduced for all new senior executives from November 2003. The main difference between the new contracts and the subsisting contracts is that the former provide for mitigation and the phasing of payments for compensation upon leaving service. The Committee has decided to introduce the new contract to all its senior executives as part of the introduction of the revised remuneration package.
Adoption of new accounting standards, dilution and “expected value” The Committee has calculated the effect that the adoption of international accounting standards will have on the Group’s profit and loss charges for the executive share plans and has estimated that they will reduce the current profit and loss charge by approximately £1 million. It is not envisaged that there will be any issues with dilution as a result of introducing the proposed reward structure. The “expected value” of the proposed remuneration packages has been calculated by KPMG LLP.
Directors’ remuneration in 2004 This section of the report (which has been subject to audit) sets out the remuneration paid to the directors during the year to 31 December 2004.
The remuneration payable in respect of 2004 to directors who held office for any part of the financial year, including amounts paid to them as directors of subsidiary undertakings, was as follows: Basic salary/fees Bonuses Benefits Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
**To date of ceasing to be a director: Philip Twyman – 31 March 2004 and Anna Catalano – 27 April 2004.
5. For the purposes of the disclosure required by Schedule 6 to the Companies Act 1985 the total aggregate emoluments of the directors in respect of 2004 was £4.2 million (2003: £5.1 million).
6. Payments to former directors. During the year cash bonuses were paid to Tony Wyand and Mike Biggs of £190,835 and £187,978 respectively under the Annual Bonus Plan in respect of their performance in 2003. Tony Wyand agreed to serve as a consultant following his retirement from service and joined the Boards of the Group’s operations in Spain, Italy and France. Under this arrangement a fee of £126,000 was paid to Mr Wyand in 2004.
is the difference between these values. The transfer values disclosed represent an obligation on the pension fund (where funded) or the Company (where unfunded) – they are not sums paid, or due, to the director.
(a) Share options At At 1 January Options granted Options exercised Options lapsing 31 December Exercise 2004 during year during year during year 2004 price
Current plans “Savings related options” are options granted under the Inland Revenueapproved Save As You Earn (SAYE) share option scheme. Options are normally exercisable during the six months period following the end of the relevant (three, five or seven year) savings contract.
The mid-market price of an ordinary share in the Company on 31 December 2004 was 628.0 pence, and the mid-market prices during the year ranged from 484.5 pence to 631.5 pence.
(b) Share awards Details of the performance conditions relating to these awards are set out in the notes below: At Awards Awards Awards At Market price Market price 1 January granted vesting lapsing 31 December at date at date 2004* during year during year during year 2004 awards granted awards vested Vesting Number Number Number Number Number p p date
**Andrew Moss – as at 10 May 2004, the date of his appointment; Philip Twyman – as at 31 March 2004, the date of ceasing to be a director.
† Due to the proximity of Philip Twyman’s retirement age to the date of the 2004 grant he was not eligible under the rules of the Aviva Deferred Bonus Plan to participate in respect of the deferral of his bonus for 2003. An award over phantom options was granted in March 2004 specifically to facilitate a commitment made to him by the Company. As a consequence, on 26 March 2004, Philip Twyman deferred the whole of his 2003 bonus and received 36,367 shadow units which the Company matched with a further grant of 36,367 shadow units. Upon vesting in March 2007 a cash award will be paid based on the market value of 72,734 shares at that time.
The Aviva Deferred Bonus Plan was approved by shareholders at the 2001 Annual General Meeting. The awards disclosed include those made in lieu of some or all of the cash bonus earned and deferred under the Company’s Annual Bonus Plan in 2004, and also the matching awards granted on a “one for one” basis. The awards are not subject to performance conditions and vest on the third anniversary of their grant.
Guillermo de la Dehesa 144 144 – – – – – – – – Wim Dik 200 200 – – – – – – – – Richard Goeltz* – – – – – – – – – – Pehr Gyllenhammar 27,056 28,378 – – – – – – – –
George Paul 30,693 30,816 – – – – – – – – Carole Piwnica – – – – – – – – – –
We review whether the Corporate governance statement reflects the Company’s compliance with the nine provisions of the 2003 FRC Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
We read other information contained in the Annual Report and consider whether it is consistent with the audited accounts. This other information comprises the Highlights of the year, Chairman’s statement, Business overview, Group Chief Executive’s review, Operating review, Employees, Corporate social responsibility, Financial review, Directors’ report, Corporate governance statement, Audit committee report, Nomination committee report and the unaudited part of the Directors’ remuneration report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the accounts. Our responsibilities do not extend to any other information.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the accounts and the part of the Directors’ remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the accounts and the part of the Directors’ remuneration report to be audited.
Opinion In our opinion: • The accounts give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2004 and of the profit of the Group for the year then ended; and
• The accounts and the part of the Directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985.
A – Basis of accounts The consolidated accounts have been prepared in accordance with the special provisions relating to insurance companies of section 255A of, and Schedule 9A to, the Companies Act 1985 and with the Statement of Recommended Practice issued by the Association of British Insurers (the “ABI SORP”) issued in November 2003. The accounting policies adopted reflect UK financial reporting standards and statements of standard accounting practice applicable at 31 December 2004, as considered appropriate for an insurance company. The accounts of the Company have been prepared in accordance with section 226 of, and Schedule 4 to, the Companies Act 1985.
B – Premiums Long-term business premiums are recognised as income when receivable, except for investment-linked premiums which are accounted for when the corresponding liabilities are recognised. For single premium business, this is the date from which the policy is effective. For regular premium contracts, receivables are taken at the date when payments are due. Premiums are shown before deduction of commission and before any sales-based taxes or duties. Where policies lapse due to non-receipt of premiums, then all the related premium income accrued but not received from the date they are deemed to have lapsed is debited to premiums.
General business outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the balance sheet date, whether reported or not, together with related claims handling costs and a reduction for the expected value of salvage and other recoveries. Significant delays are experienced in the notification and settlement of certain types of general insurance claims, particularly in respect of liability business, including environmental and pollution exposures, the ultimate cost of which cannot be known with certainty at the balance sheet date. Provisions for certain claims are discounted using rates having regard to the returns generated by the assets supporting the liabilities. Any estimate represents a determination within a range of possible outcomes. Further details of estimating techniques are given in note 39a.
G – Investment income and unrealised investment gains or losses Investment income consists of dividends, interest and rents receivable for the year, together with realised investment gains and losses. Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest income is recognised as it accrues, taking into account the effective yield on the investment. It includes the interest rate differential on forward foreign exchange contracts. Rental income is recognised on an accruals basis. Realised investment gains and losses represent the difference between the net sales proceeds and the cost of acquisition. Unrealised investment gains and losses represent the difference between the carrying value at the year end and the carrying value at the previous year end or purchase value during the year.
investment income, including realised and unrealised gains, is therefore analysed between that calculated using a longer term return and short-term fluctuations from this. Further details of this analysis and the assumptions used are given in note 6b.
H – Long-term business result and fund valuations Transfers from the long-term business technical account to the nontechnical account in respect of shareholders’ profits are determined as a result of annual actuarial valuations, which are based on local practice, subject to transfers to or from the fund for future appropriations.
Some Group companies provide post-retirement healthcare or other benefits to their retirees. The entitlement to these benefits is usually based on the employee remaining in service up to retirement age and the completion of a minimum service period. None of these schemes is material to the Group and contributions are charged to the profit and loss account in the year to which they relate.
J – Tax The shareholder tax charge in the non-technical account is based on the taxable profits for the year, after any adjustments in respect of prior years. Tax, including tax relief for losses if applicable, is allocated over profits on ordinary activities and amounts charged or credited to reserves as appropriate. In the long-term business technical account, the charge is based on the method of assessing tax for long-term funds applicable in the relevant country of operation.
