Aviva 2003 year end - Part 1

Aviva PLC 25 February 2004 Aviva plc PART 1 0F 2 25 February 2004 PRELIMINARY RESULTS FOR THE 12 MONTHS ENDED 31 DECEMBER 2003 - Strong performance in both long-term savings and general insurance businesses - Robust life results: good sales growth in Continental Europe; signs of confidence returning to UK market; margins up to 26.1% - Significant growth from bancassurance: sales up 27%; now accounts for 25% of new life and pensions sales; average margins 39.7% - Excellent and sustainable general insurance results with new group combined operating ratio target of 100% for next three years - Strong capital position and well-prepared for new UK realistic reporting regime Richard Harvey, group chief executive, commented: 'These are strong results. Our distribution partnerships in Europe have made a significant contribution to our life results. Once again, our general insurance business has shown that its scale and focused approach can deliver excellent and sustainable results. 'We've driven improvement in our life business margins through pricing and expense control. We've also made operational improvements and reduced costs across the Group in a very competitive market. 'Aviva is fit for the future with a strong capital position. We welcome the new UK realistic reporting regime and are well-prepared for it. 'Investment markets are showing signs of recovery and some consumer confidence is returning. We believe Aviva is the best-placed life company in Europe to capture the market upturn, gaining competitive advantage from our extensive distribution networks, strong market positions and financial strength.' Highlights Growth in constant FY 03 FY 02 currency Operating profit before tax - achieved profit basis* Â£1,907m Â£1,720m 6% Operating profit before tax - modified statutory basis** Â£1,490m Â£1,218m 17% Worldwide new business sales# Â£14,433m Â£14,646m (5%) Total dividend per share 24.15p 23p 5% Earnings per share - achieved profit basis* 53.2p 48.3p Earnings per share - modified statutory basis** 44.0p 34.8p Total shareholders' funds*** Â£11,165m Â£9,668m Return on capital employed+ 12.7% 9.7% Net asset value per share 502p 433p * From continuing operations, including life achieved operating profit, before amortisation of goodwill and exceptional items. ** From continuing operations, before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items. *** Measured on an embedded value basis. # From continuing operations, including share of associates' premiums. + From continuing operations. All growth rates quoted are at constant rates of exchange. --------------------------------------------------------------------------------------------------------------------- GROUP CHIEF EXECUTIVE'S STATEMENT This is a strong set of results with good performances from both our long-term savings and general insurance businesses. During 2003 we took action to improve pricing and operational efficiency and to target business in the most profitable product areas. It is pleasing to see these measures already benefiting our results with operating profit before tax on an achieved profit basis increasing by 6% to Â£1,907 million (2002: Â£1,720 million), including higher life margins and an improved COR of 100%. Our return on capital increased to 12.7% (2002: 9.7%) meeting the Group's target of 10% net real. The balance sheet strengthened in the year including the benefit of retained profits in excess of Â£1 billion, driven by this strong operating performance, and some recovery in global investment markets. The net asset value per share grew to 502p. The Board has recommended a final dividend of 15.15 pence per share producing full year dividend growth of 5% to 24.15 pence and dividend cover of 1.82 times modified statutory earnings. This is in line with the Group's dividend policy of growing the dividend by approximately 5% per annum, whilst looking to sustain a target cover in a range of 1.5 to 2.0 times operating earnings after tax on a modified statutory basis. Long-term savings Many of our major life operations grew their market share during the year and at the same time increased margins on new business written. We regained our number one position in the UK and in Spain we have built the number one life business in just a three-year period. New business margins increased to 26.1% (2002: 24.4%), with the new business contribution at Â£621 million ahead by 3%, against a backdrop of sales being 3% lower at Â£2,377 million. Total life achieved operating profit was Â£1,555 million (2002: Â£1,524 million). We made good progress in our important Continental European markets with improved margins of 29.8% (2002: 25.7%). These businesses continue to provide opportunities for us to expand in lower-penetrated markets including Spain and Italy which offer superior medium-term growth potential. We have established our platform in Eastern Europe and have quickly developed new business sales in Singapore and Hong Kong and have made a very promising start in India and China. Our bancassurance partnerships continue to provide strong growth. New business sales increased by 27% to Â£563 million on an APE basis and include for the first time, sales from our new partnership with ABN AMRO in the Netherlands. Margins on bancassurance sales improved to 39.7% (2002: 35.1%). In 2004 we aim to build on our existing relationships and towards the end of the year our partnership with Credit du Nord in France will become operational. General insurance In general insurance we have built a sustainable profit-generating model and our actuarial analysis suggests that our claims reserves across the Group are now extremely strong. We have set ourselves a COR target of 100% across the Group for each of the next three years. Our focus on personal and small commercial business following our exit from long-tail risks underpins the continuing strong profits from our general insurance business. The operating result of Â£911 million (2002: Â£881 million) was achieved even though investment returns were Â£61 million lower than in 2002. The worldwide combined operating ratio was 100% (2002: 102%) with particularly strong results in the UK and Ireland, of 99% and 97%, respectively. The worldwide COR includes the Â£70 million first-half impact of the shortfall in claims reserves relating to prior years in our Canadian subsidiary, Pilot Insurance Company. Excluding this impact, the underlying Group COR was 99%.During the year we have expensed an additional Â£58 million in developments that will improve underwriting capability and efficiency going forward. In an increasingly competitive market we continue to achieve rating increases across both our personal and commercial lines. Financial Strength Total shareholders' funds on an achieved profit basis were Â£11.2 billion at 31 December 2003 (31 December 2002: Â£9.7 billion). --------------------------------------------------------------------------------------------------------------------- We continue to manage the capital of the group prudently. During the year we took the opportunity to lock into attractive financing rates through a Â£1.6 billion subordinated debt issue, to provide us with capital for future growth. In the UK, we have actively supported the move by regulators towards realistic capital assessment and reporting. We have assessed our UK with-profits funds under the new realistic regime and the solvency position of our life operations remains strong. The orphan estate measured on the realistic basis totalled Â£4.3 billion after the fair value of the guarantees, options and promises of Â£4.9 billion on a market consistent basis. Cost savings One of our key objectives in 2003 was to reduce costs and improve our operational efficiency. Through a series of initiatives that we announced in the course of the year we expect to deliver annualised cost savings of Â£250 million. The net pre-tax benefit to the profit and loss account for the year was Â£65 million after incurring one-off costs of Â£100 million representing the costs associated with achieving these savings and the increased cost of our global financial transformation programme (GFTP). In order to complete these expense saving initiatives and further work on GFTP increased costs of Â£140 million (relative to the 2002 cost base) will be incurred in 2004. We estimate that the resulting net pre-tax benefit to the profit and loss account in 2004, relative to 2002, will be Â£85 million. The full realisation of the actions announced in 2003 will deliver estimated annualised gross savings of Â£250 million. Improving operational efficiency remains a focus for management. UK fund management Following the retirement of Philip Twyman on 31 March 2004, Philip Scott will become non-executive chairman of Morley Investment Holdings Ltd (MIHL). In addition to his existing responsibilities as executive director for Aviva's non-UK life companies, he will represent Morley at the Aviva main board. Keith Jones, chief executive officer of Morley, will continue overall executive responsibility for Morley. It is the intention to appoint Andrew Moss to the board of MIHL as non-executive director, when he joins Aviva later this year. The appointment of Andrew Moss as group finance director, Aviva plc, was previously announced on 29 January 2004. He will bring considerable international experience to MIHL from his previous appointments with HSBC. Outlook We believe that the prospects for growth in 2004 in our long-term savings businesses are encouraging, with evidence that investors are gaining confidence. Aviva is one of the best-placed life companies in Europe to benefit from an upturn with our leading market positions, strong brands, unit-linked skills and the pensions expertise to benefit from widespread reforms. Our bancassurance partnerships in Europe and Asia are still at a relatively early stage of development and we expect further growth as these ventures mature. We will continue to focus on value ahead of volume. In general insurance, our strict adherence to operational disciplines of focused underwriting and efficient claims handling will continue to deliver strong, sustainable earnings. Richard Harvey Group chief executive --------------------------------------------------------------------------------------------------------------------- Enquiries: Richard Harvey Group chief executive Telephone +44 (0)20 7662 2286 Philip Twyman Group executive director Telephone +44 (0)20 7662 2679 Analysts: Steve Riley Investor relations director Telephone +44 (0)20 7662 8115 James Matthews Head of investor relations Telephone +44 (0)20 7662 2137 Media: Hayley Stimpson Director of external affairs Telephone +44 (0)20 7662 7544 Sue Winston Head of group media relations Telephone +44 (0)20 7662 8221 Alex Child-Villiers Financial Dynamics Telephone +44 (0)20 7269 7107 NEWSWIRES: There will be a conference call today for wire services at 8:15am on +44 (0)20 7019 9513 Quote: Aviva, Richard Harvey. ANALYSTS: A presentation to investors and analysts will take place at 9:30am (GMT) at St Helen's, 1 Undershaft, London, EC3P 3DQ. The investors and analysts presentation is being filmed for live webcast and can be viewed on the Group's website www.aviva.com or on www.cantos.com. In addition a replay will be available on these websites later today. There will also be a live teleconference link to the investor and analyst meeting on +44 (0) 207 019 9509. A replay facility will be available for two weeks on +44 (0) 207 784 1024. The pass code is 415541# for the whole presentation including Question & Answer session or 585224# for Question & Answer session only. The presentation slides will be available on the Group's website, www.aviva.com/investors/presentations.cfm from 9am (GMT). Photographs are available from the Aviva media centre www.aviva.com/media Notes to editors - Aviva is one of the leading providers of life and pensions to Europe with substantial positions in other markets around the world, making it the world's