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With 59,000 people working for Aviva around the world, a strong group brand – with shared values of integrity, performance, progressiveness and teamwork – helps unite us as a single team.
Worldwide business mix* by sector 1 – General insurance 28% 2 – Long-term savings# 72%
The year 2002 was a difficult one for investors. Returns were mostly negative, and often dramatically so. Aviva shareholders have also seen our share price decline. Our policyholders have experienced both a shrinking investment and reduced bonuses. There is nothing we can do about world equity markets. What we can do, however, is try to be better than the market and perform above the level of our competitors. It seems to me that we have succeeded in that ambition.
In life and pensions, we have grown to be the number one provider to Europe, having been a medium-sized company only four years ago. In general insurance, we have outperformed the market and few of our competitors in the world have been more profitable.
We have further streamlined and focused our business during the year. The biggest sale was of our Australian and New Zealand general insurance operations, following an unsolicited offer at a price the board felt compelled to accept. We also exited markets where we were sub-scale.
In life and pensions, we have grown to be the number one provider to Europe, having been a medium-sized company only four years ago.
Group strategy 1 To grow our long-term savings business aggressively and profitably.
We obviously upset many of our shareholders and the market when we announced our proposal last year to reduce our dividend. The decision was the correct course of action necessary to retain capital to take advantage of profitable growth opportunities. The subsequent fall in the equity markets has created a strain on our capital position and increased the importance of striking the right balance between retention of funds to grow our long-term savings business and dividend payments.
Our regulators have on several occasions criticised our industry in an aggressive fashion. I think that should in future be done in a more discriminating way, as there are examples of good behaviour. The buying public should not be made to mistrust a whole industry when that is unjustified.
It is in difficult times that we see excellent opportunities to improve further our leadership position.
Aviva rebased FTSE Eurotop 300 Life rebased to 100 FTSE Eurotop 300 rebased to 100
*With reference to premium income from continuing operations. #Including health premium income.
• Continental European business now accounts for 43% of worldwide life and pension sales and 49% of life achieved operating profit.
• Morley launched first US mutual funds, building capability in the North American market.
• Sold general insurance businesses in Australia, New Zealand and Spain and broker distribution business in France.
• UK expense ratio of 10.4% one of the lowest among major UK insurers.
• Improving customer service in Canada, including introduction of Total Incident Management concept from UK.
• Ongoing investment in market-leading initiatives including our pioneering Pay As You Drive™ motor insurance project.
£208bn Assets under management £1,028m Investment sales £7.5bn New external mandates in the UK
Yet we achieved a robust set of results. We took clear-sighted decisions to ensure we remain financially strong and one of the best-positioned companies in the market. Aviva is a resilient and disciplined business with excellent prospects.
Group results The testing economic environment inevitably had an impact on our group financial performance. Under the circumstances, our pre-tax operating profit† of £1,798 million (2001: £1,983 million) was a good result.
Our general insurance business has been realigned over the past three years through a clear and consistent strategy of concentrating on more stable personal and selected commercial lines and exiting the more volatile business. This helped us achieve an excellent operating profit† of £959 million (2001: £924 million). As a measure of how efficiently our business performs, we achieved a combined operating ratio (COR)† of 101.4%, which is better than our group target.
†From continuing and discontinued operations. #Restated for the effect of Financial Reporting Standard 19 ‘’Deferred Tax’’.
Investing for future growth With long-term savings business generating 72% of our total premiums, and 92% of our new business sales coming from Europe, we regard the development of our European long-term savings operations as the cornerstone of our future success.
There is significant scope for our business to grow further. Governments across Europe are introducing reforms to encourage people to make increased provision for their retirement and reduce the pressure on state schemes. In times of financial uncertainty, customers will seek the reassurance and expertise of trusted brands like ours. We can provide savings products that offer a degree of capital security or a fixed rate of return for investors wary of falling share prices. We are also confident that demand for equity-backed investments will improve as the markets recover in the medium to long term.
Being financially flexible enables us to pursue attractive opportunities for the profitable development of our business. We accepted an unsolicited offer in October 2002 to sell our general insurance businesses in Australia and New Zealand for £651 million. This was an excellent deal for Aviva’s shareholders, with the price more than twice the net asset value of the businesses.
Another important development is our new name, Aviva. Our trading operations now have the strength of an international financial services brand behind them. We have introduced the new Aviva identity very cost-efficiently, with the rebranding in each country being paid for largely from existing marketing budgets.
Short-term outlook In common with the rest of the insurance and financial services industry, we face considerable challenges in the short term. Investment markets continue to be turbulent and investors are discouraged by financial uncertainty.
The tough environment will test us in many respects throughout 2003. Even so, I am driving the business hard, using our experience, size and expertise to provide the right products and services for our customers in each market.
†With reference to premium income from continuing operations. General insurance Total long-term business including health
Our comparative success in the face of continuing market turbulence is reflected in worldwide life and pensions new business sales being maintained at £13.6 billion (2001: £13.5 billion). This included a further increase in continental European business to £5.8 billion (2001: £5.5 billion), which now accounts for 43% of our total life and pensions sales and 49% of life achieved operating profit.
These figures are a good achievement at a time when encouraging people to invest for the future has been difficult. We benefited from our developing bancassurance agreements, notably in the UK, Spain and Italy, with worldwide total bancassurance sales up 50% at £3.0 billion (2001: £2.0 billion).
We delivered a robust life achieved operating profit of £1,524 million (2001: £1,665 million) after strengthening our annuity reserves in the UK.
Our UK business seeks to achieve its strategic objective of strong, profitable growth by providing a comprehensive range of life insurance, pensions, savings and investment products through a wide choice of distribution channels.
Independent financial advisers (IFAs) continue to represent the dominant source of business, providing around 70% of our sales. We also have a salaried direct sales force, a telesales operation, an internet service and partnerships with The Royal Bank of Scotland Group (RBSG), Tesco Personal Finance and 18 building societies.
We are operating in a very competitive market facing significant regulatory change at a time when uncertain investment returns have severely weakened consumer confidence. In this context, total new business sales of £7.4 billion (2001: £8.1 billion) was a good result, and demonstrated the underlying strength of our business.
Overall, pension sales were higher at £2.7 billion (2001: £2.5 billion), including stakeholder sales of £651 million (2001: £282 million). We are developing this strong platform by seeking to improve our margins on stakeholder business through reduced commissions and a focus on large group schemes for new business.
Our market-leading equity release business, which enables customers to free up capital tied up in their homes, continued its strong growth with sales up 74% to £361 million (2001: £208 million).
We need to be more efficient in this changing world. We continue to cut costs and deliver efficiency improvements. For instance, we were the first UK life insurer to offer IFAs the choice of handling term assurance electronically both online and offline. We have also signed an innovative agreement with Misys, the leading IFA network, to deliver full e-trading to the IFA industry through the AssureWeb portal. The accelerating move towards e-only products will benefit providers, IFAs and customers through a more streamlined policy administration process.
France Aviva France is the group’s second-largest long-term savings business. We have a top-10 market position and are ranked among the top five traditional insurers, with some 1.5 million customers.
Ireland Hibernian is a top-five long-term savings provider in Ireland with a market share of over 11%. Our business strategy is to seek profitable growth through brokers, tied agents and financial institutions such as banks and building societies.
We further expanded our bancassurance network in 2002 when, together with UniCredito Italiano, we agreed to form a joint venture with Banca Popolare Commercia e Industria, a bank with some 1.15 million customers. Sales from this partnership are expected to flow through during 2003.
Together with our existing arrangements with UniCredito, Banca Popolare di Lodi and Banca delle Marche, our bancassurance reach now extends through 2,500 branches to four million customers in Italy.
The integration of our activities in Belgium following the acquisition of Bank Nagelmackers in late 2001 has established a retail banking network which sells Delta Lloyd life products to private clients. Consequently our Belgian life business, which operates under the Delta Lloyd brand, is now performing particularly well.We are also investing in South East Asia, India and China, which have great potential for future growth.
We are also investing in complementary distribution channels, including financial advisers, brokers and agents. Aviva Vida, our broker and agency company, continues to develop a specialist sales force. Pension reforms, tax incentives and increasing public awareness of the need to save offer considerable potential for further growth in this developing market.
Other Europe In Germany we achieved good growth as sales of group and private pensions boosted total new business premiums by 30% to £154 million (2001: £117 million).
Total new business sales from our other operations in Central and Eastern Europe amounted to £317 million (2001: £447 million), reflecting tough economic conditions in the region. Opportunities will grow with the expansion of the European Union in 2004. In anticipation, we are strengthening our direct sales force networks in these countries.
In June 2002 we launched a life business in India with Dabur Group as a joint venture in which we have a 26% share. We are developing a high-quality direct sales force, complemented by bancassurance partnerships with ABN AMRO, American Express, Lakshmi Vilas Bank and Canara Bank.
China is also a market with enormous long-term potential. We obtained a licence towards the end of 2002 to write life insurance in China, and in January 2003 started our new joint venture operation in Guangzhou with a major state-owned company, China National Cereals, Oils & Foodstuffs Import & Export Corporation (COFCO). We have completed our first sales through Aviva COFCO and will look to establish further branch offices as the business grows.
UK Morley Fund Management is our institutional fund management operation, with assets of over £100 billion. We cover all the major asset classes and specialise in actively managed funds.
Our biggest asset is the combined experience and talent of our team of over 190 investment professionals. We continue to use this experience to create better ways to manage our business, including improved investment processes, restructured funds, changes in asset allocation and managing appropriate levels of risk.
Morley won a number of external accolades during the year, including fund manager of the year in the Pensions Week Awards, and achieved top ratings from Standard & Poor’s for our emerging markets fund management team. We were also awarded specialist manager of the year in the UK Pension Awards, in recognition of our SRI expertise.
Our retail products, such as unit trusts and individual savings accounts (Isas), are marketed under our Norwich Union brand. Sales of £556 million (2001: £816 million) reflected caution among private investors. Continuing investment in our retail business resulted in an operating loss of £16 million (2001: £32 million). Norwich Union was named best UK insurance fund manager in Standard & Poor’s UK Investment Funds Performance Awards for the second consecutive year.
We have £58 billion of assets under management, most of which are invested on behalf of our own operations. Despite the difficult markets, we recorded an operating profit of £11 million (2001: £12 million).
Our Belgian operation Nagelmackers was voted Belgium’s best fund manager for the second successive year by Belgium’s leading financial daily, de Financieel-Economische Tijd.
Ireland Hibernian is Ireland’s fourth-largest fund manager, with £5.9 billion of assets under management and a market share of nearly 10%. During the year, in association with Morley, we launched Ireland’s first SRI funds.
Singapore We launched Navigator Asia in Singapore in October 2002 and plan to roll out our online Navigator platform more widely across the region starting in 2003. We are pleased with our selection as the first investment administrator to be given access to Singapore’s £20 billion Central Provident Fund Investment Scheme. This means we can provide our services to a comprehensive social security savings scheme with a pool of three million investors.
Operating review: General insurance 16 Aviva plc Annual report + accounts 2002
Our expense ratio in 2002 – broadly a measure of costs excluding commission as a percentage of premiums – was 10.4% (2001: 10.5%), one of the lowest among major UK insurers. The key to our expense management is balancing low costs with high levels of service, while allowing us to invest in new technology to maintain our leading position in the market. For example, we announced in early 2003 our plans to develop a call and claims processing operation in India. This investment will help us maintain a leadership position in our markets and high levels of customer service 24 hours a day.
Customers increasingly look for individually tailored products and services. We are developing a number of initiatives to meet this growing demand to give customers an even fairer price based on their particular circumstances. We continue to lobby the Government for improved flood defences in the UK, and our unique digital map covering most of mainland Britain will help us to calculate flood risks more accurately for individual policies.
Overview Our general insurance strategy is to create strong market positions focused on personal lines and selected commercial insurance. By targeting these sectors, we have a lower-risk business capable of producing a steadier stream of profits which we can use to support growth in our long-term savings operations.
Market conditions across our businesses are becoming more difficult. This is particularly true in personal lines, as rating competition intensifies. However, we will not chase sales volume at the expense of profit. Our clear strategy, combined with scale and presence in our chosen markets, positions us to continue to produce excellent returns for our shareholders.
In May 2002 we sold CGU Courtage, our broker distribution business, for £189 million, and withdrew from the aviation and space insurance pools. Our French business now concentrates mainly on personal and small business insurance for 1.2 million clients.
During the year we began work on a common claims platform for Aviva Assurances and Eurofil. This shared approach offers the opportunity for improved operational efficiency and management of costs, coupled with better customer service.
Ireland Hibernian is Ireland’s largest general insurer, with a 24% market share. We provide cover for all aspects of motor, home and small commercial insurance through brokers and corporate partnerships, by telephone, or at one of our high street branches. Operating profit was £44 million (2001: £48 million) on net premiums of £377 million (2001: £456 million).
