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Our leading long-term savings and fund management brands £1,814m Worldwide operating profit before tax*
Market position We are in the top three in all our chosen life and pension markets in the UK, our Spanish business is placed second and Hibernian in Ireland is third. We have top-five businesses in the Netherlands, and top-ten in France and Italy.
Aviva is a leading international savings, investment and insurance group. We focus on managing our business for value. Our aim is to create prosperity and peace of mind for our customers, shareholders and employees, while acting as a good corporate citizen.
Our strategy To provide a broad range of competitive motor, property, health and related insurance services to individuals and small to medium-sized enterprises in our chosen markets.
During 2005, for the first time, our long-term savings new business premiums from continental Europe exceeded 50% of the group total. We have announced a major bancassurance deal in Ireland and continue to make good progress with our newer operations in India and China. In the UK, we have purchased the RAC. This represents a significant opportunity for us. We have made good progress towards realising cost savings and have identified growth opportunities. I firmly believe that this purchase will assist the sustainability of our general insurance earnings. Our UK long-term savings performance has been robust and is strongly positioned for the future.
We do this by offering a superior range of long-term savings, investment and protection products in markets that offer significant opportunities for growth; and by providing a broad range of competitive motor, property, health and related insurance services to individuals and small to medium-sized enterprises in chosen markets.
References in our strategy to withdrawing from businesses that do not offer the potential for market-leading positions or superior returns have been discontinued, as that work is now complete.
We continue to believe that cost-effective solutions are required and that to achieve this, unnecessary legislation, regulation and complexity must be removed. Pension simplification on “A day” in April 2006 will provide a great opportunity for Norwich Union to offer customers a choice of simpler, more flexible products. We should not underestimate the challenges that lie ahead, but I am confident that we will succeed.
This was compensated by a strong recovery in the second half which can be attributed to a combination of demonstrating the value of the RAC acquisition and a growing confidence in the sustainability of our general insurance result.
Board matters The end of last year saw the retirement of Pehr Gyllenhammar. I would like to thank Pehr, on behalf of the board and our shareholders, for his vision, hard work and dedication to Aviva in his role as chairman. He leaves a company that is financially fit and strongly positioned. Deputy chairman George Paul and non-executive director Elizabeth Vallance also retired at the end of 2005. They go with the thanks of the board for their significant contributions to the success of Aviva.
Mary Francis has been appointed as a non-executive director during the year. Mary is, among other roles, a non-executive director of the Bank of England and a former director general of the Association of British Insurers. The experience and knowledge she brings with her will add to the strength of the board.
The board is committed to the highest standards of governance and has an excellent record in this area. To develop further our governance work, we are introducing a governance committee that will provide even greater focus on this important aspect of the board’s responsibilities. I would like to thank Russell Walls for agreeing to become chairman of this committee.
Corporate social responsibility The board believes that good governance and an understanding of the impacts of our international business operations are important aspects of the way we conduct business. It is therefore pleasing to be recognised for our performance in this area. We are the only UK insurer to be included in both the Dow Jones Sustainability World and STOXX (European) Indices. Additionally, out of 100 global companies we were ranked second in our sector by Fortune magazine for our management of corporate social responsibility (CSR) issues. As chair of the United Nations Global Compact in the UK, Aviva continues to lead development in CSR thinking and practice.
Employees I would like to give my warm thanks to the staff of Aviva for their continued commitment and hard work. We operate in a complex and ever-changing environment, and it is through the efforts of all our employees across the world that Aviva has been able to achieve the excellent results set out in this report.
Outlook I believe that our multinational, composite structure puts us in a good position to provide stable earnings and sustained growth into the future. While we encounter challenging trading conditions in certain of our markets, others offer good opportunities for growth, notably the increasing demand for private pension provision. It is this balance that differentiates us from our peers.
Jan 03 June 03 Jan 04 June 04 Jan 05 June 05 Dec 05
Overview During 2005, we delivered another set of strong results that are a reflection of our balanced portfolio and composite structure. This provides us with flexibility, strength, resilience and reliability. It is not just in the split between long-term savings and general insurance or our geographic spread that we achieve balance. Every major business has the advantage of a broad product range, trusted brand and balanced distribution model that meets the needs of the local market. Additionally, 2005 saw the acquisition of RAC. This has created a powerful combination with our general insurance business and will deliver substantial shareholder value.
Our international portfolio comprises large established businesses in mature markets, bancassurance-led distribution in developed markets, direct sales force businesses that are moving towards a multi-distribution model and smaller well established business with high growth potential. We have ambitious plans to grow across this portfolio. We now have over 30 bancassurance relationships across the world and are generating excellent growth through this channel. These relationships genuinely benefit both parties and we are fast becoming the “partner of first choice”.
This is highlighted by our new joint venture with Allied Irish Banks within Ireland. We have invested further in our partnership with UniCredit Group in Italy and have 18 bancassurance partnerships in India. However, bancassurance represents only part of our international story and we have strength in our intermediated businesses and direct sales forces.
Resilient UK long-term savings performance In the UK long-term savings market, we have demonstrated our strength and resilience during 2005. We have seen new entrants attempting to grow their market share, which has meant a more competitive market. Our approach has been to focus on value while maintaining market share. We are able to write all new business at returns exceeding our cost of capital. We have maintained our broad product offering and have a wide range of distribution channels, and this combination puts us in a unique position. We recognise that customer service is vital to the future of our business and we are actively addressing service standards provided to individuals and intermediaries. We are now starting to see the benefits of these actions. During 2005, our bancassurance joint venture with the Royal Bank of Scotland has seen significant growth and is demonstrating the benefits of such partnerships. Additionally, we launched our Lifetime “wrap” product, an innovative proposition that we expect to be the preferred platform for leading investment solutions.
A strong and sustainable general insurance performance Our general insurance business has a uniquely balanced distribution range covering brokers, partnerships and direct sales. This mix means that we are less dependent on any one product or distribution channel than our competitors, enabling us to take selective pricing actions. The purchase, in May 2005, of RAC further enhances our options and provides significant growth potential. The integration is on track and, in October, we announced that we expect the total pre-tax profits arising from the RAC acquisition to reach £250 million per annum on a like-for-like basis by the end of 2008 through cost savings and significant additional revenues. Our businesses in Canada and Ireland continue to deliver strong results and, in the UK, we are generating significant growth in our direct sales, particularly online. We have consistently proved that our general insurance business is able to produce sustainable profits which, in turn, provide capital to fund new business growth and acquisitions.
Our fund management operating profit of £92 million (2004: £40 million), reflected good income growth as a result of investment market conditions and the benefits of cost initiatives.
The dividend and the funding contribution reflect our capital strength, and will benefit both shareholders and employees.
As a market leader, it is essential that Aviva engages actively with external regulators, professional bodies and industry groups on technical issues affecting financial services. We need to understand these issues and influence how they will affect our external reporting and hence how we are viewed by the market.
External view It is vital that Aviva plays a leading role in shaping industry opinion and developments in our important markets.
Consequently, it will have a significant impact on the formation of a single market that delivers wider choice for the consumer.
We are supportive of the move towards a transparent and risk-based approach to capital allocation for insurers and are actively engaging with regulators to achieve the best results for the industry. We are also supportive of the European Commission’s White Paper on financial services policy for the next five years, with its over-riding theme of dynamic consolidation.
During 2005, in my twin capacity as chairman of the Association of British Insurers (ABI) and Aviva group chief executive, I hosted a number of high-level focus groups to identify the main issues affecting the long-term savings industry and to agree what we need to do to resolve them. The meetings involved politicians, regulators, employers, charities, consumer groups and people from the financial services industry.
Our people I am delighted to welcome Lord Sharman of Redlynch, who became our chairman on 1 January 2006. He has wide international experience and an outstanding track-record in international finance. We are fortunate to have him as successor to Pehr Gyllenhammar, and I am looking forward to working with him on the next stage of Aviva’s development.
In November 2005, we conducted our first global employee survey. It is important to listen to the voice of our staff and the survey has helped us to gain a clear picture of personal views across the group. In turn, this information will enable us to focus on the issues that are most important to our employees.
We have also been running an internal “think again” diversity campaign. The world is more competitive than ever, and we regard the diversity of our business and the people we employ as key strengths. Our employees are responding positively to the changes in our markets, technology, products, regulations and the needs of our customers. To retain our competitive advantage in these challenging environments, we are embracing diversity in everything we do. Our future success depends on business teams that include people with different backgrounds, experiences and perspectives and who identify with, and respond to, our customers.
Outlook We have a balanced portfolio that benefits from diversification of distribution, products and geography. Our business model provides capital to fund new business growth and acquisitions, and to support dividend growth.
Business segment: Long-term savings and fund management £24.6bn Present value of new business premiums (PVNBP)*
Our worldwide long-term savings and fund management business reported an operating profit of £1,865 million (2004: £1,631 million), an increase of 13%, reflecting strong sales growth, particularly in our continental European business and bancassurance channel. A balanced portfolio in mature markets
We now have 18 bancassurance partnerships in India and have extended our agreement with American Express for 10 years and have partnerships with ABN AMRO, Canara Bank and Centurion Bank of Punjab. In China, Aviva-COFCO is now licensed in four cities and has sales offices in five further cities.
Expanding into new regions and markets We continue to explore new opportunities to expand our business in less developed markets.
With businesses already established in several Eastern European states, we have opened a representative office in Moscow to evaluate the potential that might exist for us in the Russian long-term savings market. In India, since launching in 2002, we have expanded rapidly to become the leader in the bancassurance market, ranking seventh amongst private insurers.
We recently announced a bancassurance joint venture in Ireland with AIB that will create a leading force in the Irish life and pensions market. Sales through our joint venture with Crédit du Nord in France, which commenced in October 2004, were £728 million in 2005. We extended our deal with Banche Popolari Unite in Italy to distribute through an additional 380 branches. Recognition for our fund management businesses
We launched new institutional and retail funds during the year, particularly in property-related investments where Morley was named property manager of the year at the UK Pensions Awards 2005. Our French business won a number of awards, including being named best insurer in the 2005 Le Revenu fund management awards.
Enhancing our UK distribution We have continued to develop our strong multi-distribution framework in the UK, where the majority of our business comes from independent financial advisers. During 2005, we signed a five-year deal with Sesame, the UK’s largest IFA network. We are also building our corporate partnerships and reached major distribution agreements with Barclays and Co-Operative Insurance Society. Additionally, our existing bancassurance partnership with The Royal Bank of Scotland has grown strongly during the year.
Cracking down on insurance fraud We believe that people should be less tolerant of fraud. Although it is sometimes described as a “victimless crime”, insurance fraud costs the UK economy an estimated £14 billion – £20 billion each year, and the costs have to be recouped from customers. Norwich Union continues to lobby actively on this subject. In November 2005, we published our Fraud Report, highlighting the impact of insurance crime and making proposals for dealing with it, including: establishing a UK commission on fraud; publishing national fraud statistics and trends; and adopting interim fraud targets for the police and Crown Prosecution Service.
* From continuing operations. **On a UK GAAP basis. † Restated for changes to IFRS and discretionary changes to longer-term investment return methodology.
We are a leading online insurer Norwich Union Direct celebrated its 10th anniversary as one of the UK’s leading direct insurers, with almost four million policies now in force. The business continues to grow, particularly online, where the success of the “Quote Me Happy” advertising campaign has contributed to a rapid expansion in sales. This performance is reinforced by our recent launch of RAC Direct Insurance.
A viva plc 2005 £268m Savings from purchasing power >2.8million Roadside callouts attended
We expect to achieve annualised cost savings of £100 million in 2006, exceeding the £80 million per annum cost savings target announced when RAC was acquired. We are making substantial progress on delivering revenue benefits, and expect to generate annualised operating profit of £250 million on a like-for-like basis from RAC by 2008, including an additional 1.4 million customers. Expanding on our insurance proposition
Our ownership of HPI vehicle information check specialists and Solus Accident Repair Centre enables us to provide a more complete range of motoring services to our customers, while gaining revenue and cost-saving benefits. Leveraging group knowledge
Offering a complete motoring solution The acquisition of RAC is transforming our UK business, making us a leading provider of insurance and motoring services. We’ve already launched new motor and travel insurance products under the RAC Direct Insurance brand and will shortly be launching a homeowner product. In acquiring a group that provides roadside assistance, windscreen repair, vehicle inspection and driver training, we’re now able to offer a complete motoring solution for our customers.
companies for CSR management as measured by the Accountability RatingTM. We were ranked top CSR performer in our sector out of 18 global insurance companies by Triodos Bank. We were also listed in the Global 100 Most Sustainable Corporations in the World.
Countries in which we have employees >41,000 Employees surveyed during 2005
We seek to identify and nurture our talented people. Our annual “organisation and development review” enables us to review talent on a consistent basis worldwide. This process is complemented by the Aviva Leadership Academy which provides international development opportunities for our future leaders.
of mind Business review Group overview 16 Basis of preparation 17 Strategy and values 18 Financial position and performance
This business review has been prepared in accordance with the recommendations of the European Union (EU) Modernisation Directive and is in line with current best practice. It is addressed to, and written for, the members of Aviva plc with the aim of providing a fair review of our business development, performance and position at the current time. In providing this review, we aim to present a view that is both balanced and comprehensive and that is consistent with the size and complexity of our business. The review is written in the context of the risks and uncertainties facing our business. We anticipate that the format and content of the review will evolve over time, along with developments in our business and the external environment.
The EU Modernisation Directive requires that business reviews contain financial and, where applicable, non-financial key performance indicators. We consider that our key financial performance indicators (KPIs) are those that communicate the financial performance and strength of the group as a whole to the members. These KPIs comprise: – Return on capital employed
In addition to presenting our results and financial position on an International Financial Reporting Standards basis, we also use European Embedded Value (EEV) as an alternative performance measure. Details of the accounting basis of preparation are set out in the ‘financial reporting’ section of this business review on page 46.
Aviva is the world’s sixth-largest insurance group and the largest insurance services provider in the UK. We are one of the leading providers of life and pension products in Europe and are actively growing long-term savings businesses in Asian markets, Australia and the USA. Our main activities are long-term savings, fund management and general insurance. We have premium income and investment sales of £35.0 billion and £317 billion of assets under management. We have more than 54,000 employees serving millions of customers.
The group’s activities are organised into two strategic areas: Long-term savings and fund management; and general insurance, health and related services.
To meet our objectives, our strategic focus is on: – Understanding and meeting the evolving needs of our customers
– Delivering growth organically and through carefully selected acquisitions designed to increase shareholder value
Teamwork Teamwork is the lifeblood of Aviva. It means commitment to a common vision and objectives, depending on one another, pulling together and sharing knowledge and learning. It is creating a sense of community and belonging in how we operate as a business. It means taking pride in Aviva’s achievements.
General insurance, health and related services – Providing a broad range of competitive motor, property, health and related insurance services to individuals and small to medium-sized enterprises in chosen markets
Aviva aims to deliver an after-tax operating return on equity, including life profits on a European Embedded Value (EEV) basis, equivalent to a 10% net real return on opening equity capital.
Our 2005 post-tax operating return on equity was 15.0% (2004: 13.7%), which reflects the strong operational performance delivered by our businesses. Net of inflation, this figure was 12.8% (2004: 10.2%)
* Return on capital employed is calculated using after-tax return and opening equity capital, based on operating profit, including long-term savings profit on an European Embedded Value basis before amortisation of goodwill. The ROCE in 2001 and 2002 incorporates long-term savings profit that is calculated on an achieved profits basis and general insurance and health business on a UK GAAP basis and has not been restated.
**Dividend cover is measured on operating earnings after tax on an IFRS basis, expressed as a multiple of the ordinary dividend in respect of the financial year. The calculations in respect of 2001, 2002 and 2003 are performed on a modified statutory solvency basis.
EEV/IFRS operating profit before tax 2,128 1,669 2,904 2,224 *The proportion of the results of the group’s UK and French asset management operation, the results of Norwich Union Equity Release and the proportion of the results of Norwich Union Life Services operation that arise from the provision of fund management and other services to the life business have been included within the life operating profit on an EEV basis but are included within fund management and non-insurance on an IFRS basis.
2005 saw a continuation of our strong operational performance across all our major businesses. We achieved an operating profit before tax, including life EEV operating return, of £2,904 million (2004: £2,224 million), an increase of 29%. On an IFRS basis, worldwide operating profit before tax increased by 25% to £2,128 million (2004: £1,669 million). This strong set of results has been achieved by our continued focus on profitable growth, pricing and cost, our disciplined approach to underwriting and efficient claims management.
Following our acquisition of RAC, we sold Hyundai Cars (UK) to Hyundai Motor UK Limited and the commercial fleet division of Lex Transfleet Limited to Fraikin Limited. The post-acquisition operating profits from RAC’s non-insurance operations, including RAC Services and RAC Auto Windscreens, was £30 million (2004: nil), reflecting increased levels of investment and the sale on Hyundai.
In October 2005, HBoS plc exercised their option to purchase RAC's 50% shareholding in Lex Vehicle Leasing (LVL). We are currently in negotiations to agree a fair value. Accordingly, the assets and liabilities of LVL have been presented as held for sale on the balance sheet.
Unallocated interest charges comprise internal and external interest on borrowings, subordinated debt and intra-group loans that are not allocated to local business operations. The charge is shown net of pension income. Our total interest costs in the period were £436 million (2004: £437 million). Our external costs amounted to £248 million (2004: £246 million), while internal interest costs were broadly unchanged at £220 million (2004: £219 million). The net pension income of £32 million (2004: £28 million) represents the expected return on our pension scheme assets less the interest on our pension scheme liabilities, recognised as a consequence of adopting IFRS.
Operating profit before tax 2,128 1,669 2,904 2,224 Adjusted for the following items: Amortisation and impairment of acquired value of in-force business (73) (85) – – Amortisation and impairment of intangibles (45) (7) (21) (3) Financial Services Compensation Scheme and other levies – (49) – (49) Short term fluctuation in return on investments backing general insurance and health business 517 161 – – Variation from longer-term investment return – – 2,805 662 Effect of economic assumption changes – – (406) (318) Profit on the disposal of subsidiaries and associates 153 34 153 34 Integration costs (109) – (109) – Exceptional costs for termination of operations – (40) – (40) Profit before tax – attributable to shareholders’ profits 2,528 1,642 5,283 2,469 Tax attributable to shareholders’ profits (630) (271) (1,601) (650) Profit for the year 1,898 1,371 3,682 1,819
Coupon payment on Direct Capital Instrument net of tax (29) – (29) – Profit attributable to ordinary
In the second half of 2005, we completed the sale of our Asian general insurance business and recorded a profit on sale of £165 million. Following the acquisition of RAC, we have spent a total of £109 million on integration activities to date, and anticipate a further £21 million will be incurred in 2006.