seventh-largest insurance group based on gross worldwide premiums. - Aviva's principal business activities are long-term savings, fund management and general insurance, with worldwide premium income and retail investment sales from continuing operations of Â£30 billion and assets under management of around Â£240 billion. - Overseas currency results are translated at average exchange rates. - All growth rates are quoted in local currency. - This preliminary announcement may contain 'forward looking statements' with respect to certain of Aviva's plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Aviva's control, including amongst other things, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in the jurisdictions in which Aviva and its affiliates operate. As a result, Aviva's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in Aviva's forward-looking statements. Aviva undertakes no obligation to update the forward-looking statements contained in this presentation or any other forward-looking statements we may make. Financial calendar 2004 Ex-dividend date (ordinary shares) 24 March 2004 Record date (ordinary shares) 26 March 2004 Annual General Meeting 27 April 2004 Announcement of long-term savings new business for 3 months to 31 March 2004 5 May 2004 Payment date (ordinary shares) 17 May 2004 Announcement of unaudited six months' interim results 4 August 2004 Announcement of long-term savings new business for 9 months to 30 September 2004 2 November 2004 --------------------------------------------------------------------------------------------------------------------- Contents Page Operating and financial review 1 Achieved profit basis Summarised consolidated profit and loss account - achieved profit basis 10 Earnings per share - achieved profit basis 11 Consolidated statement of total recognised gains and losses - achieved profit basis 11 Reconciliation of movements in consolidated shareholders' funds - achieved profit basis 11 Summarised consolidated balance sheet - achieved profit basis 12 Basis of preparation 13 Components of total life achieved profit 13 New business contribution 14 Analysis of life achieved operating profit 15 Embedded value of life business 15 Segmental analysis of embedded value of life business 16 Minority interest in life achieved profit 16 Methodology 17 Principal economic assumptions 18 Other assumptions 19 Modified statutory basis Summarised consolidated profit and loss account - modified statutory basis 20 Earnings per share - modified statutory basis 21 Consolidated statement of total recognised gains and losses 21 Reconciliation of movements in consolidated shareholders' funds 21 Summarised consolidated balance sheet 22 Consolidated cash flow statement 23 Basis of preparation 24 Exchange rates 24 Acquisitions 24 Exceptional costs for termination of operations 24 Disposals 25 Geographical analysis of life and pensions and investment sales - new business and total income 25 Geographical analysis of modified statutory life operating profit 26 Geographical analysis of health premiums after reinsurance and operating result 26 Geographical analysis of general insurance premiums after reinsurance and operating result 27 Tax 28 Dividends 29 Earnings per share 29 Longer-term investment return 30 Statistical supplement Segmental analysis of Group operating profit at constant currency - achieved profit basis 31 Supplementary analyses 32 General insurance - geographical ratio analysis 36 General insurance - class of business analyses 37 Assets under management 39 Group capital structure 40 Shareholder information 47 --------------------------------------------------------------------------------------------------------------------- Page 1 OPERATING AND FINANCIAL REVIEW Group operating profit before tax The Group achieved an operating profit before tax, including life achieved operating profit, from continuing operations up 6% at constant exchange rates to Â£1,907 million (2002: Â£1,720 million). On a modified statutory basis, the operating profit from continuing operations was up 17% to Â£1,490 million (2002: Â£1,218 million). In calculating the current year Group operating profit from continuing operations, we have included the results of operations acquired. We have excluded the results of our Australian and New Zealand general insurance businesses, the sale of which completed in December 2002, from the prior year operating profit from continuing operations. 2003 2002 Â£m Â£m Achieved operating profit before tax - continuing operations 1,907 1,720 Discontinued operations - Australia and New Zealand general insurance operations - 78 -------------------------------------------------------------------------------------------------------------------- 1,907 1,798 Amortisation of goodwill (103) (135) Change in claims equalisation provision (49) (57) Exceptional costs for termination of operations (19) - Loss on sale of subsidiary undertakings (6) (4) Effect of economic assumption changes 11 (561) Short-term fluctuations in investment return - general insurance and shareholder business 83 (1,184) Variation from longer-term investment return - life business 683 (2,320) --------------------------------------------------------------------------------------------------------------------- Profit/(loss) on ordinary activities before tax - achieved profit basis 2,507 (2,463) --------------------------------------------------------------------------------------------------------------------- Profit/(loss) on ordinary activities before tax - modified statutory basis 1,390 (282) ===================================================================================================================== The increase in the achieved operating profit before tax on continuing operations is attributed to a very strong performance from both our life and general insurance operations, notwithstanding the lower contribution to operating profit from investment returns. As indicated at the time of the 2002 preliminary announcement, investment returns in 2003 were lower than the 2002 equivalent period by Â£188 million in respect of our life, general insurance and health businesses, reflecting the impact of lower asset values at the beginning of the year. Achieved operating profit in the year has been driven by a strong performance across our general insurance businesses resulting in an improved underwriting profit of Â£91 million. This operational performance resulted in increased underwriting profits of Â£121 million, better than expected weather-related claims contributed a further Â£40 million, which were offset by a charge in respect of prior year reserves of Â£70 million in Pilot. Furthermore in our life operations we have seen a year on year improvement in experience and operating assumption related profitability of Â£127 million. The impact of our cost initiatives has also delivered Â£65 million to the profit and loss account, and we have seen improvements in a number of our other non-insurance businesses and incurred a lower level of interest costs on our external and internal debt, which combined, total Â£92 million. The strong performance in our general insurance businesses and the impact of the cost savings initiatives combined with improvements in results from our non-insurance operations have also increased the modified statutory operating profit. The improvement in the modified statutory life profit reflects a combination of factors including lower new business strain in the UK, Poland and Ireland, improved investment returns in the Netherlands, France and the US and the impact of changes arising out of the normal year-end reserving reviews in Poland. The profit before tax on a modified statutory basis was Â£1,390 million (2002: loss of Â£282 million). This improvement reflects the strong operational performances of our businesses and the surplus of Â£83 million (2002: shortfall of Â£1,184 million) in the actual investment return earned in the period compared to the return based on the Group's longer-term investment return assumptions. This follows a partial recovery across equity markets during 2003, generating investment gains on equities held by the Group's non-life operations, particularly in the UK and the Netherlands where the FTSE All-Share index and the AEX index have risen by around 17% and 5% respectively since 31 December 2002. On an achieved profit basis the profit before tax was Â£2,507 million (2002: loss of Â£2,463 million), which includes a positive variation from the longer-term investment return of Â£683 million (2002: negative variance of Â£2,320 million) and the impact of economic assumption changes of Â£11 million (2002: loss of Â£561 million). The variance from the longer term investment return reflects the impact of unrealised gains following improved investment market conditions during the year on the Group's life embedded value. The taxation charge for the period was Â£753 million (2002: tax credit of Â£451 million) on the achieved profit basis and includes Â£561 million in respect of the operating profit from continuing operations, which is equivalent to an effective rate of 29.4% (2002: 30.9%). On a modified statutory basis the effective rate on operating profit from continuing operations amounted to 27.0% (2002: 30.4%). The decrease in the tax rate reflects the use of unrecognised capital losses and an increased proportion of profits arising from our overseas businesses which bear a lower tax charge than that levied in the UK. --------------------------------------------------------------------------------------------------------------------- Page 2 Long-term savings Worldwide new business sales were Â£14.4 billion (2002: Â£14.6 billion) which reflected the ongoing investor caution in 2003. Across our Continental European businesses, our life and pension sales were up 6% on an APE basis to Â£1,122 million (2002: Â£967 million) with strong performances in Italy, Spain and the Netherlands. In the UK, life and pension sales were lower on an APE basis at Â£1,068 million (2002: Â£1,231 million) on an APE basis although we have seen steady quarterly sales in 2003. Total worldwide life and pension sales on an APE basis were Â£2,377 million (2002: Â£2,373 million). Retail investment sales were Â£1,141 million (2002: Â£1,028 million) reflecting continued investor caution towards equity-backed products. 