Ex-dividend date (ordinary shares) 26 March Record date (ordinary shares) 28 March First dividend payment for 83⁄8% cumulative irredeemable preference shares 1 April Announcement of first quarter long-term savings new business figures 24 April Dividend Reinvestment Plan election date 25 April Annual General Meeting 7 May Dividend payment date (ordinary shares) 16 May First dividend payment for 83⁄4% cumulative irredeemable preference shares 1 July Announcement of unaudited six months’ interim results 31 July Second dividend payment for 83⁄8% cumulative irredeemable preference shares 30 September Announcement of third quarter long-term savings new business figures 23 October Second dividend payment for 83⁄4% cumulative irredeemable preference shares 31 December
General shareholding Lloyds TSB Registrars The Causeway 0870 600 3952 administration queries Worthing and Aviva share account queries West Sussex BN99 6DA
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In a world where many have plenty of choice, but not enough time, brands are increasingly useful as signposts, helping people make choices with confidence. Aviva is determined to build a distinctive brand. Research worldwide revealed that consumers associate the name Aviva with making the most out of life.
We reviewed our trading brands market by market and retained the strongest. Now we are rolling out Aviva as a new international brand to reinforce the best and replace the rest. The Aviva brand is already live in many of our operations in Europe and Asia. It will be introduced in Australia, Canada, the US and other markets in 2003.
It takes time, commitment and consistent delivery to build a strong brand. Norwich Union (UK), Hibernian (Ireland), Delta Lloyd (Netherlands) and Commercial Union (Poland) are valuable assets that we have retained.
We are concentrating our efforts on promoting fewer brands to help achieve greater consistency and value for money from our marketing and advertising activity worldwide.
Worldwide business mix* by geography 1 – Rest of world 10%
full yeardividend 01 Aviva plc Annual report + accounts 2002 **From continuing and discontinued operations, including life achieved operating profit and stated before amortisation of goodwill and exceptional items.
In contrast, we are expanding where we see opportunities to be leaders. We signed a further bancassurance partnership agreement in Spain and are now the third-biggest life and savings operation in that country. We have come from virtually nowhere a few years back. In France we signed a bancassurance agreement with Crédit du Nord to further consolidate our position. In the Netherlands we agreed to be the exclusive life and general insurer for ABN AMRO, one of the country’s three leading banks, and in Italy we agreed our fourth major bancassurance partnership with Banca Popolare Commercia e Industria.
Our capital position has suffered as a result of the decline in equity markets. However, we remain strong and our rating is healthy.
We are looking forward to an open, transparent and competitive European Market becoming a reality. The European Financial Services Round Table (EFR) – a group of top people from Europe’s largest banks and insurance companies – is working to achieve that goal. I am the EFR’s chairman and we are proposing ways to build the missing links in the creation of such a market, ahead of the enlargement of the European Union in 2004 when 10 new members will join. A level playing field will benefit competition and the consumer.
We propose a final dividend for 2002 of 14.25 pence net per share, which brings the total for the year to 23 pence. This is consistent with the dividend policy announced in February 2002 and will be payable on 16 May 2003 to shareholders on the register on 28 March 2003.
The world of business has been plagued by many scandals and unacceptable behaviour during the year. We operate to high standards of ethics and corporate governance and also have a demanding programme of corporate social responsibility, for which we have attracted flattering attention.
We aspire to be the low-cost producer, top service provider and insurer of choice. I readily admit that we have a distance to go, but we will get there. Our management is committed and our loyal staff continue to train and equip themselves to face the challenge. I thank them for their unstinting efforts in the past year.
Aviva relative to FTSE Eurotop 300 Life Assurance and FTSE Eurotop 300
2 – Continental Europe 32% 3 – Rest of world 5% General insurance 5 – Continental Europe 6% 6 – Rest of world 5%
No 2 market positions: UK, Poland Top-five market positions: Ireland, Netherlands, Spain, Singapore, Turkey Top-10 market positions: Australia, France, Italy Other significant operations: United States 3rd largest UK-based fund manager Top-five market positions: Ireland, Netherlands, Navigator (Australia) One of the top 10 in Europe Other significant operations: France
• New partnerships in Europe and South East Asia extend bancassurance reach to some 35 million potential customers.
• New life insurance joint ventures launched in India and China, both markets with huge long-term growth potential.
• Introduced new savings products offering capital or income protection to meet continuing investor preference for non-equity related products.
• Introduced new socially responsible investment products in UK and Ireland.
• Around 70% of French funds in top quartile for returns over three years.
• Launched Navigator Asia in Singapore, extension of highly successful Australian online fund administration platform.
• Better-than-target COR† of 101.4% resulting from disciplined underwriting and efficient claims handling.
Developments in 2002 Performance in 2002 05 Aviva plc Annual report + accounts 2002 £13,618m New life and pension sales £19,100m Net premiums written including share of associates’ premiums*
£1,524m Life achieved operating profit before tax *Including health premiums of £928 million.
Overview Without doubt, 2002 was a very demanding year. Worldwide economic uncertainty and falling equity markets contributed to the toughest conditions I have experienced in 30 years in the industry.
Worldwide long-term savings new business sales held up well, despite a loss of customer confidence in equity-backed investments. Our sales fell by 2% to £14.6 billion (2001: £15 billion), while life achieved operating profit was £1,524 million (2001: £1,665 million).
For the second consecutive year, falling global investment markets resulted in a reduction in shareholders’ funds, which at 31 December 2002 stood at £9.7 billion (2001: £11.8 billion, restated#). Nevertheless, our capital position remains sound, with sufficient earnings to fully support growth in our existing businesses.
We achieved a robust set of results. We took clear-sighted decisions to ensure we remain financially strong and one of the best-positioned companies in the market.
We see the planned expansion of the European Union in 2004 as an opportunity for our business. We already have an established operation in Poland and smaller businesses in a number of the other prospective member countries, where greater accessibility should encourage foreign investment, stimulate economic growth, increase the standard of living and give people more freedom to invest in financial products and services.
Our cash-generative general insurance operation is an integral part of the group’s business portfolio. We are the number one general insurer in the UK and Ireland and have top-five positions in Canada, the Netherlands and Singapore. Continued investment in product innovation, for example our Pay As You Drive™ motor insurance scheme in the UK, and new facilities, such as our call and claims processing operation planned in India, will help us maintain a leadership position in our markets and high levels of customer service 24 hours a day.
We have to deal with a changing regulatory framework and the need to reduce costs to match the amount of business we expect to write. We will continue to invest in projects that will enable us to enhance our low cost operating model and reduce our future cost base.
Long-term outlook The opportunities for our business in the longer term remain excellent. People still need to make financial provision for the future. We envisage growth from the strong market positions we have built in our life and pensions business. Our innovative general insurance operations have reduced their risk exposure and improved the quality of their earnings. Furthermore, our capital position is a solid foundation to support further growth.
One of our greatest strengths is the quality of the people who work as a team at the heart of our business. Our employees worldwide have a first-class track record of delivering results, and I thank them all for their dedicated efforts.
In the current financial climate, integrity, prudent management and consistent performance are more important than ever. That is what I am determined we shall deliver. I am confident that the longerterm opportunities will allow us to grow our business for the benefit of our customers and shareholders alike.
Operating profit before tax* £million *From continuing and discontinued operations, including life achieved operating profit and stated before amortisation of goodwill and exceptional items.
Operating review: Long-term savings 08 Aviva plc Annual report + accounts 2002
Overview Conditions in savings and investment markets continue to be challenging as a result of the uncertain economic environment and nervous stock markets. Sales slowed during the year as our customers took a more conservative approach to equity-backed products. In the short term, we are addressing this loss of confidence by promoting savings products that offer an element of protection for capital or income. Even so, we expect the tough sales environment to continue in 2003.
Looking further ahead, we are strongly positioned as the largest life and pensions provider to Europe. We have well-established businesses in the UK, France, the Netherlands and Ireland and, over the past few years, have built major operations in Italy and Spain. Part of our strength also lies in our diverse mix of products sold through a variety of distribution channels. We have built what we believe to be one of the insurance industry’s premier distribution models. Our business will benefit as the increasing pressure of ageing populations on state welfare schemes leads to pension reforms, with the onus on the individual to increase private provision for their future well-being. We are also investing in the developing markets of South East Asia, India and China, which have great potential for future growth.
UK With nearly six million customers, Norwich Union Life is Aviva’s largest long-term savings operation, producing around 50% of our worldwide new business in 2002.
Bond sales were lower at £2.8 billion (2001: £3.7 billion) as investors remained cautious about equity-related products. In response to these changing needs, we introduced a series of new and innovative products which offer a degree of capital or income protection.
New business sales from our partnership with RBSG grew impressively, building on the momentum established in the latter part of 2001. Through this joint venture we hold a 50% interest in two life businesses which market products under the Royal Bank of Scotland and NatWest brands. An expanded product range helped total sales through the partnership rise by 83% to £880 million (2001: £480 million). In reporting our financial numbers we include our share of the total partnership sales.
UK operating profit in 2002 was down at £699 million (2001: £850 million) after a £123 million net charge (2001: £78 million) for strengthening annuity reserves. This charge reflected new evidence that suggests improvements in life expectancy are increasing at a faster rate than previously thought.
During the year we took firm action to maintain our capital position. We led the industry in cutting with-profit bonus rates and introduced market value reductions on with-profit policies. While tough in the short term, this action was necessary for the protection of our customers’ long-term interests. Policyholders have, however, continued to enjoy good payouts. A typical Norwich Union 25-year with-profit endowment has on average produced a return of about 11% a year, compared with inflation of around 4% over the same period.
Our orphan estate, which is used to support business development for the benefit of policyholders and shareholders alike, provides a more realistic indication of the underlying strength of our withprofit funds. At 31 December 2002 it stood at £4.3 billion (2001: £5.2 billion). The orphan estate is calculated on the basis of realistic assumptions, as distinct from the statutory basis of reserving which uses rules specified by statute. We are examining the possible reattribution of the orphan estate between policyholders and shareholders. This follows the proposals in the Sandler report issued in July 2002, although this work is unlikely to be completed before the end of 2004.
Life achieved operating profit £million *Reclassification of other life and savings business from “Life” to “Non-insurance operations”.
During the year we reached important agreements that extend our distribution and create significant customer opportunities. We are setting up a joint venture with Médéric, a provident institution, to sell life products to Médéric’s client base of 75,000 companies, representing one million people. This new partnership will start in the second quarter of 2003. We have also formed a bancassurance partnership which will make Aviva the sole partner of Crédit du Nord, a federation of eight regional banks and a subsidiary of Société Générale, for all new life business sold from November 2004. We regard this agreement, which will give us access to 1.3 million customers through more than 600 branches, as a unique opportunity, making us the only life insurer present in all distribution channels in France.
Looking forward, pressure is increasing to reform the pensions and healthcare system in France. We are well placed to benefit from such changes. We shall continue to develop the business through our increased range of distribution channels and key partnerships.
A key priority for us is improving our customer service. We recognise that, despite our efforts over the past year, our service has not always been of the required standard. We are determined to improve our service levels over the coming year and, for example, an upgrade of our call centre telephone systems has already been completed. We were pleased to win provider of the year awards from each of the two largest IFA networks, Misys and Bankhall, which shows the strength of our total proposition.
During the year a number of industry regulatory reports were published, including the Sandler and Pickering reviews, the Financial Services Authority’s report on with-profit business, and a Government Green Paper on pensions. We broadly support the core proposals to improve consumer awareness of the need to save, create a range of simplified products and wider access to advice, remove overlapping regulation and provide greater understanding of with-profit products. Such initiatives should help to increase demand in the UK long-term savings market and favour providers such as ourselves with scale, multi-distribution expertise and strong product offerings. But it is important to assess how we could operate profitably under these principles. We have publicly stated that we will not sell products that are not commercially viable for us.
Our business remains fundamentally strong. Despite the current financial uncertainty and pressures in the market, people still need to save for the future. There is an estimated £27 billion annual shortfall in the UK between actual savings and the amount individuals should be putting aside for a comfortable retirement. As a major provider in the UK market we would expect to play a key role in developing the products and services that will narrow this gap, provided the returns available to shareholders are attractive.
Total new business sales were lower at £343 million (2001: £523 million) and were in line with a fall in the market overall. Savers remained cautious about investing in equity-linked products, but our performance was buoyed by one-off sales from the Irish Government’s special savings incentive accounts (SSIAs), which closed at the end of April 2002.
