No 1 market positions: UK, Ireland Top-five market positions: Canada, Netherlands, Singapore Other significant operations: France
Among our strengths is the ability to understand our customers and provide what they need through a variety of sales channels, tailored to individual markets. We have agreed new distribution partnerships in France, the Netherlands, Italy, Spain and Hong Kong, which will increase our reach through bancassurance alone to some 35 million potential customers worldwide. We are building new operations in India and China, both markets with huge longterm growth potential, and launched a new version of our online fund administration platform, Navigator, in Singapore.
During the year we reached important agreements that extend our distribution and create significant customer opportunities.
Spain We have rapidly achieved a top-three ranking in the Spanish life market, compared with 26th in 1999. This reflects the expansion of our bancassurance business, which now represents the fourthlargest banking network in the country. This is in a market where bancassurance accounts for around 70% of sales. Underpinning our business is a low-cost, efficient and innovative operation with one of the lowest expense ratios in the Spanish market.
Netherlands and Belgium The Delta Lloyd group is among the leading fund managers in the Netherlands, with assets under management of £27 billion (2001: £29 billion).
*Restated for the effect of Financial Reporting Standard 19 “Deferred Tax”.
One of our key performance measures is the group’s combined operating ratio (COR), which broadly expresses the total of claims costs, commission and expenses as a percentage of premiums. We have one of the best CORs among our European peer group. We produced a better-than-target COR of 101.4%† as a result of our disciplined underwriting and efficient claims handling. Our COR from continuing operations was 101.7%, and this excellent result gives us confidence that we are capable of sustaining our target COR of 102% over the underwriting cycle.
Our emphasis is on careful underwriting and we have withdrawn from unprofitable classes of business. We also introduced an affordable and very successful private motor policy in May 2002. Nevertheless our result suffered following storms in October, the worst for 16 years, and spending on a new shared service centre. This initiative is expected to provide efficiency and customer service benefits and is targeted to launch by the end of 2003. As a result we achieved an operating profit of £13 million (2001: £19 million) on net premiums written of £412 million (2001: £387 million).
Charities The bulk of our charitable support in the UK is concentrated on three organisations: Breakthrough Breast Cancer, Cruse Bereavement Care, and The Princess Royal Trust for Carers. In addition, we raised £220,580 for the Alzheimer’s Society, voted as our 2002 UK staff charity of the year.
Corporate governance is central to the Aviva operating model, supported by strong performance management and capital management disciplines. Throughout 2002 these disciplines have been challenged and developed by the increasing pace of change across our industry.
Pre-tax operating profit, including life achieved profit, before amortisation of goodwill and exceptional items
Continuing operations 102 103 Australia and New Zealand 98 99 *Combined Operating Ratio (COR) expresses the extent to which expenses and claims cover insurance premiums. It is the sum of expenses, including commissions, as a percentage of net written premiums, and claims as a percentage of net earned premiums. ** The group withdrew from the US general insurance market in 2000 and the disposal of the operations was completed during 2001. In 2001 the COR for the discontinued US general insurance operations was 115%. Including this item produces a COR in respect of 2001 from continuing and discontinued operations of 104%.
1. The ratio of long-term savings new business contribution to sales measured on an annual premium equivalent basis. 2. Excludes retail investment sales and is stated before the effects of solvency margin.
Expected return 849 848 Experience variances (110) (18) Operating assumption changes 9 17
Additional value of in-force1 4.4 4.1 4.7 Other net assets 12.9 12.6 12.5 1. Assumes achieved profit assumptions adjusted to reflect revised bond yields 2. Comprising internal, external and subordinated debt. 3. These sensitivities assume a full tax charge/credit on market value appreciation/falls.
At 31 December 2002, total capital employed in our long-term savings operations was lower, predominantly reflecting a reduction in the future value of inforce business. The disposal of a number of general insurance businesses and the impact of lower equity markets on the asset base reduced the total capital employed in our general insurance businesses.