2003 Local currency growth --------------------------------- ----------------------------- Life and Retail Life and Retail pensions investments Total pensions investments Total Â£m Â£m Â£m % % % Long-term savings sales United Kingdom 5,870 680 6,550 (14%) 22% (11%) Europe (excluding UK) 6,569 363 6,932 3% 62% 5% International 853 98 951 (8%) (67%) (22%) -------------------------------------------------------------------------------------------------------------------- 13,292 1,141 14,433 (6%) 6% (5%) ==================================================================================================================== Navigator - 625 625 - (29%) (29%) Investment markets are showing signs of recovery and some stability is returning. We believe that the prospects for growth in 2004 are encouraging, with evidence that a degree of investor confidence is returning. Life achieved operating profit 2003 2002 Â£m Â£m New business contribution (after the effect of solvency margin) 472 452 Profit from existing business - expected return 757 849 - experience variances (12) (110) - operating assumption changes 38 9 Expected return on shareholders' net worth 300 324 -------------------------------------------------------------------------------------------------------------------- Life achieved operating profit before tax 1,555 1,524 ==================================================================================================================== Life achieved operating profit before tax was higher at Â£1,555 million (2002: Â£1,524 million) driven by higher new business margins and higher operational profits from existing business. As anticipated, expected returns on existing business and shareholders' net worth were lower at Â£1,057 million (2002: Â£1,173 million) due to the application of lower start of the year economic assumptions to a lower opening embedded value. Our worldwide margin increased to 26.1% (2002: 24.4%) due in part to pricing action, cost control initiatives, business mix and a greater proportion of business from the higher margin bancassurance arrangements. The net charge of Â£123 million for the change in UK annuitant mortality assumptions made in 2002 did not recur in 2003. Excluding this charge, the movement in experience variances and operating assumption changes was largely unchanged year on year. Annual premium equivalent(1) New business contribution(2) New business margin(3) ----------------------------- ---------------------------- ---------------------- 2003 2002 2003 2002 2003 2002 Â£m Â£m Â£m Â£m % % Life and pensions business United Kingdom 1,068 1,231 241 290 22.6% 23.6% Europe (excluding UK) 1,122 967 334 249 29.8% 25.7% International 187 175 46 39 24.6% 22.2% -------------------------------------------------------------------------------------------------------------------- 2,377 2,373 621 578 26.1% 24.4% ==================================================================================================================== (1) Annual premium equivalent represents regular premiums plus 10% of single premiums. (2) Before effect of solvency margin which amounted to Â£149 million (2002: Â£126 million). (3) New business margin represents the ratio of new business contribution to annual premium equivalent, expressed as a percentage. --------------------------------------------------------------------------------------------------------------------- Page 3 Annual premium equivalent(1) New business contribution(2) New business margin(3) ---------------------------- ---------------------------- ---------------------- 2003 2002 2003 2002 2003 2002 Â£m Â£m Â£m Â£m % % Attributable to equity shareholders 2,108 2,189 272 278 12.9% 12.7% Analysed between: - Bancassurance channels 312 260 65 48 20.8% 18.5% - Other distribution channels 1,796 1,929 207 230 11.5% 11.9% ===================================================================================================================== (1) Stated after deducting the minority interest of sales. (2) Contribution stated after deducting cost of capital, tax and minority interest. (3) New business margin represents the ratio of new business contribution after deducting cost of capital, tax and minority interest to annual premium income after deducting the minority share, expressed as a percentage. New business contribution - after minority interest, tax and cost of capital New business margins after the cost of capital, tax and the deduction of the minority interest was 12.9% (2002: 12.7%), driven by the increasing proportion of higher margins from bancassurance arrangements with our joint venture partners in Spain and the Netherlands. UK In 2003 Norwich Union reported total life and pension sales of Â£1,068 million (2002: Â£1,231 million) on an APE basis and regained its position as the leading provider of life and pensions products in a difficult market with a market share of around 12%. Norwich Union has top three market positions in all the key product categories of pensions, annuities, investments and protection. We have seen some signs of recovery in investment markets, but investor confidence is only slowly beginning to return. New business contribution was Â£241 million (2002: Â£290 million) with a full year new business margin of 22.6% (2002: 23.6%). The adverse impact on the 2003 margin of the lower start of year economic assumptions was partly offset by the benefits of pricing and improved operational efficiency. The impact of changes in business mix is broadly neutral year on year. Life achieved operating profit was lower at Â£659 million (2002: Â£699 million). The reduction reflects lower contribution to profits from new business and as anticipated an adverse impact of Â£104 million due to lower expected returns on the lower opening embedded value. Negative consumer sentiment towards savings contracts has resulted in an increased level of lapses. During 2003 our UK business reported lapse experience losses of Â£24 million and we have strengthened our assumptions with a further adverse charge of Â£46 million. This effect has been partially offset by mortality profits of Â£47 million as our actual experience was better than our assumptions. Europe (excluding UK) Our Continental European operations delivered good new business life and pensions growth of 6% up to Â£1,122 million (2002: Â£967 million) on an APE basis, with particularly strong performances from our bancassurance partnerships in Italy, Spain and the Netherlands. Margins for the year were 29.8% (2002: 25.7%) reflecting improved business mix and the greater proportion of sales through bancassurance channels. France: Aviva France reported resilient new business sales of Â£241 million (2002: Â£223 million) on an APE basis, with underlying growth of 4% after excluding Â£13 million of 2002 sales on an APE basis relating to the group protection business sold to Mederic with effect from 1 January 2003. Sales of single premium euro products through our partnership with AFER increased to Â£1,157 million (2002: Â£983 million) and further strengthening of our relationship during late 2003 provides confidence for the future development of this business. New business contribution was Â£70 million (2002: Â£69 million) with a margin of 29.0% (2002: 30.9%). Life achieved operating profit was Â£220 million (2002: Â£228 million). Ireland: Hibernian, the third largest Irish life and pensions provider, reported lower new business sales of Â£81 million (2002: Â£103 million) on an APE basis, although 2002 regular premiums included sales of the Governments' Special Savings Incentive Account (SSIA) amounting to Â£23 million (on an APE basis), which closed in April 2002. There was strong growth in group pension sales in the final quarter of 2003, although sales of the Personal Retirement Savings Account (PRSA) have been initially slow across the market and we expect it will take time to build momentum. New business contribution was Â£23 million (2002: Â£29 million) and new business margins were maintained at 28.5% (2002: 28.2%). Life achieved operating profit was Â£65 million (2002: Â£75 million). Italy: Total sales from our Italian business increased by 15% to Â£194 million (2002: Â£153 million) on an APE basis driven by our bancassurance distribution network. Included are one-off sales in the first half of Â£19 million on an APE basis. Total new business contribution increased to Â£45 million (2002: Â£38 million) with margins of 23.2% (2002: 24.9%). Life achieved operating profit was Â£70 million (2002: Â£52 million). Netherlands (including Belgium and Luxembourg): In 2003, our top-five life and pensions business, Delta Lloyd, reported total sales of Â£224 million (2002: Â£158 million) on an APE basis. This reflects the benefit of first year sales from our new bancassurance agreement with ABN AMRO of Â£50 million on an APE basis and strong group pension sales in the fourth quarter. New business contribution increased to Â£62 million (2002: Â£21 million) with new business margins of 27.7% (2002: 13.3%), reflecting favorable business mix and the ABN AMRO business coming on line in 2003. Margins on our new agreement with ABN AMRO were 32.2% (2002: nil). Life achieved operating profit was Â£189 million (2002: Â£200 million) and includes adverse experience variances totalling Â£58 million, of which Â£36 million relates to ongoing development spend and one-off project costs. --------------------------------------------------------------------------------------------------------------------- Page 4 Poland: Although market conditions remain challenging, CU Polska continues to be one of the market leaders and reported total new business sales of Â£35 million (2002: Â£48 million) on an APE basis. New business contribution was lower at Â£3 million (2002: Â£10 million). Reduced volumes have impacted new business margins which were lower at 8.5% (2002: 20.8%). Life achieved operating profit was Â£104 million (2002: Â£111 million). Spain: Our bancassurance businesses delivered strong results in 2003 and as a result Aviva Spain is now ranked the number one business in the Spanish life market. Total sales on an APE basis increased by 18% to Â£246 million (2002: Â£189 million) demonstrating the strength of our distribution network. New business contribution increased by 41% to Â£134 million (2002: Â£87 million), with new business margins of 54.4% (2002: 45.9%). Life achieved operating profit was Â£158 million (2002: Â£83 million). International Total life and pensions new business sales were Â£187 million (2002: Â£175 million) on an APE basis including sales through our developing businesses in Singapore, India and China. Sales in the US slowed in the latter part of 2003 as the market has become increasingly competitive. New business contribution was Â£46 million (2002: Â£39 million) with margins of 24.6% (2002: 22.2%) benefiting from higher margin sales in Asia. Life achieved operating profit from our International businesses increased to Â£81 million (2002: Â£78 million), including a Â£17 million benefit from the change in risk margins in respect of our US and Australian life operations. Sales through our partnerships in India and China continued to progress well with total sales of Â£9 million and Â£3 million respectively. Our share of these sales amounted to Â£2 million in India and Â£1 million in China, representing our 26% and 50% share of the business respectively. Our joint venture life business with Dabur Group in India is now the ninth largest in the market. Distribution is through a number of bancassurance partnerships including Canara Bank and a direct sales force. In China, we have recently applied for licenses to operate in Beijing and Chengdu. Bancassurance margins Before cost of capital, tax and minority interests Bancassurance new business margins before cost of capital, tax and minority interests were 39.7% (2002: 35.1%). In the UK, new business margins from life and pensions sales through our partnership with the Royal Bank of Scotland Group (RBSG) decreased to 17.9% (2002: 21.5%), following the significant fall in with-profit bond business as a result of volatile investment markets and lack of investor confidence. In the second half of the year margins increased as a result of the actions we took to enhance productivity and improve cost efficiency. New business bancassurance margins in Italy and Spain were 23.4% and 59.4% (2002: 24.9% and 51.3%) respectively. Our new bancassurance agreement with ABN AMRO in the Netherlands generated margins of 32.2%. New business bancassurance margins from our partnership with DBS in Singapore and Hong Kong were 43.7% (2002: 29.4%) and reflect the impact of our increased focus on higher margin regular premium sales. Life operating profit on a modified statutory basis On a modified statutory basis, our life operating profit amounted to Â£1,138 million (2002: Â£1,022 million). As a result of falling annual and final bonus rates, our UK with-profit result has decreased to Â£145 million (2002: Â£190 million), although in the second half of 2003 the special bonus awarded to whole life policies contributed Â£11 million to shareholders. The non-profit result of Â£449 million (2002: Â£436 million) reflects lower new business strain arising from changes in business mix. In Continental Europe, life modified statutory profit increased to Â£506 million (2002: Â£387 million) with strong results across most of our businesses, particularly in France, Spain and Poland. The French operating profit increased to Â£179 million (2002: Â£142 million) driven by higher unit-linked sales in the second half as equity markets showed some recovery. Operating profit in the Netherlands also