We are well prepared for the introduction of the Government’s new personal retirement savings accounts (PRSAs) in 2003, and will benefit from Norwich Union’s experience in the UK stakeholder market. We have also been testing the sale of long-term savings products through Tesco, building on the supermarket retailer’s partnership with Norwich Union in the UK.
Italy Our Italian business is ranked sixth in the Italian life market. It has a cost base below the market average and sells attractive investment, savings and pensions products. Italy is a growth market with a relatively low level of life and pensions sales. Prospective pension and tax reforms expected by the end of 2003 should further stimulate demand.
We see bancassurance, which accounts for around 70% of new business in Italy, as the key to continuing growth in our business. We achieved a 17% increase in total sales to £1,133 million (2001: £958 million), of which £964 million (2001: £833 million) came through bancassurance.
Long-term savings premium income (after reinsurance)* £million *Including associates’ share of premiums.
Netherlands, Belgium and Luxembourg Delta Lloyd’s top-five position in the Dutch life market has been reinforced by a new bancassurance partnership with ABN AMRO, a top-three bank in the Netherlands, which complements our independent intermediary and direct distribution channels.
The agreement with ABN AMRO, announced in November 2002, represents a major step towards enhancing our multi-distribution capability. It provides for the sale of life and general insurance products through the bank’s network of 570 branches to over five million customers. We expect to see sales coming through from the second quarter of 2003.
Total life and pensions sales were maintained at £796 million (2001: £777 million). This reflected lower pension sales arising in part from changes in tax legislation, offset by increased sales of immediate annuity products as we sought to retain monies from maturing life policies. Operating profit was £200 million (2001: £221 million).
During 2002 our business continued to grow strongly. Total new business rose by 39% to £1,309 million (2001: £932 million), of which 95% came through our bancassurance partnerships. Operating profit was £83 million (2001: £80 million).
In Poland we remain the leading provider of individual life and private pensions products and are restructuring our business to benefit from the next stage of economic development. In Turkey we are one of the first five companies invited to obtain a licence to sell pension products.
International Life and pensions new business outside Europe grew by 42% to £952 million (2001: £689 million).
Our US operation, which is a niche player in the world’s largest life market, reported total life and pension sales up 66% to £587 million (2001: £371 million). We sell life products and annuities through a network of 7,000 independent agents and brokers, supported by market-leading web technology. We also have distribution agreements with several leading banks.
We are a top-10 player in the Australian market, selling a range of retail investment, insurance and superannuation products through independent agents, brokers and financial planners. Total life and pension sales were maintained at £239 million (2001: £244 million).
Our new bancassurance arrangements in South East Asia are developing well. Our partnership with DBS, one of the leading banks in the region, has given us exclusive access to about four million customers in Singapore since the second half of 2001. In 2002 we reached a second agreement with DBS, giving us access to another one million customers in Hong Kong. Total new business sales from these arrangements were £121 million (2001: £63 million). Our focus in 2003 will be developing these operations towards their full potential.
Operating review: Fund management 14 Aviva plc Annual report + accounts 2002
Overview Investing in equity markets was a frustrating business last year. Investors in major stock markets typically experienced losses of between 15% and 40% by the end of 2002. Although we anticipate a gentle recovery in the global economy in 2003, we expect the impact of difficult investment conditions to persist in the short term.
In such conditions, Aviva’s in-house fund management expertise is even more crucial to our business. We continuously strive to generate superior investment performance on behalf of our shareholders, policyholders and institutional clients. To that end, we continue to develop our presence as a leading international fund manager by making increased use of shared systems, investment processes and research expertise across our operations.
Worldwide assets under management were maintained at £208 billion (2001: £209 billion) as flows of new business compensated for the impact of falling investment values. However, the effect of lower markets on fee income saw operating profit fall to £5 million (2001: £29 million).
The volatile markets during 2002 saw new business volumes in the industry drop sharply, but we succeeded in securing £7.5 billion of new external mandates (2001: £3.8 billion). In the circumstances, and taking into account the impact of lower equity markets on fee income, Morley’s operating profit of £4 million (2001: £25 million) was a good result.
France Aviva Gestion d’Actifs (formerly Victoire Asset Management) has a reputation for strong investment performance, with around 70% of our funds in the top quartile for returns over three years.
Awards won in 2002 included best insurance asset manager for the third time in four years from monthly financial magazine Mieux Vivre Votre Argent, and best performance awards over one and three years from La Tribune/Standard & Poor’s.
We offer our clients a broad spread of investment products: Delta Lloyd focuses on lower-risk stock selection to provide less volatile returns, while OHRA adopts a themed approach to industry sectors considered to offer the best long-term growth potential. Investment sales rose to £119 million (2001: £85 million), partly owing to the introduction of products with a fixed return to offset the unpredictable markets.
Australia Portfolio Partners, which manages £3.3 billion of assets for retail and institutional investors through a range of unit trusts and individual mandates, reported new sales of £267 million (2001: £347 million). Navigator, our online investment portfolio service, is among the top five master trusts in Australia, with £2.8 billion in funds under administration (2001: £2.8 billion). New sales, affected by consumer caution in the light of poor stock market performance, were £797 million (2001: £930 million).
UK Norwich Union Insurance is the largest general insurer in the UK and produces 61% of the group’s general insurance business. Our overall UK market share is around 16%, although higher in our chosen sectors, such as private motor and targeted business cover. We are committed to delivering consistent and sustainable performance, and high-quality products and service, while building on our market leadership.
Competition in the personal lines market is intense, with new entrants, high street retailers and other major brands increasing the pressure on insurers to provide low prices. In contrast, the commercial market has seen increasing opportunities as insurers reassess their risk strategies and tighten underwriting standards following the demise of Independent Insurance Group and the World Trade Center disaster.
We produce sustainable returns through disciplined underwriting, efficient claims handling and rigorous management of costs. We believe that the skills of our insurance professionals are fundamental to running an efficient and effective business.
Following the launch of our Underwriting Academy in 2001 to develop our skills and improve our risk selection, we created a Claims Academy in 2002 to provide our staff with the training support they need to deliver excellent customer service.
Other examples of market-leading initiatives include our pioneering Pay As You Drive™ motor insurance project and the launch of Norwich Union Rescue as a branded vehicle breakdown service. We have also launched a series of business products that are more straightforward and relevant to the needs of our customers.
The success of our approach is reflected in an improved operating profit of £611 million (2001: £590 million), on net premiums written of £4.7 billion (2001: £4.8 billion). Behind this result is a change in mix between personal lines premiums of £2.8 billion (2001: £3.1 billion) and commercial lines premiums of £1.9 billion (2001: £1.7 billion). This reflects how we manage our business as a balanced portfolio in response to changing market conditions.
The success of our strategy is reflected in an excellent operating profit† of £959 million (2001: £924 million). Operating profit from continuing operations was £881 million (2001: £876 million). Worldwide net premiums written from continuing operations were maintained at £7.8 billion (2001: £7.9 billion).
Another strength lies in our multi-distribution capability, which gives customers the opportunity to buy our products in the way they choose. We have leading positions across the broker, corporate partnership and retail direct channels, including a growing number of customers who conduct their business with us over the internet.
France We operate in France through Aviva Assurances, a general insurer which sells through a network of 900 tied agents, and Eurofil, the second-largest direct insurance business in the French market with some 160,000 clients. In addition, from September 2002 we began selling car and household insurance through a new bancassurance agreement with the Crédit du Nord group, a federation of eight regional banks with over 600 branches.
We achieved an operating profit of £47 million (2001: £58 million), despite claims arising from the floods in southern France in September 2002. Net premiums written were down 32% at £478 million. These results also reflect the reduced size of the business following the sale of CGU Courtage.
Taking a focused approach to general insurance, with disciplined underwriting and efficient claims handling.
We achieved an improvement in our customer service standards during 2002, particularly through our new service centres in Galway and Cork. Our claims service also benefited from the introduction of a new e-claims system.
Customers increasingly look for individually tailored products and services. We are developing a number of initiatives to meet this growing demand.
†Continuing operations excludes the results of the disposed general insurance operations in Australia and New Zealand.
Netherlands In the Netherlands, where Delta Lloyd is a top-five general insurer, we primarily target small to medium commercial insurance sold through intermediaries. We also operate a direct channel under the OHRA brand aimed at individuals, and our new bancassurance agreement with ABN AMRO will offer further opportunities in 2003 to cross-sell general insurance products.
Canada CGU Canada (which rebrands to Aviva later in 2003) has been insuring Canadians since 1906. It is our second-largest general insurance operation by premium income. Through a network of independent insurance brokers, we provide a broad range of traditional products and services. In addition, we underwrite a number of specialist products.
We have begun an Intelligent Underwriting programme, which combines systems technology and working more closely with brokers at the point of sale. This is already producing benefits by helping us to identify acceptable risks within the small to mediumsized business market.
In addition, we have devoted significant effort to improving customer service through more efficient resolution of claims, and are introducing the Total Incident Management concept developed by Norwich Union in the UK. Another important initiative is our broker portal, which provides personal lines policy information to brokers via the internet.
Communities We recognise our responsibility to work in partnership with the communities in which we operate. In 2002, Aviva invested over £5.9 million in community initiatives worldwide.
Examples include our sponsorship of crime prevention activities, including a national community scheme with Crime Concern in the UK and Neighbourhood Watch in Canada. Commercial Union Poland celebrated its 10th anniversary by encouraging staff, agents and clients to become involved in voluntary work, in addition to continuing support for healthcare and education initiatives. In the Czech Republic we responded to the widespread floods in August 2002 by launching an appeal among our staff and insurance advisers. The money we raised helped to rebuild a kindergarten and repair a local health centre.
Overview As a company with 59,000 employees serving nearly one million shareholders and 25 million customers around the world, we recognise our responsibility to help sustain and build the communities in which we live and work.
CSR embraces performance in environmental management, community, employees, human rights, health and safety, suppliers, customers and standards of business conduct.
Environment Our environmental programme continues to move ahead strongly. For example, in the UK approximately 30% of our electricity is now derived from renewable resources (2001: 19%). We also ask would-be suppliers in the UK for details of their environmental and human rights performance.
Our businesses in Europe, Asia, Australia and North America have environmental initiatives in place to reduce waste, increase recycling and manage their use of energy resources. In Canada, like the UK, we include environmental performance questions in our tendering process.
We also chaired a working group under the United Nations Environment Programme which, in January 2003, produced international guidelines on environmental management and reporting practice for financial services organisations.
Measuring progress External recognition of our progress is reflected in Aviva’s continued inclusion in socially responsible investment (SRI) funds. We continue to be the only UK insurer in the Dow Jones Sustainability Indexes, and we are included in the FTSE4Good indices.
We are committed to following the principles of the UN’s Global Compact and are keen to play our part in developing CSR thinking and practice worldwide. Aviva is also proud to have had the opportunity of chairing the Acorn Trust, which has developed an accreditation system for small and medium-sized enterprises in the UK.
Basis of preparation The financial statements have been prepared on the modified statutory solvency basis, with supplementary information using the achieved profits basis. The main difference between the two methods is that the achieved profits basis recognises a prudent element of profit on insurance contracts at the point of sale, whereas the modified statutory solvency basis defers more of the contract profit until later in the policy term.
At the end of 2002 we disposed of our general insurance operations in Australia and New Zealand and accordingly the operating results from these businesses have been treated in the financial statements as arising from discontinued operations.
All growth rates in the financial review are quoted at constant rates of exchange.
Fund management 5 29 General insurance 881 876 Non-insurance (69) 7 Corporate costs (218) (187) Unallocated interest charges (434) (426) Wealth management (30) (99)
This corresponds to a normalised post-tax return on opening equity capital of 10.1% (2001: 9.7%). The total return on equity capital has steadily increased over the last three years.
The reduction in operating profit, including life achieved profit, was driven by a number of economic effects. The downturn in the global equity markets has dampened consumer demand for our long-term savings products which has in turn reduced the contribution to profits from new business sales. In addition, following the recent industry report that indicated improvements in the rate of life expectancy in UK male annuitant policyholders, we have taken the prudent decision to strengthen our reserves in our UK life operations for the second year running, albeit at a more pronounced level this year. Our fund management operations have continued to suffer from reduced fee income, while in our noninsurance operations and at a corporate level we have invested more heavily in our infrastructure. Finally, the reduction in overall profitability masks a strong improvement in the underwriting performance of our general insurance business which is better than our target of a COR of 102%.
On a modified statutory basis operating profit before tax from continuing operations was also lower at £1,218 million (2001: £1,464 million). Including the results of discontinued operations, operating profits before tax amounted to £1,296 million (2001: £1,512 million).