A number of steps have been taken to address issues affecting the insurance market in Ireland. For example, the Irish Government has set up a personal injuries assessment board to ensure greater consistency in compensation awards, reduce litigation and restrict rising insurance costs. For our part, we continue to offer reduced car insurance premiums to inexperienced drivers who successfully complete the advanced tuition provided through our highly successful Ignition training programme. We have also introduced a new web-based software package, free to all Hibernian business customers. It enables companies to assess their individual risks and needs, and qualify for a reduction in their premiums.
Healthcare insurance provides over half our premium income, and we aim to become the best online health insurer in the Netherlands. In an effort to improve our service for customers, we are the only Dutch insurer to limit the wait for all hospital operations to a maximum of two weeks.
A new initiative aimed at the self-employed and small to medium-sized businesses is our sick leave policy, which provides income protection during the first year of illness. Our complementary sick leave management programme helps employees return to work as soon as they are able.
Other Europe In July we sold our Spanish general insurance business and the brand name Plus Ultra for £152 million. We also agreed the sale of a number of other small general insurance businesses in Portugal, Switzerland, Greece and Malta. These operations did not offer the potential for market-leading positions or superior returns.
Creating better processes, pricing strategies and customer service are the three main pillars of our general insurance strategy in Canada. We aim to have a strong position in each of our regional markets and are committed to profitable growth.
Net premiums written rose to £1,009 million (2001: £878 million), together with an operating profit of £80 million (2001: £72 million).
Asia Our Asian general insurance operations continued to perform strongly. We were voted best overall insurer for the third successive time in the Singapore International Insurance Brokers’ Awards.
Australia and New Zealand In October 2002 we agreed to sell our general insurance businesses in Australia and New Zealand for £651 million. The price was equivalent to 6% of our market capitalisation; by contrast, these operations accounted for just 2% of our group premiums and profit. The results of these businesses are shown as discontinued operations.
People This year, for the first time, our CSR report covers performance in the areas of workforce, human rights and health and safety according to the parameters of the Gyllenhammar report. These guidelines were the outcome of a group convened by the European Commission under our own chairman, Pehr Gyllenhammar.
Initiatives designed to benefit our employees include the involvement of hundreds of call centre staff in the UK in a work-life balance project sponsored by the Department of Trade and Industry to test a range of flexible working arrangements. Our Dutch business, Delta Lloyd, won the diversity award from the Confederation of Netherlands Industry and Employers (VNO-NCW) for encouraging female staff to take up senior positions.
In France we direct our charity support through the Aviva Foundation, which works mainly with children and the elderly. We raised £128,800 for the United Way in Canada, a charity dedicated to building caring communities, and took part in fundraising for the Canadian Paraplegic Association. In Australia we launched a Guiding Star Workplace Giving programme to support six major charities.
Customer service Our businesses strive to provide our customers with a service hallmarked by integrity, quality and care. In the UK, innovative products such as Pay As You Drive™ insurance and a revolutionary digital flood map to help calculate fairer premiums are examples of how our core businesses help to meet our CSR goals.
Substantial progress has been made in Aviva’s corporate social responsibility (CSR) programme over the past year. We issued our first CSR report in April 2002, having produced an environment report in each of the previous three years. In 2002, our programme covered 93% of the group.
In addition, we were ranked the top global insurer for CSR performance by Innovest, the investment research advisers and ratings agency, in December 2002. The report highlighted that Aviva was setting the standard for best practice in nearly every aspect of CSR in the insurance industry.
Public bodies Aviva has helped to define CSR practice in the UK through our chairmanship of the Forge II project, a public/private partnership which in November 2002 published guidance for the management and reporting of CSR by UK financial services organisations.
Further details More CSR information can be found in the Directors’ report on page 32. Full details of our activities, including our annual CSR report, are on our website at www.aviva.com/csr
Key financial objectives The group strategy is underpinned by the following key financial objectives: • Delivering an after-tax operating profit, including life achieved profit, equivalent to a 10% net real return on opening equity capital; • Maintaining a dividend cover between 1.5 and 2.0 times based on statutory after-tax operating profits; and
• Achieving a combined operating ratio, on general insurance business, of 102% across the underwriting cycle.
The directors believe that profit measured on an achieved profits basis more closely reflects the performance of a long-term savings operation than that measured on a modified statutory basis. Accordingly, these financial statements include supplementary information on achieved profits reporting on pages 92 to 98 and the group’s incentive schemes and internal management reporting are aligned to that basis.
Operating profit before tax, including life achieved profit, is a primary measure used by the group to assess its financial performance and is the measure used to evaluate a shareholders’ return on equity capital. It is based upon longer term investment returns and it excludes the amortisation of goodwill and exceptional items.
The modified statutory solvency basis of reporting is required by statute. The statutory operating profit excludes amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items. Dividend cover is measured as statutory operating profit after tax, minorities and preference dividends, expressed as a multiple of ordinary dividends for the year.
Continuing operations 1,720 1,935 Discontinued operations – Australia and New Zealand general insurance 78 69 – US general insurance – (21)
Operating profit before amortisation of goodwill and exceptional items, after tax, attributable to equity shareholders 1,161 1,249
Operating earnings** per share – achieved profit basis 51.5p 55.5p – modified statutory solvency basis 38.0p 42.6p *Restated for the effect of Financial Reporting Standard 19 “Deferred Tax”. **Operating profit before amortisation of goodwill and exceptional items after-tax, attributable to equity shareholders in respect of continuing and discontinued operations. The modified statutory solvency operating earnings is also stated before the amortisation of acquired additional value of in-force long-term business.
The group’s operating profit before tax from continuing and discontinued operations, including life achieved profit, was 10% lower at £1,798 million (2001: £1,983 million).
The proceeds from all the disposals initiated or completed during 2002 amounted to over £1.0 billion. With the exception of Australia and New Zealand, the remaining disposals are less material in the context of the group, and accordingly the results from these businesses have been treated as arising from continuing operations.
(Loss)/profit before tax: – achieved profit basis (2,463) (546) – modified statutory basis (282) 514
Dividends per share 23.0p 38.0p *Restated for the effect of Financial Reporting Standard 19 “Deferred Tax”.
Included in both the non-life and life investment variances and economic assumption changes are a number of one-off impacts. These relate to the impact of a changed UK with-profit asset mix, a change in the assumed future with-profit bonus rate profiles, some adverse tax effects following anticipated changes in UK Inland Revenue legislation and prudent recognition of deferred tax assets. These one-off effects together amounted to £0.5 billion, on a post tax basis.
The directors establish the appropriate level for dividends with reference to the longer-term trend in business performance, keeping in mind the need to retain earnings to fund future growth. The profit for the financial year reflects the volatility of the financial markets and is not, therefore, directly comparable to the dividends paid by the group. The total ordinary dividends for 2002 were £519 million (2001: £857 million) representing 23 pence net per share (2001: 38 pence net per share).
Long-term savings On an annual premium equivalent basis (the sum of new regular premiums and one tenth of new single premiums) total new business sales increased by 1% in 2002 to £2,488 million. This includes a substantial and growing contribution from our expanding bancassurance operations, particularly in Spain and Italy, which accounted for 21% of total sales in 2002. The life and pensions products contributed £2,373 million, a growth of some 2% over last year with sales in our continental European operations contributing 43% of total life and pensions new business sales.
Our UK life and pensions business reported sales totalling £1,231 million (2001: £1,269 million) on an annual equivalent basis with an enhanced contribution from our alliance with The Royal Bank of Scotland Group. Sales through the influential IFA channel on an APE basis declined by 9% during 2002, reflecting investor caution during the worst bear market for over a quarter of a century.
The decline in equity-related business contributed to a sales slowdown in France and Ireland.
1. Excludes retail investment sales and is stated before the effect of solvency margin.
On a modified statutory basis, the profit from long-term business operations before tax was £1,022 million (2001: £1,194 million). The year on year reduction principally reflects falling annual and final bonus rates to our with-profit policyholders and lower expected investment returns in the Netherlands. On this basis of profit measurement, the impact of improved life expectancy on our UK annuity portfolio has been offset by the impact of a number of other adjustments including items arising out of our normal year end reserving reviews.
General Insurance Worldwide general insurance net premium income, from continuing operations, amounted to £7,805 million (2001: £7,850 million) reflecting a rigorous approach to underwriting and pricing and a consequent adverse impact on policy volumes. Including the contribution from the disposed general insurance operations in Australia and New Zealand and the US general insurance operation disposed in June 2001, net premium income decreased to £8,497 million (2001: £9,536 million).
Netherlands (including Belgium and Luxembourg) 105 104 Other Europe 102 105
New business contribution amounted to £578 million for the year with strong growth in Italy, Spain and our International operations.
In the UK, an increasing proportion of new business relates to products with a much tighter pricing structure, most notably in the pensions sector. The reduction in the UK new business contribution is in part attributed to the switch in mix towards these products. The effect of changes in business mix and lower sales volumes is reflected in reduced new business contribution in both France and the Netherlands.
New business margins in our rapidly growing operations in Italy and Spain remain strong as business expansion secures incremental economies of scale. The new business margins of our more developed businesses in the UK, France and the Netherlands are lower compared to 2001, due to strong competition in the respective marketplaces.
In 2002 there have been a number of changes to operational assumptions, the most significant being the adverse impact
25 Aviva plc Annual report + accounts 2002 resulted in an improved COR of 102% (2001: 107%). In the Netherlands profitability was lower as a result of the storms in October and higher project spend on a new shared service centre.
Netherlands (including Belgium and Luxembourg) 13 19 Other Europe 49 41
Normalised investment returns have declined during 2002 as a result of general insurance disposals over the last two years, falling values of investments and changes to the asset mix from equities to fixed income securities. The effect of lower investment values at the end of 2002 is expected, all other things being equal and assuming unchanged longer term investment rates of return, to have an even more pronounced effect in 2003 reducing normalised investment returns by an estimated £125 million, based on a fall of £1,754 million in equity and property portfolios.
Fund Management Falling market values of equity investments have led to depressed fund management fees across the Group’s fund management operations. The notable exception was France where the majority of the investment portfolio is held in fixed income securities.
Non-insurance The Group’s non-insurance businesses suffered a loss of £69 million (2001: profit of £7 million). This decline primarily reflects the costs of upgrading our unit-pricing system and costs associated with the reorganisation of a number of IFA service centres borne by the UK life service company.
Total capital employed 17,326 19,495 *Restated for the effect of Financial Reporting Standard 19 “Deferred Tax”.
In addition to its external funding sources, the group has a number of internal debt arrangements in place. These have allowed the assets supporting technical liabilities to be invested into the pool of central capital for use across the group. They have also enabled the shareholders to deploy cash from some parts of the business to others in order to fund growth. Although intra-group loans in nature, they are counted as part of the capital base for the purpose of capital management. All internal loans have been negotiated at market rates and are appropriately serviced. Internal debt increased in 2002 as a result of the formalisation of intra group arrangements, offset by the use of corporate assets to satisfy the third instalment of the Berkshire Hathaway premium of £0.5 billion.
Return on capital employed Progress towards the group’s 10% net real return target has been frustrated this year by depressed profitability on long-term savings and the reduced profitability of our Netherlands general insurance business.
Opening Normalised equity Return on after-tax capital capital Return on return restated* annualised capital
General insurance, health, corporate and other business 2,603 2,481 1,115 (292) 5,907 6,734
External debt (2,053) (2,651) Internal debt (3,671) (3,284) Subordinated debt (1,190) (1,157)
Our exposure to equities has reduced from £4.9 billion at 31 December 2001 to £3.1 billion, which represents 18% of our total capital employed. This reduction reflects the divestment of businesses during the year, the impact of falling markets and the reduction of equity holdings.
Aviva group had an estimated excess regulatory capital, as measured on the new EU Directive, of some £0.7 billion at 31 December 2002 (2001: £1.7 billion). 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 the group’s UK life funds.
The combined businesses of the CGUII group and NUI have strong solvency positions. On an aggregate basis the estimated excess solvency margin (representing the regulatory value of excess available assets over the required minimum margin) was £2.3 billion at end 2002 after covering the required minimum margin of £3.2 billion. The solvency margin of the combined regulated group is resilient to equity market movements. We estimate that the solvency can withstand further significant market falls from end 2002 levels before the solvency cover is reduced to 1.0 times.
Furthermore, as CGUII also indirectly holds the majority of our overseas life and non-life businesses its regulatory solvency strength is available to support these businesses. Another measure that the group uses to assess its capital requirements is risk-based capital. As at 31 December 2002 the risk-based capital requirement of our worldwide general insurance businesses was £3.1 billion in comparison to £4.0 billion of capital employed by these businesses after deducting goodwill and adding back the claims equalisation reserve.The combined general insurance businesses of CGUII and NUI hold total regulated available assets of £5.5 billion. After deducting the risk-based capital for the general insurance businesses of CGUII and NUI of £3.1 billion and, adding back the claims equalisation reserve of £0.3 billion, the remaining available capital of £2.7 billion is available to fund future UK and overseas business growth.
