The categories of ordinary shareholders and the ranges and size of shareholding as at 31 December 2003 are set out below: Analysis of shareholders No. of shareholders % No. of shares %
Ex-dividend date (ordinary shares) 24 March Record date (ordinary shares) 26 March First dividend payment for 83⁄8% cumulative irredeemable preference shares 1 April Dividend Reinvestment Plan election date 23 April Annual General Meeting 27 April Announcement of first quarter long-term savings new business figures 5 May Dividend payment date (ordinary shares) 17 May First dividend payment for 83⁄4% cumulative irredeemable preference shares 1 July Announcement of unaudited six months’ interim results 4 August Second dividend payment for 83⁄8% cumulative irredeemable preference shares 30 September Announcement of third quarter long-term savings new business figures 2 November Second dividend payment for 83⁄4% cumulative irredeemable preference shares 31 December
Corporate and single company Peps Barclays Stockbrokers Limited Tay House 0870 514 3263 300 Bath Street
Aviva worldwide internet sites www.aviva.com/customers/global.cfm 01 Highlights of the year 02 04 Business overview 06 08 26 28 36 39 41 44 46 46 47 55 56 Accounting policies 59 61 Non-technical account 63 Consolidated statement of total 63 Reconciliation of movements in 64 66 Consolidated cash flow statement 67 Company balance sheet 68 Notes to the accounts 101 102 long-term business 111 112
Consolidated profit and loss account Technical account – long-term business Consolidated profit and loss account Technical account – general business
Reconciliation of Group operating profit to profit on ordinary activities before tax recognised gains and losses consolidated shareholders’ funds Consolidated Group balance sheet
Life profits reporting In reporting the Aviva plc headline operating profit, life profits have been included using the achieved profit basis. This is used throughout the Aviva group and by many in the investment community to assess performance. The modified statutory basis, which is used in our accounts, is also identified in the headline figures. We have focused on the achieved profit basis, as we believe life achieved operating profit is a more realistic measure of the performance of life businesses than the modified statutory basis. Life modified statutory operating profit before tax amounted to £1,138 million. The basis used for reporting achieved profit is consistent with the guidance circulated by the Association of British Insurers.
Aviva is the world’s seventh-largest insurance group† and the biggest in the UK. It is one of the leading providers of life and pensions products to Europe and has substantial businesses elsewhere around the world. Its main activities are long-term savings, fund management and general insurance. It has premium income and investment sales from continuing operations of £30 billion**, and around £240 billion of assets under management. The group has 56,000 employees serving 30 million customers worldwide.
Robust life results: good sales growth in continental Europe; signs of confidence returning to UK market; margins up to 26.1%
Significant growth from bancassurance: sales up 27%; now accounts for 25% of new life and pensions sales; average margins 39.7%
Excellent and sustainable general insurance results with new group combined operating ratio target of 100% for next three years
Strong capital position and well-prepared for new UK realistic solvency reporting regime
General insurance 4 UK 17% 5 Continental Europe 6% 6 Rest of world 5%
*From continuing operations, including life achieved operating profit, before amortisation of goodwill and exceptional items.
All growth rates in this document are quoted at constant rates of exchange.
In the UK, our long-term savings business is showing resilience in a slow market. We are making steady progress in France, with strong performances in Spain and Italy. Our recent bancassurance agreement with ABN AMRO in the Netherlands is off to a promising start. In the United States we are growing profitably. Our start-up
Aviva has come through a third year of adverse economic conditions. Some of our competitors have suffered severely. Others have undertaken massive capital raisings. At Aviva we reduced dividends early to a sustainable level. We further increased our capital strength by issuing subordinated debt in 2001 and 2003 to raise altogether £2.8 billion.
Through strict cost control and stringent capital allocation we have run and developed our business with undisturbed continuity and maintained a Standard & Poor’s AA range of ratings for the group.
Our two main operational aims – to be the insurance industry’s low-cost producer and provider of choice – are being reached gradually. We benchmark our performance continually to measure our progress.
Pehr G Gyllenhammar Chairman operations in India and China are growing well, above plan.
Our UK general insurance operation is turning in excellent results and good free cashflow. Worldwide, our general insurance business is improving steadily, and Canada is promising after a setback earlier in the year.
Our fund management results are more robust than in the previous year.
From the 2004 financial year we shall be required to report the board’s compliance with the revised Combined
Code incorporates recommendations from the Higgs review of the role of non-executive directors, which generated considerable debate in the
Partridge, a non-executive director and member of the audit committee, retired in May 2003, and I thank him for his invaluable contribution.
As chairman of the European Financial Services Round Table, I am pleased with the progress we are making towards the creation of a single market for financial services, although much patience is required. We have proposed significant simplification to supervision and regulation, steps toward a single capital market, and are preparing proposals for more effective and community-wide consumer protection.
I believe that Aviva has emerged from tough times in good shape. We are strongly positioned as a leading European-based financial services group. That should benefit you as our shareholders.
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Our credentials Our strategy is to grow this business aggressively and profitably by building strong positions in our chosen markets. Aviva is one of the leading life and pensions providers to Europe. We are the largest life markets. We are among the top five in the Netherlands, Ireland, Poland, Turkey and Singapore, among the top 10 in France, Italy, Belgium, operations in the United States and Germany. We have also established businesses with great £1,555m Geographical analysis of net premium and investment sales from continuing operations
• Life and pension new business sales were £13.3 billion, including a 3% increase in continental European sales to £6.6 billion, mostly driven through bancassurance.
range of investment choices available to financial advisors and their clients in Australia.
We continue to develop our presence as a leading international fund manager, with worldwide assets under management of around £240 billion. We are the second-largest UK-based fund manager, among the top five in Ireland and the Netherlands, and a top-five master trust in Australia through Navigator. We also have a significant business in France.
• Excellent investment performance in France again earned a large number of awards from the financial press.
• Healthy fund performances, strong demand and third-party distribution arrangements contributed to increased assets under management of
• Third consecutive year of improvements as we achieved a combined operating ratio from
• Continued investment in the development of innovative, tailored propositions such as digital flood mapping, Pay As You Drive Union Rescue vehicle breakdown service.
• Shared service initiatives helped keep costs down and improved claims handling and standards of customer service across the group.
“We took a number of tough but clear-sighted decisions to protect and grow our business during 2003”
Overview The Aviva group delivered a strong performance against a challenging commercial backdrop in 2003. We committed ourselves to applying our strategy clearly and consistently in the face of slow worldwide economic growth, stock market volatility and increasing pace of regulatory change.
of £911 million (2002: £881 million) from our general insurance business, which reaped the benefits from strict underwriting and pricing disciplines for the third consecutive year, in addition to favourable weather conditions. We achieved a combined operating ratio (COR)† of 100%.
This operational performance, combined with improvements in global investment markets and a strengthened euro, saw shareholders’ funds# increase to £11.2 billion (2002: £9.7 billion). Net asset value per share was up 12% to 502 pence (2002: 433 pence per share).
On a modified statutory basis, group operating profit before tax*** was £1,490 million (2002: £1,218 million).
Cost management We continue to improve our operational efficiency by reducing costs and capitalising on economies of scale. We endeavour to align costs to revenues across our businesses. We have continued to apply rigorous financial targets for new developments and internal projects.
Senior management responsibilities A realignment of responsibilities among the executive directors took effect from July 2003 to support our strategy and structure more effectively.
†From continuing operations. **From continuing operations, including share of associates’ premiums. ***From continuing operations, before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items.
In addition to my duties as group chief executive, I became non-executive chairman of Norwich Union Life in the UK, with Gary Withers continuing as chief executive. Our continental European and international long-term savings businesses now report to Philip Scott. Patrick Snowball, chief executive of Norwich Union Insurance in the UK, also took on responsibility for our general insurance businesses in Canada, Ireland and Asia.
Philip Scott will become non-executive chairman of Morley Investment Holdings, in addition to his existing responsibilities, after Philip Twyman’s retirement on 31 March 2004. We look forward to welcoming Andrew Moss as group finance director, following the departure of Mike Biggs.
Outlook Investment markets are showing signs of recovery and there is evidence that investors are regaining confidence. The group’s longer-term prospects remain excellent.
Having invested around £2 billion in strategic long-term businesses and savings partnerships since 2000, we are beginning to gain rewards in terms of sales volumes, profitability and market share. Many of our bancassurance partnerships worldwide are still at a relatively early stage of development and we expect further growth as these relationships mature. Furthermore, as one of the leading providers of life and pension products to Europe, Aviva’s potential to grow remains strong, particularly given Europe’s ageing populations and widespread pension reform. We are well placed to capitalise on this growing demand for private provision as the European Union expands.
Our powerful presence in our chosen markets is aided by the Aviva brand, which has been successfully launched in more than 20 countries worldwide. Our long-term savings business is focused on profitable growth, supported by well-managed general insurance operations where our investment in improved efficiency, claims handling and distribution is generating consistent and sustainable earnings.
We took a number of tough but clearsighted decisions to protect and grow our business during 2003. We will continue with clarity of purpose and action to develop our distribution channels, improve standards of customer service, increase efficiency and maintain capital disciplines. We remain financially strong and we believe we are the bestpositioned life company in Europe to benefit as consumer confidence returns.
Long-term savings Aviva is strongly positioned as one of the largest life and pensions providers to Europe, with competitive businesses elsewhere around the world. Our clear-sighted strategy is to achieve profitable growth by providing our customers with a choice of high-quality, value-for-money products through a variety of distribution channels.
“There are excellent opportunities to develop our strong positions in Europe and emerging markets through our multi-distribution capability” Philip Scott, group executive director, Aviva life international
Market position Aviva is one of the leading life and pensions providers to Europe. We are the largest company in the UK long-term savings market and the Spanish life market. We are also among the top five in the Netherlands, Ireland, Poland, Turkey and Singapore, among the top 10 in France, Italy, Belgium, Romania, Australia and India, and have significant operations in the United States and Germany.
In 2003 Norwich Union regained its leadership position in the UK, with a market share of over 12% in the third quarter and nearly seven million customers. Aviva also became the largest life insurer in the Spanish market during 2003, having grown considerably over the past few years through our success with our bancassurance partners. Hibernian improved its position to become Ireland’s number three life and pensions company, with a market share of 11%. We also established the foundation for our important long-term operations in India and China.
Delta Lloyd customers in the Netherlands can access a full range of information, products and services via the internet, in addition to a choice of other methods, including the telephone, intermediaries and bancassurance.
Multi-distribution capability In the UK, independent financial advisers (IFAs) remain our main distribution channel, producing about 74% of sales, and we continue to develop relationships with the largest IFA firms. In addition, we have developed a strong multi-distribution business through our bancassurance agreement with The Royal Bank of Scotland Group, together with other partnerships, including Tesco Personal Finance and 20 building societies. This capability positions us well as we look towards depolarisation of the IFA market, when more advisers will have greater freedom to sell products from a wider choice of providers.
Imaginative and prominent marketing has helped Aviva become a familiar name in India. We operate in more that 90 locations, selling innovative products through strong bancassurance partnerships and a well-trained direct sales force.
Similarly, Aviva France sells through a mixture of distribution channels, including tied agents, brokers, a salaried sales force, direct operations, a partnership with AFER, the largest savings association in the country with 580,000 members, and our general insurance business, Aviva Assurances. When it launches in October 2004, our bancassurance partnership with Crédit du Nord will greatly strengthen our distribution mix. The equally owned joint venture at the heart of the partnership will enjoy access to the bank’s 1.3 million customers for the sale of long-term savings products.
Delta Lloyd has enhanced its multidistribution capability in the Netherlands through a bancassurance joint venture with ABN AMRO, selling life and general insurance products to over five million potential customers through a network of 570 branches. The arrangement complements existing channels through independent intermediaries (using our Delta Lloyd operating brand) and direct (through our OHRA brand). We also signed an agreement in February 2003 with MKB Nederland, the Dutch organisation for small and medium-sized businesses, to advise on pension schemes, which gives us a foothold in one of our main target markets.
In Ireland, Hibernian products are predominantly distributed by brokers and we aim to increase our market share by targeting this sector. Our main sales channel in Australia is independent advisers, with our Navigator online platform broadening our distribution capability. In the United States we have a network of 6,000 agents and brokers, and have distribution agreements with several leading banks.
In addition to these more developed businesses, we are also improving our multi-distribution capability in emerging markets.
In China, where we have a joint venture with COFCO, we have applied for licences to sell life and pensions products through banks and direct sales in Beijing and Chengdu. Our existing operation in Guangzhou employs a sales force of around 2,000 people.
“We made substantial progress on improving customer service through greater productivity in 2003.” Gary Withers, chief executive,
We continue to develop specialist direct sales forces as our main distribution method in Central and Eastern Europe, while looking for viable opportunities to diversify distribution throughout the region.
We achieved similar successes in other businesses. In Ireland, for example, Hibernian earned the most improved company accolade in the Irish Brokers Association Service Excellence Awards. Our customer service was also recognised in Spain and Italy, where we are among the most efficient and lowest-cost providers.
We also took further steps towards ensuring our service is efficient and streamlined. For example, in the Netherlands, Delta Lloyd introduced online pensions administration for its business customers via an internet facility called Pension World, which allows employers to view and make amendments to their own information.
Performance Worldwide long-term savings new business sales* were stable at £14.4 billion (2002: £14.6 billion). This was a good overall performance by the group in difficult but improving market conditions. Life and pension new business sales* were £13.3 billion (2002: £13.6 billion), including a 3% increase in continental European sales to £6.6 billion, mostly driven through bancassurance. Continental Europe new business now accounts for almost half of our total life and pension sales and over half of life achieved operating profit.
Bond and savings sales were lower at £1.9 billion (2002: £2.8 billion), reflecting the poor investment climate in which market demand for with-profit bonds fell by 77% during 2003. Unitlinked bonds sales increased significantly benefiting from the relaunch of our product range during the second half of 2003, and we expect continued growth in 2004.
Our equity release business, which enables customers to free up capital from their homes, continued its strong growth with sales up 39% to £501 million (2002: £361 million), fuelled by an ageing population, low investment returns and house price inflation. Norwich Union is the UK’s largest equity release provider, with a market share of 43%.
We maintained our financial strength in the UK. We led the market in lowering with-profit bonus rates to protect the long-term interests of policyholders and ensure the continued financial stability of our funds.
Sales of single premium euro products through the AFER savings association increased to £1,157 million (2002: £983 million). In October we signed an agreement reaffirming our role as the insurer of AFER, and are optimistic about the future prospects for this important sales channel.
The Government’s proposed reform of pension legislation is the first step in opening up the French pension market. We intend to launch a new pensions product later in 2004 and expect gradual take-up as consumers adapt to longerterm saving commitments.
In difficult market conditions we continued our drive to contain operating expenses while delivering growth in revenues, resulting in an operating profit of £220 million (2002: £228 million).
Ireland Hibernian reported total sales of £250 million (2002: £343 million), which reflected continuing difficult market conditions and non-recurring sales in 2002 of the Government’s special savings incentive account. Operating profit was £65 million (2002: £75 million).
Italy Continued growth through our bancassurance network and one-off direct sales of £187 million (2002: £126 million) resulted in total new business sales in Italy up 16% to £1,453 million (2002: £1,133 million). Operating profit was £70 million (2002: £52 million).
Bancassurance sales accounted for £1,245 million (2002: £964 million), or 86% of new business. Pension reforms should create further opportunities for the private sector.
Continental Europe accounts for over half of the group’s life achieved operating profit.
“We are delighted by the strong performance of our new operations in South East Asia. Our controlled growth strategy is working well” Charles Anderson, managing director,
Our marketing and propositions team in Singapore see significant growth opportunities in the longterm savings market, where we continue to develop our bancassurance partnership with DBS and are a leader in the growing independent adviser sector.
Other European and international operations Total new business sales from our other European operations amounted to £239 million (2002: £225 million), reflecting continued testing economic conditions in Central and Eastern Europe.