Investment properties, properties and equipment 14,160 11,869 14,160 11,869 Additional value of in-force long-term business – – 6,454 5,018 Investments in joint ventures and associates 3,014 2,128 3,014 2,128
Additional retained profit on an EEV basis – – 6,431 4,768 Equity attributable to shareholders of Aviva plc 8,974 7,093 15,099 11,861
During 2005, the equity attributable to our shareholders on an IFRS basis has increased by 27% to £8,974 million (2004: £7,093 million). This increase primarily reflects the growth in retained earnings, in turn reflecting our strong operational performance during 2005. Under EEV, we recognise an additional retained profit of £6,431 million (2004: £4,768 million) bringing the total shareholders’ funds on an EEV basis to £15,099 million (2004: £11,861 million).
Other liabilities include our total pension deficit of £1,471 million (gross of tax). This is an increase of £578 million on the previous year end and has been driven by a number of factors, including the acquisition of the pension deficit of RAC staff of £313 million and the adverse impact on the valuation of liabilities of a 70 basis point reduction in real interest rates during 2005. These changes have been offset by the positive effect of the strong rise in equity markets. The UK pension schemes are the largest and have a total deficit of £1,371 million.
Currently, substantially all of the deficit is borne by shareholders as historic contractual arrangements have, to date, meant that no deficit funding has been recharged to our UK with-profit funds. We are close to finalising our negotiations on the appropriate proportion to be borne by the UK with-profit funds and are hopeful that these funds will contribute approximately 12% of the future deficit funding payments to the Norwich Union pension fund.
NonLong -term long-term Total Total business business Full year Full year operations operations 2005 2004 £m £m £m £m
Additionally, we have a bancassurance joint venture with The Royal Bank of Scotland giving us access to their large retail branch network. We are regulated by the Financial Services Authority (FSA) and are based in York, with significant operating sites in Norwich, Sheffield, Stevenage and Pune and Bangalore in India.
Adverse persistency and expense variances have been offset by mortality profits of £105 million (2004: £51 million profits) arising principally on protection contracts, better than expected default experience on corporate bonds and commercial mortgages of £19 million (2004: £29 million). Additionally, £110 million has arisen from the change in the level of required capital for annuity business from 200% to 150%.
Adverse exceptional expenses of £148 million (2004: £153 million adverse) included £47 million in respect of ongoing restructuring in the UK life business and a further £101 million of other exceptional and project costs associated with regulatory change and strategic initiatives.
Persistency experience on our unitised with-profit and unit-linked bonds, as well as pensions products, continues to be adverse, generating a loss of £78 million (2004: £50 million loss). This loss principally arises in relation to bond contracts, on surrenders occurring at set anniversary dates where market value adjustments do not apply. Actual lapse experience has continued to be higher than assumed, notwithstanding the change in lapse assumptions made in 2004. While action is ongoing to improve our current persistency experience, this coupled with an increase in the expected number of lapses on pension business has resulted in a provision for lapses with a consequential adverse impact on profits of £130 million (2004: £110 million adverse).
We launched our pension simplification (A-Day) strategy in October 2005 and are well-positioned to benefit in what we anticipate will be a growing market. We will offer flexible solutions for our customers’ long-term needs and are confident in our ability to grow our pension business and reduce costs after A-Day.
We are continuing to review the possibility of a reattribution of the inherited estate, or orphan assets, of two of our with-profit funds, CGNU Life and Commercial Union Life Assurance Company. The inherited estate consists of surplus assets accumulated over time in a with-profit fund. We are exploring the benefits to policyholders and shareholders from a reattribution and have established a project team to perform the research. Under FSA rules, a condition of the new regulatory system for reattributing an inherited estate is the appointment of an independent policyholder advocate to represent policyholder interests. We welcome this initiative and are pleased to announce the appointment of Clare Spottiswoode, a former director of Ofgas, as the policyholder advocate. At this stage, no decision has been taken to proceed with a reattribution; it will only be undertaken if there are clear benefits for policyholders and shareholders.
What is bancassurance? Bancassurance is the distribution of insurance products by banks. It is a significant sales channel in most countries and dominant in a few. The sales model varies according to the market place and the type of partnership, and can include sales by bank counter staff, by a branch-based adviser or by referral from the branch to one of our sales advisers.
We have expertise in product design, insurance risk management, service delivery and the sales process for insurance products. Particularly important for our success is our knowledge and experience of making bancassurance partnerships work effectively in many different markets. We also have a highly respected brand name that complements our bank partners’ strong brands and reputations. Through bancassurance partnerships, we can achieve high sales volumes with economies of scale. In turn, these benefits are passed on to consumers through competitively priced products.
For a partnership to work successfully there must be clear benefits for both parties.
How are we doing? We have a leading position in bancassurance distribution throughout the world and it is an integral part of our distribution strategy. We generate significant sales volumes through our partnerships, and see bancassurance as continuing to grow in future years. This year, bancassurance has generated 25% of Aviva's new long-term savings business, an increase from 23% in 2004. Additionally, we are rapidly becoming the “partner of first choice”.
Higher expected returns and experience variances were offset by lower operating assumption variances. The favourable experience variance of £32 million (2004: £22 million) includes mortality profits of £29 million (2004: £21 million). We generated strong sales growth of 26% to £3,530 million (2004: £2,782 million). Within this total, unit linked sales increased by 73% to £1,423 million (2004: £818 million) and we are well positioned for continued growth in unit-linked business. Our bancassurance partnership with Crédit du Nord recorded sales of £728 million in its first full year (2004: £127 million) and AFER unit-linked sales grew substantially by 78% to £367 million (2004: £205 million). Our strategic focus on more profitable unit-linked sales resulted in a 41% increase in new business contribution to £135 million (2004: £95 million) giving a higher full year new business margin of 3.8% (2004: 3.4%).
We expect to see overall market growth slowing in 2006. However, we have built a strong base from which to grow while seeking to retain our focus on the higher-margin unit-linked market.
Aviva France is one of the top 10 long-term savings businesses in France with a market share of 5%. It focuses on higher-margin unit-linked products in which its market share is 8%. We offer a comprehensive range of life and savings products for both private and corporate clients. Distribution is multi-channel, including a direct sales force, brokers, AFER (the largest retirement savings association in France), the UFF network of financial advisers, Aviva Direct, Aviva Assurances agents and our bancassurance partnership with Crédit du Nord. The centralisation of operations in the outskirts of Paris in the first half of 2005 is expected to yield benefits through closer co-operation and operating efficiencies.
Worldwide sales by distribution channel 1 Financial advisers 2 Partnerships 3 Direct 4 Bancassurance
During 2005, the development of our venture with ABN AMRO has continued, with the introduction of new products to complete our range. We have adapted our existing pension products and introduced new ones in anticipation of changing pension laws that come into effect during 2006, with a particular focus on sales to small-to-medium sized enterprises. Given continuing low interest rates, we have increased provisions to cover our commitments in respect of contract guarantees. In Belgium, a major reorganisation has substantially improved our operating model and has brought improvements to our cost base and we will focus on strengthening our distribution. In December 2005, we completed the sale of our 80% holding in ENNIA Caribe Holding NV, a Dutch Antilles and Aruba-based insurer, to Banco di Caribe NV in Curaçao for a cash consideration. The sale had no material impact on our financial position and is in line with our strategy of focusing on our core markets.
Aviva Spain operates in the long-term savings, pensions and protection markets through a multi-distribution platform. We are the second-largest life insurer with a 9% market share. Our distribution is dominated by five bancassurance partnerships with Bancaja, Caja España, Caixa Galicia, Unicaja and Caja de Granada. The majority of our products are marketed through the brands of our bancassurance partners. We use the Aviva brand in relation to our Aviva Vida y Pensiones (AVP) business, which distributes products through an agency-based network. We are based in Madrid, with operating companies in other major Spanish cities.
We aim to maintain our position as a leading player in the Spanish market through sustained profitable growth. We will concentrate on consolidating relationships with existing bancassurance partners, maintaining an emphasis on higher-margin protection and pension products, and maintaining a cost-efficient operation. We will also pursue additional bancassurance arrangements while improving penetration in our current partnerships. We are further developing our adviser-based business in AVP.
During 2005, we launched new financial annuity, unit-linked and protection products to enhance our market proposition. We continue to focus on increasing penetration of the banks customer bases and cross-selling in all of our major relationships.
Our life EEV operating return rose to £214 million (2004: £180 million) due to higher new business contribution as a result of a beneficial change in product mix. Total sales were £2,013 million (2004: £2,110 million) and we achieved an underlying growth, excluding one-off sales, of 6%. New business contribution increased significantly by 22% to £175 million (2004: £143 million), improving the new business margin to 8.7% (2004: 6.8%) as we continue to focus on higher margin protection and pension products. The growth outlook in the Spanish long-term savings and pension market continues to be positive.
During 2005, we launched a new series of the Guaranteed Fund and developed a number of property fund offerings that have proved attractive to investors. We also continue to achieve significant improvements in the quality of our operational data, which enable us to provide a better experience for customers.
During 2006 and into 2007, the maturing of special savings incentive accounts (SSIAs) will provide an opportunity for increased sales. We anticipate that a significant amount of the maturing monies will be invested in pension and saving products.
Our business in Germany adapted its sales focus in 2005, with sales of profit-sharing savings products and credit life products performing well.
In Turkey, our main products are unit-linked savings and protection plans, together with group and individual pensions. Sales are mainly through our direct sales force. We aim to be the leading long-term savings provider in Turkey and will achieve this by developing our direct sales force and exploiting pension opportunities as the market continues to grow rapidly. We are also exploring other distribution opportunities, including bancassurance. Single premium pension sales were boosted by transfers from existing life policies ahead of an October 2006 regulatory deadline.
Our other European operations are seeking to achieve strong organic growth with unit-linked savings products focused on high-net-worth individuals. We are looking to grow our direct sales forces and improve performance while investigating other distribution channels, particularly brokers and banks. For example, during 2005 volumes increased in our Czech business through a bancassurance deal with Zivnostenka Banka, and in our Romanian business through our distribution agreements with BRD and ABN AMRO.
In October 2005, we completed the disposal of our 50% shareholding in Eurovida, our Portugese life joint venture to Banco Popular Portugal for a profit.
We generated a life EEV operating return of £33 million (2004: £22 million) through our other European operations. Total life and pension sales were £739 million (2004: £804 million).
During 2005, we made further progress in terms of developing new products, extending distribution and improving systems. We also signed a new bancassurance agreement with Deutsche Bank. We were also pleased to be named life insurance company of the decade by Home & Market magazine.
Our objective is to be Ireland’s leading provider of long-term savings and protection products through a range of business partners. We are developing strategies to increase our market share and distribution profile significantly. To that end, we have announced a new bancassurance partnership with Allied Irish Banks (AIB) to create a leading force in the Irish life and pensions market and bringing further opportunities for growth. In January 2006, we acquired all the shares of AIB-owned Ark Life in exchange for 24.99% of the joint venture and a balancing cash payment of a195.4 million. This is a transformational deal for our Irish life business and increases our share of the Irish life market to 16%.
Aviva Singapore and Hong Kong employ a multi-channel distribution strategy alongside a strong partnership with banking group Development Bank of Singapore (DBS). In Singapore we are ranked fifth and in Hong Kong 24th. Our business in Singapore remains the market leader in the developing broker market as well as the employee benefits and healthcare segment.
In both China and India, we are actively pursuing growth in cities and provinces with significant long-term potential. Aviva India is a leader in the bancassurance market and is now ranked seventh overall among private insurance companies. We have recently entered into a significant new bancassurance agreement with Centurion Bank of Punjab, a leading private bank, thereby extending our market-leading bancassurance position. This latest agreement brings the total number of bancassurance agreements to 18. We also doubled our direct sales force to 6,700 and in addition, there are more than 1,800 people in training due to join soon, allowing us to expand our representation in smaller cities.
Morley is the largest UK-based active fund manager, with total funds under management of £154 billion (2004: £134 billion). We have offices in London, Melbourne, Dublin, Warsaw, Boston, Milan and Madrid. Our clients include Aviva group companies, leading UK financial services companies, external pension funds, public sector organisations and public companies and specialist distributors of retail financial products in the UK and Europe. Our distribution capabilities, in this highly intermediated industry, are focused on the UK and a small number of pan-European markets. We are recognised as a provider of fund management solutions to third party distributors, and we hold key relationships with pension fund consultants, third-party life companies and discretionary fund managers.
The achievements of our property team were recognised when Morley was named property manager of the year at the UK Pension Awards 2005. Other award-winning funds include the Aviva Emerging Countries Equity Fund (Lipper Fund Award), Morley Sustainable Future Corporate Bond Fund (Standard & Poor’s Award) and Aviva Funds Long-Term European Bond (Standard & Poor’s Award).
We have achieved strong growth in 2005. Operating profit rose to £49 million (2004: £18 million), reflecting increased investment fee revenue, increased profit from higher performance fees (recognised in the second half of the year) of £9 million (2004: £4 million) and ongoing cost control. Of the total profit, £36 million was in respect of the UK (2004: £10 million) while overseas businesses, including Hibernian Investment Managers (HIM), accounted for £13 million (2004: £8 million). Our fee income benefited from new business mandates, revenue enhancing initiatives and strongly performing investment markets. Management of our expense base delivered an improved cost/income ratio of 77% (2004: 88%) bringing it into line with the industry average.
In addition to sales under the Morley brand in the UK, we sell retail Isas, unit trusts, open-ended investment companies (Oeics) and structured products under the Norwich Union and The Royal Bank of Scotland Group (RBSG) brands.
We have £46.2 billion of funds under management, mostly on behalf of group companies, including the non-linked funds of Crédit du Nord. Operating profit was £26 million (2004: £15 million), reflecting strongly performing equity markets and new business inflows.
In Australia, Navigator is one of the top 10 investment administration services. We offer full-service and low-cost platforms that give customers access to various wealth-creation and postretirement products. We seek to differentiate ourselves through superior service, leading product features, adviser tools and integrated infrastructure. We are recognised by financial advisers for the quality of our product. The Australian financial services market is one of the fastest growing in the world and we are well placed to take advantage of this expanding market.
Morley’s property business Morley Property is a mature, profitable business with a strong growth record. Five years ago, our property team managed £7.6 billion in property assets, including just £300 to £400 million in external assets. Today we are the largest property fund manager in the UK and one of the largest in Europe, with a team of over 100 people managing more than £22 billion, including £10 billion in external assets. In the same period, the number of specialist property funds we manage has grown from six to twenty.
The business model we put in place has been vital to our efficiency and success. We decided to focus on what we're good at – active property fund management – and work with property partners who are specialists in their chosen sectors. Subsequently we have delivered one of the most comprehensive ranges of innovative property products in the market, for example: – The first, and now largest, retail property unit trust in the UK – the Norwich Property Trust which is over £2 billion in size
– The first specialist healthcare fund – Quercus Healthcare Property Partnership
– The first student accommodation fund – the Beach Student Accommodation Fund
– The first Central European multi-let industrial fund – the Central European Industrial Fund.
So where next for Morley property? We still think there are some exciting opportunities – continued innovation in specialist property funds and the advent of real estate investment trusts in the UK to name a few. We are aiming to grow over the next three years across our retail, specialist fund and institutional business. We also have ambitious plans in Europe and we've made a promising start, building our team and launching five products in just over a year. Investors have a growing appetite for European property and Morley is set to meet that demand. So far countries in which Morley has invested include Spain, Italy, Portugal, Poland, Czech Republic, Hungary, Slovakia, Slovenia, Croatia, Bulgaria and Romania.
Following the RAC acquisition, we sold Hyundai Cars (UK) to Hyundai Motor UK Limited and the commercial fleet division of Lex Transfleet Limited to Fraikin Limited. In October 2005 HBOS plc exercised their call option to purchase RAC’s 50% shareholding in LVL. We are currently in negotiations to agree a fair value.
During 2005, we signed a deal with Barclays to become its sole provider of homeowner, motor and travel insurance, and extended our long-standing agreement with Asda to be its sole provider of general insurance until the end of 2009. Both deals underscore our position as partner of choice to the UK’s top brands. We have won Insurance Times general Insurer of the year for the third successive year.
We continue to invest in strategic initiatives. Our internet business is already successful, holding a 14% share of the online insurance market, and 40% of new NU Direct motor policies are now purchased online. We aim to deliver further service improvements and cost efficiencies using e-technology. Our Pay As You Drive™ pilot has been successful and we plan to install 100,000 PAYD devices by the end of 2006.
RAC delivered a good performance in the period with post acquisition operating profits of £59 million. The Rescue business, presented as general insurance, contributed £29 million to NUI’s underwriting result; the remainder is included in the non-insurance result.
As announced in October, we now expect to achieve savings of £100 million in 2006, exceeding the £80 million per annum cost savings target announced when RAC was acquired. We expect to deliver an annualised operating profit of £250 million on a likefor -like basis from the RAC acquisition and an additional 1.4 million RAC customers by 2008. As part of this plan, we will be launching a new RAC Direct Insurance home product in March 2006.
Our total UK result also includes Norwich Union Healthcare, a leading UK health insurer providing private medical insurance and income protection for over 750,000 customers. During 2005, we acquired the business and fixed assets of Private Health Care Limited, one of the leading independent occupational health services providers in the UK. The acquisition allowed us to broaden the services we offer to corporate clients. Our operating profit for the year was £4 million (2004: £9 million).
General Insurance and health total 1,368 1,259 97 9,818 271 *General insurance business only.
In our core insurance markets, we achieved a 4% increase in personal motor rates (2004: 2%) and 6% in homeowner rates (2004: 6%). Commercial rates are holding up well and profitability remains strong.
We acquired RAC in May 2005 and have made significant progress in integrating its operations into our business. We believe the acquisition is a transformational opportunity for NUI, enabling us to deliver an extensive portfolio of products and services to our customers, and to provide higher quality earnings to shareholders. In the final quarter of 2005, we launched motor and travel products under the RAC Direct Insurance brand.
We reported an increased operating profit of £147 million (2004: £133 million) and our COR was unchanged at 97% (2004: 97%).
We continue to work with industry regulators and the provincial and federal governments to the benefit of the insurance industry as a whole.
