These results are a solid base on which we can build for the future as we focus on growth of our business, enhancing our returns to shareholders and delivering on our promises to customers, who continue to expect high quality at competitive prices.
Our distribution platform is supported by our joint venture bancassurance agreement with The Royal Bank of Scotland Group, a strategic partnership with Tesco, and sales through 19 building societies.
We continue to reinforce the improvement made in the UK, which was reflected in the retention of our three-star rating in the Financial Services Awards in November 2004. In Ireland, Hibernian earned a recognition of excellence award from the European Foundation of Quality Management, and was overall winner at the Irish Quality and Excellence Awards 2004.
We shall continue to build on these initiatives during 2005, giving us greater flexibility to improve our customer service.
The inflow of new funds grew strongly, driven by an increase in funds from retail investors and a series of large mandates won by Delta Lloyd Asset Management, including a270 million from the Dutch Xerox Pension Fund.
Other initiatives include Norwich Union Rescue, our vehicle breakdown service, which continues to expand with more than 270,000 customers at the end of 2004. Sales of Physiofast, which offers fast-track recovery treatment as an add-on to our UK motor policies, increased significantly. Volumes of our home emergency products also rose.
General insurance net written premiums from continuing operations £million £1,326m General insurance operating profit from continuing operations (2003: £911 million).
We achieved an excellent combined operating ratio (COR) of 97% (2003: 100%), with strong performances across all of our businesses. We beat our group COR target, which is to deliver 100% in each of the three years from the start of 2004. COR broadly expresses the total of claims costs, commission and expenses as a percentage of premiums, and is one of our key performance measures. Operating profit of £1,326 million (2003: £911 million) was an excellent result, reflecting our disciplined underwriting and the action we have taken to reduce costs and improve operational efficiency. Worldwide net premiums written increased to £8.8 billion (2003: £8.5 billion).
During the year we expanded our call and claims offshore processing operations to service our UK general insurance business, with around 2,600 jobs created overall at the end of 2004. We also began the process of extending the cost and service benefits from the UK across our other general insurance businesses, with a number of jobs created offshore in 2004 to service our Canadian business.
We continue to chair the UK Forge group of banks and insurers. This is a financial focus group, which works with stakeholders to explore, define and apply better CSR practices within financial services. It is currently focusing on producing practical performance indicators for financial services.
Basis of preparation The accounts have been prepared in accordance with applicable accounting standards and the modified statutory solvency basis of reporting as 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. The accounts have also been prepared in accordance with the Statement of Recommended Practice (SORP) on accounting for insurance business issued by the Association of Business Insurers (ABI) in November 2003 which the group adopted early with effect from 1 January 2003.
The profit for the year attributable to equity shareholders on a modified statutory basis was £1,034 million (2003: £932 million). This resulted in earnings per share of 45.8 pence (2003: 41.4 pence per share). Retained profit post-ordinary dividend on a modified statutory basis was £459 million (2003: £387 million).
Results on a European Embedded Value (EEV) basis Operating result on an EEV basis (see figure 1) The group’s operating profit before tax, including life EEV return, was up 25% to £2,344 million (2003: £1,906 million), driven by the excellent result from our general insurance business. This profit equates to an increase in the normalised post tax return on opening equity capital of 14.4% (2003: 13.1%) and exceeds our target return on equity capital of 10% net real.
We measure the sales performance of our business on two bases – volumes and contribution. Volumes are expressed as PVNBP which is a new measure developed for the purposes of EEV reporting. PVNBP is equal to total single premium sales for the year plus the discounted value of regular premiums expected to be received over the term of the new contracts, calculated at the point of sale. In effect PVNBP is the total revenue we expect to receive over the term of the new contracts sold during the year, at today’s value. Contribution is the present value of the projected stream of after tax distributable profit from new business sales – this is then grossed up at the appropriate rate of corporation tax. New business margin is the ratio of new business contribution to sales measured on a PVNBP basis.
We achieved a strong COR in all of our business units with particularly strong results in the UK, Ireland and Canada. The improved COR of 97% (2003: 108%) for our Canadian business reflects improved efficiency in our claims operations and the non-recurrence of the prior year reserve strengthening of £70 million in Pilot, one of our subsidiaries.
The higher operating profit (see figure 8) comprised an underwriting profit of £301 million (2003: loss of £54 million) and a higher normalised investment return of £1,025 million (2003: £965 million), as a result of higher start of year investment values and cash generation during the year. The improvement in the underwriting result reflects a disciplined approach to risk and the continued achievement of small rating increases in a number of markets, despite an increasingly competitive environment. We are also seeing the benefit of our actions to improve efficiency and reduce costs.