No provision is made for tax that might arise if profits retained by overseas subsidiaries and associated undertakings were remitted to the UK, unless a binding agreement exists for the relevant undertaking to distribute those earnings in future.
O – Participating interests, associated undertakings and joint ventures Participating interests are investments in which the Group has a long-term equity holding of over 20% and not more than 50%. Where the interests are beneficial and significant influence is exercised, such interests are classified as associated undertakings. The Group has also invested in a number of joint ventures, where its share of the underlying assets and liabilities may be greater than 50% but where the terms of the relevant agreements make it clear that control is not exercised. The appropriate proportion of the profit or loss on ordinary activities before tax of joint ventures and associated undertakings is shown separately in the non-technical account, except where these investments are held by the long-term businesses, in which case the profit is included within investment income in the long-term business technical account. The appropriate proportion of the shareholders’ funds of joint ventures and associated undertakings is included in the consolidated balance sheet, with gross equity method disclosures for the former as required by FRS9 “Associates and joint ventures”.
P – Additional value of in-force long-term business The additional value of in-force long-term business arising on acquisitions is recognised in the Group’s balance sheet and is amortised through the profit and loss account over the useful lifetime of the related contracts in the portfolio on a systematic basis. The rate of amortisation is chosen by considering the profile of the additional value of in-force business acquired and the expected depletion in its value. The value of acquired additional in-force long-term business is reviewed annually for any impairment in value and any reductions are charged to the long-term business technical account.
R – Tangible assets Computer equipment, motor vehicles and other tangible assets are capitalised at cost and depreciation is charged to the profit and loss account, within expenses on a straight-line basis, over their estimated useful lives of between three and five years. All tangible assets are tested for impairment where events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment losses are included within the cumulative depreciation amounts disclosed.
Transactions denominated in foreign currencies are accounted for at the exchange rates prevailing at the date of the transactions. Foreign currency assets and liabilities held at the year end are translated at year end rates of exchange. The resulting exchange gains or losses are included in the profit and loss account.
W – Share-based compensation The Group offers share award and option plans over the Company’s ordinary shares for certain employees, including a Save As You Earn plan (SAYE plan), details of which are given in the Directors’ remuneration report on pages 53 to 62. Compensation costs for non-SAYE plans are based on the market price of the shares at the time of grant, less any amounts paid or payable by employees in respect of the awards. These costs are charged to the profit and loss account over the periods during which the share awards or options are earned. Shares purchased by the employee share trusts to fund these awards are shown as a deduction from shareholders’ funds at their original cost.
(12,231) Change in technical provision for linked business, net of reinsurance (Q) (8,317) (8,866)
(21,507) Changes in other technical provisions, net of reinsurance (14,625) (12,110)
(891) Tax attributable to long-term business (J & 13b) (606) (529) (98) Allocated investment return transferred to the non-technical account (G & 6b) (67) (129)
(1,149) Transfers to the fund for future appropriations (T) (781) (4,672)
Long-term business operating profit before amortisation of acquired additional value of 1,743 in-force long-term business and amortisation of goodwill on associated undertakings (3a) 1,185 1,122
Amortisation of goodwill on associated undertakings (21) (included within investment income) (6a & 20c) (14) (13)
Consolidated profit and loss account Technical account – long-term business For the year ended 31 December 2004
14,425 Net premiums written (B) 9,809 9,590 Change in the provision for unearned premiums 14,141 Earned premiums, net of reinsurance 9,616 9,263 1,596 Allocated investment return transferred from the non-technical account (G & 6b) 1,085 1,039 Claims paid
– Changes in other technical provisions, net of reinsurance – 1
Consolidated profit and loss account Technical account – general business For the year ended 31 December 2004
(747) Investment expenses and charges (6a) (508) (437) Allocated investment return transferred to the general business
Other charges: (200) Net loss on the disposal of subsidiary and associated undertakings (16c) (136) (6)
(13) Other levies (9) – (73) Exceptional costs for termination of operations (16d) (50) (19)
(522) Tax on profit on ordinary activities (J & 13a) (355) (367)
Amortisation of goodwill (21) – long-term business associates (6a & 20c) (14) (13)
(141) – long-term business subsidiary undertakings (96) (100) (44) – long-term business associates (30) (35)
(200) Net loss on the disposal of subsidiary and associated undertakings (16c) (136) (6) (73) Exceptional costs for termination of operations (16d) (50) (19)
All profit is from continuing operations. * Included within modified statutory life operating profit, fund management and non-insurance operating profit are £62 million (2003: £29 million), loss of £7 million (2003: loss of £6 million)
† Included within modified statutory life operating profit is £34 million (2003: £36 million) of operating profit from joint ventures.
The accounting policies (identified alphabetically) on pages 64 to 66 and notes (identified numerically) on pages 76 to 111 are an integral part of these accounts. The auditors’ report is on page 63.
1m £m £m 1,554 Profit for the financial year 1,057 949 1,354 Total recognised gains and losses arising in the year 1,085 1,278
Reconciliation of movements in consolidated shareholders’ funds For the year ended 31 December 2004 1m £m £m 9,363 Shareholders’ funds at 1 January 6,554 5,836 1,354 Total recognised gains and losses arising in the year 1,085 1,278 (879) Dividends and appropriations (598) (562) 151 Shares issued in lieu of dividends (34) 103 – 37 Increase in share capital (30d) 25 2 1,456 Issue of Direct Capital Instrument (32) 990 – (13) Issue costs of Direct Capital Instrument (9) –
Investments in joint ventures (O & 19) 3,063 Share of gross assets 2,175 1,416
(2,418) Share of gross liabilities, including loans from Group undertakings (1,717) (1,226)
1,145 Loans to joint ventures 813 679 1,151 Investments in associated undertakings and other participating interests (O & 20) 817 1,043 205,314 Other financial investments (21a) 145,773 131,851 (7,056) Less: Non-recourse funding (21a) (5,010) (3,143)
635 Acquired additional value of in-force long-term business (P & 23) 451 488 1,394 Deposits with ceding undertakings 990 113 72,034 Assets held to cover linked liabilities (24) 51,144 40,665
Debtors 5,245 Debtors arising out of direct insurance operations (25) 3,724 3,427 1,025 Debtors arising out of reinsurance operations 728 806
Other assets 4,395 Cash at bank and in hand 3,121 2,999
Capital and reserves 282 Preference share capital (31a) 200 200 1,394 Direct capital instrument (32) 990 –
2,479 Called up capital 1,760 764 1,570 Share premium account (30d) 1,115 1,096
Shareholders’ funds: 928 Minority interests – equity 659 546 13,019 Total capital and reserves 9,244 7,365 16,996 Total capital, reserves and subordinated debt 12,067 10,179
Technical provisions 6,923 Provision for unearned premiums (B) 4,915 4,666 175,643 Long-term business provision (Q & 38) 124,707 115,979 97 Other technical provisions 69 68 73,234 Technical provision for linked liabilities (Q & 24) 51,996 41,244 1,445 Provisions for other risks and charges (41) 1,026 870 1,289 Deposits received from reinsurers 915 860
Non-long-term business borrowings 73 Amounts due to credit institutions (42c) 52 112 11,486 Other creditors including tax and social security (43) 8,155 7,721 24 Loans from associated undertakings 17 14 1,810 Accruals and deferred income (44) 1,285 1,151 310,145 Total other liabilities 220,203 198,501
Operating activities Net cash inflow from operating activities, excluding exceptional items (47a)* 2,352 1,197 2,296 675 Dividends from joint ventures and associates Dividends from associates (20b) 12 5
Returns on investments and servicing of finance Interest paid on borrowings (81) (120) Interest paid on subordinated debt (167) (75) Preference dividends paid (17) (17) Dividends paid to minorities (44) (44) Net cash outflow from servicing of finance (309) (256)
Capital expenditure Purchases of tangible fixed assets (118) (104) Sales of tangible fixed assets 7 3 Net purchases of tangible fixed assets (111) (101)
Cash flows were invested as follows: Decrease in cash holdings (47d) (161) (173) Net portfolio investment Purchases of investments 24,385 24,217 Sales of investments (21,917) (22,545) Net purchases of investments (47f) 2,468 1,672
Net investment of cash flows 2,232 1,424 * Included within the exceptional items are payments to the Berkshire Hathaway Group for reinsurance purchased in December 2000, to secure protection against any adverse impact of the run-off of London Market claims reserves. The final instalment was paid on 2 January 2003.