What are our plans for the future? We expect significant revenue benefits to be created from the acquisition of RAC, and anticipate growth in customer numbers of over 1.4 million by the end of 2008. This includes increasing individual Rescue membership from 2.2 million to 3.0 million; including growth in Ireland in partnership with Hibernian. Additionally, we aim to acquire 600,000 RAC Insurance customers over the same period. The additional sales and the projected annual cost savings are expected to produce £250 million annual pre-tax profits by the end of 2008, when compared to the RAC profits of £80 million before acquisition.
Hibernian is the largest general insurer in Ireland, with a market share of 21%. Around 65% of our business is via brokers, with the remainder being split between direct and corporate partners. However, we expect further growth in the proportion of business written through our direct channel, while brokers continue to dominate the commercial market. Our expertise in the management of underwriting and claims has allowed us to maintain our leading position. Hibernian has earned strong brand recognition in the Irish market.
During 2005, our disciplined underwriting strategy enabled us to manage reducing premium rates effectively. We implemented the strategic decision to stop underwriting motorcycle business due to concerns over the longer term profitability of this business and in July, our corporate partnership with Tesco moved from completion of the pilot to a full rollout. We have also expanded our RAC Rescue capability in Ireland and are targeting the addition of 400,000 roadside customers by 2008. We continue to invest in Geocoding, our flood mapping project that will improve risk selection and pricing.
UK net written premium 1 Intermediaries (personal) 2 Intermediaries (commercial) 3 Corporate partners 4 Direct
Our French general insurance business sells predominantly personal, small commercial and health insurance and has a market share of over 2%. We operate a multi-distribution strategy selling products through an 850-strong agent network, our direct insurer Eurofil and La Paix, our legal protection specialist. Our agent network is particularly strong in provincial cities where its key strength is the proximity to and understanding of customers.
Eurofil is the second-largest direct insurer in the French market and is now integrated with our other general insurance operations.
Our aim is to improve profitability and to develop our agent network successfully. To achieve these goals we are undertaking a programme to renew and grow our agent network by recruiting new agents and adopting a targeted approach to our products and rating policy. We are also seeking to increase the volume of life business sold through our agents, particularly AFER unit-linked sales. Additionally, we are pursuing a programme to simplify and standardise our internal processes to reduce costs and increase efficiency.
We have achieved greater efficiency in the claims handling process through the use of a common claims platform.
Our combined general insurance and health business reported an operating profit of £35 million (2004: £33 million). Our net written premiums increased by 8% to £726 million (2004: £670 million) reflecting rating increases in commercial and health lines. The longer-term investment return was higher at £56 million (2004: £49 million). Our general insurance business reported an unchanged COR of 101% (2004: 101%).
In the health market, new regulations are expected to lead to an overhaul of our current healthcare product range. We anticipate a stabilisation of rates and a moderate increase in market competition on motor business during 2006.
Delta Lloyd sells a range of general insurance products including personal motor, household and small commercial policies in addition to healthcare policies in the Dutch market. Distribution is through intermediaries under the Delta Lloyd brand, directly under the OHRA brand, and through our bancassurance joint venture with ABN AMRO.
During 2005, our general insurance shared service centre became operational, leading to greater efficiency and improved customer service standards. Significant changes to the Dutch health and disability markets are forthcoming. In 2006, health provision will be reformed with the amalgamation of public healthcare provision into the private sector. We have been planning for these changes during 2005, through organisational restructuring, consolidation of back offices, introduction of new IT systems and product redesign. We are also looking at opportunities presented by partnerships with care providers. A new occupational disability law will be introduced in 2006, giving insurers access to this market in 2007. New products are being developed, particularly in Delta Lloyd Insurance and ABN AMRO.
Our operating profit increased by 54% to £137 million (2004: £88 million) and our general insurance COR improved to 93% (2004: 95%) reflecting strong premium rates and favourable claims experience, including the benefit of lower than average weather-related claims.
Delta Lloyd has achieved a strong performance in 2005, supported by favourable climatic claims experience. We anticipate that the strong results in the market will lead to some weakening of premium rating in 2006. We will continue to focus on control of our cost base. By the end of 2006, a shared service centre for health insurance and HRM will be operational. This, together with a focus on product harmonisation will lead to greater efficiency, cost effectiveness and high quality customer service.
Our other European general insurance operations are based in Italy, Poland and Turkey. They sell predominantly personal and small commercial insurance through networks of agents and brokers. We also have a healthcare business in Asia.
We maintain an efficient capital structure using a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. The structure is consistent with our risk profile and the regulatory and market requirements of our business.
We have a number of sources of capital available to us and seek to optimise our debt to equity structure so we can maximise returns to shareholders. We consider alternative sources of capital such as reinsurance and securitisation in addition to traditional sources of capital funding. The selection of the source of capital funding is appropriate to its deployment and usage.
Long-term savings 15,598 13,826 General insurance and health 5,581 5,005 Other business 1,876 838
At 31 December 2005 we had £23 billion (31 December 2004: £19.3 billion) of total capital employed in our trading operations. Total equity is efficiently financed by a combination of equity shareholders’ funds, preference capital, direct capital instruments, subordinated debt and internal and external borrowings.
We are subject to a number of regulatory capital tests and also employ a number of realistic scenario tests to allocate capital and manage risk. Overall, the group and its subsidiaries satisfy all existing requirements. The ratings of our main operating subsidiaries are AA/AA- (“very strong”) with a stable outlook from Standard and Poor’s and Aa2 (“excellent”) from Moody’s. The ratings were reaffirmed in November 2005 reflecting our financial and capital strength, strong underlying earnings and positive strategic management.
Relevant capital and solvency regulations are used to measure and report the financial strength of our insurance subsidiaries. These measures are based on local regulatory requirements and consolidated under the European Insurance Groups Directive (IGD). The regulatory capital tests verify that we retain an excess of solvency capital above the required minimum level calculated using a series of prudent assumptions about the type of business written by our insurance subsidiaries.
In addition to the FSA realistic reporting regime, the UK Accounting Standards Board requires certain capital disclosures to be made in accordance with Financial Reporting Standard 27, Life Assurance (FRS 27). The purpose of the capital statement is to set out the financial strength of the entity and to provide an analysis of the disposition and constraints over the availability of capital to meet risks and regulatory requirements. The disclosures required by FRS 27 are set out in Note 49 on pages 176 to 178.
We continue to develop our risk-based capital modelling capability for all our businesses as part of our longer-term development programme for more complex risk modelling techniques, and to operate increasingly our business by reference to economic and risk-based capital requirements.
Insurance Groups Directive (IGD) £3.5bn £3.6bn Cover (times) 1.8 times 1.9 times
At 31 December 2005, we had an estimated excess regulatory capital of £3.5 billion (31 December 2004: £3.6 billion), as measured under the EU Group’s Directive. This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in our UK life funds. In broad terms, this is set at 4% and 1% for non-linked and unit-linked life reserves respectively. For our general insurance portfolio of business, the minimum solvency requirement is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our other major non-European businesses (USA, Australia and Canada), a risk charge on assets and liabilities approach is used.
Economic bases For our non-participating worldwide life assurance businesses the capital requirements are set as the higher of: – Target levels set by reference to internal risk assessment and internal objectives
UK life operations Our UK life businesses are required to hold sufficient capital to meet the FSA’s capital requirements. Under the FSA’s realistic reporting regime, the UK with-profits business capital requirement is determined from the “twin peaks” approach, such that capital resources must be sufficient to cover the greater of the statutory and realistic liability and capital requirements. The businesses must also take into account the ICA which considers certain business risks not reflected in the twin peaks approach. For UK non-participating business, the capital requirement is calculated on the statutory basis based on EU Directives.
The available capital of the with-profit funds is represented by the realistic orphan estate. The orphan estate consists of the long-term with-profit funds less the realistic liabilities for non-profit policies, less asset shares aggregated across the with-profit policies including any additional amounts expected to be paid to in-force policyholders at the valuation date in respect of smoothing costs and guarantees.
Realistic balance sheet information is shown below for the three UK with-profit funds, CGNU Life (CGNUL), Commercial Union Life Assurance Company (CULAC) and Norwich Union Life and Pensions (NUL&P). The realistic liabilities have been included in the long-term business provision and the liability for investment contracts on our IFRS balance sheet at both 31 December 2005 and 31 December 2004.
Realistic Realistic orphan capital Estimated assets liabilities1 estate margin excess £bn £bn £bn £bn £bn
1. Realistic liabilities include shareholders’ portion of future bonuses of £0.7 billion.
Realistic liabilities adjusted to eliminate the shareholders’ share of future bonuses are £50.5 billion (2004: £47 billion).
2. These realistic liabilities make provision for guarantees and options on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £0.7 billion, £0.9 billion and £3.4 billion for CGNU Life, CULAC and NUL&P respectively. (2004: £0.6 billion, £0.9 billion and £3.3 billion for CGNU Life, CULAC and NUL&P respectively).
3. The required capital margin (RCM) is 2.7 times covered by the orphan estate (2004: 2.6 times).
The aggregate investment mix of the assets in the three main with-profit funds at 31 December 2005 was: 31 December 31 December
Regulatory basis Our principal UK regulated general insurance subsidiaries are CGU International Insurance Group (CGUII) and Norwich Union Insurance (NUI). The combined businesses of the CGUII group and the NUI group have strong solvency positions. The table below sets out the regulatory basis of the general insurance groups at 31 December 2005 and 31 December 2004: NUI and CGUII Group
On an aggregate basis, the estimated excess solvency margin (representing the regulatory value of excess available assets over the required minimum margin) was £5.4 billion (31 December 2004: £5.7 billion) after covering the minimum capital base of £4.3 billion (31 December 2004: £4.1 billion).
Economic bases We use a number of measures of risk based capital to assess the capital requirements for our general insurance businesses. Financial modelling techniques enhance our practice of active capital management, verifying that sufficient capital is available to protect against unforeseen events and adverse scenarios, and to manage risk. Our aim continues to be an optimal use of capital.
Our traditional risk-based capital methodology for general insurance business assesses insurance, market and credit risks and makes prudent allowance for diversification benefits. The capital assessed under this methodology is that necessary to enable the general insurance business to meet regulatory solvency margins over a five year period with a 99% probability of not requiring further capital. We consider risks over the five year period, allowing for planned levels of business growth. Based on the model, our risk-based capital requirement may be expressed as 34% of net written premiums, which is equivalent to £3.5 billion (2004: £3.3 billion) of capital. This compares with a total of £5.6 billion (2004: £5.0 billion) of shareholders’ capital deployed in the general insurance business.
We are committed to delivering excellent service to our customers. This has been a high priority during 2005, when we put in place a customer feedback programme. This has given us regular insights into all aspects of our service and has enabled us to target and track improvements. Our target for call handling customer satisfaction in 2006 is 75% “extremely” and “very” satisfied customers, up from 70% in 2005.
We have taken a leading approach to protecting our policyholders’ interests. We are restructuring our pension strategy by writing all new pension policies under a single scheme, allowing customers to move seamlessly between products and tailor their retirement planning to their own needs. We are also involved in the ongoing pension debate in the UK. We have engaged with senior stakeholders in relation to Pensions Commission activity to address the future of pensions in the UK.
In addition, Norwich Union chairs the Association of British Insurers (ABI) committee that is looking at improving the clarity of annual statements to customers. We will undertake a systematic review of our customer communications and we are refreshing our internal writing guidelines for customer materials.
Our Corporate Social Responsibility (CSR) policy embraces performance in respect of standards of business conduct, the environment, human rights and health & safety as well as the promotion of good and fair relations with our employees, our customers, our suppliers and the broader community.
We believe that responsibility involves forward thinking in all aspects of our business and that performance in the eight elements of our CSR framework is important to our success in the short, medium and long term. We report fully on our progress in a separate annual CSR report, which is available online at www.aviva.com. A printed summary of our CSR report is also available from the group company secretary.
We are committed to conducting all aspects of our business according to rigorous ethical, professional and legal standards. We regard ethical practice as critical to responsible business and have put in place measures to refresh regularly our employees’ understanding of our Standards of Business Conduct policy.
Proposed regulatory changes, together with the impact of the 3rd EU Directive on anti-money laundering, have reinforced the need to adopt a risk-based approach to financial crime prevention, which has historically underpinned our financial crime management framework.
We have an in-house Socially Responsible Investment (SRI) team that engages on behalf of all our assets under management, including all of our unscreened funds, to raise issues of concern with companies, including environmental liability, corporate governance and human rights. We believe that these “extra financial” issues can have a long-term impact on shareholder value. As responsible investors we need to analyse, assess and, where necessary, vote on companies’ management in these areas.
The SRI team also manages a range of SRI funds, currently valued at over £800 million. These give our customers the option of investing in funds that are positively screened, and therefore invest in companies contributing to sustainable development. In 2005, we published our Sustainability Matrix; rating the FTSE 100 and Eurotop 50 for the third time. By publishing our ratings, we give our customers a clear insight into how we rate companies’ performance on social, environmental, ethical and governance issues. We also engage in debate with the largest companies in Europe to encourage higher standards of corporate social responsibility.
Continuous and extensive service satisfaction research is conducted across all products and elements of our service experience. In 2005, sales and service satisfaction averaged 92% with claims service averaging 83%. These scores represent customers explicitly stating satisfaction with our service. In 2006, in recognition of our customers’ rating claims as the most significant aspect of our service, we have set ourselves the challenge of achieving 85% “extremely” and “very” satisfied customers. Achieving our target would represent industry-leading performance.
Our focus will also be on the harder challenge of creating customer advocacy; new insight tools are being deployed to assist this journey. We will implement a Customer Experience Monitor (CEM), enabling us to understand, direct from customers, what they see as the key touchpoints with us in any period of interactions and enabling us to address rapidly any areas where we are not creating customer advocates. This will be based on “willingness to recommend, renew or upgrade present products”.
Global community investment 1 Cash support 2 Gifts in kind 3 Staff time 4 Management time
Our general insurance business has significant exposure to claims from weather-based events across our European and Canadian businesses. In the UK alone, the ABI estimates that weather related costs to insurers are in the order of £500 million to £1 billion per year.
We established a climate change forum in 2005 to co-ordinate related activities across our businesses. Significant climate change related initiatives that our businesses are involved in include flood research, flood mitigation and prevention work and the sponsorship of a pan-European flood project. Additionally, we are developing products and services that provide a positive link between climate change and premium paid, for example Norwich Union’s Pay As You Drive™ product. We also use the investment influence of our fund management subsidiaries to encourage environmentally responsible behaviour.
We report annually on our progress in accordance with the FORGE management and reporting guidelines for banks and insurers.
To mitigate CSR risks, we have an established system of risk management that is embedded into our business planning and performance monitoring processes. This system includes the management of risks relating to social, environmental and ethical (SEE) matters. Further details of this process are contained in the internal controls section of the Corporate Governance Report on
During 2005, our average number of employees worldwide was 54,791, compared with 55,872 during 2004.
In addition to these initiatives, research conducted amongst our senior managers has resulted in a refreshed focus on structured development planning, the increased provision of international career opportunities through short-term secondments and a strengthened link between measured performance and reward. 2005 saw the implementation of our senior manager reward strategy, covering the group’s top four tiers of senior management. The main reasons for this new strategy were to drive performance through highly differentiated rewards and to bring greater alignment with shareholders’ interests and good corporate governance practice.
During 2005, our commitment to diversity has strengthened and a “diversity launch” was implemented across 17 of our business units, raising awareness of the business benefits of harnessing diversity in the workforce. A variety of media has been used to encourage employees to “think again…” about the competitive advantage we can derive from business teams that include people with different backgrounds, experiences and perspectives. In 2006, our diversity steering group, sponsored by the group executive, will lead further initiatives to enhance employee awareness, to encourage innovation and creativity and to deepen understanding of the benefits to our customers. The success of the group’s diversity work is reflected in the increasing number of senior managers who are female: 18%, following an upward trend since 2000 when this figure was 13%.
Following up the 2005 survey will form a key aspect of our business planning for 2006. We will address issues arising from the survey as part of our drive for increased personal and organisational effectiveness, and increased employee morale and engagement.
We continue to deliver value to our customers through lower cost, 24-hour claims processing and sales facilities in India and Sri Lanka.
Developing a flexible and adaptable workforce is a key element in our determination to make effective change management a sustainable capability to meet our changing needs.
The most important change in the pipeline is phase II of the IASB’s project on insurance contracts. The timing of this project remains uncertain, however the IASB estimate that a final standard is unlikely to be published before 2008 at the earliest. The range of possible outcomes is large and therefore it is too early to assess the impact this change in accounting may have.
European Embedded Value (EEV) basis of reporting We present the results and financial position of our life and related businesses on an EEV basis, in addition to the IFRS basis. The directors’ opinion is that the EEV basis provides a more accurate and transparent view of the performance of the life and related operations year on year than the results presented under the IFRS basis. The EEV methodology adopted is in accordance with the EEV Principles introduced by the CFO Forum in May 2004, and updated in October 2005. Under the EEV methodology, the total profit recognised over the full lifetime is the same as under the IFRS basis of reporting. However, the EEV basis gives a fairer indication of the profitability of business on inception. Additionally, shareholders’ funds incorporate internally-generated additional value in-force (AVIF) on an EEV basis, this is not the case under IFRS. The financial statements include supplementary information on EEV reporting on pages 200 to 221 and our incentive schemes and internal management reporting are aligned to the EEV basis.
The Life Insurance Risk committee monitors whether guidance and procedures are in place for each of the major components of life insurance risk and that businesses adopt a local risk management framework. The local frameworks adopted in business units are reviewed in detail and approved twice yearly by the committee. The committee also considers the reinsurance coverage across the life business. Business units can select reinsurers locally but the overall programme is assessed centrally to manage group-wide risk exposures.
General insurance risk General insurance risk arises from: – Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations
The governance structure and policy set is regularly reviewed to reflect the changing commercial and regulatory environment and our own organisational structure.
Integration of financial risk and capital management We have developed a framework using Individual Capital Assessment (ICA) principles for identifying the risks that business units, and the group as a whole, are exposed to and quantifying their impact on economic capital. The ICA estimates the capital required to mitigate the risk of insolvency to a 99.5% confidence level against financial and non-financial tests. In addition, we are developing a risk-based capital model for our businesses that will provide a more detailed assessment of the capital needs of the business. We also use financial condition reports (FCRs) to inform capital management decisions.
Further details on the ICA and capital management are set out in the “Group capital strength and solvency” section of this review on pages 39 to 41.