Morley – UK business 12 3 – overseas business 8 4 Subtotal Morley 20 7 Other fund management operations UK – Royal Bank of Scotland (7) (6) – Norwich Union Investment funds 5 (3)
The key assumptions for the three main with-profit funds are shown below: CGNU CULAC NUL&P
(iii) Overseas life operations – the capital requirements and corresponding regulatory capital held by overseas businesses, are calculated using the locally applicable regulatory regime. The available capital resources in all these businesses are subject to local regulatory restrictions which may constrain management’s ability to utilise these in other parts of the group. Any transfer of available capital may give rise to a tax charge subject to availability of tax relief elsewhere in the group.
No market valuation reduction (MVR) guarantees – For unitised business, there are a number of circumstances where a “no MVR” guarantee is applied, for example on certain policy anniversaries, guaranteeing that no market value reduction will be applied to reflect the difference between the guaranteed value of the policy and the market value of the underlying assets.
Although interest rates were below 4% at end 2004, no adequacy reserves were required. A further fall in interest rates below 3% would require adequacy reserves to be set up to prevent liabilities from becoming inadequately covered.
The group has also established an Asset Liability Management Committee which ensures that the underlying governance structures and processes embed a clear understanding as to the level of group financial risk appetite and that the capital of the group is managed in a way that delivers optimised returns within this stated risk appetite.
There are group policies for underwriting, claims, reinsurance and reserving which operate within the group risk management framework. A group General Insurance Risk Committee has been established to oversee management of this risk.
Results The Group results for the year are shown in the Consolidated profit and loss account on pages 67 to 69.
The final dividend for 2004 will be paid on 17 May 2005 to all holders of ordinary shares on the Register of Members at the close of business on 18 March 2005. The Company’s Scrip Dividend Scheme will be available to shareholders in respect of the payment of the final dividend. In addition, a local currency payment service will be available to shareholders residing in certain participating countries outside the UK. Further details of these arrangements can be found within the shareholder information on page 148.
George Paul and Elizabeth Vallance who have both served as directors for over nine years will also stand for re-election by shareholders at the Annual General Meeting. In line with the Board’s succession plans, and as previously disclosed, it is the intention that, if re-elected, they will retire from the Board on or before 31 December 2005.
* The table shows the number of meetings attended by each director, expressed as a percentage of the number of meetings held during the year, or during the period since they joined or until they left the Board or Committee.
Further details of the systems of internal controls maintained by the Group are more fully described in the report of the Audit Committee on pages 50 and 51.
The Committee has responsibility for considering any proposed changes in accounting practices and policies. During the year the Committee reviewed the principles underlying the European Embedded Value (EEV) basis of reporting life assurance results. The Committee considered the assumptions and the methodology used and reviewed the restatements of the Company’s 2003 and half year 2004 financial statements on the EEV basis. Following a report from the Committee, the Company made a recommendation to the Board to adopt the EEV principles in place of the achieved profit basis for supplementary reporting for the year ended 31 December 2004. The EEV basis is considered to provide a better reflection of the results of the business, a greater level of transparency and, once other companies report on this basis, comparability.
Risk identification, assessment and management The Group has an established system of business risk management, which is integrated into the Group’s business planning and performance monitoring processes. The Group’s risk management and control framework is designed to support the identification, assessment, monitoring and control of risks that are significant to the achievement of the Group’s business objectives. There is an established risk management network across the Group, with dedicated risk management teams within Head Office and within each of the businesses in the UK. The overseas businesses also have risk management functions, a number of which are combined with either compliance or internal audit. These teams use a consistent methodology, and are responsible for assessing and reporting the potential impact and probability of the most significant risks identified across the Group and the adequacy of the mitigating action programmes. These impact assessments are based on financial, reputational and operational criteria and take into account social, ethical and environmental risks as well as business risks.
Basic salaries In determining the level of basic salaries, the Committee gathers data from a number of independent sources concerning the level of salaries paid to senior executives performing comparable functions within the 50 largest listed companies in the UK, with an additional focus on leading UK and European financial services companies. In addition to market data the Committee also takes into account the executive’s performance as well as the level of salaries, and salary increases, for employees generally. The Company’s policy is to set basic salaries for competent performance at the median level with further progression based on performance. Salaries are reviewed annually.
Annual and deferred bonuses As stated above executive directors currently have a target annual bonus opportunity of 35% of their basic salary subject to a maximum of 50%. Under the current arrangement 50% of any bonus awarded must be deferred into Aviva shares and executives are encouraged to voluntarily defer all or part of the balance. Any bonus deferred is matched on a “one for one” basis (giving effective bonus levels of 70% at “Target” (on plan) and 100% at “Stretch” (outperformance). At present the deferred and matched shares vest provided the executive director is still in employment with the Company after three years.