Our operation in Turkey continues to progress positively, and we launched a personal pensions business in the fourth quarter. In Lithuania, where we have achieved a market share of almost 30% for new life policies within two years of starting the business, early sales of pensions were also very encouraging. Owing to the prevailing economic conditions in Poland, sales of individual life products remained challenging, although our new mutual fund business performed strongly, resulting in total sales of £174 million (2002: £92 million).
Life and pensions sales in our International businesses were £853 million (2002: £952 million). As fixed annuity sales slowed in the second half of the year, our business in the United States reported sales of £538 million (2002: £587 million). In Australia, life and pension sales were £230 million (2002: £239 million). Sales of unit trusts were £98 million (2002: £267 million) from our Australian business.
Sales in Singapore and Hong Kong through our bancassurance partnership with DBS were £63 million (2002: £121 million) as we focused on higher-margin regular premium savings business.
Aviva’s in-house fund management expertise is crucial to our business. Our aim is to generate superior investment performance on behalf of our shareholders, policyholders and institutional clients.
Total retail investment sales. New funded external mandates secured by Morley Fund Management.
Worldwide assets under management *Has not been restated for the effect of Financial Reporting Standard 19 ’Deferred Tax‘.
Market position Following continued volatility in the first half of 2003, global equity markets demonstrated greater stability during the second half of the year, with share prices becoming less volatile and growing signs of investor confidence as most markets finished the year higher than they started for the first time since 1999. Prospects for 2004 remain cautiously optimistic.
We are the second-largest UK-based fund manager, among the top five in Ireland through Hibernian, the Netherlands, and a top-five master trust in Australia through Navigator. We also have a significant fund management business in France.
Worldwide assets under management increased to £240 billion (2002: £208 billion), reflecting the benefit of new business flows and improved investment markets. Operating profit rose to £10 million (2002: £5 million), reflecting the partial recovery across global equity markets during 2003.
Morley Fund Management Morley Fund Management is a leading UK-based institutional fund manager, with staff in London, Dublin, Boston, Melbourne, Singapore, Tokyo and Warsaw, and a presence in Milan and Madrid.
Morley’s achievements have been recognised in the investment market, and we received a number of awards and nominations during the year. For example, Standard & Poor’s placed us first in two sectors over five years for the Norwich European Equity Fund, and we won the title of best property fund manager at the Pensions Management Provider Awards.
Morley’s operating profit of £3 million (2002: £4 million) for its combined institutional and retail UK-based businesses was a good result in uncertain markets and reflects active management of the underlying cost base. Within the group results are profits of £6 million relating to other Morley businesses including our pooled pension business and overseas operations. Assets under management for the global operations rose to £121 billion.
Other UK In addition to mutual fund sales under the Morley brand, we sell retail Isas, unit trusts, open-ended investment companies (Oeics) and structured products under the Norwich Union and Royal Bank of Scotland Group (RBSG) brands.
Our new collective investment joint venture with RBSG produced sales of £103 million. Operating loss was £6 million (2002: nil), predominantly arising from £7 million of development costs.
France Aviva Gestion d’Actifs has an enviable reputation for strong investment performance, with over 70% of our funds in the top quartile for returns over three years.
Our excellent investment performance was once again widely recognised in the financial press. Awards won in 2003 included best asset manager over five years from monthly financial magazine Mieux Vivre Votre Argent, and best performance over three years among asset managers with a large range of funds from La Tribune/Standard & Poor’s. For the second successive year, we received the gold Lauriers award from Investir Magazine for our unit trust performance over five years.
Netherlands and Belgium Delta Lloyd is among the leading fund managers in the Netherlands. Continued strong demand for investment products, healthy fund performances and thirdparty distribution arrangements contributed to increased assets under management of £34 billion (2002: £27 billion). Total investment sales increased 56% to £204 million (2002: £119 million).
Navigator Navigator is a top-five master trust and one of Australia’s largest investment portfolio administration services, with £3.5 billion of funds under administration. New sales in 2003 of £617 million (2002: £797 million) reflected investor sentiment in equity markets, although sales showed some improvement in the second half of the year. Sales from our Navigator business in Singapore were £8 million (2002: nil). In November, Navigator added a number of new funds to enhance the range of investment choices available to financial advisers and their clients.
Outlook We will build on the good progress made in 2003 by continuing to improve our investment performance and increasing our sales revenue as markets slowly recover. Our focus will be on those core investment classes where we have superior expertise and which satisfy the needs of our customers and partners.
Business strategy Rigorous cost control, disciplined underwriting and excellent customer service are at the core of our general insurance business. We aim to deliver high-quality earnings from our marketleading positions in personal insurance and selected commercial lines.
Our sustained profitability gives us a solid platform from which to deliver high-quality service, strengthen our relationships with our customers and broaden our range of propositions. Our range of distribution channels and balanced portfolio of products and services enable us to react flexibly to changing market conditions and to meet customer needs. By investing for the future, we ensure that we can deliver innovative solutions to our customers and sustain our excellent performance.
Market position Aviva is the leading general insurer in the UK, where Norwich Union has a 14% market share, and in Ireland, where Hibernian has a 22% share of the market.
Multi-distribution capability Part of our strength lies in our balanced distribution approach, enabling customers to conduct business with us through a choice of methods to suit their needs.
“We have demonstrated our ability to deliver consistent earnings in a rapidly changing market” Patrick Snowball, group executive director, Aviva general insurance
We also have an integrated approach in the Netherlands, with intermediary business sold through Delta Lloyd and direct business through OHRA augmented by sales through our new bancassurance relationship with ABN AMRO. To support intermediaries and direct customers, Delta Lloyd specialists from general insurance work in a new shared service centre. In addition, intermediaries have access to administrative processes via our Meeting Point website, which saw the number of connections tripled and the number of online sales doubled.
While the Irish market remains dominated by traditional brokers, Hibernian is expanding its direct capability and recorded a 20% increase in direct policies in force since the prior year.
In Asia we augmented our traditional broker distribution network with a bancassurance partnership to market our products to HSBC customers in Malaysia.
Our “Quote Me Happy” advertising campaign in the UK underlined our ability to provide competitively priced products, reflecting our values of integrity and progressiveness.
Performance Market conditions continued to be competitive during 2003. Our focused approach to disciplined underwriting, pricing, efficient claims handling and rigorous cost control has enabled us to benefit from our size and strength in our chosen markets. We delivered a firstclass operational performance for the third consecutive year as a favourable rating environment persisted in commercial lines while personal lines continued to be competitive.
Our success was reflected in an excellent combined operating ratio (COR)* of 100% (2002: 102%), underpinned by strong performances in the UK and Ireland. COR, which broadly expresses the total of claims costs, commission and expenses as a percentage of premiums, is one of our key performance measures. An excellent operating profit* of £911 million (2002: £881 million) was helped by better-than-expected weather conditions, offset by anticipated lower longer-term investment returns. Worldwide net premiums written* were £8.5 billion (2002: £7.8 billion).
We continue to improve efficiency and invest in product development initiatives to maintain our market-leading positions and sustain our operational performance in the future.
UK Norwich Union Insurance in the UK produces 60% of Aviva’s general insurance business sales. Our marketleading position is based upon a proven business model designed to achieve consistent and sustainable performance. Our results are underpinned by a commitment to deliver customer satisfaction, combined with profitable growth, in an increasingly competitive market.
Our strategy has delivered an excellent COR of 99% (2002: 101%) and we are confident that we can deliver a target COR of 100% over each of the next three years. Our operating profit of £676 million (2002: £611 million) was achieved from net premiums written of £5.1 billion (2002: £4.7 billion).
France Aviva France achieved an operating profit of £35 million (2002: £47 million), despite the floods in December and lower longer-term investment returns. Net premiums written were up at £515 million (2002: £478 million).
We also achieved a COR of 102%, reflecting our focus on personal and small commercial business, where we have a strong presence in the motor, household and health markets.
(2002: £377 million) and an excellent operating profit of £91 million (2002: £44 million) reflected the impact of significant rating increases, markedly lower motor claims and better-thanexpected weather-related claims for
Hibernian, which provides cover for motor, household and small commercial business.
Against a backdrop of the Irish Government’s commitment to reduce insurance costs, in November we introduced a 10% premium discount for motorists with no penalty points on their driving licences. We also offer reduced premiums to those who complete our Ignition driver training programme. In addition we are using technology to help contain costs. Hibernian’s e-Claims project has implemented automated claims processing for all our business in Ireland.
Netherlands In the Netherlands, Delta Lloyd achieved an operating profit of £35 million (2002: £13 million) on net premiums written of £563 million (2002: £412 million). Our COR was 101% (2002: 105%).
Canada In Canada, the group’s second-largest general insurance operation, our COR was 108% (2002: 102%) and operating profit was £12 million (2002: £80 million) after strengthening prior year reserves by £70 million in Pilot, one of our subsidiaries. We have increased our rates to align them more closely with our claims experience.
or po ra te s oc ia l r es po ns ib ili ty
CSR focuses on managing performance in respect of the environment, community, employees, health and safety, human rights, standards of business conduct, suppliers and customers.
Environment Our environment programme continues to build on the foundations laid in 1998. We measure, monitor and seek to improve performance in all the areas where we have a significant impact on the environment.
For example, 86% of the electricity we use in the UK comes from renewable sources. Our businesses in the UK, France, Ireland, Canada and the Netherlands include environmental performance questions in their supplier tendering process.
“Our CSR programme continues to become more firmly embedded in our business and to deliver clear benefits” Anthony Sampson, director of corporate social responsibility £4.6m
In 2003 we donated some £4.6 million to various community initiatives.
Innovest placed Aviva first for CSR performance among the world's leading insurers for the second consecutive year.
Employees We believe that our employees are a source of competitive advantage, and we encourage and support them in the workplace and in their personal careers. Our group development programmes continue to encourage and develop talented staff for future roles, and help to bring the company together by building mutual understanding and international networks.
Managing customer relations Our businesses are committed to providing our customers with a service hallmarked by integrity, quality and care. In Ireland, Hibernian’s pioneering products such as Ignition (for inexperienced drivers) and RiskASyst (for commercial customers) are both examples of how our businesses innovate to meet customer needs. In the UK, Norwich Union Insurance’s ground­ breaking digital flood mapping helps to link premiums more accurately to individual risk.
Our partnership with children’s charity NCH in the UK provides opportunities for staff teambuilding while making a difference to the community, including this garden makeover at King’s Lynn, Norfolk.
We have also been instrumental in setting up a UK forum for UN Global Compact signatories, of which Aviva is one, to develop understanding and practice in embedding the nine principles of the Compact covering human rights, labour and the environment.
Return on Capital Employed (ROCE)1 10% + inflation 12.7% 9.7% 11.1% COR2 102% 100% 102% 103% Proposed ordinary dividend per share increase by around 5% pa 24.15p 23p 38p Dividend cover3 1.5-2.0x 1.82x 1.51x 1.07x *From continuing operations excluding the results of our Australia and New Zealand general insurance operations which were disposed of in December 2002.
1. Calculated using after-tax returns and opening equity capital, based on operating profit, including life achieved profit, before amortisation of goodwill and exceptional items. 2. Combined Operating Ratio (COR) expresses the extent to which expenses and claims cover insurance premiums. It is the sum of expenses, including commissions, expressed as a percentage of net written premiums, and claims as a percentage of net earned premiums. 3. Measured on operating earnings after tax, on a modified statutory solvency basis, expressed as a multiple of the ordinary dividend for the year.
Introduction Business news in 2003 was dominated by concerns about the reliability of company accounts, controls and risk management systems, and corporate governance. In my comments below I will show that Aviva operates under strong corporate governance principles which are supported by strict management disciplines. I will also highlight our more important financial measures of performance.
Developments in the year Our major focus in the year has been on reducing costs and improving operational efficiency. The benefit to the profit and loss account for the year from cost savings was £65 million.
Operating profit – including life achieved operating profit – including modified statutory solvency profit Operating earnings per share – achieved profit basis
**Operating profit before amortisation of goodwill and exceptional items after tax, attributable to equity shareholders in respect of continuing operations. The modified statutory solvency operating earnings is also stated before the amortisation of acquired additional value of in-force long-term business.
Performance management Key financial objectives The group strategy is underpinned by the following key financial objectives: • Prudent and reliable financial management systems; • Delivering an after-tax operating profit, including life achieved profit, equivalent to a 10% net real return on opening equity capital; • Maintaining a dividend cover between 1.5 and 2.0 times based on statutory after tax operating profits; and
In November 2003, the Association of British Insurers (“ABI”) issued a revised version of its Statement of Recommended Practice (“SORP”) on accounting for insurance business. This takes effect for accounting periods beginning on or after 1 January 2004. The directors have chosen to adopt the SORP early, from 1 January 2003. Its main effect is to exclude internallygenerated additional value of in-force long-term business (“AVIF”) from the modified statutory basis balance sheet.
The group continues to report supplementary information using profits measured on an achieved profit basis as the directors believe this more closely reflects the performance of a long-term savings business than that measured on a modified statutory basis. Accordingly, these financial accounts include supplementary information on achieved profit reporting on pages 102 to 110 and the group’s incentive schemes and internal management reporting are aligned to that basis.
The directors and many of our investors continue to believe that shareholders’ funds incorporating internally-generated AVIF present a more realistic view of assets. We have therefore included an achieved profit basis summarised consolidated balance sheet within the supplementary information section of these accounts. This combines the modified statutory basis net assets with the internally-generated AVIF.
Life achieved operating profit (see figure 1) The group’s operating profit before tax from continuing operations, including life achieved profit, was up 6% to £1,907 million (2002: £1,720 million).
Our operating profit has increased as a result of a very strong performance from our life and general insurance operations notwithstanding the lower contribution to operating profit from investment returns. Investment returns in 2003 were lower than 2002 by £188 million in respect of our life, general insurance and health businesses, as a result of lower asset values at the start of the year.
Modified statutory operating profit (see figure 1) On a modified statutory basis operating profit before tax from continuing operations showed a 17% improvement to £1,490 million (2002: £1,218 million).
The improvement in modified statutory operating profit benefited from higher life profits driven primarily by strong results from our European businesses, particularly France, Spain and Poland and the excellent general insurance underwriting performance.
Profit and loss account – achieved profit basis (see figure 2) The strong operational performance and positive long-term investment return variances of £766 million (2002: negative variance of £3,504 million) and the impact of economic assumption changes of £11 million (2002: loss of £561 million) resulted in a profit on ordinary activities before tax of £2,507 million (2002: £2,463 million loss). This reflected the impact of the partial recovery across global equity markets on the group’s life embedded value.
The tax for the year included a charge of £561 million (2002: £531 million) in respect of the operating profit from continuing operations. The effective rate of tax on life achieved operating profit was lower at 29.4% (2002: 30.9%).
Profit for the year attributable to equity shareholders improved significantly to £1,625 million (2002: £2,062 million loss). Earnings per share attributable to equity shareholders reflected this improvement and was higher at 72.2 pence (2002: loss per share 91.5 pence).
The retained profit for the year after ordinary dividends was £1,080 million (2002: £2,581 million loss).
The result for the year attributable to equity shareholders on a modified statutory basis improved significantly to a profit of £932 million (2002: £551 million loss). This resulted in improved earnings per share of 41.4 pence (2002: 24.4 pence loss per share).
The following table summarises the benefit to the profit and loss account for 2003 and 2004 relative to the 2002 expense base.
Our expense saving initiatives are expected to deliver total estimated annualised savings of £250 million. The net pre-tax benefit to the profit and loss account in 2003 was £65 million after bearing one-off costs of £66 million representing the costs associated with achieving these savings and the incremental cost of our global financial transformation programme of £34 million.
The net pre-tax benefit to the profit and loss account is shown in figure 3 for each business unit.
In 2004 the net pre-tax benefit to the profit and loss account is estimated to be £85 million. This represents the realisation of a substantial part of the £250 million annualised savings achieved, offset by the remainder of the upfront costs and the increased cost in 2004 of our global financial transformation programme.