Interest rate risk and maturity periods Interest rate risk arises primarily from the products we sell and the value of our investments. For example, long-term debt and fixed income securities are exposed to fluctuations in interest rates. Exposure to interest rate risk is monitored through several measures, including Value-at-Risk analysis, position limits, scenario testing, stress testing and asset and liability matching using measures such as duration. Interest rate risk is managed using a variety of derivative instruments, including futures, options, swaps, caps and floors in order to hedge against unfavourable market movements in interest rates inherent in the underlying assets and liabilities.
Market risk is the potential adverse financial impact of changes in values of financial instruments from fluctuations in foreign currency exchange rates, interest rates, property prices and equity prices.
Market risks arise in business units due to fluctuations in the value of liabilities arising from products sold against the value of investments held. At group level, market risk also arises in relation to the overall portfolio of international businesses. For each of the main components of market risk described below, we have policies and procedures on how each risk should be monitored and managed. At group level, the Investment committee is responsible for overseeing market risk, including ALM risk. Additionally, the potential financial impact of changes to market values is monitored through the ICA and FCR processes.
This aspect of foreign exchange risk is monitored centrally against predetermined limits to control the extent to which capital deployment and capital requirements are not aligned. Currency borrowings and derivatives are used as required to keep exposures within the predetermined limits.
Our group-wide policy on asset/liability management for technical provisions sets out the minimum principles that business units are required to adopt. We centrally monitor adherence to this policy and regularly review how business units are managing ALM risks locally through the Investment committee and ultimately through the Asset Liability Management committee. The policy sets out the framework for matching assets with appropriate liabilities, approaches to take when liabilities cannot be matched and the monitoring processes that are required. Further details on specific areas of ALM risk are given below: Cash flow and liquidity risk Liquidity risk is the risk that we do not have sufficient available assets to meet our obligations as they fall due. Robust liquidity management forms an important component of our financial management practices.
Each business unit is required to identify sources of liquidity risk and implement systems to both measure and monitor potential exposures. Business units must also install controls to manage liquidity requirements. At group level, liquidity is maintained at a prudent level and consistent with the expectations of the FSA and the investment community. At a group level, we also maintain a liquid asset buffer to cover contingencies including the provision of temporary funds to business units that experience temporary liquidity shortfalls.
Operational risks are assessed according to the potential impact and probability of the event concerned. Impact assessments are made against financial, operational and reputational criteria and are reported on a quarterly basis by business units to group. Risks assessed by business units to be at the two highest impact assessments are escalated to group between quarterly reporting. This reporting enables us to: – Assess and monitor overall operational risk exposures
Credit risk is the risk of loss in the value of financial assets due to counterparties failing to meet part or all of their obligations, or changes to the market value of assets caused by changed perceptions of the creditworthiness of counterparties.
Our management of credit risk includes monitoring of aggregate group exposures to individual counterparties. The aggregate exposure is then measured against centrally set limits based on the credit ratings issued by companies such as Standard and Poor’s. The process measures exposure to individual counterparties across a broad range of asset types including fixed income securities, bank deposits and mortgages. These specific credit risks are monitored by the Credit and Reinsurance Security committees. In addition to monitoring specific credit risks, we assess general credit risks such as the concentration of exposures by industry sector and geographic region. This general credit risk is the responsibility of the Investment committee.
3. Philip Scott FIA (52) Executive director Appointed to the board in May 2000. Joined Norwich Union in 1973 and held a number of senior positions before joining the Norwich Union board in 1993. Currently responsible for the group’s international insurance businesses and United Kingdom fund management operations.
Chairman of the nomination committee and member of the corporate social responsibility committee.
6. Guillermo de la Dehesa (64) Independent non-executive director Appointed to the board in May 2000. Joined the board of Norwich Union as a non-executive director in 1999. Currently non-executive chairman of Aviva’s operations in Spain, non-executive vice-chairman of Goldman Sachs Europe (banking) and a director of Campofrio (consumer), Unión Eléctrica Fenosa (utility), Bank Santander Central Hispano (banking) and Telepizza (consumer). Chairman for the Centre of Economic Policy Research and a member of the Group of Thirty (consultative group on international economic and monetary affairs). A former deputy governor of the International Monetary Fund and the World Bank, a former deputy general manager of the Bank of Spain and former Secretary of State of Finance in Spain.
Senior independent director, Chairman of the corporate social responsibility committee and member of the nomination, governance and regulatory committees.
9. Richard Karl Goeltz (63) Independent non-executive director Appointed to the board in May 2004. Currently a non-executive director of the Warnaco Group Inc (clothing), Federal Home Loan Mortgage Corporation (Freddie Mac) (financial services), New Germany Fund (investment trust) and a director of The London School of Economics and Political Science. A former chief financial officer of American Express Company (financial services), NatWest Group plc (banking) and The Seagram Company Ltd (drinks) and a former member of the Accounting Standards Board (UK).
10. Carole Piwnica (48) Independent non-executive director Appointed to the board in May 2003. Currently non-executive vice-chairman – governmental affairs for Tate & Lyle plc (agricultural/industrial). A member of the New York and Paris bars, practising law in Europe and the United States specialising in private equity and EU regulatory matters. A former chairman of Amylum Group (agricultural/industrial).
Chairman of the audit committee and of Aviva Staff Pension Trustee Limited and member of the corporate social responsibility committee.
12. André Villeneuve (61) Independent non-executive director Appointed to the board in May 1996. Currently non-executive chairman of Euronext Liffe (financial services), a non-executive director of United Technologies Corporation (aerospace) and a director of the Institut Francais de Relations Internationales. A former executive chairman of Instinet Corporation (securities broker), a former executive director of Reuters plc (media) and a former chairman of Promethee.
13. Russell Walls (62) Independent non-executive director Appointed to the board in May 2004. Currently a non-executive director of Signet Group plc (retail) and the senior independent director of Stagecoach Group plc (transport). A former group finance director of BAA plc (transport), Wellcome plc (pharmaceuticals) and Coats Viyella plc (textiles). Former non-executive director of Hilton Group plc (leisure) and the Mersey Docks and Harbour Company (transport).
Chairman of the governance and regulatory committee and member of the audit committee.
The directors submit their report and accounts for Aviva plc, together with the consolidated accounts of the Aviva Group of companies, for the year ended 31 December 2005.
At the forthcoming Annual General Meeting shareholders’ approval will be sought to increase the Company’s authorised preference share capital to £1.2 billion and a700 million by the creation of 500 million new preference shares of £1 each. Further details are set out in the notice of the Annual General Meeting.
The biographical details of the persons currently serving as directors appear on pages 52 to 53.
Independent non-executive directors Derek Stevens and André Villeneuve were re-elected by shareholders at last year’s Annual General Meeting. Both these directors have now served on the Board for more than nine years and therefore will retire and seek re-election again at this year’s meeting. However, subject to being re-elected, it is intended that these directors will retire on or before 31 December 2006 in line with the Board’s plans to renew and refresh its composition.
Health and safety The health and safety of staff is a priority and is reviewed at regular intervals. Each business within the Group has an appointed health and safety representative, whose role is to bring to the attention of senior management any areas of concern that should be addressed within the health and safety programme.
Charitable donations Aviva has continued to support community initiatives and charitable causes worldwide and the total Group commitment during the year, as measured in accordance with Business in the Community’s PerCent Standard, was over £5.7 million (2004: £4.6 million).
In 2005, the Group’s community investment in the United Kingdom totalled £3.9 million (2004: £3.4 million) of which £1.7 million (2004: £1.3 million) was given in the form of donations to charitable organisations. The Company allocates a part of its budget to matching contributions raised by staff and to providing financial support to charities and communities where members of staff give a personal commitment in terms of their time. In addition, the Company provides a significant level of support to a small number of national charities. During 2005, the Company continued its commitment to Breakthrough Breast Cancer, Wheelpower (the British wheelchair sports association) and The Princess Royal Trust for Carers. In addition, the Group supported the Make A Wish Foundation UK, which was chosen by staff in the United Kingdom as their “charity of the year”, and NCH (the children’s charity). The Group and its staff worldwide made substantial donations to the Asian Tsunami appeal in 2005.
In 2004, shareholders passed a resolution authorising the Board to incur expenditure, up to an aggregate limit of £100,000 per annum, on activities that fall under the Political Parties, Elections and Referendums Act 2000 (PPER). The PPER introduced a very broad definition of political expenditure, such that some of the activities undertaken throughout the Group’s businesses could arguably fall within that definition. The Board sought shareholders’ authority to incur such expenditure in order to avoid any inadvertent breaches of the PPER. The Board does not believe that the Group has incurred any such political expenditure in the past year. The Board’s authority to incur such political expenditure expires in 2008.
Group employees The Group’s statement on its employees is set out on pages 44 and 45.
Creditor payment policy and practice It is the Group’s policy to pay creditors when they fall due for payment. Terms of payment are agreed with suppliers when negotiating each transaction and the policy is to abide by those terms, provided that the suppliers also comply with all relevant terms and conditions.
Aviva plc, the holding company of the Group, has no trade creditors. In respect of Group activities in the UK, the amounts due to trade creditors at 31 December 2005 represented approximately 8 days of average daily purchases through the year (2004: 11 days).
Auditor and the disclosure of information to the auditor So far as each person who was a director at the date of approving this report is aware, there is no relevant audit information, being information needed by the auditor in connection with preparing its report, of which the auditor is unaware. Having made enquiries of fellow directors and the Company’s auditor, each director has taken all the steps that he/she is obliged to take as a director in order to make himself/herself aware of any relevant audit information and to establish that the auditor is aware of that information.
In accordance with s. 385 of the Companies Act 1985, a resolution is to be proposed at the Annual General Meeting for the reappointment of Ernst & Young LLP as auditor of the Company. A resolution will also be proposed authorising the directors to determine the auditor’s remuneration. The Audit Committee reviews the appointment of the auditor, the auditor’s effectiveness and relationship with the Group, including the level of audit and non-audit fees paid. Further details on the work of the auditor and the Audit Committee are set out in the Audit Committee Report on pages 62 and 63.
Annual General Meeting The Annual General Meeting of the Company will be held on 10 May 2006 at The Barbican Centre, Silk Street, London EC2Y 8DS at 11.00am. A separate document accompanying the Annual Report and Accounts contains the notice convening the Meeting and a description of the business to be conducted thereat.
The Board has adopted a procedure whereby directors may, in the performance of their duties, seek independent professional advice at the Company’s expense if considered appropriate. No director obtained any such independent professional advice during 2005.
The directors The Board currently comprises the Chairman, eight independent non-executive directors and four executive directors. Each non-executive director serves for a fixed term not exceeding three years that may be renewed by mutual agreement. Subject to the Board being satisfied with a director’s performance, independence and commitment, there is no specified limit regarding the number of terms a director may serve. All directors are required to be elected by shareholders at the Annual General Meeting following their appointment by the Board and re-elected at least once every three years. Non-executive directors who have served on the Board for nine years or more are required to submit themselves for reelection annually.
The Board’s policy is to appoint and retain non-executive directors who can apply their wider knowledge and experiences to their understanding of the Aviva Group, and to review and refresh regularly the skills and experience it requires through a programme of rotational retirement. In addition to the strengths of experience, diversity and an international perspective, the Board also seeks to comply with the requirements of the Combined Code on the independence of directors. The process for appointing new directors is conducted by the Nomination Committee whose report, including a description of its duties, is set out on page 64.
In accordance with the Company’s articles of association, the directors retiring, and proposed for re-election at the forthcoming Annual General Meeting, are Richard Harvey, Carole Piwnica, Philip Scott and Patrick Snowball. Richard Harvey is the Group’s Chief Executive. Philip Scott is the executive director responsible for the Group’s international businesses and Morley, the United Kingdom fund management business. Patrick Snowball is the executive director responsible for the Group’s UK businesses namely Norwich Union Insurance, Norwich Union Life and RAC.
Derek Stevens and André Villeneuve have both served as directors for more than nine years and will therefore retire at the Annual General Meeting and seek re-election. However, in line with the Board’s succession plans, it is the intention that subject to being re-elected, they will both retire on or before 31 December 2006. Derek Stevens is a member of the financial sector committee of the Accounting Standards Board and is a former Chief Financial Officer of British Airways plc and of the TSB Group plc. He is able to contribute recent and relevant financial experience and is the chairman of the Board’s Audit Committee and a member of the Corporate Social Responsibility Committee. André Villeneuve has knowledge of broking and financial markets and wide general management experience in the United Kingdom and the United States. He is a member of the Nomination and Remuneration committees.
Biographical details of all the directors, including those proposed for election or re-election, are set out on pages 52 and 53.
Pehr Gyllenhammar served as the Chairman from 1998 until his retirement from the Board on 31 December 2005. He was succeeded by Lord Sharman on 1 January 2006. There were no significant changes to Pehr Gyllenhammar’s commitments during the year. Lord Sharman’s main duties outside the Company are set out in his biographical details on pages 52 and 53. He resigned from the board of Group 4 Securicor plc on 31 December 2005 in anticipation of the time commitment he would need to give to the Aviva Board. Lord Sharman’s contractual commitment to the Company is two to three days per week.
Senior independent director The main responsibility of the senior independent director is to be available to shareholders should they have concerns that they have been unable to resolve through normal channels, or when such channels would be inappropriate. The senior independent director is also responsible for leading the Board’s discussion on the Chairman’s performance and the appointment of a new chairman, when appropriate. George Paul served as Deputy Chairman and as the senior independent director throughout 2005. Mr Paul retired from the Board on 31 December 2005 and Wim Dik was appointed as the senior independent director on 25 January 2006.
Guillermo de la Dehesa 7/9 – – 2/3 Wim Dik 8/9 – 6/8 2/3 Mary Francis* 3/3 – – – Pehr Gyllenhammar 9/9 – – 3/3 Richard Goeltz 9/9 5/5 7/8 – Richard Harvey 9/9 – – 3/3 Andrew Moss 9/9 – – – George Paul 9/9 – 8/8 – Carole Piwnica 9/9 5/5 – – Philip Scott 9/9 – – – Lord Sharman 9/9 – – – Derek Stevens 9/9 5/5 – – Patrick Snowball 9/9 – – – Elizabeth Vallance 9/9 – 7/8 – André Villeneuve 9/9 – 8/8 3/3 Russell Walls 9/9 5/5 – –
The reports of the Audit, Nomination and Remuneration committees are set out below.
In January 2006, the Board established two new committees: – Corporate Social Responsibility Committee – in order to maintain and build further on the Company’s leading position this committee will provide guidance and direction to the Group’s corporate social responsibility programme and monitor its progress.
– Governance and Regulatory Committee – in order to maintain the Group’s strong governance and compliance disciplines this committee will provide leadership and oversight of the Group’s governance processes including regulatory compliance. The work of this committee will form an important part of the Group’s control function and as such the Committee will work closely with the Audit Committee.
Membership of the Governance and Regulatory Committee comprises Russell Walls (chairman), Mary Francis and Wim Dik.
Internal controls The Board has ultimate responsibility for maintaining the systems of internal control of the Company and for reviewing their effectiveness. The systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material financial misstatement or loss. The systems are designed to: – Safeguard assets; – Maintain proper accounting records; – Provide reliable financial information; – Identify and manage business risks; – Maintain compliance with appropriate legislation and regulation; – Identify and adopt best practice.
The Group adapted its risk and governance frameworks in 2004 to implement the Prudential Sourcebook – the Financial Services Authority’s risk-based framework for integrating and embedding risk and capital management. Further refinements continued during 2005 to reflect developing good practice.
The Group also monitors the completeness of the risk profile on a regular basis through the Group Risk monitoring framework. Each quarter, businesses report residual risk profiles, and the adequacy of the mitigating action programmes, based on local materiality levels. These impact assessments are based on financial, reputational and operational criteria and also take into account social, ethical and environmental risk as well as business risk. This enables the Group risk function to assess the overall risk exposure and to develop a Group-wide risk profile. This is refreshed quarterly and material items in the Group risk report are reported to the Group’s Executive Committee, the Audit Committee (from 2006 the Governance and Regulatory Committee rather than the Audit Committee) and the Board, who consider whether residual risks are within the Group’s risk appetite, and the adequacy of the mitigating actions.
In the Board’s view, the Group maintains effective and embedded systems of internal control in accordance with the Guidance on Internal Control (the Turnbull Guidance) and such systems were in place throughout the year and up to the date of the signing of this report.
Communication with shareholders The Company places considerable importance on communication with shareholders and engages with them on a wide range of issues.
The Board consults with shareholders in connection with specific issues where it considers appropriate. For example, the chairman of the Remuneration Committee met with institutional shareholder bodies and a number of major shareholders in 2004 to seek their views on the Company’s proposed remuneration review. It is the intention to undertake similar consultation in 2006 regarding the proposed changes to the directors’ pension arrangements described on pages 67 and 68.
The Board is equally interested in the concerns of private shareholders and, on its behalf, the Group Company Secretary oversees communication with these shareholders. The Company issues a postage paid reply form with its Annual General Meeting documentation to enable shareholders to put questions to the directors. This is particularly helpful for those shareholders who are unable to attend the meeting. Written responses are provided through a brochure containing answers to the most frequently asked questions which is also placed on the Company’s website. All material information reported to the regulatory news services is simultaneously published on the Company’s website affording all shareholders full access to Company announcements.
The Company’s Annual General Meeting provides a valuable opportunity for the Board to communicate with private investors. At the meeting, the Company complies with the Combined Code as it relates to voting, the separation of resolutions and the attendance of committee chairmen.
The Company’s annual report and accounts and annual review, together with the Company’s interim reports, trading statements and other public announcements are designed to present a balanced and understandable view of the Group’s activities and prospects. The Chairman’s statement, Group Chief Executive’s review, and Business Review on pages 16 to 49 provide an assessment of the Group’s affairs and will be supported by a presentation to be made at the Annual General Meeting.
Institutional investor Morley Fund Management Limited, the Group’s asset management company, believes that good governance contributes 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 matters which may affect the future performance of those companies.
The Audit Committee The Audit Committee currently comprises the following independent non-executive directors, appointed by the Board: Derek Stevens (Chairman) Richard Karl Goeltz Carole Piwnica Russell Walls
Derek Stevens, a Chartered Accountant, is a member of the financial sector committee of the Accounting Standards Board and is a former Chief Financial Officer of British Airways plc and the TSB Group plc. Richard Karl Goeltz is a former Chief Financial Officer of American Express Company, NatWest Group plc and The Seagram Company Ltd. Russell Walls, a Fellow of the Chartered Certified Accountants, is a former Group Finance Director of BAA plc, Wellcome plc and Coats Viyella plc. The Board is satisfied that all these directors have recent and relevant financial experience.