Closed plans “Executive options” are those granted to former CGU directors under the CGNU Executive Share Option Scheme, or predecessor schemes. Options are normally exercisable between the third and tenth anniversaries of their date of grant. No options have been granted to executive directors under the executive share option scheme since 2000. Options granted after 1997 are only exercisable if certain performance conditions have been met. For any options to become exercisable under the TSR condition the Company’s TSR, when compared with the TSR of a comparator group of European financial services companies (see page 54), would need to at least match median performance when 20% of the options become exercisable. At upper decile performance 70% of the options would become exercisable. Between median and upper quartile the number of options becoming exercisable is determined on a straight-line basis. For any options to vest under the ROCE condition, the Company’s ROCE would have to exceed 24% above RPI over the three-year performance period when 24% of the options would become exercisable, rising to 30% if the ROCE exceeded 30% over the same period. At the end of the performance period relating to the options granted in 2000, the Company was ranked 12th out of the 20 companies in the comparator group and the ROCE was 24.3%. Accordingly none of the options became exercisable based on the TSR part of the Plan but 11% of the options became exercisable under the ROCE condition. The options which vested are exercisable at 960p per share.
The profit and loss account for the year reflects all income, expenditure, and investment gains and losses, except certain items which are taken directly to reserves after tax. The items taken directly to reserves include exchange gains and losses on the net investment in foreign enterprises (except for certain items dealt with in the fund for future appropriations). The general business technical result is determined on an annual basis.
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. Long-term business deferred acquisition costs are amortised systematically over a period no longer than that in which they are expected to be recoverable out of margins in revenues from the related policies. General business deferred acquisition costs are amortised over the period in which the related premiums are earned.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension plans. Once the contributions have been paid, the Group, as employer, has no further payment obligations. The Group’s contributions are charged to the profit and loss account in the year to which they relate and are included in staff costs. In some countries, the pension schemes have invested in the Group’s life funds.
K – Goodwill Goodwill arising on the acquisition of subsidiary undertakings is carried on the balance sheet as a separate intangible asset. Goodwill arising on the acquisition of associated undertakings is included within their carrying value. All goodwill is amortised on a straight-line basis over its useful economic life, and its carrying value is reviewed regularly for indications of impairment. On subsequent disposal of the underlying investment, any goodwill not yet amortised will be taken to the profit and loss account when calculating the profit or loss on disposal.
1,083 Balance on the long-term business technical account (H) 737 701 1,083 Balance on the long-term business technical account 737 701 454 Tax credit attributable to balance on the long-term business technical account (J & 13a) 308 273 1,537 Profit from long-term business operations before tax 1,045 974
Other income/(charges), including value adjustments 73 Profit from fund management (3a) 50 16 (169) Loss from other operations (3a) (115) (56)
and £7 million (2003: £8 million), respectively from the Group’s share of operating profit of its associates.
Called up capital 1,760 764 Share premium account (30d) 1,115 1,096 Revaluation reserve (35) 7,601 7,396 Merger reserve (35) 227 227 Profit and loss account: (35) 2,234 1,269
(b) The result of the Group’s equity release business in the UK was previously reported within the result of our non-insurance operations but is now shown as part of the result of our life operations. The result reclassified in 2004 is £nil (2003: loss of £16 million). The related assets and liabilities reclassified at 31 December 2004 are £168 million (2003: £47 million) and £142 million (2003: £47 million) respectively. Assets and liabilities of the related securitisation companies of £1,303 million (2003: £912 million) and £1,292 million (2003: £906 million), together with their associated cash flows, have also been reclassified.
(iv) General insurance business premium income (excluding health business premiums) by geographical origin Premiums before reinsurance Premiums after reinsurance £m £m £m £m
Longer-term return credited to operating results: Long-term business* 472 562 Non-long-term business 6,526 7,005
Global finance transformation programme 85 60 Central costs and sharesave schemes 93 100 10 – Employee information The average number of persons employed by the Group during the year was: Number Number
The acquisition of HPI Group Holdings Limited has given the Group access to customer lists, information databases and the HPI brand. As UK GAAP constrains our ability to recognise these items as separate intangible assets, they are included within the goodwill figure above.
Non adjusting post balance sheet event: Sale of general insurance businesses in Asia (i) On 7 September 2004, the Group announced the disposal of its Asian general insurance businesses to Mitsui Sumitomo Insurance (MSI) for a total of US$450 million in cash. The sale was subject to obtaining regulatory clearance and approval from other shareholders in the Asian businesses.
Net assets at 31 December 2003 60 108 Post tax operating profit to 31 December 2004 13 24
During 2003, the Group incurred costs on the closure of its general insurance operations in Belgium. These exceptional costs relate to termination activities, including redundancy costs and closure provisions.