Reinsurance is actively used to limit risk and capital requirements in the inherently volatile general insurance business. In 2002, reinsurance retentions for catastrophes were £100 million. On renewal of the contract at 1 January 2003, reinsurance retentions for catastrophes at a group level was increased to £250 million for a single event covering more than one country or a series of events throughout the calendar year. This cover protects the net exposures of our individual business units who have their own reinsurance in place.
Pehr Gyllenhammar (67) Chairman Appointed to the board in 1997, becoming chairman in 1998. Former executive chairman of AB Volvo. Currently a senior adviser to Lazard Freres & Co. LLC, chairman of the Trustees of Reuters Founders Share Company Limited and of Swedish Ships Mortgage Bank and a non-executive director of Lagardère SCA. Chairman of the nomination committee.
Richard Harvey FIA (52) Group Chief Executive Appointed group chief executive in April 2001, having been previously appointed to the board as deputy group chief executive in May 2000. Joined Norwich Union in 1992, holding senior positions in New Zealand and the United Kingdom before joining the Norwich Union board in 1995 and becoming group chief executive of Norwich Union in 1998. Member of the nomination committee.
Guillermo de la Dehesa (61) Non-executive director Appointed to the board in May 2000. Joined the board of Norwich Union as a non-executive director in 1999. Former chief executive and director of Banco Pastor. A former deputy governor of the International Monetary Fund and the World Trade Bank and a former deputy general manager of the Bank of Spain and Secretary of State of Finance in Spain. Currently non-executive chairman of Aviva’s operations in Spain, non-executive vice-chairman of Goldman Sachs Europe and a director of Campofrio, Unión Eléctrica Fenosa, Bank Santander Central Hispano and Telepizza. Member of the audit and nomination committees.
Patrick Snowball (52) Executive director Appointed to the board in March 2001 as chief executive of Norwich Union Insurance (Aviva’s general insurance operation in the UK). He was previously a director of Norwich Union, appointed in October 1999, having joined that company in 1989.
Derek Stevens (64) Non-executive director Appointed to the board in 1995. A former director and chief financial officer of British Airways Plc, a former finance director of TSB Group plc and a former chairman of the Trustees of British Airways Pension Scheme. Currently chairman of the Airline Group Limited, a director of NATS Holdings Limited and a member of the Council of the Institute of Education at the University of London. Chairman of the audit committee and chairman of Aviva Staff Pension Trustee Limited.
Group Company Secretary 29 Aviva plc Annual report + accounts 2002
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 2002.
Annual General Meeting A separate document accompanying the Annual report and accounts contains the notice convening the Annual General Meeting and a description of the business to be conducted thereat. The Annual General Meeting of the Company will be held on 7 May 2003 at The Barbican Centre, Silk Street, London EC2Y 8DS at 11.00am.
Change of name Following shareholders’ approval at last year’s Annual General Meeting, the Company changed its name from CGNU plc to Aviva plc on 1 July 2002.
Principal activities Aviva plc is the holding company of the Aviva Group of companies, which transacts life assurance (other than industrial life) and long-term savings business, fund management, and all classes of general insurance through its subsidiaries, associates and branches in the United Kingdom, continental Europe and Ireland, North America, 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. Details of material acquisitions and disposals made by the Group during the year are contained on pages 67 to 69.
Results The Group results for the year are shown in the Consolidated profit and loss account on pages 47 to 49.
The final dividend for 2002 will be paid on 16 May 2003 to all holders of ordinary shares on the Register of Members at the close of business on 28 March 2003. The Company’s Dividend Reinvestment Plan will be available to shareholders in respect of the payment of the final dividend. In addition, a Transcontinental Account Payment Service will be available to shareholders residing in certain participating jurisdictions. Further details of these arrangements can be found within the shareholder information on page 100.
The following changes to directors’ interests during the period 1 January 2003 to 25 February 2003 have been reported to the Company. They relate to shares acquired through the reinvestment of dividends in Personal Equity Plans and/or Individual Savings Accounts, and through the acquisition of Partnership Shares by the Trustee of the Aviva All Employee Share Ownership Plan.
Through their participation, staff can help to shape future employment developments. In addition, regular discussions take place with the staff representative bodies.
The Company encourages and promotes employee development. Support includes the building of relevant competencies, encouraging staff to gain appropriate professional qualifications and assistance with wider personal development.
In light of the guidelines of the Association of British Insurers, the governance of Aviva’s CSR programme is subject to a fixed schedule. The Board reviews progress and plans on an annual basis, whilst the Executive Committee regularly reviews progress throughout the year. High level progress is reviewed internally by a CSR Steering Group which meets four times each year and which comprises senior executives from principal businesses.
Detailed external review is undertaken each year with participants drawn from various parts of the business together with representatives from non-governmental organisations. This is the most important CSR policy review group for Aviva. CSR risks and opportunities are assessed as part of the review process. Aviva’s CSR programme is externally assured every two years.
Health and Safety The health and safety of staff is a priority and is reviewed at regular intervals. Each business unit 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 was £5.9 million.
In 2002, the Group’s community investment in the United Kingdom, as measured using the Business in the Community’s benchmarking template, totalled £4.9 million of which £2.3 million (2001: £1.3 million) was direct donations to charitable organisations.
At the 2002 Annual General Meeting, shareholders passed a resolution authorising the Board to make expenditure, up to an aggregate limit of £100,000, on activities which fall under the Political Parties, Elections and Referendums Act (PPER). This piece of legislation introduced a very broad definition of EU political expenditure in the European Union, such that some of the activities undertaken throughout the Group’s businesses in the EU could now fall within that definition.
Auditor In accordance with Section 384 of the Companies Act 1985, a resolution is to be proposed at the forthcoming Annual General Meeting for the reappointment of Ernst & Young LLP as auditor of the Company.
Registered Office: St. Helen’s 1 Undershaft, London EC3P 3DQ Registered in England No. 2468686
During 2003 we will be reviewing our corporate governance arrangements in the light of changes proposed to the Combined Code following the recent reports by Higgs and Smith.
The Board of Directors The Board has eight scheduled meetings each year and meets more frequently as required. It currently comprises seven non-executive directors, excluding the Chairman, and six executive directors. Each non-executive director serves for a fixed term of three years, which may be renewed by mutual agreement, and there is no limit to the number of terms a director may serve. The Company’s articles of association require that, following appointment by the Board, directors must submit themselves for election by shareholders at the following Annual General Meeting.
The directors bring to the Board a wide range of experience and skills and participate fully in decisions on the key issues facing the Group. To ensure that the non-executive directors are able to exercise an independence of judgement, the Nomination Committee undertakes an annual review of directors’ interests in which all potential or perceived conflicts and issues relevant to their independence are considered. Based on the December 2002 review, the Board considers that all of the current non-executive directors and the Chairman are independent of management and free of any relationship that could materially interfere with the exercise of their independent judgement.
Directors receive appropriate training when joining the Board and are required to commit to continue their personal development through attendance and participation on courses, seminars, workshops and lectures on issues relevant to the Group’s business.
The duties of the Board and its committees are set out clearly in formal terms of reference, which are reviewed annually, stating the items specifically reserved for decision by the Board, which include the approval of the Group’s strategy and business plans, acquisitions and disposals outside delegated limits, significant financial decisions and approval of key business policies. The said terms of reference contain a procedure whereby directors may, in the furtherance of their duties, seek independent professional advice at the Company’s expense if considered appropriate. Directors are fully briefed in advance of Board meetings on all matters to be discussed and at the Board meetings directors receive regular reports on the Group’s financial position, key areas of the Group’s business operations and other material issues.
The Group Company Secretary is responsible for ensuring that Board procedures are followed and all directors have access to his advice and services.
Remuneration Committee Details of the Remuneration Committee, including its membership and duties are set out in the Directors’ remuneration report on page 35.
The Committee deals with the constitution of the Board and considers the balance of skills and experience of the directors. It oversees the appointments and reappointments to the Board, monitors potential conflicts of interests and reviews annually the independence of the non-executive directors. The Committee makes recommendations to the Board as appropriate.
Chairman’s Committee The Chairman’s Committee comprises the following non-executive directors, appointed by the Board: Pehr Gyllenhammar (Chairman) George Paul Derek Stevens Elizabeth Vallance
The main duties of this Committee are to review the performance of the Group Chief Executive and the other executive directors, and the succession planning for this group of management. The Committee makes recommendations to the Board as appropriate.
Information Technology Strategy Committee This Committee comprises the following members appointed by the Board: André Villeneuve (Chairman) Wim Dik Pehr Gyllenhammar Richard Harvey Sven Skarendahl* Philip Twyman *Sven Skarendahl is an independent consultant. He is not a director of the Company but has been appointed by the Board to this Committee due to his broad experience in technology and internet-based companies.
The Committee advises the Board on the Group’s information technology and e-commerce strategies.
Relations with shareholders The Company places considerable importance on communications with shareholders and responds to them on a wide range of issues. It has an ongoing programme of dialogue and meetings between the executive directors and its major institutional shareholders, where a wide range of relevant issues including strategy, performance, management and governance are discussed within the constraints of the information already known to the market. As and when considered appropriate, the Company seeks the views of major investors, particularly on remuneration issues, both directly and through consultation with the Association of British Insurers.
Morley operates a Corporate Governance and Voting Policy in respect of the voting rights it holds in UK companies. The policy also extends to cover social, environmental and ethical issues. Details of how voting discretion has been used on any particular issue are available to clients upon request. In addition, Morley engages with the management of the companies in which it invests on contentious matters, and its policy is applied flexibly after careful consideration of all relevant information.
Appointment of the auditor Ernst & Young LLP was appointed as auditor of the Company in 2001 following a competitive bid process between the firms which had acted as auditors of Norwich Union and CGU prior to their merger in 2000. During the current year, Ernst & Young’s audit signing partner will change as part of a rotation process.
The Company has established a policy aimed at safeguarding and supporting the independence of the auditor by avoiding conflicts of interests. The policy sets out the approach to be taken by the Group when using the services of the auditor and distinguishes between those matters where the Company requires an independent view, such as audit and assurance work, from other consultancy work. The policy recognises that there may be a small number of areas where, for pragmatic or historical reasons, it may be in the Company’s interests to use the auditor for other work but such appointments are subject to a clear and transparent approval process.
An analysis of the fees paid to the auditor in 2002 is set out in note 13 on page 64.
The Group’s risk management and control framework is designed to support the identification, assessment, monitoring and control of risks significant to the achievement of its business objectives. During the year work has commenced to align this framework to the requirements of the Financial Services Authority’s Prudential Sourcebook. Risk management functions within the business are responsible for assessing and reporting the potential impact and probability of the most significant risks identified across the Group and the adequacy of related mitigation programmes. This includes assessing and reporting risks arising from the Group’s financial, regulatory and operational activities as well as social, ethical and environmental risks. The results of these assessments are reviewed by the Group Business Risk Committee, under the chairmanship of the Group Finance Director and reported to the Board at each meeting. The overall risk management process is reviewed six monthly by the Group Audit Committee and annually by the Board.
Control procedures and monitoring systems The Group has a well-developed system of planning and monitoring, which incorporates Board approval of a rolling three year Group Business Plan. Performance against the Group Business Plan is monitored monthly by the executive directors and reviewed at each Board meeting. This report also includes reports on risk, audit, compliance, solvency and liquidity. Performance is also reported formally through the publication of Group results and accounting policies applied consistently throughout the Group. Operational management report frequently to the Executive Directors and the Board receives regular representations from management responsible for each principal business operation.
This report sets out the remuneration policy for the Company’s senior executives, including the executive directors, outlines the various elements of their remuneration, and details the amounts of remuneration paid in 2002.
On a regular basis, the Committee commissions its own independent review of the remuneration policy and the packages paid, to ensure that the policy reflects good practice and that the packages remain competitive and in line with the market. New Bridge Street Consultants, who provide no other services to the Group, were appointed by the Committee to undertake such a review during the year.
The Board determines the level of fees paid to the Company’s non-executive directors following a recommendation from the executive directors.
Remuneration policy The Company’s remuneration policy seeks to provide remuneration packages appropriate for each particular market in which the Company operates, which attract and retain high calibre employees and encourage and reward superior performance in a manner which is consistent with the interests of shareholders. The policy is aimed at ensuring senior executives are rewarded fairly for their individual and collective contributions to the Company’s performance.
During the year, New Bridge Street Consultants were appointed to review and advise on the current remuneration policy and packages which were introduced in 2000 upon the merger of CGU and Norwich Union. New Bridge Street Consultants’ report, which was considered by the Committee in July 2002, confirmed that overall the Company’s remuneration policy and levels of remuneration were broadly in line with market practice for companies of similar size. Two areas in relation to the long-term incentive plans, where the Company’s approach differed from that recommended by institutional investors, were noted and these are commented upon below. A number of minor matters which were suggested were considered and will be adopted.