The Group Chief Executive, Group Finance Director, Group Audit Director and the external auditor normally attend, by invitation, all meetings of the Committee. Other members of senior management are also invited to attend as appropriate to present reports. In performing its duties, the Committee has access to the services of the Group Audit Director, the Group Company Secretary and external professional advice.
The Committee follows an agreed annual work plan. It reviews, with members of management and the internal and external auditors, the Company’s financial announcements including the annual report and accounts to shareholders and associated documentation. It places particular emphasis on their fair presentation and the reasonableness of the judgemental factors and appropriateness of significant accounting policies used in their preparation. At each meeting, the Committee receives a report from the Group Audit Director concerning the Company’s systems of internal control, including any significant new issues and actions taken on previously reported issues. Twice each year, the Committee receives reports on the adequacy of the Group’s life assurance and general insurance reserves. The Committee also reviews the annual work plan for the Group’s internal audit function.
During 2005, the Committee received regular reports on risk management, fraud, anti money laundering, “whistle blowing”, legal and corporate governance matters to help it assess the effectiveness of the risk management and control frameworks. The Group Tax and Regulatory Director reported on the Group’s compliance with appropriate rules and regulations, highlighting significant regulatory developments and compliance issues. During the early part of 2006 the responsibility for overseeing governance, regulatory and compliance issues, as well as the oversight of the non-financial internal controls will be transferred to the Governance and Regulatory Committee which was established in January 2006.
In addition the Committee reviewed the Group’s capital and risk frameworks against the regulatory reforms incorporated in the Financial Services Authority’s Prudential Sourcebook (PSB) concerning individual capital assessments (ICA). The Committee considered the proposed assumptions, methodology and process followed in determining the amount of capital required to support the Group’s business plans, and the adequacy of its capital resources. It recommended the Group’s ICA for 2005 to the Board for submission to the Financial Services Authority.
The Committee receives reports from the external auditor and regularly holds discussions with both the internal and external auditors in the absence of management. The chairman of the Committee reports at the subsequent meeting of the Board on the Committee’s work and the Board receives a copy of the minutes of each meeting of the Committee.
The Company has policies aimed at safeguarding and supporting the independence and objectivity of the external auditors. The policies regulate the appointment of former audit employees to senior finance positions in the Group and set out the approach to be taken by the Group when using the services of the auditors. It distinguishes between those matters where an independent view is required, such as audit and assurance work, and other advisory services. In addition to statutory audits, audit and assurance work includes reviewing statutory returns, actuarial assurance, regulatory advice requiring auditor reporting, due diligence on acquisitions and disposals, fraud investigations and control reviews and audit reviews. As a general principle the auditor cannot be engaged by the Company for any other purpose, although the policy recognises that there may be areas of minor significance where, for pragmatic reasons, it may be in the Group’s interests to use the external auditor for this work. During the year the Committee also reviewed independence issues in relation to PwC.
During the year, the Committee performed its annual review of the independence, effectiveness and objectivity of the external auditor; evaluating both the audit firm and audit teams. The process was conducted by means of a questionnaire, completed group-wide by members of senior management and members of the Group’s finance community. The questionnaire sought opinions on the importance of certain criteria and the performance of the auditor against those criteria. The questionnaires were collated by the Group Company Secretary. Based on this review, the Committee concluded that the audit service of Ernst & Young LLP was fit for purpose and provided a robust overall examination of the Group’s business and the risks involved.
The Committee currently comprises the following directors, appointed by the Board: Lord Sharman (Chairman) Guillermo de la Dehesa Richard Harvey Wim Dik André Villeneuve
The Committee monitors the skill requirements of the Board and the knowledge, experience, length of service and performance of the directors. It also reviews their external interests with a view to identifying any actual, perceived or potential conflicts of interests, including the time committed to their duties to the Company. The Committee also monitors the independence of each non-executive director and makes recommendations concerning such to the Board. The results of these reviews are important when the Board considers succession planning and the re-election of directors. Members of the Committee take no part in any discussions concerning their own circumstances.
This report was reviewed and approved by the Board on 1 March 2006.
George Paul and Elizabeth Vallance were members of the Committee throughout the year until their retirement on 31 December 2005. Mr Paul was the chairman. In January 2006, Mrs Francis and Mrs Piwnica joined the Committee and Mr Dik, who had been a member throughout 2005, left the Committee. Mr Goeltz was appointed chairman. The Committee met on eight occasions in 2005 and the members’ attendance record is set out on page 59. The Group Company Secretary acts as the secretary to the Committee.
Deloitte advised the Committee on the calculation of total shareholder return for the purposes of the long-term incentive plans. Deloitte provided actuarial and accounting services to the Group during the year. In addition, the Committee has considered the views of the Chairman and Group Chief Executive in assessing the performance of the executive directors.
Remuneration policy Executive directors The Company’s remuneration policy seeks to provide remuneration packages appropriate for each particular market in which the Company operates that will attract and retain high calibre employees and encourage and reward superior performance consistent with the interests of shareholders. The policy aims to reward senior executives fairly for their individual and collective contributions to the Company’s performance. It is designed to provide an appropriate balance between the delivery of the annual business plan and the long-term profitable growth of the Company.
Chairman and non-executive directors It is the Company’s policy to set the fees paid to its Chairman and non-executive directors at the median level for international companies of similar size and complexity. Non-executive directors receive a basic annual fee in respect of their Board duties. A further fee is paid to directors (other than the Chairman) in respect of their membership and, where appropriate, chairmanship of Board committees. Fees are reviewed regularly and are set by the Board to attract individuals with the range of skills and experience appropriate for a major international company. In determining the level of fees paid to the non-executive directors, the Board receives recommendations from the executive directors who consider the non-executive directors’ duties and responsibilities, together with the time commitment required in preparing for and attending meetings, and the amounts paid by competitors and similar-sized companies. Other than Pehr Gyllenhammar, who received a car allowance, the non-executive directors receive no benefits in addition to their fees nor do they participate in any incentive or performance plans.
The fee paid to the Deputy Chairman (including acting as the chairman of the Remuneration Committee and as the senior independent director) was left unchanged at £160,000 pa.
Remuneration package The remuneration package for the Group’s senior executives comprises the following elements: – A basic salary; – An annual bonus; – A long-term incentive plan; – A pension provision; – Other benefits comprising a car allowance and private medical insurance.
Basic salaries In determining the level of basic salaries, the Committee gathers data from a number of independent sources regarding the level of salaries paid to senior executives performing comparable functions within the 50 largest listed companies in the UK, with an additional focus on leading UK and European financial services companies. In addition to market data the Committee also takes into account the executive’s individual performance as well as the level of salaries and salary increases for employees generally. The Company’s policy is to set basic salaries for competent performance around the median level, with further progression based on performance. Salaries are reviewed annually.
The balance between fixed and variable elements of pay for the executive directors is set out below (Group Chief Executive in brackets): Long-term Basic Annual incentive salary bonus plan
“Stretch” performance is measured against those key measures that influence share price performance and equates to 120% of “Target” level. No bonus is paid if performance falls below 90% of “Target”.
In 2005, the performance targets comprised numerous relevant measures, including but not limited to: – Group and business unit operating profits; – Return on capital employed; – Combined operating ratios; and
The actual performance against each of the measures is aggregated to determine the bonus levels paid. The performance measures vary between participants depending upon their particular responsibilities and spheres of influence.
In respect of any bonuses that are earned under the plan, one-third is paid in cash when the bonus is awarded. The remainder is converted into shares of the Company. The shares are transferred to the executive on the third anniversary of the grant provided that he/she remains in service over that period.
Long-term incentives The Aviva Long-Term Incentive Plan is a discretionary share plan. It is the Committee’s policy to make an annual award of shares to executive directors with a value equal to 150% of basic salary (175% for the Group Chief Executive). All awards are made subject to the achievement of stretching performance conditions. The awards vest after three years, but only to the extent that the performance conditions are satisfied. Awards which do not vest, lapse.
Performance graph The following graph compares the TSR performance of the Company over the past five years with the TSR of the FTSE100 Return Index. This index has been chosen because it is a recognised equity market index, of which Aviva is a member. The graph also includes the median TSR of the companies in the comparator group as this is the group against which performance is measured for the purpose of the Aviva Long-Term Incentive Plan. The companies which compose the comparator group for TSR purposes were amended when the new Long-Term Incentive Plan was introduced in 2005 so that the group matches more closely the companies which offer similar products in similar geographic markets to Aviva. The TSR graph for the comparator group has therefore been plotted using the 19 companies (excluding Aviva) in the comparator group pre-2005 and the 14 companies (excluding Aviva) in the group for 2005.
Between March 1998 and March 2003, the Company met its liability for shares awarded under the incentive plans by funding an employee trust that acquired shares in the market at the time of grant. Details of the shares currently held in the employee trust are set out in note 29 on page 145.
Major changes to accounting policies and practices in 2005, including adopting international financial reporting standards and European Embedded Value principles for supplementary reporting, affected a number of the key performance indicators and performance measures used in connection with the Company’s long-term incentive plans. During the transition period the Committee received reports showing the impacts of these changes on the performance measures and satisfied itself that the evaluation of actual performance against the performance conditions which were originally set using prior accounting practices is appropriate having made allowance for the accounting changes.
As mentioned above it has been the practice of the Company to provide for pensions in excess of the HMRC earnings cap through the provision of an UURB. The UURB liability is unfunded and therefore once it falls into payment it is met each year from the Company’s general resources and recorded as an expense. At 31 December 2005 30 current employees had accrued an UURB benefit and the aggregate liability of these benefits was estimated to be £23.5 million. Following the changes brought about by pension simplification the Company is taking the opportunity to curtail its UURB liability by funding it either through the Scheme, in cases where there is scope within the lifetime allowance, or through the capitalisation of the UURB benefit into an investment fund, thus crystallising the liability. Fifteen executives, including Richard Harvey, have benefits which currently exceed the lifetime allowance and are currently considering the terms which the Company has offered regarding the crystallising of these benefits into an investment fund. Those executives who do not accept the offer will remain entitled to an UURB. The Company ceased offering any new UURB benefits from April 2005.
All new employees in the United Kingdom including senior executives are now offered membership of the defined contribution section of the Scheme.
The Company operates a number of HMRC approved all-employee share plans in the United Kingdom. Senior executives are entitled to participate in these plans on the same basis as other eligible employees. These include the Free Share element of the Aviva All-Employee Share Ownership Plan (AESOP). Under this plan, eligible employees can receive up to a maximum of £3,000 pa in the form of shares from the profits of the Company, free of tax, subject to a retention period. The Partnership element of the AESOP allows participants to invest up to £125 per month out of their gross salary in the Company’s shares.
Pension arrangements and long term benefits During 2005, the remuneration package for senior executives in the United Kingdom included Company contributions into the defined benefit section of the Aviva Staff Pension Scheme (the Scheme). Executive directors accrued pensions at a rate of one thirtieth (Richard Harvey, Philip Scott and Patrick Snowball) or one forty-fifth (Andrew Moss) of their final pensionable salary for each year of service as a senior executive, subject to a maximum pension of two-thirds of their final pensionable salary. No pension benefits were 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 twothirds of a member’s actual or prospective pension. Post-retirement, pensions are reviewed annually and increases are guaranteed at a rate equivalent to the increase in the Retail Prices Index up to a maximum of 10% pa. Under the Scheme, executive directors have a normal retirement age of 60.
The Aviva Savings Related Share Option Scheme allows eligible employees to acquire options over the Company’s shares at a discount of up to 20% to their market value at the date of grant. In order to exercise these options, participants must have saved the consideration through either a three, five or seven-year approved savings contract, subject to a maximum savings limit of £250 per month.
Share ownership requirements The Group Chief Executive and the executive directors are required to build, over a five-year period, a shareholding in the Company equivalent to 1.75 times annual salary and 1.5 times annual salary respectively.
Executive directors have rolling service contracts that can be terminated by the Company giving 12 months’ notice and by the director giving six months’ notice. In respect of the early termination of a service contract by the Company, other than on the grounds of dismissal for cause, the Company would, depending upon the circumstances, either seek to make a payment in respect of damages, less an amount for appropriate mitigation, or would invoke a provision in the contract allowing it to be terminated by the Company making a payment of one year’s basic salary in lieu of notice. Under the Company’s discretionary redundancy arrangements, which apply to United Kingdom based employees, an executive director may, depending on his length of service, receive an ex-gratia payment of up to one year’s basic salary, should he leave employment on the grounds of redundancy. The maximum payment receivable by an executive director on termination of his contract is therefore one year’s basic salary in lieu of notice and, if made redundant, an additional payment up to a maximum of one year’s salary. No special arrangements would apply should there be a change in the control of the Company.
Service contracts issued since November 2003 meet recommended corporate governance practice, including a specific requirement for employees to mitigate their losses and the phasing of termination payments over the notice period. During the current year, the Company proposes to amend the service contracts for all its senior executives in the UK onto the same basis. It is the Company’s practice to notify the market of the terms offered to executive directors upon their appointment.
Of the directors seeking election/re-election at the Company’s 2006 Annual General Meeting Mr Harvey, Mr Snowball and Mr Scott each have a service contract with a Group company as set out above. Mrs Francis, Mrs Piwnica, Mr Stevens and Mr Villeneuve do not have service contracts. Directors’ service contracts and letters of appointment are available for inspection at the Company’s registered office during normal hours of business.
Directors’ remuneration in 2005 This section of the report (which has been subject to audit) sets out the remuneration paid or payable to the directors in respect of the year to 31 December 2005. The remuneration payable to directors, who held office for any part of the financial year, including amounts paid to them as directors of subsidiary undertakings, was as follows: Basic salary/fees Bonuses1 Benefits2 Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Guillermo de la Dehesa 77 67 – – – – 77 67
*From date of appointment: Lord Sharman (14 January 2005) and Mary Francis (1 October 2005).
2. “Benefits”. All the executive directors received the benefit of private medical insurance and, along with the Chairman, a car allowance. The above disclosure also includes, in respect of Richard Harvey, an amount relating to the cost incurred by the Company of insuring the life assurance and spouses’ benefits which, had he died during the year, could not have been paid by the pension scheme as a result of the “earnings cap” and which would therefore have been met by the Company. In respect of Mr Snowball the disclosure includes an allowance of £66,000 incurred as a result of him being required to relocate from Norwich to London following a change in his responsibilities. The disclosure also includes a benefit relating to accompanied travel (Mr Harvey £10,000, Mr Snowball £22,000 and Mr Scott £32,000).
5. For the purposes of the disclosure required by Schedule 6 to the Companies Act 1985 the total aggregate emoluments of the directors in respect of 2005 was £6.6 million. (2004: £4.2 million).
8. The total compensation paid during the year to key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Company, including the Company’s directors and non-executive directors (as required to be disclosed by International Accounting Standard 24) is set out in note 53 on page 189.
Accrued annual pension at 1 January 2005 501 6 312 191 Increase in accrued annual pension during year as a result of inflation 14 – 8 5 Adjustment to accrued annual pension as a result of salary increase relative to inflation 12 1 8 16 Increase in accrued annual pension as a result of additional service1 – 10 15 19
Accrued annual pension at 31 December 20052 527 17 343 231
Notes 1. Mr Harvey has reached the maximum service accrual and therefore received no increase during 2005 for an additional year of service.
2. The “accrued pension” is the amount of annual pension to which the directors would have been entitled to at age 60 had they left service at 31 December 2005.
3. The amount of the benefits to be paid out of the Aviva Staff Pension Scheme in respect of Mr Harvey and Mr Moss are restricted due to the earnings cap, with the benefits in excess of the cap to be paid by the Company. As a result, £15,705 of the contributions paid by these directors was paid to the Scheme with the balance paid to the Company.
4. Transfer values represent the estimated liability on the Scheme to pay the stated level of benefits (in respect of benefits in excess of the earnings cap the liability rests with the Company). They are not sums paid, or due, to a director.
(b) Share awards continued At Awards Awards Awards At Market price Market price 1 January granted vesting lapsing 31 December at date awards at date awards 2005 during year during year during year 2005 granted vested
Where no awards vest at the end of the three-year performance period the performance conditions can, under this particular Plan, be retested at the end of five years with the performance conditions being suitably adjusted. This situation occurred in relation to the awards granted in 2000, which fell for retesting in March 2005. 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 would need to at least match median performance when 20% of the awards become exercisable. For a top 10% performance, 70% of the awards would vest. Between median and upper decile 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 40% in excess of RPI over the five-year performance period which would mean 24% of the awards would vest, rising to 30% if the ROCE exceeded 50% over the same period. At the end of the performance period relating to the awards granted in 2000, the Company was ranked 8 out of the 20 companies in the comparator group and the ROCE was 42.6%. Accordingly, 34.9% of the awards vested based on the TSR part of the Plan and 15.2% of the awards vested under the ROCE condition. The 49.9% of the awards that did not vest, lapsed.
The Aviva Deferred Bonus Plan was approved by shareholders at the 2001 Annual General Meeting. The awards disclosed include those made in lieu of some or all of the cash bonus earned and deferred under the Company’s Annual Bonus Plan and also the matching awards granted on a “one-for-one” basis. The vesting of the awards on the third anniversary of their grant is not subject to performance conditions.
The Aviva Share Plan was established in May 2004 specifically to facilitate the recruitment of Andrew Moss. The awards made under the Plan compensate Andrew Moss for the value of long-term incentive awards granted to him by his previous employer and which lapsed when he resigned to join Aviva. Andrew Moss is the only participant in the Plan. On 10 May 2004, the date Andrew Moss joined the Company, 103,846 shares in the Aviva Employee Trust (with a market value of £540,000) were allocated to him. On 31 October 2004 67,307 of the shares vested, 23,077 vested on 31 December 2005 and the balance of 13,462 will vest on 31 December 2006. The vesting of these shares is not subject to any performance conditions.
Directors’ interests in Aviva shares The interests held by each person who was a director at the end of the financial year in the ordinary shares of 25 pence each in the Company is shown below. All the disclosed interests are beneficial. The table also summarises the interests in shares held through the Company’s various all-employee and executive share schemes. Details of the options and long-term incentive awards are shown on pages 72 to 73 and the Aviva Share Plan is described above.