In 2001 the group’s dividend cover amounted to 1.1 times statutory operating profits after tax. The 2002 dividend cover based on the modified statutory solvency basis operating earnings in respect of continuing and discontinued operations was 1.65 times (1.51 times excluding discontinued operations).
The pre-tax profit on disposal of our Australian and New Zealand general insurance operations was £234 million before deducting goodwill previously written off through reserves. We also completed the sale of CGU Courtage, our broker-based French general insurance operation, and exited the Spanish general insurance market.
Earnings per share based on (loss)/profit for the financial year: – achieved profit basis (91.5)p (23.1)p – modified statutory basis (24.4)p 10.8p
The group reported a loss before tax on a modified statutory basis of £282 million which was depressed by a £1.2 billion shortfall in the actual investment return compared to the group’s longer-term assumptions. This reflects unrealised losses on equities held by the group’s non-life operations, particularly in the UK and Europe where the major equity markets fell between
On an achieved profit basis, the loss before tax of £2,463 million includes the adverse effect of economic assumption changes of £0.6 billion and a further investment return shortfall of £2.3 billion, reflecting the impact of market falls on the group’s life embedded value. Approximately £1.7 billion of these items arose in the UK with a further £0.8 billion shortfall in France and the Netherlands. The 2001 results were depressed for similar reasons but to a lesser extent.
In preparing the 2002 financial statements we have adopted the requirements of Financial Reporting Standard 19 “Deferred Tax”. The principal change has been to provide, on a discounted basis, an additional deferred tax on unrealised appreciation or depreciation of investments. On an achieved profit basis the effect of this new policy has resulted in a tax credit on other ordinary activities of £982 million (2001: £740 million, restated). The tax for the year includes a charge of £531 million (2001: £616 million, restated) in respect of operating loss from continuing operations, equivalent to an effective rate of 30.9% (2001: 31.8%). On a modified statutory basis the effective rate on operating profit from continuing operations amounted to 30.4% (2001: 32.2%).
24 Aviva plc Annual report + accounts 2002 of changes to the annuitant mortality assumptions in the UK. The output of industry studies in the UK has indicated revised predictions of the rate of improvement in male annuitant mortality. Our current experience shows profits against the existing reserve basis, however, in setting our assumptions we have taken the prudent decision to increase our reserves on our UK annuity portfolio by a net £123 million (2001: £78 million).
We are committed to our strategy of taking a focused approach to general insurance operations. During 2002 we withdrew from Spain, completed the sale of our broker-based operations in France and announced our exit from an aviation pool in the UK.
Our aim is to achieve a group COR of 102% across the cycle, and it is satisfying to see this delivered. Although market conditions are favourable, the achievement of 101.7% on continuing operations is an excellent result. Except for the Netherlands, improvements have been made in all segments with particular success in Canada where the strong rating action and disciplined underwriting has
Life achieved operating profit of £1,524 million is lower than last year due to a combination of economic and operational factors. The depressed state of equity markets has meant that the expected returns on existing business and shareholders’ net worth have been lower than in 2001. The effect of this will be even more pronounced in 2003 where we estimate, all other things being equal, that the equivalent expected returns will be lower by £175 million based upon an opening embedded value which is lower by £915 million and economic assumptions which are also lower by between 0.5% and 1%.
Continuing operations 881 876 Australia and New Zealand 78 69 United States – (21)
The operating profit from continuing operations reflects the improvement in the underwriting performance to £145 million loss (2001: £223 million loss), together with the normalised investment return of £1,026 million (2001: £1,099 million).
Our UK fund management business, which includes the results of our retail investment operations and our institutional business, Morley Fund Management, reported a loss of £12 million (2001: loss of £4 million). The investment in the retail operation has been significantly scaled back this year. In spite of the fall in the worldwide equity markets, the group finished the year with £208 billion of assets under management (2001: £209 billion).
Corporate costs Higher corporate costs reflect a £26 million spend on a programme to improve the quality of our global finance systems and processes. We have assessed the impact of the changing corporate governance, regulatory and financial reporting environment and believe that it is critical that the group undertakes this investment.
Shareholders’ funds have declined by 18% to £9,669 million, (2001: £11,752 million, restated) largely reflecting the fall in European equity markets. This corresponds to a net asset value per ordinary share of 433 pence (2001: 524 pence per share, restated) after adding back the equalisation provision of £314 million (2001: £272 million).
Capital employed 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.
Long-term savings 10,379 11,307 General insurance and health 3,917 4,560 Other business 554 324
Our capital position has suffered as a result of the decline in equity markets but remains healthy. The ratings of the group’s main operating subsidiaries are AA (“very strong”) from Standard & Poor’s and Aa2 (“excellent”) from Moody’s. These ratings were confirmed in February 2003, although the rating agencies have highlighted that the insurance sector remains under review.
– Australia and New Zealand 72 357 20.2 11.1 – US general insurance – – – –
1. The return on capital is calculated as the after tax return on opening equity capital, based on operating profit, including life achieved profit, before amortisation of goodwill and exceptional items. *Restated for the effect of Financial Reporting Standard 19 “Deferred Tax”.
Financial strength of the group and its principal insurance operations In a market that increasingly looks for quality and financial strength, the resilience of the regulatory capital position of the group and its principal insurance operations is of great importance.
The group’s capital, from all funding sources, has been allocated such that the capital employed by trading operations is some £5.7 billion (2001: £5.9 billion) greater than the capital provided by its shareholders and its subordinated debtholders. As a result, the group is able to enhance the returns earned on its equity capital.
Equities securities investments net assets Total Total £m £m £m £m £m £m
Total continuing operations 9,469 11,195 Discontinued operations – Australia and New Zealand – 357
Equity shareholders’ funds 9,469 11,552 *Restated for the effect of Financial Reporting Standard 19 “Deferred Tax”.
At the end of 2002, the group’s total external borrowings amounted to £3.2 billion (2001: £3.8 billion) including subordinated debt. A significant proportion of these borrowings are on a fixed rate basis with maturity terms between two and 34 years, with the balance being represented by commercial paper and floating rate bank borrowings.
The ratio of the group’s external debt to shareholders’ funds was 18% (2001: 20%, restated). Interest cover, which measures the extent to which external interest costs are covered by achieved operating profit, was 14 times (2001: 12 times).
Our principal UK general insurance regulated subsidiaries are CGU International Insurance plc (CGUII) and Norwich Union Insurance (NUI). CGUII is the parent company of the majority of the group’s overseas life and general insurance subsidiaries.
A common measure of the financial strength in the UK for life insurance business is the free asset ratio (FAR). We estimate that the average free asset ratio of our three UK life companies was 11.8% at end 2002 including implicit items (31 December 2001: 14.7%). If these implicit items were excluded then the FAR would
The realistic strength of our with-profit funds is underpinned by our UK orphan estate. At 31 December 2002, the orphan estate of £4.3 billion (2001: £5.2 billion) is based upon a realistic assessment of liabilities and is calculated after prudently allowing for over £4 billion in respect of the expected cost of guarantees and the glide path. The orphan estate is used to support strong business development for the benefit of our policyholders and shareholders alike. The orphan estate is calculated on the basis of realistic assumptions, as distinct from the statutory basis of reserving which uses rules specified by statute.
The group recognises the critical importance of efficient and effective risk management systems. Close attention is paid to asset and liability management. This is particularly important for our life businesses, given the long-term nature of the liabilities involved.
General insurance funds are invested in fixed income securities to match broadly our insurance liabilities, the balance of the portfolio invested largely in equities.
Derivatives Derivative instruments are only used to a limited extent, within guidelines established by the Board. Derivatives are used for efficient portfolio management, hedging debt and the outcome of corporate transactions, or to structure specific retail savings products. Speculative activity is prohibited and all derivative transactions are covered fully, either by cash or by corresponding assets and liabilities.
Exchange fluctuation As a result of the international diversity of its operations, approximately half of the group’s premium income arises in currencies other than sterling. Similarly, its net assets are denominated in a variety of currencies, of which the largest are the euro (52%) and sterling (29%).
In managing our foreign currency exposures we do not hedge revenues as these are substantially retained locally to support the growth of our business and to meet local regulatory and market requirements.
The group’s net assets and, to a more limited extent its solvency, are exposed to movements in exchange rates. The group hedges part of this exposure through local currency borrowings and derivatives.
George Paul Mike Biggs Guillermo de la Dehesa Wim Dik Sir Michael Partridge
George Paul DL (63) Deputy Chairman and non-executive director Appointed to the board in May 2000 as deputy chairman. Joined the Norwich Union board as a non-executive director in 1990, becoming chairman in 1994. Non-executive chairman of Agricola Group Limited and of Fleming Overseas Investment Trust plc and a non-executive director of Notcutts Limited. A former chairman and chief executive officer of Harrisons & Crosfield plc. Senior non-executive director, chairman of the remuneration committee and member of the audit committee.
Mike Biggs ACA (50) Executive director Appointed group finance director in March 2001 having been previously appointed to the board in May 2000 as executive director responsible for the general insurance operations in the UK. Joined Norwich Union in 1991 and the Norwich Union board in 1996. Held a number of executive appointments in Norwich Union, becoming finance director in 1997.
Wim Dik (64) Non-executive director Appointed to the board in 1999, having served as a chairman of Nuts Ohra, a Dutch insurer acquired by the group in 1999. A former chairman of Nederlandse Unilever Bedrijven BV and former chairman and chief executive officer of KPN, Royal Dutch Telecom. Currently a member of the Supervisory Board of ABN AMRO Bank and TNT Post Group, an advisory member of the boards of Unilever and a non-executive director of LogicaCMG plc and Vos Logistics. Member of the remuneration committee.
Sir Michael Partridge KCB (67) Non-executive director Appointed to the board in May 2000. Joined the board of Norwich Union as a non-executive director in 1996. Former permanent secretary, Department of Social Security, non-executive director of Methodist Ministers’ Pension Trust Limited and Epworth Investment Management Limited. Sir Michael will retire from the board at the forthcoming Annual General Meeting. Member of the audit committee.
Philip Scott FIA (49) Executive director Appointed to the board in May 2000. Joined Norwich Union in 1973, held a number of senior positions and was appointed to the board of Norwich Union in 1993. He was the chief executive of Norwich Union Life (Aviva’s UK life and long-term savings business) until September 2002, at which time he became executive chairman of Norwich Union Life.
Philip Twyman FIA, FIAA (58) Executive director Appointed to the board in June 1998. Joined the board of General Accident in 1996 as executive director responsible for finance, life and investment operations. Currently responsible for Aviva’s international and fund management operations.
Elizabeth Vallance (57) Non-executive director Appointed to the board in May 2000. Joined the board of Norwich Union as a non-executive director in 1995. Currently chairman of the NHS Advisory Committee on Distinction Awards, Fellow of Queen Mary College, University of London, chairman of the Council of the Institute of Education, University of London, non-executive director of Charter Pan European Trust plc and a former non-executive director of HMV Group Limited. Member of the remuneration and nomination committees.
André Villeneuve (58) Non-executive director Appointed to the board in 1996. A non-executive director of United Technologies Corporation. A former chairman of Instinet Corporation and executive director of Reuters plc. Member of the remuneration committee.
Tony Wyand (59) Executive director Appointed to the board in 1987. Joined Commercial Union in 1971 and worked for the group in the UK, the United States and France. Currently responsible for Aviva’s operations in continental Europe and Ireland. A non-executive director of Société Générale, UniCredito Italiano (two companies with which Aviva has joint venture arrangements) and Grosvenor Group Holdings Limited.
30 Aviva plc Annual report + accounts 2002 31 Directors’ report 33 Corporate governance 35 Directors’ remuneration report 43 Statement of directors’ responsibilities 43 Independent auditors’ report 44 Accounting policies 47 Consolidated profit and loss account
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 and business operating and financial reviews set out on pages 2 to 27.
Dividend The directors are recommending a final dividend of 14.25 pence (2001: 23.75 pence) per share which, together with the interim dividend of 8.75 pence (2001: 14.25 pence) per share, produces a total dividend for the year of 23.00 pence (2001: 38.00 pence) per share. The total cost of dividends for 2002, including preference dividends, will amount to £536 million (2001: £874 million), requiring £1,070 million to be transferred from reserves (2001: £615 million, restated).
Share capital Details of the share capital and shares under option as at 31 December 2002, and shares issued during the year which ended on that date, are given in note 32 on pages 77 to 78.