Remuneration package The remuneration package for the Company’s senior executives comprises the following elements: • a basic salary; • an annual bonus plan – to encourage executives to meet annual targets relating to business and personal performance; • a deferred bonus plan – linked to the annual bonus plan to encourage executives to take all of their bonus in the form of shares and retain them for a period of three years; • a long-term incentive plan – to align executives’ longer-term interests with those of shareholders; • a non-contributory defined benefit pension entitlement and other benefits.
The balance of these elements is such that, for directors achieving “Target” performance, basic salary represents approximately 40% of the remuneration package, with the annual bonus/deferred bonus plan representing 35% and the long-term incentive plan 25%. At “Stretch” performance, basic pay represents approximately 28% of the remuneration package, with the annual bonus/deferred bonus plan representing 36% and the longterm incentive plan also representing about 36%. “Stretch” performance would represent the achievement of business results significantly better than the business plan target.
Directors’ remuneration report 35 Aviva plc Annual report + accounts 2002
*For the purposes of this diagram, the following assumptions have been made: At “Target” performance – the annual bonus is 35% of basic pay and the executive director chooses to defer the whole of his bonus, which is matched. The ROCE performance condition on the long-term incentive plan is met in full and the Company’s TSR position is median, resulting in the vesting of 50% of the shares awarded. The share price growth during the three-year performance/deferral period averages 5% per year.
At “Stretch” performance – the annual bonus is 50% of basic salary and the executive director chooses to defer the whole of his bonus, which is matched. The ROCE performance condition on the long-term incentive plan is met in full and that the Company’s TSR position is upper decile, resulting in the vesting of 100% of the shares awarded. The share price growth during the three-year performance/deferral period averages 10% per year.
For the executive directors, shared Group-wide objectives are based on financial measures relevant to the business, including new business contribution, combined operating ratio and operating profit. For the Group Chief Executive and the Group Finance Director, Group-wide targets are the relevant performance measures for annual bonus purposes. For the other executive directors, Group-wide targets represent about 40% of their overall financial target, with the remainder represented by targets pertaining to the business unit(s) for which they are responsible.
The Committee considers it important that senior executives hold shares in the Company and a fundamental part of the annual bonus plan is the requirement that a stated proportion of any cash bonus awarded under the plan be taken in the form of shares through the Deferred Bonus Plan. Executive directors are required to defer 50%, and may elect to defer up to 100%, of their cash bonus. In respect of bonuses deferred, participants are granted an award of shares of equal value to the amount of cash bonus deferred and this is matched on a “one for one” basis with a further award of shares.
Long-term incentives The Aviva Long Term Incentive Plan is a discretionary share plan and it is the Committee’s policy to make an annual award of shares to executive directors with a value of 100% of their basic salary at the time the award is granted. All awards are made subject to the achievement of stretching performance conditions – 70% of the award relating to Total Shareholder Return (TSR) performance against a comparator group and 30% of the award relating to Return on Capital Employed (ROCE) performance. The awards vest after three years, but only to the extent that the performance conditions are satisfied.
The performance conditions compare the TSR produced by the Company over the performance period against the TSR of companies in a chosen comparator group, and on the ROCE within the Company. The Committee believes that this combination is the most appropriate way of incentivising executives since it takes into account both the total returns to shareholders and the Company’s underlying performance. Achievement of median TSR performance within this group triggers the vesting of 20% of the shares, which rises to 70% if the Company’s performance is in the upper decile of the comparator group. Recognising the Company’s position as the largest provider of life and pension products to Europe, the comparator group for the TSR part of the plan comprises 19 European financial services companies, namely – Abbey National, AEGON, Allianz, AXA, Barclays, CNP Assurances, Ergo, Fortis, HBOS, HSBC, ING, Legal & General, Lloyds TSB, Prudential, Royal Bank of Scotland, Royal & Sun Alliance, Skandia, Swiss Life and Zurich. The Committee believes that this is the group of competitors against which Aviva’s relative performance is most appropriately measured.
The other 30% of the award vests if the Company achieves a given return, in excess of inflation, on ROCE over the three year performance period. Awards under this performance condition will begin to vest if the cumulative ROCE over the performance period is 24% in excess of the rate of inflation, with the full 30% vesting if the ROCE is 30%, or higher.
Whether or not the performance conditions have been met is determined by the Committee. The rules of the plans require the Committee to request an independent consultant to determine the relevant TSR positions. In respect of the ROCE calculation, the Committee requests that the Group’s auditor expresses a view on the basis of the calculation used.
Shares are acquired in the market and are held in trust for use in connection with these incentive plans.
The Company operates a number of Inland Revenue approved allemployee share plans in the UK. 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.
Philip Twyman and Tony Wyand are both approaching their retirement dates when their service contracts will terminate. Accordingly, Mr Wyand’s contract will terminate in November 2003 and Mr Twyman’s in April 2004. In line with the Company’s policy, the other executive directors have rolling service contracts which came into effect on 1 June 2000 and which can be terminated by the Company giving 12 months notice and by the director giving six months notice.
Under the Company’s discretionary redundancy arrangements, which apply to UK based employees, an executive director may, depending on his length of service, receive an ex-gratia payment of up to one year’s basic salary should he leave employment on the grounds of redundancy. No special arrangements would apply should there be a change in the control of the Company.
Directors’ remuneration in 2002 This section of the Report (which has been subject to audit) sets out the remuneration which was paid to the directors during the year to 31 December 2002. As a result of recent mergers, there are a number of incentive plans of the former companies, which are now closed but under which some awards/options remain outstanding.
Executive Directors Salary and bonuses The remuneration payable to executive directors who held office for any part of the financial year in respect of 2002, including amounts paid to them as directors‘ of subsidiary undertakings, was as follows: Basic salary Bonuses (note 1) Benefits (note 2) Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 *From date of appointment.
Notes (1) “Bonuses” include amounts earned under the Annual Bonus Plan (including amounts deferred under the Aviva Deferred Bonus Plan) in respect of performance in 2002 and the value of shares granted under the free share part of the Aviva All-Employee Share Ownership Plan in respect of 2002 performance. Also paid to directors during the year were one-off incentive bonuses relating to prior years performance periods, i.e. the one-off cash award made in March 2002 under the CGNU Integration Incentive Plan and the one-off cash award made in March 2002 based on the Norwich Union Restricted Share Plan, as set out below.
Integration Integration incentive incentive Restricted Restricted Total Total plan* plan* share plan* share plan* Emoluments Emoluments £’000 £’000 £’000 £’000 £’000 £’000 *One-off awards – Plans now closed. Details of these plans are contained on pages 41 and 42 below.
Pension benefits During the year each of the directors accumulated pension benefits under the defined benefits section of the Group’s pension scheme for UK employees. The Directors’ Remuneration Report Regulations 2002 require disclosure of defined benefit pension arrangements on a different basis to that specified in Section 1 of the Combined Code. Details on both basis are set out below.
Increase in Increase in Pension Increase in transfer Pension Increase in transfer accumulated pension Transfer value value Age at accumulated pension value £’000 £’000 £’000 £’000 £’000 2002 £’000 £’000 £’000
Disclosed for each director is the “pension accumulated”, being the amount of pension to which the director would be entitled to on leaving service at 31 December 2002. Under the Combined Code the “increase in pension” is the increase during the year net of inflation and the increase in the “transfer value” represents the transfer value of that increase. Under the Directors’ Remuneration Report Regulations the “increase in pension” relates to the difference between the accumulated pensions at the end of 2001, and 2002. Also disclosed is the “transfer value” of the accumulated pensions at 31 December 2002 and 2001. The “increase in transfer value” for 2002 is the difference between these values, and represents an obligation on the pension fund (where funded) or the Company (where unfunded) – they are not sums paid or due to the director. Although the director may have had an increase in pension benefits over the year, the fall in equity markets since the beginning of 2002 may have resulted in a reduced transfer value.
Payments to former directors No payments or awards were made to former directors during the year, and no former directors received any increase in retirement benefits in excess of the amount to which they were entitled on the later of the date when the benefits first became payable or 31 March 1997. No compensation for loss of office was made to any director, or former director, during the year.
Directors’ remuneration report continued 38 Aviva plc Annual report + accounts 2002
Share options At At 1 January Options granted Options exercised Options lapsing 31 December Exercise 2002 during year during year during year 2002 price
Current plans “Savings related options” are options granted under the Inland Revenue-approved SAYE Share Option Schemes. Options are normally exercisable during the six months period following either the third, fifth or seventh anniversary of the relevant savings contract.
Closed plans “Executive options” are those granted to former CGU directors under the CGNU Executive Share Option Scheme, or predecessor schemes. Options, granted on various dates from 1994 to 2000 are normally exercisable between the third and tenth anniversaries of their date of grant. No options have been granted to executive directors under these schemes since 2000.
“Bonus Plan options” are the options granted in 1999 and 2000 under the CGU Deferred Bonus Plan. Participants who deferred their annual cash bonus and received an award of shares also received a matching award over an equivalent number of options. These options, which are not subject to performance conditions, are normally exercisable between the third and tenth anniversary of their grant.
Share awards Details of the performance conditions relating to these awards are set out in the notes below: Market price Market price At Awards Awards Awards At at date at date 1 January granted vesting lapsing 31 December awards awards 2002 during year during year during year 2002 granted vested
Mike Biggs CGNU Integration Incentive Plan 37,333 – 37,333 – – 960.0 762.0 March 2002 Aviva Long Term Incentive Plan – 2000 34,453 – – – 34,453 960.0 – March 2003
Richard Harvey CGNU Integration Incentive Plan 59,393 – 59,393 – – 960.0 762.0 March 2002 Aviva Long Term Incentive Plan
Patrick Snowball CGNU Integration Incentive Plan 28,282 – 28,282 – – 960.0 762.0 March 2002 Aviva Long Term Incentive Plan
CGNU Restricted Share Plan 13,141 – 5,584 7,557 – 960.0 735.0 March 2002
Directors’ remuneration report continued 40 Aviva plc Annual report + accounts 2002
Closed plans The CU Long Term Incentive Plan is the Commercial Union plan approved by shareholders in 1997. Awards were granted that year but, as a result of the merger with General Accident in 1998, no further awards were made under the plan. The awards vested at the end of their relevant performance periods (1999 and 2000) and, in accordance with the terms of the plan, half of the vesting shares were transferred to the participants immediately with the balance transferred two years later. The award referred to in the above table is the remaining half of the award which vested in 2000 and which was transferred to the participant during the year.
The CGNU Integration Incentive Plan relates to the merger of CGU and Norwich Union, and was approved by shareholders at the 2001 Annual General Meeting. The Plan had two parts – a share award aimed at incentivising management to exceed the estimated annualised cost savings to result from integrating the businesses, and a cash-based award aimed at focusing management on the operating performance of the Group or Business Unit as appropriate during the integration process. The performance conditions relating to both parts of the plan were achieved. Details are as follows: Share award – The performance condition attaching to this part of the plan was to exceed the estimated annualised cost savings of £275 million, which was announced to the market in August 2000, by at least 10%. The actual annualised cost saving achieved was £317 million whilst the additional one-off cost which arose from generating the increased annualised cost savings was within the target. As a result of the performance condition being met, the shares referred to in the above table, which were awarded in September 2000, vested in March 2002.
Cash bonus – Under this part of the plan, executive directors would receive a cash bonus of up to 50% of their basic salary if appropriate performance conditions were met. Half of the bonus would be achieved if either the Group or business unit, as appropriate, met their integration savings targets, and the other half would be achieved if the Group or business unit met their trading performance targets during 2000 and 2001. The integration targets were met in full but some of the Group and business unit trading targets were not fully achieved. As a consequence, the executive directors became eligible to receive cash bonuses which were paid in March 2002. The amounts are included in “Salary and Bonuses” disclosed above on page 38.
In addition to focusing senior executives on the achievement of both trading performance and integration savings, the integration incentive plan achieved the objective of retaining key employees throughout the integration period.
Non-executive directors receive a basic annual fee in respect of their Board and Board committee duties, with a further fee being paid to those directors (other than the Chairman and Deputy Chairman) who have the additional responsibility of chairing the meetings of the Board committees. These fees are reviewed, but not necessarily increased, annually and are set by the Board to attract individuals with the broad range of skills and experience appropriate for a major international company. In determining the level of non-executive directors’ fees, including the Chairman’s and Deputy Chairman’s fees, the recommendation of executive directors is considered, which takes into account the time commitment expended in preparing for and attending meetings as well as market practice. Other than the Chairman who receives a car allowance, non-executive directors receive no benefits in addition to their fees nor do they participate in any incentive or performance plans.
Pehr Gyllenhammar 297 268 Guillermo de la Dehesa 68 57 Wim Dik 38 36 Sir Michael Partridge 38 36 George Paul 160 160 Derek Stevens 63 54 Dr Elizabeth Vallance 38 36 André Villeneuve 38 36
The aggregate amount of emoluments, paid to directors in 2002 was £6.6 million (2001: £6.6 million).
The directors are required to ensure that accounts are prepared for each accounting period which comply with the relevant provisions of the Companies Act 1985, and which give a true and fair view of the state of affairs of the Company and the Group as at the end of the accounting period and of the profit or loss for that period. Suitable accounting policies have to be used and applied consistently in preparing accounts, using reasonable and prudent judgements and estimates on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business. Applicable accounting and financial reporting standards also have to be followed, with any material departures being disclosed and explained.