benefited from a recovery in investment market conditions and higher interest rates. In Poland, operating profit increased to Â£103 million (2002: Â£66 million) driven by the improved investment returns and a one-off benefit of Â£21 million following recent regulatory changes in the level of required reserves on pensions business. Operating profit in Spain increased to Â£50 million (2002: Â£27 million) largely driven by higher investment returns and the impact of higher volumes of risk business which delivers statutory earnings in the first year. Operating profit from our International businesses improved to Â£38 million (2002: Â£9 million) primarily as a result of reduced new business strain due to product mix and increased investment income. Health Premium income after reinsurance from our health business was Â£1,066 million (2002: Â£928 million), with total operating profit of Â£61 million (2002: Â£61 million). Our business in the Netherlands continued to be the main contributor to the results with operating profit of Â£39 million (2002: Â£42 million). Fund management The partial recovery across global equity markets during 2003 resulted in increased operating profits of Â£10 million (2002: Â£5 million) for our worldwide fund management operations. Assets under management at 31 December 2003 increased to Â£240 billion (2002: Â£208 billion), driven by the benefit of new business flows in the period and the improvement in worldwide investment markets. Our UK fund management business comprises Morley Fund Management, a retail and institutional business, a retail investment business operating as Norwich Union, and our new collective investment business with RBSG. These businesses reported a loss of Â£6 million (2002: loss of Â£12 million) in aggregate. --------------------------------------------------------------------------------------------------------------------- Page 5 Morley's UK operations reported a profit of Â£3 million (2002: Â£4 million). This result reflects an improvement in fee income and lower operating costs offset by the one-off costs associated with the centralisation of our international equity expertise, the recently announced venture with JP Morgan Investment Services and the reallocation of Â£3 million relating to group profit share and other incentive schemes, previously included within corporate costs. Within the Group results are additional profits of Â£6 million relating to other Morley businesses including the pooled pensions business and overseas operations. The loss from our Norwich Union retail investment operations improved to Â£3 million (2002: loss of Â£16 million) benefiting from changes to commission charges on our ISA products. The loss of Â£6 million reported by our new collective investment vehicle includes Â£7 million of development costs following the launch of the vehicle to sell collective investments business with The Royal Bank of Scotland Group. Aviva Gestion d'Actifs, our award-winning fund management operations in France, reported an operating profit of Â£13 million (2002: Â£11 million). In Australia our multi-manager fund administration business, Navigator, reported lower sales of Â£617 million (2002: Â£797 million) reflecting investor sentiment towards equity-backed products. These sales are excluded from the Group's headline new business figures. Sales from our Navigator business in Singapore were Â£8 million (2002: nil). The embedded value of our Navigator Australian business was Â£44 million (2002:Â£36 million). General insurance Our worldwide general insurance operations reported excellent results with total operating profit of Â£911 million (2002: Â£881 million). For the third year running we are seeing the benefits of our strategy of focusing on personal and small commercial business and our achievements continue to be underpinned by our strict adherence to our operational disciplines of focused underwriting and efficient claims handling. Our worldwide combined operating ratio (COR) improved to 100% (2002: 102%), with the UK and Ireland reporting CORs of 99% and 97% respectively. We are targeting a Group COR of 100% for each of the next three years across the business. As anticipated at the start of 2003, the longer-term investment return on general insurance business assets fell to Â£965 million (2002: Â£1,026 million). This reflects the lower start of year asset values which had been depressed by falling investment markets, partially offset by the impact of the appreciation of the euro and additional returns on assets acquired during the year. The underwriting result improved to a loss of Â£54 million (2002: loss of Â£145 million) including the benefit of better than expected weather-related claims experience of Â£40 million. The result bears a first half charge in respect of the Â£70 million impact of the shortfall in claims reserves relating to prior years identified in our Canadian subsidiary, Pilot. The worldwide expense ratio from continuing operations was 11.3% (2002: 11.3%) notwithstanding an allocation to the result of Â£43 million of group profit share and other incentive plan costs which were previously reported in corporate costs and upfront costs associated with our savings initiatives of Â£58 million. The underlying improvement reflects our continued focus on driving costs out of the business and achieving enhanced efficiencies. Underwriting result* Operating profit* 2003 2002 2003 2002 Â£m Â£m Â£m Â£m United Kingdom 50 (52) 676 611 Europe (excluding UK) 6 (60) 193 153 International (110) (33) 42 117 -------------------------------------------------------------------------------------------------------------------- Continuing operations (54) (145) 911 881 ==================================================================================================================== Discontinued operations - 7 - 78 * Excludes the change in the equalisation provision of Â£49 million (2002: Â£57 million). UK A focused and disciplined approach remains at the core of our general insurance strategy. Our success is evident in the continued delivery of good quality earnings from market-leading positions in personal insurance and selected commercial lines. Sustainable profitability gives us a solid platform upon which we can invest for the future. Our position enables us to provide high quality service, increase access to our customers and broaden our range of propositions, such as the growth of NU Rescue and the introduction of car and electrical goods purchasing. We have achieved an excellent COR of 99% (2002: 101%). The result includes a benefit of favourable weather-related claims in the year, and although this was partially offset by a small increase in subsidence costs, we saw a benefit of Â£30 million. The strength of our UK reserves will enable us to raise the net retention on our UK catastrophe reinsurance programme by at least Â£50 million. The COR from our personal lines business has remained steady at 101% (2002: 101%). Although the market remains competitive, we have achieved rate increases of 3% for personal motor and 4% for homeowners, slightly higher than in 2002. A targeted approach to pricing has enabled us to maintain a profitable book. In commercial lines business, our net written premiums have increased by 11% to Â£2.1 billion and we have achieved a COR of 96% (2002: 102%). We remain focused on the small commercial business sector, where we lead the market having achieved annualised rating increases of 25% for commercial liability and 12% for commercial property. --------------------------------------------------------------------------------------------------------------------- Page 6 Our expense ratio for 2003 was 10.5% (2002: 10.4%). This has been achieved after absorbing Â£39 million profit share and other incentive plan costs that were previously carried in corporate costs. Expenses in 2003 also included Â£58 million in respect of an operational efficiency review and upfront costs associated with our operations in India, both of which will deliver ongoing savings. Continued focus on cost management provides opportunities to invest in further initiatives for the future and we are targeting an expense ratio of 10% for 2004. In February 2004 we announced the closure of our UK national broker subsidiary, Hill House Hammond ('HHH'), by the end of 2004 and the sale of its commercial business. As a result of the closure 1,600 jobs will be lost, however around 400 staff will be re-deployed through our UK operations. In addition we will be creating over 450 new jobs in call centres in the UK to help handle anticipated business as personal lines customers will be invited to transfer to Norwich Union Direct. The associated costs of these changes will be around Â£60 million (post-tax Â£52 million) and will be reported as an exceptional item in 2004. Europe (excluding UK) In Europe, our general insurance businesses produced total operating profit of Â£193 million (2002: Â£153 million) with improvements in performance in Ireland and the Netherlands following better than expected weather-related claims in 2003 of Â£10 million. In France our business reported an improvement in the underwriting result to a loss of Â£9 million (2002: loss of Â£14 million) with a COR of 102% (2002: 102%), despite the costs of the floods in December. The longer-term investment return in France was lower at Â£44 million (2002: Â£61 million) reflecting the reduced asset base following the disposal of CGU Courtage and the sale of Societe Generale shares to effect the early redemption of the debenture bond in July 2002. Hibernian, our market-leading general insurance business in Ireland, reported an excellent operating profit of Â£91 million (2002: Â£44 million) with a COR of 97% (2002: 100%). This result has been driven by the strong rating actions in the latter part of 2002 combined with a benign claims environment and better than expected weather-related claims of Â£7 million. We anticipate that the market will be becoming increasingly competitive as capacity increases in 2004. In the Netherlands operating profit increased to Â£35 million (2002: Â£13 million) reflecting the inclusion of the results from our profitable ABN AMRO general insurance operations whose COR was 93%. Furthermore, the shared service centre commenced at the end of 2003 and is expected to bring benefits through increased efficiency in 2004. International Our International businesses recorded an operating profit from continuing operations of Â£42 million (2002: Â£117 million) predominantly driven by a lower operating result in Canada. Our Canadian general insurance business reported lower operating profits of Â£12 million (2002: Â£80 million) and a COR of 108% (2002: 102%). This result includes the impact in the first half of the shortfall in claims reserves relating to prior years in Pilot of Â£70 million. Excluding the impact of Pilot, the underlying COR of our Canadian business was 101%. The operating profit from our other international businesses of Â£30 million (2002: Â£37 million) includes the results of the Group's captive and improved results from our Asian businesses. Non-insurance operations The result of the Group's non-insurance operations improved significantly to a loss of Â£64 million (2002: loss of Â£99 million), which is primarily due to non-recurring spend by our UK wealth management project. The loss in the period also includes an allocation of Â£30 million in respect of group profit share and other incentive plan costs, which were previously included within corporate costs. The loss in our UK Life Services Company is unchanged at Â£54 million (2002: loss of Â£54 million). The unrelenting pace of regulatory change has meant that we have continued to invest in improving our systems capability. The impact of our cost savings initiatives have been offset by the allocation of Â£15 million of corporate costs in 2003. Corporate costs Corporate costs were lower in the year at Â£160 million (2002: Â£218 million). With effect from 1 January 