Mike Biggs 20 Richard Harvey 215 Sir Michael Partridge 16 George Paul 42 Philip Scott 194 Patrick Snowball 194
The Group’s operations in the United Kingdom have established employee career and recognition frameworks, which draw together the formal competencies, target settings and review systems and links them to appropriate rewards and benefits.
conditions being retested. From a benchmarking exercise undertaken on its behalf, the Committee is aware that the Company’s performance conditions are very demanding compared with such plans generally. The Committee believes that it is important to strike a balance between setting challenging performance conditions and retaining the motivational incentive which is the fundamental purpose of the plan. After careful consideration, it believes that this is best achieved by retaining the demanding conditions but allowing one retest at the end of five years. No retesting takes place if any part of the performance condition has been met at the end of the three year performance period.
The following graph compares the TSR performance of the Company with the TSR of the FTSE100 index. The period covered is the three years since the beginning of 2000, the year in which CGU and Norwich Union merged to form Aviva. The graph also includes the median TSR of the companies in the comparator group. This graph is included as it is the group with which performance is measured for the purposes of the long-term incentive plan. In addition to insurers, there are a number of European banks in the comparator group. Aviva has outperformed the insurers over each of the three years, two years and one year periods to December 2002, but has underperformed the whole comparator group.
Pension arrangements The remuneration package for senior executives in the United Kingdom includes Company contributions into the Group’s pension scheme. All executive directors are members on a non-contributory basis of the defined benefit section of the Aviva (formerly CGNU) Staff Pension Scheme.
Philip Scott CGNU Integration Incentive Plan 38,052 – 38,052 – – 960.0 762.0 March 2002 Aviva Long Term Incentive Plan
The emoluments paid to the Chairman and Deputy Chairman take into account their duties and the amounts paid by competitors and similar-sized companies.
Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual report, the Directors’ remuneration report and the accounts in accordance with applicable United Kingdom law and accounting standards are set out in the Statement of directors’ responsibilities above.
In November 2000, the Accounting Standards Board issued Financial Reporting Standard (“FRS”) 17 Retirement Benefits, the accounting provisions of which are not required to be adopted by the Group until 2005. However, the FRS requires certain disclosures to be made in the notes to the accounts, as shown in note 45(d).
Long-term business operating profit before amortisation of acquired additional value of in-force long-term business and amortisation of goodwill on associated
Consolidated profit and loss account Technical account – general business For the year ended 31 December 2002 1m £m £m 15,549 Gross premiums written – continuing operations (6a) 9,796 9,734 16,792 Gross premiums written (6b) 10,579 11,586 (1,832) Outward reinsurance premiums (1,154) (1,209)
(3) Changes in other technical provisions, net of reinsurance (2) 1
(94) – long-term business (7b) (59) (36) (1,880) – non-long-term business (7b) (1,184) (952)
(2,398) of in-force long-term business* (34) (1,511) (761) (800) Foreign exchange gains/(losses) (U & 34) 179 (191)
1,615 Investments in associated undertakings and participating interests (N & 21a) 1,050 1,077 178,701 Other financial investments (22a) 116,156 120,974 (3,229) Less: Non-recourse funding (22a) (2,099) (1,149)
Reinsurers’ share of technical provisions 795 Provision for unearned premiums (B) 517 397 4,471 Long-term business provision (P) 2,906 1,319 518 Technical provision for linked liabilities (P & 25) 337 537
Debtors 4,922 Debtors arising out of direct insurance operations (26) 3,199 3,473 1,252 Debtors arising out of reinsurance operations 814 629 38 Loan to associated undertaking 25 32
Other assets 4,907 Cash at bank and in hand 3,190 2,125
4 – Geographical segmental information The Group’s reportable business segments are long-term business, health business, fund management and general insurance business. The main geographical segments are the United Kingdom, Europe (excluding the United Kingdom) and International.
Total life and pensions (including share of associates) 12,494 12,400 1,124 1,079 13,618 13,479
(a) (i) Total premiums written and investment sales Premiums before reinsurance Premiums after reinsurance £m £m £m £m
Expenses and charges, including allocated interest charges (270) (240) (51) (85) Unallocated interest charges: External – subordinated debt – – (73) (10) – other borrowings – – (133) (169)
Deferred tax Origination and reversal of timing differences (676) (935) Decrease in discount 51 107
(iii) The net (asset)/provision for deferred tax is disclosed in the accounts as follows: Long-term business Non-long-term business
Irish shareholders who are due to be paid a dividend denominated in euros will receive a payment at the exchange rate prevailing on 25 February 2003.