Directors The names of the present members of the Board and their biographical notes appear on pages 28 to 29.
The directors retiring by rotation in accordance with the articles of association at the forthcoming Annual General Meeting and, being eligible, offering themselves for reappointment are Mike Biggs, Guillermo de la Dehesa, Pehr Gyllenhammar and Richard Harvey. Mike Biggs and Richard Harvey each have a service contract with a Group company, details of which can be found on page 37.
Sir Michael Partridge retires by rotation at the forthcoming Annual General Meeting but will not be seeking re-election.
Directors’ interests The table below shows the interests held by each person who was a director at the end of the financial year in the ordinary shares of 25 pence each in the Company, as recorded in the register maintained by the Company in accordance with the provisions of Section 325 of the Companies Act 1985. Details of any options and awards held through the Company’s share schemes and incentive plans are shown on pages 39 to 41. All the disclosed interests are beneficial.
Mike Biggs 20,703 43,550 Guillermo de la Dehesa 144 144 Wim Dik – 200 Pehr Gyllenhammar 16,756 25,760 Richard Harvey 21,205 21,829 Sir Michael Partridge 2,297 2,004 George Paul 25,464 30,593 Philip Scott 26,772 68,571 Patrick Snowball 290 3,447 Derek Stevens 1,991 2,005 Philip Twyman 17,131 24,286 Elizabeth Vallance 830 830 André Villeneuve 640 640 Tony Wyand 13,964 31,389
Substantial shareholdings As at 25 February 2003, the Company’s register of substantial shareholdings maintained in accordance with the provisions of Section 211 of the Companies Act 1985 showed that the only holding exceeding the 3% disclosure threshold was that of Legal & General Investment Management Limited which held 81,261,749 ordinary shares, representing an interest of 3.60% of the issued ordinary share capital of the Company.
Employees are encouraged to have their say on how they view the Company and their employment through confidential staff opinion surveys. Results are fed back to staff and, where appropriate, action plans are put in place to address key issues.
At the 2001 Annual General Meeting, shareholders approved the establishment of an All Employee Share Ownership Plan as a way for employees to participate further in the Group’s success through share ownership. The Group operates two elements of the plan. The partnership element allows eligible employees to purchase Aviva shares at the prevailing market price from their pre-tax income. The second element enables staff to receive free shares, at the Board’s discretion, based broadly on the performance of the Company’s operations in the UK. The Group also operates a savings related share option scheme, which provides employees with an opportunity to save over a fixed period and acquire share options at a discount to the prevailing market price.
Aviva’s CSR report contains full details of progress achieved within the CSR programme during the year. A copy of the printed summary CSR report is available from the Group Company Secretary or the full report may be viewed on www.aviva.com/csr
Information on health and safety matters is communicated to staff through the normal communication channels. Under the Group’s Health and Safety Policy, the Group Chief Executive is accountable for health and safety.
Political donations No political donations were made in the United Kingdom during the year (2001: £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.
There is a requirement for companies to seek shareholders’ approval for expenditure falling under the PPER and therefore, at the forthcoming Annual General Meeting, shareholders will be asked to renew the authority granted at the 2002 Annual General Meeting to permit political expenditure, as defined by the PPER, up to £100,000 so as to avoid inadvertent infringements of that legislation. Further clarification on this issue can be found in the notice of meeting for the Annual General Meeting which accompanies this report.
The Company has no trade creditors. In respect of Group activities in the United Kingdom, the amounts due to trade creditors at 31 December 2002 represented approximately 29 days of average daily purchases through the year (2001: 27 days).
Directors’ report continued 32 Aviva plc Annual report + accounts 2002
Application of the Combined Code The Financial Services Authority requires listed companies to disclose, in relation to Section 1 of the Combined Code produced by the Committee on Corporate Governance in June 1998 (the Combined Code), how they have applied its principles and whether they have complied with its provisions throughout the accounting year.
The articles also provide that one-third of directors must retire by rotation each year, but are eligible to submit themselves for re-election by the shareholders, and that all directors are obliged to retire at least every three years.
The Board has a formal performance review process to assess how well the Board, its committees and processes are performing and how they might be improved. The review also assesses the performance of each director and the contribution he/she makes. The last review was undertaken in July 2002.
The Board has established a number of committees, including Remuneration, Audit, Nomination, Chairman’s and Information Technology Strategy. Each operates within clear terms of reference and the minutes of their meetings are circulated to all directors.
Audit Committee The Audit Committee comprises the following non-executive directors, appointed by the Board: Derek Stevens (Chairman) Guillermo de la Dehesa George Paul Sir Michael Partridge
The Committee meets four times each year to assist the Board in discharging its responsibilities for the Company’s financial announcements (including considering the appropriateness of accounting policies), business risk management, internal control issues and regulatory compliance, as well as to oversee the objectivity and effectiveness of the internal and external auditors. The Committee receives reports on significant issues raised at the audit committees which have been established in the Group’s principal businesses. The Committee meets regularly with the external auditors, in the absence of management, and reports regularly to the Board.
Nomination Committee The Nomination Committee comprises the following directors, appointed by the Board: Pehr Gyllenhammar (Chairman) Guillermo de la Dehesa Richard Harvey Elizabeth Vallance
At its Annual General Meetings, the Company complies with the Combined Code as it relates to the disclosure of proxy voting, the separation of resolutions and the attendance of Committee Chairmen. The notice of the Annual General Meeting is sent out at least 20 business days before the meeting, to ensure that shareholders have sufficient time in which to consider the items of business.
Both the Company’s Annual report and Annual review are designed to present a balanced and understandable view of the Group’s activities and prospects. The Chairman’s statement, Group Chief Executive’s review and business operating and financial reviews on pages 2 to 27 provide an assessment of the Group’s affairs and position and will be supported by a presentation to be made at the Annual General Meeting.
Institutional investor As a major investor, the Group monitors the governance of the companies in which it invests. Morley Fund Management Limited, the Group’s UK asset management company, has regular meetings with senior management of companies where it will raise all relevant matters which may affect the future performance of those companies.
During the year, the Group Audit Committee, on behalf of the Board, has reviewed the effectiveness of the framework of the Group’s systems of internal control, the principal features of which are as follows.
Risk identification and assessment The Board has in place a system of business risk management, which has been integrated throughout the Group into the business planning and monitoring process.
The Group has well-established internal audit, risk management and compliance functions. There are formal procedures in place for both internal and external auditors to report independently their conclusions and recommendations to management and to the Group Audit Committee.
Compliance with the Combined Code The Company has complied fully throughout the accounting period with the provisions set down in Section 1 of the Combined Code, except that during the period two executive directors had contracts with notice periods which exceeded 12 months. The auditor’s report on page 43 covers their review of the Company’s compliance with the relevant provisions of the Combined Code.
Corporate governance continued 34 Aviva plc Annual report + accounts 2002
The Remuneration Committee The Remuneration Committee (the Committee) comprises the following non-executive directors, appointed by the Board: George Paul (Chairman) Wim Dik Elizabeth Vallance André Villeneuve
The Group Chief Executive normally attends the meetings of the Committee, except when his own remuneration is being discussed, as does the Group Human Resources Director.
The Committee, which has four scheduled meetings each year, considers all aspects of remuneration paid to senior 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, which is approved by the Board, the Committee determines the level of remuneration paid to each of the executive directors.
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. He has been supported by Ernst & Young LLP who have advised on remuneration benefits generally, including salary levels, bonus and incentive arrangements. Deloitte & Touche advise 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, on performance assessment. Ernst & Young LLP is the Company’s auditor and has provided other audit and assurance services to the Group as disclosed in note 13 on page 64. Deloitte & Touche provide no other material services to the Group.
The Committee also exercises discretion on behalf of the Board in relation to the operation of the Group’s various share schemes and incentive plans.
In line with best practice, and in anticipation of regulations which are now in place, the Company put its remuneration report to a vote at last year’s Annual General Meeting.
Against this broad policy, the Committee has set 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, current economic conditions, prevailing operating conditions within both the Group and the financial services industry generally, the earnings of the Group’s employees and the skills and management capabilities which the Group must secure in order to attain its strategic objectives.
The Committee’s philosophy is that senior executives’ own interests should be aligned with those of the Company’s shareholders. It therefore believes that, whilst paying a competitive basic salary, the majority of the total remuneration package should be closely linked to the performance of the business and delivered in the form of shares. The policy seeks to provide an appropriate balance between the delivery of the annual business plan and the longterm profitable growth of the Company.
When reviewing basic salaries, the Committee takes into account market data and the senior executive’s performance. The Company’s policy is to set basic salaries for competent performance at the median level. Salaries are targeted towards the upper quartile for those executives who display sustained superior performance.
Cash bonuses Senior executives participate in a discretionary annual cash 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% can be made. 70% of the potential payment under the plan is dependent upon financial targets. The remaining 30% of the bonus is based upon the director’s attainment of personal objectives.
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 all other cases, the matching shares lapse. The shares granted under the plan are held in trust and vest automatically after three years.
The Committee has considered carefully the suggestion of certain institutional investors that the vesting of the matching awards should be subject to the attainment of performance conditions. The award of matching shares can only be made in relation to bonuses actually earned, (i.e. the performance conditions attaching to the annual bonus plan must have been met). The plan makes it compulsory for participants to defer 50% of their bonus into shares and encourages participants to invest the whole of their bonus into shares, thereby strengthening further the alignment of their interests with those of shareholders. It is felt that the imposition of additional performance conditions would be detrimental to achieving this. As a result of benchmarking the Company’s remuneration package, the Committee is aware that the maximum amount which a participant can earn under the Company’s annual bonus plan, and hence defer (being 50% of basic salary), is at the lower end of the market range. The Committee believes that the deferred bonus plan is not excessive.
Directors’ remuneration report continued 36 Aviva plc Annual report + accounts 2002
Under the Scheme, executive directors have a normal retirement age of 60 and accrue pensions at a rate of one-thirtieth 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 spouse’s 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% per annum.
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, additional benefits are provided from the unfunded arrangement. Mike Biggs, Richard Harvey and Philip Twyman are affected by this limit and therefore will, at retirement, receive some of their pension benefits from the unfunded arrangement.
The Aviva Savings Related Share Option Scheme allows eligible employees to acquire options over the Company’s shares at a discount of up to 20% to their market value at the date of grant. In order to exercise the options, participants must have saved the consideration through either a three, five or seven year approved savings contract, subject to a maximum savings limit of £250 per month.
The Company is currently reviewing its policies against the statement on best practice on executive contracts and severance recently issued by the Association of British Insurers.
The non-executive directors, including the Chairman, have letters of appointment which set out their duties and responsibilities. Such appointments are for three years and may be renewed by mutual consent. The Company may terminate these appointments at any time without the payment of compensation.
(2) 2002 Benefits. All the executive directors received the benefit of a company car allowance and private medical insurance. In respect of Mike Biggs the amount disclosed includes benefit in kind charges in respect of the provision of accommodation in London. The disclosure for Philip Scott includes benefit in kind charges in relation to accommodation in York where a significant part of Norwich Union Life’s operations are based and relocation expenses reimbursed by the Company relating to the purchase of a property in London where Philip Scott needs to be located to fulfil his executive duties. A charge relating to the benefits which cannot be provided from the pension scheme as a result of the ’earnings cap‘ is also included in respect of Richard Harvey and Mike Biggs.
Options granted after 1997 are only exercisable if certain performance conditions have been met. During the year, the three-year performance periods attaching to options granted in 1998 and 1999 expired. In order for participants to exercise these options, the Company’s TSR, when compared with the TSR of a comparator group of financial services companies, would need to at least match median performance. At median performance, 40% of the options become exercisable and, at upper quartile performance, 100% of the options become exercisable. Between median and upper quartile, the number of options vesting is determined on a straight-line basis. At the end of the performance period attaching to the options granted in 1998, the Company was ranked fourth out of the 10 companies remaining in the comparator group and accordingly 72.7% of the options have become exercisable at 853 pence per share. In respect of the options granted in 1999, the Company was ranked seventh in the comparator group and therefore none of these options have become exercisable. Under the rules of the scheme, the performance conditions will be retested at each subsequent anniversary of their grant in respect of the options which have not vested.
The mid-market price of an ordinary share in the Company on 31 December 2002 was 443 pence, and the mid-market prices during the year ranged from 341.5 pence to 873.0 pence. No director exercised any options during the year and therefore no gains on such were made.