Current assets Amounts owed by subsidiary undertakings 4,850 3,734 Other assets 170 100
Total assets less current liabilities 15,958 13,963 Creditors: Amounts falling due after more than one year
Represented by: Capital and reserves Ordinary share capital (30) 570 564 Preference share capital (31a) 200 200 Direct capital instrument (32) 990 –
1 – Exchange rates The euro rates employed in this report are an average rate of 11 = £0.68 (2003: E1 = £0.69) and a closing rate of 11 = £0.71 (2003: E1 = £0.70).
(ii) Underwriting result and operating profit in respect of health business Underwriting result Operating profit £m £m £m £m
Total Group operating profit in respect of fund management, excluding share of associates 50 16
3 – Segmental information continued (iv) Underwriting result and operating profit in respect of general insurance business excluding health business, before exceptional items
Total Group operating profit in respect of general insurance 301 (54) 1,326 911
3 – Segmental information continued (d) Net assets by principal currency £m £m
Sterling 3,352 2,473 Euro 4,540 3,535 Canadian dollar 649 534 United States dollar (93) 231 Other 796 592
New single premiums New regular premiums Total £m £m £m £m £m £m
Life and pensions: Ireland 203 188 66 62 269 250 Italy 1,529 1,399 45 54 1,574 1,453 Netherlands (including Belgium and Luxembourg) 1,131 850 148 139 1,279 989 Poland – life 40 24 15 17 55 41
Total long-term savings (including share of associates) 16,049 13,753 1,175 1,181 17,224 14,934 * The figures for associates comprise the Group’s 49.99% share of our associates RBS Life Investments Limited and RBS Collective Investments Limited.
**The figures for International include the Group’s 26% share of our associate company in India (Aviva Life Insurance Pvt. Limited) and our 50% share of the joint venture in China (Aviva-COFCO Life Insurance Company Limited).
In addition to the amounts included above, Navigator, our Australian funds administration business, recorded sales of £661 million in 2004 (2003: £625 million) including sales through Navigator Asia in Singapore.
Long-term business premiums (note 5a(ii)) 20,861 19,648 20,205 19,035 Sales of investment products (note 4) 1,629 1,141 1,629 1,141 Health business premiums (note 5a(iii)) 995 1,069 994 1,066 General insurance business premiums (note 5a(iv)) 9,558 9,326 8,815 8,524
(ii) Long-term business premium income by geographical origin Premiums before reinsurance Premiums after reinsurance £m £m £m £m
Ireland 480 464 454 442 Italy 1,826 1,681 1,806 1,662 Netherlands (including Belgium and Luxembourg) 2,019 1,758 1,990 1,722 Poland 764 705 763 703 Spain 1,814 1,658 1,795 1,641 Other Europe 775 674 724 616 International 980 1,031 954 1,007
Total Group long-term business premiums, excluding share of associates 20,533 19,373 19,899 18,778 * Included within premium income (after reinsurance) and investment sales of £8,827 million (2003: £8,942 million) are transfers of institutional business into Morley Pooled Pensions of £334 million (2003: £1,247 million) which, since they are institutional in nature, are excluded from the new business sales figures in note 4.
(iii) Health business premium income by geographical origin Premiums before reinsurance Premiums after reinsurance £m £m £m £m
Total general insurance business premiums (excluding health business) 9,558 9,326 8,815 8,524
5 – Premiums written and sales of investment products continued (b) The analysis of general insurance business premiums written before reinsurance is: £m £m
General insurance business premiums (note 5a(iv)) 9,558 9,326 Health business (note 5a(iii)) 995 1,069
Share of result of joint ventures 34 36 – – Share of result of associated undertakings 62 29 – 2 Amortisation of goodwill on associated undertakings (note 20c) (14) (13) (2) (2) Amortisation of acquired additional value of in-force long-term business (note 20b) (21) (24) – –
27 (8) (2) – Income from land and buildings 579 656 28 35 Income from other investments 7,391 6,953 940 931 Realised investment gains/(losses) 1,354 (135) (64) 44
Investment return before unrealised gains 9,078 7,203 394 573 Unrealised investment gains 5,114 7,069 288 143
Investment income of the long-term and non-long-term business includes interest receivable on lending funds to other Group companies. Interest rates on such transactions are on an arm’s length basis. The interest payable by Group companies is included within unallocated interest charges above. These amounts are therefore eliminated from total investment return before tax and hence Group operating profit and Group profit before tax.
6 – Analysis of investment return continued (iii) The longer term investment return is calculated separately for each principal general insurance business unit and certain long-term business operations. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer term rate of investment return. The longer term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated longer term return for other investments is the actual income receivable for the year.
(iv) The principal assumptions underlying the calculation of the longer-term investment return are: Longer term rates of return Longer term rates of return
* Figures represent non-with-profits business only, where a longer term rate of return is used.
Bonuses allocated in anticipation of a bonus declaration, included in claims paid 228 332 Reversionary and similar policyholder bonuses, included in the movement in the long-term business provision 2,162 2,372
12 – Auditors’ remuneration The total remuneration payable by the Group, excluding VAT and any overseas equivalent thereof, to its principal auditor, Ernst & Young LLP, in respect of the audit of these accounts is shown below, together with fees payable in respect of other work.
The auditors’ remuneration in respect of the parent company was £13,000 (2003: £12,000).
(b) Long-term business Tax credited/(charged) in the long-term business technical account comprises: £m £m
Current tax charge at standard UK corporation tax rate of 30% (2003: 30%) (446) (417) Adjustment to tax charge in respect of prior years 87 20 Non-assessable dividends (48) 5 Non-taxable net loss on the sale of subsidiaries and associates (73) (10) Non-taxable amortisation of goodwill (22) (5) Other disallowable expenses (16) (33) Utilisation/(non-utilisation) of current year tax losses 6 (10) Different local basis of tax on overseas profits 87 53 Deferred tax charge arising from movement in unrealised gains and losses 18 20 Other deferred tax movements 38 10 Deferred tax assets not recognised 134 38 Other items (46) (22)
(d) Factors that may affect future tax charges The deferred tax assets, which have not been recognised due to the uncertainty of their recoverability in the foreseeable future, comprise: Long-term business Non-long-term business Total £m £m £m £m £m £m
The deferred tax assets above are principally in respect of corporate entities and would be recoverable in the event that these entities generate taxable profits in the future.