2003, costs arising from bonus plans and staff share schemes have been formally allocated to business operations. A total of Â£76 million of such costs have been included in business unit operating results in 2003. Costs from the global finance transformation programme totalled Â£60 million for 2003 (2002: Â£26 million). The main activity of the programme will be in 2004, when costs are expected to be up to Â£100 million, tailing off thereafter. Unallocated interest charges Unallocated interest charges comprise internal and external interest on external borrowings, subordinated debt and intra-group loans not allocated to local business operations. Total interest costs were Â£406 million (2002: Â£434 million). External interest costs were Â£210 million (2002: Â£206 million), and include the additional interest charge of Â£25 million on the subordinated debt issued in September 2003 offset by the impact of interest rate falls and the repayment of senior debt. Internal interest costs fell to Â£196 million (2002: Â£228 million) largely as a result of a lower average level of internal debt during 2003. We anticipate that interest costs in 2004 will be higher as a result of a full year's interest charge on the subordinated debt. Cost savings One of our key objectives for 2003 has been to focus on reducing costs and improving our operational efficiency. In 2003 we have announced and taken actions to reduce our costs base through a series of initiatives. We have increased hurdle rates on new developments and internal projects. --------------------------------------------------------------------------------------------------------------------- Page 7 The table below summarises the benefit to the profit and loss account for 2003 and 2004 relative to the 2002 expense base. Benefit to the profit Annualised Earned One-off and loss savings savings costs* account Â£m Â£m Â£m Â£m Relative to 2002: 2003 expenses 250 165 (100) 65 2004 expenses 250 225 (140) 85 * Includes increased costs of GFTP of Â£34 million in 2003 and Â£74 million in 2004. In 2003 we announced a series of job reductions across our UK life and general insurance operations and a total of 3,700 new jobs in India to service the Group's UK life and general insurance businesses and our general insurance operations in Canada. In 2003, total upfront costs incurred on these initiatives were Â£66 million with an equivalent amount in 2004. Our expense saving initiatives are expected to deliver total estimated annualised savings of Â£250 million. The net pre-tax benefit to the profit and loss account in 2003 was Â£65 million after bearing one-off costs of Â£66 million representing the costs associated with achieving these savings and the increased cost of our global financial transformation programme of Â£34 million. The net pre-tax benefit to the profit and loss account is shown below for each business unit. Benefit to the One-off profit and loss Earned savings costs account Â£m Â£m Â£m UK Life 33 (8) 25 UK General insurance 98 (58) 40 Other businesses 18 - 18 Corporate costs 16 (34) (18) -------------------------------------------------------------------------------------------------------------------- 165 (100) 65 =================================================================================================================== In 2004 the net pre-tax benefit to the profit and loss account is estimated to be Â£85 million. This represents the realisation of a substantial part of the Â£250 million annualised savings achieved, offset by the remainder of the upfront costs and the increased cost in 2004 of our global financial transformation programme. The realisation of the actions announced in 2003 will deliver estimated annualised gross savings of Â£250 million in 2005. Dividend The Board has recommended a final dividend of 15.15 pence net per share (2002: 14.25 pence) payable on 17 May 2004 to shareholders on the register on 26 March 2004. This equates to 5% growth in the total dividend for 2003 of 24.15 pence (2002: 23 pence). The dividend cover for the year ended 31 December 2003 increased significantly to 1.82 times (2002: 1.51 times) the operating earnings after tax, measured on a modified statutory solvency basis. This is within the Group's stated target range of 1.5 to 2 times. Group capital and financial strength Shareholders' funds Equity shareholders' funds on an achieved profit basis increased to Â£11.0 billion (31 December 2002: Â£9.5 billion) primarily reflecting strong operational performance, the impact of the partial recovery in equity markets in 2003 and the appreciation of the euro during 2003. Net asset value per ordinary share, based on equity shareholders' funds, increased to 502 pence per share (31 December 2002: 433 pence per share) after adding back the equalisation provision of Â£364 million (31 December 2002: Â£314 million). The ratings of the Group's main operating subsidiaries are AA/AA- ('very strong') with a stable outlook from Standard & Poor's and Aa2 ('excellent') from Moody's. These ratings were reaffirmed in September 2003, although the rating agencies have highlighted that the insurance sector remains under review. Return on capital employed The Group's normalised 2003 post-tax operating return on equity was 12.7% (2002: 9.7%) which reflects the strong operational performance delivered by our businesses in the year. The normalised return is based on the post-tax operating profit on continuing operations, including life achieved profit, before amortisation of goodwill and exceptional items, expressed as a percentage of the opening equity capital. Financial strength of the Group and its principal insurance operations The Group is subject to a number of regulatory capital tests and also employs a number of realistic tests to allocate capital and manage risk. We report on these below. EU Groups directive Aviva group had an estimated excess regulatory capital, as measured on the new EU Groups Directive, of some Â£2.4 billion at 31 December 2003 (2002: Â£0.7 billion) including the benefit of Â£1.6 billion of subordinated debt issued in September 2003. 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 and Irish life funds. ----------------------------------------------------------------------------------------------------------------- Page 8 General insurance - regulatory basis Our principal UK general insurance regulated subsidiaries are CGU International Insurance group (CGUII) and Norwich Union Insurance (NUI). The combined businesses of the CGUII group and NUI group 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 Â£3.9 billion (2002: Â£2.2 billion) at end 2003 after covering the required minimum margin of Â£3.3 billion (2002: Â£3.2 billion). The increase in the excess solvency margin is largely attributable to the benefit of Â£1.2 billion of equity capital injected following the hybrid issue. Solvency cover for the CGUII group has been estimated at 7.6 times (2002: 4.2 times) and for the NUI group at a cover of 3.2 times (2002: 2.2 times). The FSA has proposed a new consultation paper (CP190). This is still in a period of development and at this point in time it is too early to comment on the appropriate levels of capital or disclosures. CGUII/NUI group continues to demonstrate its strong excess solvency position as shown at year end 2003. The hybrid issue proceeeds provide us with a number of options to meet the changing regulatory environment. General insurance - realistic basis Capital requirements for the Group's worldwide general insurance businesses are assessed using risk based capital techniques and results were published for the first time in 2002. Using this basis, capital is defined as that required to ensure that at all times the ongoing level of capital will exceed the statutory minimum solvency margin over the next 5 years with a 99% probability. Calculations have been reviewed to reflect recent trends including increasing strength of the general insurance business balance sheets and improving stability and reductions achieved in the combined operating ratios, producing a revised risk based capital requirement of 34% of net written premiums (2002: 36%). As at 31 December 2003 the risk based capital requirement of our worldwide general insurance businesses was Â£3.3 billion (2002: Â£3.1 billion) in comparison to Â£4.5 billion (2002: Â£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 Â£7.2 billion (2002: Â£5.5 billion). After deducting the risk based capital for the general insurance businesses of CGUII and NUI of Â£3.3 billion (2002: Â£3.1 billion) and, adding back the claims equalisation reserve of Â£0.4 billion (2002: Â£0.3 billion), the remaining available capital of Â£4.3 billion (2002: Â£2.7 billion) is sufficient to cover the minimum margins of the overseas life businesses by approximately 2.2 times (2002: 1.7 times). UK Life operations We manage the strength of our funds through a variety of different means. We have the option to use, where appropriate, financial reinsurance, securitisation, shareholder funds and policyholder funds. In addition, during 2004 we are progressing our review to merge the legacy non profit life funds to improve operational efficiency and reduce solvency margin requirements. We continue our review of the potential reattribution of the orphan estate in the interests of both policyholders and shareholders alike. With profit funds - Statutory and realistic basis Statutory basis During 2003 the FSA indicated that companies that could demonstrate that statutory regulations for valuation of liabilities were unduly onerous relative to the realistic approach could secure modifications to the rules - the so called Tiner waivers. These waivers are a step toward the wider ranging changes to be introduced by the Prudential Sourcebook (PSB) in 2004. Such waivers were granted to CGNU Life (CGNU) and Commercial Union Life Assurance Company (CULAC) in 2003 and the statutory valuation approach was modified at year end. We did not seek a waiver for Norwich Union Life and Pensions (NUL&P). Having modified the statutory approach for CGNU and CULAC, it was no longer appropriate to continue to use an implicit item for these companies and this has been allowed to lapse. An implicit item remains in NUL&P supported by the non-profit business. The free asset ratio (FAR) is the measure of the excess of assets over liabilities, expressed as a proportion of liabilities. The ratio is based on the statutory basis (as modified) including provision for adverse movement in asset values - the resilience test, based on a fall in equity values of 18.1% and property of 20.0%. Realistic basis We measure our realistic strength by the value of the orphan estate. The estate provides a level of capital that is available to absorb any unexpected short-term impact from adverse experience. It provides a level of investment freedom to improve policyholders returns and enables the operation of the with-profit business and associated features of guarantees and smoothing. The FSA issued CP195 in 2003, which consulted on proposals for calculation of realistic balance sheets (i.e. the estate). Whilst methodology, approach and calculations are developing, the basis is settling and we are reasonably advanced in our work. --------------------------------------------------------------------------------------------------------------------- Page 9 Results below have been calculated in line with the key principles of CP195, for CGNU, CULAC and for the realistic orphan estate for NUL&P. This makes appropriate allowance for all realistic liabilities of the with-profits fund, including provision for future bonus, the fair value of guarantees, options and promises on a market consistent basis and the cost of shareholder transfers and tax associated with future bonus. The estimated value of these is Â£4.9 billion. The calculations also make allowance for how the with-profit funds are expected to be run, for example investment policy, and how policyholders are expected to behave, for example