At Awards Awards Awards At at date at date 1 January granted vesting lapsing 31 December awards awards 2002 during year during year during year 2002 granted vested Number Number Number Number Number p p Vesting date
CGNU Integration Incentive Plan 41,138 – 41,138 – – 960.0 762.0 March 2002 Aviva Long Term Incentive Plan
Tony Wyand CU Long Term Incentive Plan 3,057 – 3,057 – – 848.0 717.0 Feb 2002 CGU Deferred Bonus Plan 4,593 – 4,593 – – 967.0 485.0 Oct 2002 CGNU Integration Incentive Plan 44,429 – 44,429 – – 960.0 762.0 March 2002 Aviva Long Term Incentive Plan
Current plans The Aviva Long Term Incentive Plan was approved by shareholders at the 2001 Annual General Meeting. Awards under the plan are made on an annual basis and the 2002 award was made in March. Awards are subject to the attainment of performance conditions over a three-year performance period as described on page 36.
The Aviva Deferred Bonus Plan was approved by shareholders at the 2001 Annual General Meeting and replaced the CGU Deferred Bonus Plan. 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 2002, 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.
Norwich Union Restricted Share Plan – Norwich Union had a deferred bonus arrangement in which a small number of senior managers participated. Awards were granted which vest after three years, subject to the attainment of a performance measure based on Total Shareholder Return (TSR). To vest, Norwich Union’s ranking against the TSR of the FTSE 100 companies would have to be better than median, when 25% of the awards would vest, rising to 100% of the awards vesting if the Company ranked 20th or above. This plan lapsed in 2000 upon the merger of CGU and Norwich Union. However, a one-off arrangement based on “phantom shares” was introduced at that time to replicate the plan but only in respect of the three-year performance period which commenced in 1999. Based on the TSR over the performance period (subject to appropriate weighted adjustments being made to recognise that the Company, for the purpose of the calculation, was Norwich Union plc up to 30 May 2000), the Company was ranked 43rd against the FTSE 100 and therefore a cash award, based on 42.5% of the number of “phantom shares” awarded and the market value of an ordinary share, was paid in March 2002. Mr Snowball was the only executive director to participate in this phantom plan as it was not extended to those former Norwich Union executives who became directors of Aviva at the time of the merger. In respect of these directors, the Committee reserved the right to approve a discretionary cash payment and, in this regard, the Committee awarded a cash bonus to these directors based on a number of shares and the Company’s share price on 8 March 2002. The cash bonuses were paid in March 2002 and are disclosed under “Salary and Bonuses” above on page 38.
Non-executive Directors The Company’s articles of association provide that the total remuneration paid to directors shall be determined by the Board within the limits set by shareholders. The current limit is £1 million per annum as approved by shareholders at last year’s Annual General Meeting. Executive directors receive no fees for acting as directors.
The fee disclosed for Pehr Gyllenhammar includes a car allowance. The fee for George Paul reflects his duties as Deputy Chairman, which includes chairing the Remuneration Committee and acting as the senior non-executive director. The fee for Derek Stevens includes an additional amount for acting as the Chairman of the Board’s Audit Committee and of the Aviva Staff Pension Scheme and that for Guillermo de la Dehesa includes a fee for acting as the non-executive chairman of the Group’s operations in Spain. No non-executive director accrued retirement benefits during the year.
Directors’ remuneration report continued 42 Aviva plc Annual report + accounts 2002
The directors are responsible for maintaining proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group. They are also responsible for safeguarding the assets of the Company and the Group and for ensuring that controls are in place for the prevention and detection of fraud and other irregularities.
We report to you our opinion as to whether the accounts give a true and fair view and whether the accounts and the part of the Directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’ report is not consistent with the accounts, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors’ remuneration and transactions with the Group is not disclosed.
We review whether the Corporate governance statement reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, 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 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 2002 and of the loss of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985.
Independent auditors’ report to the members of Aviva plc 43 Aviva plc Annual report + accounts 2002
A – Basis of accounts The consolidated accounts have been prepared in accordance with Section 255A of, and the special provisions relating to insurance companies of 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 December 1998. The accounting policies adopted reflect United Kingdom financial reporting standards and statements of standard accounting practice applicable at 31 December 2002, as considered appropriate for an insurance company. The balance sheet of the Company has been prepared in accordance with Section 226 of, and Schedule 4 to, the Companies Act 1985.
The profit and loss account for the year reflects all income, expenditure, and investment gains and losses, except certain items which are taken directly to reserves after tax. The items taken directly to reserves include movements in the value of internally generated in-force long-term business and exchange gains and losses on the net investment in foreign enterprises (except for certain items dealt with in the fund for future appropriations).
B – Premiums General business premiums written reflect business incepted during the year. General business unearned premiums are those proportions of the premiums written in a year that relate to the periods of risk after the balance sheet date. Unearned premiums are computed principally on either the daily or monthly pro rata basis. Long-term business premiums are accounted for when receivable, except for investment-linked premiums which are accounted for when liabilities are recognised.
Long-term business deferred acquisition costs are amortised over a period no longer than that in which they are expected to be recoverable out of margins in revenues from the related policies.
I – 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.
Provision is made for deferred tax liabilities, or credit taken for deferred tax assets, using the liability method, on all material timing differences, including revaluation gains and losses on investments recognised in the profit and loss account. Deferred tax is calculated at the rates at which it is expected that the tax will arise and discounted to take into account the likely timing of payments and pattern of expected realisation of investments. The discount rates used are the post-tax yields to maturity that could be obtained at the balance sheet date on government bonds with maturity dates and in currencies similar to those of the deferred tax assets or liabilities. This is a change in accounting policy, the effects of which are detailed in note 3(a) on pages 56
J – Goodwill Goodwill arising on the acquisition of subsidiary undertakings is carried on the balance sheet as a separate intangible asset. Goodwill arising on the acquisition of associated undertakings is included within the carrying value of associated undertakings. All goodwill is amortised on a straight-line basis over its useful economic life, and its carrying value is reviewed regularly for indications of impairment. On subsequent disposal of the underlying investment, any goodwill not yet amortised will be taken to the profit and loss account when calculating the profit or loss on disposal.
K – Investments Investments are stated at their current values at the end of the year, with the exception of most non-linked long-term business debt securities and fixed income securities which are shown at amortised cost, as this basis more closely corresponds with the valuation of the relevant long-term liabilities. Current values, for this purpose, are: stock exchange mid-market values for listed securities; average trading prices for unlisted securities where a market exists; and directors’ valuations for other unlisted securities, and for mortgages and loans.
L – Derivative instruments The Group uses derivative instruments, including forward foreign exchange contracts, interest rate swaps, futures and options for hedging purposes. Derivative instruments are accounted for as follows: • forward foreign exchange contracts. The interest rate differential is included in investment income, while the effect of the currency movements on these contracts is treated as an exchange difference; • cross-currency swaps related to the Group’s borrowings. These are translated at the year end rates and included as part of borrowings; • interest rate swaps. The interest payable and receivable is included within investment expenses or investment income as appropriate; • futures contracts and purchased options. These are included at market value and shown under the category of investments to which the contracts relate. No adjustment is made to the classification of existing investments to reflect the effect of the future settlement of these transactions.
O – Additional value of in-force long-term business The valuation of long-term business included in the Group’s balance sheet comprises two elements: the net assets of the long-term business operations, stated in accordance with United Kingdom accounting principles; and an additional asset, called the additional value of in-force long-term business, which is shown separately and represents the difference between the total embedded value of the long-term operations and their net assets included in these accounts. Movements in the additional value of internally-generated in-force long-term business are taken to the revaluation reserve.
The embedded value is carried at the directors’ valuation, and is audited by the Group’s auditors. Further detail of the methodology and assumptions is included as supplementary information on pages 96 to 97. The embedded value is the total of the shareholders’ net worth of the long-term operations and the present value, at risk discount rates, of the projected releases to shareholders arising from the business in force, less a deduction for the effect of meeting the statutory solvency requirements of the business. The shareholders’ net worth comprises the market value of the shareholders’ funds and the shareholders’ interest in the surplus held in the non-profit component of the long-term business funds determined on a statutory solvency basis and adjusted to add back any non-admissible assets. This effect of solvency requirements is the difference between the nominal value of required solvency capital and the present value, at risk discount rates, of the projected release of this capital and investment earnings on the capital.
Within the long-term business provision, explicit allowance is made for vested bonuses, including those added following the current valuation, but not generally for future reversionary or terminal bonuses. The provisions held for linked business and unitised with profits business are the unit liabilities together with certain nonunit provisions.
Q – 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. Assets acquired under finance leases are capitalised and charged to the profit and loss account over the shorter of the term of the leases or their estimated useful lives, subject to a maximum of 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.
R – Subordinated debt and debenture loans Subordinated debt and borrowings issued at a discount are included in the balance sheets at their proceeds, net of other expenses, together with amortised discount to the balance sheet date. The discount, amortised on a compound basis, and expenses are charged to loan interest in the profit and loss account over the term of the instrument.
Transactions denominated in foreign currencies are translated at the exchange rate at the date of transaction. 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.
For the SAYE plan, shares are issued to a qualifying share ownership trust, with the excess of the market price subscribed at the date of transfer by the trust over the nominal value being recorded in the Company’s share premium account. The difference between the market price at the date of transfer to the trust and the exercise price payable by employees is charged to the Company’s profit and loss account or, in the consolidated group accounts, directly to the profit and loss account reserve.
Restated 1m £m £m 29,095 Gross premiums written – continuing operations (6a) 18,330 17,564 (725) Outward reinsurance premiums (457) (335)
28,370 Written and earned premiums, net of reinsurance (B & 6a) 17,873 17,229
301 Change in technical provision for linked business, net of reinsurance (P) 190 (727)
968 Balance on the long-term business technical account – continuing operations (G) 610 764 968 Balance on the long-term business technical account 610 764 413 Tax credit attributable to balance on the long-term business technical account 260 353 1,381 Profit from long-term business operations before tax 870 1,117
Allocated investment return transferred from the 1,876 non-technical account (F & 7b) 1,182 1,404
Change in the provision for claims 529 Gross amount 333 (302)
Restated 1m £m £m 968 Balance on long-term business technical account 610 764 413 Tax credit attributable to balance on the long-term business technical account (I) 260 353 1,381 Profit from long-term business operations before tax 870 1,117 1,529 Balance on general business technical account 963 907
(875) (Loss)/profit for the financial year attributable to equity shareholders (551) 242
Consolidated statement of total recognised gains and losses For the year ended 31 December 2002
*Stated before the effect of foreign exchange movements which are reported within the foreign exchange gains/(losses) line.
Reconciliation of movements in consolidated shareholders’ funds For the year ended 31 December 2002
Balance at 1 January As previously reported 13,633 Prior year adjustment (346)
(4,046) Total recognised gains and losses arising in the year (1,866) (693)
18 Increase in share capital (32c) 11 29 489 Goodwill written back and other movements (J & 34) 308 3
(1,732) Share of gross liabilities, including loans from Group undertakings (1,126) –
Prepayments and accrued income 2,254 Accrued interest and rent 1,465 1,432 1,203 Other prepayments and accrued income 782 713
Shareholders’ funds: 746 Minority interests – equity 485 393 16,018 Total capital and reserves 10,412 12,403 17,849 Total capital, reserves and subordinated debt 11,602 13,560
Technical provisions 6,830 Provision for unearned premiums (B) 4,440 4,679 167,132 Long-term business provision (P & 38) 108,636 102,955 82 Other technical provisions 53 54 45,961 Technical provision for linked liabilities (P & 25) 29,875 29,241 1,271 Provisions for other risks and charges (41) 826 1,562 1,380 Deposits received from reinsurers 897 912
Operating activities Net cash inflow from operating activities, excluding exceptional items and merger transaction costs (47a)* 1,001 697 Exceptional items and merger transaction costs paid* (523) (491)
Returns on investments and servicing of finance Interest paid on borrowings (136) (197) Interest paid on subordinated debt (73) (10) Preference dividends paid (21) (17) Dividends paid to minorities (35) (22) Net cash outflow from servicing of finance (265) (246)
Capital expenditure Purchases of tangible fixed assets (138) (131) Sales of tangible fixed assets 36 17 Net purchases of tangible fixed assets (102) (114)
Financing activities Issue of share capital (47c) 11 29 Net (repayment)/drawdown of loans** (68) 313 Proceeds from issue of subordinated debt (36) – 1,157 Net cash (outflow)/inflow from financing activities (57) 1,499
Cash flows were invested as follows: Increase/(decrease) in cash holdings (47d) 719 (69) Net portfolio investment Purchases of investments** 9,815 16,474 Sales of investments (10,562) (15,032) Net (sales)/purchases of investments (47f) (747) 1,442
Fixed assets Shares in subsidiary undertakings (M & 17d) 10,615 13,579 Investment in joint venture (N and 20c) 20 –
Called up share capital 764 764 Share premium account (32c) 1,094 1,083
1 – Exchange rates The euro rates employed in this report are an average rate of 11 = £0.63 (2001: 11 = £0.62) and a closing rate of 11 = £0.65 (2001: 11 = £0.61).