Shares1 Bonus Plan Awards2 Long-Term Incentive Awards3 Options4 Aviva Share Plan5 1 January 31 December 1 January 31 December 1 January 31 December 1 January 31 December 1 January 31 December
George Paul 30,816 30,894 – – – – – – – – Carole Piwnica – – – – – – – – – –
We have audited the group and parent company financial statements (the “financial statements”) of Aviva plc for the year ended 31 December 2005 which comprise the Accounting Policies, the Consolidated and Parent Company Income Statements, the pro forma reconciliation of Group Operating Profit to Profit Before Tax, the Consolidated and Parent Company Balance Sheets, the Consolidated and Parent Company Statement of Recognised Income and Expense, the Consolidated and Parent Company Statements of Change in Shareholders’ Equity, the Consolidated and Parent Company Cash Flow Statements and the related notes 1 to 53 and A to J. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited.
This report is made solely to the company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you if, in our opinion, the Directors’ Report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed.
We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises only the Overview, the Management Review, the Directors’ Report, the Corporate Governance statement, the Audit Committee report, the Nomination Committee Report and the unaudited part of the Directors’ Remuneration Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ Remuneration Report to be audited.
Separate opinion in relation to IFRSs As explained in the Accounting Policies to the group financial statements, the group in addition to complying with its legal obligations to comply with IFRSs as adopted by the European Union, has also complied with the IFRSs as issued by the International Accounting Standards Board.
Financial statements 78 Accounting policies 87 Consolidated income statement 88 Pro forma reconciliation of Group operating profit to profit before tax 90 Consolidated balance sheet 91 Consolidated statement of recognised income and expense 91 Reconciliation of movements in consolidated shareholders’ equity 92 Consolidated cash flow statement 93 Notes to the consolidated financial statements 190 Financial statements of the Company 199 Independent auditors’ report to the directors of Aviva plc on the alternative method of reporting long-term business profits 200 Alternative method of reporting long-term business 222 Aviva Group of companies 223 Shareholder services
Aviva plc (the “Company”), a public limited company incorporated and domiciled in the United Kingdom (UK), together with its subsidiaries (collectively, the “Group” or “Aviva”) transacts life assurance and long-term savings business, fund management, and most classes of general insurance and health business through its subsidiaries, associates and branches in the UK, Ireland, Continental Europe, United States (US), Canada, Asia, Australia and other countries throughout the world. The Group also invests in securities, properties, mortgages and loans and carries on the business of trading in property.
(A) Basis of presentation From 2005, all European Union listed companies are required to prepare consolidated financial statements using International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and endorsed by the European Union. This is the Group’s first set of full year results prepared in accordance with IFRS accounting policies and its previously reported 2004 consolidated financial statements have accordingly been restated to comply with IFRS, with the date of transition to IFRS being 1 January 2004. The principal effects of the adoption of IFRS have been reflected within note 1 on first time adoption.
The consolidated financial statements have been prepared in accordance with IFRS applicable at 31 December 2005. The IASB issued amendments to IAS 19, Employee Benefits, and IAS 39, The Fair Value Option, in December 2004 and June 2005 respectively, and its Interpretations Committee (IFRIC) issued IFRIC Interpretation 4, Determining whether an Arrangement contains a Lease, in December 2004. Their requirements are applicable for accounting periods beginning on or after 1 January 2006, but the Group has decided to adopt them early and reflect their impact in these financial statements.
In accordance with Phase I IFRS 4, Insurance contracts, the Group has applied existing accounting practices for insurance and participating investment contracts, modified as appropriate to comply with the IFRS framework and applicable standards. Further details are given in policy E below.
Items included in the financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (“the functional currency”). The consolidated financial statements are stated in sterling, which is the Company’s functional and presentation currency. Unless otherwise noted, the amounts shown in these financial statements are in millions of pounds sterling (£m). As supplementary information, consolidated financial information is also presented in euros.
FRS 27 Financial Reporting Standard 27, Life Assurance, (FRS 27) was issued by the UK’s Accounting Standards Board (ASB) on 13 December 2004, following the Penrose inquiry. Aviva, along with other major insurance companies and the Association of British Insurers (ABI), signed a Memorandum of Understanding (MoU) with the ASB relating to FRS 27. Under this MoU, Aviva voluntarily agreed to adopt in full the standard from 2005 within the Group’s IFRS financial statements.
Within FRS 27, the ASB acknowledged the difficulty of applying the requirements retrospectively and it is the Group’s view that it would be impractical to do so in accordance with IAS 8. Therefore, only the balance sheet at 31 December 2004 has been restated for the impact of FRS 27. This has no impact on net assets or profit for the year ended 31 December 2004, as the adjustments reflect changes in balance sheet presentation between the unallocated divisible surplus and insurance liabilities. No adjustments have been made, nor are any required, to the balance sheet at 1 January 2004 or the income statement for the year ended 31 December 2004.
The comparatives presented for the year ended 31 December 2004 have therefore been prepared in accordance with the Group’s IFRS accounting policies and the transitional arrangements above.
Any surplus of the acquirer’s interest in the subsidiary’s net assets over the cost of acquisition is credited to the income statement.
Associates and joint ventures Associates are entities over which the Group has significant influence, but which it does not control. Generally, it is presumed that the Group has significant influence where it has between 20% and 50% of voting rights. Joint ventures are entities whereby the Group and other parties undertake an economic activity, which is subject to joint control arising from a contractual agreement. In a number of these, the Group’s share of the underlying assets and liabilities may be greater than 50% but the terms of the relevant agreements make it clear that control is not exercised. Such jointly-controlled entities are referred to as joint ventures in these financial statements.
Investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group’s share of that entity’s post-acquisition changes to shareholders’ funds, is included as an asset in the consolidated balance sheet. The Group’s share of their post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. Equity accounting is discontinued when the Group no longer has significant influence over the investment.
The Company’s investments In the Company balance sheet, subsidiaries and joint ventures are stated at their fair values, estimated using applicable valuation models underpinned by the Company’s market capitalisation. These investments are classified as available for sale financial assets, with changes in their fair value being recorded in a separate investment valuation reserve within equity.
Translation differences on debt securities and other monetary financial assets measured at fair value and designated as held at fair value through profit or loss (FV) (see policy R) are included in foreign exchange gains and losses in the income statement. For monetary financial assets designated as available for sale (AFS), translation differences are calculated as if they were carried at amortised cost and so are recognised in the income statement, whilst foreign exchange differences arising from fair value gains and losses are included in the investment valuation reserve within equity. Translation differences on non-monetary items, such as equities which are designated as FV, are reported as part of the fair value gain or loss, whereas such differences on AFS equities are included in the investment valuation reserve.
(F) Premiums earned Premiums on long-term insurance contracts and participating investment contracts are recognised as income when receivable, except for investment-linked premiums which are accounted for when the corresponding liabilities are recognised. For single premium business, this is the date from which the policy is effective. For regular premium contracts, receivables are taken at the date when payments are due. Premiums are shown before deduction of commission and before any sales-based taxes or
Accounting policies continued duties. Where policies lapse due to non-receipt of premiums, then all the related premium income accrued but not received from the date they are deemed to have lapsed is offset against premiums.
Long-term business provisions Under current IFRS requirements, insurance and participating investment contract liabilities are measured using accounting policies consistent with those adopted previously under existing accounting practices, with the exception of liabilities remeasured to reflect current market interest rates and those relating to UK with-profit contracts. In certain cases, shadow adjustments to the liabilities or related deferred acquisition costs are recognised directly in equity so that unrealised gains or losses on assets that are recognised directly in equity affect the measurement of the liability or related deferred acquisition costs in the same way as realised gains or losses. From 31 December 2004, the Group has adopted FRS 27, Life Assurance, for liabilities relating to such contracts. FRS 27 adds to the requirements of IFRS but does not vary them in any way, and further details are given in policy A above.
A viva plc 2005 capital regime, and hence FRS 27, an amount may be recognised for the present value of future profits on non-participating business written in a with-profit fund where the determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value. This amount is recognised as a reduction in the liability rather than as an asset on the balance sheet, and is then apportioned between the amounts that have been taken into account in the measurement of liabilities and other amounts which are shown as an adjustment to the unallocated divisible surplus.
General insurance and health provisions (i) Outstanding claims provisions General insurance and health outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the balance sheet date, whether reported or not, together with related claims handling costs. Significant delays are experienced in the notification and settlement of certain types of general insurance claims, particularly in respect of liability business, including environmental and pollution exposures, the ultimate cost of which cannot be known with certainty at the balance sheet date. Provisions for certain claims are discounted, using rates having regard to the returns generated by the assets supporting the liabilities. Any estimate represents a determination within a range of possible outcomes. Further details of estimation techniques are given in note 35(c).
Other assessments and levies The Group is subject to various periodic insurance-related assessments or guarantee fund levies. Related provisions are established where there is a present obligation (legal or constructive) as a result of a past event. Such amounts are not included within insurance liabilities but are included under “Provisions” in the balance sheet.
The fair value liability is in principle established through the use of prospective discounted cash-flow techniques. For unit-linked contracts, the fair value liability is equal to the current unit fund value, plus additional non-unit reserves if required on a fair value basis.
The carrying amount of goodwill for each cash generating unit is reviewed when circumstances or events indicate that there may be uncertainty over its carrying value, and at least annually. Goodwill is written down for impairment where the recoverable amount is insufficient to support its carrying value. Further details on goodwill allocation and impairment testing are given in note 15(b).
The full embedded value of the long-term business and further details of the methodology and assumptions are included as supplementary information on pages 200 to 221.
Investment properties under construction are included within property and equipment until completion, and are stated at cost less provision for any impairment in their values.
Land is not depreciated. Depreciation is calculated on the straight-line method to write down the cost of other assets to their residual values over their estimated useful lives as follows: – Properties under construction No depreciation – Motor vehicles Three years, or lease term if longer – Computer equipment Three to five years – Other assets Three to five years
(Q) Derecognition and offset of financial assets and financial liabilities A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: – The rights to receive cash flows from the asset have expired; – The Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or
Reversals of impairments are only recognised where the decrease in the impairment can be objectively related to an event occurring after the write down (such as an improvement in the debtor’s credit rating), and are not recognised in respect of equity instruments.
Derivative contracts may be traded on an exchange or over-the-counter (OTC). Exchange-traded derivatives are standardised and include certain futures and option contracts. OTC derivative contracts are individually negotiated between contracting parties and include forwards, swaps, caps and floors. Derivatives are subject to various risks including market, liquidity and credit risk, similar to those related to the underlying financial instruments.
The notional or contractual amounts associated with derivative financial instruments are not recorded as assets or liabilities on the balance sheet as they do not represent the potential gain or loss associated with such transactions. These amounts are disclosed in note 51.
Interest rate and currency swaps Interest rate swaps are contractual agreements between two parties to exchange periodic payments in the same currency, each of which is computed on a different interest rate basis, on a specified notional amount. Most interest rate swaps involve the net
– The Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
(R) Financial investments The Group classifies its investments as either financial assets at fair value through profit or loss (FV) or available for sale financial assets (AFS). The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. In general, the FV category is used as, in most cases, the Group’s strategy is to manage its financial investments on a fair value basis. In certain circumstances, the FV category is used where this eliminates an accounting mismatch. The AFS category is used where the relevant life liability (including shareholders’ funds) is passively managed and carried at amortised cost.
Changes in the fair value of trading and other than trading investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS, except for impairment losses and relevant foreign exchange gains and losses, are recorded in a separate investment valuation reserve within equity.
(T) Loans Loans with fixed maturities, including policyholder loans, mortgage loans on investment property, securitised mortgages and collateral loans, are recognised when cash is advanced to borrowers. The majority of these loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method. Loans with indefinite future lives are carried at unpaid principal balances or cost.
(U) Deferred acquisition costs and other assets The costs directly attributable to the acquisition of new business for insurance and participating investment contracts (excluding those written in the UK) are deferred to the extent that they are expected to be recoverable out of future margins in revenues on these contracts. For participating contracts written in the UK, acquisition costs are generally not deferred, as the liability for these contracts is calculated in accordance with the FSA’s realistic capital regime and FRS 27. For non-participating investment and investment fund management contracts, incremental acquisition costs and sales enhancements that are directly attributable to securing an investment management service are also deferred.
Long-term business deferred acquisition costs are amortised systematically over a period no longer than that in which they are expected to be recoverable out of these margins. Deferrable acquisition costs for non-participating investment and investment fund management contracts are amortised over the period in which the service is provided. General insurance and health deferred acquisition costs are amortised over the period in which the related revenues are earned. The reinsurers’ share of deferred acquisition costs is amortised in the same manner as the underlying asset.
Other post-retirement obligations Some Group companies provide post-retirement healthcare or other benefits to their retirees. The entitlement to these benefits is usually based on the employee remaining in service up to retirement age and the completion of a minimum service period. None of these schemes is material to the Group. The costs of the Dutch and Canadian schemes are included within those for the defined benefit pension schemes in those countries. For such schemes in other countries, provisions are calculated in line with local regulations, with movements being charged to the income statement within staff costs.
Equity compensation plans The Group offers share award and option plans over the Company’s ordinary shares for certain employees, including a Save As You Earn plan (SAYE plan), details of which are given in the Directors’ Remuneration Report on pages 65 to 74 and in note 28.
The Group accounts for options and awards under share equity compensation plans, which were granted after 7 November 2002, until such time as they are fully vested, using the fair value based method of accounting (the “fair value method”). Under this method, the cost of providing equity compensation plans is based on the fair value of the share awards or option plans at date of grant, which is recognised in the income statement over the expected vesting period of the related employees and credited to the equity compensation reserve, part of shareholders’ funds.
(AC) Fiduciary activities Assets and income arising from fiduciary activities, together with related undertakings to return such assets to customers, are excluded from these financial statements where the Group has no contractual rights in the assets and acts in a fiduciary capacity such as nominee, trustee or agent.
(AE) Operations held for sale The requirements of IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, have been applied prospectively from 1 January 2005. Assets held for disposal as part of operations which are held for sale are recorded at the lower of their carrying amount and their fair value, less the estimated cost to sell the assets.
Consolidated income statement For the year ended 31 December 2005 1m Note £m £m
Income 5 38,675 Gross written premiums 26,299 24,778 (1,937) Premiums ceded to reinsurers (1,317) (1,427)
Expenses 6 (28,979) Claims and benefits paid, net of recoveries from reinsurers (19,706) (17,799) (15,259) Change in insurance liabilities, net of reinsurance (10,376) (6,104) (11,491) Change in investment contract provisions (7,814) (5,635) (2,167) Change in unallocated divisible surplus (1,474) (1,330) (6,362) Fee and commission expense (4,326) (4,471)
3,718 Profit before tax attributable to shareholders’ profits 2,528 1,642 1,356 Less: tax attributable to policyholders’ returns 12 922 383 (927) Tax attributable to shareholders’ profits (630) (271)
Earnings per share AD&13 108.1c Basic (pence per share) 73.5p 55.8p 107.2c Diluted (pence per share) 72.9p 55.3p
Operating profit before tax attributable to shareholders’ profits 1,566 Long-term business 1,065 1,116 2,281 General insurance and health 1,551 1,259
3,129 Operating profit before adjusting items and tax attributable to shareholders’ profits 2,128 1,669 Adjusted for the following items Impairment of goodwill 15
(160) Integration costs 3a(i) (109) – – Exceptional costs for termination of operations 3d – (40)
(790) Operating profit 13a(iii) (536) (319) (137) Other activities 13a(iii) (94) 48 2,791 Profit for the year 1,898 1,371
Consolidated statement of recognised income and expense For the year ended 31 December 2005 1m Note £m £m
(76) Fair value gains/(losses) on AFS securities, owner-occupied properties and hedging instruments 32 (52) 3 604 Fair value gains transferred to profit 32 411 109 (66) Impairment losses on revalued assets 32 (45) –
Reconciliation of movements in consolidated shareholders’ equity For the year ended 31 December 2005 1m Note £m £m 2,843 Total recognised income and expense for the year 1,962 1,421 768 Issue of share capital for the acquisition of RAC plc 3a 530 – 86 Other issues of share capital, net of transaction costs 27 59 25 145 Shares issued in lieu of dividends 33 100 103 – Issue of direct capital instrument, net of transaction costs of £9 million – 981 307 Capital contributions from minority shareholders 212 4 (101) Minority share of dividends declared in the year (70) (41) (52) Minority interest in (disposed)/acquired subsidiaries (36) 45
– Movement in shares held by employee trusts 29 – 1 (1) Other movements (1) –
Consolidated cash flow statement For the year ended 31 December 2005
Cash flows from operating activities Cash generated from operations 48a 1,717 1,067 2,784 2,050
1 – First time adoption of International Financial Reporting Standards (a) The Group has adopted International Financial Reporting Standards (IFRS) for these financial statements for the year ended 31 December 2005. In order to show comparative balances, the year ended 31 December 2004 is also shown under IFRS. The date of transition to IFRS is 1 January 2004.
Transitional provisions The Group has elected to disclose only five years of data in its loss development tables, as permitted by IFRS 4 in the year of adoption of IFRS. This will be increased in each succeeding additional year, until the full ten years of information is included.
(i) Summarised consolidated balance sheet at date of transition to IFRS – 1 January 2004 UK GAAP
Liability for investment contracts – 57,467 57,467 Unallocated divisible surplus 8,443 1,650 10,093 Net asset value attributable to unitholders – 1,606 1,606
1 – First time adoption of International Financial Reporting Standards continued Analysis of adjustments to the balance sheet at 1 January 2004 as a result of the transition to IFRS
Property and equipment 563 563 Investment property 618 618 Financial investments
Note references are to section (iii) on pages 98 to 102.
Acquired value of in-force business and intangible assets 451 65 516 Investments in joint ventures and associates 2,088 40 2,128 Property and equipment 283 529 812
Financial investments and loans 140,763 47,648 188,411 Assets held to cover linked liabilities 51,144 (51,144) –
Equity Share Capital 1,760 – 1,760 Capital reserves 3,878 – 3,878 Revaluation and other reserves – 736 736
Acquired value of in-force business and intangible assets 65 – 65
Equity attributable to shareholders of Aviva plc 284 166 (909) 129 364 (322) (26) 77 (237)
Note references are to section (iii) on page 98 to 102.