(e) Balance sheet (i) The discounted net (provision)/asset for deferred tax, comprises: Long-term business Non-long-term business Total £m £m £m £m £m £m
Undiscounted net provision for deferred tax (783) (393) (117) (77) (900) (470) Discount 234 59 43 92 277 151
(ii) Movements in the deferred tax balances are analysed as follows: Long-term business Non-long-term business Total £m £m £m £m £m £m
Interim – 9.36 pence (2003: 9.0 pence) paid on 17 November 2004 211 203 Final – 16.00 pence (2003: 15.15 pence) payable on 17 May 2005 364 342
Dividends payable have been calculated on the number of shares in issue at 31 December or 30 June, as appropriate, reduced by the number of shares held in employee trusts where the trustees have waived their right to dividends.
Profit attributable to equity shareholders 1,488 1,034 45.8 1,390 932 41.4 * All operating profit is from continuing operations.
The calculation of basic earnings per share uses a weighted average of 2,256 million (2003: 2,251 million) ordinary shares in issue, after deducting shares owned by the employee share trusts as required by FRS14 “Earnings per share”. The actual number of shares in issue at 31 December 2004 was 2,282 million (2003: 2,257 million).
HPI Group Holdings Limited Great Britain 100% August Antarius France 50% October
On 16 August 2004, the Group’s UK general insurance subsidiary, Norwich Union Insurance (NUI), acquired the entire share capital of HPI Holdings (HPI). Total cash consideration including purchase costs was £122 million, comprising £118 million cash, £2 million loan notes and £2 million of acquisition costs. The net assets acquired were £8 million, giving rise to goodwill of £114 million.
On 1 October 2004, as part of its bancassurance partnership with Crédit du Nord, the Group acquired 50% and one share of the issued share capital of Antarius, the life insurance company for Crédit du Nord clients, for a cash consideration of £62 million. The Group’s share of Antarius embedded value and net assets acquired was £51 million, giving rise to a provisional goodwill of £11 million. The acquisition is still subject to the completion of the accounts process during the next 12 months, upon which goodwill estimates will be finalised.
(b) Goodwill on acquisitions The identifiable assets and liabilities of these acquisitions at the relevant date of acquisition were as set out below: (i) Acquisition of HPI Group Holdings Limited Book and fair value £m
In addition to the goodwill arising on the above acquisitions, the Group also made a number of smaller acquisitions giving rise to an additional goodwill amount of £19 million. Total goodwill arising in the year was £144 million (note 17).
(c) Disposals The net loss on the disposal of subsidiary and associated undertakings comprises: £m £m
Other business UK (see (ii) below) (141) – France (note 20b(i)) 5 – Other small operations – (6)
Under the terms of the agreement, MSI will acquire all of Aviva’s general insurance businesses in Asia. These comprise the general insurance business of Aviva Limited and the general insurance assets of Aviva Asia Pte Limited in Singapore; Aviva Insurance Berhad in Malaysia (including its branch in Brunei); Aviva Insurance (Thai) Company Limited in Thailand; PT Aviva Insurance in Indonesia; Dah Sing General Insurance Company Limited in Hong Kong; and Aviva’s branch operations in Hong Kong, the Philippines, Marianas, Macau and Taiwan. The transaction will be achieved through share purchase of Aviva’s interests in joint venture operations, business purchase and asset purchase in Singapore, and transfer of Aviva’s general insurance branch operations in Hong Kong, the Philippines, Marianas, Macau and Taiwan.
16 – Subsidiary undertakings continued The transaction was expected to complete in two phases. Phase I completed on 28 February 2005 and included all businesses above except for Malaysia, Indonesia, Macau, Marianas, Taiwan, Dah Sing and the Philippines, which will be included as part of the completion of Phase II, expected in the second half of 2005.
Subject to the receipt of regulatory approval, the total proceeds for the sale of these businesses were fixed by reference to the net assets of the businesses as at 31 December 2003 and are not adjusted to reflect the results in the period from 1 January 2004 to completion. The Group does not bear any continuing operating risk from 31 December 2003.
The operating profit before tax, amortisation of goodwill and exceptional items for the Asian general insurance businesses was £20 million, comprising £15 million underwriting profits and £5 million of long-term investment return.
(d) Exceptional costs for termination of operations In February 2004, the Group announced the closure of its UK national broker subsidiary, Hill House Hammond (HHH) by the end of 2004 together with the sale of its commercial business. The associated pre-tax costs of the closure of HHH are £50 million and these exceptional costs relate to the redundancy costs and closure provisions.
Shares in subsidiary undertakings are stated at current value, which for this purpose is European Embedded Value for life operations or net asset value for other entities, computed in accordance with the Company’s accounting policies. The resulting gain over book value of £7,601 million (2003: restated £7,396 million) has been credited to the Company’s revaluation reserve (see note 35). The directors are satisfied that the aggregate value of all such investments is not less than the aggregate amount at which they are stated in the balance sheet.
17 – Goodwill The carrying value of goodwill on subsidiary undertakings relates to investments held by the non-long-term business operations and comprises the following: Positive Negative Total Total goodwill goodwill 2004 2003 £m £m £m £m
The cost of land and buildings at 31 December 2004 was £6,258 million (2003: £7,452 million). The carrying value of land and buildings occupied by the Group for its own activities was £282 million (2003: £405 million).
The valuation of properties has been undertaken by qualified external valuers or by local qualified staff of the Group in overseas operations. All properties are valued at open market value.
19 – Investments in joint ventures (a) As part of their investment strategy, the UK long-term business policyholder funds have invested in a number of property limited partnerships (PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), in which the UK long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a group subsidiary.
Most of the PLPs have raised external debt, secured on their respective property portfolios. The lenders are only entitled to obtain payment, of both interest and principal, to the extent that there are sufficient resources in the respective PLPs. The lenders have no recourse whatsoever to the policyholder or shareholders’ funds of any company in the Aviva Group.
Accounting for the PUTs and PLPs as subsidiary undertakings, joint ventures or other financial investments depends on the shareholdings in the GPs and the terms of each partnership agreement. Where the Group exerts control over a PLP, it has been treated as a subsidiary and its results, assets and liabilities have been consolidated. Where the partnership is managed by a contractual agreement such that no one party exerts control, notwithstanding that the Group’s partnership share in the PLP (including its indirect stake via the relevant PUT and GP) may be greater than 50%, such PUTs and PLPs have been accounted for as joint ventures, and are covered in this note. Here, the Group’s share of the respective PLPs’ gross assets and gross liabilities are shown on the face of the consolidated balance sheet, in accordance with the requirements of FRS9 “Associates and joint ventures”. Where the Group holds minority stakes in PLPs, with no disproportionate influence, the relevant investments are included in other financial investments at their market value.
(b) Movements in the Group’s investments in joint ventures comprise: £m £m
Share of result for the year after tax 34 36 Unrealised investment gains after tax 218 52 Dividends received (33) (33)
(ii) Other The Group also has a 50% holding in AVIVA-COFCO Life Insurance Company Limited, a life assurance company incorporated and operating in China. These shares are held by the Company, with a cost of £22 million (2003: £22 million) and share of net assets of £14 million (2003: £18 million).
20 – Investments in associated undertakings and other participating interests (a) Investments in participating interests included in the consolidated balance sheet comprise: Long-term business Non-long-term business Total £m £m £m £m £m £m
Investments in associated undertakings (note 20b) 639 725 138 249 777 974
20 – Investments in associated undertakings and other participating interests continued (b) Associated undertakings (i) Movements in the Group’s investments in associated undertakings comprise: Long-term Non-long-term Total business business 2004 £m £m £m
Net assets acquired 36 47 83 Amortisation of goodwill (note 6a) (14) (2) (16) Amortisation of acquired additional value of in-force long-term business (note 6a) (21) – (21)
The amortisation charges for the year in respect of both goodwill and acquired additional value of in-force long-term business (AVIF) appear under the heading “Investment income” in the long-term business technical account on page 67. The amortisation charge for AVIF is grossed up for attributable tax in the reconciliations on pages 67 and 70.