The Group’s consolidated profit and loss account incorporates the following financial information in respect of the Australia, New Zealand and US general insurance businesses: Abridged statement of operating and investment gains Australia and New Zealand general insurance business US general insurance business £m £m £m £m
Net premiums written 692 583 – 1,103 Change in the provision for unearned premiums (38) (24) – 102
Balance on the general business technical account Underwriting result 7 (1) – (173) Longer term investment return 71 70 – 152
Profit/(loss) on ordinary activities before tax 36 62 – (30) Tax on profit/(loss) on ordinary activities (6) (12) – (93)
With-profit business Reduction in fund for future appropriations 53 735 Non-profit business Increase in additional value of in-force business 12 90 General insurance business and other Reduction in shareholders’ funds 47 120
Incremental deferred tax provision arising from the move from SSAP 15 to FRS 19 112 945
(ii) The implementation of FRS 19 has resulted in a decrease in loss after tax of £151 million (2001: increase in profit after tax of £226 million).
(ii) Operating profit in respect of health business Underwriting result Operating result £m £m £m £m
Other Europe 2 2 International Australia and New Zealand (1) 7 Other International 1 4 57 Aviva plc Annual report + accounts 2002
(iv) Operating profit in respect of general insurance business excluding health, before exceptional items Underwriting result Operating result £m £m £m £m
Other business 554 324 Additional value of in-force long-term business 4,422 5,948 Corporate and other holding company assets 2,476 2,947
External borrowings (2,053) (2,651) Internal borrowings (3,671) (3,284) Subordinated debt (1,190) (1,157) Discontinued operations – 357
5 – New long-term savings business premiums The analysis of new life and savings business premiums written is: New business – single premiums New business – regular premiums Total £m £m £m £m £m £m
Total premiums written and investment sales – continuing operations 29,469 29,148 27,933 27,756 General insurance business premiums – discontinued operations (v) 783 1,852 692 1,686
Total Group long-term business premiums 18,330 17,564 17,873 17,229 *The figures for associates comprise the Group’s share of the associated partnership in RBS Life Investments Limited.
(iii) Health premium income by geographical origin – continuing operations Premiums before reinsurance Premiums after reinsurance £m £m £m £m
Total general insurance business premiums (excluding health) 8,865 8,892 7,805 7,850
(b) The analysis of general insurance business premiums written before reinsurance is: £m £m
General business premiums excluding health – continuing operations 8,865 8,892 Discontinued operations 783 1,852
Total general business premiums 10,579 11,586 7 – Analysis of investment return
Share of result of joint ventures (20b) 29 – – – Share of result of associated undertakings 27 10 16 4 Amortisation of goodwill on associated undertakings (21c) (13) (13) – –
Total investment return before tax (4,288) (4,519) (420) 30 61 Aviva plc Annual report + accounts 2002
(i) The longer term investment return, net of expenses, allocated to the general business technical account and transferred to the long-term business technical account was £1,182 million (2001: £1,404 million) and £59 million (2001: £36 million) respectively.
Total investment return before tax 28 76 (420) 30 Less: share of result of associated undertakings – – (16) (4) Add: unallocated interest charges – – 434 426
Longer term investment return 87 112 1,182 1,404 Short-term fluctuation in investment return (59) (36) (1,184) (952)
(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.
(c) The actual return on investments, before deducting investment management expenses and charges, is compared below with the aggregate longer term return over a five year period.
Actual return attributable to shareholders: Long-term business* 581 718 Non-long-term business 6,692 9,453
9 – Net operating expenses Net operating expenses in the technical accounts comprise: Long-term business General business
Group-wide staff profit share and other incentive plans 86 78 Global finance improvement programme 26 6 Other corporate costs 106 103
Merger integration incentive plans – 49 Costs of integrating acquired undertakings – 10
Integration costs in 2001 included £49 million in respect of integration incentive plans relating to the integration of the former CGU and Norwich Union businesses, which were payable to staff of certain business units and to senior management and were conditional upon the performance of the Group against predefined targets. A charge of £10 million was also included in 2001 relating to the costs of integrating the acquired businesses of Fortis Australia Limited and Aviva Limited (formerly known as The Insurance Corporation of Singapore). The tax impact of these charges was a credit of £8 million.
12 – Directors Information concerning individual directors’ emoluments, interests and transactions is given on pages 38 to 42.
13 – Auditor’s remuneration The total remuneration payable by the Group, excluding VAT and any overseas equivalent thereof, in respect of the audit of these accounts is shown below, together with fees paid to the auditor of the parent company and its associated firms in respect of other work.
Auditing these financial statements 4.6 3.9 Other audit work 4.2 2.9
(a) Tax on (loss)/profit on ordinary activities Tax charged /(credited) in the non-technical account comprises: Restated £m £m
Current tax: UK corporation tax 15 22 Overseas tax 89 87 Prior year adjustments
(b) Long-term business Tax (credited)/charged in the long-term business technical account comprises: Restated £m £m
The total tax (credited)/charged in the long-term business technical account relates to the following: Parent company and subsidiary undertakings (171) (641) Associated undertakings 8 –
(c) Factors affecting current tax charge for the year The tax assessed in the non-technical account is higher than the standard UK corporation tax rate, because of the following factors: Non-long-term business £m £m
Unrealised losses on investments – 9 29 – Provisions and other timing differences 165 100 90 84
Net (asset)/provision at 1 January 1,029 1,868 34 299 Amounts credited to the profit and loss account (625) (828) (156) (263)
(iv) Deferred tax assets arise in certain overseas subsidiaries in respect of tax timing differences. The subsidiaries are expected to generate sufficient future taxable profits to use the assets created.
15 – Ordinary dividends Ordinary dividends in the profit and loss account comprise: Interim – 8.75 pence (2001: 14.25 pence) paid on 15 November 2002 197 321 Final – 14.25 pence (2001: 23.75 pence) payable on 16 May 2003 322 536
Notes to the accounts continued 66 Aviva plc Annual report + accounts 2002
Operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items: Adjusted for the following items: Amortisation of acquired additional value of in-force long-term business (139) (100) (4.4) (64) (49) (2.2) Financial Services Compensation Scheme levy – – – (31) (22) (1.0)
(Loss)/profit attributable to equity shareholders (282) (551) (24.4) 514 242 10.8
Earnings per share has been calculated based on the operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after tax attributable to equity shareholders for continuing operations and for total operations, as well as on the profit attributable to equity shareholders. The directors believe the former two earnings per share figures provide a better indication of operating performance. The calculation of basic earnings per share uses a weighted average of 2,254 million (2001: 2,250 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 2002 was 2,257 million (2001: 2,255 million).
Weighted average Weighted average Total number of shares Per share Total number of shares Per share £m m p £m m p
(Loss)/profit attributable to equity shareholders (551) 2,254 (24.4) 242 2,250 10.8 Dilutive effect of share awards and options – 4 – – 4 (0.1)
(a) Acquisitions During the year ended 31 December 2002, the Group acquired the following companies: Country of incorporation Percentage acquired Month of acquisition
Dao Heng Assurance Limited Hong Kong 100% May 2002 DBS Kwong On Insurance Company Limited Hong Kong 100% May 2002 Caja de Granada Vida Spain 50% October 2002
In October 2002, the Group entered into a new bancassurance partnership with the Spanish savings bank, Caja de Granada. As part of this transaction, Unicorp Vida, the life and pensions business owned equally by Aviva and Unicaja, and of which Aviva has management control, acquired 50% of the issued equity share capital and management control of Caja de Granada’s life and pensions agency, Caja de Granada Vida. The Group’s share of the initial cash consideration paid by Unicorp Vida was £24 million including transaction costs with further amounts payable if Caja de Granada Vida achieves certain performance targets. The Group’s share of Caja de Granada Vida’s net assets at the date of acquisition amounted to £1 million, giving rise to goodwill of £23 million.
(b) Goodwill on acquisitions The identifiable assets and liabilities of the entities acquired, at the relevant date of acquisition, were as set out below.
Liabilities Technical provisions including linked liabilities 1 Other creditors and provisions –
(c) Disposals The net (loss)/profit on the disposal of subsidiary undertakings comprises: Long-term savings businesses: Canada – (5)
General insurance businesses: UK (see (i) below) (20) – France (see (ii) below) 6 – New Zealand - State Insurance – 52 Australia and New Zealand (see (v) below) (66) – United States – 125 Belgium – 46 Spain (see (iv) below) 94 –
Other businesses: France (see (iii) below) 1 – UK – 70
(ii) In May 2002, the Group completed the disposal of its wholly-owned subsidiary CGU Courtage SA, for a total consideration of £189 million. The net assets disposed of amounted to £137 million and the profit on disposal, after transaction costs, warranties and indemnities was £6 million.
(iv) In July 2002, the Group completed the disposal of its wholly-owned subsidiary, Plus Ultra Compania Anonima de Seguros y Reaseguros, for a total cash consideration of £152 million. Net assets at the date of disposal amounted to £52 million and the profit on disposal, after transaction costs, was £94 million.
(v) In October 2002, the Group entered into a binding agreement to dispose of its Australian and New Zealand general insurance businesses which became unconditional on 24 December 2002. Under the terms of the agreement, the Group sold its wholly-owned subsidiaries CGU Australia Limited and Belves Investments Limited, which are the holding companies for all of Aviva’s general insurance businesses in Australia and New Zealand, for a total cash consideration of £651 million including a pre-completion dividend of £106 million. At the date of disposal, the combined businesses had total net assets of £293 million, including the value of acquired goodwill. The loss on disposal, after writing back goodwill of £300 million previously written off to reserves and after deducting associated costs of sale, was £66 million.
(d) The Company’s subsidiary undertakings Movements in the Company’s shares in subsidiary undertakings are set out below: Restated £m £m
Net asset value At 1 January 13,579 13,309 Additions – 1,238 Movement in net asset value (2,964) (968)
Charge in the year 125 (3) 122 74 Disposals (19) – (19) (8) Foreign exchange rate movements 1 (1) – (1)
Freeholds 7,027 6,276 599 759 7,626 7,035 Long leaseholds – over 50 years 1,692 1,877 12 22 1,704 1,899 Short leaseholds – under 50 years 29 31 57 76 86 107
The valuation of properties has been undertaken by qualified external valuers or prepared or monitored by qualified members of staff reporting to the Head of Property of Morley Fund Management Limited, who is a Fellow of The Royal Institution of Chartered Surveyors, or by local qualified staff of the Group in overseas operations. All properties are valued at market value.
In addition to the PLPs described above, the Group has invested in a joint venture life assurance company in China which had not commenced operations at 31 December 2002. Details of the principal joint ventures are given in section (c) below.
(b) Movements in the Group’s investments in joint ventures comprise: Long-term business £m £m
Share of result for the year after tax 29 – Unrealised investment gains after tax 72 – Dividends received (27) – Additions 707 –
Ashtenne Industrial Partnership 66.7% 57.6% Bishopsbridge Limited Partnership 50% 50% The Junction Limited Partnership 50% 50.7% The Mall Limited Partnership 50% 50% Quercus Property Partnership Limited 50% 80%
Notes to the accounts continued 70 Aviva plc Annual report + accounts 2002
(i) Movements in the Group’s investments in associated undertakings comprise: Long-term Non-long-term Total business business 2002 £m £m £m
Share of result for the year after tax 19 7 26 Foreign exchange rate movements 8 10 18 Realised investment gains after tax – 2 2 Unrealised investment losses after tax (15) (17) (32) Dividends received – (4) (4)
Global Aerospace Underwriting Managers Limited Ordinary £1 shares 50.0% Great Britain Norwich Winterthur Holdings Limited Ordinary £1 shares 48.5% Great Britain ProCapital S.A. Ordinary 11 shares 43.5% France RBS Life Investments Limited Ordinary £1 shares 49.99% Great Britain Société Foncière Lyonnaise Ordinary 12 shares 31.49% France The British Aviation Insurance Company Limited Ordinary £1 shares 38.1% Great Britain
The Group’s shareholding in SFL would reduce to 26.37% if all convertible bonds previously issued by SFL are converted to ordinary shares.