(i) In January 2002, the Group completed the disposal of its wholly-owned subsidiary, Sabre Insurance Company Limited, for a total consideration of £14 million. The net assets disposed of amounted to £24 million and the loss on disposal, after transaction costs and the inclusion of £10 million of goodwill previously written off to reserves, was £20 million.
In calculating the £86 million loss on the disposal of Sabre Insurance Company Limited, CGU Australia Limited and Belves Investments Limited, £310 million of goodwill previously written off to reserves has been brought back into account, as required by FRS10 “Goodwill and Intangible Assets”. The same goodwill amount is also credited directly to the profit and loss account reserve and therefore has a neutral effect on shareholders’ funds.
(a) Investments in participating interests included in the consolidated balance sheet comprise: Long-term Non-long-term Total Long-term Non-long-term Total business business 2002 business business 2001 £m £m £m £m £m £m
Additions in the table above include an investment in a new associate, ProCapital SA in France. The Group also increased its shareholding in its French associate, Sofragi, to 56.4% and that company has therefore been reclassified as a subsidiary.
Shares and other variable yield securities and units in unit trusts 22,197 2,603 24,800 37,342 4,133 41,475
Loans secured by mortgages: Loans secured on policies 150 – 150 152 – 152 Other loans 2,417 75 2,492 2,880 201 3,081
DL has purchased £18 million of the fixed rate notes in Arena 2000-1 BV, which are repayable in 2062, and £21 million of the fixed rate notes in Arena 2001-1 BV, repayable in 2053. These are included in debt securities and other fixed income securities within other financial investments in the consolidated balance sheet at their market value of £5 million (2001: £41 million).
Additional value of internally-generated in-force long-term business 3,917 5,349 (1,432) Amount attributable to minority interests (85) (81) (4)
(c) The embedded value of the long-term operations comprises: Restated £m £m
Expected return on pension scheme assets (402) Interest on pension scheme liabilities 319
Actuarial loss that would be recognised in the statement of total recognised gains and losses under FRS17 1,032
(d) Pensions mis-selling The Pensions Review of past sales of personal pension policies which involved transfers, opt outs and non-joiners from occupational schemes, as required by the Financial Services Authority (“FSA”), has largely been completed. A provision of some £68 million (2001: £96 million) remains to meet the outstanding costs of the few remaining cases, the anticipated cost of any guarantees provided, and potential levies payable to the Financial Services Compensation Scheme. It continues to be the directors’ view that there will be no material effect either on the Group’s ability to meet the expectations of policyholders or on shareholders.
Pence per ordinary share Net asset value (a) 433p 524p 591p 700p 669p Market price (London) (a) 443p 845p 1082p 998p 941p Earnings per share attributable to equity shareholders (b): MSSB operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after tax, attributable to equity shareholders in respect of continuing operations 34.8p 40.8p 24.6p 38.5p 32.5p
• The value of in-force business allows for future premiums under recurring single premium business where collection of future single premiums is expected and where the receipt of further single premiums is not regarded as new business at the point of receipt. It does not allow for future premiums under non-contractual increments, or for future Department of Social Security (DSS) rebate premiums, and the value arising therefrom is included in the value of new business when the premiums are received.
Profits are affected by a change in underlying interest rates. When interest rates change, expected future investment returns will also change and this in turn will affect projected cash flows. A change in interest rates will also result in a change in the discount rate used to calculate the present value of the projected cash flows. The impact of an increase of one percentage point in interest rates incorporates all such changes. In addition, the impact on embedded value includes the impact of the reduction that would occur in the market value of fixed interest investments if interest rates increased by one percentage point. Market values of other asset classes are assumed to reduce in proportion to movements in the market value of fixed interest investments of an appropriate term.
Associates and joint ventures In addition to the principal subsidiaries listed above, the Group has ongoing interests in the following operations that are classified as associates or joint ventures. Further details of those operations that were most significant in 2002 are set out in notes 20 and 21 on pages 70 to 72.
Aviva Group of companies 99 Aviva plc Annual report + accounts 2002
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