In June 2004, our French operations, Aviva France, sold its 31.4% holding in Société Foncière Lyonnaise (SFL) a French listed property company for a427 million (£285 million), and after sale expenses, recorded a gain of £5 million. These shares were owned by both our French life and non-life operations. Cumulative investment gains in the life company of £22 million have been transferred to a French GAAP statutory provision forming part of the fund for future appropriations under UK GAAP, and will be attributed to policyholders and shareholders as bonuses are declared to policyholders within the next eight years.
All investments in associated undertakings are held by subsidiary undertakings and are included in the accounts using year ended 31 December 2004 figures. None of the associated undertakings are listed.
(c) The carrying value of goodwill on associated undertakings comprises the following: Long-term business Non-long-term business Total £m £m £m £m £m £m
Cost: Amortisation: Charge in the year (note 6a) 14 13 2 2 16 15
Goodwill is being amortised on a straight-line basis over its useful economic life of 20 years, which has been determined to match the period over which the value of the underlying businesses will exceed the value of their identifiable net assets.
Long-term Non-long-term Total Long-term Non-long-term Total business business 2004 business business 2004 £m £m £m £m £m £m
Shares and other variable yield securities and units in unit trusts 30,080 3,149 33,229 25,608 2,855 28,463
Debt securities and other fixed income securities: Participation in investment pools 57 – 57 57 – 57 Loans secured by mortgages: Less: Non-recourse funding (note 22) (3,573) (1,437) (5,010) (3,573) (1,437) (5,010)
Debt securities and other fixed income securities: Participation in investment pools 7 – 7 7 – 7 Loans secured by mortgages: Less: Non-recourse funding (note 22) (3,143) – (3,143) (3,143) – (3,143)
(c) The long-term debt securities and other fixed income securities, which are shown at amortised cost, are analysed below: £m £m
The Royal Bank of Scotland Group 977 808 49 46 1,026 854 1.8% 1.8% Scotland
All of the above are banking companies, except Münchener Rückversicherungs-Gesellschaft which is a reinsurance company.
In 1998 and 2003, the Group purchased several swap options from European banks, to cover its possible future exposure to interest rates related to guaranteed annuities sold by subsidiaries in the UK. At 31 December 2004, the exposure hedged by these options was £2,985 million (2003: £3,147 million) and the contracts had a fair market value of £177 million (2003: £190 million). These options have varying expiry dates up to 2028.
(g) The Group has entered into stocklending arrangements in the UK and overseas during the year in accordance with established market conventions. In the United Kingdom, investments are lent to locally-domiciled counterparties and governed by agreements written under English law. Other investments are specifically deposited under local laws in various countries overseas as security to holders of policies issued there.
Included within other financial investments are £158 million (2003: £164 million) of debt securities and other fixed income securities which have been sold under stock repurchase arrangements. The obligations arising under these arrangements are included in other creditors (see note 43).
22 – Securitised mortgages and related assets Other financial investments include loans secured by mortgages, subject to non-recourse finance arrangements, in a UK long-term business subsidiary and in two Dutch subsidiaries. Details of the relevant transactions are as follows: (a) In a UK long-term business subsidiary, Norwich Union Equity Release Limited (NUER), the beneficial interest in four portfolios of equity release mortgages has been transferred to four special purpose securitisation companies, Equity Release Funding (No. 1) plc (ERF1), Equity Release Funding (No. 2) plc (ERF2), Equity Release Funding (No.3) plc (ERF3), and ERF Trustee (No.4) Limited (ERF4T) held on trust for the benefit of Equity Release Funding (No.4) plc (ERF4) (together “the ERF companies”), in return for initial consideration and, at later dates, deferred consideration. The deferred consideration represents receipts accrued within the ERF companies after meeting all their obligations to the noteholders, loan providers and other third parties in the priority of payments. No gain or loss was recognised on the transfers to ERF1 and ERF3, and gains of £5 million and £9 million were recognised on the transfers to ERF2 and ERF4T respectively. The purchases of the mortgages were funded by the issue of fixed rate, floating rate and index linked notes by the ERF companies.
At 31 December 2004, DLL and AMS held £48 million (2003: £23 million) of fixed rate notes in the securitisation companies, which are repayable at various dates between 2037 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 £49 million (2003: £24 million).
(c) In all of the above transactions, the Company and its subsidiaries are not obliged to support any losses that may be suffered by the noteholders and do not intend to provide such support. Additionally, the notes were issued on the basis that noteholders are only entitled to obtain payment, of both principal and interest, to the extent that the available resources of the respective special purpose securitisation companies, including funds due from customers in respect of the securitised loans, are sufficient and that noteholders have no recourse whatsoever to other companies in the Aviva Group.
Total mortgage assets and non-recourse funding in the above quasi-subsidiaries at 31 December 2004 were £5,021 million (2003: £3,149 million) and £5,010 million (2003: £3,143 million) respectively. As permitted by FRS5 “Reporting the substance of transactions”, these balances are accounted for in the consolidated Group balance sheet using a linked presentation. Interest receivable and payable on the above items in 2004 totalled £150 million (2003: £195 million) and £111 million (2003: £166 million) respectively. Apart from the administration fees payable to other Group undertakings, described above, there are no other material profit and loss items in these companies.
The majority of the securitisations relate to long-term business. Cash inflows from non-recourse funding on non-long-term business were £1,437 million in 2004 (2003: £nil).
The additional inforce long-term business acquired at £30 million include £18 million for Antarius and the remainder is in respect of smaller acquisitions.
The amortisation charge for the year appears under the heading “Other technical charges” in the long-term business technical account on page 67. This is grossed up for attributable tax in the reconciliations on pages 67 and 70.
(b) The cost of assets held to cover linked liabilities is £49,285 million (2003: £37,150 million).
Amounts owed by policyholders 2,035 1,990 Amounts owed by intermediaries 1,689 1,437
Banking assets (note 29a) 3,565 4,106 Deferred tax asset (note 13e(iii)) 63 215 Other 1,871 2,088 27 – Tangible assets Motor Computer vehicles equipment Other Total £m £m £m £m
Net book value at 31 December 2004 10 124 149 283
The Group has no material finance leases, or leases to third parties under operating leases, for property and equipment, other than as detailed in note 18.
Costs in respect of long-term business 1,628 1,862 Costs in respect of general business 1,041 980 29 – Banking activities (a) Banking assets (see note 26), excluding intra-group balances, comprise: £m £m
Deposits by banks 272 130 Bank customer accounts 2,600 2,790 Other liabilities 298 965
30 – Ordinary share capital (a) The authorised share capital of the Company at 31 December 2004 was: £m £m 3,000,000,000 (2003: 3,000,000,000) ordinary shares of 25 pence each 750 750
Hibernian Savings Related Option price Number Normally Option price Number Normally Share Option Scheme (in euros) c of shares exercisable c of shares exercisable
30 – Ordinary share capital continued CGU plc Option price Number Normally Option price Number Normally Deferred Bonus Plan p of shares exercisable p of shares exercisable
Other than those grants marked with an asterisk, the exercise of options outstanding under the Aviva Executive Share Option Scheme and Aviva Executive Share Option Scheme (Delta Lloyd) are subject to the attainment of performance conditions. Options which are not exercised lapse.