persistency. Free asset ratios for the three main companies at 31 December 2003 based on the statutory basis are set out below together with a comparison of with profit free assets on statutory and realistic bases. Statutory FAR With profit free assets* Realistic orphan (net of RMM) estate % Â£bn Â£bn CGNU Life 16.0 0.9 1.3 CULAC 13.6 1.1 1.6 NUL&P 17.7 1.8 1.4 --------------------------------------------------------------------------------------------------------------------- Aggregate 16.2 3.8 4.3 ===================================================================================================================== * The with profit free assets net of the required minimum margin is the free assets measured on a statutory basis, as modified. The FAR for NUL&P includes implicit items for non profit business only. The realistic orphan estate is quoted before any Risk Capital Margin (RCM). FSA are currently consulting on proposals for an appropriate RCM for with profit business. Based on current guidelines the RCM is more than 2.5 times covered by the orphan estate in aggregate. The aggregate value of assets in the three main with-profit funds amounted to Â£50 billion. The aggregate investment mix of these funds at year end was: 2003 2002 % % Equity 38 35 Property 16 17 Fixed interest 42 44 Other 4 4 ------------------------------------------------------------------------------------------------------------------- 100 100 =================================================================================================================== Equity backing ratios, including property, supporting with profit asset shares is 65% in CGNU and CULAC and 52% in NUL&P. CGNU is the fund that incresingly writes new business for UK Life. Life profits reporting In reporting the headline operating profit, life profits have been included using the achieved profit basis. This is used throughout the Aviva Group and by many in the investment community to assess performance. We have focused on the achieved profit basis, as we believe life achieved operating profit is a more realistic measure of the performance of life businesses than the modified statutory basis. The modified statutory basis is used in our financial statements and, on this basis, the life operating profit before tax on continuing operations amounted to Â£1,138 million. The basis used for reporting achieved profit is consistent with the guidance set out by the Association of British Insurers. Definitions of Group key performance indicators and other terms Achieved operating profit - From both continuing and discontinued operations and is stated before amortisation of goodwill and exceptional items. Achieved operating earnings per share - Operating profit on an achieved profit basis before amortisation of goodwill and exceptional items, after taxation, attributable to equity shareholders in respect of continuing and discontinued operations. Annual premium equivalent (APE) - Is the UK industry standard for calculating life, pensions and investments new business levels. It is the total of new regular life premiums and 10% of single life premiums. Modified statutory operating profit - From both continuing and discontinued operations, and is stated before tax, amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items. Continuing operations - Business operations excluding the discontinued Australian, New Zealand and US general insurance operations. Net asset value per ordinary share - Is calculated based on equity shareholders' funds, adding back the equalisation provision of Â£364 million (31 December 2002: Â£314 million). Assets under management - Represents all assets managed by the Group including funds held on behalf of third parties. New business contribution - Is calculated using the same economic assumptions as those used to determine the embedded values at the beginning of each year and is stated before tax and the effect of the solvency margin. New business margin - The ratio of new business contribution to sales measured on an annual premium equivalent basis. Combined operating ratio (COR) - The aggregate of incurred claims expressed as a percentage of earned premiums and written expenses and written commissions expressed as a percentage of written premiums. Implicit items - The specific amounts by which prudential margins within life technical provisions may be adjusted to give a more appropriate measure of assets available to meet the Group's solvency requirement. In order to take allowance for implicit items FSA approval must be granted and the FSA must be satisfied that sufficient prudential margins exist to allow this adjustment. Free asset ratio (FAR) - The excess of the regulatory value of assets over total liabilities divided by the regulatory value of total liabilities, expressed as a percentage. Solvency cover - The excess of the regulatory value of total assets over total liabilities, divided by the regulatory value of the required minimum solvency margin. Orphan estate - The assets of the long-term with-profit funds less the realistic reserves for non-profit policies, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs and guarantees. CGUII - A principal UK general insurance company and the parent of the majority of the Group's overseas general insurance and life assurance subsidiaries. EU solvency - The excess of assets over liabilities and the world-wide minimum solvency margins, excluding goodwill and the additional value of in-force long-term business, and excluding the surplus held in the Group's life funds. The Group solvency calculation is determined according to the UK Financial Services Authority application of EU Insurance Groups Directive rules. --------------------------------------------------------------------------------------------------------------------- Page 10 Summarised consolidated profit and loss account - achieved profit basis For the year ended 31 December 2003 Page 2003 2003 2002 â‚¬m Â£m Â£m Operating profit 13 2,255 Life achieved operating profit 1,555 1,524 26 88 Health 61 61 31 14 Fund management 10 5 27 1,320 General insurance 911 881 32 (93) Non-insurance operations* (64) (99) 32 (232) Corporate costs (160) (218) 31 (588) Unallocated interest charges (406) (434) -------------------------------------------------------------------------------------------------------------------- Operating profit - continuing operations before 2,764 tax, amortisation of goodwill and exceptional items 1,907 1,720 Discontinued operations - Australia and New 27 - Zealand general insurance operations - 78 ------------------------------------------------------------------------------------------------------------------- Operating profit - before tax, amortisation of 2,764 goodwill and exceptional items 1,907 1,798 (149) Amortisation of goodwill (103) (135) -------------------------------------------------------------------------------------------------------------------- 2,615 Operating profit before tax 1,804 1,663 1,110 Variation from longer-term investment return 766 (3,504) 16 Effect of economic assumption changes 11 (561) (71) Change in the equalisation provision (49) (57) 25 (9) Loss on the disposal of subsidiary undertakings (6) (4) 24 (28) Exceptional costs for termination of operations (19) - ------------------------------------------------------------------------------------------------------------------- 3,633 Profit/(loss) on ordinary activities before tax 2,507 (2,463) Tax on operating profit - continuing operations before (813) amortisation of goodwill and exceptional items (561) (531) (278) Tax on profit/(loss) on other ordinary activities (192) 982 ------------------------------------------------------------------------------------------------------------------- 2,542 Profit/(loss) on ordinary activities after tax 1,754 (2,012) (162) Minority interests (112) (33) -------------------------------------------------------------------------------------------------------------------- 2,380 Profit/(loss) for the financial year 1,642 (2,045) 29 (24) Preference dividends (17) (17) -------------------------------------------------------------------------------------------------------------------- Profit/(loss) for the financial year 2,356 attributable to equity shareholders 1,625 (2,062) 29 (790) Ordinary dividends (545) (519) -------------------------------------------------------------------------------------------------------------------- 1,566 Retained profit/(loss) for the financial year 1,080 (2,581) ==================================================================================================================== * The wealth management result has been included within non-insurance in all periods. --------------------------------------------------------------------------------------------------------------------- Page 11 Earnings per share - achieved profit basis For the year ended 31 December 2003 2003 Earnings per share 2003 2002 Operating profit on an achieved profit basis before amortisation of goodwill and exceptional items, after tax, attributable to equity shareholders in respect of: 77.1c Continuing operations 53.2p 48.3p 77.1c Continuing and discontinued operations 53.2p 51.5p 104.6c Profit/(loss) attributable to equity shareholders 72.2p (91.5)p 104.2c Profit/(loss) attributable to equity shareholders - diluted* 71.9p (91.5)p * As required by FRS 14 'Earnings per share', the impact of the dilutive effect on the 2002 comparatives is not recognised at it would result in a smaller loss. Consolidated statement of total recognised gains and losses - achieved profit basis For the year ended 31 December 2003 2003 2002 Â£m Â£m Profit/(loss) for the financial year* 1,642 (2,045) Foreign exchange gains 415 179 --------------------------------------------------------------------------------------------------------------------- Total recognised gains/(losses) arising in the year 2,057 (1,866) ===================================================================================================================== *Stated before the effect of foreign exchange movements, which are reported within the foreign exchange gains line. Reconciliation of movements in consolidated shareholders' funds - achieved profit basis For the year ended 31 December 2003 Restated* 2003 2002 Â£m Â£m Shareholders' funds at the beginning of the year, as originally reported 9,669 11,752 Prior year adjustment (1) (10) --------------------------------------------------------------------------------------------------------------------- Shareholders' funds at the beginning of the year, as restated 9,668 11,742 Total recognised gains/(losses) arising in the year 2,057 (1,866) Dividends (562) (536) Other movements 2 328 -------------------------------------------------------------------------------------------------------------------- Shareholders' funds at the end of the year 11,165 9,668 ==================================================================================================================== * Restated for the effect of a change in accounting policy in respect of the treatment of shares held by employee trusts as a deduction from shareholders' capital. --------------------------------------------------------------------------------------------------------------------- Page 12 Summarised consolidated balance sheet - achieved profit basis As at 31 December 2003 Restated* General General Long-term business Long-term business Restated* business and other Group business and other Group 2003 2003 2003 2002 2002 2002 Â£m Â£m Â£m Â£m Â£m Â£m Total assets before acquired additional value of in-force long-term business 177,906 30,286 208,192 152,887 27,613 180,500 Acquired additional value of in-force long-term business 488 - 488 505 - 505 -------------------------------------------------------------------------------------------------------------------- Total assets included in the modified statutory balance sheet 178,394 30,286 208,680 153,392 27,613 181,005 ==================================================================================================================== Liabilities of the long-term business (170,765) - (170,765) (146,930) - (146,930) Liabilities of the general insurance business - (27,736) (27,736) - (26,391) (26,391) --------------------------------------------------------------------------------------------------------------------- Net assets on a modified statutory basis 7,629 2,550 10,179 6,462 1,222 7,684 Additional value of in-force long-term business 1 4,744 - 4,744 3,917 - 3,917 -------------------------------------------------------------------------------------------------------------------- Net assets on an achieved profit basis 2 12,373 2,550 14,923 10,379 1,222 11,601 ==================================================================================================================== Shareholders' capital, share premium, shares held by employee trusts and merger reserves 4,622 4,710 Modified statutory basis retained profit 1,932 1,126 Additional achieved profit basis retained profit 4,611 3,832 -------------------------------------------------------------------------------------------------------------------- Shareholders' funds on an achieved profit basis 11,165 9,668 Minority interests 944 743 -------------------------------------------------------------------------------------------------------------------- 12,109 10,411 Subordinated debt 2,814 1,190 -------------------------------------------------------------------------------------------------------------------- Achieved profit basis total capital, reserves and subordinated debt 14,923 11,601 ==================================================================================================================== * Restated for the effect of a change in accounting policy in respect of the treatment of shares held by employee trusts as a deduction from shareholders' capital. 1 The analysis between the Group's and the minority interest share of the additional value of in-force long-term business is as follows: Movement in the 2003 2002 year Â£m Â£m Â£m Group's share included in shareholders' funds 4,611 3,832 779 Minority interest share 133 85 48 -------------------------------------------------------------------------------------------------------------------- Balance at 31 December 4,744 3,917 827 ==================================================================================================================== 2 Analysis of net assets on an achieved profit basis is made up as follows: 2003 2002 Â£m Â£m Long-term business net assets on an achieved profit basis 12,373 10,379 -------------------------------------------------------------------------------------------------------------------- Comprises: Embedded value 12,155 10,148 RBSG goodwill 218 231 ==================================================================================================================== --------------------------------------------------------------------------------------------------------------------- Page 13 Basis of preparation - achieved profit basis The achieved profit statement on page 10 includes the results of the Group's life operations reported under the achieved profit basis combined with the modified statutory basis results of the Group's non-life operations set out on pages 20 to 30. In the directors' opinion, the achieved profit basis provides a more accurate reflection of the performance of the Group's life operations year on year than results under the modified statutory basis. The achieved profit methodology used is in accordance with the guidance on 'Supplementary reporting for long-term insurance business (the achieved profit method)' circulated by the Association of British Insurers in December 2001. Further details on the methodology and assumptions are set out on pages 17 to 19. The results of the Group's life operations under the modified statutory basis, which is the basis used in the annual statutory accounts, can be found on pages 20 to 30. The contribution from the Group's share of the alliance with The Royal Bank of Scotland Group (RBSG) is incorporated within the achieved operating profit. Goodwill amortised in the year in respect of the Group's holding in the associated company, RBS Life Investments Limited, is included within the 'Amortisation of goodwill' on page 10. The results for 2003 and 2002 have been audited by the auditors Ernst & Young LLP. Their audit report in respect of 2003 is included in the Report and Accounts on page 110 of that document. 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 period including value added between the point of sale and end of the period; - the profit from existing business equal to: - the expected return on the value of the in-force business at the beginning of the period, - 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. 2003 2002 Â£m Â£m New business contribution (after the effect of solvency margin) 472 452 Profit from existing business - expected return 757 849 - experience variances (12) (110) - operating assumption changes* 38 9 Expected return on shareholders' net worth 300 324 ------------------------------------------------------------------------------------------------------------------- Life achieved operating profit before tax 1,555 1,524 Investment return variances 683 (2,320) Effect of economic assumption changes 11 (561) -------------------------------------------------------------------------------------------------------------------- Total life achieved profit/(loss) before tax 2,249 (1,357) Tax on operating profit (473) (460) Tax on other ordinary activities (191) 857 -------------------------------------------------------------------------------------------------------------------- Total life achieved profit/(loss) after tax 1,585 (960) ==================================================================================================================== * In 2003, operating assumption changes included the impact of reducing risk margins in Poland, the US and Australia in line with the directors' views of the risks associated with this in-force portfolio. The impact of this change was Â£24 million. In 2002, operating assumptions included the impact of reducing risk margins in the US. The impact of this change was Â£13 million. --------------------------------------------------------------------------------------------------------------------- Page 14 New business contribution The following table sets out the contribution from new business written by the long-term business operations. The contribution generated by new business written during the period is the present value of the projected stream of after tax distributable profit from that business. Contribution before tax is calculated by grossing up the contribution after tax at the full corporation tax rate for UK business and at appropriate rates of tax for other countries. Annual premium New business equivalent* contribution ----------------------------- ------------- Local currency 2003 2002 growth 2003 2002 Â£m Â£m % Â£m Â£m United Kingdom 1,068 1,231 (13%) 241 290 Europe (excluding UK) France 241 223 (2%) 70 69 Ireland 81 103 (29%) 23 29 Italy 194 153 15% 45 38 Netherlands (including Belgium and Luxembourg) 224 158 29% 62 21 Poland 35 48 (23%) 3 10 Spain 246 189 18% 134 87 Other 101 93 2% (3) (5) International 187 175 9% 46 39 ------------------------------------------------------------------------------------------------------------------- Total annualised premiums 2,377 2,373 (3%) Total new business contribution before effect of solvency margin** 621 578 Effect of solvency margin (149) (126) -------------------------------------------------------------------------------------------------------------------- Total new business contribution including effect of solvency margin 472 452 =================================================================================================================== * Annual premium equivalent represents regular premiums plus 10% of single premiums. ** New business contribution before effect of solvency margin includes minority interests in 2003 of Â£106 million (2002: Â£69 million). This comprises minority interests in France of Â£4 million (2002: Â£4 million), Italy Â£25 million (2002: Â£19 million), Netherlands Â£8 million (2002: Â£nil), Poland Â£1 million (2002: Â£1 million) and Spain Â£68 million (2002: Â£45 million). New business contributions have been calculated using the same economic assumptions as those used to determine the embedded values as at the beginning of each year and operating assumptions used to determine the embedded values as at the end of the period. The effect of solvency margin represents the impact of holding the minimum European Union (EU) solvency margin (or equivalent for non-EU operations) and discounting to present value the projected future releases from the solvency margin to shareholders. --------------------------------------------------------------------------------------------------------------------- Page 15 Analysis of life achieved operating profit Life achieved operating profit is calculated on an after-tax basis and then grossed up at the full rate of corporation tax for UK business and at appropriate rates of tax for other countries. 2003 2002 Â£m Â£m United Kingdom 659 699 Europe (excluding UK) France 220 228 Ireland 65 75 Italy 70 52 Netherlands (including Belgium and Luxembourg) 189 200 Poland 104 111 Spain 158 83 Other 9 (2) International 81 78 ------------------------------------------------------------------------------------------------------------------- Total life achieved operating profit before tax* 1,555 1,524 =================================================================================================================== * Life achieved operating profit includes minority interests in 2003 of Â£154 million (2002: Â£90 million). This comprises minority interests in France of Â£6 million (2002: Â£7 million), Italy Â£37 million (2002: Â£26 million), Netherlands Â£14 million (2002: Â£nil), Poland Â£20 million (2002: Â£18 million), Spain Â£76 million (2002: Â£39 million) and Other Europe Â£1 million (2002: Â£nil). Embedded value of life business 2003 2002 Â£m Â£m Embedded value at the beginning of the year 10,148 11,063 Total life achieved profit/(loss) after tax 1,585 (960) Exchange rate movements 342 220 Embedded value of businesses acquired* 64 13 Amounts injected into life operations 221 419 Amounts released from life operations (205) (607) ------------------------------------------------------------------------------------------------------------------- Embedded value at the end of the year** 12,155 10,148 =================================================================================================================== * Embedded value of businesses acquired in 2003 represents the embedded value of Delta Lloyd ABN AMRO Verzekeringen Holding BV, the insurance company acquired as part of the bancassurance agreement entered into with ABN AMRO NV in the Netherlands of Â£64 million. Embedded value from businesses acquired in 2002 represents the life subsidiary of DBS Hong Kong of Â£13 million. ** Embedded value at the end of the period includes minority interests in 2003 of Â£559 million (2002: Â£410 million). This comprises minority interests in France of Â£46 million (2002: Â£42 million), Italy Â£230 million (2002: Â£180 million), Netherlands Â£43 million (2002: Â£nil), Poland Â£63 million (2002: Â£51 million), Spain Â£174 million (2002: Â£134 million) and Other Europe Â£3 million (2002: Â£3 million). --------------------------------------------------------------------------------------------------------------------- Page 16 Segmental analysis of embedded value of life business Net worth Value of in-force Embedded value at 31 December* at 31 December** at 31 December --------------- ----------------- -------------- 2003 2002 2003 2002 2003 2002 Â£m Â£m Â£m Â£m Â£m Â£m United Kingdom 2,141 1,845 3,532 3,167 5,673 5,012 Europe (excluding UK) France 1,012 833 437 388 1,449 