Earned One-off profit and savings costs loss account £m £m £m
UK Life 33 (8) 25 UK General insurance 98 (58) 40 Other businesses 18 – 18 Corporate costs 16 (34) (18)
UK 241 290 France 70 69 Ireland 23 29 Italy 45 38 Netherlands (including Belgium and Luxembourg) 62 21 Poland 3 10 Spain 134 87 Other Europe (3) (5) International 46 39 Total 621 578 1. Excludes retail investment sales and is stated before the effect of solvency margin.
UK 22.6 23.6 France 29.0 30.9 Ireland 28.5 28.2 Italy 23.2 24.9 Netherlands (including Belgium and Luxembourg) 27.7 13.3 Poland 8.5 20.8 Spain 54.4 45.9 Other Europe (3.0) (5.4) International 24.6 22.2 Total 26.1 24.4 1. The ratio of long-term savings new business contribution to sales measured on an annual premium equivalent basis. 2. Excludes retail investment sales and is stated before the effects of solvency margin.
UK 99 101 France 102 102 Ireland 97 100 Netherlands (including Belgium and Luxembourg) 101 105 Other Europe 103 102 Canada 108 102 Other international 103 101 Continuing operations 100 102 *Combined Operating Ratio (COR) expresses the extent to which expenses and claims cover insurance premiums. It is the sum of expenses, including commissions, as a percentage of net written premiums, and claims as a percentage of net earned premiums.
Life achieved operating profit was £1,555 million (see figure 6) reflecting a combination of economic factors. The 2003 expected returns from existing business and on shareholders’ net worth were lower than 2002 by £116 million due to the application of lower start of year economic assumptions to a lower opening embedded value. Improvements in new business contribution and profits from in-force business more than offset this.
The net charge of £123 million for the change in UK annuitant mortality assumptions made in 2002 did not recur in 2003. Excluding this charge, the profit from experience variances and operating assumption changes was largely unchanged year on year.
Global finance transformation programme (60) (26) Central costs and share save schemes (176) (192)
(236) (218) Allocation of staff profit share and other incentive plans to business unit operating results 76 –
Fund management Fees for fund management operations are linked to the group’s assets under management which increased at 31 December 2003 to £240 billion (2002: £208 billion) driven by a partial recovery of global equity markets and new business flows. The benefit of increased fee levels, cost reductions and improved operational efficiency across the group’s major operations were offset by set-up costs arising from our new agreement with the Royal Bank of Scotland Group (RBSG) to sell collective investments.
Long-term savings1 12.4 11.9 12.5 General insurance and other 8.1 7.9 7.8 Borrowings2 (8.4) (8.4) (8.4) Shareholders’ funds 12.1 11.4 11.9 1. Assumes achieved profit assumptions adjusted to reflect revised bond yields. 2. Comprising internal, external and subordinated debt. 3. These sensitivities assume a full tax charge/credit on market value appreciation/falls.
Long-term savings 12,373 10,379 General insurance and health 4,481 3,917 Other business 725 554 Corporate 2,934 2,475 Total continuing operations 20,513 17,325 Discontinued operations
– Australia and New Zealand – – Total capital employed 20,513 17,325 reported a loss of £3 million (2002: loss of £16 million). The loss of £7 million reported by our collective investments business with RBSG reflected set-up costs.
Within the group results are profits of £6 million relating to other Morley businesses including our pooled pensions business and overseas operations.
Non-insurance The non-insurance result was a loss of £64 million (2002: loss of £99 million) due to the non-recurring costs in our wealth management operations and a better result from banking operations in the Netherlands. The loss in the period includes an allocation of £30 million in respect of group profit share and other incentive plan costs, which were previously included within corporate costs.
Costs from the global finance transformation programme were £60 million in the year (2002: £26 million). The main activity of the programme will be in 2004, with costs expected to be up to £100 million, tailing off thereafter.
Based on current proposals, the principal effects of reporting under IFRS are an increase in the use of fair value accounting for both assets and liabilities, and additional disclosures in the accounts. However, the most significant aspect of IFRS for the European insurance sector is the treatment of insurance contracts, for which an accounting standard is yet to be developed.
The need to meet the EU deadline has led to a two phase development with Phase 1, due to be issued in March 2004, providing interim guidance until a comprehensive basis of accounting for insurance contracts is delivered in Phase 2. The IASB’s interim proposals for 2005 require some contracts with the legal form of insurance to be reclassified as investment products with changes in their valuation, whereas those still classified as insurance contracts remain valued under local GAAP until the IASB has completed its project. Given the current state of developments and associated uncertainty in the industry, we are not yet in a position to evaluate fully the impact of IFRS on our group.
Our preparations for reporting under IFRS are well-advanced in all our businesses and represent a major part of our global finance transformation programme. The group is actively engaged, both internally and externally, in understanding and influencing the IASB developments. Our objective is to see the development of a conceptually robust and economically meaningful basis of accounting for insurance which has been properly field-tested. We continue to believe that the achieved profit basis, modified to more fully reflect the fair value of guarantees and options, is the most meaningful method of accounting for longer-term insurance contracts.
Shareholders’ funds are sensitive to movements in global investment markets. We have sound processes in place to actively manage these risks. The need for these processes is illustrated by the sensitivity to a 10% fall in global equity markets or a 1% rise in global interest rates (see figure 10).
Equities securities investments net assets £m £m £m £m £m £m
Assets Long-term savings 604 3,843 924 1,552 6,923 5,726 General insurance, health, long-term business 5,232 4,422 Assets backing total capital employed
At the end of 2003, the group’s total external borrowings amounted to £4.6 billion (2002: £3.2 billion) including subordinated debt (see figure 12). A significant proportion of these borrowings are on a fixed rate basis with maturity terms between one and 33 years. The balance comprises commercial paper and floating rate bank borrowings.
Our exposure to equities has increased from £3.1 billion at 31 December 2002 to £3.6 billion, which represents 17% of our total capital employed (see figure 12).
Financial review continued Our capital position has improved as a result of strong operational performance and improving equity markets. The ratings of the group’s main operating subsidiaries are AA/AA- (“very strong”) with a stable outlook from Standard & Poor’s and Aa2 (“excellent”) from Moody’s. These ratings were reaffirmed in September 2003, although the rating agencies have indicated that the insurance sector remains under review.
The group achieved an excellent return on capital of 12.7% (2002: 9.7%), against its target of 10% net real return.
Financial strength of the group and its principal insurance operations Markets are increasingly looking for quality and financial strength, so the resilience of the regulatory capital position of the group and its principal insurance operations is of great importance.
The combined businesses of the CGUII group and NUI have strong solvency positions. On an aggregate basis the estimated excess solvency margin (representing the regulatory value of excess available assets over the required minimum margin) was £3.9 billion at the end of 2003 (2002: £2.2 billion) after covering the required minimum margin of £3.3 billion (2002: £3.2 billion). The increase in the excess solvency margin is largely attributable to the benefit of £1.2 billion of subordinateddebt proceeds injected in the form of equity capital.
At 31 December 2003 the risk-based capital requirement of our worldwide general insurance businesses was £3.3 billion (2002: £3.1 billion). The combined general insurance businesses of CGUII and NUI hold total regulated available assets of £7.2 billion. After deducting the risk-based capital for the general insurance businesses of CGUII and NUI of £3.3 billion and adding back the claims equalisation reserve of £0.4 billion, the remaining available capital of £4.3 billion is sufficient to cover the minimum margins of the overseas life businesses by approximately 2.2 times (2002: 1.7 times).
UK Life Operations With-profit funds – statutory basis The statutory approach for CGNU Life (CGNU) and Commercial Union Life Assurance Company (CULAC) has been modified to include Tiner waivers. We did not seek a waiver for Norwich Union Life and Pensions (NUL&P). An implicit item remains in NUL&P, supported by the non-profit business.
The FAR for the three main companies at 31 December 2003 based on the statutory basis are set out below together with a comparison of withprofit free assets on statutory and realistic bases.
We manage the strength of our non-profit fund through a variety of different means. In addition, during 2004 we continue to use, where appropriate, financial reinsurance and securitisation. In addition, we are progressing our review to merge the legacy non-profit life funds to improve operational efficiency and consolidate solvency margin requirements. We continue our review of the potential reattribution of the orphan estate in the interests of both policyholders and shareholders alike.
CGNU Life 16.0 0.9 1.3 CULAC 13.6 1.1 1.6 NUL&P 17.7 1.8 1.4 Aggregate 16.2 3.8 4.3
Long-term savings 1,082 10,379 10.4 9.4 General insurance and health 641 3,917 16.4 12.5 Other business (44) 554 (7.9) (20.7) Corporate (38) 2,475 (1.5) (2.1)
Management of financial and non-financial risks The group recognises the importance of effective risk management systems and has an established group governance framework. The group analyses risk exposures between financial risks (these being market, liquidity, credit and insurance risk), and non-financial risks (these being operational, group and strategic risk). Each of these risks areas are overseen by a specialist risk committee and/or the Group Risk Committee. The results of the Group Risk Committee, which reviews all financial and non-financial risks reported at a group level are reported to the Group Executive Committee, The Group Audit Committee and the Board.
Market risk Asset and liability management Close attention is paid to asset and liability management which is particularly important for our life businesses, given the long-term nature of the liabilities involved. General insurance funds are primarily invested in fixed income securities to match broadly the duration of our insurance liabilities. The balance of the portfolio is invested largely in equities.
Derivatives Derivative instruments are used within guidelines outlined in the Group Derivative Policy for efficient portfolio management, hedging debt and the outcome of corporate transactions or to structure specific retail savings products. In addition, the group’s Dutch bank trades in derivatives as part of its normal banking activities. This trading is controlled through the allocation of limits which are very low in the context of both Delta Lloyd and the group. Derivatives trading, except for these uses, is prohibited.
In managing our foreign currency exposures the group does not hedge revenues as these are substantially retained locally to support the growth of our business and to meet local regulatory and market requirements.
Liquidity risk The group has a strong liquidity position and through the application of a group liquidity management policy seeks to ensure that it has sufficient financial resources available to meet its obligations as they fall due.
Credit risk The group manages credit risk at business unit (BU) level within a framework of approved investment mandates. Aggregate group-wide credit exposures are progressively being monitored centrally so that material exposures can be identified and managed appropriately. The financial strength of reinsurance counterparties is also assessed centrally on an ongoing basis and monitored against approved limits.
Insurance risk Insurance risk is fundamental to our business and as such is controlled at an individual BU level, through practices such as underwriting guidelines and authorities, pricing guides, reserving and claims processes.
Non-financial risks Operational, group and strategic risk Further details are given in the Audit Committee report on page 44. There is also an established process for the central monitoring of the group capital and solvency positions which reflects both current and expected future regulatory capital requirements. Details are contained on pages 33 to 35.
Board of directors 1. Pehr Gyllenhammar (68) Chairman Appointed to the board in 1997, becoming chairman in 1998. Currently vice-chairman, Europe at Rothschild (banking), chairman of Reuters Founders Share Company Limited (media) and of Swedish Ships Mortgage Bank (banking) and a non-executive director of Lagardère SCA (media and technology). Former executive chairman of AB Volvo (automotive) and former senior adviser to Lazard Freres & Co. LLC (banking). Chairman of the chairman’s and nomination committees.
3. George Paul DL (64) Deputy Chairman and senior independent 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. Currently a non-executive chairman of Agricola Group Limited (agricultural) and of JP Morgan Fleming Overseas Investment Trust plc (asset management) and a non-executive director of Notcutts Limited (horticulture). A former chairman and chief executive officer of Harrisons & Crosfield plc (manufacturing). Chairman of the remuneration committee and member of the audit and chairman’s committees.
Appointed to the board in 1999, having served as a chairman of Nuts Ohra, a Dutch insurer acquired by the group in 1999. Currently chairman of NV Casema (telecommunications), a member of the Supervisory Board of ABN AMRO Bank (banking) and an advisory member of the boards of Unilever (consumer) and a non-executive director of LogicaCMG plc (computer services). A former chairman of Nederlandse Unilever Bedrijven BV (consumer) and former chairman and chief executive officer of KPN Royal Dutch Telecom (telecommunications). A former member of the advisory board of TNT Post Group (mail services) and former director of Vos Logistics (transport). Former Minister for Foreign Trade in the Netherlands. Member of the remuneration committee.
Appointed to the board in 1995. Currently non-executive chairman of The Airline Group Limited (transport), chairman of British Airways Pension Investment Management Limited, nonexecutive director of NATS Holdings Limited (transport), a member of the financial sector committee of the Accounting Standards Board, chairman of The Royal Academy of Arts Pension Scheme Board, a member of the Council of the Institute of Education at the University of London, a member of the Fundraising Advisory Board of VSO (charity) and chairman of The Travel Foundation (charity). A former director and chief financial officer of British Airways Plc (transport), a former finance director of TSB Group plc (banking) and a former chairman of the Trustees of British Airways Pension Schemes. Chairman of the audit committee, member of the chairman’s committee and chairman of Aviva Staff Pension Trustee Limited.
12. Elizabeth Vallance (58) Independent non-executive director Appointed to the board in May 2000. Joined the board of Norwich Union as a non-executive director in 1995. Currently Fellow of Queen Mary College University of London, chairman of the Council of the Institute of Education University of London, chairman of the Advisory Committee on Clinical Excellence, non-executive director of Charter Pan European Trust plc (asset management), a former non-executive director of HMV Group Limited (music retail) and former chairman of the NHS Advisory Committee on Distinction Awards. Member of the remuneration, nomination and chairman’s committees.
Annual General Meeting A separate document accompanying the Annual report and accounts contains the notice convening the Annual General Meeting and a description of the business to be conducted thereat. The Annual General Meeting of the Company will be held on 27 April 2004 at The Barbican Centre, Silk Street, London EC2Y 8DS at 11.00am.
Details of material acquisitions and disposals made by the Group during the year are contained on pages 78 to 79.
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, business reviews and financial reviews set out on pages 2 to 35.
Dividend The directors are recommending a final dividend of 15.15 pence (2002: 14.25 pence) per share which, together with the interim dividend of 9.00 pence (2002: 8.75 pence) per share, produces a total dividend for the year of 24.15 pence (2002: 23.00 pence) per share. The total cost of dividends for 2003, including preference dividends, will amount to £562 million (2002: £536 million), leaving £387 million to be transferred to reserves (2002: £1,070 million transferred from reserves).
Share capital Details of the share capital and shares under option as at 31 December 2003, and shares issued during the year which ended on that date, are given in note 31 on pages 86 to 87.
Philip Twyman will reach his normal retirement age in March 2004 and will retire as a director of the Company and from service on 31 March 2004.
On 8 May 2003, Anna Catalano and Carole Piwnica were appointed to the Board as independent non-executive directors. As these directors joined the Board after the date of the last Annual General Meeting they will, in accordance with the Company’s articles of association, retire at the forthcoming Annual General Meeting and, being eligible, offer themselves for election by shareholders.
The directors retiring by rotation in accordance with the articles of association at the Annual General Meeting and, being eligible, offering themselves for reappointment are George Paul, Philip Scott, Patrick Snowball and Elizabeth Vallance. Philip Scott and Patrick Snowball each have a service contract with a Group company, details of which can be found on page 50.
Other than service contracts between executive directors and a Group company, no director had a material interest at any time during the year in any contract of significance with the Company or any of its subsidiary undertakings.
The Company encourages and promotes employee development. Support includes the building of relevant competencies, encouraging staff to gain appropriate professional qualifications and assistance with wider personal development. The Group is developing its electronic based training applications and increasing numbers of staff have access to a very wide range of development materials and are taking increasing ownership of their own learning.
Corporate Social Responsibility (CSR) Aviva defines CSR as embracing corporate performance in environmental management, community, employees, human rights, health and safety, suppliers, customers and standards of business conduct.
Regular dialogue is maintained with a number of external agencies to help ensure that the CSR programme remains focused and in line with emerging best practices. Representatives from these agencies join members of senior management annually to undertake a review of the Group’s performance.