Aviva Long Term Incentive Plan of shares Vesting period of shares Vesting period
Number Number Aviva Restricted Share Awards of shares Vesting date of shares Vesting date
A total of 20,115,947 shares of 25 pence each with an aggregate nominal value of £5 million were issued on 17 November 2004 under the Aviva Scrip Dividend Scheme in lieu of interim dividend. This issue of shares in lieu of cash dividends is considered as a bonus issue under the terms of the Companies Act 1985 and the nominal value of the shares is charged to the share premium account.
31 – Preference share capital (a) The preference share capital of the Company at 31 December 2004 was: £m £m
Notional amount Issue date £m £m 5.9021% £500 million direct capital instrument 25 November 2004 500 – 4.7291% e700 million direct capital instrument 25 November 2004 490 –
34 – Group reserves continued The shares issued in lieu of dividends, an amount of £103 million, is in respect of the transfer to retained profits from the ordinary dividend account, arising from the treatment of shares issued in lieu of the 2004 interim dividend as explained in note 30d.
As explained in accounting policy K on page 65, goodwill arising on acquisitions since 1 January 1998 is carried on the balance sheet and amortised over its useful economic life. The cumulative amounts of positive and negative goodwill charged or credited to the consolidated profit and loss account, attributable to subsidiary undertakings acquired from 1 January 1968 to 31 December 1997 and not subsequently sold, are £787 million and £15 million respectively. Similar information relating to subsidiary undertakings acquired before 1968 is not readily available.
35 – Company reserves Revaluation Profit and reserve Other reserves loss account Total £m £m £m £m
As part of the Group restructuring in 2000, following the merger between CGU and NU, the Company sold certain subsidiaries to other companies within the Group, generating a profit of £5,735 million over their cost to the Company. This profit has been disclosed as being non-distributable in the Company’s accounts since then. After consideration of ICAEW guidance note 7/03 on the determination of realised profits and losses, the directors believe that this amount should more properly have remained within the Company’s revaluation reserve and have authorised the above reserve transfer.
A description of each of the above subordinated notes is set out in the table below: Callable at par at option of the In the event the Company does not call the notes, Notional amount Issue date Redemption date Company from the coupon will reset at each applicable reset date to £700 million 14 Nov 2001 14 Nov 2036 16 Nov 2026 5 year Benchmark Gilt + 2.85% 1800 million 14 Nov 2001 14 Nov 2021 14 Nov 2011 3 month Euribor + 2.12% 1650 million 29 Sep 2003 2 Oct 2023 2 Oct 2013 3 month Euribor + 2.08% 1500 million 29 Sep 2003 Undated 29 Sep 2015 3 month Euribor + 2.35% £800 million 29 Sep 2003 Undated 29 Sep 2022 5 year Benchmark Gilt + 2.40%
37 – Long-term business (a) The Group underwrites long-term business in a number of countries as follows: (i) In the UK mainly in
– “with-profit” funds of CGNU Life Assurance, Commercial Union Life Assurance, Norwich Union Life & Pensions and the Provident Mutual fund, where the with-profits policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance; – “non-profit” funds of Norwich Union Annuity, Norwich Union Life & Pensions and Norwich Union Linked Life Assurance, where shareholders are entitled to 100% of the distributed profits. Shareholder profits on unitised with-profit business written by Norwich Union Life & Pensions and on stakeholder unitised with-profit business are derived from management fees and policy charges, and emerge in the non-profit funds.
38 – Long-term business provision (a) Methodology There are two main methods of actuarial valuation of liabilities arising under long-term insurance contracts – the net premium method and the gross premium method – both of which involve the discounting of projected premiums and claims.
Bonuses paid during the year are reflected in claims paid, whilst those allocated as part of the bonus declaration are included in the movements in the long-term business provision, as detailed in note 7.
The principal assumptions in the UK, France and the Netherlands are: (i) UK The gross premium method is used for all contracts apart from conventional whole life and endowment assurances in the Norwich Union Life & Pensions and Norwich Union Linked Life Assurance life and annuity funds, where a net premium method is used. All contracts are assumed to continue for the contractual term and, for consistency with the discount rates, no future regular bonuses are assumed to be added to with-profit business.
Valuation discount rate assumptions are set with regard to yields on the supporting assets and the general level of long-term interest rates as measured by gilt yields. An explicit allowance for risk is included by restricting the yields for equities and properties with reference to a margin over long-term interest rates or by making an explicit deduction from the yields on corporate bonds, mortgages and deposits, based on historical default experience of each asset class. An allowance for investment expenses and a further margin for risk are then deducted for all asset classes.
The changes in the valuation discount rates since 2003 reflect the changes in the yields on the supporting assets. Valuation discount rates
Assurances Life conventional with-profit 3.4% to 3.5% 3.3% to 3.8% Life conventional non-profit 3.2% to 4.0% 3.3% to 4.0% Life unitised with-profit 3.7% 3.7% to 4.0% Pensions conventional with-profit 4.3% 4.2% to 4.8% Pensions conventional non-profit 4.0% to 4.5% 4.2% to 5.8% Pensions unitised with-profit 4.3% 4.3% to 4.8%
Mortality assumptions are set with regard to recent company experience and general industry trends. Since 2003, there have been some changes to the adjustments to the base tables for annuities in payment in order to reflect more closely the actual experience of this business.
Assurances With-profit AM92/AF92 or A67/70 adjusted Non-profit AM80/AF80 or AM92/AF92 or TM92/TF92 adjusted for smoker status
Pensions business after vesting PMA80/PFA80 or PMA92/PFA92 adjusted plus allowance for future mortality improvement*
(iii) Netherlands Provisions are generally calculated using the net premium valuation method, in accordance with local regulation, where the valuation assumptions generally depend on the date of issue of the contract, with additional provisions where experience indicates this is required. There have been no changes in the assumptions since 2003.
38 – Long-term business provision continued Valuation discount rate Mortality tables used
Annuities in deferment and in payment 3.0% or 4.0% GBM/V 76-80, 80-85, 85-90, 90-95, Coll 1993 and DIL 98, plus further allowance for future mortality improvement
(iv) In all countries, local generally accepted interest rates and published standard mortality tables are used for different categories of business as appropriate. The tables are based on relevant experience and show mortality rates, by age, for specific groupings of people.
Netherlands Permanent health and injury 3.27% 3.25% 10 years 11 years
Net of reinsurers’ share, the outstanding claims provisions before discounting were £11,359 million (2003: £10,430 million). The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims and related reinsurance recoveries.
Foreign exchange rate movements on opening provisions – 6 2 8
(b) Debenture loans Long-term business Other £m £m £m £m 9.5% guaranteed bonds 2016 – – 171 170 8.625% guaranteed bonds 2005 – – 168 168 2.5% perpetual subordinated loan notes – – 122 121 Other loans 33 16 11 17
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 effectively been converted into euro liabilities through the use of financial instruments in a subsidiary undertaking.
(c) Amounts due to credit institutions Long-term business Non long-term business Other £m £m £m £m £m £m
As explained in note 19a, the UK long-term business policyholder funds have invested in a number of property limited partnerships (PLPs). The PLPs have raised external debt, secured on their respective property portfolios, and the lenders are only entitled to obtain payment of both interest and principal to the extent there are sufficient resources in the respective PLPs. The lenders have no recourse whatsoever to the policyholder or shareholders’ funds of any companies in the Aviva Group. The figures in the long-term business columns above include £57 million (2003: £126 million) relating to those PLPs which have been consolidated as subsidiaries.