1,221 Ireland 270 218 284 254 554 472 Italy 348 250 94 99 442 349 Netherlands (including Belgium and Luxembourg) 1,267 859 1,131 947 2,398 1,806 Poland 148 129 248 223 396 352 Spain 187 149 268 201 455 350 Other 140 128 60 48 200 176 International 468 294 120 116 588 410 ------------------------------------------------------------------------------------------------------------------- 5,981 4,705 6,174 5,443 12,155 10,148 =================================================================================================================== * 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. ** The value of in-force includes the effect of holding shareholders' capital to support the minimum statutory solvency margin requirements and allowing for projected future releases. This impact reduces the value of in-force by Â£870 million (2002: Â£750 million). The minimum statutory solvency margin requirements supported by shareholders' capital of Â£3,100 million (31 December 2002: Â£2,600 million) is included within the net worth. Minority interest in life achieved profit 2003 2002 ------------------------------------------ ------- Shareholders' Minority interest interest Group Group Â£m Â£m Â£m Â£m New business contribution before effect of solvency margin 515 106 621 578 Effect of solvency margin (126) (23) (149) (126) -------------------------------------------------------------------------------------------------------------------- New business contribution including effect of solvency margin 389 83 472 452 =================================================================================================================== Life achieved operating profit before tax and exceptional items 1,401 154 1,555 1,524 =================================================================================================================== Total life achieved profit/(loss) before tax 2,129 120 2,249 (1,357) Attributed tax (624) (40) (664) 397 ------------------------------------------------------------------------------------------------------------------- Total life achieved profit/(loss) after tax 1,505 80 1,585 (960) ==================================================================================================================== Closing life embedded value 11,596 559 12,155 10,148 =================================================================================================================== --------------------------------------------------------------------------------------------------------------------- Page 17 Methodology (a) Life achieved profit The achieved profit method of financial reporting is designed to recognise profit as it is earned over the life of an insurance policy. The total profit recognised over the lifetime of a policy is the same as under the modified statutory basis of reporting, but the timing of recognition is different. Distributable profits from long-term businesses arise when they are released to shareholders following actuarial valuations. These are carried out in accordance with statutory requirements designed to ensure and demonstrate solvency in long-term business funds. Future distributable profits will depend on experience in a number of areas such as investment return, discontinuance rates, mortality and administration costs. Using realistic assumptions of future experience, we can project releases to shareholders arising in future years from the business in-force and associated minimum statutory solvency margin. The life achieved profit reflects current performance by measuring the movement, from the beginning to the end of the year, in the present value of projected releases to shareholders from the business in-force and associated minimum statutory margin, together with the movement in the net assets of the long-term operations, adjusted for any amounts released from or invested in life operations. The present value of the projected releases to shareholders is calculated by discounting back to the current time using a risk discount rate. The risk discount rate is a combination of a discount rate to reflect the time value of money and a risk margin to make prudent allowance for the risk that experience in future years may differ from the assumptions referred to above. Achieved profit reporting takes account of the cost of maintaining local provisions. In addition, a significant allowance for the expected cost of guarantees is implicitly allowed for in the risk margin inherent in the risk discount rate consistent with the principles of the achieved profit guidance. The calculations are carried out on an after-tax basis and the profits are then grossed up for tax at the full rate of corporation tax for the United Kingdom and at an appropriate rate for each of the other countries. (b) Embedded value The shareholders' interest in the long-term business operations is represented by the embedded value. The embedded value is the total of the net assets of the long-term operations and the present value at risk discount rates (which incorporate a risk margin) of the projected releases to shareholders arising from the business in-force, less a deduction for the effect of holding the minimum statutory solvency margin. This effect of solvency margin is the difference between the nominal value of the solvency margin and the present value at risk discount rates of the projected release of the solvency margin and investment earnings on the assets deemed to back the solvency margin. For with-profit funds in the United Kingdom and Ireland, for the purpose of recognising the value of the estate, it is assumed that terminal bonuses are increased to exhaust all of the free assets over the future lifetime of the in-force with-profit policies. --------------------------------------------------------------------------------------------------------------------- Page 18 Principal economic assumptions Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at each period end. Margins are applied on a consistent basis to risk-free yields to obtain investment return assumptions for ordinary shares and property and risk discount rates. The change in assumptions in 2003 reflects the actual movements in risk free yields in each territory. Risk margins remain unchanged in all of our key businesses, except Poland, the US and Australia. The principal economic assumptions used are as follows: United Kingdom France ---------------------- ---------------------- 2003 2002 2001 2003 2002 2001 Risk discount rate 7.5% 7.3% 7.7% 8.1% 8.1% 8.6% Pre-tax investment returns: Base government fixed interest 4.8% 4.5% 5.0% 4.3% 4.3% 5.1% Ordinary shares 7.3% 7.0% 7.5% 6.3% 6.3% 7.1% Property 6.3% 6.0% 6.5% 5.8% 5.8% 6.6% Future expense inflation 4.1% 3.6% 3.7% 2.5% 2.5% 2.5% Tax rate 30.0% 30.0% 30.0% 35.4% 35.4% 36.4% Ireland Italy ---------------------- ---------------------- 2003 2002 2001 2003 2002 2001 Risk discount rate 8.6% 8.7% 9.3% 7.4% 7.3% 7.6% Pre-tax investment returns: Base government fixed interest 4.5% 4.6% 5.3% 4.4% 4.4% 5.3% Ordinary shares 7.5% 7.6% 8.3% 7.4% 7.4% 8.3% Property 6.0% 6.1% 6.8% 5.9% 5.9% 6.8% Future expense inflation 4.0% 4.0% 4.0% 3.3% 3.3% 3.3% Tax rate 12.5% 12.5% 16.0% 38.3% 39.8% 41.0% Netherlands Poland* ---------------------- ---------------------- 2003 2002 2001 2003 2002 2001 Risk discount rate 7.4% 7.4% 8.0% 13.5% 15.4% 18.5% Pre-tax investment returns: Base government fixed interest 4.2% 4.2% 5.1% 6.0% 8.0% 12.5% Ordinary shares 7.2% 7.2% 8.1% 6.0% 8.0% 12.5% Property 5.7% 5.7% 6.6% n/a n/a n/a Future expense inflation 2.5% 2.5% 2.5% 3.4% 5.4% 9.2% Tax rate 25.0% 25.0% 25.0% 19.0% 27.0% 28.0% Spain ----------------------- 2003 2002 2001 Risk discount rate 7.7% 7.7% 8.3% Pre-tax investment returns: Base government fixed interest 4.6% 4.6% 5.3% Ordinary shares 7.6% 7.6% 8.3% Property 6.1% 6.1% 6.8% Future expense inflation 3.0% 3.0% 3.2% Tax rate 35.0% 35.0% 35.0% * The economic assumptions shown above are those in the calculations for the life business. The economic assumptions for the pension business are identical with the exception of the risk discount rate which is 12.7% (2002: 13.8%; 2001: 16.9%). --------------------------------------------------------------------------------------------------------------------- Page 19 Other assumptions - Current tax legislation and rates have been assumed to continue unaltered, except where changes in future tax rates have been announced. - 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. - It has been assumed that there will be no changes to the methods and bases used to calculate the statutory technical provisions and current surrender values. - The value of in-force business allows for future premiums under recurring single premium business where collection of future single premiums is expected and where the receipt of further single premiums is not regarded as new business at the point of receipt. It does not allow for future premiums under non-contractual increments, or for future Department of Work and Pensions (DWP) rebate premiums, and the value arising therefrom is included in the value of new business when the premiums are received. - The value of the in-force business has been determined after allowing for the effect of holding solvency margins equal to the minimum EU solvency equirement (or equivalent for non-EU operations). Solvency margins relating to with-profit business are assumed to be covered by the surplus within the with-profit funds and no effect has been attributed to shareholders. - Bonus rates on with-profit business have been set at levels consistent with the economic assumptions and Aviva's medium-term bonus plans. The distribution of profit between policyholders and shareholders within the with-profit funds assumes that the shareholder interest in conventional with-profit business in the United Kingdom and Ireland continues at the current rate of one-ninth of the cost of bonus. Alternative assumptions Economic assumptions The table below shows the sensitivity to a one percentage point increase in the assumed investment returns for equity and property investments and in the discount rate for new business contribution and embedded value. New business contribution Embedded value ------------------------- ---------------------------- Equity/ Equity/ property Discount property Discount returns rates returns rates Â£m Â£m Â£m Â£m United Kingdom 16 (40) 150 (275) Europe (excluding UK) France 3 (7) 50 (80) Ireland 2 (3) 10 (15) Italy - (3) 20 (10) Netherlands (including Belgium and Luxembourg) 14 (15) 225 (130) Poland 1 (1) 10 (15) Spain 1 (9) 5 (20) Other - (1) 5 (5) International - (8) - (20) -------------------------------------------------------------------------------------------------------------------- 37 (87) 475 (570) ==================================================================================================================== The impact of an increase of one percentage point in the assumed investment returns for equity and property investments is calculated with all other assumptions remaining unchanged. The impact of an increase of one percentage point in the discount rate is calculated with all other assumptions remaining unchanged. Non-economic assumptions Sensitivity calculations have been performed to identify the non-economic assumptions to which new business contribution and the value of in-force business within embedded value are particularly sensitive. The calculations have been based on similar percentage movements in each assumption from the base assumption used to calculate the published new business contribution and value of in-force. Based on this, both the Group's new business contribution and value of in-force are most sensitive to changes in future maintenance expenses. --------------------------------------------------------------------------------------------------------------------- END OF PART 1 OF 2 This information is provided by RNS The company news service from the London Stock Exchange

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