More CSR information can be found on pages 26 and 27. Aviva also prepares a separate CSR report each year which includes full details of the Group’s CSR programme and the progress achieved during the year. A copy of the printed summary of the CSR report is available from the Group Company Secretary and the full report may be viewed on www.aviva.com/csr
Employee practice Aviva Group companies are committed to providing equal opportunities to all employees, irrespective of their sex, sexual orientation, marital status, creed, colour, race, ethnic origin or disability. The commitment extends to recruitment and selection, training, career development, flexible working arrangements, promotion and performance appraisal. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and to provide specialised training where this is appropriate.
Application of the Combined Code The directors’ report on the Company’s compliance with the applicable provisions of the Combined Code during 2003 is set out below.
The Board of Directors The Board has eight scheduled meetings each year and meets more frequently as required. It currently comprises the Chairman, eight independent non-executive directors and four executive directors. Each non-executive director serves for a fixed term of three years, which may be renewed by mutual agreement and, subject to the Board being satisfied as to the director’s performance and independence, there is no specified limit regarding the number of terms a director may serve. The Company’s articles of association require that following appointment by the Board, directors submit themselves for election by shareholders at the next Annual General Meeting. The articles also provide that one-third of directors shall retire by rotation each year, but are eligible to submit themselves for re-election by the shareholders, and that directors shall not serve longer than the third Annual General Meeting following their election without being re-elected by shareholders. Details of the directors retiring by rotation and seeking re-election at the forthcoming Annual General Meeting are set out below and in the Notice of Meeting. In accordance with the revised Combined Code any non-executive directors who serve on the Board of the Company for nine years or more will in future submit themselves for re-election annually.
The Board has appointed George Paul, the Deputy Chairman, to be the Company’s senior independent non-executive director.
During 2003 the Board met on eight occasions and all directors attended every meeting. Wim Dik was unable to attend the Annual General Meeting. The directors bring to the Board a wide range of experiences and skills and participate fully in decisions on the key issues facing the Group.
In respect of the composition of the Board it is necessary to retain directors possessing a sound understanding of both the Group and the financial services industry whilst at the same time maintaining a programme to refresh the Board through the acquisition of new skills and experience. In addition to the strengths of skill, diversity and an international perspective, the Board also seeks to comply with the requirements of the revised Combined Code as they relate to the independence of directors.
George Paul and Elizabeth Vallance fall due for retirement in accordance with the Company’s articles of association at the forthcoming Annual General Meeting and submit themselves for re-election. Both directors joined the Company’s Board when CGU merged with Norwich Union in 2000 and, therefore have, in legal terms, served as directors of the Company for three years although, when their service as directors of Norwich Union is included, they have been connected with the Group for 13 and nine years respectively. The Board has therefore considered the independence of these directors with particular care. Both directors contribute significantly through their individual skills, their considerable knowledge of both the Company and the insurance industry and they currently provide continuity and an overall balance to the Board. In particular, they both continue to demonstrate a strong independence of management in the manner in which they discharge their responsibilities as directors. Accordingly, the Board has decided that, in the absence of any other relevant factors, George Paul and Elizabeth Vallance are independent non-executive directors. However, being mindful of the programme to refresh the skills and experiences of the directors, it is the Board’s intention that subject to being re-elected by shareholders at the Annual General Meeting, George Paul and Elizabeth Vallance will retire from service by 31 December 2005.
Board process The duties of the Board and its committees are set out clearly in formal terms of reference. This document is reviewed annually by the Board and was updated during the year to reflect the requirements of the revised Combined Code. The terms of reference address a wide range of corporate governance issues including those items which are specifically reserved for decision by the Board. These include the approval of the Group’s strategy, business plans, acquisitions and disposals outside delegated limits, significant financial decisions and the approval of key business policies including the remuneration policy. Matters which are not specifically reserved to shareholders by applicable legislation or regulation or by the Company’s articles of association, or to the Board and its committees under the Board’s terms of reference, are delegated to the Group Chief Executive.
The Board’s terms of reference describe the procedure whereby directors may, in the furtherance of their duties, seek independent professional advice at the Company’s expense if considered appropriate. No director obtained any such independent professional advice during 2003. The document also sets out the separate roles and responsibilities of the Chairman and the Group Chief Executive.
The Board has established a number of standing committees, including Remuneration, Audit, Nomination, and Chairman’s committees. Each committee operates within defined terms of reference and the minutes of their meetings are circulated to the Board. Details of the work of the respective committees, including their membership and duties, are set out in the reports of the committees on pages 44 to 54.
During the year, the directors met without the Chairman being present to consider his performance and the Chairman and nonexecutive directors met in the absence of the executive directors.
The Board believes strongly in the development of all its employees, including its directors, and it is a requirement of directors’ appointments that they commit to continue their development. The form which this development takes varies depending upon each director and the quality/relevance of the training available, but directors have attended a range of courses, seminars, workshops and lectures on issues relevant to the Group’s business and/or their roles and responsibilities. During the year three directors attended courses designed specifically for non-executive directors of major companies. Following attendance on a course, directors report briefly to the Board on its content and relevance. The 2004 work plan for the Board includes two specific training topics. The Board undertook two site visits during the year in order to gain a closer understanding of the businesses visited. The two non-executive directors who joined the Board during the year have completed a detailed induction programme which was conducted over a seven-month period comprising 14 sessions including visits to the Group’s main operating businesses and meetings with the external auditor and one of the Company’s corporate brokers.
The Company’s Annual General Meeting provides a valuable opportunity to communicate with private investors. At the meeting, the Company complies with the Combined Code as it relates to voting, including votes withheld, the separation of resolutions and the attendance of committee chairmen. The Notice of the Annual General Meeting is sent out to shareholders at least 20 business days before the meeting, to ensure that they have sufficient time in which to consider the items of business. Details of the voting by shareholders at general meetings are made available on request and are placed on the Company’s website. Whenever possible all directors attend the Annual General Meeting and shareholders are invited to ask questions during the meeting and have an opportunity to meet with the directors after the conclusion of the formal part of the meeting.
Institutional investor Morley Fund Management Limited, the Group’s asset management company believes that good governance leads to better performance and practices. Therefore, as a major investor, the Group monitors the governance of the companies in which it invests. To this end Morley holds regular meetings with the senior management of companies where it will raise all relevant matters which may affect the future performance of those companies.
Directors’ responsibilities Directors are required to ensure that accounts are prepared for each accounting period which comply with the relevant provisions of the Companies Act 1985, and which give a true and fair view of the state of affairs of the Company and the Group as at the end of the accounting period and of the profit or loss for the period. Suitable accounting policies have to be used and applied consistently in preparing accounts, using reasonable and prudent judgements and estimates on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business. Applicable accounting and financial reporting standards also have to be followed, with any material departures being disclosed and explained.
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. The auditor’s report on page 55 covers its review of the Company’s compliance with the relevant provisions of the Combined Code as applicable to the Company during the year under review.
Derek Stevens is a Chartered Accountant and served as the Chief Financial Officer of British Airways Plc for 13 years until his retirement from service in 2001. In addition to his other non-executive appointments, he is also a member of the “Financial Sector and Other Special Industries Committee of the Accounting Standards Board”. Accordingly the Board is satisfied that Mr Stevens has recent and relevant financial experience.
The Committee undertakes its duties in line with an agreed annual work plan. It reviews, with members of management and the internal and external auditors, the Company’s formal financial announcements including the Annual report and accounts to shareholders and associated documentation, with a particular emphasis on their fair representation and the reasonableness of the judgemental factors and appropriateness of significant accounting policies used in their preparation. Twice each year, the Committee receives reports from the Group’s reporting actuary regarding the adequacy of the Group’s life assurance and general insurance reserves. At each meeting, the Committee receives a report from the Group Business Risk Director covering internal audit, risk management, fraud, anti money laundering and corporate governance matters to help it assess the effectiveness of the risk management and control frameworks. These reports include material notifications arising under the Group policy on “whistleblowing”. The Committee also reviews annually the operational plan for the Group’s internal audit function. The Group Compliance Director reports to the Committee regularly on the Group’s compliance with rules and regulations and any regulatory developments and compliance issues which have arisen.
Each of the Group’s major business units have formally constituted audit committees which provide an oversight role for their business. All such committees include some members who are independent of the relevant business. The Group Business Risk Director reviews the business unit audit committee papers and minutes on behalf of the Group Audit Committee and all significant matters are brought to the Committee’s attention.
The Committee receives regular reports from the external auditor as well as reports of significant issues raised at the audit committees of the Group’s principal businesses. The Committee also meets regularly with both the internal and external auditors in the absence of management. In order that the Board is kept fully appraised of the Committee’s work, its chairman reports at the next following meeting of the Board and the Board receives a copy of the minutes of each meeting of the Committee.
External auditor Ernst & Young LLP was appointed as auditor of the Company in 2001 following a competitive bid process between the firms which had acted as auditors of CGU and Norwich Union prior to their merger in 2000. Ernst & Young had been the auditor of Norwich Union plc. During 2002, the audit signing partner changed as part of a rotation process. Ernst & Young LLP audit the whole of the Group other than Delta Lloyd, the Group’s subsidiary in the Netherlands, which is audited by PricewaterhouseCoopers LLP (PwC). To fulfil its Group reporting responsibilities Ernst & Young LLP reviews the work of PwC in accordance with standard auditing practices.
The total fees paid to Ernst & Young LLP in 2003 were £13.3 million of which £3.6 million related to non-audit work. Further details are provided in note 13 to the Report and Accounts on page 74.
The Committee reviews, annually, a formal letter provided by the external auditor confirming its independence and objectivity within the context of regulatory requirements and professional standards.
Internal controls The Board has the ultimate responsibility for the systems of internal control maintained by the Group and for reviewing the effectiveness of those control systems. The systems of internal control are intended to provide reasonable assurance, but not an absolute guarantee, against material financial misstatement or loss, and include the safeguarding of assets, the maintenance of proper accounting records, the reliability of financial information, compliance with appropriate legislation, regulation and best practice, and the identification and containment of business risks.
Businesses report residual risk profiles, based on local materiality levels on a regular basis. A consolidated Group risk report, is reviewed regularly by the Group Business Risk Committee, under the chairmanship of the Group Finance Director. Each quarter, material items in the Group risk report are reported to the Group Executive Committee, the Audit Committee and the Board, who consider whether residual risks are within risk appetite and the adequacy of the risk mitigating actions. Local business unit boards, audit committees and management also consider local risk reports in a similar way. These regular reports are supported by escalation procedures for new or deteriorating risks that are classified at the highest impact levels.
In addition, all business unit heads and Group functional heads provide to the Group a formal certificate every six months confirming compliance with the Group’s risk management framework and the terms of their delegated authority. They are also required to specify any risks or control issues not already reported through the regular risk management processes.
The Committee also keeps under review and advises the Board on matters relating to the independence of each non-executive director and directors’ other interests with a view to monitoring any conflicts or perceived/potential conflicts of interests including directors’ time commitments. The matters of independence and conflicts of interest are reviewed formally each year and, based on this and the Board’s performance review, the Committee makes recommendations to the Board regarding the renewal of individual
The Committee comprises the following directors, appointed by the Board: Pehr Gyllenhammar (Chairman) George Paul Derek Stevens Elizabeth Vallance
The main duties of this Committee are to review the performance of the Group Chief Executive and the succession planning for the executive director group of management. The Committee has two scheduled meetings each year and makes recommendations to the Board as appropriate.
director’s appointments. No member of the Committee takes part in any discussions concerning their own circumstances. In assessing a director’s conflicts of interests, the Committee attempts to identify relationships between Group companies and those companies in which the relevant director has an interest. The Group is one of the United Kingdom’s largest institutional investors and holds shares in most of the country’s major companies. The Committee does not believe that this situation compromises the independence of those non-executive directors who serve on the boards of companies in which the Group invests.
During the year, the Board undertook to widen its base of skills and experience by appointing two new independent non-executive directors. In addition to the acquisition of specific skills, the Board was seeking to diversify its composition in terms of international experience and age. With the assistance of search consultants, the Committee prepared a shortlist of suitable candidates for consideration. Following meetings with the candidates, the Committee made a recommendation to the Board that two new non-executive directors, Anna Catalano and Carole Piwnica, join the Board with effect from 8 May 2003. These recommendations were unanimously approved by the Board.
The Committee is keeping the constitution of the Board under review and continues to work with executive search consultants in this regard.
This report sets out the remuneration policy for the Company’s directors and senior executives, outlines the various elements of their remuneration and sets out the amounts of remuneration paid to the directors in 2003. Shareholders will be invited to approve this report at the Annual General Meeting to be held on 27 April 2004.
The Committee met on four occasions during the year and all members recorded a full attendance other than Wim Dik who was absent from one meeting.
The Group Chief Executive is normally invited to attend the meetings of the Committee, except when his own remuneration is being discussed, as is the Group Human Resources Director.
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 has advised on remuneration benefits generally, including salary levels, bonus and incentive arrangements. Deloitte & Touche has advised on the calculation of total shareholder return for the purposes of the longterm incentive plans. In addition, the Committee has taken into account the views of Pehr Gyllenhammar, Chairman, and Richard Harvey, Group Chief Executive, on performance assessments. Ernst & Young LLP is the Company’s auditor and has provided audit and assurance services to the Group as disclosed in the report of the Audit Committee on page 44 and note 13 on page 74. KPMG LLP has now been appointed by Management, in place of Ernst & Young LLP, to assist it with a thorough review of senior executive remuneration to be undertaken during the current year. Deloitte & Touche provide no other material services to the Group.
It is the Committee’s current practice to commission every three years its own independent review of the remuneration policy and the packages paid, to ensure that the policy reflects good practice and that the packages remain competitive and in line with the market. New Bridge Street Consultants, who provide no other services to the Group, were appointed by the Committee to undertake such a review during 2002. In light of a wider review of the Company’s executive remuneration to take place in 2004, the Committee will seek a further independent review.
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. It also considers the current economic and prevailing operating conditions within both the Group and the financial services industry generally. The Committee considers the level of earnings of the Group’s employees and the skills and management capabilities which the Group must secure in order to attain its strategic objectives.
In their 2002 review, New Bridge Street Consultants confirmed that overall the Company’s remuneration policy and levels of remuneration were broadly in line with market practice for companies of similar size. Two areas in relation to the long-term incentive plans, where the Company’s approach differed from that preferred by institutional investors, were noted and these are commented upon below.
Non-executive directors The Company’s articles of association provide that the total aggregate fees paid to directors shall be determined by the Board within the limits set by shareholders. The current limit is £1 million pa as approved at the 2002 Annual General Meeting. Executive directors receive no fees for serving as directors.
The fees paid to the non-executive directors are set by the Board after considering a recommendation from the executive directors.
In determining the level of fees, the Board considers a recommendation of the executive directors who take into account the duties and responsibilities of the non-executive directors, the time commitment required in preparing for and attending meetings, and the amounts paid by competitors and similar-sized companies. Other than the Chairman who receives a car allowance, non-executive directors receive no benefits in addition to their fees nor do they participate in any incentive or performance plans.
Remuneration package The remuneration package for the Company’s senior executives comprises the following elements: • a basic salary; • an annual bonus plan – to encourage executives to meet annual targets relating to business and personal performance; • a deferred bonus plan – linked to the annual bonus plan to encourage executives to take all of their bonus in the form of shares and retain them for a period of three years; • a long-term incentive plan – to align executives’ longer term interests with those of shareholders; • a defined benefit pension entitlement and other benefits.
The balance of these elements is such that, for directors achieving “Target” performance, basic salary represents approximately 40% of the potential total remuneration package, with the annual bonus/deferred bonus plan representing 35% and the long-term incentive plan 25%. At “Stretch” performance, basic pay represents approximately 28% of the potential total remuneration package, with the annual bonus/deferred bonus plan representing 36% and the long-term incentive plan also representing about 36%. “Stretch” performance would represent the achievement of business results significantly better than the business plan target.
The relative value of the elements of executive directors’ remuneration* (£’000)
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. Of the potential payment, 70% is dependent upon financial targets and the remaining 30% is based upon the director’s attainment of personal objectives.