The interest charge for the year on the above borrowings was: 34 47
(f) After taking into account the various interest rate and currency swaps entered into by the Group, the currency and interest rate exposure of the non-long-term business borrowings of the Group was: Floating rate borrowings Fixed rate borrowings Total £m £m £m £m £m £m
United States dollar 285 334 – – 285 334 Canadian dollar – 3 4 5 4 8
The floating rate borrowings comprise commercial paper and bank borrowings bearing interest based on local inter-bank offer rates, which are fixed in advance for the period of the borrowings. Excluding the subordinated perpetual loan notes, the fixed rate borrowings have a weighted average interest rate of 7.92% (2003: 7.93%) for a weighted average term of six years (2003: seven years).
Expiring within one year 650 1,605 Expiring beyond one year 1,600 1,357
(h) The difference between the carrying value and the fair value of the non-long-term business fixed rate borrowings and the related swaps is as follows: Carrying value Fair value Carrying value Fair value £m £m £m £m
(i) Non-equity minority interests principally relate to the General Accident preference shares, which are included at their par value of £250 million together with an £8 million accrual for dividends. These are listed on the London Stock Exchange and their fair value at 31 December 2004 was £329 million (2003: £292 million), based on their quoted market price.
Banking liabilities (note 29b) 3,170 3,885 Proposed final ordinary dividend (note 14) 364 342 UK and overseas tax 931 742 Bank overdrafts 651 214 Other 3,039 2,538
Bank overdrafts arise substantially from unpresented cheques and amount to £133 million (2003: £77 million) in long-term business operations and £518 million (2003: £137 million) in general business and other operations. The “other” totals include the obligation to repay £158 million (2003: £164 million) received under stock repurchase arrangements entered into in the UK and the Netherlands.
Deferred reinsurance commissions 74 48 Other accruals and deferred income 1,211 1,103
(c) In the UK, the Group operates one main pension scheme, the Aviva Staff Pension Scheme. New entrants join the defined contribution section of the scheme, as the defined benefit section is generally closed to most new employees.
The scheme was valued as at an effective date of 1 April 2002, on a market value basis using the Projected Unit Method. The main financial assumptions used were a pension increase rate of 2.5%, a salary increase rate of 4.25% and an interest rate of 6.4%. The scheme had an asset value of £4,639 million, projected accrued liabilities of £4,010 million and a funding level of 116%. The employer cost of future service benefits in respect of defined benefit members for 2004 was 19.7% of pensionable salaries which, after allowing for interest on the prepayment held in the balance sheet and the additional surplus since, led to a net pension cost for the year to 31 December 2004 of 7.2% of pensionable salaries. The pension cost was then increased to allow for the amounts credited to members’ accounts under the defined contribution section of the scheme.
The employing companies’ contributions to the defined benefit section of the scheme throughout 2004 were 25% of employees’ pensionable salaries, together with the cost of redundancies during the year and an additional payment of £50 million. The contribution rates for members of the defined contribution section were 8% of pensionable salaries, together with further contributions of up to 4% where members contribute, and the cost of the death-in-service benefits. The employers’ contribution rate for 2005 for members of the defined benefit section has been agreed as 29% of pensionable salaries together with an additional payment of £51.5 million, while the contribution rates for members of the defined contribution section are the same as for 2004. As the defined benefit section of the scheme is generally closed to new entrants and the contribution rate is determined using the project unit method, it is expected that the percentage cost of providing future service benefits under this section will gradually increase as the membership ages.
45 – Pension and other post-retirement benefit costs continued (d) The pension costs of the Group’s defined benefit and defined contribution schemes were: £m £m
Date of most recent actuarial valuation 1.4.04 1.4.03 31.12.03 31.12.02 31.12.03 31.12.02 1.1.04 Various
The main financial assumptions used to calculate scheme liabilities under FRS17 are: * Age-related scale increases plus 1.5%
The overall rates of return are based on the expected returns within each asset category and on current asset allocations. The expected returns are developed in conjunction with external advisors and take into account both current market expectations of future returns, where available, and historical returns. These rates have been developed specifically for reporting under FRS17 and therefore differ from the rates used in the European embedded value (EEV) and Longer Term Investment Return (LTIR) calculations elsewhere in this report.
(iii) The pension expense for these schemes on an FRS17 basis comprises: Total £m £m
Total charge that would be made to profit on ordinary activities before tax in respect of these schemes under FRS17 128 131
Actuarial loss that would be recognised in the statement of total recognised gains and losses under FRS17 130 219
45 – Pension and other post-retirement benefit costs continued (iv) The following disclosures of experience gains and losses will be built up over time to give a five year history: Difference between the expected and actual return on scheme assets
Percentage of the scheme assets at the end of the year 3.5% 8.4% 23.4% Experience (gains)/losses on scheme liabilities
Total amount that would be recognised in the statement of total recognised gains and losses under FRS17 Amount of loss 130 219 1,032 Percentage of the present value of scheme liabilities 1.8% 3.3% 18.7%
Total market value of assets 5,006 4,551 755 649 168 163 372 333 6,301 5,696 Present value of scheme liabilities (5,734) (5,264) (838) (749) (202) (180) (405) (341) (7,179) (6,534)
Deficit in the schemes (728) (713) (83) (100) (34) (17) (33) (8) (878) (838) Related deferred tax asset 218 214 25 34 12 6 4 1 259 255
Deficits in the schemes at 1 January (838) (654) Contributions paid into the schemes 220 172 Charge to net operating expenses (157) (157) Credit to investment income 29 26 Actuarial losses (130) (219) Exchange rate movements on foreign plans (2) (6)
(vii) The effect on the Group’s net assets and retained profits at 31 December 2004 of substituting the FRS17 figures for the corresponding SSAP24 balance sheet entries would be as follows: Net assets Profit and loss account reserve £m £m £m £m
Totals included in the Group accounts 9,244 7,365 2,682 1,932 Less: pension asset on SSAP24 basis (279) (251) (279) (251)
46 – Assets under management The total Group assets under management are: £m £m
Total assets included in the balance sheet 232,270 208,680 Additional value of internally-generated in-force long-term business 4,875 4,340 Third party funds under management
Securitised mortgages (gross of non-recourse funding) 5,010 3,143 Unit trusts, Oeics, Peps and Isas 5,450 4,460 Segregated funds 24,899 19,355
Total assets under management 272,504 239,978 47 – Cash flow statement The cash flow statement reflects long-term business activities only to the extent that cash is transferred between long-term and non-long-term operations. In the following analyses, long-term business assets and liabilities shown in the consolidated balance sheet have therefore been excluded. The 2003 comparatives reflect the reclassification of the equity release business in the UK as described in note 2b.