We have audited the Group’s accounts for the year ended 31 December 2002 which comprise the Accounting policies, the Consolidated profit and loss account, Reconciliation of Group operating profit to profit on ordinary activities before taxation, Consolidated statement of total recognised gains and losses, Reconciliation of movements in consolidated shareholders’ funds, Consolidated Group balance sheet, Consolidated cash flow statement and Company balance sheet, and the related notes 1 to 49. These accounts have been prepared on the basis of 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.
We read other information contained in the Annual report and consider whether it is consistent with the audited accounts. This other information comprises the Chairman’s statement, Group at a glance, Group Chief Executive’s review, Operating review, Financial review, Directors’ report, Corporate governance statement and the unaudited part of the Directors’ remuneration report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the accounts. Our responsibilities do not extend to any other information.
Equalisation provision Our evaluation of the presentation of information in the accounts has had regard to the statutory requirement for insurance companies to maintain an equalisation provision. The nature of the equalisation provision, the amount set aside at 31 December 2002 and the effect of the movement in the provision during the year on the general business technical result and loss on ordinary activities before tax, are disclosed in accounting policy T and note 40 to the accounts.
General business outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the balance sheet date, whether reported or not, together with related claims handling costs and a reduction for the expected value of salvage and other recoveries. Significant delays are experienced in the notification and settlement of certain 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 point within a range of possible outcomes. Further details of estimating techniques are given in note 39(a).
D – Deferred acquisition costs Deferred acquisition costs represent a proportion of commission and other acquisition costs that relate to policies that are in force at the year end. General business deferred acquisition costs are amortised over the period in which the related premiums are earned.
H – Pension costs The Group operates defined-benefit pension schemes in a number of countries around the world, with contributions made on a going concern basis, as recommended by actuaries. There are also several money purchase pension plans. Where separate pension schemes exist, they are fully funded on a discontinuance actuarial valuation basis. The pension costs, which are included in expenses, are calculated using actuarial valuation methods which give a substantially even charge over the expected service lives of employees. The costs of other material post-retirement benefits, also included in expenses, are charged as they accrue.
M – Consolidation of subsidiary undertakings The results of all material subsidiary undertakings are consolidated using audited accounts prepared to 31 December, either from 1 January or the effective date of acquisition. In the Company balance sheet, subsidiary undertakings are stated at current value which, for this purpose, is net asset value.
N – Participating interests, associated undertakings and joint ventures Participating interests are investments in which the Group has a long-term equity holding of over 20% and not more than 50%. Where the interests are beneficial and significant influence is exercised, such interests are classified as associated undertakings. The Group has also invested in a number of joint ventures, where its share of the underlying assets and liabilities may be greater than 50% but where the terms of the relevant agreements make it clear that control is not exercised. The appropriate proportion of the profit or loss on ordinary activities before tax of joint ventures and associated undertakings is shown separately in the non-technical account, except where these investments are held by the long-term businesses, in which case the profit is included within investment income in the long-term technical account. The appropriate proportion of the shareholders’ funds of joint ventures and associated undertakings is included in the consolidated balance sheet, with gross equity method disclosures for the former as required by FRS9 “Associates and joint ventures”.
The additional value of in-force long-term business arising on acquisitions is recognised in the balance sheet, and is amortised through the profit and loss account over the useful lifetime of the related contracts in the portfolio on a systematic basis. The rate of amortisation is chosen by considering the profile of the in-force business acquired and the expected depletion in its value. The value of purchased in-force long-term business is reviewed annually for any impairment in value and any reductions are charged to the long-term business technical account.
P – Long-term business provision and technical provision for linked liabilities The long-term business provision is calculated separately for each life operation, mainly using the net premium method, based on local actuarial principles consistent with those applied in the United Kingdom. Each calculation represents a point within a range of possible outcomes, and the assumptions used in the calculations depend on the circumstances prevailing in each life operation. The principal assumptions are given in note 38.
S – Fund for future appropriations The fund for future appropriations is used in conjunction with long-term business where the nature of the policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain. Amounts whose allocation either to policyholders or shareholders has not been determined by the end of the financial year are held in the fund for future appropriations. Transfers between the fund for future appropriations and the long-term business technical account represent changes in the unallocated amounts between balance sheet dates.
V – Share-based compensation The Group offers share award and option plans over the Company’s ordinary shares for certain employees, including a Save As You Earn plan (“SAYE plan”), details of which are given in the Directors’ remuneration report on pages 35 to 42. Compensation costs for non-SAYE plans are based on the market price of the shares when purchased by an employee share trust, less any amounts paid or payable by employees in respect of the awards. These costs are charged to the profit and loss account over the periods during which the share awards or options are earned.
Accounting policies continued 46 Aviva plc Annual report + accounts 2002
Consolidated profit and loss account Technical account – long-term business For the year ended 31 December 2002
(3,140) Changes in other technical provisions, net of reinsurance (1,978) (6,184)
(14,021) Unrealised losses on investments (F & 7a) (8,833) (11,120) (159) Other technical charges (24a) (100) (49) 259 Tax attributable to long-term business (I & 14b) 163 641 94 Allocated investment return transferred from the non-technical account (F & 7b) 59 36 4,445 Transfers from the fund for future appropriations (S) 2,801 6,230
(221) (included within other technical charges) (139) (64) (20) Amortisation of goodwill on associated undertakings (7a & 21c) (13) (13)
13,862 Net premiums written – continuing operations (6a) 8,733 8,691 14,960 Net premiums written (B) 9,425 10,377 Change in the provision for unearned premiums 14,586 Earned premiums, net of reinsurance 9,189 10,491
(90) Change in the equalisation provision (T & 40) (57) (56)
Allocation of Underwriting result longer term investment return Total £m £m £m £m £m £m
Financial Services Compensation Scheme levy – (31) Change in the equalisation provision (57) (56)
Consolidated profit and loss account Non-technical account For the year ended 31 December 2002
Investment income (F & 7a) 25 Share of result of associated undertakings, net of goodwill amortisation 16 4
Allocated investment return transferred to the long-term business (94) technical account (F & 7b) (59) (36)
(770) Investment expenses and charges (7a) (485) (511) (1,614) Unrealised losses on investments (7a) (1,017) (1,193)
Allocated investment return transferred to the general business (1,876) technical account (F & 7b) (1,182) (1,404)
Other income/(charges), including value adjustments 8 Profit from fund management (4a) 5 29
(48) Loss on wealth management (30) (99) (135) (Loss)/profit from other operations (85) 3
Earnings per share attributable to equity shareholders Operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after tax, in respect of: 60.3c – continuing and discontinued operations (16a) 38.0p 42.6p
(38.7)c (Loss)/profit for the financial year (16a) (24.4)p 10.8p (38.7)c (Loss)/profit for the financial year – diluted (16b) (24.4)p 10.7p
Reconciliation of Group operating profit to profit on ordinary activities before tax For the year ended 31 December 2002
Operating profit before tax based on longer term investment return before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items: Continuing operations 1,622 Modified statutory life profit (4a) 1,022 1,194
124 – Australia and New Zealand general insurance operations 78 69 – – US general insurance operation – (21)
(20) – long-term business (7a & 21c) (13) (13) (194) – non-long-term business (18) (122) (74)
(221) Amortisation of acquired additional value of in-force long-term business (139) (64)
– Financial Services Compensation Scheme levy – (31) – Integration costs (10) – (59)
Operating profit before tax based on longer term investment return after amortisation of goodwill, amortisation of acquired additional value 1,622 of in-force long-term business and exceptional items (4b) 1,022 1,271 Short-term fluctuation in investment return
(90) Change in the equalisation provision (40) (57) (56) (6) Net (loss)/profit arising on the disposal of subsidiary undertakings (17c) (4) 287
(848) (Loss)/profit for the financial year (534) 259 Movement in internally-generated additional value
(4,236) Total recognised gains and losses since last annual report (1,986)
Investments in joint ventures (N & 20) 1,911 Share of gross assets 1,242 –
Capital and reserves 867 Ordinary share capital (32c) 564 564 308 Preference share capital (33a) 200 200 1,175 Called up share capital 764 764 1,683 Share premium account (32c) 1,094 1,083 1,732 Profit and loss account (A & 34) 1,126 1,662
Creditors 2,246 Creditors arising out of direct insurance operations 1,460 1,119 1,543 Creditors arising out of reinsurance operations 1,003 1,494
– Long-term business borrowings – Debenture loans (R & 42b) – 51 131 Amount due to credit institutions (42c) 85 – – General business and other borrowings 277 Amounts due to credit institutions (42c) 180 191 10,735 Other creditors including tax and social security (43) 6,978 8,567 42 Loans from associated undertakings 27 17 1,626 Accruals and deferred income (44) 1,057 1,003 266,648 Total other liabilities 173,321 174,764
Consolidated cash flow statement For the year ended 31 December 2002
Dividends from joint ventures and associates Dividends from associates (21b) 4 4
Acquisitions and disposals Net disposals of subsidiary and associated undertakings (47b) 241 853
The cash flows presented in this statement relate to non-long-term business transactions only. Long-term business profits are included as net cash inflow from operating activities only to the extent that they have been remitted to shareholders by way of dividends from life operations. The proceeds from the sale of our Australian and New Zealand general insurance businesses are excluded from the above cash flow statement as they are accounted for within debtors at 31 December 2002 and were received on 2 January 2003. *Payments to the Berkshire Hathaway Group for reinsurance purchased in December 2000, to secure protection against any adverse impact on the run-off of London Market claims reserves, are now shown within exceptional items.
**The cash flows relating to mortgages securitised have been reclassified from net purchases of investments to drawdown of loans in 2001.
Current assets Amounts owed by subsidiary undertakings 4,111 3,467 Other assets 146 355 Own shares – 10
Creditors: Amounts falling due within one year Amounts owed to subsidiary undertakings (1,745) (1,799)
Represented by: Capital and reserves Ordinary share capital (32) 564 564 Preference share capital (33) 200 200
2 – Discontinued operations ”Discontinued operations“ disclosures in 2002 relate to the disposal of the general insurance businesses in Australia and New Zealand. The 2001 comparatives include both these businesses and the general insurance business in the United States, which was sold in that year. The results of all other operations are described as ”Continuing operations“.
Earned premiums, net of reinsurance 654 559 – 1,205 Allocated investment return transferred from the non-technical account 71 70 – 152 Claims incurred, net of reinsurance (452) (389) – (978)
Operating profit/(loss) 78 69 – (42) Amortisation of goodwill (2) (1) – (1) Short-term fluctuation in investment returns and other items (40) (6) – 13
Profit/(loss) for the financial year 30 50 – (123) Retranslation to closing rate – – – (2)
(a) Provision for deferred tax Financial Reporting Standard 19 (“FRS19”) “Deferred Tax” was published by the Accounting Standards Board in December 2000, and replaced the existing Statement of Standard Accounting Practice (“SSAP15”) on deferred tax. FRS19 is effective for the year ended 31 December 2002. The principal impact of the change from the accounting policy applied under SSAP15 is to provide additional deferred tax on unrealised appreciation or depreciation of investments. The additional deferred tax provision results in a reduction in the fund for future appropriations for with-profit life business and a reduction in profit and loss account reserve for general insurance business. In the case of non-profit life business, the establishment of an additional deferred tax provision has a neutral effect on shareholders’ funds as the increase in deferred tax provision is offset by a corresponding decrease in the additional value of in-force longterm business. The Group has chosen to adopt the discounting option for its deferred tax balances, to reflect the time value of money.
Notes to the accounts 56 Aviva plc Annual report + accounts 2002
(b) Presentation changes The Group’s long-term businesses include various service companies as well as the main operating companies. The results of the former were previously included in the long-term business technical account but are now shown as part of profit from other operations in the non-technical account. The loss reclassified in 2002 is £54 million (2001: profit of £9 million).
(i) Operating profit in respect of long-term business before amortisation of acquired additional value of in-force long-term business and amortisation of goodwill on associates £m £m
*The other life and savings result has been reclassified to non-insurance (note 3(b)).
(iii) Operating profit in respect of fund management Operating result £m £m
Discontinued operations: Australia and New Zealand 7 (1) 78 69 United States – (173) – (21)
(c) Net assets by business and geographical segment Long-term business General insurance and health business Total
In addition to the amounts included above, Navigator, our Australian funds administration business, recorded sales of £797 million for the 12 months to 31 December 2002 (2001: £930 million).