Increase in valuation of debt securities 1,718 2,459 Change in valuation of certain mortgages 113 119 Other sundry adjustments 23 21
The principal changes are discussed further below: a) Debt securities Under UK GAAP, equity securities and unit trusts are carried at current value. Debt and other fixed income securities are carried at current value, with the exception of many non-linked long-term business debt securities and fixed income securities, which are carried at amortised cost.
As a result of applying IAS 39, the Group now carries all investments in debt and equity securities at fair value. The change in valuation of debt securities from amortised cost to fair value increases the valuation of investments by £1,718 million at 1 January 2004 and £2,459 million at 31 December 2004. This change in the valuation of debt securities is largely offset by corresponding movements in the unallocated divisible surplus and technical liabilities. The net impact on shareholders’ funds at 1 January 2004 and 31 December 2004 is to increase them by £191 million and £284 million respectively.
b) Commercial mortgages backing certain annuity business Under IFRS, the Group has chosen to move certain of its commercial mortgage portfolio to an active fair valuation basis in accordance with IAS39, which has increased the value of investments by £113 million at 1 January 2004 and £119 million at 31 December 2004. The annuity liabilities which are backed by these assets have been correspondingly revalued, with the result that there is an insignificant impact on shareholders’ funds at either date.
c) Revaluation reserve Under IFRS, certain investment gains are recorded as a separate component of shareholders’ equity, whereas under UK GAAP they would be included in retained earnings.
The amounts included in the above reserves are, where appropriate, net of deferred tax and impairment losses.
(2) Insurance changes The impact on shareholders’ funds of insurance changes is as follows: 1 January 31 December £m £m
b) Equalisation provision An equalisation provision is recorded in the balance sheets of individual general insurance companies in the United Kingdom and in a limited number of other countries, to eliminate or reduce the volatility in incurred claims arising from exceptional levels of claims in certain classes of business. The provision is required by law even though no actual liability exists at the balance sheet date and is included in the UK GAAP consolidated balance sheet. The annual change in the equalisation provision is recorded in the UK GAAP profit and loss account. Under IFRS, no equalisation provision is recorded, as no actual liability exists at the balance sheet date. There are increases of £364 million and £388 million in shareholders’ funds at 1 January 2004 and 31 December 2004 respectively as a result of the removal of this provision.
Having applied an active basis for valuing liabilities on a traditional gross and individual savings business, the amounts representing undistributed gains on investments backing these products which were previously booked to the fund for future appropriations under UK GAAP of £34 million at 1 January 2004 and £161 million at 31 December 2004 have been released to equity.
e) Non-participating investment contracts and other sundry items The liability for those contracts classified as non-participating investment contracts is valued in accordance with IAS 39. The majority of the Group’s contracts classified as non-participating investment contracts are unit-linked contracts and have been valued at fair value. For unit-linked contracts, the fair value liability is deemed to equal the current unit fund value, plus positive non-unit reserves if required on a fair value basis. This replaces the reserve held under UK GAAP which equals the unit fund value plus any positive or negative non-unit reserves determined on the local valuation basis, and which differs from that required on a fair value basis.
This change in accounting has resulted in the removal of the Group’s SSAP 24 balances, a net debtor of £251 million after allowing for deferred tax, at 1 January 2004 (31 December 2004: £279 million) and the recognition of a deficit of £583 million (31 December 2004: £630 million), net of deferred tax, valued in accordance with IAS 19. This gives an overall impact on shareholders’ funds of £834 million at 1 January 2004 and £909 million at 31 December 2004.
In some countries, the pension schemes have invested in the Group’s long-term business funds. IAS 19 requires the liquidity of the schemes’ assets to be considered and, if these are deemed non-transferable, the presentation of the total obligation to the schemes must include these amounts. Accordingly, insurance liabilities have been reduced by £715 million at 1 January 2004 (£813 million at 31 December 2004) and provisions increased by the same amounts, to reflect this disclosure. There is no impact on equity or income arising from this presentation.
There are a number of adjustments impacting the Group’s “Provisions” line. However, the most significant adjustment relates to the recognition of the pension obligations as shown in the table below: 1 January 31 December £m £m
Provisions as stated under UK GAAP 336 340 Less: SSAP 24 pension obligation (78) (63) Deficit in the staff pension schemes 838 893 Other obligations to staff pension schemes – insurance policies issued by Group companies 715 813 Total IAS 19 obligations to staff pension schemes 1,553 1,706 Adjustments to other provisions arising under IFRS 111 142
1 – First time adoption of International Financial Reporting Standards continued (4) Goodwill and intangibles Under UK GAAP, goodwill arising before 1 January 1998 was eliminated against shareholders’ funds and was not subsequently reinstated. Goodwill previously written off to shareholders’ funds is taken back through the profit and loss account when calculating the profit or loss in the event of any subsequent disposal of the underlying investment. Under UK GAAP for acquisitions subsequent to 1997, goodwill arising on acquisition is carried on the balance sheet and amortised in the consolidated profit and loss account on a straight-line basis over its useful economic life, not exceeding 20 years.
Under IAS 36, Impairment of Assets, goodwill is no longer amortised but is tested for impairment at least annually. Any goodwill previously amortised prior to the date of transition (1 January 2004) or, for goodwill arising before 1 January 1998, eliminated against shareholders’ funds has not been reinstated. Amortisation charged in 2004 under UK GAAP is not charged to profit under IFRS to the extent that it does not relate to an impairment, and hence shareholders’ funds increase upon conversion to IFRS. In addition, negative goodwill of £40 million at 1 January 2004 and £37 million at 31 December 2004, previously recognised under UK GAAP, is included directly in retained earnings.
IFRS 3, Business combinations, requires that intangible assets such as customer lists, which can be separately identified and valued, must be recognised separately in the balance sheet. The Group has applied IFRS 3 to acquisitions since 1 January 2004, which has resulted in £65 million of goodwill being reclassified as intangibles upon conversion to IFRS.
(5) Dividend recognition Under UK GAAP, dividends are accrued in the period to which they relate, regardless of when they are declared and approved. Under IAS 10, Events after the Balance Sheet Date, shareholders’ dividends are accrued only when declared and appropriately approved. This has increased shareholders’ funds by £344 million at 1 January 2004 and £364 million at 31 December 2004.
Under IAS 12, Income tax, deferred tax is provided under the liability method for all relevant temporary differences, being the difference between the carrying amount of an asset or liability in the balance sheet and its value for tax purposes. IAS 12 does not require all temporary differences to be provided for. In particular, the Group does not provide for deferred tax on undistributed earnings of subsidiaries where the Group is able to control the timing of the distribution and the temporary difference created is not expected to reverse in the foreseeable future. Deferred tax assets are recognised for unused tax losses and other deductible temporary differences to the extent that it is probable that future taxable profit will be utilised against the unused tax losses and credits. Discounting is prohibited under IAS 12.
Reversal of discounting (the total discounting applied to UK GAAP deferred tax liabilities at 1 January 2004 was £151 million (31 December 2004: £277 million), of which £110 million (31 December 2004: £215 million) relates to non-life and shareholders’ interests) 110 215
Notes to the consolidated financial statements continued 1 – First time adoption of International Financial Reporting Standards continued (7) Borrowings and cash IFRS requires a number of presentational changes to borrowings and cash. The most significant change is that the linked presentation can no longer be adopted for the Group’s borrowing securitised on certain of its mortgage portfolios. This increases borrowings and investments by £3,143 million at 1 January 2004 and £5,110 million at 31 December 2004. The equity impact of £37 million at 1 January 2004 and £26 million at 31 December 2004 relates to the application of the fair value option to the mortgages of the UK equity release business, the loan notes which are securitised upon them and backing derivatives, which more appropriately reflects the commercial substance of this business. This has increased borrowings by £90 million at 1 January 2004 and £97 million at 31 December 2004. Additionally, £3,307 million of the Group’s investments at 1 January 2004 (31 December 2004: £8,792 million) meet the definition of cash equivalents and so have been reclassified to this heading in the consolidated balance sheets.
(9) Other items The other changes that arise as a result of the transition to IFRS are principally reclassifications and presentational changes. The total effect of the other changes to shareholders’ funds is £71 million at 1 January 2004 and £77 million at 31 December 2004.
(iv) Mutual funds have been consolidated where these vehicles meet the definition of a subsidiary. This has resulted in an increase in gross assets of £1,606 million at 1 January 2004 and £2,247 million at 31 December 2004, representing the part of the funds owned by third parties. This third party interest is recorded in the line “net assets attributable to unitholders” within liabilities. The consolidation of mutual funds has no impact on shareholders’ funds or profit after tax.
1 – First time adoption of International Financial Reporting Standards continued (iv) Summarised consolidated pro forma operating profit statement for the year ended 31 December 2004
Operating profit before tax attributable to shareholders’ profits 1,861 (95) 1,766 (97) 1,669 Amortisation/impairment of goodwill (120) 79 (41) – (41) Amortisation of acquired additional value of in-force long-term
Financial Services Compensation Scheme and other levies (49) – (49) – (49) Short-term fluctuation in return on investments 131 (67) 64 97 161 Change in the equalisation provision (23) 23 – – – Net loss on the disposal of subsidiaries and associates (136) 170 34 – 34 Exceptional costs for termination of operations (50) 10 (40) – (40)
Profit before tax attributable to shareholders’ profits 1,488 154 1,642 – 1,642 Tax attributable to shareholders’ profits (355) 84 (271) – (271)
Attributable to: Equity shareholders of Aviva plc 1,057 218 1,275 – 1,275
Earnings per share based on profit after tax attributable to ordinary shareholders 45.8p 55.5p 55.5p
Note references are to section (v) on pages 104 to 106.
1. Represents the application of deposit accounting for those contracts classified as non-participating investment contracts.
Investment Insurance Employee Policyholder valuation changes benefits Goodwill tax Total (note 1) (note 2) (note 3) (note 4) (note 5) Other items adjustments £m £m £m £m £m £m £m
Operating profit before tax attributable to shareholders 111 (72) (48) – (93) 7 (95)
In addition, changes to investment accounting have resulted in £67 million of investment gains being reclassified from short-term fluctuations to the life operating profit.
This reduction in profit is no more than a timing adjustment. Aviva’s main value measure remains European embedded value and the profit arising on this basis is unaffected by this technical accounting change.
(3) Employee benefits The overall impact of adopting IAS 19, Employee benefits, and IFRS 2, Share based compensation, has been to increase costs by £48 million in 2004. This partly reflects the fact that IAS 19 has used a more current actuarial valuation to measure the ongoing pension service cost. The charge under UK GAAP was based on the SSAP 24 valuation which, as disclosed in the 2004 Annual Report and Accounts, was last updated for financial reporting purposes in April 2002.
Under IFRS, all taxation must be reported within the taxation line. The profit before this total tax would present a misleading picture of the Group’s profit as (i) much of the policyholder tax is in the with-profits funds where the unallocated divisible surplus is adjusted on a net of tax basis; (ii) the cost of policyholder tax is priced into the relevant products; and (iii) the level of tax will vary on an annual basis in line with the investment return on assets backing the long-term funds.
The UK industry has therefore agreed that it is appropriate to adopt an income statement presentation which depicts profit before tax attributable to the shareholders. This requires an allocation of the total tax charge between policyholders and shareholders, with the policyholder charge being offset against operating profit. There is no universal view on how this allocation should be performed. Aviva has taken the view that the IFRS conceptual framework does not permit companies to use notional allocation or gross-up methods. Instead, the allocation to policyholder tax should reflect the actual tax payable at policyholder rates, including deferred tax. Aviva has therefore developed a conceptual methodology to achieve this consistently year-on-year.
In 2004, the level of tax attributed to the shareholders was reduced by the following arrangement. The £1.5 billion of capital injected into the life funds on the demutualisation of Norwich Union in 1997 had the effect that future distributions up to that amount by Norwich Union Life and Pensions are treated as already having suffered some shareholder tax. In 2004, a substantial proportion of the company’s shareholders’ surplus was sheltered by this arrangement and this has the impact of lowering the actual tax paid at shareholder rates. This is a genuine benefit to shareholders and resulted in higher profit after tax. This tax benefit has a finite capacity and will at some point be exhausted, such that over the long-term there will be an increase in shareholder tax rates back towards 30%. The use of this capacity is dependent on the level of distributions made by Norwich Union Life & Pensions.
The impact of this is that operating profit before tax falls relative to the UK GAAP result, as the actual shareholder rate suffered in the UK in 2004 was lower than 30%.
It should be noted that, from an EEV perspective, an asset representing this tax benefit is already established and so 30% remains as an appropriate shareholder tax rate for this business.
(vi) Reconciliation of the cash flows reported under UK GAAP to cash flows reported under IFRS Under UK GAAP, as amended by the ABI SORP for insurance companies, the consolidated statement of cash flows presents only the cash flows of general insurance business and shareholders’ funds. Cash flows of the long-term business, other than amounts transferred to shareholders, are not included in this statement. IAS 7, Cash Flow Statements, requires the cash flow statement to include cash flows from all activities of the Group, including the reconciliation of cash flows from operating activities to profit or loss reported in the income statement. Other differences arise between the UK cash flow statements and IFRS, mainly due to reclassification of items under IFRS.
Total foreign currency movements during 2005 resulted in a loss recognised in the income statement of £203 million (2004: £31 million gain).
3 – Subsidiaries (a) Acquisitions (i) RAC plc On 4 May 2005, the Group acquired 100% of the share capital of RAC plc. The results of RAC plc’s operations have been included in the consolidated financial statements of the Group with effect from 4 May 2005, and contributed £15 million to the consolidated profit before tax.
Purchase cost Cash paid 566 Fair value of 88 million shares issued, based on their published price at date of exchange (average of £6.03 per share) 530 Costs attributable 17
The issue of new shares in the Company in exchange for shares in RAC plc has attracted merger relief under section 131 of the Companies Act 1985. Of the £530 million above, £22 million has been credited to share capital (see note 27(b)) and £508 million has been credited to the merger reserve, increasing that reserve from £2,763 million to £3,271 million.
Revaluation scheme policy Book value of Intangibles valuation adjustments Fair value £m £m £m £m £m
Total goodwill and intangible assets 1,531 Less: deferred tax liability (118)
Separable intangible assets have been identified and valued by an independent third party at £392 million, using estimated post-tax cash flows and post-tax discount rates. The Group has assessed the useful economic lives of these intangibles, considering relevant factors such as usage of the asset, typical product life cycles, potential obsolescence, maintenance costs, the stability of the industry, competitive position, and the period of control over the assets. In the case of the RAC and BSM brands, it has been determined that the existing lives of the assets, their competitive position in and the stability of their respective markets indicate that the brands have indefinite useful lives, and thus no amortisation has been charged in the period since acquisition. Of the total £392 million, £260 million has been assessed as having an indefinite life, with the remaining £132 million, mainly contractual customer relationships, being amortised over nine to 22 years.
The residual goodwill of £1,139 million essentially represents synergies, both in increased revenues and in reduced costs, expected to arise in RAC plc and our UK general insurance business as a result of the acquisition.
Notes to the consolidated financial statements continued 3 – Subsidiaries continued (iv) Unaudited pro forma combined revenues and profit Shown below are unaudited pro forma figures for combined revenues and profit as though the acquisition date for all business combinations effected during the year had been 1 January 2005, after giving effect to purchase accounting adjustments and the elimination of intercompany transactions. The pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisitions taken place at 1 January 2005, nor is it necessarily indicative of future results.
Revenues (premiums and fee income) 27,842 Profit before tax attributable to shareholders 2,578
(v) Non-adjusting post-balance sheet events: Irish bancassurance agreement On 22 November 2005, the Group announced a new bancassurance agreement in Ireland between its wholly-owned subsidiary Hibernian Group plc (“Hibernian”) and Allied Irish Banks plc (“AIB”). This will create a leading force in the Irish life and pensions market and bring further opportunities for growth in this market. The transaction completed on 27 January 2006, following the receipt of regulatory and European Commission approval.
(b) Disposals of subsidiaries and associates The profit on disposal was determined as follows: £m £m
Proceeds from sale 421 327 Net assets sold (245) (293) Transaction costs (23) –
Profit on disposal before tax 153 34 Tax on profit on disposal (43) –
3 – Subsidiaries continued The profit/(loss) on the disposal of subsidiaries and associates comprises: £m £m
(i) Sale of Asian general insurance businesses During 2005, the Group completed the disposal of its Asian general insurance businesses to Mitsui Sumitomo Insurance (MSI) for a total of US$450 million in cash. Under the terms of the agreement, MSI acquired all of Aviva’s general insurance businesses in Asia. These comprised the general insurance business of Aviva Limited and the general insurance assets of Aviva Asia Pte Limited in Singapore; Aviva Insurance Berhad in Malaysia (including its branch in Brunei); Aviva Insurance (Thai) Company Limited in Thailand; PT Aviva Insurance in Indonesia; Dah Sing General Insurance Co Limited in Hong Kong; and Aviva’s branch operations in Hong Kong, the Philippines, Marianas, Macau and Taiwan. The transaction was achieved through share purchase of Aviva’s interests in joint venture operations, business purchase and asset purchase in Singapore, and transfer of Aviva’s general insurance branch operations in Hong Kong, the Philippines, Marianas, Macau and Taiwan.
The net assets at disposal of £73 million, comprised financial investments (£220 million) and other assets (£95 million), less insurance liabilities (£207 million) and other liabilities (£35 million).
Notes to the consolidated financial statements continued 3 – Subsidiaries continued (ii) Other In July 2005, the Group completed the sale of the business and certain operational assets and liabilities of Hyundai Cars (UK), which was acquired as part of the RAC group, to Hyundai Motor UK Limited for a total of £70 million. This sale did not give rise to any gain or loss.
Intangible assets 9 – Investments and property and equipment 320 – Receivables and other financial assets 68 – Deferred acquisition costs and other assets 40 – Cash and cash equivalents 25 –
At year end, the Group held for sale certain divisions of Manufacturer Support Services (MSS), part of the RAC group. The decision to sell is part of the Group’s wider strategy to integrate RAC and exit non-core operations. The divisions being sold primarily comprise Lex Transfleet Limited, Multipart Holdings Limited and Lex Commercials Limited, both wholly-owned subsidiaries, and Hyundai Car Finance Limited, an associate in which the Group holds 49.99%. Lex Transfleet is a provider of complex fleet solutions, Multipart Holdings provides logistics and aftermarket services to the automotive sector and Lex Commercials is a leading UK commercial vehicles dealership group, while Hyundai Car Finance Limited provides vehicle instalment finance and leasing. The disposal groups have also been treated as Held for Sale and are expected to be sold by the second quarter of 2006.