Profit on ordinary activities before tax, excluding the results of joint ventures and associated undertakings 1,475 1,385 Add back: Exceptional costs for termination of operations 50 19 Financial Services Compensation Scheme and other levies 49 –
(b) Analysis of cash flows in respect of the acquisition and disposal of subsidiary and associated undertakings is: £m £m
47 – Cash flow statement continued (c) Changes in financing during the year were: Capital Borrowings £m £m £m £m
Issue of ordinary share capital (note 30d) 3 2 – – Issue of Direct Capital Instrument (note 32) 990 – – – New borrowings drawn down, net of expenses – – 452 2,903 Repayment of borrowings – – (764) (1,702)
Shares issued for non-cash consideration 22 – – – Foreign exchange rate movements – – 21 64 Borrowings acquired/loans repaid for non-cash consideration – – – 35 Amortisation of discounts and other non-cash items – – 3 2
Balance at 31 December Capital 4,871 3,856 External borrowings (note 42 and note 36) 4,246 4,534
Capital is represented by: Ordinary share capital (note 30) 570 564 Preference share capital (note 31a) 200 200 Direct Capital Instrument (note 32) 990 – Share premium account (note 30d) 1,115 1,096 Merger reserve in respect of share capital 1,996 1,996
Increase/(decrease) in cash holdings (161) (173) Foreign exchange rate movements 4 29
Changes in cash (157) (144) Balance at 1 January 1,138 1,282
Cash at bank and in hand: General business and other activities 1,499 1,233 266
Net non-long-term business cash included in the consolidated balance sheet 981 1,138 (157)
Net investments acquired with subsidiary undertakings – 289 Changes in market values and foreign exchange rate movements 322 915
Net movement in opening and closing non-long-term portfolio investments 2,790 2,876 Balance at 1 January Total non-long-term portfolio investments 16,271 13,395
(g) Non-long-term portfolio investments included in the consolidated balance sheet comprised: 2004 2003 Changes in year £m £m £m
Land and buildings (note 18) 637 637 – Other participating interests (note 20a) 40 30 10 Other financial investments (note 21a) 17,157 14,422 2,735 Deposits with ceding undertakings 29 41 (12) Banking investments (note 29a) 1,198 1,141 57 48 – Contingent liabilities and other risk factors (a) Uncertainty over claims provisions Note 38 gives details of the assumptions used in determining the long-term business provision which are designed to allow for prudence and the appropriate emergence of surpluses to pay future bonuses. Note 39 gives details of the estimation techniques used in determining the general business outstanding claims provision. Both are estimated to give a result within the normal range of outcomes. To the extent that the ultimate cost falls outside this range, for example where experience is worse than that assumed for long-term business, or assumptions over general business claims inflation may alter in the future, there is uncertainty in respect of this liability.
(b) Asbestos, pollution and social environmental hazards In the course of conducting insurance business, various companies within the Group receive general insurance liability claims, and become involved in actual or threatened litigation arising therefrom, including claims in respect of pollution and other environmental hazards. Amongst these are claims in respect of asbestos production and handling in various jurisdictions, including the UK, United States, Australia and Canada. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents which they cover and the uncertainties associated with establishing liability and the availability of reinsurance, the ultimate cost cannot be determined with certainty. However, the Group’s exposure to such liabilities is not significant and, on the basis of current information and having regard to the level of provisions made for general insurance claims, the directors consider that any costs arising are not likely to have a material impact on the financial position of the Group.
(f) Split capital investment trusts The Group’s fund management subsidiary, Morley Fund Management Limited (MFML), acts as investment advisor 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. These investigations have now concluded.
MFML is party to an agreement reached between the FSA and a number of firms which were subject to the investigations (the Firms). The FSA and the Firms have agreed a package of £194 million for investors. The Firms have agreed to contribute, without admissions, to a fund which will be available for distribution to eligible individuals who invested in zero dividend preference shares (Zeros) and in a number of specified unit trusts and other financial products that invested in Zeros. MFML has contributed to the fund, and the directors consider that no further material contingent liability exists from these investigations.
49 – Capital commitments In carrying on the business of investment, the Group has entered into future commitments, including property development, after 31 December 2004. These amounts are not reflected in the consolidated Group balance sheet on pages 72 and 73. The Group has in hand a number of property developments which, under contracts already signed, will require expenditure of £197 million (2003: £181 million) for long-term business operations.
50 – Related party transactions There are no related party transactions requiring disclosure in accordance with FRS8 “Related Party Disclosures”.
Operating profit including EEV profit/life achieved profit – continuing operations 2,344 1,906 1,720 1,935 1,325
Discontinued operations – – 78 48 (472) Amortisation of goodwill and acquired additional value of in-force long-term business (246) (238) (274) (151) (121) Financial Services Compensation Scheme levy and other levies (49) – – (31) – Integration costs – – – (59) (425)
Operating profit/(loss) before tax 1,566 1,252 1,022 1,271 (72) Short-term fluctuation in investment return 131 212 (1,243) (988) 258 Change in the equalisation provision (23) (49) (57) (56) (27) Net profit/(loss) on the disposal of subsidiary and associated undertakings (136) (6) (4) 287 (1,058) Exceptional costs for termination of operations (50) (19) – – – Loss on withdrawal from London Market operations – – – – (448) Merger transaction costs – – – – (59)
Profit/(loss) on ordinary activities before tax 1,488 1,390 (282) 514 (1,406) Tax (355) (367) (206) (198) (255) Minority interests (76) (74) (46) (57) (52) Dividends (598) (562) (536) (874) (872)
Consolidated shareholders’ funds Equity shareholders’ funds 7,130 6,354 5,636 6,274 7,078 Non-equity shareholders’ funds 1,190 200 200 200 200
Shareholders’ funds on an EEV basis 12,937 10,752 9,304 11,742 13,277
(c) The profit and loss account and balance sheet figures have been restated to reflect the following changes in accounting policy and presentational changes.
(iv) Equity shareholders’ funds for 2000, 2001 and 2002 have been restated for the changes in accounting policies in respect of the internally-generated additional value of in-force long-term business no longer recognised and the treatment of shares held by employee trusts as a deduction from shareholders’ funds.
(d) The proportion of the results of the Group’s UK and French asset management operation, the results of Norwich Union Equity Release and the proportion of the results of Norwich Union Life Services operations that arise from the provision of fund management and other services to the life business have been included within life assurance operating profit on an EEV basis but are included within fund management and non-insurance on a MSSB basis.
In January 2004 The Committee of European Securities Regulators issued guidance regarding the transition to IFRS which encourages companies to provide markets with appropriate and useful information during the transition phase from local accounting standards to IFRS. Aviva believes that it is important to remove some of the uncertainty regarding IFRS and in line with the recommendations in the guidance has chosen to publish early its consolidated summarised balance sheet prepared in accordance with IFRS at the date of transition, namely 1 January 2004, together with a reconciliation of shareholders’ equity at this date. The Group’s preparations for reporting under IFRS are well advanced, however Aviva is not yet required to publish full restated 2004 comparatives. This information will be provided as part of the 2005 interim reporting.
Basis of preparation The Group’s preliminary consolidated balance sheet at 1 January 2004 (“the restated IFRS preliminary opening balance sheet”) has been prepared in accordance with IFRS issued by the IASB and endorsed by the European Commission effective for 2005 year ends. In addition the Group plans to adopt early the recently issued Amendment to IAS19 Employee Benefits (2004). It is assumed that the amendment will be endorsed by the European Commission so as to be available for adoption in 2005. The IFRS themselves are subject to possible amendment by interpretative guidance from the IASB or other external bodies and are therefore subject to change prior to publication of the Group’s first IFRS results in August 2005.
In October 2004 the European Commission voted to partially adopt International Accounting Standard 39, Financial Instruments: Recognition and Measurement (IAS39). In summary this “carve-out version” of IAS39 removes the use of the fair value option for financial liabilities and relaxes the rules for hedge accounting. It is Aviva’s intention to comply as far as possible with the full version of IAS39 issued by the IASB. Recent guidance issued by the UK’s Accounting Standards Board, clarifies that UK companies are able to apply the hedge accounting provisions within IAS39 in full, and fair value those liabilities that were permitted to be held at current value under UK Company Law. This would include liabilities arising from unit linked contracts. Aviva has applied the guidance in this case.
Within the restated IFRS preliminary opening balance sheet, those assets held to cover the Group’s linked liabilities are no longer disclosed in a single line but have been reported in the various asset classifications. The method of presentation of these assets is currently being debated by the industry and so is subject to change, but in any event we will provide in our full financial statements additional disclosure so that the amounts included in individual asset lines can be separately identified.
A summary of the IFRS accounting policies adopted by the Group in preparing the restated preliminary IFRS opening balance sheet have been included on pages 121 to 126.