(ii) Long-term business premium income by geographical origin – continuing operations Premiums before reinsurance Premiums after reinsurance £m £m £m £m
Total long-term business premiums, including share of associates 18,645 17,939 18,172 17,590 Less: share of associates’ premiums (UK)* (315) (375) (299) (361)
(iv) General insurance business premium income by geographical origin – continuing operations Premiums before reinsurance Premiums after reinsurance £m £m £m £m
Notes to the accounts continued 60 Aviva plc Annual report + accounts 2002
(v) General insurance business premium income by geographical origin – discontinued operations Premiums before reinsurance Premiums after reinsurance £m £m £m £m
Australia and New Zealand 783 665 692 583 United States – 1,187 – 1,103
Income from land and buildings 599 521 41 45 Income from other investments 5,618 5,648 918 1,113 Realised investment (losses)/gains (1,445) 675 107 572
(iv) The principal assumptions underlying the calculation of the longer term investment return are: Longer term rates of return Longer term rates of return
Longer term return credited to operating results: Long-term business* 626 678 Non-long-term business 7,587 8,120
(Shortfall)/excess of actual returns over longer term returns (940) 1,373 *Figures represent non-with-profits business only, where a longer term rate of return is used.
Equities 1% higher/lower Group operating profit before tax £40m Properties 1% higher/lower Group operating profit before tax £13m
Notes to the accounts continued 62 Aviva plc Annual report + accounts 2002
8 – Long-term business bonuses The following amounts have been included in the long-term business technical account in respect of policyholder bonuses: Bonuses allocated in anticipation of a bonus declaration, included in claims paid 508 826 Reversionary and similar policyholder bonuses, included in the movement in the long-term business provision 2,346 3,117
Policyholder bonuses in the table above now include amounts for the Group’s Dutch and French businesses in 2001 and 2002.
Changes in deferred acquisition costs (144) (42) (30) 28 Administrative expenses – Financial Services Compensation Scheme levy – – – 31 10 – Corporate costs and integration costs £m £m
11 – Employee information The average number of persons employed by the Group during the year was: United Kingdom 36,298 36,091 Europe (excluding UK) 18,555 18,520
The analysis of total staff costs was: 2002 2001 £m £m
The auditor’s remuneration in respect of the parent company was £11,000 (2001: £10,000).
Accounting and tax advice 0.6 1.7 Assurance services 3.4 4.2 Due diligence 1.6 0.7
Of the £8.8 million (2001: £6.8 million) of audit fees, £7.3 million (2001: £5.4 million) was paid to Ernst & Young and £1.5 million (2001: £1.4 million) was paid to other firms. Fees for other work of £6.6 million (2001: £7.9 million) relate to amounts payable to Ernst & Young only.
Tax attributable to balance on long-term business technical account 260 353
Deferred tax: Origination and reversal of timing differences (177) (268) Changes in tax rates or law (5) – Decrease in discount 26 5
The total tax charged in the non-technical account relates to the following: Parent company and subsidiary undertakings 197 198 Associated undertakings 9 –
Notes to the accounts continued 64 Aviva plc Annual report + accounts 2002
Current tax UK corporation tax 382 125 Overseas tax 77 91 Prior year adjustments
Total tax credited in the long-term business technical account (163) (641)
(d) Factors that may affect future tax charges The deferred tax assets, which have not been recognised due to the uncertainty of their recoverability in the foreseeable future, comprise: Long-term business Non-long-term business
The deferred tax assets above are principally in respect of corporate entities which are more likely than not to generate tax losses in the future. The assets would be recoverable in the event that these entities generate taxable profits.
(i) The discounted net (asset)/provision for deferred tax, comprises: Long-term business Non-long-term business
Unrealised gains on investments 214 1,058 48 299 Deferred acquisition costs 203 179 – – Provisions and other timing differences 62 (63) 37 19
(ii) Movements in the deferred tax balances are analysed as follows: Long-term business Non-long-term business
Amount included in provisions for other risks and charges (note 41) 407 1,120 58 189 Amount included in other debtors (note 27) (25) (91) (197) (155)
Short-term fluctuation in investment return (1,243) (1,071) (47.5) (988) (754) (33.4) Change in the equalisation provision (57) (40) (1.8) (56) (39) (1.7) Net (loss)/profit arising on the disposal
On 31 May 2002, the Group extended its bancassurance partnership with DBS Group Holdings Limited (DBS) and acquired 100% of the issued equity share capital of Dao Heng Assurance and DBS Kwong On Insurance (together DBS Hong Kong), DBS’s life and general subsidiary in Hong Kong. Total cash consideration was £31 million and net assets on acquisition of DBS Hong Kong were £16 million, giving rise to goodwill of £15 million. Further amounts may be payable depending on the achievement of performance targets by DBS Hong Kong.
In addition to the goodwill arising on the acquisitions of these subsidiary undertakings, the Group acquired a further 30% of the share capital of Eurovita Italcasse Assicurazioni S.p.A. (Eurovita), a 50.96% subsidiary of the Group, for a cash consideration of £21 million. The consideration is equivalent to the increase in the Group’s share of net assets and there is no additional goodwill arising. The Group now owns 80.96% of this subsidiary. The Group also made a number of smaller acquisitions in continental Europe. These gave rise to an additional amount of £38 million goodwill. Total positive goodwill arising in the year was £76 million (note 18).
(iii) In May 2002, the Group completed the disposal of its wholly-owned subsidiary, Royal Saint Georges Banque, for a total consideration of £16 million. The net assets disposed of amounted to £15 million and the profit on disposal, after transaction costs, was £1 million.
Notes to the accounts continued 68 Aviva plc Annual report + accounts 2002
Shares in subsidiary undertakings are valued at net asset value computed in accordance with the Company’s accounting policies. The resulting gain over book value of £115 million (2001: £3,079 million, restated) has been credited to the Company’s revaluation reserve (see note 35). The directors are satisfied that the aggregate value of all such investments is not less than the aggregate amount at which they are stated in the balance sheet.
(e) Principal subsidiary undertakings at 31 December 2002 are listed on page 99.
Positive and negative goodwill is being amortised on a straight-line basis over its useful economic life. Useful economic lives have been determined in respect of each acquisition to match the period over which the value of the underlying businesses will exceed the value of their identifiable net assets. No useful economic lives are in excess of 20 years. As explained in accounting policy J on page 45, goodwill arising in 1997 and prior years was charged directly to reserves.
19 – Land and buildings The carrying value of land and buildings comprises: Long-term business Non-long-term business Group £m £m £m £m £m £m
The cost of land and buildings at 31 December 2002 was £7,741 million (2001: £7,211 million). The carrying value of land and buildings occupied by the Group for its own activities was £355 million (2001: £554 million).
(a) As part of their investment strategy, the UK long-term business policyholder funds have invested in a number of property limited partnerships (“PLPs”) during the year, through a mix of capital and loans. The PLPs are managed by general partners (“GPs”), in which the UK long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs.
Most of the PLPs have raised external debt, secured on their respective property portfolios. The lenders are only entitled to obtain payment, of both interest and principal, to the extent that there are sufficient resources in the respective PLPs. The lenders have no recourse whatsoever to the policyholder or shareholders’ funds of any company of the Aviva Group.
Accounting for the PLPs as subsidiary undertakings, joint ventures or other financial investments depends on the shareholdings in the GPs and the terms in each partnership agreement. Where the Group exerts control over a PLP, it has been treated as a subsidiary and its results, assets and liabilities have been consolidated. Where the partnership is managed by a contractual agreement such that no one party exerts control, notwithstanding that the Group’s partnership share in the PLP (including its indirect stake via the relevant GP) may be greater than 50%, such PLPs have been accounted for as joint ventures. Here, the Group’s share of the respective PLPs’ gross assets and gross liabilities are shown on the face of the consolidated balance sheet, in accordance with the requirements of FRS9 “Associates and joint ventures”. Where the Group holds minority stakes in PLPs, with no disproportionate influence, the relevant investments are included in other financial investments at their market value.
Movements in investments in joint ventures 781 – Balance at 1 January – –
(ii) Other The Group also has a 50% holding in AVIVA-COFCO Life Insurance Company Limited, a life assurance company incorporated and operating in China. These shares are held by the Company, with a cost of £20 million and share of net assets of £20 million.
Investments in associated undertakings (21b) 727 240 967 752 257 1,009 Other participating interests 36 47 83 43 25 68
The cost of the above investments was £915 million and £44 million respectively (2001: £902 million and £76 million respectively).
None of the other participating interests are listed on a recognised investment exchange.
Amortisation of goodwill on associated undertakings (7a) (13) – (13) Reclassification to subsidiary undertakings (24) (28) (52)
Movements in investments in associated undertakings (25) (17) (42) Balance at 1 January Goodwill (21c) 244 – 244 Share of net assets 508 257 765
Balance at 31 December Goodwill (21c) 231 – 231 Share of net assets 496 240 736
(ii) The principal associated undertakings included above are: Country of incorporation Company Class of share Proportion held and operation
All investments in associated undertakings are held by subsidiary undertakings and are included in the accounts using year ended 31 December 2002 figures. Société Foncière Lyonnaise (“SFL”) is listed on a recognised investment exchange and its total value, based on mid market prices at 31 December 2002, is £682 million (2001: £583 million). All other associated undertakings are not listed. All associated undertakings transact insurance business, with the exception of SFL which is a property company, and ProCapital, which is an online brokerage company.
Debt securities and other fixed income securities: At current value 23,084 7,737 30,821 20,353 9,288 29,641 At amortised cost 42,721 – 42,721 34,129 – 34,129
Shares and other variable yield securities and units in unit trusts 21,521 36,462 Debt securities and other fixed income securities 66,595 58,837
(c) The long-term debt securities and other fixed income securities, which are shown at amortised cost, are analysed below: 2002 2001 £m £m
(e) Included within other financial investments are shareholdings held on a long-term basis in the issued share capital of Société Générale, a banking company incorporated in France, Münchener Rückversicherungs-Gesellschaft, a reinsurance company incorporated in Germany and The Royal Bank of Scotland Group, a banking company incorporated in Scotland. The market values of these holdings at 31 December 2002 were £595 million, £372 million and £956 million respectively (2001: £1,100 million, £1,203 million and £1,546 million respectively) and represented 3.8%, 2.8% and 2.2% (2001: 6.6%, 3.6% and 3.2%) of the respective issued share capitals of these companies. Of these holdings, the long-term business operations owned £355 million (2001: £453 million) of the Société Générale shares, £211 million (2001: £509 million) of the Münchener Rückversicherungs-Gesellschaft shares and £911 million (2001: £1,510 million) of The Royal Bank of Scotland Group shares.
(f) At 31 December 2002, the Group held equity index futures, forwards and options to buy a notional total of £1,480 million (2001: £1,771 million) and to sell a notional total of £1,832 million (2001: £1,657 million) for long-term business operations. These contracts have a net positive fair value of £331 million (2001: £86 million). No adjustment has been made to the classification of existing investments to reflect the effect of the future settlement of these transactions.
23 – Securitised mortgages and related assets Other financial investments include loans secured by mortgages, subject to non-recourse finance arrangements, in a UK long-term business subsidiary and in a Dutch subsidiary. These balances are accounted for using a linked presentation in accordance with FRS 5 “Reporting the substance of transactions”. Details of the relevant transactions are as follows: (a) In a United Kingdom long-term business subsidiary (“NUER”), the beneficial interest in two portfolios of equity release mortgages has been transferred to two special purpose securitisation companies, Equity Release Funding (No 1) plc (“ERF1”) and Equity Release Funding (No 2) plc (“ERF2”) (together “the ERF companies”), in return for initial consideration and, at later dates, deferred consideration. The deferred consideration represents receipts accrued within the ERF companies after meeting all their obligations to the noteholders, loan providers and other third parties in the priority of payments. No gain or loss was recognised on the transfer to ERF1, and a gain of £5.2 million was recognised on the transfer to ERF2. The purchases of the mortgages were funded by the issue of fixed and floating rate notes by the ERF companies.
NUER has indemnified the ERF companies for any losses they may suffer should its customers set off any shortfall in their annuities purchased from another Aviva Group company against amounts they owe to the ERF companies, and any shortfall due to negative equity not insured elsewhere. NUER’s liability under these indemnities, estimated as £5 million, is included in other creditors in the consolidated balance sheet, whilst the linked liabilities figure has been reduced by the same amount to show the Group’s net interest in these securitisations.
NUER receives payments from the ERF companies in respect of fees for loan administration and cash handling purposes. Income of £2 million (2001: £1 million) has been included in investment income, relating to the securitisation of the mortgage portfolios.
(b) In a Dutch subsidiary (“DL”), the principal benefits of three portfolios of mortgage loans have been transferred to three special purpose securitisation companies, Arena 2000-1 BV, Arena 2001-1 BV and Arena 2002-1 BV, (“the Arena companies”), which were funded primarily through the issue of fixed rate notes. No gains or losses were recognised on these transfers.
All the shares in the Arena companies are held by independent trustees, respectively Stichting Security Trustee Arena 2000-1 BV, Stichting Security Trustee Arena 2001-1 BV and Stichting Security Trustee Arena 2002-1 BV. DL does not own, directly or indirectly, any of the share capital of the Arena companies or their parent companies. DL has no right, nor any obligation, to repurchase the benefit of any of the securitised mortgage loans, other than in certain circumstances where DL is in breach of warranty.