A viva plc 2005 3 – Subsidiaries continued (d) Exceptional costs for termination of operations In February 2004, the Group announced the closure of its UK national broker subsidiary, Hill House Hammond (HHH) together with the sale of its commercial business. The associated pre-tax costs of the closure of HHH were £40 million and relate to termination activities, including redundancy costs and closure provisions.
Fund management activities Our fund management business invests policyholders’ and shareholders’ funds, provides investment management services for institutional pension fund mandates and manages a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. Clients include Aviva Group businesses and third-party financial institutions, pension funds, public sector organisations, investment professionals and private investors.
Gross written premiums 15,282 – 11,017 – 26,299 Premiums ceded to reinsurers (611) – (706) – (1,317)
Claims and benefits paid, net of recoveries from reinsurers (13,482) – (6,224) – (19,706) Change in insurance liabilities, net of reinsurance (10,004) – (372) – (10,376) Change in investment contract provisions (7,814) – – – (7,814) Change in unallocated divisible surplus (1,474) – – – (1,474)
Amortisation of acquired value of in force business (45) – – – (45) Amortisation of intangible assets (18) – (5) (16) (39) Net impairment of acquired value of in force business (28) – – – (28) Net impairment of intangible assets (6) – – – (6) Impairment of goodwill (14) – – (29) (43) Other net impairment losses recognised in the income statement (37) – – – (37) Inter-segment expenses (103) – (9) – (112)
Segment result before share of profit/(loss) of joint ventures and associates 1,525 93 1,994 (272) 3,340 Share of profit/(loss) of joint ventures and associates 340 (1) 1 18 358
Finance costs on central borrowings (248) (248) Adjusted for the following items
Less: Tax attributable to policyholders’ returns (922) – – – (922)
Gross written premiums 14,216 – 10,562 – 24,778 Premiums ceded to reinsurers (683) – (744) – (1,427)
Net written premiums 13,533 – 9,818 – 23,351 Change in unearned premium reserve – – (176) – (176)
Amortisation of acquired value of in force business (72) – – – (72) Amortisation of intangible assets – – – – – Net impairment of acquired value of in force business (13) – – – (13) Amortisation of other intangible assets (7) – – – (7) Impairment of goodwill on subsidiaries (18) – (2) (21) (41) Net impairment of property and equipment (1) (24) (25) Net impairment of other financial assets (3) – – – (3) Other reversal of impairment losses recognised in the income statement Inter-segment expenses (105) – (9) – (114)
4 – Segmental information continued Pro forma reconciliation to operating profit before tax attributable to shareholders’ profits
Finance costs on central borrowings – – – (246) (246) Adjusted for the following items
Amortisation and impairment of acquired value of in-force business 85 – – – 85 Amortisation and impairment of intangibles 7 – – – 7 Financial Services Compensation Scheme and other levies – 9 40 – 49 Short-term fluctuation in return on investments backing general insurance and health business – – (161) – (161) Profit on the disposal of subsidiaries and associates – – (12) (22) (34) Exceptional costs for termination of operations – – – 40 40
Less: Tax attributable to policyholders’ returns (383) – – – (383)
Operating profit before tax attributable to shareholders’ profits 1,116 40 1,259 (746) 1,669
Liability for investment contracts 69,555 – – – 69,555 Unallocated divisible surplus 7,549 – – – 7,549 Net asset value attributable to unitholders 2,247 – – – 2,247
4 – Segmental information continued (ii) Segmental results and balance sheets – geographical segments
United Kingdom France Netherlands Other Europe International Total Year ended 31 December 2005 £m £m £m £m £m £m
Segment liabilities: Other liabilities, including inter-segment liabilities (126,759) (44,274) (30,714) (26,387) (9,717) (237,851)
United Kingdom France Netherlands Other Europe International Total Year ended 31 December 2004 £m £m £m £m £m £m
Segment liabilities: Other liabilities, including inter-segment liabilities (116,850) (41,866) (23,911) (26,832) (8,296) (217,755)
An analysis of new long-term business sales is provided below. In this table, 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. Life and pensions total income represents all net written premiums in the year for insurance contracts and investment contracts, excluding non-participating investment contracts which are required to be accounted for under IAS 39, Financial Instruments: Recognition and Measurement, and IAS 18, Revenue.
Life and pensions: – associates and joint ventures – 205 – 17 – 319
Total long term savings (including share of associates and joint ventures) 18,300 16,049 1,176 1,175 17,331 15,490
Included within new business sales is £5,071 million single premiums and £357 million regular premiums (2004: £4,338 million and £410 million respectively) in respect of contracts that meet the definition of “non-participating investment” contracts under IFRS 4, Insurance Contracts. Under IFRS, the premiums on these contracts are not included in the Group income statement under earned premiums, but are included on the balance sheet as a deposit.
Net investment income Interest and similar income 6,396 6,052 Dividend income 1,778 1,494 Other income from investments designated as trading Realised gains and losses (78) (250) Unrealised gains and losses 42 190
Realised gains and losses 4,502 1,873 Unrealised gains and losses 8,771 4,007
Realised gains and losses on AFS investments 154 322 Net income from investment properties
Net investment income 23,722 15,733 Share of profit after tax of joint ventures 17 326 234 Share of profit after tax of associates 18 32 8 Share of profit after tax of joint ventures and associates 358 242 Profit on the disposal of subsidiaries and associates 3b 153 34
Notes to the consolidated financial statements continued 6 – Details of expenses
Insurance contracts 10,325 9,276 Participating investment contracts 2,465 3,114 Non-participating investment contracts 1,188 62
Insurance contracts (697) (595) Participating investment contracts (50) (89) Non-participating investment contracts (48) (100)
Other operating expenses Staff costs and other employee-related expenditure 9 1,640 1,815 Global finance transformation programme 28 85 Other corporate costs 108 49
Impairment losses on property and equipment 19 – 25 Impairment of goodwill on subsidiaries 15 43 41 Amortisation of acquired value of in-force business 16 & 18 44 72 Amortisation of intangible assets 16 39 7 Impairment of acquired value of in-force business 16 29 13 Impairment of intangible assets 16 6 – Integration costs 109 –
Net impairments on loans 21 4 1 Net impairments on financial investments 5 1 Net impairments on receivables and other financial assets 10 1 Net impairments on non-financial assets 38 –
Investment return before unrealised gains 13,030 10,099 Unrealised investment gains on financial investments and loans designated as at fair value through profit or loss 10,384 5,351
In addition to the investment return recognised above, £110 million of investment losses (2004: £64 million) has been recognised directly in equity as detailed in the statement of recognised income and expense on page 91.
(b) Effective interest rates The table below summarises the average effective interest rate by major currency for monetary financial instruments: Sterling Euro Can $ Sterling Euro Can $
(b) The longer-term investment return and short-term fluctuation are as follows: General insurance and health business £m £m
8 – Longer term investment return continued (c) The longer term investment return is calculated separately for each principal general insurance and health business unit. 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.
For 2006, the Group intends to apply the same economic assumptions for equities and properties as are used under EEV principles to calculate the longer-term investment return for its general insurance and health business.
(e) The table below compares the actual return on investments attributable to the general insurance and health business, after deducting investment management expenses and charges, with the aggregate longer term return over a two year period. This table will be built up over time to give aggregate and comparative figures over a five-year period.
Actual return attributable to shareholders 2,712 Longer term return credited to operating results (2,034)
Wages and salaries 1,677 1,645 Social security costs 210 208 Post-retirement obligations
Profit sharing and incentive plans 116 61 Equity compensation plans (notes 28d & 32) 22 21 Termination benefits 10 14
Audit services Statutory audit 6.9 7.0 Audit-related regulatory and supplementary reporting 3.1 3.1
Further assurance services included advice on accounting and regulatory matters, restatement of supplementary reporting opening balance sheet, reporting on internal controls and corporate governance matters, and due diligence work.
Current tax For the year 799 475 Prior year adjustments (212) (92)
(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce current tax expense and deferred tax expense by £49 million and £33 million, respectively (2004: £148 million and £nil, respectively).
(b) Tax (credited)/charged to equity (i) The total tax (credit)/charge comprises: £m £m
(ii) The tax credit attributable to policyholders’ returns included in the credit above is £3 million (2004: £nil).
Tax calculated at standard UK corporation tax rate of 30% (2004: 30%) 1,035 608 Different basis of tax for UK life insurance 616 217 Adjustment to tax charge in respect of prior years (253) (88) Non-assessable dividends (26) (30) Non-taxable (profit)/loss on sale of subsidiaries and associates (4) 12 Disallowable expenses 55 65 Different basis of tax on overseas profits/(losses) 168 (13) Deferred tax assets not recognised (25) (120)
Profit for the year 1,898 1,371 Amount attributable to minority interests (131) (96) Cumulative preference dividends for the year (17) (17) Coupon payments on direct capital instrument (DCI) (net of tax) (29) –
Before tax appropriation Per share Before tax appropriation Per share £m £m p £m £m p
Profit attributable to ordinary shareholders 2,528 1,721 73.5 1,642 1,258 55.8
Profit attributable to ordinary shareholders 1,721 2,340 73.5 1,258 2,256 55.8 Dilutive effect of share awards and options – 20 (0.6) – 18 (0.5)
Irish shareholders who are due to be paid a dividend denominated in euros will receive a payment at the exchange rate prevailing on 1 March 2006.
Goodwill arising on acquisitions completed before 1 January 1998 was charged directly to reserves. Goodwill arising on the Group’s investment in joint ventures and associates is included within the carrying value of those investments (see notes 17 and 18).
(b) Goodwill allocation and impairment testing The carrying amount of goodwill allocated to Spain (long-term business), United Kingdom (general insurance and health) and RAC (non-insurance operations) is considered significant in comparison with the total carrying amount of goodwill.
Carrying amount of intangibles with indefinite useful lives – – 185 – 75 – – – 260 –
As explained in accounting policy M, the carrying amount of goodwill and intangible assets with indefinite useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. The tests led to impairment of goodwill in the amount of £43 million.
United Kingdom (general insurance and health) The recoverable amount of the United Kingdom general insurance and health unit has also been determined based on a value in use calculation. The calculation uses cash flow projections based on business plans approved by management covering a three year period and a risk adjusted discount rate of 10.45% (2004: 9.63%). Cash flows beyond that three-year period have been extrapolated using a steady 3% growth rate (2004: 5%). The recoverable amount significantly exceeds the carrying value of the cash generating unit including goodwill and intangible assets with indefinite useful lives and a reasonably possible change in a key assumption will not cause the carrying value of the cash generating unit to exceed its recoverable amount.
Key assumptions used for the calculation were: – Budgeted operating profit represents the operating profit in the business plans, approved by management and as such reflect the best estimate of future profits based on both historical experience and expected growth rates for the UK general insurance industry. Some of the assumptions that underline the budgeted operating profit include market share, premium rate changes, claims inflation and commission rates.
Key assumptions used for the calculation were: – Budgeted operating profit represents the operating profit in the business plans, approved by management and as such reflect the best estimate of future profits based on both historical experience and expected growth. Some of the assumptions that underline the budgeted operating profit include market share, fee income and customer numbers.
Acquisition of subsidiaries – 333 333 Foreign exchange rate movements (12) (1) (13)
Amortisation for the year (51) (7) (58) Impairment losses recognised (13) – (13) Foreign exchange rate movements (2) (1) (3)
Amortisation for the year (26) (39) (65) Impairment losses recognised (29) (6) (35) Foreign exchange rate movements 4 (1) 3
Disposals and reductions in group interests – (43) – (43) – Reclassification to subsidiaries – (8) – (8) (89)
Accounting for the PUTs and PLPs as subsidiaries, joint ventures or other financial investments depends on the shareholdings in the GPs and the terms of each partnership agreement. Where the Group exerts control over a PLP, it has been treated as a subsidiary and its results, assets and liabilities have been consolidated. Where the partnership is managed by a contractual agreement such that no party exerts control, notwithstanding that the Group’s partnership share in the PLP (including its indirect take via the relevant PUT and GP) may be greater than 50%, such PUTs and PLPs have been classified as jointly-controlled entities. These are accounted for as joint ventures, and are covered in this note. Where the Group holds minority stakes in PLPs, with no disproportionate influence, the relevant investments are included in financial investments at their fair value.
The joint ventures have no significant contingent liabilities to which the Group is exposed, nor has the Group any significant contingent liabilities in relation to its interest in the joint ventures.
Share of results before tax – 39 – 39 28 Share of tax – (7) – (7) (20)
The loans are not secured and no guarantees were received in respect thereof. They bear an annual interest of 10%, and will be settled in cash through monthly payments over the next two years.
18 – Investments in associates continued (b) The principal associates included above are: Type of Proportion Country of incorporation Company business Class of share held and operation
Aviva Life Insurance Company India Pvt. Limited Insurance Ordinary Rs1 shares 26.0% India ProCapital S.A. Online brokerage Ordinary a1 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 The British Aviation Insurance Company Limited Insurance Ordinary £1 shares 38.1% Great Britain
(c) Additional information (i) Summarised aggregate financial information on the Group’s interests in its associates is as follows: £m £m
The associates have no significant contingent liabilities to which the Group is exposed, nor has the Group any significant contingent liabilities in relation to its interest in the associates.
(d) Impairment testing The Group’s investments in RBS Life Investments Limited and RBSG Collective Investments Limited have been tested for impairment by comparing their carrying values (which include goodwill which arose on their acquisition) with their recoverable amounts. The recoverable amounts for both the investments have been determined based on value in use calculations. The calculations use cash flow projections based on business plans approved by management covering a five year period and a risk adjusted discount rate of 9.9%. Cash flows beyond that five-year period have been extrapolated using a growth rate of 4.5%.The recoverable amounts significantly exceed the carrying values of both the investments and a reasonably possible change to the key underlying assumptions will not cause the carrying values of the investments to exceed their recoverable amounts. Financial statem ents A
Capitalised expenditure on existing assets 7 – – – – 7
Fair value gains (see note 32) – 33 – – – 33 Foreign exchange rate movements (1) (5) – – (1) (7)
Less assets classified as held for sale – – – – (85) (85)
The fair value of investment properties leased to third parties under operating leases was as follows: £m £m
Policy loans 1,020 1,032 Bank loans 125 52 Securitised mortgage loans (see note 22) 7,476 5,106 Non-securitised mortgage loans 15,224 14,663 Other loans 699 1,202
The impairment charge in respect of the above loans, charged to profit for the year, was £8 million (2004: £5 million) and reversals of impairments on these loans were £4 million (2004: £4 million).
22 – Securitised mortgages and related assets The Group has loans secured by mortgages, subject to non-recourse finance arrangements, in a UK long-term business subsidiary and in two Dutch subsidiaries. Details of the relevant transactions are as follows: (a) United Kingdom In a United Kingdom long-term business subsidiary (NUER), the beneficial interest in certain portfolios of lifetime mortgages has been transferred to five special purpose securitisation companies, Equity Release Funding (No 1) plc (ERF1), Equity Release Funding (No 2) plc (ERF2), Equity Release Funding (No 3) plc (ERF3), ERF Trustee (No 4) Limited (ERF4T) held on trust for the benefit of Equity Release Funding (No. 4) plc (ERF4), and ERF Trustee (No 5) Limited (ERF5T) held on trust for the benefit of Equity Release Funding (No. 5) plc (ERF5) (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 note holders, loan providers and other third parties in the priority of payments. No gain or loss was recognised on the transfers to ERF1, ERF3 and ERF5T, and gains of £5 million and £9 million were recognised on the transfers to ERF2 and ERF4T respectively. The purchases of the mortgages were funded by the issue of fixed rate, floating rate and index-linked notes by the ERF companies.
NUER has purchased subordinated notes and granted subordinated loans to some of the ERF companies. These have been offset against the borrowings of the ERF companies in the consolidated balance sheet.
(b) Netherlands In two Dutch subsidiaries, Delta Lloyd Levensverzekering NV (DLL) and Amstelhuys NV (AMS), the principal benefits of certain portfolios of mortgage loans have been transferred to a number of special purpose securitisation companies, Arena 2000 - I BV, Arena 2001 - I BV, Arena 2002 - I BV, Arena 2003 - I BV, Arena 2004 - I BV, Arena 2004 - II BV, Arena 2005 - I BV and DARTS Finance BV (the securitisation companies), which were funded primarily through the issue of fixed rate, floating rate and index-linked notes. No gains or losses were recognised on these transfers.
23 – Financial investments (a) Financial investments comprise: At fair value through profit or loss
Derivative financial instruments 1,003 (536) – 467 Deposits with credit institutions – 165 – 165 Specialised investment companies (see note 18c) – 9,783 – 9,783 Minority holdings in property management undertakings (see note 17b) – 499 – 499 *The loss related to AFS investments recognised in equity was £65 million (2004: £64 million loss) and the amount recognised in the income statement on disposals was £154 million (2004: £322 million gain). (See notes 5 and 32).
Deposits with credit institutions – 1,699 2 1,701 Specialised investment companies (see note 18c) – 7,942 – 7,942 Minority holdings in property management undertakings (see note 17b) – 410 – 410 *The loss related to AFS investments recognised in equity was £65 million (2004: £64 million loss) and the amount recognised in the income statement on disposals was £154 million (2004: £322 million gain). (See notes 5 and 32).
Derivative financial instruments – 617 – 617 Deposits with credit institutions 1,701 – – 1,701 Specialised investment companies 7,942 – – 7,942 Minority holdings in property management undertakings 410 – – 410
(c) Other information on investments (i) In addition to the investments in associates detailed in note 18, 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 nil (2004: 20.13%) is held directly and a further nil (2004: 11.74%) is held in segregated policyholders 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 instruments in these financial statements.
(d) Impairments The accumulated impairment charges on available for sale investments are as follows: Debt Equity Other securities securities investments Total £m £m £m £m
Debt Equity Other securities securities investments Total £m £m £m £m
Included within financial investments are £461 million (2004: £240 million) of debt securities and other fixed income securities which have been sold under stock repurchase arrangements. The obligations arising under these arrangements are included in other financial liabilities (see note 44).
Less: Amounts classified as held for sale – (40) (40) –
Deferred acquisition costs on long-term business are generally recoverable in more than one year whilst such costs on general insurance and health business are generally recoverable within one year after the balance sheet date.
Carrying amount at 1 January 2,709 2,872 Acquisition costs deferred during the year 3,108 2,807
(c) Other assets include £472 million (2004: £369 million) that is expected to be recovered more than one year after the balance sheet date.