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, (ie 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. The Committee believes 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 cash bonus plan, and hence defer (being 50% of basic salary), is at the bottom decile of the market range. Taking the above into account, the Committee believes that the absence of performance conditions is reasonable. However, the Company’s incentive plans fall for renewal by shareholders at the 2005 Annual General Meeting and therefore during 2004 the plan will be fully reviewed when all relevant matters, including the above issue and emerging best practice, will be taken into account.
All awards are made subject to the achievement of stretching performance conditions which contain two elements. The first element compares the Total Shareholder Return (TSR) produced by the Company over the performance period with the TSR of companies in a chosen comparator group (70% of award). The second element of the performance condition measures the Return on Capital Employed (ROCE) within the Company against a target return (30% of award). The Committee believes that this combination is the most appropriate way of incentivising executives since it takes into account both the returns to shareholders and the Company’s underlying performance.
The Committee is conscious that certain institutions are not in favour of performance conditions being retested. From a benchmarking exercise the Committee is aware that the Company’s performance conditions ie upper decile TSR and ROCE exceeding 30% real return over the performance period, are very demanding compared with such plans generally. The Committee believes that it is important to strike a balance between setting challenging performance conditions and retaining the motivational incentive which is the fundamental purpose of the plan. The Committee is also conscious of the cyclical nature of its general insurance operations and believes that one retest allows performance to be measured over a larger part of the cycle. After careful consideration it believes that this is best achieved by retaining the demanding conditions but allowing one retest at the end of five years. No retesting takes place if any part of the performance condition has been met at the end of the three-year performance period. The Company’s incentive plans fall for renewal by shareholders at the 2005 Annual General Meeting and therefore during 2004 the plan will be fully reviewed when all relevant matters, including the above issue and emerging best practice, will be taken into account.
Whether or not the performance conditions have been met is determined by the Committee. The rules of the plan require the Committee to request an independent consultant to determine the relevant TSR positions. In respect of the ROCE calculation, the Committee requests that the Group’s auditor expresses a formal opinion on the basis of the calculation used.
Pension arrangements The remuneration package for senior executives in the United Kingdom includes company contributions into the Group’s staff pension scheme. All executive directors are members of the defined benefit section of the Aviva Staff Pension Scheme.
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% pa.
During the year, the majority of members of the defined benefit section of the Scheme, including executive directors, have been members on a non-contributory basis. From 1 April 2004, all members, including executive directors, who do not currently contribute will be required to pay 2.5% pa of their total gross pensionable salary, increasing to 5% pa from 1 April 2005.
The benefits paid from the Scheme are subject to Inland Revenue limits. There is in place an unfunded pension top-up arrangement to ensure that senior executives receive the benefits promised by the Scheme notwithstanding an Inland Revenue limit relating to their level of earnings, which, in some cases, caps the amount of pension that can be paid from a tax-approved scheme. Where this limit applies, additional benefits are provided from the unfunded arrangement. 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.
Service contracts Service contracts agreed with each executive director incorporate their terms and conditions of employment. Executive directors have rolling service contracts which came into effect from 1 June 2000 and which can be terminated by the Company giving 12 months’ notice and by the director giving six months’ notice.
Directors’ service contracts and letters of appointment are available for inspection at the Company’s registered office during normal hours of business.
(2) “Benefits”. All the executive directors received the benefit of private medical insurance and, along with the Chairman, a car allowance. The disclosure also includes, in respect of Mike Biggs, Richard Harvey and Philip Twyman, charges relating to the cost of insuring their pension entitlements which cannot be provided from the pension scheme as a result of the “earnings cap”, and in the case of Mike Biggs, the cost of providing accommodation in London and the payments for holiday entitlements not taken by his date of leaving.
(3) “Incentive Plans”. In 2002, awards were made to participants in the CGNU Integration Incentive Plan and the Norwich Union Restricted Share Plan. Full details were disclosed in the Remuneration report for that year. These were one off awards and the plans are now closed.
Disclosed for each director is the “Pension accumulated 2003”, being the amount of pension to which the directors would have been entitled had they left service at 31 December 2003. The “Increase in pension” columns relate to the difference between the accumulated pensions at the end of 2003 on both gross and net of inflation basis. Also disclosed is the transfer value of the accumulated pensions at 31 December 2002 and 2003. The “Increase of transfer value 2003” is the difference between these values. The transfer values disclosed represent an obligation on the pension fund (where funded) or the Company (where unfunded) – they are not sums paid or due to the director.
D ire ct or s’ r em un er at io n re po rt
Share options At At 1 January Options granted Options lapsing 31 DecemberOptions exercised Exercise 2003 2003during year during year during year price
– Bonus Plan options 1999 4,593 – – – 4,593 966.5 July 2002 – July 2009 *As at the date of ceasing to be a director – 31 July 2003.
Current plans “Savings related options” are options granted under the Inland Revenue-approved Save As You Earn (SAYE) share option schemes. Options are normally exercisable during the six month period following either the third, fifth or seventh anniversary of the relevant savings contract.
Options granted after 1997 are only exercisable if certain performance conditions have been met. The exercise of options is subject to the attainment of performance conditions over a three-year performance period. The three-year performance condition relating to the options granted in 2000 fell due for testing during the year. For any options to vest under the Total Shareholder Return (TSR) condition, the Company’s TSR, when compared with the TSR of a comparator group of European financial services companies (see page 49), would need to at least match median performance. At median performance, 20% of the options become exercisable and at upper decile performance 70% would become exercisable. Between median and upper quartile the number of options vesting is determined on a straight-line basis. For any options to vest under the ROCE condition, the Company’s ROCE would have to exceed 24% in excess of RPI over the three-year performance period when 10% of the awards would vest, rising to 30% if the ROCE exceeded 30% over the same period. At the end of the performance period relating to the options granted in 2000, the Company was ranked 12th out of the 20 companies in the comparator group and the ROCE, net of inflation, was 24.3%. Accordingly, none of the options vested under the TSR condition but 11% of the options vested under the ROCE condition. The options are exercisable at 960 pence per share. Under the rules of the Scheme options which have not vested lapse.
Mike Biggs Aviva Long Term Incentive Plan* – 2000 34,453 – – – 34,453 960.0 – March 2005 – 2001 43,229 – – – 43,229 949.5 – March 2004 – 2002 54,177 – – – 54,177 739.0 – March 2005 – 2003 – 111,250 – – 111,250 379.5 – March 2006 Aviva Deferred Bonus Plan* – 2001 29,492 – – – 29,492 949.5 – May 2004 – 2002 46,592 – – – 46,592 739.0 – March 2005 – 2003 – 80,100 – – 80,100 379.5 – March 2006
Philip Twyman CGU Deferred Bonus Plan – 2000 4,259 – 4,259 – – 875.0 352.0 March 2003 Aviva Long Term Incentive Plan – 2001 41,666 – – – 41,666 949.5 – March 2004 – 2002 57,441 – – – 57,441 739.0 – March 2005 – 2003 – 113,750 – – 113,750 379.5 – March 2006 Aviva Deferred Bonus Plan – 2001 21,666 – – – 21,666 949.5 – May 2004 – 2002 34,464 – – – 34,464 739.0 – March 2005 – 2003 – 87,586 – – 87,586 379.5 – March 2006
– 2001 45,000 – – – 45,000 949.5 – March 2004 – 2002 60,704 – – – 60,704 739.0 – March 2005 – 2003 – 120,000 – – 120,000 379.5 – March 2006 Aviva Deferred Bonus Plan – 2001 20,700 – – – 20,700 949.5 – May 2004 – 2002 52,206 – – – 52,206 739.0 – March 2005 – 2003 – 44,400 – – 44,400 379.5 – March 2006
r em un er at io n re po rt *Awards granted to Mike Biggs under the Long Term Incentive Plan lapsed on 1 January 2004 following his resignation taking effect on 31 December 2003. Based on the performance of Mr Biggs during his notice period, the Committee exercised its discretion to allow him to retain the benefits of his matched awards which will vest at the end of their deferral period.
**As at the date of ceasing to be a director – 31 July 2003.
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 2003 award was made in March. Awards are subject to the attainment of performance conditions over a three-year performance period as described on pages 48 and 49. The three-year performance condition relating to the awards granted in 2000 fell due for testing during the year. For any awards to vest under the TSR condition the Company’s TSR, when compared with the TSR of a comparator group of European financial services companies (see page 49), would need to at least match median performance when 20% of the awards become exercisable. At upper decile performance 70% of the options would become exercisable. Between median and upper quartile the number of awards vesting is determined on a straight-line basis. For any awards to vest under the ROCE condition, the Company’s ROCE would have to exceed 24% in excess of RPI over the three-year performance period when 10% of
Directors’ interests in Aviva shares the awards would vest, rising to 30% if the ROCE exceeded 30% over the same period. At the end of the performance period relating to the awards granted in 2000, the Company was ranked 12th out of the 20 companies in the comparator group and the ROCE was 21.4%. Accordingly none of the awards vested. Under the rules of the Plan, there will be one further test of the performance condition in 2005 measured over five years.
The Aviva Deferred Bonus Plan was approved by shareholders at the 2001 Annual General Meeting. The awards disclosed include those made in lieu of some or all of the cash bonus earned under the Company’s Annual Bonus Plan in 2003 and deferred, 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.
1 January 31 December 1 January 31 December 1 January 31 December 1 January 31 December 2003 2003 2003 2003 2003 2003 2003 2003
Mike Biggs 43,550 44,404 76,084** 156,184 131,859 243,109** – – Anna Catalano* – – – – – – – – Guillermo de la Dehesa 144 144 – – – – – – Wim Dik 200 200 – – – – – – Pehr Gyllenhammar 25,760 27,056 – – – – – – Richard Harvey 21,829 23,151 123,454 251,204 264,072 439,072 4,426 4,426 George Paul 30,593 30,693 – – – – – – Carole Piwnica* – – – – – – – – Philip Scott 68,571 73,274 79,882 159,982 127,171 238,421 4,096 4,096 Patrick Snowball 3,447 4,719 53,440 89,052 106,831 203,081 – 2,272 Derek Stevens 2,005 2,005 – – – – – – Philip Twyman 24,286 28,818 60,389 143,716 99,107 212,857 201,429 164,346 Elizabeth Vallance 830 830 – – – – – – André Villeneuve 640 640 – – – – – –
(2) “Deferred Bonus Plan Awards” relates to an entitlement to shares arising through the Aviva Deferred Bonus Plan. Half of the number of the shares disclosed relate to the deferral of some or all of the directors’ annual cash bonuses and therefore represent a director’s investment in the Company. The remaining half are shares granted on a “one for one” matching basis and, normally, will only be received if the director remains in employment until the vesting date. Upon vesting the participants are entitled to receive additional shares representing the dividends paid during the deferral period.
(3) “Long Term Incentive Awards” are awards granted under the Aviva Long Term Incentive Plan which vest subject to the attainment of performance conditions.
Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual report, the Directors’ remuneration report and the accounts in accordance with applicable United Kingdom law and accounting standards are set out in the Statement of directors’ responsibilities on page 43.
We review whether the Corporate governance statement reflects the Company’s compliance with the seven provisions of the Combined Code issued in June 1998 that are 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 read other information contained in the Annual report and consider whether it is consistent with the audited accounts. This other information comprises the Highlights of the year, Chairman’s statement, Business overview, Group Chief Executive’s review, Operating review, Corporate social responsibility, Financial review, Directors’ report, Corporate governance statement, Audit committee report, Nomination committee report, Chairman’s committee report and the unaudited part of the Directors’ remuneration report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the accounts. Our responsibilities do not extend to any other information.
Equalisation provision Our evaluation of the presentation of information in the accounts has had regard to the statutory requirement for insurance companies to maintain an equalisation provision. The nature of the equalisation provision, the amount set aside at 31 December 2003 and the effect of the movement in the provision during the year on the general business technical result and profit on ordinary activities before tax, are disclosed in accounting policy T and note 40 to the accounts.
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 November 2003. The practices recommended by the ABI SORP are applicable for accounting periods ending after 1 January 2004, but the Group has chosen to adopt such practices early. The accounting policies adopted reflect United Kingdom financial reporting standards and statements of standard accounting practice applicable at 31 December 2003, 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.
C – Claims General business claims incurred include all losses occurring during the year, whether reported or not, related handling costs, a reduction for the value of salvage and other recoveries, and any adjustments to claims outstanding from previous years.
Long-term business claims reflect the cost of all claims arising during the year, including claims handling costs, as well as policyholder bonuses paid in anticipation of a bonus declaration.
D – Deferred acquisition costs Deferred acquisition costs represent a proportion of commission and other acquisition costs that relate to policies that are in force at the year end. General business deferred acquisition costs are amortised over the period in which the related premiums are earned. 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.
Long-term business investment income and unrealised gains and losses are included in the long-term business technical account and, where applicable, a transfer is made to the non-technical account to ensure that the return remaining in the long-term technical account attributable to shareholders reflects the longer-term investment return.
Non-long-term business investment income and unrealised gains and losses are taken to the non-technical account. The longer-term return on the investments owned by general business operations is then transferred from the non-technical account to the general business technical account. Profits and losses arising on investment transactions with the long-term funds are included in realised investment gains.
H – Pension costs The Group operates defined benefit pension schemes in a number of countries around the world, with contributions made on a going concern basis, as recommended by actuaries. There are also several money purchase pension plans. The pension costs, which are included in expenses, are calculated using actuarial valuation methods which give a substantially even charge over the expected service lives of employees. The costs of other material post-retirement benefits, also included in expenses, are charged as they accrue.
In November 2000, the Accounting Standards Board issued Financial Reporting Standard (“FRS”) 17 “Retirement Benefits”, the accounting provisions of which are not required to be adopted by the Group until 2005. However, the FRS requires certain disclosures to be made in the notes to the accounts, as shown in note 45e.
K – Investments Investments are stated at their current values at the end of the year, with the exception of certain 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.
All properties are valued annually by qualified external valuers or members of staff, at market value. No depreciation is provided on properties held for own use since such depreciation is immaterial. No depreciation is provided on investment properties as the directors consider that, as these properties are held for investment, to depreciate them would not give a true and fair view of the Group’s financial position or results for the financial year.
O – Acquired additional value of in-force long-term business The additional value of in-force long-term business arising on acquisitions is recognised in the Group’s balance sheet and is amortised through the profit and loss account over the useful lifetime of the related contracts in the portfolio on a systematic basis. The rate of amortisation is chosen by considering the profile of the additional value of in-force business acquired and the expected depletion in its value. The value of acquired additional in-force long-term business is reviewed annually for any impairment in value and any reductions are charged to the long-term business technical account.
P – Long-term business provision and technical provision for linked liabilities The long-term business provision is calculated separately for each life operation, based on local actuarial principles consistent with those applied in the United Kingdom. Each calculation represents a point within a range of possible outcomes, and the assumptions used in the calculations depend on the circumstances prevailing in each life operation. Further details of the methodology and the principal assumptions used are given in note 38.
U – Exchange rates The results of foreign enterprises are translated into sterling at average exchange rates while their assets and liabilities are translated at year end rates. The resulting exchange differences arising within long-term businesses are included within the long-term business technical account and form part of the transfer to the fund for future appropriations, while those arising within other businesses are taken directly to reserves.