Movements in investments in joint ventures 402 88 Balance at 1 January 869 781
25 – Debtors arising out of direct insurance operations £m £m
28 – Deferred acquisition costs The asset in the consolidated balance sheet comprises: £m £m
The allotted, called up and fully paid share capital of the Company at 31 December 2004 was: £m £m 2,282,385,200 (2003: 2,257,282,501) ordinary shares of 25 pence each 570 564
Retained profit for the year – – 871 871 Shares issued in lieu of dividends (note 34) – – 103 103 Issue costs on Direct Capital Instrument (note 32) – – (9) (9) Unrealised gain (note 16e) 205 – – 205
UK defined benefit schemes 30 39 UK defined contribution schemes 31 34 Overseas defined benefit schemes 40 33 Overseas defined contribution schemes 16 10
Cash consideration for subsidiary and associated undertakings acquired (122) (218) Cash proceeds from disposal of subsidiary and associated undertakings 201 698 Net cash balances (divested)/acquired with subsidiary undertakings (20) 120
In August 2004, the Group confirmed its intention to introduce time barring on mortgage endowment complaints, under FSA rules, by the end of 2005. The Group is writing to its one million endowment policyholders as part of its ongoing review, introducing a time bar on mortgage endowment complaints in the future. Customers will be given at least 12 months’ individual notice before a time bar becomes applicable – double the six months’ notice required by the FSA.
Consolidated profit and loss account Life assurance (European embedded value basis/achieved profit basis) 1,611 1,496 1,518 1,662 1,530 Health 58 61 61 70 68 Fund management and non-insurance operations (8) 4 (88) (60) (57) General insurance 1,326 911 881 876 330 Corporate costs and unallocated interest charges (643) (566) (652) (613) (546)
Operating profit on continuing operations before tax, amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items 1,861 1,490 1,218 1,464 946
(b) Basic earnings per ordinary share are shown only. No figures have been provided for diluted earnings per share.
(vi) The 2003 profit and loss account figures and the balance sheet figures for 2003 and 2002 have been restated to reflect the adoption of European embedded value (EEV) Principles, in place of the achieved profits basis of reporting.
The restated preliminary IFRS opening balance sheet has been audited by Ernst & Young. A copy of their opinion can be found on page 127.
Property and equipment 563 563 Investment property 618 618 Investments in joint ventures
General insurance and health premiums written reflect business incepted during the year. Unearned premiums are those proportions of the premiums written in a year that relate to periods of risk after the balance sheet date. Unearned premiums are computed principally on either a daily or monthly pro rata basis. Premiums collected by intermediaries, but not yet received, are assessed based on estimates from underwriting or past experience, and are included in premiums written.
P – Derecognition and offset of financial assets and financial liabilities A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised where: • The rights to receive cash flows from the asset have expired; • The company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or
Changes in the fair value of derivatives that are designated and qualify as net investment hedges, and that prove to be highly effective in relation to the hedged risk, are recognised in a separate reserve within equity. Gains and losses accumulated in this reserve are included in the income statement on disposal of the relevant investment. Upon transition to IFRS this reserve is deemed to be zero.
Y – Income taxes Provision is made for deferred tax liabilities, or credit taken for deferred tax assets, using the liability method, on all material temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements.
2,303 Profit on ordinary activities after tax 1,566 1,714 2,059 Profit for the financial year 1,400 1,593
Liabilities of the long-term business (192,313) – (192,313) (170,812) – (170,812) Liabilities of the general insurance business – (27,890) (27,890) – (27,689) (27,689)
£m £m £m £m £m £m * Restated for the effect of implementing European Embedded Value principles.
The increased allowance in the UK largely reflected the new business written in Norwich Union Equity Release. In France, the allowance included in new business contribution of £10 million together with the impact of lower assumed bond yields of £7 million and a small allowance from Antarius in the acquired embedded value were partially offset by favourable investment variances, which reduced the time value of options and guarantees by £13 million. In the Netherlands, the key impacts were the increase due to lower assumed bond yields of £21 million and reduction arising from the tax assumption change of £10 million. The increase in Other Europe arose in our German business and reflects the impact of lower assumed bond yields.
New business contribution before effect of required capital 585 121 706 646 Effect of required capital (163) (27) (190) (172)
Closing life and related businesses embedded value 12,218 796 13,014 11,751 * Restated for the effect of implementing European Embedded Value principles.
1% increase in 1% decrease in 1% increase in 1% decrease in New business contribution As reported discount rates discount rates interest rates interest rates 2004 £m £m £m £m £m
Australia Aviva Australia Holdings Limited and its principal subsidiaries: Norwich Union Life Australia Limited Navigator Australia Limited Portfolio Partners Limited
Ireland Hibernian Group plc and its principal subsidiaries: Hibernian General Insurance Limited Hibernian Investment Managers Limited Hibernian Life & Pensions Limited