(c) The carrying value of goodwill on associated undertakings comprises: Long-term Non-long-term Total Total business business 2002 2001 £m £m £m £m
Amortisation: At 1 January 13 – 13 – Charge in the year 13 – 13 13
(d) In France, the Group has invested in a number of specialised investment companies. These invest mainly in equities, bonds and properties, and distribute most of their income. The Group’s interests in these companies are included in these accounts within other financial investments or land and buildings as appropriate.
(a) These financial investments comprise: Long-term Non-long-term Total Long-term Non-long-term Total business business 2002 business business 2001 £m £m £m £m £m £m
Notes to the accounts continued 72 Aviva plc Annual report + accounts 2002
(b) Listed investments included in the carrying value above are: £m £m
The redemption value of investments held at the year end was £536 million less (2001: £614 million less) than the amortised cost.
(d) In addition to the investments in participating interests detailed in note 21, the Group holds investments exceeding 20% of a class of the equity capital in a number of other companies in the United Kingdom and elsewhere. These investments do not represent a material part of the assets or investment income of the Group. These include the Group’s 8.3% (2001: 7.8%) shareholding in Delta Lloyd Investment Fund NV. As this company invests mainly in equities and all dividends received are passed on to the shareholders, the Group’s interest has been shown in other financial investments in these accounts. The economic benefits of ownership of an additional holding of 21.2% (2001: 16.6%) belong to the Delta Lloyd Pension Fund.
In 1998, the Group purchased several swap options from a European bank to cover a possible future exposure to interest rates related to guaranteed annuities in a subsidiary purchased prior to 1998. At 31 December 2002, the exposure hedged by these options was £2,550 million (2001: £2,451 million) and the contracts had a fair market value of £167 million (2001: £132 million). These options have varying expiry dates up to 2028.
(g) The Group has entered into stocklending arrangements in the United Kingdom 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 £295 million (2001: £336 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).
The ultimate effective holding company of both the ERF companies is Equity Release Funding Holdings Limited, whose shares are held on trust. NUER does not own, directly or indirectly, any of the share capital of the ERF companies or their parent company. NUER has no right to repurchase the benefit of any of the securitised mortgage loans, other than in certain circumstances where NUER is in breach of warranty or loans are substituted in order to effect a further advance.
NUER has purchased £12.5 million of subordinated fixed rate notes in ERF1, which are repayable in 2031. These are included in debt securities and other fixed income securities within other financial investments in the consolidated balance sheet.
The adjustment to in-force business previously acquired arises from the final determination of the embedded value of long-term businesses acquired in 2001. The Group received a refund of part of the consideration it paid to reflect the reduced additional value of in-force long-term business acquired.
Details of the assumptions and methodology supporting the additional value of in-force long-term business can be found on pages 96 to 97.
(b) The reserve arising from the additional value of in-force long-term business comprises: Restated Movement 2002 2001 in the year £m £m £m
Excluding this reserve, total shareholders’ funds at 31 December 2002 would be £5,837 million (2001: £6,484 million, restated).
Net assets of the long-term businesses (4c) 5,957 5,359 Less: Goodwill arising on investment in Royal Bank of Scotland Life Investments (21c) (231) (244)
(a) A reconciliation of assets to linked liabilities is as follows: 2002 2001 £m £m
(b) The cost of assets held to cover linked liabilities is £28,047 million (2001: £27,336 million).
Banking and stockbroking assets (31a) 3,514 3,359 Deferred tax asset (note 14e) 222 246
30 – Deferred acquisition costs The asset in the consolidated balance sheet comprises: Costs in respect of long-term business 1,750 1,595 Costs in respect of general business 934 1,008
Notes to the accounts continued 76 Aviva plc Annual report + accounts 2002
(a) Banking and stockbroking assets (see note 27), excluding intra-group balances, comprise: £m £m
(b) Banking and stockbroking liabilities (see note 43), excluding intra-group balances, comprise: £m £m
Deposits by banks 72 229 Bank customer accounts 2,720 2,270 Bank overdrafts – 41 Other banking and stockbroking liabilities 457 772 32 – Ordinary share capital
The allotted, called up and fully paid share capital of the Company at 31 December 2002 was: £m £m 2,256,737,144 (2001: 2,254,928,378) ordinary shares of 25 pence each 564 564
(b) At 31 December 2002, options to subscribe for ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva Savings Related Option price Number Normally Option price Number Normally Share Option Scheme p of shares exercisable p of shares exercisable
Hibernian Savings Related Option price Number Normally Option price Number Normally Share Option Scheme 1 of shares exercisable 1 of shares exercisable
As at 31 December 2002, awards over a total of 3,278,807 ordinary shares, and options over a total of 252,694 ordinary shares, were outstanding under the Aviva Deferred Bonus Plan. These awards will vest in 2003, 2004 and 2005. Shares will be purchased into an employee share trust to satisfy the vesting awards.
Profit for the year attributable to equity shareholders, including dividends received or receivable from subsidiary undertakings – – 1,406 1,406
The cumulative amount in the profit and loss account includes non-distributable gains of £5,735 million (2001: £5,735 million).
The 6.125% Fixed/Fixed Rate Reset Subordinated Notes 2036 and the 5.75% Fixed/Floating Rate Reset Subordinated Notes 2021 were issued by the Company on 14 November 2001. The Notes rank below the senior obligations and ahead of the preference and ordinary share capital issued by the Company. The 2036 Notes are callable at par, at the option of the Company, on 16 November 2026 and 14 November 2031. If the Notes are not called, the interest rate payable will be reset to an amount of 2.85% over the Gross Redemption Yield on the appropriate five-year benchmark gilt on the reset date. The 2021 Notes are callable at par on 14 November 2011 and at three monthly intervals thereafter up to maturity. If the Notes are not called, the interest payable will be reset to an amount of 2.12% above three month Euribor.
– “with-profit” funds of CGNU Life, Commercial Union Life, 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, 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.
(b) The directors have been advised by the Group’s reporting actuary that the assets of each of the long-term operations were at least sufficient to meet their respective liabilities at 31 December 2002.
Annuities in deferment and in payment 3 to 4 GBM/V 76-80, 80-85, 85-90, 90-95, Coll 1993 and DIL 98 plus further allowance for future mortality improvement
Netherlands Permanent health and injury 3.5% 3.5% 12 years 12 years
Net of reinsurers’ share, the outstanding claims provisions before discounting were £9,508 million (2001: £9,700 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.
40 – Equalisation provision An equalisation provision has been established in the Group accounts as explained in accounting policy T on page 46. This had the effect of reducing Group and Company shareholders’ funds by £314 million at the year end (2001: £272 million). The change in the equalisation provision during the year comprised a reduction of £57 million (2001: £56 million) in the balance on the general business technical account and the profit on ordinary activities before tax, offset by £15 million representing the equalisation provision of a subsidiary company sold during the year.
42 – Debenture loans, amounts due to credit institutions and commercial paper
“Other” comprises borrowings by holding companies within the Group which are not allocated to operating companies. The amounts shown above are net of related derivative contracts.
The interest charge for the year on the above loans was: – 2 41 56
42 – Debenture loans, amounts due to credit institutions and commercial paper continued The 1.5% FF2.8 billion exchangeable bonds were issued by a French subsidiary undertaking and were redeemed at the option of that company in June 2002.
The 10.75% guaranteed bonds matured in March 2002 and were repaid on the same date.
The 2.5% subordinated perpetual loan notes were issued by a Dutch subsidiary undertaking to finance the acquisition of NUTS OHRA Beheer BV. These loan notes have a face value of 1489.9 million and their fair value is estimated at 1172.4 million (2001: 2175.0 million) which is based on the future cash flows in perpetuity discounted back at a market rate of interest. The rate of interest paid on the notes will be gradually increased over the next seven years to a maximum of 2.76%. The loan notes are convertible into ordinary shares in Delta Lloyd NV, should there be a public offering of those shares.
As explained in note 20(a), 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 relate to those PLPs which have been consolidated as subsidiaries.
The interest charge for the year on the above borrowings was: 67 83
All commercial paper is repayable within one year and is issued in a number of different currencies. Part of this has been converted into a sterling liability through the use of financial instruments in the Company and a subsidiary undertaking.
42 – Debenture loans, amounts due to credit institutions and commercial paper continued
Expiring within one year 880 1,550 Expiring beyond one year 2,060 1,430
(i) 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
Bank overdrafts arise substantially from unpresented cheques and amount to £61 million (2001: £554 million) in long-term business operations and £287 million (2001: £364 million) in general business and other operations. The “other” totals include the obligation to repay £295 million (2001: £336 million) received under stock repurchase arrangements entered into in the United Kingdom and the Netherlands.
Deferred reinsurance commissions 90 51 Other accruals and deferred income 967 952
Notes to the accounts continued 84 Aviva plc Annual report + accounts 2002
(a) The Group operates a large number of pension schemes around the world, whose members receive benefits on either a defined benefit basis or a defined contribution basis. The largest defined benefit schemes are in the United Kingdom, the Netherlands, Canada and Ireland, where the scheme assets comprise over 95% of the total defined benefit scheme assets throughout the Group. Of this total, the United Kingdom comprises some 80%. The assets of the main United Kingdom, Irish and Canadian schemes are held in separate trustee-administered funds and, in the Netherlands, the main scheme is held in a separate foundation which invests in the life funds of the Group. An actuarial report has been submitted for each of the defined benefit schemes within the last three years, using appropriate methods for the respective countries on local funding bases. These reports showed no material deficits in any of the main schemes.
(b) The Group has continued to account for pensions in accordance with SSAP24 and the disclosures given in section (c) below are those required by that accounting standard. FRS17 “Retirement Benefits” was issued in November 2000 and differs from SSAP24 in a number of ways. These are principally in the choice of assumptions, and that the difference between the market value of assets and liabilities is immediately recognised in the balance sheet under FRS17, whereas changes in assets and liabilities are recognised on a smoothed basis under SSAP24.
The accounting provisions of FRS17 were not expected to be mandatory for the Group until the year ending 31 December 2003 but, in the transitional period, certain disclosures were required in the notes to the accounts. In November 2002, the Accounting Standards Board issued an amendment to FRS17 which extended the transitional period through to, in the Group’s case, the year ending 31 December 2005. The transitional disclosures, to the extent not given in section (c), are set out in section (d) below.
The employing companies’ contributions to the defined benefit section of the merged scheme throughout 2002 were 12.5% and 3.2% of employees’ pensionable salaries in respect of members of the previous CGU scheme and NU scheme respectively. The employers’ contribution rate for 2003 has been agreed as 25% of pensionable salaries for all members of this section.
(i) The valuation used for FRS17 disclosures has been based on the most recent actuarial valuations, updated to take account of the requirements of FRS17 in order to assess the liabilities of the major schemes at 31 December 2002. The updating was made by actuaries in each country, with overall co-ordination by external consultants, Watson Wyatt. Other than the actuary of the Aviva Staff Pension Scheme, the actuaries making the calculation were independent of the Group. Scheme assets are stated at their market values at 31 December 2002. The details for the main defined benefit schemes are shown below. Where schemes provide both defined benefit and defined contribution pensions, the assets and liabilities shown exclude those relating to defined contribution pensions.
The main financial assumptions used to calculate scheme liabilities under FRS17 are: 85 Aviva plc Annual report + accounts 2002
(iii) The pension expense for these schemes on an FRS17 basis comprises: Total £m
Total charge that would be made to profit on ordinary activities before tax in respect of these schemes under FRS17 55
Difference between the expected and actual return on scheme assets Amount 1,139 Percentage of the scheme assets at the end of the year 23.4%
Experience gains and losses on scheme liabilities Amount 131 Percentage of the present value of scheme liabilities 2.4%
Total amount recognised in the statement of total recognised gains and losses Amount 1,032 Percentage of the present value of scheme liabilities 18.7%
Total market value of assets 3,950 4,710 486 443 140 165 282 338 4,858 5,656
Present value of scheme liabilities (4,538) (4,518) (533) (430) (156) (145) (285) (229) (5,512) (5,322)
Notes to the accounts continued 86 Aviva plc Annual report + accounts 2002
The change in the net pension surplus calculated under FRS17 is mainly attributable to a reduction in the market value of the schemes’ assets. These assets principally comprise equities, the values of which have been subject to significant market fluctuations. The fall in the relevant share indices accounts for the majority of the £1,139 million difference between actual and expected return on assets.