In all of the above transactions, Aviva Group and its subsidiaries are not obliged to support any losses that may be suffered by the noteholders and do not intend to provide such support. Additionally, the notes were issued on the basis that noteholders are only entitled to obtain payment, of both principal and interest, to the extent that the available resources of the respective special purpose securitisation companies, including funds due from customers in respect of the securitised loans, are sufficient and that noteholders have no recourse whatsoever to other companies in the Aviva Group.
Notes to the accounts continued 74 Aviva plc Annual report + accounts 2002
(a) Movements in the additional value of in-force long-term business (“AVIF”) comprise: Restated Internally Restated generated Acquired Total £m £m £m
Transfer to revaluation reserve reflecting movement in AVIF in the year (34) (1,511) – (1,511) Movement in minority interest on internally-generated in-force business (24b) 4 – 4
The amortisation charge for the year appears under the heading “Other technical charges” in the long-term business technical account on page 47. This is grossed up for attributable tax in the reconciliations on pages 47 and 50.
Net assets of long-term operations 5,726 5,115 Additional value of in-force long-term business 4,422 5,948
Assets held to cover linked liabilities 29,538 28,704 Reinsurers’ share of technical provision 337 537
Amounts owed by policyholders 1,748 1,892 Amounts owed by intermediaries 1,451 1,581
Debtors arising out of direct insurance operations 3,199 3,473 27 – Other debtors £m £m
Other debtors 5,929 5,636 28 – Tangible assets Motor Computer vehicles equipment Other Total £m £m £m £m
Acquisitions/(disposals) of subsidiaries (2) (23) (17) (42) Charge for the year 8 62 37 107
Net book value at 31 December 2001 23 127 157 307 29 – Own shares Movements in the residual value of own shares comprise: Number £m Number £m
Distributed in year (1,232,103) – (1,214,033) – Charge for the year – (10) – (18)
These shares are owned by employee share trusts in the Company and a subsidiary undertaking to satisfy awards under the Group’s Long Term Incentive Plan, Executive Share Option Plans and Deferred Bonus Plans. The shares are purchased in the market and carried at cost. Further details of the shares held can be found in note 32(b). Further details of the features of the plans can be found in the Directors’ remuneration report on pages 36 and 37.
Loans and advances to banks 543 402 Loans and advances to customers 1,722 2,242
Short-term deposits and cash – 21 Other banking and stockbroking assets 272 64
(a) The authorised share capital of the Company at 31 December 2002 was: £m £m 3,000,000,000 (2001: 3,000,000,000) ordinary shares of 25 pence each 750 750
Norwich Union Savings Related Option price Number Normally Option price Number Normally Share Option Scheme p of shares exercisable p of shares exercisable
General Accident Savings Related Option price Number Normally Share Option Scheme p of shares exercisable 77 Aviva plc Annual report + accounts 2002
32 – Ordinary share capital continued Aviva Executive Option price Number Normally Option price Number Normally Share Option Scheme p of shares exercisable p of shares exercisable
At 31 December 2002, awards over a total of 3,672,199 ordinary shares were outstanding under the Aviva Long Term Incentive Plan. Subject to satisfying performance criteria, these awards will vest in 2003, 2004 and 2005. Further details of this plan can be found on page 36. The awards will be satisfied by means of shares purchased by employee share trusts set up for the purpose of satisfying awards under various executive incentive plans and funded by the Company. Details are given in note 29. As at 31 December 2002, the trusts held 2,008,459 shares with an aggregate nominal value of £0.5 million and their market value at the year end was £8.9 million. The trustees have waived their right to dividends on the shares held in trust.
(c) During 2002, a total of 1,808,766 ordinary shares of 25 pence each were allotted and issued by the Company as follows: Share capital Share premium
Shares issued under the Group’s Employee and Executive Share Option Schemes 1,716,805 – 10 Shares issued in relation to the acquisition (in 2000) of UK Property Gold Limited 91,961 – 1
Notes to the accounts continued 78 Aviva plc Annual report + accounts 2002
(a) The preference share capital of the Company at 31 December 2002 was: £m £m
34 – Group reserves Revaluation Profit and loss reserve Merger reserve account Total £m £m £m £m
At 1 January 2002 as previously reported 5,178 2,975 1,872 10,025 Prior year adjustment (3a) 90 – (210) (120)
Transfer to non-technical account – – (1,070) (1,070) Foreign exchange rate movements 75 – 104 179 Decrease in value of in-force long-term business (O & 24a) (1,511) – – (1,511) Goodwill on disposals, previously written off (17c) – – 310 310
As explained in accounting policy J on page 45, goodwill arising on acquisitions since 1 January 1998 is carried on the balance sheet and amortised over its useful economic life. The cumulative amounts of positive and negative goodwill charged or credited to the consolidated profit and loss account, attributable to subsidiary undertakings acquired from 1 January 1968 to 31 December 1997 and not subsequently sold, are £957 million and £15 million respectively. Similar information relating to subsidiary undertakings acquired before 1968 is not readily available.
The cumulative amount in the profit and loss account reserve relating to unrealised gains and losses is £136 million (2001: £907 million, restated).
35 – Company reserves Movements in the Company’s reserves comprise: Revaluation Merger Profit and loss reserve reserve account Total £m £m £m £m
At 1 January 2002 as previously reported 3,199 227 6,599 10,025 Prior year adjustment (3a) (120) – – (120)
The fair value of these notes at 31 December 2002 was £1,167 million (2001: £1,133 million).
38 – Long-term business provision The long-term business provision is calculated separately for each life operation, mainly using the net premium method. The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, modified where necessary to reflect requirements of the Companies Act. Material judgement is required in calculating the provisions and is exercised particularly through the choice of assumptions where there is discretion over these.
United Kingdom Assurance: With-profit 3.2 to 3.5 AM92/AF92 or A67/70 adjusted Non-profit 3.2 to 4 AM80/AF80 or AM92/AF92 or
TM92/TF92 adjusted for smoker status Pure endowment and deferred annuity: Pensions business (in deferment) 3.5 to 5.5 Nil or AM80/AF80 or AM92/AF92 adjusted General annuity business (from vesting) 4 IM80/IF80 or IM92/IF92 adjusted plus allowance for mortality improvement* Pensions business (from vesting) 4 to 4.5 PMA80/PFA80 or PMA92/PFA92 adjusted plus allowance for future mortality improvement* Annuity in payment: General annuity 4.8 to 5.3 IMA80/IFA80 adjusted plus allowance for future mortality improvement
Notes to the accounts continued 80 Aviva plc Annual report + accounts 2002
38 – Long-term business provision continued For unitised with-profit business, the provisions are valued initially by determining the lower of the current non-guaranteed surrender value and the bid value of units. This result is then compared with a prospective valuation and the higher result is taken.
(a) The ultimate cost of general business outstanding claims is estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. Such methods extrapolate the development of paid and incurred claims, average costs per claim and ultimate claim numbers for each accident year, based upon the observed development of earlier years and expected loss ratios. The main assumption underlying these techniques is that past claims development experience can be used to project ultimate claims costs. Judgement is used to assess the extent to which past trends may not apply in future, for example to reflect public attitudes to claiming, economic conditions or varying levels of claims inflation. The approach adopted takes into account, inter alia, the nature and materiality of the business and the type of data available. Large claims are usually separately assessed, either by being measured at case estimate face value or separately projected in order to reflect their future development. Case estimates are generally set by skilled claims technicians applying their experience and knowledge to the circumstances of individual claims. Additional qualitative input, such as allowance for one-off occurrences or changes in legislation, policy conditions or portfolio mix, is also used in arriving at the estimated ultimate cost of claims, in order that it represents the most likely outcome, from a range of possible outcomes, taking account of all the uncertainties involved.
41 – Provisions for other risks and charges Movements in provisions for other risks and charges were: Restated Pensions and Deferred tax Restated similar obligations (note 14e) Other Total £m £m £m £m
Foreign exchange rate movements on opening provisions 3 7 6 16 Movement during the year: Additional provisions made in the year 172 Amounts utilised (46) Amounts released unutilised (21)
Debenture loans credit institutions Commercial paper Total £m £m £m £m £m £m £m £m
(b) Debenture loans comprise: Long-term business Other £m £m £m £m 1.5% FF2.8 billion exchangeable bonds 2003 – – – 281 2.5% subordinated perpetual loan notes – – 113 106 Institutional borrowings (average rate 5%) – 51 – –
Repayable as follows: One year or less – 1 – 100 Between one and two years – 6 – 281 Between two and five years – 44 161 153 After five years – – 270 251
The long-term institutional borrowings in the prior year arose wholly in the Netherlands and were mainly in respect of segregated funds for external pension schemes.
(c) Amounts due to credit institutions comprise: Long-term business General business Other £m £m £m £m £m £m
Repayable as follows: One year or less – – 11 11 93 156 Between one and two years – – – – 75 – Between two and five years – – – – 1 – After five years 85 – – – – 24
The interest charge for the year on the above was: 2 – 1 1 13 14
Repayable as follows: One year or less 1,433 1,741 Between one and two years 75 – Between two and five years 199 199 After five years 198 198
The floating rate borrowings comprise commercial paper and bank borrowings bearing interest based on local inter-bank offer rates, which are fixed in advance for the period of the borrowings. Excluding the subordinated perpetual loan notes, the fixed rate borrowings have a weighted average interest rate of 7.94% (2001: 6.26%) for a weighted average term of 8 years (2001: 10 years).
(j) The General Accident preference shares, included in minority interests at their par value of £250 million together with an £8 million accrual for dividends, are listed on the London Stock Exchange. Their fair value at 31 December 2002 was £267 million (2001: £331 million), based on their quoted market price.
43 – Other creditors including tax and social security 2002 2001 £m £m
Banking and stockbroking liabilities (31b) 3,249 3,312 Proposed final ordinary dividend (15) 322 536 United Kingdom and overseas tax 868 174 Bank overdrafts 348 918
(c) In the United Kingdom, the Group operated two main pension schemes until their merger on 31 December 2001 to form the CGNU Staff Pension Scheme, which has since been renamed the Aviva Staff Pension Scheme. New entrants now join the defined contribution section of the scheme, as the defined benefit section is generally closed to new employees.
The merged scheme was valued as at an effective date of 1 April 2002, on a market value basis using the Projected Unit Method. The main financial assumptions used were a pension increase rate of 2.5%, a salary increase rate of 4.25% and an interest rate of 6.4%. The scheme had an asset value of £4,639 million, projected accrued liabilities of £4,010 million and a funding level of 116%. The cost of future service benefits in respect of defined benefit members was 21.4% of pensionable salaries which, after allowing for amortisation of the scheme surplus and interest on the balance sheet prepayment, led to a net pension cost for the period to 31 December 2002 of 8.2% of pensionable salaries. The pension cost was then increased to allow for the amounts credited to members’ accounts under the defined contribution section of the scheme.
The 2002 pension costs of defined benefit and defined contribution schemes for the Group were £117 million (2001: £89 million). There were no significant contributions outstanding or prepaid as at 31 December 2002.
(ii) The expected rates of return on the schemes’ assets are: UK Netherlands Canada Ireland
Expected return on pension scheme assets less actual return 1,139 Experience gains and losses arising on scheme liabilities (131) Changes in assumptions underlying the present value of the scheme liabilities 41 Increase in recoverable surplus (17)
(iv) The following disclosures of experience gains and losses will be built up over time to give a five year history: £m %
(v) The assets and liabilities of the schemes, attributable to defined benefit members, at 31 December 2002 were: UK Netherlands Canada Ireland Total £m £m £m £m £m £m £m £m £m £m
Surplus not possible to recognise – – – – – – – (17) – (17)
Related deferred tax asset/(liability) 176 (58) 16 (3) 6 (8) – (15) 198 (84)
(vi) Movements in the pension schemes’ surplus on a FRS17 basis comprise: Total £m
Surplus in the schemes at 1 January 334 Contributions paid into the schemes 113 Charge to net operating expenses (138) Credit to investment income 83 Actuarial loss, excluding increase in recoverable surplus (1,049) Foreign exchange rate movements 3
Totals excluding pension asset 10,237 12,260 951 1,519 (Less)/add: pension (liability)/asset on FRS17 basis (456) 233 (456) 233
Totals including pension liability/asset on FRS17 basis 9,781 12,493 495 1,752 46 – Assets under management The total Group assets under management are: Restated £m £m
Total assets under management 207,613 208,999 87 Aviva plc Annual report + accounts 2002
47 – Cash flow statement The cash flow statement reflects long-term business activities only to the extent that cash is transferred between long-term and non-long-term operations. In the following analyses, long-term business assets and liabilities shown in the consolidated balance sheet have therefore been excluded.