(17,551) Changes in other technical provisions, net of reinsurance (12,110) (1,978)
– Unrealised losses on investments (F & 7a) – (8,833) (107) Other technical charges (24) (74) (100) (774) Tax attributable to long-term business (I & 14b) (534) 163 (187) Allocated investment return transferred (to)/from the non-technical account (F & 7b) (129) 59
(6,770) Transfers (to)/from the fund for future appropriations (S) (4,672) 2,801
Long-term business operating profit before amortisation of acquired additional value 1,650 of in-force long-term business and amortisation of goodwill on associated undertakings (4a) 1,138 1,022
Amortisation of acquired additional value of in-force long-term business (196) (included within other technical charges and investment income) (135) (139)
Net premiums written (B) 9,590 9,425 Change in the provision for unearned premiums 13,425 Earned premiums, net of reinsurance 9,263 9,189 1,506 Allocated investment return transferred from the non-technical account (F & 7b) 1,039 1,182
Change in the provision for claims (1,169) Gross amount (806) 333
1 Changes in other technical provisions, net of reinsurance 1 (2) (3,977) Net operating expenses (9) (2,744) (2,693)
Operating profit General insurance – continuing operations (4a) (54) (145) 965 1,026 911 881 Health business – continuing operations (4a) (13) (24) 74 85 61 61
Investment income (F & 7a) – Share of result of associated undertakings, net of goodwill amortisation – 16 207 Unrealised gains on investments (F & 7a) 143 –
(632) Investment expenses and charges (7a) (437) (485) – Unrealised losses on investments (7a) – (1,017)
Other income/(charges), including value adjustments 23 Profit from fund management (4a) 16 5
(9) Net loss on the disposal of subsidiary undertakings (17c) (6) (4) (28) Exceptional costs for termination of operations (17d) (19) –
(531) Tax on profit/(loss) on ordinary activities (I & 14a) (367) (206)
1,351 Profit/(loss) for the financial year attributable to equity shareholders 932 (551) (790) Ordinary dividends (15) (545) (519)
Earnings per share attributable to equity shareholders Operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after tax, in respect of: 63.8c – continuing operations (16a) 44.0p 34.8p 63.8c – continuing and discontinued operations (16a) 44.0p 38.0p 60.0c Profit/(loss) attributable to equity shareholders (16a) 41.4p (24.4)p 59.9c Profit/(loss) attributable to equity shareholders – diluted (16b) 41.3p (24.4)p
Total continuing operations 1,490 1,218 Discontinued operations (4a) – Australia and New Zealand general insurance operations – 78 1,490 1,296 Amortisation of goodwill – long-term business associates (7a & 21) (13) (13) – non-long-term business subsidiary undertakings (18) (88) (122) – non-long-term business associates (7a & 21) (2) –
(103) (135) Amortisation of acquired additional value of in-force business – long-term business subsidiary undertakings (100) (139) – long-term business associates (35) –
Short-term fluctuation in investment return – long-term business (7b) 129 (59) – non-long-term business (7b) 83 (1,184)
1m £m £m 1,375 Profit/(loss) for the financial year 949 (534) (179) Foreign exchange gains (U & 34) 329 104 1,196 Total recognised gains and losses arising in the year 1,278 (430)
Reconciliation of movements in consolidated shareholders’ funds For the year ended 31 December 2003 1m £m £m
Investments (K) Land and buildings (19) Investments in joint ventures (N & 20)
Investments in associated undertakings and other participating interests (N & 21a)
Acquired additional value of in-force long-term business (O & 24) Deposits with ceding undertakings 58,093 Assets held to cover linked liabilities (25) 40,665 29,538
Debtors 4,896 Debtors arising out of direct insurance operations (26) 1,151 Debtors arising out of reinsurance operations 3 Loan to associated undertaking 9,156 Other debtors (27)
15,206 Other assets 457 Tangible assets (Q & 28) 4,284 Cash at bank and in hand 4,741
Capital and reserves 286 Preference share capital (32a) 200 200 1,091 Called up share capital 764 764 1,566 Share premium account (31c) 1,096 1,094
Creditors arising out of direct insurance operations Creditors arising out of reinsurance operations Long-term business borrowings
Debenture loans (R & 42b) Amounts due to credit institutions (42c) Commercial paper (42d)
Returns on investments and servicing of finance Interest paid on borrowings Interest paid on subordinated debt Preference dividends paid Dividends paid to minorities Net cash outflow from servicing of finance
Financing activities Issue of share capital (47c) Proceeds from issue of subordinated debt (36 & 47c) Net drawdown/(repayment) of debt (47c)
Cash flows were invested as follows: (Decrease)/increase in cash holdings (47d) Net portfolio investment Purchases of investments
The cash flows presented in this statement relate to non-long-term business transactions only. Long-term business profits are included as net cash inflow from operating activities only to the extent that they have been remitted to shareholders by way of dividends from life operations. *Included within the exceptional items are payments to the Berkshire Hathaway Group for reinsurance purchased in December 2000, to secure protection against any adverse impact of the run-off of London Market claims reserves. The final instalment was paid on 2 January 2003.
**The 2003 figure includes £651 million of consideration received on 2 January 2003 in relation to the disposal of the Australia and New Zealand general insurance businesses.
Fixed assets Shares in subsidiary undertakings (M & 17e) 14,046 10,614 Investment in joint venture (N and 20c) 22 20
Current assets Amounts owed by subsidiary undertakings 3,734 4,111 Other assets 100 146 3,834 4,257 Creditors: Amounts falling due within one year Amounts owed to subsidiary undertakings (1,949) (1,745) Loans (42e) (1,172) (1,433) Proposed ordinary dividend (15) (342) (322) Other creditors (63) (61)
Creditors: Amounts falling due after more than one year Loans (42e) (397) (472) Subordinated debt (R & 36) (2,814) (1,190)
Called up share capital 764 764 Share premium account (31c) 1,096 1,094 Revaluation reserve (35) 2,074 114 Merger reserve (35) 227 227 Profit and loss account: (35)
Operating profit – 78 Amortisation of goodwill – (2) Short-term fluctuation in investment returns and other items – (40)
Profit for the financial year – 30 3 – Changes in accounting policy
(a) Additional value of internally-generated in-force business In November 2003, the Association of British Insurers issued a revised version of its Statement of Recommended Practice on accounting for insurance business (“ABI SORP”). One of the amendments is that insurance companies are no longer allowed to recognise the internally-generated additional value of in-force business (“AVIF”) on their balance sheets, either as an asset or as part of shareholders’ funds. The Group has therefore changed its accounting policy in this area.
(i) In December 2003, the Urgent Issues Task Force issued UITF Abstract 38 which requires shares held by employee share trusts to be deducted from capital in arriving at shareholders’ funds rather than being held as assets.
United Kingdom 9 5 13 9 Europe (excluding UK) France (2) (2) 9 10 Netherlands (20) (27) 39 42
United Kingdom (6) (12) Europe (excluding UK) France 13 11 Netherlands – 4 Other Europe 3 2 International Australia and New Zealand (1) (1) Other International 1 1
Operating profit in respect of fund management, excluding associates 16 5
(iv) Operating profit in respect of general insurance business excluding health business, before exceptional items
United Kingdom 50 (52) 676 611 Europe (excluding UK) France (9) (14) 35 47 Ireland 26 (15) 91 44 Netherlands (5) (21) 35 13 Other Europe (6) (10) 32 49 International Canada (98) (28) 12 80 Other International (12) (5) 30 37
Continuing operations (54) (145) 911 881 Discontinued operations (note 2) – 7 – 78
Continuing operations 1,818 1,596 Discontinued operations (note 2) – 78 Corporate costs (note 10) (160) (218) Unallocated interest charges (note 7a) (406) (434)
Other business Acquired additional value of in-force long-term business (note 24) Corporate and other holding company assets
Sterling 2,473 508 Euro 3,535 4,265 Canadian dollar 534 532 United States dollar 231 240 Other 592 949
An analysis of new life and savings business premiums written is provided below.
Single premiums are those relating to products issued by the Group, which provide for the payment of one premium only. Regular premiums are those where there is a contractual obligation to pay on an ongoing basis.
In addition to the amounts included above, Navigator, our Australian funds administration business, recorded sales of £625 million in 2003 (2002: £797 million) including sales through Navigator Asia in Singapore.
(iii) Health business premium income by geographical origin – continuing operations
(iv) General insurance business premium income (excluding health business premiums) by geographical origin – continuing operations
United Kingdom 5,721 5,461 5,135 4,740 Europe (excluding UK) France 558 544 515 478 Ireland 650 594 611 377 Netherlands 605 444 563 412 Other Europe 284 489 226 408 International Canada 1,307 1,082 1,208 1,009 Other International 201 251 266 381
Total general insurance business premiums (excluding health business) 9,326 8,865 8,524 7,805
(b) The analysis of general insurance business premiums written before reinsurance is: 2003 2002 £m £m
Investment income Expenses and charges, including allocated interest charges Unallocated interest charges: External – subordinated debt
(i) The longer-term investment return, net of expenses, allocated to the general business technical account and transferred from the long-term business technical account was £1,039 million (2002: £1,182 million) and £129 million (2002: £59 million transferred to), respectively.
(ii) The longer-term investment return and short-term fluctuation are as follows: long-term business Non-long-term business
Total investment return before tax Less: share of result of associated undertakings, net of goodwill amortisation Add: unallocated interest charges
(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.
Longer-term return credited to operating results: Long-term business* 562 626 Non-long-term business 7,005 7,587
The following amounts have been included in the long-term business technical account in respect of policyholder bonuses: 2003 2002 £m £m
Central costs and sharesave schemes 176 192 Global finance transformation programme 60 26 236 218 Allocation of staff profit share and other incentive plans to business unit operating results (76) –
Information concerning individual directors’ emoluments, interests and transactions is given on pages 50 to 54.
Deferred tax Origination and reversal of timing differences (19) 177 Changes in tax rates or law (11) 5 Increase/(decrease) in discount 14 (26)
The total tax (charged)/credited in the long-term business technical account relates to the following: Parent company and subsidiary undertakings (525) 171 Associated undertakings (9) (8)
Current tax (charge)/credit at standard UK corporation tax rate of 30% (2002: 30%) (417) 85 Adjustment to tax charge in respect of prior years 20 2 Non-assessable dividends 5 9 Non-taxable loss on the sale of subsidiaries and associates (10) (58) Non-taxable amortisation of goodwill (5) (21) Other disallowable expenses (33) (20) Non-utilisation of current year tax losses (10) – Different local basis of tax on overseas profits 53 (51) Deferred tax credit arising from movement in unrealised gains and losses 20 (154) Other deferred tax movements 10 (23) Deferred tax assets not recognised 38 (96) Other items (22) (35)
In addition, the Group has capital losses which may be available to offset future capital gains.
Undiscounted net (provision)/asset for deferred tax (393) (476) (77) 61 (470) (415) Discount 59 94 92 78 151 172
Net (provision)/asset at 1 January (382) (1,029) 139 (34) (243) (1,063) Amounts (charged)/credited to the profit and loss account (note 14a and 14b) (171) 625 (16) 156 (187) 781 Other items 219 22 (108) 17 111 39
Net (provision)/asset at 31 December (334) (382) 15 139 (319) (243)
Amount included in provisions for other risks £m £m £m £m £m and charges (note 41) (438)
(407) (96) (58) (534) (465) Amount included in other debtors (note 27) 104 25 111 197 215 222
Ordinary dividends in the profit and loss account comprise: A vi va p lc
Interim – 9.0 pence (2002: 8.75 pence) paid on 17 November 2003 203 197 Final – 15.15 pence (2002: 14.25 pence) payable on 17 May 2004 342 322
Profit/(loss) attributable to equity shareholders 1,390 932 41.4 (282) (551) (24.4)
(b) Diluted earnings per share 2003 2002 £m m p £m m p
(a) Acquisitions During the year ended 31 December 2003, the Group acquired the following company: Country of incorporation Month of acquisitionPercentage acquired
On 8 May 2003, the Group’s Dutch subsidiary, Delta Lloyd Group (“Delta Lloyd”), entered into a bancassurance agreement with ABN AMRO Bank NV (“ABN AMRO”) for life and general insurance. As part of this agreement, the Group purchased 51% of the issued share capital of Delta Lloyd ABN AMRO Verzekeringen Holdings BV (“DL ABN AMRO”), the company established by ABN AMRO on 30 December 2002, into which the insurance businesses were transferred. Total cash consideration was £178 million, including transaction costs, with a further maximum amount payable over the next five years of £16 million if DL ABN AMRO meets certain performance criteria. The Group’s share of DL ABN AMRO’s embedded value and net assets was £62 million, giving rise to goodwill of £132 million after taking into account the estimated value of the deferred consideration. Under the terms of the agreement the results of DL ABN AMRO have been consolidated in the Group accounts with effect from 1 January 2003.
Liabilities Technical provisions including linked liabilities 2,332 – – 2,332 Other creditors and provisions 473 (5) – 468
In addition to the goodwill arising on the acquisition of DL ABN AMRO, the Group also made a number of smaller acquisitions giving rise to an additional goodwill amount of £8 million.
Additions 1,472 – Movement in current value (note 35) 1,960 (2,965)
Shares in subsidiary undertakings are valued at current value, which for this purpose is embedded value for life operations or net asset value for other entities, computed in accordance with the Company’s accounting policies. The resulting gain over book value of £2,074 million (2002: £114 million) has been credited to the Company’s revaluation reserve (note 35). The directors are satisfied that the aggregate value of all such investments is not less than the aggregate amount at which they are stated in the balance sheet.
(f) Principal subsidiary undertakings at 31 December 2003 are listed on page 111.
The carrying value of goodwill on subsidiary undertakings relates to investments held by the non-long-term business operations and comprises the following: goodwill goodwill £m £m £m £m
Positive and negative goodwill is being amortised on a straight-line basis over its useful economic life. Useful economic lives have been determined in respect of each acquisition to match the period over which the value of the underlying businesses will exceed the value of their identifiable net assets. No useful economic lives are in excess of 20 years. As explained in accounting policy J on page 57, goodwill arising in 1997 and prior years was charged directly to reserves.
The carrying value of land and buildings comprises: Long-term business Non-long-term business
The valuation of properties has been undertaken by qualified external valuers or by local qualified staff of the Group in overseas operations. All properties are valued at market value.
(b) Movements in the Group’s investments in joint ventures comprise: 2003 2002 £m £m
Ashtenne Industrial Partnership 66.7% 40.2% Bishopsbridge Limited Partnership 50.0% 50.0% The Junction Limited Partnership 50.0% 50.7% The Mall Limited Partnership 50.0% 34.7% Quercus Property Partnership Limited 50.0% 76.7%
The cost of the above investments was £950 million and £72 million respectively (2002: £915 million and £44 million respectively).
(b) Associated undertakings (i) Movements in the Group’s investments in associated undertakings comprise: A vi va p lc
The amortisation charges for the year in respect of both goodwill and acquired additional value of in-force long-term business (“AVIF”) appear under the heading “Investment income” in the long-term business technical account on page 59. The amortisation charge for AVIF is grossed up for attributable tax in the reconciliations on pages 59 and 62.
(ii) The principal associated undertakings included above are: Country of incorporation Company and operationType of business Proportion held Class of share
Aviva Life Insurance Company India Pvt. Limited Insurance Ordinary Rs1 shares 26.0% India ProCapital S.A. Online brokerage Ordinary 11 shares 43.5% France RBSG Collective Investments Limited Investment Ordinary £1 shares 49.99% Great Britain RBS Life Investments Limited Insurance Ordinary £1 shares 49.99% Great Britain Société Foncière Lyonnaise Property Ordinary 12 shares 31.4% France The British Aviation Insurance Company Limited Insurance Ordinary £1 shares 38.1% Great Britain
Through two separate transactions in January and September 2003, the Group acquired 49.99% of the ordinary share capital of RBSG Collective Investments Limited (“RBSGCI”), the immediate holding company of RBS Collective Investment Funds Limited (“RBSCIF”), for a total cash consideration of £47 million, representing net assets acquired of £10 million and goodwill of £37 million. The investment is in the form of a £0.5 million 49.99% equity participation in RBSGCI and a £46.5 million interest-free loan to RBS Collective Investments Holding Limited, the company holding the remaining 50.01% of the ordinary shares in RBSGCI. The loan would become repayable if RBSGCI disposed of its investment in RBSCIF and is guaranteed by The Royal Bank of Scotland plc.