(vii) The effect on the Group’s net assets and retained profits at 31 December 2002 of substituting the FRS17 figures for the corresponding SSAP24 balance sheet entries would be as follows: Profit and loss Net assets account reserve
Totals included in the Group accounts 10,412 12,403 1,126 1,662 Less: pension asset on SSAP24 basis (175) (143) (175) (143)
Total assets included in the balance sheet 184,923 188,324 Third party funds under management Securitised mortgages (gross of non-recourse funding) 2,099 1,149 Unit trusts, Oeics, Peps and Isas 3,636 4,677 Segregated funds 16,955 14,849
(a) The reconciliation of (loss)/profit on ordinary activities to net cash inflow from operating activities is: £m £m
(c) Changes in financing during the year were: Share capital Borrowings £m £m £m £m
Foreign exchange rate movements – – 60 (24) Loans repaid for non-cash consideration – – (299) – Amortisation of discounts and other non-cash items – – 1 –
Balance at 31 December Share capital 3,854 3,843 External borrowings 3,254 3,819 Non-recourse funding 478 219
Notes to the accounts continued 88 Aviva plc Annual report + accounts 2002
Changes in cash 735 (67) Balance at 1 January 538 605
Bank overdrafts: General business and other activities (287) (364) 77 Banking and stockbroking – (41) 41
(f) Movements in opening and closing non-long-term portfolio investments were: £m £m
Net (sales)/purchases of investments (747) 1,442 Net investments (divested)/acquired with subsidiary undertakings (1,826) (6,165) Changes in market values and foreign exchange rate movements (668) (732) Investments sold for non-cash consideration (267) – Changes in non recourse funding (259) (219)
Net movement in opening and closing non-long-term portfolio investments (3,767) (5,674) Balance at 1 January Total non-long-term portfolio investments 17,769 23,224 Non-recourse funding (219) –
(g) Non-long-term portfolio investments included in the consolidated balance sheet comprised: 2002 2001 Changes in year £m £m £m
(f) Other In addition, the Company has guaranteed the overdrafts and borrowings of certain subsidiary and associated undertakings. In the opinion of the directors, no material loss will arise in respect of these guarantees and indemnities.
49 – Capital commitments In carrying on the business of investment, the Group has entered into future commitments, including property development, after 31 December 2002. These amounts are not reflected in the consolidated Group balance sheet on pages 52 and 53. The Group has in hand a number of property developments which, under contracts already signed, will require expenditure of £344 million (2001: £207 million) for long-term business and £nil (2001: £1 million) for general business operations.
Premium income after reinsurance and investment sales Life assurance, investment sales, including share of associates 19,200 19,065 17,349 15,048 11,342
Corporate costs and unallocated interest charges (652) (613) (546) (402) (286)
Operating profit on continuing operations before tax, amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items 1,218 1,464 946 1,284 1,272
Amortisation of goodwill and acquired value of long-term business (274) (151) (121) (56) (10) Financial Services Compensation Scheme levy – (31) – – –
(Loss)/profit on ordinary activities before tax (282) 514 (1,406) 1,468 1,609
Consolidated shareholders’ funds Equity shareholders’ funds 9,469 11,552 13,087 15,473 14,691
(d) Figures for 1999 and 1998 are based on the weighted average dividends per share of CGU plc and Norwich Union plc.
Five year review 91 Aviva plc Annual report + accounts 2002
Operating profit - before tax, amortisation of goodwill and 2,854 exceptional items 1,798 1,983 (214) Amortisation of goodwill (135) (87)
– Financial Services Compensation Scheme levy – (31) – Integration costs – (59)
(843) goodwill and exceptional items (531) (616) 1,559 Tax on loss on other ordinary activities 982 740
(3,273) Loss for the financial year attributable to equity shareholders (2,062) (519)
(145.2)c Loss attributable to equity shareholders (91.5)p (23.1)p (145.2)c Loss attributable to equity shareholders – diluted** (91.5)p (23.1)p **As required by FRS14 “Earnings per share”, the impact of the dilutive effect is not recognised as it would result in a smaller loss.
Basis of preparation – achieved profit basis The achieved profit statement above includes the results of the Group’s life operations reported under the achieved profit basis combined with the modified statutory basis results of the Group’s non-life operations set out on pages 44 to 90. In the directors’ opinion, the achieved profit basis provides a more accurate reflection of the performance of the Group’s life operations year on year than results under the modified statutory basis. The achieved profit methodology used is in accordance with the guidance on “Supplementary reporting for long-term insurance business (the achieved profits method)” circulated by the Association of British Insurers in December 2001. Further details on the methodology and assumptions are set out on pages 96 to 97.
The results of the Group’s life operations under the modified statutory basis, which is the basis used in the annual statutory accounts, can be found on pages 44 to 90.
The contribution from the Group’s share of the alliance with The Royal Bank of Scotland Group (RBSG) is incorporated within the achieved operating profit. Goodwill amortised in the year in respect of the Group’s holding in the associated company, RBS Life Investments Limited, is included within the ‘Amortisation of goodwill’ above.
New business contribution (after the effect of solvency margin) 452 479 Profit from existing business – expected return 849 848
– experience variances (110) (18) – operating assumption changes** 9 17
Life achieved operating profit before tax and exceptional items 1,524 1,665 Exceptional items*** – (12) Investment return variances (2,320) (1,632) Effect of economic assumption changes (561) 1
Total life achieved (loss)/profit before tax (1,357) 22 Tax on operating (loss)/profit (460) (511) Tax on other ordinary activities 857 499
New business contribution The following table sets out the contribution from new business written by the long-term business operations. The contribution generated by new business written during the period is the present value of the projected stream of after-tax distributable profit from that business. Contribution before tax is calculated by grossing up the contribution after-tax at the full corporation tax rate for UK business and at appropriate rates of tax for other countries.
Total new business contribution before effect of solvency margin** 578 591
Total new business contribution including effect of solvency margin 452 479 *Annual premium equivalent represents regular premiums plus 10% of single premiums.
Analysis of life achieved operating profit Life achieved operating profit is calculated on an after-tax basis and then grossed up at the full rate of corporation tax for UK business and at appropriate rates of tax for other countries.
Embedded value at the end of the year** 10,148 11,063 *Embedded value from businesses acquired in 2002 represents the life subsidiary of DBS Hong Kong of £13 million. Embedded value from businesses acquired in 2001 comprises Risparmio and Eurovita in Italy (£120 million), the life operations of Unicaja, Caixa Galicia and Caja España in Spain (£64 million), Hungary (£11 million) and The Insurance Corporation of Singapore (£25 million). Embedded value from business disposed of in 2001 comprises NU Vita (Italy) (£16 million), Greece (£3 million) and Canada (£117 million).
**Embedded value at the end of the year includes minority interests in 2002 of £410 million (2001: £347 million). This comprises minority interests in France of £42 million (2001: £34 million), Italy £180 million (2001: £149 million), Poland £51 million (2001: £55 million), Spain £134 million (2001: £107 million) and Other Europe £3 million (2001: £2 million).
Segmental analysis of embedded value of life business Net worth at 31 December* Valuation of in-force at 31 December** Embedded value at 31 December £m £m £m £m £m £m
**The net worth includes £2,600 million (2001: £2,200 million) in respect of minimum statutory solvency margin requirements that are supported by shareholders’ capital. The effect of holding the minimum statutory solvency margin and allowing for projected future releases was £750 million (2001: £700 million).
New business contribution before effect of solvency margin 509 69 578 591 Effect of solvency margin (108) (18) (126) (112)
Life achieved operating profit before tax and exceptional items 1,434 90 1,524 1,665
Closing life embedded value 9,738 410 10,148 11,063 95 Aviva plc Annual report + accounts 2002
Future distributable profits will depend on experience in a number of areas such as investment return, discontinuance rates, mortality and administration costs. Using realistic assumptions of future experience, we can project releases to shareholders arising in future years from the business in-force and associated minimum statutory solvency margin.
The life achieved profit reflects current performance by measuring the movement, from the beginning to the end of the year, in the present value of projected releases to shareholders from the business in-force and associated minimum statutory margin, together with the movement in the net assets of the long-term operations, adjusted for any amounts released from or invested in life operations.
(b) Embedded value The shareholders’ interest in the long-term business operations is represented by the embedded value. The embedded value is the total of the net assets of the long-term operations and the present value at risk discount rates (which incorporate a risk margin) of the projected releases to shareholders arising from the business in-force, less a deduction for the effect of holding the minimum statutory solvency margin. This effect of solvency margin is the difference between the nominal value of the solvency margin and the present value at risk discount rates of the projected release of the solvency margin and investment earnings on the assets deemed to back the solvency margin.
Principal economic assumptions Economic assumptions are derived actively based on market yields on risk-free fixed interest assets at each period end. Margins are applied on a consistent basis to risk free yields to obtain investment return assumptions for ordinary shares and property, and risk discount rates. The reductions in assumptions in 2002 reflect the fall in actual risk-free yields (for example, in the UK the 15-year gilt) over the year in each territory. Risk margins remain unchanged in all our key businesses.
Alternative method of reporting long-term business continued 96 Aviva plc Annual report + accounts 2002
Interest rates Discount rate Interest rates Discount rate £m £m £m £m
Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual report, including, as described on page 43, the accounts prepared on the modified statutory solvency basis. Our responsibilities in relation to the Annual Report, including those accounts, are set out on page 43. The directors are also responsible for preparing the supplementary information on the above achieved profits basis.
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 supplementary information stated on the achieved profits basis is 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 the supplementary information.
Opinion In our opinion, the supplementary information for the year ended 31 December 2002 has been properly prepared in accordance with the achieved profit basis, using the methodology and assumptions set out on pages 96 to 97.
United Kingdom CGNU Life Assurance Limited CGU Bonus Limited CGU Insurance plc CGU International Insurance plc CGU Underwriting Limited Commercial Union Life Assurance Company Limited General Accident plc London & Edinburgh Insurance Group Limited Morley Fund Management Limited Morley Investment Services Limited Morley Pooled Pensions Limited Morley Properties Limited Northern Assurance Company Limited, The Norwich Union Annuity Limited Norwich Union Healthcare Limited Norwich Union Insurance Limited Norwich Union Investment Funds Limited Norwich Union Investment Management Limited Norwich Union Life & Pensions Limited Norwich Union Linked Life Assurance Limited Norwich Union Wealth Management Limited Scottish General Insurance Company Limited your-move.co.uk Limited
Australia CGNU Australia Holdings Limited and its principal subsidiaries: Norwich Union Life Australia Limited Navigator Australia Limited
Netherlands Delta Lloyd NV and its principal subsidiaries: Delta Lloyd Asset Management NV Delta Lloyd Bankengroep NV (Banking) Delta Lloyd Levensverzekering NV Delta Lloyd Schadeverzekering NV Delta Lloyd Zorgverzekering NV OHRA Schadeverzekeringen NV OHRA Levensverzekeringen NV
Portugal Eurovida BNC – CGU Companhia de Seguros de Vida S.A. (50%)
Dividend payments direct to your bank account If you wish, you can have your dividend payments credited to your bank or building society account on the dividend payment date – a tax voucher will still be posted to your home address to confirm the payment. The Company has also recently introduced a service – the Transcontinental Account Payment Service (“TAPS”) – which allows shareholders in many countries to have dividends credited direct to bank accounts in local currencies.
To obtain further details and a mandate form for either service please contact the Company’s registrars (at the address opposite).
Shareview Shareview is the internet based service that allows you to view your shareholding online and, if you wish, to receive shareholder communications (e.g. Notice of Meeting, Report and Accounts, etc.) via e-mail rather than by post.
Share price If you would like to access the current share price of Aviva shares, you can call 0906 843 2197*. The share price is also posted on the Company’s internet site at www.aviva.com
Shareholder profile The categories of ordinary shareholders and the ranges and size of shareholding as at 31 December 2002 are set out below: Analysis of shareholders No. of shareholders % No. of shares %
*Calls are currently charged at 60 pence per minute at all times. The average time to access the share price is approximately one minute.
Non-technical account 50 Reconciliation of Group operating profit to profit on ordinary activities before tax 51 Consolidated statement of total recognised gains and losses 51 Reconciliation of movements in consolidated shareholders’ funds 52 Consolidated Group balance sheet 54 Consolidated cash flow statement 55 Company balance sheet 56 Notes to the accounts 91 Five year review 92 Alternative method of reporting long-term business 99 Aviva Group of companies 100 Shareholder information
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