(Loss)/profit on ordinary activities before tax, excluding the results of joint ventures and associated undertakings (283) 512 Add back: Integration costs – 59 Financial Services Compensation Scheme levy – 31
(Loss)/profit on ordinary activities before tax, excluding exceptional items (283) 602 Adjustments for financing expense and items not involving movements of cash: Depreciation of tangible fixed assets 82 136 Amortisation of goodwill 135 87 Amortisation of acquired additional value of in-force long-term business 139 64 Increase/(decrease) in general business underwriting liabilities and provisions 461 (347) Realised and unrealised losses on investments 894 621 Net loss/(profit) arising on the disposal of subsidiary undertakings 4 (287) Decrease/(increase) in deferred acquisition costs (30) 28 Movement in banking and stockbroking assets and liabilities 40 (398) Movement in other assets/liabilities (293) 676 Profits not yet transferred from long-term business funds (412) (702) Loan interest expense 264 217
Net cash inflow from operating activities, excluding exceptional items and merger transaction costs 1,001 697
Cash consideration for subsidiary undertakings acquired (55) (603) Cash proceeds from disposal of subsidiary undertakings 381 1,732 Net cash balances acquired/(divested) with subsidiary undertakings (85) (276)
Issue of ordinary share capital 11 29 – – New borrowings drawn down, net of expenses – – 1,466 10,509 Repayment of borrowings – – (1,534) (9,039)
Balance at 1 January Share capital 3,843 3,814 External borrowings 3,819 2,592 Non-recourse funding 219 –
Share capital is represented by: Ordinary share capital 564 564 Preference share capital 200 200 Share premium account 1,094 1,083 Merger reserve in respect of share capital 1,985 1,967
Increase/(decrease) in cash holdings 719 (69) Foreign exchange rate movements 16 2
(e) Non-long-term business cash included in the consolidated balance sheet comprised: 2002 2001 Changes in year £m £m £m
Cash at bank and in hand: General business and other activities 1,560 922 638 Banking and stockbroking – 21 (21)
Balance at 31 December Total non-long-term portfolio investments 14,261 17,769 Non-recourse funding (478) (219)
Land and buildings 668 857 (189) Other participating interests 47 25 22 Other financial investments 12,073 15,886 (3,813) Deposits with ceding undertakings 18 152 (134) Banking and stockbroking investments 977 630 347 89 Aviva plc Annual report + accounts 2002
(c) Guarantees on long-term savings products As a normal part of their operating activities, various Group companies have given guarantees, including interest rate guarantees, in respect of certain long-term insurance and fund management products. In the United Kingdom, in common with other pension and life policy providers, the Group wrote individual and group pension policies in the 1970s and 1980s with a guaranteed annuity rate option (“GAO”). Since 1993, such policies have become more valuable to policyholders, and more costly for insurers, as current annuity rates have fallen in line with interest rates. Reserving policies for the cost of GAOs varied until a ruling by the House of Lords in the Equitable case in 2000 which effectively required full reserving by all companies. Prior to the ruling, consistent with the Group’s ordinary reserving practice in respect of such obligations, full reserves for GAOs had already been established. No adjustment was made, or was necessary, to the Group‘s reserving practice as a result of the ruling. The directors continue to believe that the existing provisions are sufficient.
In May 2002, in accordance with FSA requirements, the Group commenced sending out the second phase of endowment policy update letters, which provide policyholders with information about the performance of their policies and advice as to whether these show a projected shortfall at maturity. The Group will continue to send these updates annually to all mortgage endowment holders, in accordance with FSA requirements. An expense provision of £50 million (2001: £10 million) has been made to meet potential mis-selling costs and the associated expenses of investigating complaints. It continues to be the directors’ view that there will be no material effect either on the Group’s liability to meet the expectations of policyholders or on shareholders.
Notes to the accounts continued 90 Aviva plc Annual report + accounts 2002
Consolidated profit and loss account Life assurance (achieved profit basis) 1,524 1,665 1,533 1,455 1,410
Operating profit including life achieved profit – continuing operations 1,720 1,935 1,325 1,608 1,637
Short-term fluctuation in investment return (1,243) (988) 258 250 784 Change in the equalisation provision (57) (56) (27) (55) 47 Net (loss)/profit arising on the disposal of subsidiary undertakings (4) 287 (1,058) (8) 17 Loss on withdrawal from London Market operations – – (448) – – Merger transaction costs – – (59) – (75)
Notes (a) The net asset value and market price (London) are as at 31 December. Market prices for 1999 and 1998 are for CGU plc. The net asset value is calculated based on equity shareholders’ funds, adding back the equalisation provision.
(c) The profit and loss account figures for 2001 and the balance sheet figures for 2000 and 2001 have been restated for the effects of implementing accounting standard FRS19 “Deferred Tax”. All years have been restated for the reclassification of the results of the various service companies from life assurance to non-insurance operations.
Summarised consolidated profit and loss account – achieved profit basis For the year ended 31 December 2002
Discontinued operations 124 Australia and New Zealand general insurance operations 78 69
2,640 Operating profit before tax 1,663 1,806 (5,564) Variation from longer-term investment return (3,504) (2,584)
(890) Effect of economic assumption changes (561) 1 (90) Change in the equalisation provision (57) (56) (6) (Loss)/profit on the disposal of subsidiary undertakings (4) 287
(3,910) Loss on ordinary activities before tax (2,463) (546) Tax on operating profit – continuing operations before amortisation of
Earnings per share Operating profit on an achieved profit basis before amortisation of goodwill and exceptional items, after tax, attributable to equity shareholders in respect of: 81.7c – continuing and discontinued operations 51.5p 55.5p
The results for 2002 and 2001 have been audited by the auditors Ernst & Young LLP. Their audit report in respect of 2002 is on page 98.
Alternative method of reporting long-term business 92 Aviva plc Annual report + accounts 2002
Components of total life achieved profit Total life achieved profit, including the Group’s share from the alliance with RBSG, comprises the following components, the first three of which in aggregate are referred to as life achieved operating profit: • new business contribution written during the year including value added between the point of sale and end of year; • the profit from existing business equal to: – the expected return on the value of the in-force business at the beginning of the period,
– experience variances caused by the differences between the actual experience during the period and expected experience based on the operating assumptions used to calculate the start of year value,
– the impact of changes in operating assumptions including risk margins; • the expected investment return on the shareholders’ net worth, based upon assumptions applying at the start of the year; • investment return variances caused by differences between the actual return in the period and the expected experience based on economic assumptions used to calculate the start of year value; and
• the impact of changes in economic assumptions in the period. 2002 2001*
Total life achieved (loss)/profit after tax (960) 10 *The other life and savings result has been reclassified to non-insurance (page 57).
**Operating assumption changes include the impact of reducing the risk margins in the US in line with the directors’ views of the risks associated with this in-force portfolio. The impact of this change was £13 million. In 2001, operating assumption changes included the impact of reducing risk margins in the Netherlands and the Poland life and pensions operations. The impact of the change in the Netherlands was £17 million. The impact was £22 million in the Poland life operation and £6 million in the Poland pensions operation.
**New business contribution before effect of solvency margin includes minority interests in 2002 of £69 million (2001: £51 million). This comprises minority interests in France of £4 million (2001: £4 million), Italy £19 million (2001: £14 million), Poland £1 million (2001: £1 million) and Spain £45 million (2001: £32 million).
Total life achieved operating profit before tax and exceptional items* 1,524 1,665 *Life achieved operating profit includes minority interests in year to 31 December 2002 of £90 million (2001: £84 million). This comprises minority interests in France of £7 million (2001: £8 million), Italy £26 million (2001: £27 million), Poland £18 million (2001: £15 million) and Spain £39 million (2001: £34 million).
Embedded value at the beginning of the year 11,063 11,234 Total life achieved (loss)/profit after tax (960) 18 Exchange rate movements 220 (97) Embedded value of businesses acquired/(disposed)* 13 84 Amounts injected into life operations 419 175 Amounts released from life operations (607) (351)
Alternative method of reporting long-term business continued 94 Aviva plc Annual report + accounts 2002
Netherlands (including Belgium and Luxembourg) 859 1,032 947 834 1,806 1,866 *The shareholders’ net worth comprises the market value of the shareholders’ funds and the shareholders’ interest in the surplus held in the non-profit component of the long-term business funds determined on a statutory solvency basis and adjusted to add back any non-admissible assets.
New business contribution including effect of solvency margin 401 51 452 479
Pre-tax investment returns: *The economic assumptions shown above are those in the calculations for the life business. The economic assumptions for the pension business are identical with the exception of the risk discount rate which is 13.8% (2001: 16.9%; 2000: 17.3%).
• Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva’s recent operating experience.
• The management expenses of Aviva attributable to long-term business operations have been split between expenses relating to the acquisition of new business and to the maintenance of business in-force. Certain expenses of an exceptional nature have been identified separately and the discounted value of projected exceptional costs has been deducted from the value of in-force business. A realistic estimate of future fund management expenses that will be charged to long-term businesses by Group companies not included in the long-term business covered by the achieved profits method has been included within the value of in-force business.
Non-economic assumptions Sensitivity calculations have been performed to identify the non-economic assumptions to which new business contribution and the value of in-force business within embedded value are particularly sensitive. The calculations have been based on similar percentage movements in each assumption from the base assumption used to calculate the published new business contribution and value of in-force business. Based on this, the Group’s new business contribution is most, and broadly equally, sensitive to changes in future maintenance expenses and discontinuance rates, whereas the value of in-force business is most sensitive to changes in levels of future maintenance expense.
Auditors’ report to the directors of Aviva plc on the alternative method of reporting long-term business profits We have audited the supplementary information on pages 92 to 97 in respect of the year ended 31 December 2002, which comprises the Summarised profit and loss account – achieved profit basis and the related notes and analyses. The supplementary information has been prepared in accordance with the achieved profit basis, using the methodology and assumptions set out on pages 96 to 97. The supplementary information should be read in conjunction with the accounts prepared on the modified statutory solvency basis, which are on pages 44 to 90.
Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the supplementary information. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the supplementary information, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.
Alternative method of reporting long-term business continued 98 Aviva plc Annual report + accounts 2002
Canada CGU Group Canada Limited and its principal operating subsidiary: CGU Insurance Company of Canada
France Aviva Participations SA and its principal subsidiaries: Aviva Assurances SA Aviva Courtage SA Aviva Direct SA Aviva France SA Aviva Gestion d’Actifs Aviva Vie SA Eurofil SA Société d’Epargne Viagére SA (75.0%) Union Financiere de France Banque (76.33%)
Germany Delta Lloyd Deutschland AG and its principal subsidiary: Berlinische Lebensversicherung AG (99.5%)
Hungary Aviva Eletbiztosito Rt. Ireland Hibernian Group plc and its principal subsidiaries: Hibernian General Insurance Limited Hibernian Investment Managers Limited
Details of the principal joint ventures and associates are set out in notes 20 and 21 on pages 70 to 72.
Italy Aviva Italia Holding SpA and its principal subsidiaries: Commercial Union Assicurazioni SpA (50.0%) Commercial Union Insurance SpA (99.0%) Commercial Union Life SpA (50.0%) Commercial Union Previdenza SpA (50.0%) Commercial Union Vita SpA (55.0%) Eurovita Assicurazioni Spa (40.5%) Risparmio Vita Assicurazioni Spa (55.0%)
Spain Ahorro Andaluz, Entidad Gestora de Fondos de Pensiones (50.0%) Aseguradora Valenciana, SA de Seguros y Reaseguros (50.0%) Aviva Vida y Pensiones, SA de Seguros y Reaseguros Bia Galicia de Seguros y Reaseguros (50.0%) Caja Espana Vida, Compania de Seguros y Reaseguros (50.0%) Unicorp Vida, Compania de Seguros y Reaseguros SA (50.0%)
United States CGNU Corporation and its principal operating subsidiary: CGU Life Insurance Company of America
United Kingdom RBS Life Investments Limited (49.99%) The British Aviation Insurance Company Limited (38.1%) The Group also has interests in several UK property limited partnerships. Further details are provided in note 20 on page 70.
Dividend Reinvestment Plan Aviva’s Dividend Reinvestment Plan (the “Plan”) enables cash dividends to be reinvested in the Company’s shares at reduced dealing costs. Shareholders who have not already joined the Plan and wish to do so should contact the Company’s registrar (at the address opposite) to obtain full details and a mandate form. Shareholders who have previously elected to join the Plan need take no further action.
To register for the service please go to www.shareview.co.uk where you will also find more details of the service, practical help and extensive information on other share registration matters.
Banks and nominee companies 24,285 2.57 1,742,711,608 77.22 Pension fund managers and insurance companies 133 0.02 36,741,529 1.63
No1 insurer in the UK and life and pensions provider to Europe 25m customers worldwide £28bn premium income and investment sales from continuing operations*
We are the world’s seventhlargest insurer, the biggest in the UK and the leading provider of life and pension products to Europe. Now we are taking the opportunity to build a distinctive international brand to reflect that strength.
*Including share of associates' premiums. All growth rates are quoted at constant rates of exchange.
Individual Savings Accounts (“Isas”) Lloyds TSB Registrars The Causeway 0870 242 4244 (Isa Manager) Worthing
Buying a home www.your-move.co.uk 101 Aviva plc Annual report + accounts 2002