Long-term Non-long-term Long-term Non-long-term business business 2003 business business 2003 £m £m £m £m £m £m
Shares and other variable yield securities and units in unit trusts 27,346 2,967 30,313 24,816 2,839 27,655
Debt securities and other fixed income securities: At current value 36,950 10,098 47,048 35,668 10,071 45,739 At amortised cost 34,709 – 34,709 33,806 – 33,806
Loans secured on policies 1,065 – 1,065 1,065 – 1,065 Other loans 285 46 331 284 43 327
Deposits with credit institutions 2,436 394 2,830 2,436 394 2,830 Other investments 1,777 65 1,842 1,682 50 1,732
Shares and other variable yield securities and units in unit trusts 22,197 2,603 24,800 23,409 2,749 26,158
Participation in investment pools 68 – 68 68 – 68 Loans secured by mortgages: Own mortgages 9,320 1,121 10,441 8,606 1,124 9,730 Securitised mortgages (note 23) 1,621 483 2,104 1,621 483 2,104 Less: Non-recourse funding (note 23) (1,621) (478) (2,099) (1,621) (478) (2,099)
Deposits with credit institutions 2,207 532 2,739 2,207 532 2,739 Other investments 1,053 52 1,105 1,070 52 1,122
Shares and other variable yield securities and units in unit trusts 25,623 21,521 Debt securities and other fixed income securities 76,318 66,595
(d) In addition to the investments in participating interests detailed in note 21a, 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 shareholding in Delta Lloyd Investment Fund NV where 13.0% (2002: 8.3%) is held directly and a further 20.8% (2002: 25.1%) is held in segregated policyholder funds. 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.
Notes to the accounts continued 23 – Securitised mortgages and related assets
plc (“ERF1”), Equity Release Funding (No. 2) plc (“ERF2”) and Equity Release Funding (No.3) plc (“ERF3”) (together “the ERF companies”), in return for initial consideration and, at later dates, deferred consideration. The deferred consideration represents receipts accrued within the ERF companies after meeting all their obligations to the noteholders, loan providers and other third parties in the priority of payments.
DLL received interest of £2 million in 2003 (2002: £2 million) on the loan notes it holds in the Arena companies. It also receives payments under the terms of interest rate swaps written between DLL and these companies to hedge their respective exposures to movements in interest rates arising from these transactions. In each case, the effect of the swaps is that the Arena companies convert all or part of the interest flows receivable from customers in respect of the securitised mortgage loans into fixed interest flows which are designed substantially to match the interest payable to the noteholders. DLL has written further interest rate swaps with a bank to hedge its own interest rate risk under these contracts. Included in investment income is £25 million (2002: £7 million) relating to these swaps.
Total mortgage assets and non-recourse funding in the above quasi-subsidiaries at 31 December 2003 were £3,149 million (2002: £2,104 million) and £3,143 million (2002: £2,099 million) respectively. As permitted by FRS5 “Reporting the substance of transactions”, these balances are accounted for in the consolidated Group balance sheet using a linked presentation. Interest receivable and payable on the above items in 2003 totalled £195 million (2002: £121 million) and £166 million (2002: £106 million) respectively. Apart from the administration fees payable to other Group undertakings, described above, there are no other material profit and loss items in these companies.
Balance at 1 January 505 Foreign exchange rate movements 21 Additional in-force long-term business acquired in subsidiaries 36 Amortisation charge for the year (74) Movements arising in the year (17)
(a) A reconciliation of assets to linked liabilities is as follows: Reinsurers’ share of technical provision Assets held to cover linked liabilities
Debtors arising out of direct insurance operations 3,427 3,199 27 – Other debtors
Banking assets (note 30a) 4,106 3,514 Deferred tax asset (note 14e(iii)) 215 222 Other 2,088 2,193 28 – Tangible assets
Cost: At 1 January 37 411 352 800 Additions 8 77 55 140 Disposals (15) (53) (21) (89) Foreign exchange rate movements – 11 13 24
Net book value at 31 December 2003 16 123 181 320
Net book value at 31 December 2002 17 114 164 295
The asset in the consolidated balance sheet comprises: 2003 2002 £m £m
Costs in respect of long-term business 1,862 1,750 Costs in respect of general business 980 934 30 – Banking activities
(a) Banking assets (see note 27), excluding intra-group balances, comprise: 2003 2002 £m £m
Deposits by banks 130 72 Bank customer accounts 2,790 2,720 Other liabilities 965 457 31 – Ordinary share capital
The allotted, called up and fully paid share capital of the Company at 31 December 2003 was: 2,257,282,501 (2002: 2,256,737,144) ordinary shares of 25 pence each 564 564
Hibernian Savings Related Share Option Scheme (in Euros) of shares exercisable of shares exercisable
General Accident Savings Related Option price Number Normally Option price Number Normally p pShare Option Scheme of shares exercisable of shares exercisable
Aviva Executive Share Option Scheme of shares exercisable of shares exercisable 547.17 39,251 1997 to 2004 1,119.00 59,372 2001 to 2008 575.29 130,625 1997 to 2004 853.00 571,667 2001 to 2008 542.17 18,222 1998 to 2005 965.00 32,295 2002 to 2009 614.83 6,587 1998 to 2005 870.83 119,624 2002 to 2009 581.17 179,262 1999 to 2006 919.00 988,779 2002 to 2009 601.17 23,423 1999 to 2006 947.67 3,165 2002 to 2009 689.17 13,690 1999 to 2006 952.00 28,362 2002 to 2009 677.50 18,015 2000 to 2007 822.00 82,410 2003 to 2010 680.00 60,877 2000 to 2007 972.33 23,245 2003 to 2010 725.50 2,345 2000 to 2007 960.00 133,836 2003 to 2010 763.50 3,929 2000 to 2007 1,035.00 2,025,484 2004 to 2011 773.50 41,231 2000 to 2007 499.00 14,272 2005 to 2012 857.00 32,352 2000 to 2007 516.00 3,903,162 2005 to 2012
General Accident Executive Option price Number Normally Option price Number Normally of shares exercisable of shares exercisable p pShare Option Scheme
Aviva Executive Share Option Scheme (Delta Lloyd) of shares exercisable of shares exercisable 965.00 364,198 1999 to 2004 950.00 714,679 2001 to 2006 952.00 19,388 1999 to 2004 739.00 947,096 2002 to 2007 822.00 587,186 2000 to 2005 380.00 2,678,317 2003 to 2008 p p CGU plc Option price Number Normally Option price Number Normally Deferred Bonus Plan of shares exercisable of shares exercisable
At 31 December 2003, awards over a total of 6,998,765 ordinary shares were outstanding under the Aviva Long Term Incentive Plan. Subject to satisfying performance criteria, these awards will vest in 2003, 2004, 2005 and 2006. Further details of this plan can be found on pages 48 and 49. The awards will be satisfied by means of shares purchased by employee share trusts set up for the purpose of satisfying awards under various executive incentive plans and funded by the Company. Details are given in note 33. In respect of grants made from March 2003 onwards, awards will be satisfied by means of a new issue of shares. As at 31 December 2003, the trusts held 7,598,384 shares with an aggregate nominal value of £1.9 million and their market value at the year end was £37.2 million. The trustees have waived their right to dividends on the shares held in trust.
As at 31 December 2003, awards over a total of 6,659,928 ordinary shares, and options over a total of 406,429 ordinary shares, were outstanding under the Aviva Deferred Bonus Plan. These awards will vest in 2004, 2005 and 2006. Shares will be purchased into an employee share trust to satisfy the vesting awards and will also be satisfied by the new issue of shares.
(c) During 2003, a total of 545,357 ordinary shares of 25 pence each were allotted and issued by the Company as follows: £m £m Share capital Share premium
(a) The preference share capital of the Company at 31 December 2003 was: 2003 2002 £m £m
Credit to shareholders’ funds in respect of the above At 1 January Movement for the year
At 1 January 2003 as previously reported 3,832 2,853 1,126 7,811 Prior year adjustment (note 3a) (3,832) – – (3,832)
Restated opening balances – 2,853 1,126 3,979 Transfer from non-technical account – – 387 387 Foreign exchange rate movements – – 329 329 Other movements – (90) 90 –
As explained in accounting policy J on page 57, goodwill arising on acquisitions since 1 January 1998 is carried on the balance sheet and amortised over its useful economic life. The cumulative amounts of positive and negative goodwill charged or credited to the consolidated profit and loss account, attributable to subsidiary undertakings acquired from 1 January 1968 to 31 December 1997 and not subsequently sold, are £957 million and £15 million respectively. Similar information relating to subsidiary undertakings acquired before 1968 is not readily available.
Movements in the Company’s reserves comprise: Revaluation Merger Profit and loss reserve reserve account Total £m £m £m £m
At 1 January 2003 as previously reported 115 227 7,469 7,811 Prior year adjustment (note 3b(i)) (1) – – (1)
The cumulative amount in the profit and loss account includes non-distributable gains of £5,735 million (2002: £5,735 million).
Group and Company 6.125% £700 million subordinated notes 2036 679 679 5.750% 1800 million subordinated notes 2021 553 511 5.250% 1650 million subordinated notes 2023 450 – 5.700% 1500 million undated subordinated notes 347 – 6.125% £800 million undated subordinated notes 785 –
The subordinated notes rank below the senior obligations of the Company and ahead of the preference shares and ordinary share capital issued by the Company. The dated subordinated notes rank ahead of the undated subordinated notes. The fair value of these notes at 31 December 2003 was £3,003 million (2002: £1,167 million).
Pensions and on stakeholder unitised with-profit business are derived from management fees and policy charges, and emerge in the non-profit funds.
(a) Methodology There are two main methods of actuarial valuation of liabilities arising under long-term insurance contracts – the net premium method and the gross premium method – both of which involve the discounting of projected premiums and claims.
Bonuses paid during the year are reflected in claims paid, whilst those allocated as part of the bonus declaration are included in the movements in the long-term business provision, as detailed in note 8.
Deferred annuities With-profit – in deferment 4.2% to 4.8% 4.0% to 5.0% Non-profit – in deferment 4.2% to 5.8% 5.0% to 5.3% In payment 4.2% to 4.7% 4.0% to 5.0%
Mortality assumptions are set with regard to recent company experience and general industry trends. Since 2002, there have been some changes to the adjustments to the base tables for annuities in payment in order to reflect more closely the actual experience of this business.
Assurances With-profit AM92/AF92 or A67/70 adjusted Non-profit AM80/AF80 or AM92/AF92 or
Pure endowments and deferred annuities before vesting Nil or AM80/AF80 or AM92/AF92 adjusted General annuity business after vesting IM80/IF80 or IM92/IF92 adjusted plus allowance for future mortality improvement*
(iii) Netherlands Provisions are generally calculated using the net premium valuation method, in accordance with local regulation, where the valuation assumptions generally depend on the date of issue of the contract, with additional provisions where experience indicates this is required. There have been no changes in the assumptions since 2002.
Life assurances 3.0% or 4.0% GBM 61-65, 76-80, 80-85 GBM/V 85-90, 90-95
Annuities in deferment and in payment 3.0% or 4.0% GBM/V 76-80, 80-85, 85-90, 90-95, Coll 1993 and DIL 98 plus further allowance for future mortality improvement
Provisions are calculated allowing for reinsurance recoveries and a separate asset is recorded for the reinsurers’ share, having regard to collectability.
Notes to the accounts continued 39 – Provisions for outstanding claims continued
“Other” provisions comprise many small provisions throughout the Group for obligations such as the costs of compensation, litigation, staff entitlements and reorganisation.
(b) Debenture loans Other 9.5% guaranteed bonds 2016 170 157 11.9% C$24 million mortgage 2005 5 6 8.625% guaranteed bonds 2005 168 155 2.5% subordinated perpetual loan notes 133 113 476 431 Repayable as follows: One year or less 1 – Between one and two years 172 – Between two and five years – 161 After five years 303 270
The interest charge for the year on the above loans was: 42 41
The interest charge for the year on the above was: 3 2 1 1 5 13
As explained in note 20a, 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.
Sterling 390 922 338 323 728 1,245 Euro 543 106 143 113 686 219 United States dollar 334 582 – – 334 582 Canadian dollar 3 8 5 6 8 14 Other 3 3 1 1 4 4
The floating rate borrowings comprise commercial paper and bank borrowings bearing interest based on local inter-bank offer rates, which are fixed in advance for the period of the borrowings. Excluding the subordinated perpetual loan notes, the fixed rate borrowings have a weighted average interest rate of 7.93% (2002: 7.94%) for a weighted average term of seven years (2002: eight years).
(h) The Group has the following undrawn committed central borrowing facilities available to it, of which £1,100 million (2002: £1,000 million) is used to support the commercial paper programme: Expiring within one year 1,605 880 Expiring beyond one year 1,357 2,060
The scheme was valued as at an effective date of 1 April 2002, on a market value basis using the Projected Unit Method. The main financial assumptions used were a pension increase rate of 2.5%, a salary increase rate of 4.25% and an interest rate of 6.4%. The scheme had an asset value of £4,639 million, projected accrued liabilities of £4,010 million and a funding level of 116%. The employer cost of future service benefits in respect of defined benefit members for 2003 was 21.2% of pensionable salaries which, after allowing for interest on the prepayment held in the balance sheet and the additional surplus since, led to a net pension cost for the period to 31 December 2003 of 8.6% of pensionable salaries. The pension cost was then increased to allow for the amounts credited to members’ accounts under the defined contribution section of the scheme.
Date of most recent actuarial valuation 1.4.03 1.4.02 31.12.02 31.12.01 31.12.02 31.12.01 Various Various
The main financial assumptions used to calculate scheme liabilities under FRS17 are: Inflation rate 2.6% 2.2% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% General salary increases 4.4% 4.0% 3.5% 3.5% 3.0% 3.0% 4.25% 4.25% Pension increases 2.6% 2.2% 2.5% 2.5% 1.25% 1.25% 2.25% 2.25% Deferred pension increases 2.6% 2.2% 2.5% 2.5% 0% 0% 2.25% 2.25% Discount rate 5.6% 5.75% 5.25% 5.5% 5.5% 5.75% 5.3% 5.55%
(iii) The pension expense for these schemes on an FRS17 basis comprises: 149 137 Past service cost 1 1 Loss on curtailments 7 – Charge to net operating expenses 157 138
Difference between the expected and actual return on scheme assets Amount (479) 1,139 Percentage of the scheme assets at the end of the year 8.4% 23.4%
Total market value of assets 4,551 3,950 649 486 163 140 333 282 5,696 4,858 Present value of
(vi) Movements in the pension schemes’ surplus/deficit on a FRS17 basis comprise: Total
Contributions paid into the schemes 172 113 Charge to net operating expenses (157) (138) Credit to investment income 26 83 Actuarial loss, excluding increase in recoverable surplus (219) (1,049) Foreign exchange rate movements (6) 3
The change in the net pension deficit calculated under FRS17 is mainly attributable to changes in assumptions underlying the present value of the schemes’ liabilities, partially offset by an increase in the market value of their assets. In the United Kingdom, the value of the liabilities has increased due to lower corporate bond yields, which are used to set the valuation discount rate, and a higher assumed inflation rate. The increase in asset values is primarily due to a strong improvement in equity values since the previous year end.
(vii) The effect on the Group’s net assets and retained profits at 31 December 2003 of substituting the FRS17 figures for the corresponding SSAP24 balance sheet entries would be as follows: Net assets £m £m £m £m
Totals included in the Group accounts 7,365 6,494 1,932 1,126 Less: pension asset on SSAP24 basis (251) (175) (251) (175)
Totals excluding pension asset 7,114 6,319 1,681 951 Less: pension liability on FRS17 basis (583) (456) (583) (456)
Totals including pension liability on FRS17 basis 6,531 5,863 1,098 495 46 – Assets under management
Securitised mortgages (gross of non-recourse funding) 3,143 2,099 Unit trusts, Oeics, Peps and Isas 4,460 3,636 Segregated funds 19,355 16,955
Total assets under management 240,382 207,612 47 – Cash flow statement
Net cash inflow from operating activities, excluding exceptional items 1,203 1,001
(b) Analysis of cash flows in respect of the acquisition and disposal of subsidiary and associated undertakings is: 2003 2002 £m £m
Cash consideration for subsidiary and associated undertakings acquired (218) (55) Cash proceeds from disposal of subsidiary and associated undertakings 698 381 Net cash balances acquired/(divested) with subsidiary undertakings 120 (85)
Issue of ordinary share capital (note 31c) 2 11 – – New borrowings drawn down, net of expenses – – 3,349 1,466 Repayment of borrowings – – (1,702) (1,534)
Net cash inflow/(outflow) Foreign exchange rate movements Borrowings acquired/loans repaid for non-cash consideration Amortisation of discounts and other non-cash items
Changes in financing Balance at 1 January Share capital External borrowings
Changes in cash (135) 735 Balance at 1 January 1,273 538
(e) Non-long-term business cash included in the consolidated balance sheet comprised: 2003 2002 Changes in year £m £m £m
Cash at bank and in hand: General business and other activities 1,233 1,560 (327) Banking 42 – 42
(a) Uncertainty over claims provisions Note 38 gives details of the assumptions used in determining the long-term business provision which are designed to allow for prudence and the appropriate emergence of surpluses to pay future bonuses. Note 39 gives details of the estimation techniques used in determining the general business outstanding claims provision. Both are estimated to give a result within the normal range of outcomes. To the extent that the ultimate cost falls outside this range, for example where experience is worse than that assumed for long-term business, or assumptions over general business claims inflation may alter in the future, there is uncertainty in respect of this liability.
(d) Pensions mis-selling The Pensions Review of past sales of personal pension policies which involved transfers, opt outs and non-joiners from occupational schemes, as required by the Financial Services Authority (“FSA”), has largely been completed. A provision of some £65 million (2002: £68 million) remains to meet the outstanding costs of the few remaining cases, the anticipated cost of any guarantees provided, and potential levies payable to the Financial Services Compensation Scheme (“FSCS”). The provision reflects the significant increases in levies expected over the next two to three years, as advised by the FSCS. It continues to be the directors’ view that there will be no material effect either on the Group’s ability to meet the expectations of policyholders or on shareholders.
In carrying on the business of investment, the Group has entered into future commitments, including property development, after 31 December 2003. These amounts are not reflected in the consolidated Group balance sheet on pages 64 and 65. The Group has in hand a number of property developments which, under contracts already signed, will require expenditure of £181 million (2002: £344 million) for long-term business operations.
Premium income after reinsurance and investment sales Life assurance, investment sales, including share of associates 20,176 19,200 19,065 17,349 15,048 General insurance 8,524 7,805 7,850 8,356 7,699 Health 1,066 928 841 687 402
Operating profit including life achieved profit – Continuing operations 1,907 1,720 1,935 1,325 1,608
Deduct life achieved profit (1,555) (1,524) (1,665) (1,569) (1,496) Add modified statutory life profit 1,138 1,022 1,194 1,190 1,172
Operating profit/(loss) before tax 1,252 1,022 1,271 (72) 1,281 Short-term fluctuation in investment return 212 (1,243) (988) 258 250 Change in the equalisation provision (49) (57) (56) (27) (55) Net profit/(loss) on the disposal of subsidiary undertakings (6) (4) 287 (1,058) (8) Exceptional costs for termination of operations (19) – – – – Loss on withdrawal from London Market operations – – – (448) – Merger transaction costs – – – (59) –
Profit/(loss) on ordinary activities before tax 1,390 (282) 514 (1,406) 1,468 Tax (367) (206) (198) (255) (382) Minority interests (74) (46) (57) (52) (66) Dividends (562) (536) (874) (872) (790)
Consolidated shareholders’ funds Equity shareholders’ funds (e) 6,354 5,636 6,274 7,078 9,555 Non-equity shareholders’ funds 200 200 200 200 200
Shareholder funds per statutory accounts Additional value of internally-generated in-force long-term business
Shareholders’ funds on an achieved profit basis 11,165 9,668 11,742 13,277 15,669
(d) The profit and loss account figures for 1999 and 2000 and the balance sheet figures for 1999 have not been restated for the effects of implementing FRS19 “Deferred Tax”. The wealth management result has been included within fund management and non-insurance operations in all years.
(e) Equity shareholders’ funds for all years have been restated for the effects of the changes in accounting policy as detailed in note 3.
Operating profit 2,255 Life achieved operating profit 1,555 1,524 1,320 General insurance 911 881 (93) Non-insurance operations* (64) (99)
Operating profit – continuing operations before tax, 2,764 amortisation of goodwill and exceptional items 1,907 1,720
Operating profit before tax Variation from longer-term investment return Effect of economic assumption changes Change in the equalisation provision Net loss on the disposal of subsidiary undertakings Exceptional costs for termination of operations 3,633 Profit/(loss) on ordinary activities before tax 2,507 (2,463) Tax on operating profit – continuing operations before amortisation of
(813) goodwill and exceptional items (561) (531) (278) Tax on profit/(loss) on other ordinary activities (192) 982 2,542 Profit/(loss) on ordinary activities after tax 1,754 (2,012) (162) Minority interests (112) (33)
*The wealth management result has been included within non-insurance in all periods.
Earnings per share Operating profit on an achieved profit basis before amortisation of goodwill and exceptional items, after tax, attributable to equity shareholders in respect of: 77.1c – continuing operations 53.2p 48.3p 77.1c – continuing and discontinued operations 53.2p 51.5p 104.6c Profit/(loss) attributable to equity shareholders 72.2p (91.5)p 104.2c Profit/(loss) attributable to equity shareholders – diluted** 71.9p (91.5)p **As required by FRS14 “Earnings per share”, the impact of the dilutive effect on 2002 comparatives is not recognised as it would result in a smaller loss.
2,380 Profit/(loss) for the financial year* 1,642 (2,045) (492) Foreign exchange gains 415 179 1,888 Total recognised gains/(losses) arising in the year 2,057 (1,866)
*Stated before the effect of foreign exchange movements, which are reported within the foreign exchange gains line.
Shareholders’ funds at the beginning of the year, as originally reported 11,752 Prior year adjustment (10)
14,874 Shareholders’ funds at the beginning of the year, as restated 9,668 11,742 1,888 Total recognised gains/(losses) arising in the year 2,057 (1,866) (815) Dividends (562) (536)
Summarised consolidated balance sheet – achieved profit basis As at 31 December 2003
Long-term business Long-term business Restated* business and other business and other
Total assets included in the modified statutory balance sheet 178,394 30,286 208,680 153,392 27,613 181,005
Net assets on a modified statutory basis Additional value of internally-generated in-force long-term business (1)
Net assets on an achieved profits basis (2) 12,373 2,550 14,923 10,379 1,222 11,601
Shareholders’ capital, share premium, shares held by employee trusts and merger reserve
Group’s share included in shareholders’ funds 4,611 3,832 779 Minority interest share 133 85 48
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” line in the Summarised consolidated profit and loss account.
The results for 2003 and 2002 have been audited by the auditors Ernst & Young LLP. Their audit report in respect of 2003 is on page 110.
Total life achieved profit, including the Group’s share from the alliance with RBSG, comprises the following components, the first three of which in aggregate are referred to as life achieved operating profit: • new business contribution written during the period including value added between the point of sale and end of the period; • the profit from existing business equal to: – the expected return on the value of the in-force business at the beginning of the period,
New business contribution (after the effect of solvency margin) 472 452 Profit from existing business – expected return 757 849
Total life achieved profit/(loss) before tax 2,249 (1,357) Tax on operating profit/(loss) (473) (460) Tax on other ordinary activities (191) 857
**New business contribution before the effect of solvency margin includes minority interests in 2003 of £106 million (2002: £69 million). This comprises minority interests in France of £4 million (2002: £4 million), Italy £25 million (2002: £19 million), Netherlands £8 million (2002: nil), Poland £1 million (2002: £1 million) and Spain £68 million (2002: £45 million).
United Kingdom 659 699 Europe (excluding UK) France 220 228 Ireland 65 75 Italy 70 52 Netherlands (including Belgium and Luxembourg) 189 200 Poland 104 111 Spain 158 83 Other 9 (2) International 81 78
Total life achieved operating profit before tax* 1,555 1,524 *Life achieved operating profit includes minority interests in 2003 of £154 million (2002: £90 million). This comprises minority interests in France of £6 million (2002: £7 million), Italy £37 million (2002: £26 million), Netherlands £14 million (2002: nil), Poland £20 million (2002: £18 million), Spain £76 million (2002: £39 million) and Other Europe £1 million (2002: nil).
Embedded value at the end of the year** 12,155 10,148 *Embedded value of businesses acquired in 2003 represents the embedded value of Delta Lloyd ABN AMRO Verzekeringen Holding BV, the insurance company acquired as part of the bancassurance agreement entered into with ABN AMRO NV in the Netherlands of £64 million. Embedded value from businesses acquired in 2002 represents the life subsidiary of DBS Hong Kong of £13 million.
**Embedded value at the end of the year includes minority interests in 2003 of £559 million (2002: £410 million). This comprises minority interests in France of £46 million (2002: £42 million), Italy £230 million (2002: £180 million), Netherlands £43 million (2002: nil), Poland £63 million (2002: £51 million), Spain £174 million (2002: £134 million) and Other Europe £3 million (2002: £3 million).
United Kingdom 2,141 1,845 3,532 3,167 5,673 5,012 Europe (excluding UK) France 1,012 833 437 388 1,449 1,221 Ireland 270 218 284 254 554 472 Italy 348 250 94 99 442 349 Netherlands (including Belgium and
Luxembourg) 1,267 859 1,131 947 2,398 1,806 Poland 148 129 248 223 396 352 Spain 187 149 268 201 455 350 Other 140 128 60 48 200 176 International 468 294 120 116 588 410
A vi va p lc *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.
New business contribution before effect of solvency margin 515 106 621 578 Effect of solvency margin (126) (23) (149) (126)
Total life achieved profit/(loss) before tax 2,129 120 2,249 (1,357) Attributed tax (624) (40) (664) 397
(a) Life achieved profit The achieved profit method of financial reporting is designed to recognise profit as it is earned over the life of an insurance policy. The total profit recognised over the lifetime of a policy is the same as under the modified statutory basis of reporting, but the timing of recognition is different.
Achieved profit reporting takes account of the cost of maintaining local provisions. In addition, a significant allowance for the expected cost of guarantees is implicitly allowed for in the risk margin inherent in the risk discount rate consistent with the principles of the achieved profit guidance.
Risk discount rate 8.6% 8.7% 9.3% 7.4% 7.3% 7.6% Pre-tax investment returns: Base government fixed interest 4.5% 4.6% 5.3% 4.4% 4.4% 5.3% Ordinary shares 7.5% 7.6% 8.3% 7.4% 7.4% 8.3% Property 6.0% 6.1% 6.8% 5.9% 5.9% 6.8%
Future expense inflation 4.0% 4.0% 4.0% 3.3% 3.3% 3.3% Tax rate 12.5% 12.5% 16.0% 38.3% 39.8% 41.0%
Future expense inflation 2.5% 2.5% 2.5% 3.4% 5.4% 9.2% Tax rate 25.0% 25.0% 25.0% 19.0% 27.0% 28.0%
*The economic assumptions shown above are those in the calculations for the life business. The economic assumptions for the pension business are identical with the exception of the risk discount rate which is 12.7% (2002: 13.8%; 2001: 16.9%).
• The management expenses of Aviva attributable to long-term business operations have been split between expenses relating to the acquisition of new business and to the maintenance of business in-force. Certain expenses of an exceptional nature have been identified separately and the discounted value of projected exceptional costs has been deducted from the value of in-force business. A realistic estimate of future fund management expenses that will be charged to long-term businesses by Group companies not included in the longterm business covered by the achieved profits method has been included within the value of in-force business.
• The value of in-force business allows for future premiums under recurring single premium business where collection of future single premiums is expected and where the receipt of further single premiums is not regarded as new business at the point of receipt. It does not allow for future premiums under non-contractual increments, or for future Department of Work and Pensions (DWP) rebate premiums, and the value arising therefrom is included in the value of new business when the premiums are received.
• Bonus rates on with-profit business have been set at levels consistent with the economic assumptions and Aviva’s medium-term bonus plans. The distribution of profit between policyholders and shareholders within the with-profit funds assumes that the shareholder interest in conventional with-profit business in the United Kingdom and Ireland continues at the current rate of one-ninth of the cost of bonus.
United Kingdom Europe (excluding UK) France Ireland Italy Netherlands (including Belgium and Luxembourg) Poland Spain Other International returns
The impact of an increase of one percentage point in the discount rate is calculated with all other assumptions remaining unchanged.
Non-economic assumptions Sensitivity calculations have been performed to identify the non-economic assumptions to which new business contribution and the value of in-force business within embedded value are particularly sensitive. The calculations have been based on similar percentage movements in each assumption from the base assumption used to calculate the published new business contribution and value of in-force business. Based on this, both the Group’s new business contribution and value of in-force are most sensitive to changes in future maintenance expenses.
We have audited the supplementary information on pages 102 to 109 in respect of the year ended 31 December 2003, which comprises an achieved profit basis Summarised profit and loss account, Consolidated statement of total recognised gains and losses, Reconciliation of movements in consolidated shareholders’ funds, Summarised consolidated balance sheet and the related notes and analyses. The supplementary information has been prepared in accordance with the achieved profit basis, using the methodology and assumptions set out on pages 107 to 109. The supplementary information should be read in conjunction with the accounts prepared on the modified statutory solvency basis, which are on pages 56 to 100.
We also read the other information in the Annual Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the supplementary information. The other information comprises the Highlights of the year, the Chairman’s statement, Business overview, Group Chief Executive’s review, Operating review, Corporate social responsibility, Financial review, Director’s report, Corporate governance statement, Audit Committee report, Nomination Committee report, Chairman’s Committee report and the unaudited part of the Director’s remuneration report.
Subsidiaries The principal subsidiaries of the Company are listed below by country of incorporation. All are wholly-owned, directly or indirectly, and transact insurance or reinsurance business, fund management or services in connection therewith, unless otherwise stated.
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 International 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 Equity Release Limited Norwich Union Healthcare Limited Norwich Union Insurance Limited Norwich Union Investment Funds Limited Norwich Union Life & Pensions Limited Norwich Union Linked Life Assurance Limited Norwich Union Personal Finance Limited your-move.co.uk Limited
Italy Aviva Italia Holding SpA and its principal subsidiaries: Aviva Vita SpA (25.5%) Commercial Union Assicurazioni SpA (50.0%) Commercial Union Insurance SpA Commercial Union Life SpA (50.0%) Commercial Union Previdenza SpA (50.0%) Commercial Union Vita SpA (51.0%) Eurovita Assicurazioni SpA (41.0%)
Portugal Eurovida BNC – CGU Companhia de Seguros de Vida S.A. (50.0%)
If you wish, you can have your dividend payments credited directly into your bank or building society account on the dividend payment date. For overseas shareholders the Company has introduced 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 please contact the Company’s registrar at the address opposite.
To register please go to www.shareview.co.uk where you will also find more details of the service, practical help and extensive information on other share registration matters.
Share dealing facilities for UK shareholders/share account members: Shareview Dealing is a telephone and internet service arranged through Lloyds TSB Registrars and provides a simple and convenient way of selling Aviva plc shares. For telephone sales call 0870 850 0852 between 8.30am and 4.30pm, Monday to Friday and for internet sales log on to www.shareview.co.uk/dealing
The Orr Mackintosh Foundation operates a, purely voluntary, charity share donation scheme for shareholders who wish to dispose of small numbers of shares whose value makes it uneconomical to sell them. Details of the scheme are available from ShareGift at www.sharegift.org or telephone 020 7337 0501, or can be obtained from the Company’s registrar.
Alternative versions of this publication (including braille, large print and audio-tape) are available on request from the Company’s registrar. *Calls are currently charged at 60 pence per minute at all times. The average time to access the share price is approximately one minute.
01 Highlights of the year 02 Chairman’s statement 04 Business overview 06 Group Chief Executive’s review 08 Operating review 26 Corporate social responsibility 28 Financial review 36 Board of directors 39 Directors’ report 41 Corporate governance 44 Audit Committee report 46 Nomination Committee report 46 Chairman's Committee report 47 Directors’ remuneration report 55 Independent auditors’ report 56 Accounting policies 59 Consolidated profit and loss account
Technical account – long-term business 60 Consolidated profit and loss account
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